Air Canada (TSX:AC) is a volatile stock. At the start of 2020, shares were above $50. Now they’re priced at $17.
Things weren’t always this way. From 2012 to 2019, AC stock rose 50 times in value!
Where will Air Canada shares go next? Is another massive bull run on the way, or will COVID-19 fears push the stock down even more?
Learn these facts
Before you bet on any stock, it’s important to know what you’re betting on.
Of course, the major challenge right now is the coronavirus pandemic. Air Canada shares will live or die by what happens there. CEO Calin Rovinescu has stressed again and again how unique the current operating environment is.
“No adjectives can adequately describe the pandemic’s cataclysmic effects upon our industry, nor can numbers fully quantify the extent of financial devastation,” he warned. “We’re now living through the darkest period ever in the history of commercial aviation, significantly worse than the aftermath of 9/11, SARS, and the 2008 financial crisis.”
Right now, Air Canada is operating at just 5% of capacity. This is forcing the company to lose roughly $20 million every day. This is not sustainable.
I recently estimated that the company has just 24 months of cash runway left before bankruptcy becomes a significant risk. A sustainable recovery must be achieved before then.
Should you bet on Air Canada stock?
How long will the current downturn last? Delta Air Lines thinks the industry will be “permanently” smaller. Boeing and Airbus anticipate a three to five year recovery. Even Air Canada thinks the future lacks optimism.
“Realistically, we expect it to take at least three years for Air Canada to get back to 2019 levels of revenue and capacity,” said Rovinescu.
Things certainly won’t be returning to normal anytime soon.
Air Canada executives have pressured the government to ease travel restrictions, but the latest spate of bad news will prolong any positive developments. More than 30 flights recently entered Canada with positive cases, and 85% of Canadians support keeping borders closed through the end of the year.
Expect airlines to continue hemorrhaging money over the next six months. Even if a vaccine were discovered tomorrow, it will take months to approve, scale, and distribute to the population.
Throw in the fact that one-third of Americans recently reported that they wouldn’t take a free vaccine, and the “everything will return to normal once there’s a vaccine” argument starts to fall apart.
Air Canada is skating on thin ice. The risk of bankruptcy is high, yet shares trade at a multi-billion-dollar valuation. Even if the company can raise an unprecedented amount of capital, it’s unclear if current shareholders will benefit.
“The sad reality is that unless airlines raise new capital, they will go bankrupt,” said the chief investment officer at Investment Management Associates. “This capital, though it might save them, will reduce the value of their businesses. Equity issuances would permanently dilute shareholders, as future earnings will be shared with a much-increased shareholder base.”
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The Motley Fool recommends Delta Air Lines. Fool contributor Ryan Vanzo has no position in any stocks mentioned.