Air Canada buying back Aeroplan loyalty program

Air Canada is the largest airline in Canada by fleet size and passengers carried. The airline, founded in 1937, provides scheduled and chartered air transport for passengers and cargo to 207 destinations worldwide. It is a founding member of the Star Alliance, one of the world’s largest global airline alliances.

Airline stock Air Canada (TSX—AC) has signed a definitive agreement to buy the Aeroplan loyalty program from Aimia Inc. (TSX—AIM) for $450 million in cash.

Under the deal, Air Canada will also assume $1.9 billion of Aeroplan miles liability. Air Canada management says it has also signed agreements with TD Bank, CIBC and Visa where they will continue to be part of the Aeroplan loyalty program. The company also reported third quarter 2018 results that met analyst estimates.

Toronto-based AltaCorp Capital analysts Chris Murray and Lovish Gupta give the airline stock an “outperform” rating and raise their target share price to $44 from a previous $42.

Q3 financial results exceed expectations

Providing further details on the financial results, the analysts note: “Air Canada announced third quarter 2018 results reporting revenue, EBITDAR [earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs] and adjusted fully diluted EPS [earnings per share] of $5.41 billion, $1.27 billion, and $2.03 as compared to our estimates of $5.41 billion, $1.23 billion, and $1.96, respectively.

“Air Canada reported a 7.5 per cent and 6.7 per cent year-over-year increase in traffic and capacity in the third quarter of 2018. The quarterly load factor was 85.9 per cent, up 64 basis points year-over-year and 17 basis points below our estimate of 86.1 per cent.

“The company continued to report positive yield growth, with the third quarter of 2018 system yield up by 3.4 per cent year-over-year. The increase in yield was attributable to the greater proportional growth of higher-yielding business and premium economy passengers, improvement in the overall fare mix, an increase in ancillary revenue, introduction of an expanded suite of fare offerings, and an $11 million favorable currency impact.

“The Company now expects free cash flow in 2018, to range between $500 million to $600 million, as compared to previous expectation of $350 million to $500 million, primarily due to higher than expected cash from operations, including working capital. We revise our 2018, 2019 and 2020 EBITDAR estimates to $2.807 billion, $3.305 billion and $3.960 billion. Our 2018, 2019 and 2020 Adjusted FD [fully diluted] EPS are revised to $2.36, $3.62 and $5.46 from $2.24, $3.43 and $6.27, respectively.

Impact of new IFRS 16 standard uncertain

“In 2019, Air Canada along with other North American companies will be subject to the new IFRS [International Financial Reporting Standards] 16 standard requiring the capitalization of most operating leases. The Company continues to evaluate the impact of the standard.

“Our initial expectation is to see an increase in depreciation and interest costs, lower maintenance expenses (due to capitalizing maintenance), and lower operating lease costs.

“We also expect the adjustment made to capitalize operating leases using a multiple of rent expense is likely to have a neutral impact to our enterprise value estimate. The IFRS 16 standard change is likely to require a full restatement of Company guidance to reflect the new accounting treatment. We have not adjusted our estimates for the new standard as yet, however anticipate making adjustments prior to 2019 reporting, although we do not expect the change to impact our opinion of the Company’s fundamental value.”

This is an edited version of an article that was originally published for subscribers in the December 21, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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