Air Canada (TSX: AC) has been moving higher in recent months. And though shares aren’t yet at cruising altitude, they may just get there over the next year or two as the company continues doing its best to power through what have been some pretty severe headwinds. Though only time will tell if said headwinds will turn into tailwinds, I do think new investors should continue to keep their seatbelts fastened for more turbulence. Despite the hefty implied volatility in the name, I still think it’s worth staying aboard as Canada’s economy looks to pick itself up after a sluggish year.
Though it’s not an official economic recession, former Bank of Canada governor recently stated his belief that Canada is in a recession, though not one that meets the traditional definition (that’d be two straight quarters of negative GDP growth). In any case, it’s not hard to imagine that various factors are masking the harsher reality of the situation. Head over to the local grocery store and you’ll see many Canadian consumers are still in a pinch despite the cooling off of inflation.
In many ways, the wounds of recent years of inflation have already been formed. And it may take more than just normalized inflation to heal such wounds. If Canada is in some sort of unofficial recession-like climate, perhaps a bit of disinflation could be in the cards come the new year.
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Air Canada stock looks intriguing again after recent gains
In any case, the price of airfare has remained relatively tame. That said, high demand for air travel may very well pave the way for higher ticket prices despite the continued ascent of ultra-low-cost carriers (most notably Flair Airlines) that have beckoned in budget travelers who are more than willing to pack light.
More recently, Air Canada announced that it will cut out carry-on luggage on its most basic plans. And while consumers may not be big fans of being nickeled and dimed at the airport, I do think that, ultimately, such efforts could bode well for Air Canada’s margins and sales over the longer term. Indeed, budget travelers hurt by inflation will be drawn in by lower basic airfares, while many of them may underestimate how much they’re packing for their trips.
Though removing luggage from basic airfares is going to be a controversial decision, I do think consumers will speak with their wallets. And if it means lower airfares, perhaps some Canadians will be all for the move. In any case, I think the air travel environment could be looking up in the new year as shares of AC look to add to their recent rally off 52-week highs, which started this August.
The bottom line for Air Canada stock
The stock’s a surprising year-to-date winner, now up more than 36%. And while the stock appears to be an absolute steal of a bargain at 9.3 times forward price-to-earnings (P/E), I would caution investors from chasing the name right here. If we are headed for a recession (Trump tariffs may be the catalyst for such), Air Canada may be headed for a slight tailspin before its next leg higher.
Either way, I’d watch the name and look to pick up shares should they make a return to the high teens again. As for how high AC stock can fly in the new year, some bullish analysts see a move to the low-to-mid $30 levels.
