Air Canada (TSX:AC) closed what it calls the bleakest year in its history after reporting earnings for 2020. The flag carrier reported a $4.65 billion loss for the year against a profit of $1.48 billion in 2019. It was no surprise that the airline reported such a big loss when a large portion of its fleet was grounded. While the results seem a mixed bag for investors, there are some set of numbers they might not like.
Accelerated cash burn
Air Canada’s cash burn accelerated in the fourth quarter of 2020. During Q4, it burned $15 million per day compared to $9 million in Q3 2020. Air Canada has done a tremendous job by cutting expenses to save cash. However, the higher cash burn could jeopardize the stock’s rally.
Importantly, Air Canada has a strong liquidity position, even after its faster cash burn in Q4. It might have to seek additional cash-retention opportunities if it wants to last longer in the crisis.
When the vaccine was launched last year, it seemed that the year 2021 would certainly bring some good news for Air Canada. However, that day still seems far for now. Air Canada will continue to operate with lower capacity in Q1 2021.
It revised lower and announced it would reduce capacity by 85% for the first quarter of 2021 compared to Q1 2020. So, contrary to investor expectations, Air Canada might continue with losses and a similar revenue dent in Q1 2021 as last year. The mutating virus has been substantially damaging for AC and has delayed its recovery.
On the bright side, Air Canada expects the government to lend a hand amid the country’s stringent travel restrictions. It’s been months now that the government and Canadian airline companies are discussing the bailout package terms.
Lower capital spending
While investors might have expected an aggressive comeback from AC, its outlook actually seems a tad downbeat for the post-pandemic world. It has lowered planned capital expenditure by $3 billion for the next three years. Perhaps this is only sensical to sustain itself longer in this particular environment instead of deploying capital for growth.
Amid these gloomy numbers, there are also factors for investors to cheer about. The government last week approved Air Canada’s long-pending Transat A.T. acquisition. Air Canada seized this holiday specialist at a huge bargain amid the pandemic. The country’s biggest airline will likely reap significant benefits of the deal in the post-pandemic world.
Air Canada stock rallied more than 5% on Friday on its Q4 numbers. The rally came predominantly due to its government aid hopes and not because of the numbers. The stock could soar higher if we see the federal support anytime soon.
As earlier stated, the recovery is taking longer due to mutating viruses and slower vaccinations. Air Canada’s strong balance sheet, operational efficiency, and leading market share should fuel an industry-leading recovery. However, long-term investors might have to wait longer than expected.