When the pandemic started three years ago, the impact of the shutdown that followed affected every business on the planet. Some businesses were more impacted than others. A prime example of this is airline stocks. But now that markets are reopened, are airline stocks a good buy?
Let’s look at Canada’s largest airline stock and try to answer that question.
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Does this stock hold massive growth potential, or is it a dud?
It would be nearly impossible to consider the appeal of airline stocks without mentioning the largest airline stock in Canada: Air Canada (TSX:AC).
With markets fully open, Air Canada is witnessing strong earnings growth. By way of example, in the most recent quarter, Air Canada saw passenger revenues come in at $4.062 billion. This reflects more than double the amount reported in the same period last year. That figure also surpassed the amount reported in the fourth quarter of 2019 prior to the pandemic.
Despite the increased revenue, Air Canada still posted a loss of $28 million for the fourth quarter. For the full fiscal year, that loss extends to $187 million. By way of comparison, in the same period last year, that full fiscal loss came in at $3.049 billion.
In short, conditions are improving, but Air Canada still has ways to go. As of the time of writing, the stock trades at just over $18. Prospective investors looking at pre-pandemic performance will need to look back to 2017 to find a comparable stock price.
But does this make airline stocks a good buy right now? In the case of Air Canada, the airline still has plenty of room to grow. Air Canada extends those gains to continue into fiscal 2024 and beyond. Specifically, the airline is expecting ASM (available seat miles) to surpass 2019 levels.
If that’s not enough, in the most recent quarter Air Canada reported ticket sales come in at 102% of 2019 levels, despite offering a lower level of capacity.
The road to recovery isn’t an easy one
Despite Air Canada seeing much-improved results, there are still other factors for investors to consider. The market remains rife with volatility, fueled by rising interest rates and still-high inflation.
Both can have an impact on Air Canada achieving the growth that it needs to push out from its current position. If that’s not enough, if that volatility gives way to a recession as many expect, demand for air travel could begin to drop.
In other words, that full recovery still isn’t here, and if anything, Air Canada could see its share price drip further.
Final thoughts: Should you buy?
No investment is without risk, and that includes Air Canada. The market is full of uncertainty, and that could continue to drive Air Canada’s stock price (and by extension, demand) down.
Fortunately, there is an alternative. It’s not a question as to if Air Canada’s stock will return to growth, but rather when. Air Canada’s management has brilliantly navigated volatility before, and there’s little reason to doubt that the airline won’t recover over a longer period.
In my opinion, investors with a very long-term horizon that can tolerate plenty of risk may want to consider a small position in Air Canada, as part of a larger, well-diversified portfolio.
