The Motley Fool

Oops! Air Canada (TSX:AC) Isn’t Out of Trouble Yet

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Air Canada’s (TSX:AC) chief medical officer sent a letter to the transport minister and other cabinet ministers. He urged the government to take a more scientific approach to reopen and to ease travel restrictions. He feels that the travel restriction and stringent reopening policies the government put forth are disproportionate for a country that’s seeing a relatively swift recovery.

Many of Air Canada’s trouble stems from the fact that a relatively smaller chunk of its revenue generation comes from international travel. The regional business makes up only about 30% of Air Canada’s total business. The letter outlined some measures the government can take to provide the airline with some breathing room.

Proposed travel easing

The letter is in response to the government’s extension of mandatory quarantine rules that the government imposes on anyone entering Canada. The rules state that anyone who enters Canada (either by air or sea) should quarantine for 14 days if they don’t have any symptoms. If they are exhibiting any symptoms, then they should properly isolate themselves.

The rules seem adequate and very reasonable if you consider travellers from across the border, which has become the new hot spot for the virus. But for travellers from European countries that are past the virus’s current peak, these rules only discourage people from traveling to Canada, directly impacting Air Canada’s ability to make money from regular international operations.

The chief medical officer claimed that travellers from low-risk countries like New Zealand, Bahamas, Germany, Taiwan, Hong Kong, etc., pose no greater threat of transmission than the local, provincial travel does. He said that the government should exempt travellers from these countries from the 14-day quarantine rule.

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Air Canada stock

Air Canada stock showed a little bit of life in mid-July and reached beyond $18 in valuation, but then dropped again. Though this fluctuation is understandable, the fact that the stock hasn’t been able to stick to the $20 mark in four months is troublesome. Travel restrictions aside, the company, even with all its cost-cutting and cash-raising efforts, has been unable to raise investor morale.

At its current valuation, it might attract investors who are hoping that the country’s premier airline will surge again and reach its pre-pandemic values and growth pace (even if it takes a few years). But many investors — even those who can’t pass up a good bargain — aren’t willing to bet on Air Canada.

If the company doesn’t make it on its own and requires government intervention, it’s difficult to say how it will impact the stock’s valuation.

Foolish takeaway

Airlines across the border have been looking a bit less grim lately because many vaccine trials are offering promising prospects, and investors are trying to ride the surging wave ahead of optimism. But it’s too soon to say whether or not a fully functional vaccine will come in time to save Air Canada.

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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.

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