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For years, the airline’s stock was beaten down by high operating costs, high costs of capital, debt, low returns and a pension funding shortfall. (Chris Young/THE CANADIAN PRESS)
For years, the airline’s stock was beaten down by high operating costs, high costs of capital, debt, low returns and a pension funding shortfall. (Chris Young/THE CANADIAN PRESS)

AIRLINES

Air Canada stock: How high can it fly? Add to ...

The mere suggestion of owning Air Canada stock is enough to make investors with long memories hunker down and shield their portfolios.

Over a long stretch beginning in early 2007, the company’s financial problems, amplified by the recession, reached critical levels. A second bankruptcy in a decade loomed. The share price fell by 96 per cent to less than $1, and there it remained, more or less, until midway through last year.

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Since then, Air Canada has been a company resurrected, its stock having risen by more than 400 per cent to flirt with the $5-range for the first time since October, 2008.

“A lot of people have been hurt by this stock over the years. People are still afraid to touch it,” said Salman Malik, associate portfolio manager at Barometer Capital Management. “We think the management team has done a great job over the past few years to remove a lot of the obstacles in front of equity holders.”

There is still plenty of room for Air Canada to improve on its already stellar rally, Mr. Malik said. “Equity holders could be in a position to earn some really good returns.”

For years, Air Canada’s stock was beaten down by high operating costs, high costs of capital, debt, low returns and a pension funding shortfall that swelled to $4-billion.

Since management was replaced in 2009 and Calin Rovinescu was installed as CEO, the company has undergone a makeover, slashing its pension liability with the help of a federal government lifeline, cutting costs – partly through labour concessions – and deleveraging.

In June, Walter Spracklin, an analyst at RBC Dominion Securities, said Air Canada was on the verge of becoming “investible” – a quality that had long escaped the national carrier.

Analyst targets began to creep upward. Then in August, the company reported its best second-quarter results in its history – a product of accelerated cost cutting and increased traffic. Its stock rose by more than 20 per cent.

Then last week, the company said it expects its cost per available seat mile for 2013 to fall up to 50 per cent more than anticipated. The share price registered another 12 per cent spike.

And this week, Air Canada announced plans to expand its European routes through its lower-cost carrier, Air Canada Rouge, nudging the stock up another 2 per cent on Wednesday.

“We believe Air Canada is in the early stages of a transformational change which will lead to vastly improved operating metrics,” Mr. Spracklin said in a recent note, in which he raised his price target to $5.50.

If the company can realize its expected unit cost savings – which it recently increased to a whopping 15 per cent over the medium term – profitability will improve, said Mr. Malik of Barometer. “As long as they stay disciplined, there is a lot of upside,” he said.

It’s unusual to think of Air Canada as a Bay Street darling. And given the speed of the stock’s recovery, it’s understandable that skeptics remain unconvinced.

“The company, fundamentally, is doing some really good stuff,” said Michael Bowman, portfolio manager at Wickham Investment Counsel and a frequent contributor to Globe Investor’s Number Cruncher column. “But it’s too steep of a rally for me.”

It has been a very good stretch for the airline sector as a whole, and part of Air Canada’s resurgence is owed to benefit by association, said Jordan Snow, senior fund analyst at Westcourt Capital Corp. “U.S. airlines are just on a tear. Capital that missed out on the U.S. [rebound] was looking for somewhere to play it.”

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AC.B-T Air Canada 9.77 -0.02
-0.204 %
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