Air Canada (TSX:AC) Stock: Up 100% or Bankrupt in 2021?

Air Canada (TSX:AC) stock has extreme upside, but also extreme downside. If you want to make a bunch of money this year, check this out.

| More on:
You Should Know This

Image source: Getty Images

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.

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.

Fool contributor Ryan Vanzo has no position in any stocks mentioned.

More on Coronavirus

Aircraft wing plane
Coronavirus

1 TSX Stock Down 60% That Could Bounce Back Stronger

Air Canada (TSX:AC) stock got severely beaten down in the March 2020 COVID crash. Here's why it's probably not going…

Read more »

A bull and bear face off.
Stocks for Beginners

Down 30% in 3 Months, Is AC Stock a Buy Today?

Air Canada stock (TSX:AC) climbed this year and is still up 10% in the last year, but down 30% in…

Read more »

Airport and plane
Stocks for Beginners

This Bargain Stock Is the Cheapest It’s Been in Years

This top stock still trades below $25 per share, despite much positive movement. A strong opportunity could be in the…

Read more »

Hands holding trophy cup on sky background
Stocks for Beginners

Here’s Why Shopify Stock Can Be a Long-term Winner

Shopify stock (TSX:SHOP) is still lightyears away from where it was at all-time highs, but those prices could be reached…

Read more »

Coworkers standing near a wall
Stocks for Beginners

Everyone Is Talking About This Stock: Is It a Good Long-term Option?

NFI stock (TSX:NFI) reported record earnings this week, with a huge backlog and production ramp up. So why did shares…

Read more »

stock market
Tech Stocks

A Bull Market Could Be Here: 3 Reasons to Buy WELL Stock

WELL stock (TSX:WELL) may have crashed since the lifting of pandemic restrictions, but after 18 record quarters, it's time to…

Read more »

Airport and plane
Stocks for Beginners

Afraid You Missed Your Chance With This High-Flying Stock? Think Again

Bombardier stock (TSX:BBD.B) continues to experience major demand for its business jets, which is why now is the time to…

Read more »

Coronavirus

Stocks With Stamina: 3 Plays That Stayed Healthy Even During COVID

COVID was a good litmus test to differentiate resilient stocks from the rest. These stocks might be viable options, even…

Read more »