Air Canada stock is a bad investment, this investor says

Just a year ago, the airlines were flying high, including Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) which was putting the finishing touches on a successful multi-year comeback.

Scroll ahead a few months and the scene is quite different now that COVID-19 has arrived. So, when
will Air Canada get its business back in shape? The real question is why would anyone buy an airline stock anymore? So says portfolio manager Barry Schwartz, who argues it’s once bitten, twice shy on names like Air Canada.

“Air Canada, it’s going to be okay, but its businesses, who knows how that’s going to recover?” said Schwartz, chief investment officer at Baskin Wealth Management, speaking on BNN Bloomberg on Friday.

“Everybody wanted to take a trip this year and business travel, we don’t know how that’s going to look going forward. A lot has to go right for Air Canada —we need a vaccine, we need a change in human behaviour and, meanwhile, there’s a pile more debt on the balance sheet.”

“So, airlines have been in tough,” Schwartz said.

How tough? Passenger travel was down 96 per cent year-over-year in Air Canada’s second quarter 2020, pulling total revenue down from $4.7 billion a year ago to $527 million —that’s an 89-per-cent drop, enough to put earnings far into the red. AC’s second quarter EBITDA was a loss of $832 million versus a gain of $916 million for the Q2 2019.

Further, the third quarter didn’t delivered the uptick in passenger demand the airlines were hoping for. Both Air Canada and rival WestJet had to cancel hundreds of flights in September rather than fly half-empty planes, a sign that Canadians are reluctant to take to the skies while the pandemic rages on.

Last week, Air Canada reportedly ordered 25,000 COVID-19 testing kits that can produce results in a matter of minutes, with the reported aim being not only to calm passenger fears about exposure on flights but to help convince health authorities that flying can be conducted safely.

In recent months, Air Canada has made a number of pleas to the federal government to ease restrictions on travel in and out of Canada, saying that the travel and border restrictions are doing extreme damage to the industry.

Calling the federal and inter-provincial travel restrictions among the most severe in the world, Air Canada president and CEO Calin Rovinescu put the blame on Canadian regulators for the company’s huge drop in passengers. In the company’s second quarter report, Rovinescu said, “[Air Canada’s quarterly] reported declines in revenue of nearly 90 per cent and in passengers of over 96 per cent, should reinforce the tremendous urgency for governments in Canada to take reasonable steps to safely reopen our country
and restore economic activity.”

As for Schwartz, although drawn in by airline stocks in the past, it’s a blunder he says he
won’t repeat.

“Warren Buffett made a mistake buying airlines, I made a mistake buying airlines and I don’t think I’m ever going to do that again,” Schwartz said.