Will Air Canada (TSX:AC) Stock Fall Below $5?

Air Canada stock has fallen 75% in just over a month. Will it be able to survive the downturn?

| More on:
question marks written reminders tickets

Image source: Getty Images

The COVID-9 pandemic continues to take a toll on global equity markets. The airline industry is one of the hardest hit with shares of Canada’s top aviation company Air Canada (TSX:AC)(TSX:AC.B) falling by a massive 76% from its record highs.

The tourism industry that accounts for 10% of the global GDP has been the hardest hit as countries have announced lockdowns, closed borders, and reduced domestic flights. Several companies might file for bankruptcies as recession fears loom large.

Air Canada announces layoffs

Air Canada has grossly underperformed broader indexes that are down 36% in just over a month. The company announced that it will temporarily lay off 5,100 employees, according to a Reuters report.

These layoffs will be in effect until April 30, 2020, and employees will be rehired as Air Canada continues to ramp-up operations and increases its network capacity back to normal once the dreaded COVID-19 is under control.

As several governments around the world have shut their borders, Air Canada will reduce its trans-border network from 53 airports to 13 as of April 1. This figure could move lower and is subject to further reductions. Air Canada will also reduce its domestic network from 62 airports to 40 in April 2020.

The company’s press release states, “The restrictions on travel imposed by governments worldwide, while understandable, are nonetheless having a cataclysmic effect upon the global airline industry. Our immediate focus is on ensuring the safety and well-being of our employees, customers and communities.”

The layoffs will provide Air Canada with some breathing space even though the company has a strong balance sheet with a cash balance of $5.9 billion and operating cash flows of $5.7 billion. Its undrawn credit lines are $7.4 billion and net debt for 2019 stood at 78% of EBITDA.

In the last three trading sessions, Air Canada stock has gained over 30% to currently trade at $12.7 per share.

What’s next for Air Canada investors?

The severe drop in air traffic and global restrictions have led Air Canada to withdraw guidance for 2020 and 2021. For the second quarter of 2020, the company’s available seat miles is estimated to fall by a whopping 50%.

A few analysts now fear that the current slowdown will be worse than the one experienced in 2008 during the financial crisis. The global GDP decline could be in the double digits, which doesn’t bode well for Air Canada investors.

The stock can be expected to be volatile in the near-term. However, when the COVID-19 pandemic comes to an end, the markets will bounce back and recovery can be expected in 2021.

Air Canada has played a stellar role amid the COVID-19 crisis and has bought back thousands of Canadians stranded in foreign countries. In one week, it has brought over 200,000 Canadians home and has scheduled over 1,000 flights through the end of March 2020 to repatriate Canadians.

The government will have to step in sooner rather than later to support the airline and travel industry. It might announce aid packages to several airlines and bail them out.

While a further decline in the equity markets might drag Air Canada stock lower, the company is in a better position than its peers to handle this downturn.

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 Aditya Raghunath has no position in any of the stocks mentioned.

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 »