I’m buying Air Canada stock, this portfolio manager says

The stock has yet to break out like many expected, but investors should be thinking about Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC), says John Zechner of J. Zechner Associates, who argues the airline will be a clear winner going forward.

“Air Canada, I like it. We’ve got a position in it and I might take it higher. I like it in the short term and longer term,” said Zechner, speaking on BNN Bloomberg on Tuesday.

Air Canada released first quarter 2022 financials on Tuesday, saying passenger and operating revenues were way up on a year-over-year basis, while the company is still in the red as losses continue to pile up even as travellers have started to take to the skies again in numbers. The airline reported operating revenue of $2.573 billion, which was about 3.5 times last year’s Q1 revenue, while AC’s net loss of $974 million or $2.72 per diluted share was also better than the 2021 first quarter loss of $1.304 billion or $3.90 per share last year.

At the same time, there’s still a long way to go to get those numbers back up where they were pre-COVID. Air Canada’s first quarter revenue for 2019, for example, was $4.453 billion and net income was $345 million or $1.26 per share. 

Air Canada said the Q1 2022 results show that the recovery has begun, even as the Omicron variant caused a stumble over the quarter with fewer travellers and more travel restrictions. But the company said March was more promising, representing a better month than the holiday season this past December and in effect hitting 90 per cent of 2019’s levels in terms of ticket sales.

“For the quarter, Air Canada had operating revenues of $2.573 billion, more than triple that of the same quarter in the prior year,” said President and CEO Michael Rousseau in a press release. “This was accompanied by a strict cost discipline that reduced adjusted Cost per Available Seat Mile (CASM) by over six per cent from the fourth quarter of 2021. Quarterly EBITDA, while a negative $143 million, improved $620 million over last year and we ended the quarter with $10.162 billion in unrestricted liquidity, close to 2021 year-end levels.”

The company also touted the success of its cargo business, where quarterly revenue was up 42 per cent to $398 million in the first quarter and with the company adding two new Boeing 767-300 freighters this year to its fleet.

As for the outlook, AC stuck to its previously stated full-year guidance where it plans to increase its Available Seat Mile (ASM) capacity by 150 per cent compared to 2021 levels, with adjusted CASM expected to come in at about 13 to 15 per cent above 2019 levels while 2022’s EBITDA margin is expected to be around eight to 11 per cent.

Airlines have it tough during the best of times, as it’s difficult to consistently make a buck with externalities such as the cost of fuel and labour weighing heavily on margins. The regulatory and health restrictions of the past two-plus years have added to the uncertainties. 

But even with today’s rising fuel costs, the industry is still betting on a big recovery as those around the world with the financial ability are seemingly aching to fly again after a couple of years at home and on the ground. 

For Zechner, along with the pandemic recovery bump Air Canada has a lot of positives to the business.

“I think what I like about Air Canada is you really are moving to the recovery now and the reopening of the economy,” he said. “These guys have positioned themselves well, they restructured in the downturn, they solidified the balance sheet, they hold a dominant position in Canada and they moved a little bit more towards freight so they’re going to improve the margins of their operations overall.”

“When I saw what came out of a report on the US airlines last week, [it’s] really optimistic, even though the stocks are not reflecting it,” he said. “So, we’ve got a position in [Air Canada]. I might take it higher at a point and I like across the board the way they’re positioned up.”

Last week, Air Canada said it flew more than 100,000 customers in a single day for the time since early in the pandemic, a signal that passengers are returning in numbers. The company recorded 100,701 customers on board its planes on April 15, 2022, while the previous day over 100,000 was March 13, 2020.

“Clearly there is a pent-up demand for travel that is matched only by our enthusiasm to welcome back our customers. It is also significant that we passed this milestone smoothly, indicating Air Canada has recovered operationally from COVID-19’s effects and is prepared to safely and conveniently transport customers during the busy summer ahead,” said Kevin O’Connor, Vice President of Air Canada’s Systems Operations Control for Air Canada, in an April 18 press release.