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Will Air Canada (TSX:AC) Stock Retest $10 Levels?

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Air Canada (TSX:AC) stock fell below $10 in mid-March amid the pandemic-driven weakness. The biggest airline company in the country has already lost almost $13 billion of market value so far this year.

The negative sentiment is increasing for airline companies across the globe. Air Canada’s poor Q1 showing coupled with the management’s downbeat commentary further paint a gloomier picture. Warren Buffett’s discouraging remarks on aviation companies further added to investors’ woes yesterday.

Is more weakness coming in Air Canada stock?

AC stock tumbled 9% on its poor Q1 earnings on May 4. Notably, its earnings indicate that the weakness in the stock might be far from over.

It’s important to note that Air Canada’s Q1 bottom line plunged deep in the red when it was operating at a much lower capacity since late March. Regular operations in January and most of February must have buoyed its earnings in the reported quarter to a large extent.

It’s worth pondering the impact on Q2 earnings when the airline is not operative for two-thirds of the quarter. The airline has been focusing on cargo flights and transporting essential goods. However, its impact could be minimal.

Also, even if the travel restrictions are lifted and Air Canada starts operating later this month, fear and uncertainty will most likely dominate flyers. Second-quarter capacity has been reduced by 85-90%, while the third-quarter capacity has reduced by 75%. Air Canada also announced it will retire 79 aircraft from its fleet to reduce its cost structure and simplify its overall fleet.

Thus, it’s fair to expect significant weakness in its financials at least for the next two quarters.

Management’s downbeat outlook

Air Canada CEO Calin Rovinescu said, “While the duration of the pandemic and its fallout remain unknown, it is our current expectation that it will take at least three years to recover to 2019 levels of revenue and capacity. We expect that both the overall industry and our airline will be considerably smaller for some time, which will unfortunately result in significant reductions in both fleet and employee levels.”

As I’d noted in an earlier article, Air Canada looks well placed to weather the crisis at the moment given its strong liquidity position. However, the COVID-19 driven uncertainties are just too dominating for now; if extended, that could make things bleaker for Air Canada. Notably, management’s timeline of three years to normalize things speaks for itself.

Air Canada stock has returned approximately 3,700% in the last decade. However, this time it might be different. So far this year, the stock has already lost almost 65%. It looks like a high-risk situation for Air Canada investors given the current set of uncertainties.

Some might think AC stock as an attractive bet from its historical valuation perspective. However, lower earnings outlook might force discerning investors to completely shun the stock.

What’s more important at the moment for Air Canada is it needs to start operating at least with some capacity. Even if that looks a distant dream for now, it will start generating the necessary cash flow, and that will be a road to recovery.

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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 Vineet Kulkarni has no position in any of the stocks mentioned.

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