Canadian airline stocks have been among the hardest hit by the COVID-19 pandemic. Travel restrictions and lockdowns in 2020 suddenly led to a big decline in the demand for air travel, while the demand for cargo services remained firm. This is one of the key reasons why shares of passenger airline companies like Air Canada (TSX:AC) tanked sharply. However, shares of cargo services-focused airline companies like Cargojet (TSX:CJT) witnessed a big rally that year.
Even as expectations of a reduction in interest rates led to a big rally in most other market sectors in the final quarter of 2023, the shares of passenger airline companies failed to recover. Let’s take a quick look at the outlook for Air Canada and Cargojet in this article and assess whether these airline stocks are a good buy in February 2024.
Air Canada stock
Air Canada stock has consistently been trading on a negative note for four consecutive years. After plunging by over 53% in 2020, it extended its losses by another 18% in the following three years combined. But does this poor stock performance mean the largest Canadian passenger airline company is still struggling financially? Let’s find out.
In 2020, Air Canada’s total sales nosedived by 70% YoY (year over year) to $5.8 billion. As a result of lower revenue and higher expenses, the airline company burnt $4.2 billion in cash that year. While its financials continued to improve in the following two years, a big turnaround in its operations came in 2023 with a rapid increase in the demand for air travel. Stronger demand helped Air Canada post a 40.3% YoY increase in its sales in the first three quarters of 2023 to $16.7 billion. Similarly, its adjusted earnings in these nine months stood strong at $4.73 per share against an adjusted net loss of $2.46 per share during the same period of the previous year.
With this, Air Canada’s full year 2023 top and bottom line seems on track to exceed its pre-pandemic year 2019’s levels. As the economic outlook also improves in the years to come, the demand for its services will likely increase. Despite these positive fundamental factors, its share prices haven’t seen any appreciation so far, making it look way too undervalued to buy for the long term in February 2024.
Unlike Air Canada, shares of Cargojet more than doubled in value in 2020 as the global pandemic led to a sudden increase in the demand for time-sensitive air cargo services. However, CJT stock lost most of its 2020 gains by losing about 46% of its value in the following two years combined as investors gradually realized that the demand surge for its services was temporary.
In the first three quarters of 2023, Cargojet’s revenue fell 8% YoY to $655.6 million as a high interest rate environment badly affected volumes for discretionary items, leading to a reduced demand for its services. These factors also took a toll on the company’s profitability in these three quarters.
In my opinion, Air Canada stock could be a better long-term buy than Cargojet right now based on valuations. However, CJT stock could also witness upside movement in the short term as a reduction in interest rates will likely boost the demand for its cargo services and fuel its financial recovery.