Air Canada says it has been shifting capacity toward high-demand international markets as Canadians' appetite for cross-border travel continues to lag.
Passenger revenues from the airline's U.S. transborder segment dropped 11 per cent during the three months ended June 30 compared to last year, to $961 million, while domestic, Atlantic and Latin American markets saw a boost.
"This second quarter was not business as usual," chief commercial officer Mark Galardo told analysts on a conference call Tuesday.
"We navigated through a period of significant economic and geopolitical uncertainty and we contended with reduced demand for transborder travel, an evolving geopolitical landscape affecting the Middle East and India, increased competition in China-Hong Kong and some currency fluctuations."
The Trump administration's tariff threats, immigration crackdowns and musings about annexing Canada have prompted many Canadians to shun U.S. travel.
The decline has shown up in Statistics Canada data. Last month, the agency said Canadian-resident returns from the United States by air declined more than 24 per cent in May compared to the same month a year earlier, continuing a five-month downward trend. Returning automobile traffic was down 38 per cent year-over-year in May.
"We made the right early calls to match our capacity to the evolving demand landscape, and our diversified network and disciplined capacity management supported strong performance in international overall," said Galardo.
Domestic routes saw a three per cent boost in revenues during the quarter.
"We kept a strong and steady presence and offered more options for travellers to explore the country, increasing capacity on key leisure destinations," Galardo said.
Capacity has also shifted from the transborder market to sun destinations going into the second half of the year.
Galardo added the airline is closely monitoring the Canada-U.S. sector and has the flexibility to adjust to changing market conditions.
Air Canada shares dropped more than 12 per cent to close at $19.34 on Tuesday after it reported a drop in second-quarter profit that missed analyst expectations.
The airline reported net income of $186 million in the period, down from $410 million in the same quarter last year.
Air Canada says that on an adjusted basis, it had a net income of $207 million in the quarter compared with $369 million in the same quarter last year.
Adjusted earnings worked out to 60 cents per diluted share in the quarter, compared to 98 cents per share last year.
Analysts on average had expected an adjusted profit of 72 cents per diluted share, according to LSEG Data & Analytics.
Passenger revenues in the quarter amounted to $5.03 billion, up one per cent from last year on 2.5 per cent capacity growth.
Despite the challenges, the airline reaffirmed its financial guidance for the year that it issued in May.
RBC analyst James McGarragle said the stock sell-off Tuesday is "overdone" and presents a buying opportunity.
"In the context of a soft transborder market, we view today's results as neutral, underpinned by effective capacity reallocation and encouraging demand commentary," he wrote in a note.
"However, higher-than-expected labour costs and a conservative approach to raising (free cash flow) guidance likely contributed to the pressure on shares. That said, we remain constructive, as ongoing cost reduction initiatives and operational efficiencies should serve as meaningful tailwinds."
This report by The Canadian Press was first published July 29, 2025.
Companies in this story: (TSX: AC)
Lauren Krugel, The Canadian Press
