For obvious reasons, Air Canada (TSX:AC) was one of the most severely affected companies through the pandemic years. Today, the pandemic is over and people around the world are living their lives normally again. Yet, Air Canada’s stock price remains below $20. Is Air Canada stock a good long-term holding? Should you stick with it for the next five years?
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World Economic Forum
Let’s start by discussing what is a very shaky geopolitical environment today. Similar to the pandemic years, the world is actually feeling like a smaller place. In Prime Minister Carney’s World Economic Forum speech, he explicitly stated that powerful nations are using “economic coercion to get what they want”. Tariffs, threats, and fighting have dominated the political discourse.
To quote Carney from his World Economic Forum speech once again, “great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited”. This world is more dangerous, less inviting, and certainly, less prosperous. This political development is and will continue to negatively affect Air Canada and the airline business in general.
For example, the number of Canadians travelling to the United States has fallen sharply in the last couple of years. In fact, it has fallen more than 20%. This has certainly negatively affected the United States but it has also affected companies like Air Canada.
Air Canada’s strategy
Canada-U.S. travel has always represented a significant portion of Air Canada’s business. Today, that business has been eroding through no fault of Air Canada. In response, the airliner is embarking on a growth plan that looks quite interesting.
By focusing on pockets of strength, like Atlantic and sun destinations, as well as international destinations, Air Canada is planning to boost its growth rate. These are the destinations that have been growing in this new world, and Air Canada is successfully increasing its presence in all of them.
Air Canada stock
Yet, Air Canada stock has been stuck below $20 for the last few years, failing to sustainably break out to higher ground. I acknowledge that there are some positive points to Air Canada stock. For example, The Globe and Mail recently wrote about how Air Canada has been recognized as one of Canada’s top employers for young people. Air Canada stock was also in the Globe and Mail, citing the fact that National Bank increased its target to $24.
AC stock price
Yet in my view, there are good reasons why Air Canada’s (AC) stock price remains rangebound below and around $20. The airline business is a very capital-intensive one. Air Canada’s cost per available seat mile, or CASM, is a key metric that the airline industry tracks in order to assess the operational efficiency of the business. In its latest quarter, Air Canada’s adjusted CASM increased 15% to 14 cents.
Also, competition on international routes is intense. With many airliners competing for the same markets, there is no guarantee that Air Canada’s international push will be successful.
The bottom line
Yes, Air Canada’s stock price seems cheap – trading at only eight times this year’s earnings estimate. But this is misleading in my view.
Firstly, Air Canada has missed earnings expectations in the last two quarters, and I think this remains a big risk. Secondly, the long-term fundamentals are shaky as costs are rising. And finally, the global geopolitical landscape of political and economic uncertainty, as highlighted in Carney’s World Economic Forum speech, is not conducive to Air Canada’s business.
