The global pandemic in 2020 caused financial disarray in commercial aviation and other industries. Air Canada (TSX: AC) was riding high on 27 consecutive quarters of profits and revenue growth before the novel coronavirus breakout. Canada’s flag carrier has reported first-quarter losses since that fateful year except one.
Net income in Q1 2023 reached $4 million as passenger revenue reached a record $4 billion. However, on May 2, 2024, Air Canada reported a net loss of $81 million in Q1 2024. The share price fell 8.4% to $18.75 and hasn’t climbed above $20.
As of this writing, AC trades at $18.80 per share. Based on market analysts’ 12-month average price target of $27.56, the upside potential is 46.6%.
Financial highlights
Michael Rousseau, President and CEO of Air Canada, said the airline’s solid first-quarter results position it for strong performance this year. In the three months ending March 31, 2024, operating revenue and free cash flow (FCF) increased by an identical 7% year over year respectively to $5.2 billion and $1.01 billion. Total liquidity was $10 billion at the quarter’s end.
Mark Galardo, head of Air Canada’s Revenue and Network Planning, said cargo is a good complimentary business. Unfortunately, despite higher volumes, revenues from the segment declined $23 million year over year due to softer yields. He expects global cargo flows to improve by adding the Boeing 787-10 aircraft to the cargo fleet.
For passenger travel, Air Canada is arranging lease agreements for the delivery in 2024 and the placing into service of additional Boeing 737 MAX 8s pending reconfiguration completion.
Business outlook
Air Canada acknowledged that pent-up demand for post-pandemic travel has receded in the first quarter of 2024 after two years of boom. Also, Canada’s premier airline company didn’t experience a bounce back in business travel like its U.S. counterparts Delta Air Lines and United Airlines.
“As expected, pent-up demand and ‘revenge travel’ factors are slowing over time,” said Galardo. In addition to thinner margins on sales, the $6.7 billion airline company is contending with supply chain problems that forced the grounding of six to seven planes.
Nonetheless, a Global Business Travel Association (GBTA) report is an encouraging sign. GBTA forecasts Canadian business travel to return to pre-pandemic levels in 2024. It should reach US$25.9 billion, representing 13.5% annual growth. The global and U.S. growth forecasts are 11.8% and 9.2%, respectively.
Air Canada notes the healthy demand across the system, owing to booking curves in spring and summer. However, it won’t match or approximate the demand environment, strong yields, load factors, or challenge capacity in 2023. The domestic network should strengthen in Q2 2024 compared to the same quarter in 2023.
Base year
Performance-wise, the stock has yet to take off with the pent-up demand or revenge travel. Air Canada reached $29.80 on March 15, 2021, but can’t sustain the momentum. Also, the 12-month average price target is too optimistic. Even improved full-year financial results will not guarantee a breakout. Moreover, during the earnings call, Rousseau said that 2024 is the base year on which to rebuild.
