Air Canada (TSX:AC) has always been in the news. But this time, the stock has been the talk. Its stock price surged 10% since September 9 and reached $16.6 after falling 26% since May. Nothing could revive the stock, its rising profits, falling debt, or higher revenue.

In 2023, Air Canada reported its best-ever revenue and net income in five years. By the first half of 2024, the airline halved its net debt to $3.6 billion. The 2023 earnings before interest, taxes, depreciation, and amortization (EBITDA) margin and earnings per share (EPS) returned to its pre-pandemic level.

Despite such encouraging fundamentals, the stock traded below $18 throughout 2023, with just a seasonal jump to $25 in July. This year, the stock traded below $20. While most stocks picked up from their pandemic low, Air Canada failed to sustain the recovery.

Why did Air Canada stock suddenly jump 10% in September?

However, Air Canada stock jumped suddenly in September as the airline just averted a major crisis. The airline has been in talks with pilots over wage increases. An earlier wage increase had already increased the airline's salary expense by 16% year over year in the first half. Moreover, issues with the Pratt & Whitney engine had increased its maintenance cost by 21% — all these expenses had already reduced its net profit by 61%.

But what was scarier than rising expenses was a pilot strike. There has been a pilot shortage in the aviation industry since the pandemic, as many pilots retired. Pilots have been demanding a wage hike and even threatened to go on a 72-hour strike. Had this strike occurred, it could have grounded Air Canada's +1,000 daily flights worldwide. The opportunity cost of not agreeing to the wage hike would have been significant.

Realizing the consequences of a strike, the airline's management reached a four-year tentative agreement offering pilots a 26% upfront pay boost along with a 4% annual hike over the next three years and other benefits. This four-year contract will add $1.9 billion to Air Canada's cost, or $475 million a year. Looking at the $2.2 billion net profit of 2023, the airline can take a hit on its margins. But it cannot lose revenue, or it will lose its market share.

With this uncertainty settled, investors gave the stock a pat on its back with a 10% jump. Moreover, a fall in oil prices could help the airline partially offset the increase in salary expenses.

Analysts optimistic on Air Canada's recovery

ATB Capital Markets analyst Chris Murray stated that with the union tensions averted, the management can focus on initiatives like share buybacks and expanding the fleet. Air Canada chief financial officer John Di Bert had said that returning value to shareholders "is high on the priority list."

CIBC has given the airline stock an "outperformer" recommendation with a price target of $25, representing a 25% upside. I would remain cautiously optimistic about the stock as the economics of airlines will now play out.

The better-than-expected earnings in 2023 were triggered by a supply shortage and growing demand for revenge travel. This demand is easing, and the supply is picking up as airlines receive aircraft deliveries. If the industry lands up with overcapacity once again, it could hurt AC's profit margins.

Should you buy this stock?

The airline industry has a lot to figure out. They have to identify a new normal post-pandemic and come to work harmoniously without eating each other's profits. Until then, Air Canada's stock price upside will be limited to $25, its seasonality peak it reaches in July. You could consider buying the stock in the $14-$18 price range and selling it at $24 in June-July. However, I would steer clear of the stock for long-term investing.