Since the pandemic, Air Canada (TSX:AC) has been a range-bound stock, trading between $15-$26. The airline has come a long way and improved its operational efficiencies, despite geopolitical tensions, rising fuel prices, and supply chain bottlenecks. Disruption became the new normal for the airline industry post-pandemic.
First came the grounding of all planes and fleet cuts. When air travel restrictions were lifted in 2022, revenge travel boosted demand to a level that airlines faced a capacity shortage. It even affected their services and increased consumer complaints. This chaos in the last three years has finally normalized the airline situation.
The fundamentals of Air Canada
Air Canada travelled through all the above disruptions by improving its efficiency. As air travel demand has returned to pre-Covid levels, I looked at the airline’s pre and post-Covid fundamentals, excluding the 2020-2021 figures.
| Air Canada’s fundamentals | 2018 | 2019 | 2022 | 2023 |
| Revenue | $18 billion | $19.13 billion | $16.56 billion | $21.83 billion |
| Net Income | $37 million | $1.47 billion | -$1.7 billion | $2.276 billion |
| Net Debt | $5.2 billion | $2.84 billion | $7.5 billion | $4.567 billion |
| Free Cash Flow | $1.32 billion | $2.07 billion | $796 million | $2.756 billion |
| Passenger load factor | 83.30% | 83.40% | 80.50% | 86.70% |
| EBITDA margin | 17.80% | 19% | 8.80% | 18.20% |
| EPS | $0.13 | $5.44 | -$4.75 | $5.96 |
The year 2019 was the best year for Air Canada before the pandemic. At that time, the stock was trading at $51 per share. Switch to 2023. The airline has learned ways to make money. Its revenue, net income, and earnings per share increased above the 2019 levels. And this is despite a higher net debt. Net debt is the long-term debt after deducting cash reserves.
The airline took significant debt during the pandemic to stay operational. And now, its priority is to reduce this debt. In 2023, it repaid $1.3 billion of outstanding debt, significantly reducing its leverage ratio to 1.1 times from 5.1 times in 2022. The leverage ratio tells you that Air Canada’s net debt is 1.1 times its 2023 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Air Canada is now increasing its capacity, adding more planes to its fleet and hiring more employees. Moreover, it is increasing pilot compensation as the industry is facing pilot shortages after several pilots retired during the pandemic. It has an 86.7% passenger load factor, which means 86.7% of the available seats in the plane are filled with passengers.
Is Air Canada stock a buy for the long term?
Despite these improving fundamentals, AC stock did not take off as expected because of uncertainty. The airline industry is still finding a new normal. If revenge travel eases, the increase in capacity will become a liability more than an asset. And with fears of recession still looming, investors are treading with caution.
Until the macroeconomic signs turn positive, with strong GDP growth and interest rate cuts, AC stock may be range-bound. It creates an opportunity to buy AC stock below $20. Once the revenge travel ends and the airline industry identifies its new normal, AC stock could see significant growth as it did in 2019, when the stock price more than doubled.
Wall Street analysts also have a buy rating for Air Canada as the market has not priced in the fundamentals.
Is now the right time to buy this stock?
Remember, no one can time the market. While you can make a calculated guess, there is no assurance your predictions will come true. Hence, investors don’t time the market but spend time in the market.
When investing, look for a stock where you see value and growth potential that the stock price does not reflect. Air Canada’s fundamentals suggest that the airline is at its best profits and cash flows. Its profit and revenue growth may slow as the industry develops its new normal. AC stock could surge once the industry normal is established. Buying fundamentally strong stocks at the dip is the right time to invest. However, do not keep a time limit on the stock’s returns. You could consider investing in Air Canada till the stock trades below $20.
