Air Canada's Stock Took Flight in 2024. Will 2025 Keep the Altitude?

Air Canada's stock price surged by 35.8% in the fourth quarter, but the current stock price of CAD $22.3 (USD $15.4 for ADR) is still far from the January 2020 high of CAD $52.7 (USD $39.9).

The company recently announced a buyback of 10% of its outstanding shares to offset the dilution caused by financing after the pandemic, demonstrating the management team's confidence. Will Air Canada's stock price continue its upward trend?

● Third-quarter earnings significantly exceeded expectations

Air Canada's free cash flow soared more than 100% to 282 million Canadian dollars in the third quarter. EPS reached $5.38, exceeding expectations by 208%.

At the investor day event on December 17, the company announced it anticipates a 2% rise in adjusted cost per available seat mile from the previous year's 13.49 Canadian cents, while the overall capacity for the full year is expected to increase by 5%.

● Oil prices are expected to continue declining

Following Trump's inauguration, there were market expectations of a steady expansion in U.S. oil supply, which was anticipated to stabilize oil prices.

A Reuters monthly poll released on Tuesday indicated that oil prices are expected to remain around $70 a barrel in 2025, as a combination of weak demand from China and increasing global supplies could undermine OPEC+-led efforts to support the market. The survey, which included 31 economists and analysts, suggested a slight decrease in the forecast for Brent crude, predicting an average price of $74.33 per barrel in 2025, down from the previous month's prediction of $74.53. This adjustment marks the eighth consecutive downward revision.

In 2024, the global benchmark Brent crude has averaged close to $80 a barrel but is on track for a 3% annual decrease, primarily due to weakened demand from China, the world's leading importer.

The fall in oil prices, coupled with reduced flight costs and lower ticket prices, could promote the sustained revival of international flight routes.

● The Bank of Canada's rate cut is expected to lower Air Canada's interest expenses

After the pandemic, Air Canada's debt burden has continued to rise. In 2019, its debt ratio was 84.2%; by 2023, it had increased to 97.4%. The company's interest expenses peaked in the third quarter of 2022, reaching C$190 million. Following the Bank of Canada's rate cut, its interest expenses significantly decreased in the second and third quarters. However, before the pandemic in Q4 2019, the interest cost was only C$41 million. Currently, the market expects the Bank of Canada to continue cutting rates from 3.25% to 2.75% in 2025, thus Air Canada's interest expense costs are bound to continue decreasing.

● Air Canada unveiled its long-term strategy during 2024 investor day

On December 17, Air Canada confirmed its full-year projections for 2024, forecasting operating revenues of C$22 billion and a 5% increase in capacity, measured in available seat miles, from the 99.01 billion recorded in 2023.

Looking to the future, Air Canada has established long-term goals for 2028 and further aspirations for 2030. By 2028, the company aims for operating revenues to reach approximately C$30 billion, with expectations for continued growth beyond this target in 2030.

Air Canada is optimistic that population growth will drive its performance over the next three years. At the investor day event, CFO John Di Bert emphasized that the airline has maintained an annual growth rate of 3% from 2015 to 2024. He anticipates that this rate will serve as a minimum for the coming years, with expected annual growth ranging between 3% and 4%. He stated, "This growth aligns with regular travel demand and is further boosted by the rapid demographic changes and population growth in Canada." Moreover, Di Bert highlighted a notable annual increase of 10% in traffic on routes between India and Canada.

During the holiday season, Air Canada distributed special gifts to passengers for free to enhance customer satisfaction. The management has decided to start offering passengers free WiFi gradually from May 2025. Work on digital check-in is also ongoing.

However, the Canadian airline industry is encountering some headwinds. Scotiabank analyst Konark Gupta noted in a report that the USD-CAD exchange rate has become less favorable compared to the underlying street assumptions. Additionally, there seems to be some structural or persistent cost inflation and long-term capital expenditure requirements.