Air Canada Navigates Cross-Border Declines: Can a Shift to Europe Save Its Wings?

The U.S.-Canada travel corridor, once a pillar of Air Canada's (TSX: AC.A)(NYSE: ACD) revenue, is in freefall. With passenger traffic on Canada-U.S. routes down 7% in early 2025 and tariffs fueling geopolitical tensions, the airline faces a pivotal moment. But as Air Canada slashes U.S. routes and reallocates capacity to Europe and Asia, investors must ask: Can this pivot offset the pain of declining cross-border demand?

The Cross-Border Crisis Deepens
The decline in U.S.-Canada travel is stark. Air Canada reported a 4.6% drop in passenger revenue on North American routes in Q1 2025, with traffic (measured by revenue passenger miles) falling 7% year-over-year. Forward bookings for April 2025 were down 75.7% compared to 2024, per OAG data, though Air Canada disputes the severity. Meanwhile, capacity cuts are widespread: the airline axed five U.S. routes in late 2025, including Montreal-Detroit and Vancouver-Tampa, while Delta and United slashed frequencies on key corridors like Washington Dulles-Montreal.

The root causes? Trade wars and currency woes. U.S. tariffs on Canadian goods have strained bilateral relations, with rhetoric about Canada becoming the U.S.'s “51st state” fueling resentment. A weak Canadian dollar—down 15% versus the U.S. dollar since 2023—has made U.S. travel cost-prohibitive for many Canadians, while border detention incidents and travel advisories have deterred leisure travelers.

Strategic Shift: From Florida to Frankfurt
Air Canada's response has been twofold: cut unprofitable U.S. routes and double down on international markets. The airline has redirected capacity to Europe and Asia, where Canadian traveler demand is surging. Overseas trips now account for 36% of Canadian outbound travel, up from 27% in 2024, as travelers seek alternatives to the U.S.

This pivot could pay off. Air Canada's transatlantic flights, including its popular Toronto-Frankfurt route, are operating near capacity, and partnerships with European carriers like KLM and Lufthansa provide scale. Meanwhile, Asia's reopening has driven a 9.8% increase in Canadian overseas travel in May 2025, a trend Air Canada aims to capitalize on.

But risks remain. Expanding into Europe and Asia requires significant investment in aircraft and alliances, and competition is fierce. Rivals like Delta and WestJet are also eyeing international growth, while geopolitical tensions—such as U.S.-EU trade disputes or China's visa policies—could disrupt plans.

Financial Resilience: Cost Cuts and Cashflow
Air Canada's financial strategy hinges on cost discipline. By reducing U.S. capacity and grounding unprofitable routes, it aims to shield EBITDA, which it revised downward to $3.2–3.6 billion for . The airline is also renegotiating labor contracts and deferring capital expenditures, though its $9 billion in debt remains a concern if cashflow falters.

Investors should watch for signs of stabilization. If Air Canada can maintain a 2–3% margin on its international routes—versus losses on U.S. leisure flights—the pivot could offset 10–15% of lost North American revenue. A weaker Canadian dollar, while hurting U.S. travel, could boost exports and make Air Canada's CAD-denominated assets more attractive to foreign investors.

Catalysts and Risks Ahead
The key catalyst for recovery is a thaw in U.S.-Canada trade tensions. A resolution of tariffs or a cooling of rhetorical hostilities could reignite demand for Florida and other destinations, boosting Air Canada's earnings. Conversely, prolonged trade wars or a further CAD depreciation (making U.S. travel even pricier) could force deeper route cuts.

Valuation-wise, Air Canada trades at 6.5x 2025E EBITDA, a discount to Delta's 8.2x multiple but in line with post-pandemic industry norms. The stock could climb if the airline exceeds its $3 billion EBITDA target or secures new alliances.

Investment Thesis: Cautious Long, with Eyes on Europe
Air Canada's pivot to international markets offers a compelling upside, but execution is critical. Investors should consider a cautious long position if the airline can:
1. Maintain 80%+ load factors on European/Asian routes.
2. Avoid further U.S. capacity cuts that could trigger a liquidity squeeze.
3. Secure cost savings without sacrificing service quality.

Risks include prolonged U.S. trade disputes, which could erode consumer confidence further, and competition that limits profit margins in Europe. For now, Air Canada's shift to transatlantic markets provides a lifeline—but the airline's wings must stay strong to weather the storm.

Final Call: Buy on dips below $25/share, with a 12–18 month price target of $30–35, contingent on trade resolution and route performance.

This analysis is for informational purposes only and should not be considered a recommendation to buy or sell any security. Always consult a financial advisor before making investment decisions.