Key Takeaways:
- Air Canada’s stock price remains below $20 despite the pandemic being over
- The company is facing a challenging geopolitical environment, which is negatively affecting its business
- Air Canada is embarking on a growth plan focusing on pockets of strength, such as Atlantic and sun destinations
- The airline business is capital-intensive, and Air Canada’s cost per available seat mile (CASM) has increased
- Competition on international routes is intense, and there is no guarantee of success
- Air Canada’s stock price seems cheap, but it has missed earnings expectations in the last two quarters, and the long-term fundamentals are shaky
Introduction to Air Canada’s Current Situation
Air Canada was one of the most severely affected companies during the pandemic years. However, with the pandemic now over, the company’s stock price remains below $20. This raises questions about whether Air Canada is a good long-term holding and whether investors should stick with it for the next five years. To answer this, it’s essential to consider the current geopolitical environment and its impact on the airline industry. The world is facing a challenging time, with powerful nations using "economic coercion to get what they want." This has resulted in tariffs, threats, and fighting dominating the political discourse, making the world a more dangerous, less inviting, and less prosperous place.
The Impact of Geopolitics on Air Canada
The current geopolitical environment is negatively affecting Air Canada and the airline business in general. For example, the number of Canadians traveling to the United States has fallen sharply in the last couple of years, with a decline of more than 20%. This has not only affected the United States but also companies like Air Canada, which has historically relied on Canada-U.S. travel as a significant portion of its business. The erosion of this business has been a significant challenge for Air Canada, and the company is responding by embarking on a growth plan that focuses on pockets of strength, such as Atlantic and sun destinations, as well as international destinations. These destinations have been growing in the new world, and Air Canada is increasing its presence in all of them.
Air Canada’s Growth Plan
Air Canada’s growth plan is an interesting development, and the company is making efforts to boost its growth rate by focusing on areas of strength. The plan involves increasing the company’s presence in Atlantic and sun destinations, as well as international destinations. This is a positive step, as these areas have been growing, and Air Canada is well-positioned to capitalize on this trend. However, despite this positive development, Air Canada’s stock price has been stuck below $20 for the last few years, failing to sustainably break out to higher ground. This raises questions about the company’s long-term prospects and whether it is a good investment opportunity.
Challenges Facing Air Canada
The airline business is a very capital-intensive one, and Air Canada’s cost per available seat mile (CASM) is a key metric that the industry tracks to assess operational efficiency. In its latest quarter, Air Canada’s adjusted CASM increased 15% to 14 cents. This is a significant increase, and it highlights the challenges facing the company. Additionally, competition on international routes is intense, with many airliners competing for the same markets. There is no guarantee that Air Canada’s international push will be successful, and this uncertainty is a significant risk for investors. Furthermore, Air Canada has missed earnings expectations in the last two quarters, which is a big risk for investors.
Valuation and Long-Term Prospects
Air Canada’s stock price seems cheap, trading at only eight times this year’s earnings estimate. However, this valuation is misleading, as the company has missed earnings expectations in the last two quarters, and the long-term fundamentals are shaky. The global geopolitical landscape of political and economic uncertainty is not conducive to Air Canada’s business, and this uncertainty is a significant risk for investors. While there are some positive points to Air Canada stock, such as the company being recognized as one of Canada’s top employers for young people, the risks facing the company outweigh the potential benefits. Therefore, investors should exercise caution when considering Air Canada as a long-term investment opportunity.
Alternative Investment Opportunities
Before investing in Air Canada, it’s essential to consider alternative investment opportunities. The Motley Fool Canada team has identified what they believe are the top 10 TSX stocks for 2026, and Air Canada was not one of them. The 10 stocks that made the cut could potentially produce monster returns in the coming years. For example, MercadoLibre, which was first recommended on January 8, 2014, has produced significant returns, with a $1,000 investment growing to $21,827.88. This highlights the potential for significant returns from alternative investment opportunities, and investors should carefully consider their options before investing in Air Canada.
