Air Canada (TSX:AC) Stock: $0 or $100?

As the Air Canada saga continues to unfold, the stock might finally come crashing down this year.

| More on:

The COVID-19 pandemic is causing destruction and mayhem for economies throughout the world. Among the worst-hit sectors, due to the pandemic is the hospitality industry and airlines. Canada’s premier airline, Air Canada (TSX:AC), has been in the line of sight for plenty of discussion investors, and analysts are having amid the pandemic lockdown.

With commercial flights all but completely shut down, Air Canada is on the verge of bankruptcy unless the federal government decides to bail it out. With the company on flight lockdown and no end to travel restrictions expected in the near future, things are not looking good for the stock.

There is virtually zero demand for travel due to the pandemic. Air Canada’s operations currently are limited to essential cargo transport to keep supply chains moving. It has retrofitted three of its passenger planes to ferry cargo so that it can have a higher volume of operations.

Air cargo, however, does not drive the growth and chunk of revenue for Air Canada. Unless the travel bans end and service resumes as usual the company might be at risk of watching its wings clipped off within this year.

The world has and will change further

The last time Air Canada faced bankruptcy, it managed to make a strong comeback to reach greater heights. The situation is much different now, and there is no telling whether it can even come close to replicating its performance in the last 10 years. The world will be unlikely to return to normal as we knew it before the pandemic once the crisis subsides.

Market analysts anticipate that despite a lift in travel bans, airline operations might not return to normal for a long time. As revenue for airlines directly links to how many passengers they cater to, the outlook is eerie and unwelcoming for Air Canada and other airline operators around the world.

Widespread diseases are among the worst enemies for the aviation industry. The last time it happened was back in 2003 with the SARS outbreak. The virus was not as contagious as COVID-19, and social distancing was not required to curb the spread. This outbreak is far worse than what we witnessed back then. It will likely have a lasting impact on the psyche of airline passengers.

Will it tank?

The stock is trading for $16.53 per share as I write this. It is down by an enormous 68% from its share price at the start of 2020. We can’t be sure when the lockdown will be lifted. Even after the travel ban ends, there’s no telling when people will likely start travelling again. There is no possibility of Air Canada replicating its success in the last decade.

If Air Canada fails, it can have dire consequences for the economy. Other aviation companies in the country, along with the tourism sector, will suffer if AC goes under. The government will not let that happen. It has already stepped in with the Canada Emergency Wage Subsidy (CEWS) to help Air Canada keep its 36,000 employees on the payroll as the lockdown continues.

The government will need to step up its financial bailout plan for the company. If the government buys equity after bailing the airline out, it can help Air Canada stay afloat. A federal bailout like that can also significantly dilute individual share value.

Foolish takeaway

There might be some degree of upside potential in case a miracle happens, and Air Canada takes off. However, I would advise only the most risk-inclined investors even to consider increasing their position in the stock.

I would personally stay a country mile away from Air Canada. It’s a risky gamble, and the odds are immensely out of Air Canada’s favour.

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.

More on Dividend Stocks

woman analyze data
Dividend Stocks

The Smartest Dividend Stocks to Buy With $1,000 Right Now

Do you have some cash to invest but want to earn a safe, low-risk dividend return? These dividend stocks are…

Read more »

An investor uses a tablet
Dividend Stocks

5 Canadian Dividend Stocks I Think Everyone Should Own

These Canadian stocks have a solid track record of dividend growth and offer compelling yields near their current market price.

Read more »

calculate and analyze stock
Dividend Stocks

This 4.4% Dividend Stock Pays Cash Every Single Month

This high-quality Canadian dividend stock offers an attractive yield and plenty of long-term growth potential.

Read more »

edit Safe pig, protect money
Dividend Stocks

3 TSX Dividend Aristocrats That Can Weather Any Economic Storm

Market volatility has investors wondering which stocks can withstand an economic storm. Here are three to consider today.

Read more »

people relax on mountain ledge
Dividend Stocks

Top Canadian Stocks to Buy for Passive Income 

Are you building a passive income portfolio that can beat inflation and provide higher purchasing power? You could consider buying…

Read more »

voice-recognition-talking-to-a-smartphone
Dividend Stocks

1 Magnificent Canadian Dividend Stock Down 40 Percent to Buy and Hold Forever

This magnificent Canadian dividend stock trades at a huge discount, offers stellar growth, and pays one of the best yields…

Read more »

A plant grows from coins.
Dividend Stocks

Top Canadian Stocks to Buy for Dividend Growth

Dividend growth stocks can be a good option to build a passive income that beats inflation and improves buying power.

Read more »

Concept of multiple streams of income
Top TSX Stocks

The Best Stocks to Invest $1,000 in Right Now

Here are some of the best stocks that every investor should own today to generate massive income and strong growth…

Read more »