Shares of Air Canada (TSX:AC) have been sliding recently, and its latest quarterly report did little to reassure investors. Despite record quarterly operating revenue of nearly $7 billion in its most recent quarter, management slashed its full-year 2026 adjusted EBITDA forecast by roughly half a billion dollars, down to between $2.4 billion and $2.7 billion.
On the surface, travel demand looks resilient. However, soaring operating expenses have completely eroded those top-line gains. Last quarter, Air Canada's fuel bill surged by more than $900 million year-over-year as prices hit $1.72 per litre. Because airlines sell tickets months in advance, management estimates it can only recover about 70% of those extra costs through fare hikes. This squeezed the carrier's operating margin down to just 3.7% and swung free cash flow to negative $440 million during its seasonally strongest quarter.
Compounding this pressure is Canada’s weakening macroeconomic picture. Canadian GDP growth stalled in recent months, while headline inflation sits at 3.1%. If consumers tighten their belts and cut back on discretionary travel, pushing through additional price increases will prove difficult. Meanwhile, the company still holds nearly $10.9 billion in long-term debt and lease liabilities.
Airlines operate in a capital-intensive industry vulnerable to fuel price volatility and broader economic shifts. While the stock has gained 10% this year, it remains down 15% over five years and sits well below pre-pandemic levels.
With negative free cash flow and uncertain economic conditions ahead, investors are likely better off parking their capital in defensive, cash-generative businesses instead, as the airline stock could continue to fall lower in the weeks and months ahead.
