International Travel Expansion And Rising Costs Will Define Future Prospects

Key Takeaways

• Strong global travel demand, international network growth, and premium cabin focus are driving sustained revenue gains and competitive market positioning.
  
• Fleet modernization and digital initiatives are boosting efficiency, ancillary income, and loyalty, supporting margin expansion and recurring earnings growth.
  
• Rising labor costs, competitive yield pressure, limited geographic diversification, high capital expenditures, and shifting travel demand dynamics threaten profitability and revenue stability.

Catalysts

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

• Robust and sustained demand for international travel-driven by rising global middle-class incomes and increased appetite for experiences-continues to benefit Air Canada's transatlantic and Asia-Pacific routes, underpinning long-term revenue growth and market share expansion.
  
• Structural growth in corporate travel and high-yield premium cabins, supported by global business expansion and experience-centric consumer behavior, is evidenced by strong premium product demand (close to 31% of passenger revenue and further growth anticipated), which should positively impact yields and net margins.
  
• Aggressive international long-haul network expansion (notably into Latin America, Europe, and Southeast Asia), alongside successful development of sixth freedom traffic, positions Air Canada to capture a larger share of connecting global passengers, supporting both top-line growth and load factor resilience.
  
• Fleet modernization and upcoming entry of next-gen fuel-efficient aircraft (A220s, 737 MAX, and A321XLRs) are expected to drive down per-seat costs and enhance operational efficiency, supporting margin expansion and improved long-term earnings.
  
• Digital and loyalty initiatives, including Aeroplan partnership growth and enhanced member amenities (like free Wi-Fi), are increasing ancillary revenues and building a recurring, high-margin earnings stream, diversifying the revenue base and supporting more consistent free cash flow and earnings growth.

Air Canada Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Air Canada's revenue will grow by 5.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.6% today to 3.3% in 3 years time.
• Analysts expect earnings to reach CA$869.3 million (and earnings per share of CA$3.07) by about September 2028, down from CA$1.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$1.1 billion in earnings, and the most bearish expecting CA$667 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.5x on those 2028 earnings, up from 3.9x today. This future PE is lower than the current PE for the CA Airlines industry at 15.9x.
• 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

• Rising labor costs, including significant increases due to new and anticipated collective agreements (notably with pilots already ratified and ongoing flight attendant negotiations), have driven a 16% year-over-year labor expense increase on less than 1% headcount growth, pressuring net margins and earnings.
  
• Persistent and increasing competition on key international routes-especially in the Pacific (notably from China and Hong Kong)-has led to declining unit passenger revenues and yield pressure, which threatens future revenue growth and overall profitability.
  
• Structural demand weakness in certain core markets, including an 11% decline in transborder revenues on reduced demand for U.S. travel, creates long-term revenue risk due to Air Canada's limited geographic diversification and heavy reliance on these markets.
  
• High and ongoing capital expenditures for fleet modernization (A220s, 737 MAX, imminent A321XLRs and 787s) combined with volatile fuel prices and currency fluctuations sustain pressure on free cash flow, increase depreciation expense, and could negatively impact net margins if returns on investment are not realized.
  
• Demographic shifts, changing booking patterns, and potential normalization of remote work (noted as causing shifts in leisure/corporate demand curves and seasonality) may limit long-term passenger growth-particularly in premium/business segments-thereby constraining revenues and jeopardizing earnings stability.

Valuation

• The analysts have a consensus price target of CA$25.293 for Air Canada based on their expectations of its future earnings growth, profit margins and other risk factors. 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$17.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$26.3 billion, earnings will come to CA$869.3 million, and it would be trading on a PE ratio of 9.5x, assuming you use a discount rate of 11.0%.
• Given the current share price of CA$19.24, the analyst price target of CA$25.29 is 23.9% 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.