Air Canada (TSX:AC) stock is a mystery. Some analysts think shares will double in value this year. Others believe the stock will go to $0?
What’s the truth?
Know these facts now
Every business runs on cash. It’s irreplaceable. For airlines, 2021 was a tough year. Air Canada lost nearly $1 billion every 90 days. That’s unsustainable for any business.
How did the company survive while hemorrhaging millions of dollars every day? It took on a bunch of debt and sold stock at historically low prices. This isn’t a recipe for long-term success, but it was a necessary emergency move to ensure short-term survival.
Now that the worst of the coronavirus seems to be behind us, investors are betting that the company can return to normal. Pre-pandemic, Air Canada was posting its biggest profits in history. If conditions normalize, shares could easily double, back to their 2019 highs. But if losses continue, bankruptcy is a near certainty.
Let’s see what the future holds.
Where will Air Canada stock go?
The biggest thing to monitor for airline stocks is the relationship between plane supply and passenger demand. These are the indicators that Warren Buffett pays attention to. They’re ultimately what drove him to buy millions of airline shares in 2014. They’re also what forced him to sell his positions in 2020.
What’s the relationship between plane supply and passenger demand today? Not great. Planes don’t disappear overnight, even though passenger traffic can. That means we have enough planes for a 2019 world, but only enough flyers to fill somewhere between 20% to 30% of those seats.
If you know anything about airlines, you understand that sustainable profits are only generated when capacity utilization is above 80%, sometimes above 90%.
If passenger traffic surges this year, losses could cease quickly, taking bankruptcy risk off the table. Then, Air Canada can bide its time, consolidate the market, and come back stronger than ever. But if passenger traffic plateaus, or if it grows just a meager amount, insolvency chatter will pick up yet again.
How to bet your money now
There’s no doubt that Air Canada is a risky stock. I would wager share won’t be anywhere near where they are today one year from now. Instead, they’ll be significantly higher or significantly lower. Which future is realized depends on the relationship between plane supply and passenger demand. Those are the only factors that matter for airline profitability.
Which future should you bet on? That depends a lot on where you think the coronavirus is headed.
Think cases are on a permanent decline? Think vaccinations will cause air travel to normalize this year? I’d be bullish, anticipating up to 100% upside in Air Canada stock.
Think we’re in for yet another surge? Think the vaccination effort will prove successful, but that air travel demand will still be impaired for several years to come? I’d be bearish, projecting sizable risk for bankruptcy.
There’s a lot of money to be made with Air Canada stock right now, but you need to hold fast to your convictions and ride out volatility.
