Air Canada Stock Could Keep Trading Weak as Challenges Mount

Should you buy AC stock?

| More on:
Airport and plane

Image source: Getty Images

Many Canadian stocks breached their pre-pandemic highs this year amid re-openings. However, shares of Air Canada (TSX:AC), the country’s biggest passenger airline, are still trading way below those levels. It’s been a long time that Air Canada investors have been stuck with average or negative returns.

Some analysts seem quite hopeful of the massive recovery of the flag carrier due to surging demand. However, challenges seem to be too daunting for now, which could hinder its growth going forward.

Record-high inflation and impending recession

Airline stocks are highly susceptible to consumer discretionary spending. During high inflation periods, consumers tend to lower their discretionary spending. This could hold up the pent-up demand trends that we are currently seeing and hamper airline companies’ top line in the next few quarters. Plus, insanely high energy prices in Europe and a recession in the U.S. could hit disposable household incomes — a worrying development for airline investors.

Global airline companies have not seen a profound impact on their revenues so far, despite daunting inflation. However, higher inflation for longer should concern them in the short to medium term.

Air Canada saw its revenues jump to $4 billion during the second quarter (Q2) of 2022 — a massive 376% surge compared to Q2 2021. It has been seeing triple-digit revenue growth since the last four quarters. But it continues to burn substantial cash and report losses. It burned $481 million and reported $386 million in a net loss in Q2 2022.

High oil prices

Air Canada’s operating expenses in Q2 soared to $4.2 billion from $1.97 billion in the same quarter last year. The surge was mainly driven by a 116% rise in jet fuel prices. Fuel prices form some of the major cost components for airlines. Air Canada spends almost 35% of its revenues on fuel expenses. So, oil prices once again breaching triple-digit levels could mar Air Canada’s profitability.

So, although demand is there, Air Canada’s bottom line will likely see unceasing pressure for the next few quarters.

It seemed like things were finally falling in place for Air Canada investors with the end of pandemic-related restrictions. However, stable profitability still seems like a distant dream. And now, with economic uncertainties, the recovery appears all the more unclear.

Air Canada strengths

Air Canada had total debt of $16.6 billion as of June 30, 2022. Note that it has a strong liquidity position with $8.7 billion in cash and cash equivalents. A robust liquidity balance makes it stand relatively strong in challenging environments and offers flexibility to absorb short-term shocks.

However, a strong balance sheet with unstable profitability will be unable to create meaningful shareholder returns. So, a longer, more severe recession could significantly delay Air Canada’s recovery.

What’s next for AC stock?

AC stock plunged below $10 apiece during the pandemic crash. Air Canada is a fundamentally sound company with a leading market share and a strong balance sheet. However, with aggressive rate hikes and unrelenting inflation, AC stock might continue to trade weakly. So, in a nutshell, it seems AC investors might have to wait longer to see the golden days.

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 Coronavirus

Doctor talking to a patient in the corridor of a hospital.

3 Top TSX Healthcare Stocks to Buy in October

Healthcare stocks soared during the pandemic, and are now down in the dumps. But these three could make a huge…

Read more »

movies, theatre, popcorn

How Much is $1000 in AMC Stock Worth 1 Year Later?

AMC was once a stellar growth stock, but it’s taken a serious hit. So how much is $1,000 worth a…

Read more »

Arrow descending on a graph

Why Cineplex (TSX:CGX) Stock Fell to 2-Year Lows Last Week

Is the recent correction in CGX stock really an opportunity?

Read more »

Business success with growing, rising charts and businessman in background

1 Growth Stock Every Canadian Investor Should Consider Right Now

This growth stock saw shares pop 10% on June 20, as one analyst stated there is a significant opportunity to…

Read more »

Aircraft wing plane

Bombardier Stock Merge: What it Means for Investors

Bombardier (TSX:BBD.B) stock went through a reverse stock split on June 13, turning 25 shares into one in one swift…

Read more »

Aircraft wing plane

Air Canada (TSX:AC) Stock: Ready to Take Off?

While Air Canada is handling what it can control really well, there are many worsening macro headwinds that will likely…

Read more »

rail train

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Biotech stocks

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »