Travel News
Strong travel demand will drive 'meaningful earnings' for Air Canada: analyst -
Shares of the Montreal-based airline are up approximately 30% year-to-date
Despite concerns over a potential economic slowdown, travel demand remains strong in Canada, which an analyst says should "drive meaningful earnings and cash flow improvement" for Air Canada (AC.TO).
National Bank Financial analyst Cameron Doerksen reiterated his "outperform" rating and $32 share price target for the Montreal-based airline this week, noting that the summer travel season is "still shaping up nicely."
"Notwithstanding concerns over the consumer, demand for air travel continues to look strong for the peak summer period with air passenger levels in Canada recently tracking closer to 2019," Doerksen wrote.
"We believe that the peak summer period for Air Canada (Q2 and Q3) will show strong financial results, and we expect that ongoing positive market conditions should drive meaningful earnings and cash flow improvement for Air Canada through the remainder of 2023 and 2024."
Doerksen notes that the biggest concern for Air Canada investors has been demand sustainability and pricing in the wake of growing macroeconomic concerns. But the latest CPI data from Statistics Canada showed that the cost of air transportation is up compared to pre-pandemic levels.
"Our own sampling of trans-Atlantic fares for peak periods in the upcoming summer also shows that fares on the busiest routes are up materially, both versus last year as well as versus summer 2019," Doerksen wrote.
While Air Canada's stock is trading well below its pre-pandemic highs, shares of the airline are up approximately 30 per cent year-to-date.
The positive momentum comes despite capacity levels remaining below pre-pandemic trends, and that Canada's biggest airline is facing increased competition in the domestic market.
Overall domestic capacity, as measured by available seat miles, is projected to be down 5.6 per cent in the third quarter of the year compared to 2019, according to National Bank. Air Canada's third-quarter domestic capacity is up 3.7 per cent compared to last year, but still down 20.5 per cent compared to pre-pandemic levels. New entrants and growing airlines such as Flair and Porter Airlines are offsetting the declines seen at Air Canada and WestJet (down 20 per cent compared to 2019.) Flair's domestic capacity is up a whopping 444.7 per cent compared to 2019, as the airline significantly expanded its capacity through the pandemic, while Porter's capacity is up 53.4 per cent compared to 2019.
Still, Doerksen says Air Canada is well-positioned in the wake of increased competition in the Canadian airline space. He notes that domestic traffic – where Air Canada faces the stiffest competition from new entrants – is not the airline's most important profit driver. The airline also has major competitive advantages, including its large global and regional networks, and its Aeroplan loyalty program with more than seven million members.
"Ultimately, we think not all the rapidly growing airlines will survive," Doerksen wrote.
"The history of the Canadian airline industry would suggest that Canada is not large enough to support more than two large national airlines… . We think market conditions will shake out one or two competitors in the next year or two, especially if the current level of air travel demand wanes."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
