Analysts at Scotiabank cut their 12-month price target for Air Canada amid a delayed economic restart after historic COVID-19 restrictions that could protect Canadian airlines. 

Scotiabank Analysts Konark Gupta and Amina Djirdeh reduced the airline's stock-price target from $31 to $26 in a note to clients on Tuesday while maintaining its “sector outperform” rating. 

“We think [Air Canada] deserves to trade in line with comps as Canadian traffic recovery has recently accelerated to almost close the gap to the U.S.,” the analysts wrote in the note. “Second, we think [Air Canada’s] earnings are more likely to grow than decline in 2023, even in a downturn, given a delayed restart, pent-up demand, pending corporate travel rebound, and industry issues are extending the recovery cycle.”

Elevated fuel prices and pent-up demand are driving up airline ticket prices, which could result in decreased demand as inflation erodes consumer purchasing power, the Scotiabank analysts say. Despite widespread inflation, an extended recovery cycle could protect Canadian airlines for a longer period of time.

Scotiabank’s recessionary modelling takes into account several factors that mark 2022 as a recovery year, but projects 2023 to be comparable to 2003 or 2009. 

“The only major difference we have embedded in our 2023 forecast is stronger fuel price inflation vs. 2019 as compared to that in 2003 or 2009, which causes us to materially reduce our 2023 margin outlook,” the note said. 

In the near term, the analysts said travel demand is seemingly recovering faster than expected. 

“The Canadian Air Transport Security Authority provides real-time passenger screening data, which shows that Canadian airport traffic has now rebounded to ~80 per cent of 2019 levels (latest data point is 90 per cent for June 26).”

Airport traffic in the U.S. has rebounded in recent months and is 10 per cent higher than Canadian traffic -- hitting 90 per cent. 

“This latest ~10 per cent point gap between Canada and the U.S. has markedly improved from 40 per cent to 50 per cent back in January-February this year as Canada lifted pre-arrival testing requirement effective April 1, 2022, followed by the U.S. effective June 12, 2022,” the note said.