It’s been a long time now since airline stocks went through their COVID-19 era bear market. Unlike most sectors, they have yet to recover. While banks, energy companies and retailers quickly bounced back from their COVID-caused losses, the airline sector remains down for the count. As of June 2023, most U.S. and Canadian airlines remain down from their 2019 highs.
Air Canada (TSX:AC) was the poster child for Canadian airlines’ struggles in 2020 and 2021. It suffered a $4.6 billion loss in 2020 because of the pandemic and only recently recovered to the point where it was generating positive cash flows. The company’s most recent quarterly earnings release was a vast beat, and it sent the stock soaring. However, some issues remain. In this article, I will explore whether airline stocks are good buys in June 2023, using Air Canada stock as a case study.
Why they might be good buys
One reason to think that airline stocks are good buys is because they are now rapidly growing their revenue and recovering from their COVID-era slump.
In its most recent quarter, Air Canada delivered the following:
- $4.9 billion in revenue, up nearly 100% (an all-time high for the company)
- $4 million in net income
- $1.437 billion in cash from operations
- $987 million in free cash flow, up 984%
- $411 million in adjusted earnings before interest, taxes, depreciation, and amortization (an alternative earnings metric), up 187%
As you can see, Air Canada’s growth in the first quarter was really remarkable. Revenue nearly doubled, and the profit metrics all grew much more than that. Not only was the growth good, but the results were also ahead of analyst expectations. For example, diluted earnings per share (EPS) were about 46% ahead of the consensus estimate.
Why there are still some reasons for caution
Airlines are definitely in the midst of a recovery right now, but there remain some reasons for caution. One thing that is creating problems for airlines today is a high interest expense. In order to survive the COVID-19 pandemic on depressed revenue, airlines had to borrow vast sums of money. As a result, their interest expenses swelled. In 2021, Air Canada received a $5.9 billion bailout package from the federal government. Now, it has $240 million per quarter in interest expense. The company always had high interest expenses, but the bailout package took things to the next level. If it weren’t for all that interest, AC would have $244 million in first-quarter net income instead of $4 million.
Another issue that reared its ugly head recently was high fuel prices. In 2022, the price of oil went as high as $123, and related products, like jet fuel, rose in price as well. As a result, Air Canada failed to turn a profit that year, even though its revenue improved immensely compared to 2021 levels. Today, oil prices aren’t very high, but OPEC (a major oil cartel) is busy cutting oil output in an attempt to raise prices. If it succeeds, then airlines are going to have a tough time with fuel costs once more. It pays to play it safe with airline stocks. My feeling, though, is that the worst is over.
