Air Canada (TSX:AC) has made a dramatic comeback in late 2024, outperforming the TSX Composite Index with an impressive 54.2% rally in the fourth quarter alone. By comparison, the TSX benchmark has risen only by 6% quarter to date.

Now trading at $25.28 per share with a market cap of $9.1 billion, AC stock has come a long way from its pandemic-era lows. However, it still sits well below its pre-pandemic all-time high of over $50 per share, posted in January 2020. With the airline industry showing signs of recovery and Air Canada benefiting from increased travel demand, many investors are asking the same question: Could this be the start of a climb back to the $50 mark in 2025?

In this article, we'll analyze the factors driving Air Canada's recent performance, the challenges that lie ahead, and whether $50 is a realistic target for AC stock next year.

Main factors behind Air Canada stock's recent rally

Air Canada's recent surge in stock price could be attributed to several factors, including its robust third-quarter financial performance and recent efforts to strengthen its balance sheet.

Although some negative factors, such as reduced yields and lower passenger revenue, drove its total revenue down by 3.8% YoY (year over year) to $6.1 billion in the quarter ended in September 2024, the airline managed to offset some of these challenges through effective cost management and operational improvements. These were the key reasons why the largest Canadian passenger airline company managed to post adjusted quarterly earnings of $2.57 per share, beating Bay Street analysts' expectations of $1.58 per share by a huge margin.

Last quarter, Air Canada also saw a significant boost in free cash flow, which surged by 147% YoY to $282 million, clearly giving signs of its improving financial efficiency.

Encouraged by this financial strength despite macroeconomic challenges, its management recently announced a share buyback plan, which would allow it to repurchase up to 10% of its outstanding shares through a normal course issuer bid. With this plan, the company aims to address shareholder dilution caused by pandemic-era financing while signalling the management's confidence in its long-term growth prospects. These positive factors explain why AC stock popped by 32.3% in November 2024 alone.

Is the $50 level achievable for AC stock in 2025?

Several factors may play an important role in determining whether Air Canada stock can surge back to the $50 mark in 2025. First, the continued recovery of international and corporate travel will be critical. These segments, which historically generate higher margins for airline companies, are key revenue drivers for the Canadian flag carrier. If global travel demand sustains its upward trajectory in the coming year, supported by easing inflationary pressures and a favourable consumer spending environment, the airline could see a boost in passenger revenues.

Second, Air Canada's ability to manage rising costs will be equally important. In the most recent quarter, its operating expenses rose 3% YoY. That's why containing costs such as fuel, labour, and maintenance will be crucial for Air Canada to maintain healthy profit margins.

Although challenges remain, including economic uncertainties, geopolitical tensions, and expectations of a shift in consumer travel behaviour, Air Canada's ongoing efforts to diversify revenue streams, cut costs, and strengthen its financial base could help it overcome these obstacles. While these strengths, coupled with its share buyback program, could propel Air Canada stock higher in 2025, the timeline for it reaching the $50 mark will depend on how effectively the company navigates these challenges without compromising on profitability.