Air Canada seems to have caught the attention of investors. The stock has lost 68% of its value since January and could lose more as global and regional air travel remains frozen. This week, the airline announced it would lay off 16,500 workers. Managers would take a pay cut ranging from 25% to 100% of their 2020 salaries.
This isn’t the first time Canada’s largest airline has suffered drastic losses. During the 2008 financial crisis, the stock lost 75% of its value. Investors who bought in 2009 received a 5,959% return by early 2020. So, history could repeat itself this time.
However, I believe there are two other airline stocks that serve as better bets on a rebound in global air traffic.
Chorus Aviation (TSX:CHR.B) is lesser known and comparatively riskier than Air Canada. The tiny company provides aircraft leasing and maintenance services to large regional carriers. Basically, it rents airplanes.
The company reportedly had $128 million in cash on its books as of March, 18, but suffers from a hefty debt burden. Long-term debt was nearly 3.9 times the value of equity. Meanwhile, the dividend payout ratio was 57.4% before this crisis began, so a dividend cut could be on the cards.
However, I have three reasons to be bullish on Chorus. The company has a long-term contract with Air Canada that should ensure revenue regardless of disruption.
If airlines stop paying leases, the company can repossess the aircraft that will retain their value. Finally, I expect domestic air travel to recover sooner than international air travel as Canada tames the virus in April/May.
Although Chorus is undoubtedly a risky bet, it could have huge rewards if domestic air travel recovers by summer. If Canada tames the outbreak soon, regional air traffic could rebound sharply.
Canada’s second-largest airline, Westjet, is no longer a publicly traded company. However, its owner Onex Corporation (TSX:ONEX) could serve as a proxy.
Private equity giant Onex is exposed to the airline industry through two subsidiaries: Westjet and Sky Chef. This means an eventual rebound in global air traffic will have a tremendous impact on Onex’s balance sheet. Meanwhile, the company has enough cash on hand to weather this storm and ongoing economic shutdown.
In fact, I expect Onex to make major acquisitions of distressed assets and bolster its remarkable portfolio further in 2020. The firm has nearly $988 million in cash on its books and virtually no debt. That’s plenty of dry powder to acquire some big names. I wouldn’t be surprised if Onex’s portfolio looked a lot better within a few years.
The stock is currently down 42.6% from its all-time high and could be a multibagger over the long-term. It’s a textbook contrarian bet at this point that seems to be flying under-the-radar.
Air Canada is obviously a crowd favourite. Investors expect air traffic to bounce back when this shutdown is over and Canada’s largest airline is well placed for a recovery. However, overlooked stocks like Chorus and Onex have plenty of potential for stunning returns too.
Investors should probably cast a wider net for better bargains. Good luck and stay safe!