What’s Stopping Air Canada Stock From Breaking Out to New Highs?

Air Canada (TSX:AC)(TSX:AC.B) and WestJet Airlines Ltd. (TSX:WJA) stocks are struggling in 2018. Is this a sign of a peak in their share values?

| More on:

plane

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

It seems the party for Canada’s airline stocks is over, at least for now.

After surging 87% in 2017 and reaching a record high last month, the share price of Air Canada (TSX:AC)(TSX:AC.B) has fallen more than 10% from a record high. WestJet Airlines Ltd. (TSX:WJA), another Canadian operator, is down 13% this year at the time of writing.

So, what has changed for the Canadian airline operators after such a remarkable rally last year that saw airline profitability touching a 20-year high? Let’s have a deeper look at Air Canada, the industry leader, to see what’s happening.

Rising fuel costs

The biggest factor keeping airline stocks under pressure is the surging fuel costs that account for about a third of airline expenses.

During the past four years, airlines have benefited from the depressed fuel prices amid a global supply glut. But that situation is changing with OPEC members successfully maintaining their supply controls.

Fuel costs have begun to rise at a time when Air Canada has embarked on one of the biggest expansions of its history by adding more routes and buying new planes. That expansion may reduce growth in its key performance metrics — revenue per available seat mile — because the airline needs to hire more employees.

“Some of the main tailwinds Canada’s air transportation industry has benefited from in the past two years, primarily low fuel costs and a weaker loonie that is bolstering U.S. and foreign demand, will slowly reverse themselves over the next five years,” according a study by Conference Board’s economist Sabrina Bond published last week.

The expectations of slowing revenue growth and rising costs have so far not appeared in the company’s latest earnings report.

Air Canada’s profit more than doubled in 2017 after the operator opened new routes and flew a record number of passengers amid a sustained industry boom. The company added 30 routes globally last year, and its expanded international push helped it carry a record 48 million travelers, while boosting passenger revenue by 10%.

After such a stunning turnaround for an airline which emerged from creditor protection in 2004, the biggest challenge for CEO Calin Rovinescu is to sustain this growth momentum. He told analysts during the last earnings call that the company plans to cut spending by $250 million by the end of 2019 and will examine all areas of the company to find “real and sustainable” reductions in overhead.

The bottom line

Trading at $25.95, Air Canada stock is struggling to break above the all-time high that it reached in March. With the forward price-to-earnings multiple of just 6.45, its valuation looks attractive with the Street’s consensus 12-month target of $33 a share. That said, airline stocks belong to a highly cyclical part of the economy and are only suitable for investors with a high risk tolerance. Investors interested in Air Canada stock should wait to see what the management has to say when it releases the first-quarter earnings report on April 30.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Haris Anwar has no position in any stocks mentioned.

More on Investing

A plant grows from coins.
Dividend Stocks

1 Top Dividend Stock to Buy in August 2022 and Hold Forever

Leon's Furniture (TSX:LNF) stock is one of many quality dividend plays that could face most upside if a recession never…

Read more »

Oil pumps against sunset
Energy Stocks

Oil Falls Below US$90 for 1st Time Since February: 2 Energy Infrastructure Stocks to Buy Today

With oil prices decreasing, energy infrastructure stocks might remain solid bets, even if others see a downturn.

Read more »

The sun sets behind a high voltage telecom tower.
Dividend Stocks

BCE (TSX:BCE): An Impressive 5.75% Yielder

Canada’s top 5G stock deserves top billing in a stock portfolio because of its Dividend Aristocrat status and impressive 5.75%…

Read more »

Arrow descending on a graph
Investing

Why Maple Leaf Foods (TSX:MFI) Stock Plunged 16% Last Week

Maple Leaf Foods Inc. (TSX:MFI) stock has plunged after its earnings, but there is reason for optimism over the long…

Read more »

TSX Today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Monday, August 8

Continued strength in metals prices could help mining stocks on the TSX open slightly higher today.

Read more »

Hands holding trophy cup on sky background
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Here are three top TSX growth stocks that may be worth a look, given the significant valuation declines these stocks…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Man data analyze
Stocks for Beginners

Beginners: 2 Market-Beating Stocks Just Getting Started

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX:CSU) are proven market beaters that could continue their ways.

Read more »