As the COVID-19 pandemic crisis continues, Air Canada (TSX:AC) remains in limbo. As investors, we want to decide whether to buy Air Canada stock. We can’t be in limbo. We need to make a buy or sell decision. The volatility in Air Canada stock price is extreme. It illustrates the rampant uncertainty surrounding the airliner. This uncertainty is obviously reflected in the stock price.
Here are three company quotes that you need to hear.
“Cautiously optimistic on vaccine”
The three COVID vaccines that we have heard about have 90% plus efficacy rates. This is certainly good news, but the logistics behind distributing it are complicated. And it will take time to actually get people vaccinated. These are big constraints.
In contrast, let’s look at how the stock market has behaved. It looks like it is taking an unrealistically optimistic view that everything will go back to normal in a heartbeat. Air Canada stock is also flying high. It’s up 60% so far in November. Yet everything the company is saying is not so optimistic.
Air Canada stock is trading at levels that it was trading at in late 2018. This was when Air Canada was still expanding its fleet and adding routes. Demand was strong, and Air Canada was capitalizing on this demand big time. In 2018, revenue totaled $18 billion, or roughly $5 billion per quarter. So far in 2020, Air Canada pulled in revenue of $5 billion in the first three quarters. Air Canada continues to see revenue declines in the 90% range.
“Three- to five-year time frame to get back to 2019 levels”
Since the pandemic hit, Air Canada has reduced its fleet and its workforce. Capacity was reduced by over 80% and 20,000 jobs were eliminated. And the pain is not over yet. There are even more routes that need to cancelled and/or suspended for Air Canada to survive. These were and are necessary steps to ensure the airliner’s survival. This was all precipitated by a more than 90% drop in passenger traffic.
Needless to say, Air Canada will have a significantly smaller footprint for at least a few years. This kind of carnage does not just flip back so easily.
“Liked the Air Transat deal before COVID; continue to like it after COVID”
Air Canada is bleeding money, and the airline industry is a shell of what it once was. Furthermore, visibility and predictability are pretty much non-existent.
But it’s good to know that some things at least haven’t changed. Air Canada still likes the Air Transat combination. The company still wants this acquisition to happen because it still makes sense. Of course, the purchase price is lower now — 72% lower than the initial purchase price. This is a good reflection of the times we are in. But what does this mean if we return to normal in a few years? Well, it means that this will be thought of as one of the best acquisitions in the crisis.
A great business model that is concerned with long-term value acquires at rock-bottom valuations. As we know, the only time we really get to these valuations are in times of crisis. It is only the brave and the financially well managed that can be buyers in these times. This move by Air Canada speaks volumes. It says that Air Canada is thinking long term. The best decisions are long-term thinking.
Of course, buying an airliner these days is not a popular decision. In the short term, it can prove to be very dangerous. But Air Canada has a strong balance sheet and plenty of liquidity. The Air Transat acquisition will aid in Air Canada’s eventual recovery after the vaccine does its magic. It will enable the airliner to capture more of the leisure air travel market as well as other revenue synergies.
Motley Fool: The bottom line
Air Canada stock will remain volatile, as the market grapples with a very volatile situation. For now, the coronavirus continues to hamper air travel. But with a vaccine being imminent, investors are starting to imagine a return to normalcy. The timing of it all is the big uncertainty.
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Fool contributor Karen Thomas has no position in any of the stocks mentioned.