Air Canada will need a federal bailout, this fund manager says

Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) had a big rally last week to win back some of the territory lost to COVID-19, but with the stock still down more than 60 per cent, is this a name to be jumping on? Brian Madden of Goodreid Investment Counsel says no, arguing that the company is in a heap of trouble and will need a bailout.

Last week, Air Canada announced it would be rehiring over 16,000 employees recently laid off, with the airline saying it will apply to the federal government for the Canada Emergency Wage Subsidy.

Like airlines worldwide, AC has seen a massive drop in service as the world continues to stay away from air travel in light of COVID-19.

Air Canada CEO Calin Rovinescu said that with seat capacity and operations down 90 per cent, the company needs assistance to stay afloat, with the 75-per-cent wage subsidy being crucial.

“The Canada Emergency Wage Subsidy is an extremely important program to help employees and employers during this time of crisis, and as one of Canada’s largest employers most affected by COVID-19, we want to acknowledge the leadership of the Government of Canada in introducing it,” said Rovinescu in a press release.

“Once the crisis passes and passenger demand increases, we look forward to returning as many employees as possible to active status as we resume normal operations,” he said.

But even once things do return to normal and air travel recommences, Madden says the incurred losses and debt will be devastating to Air Canada, making it a poor choice for investors at this time.

“I don’t think this is a good entry point for Air Canada,” said Madden, senior vice president and portfolio manager at Goodreid, in conversation with BNN Bloomberg last Thursday. “I don’t want to beat up on them too much. They’re a victim of circumstance. Clearly, air travel is all but shut down.”

“The problem, though, is Air Canada like most airlines and carries a lot of debt that on its own is not a huge problem but when you have high financial leverage, meaning a lot of debt on the balance sheet and also high operating leverage, meaning a high percentage of your costs are fixed costs that you can’t just dial down if you have a downturn in demand.”

Madden said AC’s prospects could very well include government involvement which will impair value for shareholders.

Air Canada bailout likely…

“It is very likely they will need a federal bailout. I’m sure they’ll get one because the airline industry and that carrier in particular is strategically important to Canada,” Madden said. “But the problem is we don’t know what the terms of the bailout will be. It might involve the government taking an equity stake, which would be very dilutive to the current shareholders the stock if they issue, pick a number, 40, 50, 60 per cent more shares.”

“There will be a time when we’re all comfortable getting back on planes again, hopefully sooner rather than later, but in the meantime, I think it’s too early to really sniff out light at the end of the tunnel and take a flier, pardon the pun, on a company with this kind of financial and operating leverage,” Madden said.