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Air Canada is the largest aviation company in Canada in terms of fleet size and the number of passengers transported. Under brands like Air Canada Vacations and Air Canada Rouge, it offers domestic, US transborder, and international airline services. It also provides its services through capacity purchase agreements with other regional carriers.
Economic cycles have a significant impact on airline stock prices. In light of the uncertainties surrounding the pandemic, continued difficulties, and escalating high inflation levels, Air Canada stock is currently down 25% year to date. The stock is currently trading at a very cheap value that is very near to its 52-week low. So, will its stock rise again now that travel restrictions are easing and demand for travel is progressively increasing? Here we answer, Is Air Canada stock a good buy?
Facing Several Headwinds
Over the last two years, Air Canada has experienced a number of challenges that have significantly impacted its operations. The valuation of this airline operator was significantly impacted by those series of events.
In essence, because the aviation industry is so vulnerable to economic cycles, there is typically a great deal of risk associated with it. Back in 2020, when people were compelled to stay at their homes due to the global pandemic and traveling had mostly stopped, the airline industry, globally, was severely impacted. Even while the travel restrictions began to loosen again after a while, the situation didn’t really get much better. Again, by the second quarter of this year, prices for energy items, including jet fuel, began to rise as a result of the impact of the Russia and Ukraine war. The cost of jet fuel has indeed soared to multi-year highs, straining Air Canada’s bottom line.
The long-term forecast for the aviation sector, in general, is still quite positive, despite all these ongoing unfavorable events and conditions. The company’s post-pandemic financial recovery may be somewhat delayed by these short-term macroeconomic factors, but in the long run, as travel restrictions are further relaxed and demand for travel returns to pre-pandemic levels, the stock of Air Canada could start rising once again.
Air Travel Demand Is Rising
Air Canada struggled to fill its planes with passengers during the pandemic, but things have greatly improved since then. The fact that the global market for passenger air transport is anticipated to at least reach $657.15 billion in 2025 and increase at a CAGR of 6% indicates that demand conditions will also improve in the days to come.
The company currently has an excessive number of customers waiting to use its services. This overwhelming volume of customers combined with cancellations and delays has left the airline operator in a precarious scenario. Air Canada has often been overwhelmed by these factors and the airline operator was even listed as one of the worst performing airline operators in the world.
One of the main causes for the investors in Air Canada to remain optimistic about its comeback was this increase in demand. Investors had faith that since demand had grown, the company’s capital burn would eventually slow down and it would once again be able to produce robust cash flows.
Further, the intensity of the impending recession will also have an impact on Air Canada’s ability to recover. A prolonged one that would keep discretionary spending down for an extended period of time could be terrible for the airline operator, although milder ones won’t be able to significantly impair its strong balance sheet.
Steadily Improving
According to Air Canada’s financial results for the first quarter of this year, things weren’t too bad. The airline operator’s passenger revenue increased by more than five times, and its operating revenue increased by three and a half times, with its operating capacity growing by 3.4 times year over year. Additionally, compared to the negative EBITDA of $763 million and the net loss of $1.304 billion or $3.90 per diluted share it had produced the previous year, its EBITDA of negative $143 million and a net loss of $974 million or $2.72 per diluted share were far better.
Air Canada has also continued on its course towards expansion because business expansion results in enhanced growth momentum. For instance, the airline operator decided to increase its cargo operations in order to address concerns with the global supply chain and take advantage of the circumstance. In order to do that, it added two Boeing freighters to its fleet, and those aircraft are about to be delivered soon. It’s possible that this choice was what caused the company’s cargo sales to rise 42% year over year to $398 million in the first quarter.
Again, in order to expand the travel options for its clients flying to the Middle East, the company recently also signed a strategic collaboration agreement with Emirates. In the near future, the company may also benefit from this decision. The stock closed at $17 on July 27 and the average target price for the stock is $26.31, a potential upside of almost 55%.
Although Air Canada is a great firm, its worth has been significantly reduced due to economic downturns. The continued interest rate increases are concerning, despite the fact that it is making efforts to run more efficient operations while investing in growth. It is still unclear whether it will be able to endure another disruption brought on by the impending recession. In addition, Air Canada is still losing money. Investors who are risk-averse should avoid this stock.
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