Financial Insights That Matter
Written by Puja Tayal at The Motley Fool Canada
Air Canada (TSX:AC) has always been in the news. But this time, the stock has been the talk. Its stock price surged 10% since September 9 and reached $16.6 after falling 26% since May. Nothing could revive the stock, its rising profits, falling debt, or higher revenue.
In 2023, Air Canada reported its best-ever revenue and net income in five years. By the first half of 2024, the airline halved its net debt to $3.6 billion. The 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) margin and earnings per share (EPS) returned to its pre-pandemic level.
|
Air Canada’s fundamentals |
2018 |
2019 |
2022 |
2023 |
Jan-June 2024 |
|
Revenue |
$18 billion |
$19.13 billion |
$16.56 billion |
$21.83 billion |
$10.75 billion |
|
Net Income |
$37 million |
$1.47 billion |
($1.7 billion) |
$2.276 billion |
$329 million |
|
Net Debt |
$5.2 billion |
$2.84 billion |
$7.5 billion |
$4.567 billion |
$3.608 billion |
|
EBITDA margin |
17.80% |
19% |
8.80% |
18.20% |
12.70% |
Despite such encouraging fundamentals, the stock traded below $18 throughout 2023, with just a seasonal jump to $25 in July. This year, the stock traded below $20. While most stocks picked up from their pandemic low, Air Canada failed to sustain the recovery.
However, Air Canada stock jumped suddenly in September as the airline just averted a major crisis. The airline has been in talks with pilots over wage increases. An earlier wage increase had already increased the airline’s salary expense by 16% year over year in the first half. Moreover, issues with the Pratt & Whitney engine had increased its maintenance cost by 21% — all these expenses had already reduced its net profit by 61%.
But what was scarier than rising expenses was a pilot strike. There has been a pilot shortage in the aviation industry since the pandemic, as many pilots retired. Pilots have been demanding a wage hike and even threatened to go on a 72-hour strike. Had this strike occurred, it could have grounded Air Canada’s +1,000 daily flights worldwide. The opportunity cost of not agreeing to the wage hike would have been significant.
Realizing the consequences of a strike, the airline’s management reached a four-year tentative agreement offering pilots a 26% upfront pay boost along with a 4% annual hike over the next three years and other benefits. This four-year contract will add $1.9 billion to Air Canada’s cost, or $475 million a year. Looking at the $2.2 billion net profit of 2023, the airline can take a hit on its margins. But it cannot lose revenue, or it will lose its market share.
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