The Coronavirus Is Decimating Air Travel: Is it Time to Buy Air Canada (TSX:AC)?

Air Canada (TSX:AC)(TSX:AC.B) has been hit hard by the market meltdown, leaving it attractively valued, making it a speculative stock to buy today.

| More on:

Airlines are among the stocks hardest hit by the coronavirus pandemic and latest market meltdown. All the major U.S. carriers have seen their stocks plunge since the start of 2020. The worst affected is United Airlines, which is down by 69%. Whereas Southwest Airlines, one of legendary investor Warren Buffett’s holdings, is the least impacted, shedding 36%. The largest U.S. airline by revenue, Delta Airlines (NYSE:DAL), another Buffett investment, has lost 58%. There are claims that Buffett, through his company Berkshire Hathaway, has taken a US$5 billion hit on his airline investments.

Domestic flag carrier Air Canada (TSX:AC)(TSX:AC.B) was among those most harshly impacted, initially plunging by over 70%, but it rallied recently to now be 59% lower. There is speculation that worse is ahead for airlines, although Air Canada’s situation may not be as dire as some claim.

Poor short-term outlook

The coronavirus pandemic has forced governments across the globe to restrict movement and shutter non-essential services. Many have closed their borders, implemented travel bans, and enacted significant restrictions on internal movement. That has all but killed the international tourism industry.

The demand for air travel has collapsed in an unprecedented manner — far worse than even in the wake of the September 2001 terrorist attacks. Airlines across the world have been forced to ground their fleets. U.S. airline executives believe that it could be up to two months before some sense of normalcy returns to the industry. Most international carriers have no intention of recommencing flights until some time in June.

Delta is burning cash

Airlines have embarked on strategies aimed at minimizing costs and the financial impact of the current crisis. The severity of the crisis is underscored by Delta making even deeper cuts to its operations, substantially exceeding those it had initially announced. Delta slashed seat capacity by 70%, reduced international flights by 80%, and parked roughly half of its fleet.

At the start of April, Delta disclosed that passenger volumes were only 6% of what they had been for that time of year. Management stated that it was burning through more than US$60 million daily, highlighting the considerable financial impact of the coronavirus crisis.

Delta recently secured a US$2.6 billion credit facility to provide capital to survive the pandemic and ensuing economic fallout. That will eventually need to be repaid once the coronavirus crisis ends. It significantly increases Delta’s existing debt which at the end of 2019 stood at US$22.5 billion for long-term debt, pension liabilities, and leases alone. This indicates that Delta will emerge from the coronavirus crisis in a weak financial state.

This explains why Buffett reduced his exposure to Delta, selling 13 million shares two weeks ago, cutting his take by around a fifth.

Air Canada is different

Air Canada’s 58% decline has sparked considerable speculation as to whether it represents a deep-value opportunity or a risky play that could see shareholders lose their investment. Unlike Delta, Air Canada operates in a less-competitive market. It is also Canada’s flag carrier, meaning that a bailout from Ottawa is likely to happen if the situation worsens.

Air Canada also has significantly less debt and is in a sounder financial position than Delta and many other U.S. airlines. It finished 2019 with $11 billion in long-term debt, leases and pension liabilities, and a whopping $5.9 billion in cash and short-term investments. Air Canada’s net debt, leases, and pension liabilities represents a low 27% of its 2019 revenue and a mere 1.5 times EBITDA. In a normal operating environment, that indicates Air Canada’s debt and related long-term liabilities are quite manageable.

Looking ahead

Like other carriers, Air Canada has instituted a range of measures to weather the current crisis. This includes slashing capacity by up to 90%, reducing costs and capital expenditures to the tune of $500 million, furloughing a large portion of its employees, drawing down $1 billion in credit to boost liquidity, and cutting executive salaries.

Air Canada’s bankruptcy risk, even in the current environment, appears low. While it will take some time for air travel to return to normal, Air Canada will emerge from the crisis leaner and more profitable. There is every likelihood that Air Canada’s stock could fall again, but once the crisis ends and the economy returns to growth, it will soar.

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 Matt Smith has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Delta Air Lines and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares).

More on Coronavirus

A airplane sits on a runway.
Coronavirus

3 Fresh Stocks I’m Likely Buying in 2025

I am likely buying Air Canada (TSX:AC) stock in 2025.

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Coronavirus

Canadian RRSP Stocks to Buy Now for Retirement

Alimentation Couche-Tard Inc (TSX:ATD) is a quality retirement stock.

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Coronavirus

Retirees: What Rising Inflation Means for Your CPP Payments

If you aren't getting enough CPP, you can consider investing in stocks and ETFs. Canadian National Railway (TSX:CNR) is one…

Read more »

Coronavirus

Air Canada Stock Is Starting to Get Ridiculously Oversold

Air Canada (TSX:AC) has been beaten down to absurd lows.

Read more »

Coronavirus

Should You Buy Air Canada Stock While it’s Below $18?

Air Canada (TSX:AC) stock is below $18. Should you invest?

Read more »

Illustration of data, cloud computing and microchips
Stocks for Beginners

3 Canadian Stocks That Could Still Double in 2024

These three Canadians stocks have been huge winners already in 2024, but still have room to double again in the…

Read more »

Aircraft Mechanic checking jet engine of the airplane
Coronavirus

Can Air Canada Stock Recover in 2024?

Air Canada (TSX:AC) stock remains close to its COVID-19 era lows, even though its business has recovered.

Read more »

A airplane sits on a runway.
Coronavirus

3 Things to Know About Air Canada Stock Before You Buy

Air Canada stock continues to hover below $20 despite the sharp rise in travel demand seen across the industry. What's…

Read more »