It has been a bit late at coming, but the federal government has started injecting money into the airline industry to stabilize it. Some speculate that the government didn’t want a repeat of the first wave of the pandemic, which practically ran the country’s airline to the ground if the third wave gained momentum. With that perspective, the aid is just in time.
The first target of this government aid for the sector was naturally the premier airline, Air Canada, in which the government is now the fourth-largest shareholder. It gave enough funds to the airline to issue refunds and restore flier confidence.
And even though Air Canada left Transat (TSX:TRZ) to dry by pulling out of the take-over deal, the government didn’t.
$700 million bailout
Transat recently secured a $700 million loan from Ottawa. The airline was practically on its last “wings,” especially with Air Canada pulling out and no major buyers on the horizon. It was suffering from the same loss of operational activity that other airlines are suffering from, with a weaker financial base. But now, after securing a loan that’s about 3.8 times its total market valuation and more than half of its total debt, Transat is in much better condition.
The loan is issued under the Large Employer Emergency Financing Facility, and it comes with about 6% interest if the airline uses all of it. But Transat declared that it would only use this line of credit on an as-needed basis, which is understandable because if it runs through this amount without gaining a solid footing, it’s is highly unlikely to get another aid package.
The loan is expected to help Transat out in two significant avenues, operations and refunds. The airline is suffering monthly losses of about $30 million. Up until the operational levels are high enough to sustain the company (financially), the loan will be a lifeline for the company. About $310 million from the total sum might be diverted towards refunds.
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The stock price climbed over 5% as soon as the news broke. We have yet to see how far this financial backing will push the company’s valuation, but if the stock is going for a powerful rebound, now would be an amazing time to strike the iron.
While Transat doesn’t have the growth consistency of Air Canada, the stock did grow by about 117% in the five years preceding the pandemic crash. Currently, it’s 70% down from its pre-pandemic value, and if the financial boost was all it needed to start moving towards that price mark, the stock could more than double your money.
Transat will keep suffering the effects of the pandemic for a long time, and the $700 million will be a financial noose if the company doesn’t start generating enough cash soon from its operational activities to both meet its expenses and start paying off its debt, Transat will be in trouble. How well the company does in the future will depend upon how effectively it uses this financial leverage to its recovery.
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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 Adam Othman has no position in any of the stocks mentioned.