Air Canada (TSX:AC): A Winter Investment for Sunny Gains

Few businesses have suffered as much from the pandemic as airlines and hospitality, but the recovery is well underway, and we might see a lot of vitality by the next holiday season.

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According to an International Air Transport Association estimate, the airline industry around the globe is expected to suffer a revenue loss of around US$200 billion between 2020 and 2021. The losses are significantly higher if we take the entire aviation industry into account (about US$370 billion).

Last year was one of the worst years for airline businesses, as many burned through millions of dollars of cash per day, even with a fraction of the total fleet online.

The losses tapered off in 2021 when vaccinations and safety measures adopted by countries prevented major outbreaks, and third and fourth waves in many countries were not nearly as deadly as the first and second ones.

Still, many projections — both from the airlines and from regulatory bodies — put the recovery to the pre-pandemic numbers somewhere beyond 2022. Still, the financial and operation recovery might not necessarily harmonize with the stock’s recovery, and a positive outlook of the industry might be enough to trigger a rapid growth toward pre-pandemic levels.

That notion makes Air Canada (TSX:AC) a promising enough buy.

The airline

Air Canada is the country’s premier airline and the largest domestic and international air travel provider. In 2019, the company operated (on average) about 1,500 flights daily and connected 217 direct destinations. The latter number didn’t fall much in 2020 when the pandemic hit, and the company, by the end of 2020, was still flying to about 192 direct destinations in six continents.

The number of average flights, however, fell quite drastically. By the end of 2020, the number averaged out to about 544 daily scheduled flights, which is a little over one-third of its pre-pandemic capacity. The fleet of 188 aircraft was also reduced to 169, and that’s just the number the company owns and maintains. Many Air Canada aircraft were grounded during the pandemic, and it’s still only operating a fraction of its original fleet.

The domestic business suffered just as aggressively, and the airline even closed off certain destinations. But the situation is expected to change, and one litmus test would be an uptake in summer travel.

The stock

The once highly-coveted growth stock is still trading at half of its pre-pandemic valuation. The airline didn’t even break through the $30 a share mark once during 2021 (so far), and even if it does, the history suggests that it will get trapped under the next valuation ceiling, that is, $40 for the year 2022.

That’s unless the demand for travel starts rising up from the beginning of the year and the company sees its first profitable quarter in 2022. Either of those things (or ideally, a combination of the two) might be enough to push the stock high. And if you buy now and the stock manages to reach its pre-pandemic peak of $50 a share, you would be doubling your money.

Foolish takeaway

Even in its diluted condition, Air Canada is not exactly an undervalued stock. Due to the brutal financial beating it took, the stock is actually quite aggressively overvalued. And even though it’s all but certain that the stock will reach its pre-pandemic levels again, the timeline is uncertain. And if you believe the 2022 summer travel is the trigger, consider adding it to your portfolio now.

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

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