Even as the most beaten-down Canadian stocks witnessed a healthy recovery in 2023 with the TSX Composite Index rising 8.1%, shares of Air Canada (TSX: AC) continued to trade on a bearish note. Although AC stock rallied 6% in December 2023, it ended the year with a 3.6% decline.
Before I talk about some important fundamental factors that could determine Air Canada’s future stock price movement, let’s take a quick look at what kept it under pressure in 2023.
Why Air Canada stock fell 3.6% in 2023
For a little background, 2023 was the fourth consecutive year of losses for Air Canada stock. A massive selloff in its share prices started during the global pandemic phase. This was primarily because the airline industry was one of the hardest hit by the pandemic, with travel restrictions and reduced consumer confidence leading to massive declines in the sales of airline companies. As a result, AC stock lost nearly 56% of its value in 2020 and 2021 combined.
Air Canada posted a solid 159% YoY (year-over-year) increase in its sales in 2022, helping it post an adjusted annual net loss of $2.76 per share, significantly better than its net loss of $9.66 in the previous year. Even as its financial condition improved, the largest Canadian passenger airline company continued to burn cash that year due mainly to increased costs of labour and fuel. That’s why, despite starting the year on a strong note by rallying 15% in the first quarter, Air Canada stock ended 2022 with 8.2% losses.
In the first half of 2023, the central banks in the United States, Canada, and most European countries continued to raise interest rates, which made investors worried about slowing economic growth and a potential recession. These recession fears, which could potentially hurt the future air travel demand, could be the primary reason why Air Canada stock largely traded on a subdued note in 2023.
Here’s why Air Canada stock could finally recover in 2024
After consistently sliding for four years in a row, Air Canada stock is currently down 61% at $18.69 per share from its pre-pandemic year 2019’s closing level of $48.51 per share. These massive losses, in my opinion, make AC stock look way too undervalued based on its long-term growth outlook.
Although inflation hasn’t cooled down completely to normal levels, economists are cautiously optimistic about 2024, with the U.S. Federal Reserve and the Bank of Canada expected to slash interest rates multiple times during the year. Lower interest rates will not only boost stock investors’ confidence in airline companies like Air Canada but also could lead to an economic recovery.
Besides that, we shouldn’t forget the fact that Air Canada has already staged a spectacular financial recovery in the post-pandemic era. In the first three quarters of 2023, the company’s total revenue jumped more than 40% YoY to $16.7 billion. With this, the Canadian flag carrier’s adjusted earnings in these three quarters stood at $4.73 per share, which was even higher than its pre-pandemic year 2019’s annual earnings of $3.37 per share. Given its strong financial growth and expected improvements in the economy, I wouldn’t be surprised if Air Canada stock starts a strong long-term rally in 2024.
