Aeroplan IPO coming?
January 6, 2005
Bay Street's enthusiasm for Air Canada stock continues to climb, fueled by better-than-expected traffic figures and renewed speculation that Aeroplan, the airline's popular reward program, could soon be spun-off or sold.
Robert Fay, an analyst with Canaccord Capital, became the latest analyst to jump on board the Air Canada bandwagon yesterday when he raised his forecast for ACE Aviation Holdings, (ACErv/TSX) the holding company for the recently restructured airline.
In addition to hiking his 12-month target price to $42 from $32, based on revised estimates for this year and next, Mr. Fay said Air Canada's stable financial condition bodes well for the growth and eventual sale or spin-off of Aeroplan or other subsidiaries, including Air Canada's regional carrier Jazz.
"These businesses should be able to generate better valuations than the airline itself, although they will be dependent on the health of Air Canada," Mr. Fay said in a research note.
Aeroplan, with a membership over six million, saw revenues grow to $293-million for the first nine months of fiscal 2004, compared to $234-million for the same period a year earlier.
Mr. Fay values the subsidiary as worth between $1-billion and $1.5-billion, and said a new requirement to report the business as a separate entity in the fourth quarter should help in gauging the market's appetite for a public offering.
Aeroplan has been busy attracting new business partners since the airline emerged from its court-supervised restructuring last year. To date, Aeroplan has inked deals with companies including electronics retailer Future Shop, Esso service stations and Bell Canada, and has plans to sign on as many as a dozen by the end of 2005.
Mr. Fay is forecasting Aeroplan revenues of $383-million for 2004, $436-million for 2005 and $471-million for 2006.
As for Air Canada itself, Mr. Fay cited better-than-anticipated air traffic figures in November as the reason for his improved outlook on the company. Air Canada's system load factor in November, typically one of the slowest months of the year, was up 5.4 percentage points -- to 74.6% from 69.2% during the same month in 2003.
He attributed the improved performance, in part, to the airline's simplified fare structure, a model that Delta Airlines Inc. said yesterday that it was adopting in the United States.
As well, Mr. Fay noted that Air Canada's recent restructuring efforts have left it with a greater ability to manage the cyclical and seasonal nature of the airline business, although he said the strength of the economy and high fuel prices remain as risks.
"One of the major gains the company was able to achieve in its recent restructuring was the greater ability to contract or expand its capacity," Mr. Fay said. "We are expecting to see continued strength in Air Canada's traffic figures in December and continuing into 2005."
Air Canada's newfound ability to keep its planes full is being attributed to reductions in the number of employees, the ability to hire more seasonal or part-time workers and the option of moving a bigger chunk of its operations into its regional carrier, Jazz.
As well, Mr. Fay noted that Air Canada is planning to add eight more wide-body aircraft -- two of which it already owns and were written down during the restructuring -- as it expands its more profitable international operations. The carrier's lower cost structure should allow it to profitably service markets such as Rome, Madrid and Copenhagen, according to Mr. Fay.
© National Post 2005