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Air Canada (TSX:AC): Buy it Now or Avoid it Like the Plague?

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Investors who stayed their hand and didn’t tie their capital to a sinking Air Canada (TSX:AC) until they saw the results of 2020’s second quarter (which ended on June 30) didn’t get any hopeful news when the company presented the quarterly financial reports. Air Canada reported a net operating loss of $1.55 billion — a half-billion jump from the first quarter and about two billion down from the operating income of $422 million in the second quarter of 2020.

The second-quarter results, though devastating, weren’t unexpected. Given the condition of air traveling in the country and around the globe, especially across the border, Air Canada’s numbers reflect and reassert the abysmal condition of the airline industry. Still, the stock took a hit and went downhill faster than before.

Second-quarter results

One of the most shocking revelations in the second-quarter results was the number of passengers the airline carried in the second quarter — less than 4% of the number of passengers in 2019. That’s a fraction of Air Canada’s total capacity, and it’s not even the bare minimum that can help keep the company flying. Suffice to say, Air Canada’s operating “income” isn’t going to get the company through this current crisis, but its liquidity might.

As of June 30, the company has liquidity of over $9.1 billion. The revenue generation declined by 89%. And even though the cargo-based revenues were up, they are not potent enough to make up for its operating income loss. The company again urged the government to relax travel restrictions, both local and international. Air Canada’s CEO claimed that the company is laser-focused on business continuity.

This statement is backed by the tough and necessary steps the company took to stay functional in these hard times. But even if the Canadian government relaxes travel restrictions within the country, the effects might not be as pronounced for Air Canada, since the bulk of the company’s revenue is generated through its international flights. So, unless international travel resumes back to its pre-pandemic levels (or somewhere near that), and swiftly, the company will keep on bleeding.

To buy or not to buy?

Do not buy Air Canada, at least for now. There is no evidence that the company will get the traction it needs to start improving its operating income, or to at least mitigate the continuous losses. If an Australia-like second wave hits Canada, the condition may worsen even further.

But if the virus situation keeps improving, and there are no new episodes and small outbreaks, the government might revise its travel policy. It might be enough to raise some investor confidence, though not as much as a successful vaccine would. But even if it does and the stock starts to rise again, the turnaround might not be as swift as you might be hoping for. So, if you are looking for a quick payout, Air Canada might not be a good prime candidate.

Foolish takeaway

If you think Air Canada is the right bet, and you have the patience to keep the company in your portfolio for years without gaining any significant capital growth, the current low valuation might seem very attractive. But a better idea might be to wait for a while. If the government relaxes the travel restrictions, the stock might actually start recovering (unlike now, when it’s merely fluctuating). That would be an excellent time to buy and hold Air Canada.

Speaking of Air Canada...

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Fool contributor Adam Othman has no position in any of the stocks mentioned.

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