Air Canada’s (TSX:AC) troubles are far from over. The company recently canceled 30 local routes without announcing a proper refund policy, which didn’t just make people from the regional areas feel abandoned but also enraged. Air Canada currently has no plans for reopening those routes, despite the constant urging of these communities, especially Labrador.
Another seed of trouble for the company is its unwilling participation in rekindling of the pandemic. An exposure warning was given out to passengers who flew from Kelowna to Vancouver. This is not the first, and it won’t be the last. Warnings like these will keep the fear of flying alive in Canadians. It’s likely to have a direct impact on Air Canada’s operations.
Fitch downgraded Air Canada
One of the big three credit-rating agencies, Fitch, recently downgraded Air Canada for its shaky future prospects. The company now has an issuer default rating of BB negative (downgraded from BB) and unsecured notes are rated B+/RR5 instead of BB/RR4. It means that if the company defaults, its recovery prospects are below average (about 11-30% of the current principal).
Even after paying off its sizeable debt, there are many stakeholders that need to be paid before it’s the turn of regular shareholders.
The downgrading, while expected, will not do any favours to Air Canada stock. The stock is becoming riskier by the day. Right now, many investors might be holding on to Air Canada in hopes that it might recover in a couple of years. But if the probability of Air Canada going bankrupt increases, another sell-off frenzy might ensue, pulling the rug from the company’s last stand.
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Liquidity and dependency on foreign travel
Fitch tried to soften the blow of the downgrade by stating that the company has a strong liquidity position, and it’s likely to live through the crisis. Air Canada is trying to improve its cash position as well as normalize its operation. But according to the rating agency, the downgrade is because they expect Air Canada to see a steeper downturn in 2020 and a slower recovery in 2021.
One of the reasons for that is Air Canada’s heavy dependence upon international travel. In 2019, domestic operations only generated 30% of the company’s total revenues. The situation is likely to worsen even further, since the company dropped its local routes.
Air Canada is currently trading at $16 per share, and it’s steadily going down. The stock can’t seem to rally, and this downgrading indicates that the stock might go down even further. Another market crash or another wave might only aggravate the situation. And even if a vaccine might emerge as an ally to the company, the recovery might not be as swift as it was for some other companies in the pandemic.
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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 Adam Othman has no position in any of the stocks mentioned.