Air Canada could be in really bad shape, this investor says

Where is Air Canada (Air Canada Stock Quote, Chart, News, Analysts, Financials TSX:AC) headed? The stock has threatened to break out a couple of times, as investors look to climb aboard this pandemic recovery play. But along with its share price, what remains a real unknown is how beat up the company will be once people start flying again, and on that topic, portfolio manager David Burrows thinks things could be pretty ugly.

I’m not a holder of Air Canada, and as it stands, I think there was a lot of balance sheet damage going through this period,” said Burrows, president and chief investment strategist at Barometer Capital, who spoke on BNN Bloomberg on Thursday.

The skies seem to be clearing for Air Canada, which earlier this month got at least part of what it wished for in a bailout of sorts from the federal government, which says it will commit up to $5.9 billion through its Large Employer Emergency Financing Facility to aid companies ravaged by the COVID-19 pandemic.

Air Canada is definitely one of those. The company saw its 2020 sales drop a full 70 per cent to $5.833 billion and an operating loss of $3.776 billion compared to a gain of $1.650 billion in 2019.

Calling it the bleakest year in commercial aviation, Air Canada’s former CEO Calin Rovinescu said the company had a 73-per-cent decline in passengers in 2020 and had to reduce staff by more than 20,000, which effectively dismantled a global network ten years in the making.

Rovinescu says with the pandemic continuing this year remains very much up for grabs.

“As we move into 2021, while uncertainty remains as a result of the new variants of the virus and changing travel restrictions, the promise of new testing capabilities and vaccines is encouraging and presents some light at the end of the tunnel. As our success raising significant liquidity throughout 2020 indicates, investors and financial markets share our optimistic long-term outlook for our airline,” Rovinescu wrote.

Air Canada management has been very vocal over the past 12 months in criticizing the government for travel restrictions put in place for the sake of community health, along with feds’ hesitation on providing extra financial support for the country’s airlines. Now, the financial support agreement will see low-interest loans of up to $5.4 billion to Air Canada along with the government taking a $500-million equity stake in the company.

For its part, Air Canada has agreed to refund customers who had their flights cancelled last year and to restore service on some regional routes. As well, AC said it would cap executive compensation at $1 million per year, suspend its share buyback program as well as dividend payments during the period of the loan.

The result should be a company better equipped to get back on its feet. Whether and when passengers return is another story, as many are predicting that lucrative segments such as business travel will not return to pre-pandemic levels but rather leave frequent flier to make do with more Zoom meetings instead.

Sources say corporate travel left a US$710-billion hole in the airline industry in 2020, where business travel revenue typically makes up to as much as 75 per cent of revenue of some international flights. Some predictions are for 30 to 50 per cent of business travel to not return, post-pandemic, although the real number is at this point a guess.

“There is a grey area and lots of unknowns in relation to business travel,” says Martin Ferguson, vice-president of public affairs at travel management company American Express Global Business Travel, speaking to the Financial Post in January. “At the moment you can’t travel so even if you wanted to, you can’t. [What] we don’t know,” he adds, “is how many people will choose not to [travel] when they can.”

Burrows says the resulting damage from COVID-19 could be huge on the airlines like Air Canada.

“The airlines in general are pulling back over the last couple of months,” Burrows said. “We know they will be interesting as the world reopens, but it’s not my first first go-to at this point. I think there’s more damage to the balance sheets than people recognize.”

The global picture was grim for the airlines in 2020, with Lufthansa AG showing a 63-per-cent drop in revenue and a net loss of EUR6.73 billion versus net income of EUR1.21 billion for the previous year.

Delta Airlines lost $12.39 billion in 2020, while revenue fell 65 per cent year-over-year. American Airlines finished 2020 with a net loss of US$8.9 billion or US$18.66 per share while ending the year with US$14.3 billion in available liquidity. Air Canada reported unrestricted liquidity of $8 billion at the end of 2020.

(All figures in Canadian dollars except where noted otherwise.)