Assessing Air Canada's Resilience Amid Shifting Airfare Dynamics in Canada

The Canadian airline industry in 2025 is a battleground of innovation, competition, and regulatory scrutiny. With the emergence of low-fare carriers like Flair Airlines and the persistent pressure on pricing, Air Canada faces a dual challenge: maintaining its dominance in a saturated domestic market while adapting to a globalized, cost-conscious traveler. Yet, National Bank Financial's recent upgrade of its price target for Air Canada—from C$24.00 to C$26.00—suggests that the airline's long-term fundamentals remain robust, even as it navigates short-term turbulence. For value-conscious investors, the question is whether this revised outlook reflects a compelling entry point or a temporary rebound in a volatile sector.

Strategic Adaptability: Cost Discipline and Network Optimization

Air Canada's ability to thrive in a low-fare environment hinges on its strategic initiatives, which prioritize cost management, route optimization, and diversified revenue streams. The airline's adjusted cost per available seat mile (CASM) of 14.4 cents in Q2 2025, though slightly higher than the 13.53 cents in the same period of 2024, remains within its targeted range of 14.25–14.50 cents for the year. This discipline is critical in an industry where fuel and foreign exchange fluctuations can erode margins. By excluding variable costs like fuel and freighter expenses, Air Canada's adjusted CASM provides a clearer picture of its operational efficiency.

Route optimization has also been a cornerstone of Air Canada's strategy. The airline's leadership in on-time performance for May and June 2025—outpacing all major North American carriers—has bolstered customer satisfaction and reinforced its reputation for reliability. This focus on operational excellence is complemented by a measured approach to capacity growth: Air Canada plans to increase available seat miles (ASMs) by 3.25–3.75% in Q3 2025, aligning with its full-year guidance of 1–3% growth. This cautious expansion ensures that the airline avoids over-saturation in key markets while capitalizing on high-demand routes.

Ancillary Revenue and Diversification

Beyond traditional ticket sales, Air Canada has leveraged its ancillary revenue streams to offset competitive pressures. Premium revenues rose 5% year-over-year in Q2 2025, driven by demand for upgraded services and ancillary offerings like baggage fees and in-flight purchases. The airline's diversified business segments—Air Canada Cargo, Air Canada Vacations, and Aeroplan—have also contributed to its resilience. These segments not only diversify revenue but also insulate the company from the volatility of passenger ticket sales.

The success of these initiatives is underscored by Air Canada's recognition as the “Best Airline in North America” at the Skytrax World Airline Awards. Such accolades reinforce the airline's brand strength, which is a critical asset in an era where customer experience can differentiate carriers in a crowded market.

Valuation Attractiveness: A Tale of Two Airlines

Air Canada's valuation metrics paint a nuanced picture. Its forward P/E ratio of 4.98 suggests undervaluation, but the 14.25% stock price drop following the 2025 labor strike has introduced volatility. The strike, which cost the airline $1.4 billion in economic losses and stranded 130,000 passengers, exposed vulnerabilities in its liquidity and labor relations. By contrast, WestJet's stock gained 12% year-to-date in 2025, reflecting investor confidence in its stable operations and proactive labor management.

However, Air Canada's leverage ratio of 1.4—lower than Delta Air Lines' 2.8—indicates a stronger balance sheet than some international peers. The airline's $500 million share buyback in Q2 2025, which reduced outstanding shares by 26.6 million, further signals management's commitment to shareholder value. While Flair Airlines and other low-cost entrants challenge Air Canada's market share, the latter's extensive global network and international partnerships provide a structural advantage that smaller carriers cannot replicate.

National Bank's Price Target: A Vote of Confidence?

National Bank Financial's revised price target of C$26.00, coupled with an “outperform” rating, reflects confidence in Air Canada's ability to navigate short-term challenges. Analyst Cameron Doerksen highlights favorable cost tailwinds, including lower jet fuel prices ($0.85 per liter vs. the forecasted $0.90–$0.95), which added $185 million to 2025 EBITDA estimates. These tailwinds, combined with the airline's disciplined capital allocation and operational efficiency, justify the upgrade.

The analyst also anticipates a swift resolution to the labor strike, noting that the economic and public disruption caused by the 13-day walkout will likely accelerate negotiations. Once resolved, Air Canada's EBITDA loss per day of disruption is expected to rise to $25 million, but this is offset by the airline's broader cost advantages and stable demand for air travel.

Investment Implications: Balancing Risk and Reward

For value-conscious investors, Air Canada's current valuation—trading at a 29.66% discount to National Bank's C$26.00 target—presents an intriguing opportunity. However, the risks are non-trivial. The airline's liquidity buffer was projected to deplete within two weeks during the strike, highlighting the need for robust cash flow management. Additionally, sector-wide labor demands for compensation parity could ripple across the industry, affecting all carriers' EBITDA margins.

A prudent strategy would involve hedging against sector-specific risks while maintaining exposure to Air Canada's long-term potential. Investors might consider a dual approach: short-term allocations to airlines with stable labor relations (e.g., WestJet) and long-term positions in Air Canada, supported by put options to mitigate volatility.

Conclusion: A Resilient Giant in a Competitive Era

Air Canada's resilience in 2025 is a testament to its strategic adaptability and operational discipline. While the labor strike and low-fare competition pose challenges, the airline's cost management, route optimization, and ancillary revenue growth position it to outperform in the long term. National Bank's upgraded price target reflects this confidence, offering a compelling case for value investors willing to navigate short-term turbulence. As the Canadian aviation sector evolves, Air Canada's ability to balance innovation with stability will be key to unlocking its full potential.

For now, the stock's current price of C$19.77—below the C$26.00 target—suggests that the market is discounting the airline's long-term strengths. Whether this represents a mispricing or a cautionary signal depends on one's risk tolerance and conviction in Air Canada's ability to execute its strategic vision. In a sector defined by volatility, patience and a focus on fundamentals may reward those who dare to look beyond the noise.