Don’t Touch Air Canada Stock Until This Risk Is Off the Table

Air Canada (TSX:AC) stock presents a classic high-risk, high-reward dilemma. While trading at a significant discount to peers and backed by a fundamentally strong brand and network, the Canadian airline stock has been a significant underperformer. AC stock is down 12.4% over the past five years. A major factor anchoring its performance in 2026 is a pair of unresolved and complex labor negotiations that threaten both its near-term stability and its long-term cost structure. Clarity on these fronts is essential before considering a new position this year.

Air Canada faces rising labour costs

The first and most immediate challenge on AC stock is resolving the wage dispute with over 10,000 flight attendants, represented by the Canadian Union of Public Employees (CUPE). After a rejected tentative agreement and a government-intervened dispute, the matter of hourly wage rates has entered a binding arbitration. While this process prevents a repeat of the costly August 2025 strike, which led to over 3,200 canceled flights and a $375 million financial hit, it introduces a new risk.

The union, emboldened by a 99% rejection vote of the airline’s final offer and recent arbitration successes in other matters, is pushing hard. Air Canada’s last public offer already included a significant 40% increase in total compensation over four years and a new, industry-leading structure for “ground pay.” The final arbitrated wage outcome could push labour costs even higher, embedding a substantial fixed expense for years to come.

More precarious is the second challenge: the upcoming negotiation with the International Association of Machinists and Aerospace Workers (IAMAW), representing mechanics, baggage handlers, and cargo agents. Their contract expires on March 31, 2026. Unlike the CUPE situation, which is contained in arbitration, this negotiation carries the direct risk of a full-scale strike.

A work stoppage by these technically skilled, difficult-to-replace workers would effectively ground Air Canada’s fleet during the critical spring and summer travel season. Recent IAMAW victories in grievance arbitrations protecting member work underscore the union’s effective advocacy and set a tense stage for talks.

Summary of AC’s labour challenges in 2026

The critical distinction between these two labor challenges is summarized below:

Risk FactorCUPE (Flight Attendants)IAMAW (Mechanics & Ground Crew)Current StatusBinding arbitration on wages only.Active bargaining for a new contract, with an expiry of March 31, 2026.Primary RiskFinancial: An arbitrated wage award that exceeds the company’s budgeted increase, pressuring margins.Operational & Financial: High risk of a strike that halts operations, followed by a costly settlement.Impact TimelineImminent (Arbitrator’s decision expected by March 2026).Mid-2026 (Peak travel season risk if negotiations stall).

Financial impact: Squeezing Air Canada stock’s already thin margins

The financial fallout from these labour pressures isn’t theoretical. Air Canada operates on notoriously thin margins; its operating margin in the third quarter of 2025 was just 4.9%. A new, more expensive labour contract with either union will directly compress this already low figure. The average airline industry operating margin is much higher at 7.4%.

Furthermore, Air Canada has limited room to absorb these costs without affecting its recovery targets. The company has already lowered its full-year 2025 adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) guidance, citing the prior labor disruption. Free cash flow guidance is now just $0 to $200 million, leaving a minimal buffer. A significant wage award or a strike would jeopardize AC’s financial performance in 2026 and push back the timeline for achieving its long-term 2028 financial goals.

Crucially, the company’s ability to pass these increased labour costs onto customers through higher fares is uncertain.

Investor takeaway

Air Canada stock has its fair strengths. It maintains a strong liquidity position, a valuable loyalty program, and a refreshed long-haul fleet. Management’s commitment to a share-buyback program also signals confidence in the underlying business. At its current depressed valuation, a successful navigation of these labor woes could trigger a meaningful re-rating.

However, investors are currently asked to underwrite a stock with two major labour cost events that may shrink it’s below average operating margins.

The prudent investment strategy on AC stock right now is to remain patient, while watching on the sidelines. The stock may very well represent a compelling opportunity, but only after the arbitration ruling is public and the path with IAMAW becomes clear.

The post Don’t Touch Air Canada Stock Until This Risk Is Off the Table appeared first on The Motley Fool Canada.

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More reading

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• Air Canada: Buy, Sell, or Hold in 2026?

Fool contributor Brian Paradza has no position in any of the stocks mentioned. The Motley Fool recommends Air Canada. The Motley Fool has a disclosure policy.