Introduction
There are stocks with attractive tickers and exponentially increasing price charts that might convince you to buy them. However, as Benjamin Graham says, “A stock is not just a ticker symbol; it is an ownership interest in an actual business with an underlying value that does not depend on its share price.”
Remember these words as we delve into the analysis of today’s featured company. Have you ever considered that the very airline that whisks you to your dream destination could be your partner to financial success? If you haven’t, then you have landed just right as we present you with the analysis of Air Canada – the largest airline carrier in Canada.
Company Overview
Air Canada is Canada’s largest airline by fleet size and the number of passengers it caters every year. Founded in 1937, this airliner flies to 200 destinations around the world and is among the 20 largest airline companies operating globally. This is one of the airlines that had quite humble beginnings and faced obstacles like filing for bankruptcy, however, made a strong comeback later.
Air Canada is also among the founding members of the Star Alliance® Network – a 26-member airliner alliance that allows easy connections to several destinations around the world. Furthermore, the airline has also extended its roots into the cargo business and currently has a total fleet size of 204 aircrafts including the latest carriers from Airbus and Boeing.
Financial Performance
Now that we have gone through some information and the history of the company, it’s time to crunch some numbers. So, buckle up as we analyze whether Air Canada is ready to take off, or heading for turbulence.
Stock Price Movement
Looking at the stock price chart of Air Canada, we see the drastic impact that the COVID-19 pandemic had on the company. The first dip in the stock price was experienced by the company in Q1 of 2020. Let’s delve into the year-on-year analysis and take a deeper look at the overall price trends of the stock.
Air Canada operates in a highly competitive and customer-oriented industry, where the revenue and profits of the company are highly reliant on demand. As COVID-19 almost halted airline operations and most aircrafts were grounded, the airline industry operations came to an absolute standstill. As a response, the stock price saw a dip of almost 76% within Q1 of 2020.
As the world remained locked in 2020, the stock price kept fluctuating throughout the year. The start of Q1 2021 brought some hope and the stock price recovered and climbed up to 29.50 CAD which was a 145% increase in the stock price. Although the pandemic is over now, airlines are still struggling due to aftershocks of the pandemic and factors such as increasing fuel costs. Currently, the stock is trading at 18.81 CAD which is 31% lower than the average price target of 27.56 CAD.
Financial Metrics
Revenue:
Looking at the revenue figures of Air Canada, we see that the company reported a 69.51% decrease in the Y/Y revenue in 2020, which is consistent with the stock price. This shows that the impact of the COVID-19 pandemic on the aviation industry was indeed substantial. McKinsey & Company’s analysis shows that on average, a 55% decline in annual revenues was faced by airline companies worldwide as the economies shut down in 2020.
In the years following 2020, the revenue figures fluctuated where 2022 was the best recovery year as the company reported a revenue of 16.56 billion, a Y/Y increase of 158.6%. The revenue remained promising in 2023, and now the Q12024 report shows solid financial performance as the company just reported $5.2 billion in revenue which presents a 7% Y/Y increase in revenue.
Net Income:
As the pandemic broke out and the nations locked down, there was serious concern regarding the future of the aviation industry. In the first year of the pandemic i.e., 2020, the company reported a net loss of -4.65 billion CAD. The years following 2020 kept getting better for Air Canada in terms of revenue, however, the airline reported a net loss till 2022, before reporting a net income of 2.28 billion CAD, an over 233% Y/Y increase in net income.
Cash Flow:
Analyzing the cash flow chart, we can see that the trend is different compared to the other financial metrics. For instance, in 2020, Air Canada reported a cash flow amount of CAD 1.57 billion, which is the highest in the past five years. Looking closely at the figures, you will find out that this cash was acquired from debt financing. In the past five years, the company reported a negative cash balance only once in 2022 which was a good year for the company in terms of revenue, however, the airline used the extra cash for debt repayments. Similar is the case in 2023, when the company used excess cash of 2.37 billion CAD to decrease its debt liability.
Market Potential and Recent News
The aviation industry is very demand oriented. Any factor that could increase/decrease the demand for the airliner directly impacts the overall financial performance. The primary reason for such financial positioning is due to the stickiness of accrued costs to the business. There are some fixed expenses that the airline company must cater to remain operational.
Air Canada is no different and its financial performance is highly dependent on several external factors such as demand for its services, and fuel costs. Now that the aviation industry is almost out of the recovery phase, analysts are predicting a bright future for the industry. At this point, the only major concern is fuel costs which have climbed drastically in post-pandemic years.
Investors Perspective
Considering an investor’s perspective, let’s look at the opportunity that Air Canada presents us. Since the airline company reported its Q1 earnings for the year 2024, the overall outlook for the company has been positive. Air Canada reported a revenue of $5.2 billion which is $339 million more compared to last year’s. Furthermore, EBITDAstood at $453 billion which is again $42 million higher as compared to last year. In addition, the company has been able to deleverage its balance sheet by reducing gross debt, further helping it improve its S&P Global Rating.
According to the analysts, there is a strong buy rating, and they predict the average 12-month price target to be at 27.56 CAD, representing a potential upside of 46.98%. Furthermore, some analysts have predicted that the stock is currently in its bull run and it is the right time to board a stock at the taxiway.
Conclusion
The analysis of Air Canada’s stock provides a nuanced understanding of the overall aviation industry landscape. There is no doubt that the aviation industry’s stock prices and operations were severely impacted by the pandemic and border closures. However, many governments have helped their airline companies survive the tough time and Air Canada has shown an astounding recovery.
The company’s resilience is evident in its financial performance, with notable improvements in revenue, net income, and cash flow. The company’s struggle for success is further highlighted by its determination to deleverage its balance sheets. Although Air Canada still owes around $3.78 billion, the plus side is that the company has decreased its debt by $3.8 billion in the last 4 quarters.
The lingering volatility in the industry cannot be overlooked, however, analysts’ positive outlook and a strong buy rating suggest a promising future for Air Canada. Finally, the company’s policy to increase its Y/Y capacity by 6-8% in 2024 is another hallmark in its journey towards achieving financial success. If you want to bet, this is the time to get on board and get yourself ready for takeoff.
Article By: Hamza Bashir. An avid investor and strategic consultant with expertise in stock analysis. He has been investing, analyzing, and writing articles on the stock, cryptocurrency, real-estate, and commodities market for over 3 years.