Air Canada is a great recovery play, this investor says

There can be no doubt we’re all aching for this to be the year when things go back to some version of normal, with travel looming large on many people’s vision of how to make 2022 a better year than the last two. And it’s that idea which will likely send Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) soaring into the skies, says portfolio manager Jamie Murray of the Murray Wealth Group, who advises investors think about the Canadian airline when making their pandemic recovery investment plays.

Air Canada reported fourth quarter earnings on Friday which while still dismal compared to pre-COVID numbers and sporting a huge loss were nonetheless a beat of analysts’ estimates on revenue. AC saw a net loss of $493 million or $1.38 per diluted share for its Q4 2021 on revenue of $2.73 billion, while analysts on average expected a loss of $539 million on a topline of $2.43 billion.

“The unpredictable course of COVID-19 made 2021 extremely challenging for Air Canada and the global airline industry. But the sequential and year-over-year improvement in Air Canada’s fourth quarter results shows the underlying recovery remains intact despite the Omicron variant,” said president and CEO Michael Rousseau in a press release.

The fourth quarter benefitted from more travellers taking to the skies in the weeks and months leading up to Omicron’s emergence in December. The uptick in travellers helped bring Air Canada’s full-year revenue to $6.400 billion, a head above the $5.833 billion the company took in over 2020. That 2022 revenue was still a fraction of the company’s business pre-pandemic where 2019’s full-year operating revenue was $19.131 billion.

Air Canada’s share price bumped higher on Friday after the earnings were released, taking the stock back above the $25 mark, but AC has been taxiing on the runway for over a year now with investors still unsure whether and when a rebound in the company’s business will occur.

For his part, Murray says now’s a good time to climb aboard, as the market has yet to price in a solid recovery by the travel industry and Air Canada itself.

“Obviously, in the fourth quarter and into the first quarter they’re still dealing with the Omicron wave. There’s still going to be a little bit of noise in the results for the next three to six months,” said Murray, head of research at Murray Wealth, speaking to BNN Bloomberg on Friday.

“Sure, there can always be another wave and there can always be a brand new pandemic. We can’t predict the future, but we definitely think we’re going to be exiting the pandemic this year, and Canada has lagged a little bit behind the US in terms of travel so we think Air Canada is going to be set up for a very, very big summer in 2022.”

Air Canada reported a $400-million rise in advance ticket sales over the fourth quarter, which the company said it’s taking as a sign that “Omicron’s effect on our business is travel deferred not cancelled.”

The company said it has recalled over 10,000 employees including 3,900 in the fourth quarter and have started new hiring. 

“As we move into 2022, all expectations are that the recovery in air travel will continue, albeit unevenly. Nonetheless, we believe the regeneration of our business will gain momentum,” Rousseau said.

Air Canada said its quarterly EBITDA was positive for the first time in seven quarters at $22 million excluding special items compared to a loss of $728 million a year earlier. EBITDA for the year was a loss of $1.464 billion compared to an EBITDA loss of $2.043 billion in 2020.

The company also touted growth in its air cargo business which as for other airlines has grown into a more significant portion of its overall business. 2021’s cargo revenues were $1.495 billion compared to $920 million in 2020 and the company operated 10,217 cargo-only flights this past year compared to just 4,235 cargo-only flights in 2020.

But it’s the return of travellers that will be key, says Murray, who pointed specifically to international travel which he sees as likely to bounce back quicker than the market has so far projected. 

“Air Canada has had to take on a lot of leverage to get through these last couple of years and as they de-lever you’re going to see those returns accelerate, and we think that’ll happen a little bit faster than the market thinks,” Murray said.

“And so, you’re playing the travel recovery. We think the sentiment and revenue growth you’re going to see is going to be on the high side. So, Air Canada is a good way to play it, for sure,” he said.