Air Canada‘s (TSX:AC) stock price rose 28.5% April, almost three times the TSX Index’s return. But how could this be when all the news out of the airliner was negative? Well, stock prices often move on expectations more than on actual facts. This is what I believe happened with Air Canada stock in April, as given the sharp decline in air traffic, any other explanation simply doesn’t make sense.
Air Canada is in survival mode. The company is feverishly cutting costs and preparing for worst-case scenarios. Air Canada’s stock price has massively underperformed the TSX yea to date. The stock is down 60% compared to the TSX Index’s return of -14.5%. This is to be expected, as the travel industry is among the hardest hit in this crisis.
But investors may now be turning the corner and seeing Air Canada stock as one with the most upside going forward.
Air Canada stock price soars as investors see past the coronavirus crisis
As one of the hardest hit stocks on the TSX, Air Canada stock now has the most upside as things return to normal — and there will eventually be a return to “normal.” The question is, what will this new normal look like?
Investors may be looking to the future and starting to price in a recovery. The questions that we have to answer relate to how bad this will get. How long can the airliner survive and how much wealth will be destroyed? Air Canada stock is trading at slightly above its book value.
Before the crisis hit, Air Canada was transforming itself, benefiting from increases in air travel. Cost cutting and a focus on cash flow and bottom line results made Air Canada stock a top pick.
Today, I recommend exercising caution with Air Canada stock. Even before this crisis, the world was heavily indebted. After the crisis, this situation will be overwhelming, which means that people will travel less. Companies will also be dealing with hard times, both financially and in creating a new workplace. This new workplace will likely include less business travel and more virtual meetings. All of this is bad for Air Canada.
What will the new normal like for Air Canada?
Even before the coronavirus crisis, the world was increasingly conscious of the health of the environment and of the negative effects of airliners. Today, we have the coronavirus to add to the list of health concerns. While air travel may not be curbed forever, there will be some lasting effects.
The world is currently on high alert due to the coronavirus scare, leaving some travelers nervous to travel and/or simply putting off travel plans. In response to this threat, the new normal will likely include many expensive changes. Greater distancing between seats in the plane, more frequent disinfecting, and changes in the filter systems in airplanes are just a few possibilities.
In April, Air Canada announced that trans border flights to the U.S. are suspended for an additional 30 days. Flights are scheduled to begin again on May 22. But of course, this is subject to change and could very possibly be extended again. Visibility remains low.
Foolish bottom line
While April was a good month for Air Canada’s stock price, I see more difficult times ahead. The catastrophic results to come will hit the stock hard.
Longer term, there are many issues to deal with. Although visibility remains low, we can count on some lasting negative effects from this whole ordeal.
