Airline Labor Disputes and EBITDA Stability: Assessing Air Canada's Resilience and Creditworthiness Amid Recurring Tensions

The airline industry has long been a battleground for labor disputes, with strikes and contract negotiations often shaking the financial foundations of even the most established carriers. For investors, the interplay between labor tensions, operational disruptions, and creditworthiness is a critical lens through which to evaluate companies like Air Canada. The airline's recent 8-month strike with its flight attendants, represented by the Canadian Union of Public Employees (CUPE), has laid bare the fragility of its EBITDA stability and raised urgent questions about its long-term creditworthiness.

The 2025 Strike: A Financial and Operational Crisis

The 2025 strike, the first by Air Canada flight attendants in over four decades, began on August 16, 2025, and lasted nearly four days before a tentative agreement was reached. During this period, the airline suspended all flights, stranding 500,000 passengers and incurring daily losses of up to $55 million. Analysts estimate total losses could reach $280–315 million if the strike had persisted. This financial strain has pushed Air Canada's leverage ratio to 1.4 (net debt to trailing 12-month EBITDA), a stark contrast to U.S. peers like Delta (2.8) and Alaska (3.1). Fitch Ratings has flagged the airline's liquidity risks, warning that prolonged disputes could force debt issuance or equity dilution, both of which threaten a credit rating downgrade.

The strike also exposed structural vulnerabilities in Air Canada's labor strategy. Unlike U.S. carriers such as American Airlines and Alaska, which have preemptively addressed ground duty compensation, Air Canada's refusal to align with these practices has fueled union demands for higher wages. The airline's offer of a 38% compensation increase over four years—while it claims to make its flight attendants the best-paid in Canada—was rejected as insufficient by CUPE, which sought a 40% raise and better recognition of unpaid work. The union's defiance of a government-mandated back-to-work order further complicated resolution efforts, creating a three-way standoff with regulators and the federal government.

Historical Context: A Pattern of Disruption

Air Canada's labor challenges are not new. A 2025 strike by the same union lasted just over 12 hours but still caused $98 million in daily losses and the cancellation of 671 flights. In 2012, wildcat strikes by baggage handlers, ground staff, and pilots led to a Moody's credit rating downgrade from B3 to Caa1, reflecting heightened default risk. These episodes reveal a recurring theme: Air Canada's ability to manage labor disputes has often hinged on external interventions, such as government arbitration, rather than proactive negotiations.

The airline's EBITDA performance during these disruptions underscores its vulnerability. During the 2025 strike, daily losses were 2.8 times higher than during the 2020–2021 pandemic shutdown, despite a more normalized operational environment. Fixed costs, including airport fees and crew-related expenses, persisted even as flights halted, compounding financial strain. In contrast, U.S. carriers like Delta have maintained stronger EBITDA margins through preemptive wage agreements and robust liquidity buffers. Delta's Q2 2025 EBITDA margin of 16.1%, for instance, reflects a more stable labor environment.

Credit Rating Implications and Sector-Wide Trends

Credit rating agencies are now scrutinizing Air Canada's ability to navigate these challenges. Fitch has highlighted the airline's reliance on government intervention as a red flag, while S&P and Moody's are likely to assess its recovery potential and liquidity management. The broader sector is also grappling with rising labor costs, with non-fuel unit costs increasing by 1.3% in 2024. Carriers with weaker balance sheets, such as Spirit and Frontier, face insolvency risks if disputes escalate, but Air Canada's leverage ratio of 1.4 places it in a precarious middle ground.

The resolution of the 2025 strike—a tentative agreement mediated by William Kaplan—has temporarily halted further damage. However, the deal's ratification by union members and the airline's ability to restore operations without further disruptions remain critical. Investors should monitor Air Canada's liquidity position and its capacity to absorb potential wage increases. A 40% raise over four years, while costly, could stabilize operations and mitigate future strikes, but it would also erode EBITDA margins by 1.2%.

Investment Implications: Caution Amid Uncertainty

For investors, the key question is whether Air Canada can balance labor demands with financial resilience. The airline's historical ability to recover from strikes—such as the 2025 incident, where a “phased wind-down” strategy minimized chaos—suggests operational discipline. However, the 2025 strike's scale and the government's aggressive intervention signal a shift in labor dynamics.

Investors should consider the following:
1. Credit Rating Risk: A downgrade from Fitch or S&P could increase borrowing costs and erode investor confidence.
2. Liquidity Buffers: Air Canada's $4.918 billion net debt as of December 2024 raises concerns about its ability to fund future disputes without external financing.
3. Sector Comparisons: U.S. peers like Delta and Ryanair, with stronger liquidity and proactive labor strategies, offer safer alternatives in a volatile environment.

In conclusion, Air Canada's recent labor crisis underscores the fragility of its EBITDA stability and creditworthiness. While the tentative agreement provides a short-term reprieve, the airline's long-term success will depend on its ability to modernize labor practices and strengthen its balance sheet. For now, investors should adopt a cautious stance, favoring airlines with diversified revenue streams and proactive labor policies until Air Canada demonstrates a sustainable path forward.