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Air Canada (TSX:AC) Stock Is Primed for Shockingly High Returns by Year End

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I have never really analyzed airline companies, most notably Air Canada (TSX:AC)(TSX:AC.B), Canada’s flagship carrier with the largest fleet size. But with WestJet Airlines having private equity firm Onex as its new owner, Air Canada will be on the defensive.

A breakout could be in the offing, as Air Canada solidifies its leadership position against the nation’s second-largest airline. The stock is already flying high and is up 60.7% year to date. June was a relatively good month, and investors should watch out for this top airline company.

Shifting cycles

The president and CEO of Air Canada Calin Rovinescu reported excellent financial results last May. From a net loss of $203 million in Q1 2018, the airline posted a net income of $345 million in Q1 2019.

Several milestones were recorded, including the $4.453 billion in operating revenue and $6.877 billion in liquidity for the period. Likewise, there was a system yield improvement of 5% over Q1 2018.

Rovinescu attributed the strong performance to the acquisition of the Aeroplan loyalty program and the new capacity purchase agreement with Chorus Aviation for flying by Jazz. These key strategic initiatives during the quarter delivered better-than-expected results.

Air Canada is now moving into the revenue quality cycle after completing the round of investments. Profit margins are expected to improve, and the return of the loyalty program would be a major boost. Growth opportunities are plenty.

The first quarter could have been significantly better if not for the grounding of the 24 Boeing 737 MAX aircraft in Air Canada’s fleet during the last 18 days of the quarter. The grounding was ordered by Transport Canada and other regulators. It had a serious impact on cost and revenue.

Management implemented mitigation measures to prevent disruption of the flying operations. New leases and extensions were executed with other airlines to cover or consolidate some flights and maintain frequencies. Air Canada displayed agility and the flexibility to adjust to unforeseen situations.

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Asserting industry dominance

Last June 27, Air Canada and Transat, the parent company of Canada’s third-largest airline, jointly announced a final agreement for Air Canada to purchase Transat for $520 million.

The acquisition will strengthen Air Canada’s position as the country’s dominant carrier. The merger will enhance the carrier’s capabilities in the highly competitive, global, leisure-travel market. The company will gain access to new destinations and obtain more connecting traffic and increased frequencies.

I am bullish, like other market analysts, about the shares of Air Canada jumping by a never-before-seen 22.2% price increase to $51 by year-end. The growth estimate this year is 49%. That’s probably because Air Canada’s leisure-travel business will be brisk this summer.

Rival WestJet Airlines might be gearing for a potential turnaround under new ownership. By the time that happens, Canada’s flagship carrier will be way up in the sky and rewarding investors with shockingly high returns.

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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 Christopher Liew has no position in any of the stocks mentioned. Chorus Aviation is a recommendation of Stock Advisor Canada and Dividend Investor Canada.

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