Air Canada: Stock of the Week

Canada’s flag carrier is trading at a discount as bookings take off.

Andrew Willis 29 May, 2023 | 4:26AM
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Andrew Willis: We did think, at the start of this year, that air travel would rebound, but we didn’t expect the surge that has led to Air Canada (AC)’s revenue surpassing pre-pandemic levels.

Despite operating at only 84% of pre-pandemic passenger capacity, Air Canada has seen a 10% increase in revenue from 2019 levels – which will come as no surprise to anyone tracking the acceleration of ticket prices from the beginning of this year.

Sector director Brian Bernard points out that despite Canada’s national carrier posting solid revenue, it is stuck with persistent cost pressures that have plagued the entire airline industry. However, we see a path to full profitability in the near term and maintain our outlook for the stock.

This is in part because of consumer reaction to soaring ticket prices. We note that people are booking their tickets in advance, and we already expect passenger capacity beyond pre-pandemic levels by next year.

Lastly, when investing in airlines, keep in mind that cyclical downturns tend to reduce the value of passenger capacity. Air Canada also expects to add capacity over the next few years, which will be great for investors if demand continues.

For Morningstar, I’m Andrew Willis.

 

bulls Bulls Say

  • Borders have reopened, which should allow increased international travel.
  • Demand for leisure travel has recovered sharply from the pandemic. Pent-up travel demand could buoy air travel even during a recession.
  • Air Canada has reacquired its frequent flyer program, which should structurally improve the airline’s business.

bears Bears Say

  • Air Canada’s business model is predicated on international travel, which is likely to recover more slowly than domestic travel.
  • Oil prices have risen considerably since the pandemic began. High oil prices tend to compress airline margins in the short run. Although fuel prices are eventually passed on to the consumer, higher ticket prices should reduce travel demand.
  • Ultra-low-cost carriers may enter the Canadian market and create fare pressure across the industry.

 

Editor's Note: All images are courtesy unsplash.com and AP Images. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Air Canada Shs Voting and Variable Voting17.61 CAD-2.92Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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