Be patient with Air Canada, this Scotia advisor says

The pent up demand for air travel is certainly there, with most of us now jonesing to book that trip somewhere, anywhere, really, that’ll give at least a change of scenery from our familiar confines. But so far the numbers have not returned for the airlines and stocks like Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) haven’t delivered in 2021 like many had expected. 

It’s a case of the turtle beating the hare, according to Stan Wong, portfolio manager at Scotia Wealth Management, who says holding onto Air Canada is the right move.

“We continue to hold Air Canada. I think that’s a story with which you need to be patient,” said Wong, speaking on BNN Bloomberg on Thursday. “Certainly, the delta variant threw a wrench into the plans for companies like Air Canada and cruise lines and so forth. But I think that if we look forward into the next year or two years, a name like Air Canada and other airlines should recover pretty decently.”

Like the rest of the airlines, Air Canada fell off a cliff at the start of the pandemic and has yet to recover, currently sitting at $23 and well below its pre-COVID levels up above $50 per share. The stock is up about two per cent year-to-date and actually down a couple of notches for the past six months.

As a company, Air Canada continues to announce the reopening of suspended routes and the starting up of brand new travel destinations at home and abroad. This month alone, AC has promoted two new connections from Quebec City to Western Canada along with a new route between Toronto and the Dominican Republic while resuming service between Montreal and a number of cities in South America.

Investors will be hoping for some good news out of AC’s next quarterly report due on November 11, where the company’s second quarter delivered in July showed still huge losses. There, Air Canada posted an operating loss of $1.133 billion and a net cash burn of $745 million or about $8 million per day on average. Operating revenue for the quarter was $837 million, which was up 59 per cent from the disastrous Q2 2020 but still way below the comparable period in 2019 where AC’s topline was $4.757 billion.

“The COVID-19 pandemic continued to weigh on Air Canada and the Canadian airline industry in the second quarter, with its impact on travel reflected in our results,” said Michael Rousseau, President and CEO, in a press release.

But Wong says the return of air travel is inevitable and with it will come better days for Air Canada and its shareholders, likely starting next year.

“As it stands right now when you look at consensus estimates and looking into 2022, revenues should, based on forecast, look to be bouncing about 2.4 times greater than what they are in 2021, so that would bode well very well for the stock,” Wong said.

“We bought it in the depths of the pandemic dip and we’ve made some money there, but we’re willing to be patient with it. You could trade it and take some profits and move back in if there’s a dip or if it’s flat for a little while and move back into it later on, but I think you look out 12 to 18 to 24 months and I think we’ll be looking at a higher price for Air Canada,” he said.

Earlier this month RBC Capital Markets cut its rating for AC, downgrading the stock from Buy to the equivalent of a Hold, the first time it has done so since 2013. As reported by BNN Bloomberg, RBC analysts are saying recovery in the airline industry will likely take longer than previously assumed.

“The [Delta] variant has undoubtedly impacted the pace of the recovery while also adding a layer of uncertainty regarding the timing of the industry’s ‘return to normal,’” said analysts Walter Spracklin and Ryall Stroud. 

“With global case rates trending in the hundreds of thousands per day, we believe there is a distinct possibility that new virus variants will emerge and disrupt air travel in a similar fashion that the Delta variant has,” they said.

Since the beginning of the pandemic, Air Canada has been touting the strength of its liquidity position, which stood at almost $9.8 billion at the end of its last reported quarter. In the spring, the company entered into a series of debt and equity financing agreements with the Government of Canada which effectively give Air Canada access to up to $5.879 billion in liquidity through Canada’s Large Employer Emergency Financing Facility (LEEFF) program.

“Our cash burn in the second quarter of about $8 million on average per day was better than earlier projections of $13-$15 million. We attribute this to increased bookings and our continuing effective cost controls,” Rousseau wrote in the Q2 press report.