Air Canada’s $2 Billion Profit Boosted by Tax Gains, Revenue Weakness Exposed
Air Canada (TSX: AC) has reported a notable profit increase in the third quarter of 2024, primarily driven by tax asset recognition. Despite these gains, the airline experienced a 4% year-over-year drop in operating revenue and lower adjusted earnings, hinting at operational pressures within a complex industry landscape.
The airline reported a quarterly profit of $2.04 billion, or $5.38 per diluted share, a sharp rise from $1.25 billion, or $3.08 per diluted share, in the same quarter last year. However, a notable portion of this growth resulted from a one-time gain through the recognition of a deferred tax asset valued at $1.154 billion, casting some doubt on the sustainability of these elevated profit levels in future quarters without similar adjustments.
Revenue saw a decrease to $6.11 billion, down 4% from $6.34 billion in the third quarter of 2023. This decline reflects ongoing pressures on passenger revenue despite summer being a typically high-demand season. In fact, Air Canada’s load factor, which measures the percentage of available seating capacity that was filled, fell to 86.9%, down from 89.8% the previous year, indicating weaker demand or a misalignment in pricing strategy.
Passenger revenue per available seat mile (PRASM), a key metric for revenue efficiency, also dropped by 7.2%, reflecting a challenging pricing environment and possible competition from budget carriers or alternative travel options. Compared to the second quarter of 2024, the airline’s revenue slipped slightly as well, underscoring limited improvement quarter over quarter.
Operating expenses rose to $5.07 billion, a 3% increase from $4.93 billion in Q3 of the previous year, mainly due to capacity expansion and some contract-related adjustments. Operating income dropped sharply to $1.04 billion from $1.415 billion last year, reducing the airline’s operating margin to 17% from 22.3%.
Adjusted EBITDA declined to $1.523 billion, down from $1.83 billion a year prior, reflecting a decrease of 16.8%. Adjusted earnings per share were $2.57, down from $3.41 last year, with adjusted net income declining to $969 million from $1.281 billion, a decrease of roughly 24%, revealing weaker profit metrics after adjustments for extraordinary gains.
Despite these challenges, Air Canada reported improvements in cash flow metrics, a positive outcome amid other lackluster results. The airline generated $737 million in net cash flows from operating activities, up significantly from $408 million in the same period last year. Free cash flow increased to $282 million from $135 million in Q3 2023.
Air Canada’s net debt fell to CAD $3.43 billion from CAD $4.57 billion at the close of 2023, enhancing its leverage ratio to 1.0, compared to 1.1 last year, a positive shift but only moderately impactful in the face of eroding core profitability.
The announcement of a share buyback program represents an effort to stabilize shareholder value, with authorization to repurchase up to 10% of its public float, or around 35.8 million shares. While potentially favorable to investors by offsetting dilution, this program diverts capital from operational enhancements that might be more impactful given current profitability concerns.
Looking forward, the airline’s guidance suggests ongoing caution. Air Canada lowered its full-year capacity growth forecast from the prior range of 5.5%–6.5% to around 5%, reflecting adjustments for updated fuel price forecasts and contract-related expenses. While management raised its adjusted EBITDA target for 2024 to approximately $3.5 billion, up from previous guidance of $3.1 billion–$3.4 billion, the upward revision is modest and points to conservative expectations for cost savings rather than robust revenue expansion.
Air Canada last traded at $18.87 on the TSX.
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