Yahoo Finance Air Canada stock falls 7% amid higher labour costs, but carrier says demand remains strong
Shares of Air Canada (AC.TO) fell as much as seven per cent on Friday following the release of quarterly financial results, as the airline reported rising operating expenses driven in part by higher labour costs.
Canada's largest airline reported an adjusted net loss of $44 million, or 12 cents per diluted share, in the fourth quarter of the year, compared to an adjusted loss of $217 million, or 61 cents per share, during the same quarter in 2022. While the quarterly loss was an improvement from the previous year, analysts had expected an adjusted per-share quarterly loss of four cents.
Air Canada's stock finished the trading day on Friday at $18 per share, a decline of nearly seven per cent compared to Thursday's close.
Still, the airline saw total sales improve in 2023 as it expanded capacity amid strong demand. Operating revenue in the quarter totalled $5.18 billion, an increase of 11 per cent from $4.68 billion last year, as capacity grew nine per cent annually. Net income increased to $184 million in the quarter, up from $168 million last year.
Chief executive Michael Rousseau called 2023 "a very successful year" for the airline.
"We are strategically adding to our key hubs, enhancing our level of customer service and improving our operational reliability," he said on a conference call with analysts.
Operating expenses also rose, due to higher costs related to the increase in capacity, as well as better wages, salaries and benefits. Air Canada says operating expenses in 2023 overall grew 17 per cent related to traffic growth. Labour costs were up 21 per cent year over year in 2023, as the airline's full-time employee count grew 17 per cent and wage inflation and profit-sharing also increased.
North American carriers with major international operations are benefiting from strong travel demand, but face cost pressures as pilots and other workers make gains in bargaining.
Air Canada is in the midst of labour negotiations with the union representing its pilots. A representative of the Air Line Pilots Association (ALPA) said on Thursday that Air Canada pilots are seeing progress in contract talks after a private independent mediator was hired to bridge gaps over pay and quality-of-life demands.
"We are working with ALPA and have agreed upon a framework for continuous constructive bargaining through an independent and experienced mediator," Rousseau said.
"This provides stability while we work together over the next few months with a goal to reach a collective agreement that is beneficial to all stakeholders."
Analysts see opportunity amid stock slump
Air Canada has so far continued to see strong demand in 2024, particularly on international routes. The airline says it is seeing greater demand for destinations in southern Europe compared to the second and third quarters of last year, prompting it to add capacity to Greece, Italy and Spain. The airline is also seeing stronger demand in its Asia-Pacific service, and will be adding routes to Singapore and Japan later this year.
The airline says it expects a "normalized environment" in the domestic market due to its competitive nature.
"However, we are well-positioned to compete and the overall diversification of our network gives us multiple options to be deploying capacity to other geographies," Mark Galardo, Air Canada's executive vice-president of network planning, said on the conference call.
National Bank analyst Cameron Doerksen wrote in a note to clients on Friday that while the fourth-quarter results were slightly below expectations and costs are trending higher, the airline's 2024 guidance "looks achievable." Air Canada said Friday it expects adjusted earnings before interest, taxes, depreciation and amortization to be between $3.7 billion and $4.2 billion in 2024, up from its previous target of between $3.5 billion and $4 billion.
"Although the market remains concerned about how sustainable demand for air travel will be in 2024 as well as higher costs, we continue to argue that current valuation on Air Canada shares is pricing in a material decline in profitability for 2024 that is much worse than AC's guidance," Doerksen wrote.
TD Cowen analyst Helane Becker said in a note to clients on Friday that Air Canada remains a good long-term opportunity.
"We would build positions in Air Canada and continue to view the stock as a good long-term holding," Becker wrote.
"It's the dominant player in a market that is geographically advantageous to mainline carriers, has numerous revenue tailwinds, one of the best loyalty programs in the industry, is generating (free cash flow) and has a very strong credit profile."
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
Download the Yahoo Finance app, available for Apple and Android.
