Air Canada (TSX:AC) has always been in the news. But this time, actions have been the talk. Its share price rose 10% since September 9 and reached $16.6 after falling 26% since May. Nothing could revive the stock, its rising profits, its falling debt or its higher income.
In 2023, Air Canada posted its best revenue and net income in five years. For the first half of 2024, the airline halved its net debt to $3.6 billion. 2023 earnings before interest, taxes, depreciation and amortization (EBITDA) margin and earnings per share (EPS) returned to their pre-pandemic level.
| The basics of Air Canada | 2018 | 2019 | 2022 | 2023 | January-June 2024 |
| Revenue | $18 billion | $19.13 billion | $16.56 billion | $21.83 billion | $10.75 billion |
| Net income | $37 million | 1.47 billion dollars | ($1.7 billion) | $2.276 billion | $329 million |
| Net Debt | 5.2 billion dollars | $2.84 billion | 7.5 billion dollars | $4.567 billion | $3,608 billion |
| EBITDA margin | 17.80% | 19% | 8.80% | 18.20% | 12.70% |
Despite such encouraging fundamentals, shares have traded below $18 throughout 2023, with only a seasonal jump to $25 in July. This year, shares traded below $20. While most stocks rebounded from the pandemic low, Air Canada failed to sustain the recovery.
Why did Air Canada shares suddenly rise 10% in September?
However, Air Canada shares suddenly rose in September as the airline just avoided a major crisis. The airline has been in talks with pilots about pay increases. A previous salary increase had already increased the airline's salary expenses by 16% year-on-year in the first half. Additionally, problems with the Pratt & Whitney engine had increased its maintenance cost by 21%; All of these expenses had already reduced their net profit by 61%.
But what was more frightening than the increase in expenses was a pilots' strike. There has been a pilot shortage in the aviation industry since the pandemic, as many pilots retired. The pilots have been demanding a pay increase and even threatened to go on a 72-hour strike. If this strike had occurred, it could have grounded more than 1,000 daily Air Canada flights around the world. The opportunity cost of not accepting the salary increase would have been significant.
Realizing the consequences of a strike, the airline's management reached a four-year interim agreement that offered pilots an initial 26% pay increase along with a 4% annual increase for the next three years and others. benefits. This four-year contract will add $1.9 billion to Air Canada's cost, or $475 million a year. If the net profit of $2.2 billion in 2023 is analyzed, the airline may see its margins affected. But you can't lose revenue, or you'll lose your market share.
With this uncertainty resolved, investors patted the stock on the back with a 10% jump. Additionally, a drop in oil prices could help the airline partially offset the increase in salary expenses.
Analysts are optimistic about Air Canada's recovery
ATB Capital Markets analyst Chris Murray said that with union tensions averted, management can focus on initiatives such as share buybacks and fleet expansion. Air Canada Chief Financial Officer John Di Bert had said returning value to shareholders “is high on the list of priorities.”
CIBC has given the airline's shares an “outperform” rating with a price target of $25, representing an upside of 25%. I would remain cautiously optimistic on the stock as the airline economics will now develop.
The better-than-expected earnings in 2023 were due to tight supply and rising demand for revenge travel. This demand is decreasing and supply is increasing as airlines take deliveries of aircraft. If the industry returns to excess capacity, it could hurt AC's profit margins.
Should you buy this stock?
The airline industry has a lot to solve. They have to identify a new post-pandemic normal and work in harmony without eating into each other's profits. Until then, the rise in Air Canada's share price will be limited to $25, its seasonal peak which it reaches in July. You could consider buying shares in the $14 to $18 price range and selling them at $24 in June-July. However, I would stay away from stocks for long-term investments.