Why Air Canada (TSX:AC) Stock Is Trading Close to Its Yearly Lows

AC stock has lost 26% in 2022. Its strong balance sheet could help it emerge stronger through difficult times.

| More on:
A airplane sits on a runway.

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

Running an airline business involves tremendous risk because they are highly sensitive to economic cycles. The economic backdrop is becoming increasingly difficult as new challenges like rising inflation arise one after the other. Global airlines are also tackling pandemic-related uncertainties, high jet fuel prices, and an impending recession. Canada’s top passenger airline Air Canada (TSX:AC) is no exception. The stock has fallen 26% so far in 2022 and does not look too well placed.

What’s next for Air Canada?

It seemed things were finally falling in place early this year. With travel restrictions waning, airlines saw encouraging demand that drove triple-digit revenue growth. However, seat sales soon turned downward as the war in Europe broke out. Unbending inflation and fast-rising interest rates notably weighed on consumer spending. Thus, like many airline peers, Air Canada is expected to see a delayed recovery as consumer discretionary spending is expected to dry up amid a probable recession.

Air Canada will report its Q2 2022 earnings on August 2. Apart from the financials, the management commentary and outlook will guide the stock going forward. Analysts expect it to report close to $4 billion in sales for the quarter that ended on June 30, 2022. That marks jaw-dropping growth of 368% year-over-year.

Even if it registers strong top-line growth, the flag carrier is expected to report a net loss in Q2. What would be interesting to watch is its cash burn trend. Air Canada has burnt billions of dollars since the pandemic amid the subdued demand but inevitable costs. However, if the revenues surge as analysts expect, AC might see its cash burn improve in the second quarter. Notably, in Q1 2022, Air Canada’s strict cost-cutting slashed the adjusted cost per available seat mile (CASM) to 21.8 cents versus 40.4 cents in Q1 2021, helping to narrow net losses.

Air Canada and a looming recession

Air Canada’s recovery largely depends on a recession and its severity. A more prolonged downturn will likely keep discretionary spending lower for longer, brewing serious trouble for the airline. However, a milder one will likely be taken care of by Air Canada’s relatively strong balance sheet. The global economy’s path will be clearer when the US releases its GDP data this Thursday.

Air Canada has total debt of $16.2 billion as of March 31, 2022. However, it has a strong liquidity position with $8.6 billion in cash and equivalents. A strong liquidity position will be like padding, giving it more flexibility to absorb short-term shocks. However, if the recession lasts longer and demand remains subdued, Air Canada will most likely be forced to bring more debt to its balance sheet.

Should you buy AC stock?

AC stock hit a 52-week low of $15.6 last month. With broad market uncertainties and more rate hikes on the cards, the stock could continue to trade weak. However, if you are a long-term investor, consider Air Canada’s prospects two, three, or five years down the line. Agreed that AC stock has been on a long-term downtrend since January 2020. But it will likely emerge stronger through difficult times and will outperform as macro challenges ebb.

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.

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

More on Top TSX Stocks

grow money, wealth build
Top TSX Stocks

Got $2,000? Here Are 3 Smart TSX Stocks to Buy Now

If you've got some cash that you're looking to invest now, here are three smart investment options on the TSX.

Read more »

A solar cell panel generates power in a country mountain landscape.
Top TSX Stocks

3 TSX Stocks You Can Hold for the Next 3 Decades

While the market faces significant headwinds, it's crucial to ensure that you can commit to the TSX stocks you're holding…

Read more »

Top TSX stocks to buy in August 2022
Top TSX Stocks

Top TSX Stocks to Buy in August 2022

Every month, we ask our freelance writer investors to share their best stock ideas with you. Here’s what they said.…

Read more »

A worker uses a double monitor computer screen in an office.
Top TSX Stocks

TD Bank vs Suncor Energy – Which Value Stock is Best?

The Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a great dividend stock. Could Suncor Energy (TSX:SU)(NYSE:SU) be even better?

Read more »

shopping online, e-commerce
Top TSX Stocks

Shopify (TSX:SHOP) is Down by Over 70%: Can it Recover?

The blue-eyed darling of the Canadian tech sector had a stellar performance since going public until 2021 but has since…

Read more »

Arrowings ascending on a chalkboard
Top TSX Stocks

2 Growth Stocks to Boost Your Portfolio

Some of the best long-term investments for your portfolio are hard to spot. Here are two growth stocks to boost…

Read more »

crypto, chart, stocks
Top TSX Stocks

TFSA Cash: Turn a $6000 Annual Contribution to $140,000 by 2032

These Canadian stocks have strong growth potential and can multiply your TFSA cash significantly over the next decade.

Read more »

An airplane on a runway
Top TSX Stocks

It’s Time for TFSA Investors to Get Greedy With These 2 Stocks

CAE (TSX:CAE)(NYSE:CAE) and Air Canada (TSX:AC) are great stocks for TFSA investors to consider buying while they're down and out.

Read more »