Digitization And Fleet Upgrades Will Boost Global Travel Despite Challenges

Key Takeaways

• Network agility and advanced technology adoption are set to drive stronger revenue growth and profitability than current market expectations.
  
• Strategic international expansion, fleet modernization, and disciplined capital deployment position Air Canada for sustained margin improvement and elevated shareholder returns.
  
• Structural cost pressures, international competition, and operational risks threaten Air Canada's profitability, margin expansion, and revenue growth amid a challenging demand environment.

Catalysts

Provides domestic, U.S. transborder, and international airline services.

• Analyst consensus credits network diversity with moderating revenue fluctuations, but given Air Canada's demonstrated real-time agility-shifting capacity rapidly to outperform competitors and driving a 12% increase in Sixth Freedom revenues-there is strong evidence the network's ability to reallocate assets is structurally underestimated and can drive substantial margin expansion and revenue growth beyond current forecasts.
  
• While the consensus sees operational improvements modestly boosting satisfaction and financials, the accelerating adoption of advanced technology (continuous pricing, enhanced digital marketing, and customer experience digitization), combined with disciplined cost optimization, is likely to deliver sustained CASM deflation and outperformance in profitability as new processes scale-thus supporting higher-than-expected earnings and net margin improvement.
  
• With Canada's immigration-driven population growth and the rise of emerging market middle classes, Air Canada's expanded international and Latin American network positions it to capture superior long-term traffic growth, leading to persistent top-line expansion and increasing market share, with a multiplier effect on ancillary revenues and Aeroplan loyalty economics.
  
• Upcoming large-scale fleet modernization-especially widebody and A321XLR/A220 deliveries-will unlock new high-yield destinations and substantially lower operating costs, turbocharging both load factors and net margins as newer, more efficient aircraft are deployed into underpenetrated international markets.
  
• Air Canada's cash flow strength and opportunistic, accelerated buybacks-coupled with plans to settle convertible notes in cash and maintain robust liquidity-could result in a much faster reduction in share count than consensus expects, sharply increasing earnings per share and total shareholder returns in the medium term.

Air Canada Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Air Canada compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Air Canada's revenue will grow by 6.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 7.6% today to 3.5% in 3 years time.
• The bullish analysts expect earnings to reach CA$939.2 million (and earnings per share of CA$3.19) by about July 2028, down from CA$1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 3.8x today. This future PE is lower than the current PE for the CA Airlines industry at 15.5x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.15%, as per the Simply Wall St company report.

Air Canada Future Earnings Per Share Growth

Risks

• There is persistent downward pressure on transborder demand and softness in the U.S. leisure travel segment, driven by an expensive U.S. dollar and economic uncertainty, which is likely to hinder Air Canada's revenue growth and create a drag on earnings.
  
• Air Canada faces rising operating expenses from higher airport fees, continued maintenance cost inflation, and a new pilot agreement, which together reduce net margins and compress overall profitability, especially as much of these increases are structural.
  
• Increased competition in international markets, particularly from Asian and Gulf carriers in markets like China, Hong Kong, and the Middle East, could result in lower yields and market share loss for Air Canada, pressuring both revenue and margin expansion.
  
• Delivery delays in acquiring next-generation aircraft and reliance on a fleet that is not fully modernized compared to global peers could result in higher fuel and maintenance costs for Air Canada, eroding operating margins over the long term.
  
• A heavily unionized workforce, ongoing labor negotiations, and industry-wide pilot and skilled labor shortages could drive up wage bills and lead to the risk of operational disruptions, directly impacting net margins and earnings through higher costs or service interruptions.

Valuation

• The assumed bullish price target for Air Canada is CA$31.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Air Canada's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$31.0, and the most bearish reporting a price target of just CA$17.5.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CA$26.8 billion, earnings will come to CA$939.2 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 11.2%.
• Given the current share price of CA$21.58, the bullish analyst price target of CA$31.0 is 30.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.