Air Canada (TSX: AC) just bought nearly one-tenth of itself.
That’s not a typo. The airline completed an $800 million substantial issuer bid in September, purchasing 27.6 million shares for cancellation at $29 each.
Those shares represented about 9.8% of Air Canada’s outstanding stock before the transaction. It’s an enormous buyback. That said, it isn’t an automatic buy signal.
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Why buybacks work
Imagine a company earns $100 and has 100 shares. Each share represents $1 of earnings. Reduce the share count to 90 without hurting the business, and the same $100 is spread across fewer shares, and earnings per share rise.
Buybacks can therefore create significant value when a company has surplus capital and its stock trades below what management believes the business is worth.
The ugly version occurs when a company overpays, borrows too aggressively, or spends cash shareholders later discover it desperately needed. Airlines make that second possibility worth remembering.
What Air Canada bought
Air Canada’s tender price was $29. After cancelling the 27.6 million purchased shares, approximately 252.7 million shares remain outstanding. At writing, it now trades at about $27.
That means the market immediately valued the shares below the price management had just paid. That isn’t proof Air Canada made a mistake. It’s just a useful reminder that the market doesn’t receive management’s buyback announcement and necessarily agree with it. Investors still have to value the airline.
Business improves, with a catch
Second-quarter operating revenue reached a record $6.3 billion, up 11% year over year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) reached $719 million, at the top end of management’s quarterly guidance. Cash flow from operations was $651 million.
Then comes the less attractive numbers. Air Canada reported a $215 million operating loss after $388 million of labour-related and other charges. Fuel expense jumped 49% from the previous year. Full-year free-cash-flow guidance was cut to between $200 million and $500 million from the previous $400–$800 million range.
That makes the $800 million buyback much more interesting. The company has confidence in future cash generation, but it also operates a business capable of consuming cash with impressive speed.
Why I’d consider it
International, premium, corporate, and connecting travel demand has remained resilient. Air Canada has also spent years repairing the balance sheet after the pandemic. Management says an investment-grade credit rating is achievable over the medium term.
If earnings recover while the share count remains almost 10% lower, shareholders could receive a meaningful boost in per-share results. That’s the bull case for investors exploring Canadian growth stocks. The bear case is an airline facing headwinds.
Fuel can surge, labour contracts can become more expensive, recessions hurt travel, aircraft deliveries can slip, and weather and geopolitics can wreck a perfectly respectable spreadsheet before boarding begins.
Bottom line
I would consider Air Canada at $26.88, but I’d keep the position modest when buying stocks in Canada. The $800 million repurchase is meaningful because retiring almost 10% of the stock can improve future per-share economics.
All in all, I’d buy if I believed Air Canada can produce enough future cash flow to make fewer shares genuinely more valuable. The airline already bought the stock. Yet investors still need a reason to buy the business.
