Is Air Canada stock a buy for 2021?

2020 was a miserable year for the airlines including Air Canada (Air Canada Stock Quote, Chart, News, Analysts TSX:AC) which saw its share price chopped in half. Reading the tea leaves for the year ahead, are there signs of recovery for the stock? Possibly, but portfolio manager Colin Stewart has a number of worries going forward.

“We’re a little bit cautious on Air Canada and on the airline space in general,” said Stewart, CEO of JC Clark, who spoke on BNN Bloomberg Monday. “I think it’s just going to take time to figure out exactly the long-term impact [of COVID-19].”

AC saw a lift over the last two months of 2020, enough to bring the stock to a negative 53 per cent return for the year, which was better than the 66-per-cent-plus decline the stock was facing as late as the end of October.

And as can be seen by the rash of politicians resigning from posts across the country, flying has not been the thing to do in recent months with COVID-19 putting the boots to air travel worldwide and shaking a number of airlines to their very core.

Now, Canadian airlines are calling on the federal government to hold off on its plans to require mandatory pre-departure COVID-19 testing for all travellers returning to Canada from abroad. Such a measure would likely discourage international air travel, the thinking goes.

As reported by the CBC on Tuesday, Air Canada, WestJet, Air Transat and Sunwing collectively sent a letter to Transport Minister Marc Garneau, saying that the rules, announced last week and set to begin on Thursday, might end up stranding Canadians abroad.

“Minister, we have very serious concerns about the feasibility of successfully implementing such a significant measure in the extremely short time[frame] announced, without consultation or a coordinated plan,” the letter said.

Air Canada has been at pains over the pandemic to convince Ottawa to put more money into supporting the country’s airlines, while for its part the government has said its wage subsidies to the industry have been significant.

So far, Air Canada has survived, even as passenger numbers have dropped by over 90 per cent and revenues are currently a fraction of what they were a year ago. In its third quarter, Air Canada reported revenue down 86 per cent year-over-year to $757 million and a net loss of $685 million, while the company forecasted a net cash burn of about $1.2 billion over the fourth quarter. And even though AC has billions remaining on hand —its unrestricted liquidity at the end of its third quarter of $8.189 billion— debt as of the end of September stood at $5.0 billion, up from $2.8 billion nine months earlier.

But aside from the balance sheet, Stewart says Air Canada’s new normal in the post-pandemic world may not be as rosy as before, seeing as there will almost certainly be a decline in the lucrative business travel market.

“Air Canada has raised some equity recently so that’s a good thing that they’ve got a lot of liquidity on their balance sheet, but the downside is they’ve diluted shareholders by raising equity at a fairly depressed price,” Stewart said.

“The other thing is that it’s going to really take time for the EBITDA of these businesses and Air Canada as well to get back to where it once was,” he said. “I think there’s no doubt leisure travel is coming back — I think we’re going to see that come back strongly later this year — but the question is, is business travel, which was an important element for Air Canada, ever really going to get back to the level it once was?” he said.

“They tend to earn much higher seat pricing on their business class seats and higher margins. If that business is permanently impaired what will the earnings profile of a company like Air Canada look like?” Stewart said. “That’s what keeps us on the sidelines with respect to Air Canada.”

One growth area for Air Canada has been in its cargo business where the company has converted underused passenger planes to handle shipping while bringing other planes out of retirement. With the onslaught of packages from the booming e-commerce trade, cargo is also flying high, with Air Canada reporting a 22-per-cent year-over-year lift in its cargo revenues for the third quarter. AC marked its 4,000th cargo flight for the year in early December.

Air Canada has had to suspend a number of routes including coverage of many parts of Atlantic Canada and prompting the effective closure of airports in Sydney, Nova Scotia, and Saint John, New Brunswick. Air Canada has said that without support from the government, its operations along these routes has been made too difficult to sustain.