Air Canada Stock: The Underperformance Is Likely Past

Air Canada (TSX:AC) stock has underperformed over the last five years, but the worst may be behind it.

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Air Canada (TSX:AC) stock has been one of the worst-performing TSX equities over the last three years. In a period that has seen Canadian stocks as a whole climb 27%, AC stock has fallen 28%—definitely not an impressive showing.

With that said, the factors that led to Air Canada underperforming are mostly in the past. The stock crashed because, in March 2020, Canada entered a massive nationwide lockdown that required most international flights to cease. Domestic travel was still allowed, but with most provinces requiring a 14-day quarantine upon arrival, it was highly disincentivized. As a result, Air Canada’s revenue declined 81%, and it lost $4.6 billion. 2020 was a tough year for Air Canada, but now, with COVID lockdowns a thing of the past, the company’s main headwind has abated. As a result, its stock is probably safe to buy today.

COVID-19 lockdowns are over

COVID-19 lockdowns have been out of the picture in Canada for at least a year and a half now. The last big lockdowns were seen in Ontario in the winter of 2021. Since then, there have been very few lockdowns, and basically no truly large ones (e.g., lockdowns affecting entire provinces). That doesn’t mean there could never be another COVID “wave” that brings lockdowns back, but the absence of lockdowns has been a reality for almost two years. Recent history would suggest that lockdowns probably aren’t coming back, at least not soon.

This fact is a good thing for Air Canada. One of the most common features seen in COVID lockdowns was 14-day quarantines for travellers. If you entered a province after leaving another province, you had to socially isolate for 14 days. Only after completing the social isolation could you go outside. This heavily disincentivized most “leisure” and business travel because such trips usually last fewer than 14 days. Travelling and quarantining for 14 days didn’t seem “worth it” back in 2020, unless you were literally moving to another province. Today, this restriction is lifted nationwide, so Canadians are back to travelling like in the pre-COVID days. This is a positive for Air Canada, which saw its revenue jump 71% in the fourth quarter of 2022.

Air Canada’s financials are improving

Another thing Air Canada has going for it is the fact that its financials are improving. In 2020 and 2021, Air Canada lost billions of dollars. In 2023’s second quarter, it was profitable, as can be seen in the metrics below:

  • $5.42 billion in revenues, up 36%
  • $802 million in operating income, up 14.8%
  • $1.4 billion in operating cash flows
  • $950 million in free cash flow
  • $838 million in net income, up from a loss

Overall, it was a pretty good quarter. The company was undeniably profitable, and its growth was strong, too.

One risk to keep in mind

Although Air Canada has mostly overcome the “COVID lockdown” risk factor, it is now facing another risk factor: rising fuel costs.

The price of oil has been rising this year, and with high oil prices come high jet fuel prices. Jet fuel is the average airline’s biggest cost, so investors will want to monitor the situation with oil prices going forward. If prices go much higher, Air Canada’s profits will likely decline and could possibly even turn negative.

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 Andrew Button 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.

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