Five years ago, if you had invested $1,000 in Air Canada (TSX:AC), it might have seemed like a solid bet. The airline industry was soaring, and Air Canada stock was one of the top players in the Canadian market. In December 2019, Air Canada's stock price was around $50, which would have gotten you 20 shares. At the time, the airline was enjoying strong passenger demand, expanding its international routes, and modernizing its fleet.

Fast forward to today, and those 20 shares would be worth approximately $25 each, leaving you with a total investment value of about $500. This 50% drop reflects the rollercoaster ride the airline has endured, much of it driven by the global upheaval brought on by the COVID-19 pandemic.

What happened?

The pandemic hit the aviation industry like a massive air pocket, sending it into a free fall. Air Canada stock saw demand for flights evaporate almost overnight as governments around the world imposed strict travel restrictions. The airline had to ground large portions of its fleet, cut staff, and secure financial assistance to stay afloat. Its stock price plummeted during this period, reflecting the grim outlook for the sector. Recovery has been slow, and while passenger demand has bounced back, the scars of those turbulent years are still evident in the company's financials and stock performance.

Looking at the present, Air Canada stock has made significant strides to recover and rebuild. Its recent earnings reports highlight the airline's resilience. In the third quarter of 2024, Air Canada reported $6.1 billion in revenue and an operating income of $1.04 billion. Although quarterly revenue declined slightly year over year, profitability improved significantly. It reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $1.52 billion. This marks a $307 million drop from the same period last year.

In its second-quarter results for 2024, Air Canada stock reported operating revenues exceeding $5.5 billion and a robust load factor, meaning planes were flying with fewer empty seats. The airline noted particularly strong demand for international travel. This is an encouraging sign for its future growth prospects. These results align with the airline's forecast for the year; Air Canada anticipates adjusted EBITDA of about $3.5 billion — a testament to its gradual return to pre-pandemic operational efficiency.

Government drop

One of the more intriguing recent developments for Air Canada stock is the Canadian government's decision to sell part of its stake in the airline. This move, while reducing the government's direct involvement, signals confidence in the airline's ability to stand on its own. For investors, this could be seen as a double-edged sword. On the one hand, reduced government intervention may allow Air Canada stock more operational freedom. On the other hand, it means the airline loses a potentially stabilizing shareholder in times of crisis.

Air Canada stock's future hinges on several key factors, including fuel prices, geopolitical events, and the ongoing recovery of global travel. On the positive side, the airline is expanding its route network, particularly to Asia-Pacific destinations, where demand for air travel is expected to grow significantly. Its focus on international routes suggests a calculated strategy to tap into lucrative markets that were slower to reopen post-pandemic but now show promising signs of growth.

Despite these positive signals, there are risks. The airline industry is notoriously cyclical and sensitive to external shocks. Fuel price volatility, fluctuating exchange rates, and potential economic slowdowns could all impact Air Canada stock's profitability. Furthermore, the airline's debt levels remain high, with a total debt-to-equity ratio of 400%. While manageable for now, this level of leverage limits flexibility in navigating future challenges.

Bottom line

For investors considering Air Canada stock today, the question is whether the current price represents a bargain or a trap. At around $25 per share, the stock trades at a forward price-to-earnings ratio of approximately 9.4. This suggests that investors expect earnings to improve in the coming years, but it also reflects caution given the industry's history of volatility. The airline's improving financial health and a renewed focus on growth are encouraging. Yet potential investors should be prepared for turbulence, as the path ahead is unlikely to be entirely smooth.