Shares of Canada’s flagship carrier, Air Canada (TSX:AC), are once again drawing intense market scrutiny. The stock presents a compelling paradox: its single-digit earnings multiples are almost irresistible to value investors, yet the company is navigating a gauntlet of soaring capital expenditures, intense union negotiations, and geopolitically-induced operational disruptions.
This leaves investors grappling with a critical question: does today’s apparent bargain hide a costly future?
On purely financial metrics, Air Canada’s stock appears deeply undervalued. As of early 2026, the stock trades at:
This translates to a robust free cash flow yield of approximately 11%, significantly higher than the ~4.2% yield on long-term U.S. Treasury bonds. Even applying a 5% risk premium, the discounted cash flow valuation theoretically remains above that of risk-free assets. “As long as the company does not actively shrink, it is worth the investment at today’s price,” noted one analyst who recently exited the position.
Behind the attractive valuation numbers, however, a series of structural challenges are forming powerful headwinds.
For the next two years (2026-2027), Air Canada anticipates annual capital expenditures reaching up to C$5 billion, primarily for new aircraft. This spending is projected to outstrip free cash flow in most years, leading the company to forecast only breakeven free cash flow over the near term. From a cash flow perspective, this implies the company is effectively in a state of “contraction.”
Labour relations remain a looming threat. In September 2025, over 99% of flight attendants voted to reject the company’s final wage offer, and the Canadian Union of Public Employees (CUPE) is now seeking a settlement through arbitration. Simultaneously, Unifor, the union representing airport and customer service staff, has begun new contract negotiations.
A flight attendant strike in August 2025 ended with management conceding to demands, costing an estimated C$350 million. Analysis suggests that “upward pressure on labour costs remains, which will clearly pressure the airline’s bottom line.”
Recently, Air Canada suspended all flights to Cuba due to a fuel crisis on the island, stemming from a U.S. oil embargo. While the airline has committed to sending empty planes to repatriate stranded travellers, such geopolitical risks are dampening consumer demand for air travel and directly impacting revenue.
The pressure is already visible in recent quarterly results. The Q3 2025 earnings were negatively impacted by labour disruptions, rising costs, and soft U.S. travel demand. A key efficiency metric—adjusted cost per available seat mile (CASM)—jumped 15% year-over-year to 14 cents. Looking ahead to 2026, cost pressures are set to intensify: new wage terms from the CUPE arbitration, enhanced ground pay and benefits, rising airport fees, and potential jet fuel price volatility are all poised to erode the company’s margins.
While Air Canada stock trades at less than 10 times expected 2026 earnings, many analysts warn these estimates are at significant risk. The combination of revenue pressures and rising costs creates what some call a “perfect storm” for the airline’s future.
For investors, Air Canada presents a classic value-investing conundrum: is one drawn in by the remarkably low valuation, or scared off by the complex risk profile? The answer likely depends on individual investment horizons, risk tolerance, and a judgment call on whether the airline can navigate through the turbulence ahead.
