On February 12, the shares of Air Canada (TSX:AC) rallied by over 5%, despite its extremely disappointing fourth-quarter and full-year 2020 results. With this, the stock ended the second consecutive week on a positive note. After falling in the previous couple of months, its stock has recovered by 11.5% on a month-to-date basis.
Before we discuss the impact of its Q4 results on its stock, let’s take a closer look at some key highlights from its latest earnings event.
Air Canada’s Q4 earnings highlights
In the fourth quarter, Air Canada reported a much wider than expected adjusted net losses of $1.2 billion. Analysts were expecting its Q4 losses to be around $929 million. With this, the largest Canadian airline ended the full year 2020 by losing $4.2 billion compared to the consensus estimate of $3.9 billion.
To give you an idea about the seriousness of the issue, Air Canada’s 2020 losses were significantly more than its adjusted net profits in the previous four years combined. It was the company’s worst annual loss in nearly two decades. In the December 2020 quarter, the airline’s revenue stood at $827 million — also missing analysts’ consensus estimates of $885 million.
The impact of the COVID-19 crisis
In my recent articles, I’ve discussed and warned about how the COVID-19 crisis has ruined Air Canada’s years of financial turnaround efforts. The company’s president and CEO Calin Rovinescu termed the negative impact of the pandemic on the airline’s business as “catastrophic,” leading to “the bleakest year in the history of commercial aviation.” He highlighted how Air Canada saw an over 73% decline in passengers carried due to the government-imposed travel restrictions in 2020.
Air Canada’s management remains worried about the new coronavirus variants in different parts of the world. While the management continues to implement its COVID-19 mitigation and recovery plan, I don’t expect the airline to see a dramatic financial and operational recovery in 2021.
The only hope in 2021
The airline has cut its workforce by 20,000 employees amid the pandemic. But these cost-cutting efforts might be enough to give Air Canada much-needed financial stability in the near term. That’s why the company’s stability — if not survival — at the moment depends on timely financial support from the government. While commenting on the possibility of the government aid, Rovinescu said he’s “very encouraged by the constructive nature of discussions” with the government over the last few weeks.
On the one hand. he acknowledged that “there is no assurance at this stage.” On the other, the CEO expressed optimism about the possibility of a relief package, saying he’s “more optimistic on this front for the first time.”
The expectations of government aid could be the main reason for the Air Canada stock rally on Friday, despite its extremely disappointing Q4 results. I mentioned the possibility of such a short-term rally in my recent article last week.
Investors should remember that the Canadian government hasn’t yet promised financial support to the airline industry. And even if the industry gets some government aid, Air Canada’s future will still depend on how big the relief package is and how the airline utilizes it. Without a timely and significant government financial support package, Air Canada’s recent gains might not sustain for long. So, I wouldn’t buy Air Canada stock at the moment — especially when the ongoing market rally has several other, far better investment opportunities.