Have you ever tried starting the engine of a car that is parked for over a year? You have to heat the engine, turn the ignition several times, and give the car a push to start the engine. That is what’s happening with Air Canada (TSX:AC).
The hiccups in Air Canada’s recovery
Air Canada is firing the aircraft engine after 16 months of staying in the hangar. It is resuming the routes it closed during the pandemic. It will see many hiccups in restarting the operations, and these hiccups will reflect a roller-coaster stock graph. But there is no need to panic. Once the engine heats and the fuel starts burning, the airline stock will ride the recovery rally.
Air Canada stock has already surged 17% year to date and has the potential to surge another 54% and reach $40 by June 2022. What makes me sure of that is the pent-up air travel demand. People are dying to go on a holiday after staying home for 16 months. American airports have already started seeing pre-pandemic level traffic. This pent-up demand could bring AC stock close to $40 but not to the pre-pandemic level of $50.
One stock with a better recovery potential than Air Canada
The air travel demand that I am talking about is coming from leisure travel. More than Air Canada, the international tour operator Transat (TSX:TRZ) will benefit from this pent-up demand. Before the pandemic, Transat was in a deal to get acquired by Air Canada for over $500 million. But the pandemic changed it all. Transat lost 96% of its revenue and drowned it in debt. It needed $500 million funding to repay the money it had collected as advanced payments from customers.
When travellers couldn’t go anywhere, Transat had to return the money. When the AC deal was terminated in April because of the European regulator’s unwillingness, Transat considered an acquisition offer from Pierre Karl Péladeau, only to cancel it later.
Transat on the road to recovery
Patience paid off, as the Canadian government granted Transat a $700 million bailout. The tour operator is now restructuring to resume operations on July 30. It has a new CEO Annick Guérard (previously Transat’s chief operations officer), and she has set up a three-step recovery plan from 2021 to 2026 and beyond.
The most pressing issue at hand is to streamline business and reduce cash burn to stabilize things. Transat will spend 2021 and 2022 doing just that by transforming the fleet, refinancing debt, and building customers. Guérard aims to make Transat profitable again by 2026. The next 12 months are crucial for the tour operator, and it can use the pent-up travel demand to its advantage.
Transat stock has already surged 40% since the bailout and has the potential to surge further in the next 12 months.
The Delta variant risk haunts the airline sector
But Transat and AC face the risk of the Delta coronavirus variant. India and 80 other countries are grappling with this variant and re-imposing lockdowns. This variant is transmitting at a higher rate in the non-vaccinated population. Even AC has not resumed flights to India as a precautionary measure. Transat has enough liquidity to withstand the threat of a fourth wave.
The reward of another 50% growth compensates for the risk of Delta variant. Moreover, the bailout has limited Transat’s downside risk to $4.5, representing a 30% downside. Trading at $6.42, you can spare $200 on this speculative stock.
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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.