Is Air Canada stock a bargain or a trap?

Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) has had a tough time gaining traction these days but investors might be wondering if the company’s beaten down share price makes this stock a bargain.

Not really, says portfolio manager Norman Levine, who argues that all the airlines will be
struggling for quite a while.

“My view on airlines in general is that they are trades —they’re never long-term investments,” said Levine, managing director at Portfolio Management Corp, who spoke on BNN Bloomberg on Monday.

“And that’s mostly because airlines as an industry tend to be their own worst enemies. As things get better in the airline industry and more people want to want to travel, they start adding capacity, meaning buying more planes and adding more flights right near the top of a cycle,” Levine said.

“They do it time and time again and then you get a huge turnover of airlines in some countries. In the US, for example, a number of years ago you had a lot more airlines and they got rationalized down to a smaller number, which is good for the industry,” Levine added. “But I think it’s going to take a long time for people to want to fly, the way they did before.”

Air Canada was a different company a few short months ago, the proverbial high-flier with a successful turnaround now complete, its balance sheet in order and growing top and bottom lines a regular occurrence. AC’s share price reflected the good times, having climbed from as low as a buck in 2012 to above $50 per share by late 2019.

All that changed with the COVID-19 pandemic, of course, which decimated the airline industry worldwide and caused Air Canada to drop as much as 95 per cent of its flights in recent months.

Air Canada last week announced it had raised almost $1.6 billion in financing to help manage the company’s debt, a move which the market seems to have taken as a sign of optimism around the company and perhaps the industry itself, which is slowly beginning to reopen routes in hopes of returning customers.

After suspending the bulk of its international travel in recent months, Air Canada announced last month that it will fly to close to 100 destinations over the summer, still an abridged schedule but at least on the road to recovery.

But Levine said there’s still too much risk on AC to be worth it.

“Airlines are burning huge amounts of cash right now. Air Canada raised a bunch of money but they’re also burning a huge amount. They needed that, really, to survive,” said Levine.

“That’s another industry where the government has stepped in to help,” he said. “I’m not saying they should have — I don’t think [airlines] are as deserving as the energy industry from that point of view — but the bottom line is I find airline stocks to be very speculative.”

“They move in huge moves and they’re not for my type of more conservative clientele so I would defer from owning an airline here,” Levine said.