Air Canada (TSX: AC) has had its fair share of turbulence over the past few years. Most recently, the company announced it would be cancelling flights as a strike looms. Yet it’s starting to look like the airline could be gearing up for a smoother flight after the initial shock.
The stock climbed nearly 26% over the past year, riding on the back of steady travel demand, a more disciplined cost structure, and renewed investor confidence. It’s not all clear skies as the airline industry remains highly sensitive to fuel prices, economic shifts, and geopolitical risks. Yet there are signs that Air Canada stock could be poised for another leg up if current trends hold.
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What happened
While a strike could be bad news, operationally the company has been strong. In its latest quarter, Air Canada stock reported operating revenues of $5.6 billion, up 2% from last year. Operating income came in at $418 million with a 7.4% margin, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) landed at $909 million. This represented a healthy 16.1% margin.
The company also generated $895 million in operating cash flow and $183 million in free cash flow, even after significant investments in its fleet and infrastructure. Passenger numbers were strong, with 11.6 million customers flown during the quarter, and premium revenue was up 5%. This shows travellers are willing to pay more for comfort and service.
Air Canada stock has also been aggressive in rewarding shareholders. The airline completed a $500 million share buyback during the quarter, cancelling 26.6 million shares. Plus, it recently repaid its convertible notes in cash. These moves reduce share count, lower interest costs, and signal confidence in the business. With a leverage ratio of just 1.4 and over $6 billion in cash, the balance sheet looks sturdier than it has in years. That gives the airline more room to manoeuvre and potentially cut a deal sooner as opposed to later.
Looking ahead
Operationally, Air Canada stock led North American peers in on-time performance. The company has also strategically shifted capacity toward high-demand routes and premium service offerings, helping offset pockets of weaker demand. Its cargo business, vacation packages, and loyalty program Aeroplan continue to diversify revenue, providing buffers against volatility in passenger travel.
The past year hasn’t been without its challenges. Adjusted net income for the quarter was $207 million, down from $369 million a year ago, and adjusted earnings per share (EPS) fell to $0.60 from $0.98. Higher operating expenses, particularly from aircraft fuel and ground packages, put pressure on margins.
Looking ahead, management is sticking with its 2025 full-year guidance, calling for adjusted EBITDA between $3.2 billion and $3.6 billion, capacity growth of 1% to 3%, and free cash flow between break-even and plus or minus $200 million. The airline also has ambitious 2028 targets, including more than $30 billion in revenue and an adjusted EBITDA margin of at least 17%. Those are bold goals, but reflect a belief that demand for air travel will remain resilient, especially if economic conditions improve.
Foolish takeaway
For investors, the key question is whether Air Canada stock can continue to grow profitably in a volatile industry. The airline has the tailwinds of strong brand recognition, an efficient and modernizing fleet, and a diversified business model that reaches beyond ticket sales.
Still, with the stock trading at a trailing price/earnings (P/E) of under 5 and a forward P/E of under 10, Air Canada stock is priced as if significant turbulence lies ahead. If management delivers on its guidance and keeps its operational edge, there’s room for valuation expansion. For income seekers, there’s no dividend yet, but the ongoing share buybacks act as a form of capital return.
In short, Air Canada stock isn’t free of risk, especially with a strike looming. Yet it’s in better shape than it has been in years. If travel demand stays strong and the airline keeps executing on its strategy, this could be one tourism play that rises from the ashes and lights up in the years ahead.
