Air Canada will do well for years to come, this fund manager says

Don’t look now but Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) looks ready to break its all-time high with the stock once again cresting above the $50 mark.

It’s no wonder, says fund manager Andrey Omelchak of LionGuard Capital, who thinks the airlines, once considered a no-fly zone for prudent investors, are now experiencing some major tailwinds.

Air Canada has come a long way over the decade, refashioning itself after years of debt and dysfunction pushed the company from bankruptcy to profitability, boosting the share price in the process. For those of us savvy enough to see a sure-fire bargain, one could pick up AC for less than a buck a little more than seven years ago. In 2019, alone, the stock has pretty much doubled in value.

It’s the confluence of good management and secular boom times that have done the job for Air Canada, says Omelchak, president and CIO at LionGuard Capital Management.

“The whole airline industry has changed tremendously over the last several years,” said Omelchak, in conversation with BNN Bloomberg on Tuesday. “It used to be a non-investable space, so to speak, but over the last five to ten years it has become a really interesting industry. The players have become rational, they’re quite profitable and, of course, the travel demand is growing very nicely, for Air Canada, in particular.”

“They’re exposed to the best routes, they’re exposed to the best locations inside the airports, so they have some very strong strategic assets which they’re able to capitalize upon as a result of this whole travel industry growth rate,” Omelchak said.

“I think it will continue to do well. It generates very solid levels of free cash flow, so I think it remains a solid investment,” he said.

Canada’s airlines are in the middle of a real shakeup, with two huge deals announced this year, one being Onex’s purchase of number two airline WestJet and the other Air Canada’s proposed acquisition of number three airline and holiday carrier Air Transat. Both deals have yet to be cleared by regulators.

Omelchak says that Onex’s move to take WestJet private likely won’t impact Air Canada’s fortunes much from a fundamental perspective, although the further narrowing of the field of public Canadian airline options could be a boon for the stock.

“They have put a lot of debt on this company so I’m not sure how much [Onex] can invest in their operations,” said Omelchak. “Typically, when a private equity buys a company they try to milk the cashflow. I’m not sure if that’s the objective of Onex but clearly they see the upside to WestJet from this point on, otherwise they would not be able to realize the internal rate of return for the next five to ten years.”

“I view it as kind of a neutral for Air Canada and it’s almost not a big deal, really,” he added.

“Air Canada has benefitted from the scarcity value from a Canadian context as there’s really nowhere else to put the capital to work and as such I think that it will help, for sure,” Omelchak said.