Canada Extends Border Closing: What Will Happen to Air Canada (TSX:AC) Stock?

Air Canada (TSX:AC) stock trades at a deep discount to its former highs. How will the recent extension of the border closing impact shares?

| More on:
Question marks in a pile

Image source: Getty Images

Air Canada (TSX:AC) stock collapsed when the COVID-19 pandemic began. Shares fell 70% and have yet to recover.

One of its biggest obstacles is travel restrictions. In fact, the company’s CEO repeatedly blames government rules for its current failings.

“For Air Canada, the pandemic and government-imposed lockdowns and travel restrictions the world over have ended a run of 27 consecutive quarters of year-over-year revenue growth,” Air Canada CEO Calin Rovinescu said.

“With Canada’s federal and interprovincial restrictions — which have been amongst the most severe in the world — we carried less than 4% of the customers carried during last year’s second quarter,” he added. “At present, there exists no fewer than four overlapping barriers to travel and economic recovery, imposed by governments in Canada.”

If travel restrictions are to blame for the stock’s poor valuation, recent news should send a shudder through your bones.

Canada extends travel restrictions

In the spring, Canada closed its U.S. land border, only allowing commercial traffic to pass. Cross-border travel plummeted. The government also instituted strict quarantine and testing rules for air travelers.

These restrictions were only meant to last a few months, but time and time again, the new rules were extended. This week, we learned that they’d be extended yet again. This is the opposite direction that Air Canada wants to move towards.

“We are extending non-essential travel restrictions with the United States until November 21st, 2020. Our decisions will continue to be based on the best public health advice available to keep Canadians safe,” said Canada’s public safety minister.

“The situation in the United States continues to be of concern. So we’re going to make sure we’re keeping Canadians safe as best as we can,” Trudeau added.

Can Air Canada survive?

Nearly every airline in the world is struggling financially. There’s no way around the pain. It costs millions of dollars per day to maintain a global fleet of aircraft. Airlines must pay for these expenses regardless of whether they fly passengers.

Air Canada notes that passenger traffic is down by 96% versus the year before. As you can imagine, this is racking up huge losses.

Over the last six months, the company lost $2.9 billion. This quarter, analysts expect another billion-dollar loss. On an annual basis, the company is likely generating at least $5 billion in cash burn. That’s concerning considering the total market cap for Air Canada is under $5 billion.

No business can sustain quarterly losses forever. The only antidote is a turnaround in the market or new financing to plug the hole.

So far, Air Canada has been able to secure new financing to stay afloat. With travel restrictions being extended yet again, the market may soon reach the end of its rope. Once that happens, the company could go under in a matter of months.

This is simply not the place you want to be invested right now. The bankruptcy risk is abnormally high, and even if conditions do tick up, there’s no guarantee of profit. The industry supply and demand balance is way too imbalanced.

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 Ryan Vanzo has no position in any stocks mentioned.

More on Coronavirus

rail train
Coronavirus

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Biotech stocks
Coronavirus

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »

grow dividends
Coronavirus

Goodfood Stock Likely to Double in 2022!

Goodfood (TSX:FOOD) stock has had a huge rise and fall in the last few years. But at $1.85 a share,…

Read more »

grow dividends
Coronavirus

Canfor Stock Pops 5% as Sales Climb 15% YOY

Canfor (TSX:CFP) stock remained positive about its future in the global lumber market after profits climb 15% year over year.

Read more »

edit Safety First illustration
Coronavirus

2 Crash-Proof TSX Stocks I’d Buy With $5,000

These two TSX stocks have proven they can handle this economic downturn and likely will continue to be safe far…

Read more »

TSX Today
Coronavirus

What to Watch on the TSX on Tuesday, April 26

Earnings continue to come out on the TSX today, including Air Canada (TSX:AC). Meanwhile, investors may want to continue watching…

Read more »

think thought consider
Coronavirus

Should Investors Buy Goodfood Stock Ahead of Earnings?

Goodfood (TSX:FOOD) stock dropped on Wednesday ahead of the company's earnings release. And it's unclear whether there will be anything…

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Coronavirus

Cargojet Stock Soars Higher, Is it Still a Buy?

Cargojet stock (TSX:CJT) jumped after its deal with DHL, but at today's prices is the airline company still a buy…

Read more »