Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) has been struggling to make up some of the ground it lost over the past couple of months, a sign of the market’s unease with airline stocks in the age of COVID-19.
And while AC may look awfully cheap, investors should take a breather before jumping in, says portfolio manager Chris Blumas, who cautions that a drawn out economic recovery could be big trouble.
“With Air Canada, I would be inclined to watch and wait,” said Blumas, vice-president of GlobeInvest Capital Management, speaking on BNN Bloomberg Wednesday.
“If the economic recovery were a V-shaped recovery you could see a case for Air Canada. Being so deeply cyclical, it would be one of the names that would come out of this very strong,” he says.
“But as this economic recovery takes shape and it drags out, as business is slow to recover and travel is slow to recover, these airlines and specifically Air Canada are businesses that don’t function well in terms of profitability when they’re under-utilized.
They need a really really high amount of plane utilization. I think that if this recovery is more W-shaped and is uneven and the economy doesn’t get back to the same point it was at in 2019, I think that Air Canada will struggle a lot,” Blumas said.
Air Canada this week suspended flights to the United States in support of border restrictions between the two countries as the COVID-19 crisis continues and countries stay in lockdown mode.
At the moment, Air Canada said it plans to resume flights to the US by May 22, but the longer-term outlook for the airlines will likely include many months of being in standby mode.
On Thursday, Air Canada said it will likely be Christmastime before its flights to international destinations will be truly up and running again.
“I think by Christmas you will see a significant amount of flying again,” said Tim Strauss, vice president of cargo at Air Canada. “We’ll be flying to most places around the world and certainly domestically,”
That means a long layover for Air Canada whose business will take a huge hit, says Blumas, who says the market will need to see more on how the company plans to deal with the downturn before investors will return to the name.
“In terms of these types of businesses, you run the risk of getting caught when things turn down because they have such high fixed costs. So as the economy recovers, it will likely improve, but you need to see more clarity on what their planning is to come out of this and how they will right-size their costs,” Blumas said.
“Typically in these situations in the past these airlines have gone broke. And then when you invest in the restructured security, you know it has a low break even point, you know it’s well positioned for the rebound,” he said.
“I think in this case, Air Canada went in probably as strong as it’s ever been in its history, but because the downturn was so sharp I’d like to see more about their plan and how to right-size the cost structure,” Blumas added.
Year-to-date, Air Canada’s share price is down 61 per cent.