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 Investing