Air Canada (TSX:AC) stock took a beating this week as Donald Trump finally implemented a long-threatened slate of tariffs on Canada. The tariffs did not last long before Trump took another one-month pause, but they were enough to spook markets, which collapsed on Thursday. Air Canada got hit particularly hard that day, falling 3.6% in price – more than the broader markets.
So, Air Canada had a rough day.
The question is:
What’s the long-term outlook?
Stocks have bad days here and there, but that doesn’t make them un-investable. To the contrary, if they are quality companies, then down days are good opportunities to buy them. In this article, I explore Air Canada stock in detail, arguing that its recent performance belies its long-term strength.
Competitive position
One thing that Air Canada has going for it is a strong competitive position. Canada’s air travel sector is essentially a duopoly with two main players: AC and WestJet. There are technically some smaller airlines like Porter and PAL Airlines, but they are smaller than AC and WestJet, and largely regional players.
A duopoly market structure allows for a healthy amount of profit for the two main players. That’s exactly what we’re seeing with Air Canada, which had a 7% net margin in the trailing 12-month period. Profitability took a bit of a hit last quarter due to rising expenses, but the long-term trajectory remained solid.
Recent earnings
Speaking of last quarter, let’s look at the results. In the most recent quarter, Air Canada delivered:
- $5.4 billion in revenue, up 4% year over year.
- A $254 million operating loss, down from $79 million in positive operating profits.
- $696 million in adjusted earnings before interest, tax, depreciation and amortization (EBITDA), up $175 million.
- A $644 million net loss.
- $-495 million in free cash flow, down from $669 million.
As you can see, the numbers weren’t exactly all great. Revenue was strong, but the bottom line metrics were mostly negative or declining. This was due to rising expenses in various parts of Air Canada’s business, most notably compensation and capital expenditures (the latter directly impacts free cash flow but not earnings). The company expects to become FCF positive again in 2028, running at about breakeven this year and in 2026.
Long-term capital expenditures
The biggest single source of complexity for Air Canada right now is its upcoming capital expenditures. The company plans to spend about $4 billion this year and $5 billion next year on airplanes and other assets. These assets have long useful lives, so the CAPEX will be money well spent. However, it also means that we have to sit through 2025 and 2026 with almost no free cash flow. It’ll be a long journey, but the company expects to earn $1.5 billion per year in FCF by 2028. So, it could be worth it.
Bottom line
The bottom line on Air Canada is that it will be a very profitable company once it is done with its airplane buying spree. The purchases will play out over several years during which FCF will be negative. But it will be worth it in the end.