In the decade prior to the COVID-19 pandemic, Air Canada (TSX:AC) was among the best-performing TSX stocks. However, similar to other airline companies, Air Canada stock has underperformed the broader markets in the last five years.
While travel demand has rebounded since 2022, Air Canada has faced multiple headwinds, including elevated debt levels, higher fuel costs, and decade-high interest rates.
Today, AC stock is down 64% from its all-time high, valued at a market capitalization of $6 billion. Let’s see if Air Canada stock can finally recover in 2025.
Is Air Canada stock a good buy right now?
Air Canada navigated significant headwinds in the first quarter, demonstrating operational resilience despite challenging market conditions.
In the March quarter, it reported revenue of $5.2 billion, flat year-over-year, with an operating loss of $108 million and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $387 million, exceeding market expectations amid uncertainty around tariffs and trade disputes.
A turbulent quarter
The quarter highlighted both challenges and strategic advantages. Transborder demand declined as Canadian travelers reduced U.S. travel due to tariff uncertainty and unfavourable exchange rates, as the Canadian dollar traded at levels not seen since 2020.
Management reported booking declines averaging in the low teens for the next six months on transborder routes, with weakness accelerating in March.
However, Air Canada’s diversified network helped it offset a portion of these declines. The airline quickly reallocated capacity from weak U.S. markets to stronger domestic and international destinations, including Mexico and the Caribbean.
Air Canada’s Q1 financial performance showed mixed results across segments. While transborder passenger revenues declined 5%, the company maintained yield discipline and contained the impact through swift capacity adjustments. Pacific revenues fell 6% due to increased industry capacity, but the sun market performance (Mexico and the Caribbean) remained strong with 2% revenue growth.
Growing shareholder value
Management implemented decisive cost management measures, launching a $150 million cost reduction program for 2025 focused on efficiency improvements, project deferrals, and third-party spend management.
Air Canada generated operating cash flow of $1.5 billion and free cash flow of $831 million in Q1, driven by higher advance ticket sales. This suggests that the company allocated more than $650 million towards capital expenditures in the March quarter.
Air Canada has updated its full-year guidance, now expecting adjusted EBITDA to be between $3.2 billion and $3.6 billion, along with system capacity growth of 1–3%. The airline announced a stock buyback – a $500 million substantial issuer bid – showcasing confidence in its strategic position and commitment to shareholder returns.
Is the TSX stock undervalued?
Analysts tracking Air Canada stock expect adjusted free cash flow to decrease from $1.3 billion in 2024 to an outflow of $203 million in 2025 and $375 million in 2026. However, its free cash flow is expected to improve to $312 million in 2027 and soar to $2.4 billion in 2029. A widening cash flow base provides Air Canada with the flexibility to lower its debt levels and strengthen the balance sheet.
Looking ahead, Air Canada’s network diversification provides competitive advantages in uncertain times. Its strong modern fleet and strategic capacity flexibility position it to effectively capitalize on demand recovery while managing near-term volatility.
While Air Canada is expected to remain volatile over the next two years, it could gain momentum once it consistently reports a positive FCF.
If the airline stock is priced at just six times 2029 FCF, which is really cheap, it could more than double over the next four years.
