Air Canada just posted solid first-quarter results, showing continued strength and a commitment to its strategic plan. The airline is laser-focused on growth, with an eye on expanding its international network and achieving even greater operational efficiency. But beneath the surface of these positive results, there's a hidden story—one that might just signal a dramatic shift in Air Canada's capital allocation strategy.

The whispers of change are subtle, but unmistakable. John Di Bert, Air Canada's CFO, offered a tantalizing glimpse into the future when he spoke about the airline's robust financial position and its upcoming capital allocation strategy. "With a sound fleet plan and a resilient balance sheet," Di Bert stated, "we will be able to assess more traditional and historical shareholder return programs."

This is not just a casual remark. It's a carefully crafted statement that reveals Air Canada's growing confidence in its ability to generate consistent cash flow. While the airline has understandably focused on deleveraging and fleet renewal over the past few years, it seems the time for a more aggressive approach to shareholder rewards might be just around the corner.

And what better way to reward shareholders than with a share buyback program? Di Bert, during the Q&A session, hinted at this very possibility, stating that "traditionally, we have been able to return cash to shareholders and buybacks have always been a tool that has helped reward those that are supporting the stock and the company."

It's crucial to note that Di Bert stopped short of announcing a buyback program. However, his statements, taken in the context of Air Canada's increasingly strong financial position, suggest that the airline is seriously considering this option. The question is, just how big could a potential buyback be?

Let's look at the numbers. Air Canada exited the first quarter with total liquidity of $10 billion and a leverage ratio of 0.9. The airline is also on track to generate significant free cash flow in 2024, even with significant capital expenditures planned.

Assuming a conservative free cash flow estimate of $1.5 billion for 2024, and considering Air Canada's commitment to prioritize gross debt reduction "where it is economically beneficial," it's not unreasonable to assume that the airline could allocate upwards of $500 million towards a share buyback program. This represents approximately 10% of Air Canada's current market capitalization.

The implications of such a buyback would be significant. It would signal to the market that Air Canada is confident in its long-term growth prospects and sees its current share price as undervalued. It would also directly benefit shareholders by increasing earnings per share and potentially driving up the share price.

Of course, there are other factors to consider. The ongoing negotiations with the pilot's union could impact Air Canada's cost structure and, in turn, influence its capital allocation decisions. However, the fact that Air Canada has factored a new pilot agreement into its 2024 guidance suggests that the airline is prepared for a potentially higher cost environment.

Moreover, the airline's commitment to a long-term outlook, as highlighted by CEO Michael Rousseau, suggests that short-term fluctuations in costs are unlikely to derail its broader strategic plan. "We do not simply manage quarter to quarter," Rousseau stated. "Instead, we maintain a long-term outlook when making investments and strategic decisions."

Air Canada's commitment to a long-term view, coupled with its emphasis on disciplined financial management, suggests that the airline is in a strong position to pursue a buyback program without jeopardizing its future growth plans.

It's worth noting that Air Canada, over the years, has transformed itself from a primarily domestic carrier to a global airline with a strong international network. This evolution has not only diversified its revenue streams but also positioned it to capitalize on the growing demand for international travel, particularly in the Asia-Pacific region.

Furthermore, Air Canada's loyalty program, Aeroplan, has become a significant revenue driver, with its active member base more than doubling since its relaunch in 2020. Aeroplan's impressive growth, driven by strong partnerships with marquee everyday brands, further strengthens Air Canada's financial foundation.

While the airline faces a more competitive domestic market, its focus on elevating the customer experience through investments in lounges, in-flight amenities, and customer service training, could help it maintain its leading position.

All signs point to a company poised for continued growth and success. And for investors, the possibility of a share buyback program adds another layer of intrigue to an already compelling story. Air Canada is not just flying high; it's preparing for a potentially lucrative future—one in which shareholders could reap significant rewards.

Capacity Growth Across Markets

The following chart illustrates the capacity growth Air Canada plans in different geographical markets.

"Fun Fact: Air Canada's Aeroplan loyalty program is so popular that its active member base is now larger than the population of some European countries!"