3 Reasons Why I’m Not Buying Air Canada (TSX:AC) Yet

Despite some investors touting its potential, I’m not buying Air Canada (TSX:AC) just yet. Here are three reasons why you should hold off too.

| More on:
little girl in pilot costume playing and dreaming of flying over the sky

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Air Canada (TSX:AC) remains an intriguing discussion point among investors. On the one hand, pre-pandemic Air Canada was handily one of the best-performing stocks on the market. The airline had surged in the decade prior to the pandemic, establishing itself as one of the best-run airlines on the continent. Since the pandemic, some investors have shifted away from investing. Here are three reasons why I’m not buying Air Canada anytime soon.

Inoculations are slow, but Canada is even slower

When the pandemic first started, Canadians looked to the surging numbers in the U.S. with utter shock. We shut the border and locked down while parts of the U.S. remained open. Some even said that type of surge could not happen here.

Fast forward to today and parts of the country are now in their third lockdown. The border with the U.S. remains shut, even to the vaccinated that are looking to reconnect with families or trying to add some much-needed tourist revenue into provincial coffers.

Vaccinations are still progressing at a trickle, whereas the U.S. is now inoculating nearly 4 million people every day. To put that into context, that level of engagement could vaccinate all of Canada in under two weeks. The U.S. is not alone in this regard- the UK also ramped up vaccinations significantly.

In fact, some European countries are now planning to open their borders shortly to tourists that have been vaccinated. It’s a small step towards normalcy, but that’s what Air Canada needs to get on the path towards its pre-pandemic trajectory.

For that to happen, Canada needs to acknowledge the value of being vaccinated and open its borders to vaccinated cross-border and international traffic.

Delays will come even when we get back to normal

Even when we return to normal life (in whatever form that will be), there’s still the question of supply and demand. Air Canada has rightfully slashed its capacity during the pandemic, which will need to grow at some point. But that capacity is based on demand, which could take several months to fully mature before planes start flying near capacity.

Here’s another way of looking at it. People have been stuck at home for well over a year. We’ve been conditioned to maintain social distancing, and wear masks. Obviously, while COVID is still an issue, there’s a good reason for those measures. But what does that mean in terms of a comfort level for would-be passengers? Can we expect people to immediately want to squeeze into a metal tube with recycled air to be hurled through the sky for a few hours?

In short, we can expect a trickle of demand to steadily pick up over time. Unfortunately, this too is dependent on my first reason above.

Non-COVID problems persist

You may not remember it, but there are still non-COVID issues facing Air Canada that stem back to well before the pandemic. Remember the 737 Max fiasco? That had already grounded planes well before COVID-19 became an issue.

More recently, Air Canada announced this month that it would be completing an existing firm order for 40 737 Max jets. That order, which carries a price north of $5.8 billion was only possible thanks to the government investing in Air Canada.

While it is good to see the airline investing in growth, the government’s intervention is nothing short of a bailout. What’s more, is that this latest bailout comes with conditions. Specifically, Air Canada is to keep employment levels at those in place as of April 1. The airline will also begin honouring refund requests made for some flights. Specifically, those flights scheduled post-Feb 1 2020 where customers could not fly due to COVID.

Another point worth noting is that this bailout also means that the government is once again invested in the flag carrier.

I’m not buying Air Canada just yet

There’s no reason to doubt that the pandemic will end as people are finally being vaccinated. Markets and schools are reopening. But when it comes to Air Canada, that return to profitability and growth is still far off.

In other words, there are far better investments to consider right now. I’m not buying Air Canada just yet.

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 Demetris Afxentiou has no position in any of the stocks mentioned.

More on Coronavirus

Business success with growing, rising charts and businessman in background

1 Growth Stock Every Canadian Investor Should Consider Right Now

This growth stock saw shares pop 10% on June 20, as one analyst stated there is a significant opportunity to…

Read more »

Aircraft wing plane

Bombardier Stock Merge: What it Means for Investors

Bombardier (TSX:BBD.B) stock went through a reverse stock split on June 13, turning 25 shares into one in one swift…

Read more »

Aircraft wing plane

Air Canada (TSX:AC) Stock: Ready to Take Off?

While Air Canada is handling what it can control really well, there are many worsening macro headwinds that will likely…

Read more »

rail train

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Biotech stocks

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »

grow dividends

Goodfood Stock Likely to Double in 2022!

Goodfood (TSX:FOOD) stock has had a huge rise and fall in the last few years. But at $1.85 a share,…

Read more »

grow dividends

Canfor Stock Pops 5% as Sales Climb 15% YOY

Canfor (TSX:CFP) stock remained positive about its future in the global lumber market after profits climb 15% year over year.

Read more »

edit Safety First illustration

2 Crash-Proof TSX Stocks I’d Buy With $5,000

These two TSX stocks have proven they can handle this economic downturn and likely will continue to be safe far…

Read more »