Fleet Modernization Will Boost Long-Haul And Asian Routes Despite Headwinds

Key Takeaways

• Expanded premium offerings, digital transformation, and fleet renewal position Air Canada for structural margin expansion and recurring profit growth well above industry peers.
  
• Aggressive network agility and international focus enable Air Canada to capture high-yield traffic and drive sustainable top-line growth from global demographic trends.
  
• Mounting regulatory, environmental, competitive, and financial pressures threaten Air Canada's profit margins, revenue stability, and long-term earnings growth.

Catalysts

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

• Analyst consensus acknowledges Air Canada's expanding premium offerings will lift revenues and margins, but ongoing premium revenue growth-now comprising over 31% of passenger income and accelerating with strong advance bookings and international expansion-suggests the company could see higher margin expansion than currently forecast, significantly boosting earnings over the next several years.
  
• Analysts broadly recognize network agility and international growth as drivers of diversification and resilience; however, Air Canada's rapid sixth-freedom connectivity expansion, now posting double-digit growth and benefiting from accelerated fleet modernization, supports much greater capture of high-yield connecting traffic between Latin America, Europe, and Asia than consensus models, enhancing both top-line growth and net margin sustainability.
  
• The digital transformation underway-including proprietary AI-driven revenue management, process automation, and contactless services-positions Air Canada to structurally lower unit costs and unlock ancillary revenue streams at a faster pace than peers, supporting meaningful long-run margin expansion and recurring EBITDA growth.
  
• Fleet renewal with the latest A220s, 787-10s, and upcoming A321XLRs will not only reduce fuel and maintenance costs but enable profitable entry into thinner, long-haul international routes, accelerating both revenue growth and margin expansion as new demand segments are unlocked before competitors can respond.
  
• Leveraging global demographic shifts, Air Canada's international focus taps into outsized demand from a swelling Asian and Latin American middle class, situating the company as the leading North American gateway for long-haul leisure and business travel-a tailwind that can deliver structural revenue growth and sustainable market share gains for the decade ahead.

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 6.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 6.6% today to 3.8% in 3 years time.
• The bullish analysts expect earnings to reach CA$1.0 billion (and earnings per share of CA$3.54) by about August 2028, down from CA$1.5 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 10.3x on those 2028 earnings, up from 3.9x today. This future PE is lower than the current PE for the CA Airlines industry at 16.4x.
• 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 11.02%, as per the Simply Wall St company report.

Air Canada Future Earnings Per Share Growth

Risks

• Intensifying climate change regulations and the likely future escalation of carbon pricing will significantly increase Air Canada's operating expenses, while stricter emissions rules could also suppress demand for air travel, directly pressuring profit margins and long-term earnings growth.
  
• The structural shift towards remote work and virtual meetings is driving sustained reductions in business travel, a key premium and higher-yield revenue segment for Air Canada, which threatens revenue stability and limits future revenue growth.
  
• Air Canada's substantial debt burden and high leverage, much of it carried over from the COVID-19 period, continue to constrain investment flexibility and result in higher recurring interest expenses, eating into net margins and limiting the ability to drive earnings growth.
  
• The ongoing need for large capital expenditures to replace the aging fleet and to invest in decarbonization initiatives will heavily strain free cash flow and may impede the company's capacity to return capital to shareholders or fund future growth, negatively impacting long-term profitability.
  
• Intensifying competition from ultra-low-cost carriers and the persistent risk of industry overcapacity make it difficult for Air Canada to raise fares, leading to margin compression and putting pressure on both revenues and net profit over the long run.

Valuation

• The assumed bullish price target for Air Canada is CA$32.0, 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$32.0, and the most bearish reporting a price target of just CA$18.1.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be CA$26.9 billion, earnings will come to CA$1.0 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 11.0%.
• Given the current share price of CA$19.66, the bullish analyst price target of CA$32.0 is 38.6% 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.