Air Canada is a bad stock to own now, this investor says

With the return of air travel in the United States and the same likely on schedule for Canada later this year, investors may be wondering whether now’s the time to climb aboard Air Canada (Air Canada Stock Quote, Chart, News, Analysts, Financials TSX:AC) before the stock takes flight.

But portfolio manager Barry Schwartz is advising against buying Air Canada, saying questions remain about the extent of recovery in the airline industry, even in a post-pandemic environment.

If you tell me how quickly we’re going to all get vaccinated and what the regulations are going to be I’ll tell you what Air Canada is going to do,” said Schwartz, chief investment officer at Baskin Wealth Management, who spoke on BNN Bloomberg on Thursday.

“Clearly, people are betting that things are going to look better in the future and, obviously, the US airlines are in much better shape than Air Canada, given the fewer restrictions that are going on there and Americans seemingly more able to travel than Canadians right now,” he said.

“So, Air Canada is really, really hindered at the moment and it’s tough to recommend as an investment,” Schwartz said.

US airlines have shown remarkable strength over the past 12 months, with names like American Airlines, Delta and United Airlines all more than doubling in value since the sector-wide dramatic plunge last February and March.

And while many have yet to reach their pre-pandemic values (Southwest Airlines has already made it), Air Canada’s climb has been more muted. AC has risen from about $15 to now $26 per share, but that’s still a long way from the $50 highs the stock was hitting in late 2019 and early 2020.

Air Canada’s pandemic year was brought into stark relief in February with the release of its fourth quarter 2020 and full year results, which saw revenue decline by 70 per cent for the year, while the company posted an operating loss of $3.776 billion in 2020 compared to an income of $1.650 billion in 2019. AC’s 2020 EBITDA was a negative $2.043 billion compared to positive EBITDA of $3.636 billion.

By now, Air Canada’s recovery from bankruptcy to the highly efficient, growing corporation of 2019 is a well known story. And investors are likely eyeing those billions in 2019 profit and wondering how long it will be before Air Canada returns to its stellar ways.

Schwartz isn’t too sure that will be happening anytime soon, which is less a problem with Air Canada the company than with the airline industry as a whole.

“There should be brighter days ahead for Air Canada,” Schwartz said. “Obviously, the government has assisted it and the balance sheet is ugly, but it’s manageable and doable.”

“We own some of the bonds in our bond fund, but, you know, I’d rather not own airlines, for a very long time,” he said. “I remember the good old days when we owned Delta Air Lines and, really, what we were betting on was the fact that its credit card relationship with American Express was going to be tremendous.”

“Now, there are a lot of worries, a lot of concerns and a lot of headwinds. Will business travel come back, will leisure travel come back and how will it all play out?” Schwartz said. “So, I think if you’re betting on leisure I’d rather bet on companies like Disney or Live Nation or Vail Resorts than owning airlines.”

Air Canada’s share price seems to have survived fine after news came out last week that it wouldn’t be further pursuing a deal to acquire Canadian holiday destination airline Transat AT. The proposed $188.7-million deal was dropped after Air Canada refused to extend the deadline for the takeover after talks with the European Commission didn’t end to AC’s liking.

Air Canada said European regulators would not support the package of competition-related remedies the airline had proposed.

“After careful consideration, Air Canada has concluded that providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada’s ability to compete internationally, negatively impacting customers, other stakeholders and future prospects as it recovers and rebuilds from the impact of the COVID-19 pandemic,” read a statement from Air Canada on April 2.

Air Canada’s share price finished the week at even, while for the year so far, AC is currently up 19 per cent.

Calling 2020 the “bleakest year in the history of aviation,” Air Canada president and CEO Calin Rovinescu said in the company’s fourth quarter and year-end comments that the promise of new testing capabilities as well as the efficacy of vaccines “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. I am also very encouraged by the constructive nature of discussions that we have had with the Government of Canada on sector-specific financial support over the last several weeks. While there is no assurance at this stage that we will arrive at a definitive agreement on sector support, I am more optimistic on this front for the first time,” Rovinescu wrote in a February 12 press release.