Air Canada is a long-term hold, this investor says

The COVID-19 pandemic is throwing more punches this month and giving would-be travellers extra doubt on whether that holiday season trip is really the right move, and you can be the powers that be at Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) are less than pleased with seeing yet another crucial holiday market blown to smithereens by a new COVID variant. 

But short-term turbulence aside, this is a stock that deserves attention as a play on air travel’s return, says portfolio manager Michael Hakes, who likes Air Canada on a long-term horizon.

“We love it on a [two to three-year] timeframe and even longer,” said Hakes, senior portfolio manager at The Murray Wealth Group, who spoke on BNN Bloomberg on Wednesday. 

“[The stock] is down below the $50 where it hit its high prior to 2020, and they’re slowly working their way back. As COVID dissipates over time hopefully without less variants and with our ability to treat these variants you’re going to get international [air travel] back online. I know vacationers are trying to get back on the planes; business travel would be next,” he said.

Certainly, Air Canada has been one of the hardest hit of Canadian companies over the pandemic, where shareholders saw the stock lose about two-thirds of its value in the early days and then stay on life support for the rest of 2020. AC entered 2021 at $22 per share and made it close to $30 by March, only to slide all the way back by September and October. More lately, however, with the rise of omicron globally and at home the stock has been under further pressure and has touched the $20 mark on a few occasions. 

But Hakes says investors should be looking down the road a bit to see how well suited Air Canada is for long-term share price gains.

“Air Canada have had the opportunity over the last 18 months to upgrade their fleet to more fuel efficient planes and that’s really the key as we go forward is more fuel efficient planes. They’d be able to retire older planes and bring on new efficient planes [with] higher margins,” Hakes said.

“Air Canada is well positioned for that three to five-year liftoff,” he said.

The company’s management was praised pre-pandemic for its success in turning operations around from what was once a debt-laden, almost-bankrupt business in the early 2010’s into a money-making machine by the end of the decade. Some of that mojo seems to have been on display over the past year, too, where AC managed to trim its losses despite a still-gutted industry, even last month turning aside much of the funds made available to it via a government bailout package worth billions. 

“Air Canada’s recovery from COVID-19 continues. We are recalling employees, adding new routes and frequencies to our network, and restoring services, and, last quarter, we completed a $7.1-billion financing. Today, in another convincing sign of our progress, we are announcing our withdrawal from the major funding provisions of our support agreement with the Government of Canada for the $3.975 billion in facilities that were never accessed and remain unused,” said President and CEO Michael Rousseau in a press release.

As for its financials, Air Canada says it returned to positive EBITDA by the second and third months of its third quarter this year, cutting its Q3 net loss to $640 million compared to $685 million a year earlier. That number looks even better, the company said, once a foreign exchange loss of $136 million for the quarter is taken into consideration along with an FX gain of $88 million recorded in last year’s third quarter.

Operating revenues were also looking better, reaching $2.103 billion compared to just $757 million a year earlier but still less than half of the $5.553 billion in revenue achieved in the pre-pandemic third quarter of 2019.

“We are encouraged by the favourable revenue and traffic trends in the third quarter, with strong increases in key passenger geographic segments, a record cargo performance and significant improvements in both Air Canada Vacations and Aeroplan,” said Rousseau in a third quarter press release on November 2. “The combination of these factors, along with effective cost controls, resulted in net cash flow of $153 million for the quarter, materially better than expected and as compared to the third quarter of 2020.”

Rousseau said Air Canada has also expanded some of its international routes over 2021, including a new service to Cairo and expanded services to India and South America. Rousseau also said the company has reversed its decision on cancelling orders for two two Airbus A220 aircraft and is accelerating deliveries of new Boeing 737 MAX planes.