After crushing the broader markets by a wide margin in the decade before the COVID-19 pandemic, Air Canada (TSX:AC) stock has continued to trail the TSX index in recent years. Valued at a market cap of $9 billion, Air Canada stock currently trades 52% below all-time highs. So, let’s see if the TSX stock can rebound in 2025.
A strong performance in Q3 of 2024
Air Canada stock has surged over 30% in 2024 due to its strong quarterly results, resilient consumer spending, and robust free cash flow generation.
In the third quarter (Q3) of 2024, Air Canada reported operating revenue of $6.1 billion, down 4% year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $1.5 billion, indicating a margin of almost 25%, while adjusted earnings were $2.57 per share, both of which surpassed consensus estimates.
Notably, in the first nine months of 2024, Air Canada reported a free cash flow of $1.8 billion, while it spent $1.5 billion in capital expenditures.
Air Canada demonstrated its recovery momentum in the September quarter, outpacing Bay Street estimates on key metrics despite macro headwinds. Moreover, in Q3, the air carrier reached a new four-year agreement with its pilots and announced a share-buyback program to help offset the COVID-era dilution.
Air Canada transported 13 million passengers in Q3, making it among the largest airlines globally. While on-time performance improved by eight percentage points year over year, its higher-margin premium cabin sales accounted for 28% of the top line in Q3. Additionally, cargo sales rose 18% to $253 million, further diversifying the revenue base.
With a vast international network, Air Canada’s Pacific routes showed strong performance despite a fall in capacity. Comparatively, its Atlantic routes were stable despite competitive pressures.
What’s next for Air Canada stock?
Air Canada estimates capacity growth in 2024 to range around 5%, while the metric is forecast to be higher next year. The company plans to add nine A220s and two A321 XLR aircraft in 2025 and has secured a $1.35 billion loan for 27 A220 deliveries over the next three years. Air Canada’s ongoing fleet and capacity expansion should help drive future revenue and cash flows higher.
In fact, it plans to add 88 new aircraft over the next five years, which requires sizeable capital investments. However, it might be impacted by potential delays surrounding Boeing’s MAX aircraft deliveries over the next 12 months.
While travel demand is forecast to remain stable in 2025, Air Canada might wrestle with increased cost pressures tied to a new pilot labour agreement, higher airport infrastructure fees, maintenance cost inflation, and an evolving regulatory environment.
Analysts tracking Air Canada stock expect its adjusted earnings to fall from $4.56 in 2023 to $3.01 per share in 2025. Comparatively, free cash flow is forecast at less than $200 million in 2025, compared to $2.76 billion in 2023.
The Foolish takeaway
Air Canada appears to be successfully navigating the post-pandemic world, with strong international performance and improving operational metrics. The announcement of a share-buyback program signals management’s confidence in its financial position and growth prospects.
While cost pressures and potential aircraft delivery delays present challenges, Air Canada’s diverse revenue streams (including cargo and premium cabins) and strong loyalty program provide multiple growth drivers.
However, a narrowing earnings and cash flow base would mean Air Canada’s stock is unlikely to outpace the TSX index in 2025.
