Air Canada (TSX:AC) has continued to float decrease this yr as rising prices and investor skepticism proceed to place strain on its inventory worth. At face worth, Air Canada inventory seems very interesting, buying and selling at a ridiculously low 5 occasions earnings.
Are buyers lacking one thing, or is Air Canada inventory actually that dangerous of an funding?
Air Canada’s prices and ticket costs rising
The primary concern that I believe buyers have with regard to Air Canada is rising prices. This has been the pattern in the previous couple of years — one which has elevated the airliner’s price construction considerably.
For instance, within the first quarter of 2024, complete working bills elevated 6% in comparison with final yr to $5.2 billion. Most notably, wages, salaries, and advantages expense, which accounted for greater than 21% of complete expense, elevated a whopping 21% to 1.1 billion.
Additionally, with oil costs remaining above $80, Air Canada’s greatest expense line is considerably increased than it was earlier than the pandemic. This represents one other massive shift increased within the airliner’s price construction relative to the pre-pandemic days.
Lastly, Air Canada’s price per out there seat mile, or CASM, is greater than 20% increased than pre-pandemic 2019 ranges. CASM measures an airliner’s effectivity and is calculated by dividing working prices by out there seat miles.
In brief, issues are getting increasingly more costly, and consequently, ticket costs are rising. So, the state of affairs is dangerous on each ends, as rising ticket costs will ultimately hit demand.
Air journey is at document highs, however can this be sustained?
Journey demand after the pandemic was favourably impacted by pent-up demand. As issues returned to regular, air journey spiked as individuals booked their long-awaited journey plans. However at this time, even after this pent-up demand has been labored via the system, demand stays at record-breaking ranges. In actual fact, Air Canada noticed document demand within the final couple of quarters, in addition to continued energy prematurely bookings.
As is the case for a lot of corporations, immigration is a progress tailwind for Air Canada. I believe that we can’t underestimate the affect that this improve within the inhabitants has on companies. In Air Canada’s case, this reality has not gone unnoticed. Because of this, the airliner is making strategic investments to capitalize on this, and can make investments considerably in its fleet to assist the corporate’s worldwide journey progress.
This extra capability shall be pricey, however it is going to be a driver of progress within the subsequent few years. For instance, Canada has seen a giant inflow of immigration from India in the previous couple of years. This has motivated Air Canada’s plans for added capability deployments in Southeast Asia and North Africa.
The state of the patron and its impact on Air Canada
Lastly, I want to spend a while discussing the state of the patron. As we all know, inflation and better rates of interest have pressured shoppers. Whereas the patron has been extra resilient than I’d have anticipated, I believe this stays an actual concern/threat. The longer the price of dwelling stays at these increased ranges, the extra the strain will construct.
We’re already seeing downward strain on shopper spending, with discretionary spending being the primary to fall. Journey is a part of the discretionary spending pie. As such, I’d anticipate that, in combination, this spending will fall. If and when this occurs, the document journey demand will subside.
The underside line
Air Canada’s inventory worth has continued to wrestle to make a comeback. Whereas the pandemic is over, the airliner will not be the identical because it was once. It faces a better price construction and a shopper that’s more and more strapped for money. One thing has obtained to present.
Because of this, I’d keep away from Air Canada inventory at the moment.
