After almost eight months of international travel restrictions and growing anger of passengers, the Canadian government started preparing a bailout package for the airline industry. Canada’s biggest airline, Air Canada (TSX:AC), will be the key beneficiary of the bailout. AC stock soared 25% last week when CEO Calin Rovinescu stated that it is in talks with the Canadian government about financial aid. Another reason for the jump was a potential COVID-19 vaccine.
The Justin Trudeau government is under tremendous pressure to save the airline industry because
- All other governments have established a bailout package specific to the airline industry;
- AC has millions of dollars of ticket money that it has not refunded in cash; and
- The government wants to offer people competitive airlines when the pandemic is over, but AC has to survive till then.
What will a Canada airline bailout look like?
The U.S. government bailed out the airline industry by providing $25 billion in payroll support in the form of grants, low-interest loans, and equity warrants. The Canadian government provided indirect support of $1 billion through the Canada Emergency Wage Subsidy (CEWS), which it has extended till June 2021. But the subsidy is generic and available to everyone. Despite this support, AC is burning $9 million in cash daily.
What more can the government offer to save the airline industry? The first thing is that airlines are having difficulty raising capital at an attractive price. The $6 billion in additional liquidity AC raised cost it a 9% interest rate. Like the U.S., the Canadian government could provide low-interest loans through the Business Development Bank of Canada or the Export Development Corporation.
However, these loans will probably come with conditions. For example, the government might ask airlines to restart suspended routes. AC has already suspended 30 domestic routes and closed eight regional stations. It has even identified another 95 domestic, U.S. transborder, and international route suspensions and nine station closures to reduce cash burn. But it paused these additional suspensions while talks of government financial aid progress.
Another thing the Canadian government can do is mandate airports to reduce their fees. In the past few months, several airports, such as Toronto’s Pearson and Winnipeg’s Airports Authority, have raised their fees by 20-50%.
As a last resort, the government could nationalize AC. Intergovernmental Affairs Minister Dominic Leblanc has not ruled out this possibility.
What does a potential bailout mean to Air Canada shareholders?
Now that you’ve looked at the bailout options, none of them caters to AC shareholders. A bailout will help AC from going bankrupt and the stock from falling to $0. The government’s low-interest loans will help AC reduce its debt burden as high-interest loans will plague its profits for years to come. AC stock will begin to rally when it returns to profits, and the bailout will reduce the time to profit. Hence, a bailout will benefit AC shareholders indirectly. However, if the government decides to take a stake in AC, it will dilute shareholders’ interest and negatively impact the stock in the long term.
How to profit from Air Canada stock
Since the pandemic, AC stock has been hovering around the $14-$20 price range. The stock responds according to the new sentiment, and traders use this price range as a playing field to make money. For instance, the stock fell below $15 in late October when U.S. airlines reported billions of dollars in losses in their third-quarter earnings. I’d warned readers to stay away from AC in October for this very reason.
AC stock jumped 25% last week, as the government hinted at bailout discussions, as Pfizer and BioNTech announced progress on the COVID-19 vaccine, and as the airline contained losses. Even this news combined couldn’t help AC stock break the $20 barrier. The stock will only cross this border when investors see profits and not just damage control for AC.
For now, I would suggest you sell AC stock while it still hovers close to $20. If the vaccine doesn’t work, or the bailout terms are not conducive, AC stock could fall back to $14 or $15. That will be your buy point. This seesaw can convert $100 to $130.
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Fool contributor Puja Tayal has no position in any of the stocks mentioned.