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Air Canada (TSX:AC) Restarts Flying — Will the Stock Follow?

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Air Canada (TSX:AC) investors must have breathed a sigh of relief as the airline restarted operations last week. This is indeed positive news for the airline after a streak of negative reports in the last few months.

However, restarting operations might not mean that the worst is over for Air Canada. The demand could be slow, and fear will still dominate flyers initially. But it is much better than burning cash on zero operations during the harshest of times.

Air Canada readies to take off again

Air Canada has announced a schedule to fly to 97 destinations across Canada, the U.S., and globally. It flew to almost 220 destinations during the previous summer. While it is resuming flying to top global destinations, Air Canada plans to keep adding routes through September. Interestingly, many top airlines across the globe have seen slower cancellations recently, indicating instilling consumer confidence.

Air Canada stock has been trading volatile lately and should see some revival on the news. So far this year, the stock has lost almost 65%, notably underperforming the TSX Index.

It’s important to note that the demand for air travel recovering to pre-coronavirus levels will definitely take time. Air Canada estimated a long-time horizon of almost three years to normalize things. However, as the fear subsides and economies re-open, discretionary spending will boost, ultimately reviving the demand for air travel.

As Air Canada ramps up operations, lower jet fuel prices could materially benefit. While crude oil has more than doubled in just a month, it still remains low compared to last year.

The airline is one of the hardest-hit industries amid the pandemic. AC reported a net loss of $392 million in the first quarter as it was operating with only marginal capacity amid the travel restrictions.

Is Chorus Aviation a better pick?

Air Canada resuming operations could revitalize its small-sized peer Chorus Aviation (TSX:CHR.B) as well. Chorus operates chartered flights within the Canadian borders and leases its aircraft to Air Canada.

Chorus stock has fallen more than 65% so far this year, largely in line with Air Canada stock. Notably, AC restarting its operations could get the wheel turning for Chorus Aviation again. In the recently reported quarter, Chorus reported a stellar adjusted earnings growth of more than 30% compared to the same quarter last year.

Interestingly, Chorus Aviation stock looks well placed in terms of valuation compared to AC. Chorus is not a traditional airline company and also much smaller in size compared to AC. However, Chorus stock is currently trading at a significant discount against its average historical valuation.

Investors should note that aviation stocks still remain a speculative bet as there are a lot of uncertainties involved. While operations restarting is indeed a positive development for Air Canada, how air travel demand actually fares in the next few months remains to be seen.

Many economies have seen upsurges in COVID-19 cases after a gradual lifting of lockdowns. That poses a significant threat to airline companies like Air Canada. Also, a probable second and a third wave of the pandemic would be the last thing these guys would want to see.

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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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