Too big to fail? Maybe, but even if airlines like Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) do get a bailout from the government to help them through the pandemic, they’re still not a good investment idea.
So says Varun Anand of Starlight Capital, who thinks the skies remain gloomy for the industry.
“We don’t like the airlines right now,” said Anand, portfolio manager for Starlight, who spoke on BNN Bloomberg on Tuesday. “We never want to base an investment on the government bailing out a company because that obviously means that this company is in some trouble financially and the fundaments are deteriorating.”
“The airlines especially have been kind of a Robin Hood trade this year, and they’ve really been whipsawed based on, for example, what [US Speaker of the House of Representatives Nancy Pelosi] saying one thing and then traffic saying another thing but at the end of the day what matters is the fundamentals of the business and they are still very weak.”
Air Canada has been skidding along for much of 2020, with its share price currently down a full 69 per cent for the year so far, meaning that investors who bought into the company after the nosedive of February and March have yet to see much of a rally in the stock.
“We don’t like the airlines right now. We never want to base an investment on the government bailing out a company because that obviously means that this company is in some trouble financially and the fundaments are deteriorating…”
It’s no wonder, as customers have seemingly been reluctant to climb aboard, with WestJet this month eliminating much of its Atlantic Canada routes and both WestJet and Air Canada cancelling flights left and right in a sign that the recovery will take longer than perhaps thought.
Earlier this month, calls for a government bailout grew louder with two labour groups representing Canadian pilots asking Ottawa to offer low-interest loans of $7 billion to the country’s airlines in a bid to keep the industry afloat.
“The COVID-19 pandemic has created a crisis in Canada’s aviation industry unlike anything seen before, and recovery may be years away,” said Tim Perry, head of the AirLine Pilots Association’s Canadian branch, in a news conference .
Air Canada’s latest reported quarter told the tale pretty clearly, with passenger travel down 96 per cent over its second quarter and revenue falling from $4.7 billion a year ago to just $527 million. The company’s EBITDA loss was $832 million. Anand said the loss of business travelers could be a major blow to the airlines for years to come.
“Domestic travel has recovered in the US to a certain extent and in Europe but the most lucrative component of air travel is long-haul international business and that is still down more than 90 per cent. And we don’t expect that coming back anytime soon, especially
with the number of people working from home,” Anand said. “That secular shift is going to obviously dampen the airport and airline businesses for the foreseeable future, and we don’t want to bank on the government bailing out companies as a reason to own them,” he said.
Anand is not alone in being pessimistic about Canada’s largest airline. Portfolio manager Barry Schwartz, chief investment officer at Baskin Wealth Management said he was in great company in making a mistake in the space.
“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,” he said. “Air Canada, it’s going to be okay, but its businesses, who knows how that’s going to recover?” said Schwartz, , speaking on BNN Bloomberg three weeks ago. “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 added.
How bad can it get for Air Canada? Another fund manager says the stock may actually never recover.
Stephen Takacsy of Lester Asset Management said there is really no visibility at all.
“This is really, really tough —the current situation on the airline business and the hotel business and so on. I’m skeptical that the airline industry will ever fully recover to its former glory days,” said Takacsy.
“It’s very challenging out there. [Air Canada] is not the type of thing we would invest in because like I said I don’t think it’s going to recover fully to where it was before. I do think the government has to look hard at the industry and see if there are things that can be done to encourage people to travel again,” Takacsy said. “[But] until there’s a vaccine found I think it’s gonna be very hard for the business to recover.”