3 Reasons I am Bullish on Air Canada (TSX:AC) Stock

Air Canada (TSX:AC) stock continued to decline throughout this week, despite recovering earnings. Is the stock still on the road to $40? 

| More on:
An airplace on a runway

Image source: Getty Images.

Air Canada (TSX:AC) stock keeps falling. Are you losing your patience? Should you sell the stock and book losses? All these thoughts might be boggling your mind, as you see your portfolio turn red. It is all in the numbers, and right now, they are not in Air Canada’s favour. But I am still bullish on the stock and expect it to touch or come close to $40. 

Riding the stock market inefficiencies 

Famous investor Peter Lynch said, “There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.” But what if fundamentals are improving? In an efficient market, the stock price corrects itself to the company’s earnings potential in the long term. But the markets are inefficient in the short term. They tend to ignore the fundamentals. These inefficiencies are what hedge funds take advantage of. 

Air Canada’s latest earnings report hints at recovery and cash inflow. But the stock market inefficiencies have not priced these positives. The overall market is running a bearish tone, as the government has slashed the Canada Recovery Benefit (CRB). 

What could drive Air Canada stock to $40? 

Air Canada is the country’s largest international airline that connects Canada to the world. Its main source of revenue is tickets, and its main expense is buying and maintaining planes and fuel expenses. When any of these three elements are imbalanced, the airline fundamentals take a hit.

Air Canada’s decelerating cash burn 

During the pandemic, all three elements fell, as the Justin Trudeau government closed international borders for 15 months. There wasn’t any cash inflow, and there was significant cash outflow, as it had to maintain planes. The airline’s priority was to reduce this cash burn. 

AC achieved it in the second quarter, halving its daily cash burn from $15-$17 million to $8 million. Around $5 million of this cash burn vanished due to cash inflow from advance ticket sales and reduced costs and capital spending. 

The government will allow fully vaccinated U.S. citizens to enter Canada for non-essential travel on August 9. And on September 7, the government will open the borders to other foreigners. Banking on these dates, AC expects its average daily cash burn to reduce to $3-$5 million in the third quarter. That’s the first positive. 

Recovery in the airline capacity 

In the second quarter, AC resumed service to 50 Canadian cities and communities. It expects to gradually resume services to several regions in the United States and the Atlantic this summer. It is already seeing pent-up demand from Canadian leisure travellers to U.S. destinations. By 2022, AC expects demand to resume to 2019 levels in the U.S. and Atlantic. However, things remain uncertain in the Pacific, as vaccination is happening at different paces across the world. 

In the third quarter of 2021, AC expects to return to 35% of its third quarter of 2019 operating capacity. This is more than double the second-quarter capacity recovery of 15% of the 2019 capacity. And for the record, the airline has reduced its overall capacity by retiring 33% of its fleet. This speedy recovery in capacity will bring in more cash flow and help it become profitable in a few years. That’s another positive. 

Air Canada’s debt restructuring

The pandemic cash burn pushed Air Canada into enormous debt. It had a net debt of $7 billion at the end of the second quarter. The second priority for AC after slowing cash burn is reducing debt, and the airline has already started work on it. 

AC is restructuring debt to reduce the interest burden. It has $4 billion in low-cost government bailout loans, but it is trying not to use them, as that will give the government a 4% equity stake. The government already has a 6% equity stake in the airline from the $500 million equity financing. AC will evaluate the recovery situation. If the recovery goes as planned, it might opt out of the bailout loans. 

Such a decision will instill confidence in investors, and drive AC stock on the path of recovery. These three positives make me bullish on Air Canada’s recovery to $40.  

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 mentionedThe Motley Fool has no position in any of the stocks mentioned.

More on Coronavirus

A airplane sits on a runway.

3 Things to Know About Air Canada Stock Before You Buy

Air Canada stock continues to hover below $20 despite the sharp rise in travel demand seen across the industry. What's…

Read more »

tech and analysis
Stocks for Beginners

If You Invested $1,000 in WELL Health in 2019, Here is What It’s Worth Now

WELL stock (TSX:WELL) has fallen pretty dramatically from all-time highs, but what if you bought just before the rise? Should…

Read more »

Hand arranging wood block stacking as step stair with arrow up.

2 Pandemic Stocks That Are Still Rising, and 1 Offering a Major Deal

There are some pandemic stocks that crashed and burned, while others have made a massive comeback. And this one stock…

Read more »

Dad and son having fun outdoor. Healthy living concept
Dividend Stocks

1 Growth Stock Down 15.8% to Buy Right Now

A growth stock is well-positioned to resume its upward momentum in 2024 following its strong financial results and business momentum.

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Stocks for Beginners

3 Things About Couche-Tard Stock Every Smart Investor Knows

Couche-tard stock (TSX:ATD) may be up 30% this year, but look at the leadership and history of the stock to…

Read more »

Plane on runway, aircraft

Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

Read more »

Senior housing
Stocks for Beginners

Home Improvement Stocks Are Set to Fall (When They Do, Buy These Like Crazy!)

Home improvement stocks are due to drop further in the coming months. But with solid underpinnings for the sector, it…

Read more »

An airplane on a runway

Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

Read more »