Does Air Canada’s Recovery Indicate a Return to Dividend Payments?

Air Canada’s stock price continues to hover around $18, as rising costs and rates overshadow current strong demand.

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Air Canada (TSX:AC) has staged quite the recovery as it benefits from increased demand for air travel. Naturally, this leaves many of us wondering if the company’s dividend will make a comeback. It’s a fair question that deserves consideration. So let’s explore the likelihood of Air Canada stock’s dividend returning soon.

Air Canada’s financials don’t point to a dividend anytime soon

I won’t beat around the bush. I don’t really see this happening in the near future. Let’s explore some financials so I can show you where I’m coming from.

In the quarter ended June 30, 2023, Air Canada reported strong demand, which led to a 36% increase in revenue to $5.4 billion. It also led to a $1 billion increase in its operating income, to $802 million. Furthermore, management commented on the fact that visibility was good, with $5.7 billion in advance ticket sales. Pent-up travel demand is boosting ticket sales, and at this time, the effect of higher interest rates on consumers have yet to be felt by Air Canada.

Right now, Air Canada has approximately $15 billion in debt. This compares to its $9 billion debt balance in 2019. In the last quarter, Air Canada paid off $1.6 billion of its debt, and this will continue to be worked down as deleveraging remains a top priority. This higher debt level is a negative drag, as higher interest rates mean a greater hit to the bottom line. This added expense, along with the debt repayment goal, means that a dividend is not in the cards right now.

Also, on top of higher interest expense, airliners are dealing with a higher cost of labour as well as higher cost jet fuel. In fact, the cost of jet fuel increased 32% last quarter versus the prior year. Today, oil prices continue to hover around the $90 mark. This compares to an average oil price of $57 in 2019. Given that fuel is by far Air Canada’s biggest cost, we can see how this is a significant negative change to the economics of the business.

The consumer and Air Canada

I’ve talked about the interest rate environment on many occasions. In my view, the effect that the recent rate increases will have on the economy and the consumer will be meaningful. I don’t think that air travel will be immune to this. It is, in fact, one of the biggest discretionary spending categories. Big ticket items like travel are usually one of the first to be cut in times of stress – maybe this expectation is one of the reasons why Air Canada’s stock price is stuck below $20 despite the strong top-line revenue numbers.

So it is with this backdrop that I evaluate Air Canada stock and the likelihood of a dividend. In a nutshell, for me it boils down to this double whammy – rising costs, along with falling demand. On the cost side, we are already seeing costs spike, and this has presented Air Canada with a challenge. On the demand side, we are not seeing a hit at this time, but in my view, there is a strong likelihood that this will happen over the next few quarters.

What does all of this mean for a future dividend?

In the last quarter, net income was $838 million. This compares to big losses during the pandemic and net income of $1.4 billion in 2019. The difference between then and now are many. As I touched upon in this article, Air Canada’s debt-load is much higher today, and costs have also risen substantially. As a result, management’s top goal is to deleverage and look for efficiencies to bring down costs. 

Longer-term, increased immigration will continue to drive demand. However, it seems clear to me that the effect of higher interest rates have yet to be felt by Air Canada. In my view, the higher cost of living will hit air travel hard in future months and quarters. In fact, Air Canada’s stock price might be reflecting this expectation. The bottom line is that I think it’s too early to expect the return of Air Canada’s dividend.

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 Karen Thomas 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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