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Air Canada (TSX:AC) had been one of the standout performers on the TSX over the decade leading up to the COVID-19 pandemic. Benefiting from a prolonged period of economic expansion and low interest rates, the airline and its peers experienced robust growth in earnings and cash flows during that time.
In 2020, the global airline sector encountered unparalleled challenges due to the COVID-19 pandemic, leading countries to close their borders and significantly reducing air travel demand. This downturn in demand deeply affected companies operating in the capital-intensive airline industry, such as Air Canada. To address cash burn rates, these companies were compelled to undertake additional debt. This turbulence in the airline industry had broader implications, impacting related sectors like industrial stocks listed on the Toronto Stock Exchange (TSX). These TSX industrial stocks, which often supply goods and services to the aviation industry, also felt the ripple effects of reduced demand and disruptions in the airline sector.
While Air Canada's stock soared by over 3,000% from 2010 to 2020, it currently trades at a significant discount of 62% below its all-time highs, presenting a potential buying opportunity. Let's assess whether Air Canada's stock could stage a recovery in 2024.
The bullish case for Air Canada stock is supported by its strong financial performance amidst an uncertain macroeconomic environment. In 2023, Air Canada reported record revenue of $21.8 billion, marking a 32% increase year over year. The company achieved an annual operating income of $2.3 billion, compared to a $200 million loss in 2022, while its adjusted EBITDA doubled to nearly $4 billion.
Despite headwinds such as inflation and supply chain challenges, Air Canada transported 46 million passengers in 2023, underscoring its operational resilience. The company's focus on improving profitability allowed it to bolster its balance sheet, reduce debt, and effectively manage cost pressures.
While Air Canada's total debt increased from $7.1 billion in 2019 to $13 billion in 2021, it has since decreased to $10.5 billion. Although rising interest rates have led to higher debt servicing costs, the company's strong operating cash flow of $4.3 billion and free cash flow of $2.8 billion in 2023 provide flexibility to reduce debt and interest expenses.
Moreover, Air Canada's loyalty program, Aeroplan, has witnessed a doubling in membership to eight million over the past five years. The growing membership base is expected to drive higher engagement rates for Air Canada in the future.
Analysts project a modest increase in sales to $22.5 billion and a slight decline in adjusted earnings per share to $3.65 in 2024. With Air Canada's stock priced at 0.3 times forward sales and 5.4 times forward earnings, analysts remain optimistic about its potential for a 40% gain from current levels.
However, it's essential to acknowledge the risks associated with investing in Air Canada, including its high debt levels and sensitivity to macroeconomic conditions. Nevertheless, if interest rates decline and global economic growth rebounds in the coming year, Air Canada could deliver significant returns to shareholders.
