Air Canada (TSX:AC) has been one of the worst-performing TSX stocks over the last four years. Since the start of 2020, it has fallen 59% in price. Although the current stock price — $20 — is considerably higher than it was at the March 2020 lows, it is basically unchanged from the day in early 2021 when the COVID-19 vaccine was first announced.
The reason why Air Canada stock got beaten down is fairly obvious: it was a casualty of the COVID-19 pandemic. When the pandemic came to Canada, entire cities shut down, Provinces mandated 14 days of self-isolation upon arrival from other provinces, and entire international routes were shut down. Air Canada’s revenue predictably collapsed, and it lost $2.6 billion in 2020, followed by another multi-billion-dollar loss in 2022. The stock fell all the way to $12 as these events were taking place.
But a curious thing happened: in 2022, Air Canada started recovering, with no corresponding increase in its stock price. It hit a high of $29.42 in 2021 — when lockdowns were still occurring — and hasn’t retaken that level since then. In 2022, Air Canada’s revenue grew. In 2023, it was profitable. Over the last three years, revenue compounded at a 55% annual growth rate (CAGR). The company took on some extra debt during the COVID-19 crisis, but it had very low interest rates and is now being paid off.
In this article, I’ll make the case that Air Canada’s results in the next few years are likely to be satisfactory.
Revenue growth should be high
One thing that’s quite likely to happen with Air Canada in the next few years is revenue growth. COVID lockdowns are a thing of the past. People are 100% free to travel once more. But at the same time, there are only two “large” airlines in Canada, and the second largest (WestJet) is nowhere near Air Canada’s scale. So, AC likely enjoys significant pricing power heading into the fiscal year ahead.
Fuel costs might eat into earnings
On a somewhat less positive note, Air Canada is facing rising fuel prices right now. Crude oil prices have been rising all year long, and the rise in crude has caused jet fuel prices to rise, too. Jet fuel is the single biggest cost for airlines. If its price keeps rising, then Air Canada’s earnings may decline even with its revenue going up. However, the level of damage that high fuel prices could cause here is not that extreme. AC has few competitors: it can pass on some of the cost of higher fuel to customers. Earnings probably won’t be negative. However, they could decline if oil prices stay high.
Foolish bottom line
The bottom line on Air Canada stock is that it’s barely trading above its COVID-era valuation even though its business has fully recovered. It’s profitable, it’s growing. This is not the company that we saw trading for $20 per share in early 2021, but the stock is still around that level. I’d say this is a fairly sensible stock to own.
