Few other companies were more negatively affected by the pandemic than Air Canada (TSX:AC). But today, in 2023, the future is starting to look so much brighter. Demand for travel is very strong, and Air Canada has started the year with robust topline results. Let’s look at the complete picture and what this means for Air Canada’s (AC) stock price.
Air Canada: Riding high in a strong demand environment
The first quarter of 2023 has shown us what a recovery in demand looks like. Operating revenue increased 90% to $4.9 billion, in what was a Q1 record. Passenger revenue came in at $4.1 billion, which was more than two times higher versus last year. Also, Air Canada’s load factor, which is the percentage of seating that has been filled with passengers, came in at record levels. In fact, it came in at almost 85% in the first quarter.
Importantly, this strength in demand is being sustained. In fact, advance bookings have continued strong. Thus, as of now, we can expect that this strong demand environment will continue. Another important fact to keep in mind is that this is happening even as fares have increased. Also, premium offerings have been stepped up and demand for these premium-priced seats is also increasing rapidly. The clear message here is that travellers are still willing to pay up for their travel experience.
And Air Canada’s stock price has reacted well to this strong demand recovery, as we can see in its stock price graph below.
Costs challenge the bottom line
Of course, no discussion of Air Canada would be complete without a conversation about costs. This is true especially today, as it’s a different world today than in the pre-pandemic days. Essentially, every input line on Air Canada’s expense report is being pressured higher.
Fuel cost per litre, for example, increased 30% in Q1 versus the prior year. Another good barometer of costs is the cost per available seat mile (CASM). This is calculated by dividing the operating costs by available seat miles. As such, it measures the efficiency of an airliner – and lower is clearly better.
So, for the first quarter of 2023, CASM came in at 14.5 cents, 24% higher than the first quarter of 2019 (pre-pandemic). This reflects the magnitude of the challenges and cost increases that Air Canada is facing. It’s simply a new world with drastically higher costs. This challenges Air Canada’s business model, and it is now more important than ever for the airliner to find efficiencies and be able to increase fares. Its very profitability is on the line.
The recession threat risk to Air Canada (AC) stock
The problem is that along with rising costs, we have a looming macroeconomic problem. Just like Air Canada’s costs have risen, so have all of our costs. And we are the travellers. As this increased cost of living continues to add up, we will eventually begin to cut our discretionary spending. That means our travel spending.
In my view, this is a real risk that lurks underneath the strong recovery in demand that Air Canada is experiencing. We have seen the effects of falling interest rates over the last many years. It’s monetary policy in its simplest form – falling rates equals an expansionary economy. On the contrary, rising rates equal a contractionary economy. This is where we’re at today. It’s what I see when I look into the future. It does not bode well for travel stocks like Air Canada (AC) stock.
So, the answer to the question that I posed in the headline is open. I think the challenges remain – they just look different today than they did during the pandemic.
