Why Air Canada (TSX:AC) Stock Fell 54% Last Month

Here’s why Air Canada remains a solid bet for long-term investors despite a massive decline in stock prices.

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Shares of Air Canada (TSX:AC)(TSX.AC.B) closed trading at $15.75 on March 31, 2020. It fell over 54% in the last month compared to the 17% decline of the iShares S&P/TSX 60 Index ETF. Air Canada is one of Canada’s top airlines and the company has been hit hard amid the coronavirus pandemic.

The travel and tourism industry has been one of the worst affected in recent times as governments have shut borders and announced countrywide lockdowns.

This has not only bought global travel to a standstill, but has also impacted domestic flights. The airline sector has lost billions of dollars due to the pandemic and several companies might require a bailout package to stay afloat.

So, what impacted Air Canada stock in the last month?

Air Canada announces layoffs

On March 30, Air Canada announced a temporary layoff for 16,500 employees as it is struggling to cope up with the impact of the COVID-19. The layoffs will be effective as of April 3 and will include 15,200 unionized workers as well as 1,300 managers, accounting for over 80% of the company’s workforce.

Air Canada aims to save at least $500 million from cost-cutting measures and deferral of capital expenditure. It has also withdrawn its financial outlook for 2020 and 2021, given the circumstances.

In the second quarter, the company estimates system ASM (average seat miles) capacity to fall by a massive 50%. The capacity reduction in Pacific markets could be close to 75% in Q2.

In order to tide over short-term liquidity concerns, Air Canada drew down US$600 million in revolving credit and confirmed that it is working with several parties to raise capital. For 2020, the company estimated capital expenditures of $2.4 billion, the majority of which will be deferred to 2021.

However, it’s not all doom and gloom for Air Canada. The company has a healthy balance sheet with a cash balance of $7.1 billion as of March 13, 2020. This includes the proceeds from the credit facility discussed above. It has an unencumbered asset pool of $5 billion that can be used as security to raise additional debt.

The capital reduction program coupled with lower fuel prices will help the company offset a part of the 50% to 60% revenue loss it estimates for the second quarter of 2020. Around 50% of its operating expenses (excluding fuel and depreciation) are variable in nature which will lower company expenditure.

Air Canada has had a stellar role to play amid the pandemic

Air Canada has brought back several Canadian residents stranded in other countries. Between March 27 and March 29, the airline brought 22,500 passengers back to Canada on 175 flights from Asia, Europe, South America, and the United States. It also began operating cargo-only flights carrying vital supplies and essential goods.

The company’s press release on March 25 stated, “The first cargo-only flights departed from Toronto this past week for Frankfurt, London and Amsterdam, which are all both important business centres and connection points for onward cargo shipments……Air Canada Cargo is now exploring opportunities to offer this service domestically.

It is working with various governments to assess the demand and assist in moving relief goods from multiple markets within Canada.”

The COVID-19 will likely be a near-term headwind for Air Canada and peers. Though the stock will be volatile in the next few months it remains a strong buy for long-term investors given the company’s large presence in Canada, wide international network, low fuel prices, cheap valuation, and a strong balance sheet.

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.

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