Air Canada: Flying High in a Turbulent Sky?

The airline industry in 2025 is a stormy mix of resilience and risk. While Air Canada’s CEO Michael Rousseau claims demand is holding up “relatively well,” the company’s first-quarter results reveal a battle against inflation, geopolitical turmoil, and economic uncertainty. Is this a signal to board Air Canada’s stock, or should investors brace for turbulence? Let’s dive in.

Demand’s Resilience: A Mixed Bag

Air Canada transported nearly 10.8 million passengers in Q1 2025—a slight dip from 2024, but far better than feared. CEO Rousseau pointed to “strategic capacity adjustments” and cost discipline as reasons for steady demand. The company’s cargo and vacation divisions also delivered strong results, with “sixth freedom revenues” growing—a term for income from flights that connect non-home markets.

Yet, profitability took a hit. Operating revenues fell 1% to $5.196 billion, while expenses rose 2% to $5.304 billion, pushing the airline into an $108 million operating loss. Adjusted EBITDA dropped to $387 million, with margins shrinking to 7.4%—a stark contrast to pre-pandemic levels.

Macro Headwinds: The Perfect Storm?

The airline sector is a hostage to macroeconomic forces. National Bank’s analysis highlights several threats:
- Inflation: Services inflation remains stubbornly high, squeezing household budgets and travel demand.
- Currency: A stronger Canadian dollar (projected at C$1.40/USD) could hurt export revenues and international bookings.
- Geopolitical Risks: Conflicts in the Middle East and Ukraine cloud supply chains and fuel prices.

But Air Canada has a secret weapon: diversification. Its cargo division and vacation arm are growing, and it’s cutting costs aggressively. The company also slashed capacity growth guidance to 1–3% for 2025, prioritizing profit over volume.

Strategic Moves: Buying Back Fear

To signal confidence, Air Canada completed a $500 million share buyback in Q1, reducing its share count—a move that boosts EPS and shareholder value. CEO Rousseau emphasized long-term goals: hitting 17% adjusted EBITDA margins by 2028 and reducing diluted shares below 300 million.

These actions matter. In a sector where 70% of carriers globally operate on margins below 5%, Air Canada’s focus on trimming costs and returning capital to investors could set it apart.

Risks on the Horizon

• Fuel Costs: While National Bank expects fuel prices to average C$0.88 per litre—down from previous estimates—any spike could derail margins.
• Labor Shortages: Air traffic controllers and ground crews remain in short supply, risking delays and higher expenses.
• Economic Downturn: If Canadian GDP growth stalls (revised to marginal growth), leisure travel could crater.

Verdict: Buy the Dip, or Bail?

Air Canada’s Q1 results are a glass-half-full story. Yes, profits are under pressure, but demand is holding—especially in premium and cargo segments. The company’s aggressive buybacks and strategic capacity cuts show discipline, and its long-term targets remain ambitious yet achievable.

Final Call: For investors willing to ride out macro uncertainty, Air Canada offers a compelling mix of defensive traits (diversified revenue streams) and offensive moves (buybacks, margin targets). But keep a close eye on fuel prices and Canadian GDP. If the economy softens further, even the best-laid strategies might hit turbulence.

Bottom Line: Air Canada’s stock (AC.TO) is a Hold with Buy potential if margins stabilize and buybacks continue. But pack an umbrella—the skies ahead are still cloudy.