What’s Next for Air Canada (TSX:AC) Amid its Growing Troubles?

Air Canada (TSX:AC) stock might continue to trade extremely volatile on the back of growing uncertainties. What should an investor do?

| More on:
cup of cappuccino with a sad face

Image source: Getty Images

Air Canada (TSX:AC) investors just can’t stop worrying, as troubles for the struggling airline keep on soaring. While the stock has surged 20% in June, it still trades 60% lower from its levels earlier this year. Importantly, Air Canada stock might continue to trade weak in short to intermediate term on the back of growing worries.

Air Canada: Liquidity concerns

Air Canada CFO recently indicated the need for additional financing, despite raising $1.6 billion earlier this month. The company is better placed on the liquidity front at the moment. However, the need for additional financing underlines the looming pain.

Airlines are some of the hardest-hit sectors amid the COVID-19 pandemic. Broader markets, including Air Canada stock, have seen a remarkable recovery in the last three months, as economies re-open after lockdowns. However, the slower recovery and rising active cases of the virus highlight that things will not be as smooth as expected earlier.

The country’s biggest airline company, Air Canada, operated with some 10-15% of capacity during the first quarter. The situation is not significantly different in the second quarter. However, despite extensive job cuts and reduced operations, the airline continues to burn sizable cash, which might make things more unpleasant for the company.

A rating downgrade

To add to the woes, Fitch Ratings downgraded Air Canada earlier this week, citing the slower recovery in the air travel. It has maintained a negative outlook for the airline. The rating agency also highlighted the airline’s strong liquidity position, which will help survive the ongoing crisis.

A credit downgrade generally means that the company might have to raise new debt at more unfavourable terms in the future.

Air Canada is gradually restarting operations and has also seen some notable improvements in domestic bookings. However, the second wave of the pandemic and lockdown extensions could substantially hamper these green shoots. The company has already conveyed that it expects around three years’ time to normalize air travel demand. The second wave might notably delay this recovery further.

On the positive side, a sooner-than-expected cure for COVID-19 could fuel a much faster recovery. Many economists still expect a “V-shaped” recovery during the second half of the year. Even if the recovery takes time, I think Air Canada’s scale, strong balance sheet, and robust market share could help a stronger emergence from the crisis.

The Foolish takeaway

I still do not see Air Canada as a great investment at this point. Its longer expected time for revival indicates a prolonged dent on its financials, which will drive its near-term market performance.

Additionally, more capital raisings will likely dent existing shareholders further, lowering their claim on its earnings. AC stock will most likely continue to trade extremely volatile, as it has been in the last few months. For Air Canada to become an attractive long-term investment again, I would prefer certainty over its operations and, more prominently, no multiple waves of the pandemic.

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.

More on Coronavirus

eat food

Goodfood Stock Doubles Within Days: Time to Buy?

Goodfood (TSX:FOOD) stock has surged 125% in the last few weeks, so what happened, and should investors hop back on…

Read more »

stock data
Tech Stocks

If I Could Only Buy 1 Stock Before 2023, This Would Be It

This stock is the one company that really doesn't deserve its ultra-low share price, so I'll definitely pick it up…

Read more »

Aircraft Mechanic checking jet engine of the airplane

Air Canada Stock Fell 5% in November: Is it a Buy Today?

Air Canada (TSX:AC) stock saw remarkable improvements during its last quarter but still dropped 5% with more recession hints. So,…

Read more »

Airport and plane

Is Air Canada Stock a Buy Today?

Airlines are on the rebound. Does Air Canada stock deserve to be on your buy list?

Read more »

A patient takes medicine out of a daily pill box.

Retirees: 2 Healthcare Stocks That Could Help Set You up for Life

Healthcare stocks offer an incredible opportunity for growth for those investors who look to the right stocks, such as these…

Read more »

sad concerned deep in thought

Here’s Why I Just Bought WELL Health Stock

WELL Health stock (TSX:WELL) may be a healthcare stock and a tech stock, but don't let that keep you from…

Read more »

healthcare pharma

WELL Stock: The Safe Stock Investors Can’t Afford to Ignore

WELL stock (TSX:WELL) fell 68% from peak to trough, and yet there's no good reason as to why. So now…

Read more »

telehealth stocks
Tech Stocks

The Ultimate Growth Stock to Buy With $100 Right Now

After climbing 600%, this growth stock is now down 68%. But it won't be long before other investors catch on.

Read more »