Stay clear of Air Canada for the time being, says David Cockfield

Air Canada (Air Canada Stock Quote, Chart TSX:AC) could be a great stock to own if it weren’t for the vulnerabilities intrinsic to the airline business.

So says David Cockfield of Northland Wealth, who thinks the company’s bid to buy Transat is also on shaky ground.

“As a long-time manager, one of the areas in which I’ve seen more companies go down the tubes is the airline industry. When times are good and when times are bad, you usually go bankrupt. So fundamentally, I’m cautious about the airlines,” said Cockfield, managing director and portfolio manager for Northland Wealth, to BNN Bloomberg on Friday.

“[Air Canada] has done very well. They’ve got an operating plan that’s working very well for them,” says Cockfield. “WestJet is faltering a little bit. So, Air Canada got a pretty good prospect of growing earnings over the next couple of years.”

“Now, if you’re a person who thinks that there’s going to be a recession in the next 12 months, then Air Canada is definitely not your stock because the moment things start to slow down ridership drops off and people decide that they don’t want to spend their money going on that fancy holiday, and down go your earnings,” he says.

Air Canada has seen its share price soar in recent years on the back of a solid turnaround for Canada’s number one airline.

Early in May, the company impressed with its first quarter financials, which featured a record $4.45 billion in operating revenue, up from $4.07 billion a year ago and better than the consensus expectation of $4.39 billion. The Q1 also featured adjusted earnings of $17 million or $0.06 per diluted share, compared to a loss of $26 million or negative $0.10 per diluted share a year prior.

The strong quarter helped vault AC’s share price to new highs in May, where it finished up a full 24 per cent for the month and now sits up a sparkling 54 per cent year-to-date.

Last month, Air Canada announced that it was in negotiations to purchase Montreal-based holiday and travel company Transat in a $520-million deal that would value Transat shares at $13.00, a 22-per-cent premium. The deal would see AC take over Transat’s fleet of 40 jets and 5,000 employees, but the bid has already been criticized by some of Transat’s largest shareholders who claim that it undervalues the company’s assets. Transat has agreed to exclusive negotiations with Air Canada over a 30-day period, with the deal having been first announced on May 16.

Cockfield says investors may want to sit on the sidelines until the Transat acquisition gets settled one way or another.

“The takeover of Transat could be very positive for Air Canada. They’ll get some good planes, and Transat has not been doing well. There could be some opposition to this takeover. It’s very much a Quebec company and there are enough large shareholders to decide that if they don’t like the Air Canada bid, it could be dead,” says Cockfield.

“So, you’re sort of riding on the idea that the Transat takeover is in the stock, but it’s not for sure, so I’d be a little bit cautious about committing funds until you find out whether the Air Transat acquisition is going to take place,” he says.