Over the past seven years, Air Canada (TSX: AC)(TSX:AC.B) has been one of the biggest gainers on the TSX. Trading as low as $0.90 in 2012, it’s up to around $33 today — a nearly 4,000% gain. Recently, Bank of Montreal analysts rated Air Canada as a strong buy, proving that positive sentiment toward the stock is rising.
It’s one thing to observe that Air Canada stock is up. It’s quite another to show why that’s the case. Although airline stocks are highly cyclical, rising and falling with the broader economy, Air Canada’s trend has been much more pronounced than the industry average. To understand why that’s the case, we first need to understand how the stock got so low in the first place.
A history of financial difficulties
In the aftermath of the early 2000s recession, Air Canada faced a number of financial difficulties. Prior to the recession, the company had entered bankruptcy protection because of $14 billion worth of debt. Then in 2008, the company nearly tripled its pension deficit, which reached as high as $3.2 billion that year (up from $1.2 billion in 2007).
Air Canada was already in rough shape by 2008 because of the aforementioned factors. But when 2009 hit, all bets were off. As the global recession hit people in the pocketbooks, demand for air travel fell dramatically, meaning that Air Canada had to contend with massive debt and lower revenue simultaneously. It was a recipe for disaster.
Dramatic turnaround
At one point, it looked like Air Canada was pretty much finished. Faced with mounting debt, bankruptcy, and increasing pension obligations, the company was in a tough place. However, it managed to start turning things around.
First, management was able to acquire financing to repay its many debts. Second, the company started selling business units to gain extra liquidity. Third, management reached an agreement with employees over labour issues, including the pension issues that had been plaguing the company for years. Finally, in 2014, Air Canada got a stroke of good luck, as the price of oil collapsed, which lead to a reduction in fuel prices.
Return to profitability
In 2012, Air Canada posted after-tax net income of $131 million after four consecutive years of net losses. The company grew its earnings every year after that, until in 2017, it posted $2 billion in net income on $14 billion in revenue. This represented growth of 132% year over year, proving that Air Canada had recovered from recession difficulties.
In 2018, the company’s profits took a deep downswing to $167 million. Such a steep slide is a point of concern, but the company is still at least pumping out profits. More to the point, the company’s total debt, previously $14 billion, is now down to $6 billion, showing that the restructuring efforts are paying off.
In summary, Air Canada’s dramatic rise since 2012 is the result of a successful restructuring combined with a little luck. The company’s efforts at paying off debt have worked, the pension situation is in order, and the fall in the price of oil certainly didn’t hurt. As for whether the company can keep growing into the future, that remains to be seen. However, it’s unlikely that future gains will be as frothy as those seen in the past seven years.
