It’s hard to believe, but shares of top domestic airline Air Canada (TSX:AC) are still down well over 40% from their pre-pandemic all-time highs. Indeed, it’s taking the Canadian airline a lot longer to return to the heights it saw before the COVID crash of 2020. And while most other airlines, especially those in the U.S., may have been better able to move on and march to new highs, I think that Air Canada stands out as a catch-up play that may very well be able to break out again, albeit with much more delay than that of U.S. airline rivals.
As discouraging as it’s been for shareholders of AC, with the stock constantly surging to the high-$20 range, only to get hit with a round-trip right back to the low-$20s or even the teens, questions linger as to what it’s going to take for Air Canada to move on past the six-year period of extreme turbulence en route to a steady ascent back into the stratosphere.
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Air Canada’s ascent is happening right now
In my humble opinion, the tarmac has already been cleared for the airline, and while investors should expect more turbulence (do keep those seatbelts fastened), I think that it’s just a matter of time before Canada’s top airline starts becoming a market darling again, as it was before the pandemic sent shares in one of their worst crashes in recent memory.
Of course, the great Warren Buffett, the Oracle of Omaha, was never a huge fan of airline stocks. And that might be enough reason to look past names like Air Canada, no matter how cheap they get. But, in my view, times have changed, and while operating costs are still quite hefty, with labour and energy prices standing to eat a bit into margins, I think that there are factors that could improve the underlying operating economics of airlines.
Whether we’re talking about improving operating efficiencies with AI or automating various tasks behind the scenes, I think that there is a solution to the high expenses that have been a drag on major airlines over the decades.
Modern airlines are becoming increasingly investable
With airlines lining up to purchase new fuel-efficient aircraft, with a backlog stretching for several years, it’s clear that there are significant savings to be had for the airlines willing to invest. Of course, with capacity unknowns to consider, some airlines are just going to need to wait their turn. But for long-term investors, I think that such a catalyst will eventually come into play.
For now, AC stock looks like a great deal at just shy of 20.0 times forward price-to-earnings (P/E) when you weigh the multi-year catalysts. In my view, new aircraft, smarter operators, and the rise of premium experiences (Signature Plus and all the sort), I think, could be what helps improve the fundamentals of air travel over time. Of course, just because the trajectory is sound doesn’t mean there won’t be sky-high (forgive the pun) risks along the way.
Whether it’s an oil shock that drives jet fuel through the roof, another pandemic lockdown, or even a recession, there are risks to consider as well. Either way, I view AC stock as very interesting now that shares are getting some momentum (up 56% in the past year). Of course, waiting for a pullback would be what I’d do after a parabolic run, even if all-time highs are a long way off. The second half could continue to be decent, though choppier, but in my view, it’s the long-term horizon that makes me most excited about the name.
