Air Canada (TSX:AC) made a lot of effort to raise cash since the pandemic started. After posting a loss of over $1 billion and burning through about $20 million a day, the company needed substantial liquidation to carry it through the airline industry’s darkest period. This is why Air Canada raised about $1.6 billion by selling shares and convertible debt to bolster its cash flow.
On its own, raising cash isn’t enough to sustain the company when the regular operational income has been slashed to a mere fraction of its former levels. So, the company took many cost-cutting steps as well. These steps spanned from the reasonable decommissioning of many old aircraft and grounding the bulk of its fleet.
Other, more aggressive steps included laying off half the staff, even though the government was picking up the more substantial portion of the employee wages. Two recent moves that Air Canada made towards minimizing its expenses was to close eight stations and suspend 30 of its regional routes indefinitely. While these moves are logical from a profitability perspective, they’re not lauded as such by the communities that are now left stranded.
Impact on regional air travel
Many regions are hit hard by Air Canada’s move. 22 out of 30 suspended routes belong to Quebec and Atlantic provinces, with the airline being one of the most reliable connections to the rest of the country. With that cut, the regions might see a lot of bottle-necking in traveling, especially during peak seasons (like when mines are rebuilt in Labrador, etc.), and the alternatives will hike the prices up.
One thing to understand here is that Air Canada isn’t just a corporation; it’s Canada’s flagship carrier. Even if it wasn’t spelled out when the company was allowed to privatize over three decades ago, it was understood that the company would work in the best interest of the country. That included not cutting some of its routes and leaving people stranded.
Potential consequences
Some people think that this move by Air Canada is to pressure the government to bail it out and help it ride the pandemic storm. If that’s true, then Air Canada is playing a dangerous game. Even if the government bails the company out now, it might place some specific stipulations that may restrict the company’s growth and operation when the pandemic is over.
It’s all speculative now, and investors will have to wait to see how it plays out, but if it gets political, the consequences might not be in favour of investors.
Foolish takeaway
Air Canada is already dealing with a plethora of refund requests. If the company is made to comply with all the refund requests, it’s likely to deplete its cash reserves. Then surviving the pandemic might become almost impossible. On top of that, if the government takes any regulatory actions against the flagship carrier suspending regional routes, it might fall even further in valuation.
