Shares of Air Canada (TSX:TSX:AC) fell 8% on Tuesday after the airline revealed its updated 2025 guidance and long-term targets, despite reiterating strong revenue and profit projections.
Investors reacted cautiously to the company’s outlook, which focused on cost efficiencies, network expansion, and cash flow generation.
Revenue growth and long-term goals
Air Canada is targeting significant growth over the next few years, driven by strong demand for leisure travel.
The company forecasted a 36% increase in operating revenue by 2028, reaching about C$30 billion, compared to an estimated C$22 billion for 2024.
Additionally, the airline aims to achieve an adjusted core profit margin of 17% or greater by 2028, up from the projected 16% for this year.
The Montreal-based carrier anticipates adjusted EBITDA in the range of C$3.4 billion to C$3.8 billion for 2025, aligning closely with analysts’ forecasts of C$3.63 billion, as per data from LSEG.
“Our strategy, which builds on and leverages the unique strengths developed over the last decade, is to rise even higher with consistent margin expansion and structural cash generation while maintaining a strong balance sheet,” said Michael Rousseau, Air Canada’s CEO.
Cost efficiency and fleet modernization
Air Canada’s growth strategy hinges on a mix of capacity increases, cost optimization, and operational improvements.
The company expects to realize 15-20% cost efficiencies from its modernized fleet over the 2024-2028 period.
Labor productivity is another focal point, with Air Canada projecting annual improvements of about 3%, although these benefits are anticipated to take effect gradually toward the end of the forecast period.
To support its long-term growth, the airline plans to invest approximately C$18 billion in capital expenditures over the next four years.
Despite these significant investments, the company is targeting cumulative free cash flow (FCF) of C$4-5 billion and plans to keep its leverage ratio below 2x.
The airline also aims to maintain liquidity between C$6-7 billion, which includes access to its revolving credit facility.
Expanding routes and network scale
A critical component of Air Canada’s strategy is network expansion, particularly in the Asia-Pacific region.
Earlier this year, the company announced plans to increase flight capacity to China and other key markets in the Asia-Pacific region, where demand for international travel remains robust.
The carrier is also capitalizing on the global post-pandemic surge in leisure travel, as consumers increasingly prioritize experiences over goods.
This trend has provided a tailwind for airlines worldwide, boosting international and domestic passenger volumes.
Investor skepticism lingers
Despite the optimistic outlook and ambitious targets, Air Canada’s stock declined following the announcement.
Analysts suggest that concerns over rising inflation, significant capital expenditures, and the timeline for cost improvements may have tempered investor enthusiasm.
The company’s projections indicate gradual progress toward its goals, but the market appears cautious about Air Canada’s ability to execute its long-term plan amid potential economic headwinds.
A look at the numbers
- 2024 Operating Revenue Estimate: C$22 billion.
- 2028 Operating Revenue Target (NYSE:TGT): C$30 billion (+36%).
- Adjusted EBITDA for 2025: C$3.4 billion to C$3.8 billion.
- Free Cash Flow Target (2024-2028): C$4-5 billion.
CEO remains confident
Despite the stock’s reaction, Rousseau remains optimistic about the company’s trajectory.
We believe we are very well positioned to execute our long-term plans.
Investors will be looking for additional clarity on the airline’s strategy at its investor day, scheduled for later on Tuesday. Air Canada is expected to provide further insights into its financial and operational outlook.