The COVID-19 outbreak is having an enormous impact on airliners. Air Canada (TSX:AC)(TSX:AC.B), the top domestic airliner, has not been spared. This environment has drawn comparisons to the aftermath of September 11, 2001, which saw a dramatic fall in travel. The airline industry took roughly half a decade to recover, and it was hit soon after by the 2007–08 financial crisis.
It is impossible to predict how long the current economic shutdown will stretch in North America. Many optimists are betting on a snap back to normal when the COVID-19 crisis abates, but investors should not expect a rapid rebound. Indeed, this crisis will likely deal both near-term and medium-term damage to demand. It may fundamentally change travel and border control measures around the world.
This is an unfortunate turn for an industry that was on a tear entering this new decade. Today I want to look at Canada’s top airliner. Is it worth it for investors to jump on this dip in April?
Air Canada is facing historic challenges
Air Canada is the largest airliner in Canada by fleet size and passengers carried. Its shares have plunged 70% over the past three months as of close on April 2. The stock fell into single-digits in mid-March for the first time since late 2016. Less than a year ago, Air Canada looked like one of the strongest growth bets on the TSX. Does it have a chance to recapture momentum in 2020?
In the middle of March, the company’s analysts slashed price targets in response to the disruptions caused by the COVID-19 pandemic. Air Canada said that, on March 13, it possessed cash, cash equivalents, and short and long investments that totalled $7.1 billion. The company has worked to improve its balance sheet as a lesson from its troubles in the previous crisis. This is a good starting point, but we do not know how long this crisis will drag on.
On March 30, Air Canada announced that it would temporarily lay off 16,500 staff. The company has seen the bulk of its international and U.S. routes halted over the past several weeks. Air Canada’s CEO and CFO have opted to forgo 100% of their salaries in this crisis, while the rest of the executive team will give up between 25% and 50%. This illustrates its commitment to cost savings in this unprecedented crisis.
Airliners: Is now the time to hunt for value?
Challenges aside, Air Canada remains the top airliner in the country. Early last month, I discussed why investors should try to think and behave like Warren Buffett in this market pullback. That means hunting for value wherever it can be had. The airline sector is in crisis, but Air Canada has the cash to weather this storm.
Shares of Air Canada had a very favourable price-to-earnings ratio of 2.7 and a price-to-book value of 0.8 at time of writing. Its earnings were on a tear before it was blind-sided by the explosion of this global pandemic. Social distancing measures may last months, but in the long term, Air Canada is well-positioned to bounce back. Investors should expect continued turbulence in the near term. However, they should look to stack Air Canada at bargain prices given the chance.
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 Ambrose O'Callaghan has no position in any of the stocks mentioned.