Air Canada (TSX: AC) has given investors plenty to think about. Following its second-quarter (Q2) results and a major deal involving its Aeroplan loyalty program, the stock jumped roughly 9.6% in about a week. The rally raises the question: after such a sharp move, is Air Canada still a good stock to buy?
The answer depends largely on an investor’s tolerance for risk. Air Canada is showing signs of improving profitability and cash generation, but elevated fuel costs and the airline’s cyclical nature mean this remains a higher-risk investment.
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Strong demand meets stubborn costs
Last week, Air Canada delivered record Q2 operating revenue of $6.3 billion, an 11% year-over-year (YOY) increase. Unfortunately, expenses rose even faster, climbing 24% to $6.5 billion. Aircraft fuel was the biggest culprit, with costs soaring 49% to $1.7 billion. As a result, the airline posted a $215 million operating loss.
The first half of the year provides a bigger picture. Revenue increased 11% to $12.1 billion, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a popular measure of operating profitability, rose 3.5% to $1.3 billion. And free cash flow surged 75% to $1.8 billion.
This valuable asset could strengthen the balance sheet
One reason investors have become more bullish on AC stock is the partial sale of Aeroplan. Air Canada agreed to sell a 25% stake in the loyalty program for $2.5 billion, while retaining control. The proceeds are expected to help repay US$1.2 billion of debt and support share buybacks of up to $800 million.
This is meaningful. Airlines are known for being capital-intensive businesses, and Air Canada carries substantial debt, specifically, long-term debt and lease liabilities of about $12.8 billion. Unlocking value from a valuable loyalty business without giving up control helps improve financial flexibility.
The longer-term opportunity?
There is also a longer-term opportunity. Air Canada has targeted roughly $30 billion in operating revenue and an adjusted EBITDA margin of at least 17% for 2028. That would represent a meaningful improvement from its current profitability.
However, investors should not treat that target as guaranteed guidance. Fuel prices remain a major wildcard, and Air Canada can be a more unpredictable business.
So, is Air Canada stock a buy now?
Air Canada could be an appealing turnaround or cyclical investment at times, but it is not a classic buy-and-forget stock. Its earnings can swing dramatically with fuel prices, travel demand, labour costs, economic conditions, and other factors.
The recent rally also means investors should avoid chasing the stock simply because momentum is strong. Analyst targets vary widely, with the lowest target at $21.70 and the highest target at $45 per share, as shown on Yahoo Finance. The consensus price target is currently about $34, suggesting the potential upside is not massive after the recent advance. And it may not be worth it to take the risk until AC stock offers a bigger margin of safety.
The bottom line
Air Canada looks more attractive than its quarterly operating loss might suggest. Strong demand, improving cash generation, the Aeroplan transaction, and ambitious margin targets provide a credible path to higher earnings. Nevertheless, the stock remains speculative and sensitive to fuel costs. For risk-tolerant investors, Air Canada could be worth considering on meaningful pullbacks rather than chasing the stock after a recent 9.6% surge.
