Air Canada could be a “high octane” stock, this investor says

It’ll be a bumpy ride but Air Canada (Air Canada Stock Quote, Chart, News, Analysts, Financials TSX:AC) will be a good bet for investors once some level of normalcy kicks in. That’s the take from Stan Wong of Scotia Wealth who likes both its status as one of just two go-to options in Canada and the apparent pent-up demand for flights once COVID-19 hits the bricks.

Air Canada made headlines this week announcing more cuts to regional routes across Canada and another 1,700 in job losses as the airline’s struggles continue in the wake of the COVID-19 pandemic.

Citing increased travel restrictions imposed by the federal government, Air Canada said it would be cutting capacity by another 25 per cent and suspending all flights in and out of Gander and Goose Bay, Newfoundland, and Fredericton, New Brunswick, and suspending passenger service to Yellowknife and Prince Rupert and Kamloops, BC, all as of January 23.

“Since the implementation by the Federal and Provincial Governments of these increased travel restrictions and other measures, in addition to the existing quarantine requirements, we have seen an immediate impact to our close-in bookings and have made the difficult but necessary decision to further adjust our schedule and rationalize our trans-border, Caribbean and domestic routes to better reflect expected demand and to reduce cash burn,” said Lucie Guillemette, Executive Vice President and Chief Commercial Officer, in a Wednesday press release.

That cash burn has been tremendous, with Air Canada posting revenue down 86 per cent year-over-year in its latest quarter, the company’s third quarter 2020, with a net loss of $685 million. Management forecasted a fourth quarter cash burn of about $1.2 billion, which will further eat into the company’s liquidity, standing at $5.0 billion as of the end of Q3 2020.

Accordingly, Air Canada’s stock has refused to budge much from the trough it was stuck in for much of 2020, although AC has had a bit of a lift in recent months. Air Canada, after a string of strong returns in recent years, concluded 2020 down 53 per cent.

But investors with the stomach to see past the current catastrophe should be able to spot a healthy company not too far down the road, says Wong, director of wealth management at Scotia Wealth, who likes Air Canada from here.

“I do own Air Canada in our client portfolios and we bought it last year,” said Wong, speaking on BNN Bloomberg on Wednesday. “The stock obviously had a huge drop back in March, April last year and has been slowly recovering, creating a huge base since then. Since the vaccines were announced in November, it started to make a move.”

“[But] it’s going to be a bumpy road for Air Canada going forward. I think we’re going to have days in which the stock will be up ten per cent and weeks in which it might be down ten per cent, but if we’re looking two years forward I think that this stock will continue to recover,” Wong said. “We’ll have a normalization of business activity and we’ll have more people in the air and we’ll have more travellers.”

For evidence of an eventual post-pandemic upswing, Wong pointed to Carnival who this week said advanced bookings for the first half of 2022 are better than they were for the first half of 2019, a year before the pandemic began. Carnival’s share price has been lagging like Air Canada’s but got a boost on the news of what it calls a broad-based return in demand for bookings across all its brands.

Wong said, “When you look at some of the companies that are reporting on the travel side such as Carnival, who reported that 2022 demand is going to be extremely strong for their cruise lines, and of course, to get your cruise most of us have to fly.”

One of the questions for the airlines globally will be how strongly the lucrative business travel market will return to form in upcoming years. Many speculate a chunk of that segment will be permanently lost as businesses look to video conferencing as a now more acceptable cost-saving measure.

But Wong says investors should keep in mind Air Canada’s overall position as the largest among a small number of carriers across the country.

“Business travel will pick up,” Wong said. “I do like Air Canada. It’s probably for the higher octane part of your portfolio, but if we are patient with the stock we will do well with it over the next 12 to 18 to 24 months.”

“If you look at it as a business and the fact that they are one of only a couple of major airlines in Canada, we think that revenues will get back to normal next year. It’s probably going to be half of pre-pandemic levels this year, and they will start to see some more recovery going into 2022,” Wong said.

“So, absolutely, it’s not going to be an easy ride and that’s why it’s important to be patient with some of these air and travel companies,” Wong said.