Operational Improvements And Premium Offerings Will Attract Customers, But Geopolitical And Competitive Pressures May Impact Future Margins

Key Takeaways

• Air Canada's geographic flexibility and premium offerings could boost revenue by adjusting to market demand and attracting high-yield customers.
  
• Operational improvements and strategic share buybacks are set to enhance customer satisfaction, net margins, and shareholder value.
  
• Geopolitical disruptions, competitive market pressures, currency fluctuations, and fuel price volatility could strain Air Canada's margins and revenue growth.

Catalysts

Provides domestic, U.S. transborder, and international airline services.

• Air Canada's geographic network diversity allows them to strategically adjust flight capacity based on market conditions, which can enhance revenue by optimizing flight routes to cater to demand fluctuations.
  
• The implementation of operational improvements, including significant gains in on-time performance and a focus on achieving operational excellence, is likely to enhance customer satisfaction and potentially increase revenue and net margins moving forward.
  
• The expansion of Air Canada's premium offerings and successful branded fare adjustments are expected to cater to a broader range of high-yield customers, contributing positively to revenue and net margins.
  
• The company's strong cargo performance, bolstered by increased volumes and yields, suggests a sustainable revenue stream that can continue to grow, complementing passenger revenue and enhancing overall earnings.
  
• Air Canada's strategic initiatives, such as aggressive share buybacks and planned reduction in outstanding shares, aim to improve earnings per share and provide value to shareholders while maintaining a disciplined approach to capital allocation.

Air Canada Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Air Canada's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.7% today to 3.7% in 3 years time.
• Analysts expect earnings to reach CA$980.2 million (and earnings per share of CA$2.83) by about April 2028, down from CA$1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$1.2 billion in earnings, and the most bearish expecting CA$833 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, up from 2.7x today. This future PE is lower than the current PE for the CA Airlines industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 5.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.02%, as per the Simply Wall St company report.

Air Canada Future Earnings Per Share Growth

Risks

• Geopolitical disruptions and lingering supply chain issues could negatively impact Air Canada's operational capacity and ability to meet demand, potentially affecting revenues and net margins.
  
• Increased competitive capacity in the Atlantic market may outpace demand, straining pricing power and yield growth, which could lead to constrained revenue growth.
  
• Currency fluctuations, particularly a weaker Canadian dollar, might pressure operating costs and adjusted CASM, affecting net margins and free cash flow if not sufficiently hedged.
  
• Potential regulatory tariffs and retaliations could have an impact on operating revenues, particularly if they affect demand and pricing in key transborder markets.
  
• The airline industry’s sensitivity to fuel price volatility could strain Air Canada's margins and earnings if fuel prices remain higher than anticipated and are not effectively mitigated through hedging or other cost-control measures.

Valuation

• The analysts have a consensus price target of CA$24.659 for Air Canada based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$32.0, and the most bearish reporting a price target of just CA$17.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$26.5 billion, earnings will come to CA$980.2 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 11.0%.
• Given the current share price of CA$14.38, the analyst price target of CA$24.66 is 41.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.