Air Canada Financial Analysis

978 words | 4 page(s)

Air Canada is the largest Airline in Canada in terms of fleet and passenger size (Air Canada Overview, 2019). The operation serves 62 airports in Canada, 53 in the US and 101 in Africa, Asia, Australia, the Caribbean, Central America, Europe, Middle East, Mexico, and South America. Together with its regional partners Ari Canada Rouge and Air Canada Express, the three operate about 1,550 scheduled flights daily. Air Canada also partners with another airline called Star Alliance to cover 1,300 airports in 195 countries. In 2019, Air Canada added a 45 Airbus A220-300, to its 37 fuel-efficient 787 Dreamliners from Boeing. As of 2019, Air Canada operates a total of 189 aircraft, Air Canada Express 146, and Air Canada Rouge, 64. In 2019, Air Canada also acquired the Aeroplan loyalty business, which contributed significantly to its 2019 yields. Concerning passenger size, Air Canada served about 51 million passengers traveling to more than 220 destinations across the globe in 2018, making it one of the 20 largest airlines globally (Air Canada Overview, 2019).

Air Canada Stock
Air Canada trades its shares on the Toronto Stock Exchange (TSE). Its stock symbol is AC. In December 2019, Air Canada shares traded at CAD 48.80 per share on TSE: AC (Waddell & MacLean, 2019). In the past four years, stocks have fluctuated from below $15 in 2015, below $10 in 2016, before achieving higher but stagnating values in 2017 and 2018. The numbers are impressive because Air Canada has been debt-laden since it filed for bankruptcy under the Companies’ Creditor Arrangements Act (CCAA) in 2003 (InterVISTAS Consulting Inc., 2003). At that time, Air Canada had $7.8 billion in assets and $9.7 billion in liabilities and a price per share of $1. The Wall Street Journal indicates that AC will continue to experience an increase in share earnings at about $5 by 2020 and $6 by 2021 (AC.CA, 2019). The following figure shows Air Canada’s share information in the past year, while figure two presents an overview of share information.

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Important Financial Figures in the Third Quarter of 2019
Air Canada 2019 third-quarter results showed an operating revenue (revenue generated from primary business activities, such as ticket sales, leasing of aircraft, and sales of shares) of $5.553 billion (PR NEWSWIRE, 2019). The net income (after-tax income) was $636 million, while the adjusted net income was $613 million. Its earnings before interest, taxes, depreciation, amortization, and impairment (EBITDA) was $1.472 billion, a 9% improvement from 2018. This increase surpassed the 5% projected by the airline at the beginning of the third quarter. The operating income (profits minus operating expenses) stood at $956 million (PR NEWSWIRE, 2019).

The operating expenses stood at $4.597 billion, a 2% increase from the same period in 2018 (PR NEWSWIRE, 2019). Its cost per available seat mile (CASM) increased by 4.5% from the same period of 2018. The adjusted CASM increased by 9.3%. Adjusted CASM eliminates the effects of aircraft fuel expenses and ground packages incurred through Air Canada Vacation (does not provide average seat mile) because they are volatile. CASM is a unit of efficiency with lower values indicating efficiency. For Air Canada, the CASM is impressive owing to the drawbacks it suffered due to the 2018 grounding of the Boeing 737 MAX. The grounding resulted in a 2.1% reduction, a 0.9% loss in the estimated 3%, on the available seat mile (ASM) (PR NEWSWIRE, 2019). ASM indicates an airline’s passenger-carrying capacity. The grounding also created extra costs needed to replace the aircraft and continued operating maintenance. The adjusted 2019 CASM does not reflect the Aeroplan acquisition because it was not included in the 2018 financial reports. This CASM value indicates that Air Canada is having the best time in the industry (PR NEWSWIRE, 2019).

By September 30, 2019, Air Canada had unrestricted liquidity of about $7.4 billion compared to the $5.309 billion in 2018 (PR NEWSWIRE, 2019). The net debt was at $2.999 billion, which decreased by $2.215 billion from December 31, 2018. The leverage ratio was 0.8, a 50% decrease from 1.6 in December 2018 (PR NEWSWIRE, 2019). The leverage ratio measures financial leverage. The lower the value, the more the economic advantage, indicating that Air Canada is in good financial standing.

The net cash flow, amount of money moving in and out of Air Canada, was $834 million. The free cash flow (FCF), the cash left after removing operating expenses and capital expenditure (CAPEX), was $533 million. Excess money, the amount generated after total current noncash assets match total current liabilities, was $2.683 billion on September 30, 2019. The return on invested capital (ROIC) was 15.5%, while the weighted average cost of capital (WACC) was 7.2%. ROIC is a generalized form of ROI, while WACC reflects returns on debt and equity. Therefore, the higher ROIC than WACC indicates that AIR Canada is currently a money-making machine.

The figure below is an overview of Air Canada’s financial results in millions of dollars for the last eight quarters. The statistics show that Air Canada is currently a good business venture owing to the improved values from 2018-2019

Conclusion and Recommendations
After years being debt-laden, Air Canada is officially a money-making venture as reflected on high ROIC and low WACC in addition to a leverage ratio of 0.8 (despite the Boeing 737 MAX setbacks). Its shares are also worth buying because returns are expected to be high. However, care should be taken because of the predicted 2020 recession. With the recession, fewer people will be willing to travel, thereby impacting overall profitability. The ripple effects will also affect fuel prices, which might jeopardize EBITDA. Before investing, an investor should study the oil industry, such as the much-awaited Saudi AMCO IPO, which might stabilize oil prices by a fraction. Despite the looming changes, Air Canada looks a promising future investment.

  • AC.CA | Air Canada Analyst Estimates & Rating ‘ WSJ. (2019). Retrieved December 13, 2019, from https://quotes.wsj.com/CA/AC/research-ratings
  • Air Canada. (2019). Third Quarter: 2019 Management’s Discussion and Analysis of Results of Operations and Financial Condition October 29, 2019 (PDF). Retrieved from https://www.aircanada.com
  • Air Canada Overview. (2019). Retrieved December 13, 2019, from https://www.aircanada.com
  • InterVISTAS Consulting Inc. 2003. Industry Review: Restructuring Air Canada (PDF File).
    ‘PR NEWSWIRE. (2019).’Air Canada Reports Third Quarter 2019 Results. Retrieved from https://markets.businessinsider.com/news/stocks/air-canada-reports-third-quarter-2019-results-1028638281
  • Waddell, N., & MacLean, J. (2019). Cantech Quote Service – Cantech Letter. Retrieved December 13, 2019, from https://www.cantechletter.com/stock-quotes/?qm_symbol=AC%3ACA

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