Air Canada (TSX:AC) is known as one of the largest airlines in Canada, serving almost 50 million passengers annually, together with their regional partners. The company was hit hard during the time of COVID-19, and since then, it has been reforming itself to grow back to its previous levels, with mixed results.
Let’s dive into where Air Canada could realistically be headed over the next five years.
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The bull case on Air Canada stock
Air Canada’s five-year outlook really depends on how investors view the Canadian travel sector for the remainder of the decade. To some degree, Air Canada is currently firing on all cylinders, with travel demand surging to pre-pandemic levels.
Now, corporate air travel remains muted, partly driven by ongoing pandemic-related shifts in the economy. However, international travel, where Air Canada earns the majority of their profitability, remains strong. For those predicting a continuation of these trends and a reversion toward a longer-term mean in the business travel segment, it is conceivable that Air Canada’s stock price could rise sharply from here.
Indeed, Air Canada stock remains more than 60% below its pre-pandemic peak, providing significant upside potential for bulls. While the airline sector will continue to remain volatile, any sort of move toward a multi-year high could see this stock at least doubling from here. That’s the bull case, anyway.
The bear case
Of course, growth is one thing, but profitability is another. Even if Air Canada does see continued strength in terms of demand, that means little if input costs such as pilot salaries and jet fuel remain elevated. These factors largely determine the airline’s profitability, and while the airline remains highly profitable right now (and cheap, at only three times trailing earnings), Air Canada’s current status as a value stock could shift into a value trap in short order.
I have no idea where crude prices will be headed or if this inflationary environment will slow and wages will come down. But as of right now, it appears the inflationary tailwinds behind the market remain strong. Thus, there’s a compelling bear thesis building around this stock, which can be seen in its valuation. At only three times earnings, it’s clear the market is pricing in more of a bearish scenario than a bullish one right now.
The verdict
Overall, I have to say I’m cautiously bullish about Air Canada’s outlook over the next five-year period. On a relative basis, Air Canada is among the cheapest airlines in the Western world. Couple this fact with the concept that there are really only two major airlines in Canada, and the bull thesis is more likely to win out over the next five-year period, in my view.
That said, I’m not calling for a doubling of Air Canada stock from here. While that could happen, it’s clear that cracks are also showing in the Canadian economy. Thus, I think this stock is one that could hover around current levels and perhaps inch higher over time.
