Yahoo Finance Air Canada to hit pre-pandemic capacity levels in 2024 as recovery continues
It's adding capacity to meet surging travel demand, despite worries about an economic slowdown
Air Canada (AC.TO) says it will return to pre-pandemic capacity levels in 2024, as the airline reported record fourth-quarter revenue in its continued recovery from the COVID-19 pandemic.
The Montreal-based airline said on Friday that it will boost 2023 capacity by 24 per cent compared to last year, bringing it to 90 per cent of pre-pandemic levels. The company expects to reach 100 per cent of pre-pandemic capacity levels by 2024.
"We're very encouraged by several key indicators," Air Canada's chief commercial officer Lucie Guillemette said on a conference call with analysts on Friday following the release of fourth-quarter results. She says ticket sales in the fourth quarter of 2022 ending on Dec. 31 were 102 per cent above the same quarter in 2019, but on less capacity, indicating that pricing has increased in the wake of rising demand.
"Advanced booking trends remain solid, both from a volume and fare pay perspective, particularly in our international services, giving us the confidence to continue rebuilding our international network," she said.
Air Canada is one of many airlines adding capacity to meet surging post-pandemic travel demand, even amid concerns about an economic slowdown. Chief executive Michael Rousseau noted on Friday's conference call with analysts that airline travel levels are typically a multiplier of growth domestic product (GDP), meaning that when there is a recession, travel demand also declines. So far, he says the airline has not seen demand dip.
"We're continuing to see strong demand through the booking curve," Rousseau said, noting that leisure travel demand is making up for a slowdown in demand for business travel.
The airline is still in the midst of its post-pandemic recovery, but appears to be making progress. For the full year, the airline reported a net loss of $1.7 billion, an improvement from the $3.6 billion loss recorded in 2021. Operating revenue in 2022 surged to $16.6 billion, up from $6.4 billion in 2021. Operating revenue hit a record in the fourth quarter, increasing nearly 71 per cent year-over-year to $4.68 billion. Analysts on average were expecting operating revenue of $4.4 billion, according to Refinitiv.
Rousseau says the results "reflect the success of our strategy of diversifying our revenue sources."
"Air Canada cargo revenue in the fourth quarter of 2022 was 55 per cent higher than in the same period prior to the pandemic. Air Canada vacations also delivered a strong performance, and Aeroplan active membership is at an all-time high and continuing to increase."
Costs on the rise
Still, as revenue surged, so did operating expenses, increasing 77 per cent from $7.3 billion in 2021 to $16.7 billion in 2022. The increase was driven by the growth in traffic and capacity, as well as rising expenses including fuel and wages, salaries and benefits.
Air Canada expects adjusted cost per available seat mile (CASM) – a measure of how much it costs an airline to fly passengers – to increase between 13 and 15 per cent above 2019 levels in 2023, even as capacity remains below pre-pandemic levels. The airline expects adjusted CASM to be between 8 and 10 per cent above 2019 levels by 2024. It says the increase is due to the impact of higher passenger traffic, higher staffing levels required to improve operational performance and customer service levels and "general inflationary pressures."
"Revenue beat estimates, but costs were also up significantly as Air Canada seems unable to pass on all cost increases to consumers," Cowen analyst Helane Becker wrote in a note to clients on Friday.
"It appears as though higher fuel, labour and maintenance costs are causing an increase in expenses that are not being offset by higher revenue."
National Bank analyst Cameron Doerksen says "the market may be disappointed with Air Canada's cost outlook," describing it as "less favourable."
"Tempering the higher costs is a revenue environment that remains very favourable with Q4 booking trends strong and continuing into 2023," Doerksen wrote in a note to clients.
"While higher costs will remain a challenge, our positive thesis on the stock is driven by our expectation that air travel demand will remain strong and that Air Canada's profitability and cash flows will progressively improve over the next two years."
The airline's stock fell as much as nearly 13 per cent in early trading on Friday. Shares of the airline closed the trading day at $21.20, a decline of 8 per cent compared to Thursday's close.
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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