If there’s one well-known TSX stock that’s been volatile this year, Air Canada (TSX:AC) is it. Down 15% for the year despite a recent sharp rally, the stock is underperforming the index and giving investors a very bumpy ride. What’s going on here?
There are many things going on here, some that on the surface seem to justify Air Canada’s precipitous decline in the markets, others which argue that it is overdone. In this article, I’ll explain why I take a mostly bullish stance on Air Canada and think that the stock’s many years-long protracted beatdown has been excessive.
The COVID-19 situation
Air Canada’s present woes arguably began in 2020 with the COVID-19 pandemic. The stock crashed 70% top to bottom in the opening months of the pandemic, and unlike many stocks that got hit hard in that period, it did not subsequently recover – it’s still down 63% from the pre-COVID highs.
Why did Air Canada stock crash so hard during the pandemic?
Largely because of travel restrictions. Flights to many foreign destinations were cancelled in 2020, while inter-provincial travel was heavily discouraged by 14-day quarantines for Canadian travellers. Air Canada’s revenue declined more than 80% as a result of these restrictions. It lost $4.6 billion in 2020, and was again unprofitable in 2021.
COVID policies were largely over by the beginning of 2022. Air Canada’s revenue and earnings were setting record highs by 2023. AC clearly isn’t down because the underlying business hasn’t recovered from COVID. It has recovered. So we need to look elsewhere to find out what’s going on.
Trump tariffs
The main reason why Air Canada stock is down yet again this year is that Donald Trump’s tariffs are discouraging Canada-U.S. travel. Many Canadians are afraid of being detained upon entry to the United States, others simply don’t want to patronize the country’s businesses while Trump is in office. So, they aren’t flying to the U.S. as much as they used to. Some reports say that overall Canada-U.S. travel is down 70%, although Air Canada has stated that it’s not down that much.
What’s often lost in the discourse around Canada-U.S. travel is the fact that interprovincial travel is largely picking up the slack. Canadians aren’t sheltering at home like in the COVID years, they’re just re-routing their travel from the U.S. to Canada and to a lesser extent overseas. The exact revenue impact of this re-routing isn’t clear, but this is definitely not a COVID-like situation with air travel grinding to a halt.
Capital expenditures
As for why Air Canada stock was already down from 2019 levels before Trump even took office:
That might have something to do with the company’s coming capital expenditures. Air Canada plans to spend unprecedented amounts of money buying new airplanes in 2025, 2026 and 2027. It plans to run free cash flow at about a breakeven level during this period. The stock went down on the day this spending was announced. So the spending might be part of what investors are concerned about.
What investors seem to be ignoring is the fact that airplanes have very long service lives: usually more than 20 years. The fact that Air Canada has big CAPEX coming up in the near term doesn’t mean the company’s profit will be buried under aircraft purchases forever. This is a clear short-term pain for long-term gain situation. And with AC trading at 0.2 times sales, the stock is cheap if we assume the spending is done by the end of 2027. So, I will continue holding Air Canada.
