In today’s dynamic market, investors are constantly on the lookout for value and growth opportunities. The airline industry has faced turbulence due to the COVID-19 pandemic. Yet it is showing signs of recovery, making it an intriguing sector for investors. Among the airlines, Air Canada (TSX: AC) stands out as a compelling choice.
In this article, we will delve into why Air Canada has historically dominated the Canadian airline industry. Further, we’ll explore its potential for growth and investment opportunities.
Historical dominance
Air Canada’s dominance in the Canadian airline industry is rooted in several key factors. One of the most significant contributors to its success is its international exposure. Roughly 70% of Air Canada’s 2022 passenger revenue came from trips that began or ended outside of Canada. Just over 20% from flights to or from the United States. This international focus allowed Air Canada to capitalize on “sixth freedom traffic,” connecting long-haul international routes to the U.S. via layovers in Canadian airports.
Even during the COVID-19 crisis, Air Canada was in better financial shape than many of its U.S.-based peers. That’s despite the extensive travel restrictions in the Canadian market. Air industry analysts expect that Air Canada’s capacity and passenger load factors will return to pre-pandemic levels by 2024, indicating a path to recovery.
Moreover, the airline industry is evolving its pricing strategies to adapt to changing travel habits. Business and leisure travellers are no longer distinct categories, and airlines are finding new ways to attract and reward brand-loyal frequent travellers. This shift in strategy is expected to benefit Air Canada, which has a solid track record of managing its debt load and maintaining liquidity.
Debt reduction on track
Recent news highlights Air Canada’s commitment to strengthening its financial position. The airline has prepaid loans of approximately $462 million from the Export Development Corporation (EDC) and approximately $127 million supported by the Export-Import Bank of the United States (EXIM). These prepayments, totalling around $1.9 billion in debt, have bolstered the company’s balance sheet, providing more flexibility for strategic investments.
Expanding destinations
Air Canada’s growth opportunities are further underscored by its expansion plans. The announcement included new year-round routes, including Montreal to Madrid, expanded service to Italy, and earlier seasonal start-ups to various European cities. This signifies the company’s commitment to capitalizing on the rebound in international travel.
Earnings show strength
Air Canada’s recent earnings report demonstrates its resilience and potential for growth. Operating revenues increased by 36% from the second quarter of 2022, with an operating margin of 14.8%. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) reached $1.2 billion, marking a substantial improvement from the previous year. The leverage ratio also decreased, strengthening the company’s financial position.
Bottom Line
Despite its shares trading below pre-pandemic levels, Air Canada stock presents a compelling investment opportunity. The company’s historical dominance in the Canadian airline industry, coupled with its strategic initiatives to reduce debt and expand destinations, and strong earnings performance make it an attractive stock to consider.
As the airline industry continues to recover, Air Canada stock has the potential to regain its previous heights, offering investors the prospect of substantial growth in the post-pandemic world. With shares currently trading below $25, compared to the pre-pandemic level of $50, now may be an opportune moment to consider investing in Air Canada stock.
