In November, Air Canada (TSX:AC) stock took-off on the COVID-19 vaccine runway, rising 80% to the height of $27. But it couldn’t handle the air pressure at that height. The rising COVID-19 cases and uncertainty around the government bailout overheated its growth engines. The stock is now heading toward a crash. Since December 4, it has declined 14% to $23.6. Investors brace for impact as AC comes closer to the land near $20.
The bull case of Air Canada comes with contingencies
AC stock surged as much as 80% in November as the news around the COVID-19 vaccine raised investors’ hope that Canada’s five-layer travel restriction will end. But this bull case is contingent on the successful rollout of the vaccine.
The vaccine rollout could slow if there are any adverse reactions to the vaccine, people refuse to take the vaccine, or a new mutation of the COVID-19 virus makes the vaccine ineffective. So while the vaccine does show a light at the end of the pandemic tunnel, it will take months to get a clear picture of the vaccine’s impact on AC.
Another bull on which AC rode was the bailout talks with the Canadian government. AC asked for an airline-specific bailout in the form of grants or low-interest, long-term loans. But the government kept a bailout condition that AC refunds canceled ticket money and resume services on suspended routes. These talks are heading nowhere.
AC is retaliating by suspending more routes in the wake of low travel demand. It has also announced a share offering, hoping to raise $850 million in equity capital. The bailout tussle is only making matters worse. A sizeable and investor-friendly bailout could pull AC stock up, but it is difficult to say when.
The last bull on which AC stock surged was that many cities are opening up to the idea of easing the 14-day quarantine based on COVID-19 test results. But the surging cases are only adding to the uncertainty. These contingencies in the bulls won’t let AC stock fly at the $27 altitude.
Air Canada’s bears once again overpower the bulls
While AC bulls are facing a lot of turbulence, the long-term bears are pulling the stock down. When Warren Buffett exited airline stocks, he said the world has changed for airlines. And he was right: Business travel, from where airlines earn more than half of their revenue, is unlikely to return for another decade. In an interview, Buffett’s close friend and the co-founder of Microsoft Bill Gates estimated that over 50% of business travel will vanish in the post-pandemic world.
Business travel proves to be very expensive for businesses both in terms of cost and time. In the post-pandemic world, companies are looking to optimize their expenses. They would cut business travel expenses if they can do the work through teleconferencing. This way, businesses can increase employee productivity too.
AC knows that business travel is no longer the golden goose. Hence, it is looking to monetize on leisure travel and cargo. It is acquiring international tour operator Transat A.T. for $190 million even when the airline’s cash is drying up. Moreover, AC is looking to tap the global cargo commercial opportunity by converting some of its retired Boeing 767-300ER aircraft to freighters.
While AC is making efforts to put its planes in the sky, the rising oil prices are putting pressure on its expenses. During the pandemic, AC managed to contain its losses at $3.5 billion as the oil price fell below $40/barrel. Fuel alone accounts for 20% of its operating expenses.
The oil demand is recovering, and the oil price has surged to $48/barrel. The oil price is rising faster than air travel demand, which spells more losses for AC in the post-pandemic economy.
AC’s bears are directly hurting its fundamentals and could pull down its stock price to $20. However, the bulls will give significant jumps on a bump. You can make short-term gains from these bumps. Hop on to the stock when it dips to $20, and sell when it reaches the $26 altitude.
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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.
Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Microsoft.