Air Canada's new pilot agreement removes 'a significant overhang' on the stock: Analysts
The airline's shares jumped on Monday after the pilot deal was reached over the weekend
Air Canada's tentative, four-year agreement with the union representing its pilots removes a significant overhang on the airline's beleaguered stock, analysts say, as shares jumped on Monday.
Canada's largest airline reached a deal with the Air Line Pilots Association (ALPA), the union representing more than 5,200 Air Canada pilots, on Sunday, averting a strike and widespread flight cancellations. Air Canada says the terms of the tentative agreement will remain confidential pending a ratification vote by union membership, which is expected to occur next month. ALPA says the agreement adds $1.9 billion in value for its membership, with a cumulative pay rate increase of 42 per cent over four years. The last agreement expired in September 2023.
Shares of Air Canada jumped nearly eight per cent in early trading on Monday. The stock was up approximately four per cent as at 11:50 a.m. ET on the Toronto Stock Exchange, trading around $16.42.
The new collective agreement removes "a significant overhang that has weighed on shares" during the airline's post-pandemic recovery, says ATB Capital Markets analyst Chris Murray. It also allows Air Canada to shift its focus to other initiatives, such as share buybacks and adding aircraft to the fleet.
"The absolute focus for most of the year has been getting to a settlement with the pilots that they can work with, that keeps the pilots happy and allows the airline to move forward," Murray said in an interview with Yahoo Finance Canada, adding that Air Canada has been cautious about things that investors have been looking for, including share buybacks. Murray has an "outperform" rating on Air Canada, with a $26.50 share price target.
“(The new agreement) frees the company to have a more fulsome discussion around investors and what to do there.”
CIBC Capital Markets analyst Kevin Chiang wrote in a research note on Sunday that the tentative agreement "removes a key overhang on Air Canada's share price." CIBC has set a 12-18 month price target of $25 per share, with an "outperformer" recommendation on the stock.
"The risk of a pilot strike has weighed on AC's share price this year," Chiang wrote, noting that the share price going into Monday was still under $16, suggesting "a good risk/rewards setup."
"We would also note that Air Canada's (enterprise value) is back to where it was during the pandemic, but before news of a vaccine broke in November 2020. While we recognize the risk of a pilot strike was an overhang, it is hard for us to imagine this is a worse situation than what the airline sector was going through during the summer of 2020."
During its last quarterly conference call, CEO Michael Rousseau told analysts the company was "disappointed with our stock price performance year-to-date, especially coming off our record 2023, and having completely repaired the balance sheet." Even with Monday's share bump, the airline's stock is down about 11 per cent this year.
Chief financial officer John Di Bert says returning value to shareholders "is high on the priority list."
"We have indicated that we are focused on creating shareholder value and capital allocation to shareholders, and returning value to them is high on the priority list. And we will do that in due course," Di Bert said in August.
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.