Ready for Lift-Off? Air Canada Stock Gained 16.5% in January 2023

The overall recovery in air travel demand is giving a significant lift to Air Canada’s financials.

| More on:
Plane on runway, aircraft

Image source: Getty Images.

The ongoing improvement in revenues and pickup in traffic trends amid an overall recovery in air travel demand supports the uptrend in airline stocks. Thanks to the favourable operating environment, Air Canada (TSX:AC) stock gained about 16.5% in January 2023. 

It’s worth highlighting that the leisure travel demand ramped up significantly, coming out of the COVID-19 pandemic. Moreover, Air Canada has witnessed a steady month-over-month improvement in corporate travel, which is encouraging. 

Even though things have improved quite a lot from the pandemic lows, shares of the largest Canadian airline company are still trading at a massive discount from the pre-pandemic levels. Against this backdrop, let’s examine the factors impacting Air Canada stock. 

Improving fundamentals support upside

Air Canada’s financial and operating performance has consistently improved, which will likely support its stock. Air Canada’s passenger revenues exceeded $4.8 billion in Q3 (third quarter) of 2022, reflecting a three-fold increase from the prior-year quarter. Its traffic and total operating capacity more than doubled compared to Q3 of 2021.  

While Air Canada continued to operate at a lower capacity (about 79%) compared to the third quarter of 2019, its passenger revenue reached nearly 94% of what it achieved in Q3 of 2019. This stark improvement in passenger revenues reflects a better fair mix performance in all cabins, especially in the premium cabin. 

Adding to its growth is Air Canada’s network diversification which reduces its dependency on any single country or geography. 

It’s worth highlighting that Air Canada reported positive net cash flow from operations (the fifth quarter in a row). Meanwhile, it reported its first positive quarterly operating income since the pandemic began. It posted an operating income of $644 million in Q3. 

Demand to sustain

While the macroeconomic environment remains challenging, the strength in leisure demand and recovery in business travel will likely support its growth. The company highlighted that it is seeing solid leisure demand exceeding 2019 levels. Moreover, it expects the premium economy and business class revenues to grow.

Further, Air Canada highlighted that U.S. traffic is trending upward, which will support its revenue. Moreover, its expanded joint venture with United Airlines will expand its network reach. Also, the advance ticket sales remain solid, leading the company to expand its capacity further. 

While passenger metrics are improving, Aeroplan (loyalty program) continues to perform exceptionally well. This is important for Air Canada, as Aeroplan plays a key role in customer acquisitions and retention. 

Is Air Canada ready for lift-off?

The solid recovery in demand and improving passenger revenues augur well for growth and will likely drive Air Canada stock higher in the long term. However, its high debt and lack of profitability could continue to restrict the upside potential. 

Air Canada had a net debt of $7.82 billion at the end of Q3. Meanwhile, it continues to report a loss on the bottom-line front. A return to profitable growth and consistent reduction in debt could give a significant lift to Air Canada stock.

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 Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

Money growing in soil , Business success concept.
Investing

2 Great Dividend-Growth Stocks to Stash in a TFSA for Decades

CN Rail (TSX:CNR) and another dividend grower look cheap enough to own in a TFSA value fund for the long…

Read more »

Canada day banner background design of flag
Retirement

Essential RRSP Stocks: 2 Canadian Picks to Secure Your Retirement

Two dividend stocks are ideal anchors for Canadians intending to contribute to their RRSPs in 2024 and save for retirement.

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Retirement

5 Strategies for Maximizing Your CPP Benefits in 2024 and Beyond

Are you looking for the best way to max out your CPP benefits? Here are some tips you may not…

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

Better Artificial Intelligence Stock: UiPath vs. C3.ai

Deciding between UiPath and C3.ai isn't easy since both have strengths and weaknesses.

Read more »

data analyze research
Investing

The 1 Stock to Own in a Sideways Economy

Here's why Restaurant Brands (TSX:QSR) remains a top TSX stock investors shouldn't ignore for long-term gains in this market.

Read more »

Retirees sip their morning coffee outside.
Retirement

Here’s the Average RRSP Balance at Age 65 and 71 in Canada

Canadian investors can consider holding dividend stocks and supplement their CPP and RRSP payouts in retirement.

Read more »

Technology
Dividend Stocks

10 Years From Now, You’ll Be Glad You Bought These Magnificent TSX Dividend Stocks

The TSX is lucrative to buy these magnificent dividend stocks in bulk and be proud of this decision 10 years…

Read more »

sale discount best price
Energy Stocks

Time to Pounce: 1 Phenomenal TSX Stock That Hasn’t Been This Cheap in a While

Now could be the time to get into Cameco (TSX:CCO) stock, which is up 81% in the last year but…

Read more »