Air Canada: Stock of the Week

Andrew Willis: Did you know that in 2019, about only 22% of Air Canada’s ACDVF capacity was used for domestic flights? That’s because the biggest customer of Canada’s flag carrier is U.S. nationals on their way out of the continent.

Before the pandemic, Air Canada’s strategy was to capitalize on what’s known as “sixth freedom traffic,” or passengers using Canada as a layover spot. This is a strategy that relied heavily on long-haul traffic and helped put the airline in better financial shape than many U.S.-based peers. But its internationally focused business model will face considerably more stress, according to sector director Brian Bernard.

We expect the industry to make a short-haul and leisure-led recovery that isn’t ideal for Air Canada’s business model. And the low level of travel and international restrictions these past few years has caused the firm to take on significant debt to continue operating. Bernard expects the business of Air Canada to take off once again, however, with a return to 2019 passenger levels by 2024 and believes the worst is over with the return to global travel well under way this year.

We also like the looks of Air Canada’s frequent flyer program, Aeroplan, which the company said has been performing “extremely well.” That enterprise essentially comes down to selling miles to banks, which sell or give miles to customers—which makes for a solid yet capital-light business that runs even when flights are cancelled.

For Morningstar, I’m Andrew Willis.