The world’s top airlines are barely making ends meet as the COVID-19 pandemic has led to an almost complete halt in passenger flights around the world. Many airlines will not make it out of the situation unless they can get a bailout from the government. Air Canada (TSX:AC) is no exception.
The most significant Canadian airline has reduced its operating capacity by 90% and is using whatever cash it has to fund payrolls, maintenance, pay down interest on loans, and airport loans. The airline is heading toward dangerous territory with no end to the pandemic in sight. There’s a chance that Air Canada might come close to bankruptcy.
Air Canada needs revenue to survive. It has converted some of its assets into cargo planes so it can at least generate some income. However, it can’t achieve sufficient income unless the travel ban ends and the passenger flights resume.
Travel might normalize once the global health crisis ends. The SARS epidemic in 2003 took nine months to control. The COVID-19 pandemic is far worse than the SARS epidemic and might take much longer to contain. AC requires enough liquidity to remain afloat until the time comes.
A bailout might not help investors
A government bailout can take many forms. The government can provide AC with a long-term low-interest loan or even a grant that it does not need to pay back. It can even come through the purchase of preferred stocks or equity. Most forms of bailout can benefit AC shareholders. However, if the entity bailing out the airline demands an equity stake, it can massively dilute shareholder value.
For instance, if the government offers AC $1 billion in return for $1 billion worth of AC shares, the bailout can help the airline avoid bankruptcy. It also means that the airline will need to issue new shares, and the existing shares would represent a less significant claim of the company. The result is a massive decline in earnings per share.
If the company can spend the money wisely, it can make things better for shareholders despite the share dilution. But that’s something Air Canada might not be likely to guarantee.
A safer bet
Even if everything plays well with a government bailout, Air Canada can’t guarantee any prolific performances once travel bans are lifted. The airline travel might take much longer to return to normalcy since people might be hesitant to travel. It would be a better idea to ditch the airline stock entirely and consider a safer bet in the transportation sector.
The Canadian National Railway (TSX:CNR)(NYSE:CNI) stock could present investors with an opportunity to secure their capital and grow their wealth significantly. The country’s largest railway company is doing much better than its largest airline. CNR is still in recovery due to the market volatility that began with the onset of the pandemic.
At writing, the railway stock is down by just 3% from its value at the start of the year. The stock dipped by almost 25% between February 6, 2020, and March 16, 2020, due to the pandemic. It has since recovered and is up by more than 20% from its 2020 low.
Trading for $115.11 per share at writing, it is offering a 2.00% dividend yield to its shareholders. The long-standing aristocrat has a dividend growth streak of 20 years. The railway company operates both passenger and logistic operations. Its logistics side is far more robust, transporting $250 billion in goods across North America.
In the past five years, the company has increased its dividend payouts by 53%. It has also exhibited some growth over the years, but its real value lies in its defensive qualities even during a recession.
With the airline sector in serious trouble, even a government bailout can see shareholder capital in trouble for AC investors.
A much better option for investors is to opt out of increasing their position in the largest airline in the country and buy shares of the largest railway company in Canada instead.
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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 Adam Othman has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool recommends Canadian National Railway.