Aeroplan deal, new capacity expected to boost Air Canada this year

Air Canada expects big investments in its fleet and its loyalty program to pay off this year, edging it closer to its goal of an investment-grade credit rating after 15 years of grappling with debt and trying to prove its worth to investors.

Executives unveiled a blue-sky financial forecast at Air Canada’s investor day on Thursday, anticipating an expansion in margins and free cash flow in 2019 alongside a reduction in debt levels to a 1.2 leverage ratio.

“I think we can confidently say we have met or exceeded virtually all financial objectives,” chief executive Calin Rovinescu told analysts at an investor day event in Toronto.

In 2018, Canada’s largest airline earned record revenue of $18.1 billion and carried a record 50.9 million passengers. Its stock price is up nearly 30 per cent in the past two months. Yet analysts noted its valuation multiple remains lower than its American counterparts. The stock fell 3.3 per cent to $33.11 on the Toronto stock exchange.

Rovinescu told analysts he expects the multiple disparity to disappear as the airline proves it has executed its growth strategy with discipline.

“People needed to see Air Canada was going to behave rationally,” he said. “There was a ‘show me’ factor.”

In recent years, Air Canada has spent billions of dollars upgrading its fleet to and expanding international and domestic destinations, launching 29 new routes last year alone. Those expenses reduced yields and revenue per available seat mile, an important industry metric. But it’s starting to see increases in those measures as it rolled out new Boeing 737s and Air Canada Rouge, the cheaper leisure brand, started competing successfully.

“Now we’re really, really well positioned to take advantage of the $12-billion investment,” Rovinescu said.

At the same time, Air Canada is gearing up to launch its loyalty program in mid 2020 after purchasing the Aeroplan points program from Aimia Inc. for $450 million in a transaction that closed in January.

The airline originally owned Aeroplan, but sold it 15 years ago to fund its operations. While Rovinescu said that was the right decision at the time, executives decided Air Canada needed its own points program so it could erase customer frustration over using two different systems.

“Candidly, our separation affected our ability to serve our customers,” Mark Nasr, vice president of loyalty and e-commerce, said at the event.

Re-purchasing Aeroplan enables Air Canada to launch a loyalty program more quickly than starting from scratch — plus, it’s easier for customers. Nasr expects the transaction to create significant shareholder value by fully aligning the interests of the airline and the popular loyalty program. It also gives Air Canada the ability to mine data, which could help it customize offerings.

It expects Aeroplan to grow to 7 million active members in three years, up 40 per cent from 5 million this year.

On Thursday, Air Canada announced that American Express will participate in the program alongside TD, CIBC and Visa. The airline will get a cash lift from one-time signing payments from its partners, including more than $600 million from TD and $200 million from CIBC.

In a note to clients, Altacorp Capital analyst Chris Murray wrote that the Aeroplan deal is one factor contributing to continued improvements in Air Canada’s financial performance.

“Overall, we see the release as positive as it provides additional clarity around the long-term financial improvement and sustainability of the company,” Murray wrote.

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