If you owned Air Canada (TSX:AC) shares in the past month, you’re likely very pleased. They’ve risen 30% in just 30 days.
For many, the rise makes sense. We’re vaccinating the world rapidly, and pent-up demand for air travel will fuel summer sales. Others are more skeptical. We may be years away from a full rebound in passenger traffic.
Why did shares pop recently? Can you still profit?
Know these numbers now
Every business must generate profits in order to stay in business long term. The market will only subsidize losses for so long. There are rare companies like Amazon that investors are willing to back for decades without accounting profits, but everyone knows that breakneck growth rates more than compensate.
With Air Canada, you have neither high growth rates nor underlying profits. Last year, the company lost nearly $1 billion every 90 days. While that’s not a sustainable business model, the company plugged the gap by selling more debt and issuing more shares. The grand bargain with the market was reached: investors will subsidize losses as long as there’s light at the end of the tunnel.
Even after a difficult year, Air Canada remains in a strong financial position.
“We ended the year with $8 billion of unrestricted liquidity,” said company CEO Calvin Rovinescu last month. Just don’t think we’re out of the woods yet.
In the fourth quarter of 2020, net cash burn of $1.4 billion or approximately $15 million per day on average was in line with our expectations,” concluded Rovinescu. That number was in line with expectations, but it still paints an ugly picture.
Looking at remaining liquidity, the airline may have only six quarters of operational flexibility left. The clock is ticking.
Can you profit with Air Canada stock?
Betting on airlines right now is difficult, but the potential for profit is very high. If Air Canada stock returned to its pre-pandemic levels, there would be nearly 100% in upside.
What are the odds that AC stock surges higher yet again? Recent conditions need to not only persist, but improve.
Consider the last 30 days. We had positive vaccine news from around the world. Passenger traffic is rebounding strongly from historical lows. It looks like we’re in the midst of a strong recovery for air travel.
The only question left is this: Will conditions continue to improve? This question is stumping even the most expert investors, like Warren Buffett, who refuses to jump back into airlines given the extreme uncertainty.
“The world has changed for the airlines. And I don’t know how it’s changed and I hope it corrects itself in a reasonably prompt way,” he told CNBC after selling his airline stakes. “I don’t know if Americans have now changed their habits or will change their habits because of the extended period.”
It’s not just Americans. The market is uncertain what the world’s flying habits will be post-pandemic.
This is essentially the bet. Will sales spike higher than ever before due to pent-up demand? Or, will they remain depressed for years, forcing airlines to chase fewer passengers with the same supply of planes?
Your answer to this question will dictate your next investing move.
