It’s not too late to buy Air Canada, Stan Wong says

Air Canada (Air Canada Stock Quote, Chart, News, Analysts, Financials TSX:AC) has been slowly making its way back from COVID lows hit earlier last year, but there’s still a lot of ground to make up and investors should do well by the name, says Stan Wong of Scotia Wealth, that is, if you can put up with the stock’s ups and downs.

“The first thing to note is airline stocks are high-beta, highly volatile type of stocks,” said Wong, director of wealth management at Scotia, who spoke on BNN Bloomberg on Thursday.

Wong says the signs look good for a strong recovery in the airline space as countries open up to post-pandemic air travel.

“When you step back and look at where we are in the cycle and where we are with the pandemic, if you look at the US TSA or Transportation Security Admin checkpoint numbers they continue to climb as you see the vaccinations rise, particularly in the US and UK with COVID cases dropping,” Wong said.

“We are now at about 1.7 million daily travellers and the pandemic low was under 100,000 daily travellers last April. Pre-pandemic, we were at two-and-a-half million daily travellers, so we’re getting back there,” he said.

The recovery may take longer than expected, however, according to the International Air Transport Association (IATA) which last month predicted net airline industry losses for 2021 of $47.7 billion as government-imposed travel restrictions stay in place longer than previously assumed. The IATA had in November projected $38 billion in losses for 2021 but demand is now not expected to return to prior levels for a while.

“Travel restrictions, including quarantines, have killed demand. IATA estimates that travel (measured in revenue passenger kilometres or RPKs) will recover to 43 per cent of 2019 levels over the year. While that is a 26-per-cent improvement on 2020, it is far from a recovery. Domestic markets will improve faster than international travel. Overall passenger numbers are expected to reach 2.4 billion in 2021. That is an improvement on the nearly 1.8 billion who traveled in 2020, but well below the 2019 peak of 4.5 billion,” the IATA said in an April 21 report.

So far, it seems the market is in wait-and-see mode as far as the airline industry goes, with airline stocks still significantly under their pre-pandemic prices. The US Global Jets ETF , which tracks the sector as a whole while focusing on US companies, lost 29 per cent last year but has been rising steadily between May of 2020 and March of this year. But JETS is still under its pre-pandemic levels and has levelled off over the past two months.

Wong says an indexed ETF is an option for investors looking to get broader exposure to the sector amid the recovery.

“One of the ways to play the airline stocks is obviously to buy some of the individual names like United Airlines and Air Canada, and these are in our portfolios,” Wong said.

“But another way if you want to be more diversified and not have singular name risks is to look at JETS. It will hold names like Southwest, American Airlines United, Delta and Air Canada and it’s basically around 40 global airline and airline related stocks with about 70 per cent in the US,” Wong said.

“I feel that this pent up demand could push travel well beyond the pre-pandemic levels, so as long as you’re okay with the higher volatility of these types of stocks, I think that it’s a good medium- to longer-term investment,” he said.

Earlier this month, Air Canada reported its quarterly financials, showing an 80-per-cent drop in revenues compared to the first quarter of 2020. Net cash burn was a whopping $1.274 billion or about $14 million per day, while EBITDA for the Q1 was a loss of $763 million compared to positive $71 million a year earlier during the early days of the pandemic.

“The persistence of COVID-19 and its resurgence in Canada are weighing heavily on the Canadian airline industry, as reflected in Air Canada’s first quarter results,” said Michael Rousseau, President and CEO, in a press release. “Still, through the hard work and dedication of our employees, we are operating a limited schedule for necessary travel and to ship essential cargo. I thank our employees for their professionalism and assure them, as well as our investors and all stakeholders, that better times lie ahead for our airline.”

Earlier this week, Air Canada announced it would be resuming flights to holiday destinations in Mexico, Cuba and other Caribbean locales. Air Canada and other Canadian airlines suspended their holiday destination services starting in January after having just reopened them in November with rapid COVID testing protocols.