Air Canada Navigates Challenges with Strategic Resilience: Target Raised Amid Mixed Q1 Results

Air Canada’s first-quarter 2025 results revealed a complex balance between operational headwinds and strategic progress, prompting National Bank to raise its price target to C$24 from C$23. While the airline reported a net loss of C$102 million—wider than the prior-year period—key metrics suggest the carrier is executing its long-term strategy to outperform peers. Let’s dissect the numbers and consider why investors might still find value here.

Financials: A Tale of Two Halves

Air Canada’s Q1 revenue fell 1% year-over-year to C$5.196 billion, driven by a 0.4% capacity reduction and persistent cost pressures. Adjusted EBITDA dropped 14% to C$387 million, with margins contracting to 7.4% from 8.7% in Q1 2024. The operating loss of C$108 million marked a stark reversal from a C$11 million profit in the same period last year.

Yet, National Bank highlighted operational resilience in its report. While margins were squeezed by rising depreciation, ground package costs, and foreign exchange volatility, the airline’s leverage ratio improved to 1.3x—down from 1.4x at year-end 2024. This signals discipline in managing debt amid tighter liquidity, with free cash flow of C$831 million (despite a C$225 million year-over-year decline).

Strategic Moves to Watch

1. Share Buybacks: Air Canada repurchased over 15 million shares in Q1, canceling them to reduce dilution. A new Substantial Issuer Bid (SIB) targeting up to C$500 million in share buybacks could further boost shareholder returns.
2. Capacity Adjustments: For Q2, Air Canada plans a 2-2.5% capacity increase—cautious but optimistic. This aligns with its strategy to balance demand with cost controls.
3. 2028 Financial Targets: Management reiterated goals to reduce net debt, diversify revenue streams (e.g., cargo, vacations), and achieve net-zero emissions by 2050.

Why National Bank Raised the Target

The analyst firm emphasized three factors:
- Share Repurchase Impact: The SIB could reduce shares outstanding by ~3%, boosting EPS accretion.
- Cost Discipline: While adjusted CASM rose 3.5%, this was partially offset by lower fuel prices (now assumed at C$0.88/L vs. C$0.95/L earlier).
- Demand Resilience: Passenger numbers held steady at 10.8 million, and on-time performance improved. National Bank noted that Air Canada’s premium pricing power in key routes like transatlantic and transpacific markets remains intact.

Risks and Considerations

• Economic Uncertainty: Air Canada’s 2025 guidance assumes moderate Canadian GDP growth, but a recession could pressure demand.
• Foreign Exchange: A stronger Canadian dollar (assumed at C$1.40/USD) could cut international revenue.
• Sustainable Aviation Fuels (SAF): Meeting 2050 carbon targets hinges on SAF scalability, which remains uncertain.

Conclusion: A Buy with a Long-Term Lens

National Bank’s C$24 target reflects optimism about Air Canada’s ability to navigate near-term challenges while capitalizing on its structural advantages. Key data points support this view:
- Leverage Improvement: The 1.3x net debt/EBITDA ratio leaves room for growth without overextending.
- Buyback Momentum: Canceling 15 million shares in Q1 alone adds C$0.15/share to EPS over time.
- Cost Controls: Fuel price declines and the SIB offset CASM pressures, suggesting margins could stabilize in H2 2025.

While Q1’s operating loss is a red flag, Air Canada’s strategic focus on shareholder returns and capacity discipline positions it to outperform peers if demand holds. Investors should monitor the SIB execution and Q2’s 2% capacity growth. For now, the stock trades at 6.2x forward EV/EBITDA—a discount to U.S. peers like Delta (DAL) at 7.8x—supporting National Bank’s bullish call.

In sum, Air Canada’s mixed Q1 results are a hurdle, not a roadblock. With disciplined capital allocation and a resilient business model, the airline remains a compelling play for investors willing to look beyond the short term.