Why Air Canada (TSX:AC) Gained 20% Over the Last Month

Air Canada (TSX:AC) has posted some solid gains over the last month despite most other North American airlines failing to rally.

| More on:
Paper airplanes flying on blue sky with form of growing graph

Image source: Getty Images

The coronavirus pandemic has decimated tourism and air travel. It has hit cruise lines and airlines particularly hard. Air Canada (TSX:AC), like its U.S. competitors, has seen its stock tumble, plummeting 62% since the start of 2020.

The largest U.S. carrier by revenue, Delta Airlines, is down 61%. United Airlines has plummeted by 71%. Unlike the major U.S. carriers, Air Canada has rallied strongly over the last month, gaining 21%. There are a range of reasons why the market is differentiating Canada’s flag carrier from its U.S. peers.

Robust fundamentals

Key is the significant lack of domestic competition. When coupled with Air Canada’s strong brand and status as the national flag carrier, this provides it with an economic moat. That helps to protect the airline from competition.

More importantly, Air Canada finished 2019 in a solid financial position. It reported record operating revenue of $19 billion. EBITDA expanded by 13% year over year while net income grew by a notable 39 times to almost $1.5 billion. Air Canada finished 2019 with $5.9 billion in cash and short-term investments compared to $14 billion in debt, pensions, and other long-term financial obligations.

Those impressive numbers indicate that Air Canada’s performance was comparatively superior to Delta, which is rated as the most profitable U.S. carrier. In fact, Air Canada’s net debt, including pension liabilities, was only 26% of 2019 revenue, compared to 30% for Delta.

That demonstrates the strength of Air Canada’s financial position at the end of 2019.

Airlines boosting liquidity

Air Canada has been able to avoid burning cash at the same rate as Delta. Earlier this month, Delta’s CEO stated that the airline was burning through a whopping US$60 million a day. At that rate, Delta would consume the US$6 billion of cash held at the end of the first quarter 2020 in roughly 100 days.

There is every indication that air travel won’t return to anything resembling the pre-coronavirus environment for years.

Delta has taken significant measures to mitigate that and other risks associated with the current crisis. At the end of March, Delta announced it had acquired a US$2.6 billion debt facility and was drawing a further US$3 billion from existing facilities. Last week, the airline announced a US$1.5 billion debt offering and plans to add another US$1.5 billion line of credit once the capital raising closes.

This will leave Delta with a massive debt pile totalling somewhere in the vicinity of US$24 billion once pension liabilities are included. Even once air travel returns to normal this will weigh on Delta’s performance for the foreseeable future. For these reasons it is easy to understand Buffett’s decision to reduce his stake in Delta by around 13 million shares.

Air Canada preserving its financial position

In stark contrast, Air Canada has only drawn $1 billion from existing lines of credit. This gives the carrier over $6.8 billion in cash and short-term investments. The fact that Air Canada  has yet to tap capital markets for additional funds, along with the potential for assistance from Ottawa, provides it with additional levers to manage the crisis should the outlook worsen.

To preserve its solid position, Air Canada has taken measures to significantly reduce costs. These include furloughing or temporarily standing down over 16,000 employees, cutting executive salaries, reducing operating capacity, and deferring capital spending.

Foolish takeaway

For the reasons discussed, Air Canada will emerge from the crisis in better shape than most major North American airlines. After the 2008 Great Recession, which almost bankrupted the airline, it delivered outsized returns for contrarian risk tolerant investors.

Even after allowing for the latest market decline, Air Canada has returned a stunning 648% over the last decade. While past performance is no guarantee of future returns, the risk reward equation for Air Canada is in favour of investors, making now the time to buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Delta Air Lines.

More on Coronavirus

Dad and son having fun outdoor. Healthy living concept
Dividend Stocks

1 Growth Stock Down 15.8% to Buy Right Now

A growth stock is well-positioned to resume its upward momentum in 2024 following its strong financial results and business momentum.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Stocks for Beginners

3 Things About Couche-Tard Stock Every Smart Investor Knows

Couche-tard stock (TSX:ATD) may be up 30% this year, but look at the leadership and history of the stock to…

Read more »

Plane on runway, aircraft
Coronavirus

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway
Coronavirus

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »

Man considering whether to sell or buy
Stocks for Beginners

Goeasy Stock: Buy, Sell, or Hold?

When it comes to smart buys, goeasy stock (TSX:GSY) is up there as one of the smartest money can buy.…

Read more »

Woman has an idea
Stocks for Beginners

Here’s Why Magna International Is a No-Brainer Value Stock

Magna stock (TSX:MG) has been climbing back once more, but still offers huge value for long-term minded investors.

Read more »

Aircraft wing plane
Coronavirus

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »