High-flying stock Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) has been down in the dumps over the past couple of weeks as it deals with a number of headwinds. Is this a sign of further trouble ahead or a momentary blip?
That’s tough to say but with an economic slowdown forming, this is one stock you don’t want to be buying on the pullback, says fund manager Lorne Steinberg.
Air Canada on Thursday announced t would be suspending direct flights from Vancouver, Toronto and Montreal bound to Beijing and Shanghai for one month as tensions ramp up surrounding the current coronavirus outbreak.
“Air Canada regrets this situation and apologizes for the serious disruption to our customers’ travel plans,” a statement from the airline read.
The new development comes as the World Health Organization declared the outbreak a global emergency on Thursday, while nonetheless cautioning that keeping official border crossings between countries open is essential to containing the disease’s spread, in the main by preventing people from using irregular means of movement which may not allow for the checking of symptoms.
“Of all the industries, airlines are among the most economically sensitive, so with the economy slowing, we would not be a buyer of any airline stock…
Outside of the serious health concerns, the coronavirus outbreak has also had an impact on stock markets worldwide, particularly for airline companies who have seen their share prices drop in recent weeks.
Air Canada, which had a superb 2019 where it gained 87 per cent in value, started off 2020 on an uptick but is now down eight per cent for January.
The downturn might be tempting for those investors who feel like they’ve missed out on AC’s past success, but Steinberg says that the macro-winds are blowing against Air Canada and the rest of the stocks in the sector.
“Of all the industries, airlines are among the most economically sensitive, so with the economy slowing, we would not be a buyer of any airline stock,” said Steinberg, president of Lorne Steinberg Wealth Management, who spoke to BNN Bloomberg on Thursday.
“Air Canada has been spectacularly run and it has had an amazing ten-year run and [CEO Calin Rovinescu] has done a great job. But looking at the chart, even, the opportunity has been missed and we would pass,” he said.
Steinberg said the worldwide grounding of Boeing 737 Max 8 aircraft following two crashes is going to keep affecting Air Canada’s progress, as the company currently owns 36 Max 8’s, representing 24 per cent of the company’s narrow-body fleet.
Air Canada last reported earnings in late October where Rovinescu called the grounding of the Max 8’s a “serious disruption” to AC’s operations. Air Canada said that it covered more than 95 per cent of planned flights in its third quarter, despite the shortage of planes. Revenue for the quarter fell three per cent while adjusted earnings climbed eight per cent,
“If you look at the long-term numbers, this company has completely re-engineered their business most recently with the Aeroplan purchase,” Steinberg said. “[But] in the grand scheme, a slowing economy tends to be very negative for airlines earnings.”
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