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. Although trading at a significant discount to peers and backed by a fundamentally strong brand and network, Canadian airline stocks have significantly underperformed. AC shares are down 12.4% over the past five years. A key factor anchoring performance in 2026 is a pair of unresolved and complex labor negotiations that threaten both short-term stability and long-term cost structure. Clarity on these fronts is essential before considering a new position this year.

Air Canada is facing rising labor costs

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

The union, buoyed by a 99% rejection of the airline’s final offer and recent arbitration successes in other cases, is pushing hard. Air Canada’s latest public offering already included a significant increase in total compensation of 40% over four years and a new, industry-leading ground pay structure. The final arbitraged wage outcome could drive up labor costs even further, creating significant fixed costs for years to come.

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

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

Summary of AC’s labor challenges in 2026

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

Risk factor	CUPE (flight attendants)	IAMAW (Mechanics and Ground Crew)
Current status	Only binding arbitration on wages.	Actively negotiating a new contract, which expires on March 31, 2026.
Primary risk	Financial: An arbitrary wage award that exceeds the company’s budgeted increase, putting pressure on margins.	Operational and financial: High risk of a strike that shuts down operations, followed by a costly settlement.
Impact timeline	Imminent (arbitrator’s decision expected in March 2026).	Mid-2026 (risk during high season if negotiations stall).

Financial implications: Pressure on Air Canada stock’s already thin margins

The financial consequences of this labor pressure are not theoretical. Air Canada operates on notoriously thin margins; the operating margin in the third quarter of 2025 was only 4.9%. A new, more expensive labor contract with either union will immediately put pressure on this already low figure. The average operating margin in the aviation sector is much higher at 7.4%.

In addition, Air Canada has limited room to absorb these costs without affecting its recovery objectives. The company has already cut its full-year 2025 adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA), citing the previous labor disruption. Free cash flow guidance is now only $0 to $200 million, leaving minimal cushion. A significant pay cut or strike would jeopardize AC’s financial performance in 2026 and delay the timeline for achieving its long-term 2028 financial targets.

Crucially, it is uncertain whether the company can pass on these higher labor costs to customers through higher rates.

Takeaway for investors

Air Canada shares have reasonable strengths. It has a strong liquidity position, a valuable loyalty program and a renewed long-distance fleet. Management’s commitment to a share buyback program also signals confidence in the underlying business. At the current low valuation, successful navigation of these labor issues could lead to a meaningful reappraisal.

Currently, however, investors are asked to underwrite a stock if there are two major labor cost events that could cause operating margins to shrink below average.

The sensible investment strategy for AC stock right now is to remain patient and watch from the sidelines. The stock may very well represent an attractive opportunity, but alone after the arbitration award is public and the path with IAMAW becomes clear.