Air Canada (TSX:AC) Investors Face the Moment of Truth This Week

Air Canada (TSX:AC) will release its second-quarter earnings on July 31. Will it continue to trade weak, or will there be a revival?

Air Canada (TSX: AC) stock is one of the laggards this year, with its stock falling more than 65% due to the pandemic. Though the stock has recouped much ground since record lows in March, it has yet to regain its earlier charm.

Now, it’s an even more decisive moment for Air Canada, as it reports much-awaited second-quarter earnings this week. Lockdowns almost entirely dominated the period, and, thus, the numbers are not expected to be pretty. Rather, its Q2 earnings are estimated to be worst in the year and might create more downward pressure on its stock.

Air Canada: Second-quarter earnings

Air Canada stock witnessed a notable decline when it reported first-quarter earnings in May. It reported an approximate $400 million loss for the quarter, its worst quarter in years. Now, for the second quarter, the country’s biggest airline is expected to report more than a billion-dollar loss. Whether the stock retests its March lows of $9 remains to be seen.

Importantly, this should be an opportunity for long-term investors to grab the stock at lower levels. AC stock will likely bottom out on the earnings weakness and might see decent recovery later this year. Analysts also expect relatively better earnings for the second half of 2020.

Apart from Air Canada’s earnings, its liquidity position and management outlook will pave the path for its stock in short to intermediate term.

Large operations and maintenance costs continued to dent its balance sheet, even when the airline was not operating. It also trimmed thousands of jobs to cut down on operating costs. Notably, the flag carrier raised capital a couple of times in the second quarter, which might help it survive the crisis longer. However, a prolonged pandemic might significantly make things bleaker for Air Canada.

Pending Air Canada-Transat AT deal

Any update on Air Canada’s long-awaited Transat AT deal will also be important to watch. It agreed to pay $18 per share to acquire Transat in August last year. However, Transat shares have lost much of their value due to the COVID-19 this year and are now trading below $6 apiece, indicating the deal’s earlier terms are uneconomical for Air Canada.

Transat carried around five million passengers in 2019 — almost 10% that of Air Canada. The acquisition would offer AC an expansion in the holiday travel space and Transat’s decently sized fleet. However, the deal might not close anytime soon, given the regulatory hindrances.

The Foolish takeaway

Air Canada management expects it to take three years’ time to reach air traffic to its pre-pandemic levels. Given the gloomy outlook for its upcoming earnings, the stock could trade weak in the short term. However, we might see its operations gradually normalizing later this year, which might fuel some recovery in the stock.

Also, despite the recent acceleration of active coronavirus cases, full-fledged lockdowns across the globe might not return. Importantly, multiple players in the vaccine race achieving favourable results bring Air Canada’s recovery closer and make it all the more believable.

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Stocks for Beginners

money goes up and down in balance
Dividend Stocks

One $7,000 TFSA Contribution Could Grow Into $50,000: Here’s How Long It Takes

Once the money is inside a TFSA account, a $7,000 investment can become $10,000, $20,000, or considerably more with compounding,…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

You’ve Maxed Your TFSA – Now What?

Maxed your TFSA? These three Canadian growth stocks can help investors keep building wealth while they plan their next investing…

Read more »

moving into apartment
Tech Stocks

Shopify Is Spending to Win AI Shopping: Is the Stock Still Worth the Price?

Shopify is investing heavily in AI commerce while revenue and free cash flow continue growing at impressive rates.

Read more »

a sign flashes global stock data
Dividend Stocks

The Best Ways to Invest in the TSX Near All-Time Highs

Learn how to invest in the TSX near all-time highs with a broad-market ETF, a lower-volatility option, and a proven…

Read more »

dumpsters sit outside for waste collection and trash removal
Dividend Stocks

Tariffs Are Hitting Canadian Manufacturers: I’d Buy This Essential-Service Stock Instead

Tariff uncertainty is pressuring Canadian manufacturers, making essential-service businesses an attractive source of portfolio diversification.

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

Got $10,000 for a TFSA? This Dividend Stock Could Start Paying You Now

A $10,000 TFSA investment can already start generating tax-free dividend income without chasing an extreme yield.

Read more »

Printing canadian dollar bills on a print machine
Stocks for Beginners

4 Canadian Stocks to Buy Right Now With $10,000

The TSX is up this year, but you can take advantage of recent pullbacks by swiping up these four high…

Read more »

Senior uses a laptop computer
Energy Stocks

Taking CPP at 70 Isn’t Automatically Smarter: Here’s the Number I’d Check First

Delaying CPP until 70 produces a much larger payment, but retirees give up five full years of income.

Read more »