Air Canada's stock (AC.TO) surged nearly 12 per cent on Friday after the airline upgraded its 2023 outlook, pointing to stronger demand and lower fuel prices.

The Montreal-based airline says it now expects adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in 2023 to be in the range of $3.5 billion to $4 billion, up from its previous forecast of between $2.5 billion and $3 billion.

Shares of Air Canada surged on the Toronto Stock Exchange on Friday, jumping as much as 14 per cent. The stock closed the trading day at $20.46 per share, an increase of nearly 12 per cent compared to Thursday's close.

"AC is capitalizing on very solid near-term demand trends that are allowing the company to raise prices in excess of rising costs, while benefiting from the drop in fuel prices," RBC Capital Markets analyst Walter Spracklin wrote in a note to clients on Friday, increasing the price target for the stock from $20 to $22 per share.

"While we remain concerned regarding the post-summer demand and pricing, we believe management efforts to regain its footing post-COVID are commendable."

While Air Canada's capacity guidance remained relatively unchanged from its previous expectations, the airline did alter its forecast for adjusted cost per available seat mile (CASM), an industry measure of operating costs. Adjusted CASM, which excludes fuel expenses, is now expected to be between 0.5 and 2.5 per cent below 2022 levels, an increase from its previous forecast that compared it to 2019 levels.

National Bank analyst Cameron Doerksen says in a note to clients "while investors have been concerned over higher costs, we stress that higher prices are clearly offsetting these costs."

"Furthermore, unit costs should trend lower in 2024 as Air Canada brings capacity closer to 2019 levels," Doerksen wrote. He is maintaining an "outperform" rating on the stock, raising his price target from $29 per share to $32 per share.

CIBC analyst Kevin Chiang also hiked his price target for the stock from $30 to $31 per share. He says that even amid an uncertain economic backdrop and consumers feeling the pinch from rising interest rates, there are so far no signs of demand deterioration for air travel.

"We continue to expect Canadian air traffic to remain resilient," Chiang wrote in a note to clients on Friday.

"Air Canada is in the earlier innings of this recovery ballgame, and we believe this reduces the risk around its near- to medium-term earnings trajectory."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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