Would you rather stay grounded or fly with whatever you have? Well, Air Canada (TSX:AC) chose the second option. In a market struggling with faulty Pratt & White engines and a lack of pilots, flying became expensive. Now, Air Canada ain’t no engineer so the faulty engines kept some planes grounded. But the airline did whatever it could to get its wings on and flew.
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Air Canada stock jumps 27%
In September, the airline made an agreement with pilots threatening to go on strike just a month before the holiday season. It offered them a 26% pay hike and a 4% annual hike over the next three years, plus other benefits. This deal is going to cost the airline $1.9 billion over the next four years, but the airline’s got to fly. While the move was bold and it could make its profit margins as thin as a human hair, at least there will be a business.
Thanks to this decision the airline stock has soared 27% in two months and is trading above $19. Now if you are thinking the surge is because the uncertainty around the strike is gone, you are partially correct. Also, note that October to February is a peak season for the airline industry. There is no rocket science in this. Just try booking a flight ticket for these months. Another seasonal peak is May to July as summer holidays boost leisure travel. This year, the airline missed its summer season rally because of the pilot strike issue.
The holiday season came a little early for Air Canada and the stock began its seasonal ascend.
Should you buy Air Canada stock at the current price?
Such seasonal rallies are generally range-bound as many are looking to make short-term gains. In 2020, the holiday season rally was 100% as it was clubbed with the news of a vaccine and US elections. In 2021, the rally was short-lived because of lockdown restrictions and rate hike fears. In 2022, it was 37% and a mere 12% in 2023. The stock has shown resistance at the $24 price. This time, Air Canada has US elections and interest rate cuts alongside the seasonal rally. And both events can significantly influence the airline’s fundamentals.
Buying into such volatility is risky because the market can move in either direction. Moreover, the stock has already reached closer to $20. Even if you plan an exit at the $23 stock price, the upside is 20% and the downside is 22% at $15.
If you are willing to risk losing money, buying at a $19.24 price point can give you a 50% probability of a 20% upside. These are the odds I would not recommend because the upcoming third-quarter earnings on November 1 may not give a strong outlook because of the heightened cost. Instead, you could consider waiting for the stock to dip and buy it when it is below $17. At this price point, the risk is relatively low.
Investor takeaway
When markets are volatile due to some events, there are more speculators than investors in the market. At such times, it is better to avoid buying into the peak. You could consider a long-term growth stock like Dye & Durham or Descartes Systems.
