Air Canada (TSX: AC) – it’s been one of the hardest hit stocks since the pandemic. Today, it’s making a good effort at a comeback, yet, Air Canada’s stock price is stuck below $20. Is this an opportunity to get in at bargain prices or should we stay clear of it?
Let’s look into it.
Air Canada stock has been through the ringer
Four years ago, the pandemic hit and put an abrupt end to Air Canada’s good fortunes. The stock tumbled from a price of over $50 to $12. Business stopped and the company had to shift from a position of maximizing profits to a focus on survival.
And it did just that. In fact, not only did Air Canada survive, but today, the airliner is seeing extremely strong demand and a resurgence of profitability. For the full year of 2023, Air Canada posted revenue of $21.8 billion, up 32% versus 2022. This was a record number, and one that shows that in fact, the consumer has continued to spend on travel. Also, operating income came in at $2.7 billion, compared to a loss in the prior year.
Interestingly, this number is above 2019’s operating income of $1.7 billion. Yet, Air Canada stock continues to trade 65% lower than pre-pandemic levels.
Investors remain nervous as Air Canada’s costs rise
It’s clear that investors, including myself, remain nervous about Air Canada. The many headwinds that are materializing place the airliner at risk of deteriorating results, and many are not ready to take on this risk. Although I’m starting to warm up on the stock. You see, despite the many pressures that Air Canada is facing, the stock is really cheap.
So, what are these pressures? Well, for starters, we have the fact that costs are rising quite dramatically. For example, pilot wages are increasing, as is Air Canada’s cost per available seat mile, or CASM. This measures an airliner’s efficiency, and it’s calculated by dividing operating costs by available seat miles. The lower this number is the better. In the fourth quarter, CASM came in at 14.2 cents, 4.1% higher than the prior year and 21% higher than 2019 levels. This is clearly a big jump, and one that significantly alters the profitability of Air Canada.
The macro environment remains risky
While inflation is coming down, interest rates remain much higher than pre-pandemic levels, and the consumer is stretched. This means less money to spend on leisure activities such as travel. While we continued to see strong demand for travel in 2023, this may change soon. The longer rates stay at 5%, the greater the negative impact on consumers and the economy.
So why is the stock stuck below $20?
Well, the answer is quite simple. Air Canada faces rising costs along with the likelihood of a decline in demand. This combination is a very tough one to overcome. So, I think that Air Canada’s stock price will remain low until at least one of these negative pressures begins to subside.
In conclusion, while I don’t think that now is the right time to buy Air Canada stock, I have definitely begun to warm up to it, as it is very cheap and just waiting for a real catalyst to move it higher.
