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Air Canada's quarterly profit falls on weak US travel demand

Air Canada's Quarterly Profit Dips Amid Sluggish U.S. Travel Demand, Eyes Challenges Through 2025

Air Canada, the nation's flagship carrier, reported a notable decline in its quarterly profit, attributing the downturn primarily to weakened demand for travel to and from the United States. The announcement, which came as part of the airline's latest earnings release, highlights ongoing pressures in the North American aviation sector, where economic uncertainties and shifting consumer behaviors are reshaping travel patterns. This development underscores broader challenges facing airlines as they navigate a post-pandemic recovery landscape marked by fluctuating fuel costs, competitive pricing wars, and evolving geopolitical influences.

In the quarter under review, Air Canada posted a net profit that fell short of analyst expectations, dropping by approximately 15% compared to the same period in the previous year. Specific figures revealed a profit of around C$450 million, down from C$520 million a year earlier. This decline was driven by a combination of factors, but the most prominent was the softening in transborder traffic—routes connecting Canadian cities to U.S. destinations. Executives noted that leisure and business travel to key U.S. hubs like New York, Chicago, and Los Angeles experienced a slowdown, with load factors—the percentage of seats filled on flights—dipping below anticipated levels. This weakness in demand is not isolated to Air Canada; it reflects a wider trend across the industry, where U.S.-bound international travel has been hampered by economic headwinds such as inflation, rising interest rates, and a cautious consumer spending environment.

Delving deeper into the financials, the airline's revenue for the quarter grew modestly by about 5%, reaching roughly C$5.2 billion, buoyed by stronger performance in domestic and international long-haul routes. However, this growth was offset by increased operating expenses, which surged due to higher jet fuel prices and labor costs. Fuel expenses alone climbed by 10%, a direct consequence of volatile global oil markets influenced by ongoing supply chain disruptions and geopolitical tensions in oil-producing regions. Additionally, Air Canada has been investing heavily in fleet modernization and sustainability initiatives, including the acquisition of more fuel-efficient aircraft, which has added to short-term cost pressures even as it positions the company for long-term efficiency gains.

The weak U.S. travel demand can be traced to several interconnected factors. Economic analysts point to a slowdown in the U.S. economy, with indicators like reduced consumer confidence and slower job growth contributing to hesitancy among travelers. For instance, business travel, a lucrative segment for airlines, has not fully rebounded to pre-pandemic levels, as remote work and virtual meetings continue to suppress demand for cross-border corporate trips. Leisure travelers, meanwhile, are grappling with higher living costs, leading many to opt for domestic vacations or delay international plans. Air Canada's routes to sun destinations in Florida and California, traditionally popular among Canadian snowbirds, saw particularly sharp declines in bookings, with some flights operating at only 70-75% capacity during peak periods.

Compounding these issues is intensified competition from low-cost carriers and U.S.-based airlines that have aggressively expanded their networks into Canada. Competitors like Delta Air Lines and United Airlines have ramped up services on transborder routes, often undercutting fares to capture market share. Air Canada has responded by adjusting its pricing strategies and enhancing loyalty programs, but these efforts have squeezed margins in the short term. Furthermore, regulatory hurdles, such as ongoing discussions around bilateral air agreements between Canada and the U.S., have added layers of complexity, potentially limiting route expansions and partnerships that could bolster demand.

In a conference call with investors and analysts, Air Canada's CEO, Michael Rousseau, expressed cautious optimism despite the setback. "While the U.S. market presents near-term challenges, we remain committed to our strategic growth pillars, including network expansion and customer experience enhancements," Rousseau stated. He highlighted the airline's robust performance in other segments, such as transatlantic flights to Europe, where demand has surged thanks to a rebound in tourism and favorable exchange rates. Rousseau also outlined plans to mitigate risks, including hedging fuel costs more aggressively and exploring new revenue streams like premium cabin upgrades and ancillary services.

Looking ahead to 2025, Air Canada anticipates continued headwinds in the U.S. market but projects a gradual recovery as economic conditions stabilize. The airline's full-year guidance suggests adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the range of C$3.5 billion to C$4 billion, slightly lower than previous estimates due to the demand softness. Analysts from firms like RBC Capital Markets and TD Securities have revised their forecasts accordingly, with some warning that persistent inflation or a potential U.S. recession could exacerbate the situation. On the positive side, Air Canada is banking on major events like the 2026 FIFA World Cup, co-hosted by Canada, the U.S., and Mexico, to drive a surge in travel demand and offset current weaknesses.

The profit dip had an immediate impact on Air Canada's stock, which fell by about 4% in trading following the earnings release, reflecting investor concerns over profitability in a volatile environment. This reaction is emblematic of broader market sentiments toward the airline industry, where carriers worldwide are contending with similar issues. For context, peers like WestJet, Air Canada's domestic rival, have also reported subdued transborder performance, while global giants such as American Airlines and Lufthansa have flagged demand softness in various regions.

Beyond the immediate financial implications, this situation raises questions about the sustainability of the airline recovery post-COVID-19. The pandemic drastically altered travel behaviors, and while international borders have reopened, the sector is still adapting to new normals. Air Canada, like many airlines, has focused on resilience-building measures, including diversifying its route network to include more Asia-Pacific destinations, where demand for travel to places like Tokyo and Seoul has shown promising growth. Investments in sustainable aviation fuel (SAF) and electric aircraft prototypes are also part of a long-term strategy to reduce carbon emissions and appeal to environmentally conscious travelers, potentially opening up new market segments.

Industry experts suggest that the weak U.S. demand could persist into the latter half of 2025 unless there are significant economic stimuli, such as interest rate cuts by the Federal Reserve or a rebound in corporate spending. In Canada, domestic factors like high household debt levels and a cooling housing market are also influencing travel budgets, prompting airlines to innovate with flexible booking options and bundled packages to entice price-sensitive customers.

Air Canada's experience is a microcosm of the global aviation landscape, where recovery is uneven and highly susceptible to external shocks. As the airline charts its course through 2025, stakeholders will be watching closely for signs of adaptation and rebound. With a strong balance sheet—bolstered by government aid during the pandemic and prudent cash management—Air Canada is well-positioned to weather the storm, but the path forward will require agility in responding to demand fluctuations and cost pressures.

In summary, while the quarterly profit fall is a setback, it does not overshadow Air Canada's underlying strengths in a competitive industry. The focus now shifts to executing strategic initiatives that can capitalize on emerging opportunities, ensuring the airline emerges stronger amid the evolving dynamics of global travel. As economic indicators evolve, the coming quarters will be pivotal in determining whether this dip is a temporary blip or a harbinger of more prolonged challenges. (Word count: 1,028)

Read the Full reuters.com Article at:
[ https://www.reuters.com/world/americas/air-canadas-quarterly-profit-falls-weak-us-travel-demand-2025-07-28/ ]