Air Canada: Why Analysts Believe It’s a Bargain for Investors

Air Canada's stock is undervalued amidst pilot negotiations, analysts say opportunity awaits investors if the deal is ratified.

Editorial Team (ET)May 9, 2025

Air Canada (AC.TO) is navigating a period of volatility, but analysts say the airline is "significantly undervalued" compared to its industry peers. As pilots vote on a four-year agreement, the potential impact on the airline’s finances and stock performance is under scrutiny. However, analysts remain optimistic, forecasting that Air Canada is set for outperformance if the deal is ratified. This article delves into the factors behind this valuation, the current challenges Air Canada faces, and why investors may want to keep a close eye on this stock.

The Significance of the Pilot Deal

Air Canada successfully reached a tentative agreement with its pilots, avoiding a strike just hours before the deadline. The new four-year contract, valued at $1.9 billion, is designed to address concerns within the pilot union, including wages and working conditions. However, the deal is not yet finalized, as the union members are in the process of voting on ratification.

If ratified, this agreement is expected to have a noticeable impact on Air Canada’s bottom line. Analysts forecast that higher pilot wages could weigh on the airline’s upcoming quarterly results. This has led to revised earnings estimates for both Q3 and Q4 of 2024, factoring in the increased costs and the potential customer fallout from the looming strike threat.

How Air Canada is 'Significantly Undervalued'

Despite the challenges surrounding the pilot deal, some analysts are calling Air Canada "significantly undervalued" compared to other full-service carriers. Tom Fitzgerald and Helane Becker, analysts from TD Cowen, maintain a "buy" rating on Air Canada’s stock and project a price target of $19 per share. According to them, Air Canada’s current EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization) ratio remains attractive when compared to industry competitors.

Fitzgerald and Becker argue that the valuation gap will close once the pilot negotiations are finalized, and key improvements in long-haul traffic from the Asia Pacific region continue to materialize. Despite the ongoing turbulence, they believe Air Canada is well-positioned for growth in 2024 and beyond.

Impact on Air Canada’s Stock Performance

Air Canada’s stock has seen significant volatility this year, with shares down about 12% year-to-date. Much of this weakness is attributed to the uncertainty surrounding the pilot negotiations and broader concerns about declining air travel demand.

During a recent earnings call, CEO Michael Rousseau expressed frustration over the airline’s stock performance, stating, “We’re disappointed with our stock performance year-to-date, especially after our record 2023.” Rousseau noted that the company has fully repaired its balance sheet post-pandemic, yet the market has not yet reflected this progress in the stock price.

Broader Industry Trends Affecting Air Travel Demand

Air travel demand has been a mixed bag throughout 2024. While pent-up demand post-pandemic initially drove a robust recovery, there are signs that this growth may be tapering off. Analysts are closely watching industry-wide trends to assess the long-term outlook for air travel demand, particularly for international routes.

Cameron Doerksen, an analyst at National Bank, pointed out that capacity growth within the airline industry has been a double-edged sword. While additional capacity initially spurred recovery, it has also exerted downward pressure on yields—especially on routes to the U.S. and popular sun destinations. However, Doerksen expects this capacity growth to decelerate in Q4, which could provide some relief for Air Canada.

The Path Forward: Margin Recovery and Long-Term Prospects

Despite a challenging 2024, analysts believe that Air Canada's profit margins are bottoming out and set to improve. Both Fitzgerald and Becker expect margins to expand in the coming quarters, driven by improved operational efficiency and a recovery in long-haul international travel. This optimistic outlook is reflected in their "buy" rating and price target.

One of the key factors that could boost Air Canada’s performance is the recovery of long-haul international traffic, particularly in the Asia Pacific market. After months of reduced flights and travel restrictions, this region’s reopening presents significant upside potential for the airline.

The Risk of Deal Rejection

While the tentative agreement with the pilots could remove a key overhang on the stock, there is still a risk that union members may reject the deal. Some pilots, especially newer recruits, have expressed dissatisfaction with the pay structure and ongoing wage gaps between junior and senior employees. The outcome of the vote could have significant ramifications for Air Canada’s near-term outlook.

If the deal is rejected, Air Canada could face operational disruptions, including potential flight cancellations and customer dissatisfaction. In the event of a strike, analysts estimate that approximately 670 flights could be canceled daily, affecting 110,000 passengers.

The Role of Shareholder Returns in Stock Valuation

One of the key catalysts that analysts are watching is the announcement of shareholder returns. According to Fitzgerald and Becker, Air Canada’s stock remains undervalued partly because the market is waiting for confirmation of shareholder returns. Once these are announced, they expect to see a positive reaction from investors.

While the timeline for shareholder returns remains uncertain, analysts expect them to materialize once the pilot negotiations are resolved. This could serve as a key trigger for closing the valuation gap between Air Canada and its peers.

Key Analysts Ratings on Air Canada

Fitzgerald and Becker from TD Cowen maintain a "buy" rating on Air Canada stock, with a target price of $19. They view the airline as undervalued and positioned for future growth, particularly once the pilot deal is ratified and long-haul traffic improves.

National Bank analyst Cameron Doerksen also has an "outperform" rating on Air Canada, with a price target of $22. While he trimmed earnings expectations for the third and fourth quarters due to the pilot strike threat, he remains optimistic about the airline's prospects heading into 2025.

Conclusion

Air Canada may be facing a challenging year with volatility in its stock price and the ongoing pilot negotiations, but analysts remain confident in the airline's long-term prospects. The airline is significantly undervalued compared to its peers, and the successful ratification of the pilot agreement could serve as a major turning point. While risks remain, particularly regarding travel demand and the union vote, Air Canada’s recovery in margins, potential shareholder returns, and improvement in long-haul traffic could position the airline for outperformance in the coming years.

Air Canada

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