Air Canada’s glory days aren’t coming back, this investor says

Air Canada (Air Canada Stock Quote, Chart, News, Analysts, Financials TSX:AC) and the airlines in general may recover some of their former glory, but investors shouldn’t waste their time and money on that gamble, says portfolio manager Stephen Takacsy, who thinks there are just too many question marks surrounding the future of the industry.

“Air Canada, that’s a real tough one,” said Takacsy, speaking on BNN Bloomberg on Monday. “This is an industry that’s been decimated by the pandemic and it’s having a hard time regaining flight, no pun intended.”

12 months has made all the difference for Air Canada, which rolled into 2020 on a definite high. The company was making money again, it was expanding routes globally and soaking up the goodwill from investors impressed with the company’s multi-year turnaround which took the company from teetering on another bankruptcy a decade ago to an exemplary business whose share price ballooned from sub-$1.00 territory to $52.00 by early January last year.

What came next was a virtual shutdown of airlines worldwide in the face of COVID-19, crushing Air Canada’s revenue to one-tenth of what it had been and taking its share price to $15.00 in the blink of an eye.

And while the company has done well to keep the lights on while the world waits for an end to the pandemic, using up billions in unrestricted liquidity to stay afloat, investors shouldn’t be tempted by the low share price, Takacsy intimates, as the return of air travel to its former levels is neither a given nor something anyone can put a date on.

“We just don’t know how these businesses are going to recover,” says Takacsy. “They won’t be back to their former glory days anytime soon. It’s going to take years and years so it’s very tough to value them.”

“All of these airlines are really hemorrhaging. So, it’s a sector that we’ve shied away from and we have not been tempted to dip our toe in it at all because we just don’t know how this is going to all play out going forward,” he said. “We just think there are better uses of our capital in other businesses and other industries.”

Air Canada reported a loss of $685 million in its most recent quarter, the company’s third quarter 2020 delivered in early November, which was a far cry from the profit of $636 million reported a year earlier. Revenue for the Q3 was $757 million compared to $5.53 billion a year earlier as the airline’s passenger numbers plunged 88 per cent compared to the third quarter 2019. Management predicted its fourth quarter 2020 capacity to drop by 75 per cent year-over-year.

“[The third quarter 2020 results] reflect COVID-19’s unprecedented impact on our industry globally and on Air Canada in what has historically been our most productive and profitable quarter,” said Air Canada President and CEO Calin Rovinescu in a November press release.

Last year, Air Canada ended up shifting a number of its passenger planes to do cargo duty, as online shopping went through the roof during the pandemic and cargo carriers had more than enough business to go around.

Perhaps most challenging to Air Canada’s recovery prospects is how business travel will fare going forward. Traditionally a lucrative market, the rise of video conferencing during lockdowns may represent a permanent loss to business travel, which reportedly make up about 12 per cent of airline passengers but account for twice as much in terms of profit. de up about half of US airlines’ revenue in pre-pandemic years even as it accounted for only 30 per cent of passenger trips.

None other than Microsoft’s Bill Gates has pointed to the business segment as one that won’t likely return, along with the idea of any company’s having a full slate of employees working from the office.

“My prediction would be that over 50 per cent of business travel and over 30 per cent of days in the office will go away,” said Gates to Andrew Ross Sorkin during the New York Times’ Dealbook conference, as reported by CNBC in November.

A first of its kind study published in December from research firm IdeaWorks concluded that between 19 per cent and 36 per cent of airline business traffic would not return, post-pandemic.

Last month, Air Canada closed on a marketed public offering of about 35.4 million shares at C$24.00 per share for gross proceeds of about C$850 million. The company said the proceeds would go towards working capital and other corporate purposes.

“The net proceeds from the Offering will serve to increase Air Canada’s cash position, thereby allowing for additional flexibility both from an operational standpoint and in the implementation of its planned mitigation and recovery measures in response to the COVID-19 pandemic,” Air Canada said in a press release.