Air Canada's Q2 Earnings Signal Resilience Amid Volatility: A Strategic Entry Point for Long-Term Investors?

Air Canada's Q2 2025 earnings report paints a picture of resilience and strategic adaptability in a sector still grappling with macroeconomic headwinds. The airline reported operating revenues of $5.632 billion, a 2% year-over-year increase, alongside an adjusted EBITDA margin of 16.1%, the highest among major North American carriers. These figures, coupled with a disciplined capital structure and improved operational metrics, raise a critical question for investors: Is the stock's recent underperformance a buying opportunity in a recovering airline sector?

Financial Performance: Strong Margins Amid Cost Discipline

Air Canada's Q2 results highlight its ability to navigate a challenging environment. The airline generated $909 million in adjusted EBITDA, with operating income of $418 million, despite higher fuel costs and geopolitical tensions. Its leverage ratio of 1.4 (net debt to adjusted EBITDA) remains well below industry averages, reflecting prudent debt management. The company also completed a $500 million share buyback in Q2, reducing its share count to 296 million, a move that signals confidence in its cash flow generation and long-term value creation.

Notably, Air Canada's adjusted CASM (cost per available seat mile) rose slightly to 14.4 cents, but this was offset by a 5% increase in premium revenue, driven by demand for business-class travel and ancillary services. The airline's strategic reallocation of capacity to high-growth markets—such as the Caribbean, Mexico, and transatlantic routes—has proven effective in mitigating weaker transborder demand.

Stock Underperformance: A Contrarian Opportunity?

Despite these strong fundamentals, Air Canada's stock has underperformed its intrinsic value. Since 2020, the stock has declined 64% from its all-time high, trading at C$21.62 as of July 2025. This underperformance contrasts with its Q2 results, which included a 48.7% surge in Q2 2025 and a P/E ratio of 3.04, one of the lowest in the sector.

The disconnect between earnings and stock price can be attributed to several factors:
1. Structural Cost Pressures: Air Canada's unit costs remain elevated at 14.46 cents per mile, driven by wage hikes and delayed aircraft deliveries.
2. Geopolitical Risks: Trade tensions and potential strikes by flight attendants (voting on a strike mandate in Q3) add near-term uncertainty.
3. Sector Volatility: The broader airline sector has been volatile, with investors wary of overexposure to cyclical industries.

However, these risks may be overpriced. Air Canada's free cash flow of $183 million in Q2 and its $3.2–$3.6 billion adjusted EBITDA guidance for 2025 suggest a path to margin expansion. Analysts like RBC and Canaccord Genuity have raised price targets to C$25–27, citing the airline's cost discipline and capacity management.

Comparative Analysis: Outperforming Peers

Air Canada's Q2 performance outpaces many of its North American peers. While Delta and American Airlines faced transborder capacity constraints due to supply chain delays, Air Canada proactively reduced five U.S. routes and redirected capacity to sun destinations. This agility has positioned it to capture 3.25–3.75% capacity growth in Q3 2025, outpacing the industry's average of 1–2%.

The airline's diversified business segments—Air Canada Cargo (16% revenue growth in Q2) and Aeroplan loyalty program—also provide a buffer against demand fluctuations. These ancillary streams contributed to a 5% increase in premium revenue, a key differentiator in a sector where ancillary income now accounts for 30–40% of total revenue.

Valuation and Long-Term Prospects

Air Canada's current valuation appears compelling. At a P/EBITDA ratio of 6.5x, it trades below its 5-year average of 8x and significantly below peers like Delta (9.2x) and American Airlines (9.8x). Morningstar's revised fair value estimate of C$17.50 suggests potential for a 26% upside from current levels, while a PEG ratio of 0.02 indicates undervaluation relative to growth expectations.

The airline's long-term targets—$30 billion in operating revenue by 2028 and adjusted EBITDA margins of 17–20% by 2030—underscore its commitment to shareholder value. With a fully diluted share count of <300 million by 2028, Air Canada's buybacks and earnings per share growth could accelerate.

Investment Considerations

For long-term investors, Air Canada's stock presents a strategic entry opportunity if the following conditions hold:
1. Macroeconomic Stability: A resolution to U.S.-Canada trade tensions and a soft landing in Canada's economy would bolster transborder demand.
2. Labor Peace: Avoidance of a flight attendant strike (expected by late 2025) is critical to maintaining operational efficiency.
3. Cost Control: Continued execution of the $150 million cost reduction program and on-time performance leadership (best in North America for May–June 2025) will reinforce margins.

Conclusion: A Buy for Patient Capital

Air Canada's Q2 earnings affirm its position as a sector leader, with strong margins, disciplined capital allocation, and a diversified network. While near-term risks persist, the stock's underperformance has created a margin of safety for investors willing to ride out volatility. With a consensus price target of C$24.41 and a "Moderate Buy" rating from analysts, Air Canada represents a compelling case for long-term investors seeking exposure to a recovering airline sector.

Final Verdict: Buy for a 12–24-month horizon, with a stop-loss at C$18 to mitigate downside risk.