Air Canada Stock: Is It the Right Time to Buy?

The dreaded COVID-19 pandemic has adversely affected the economy across all sectors. However, sectors such as aviation were more adversely impacted because of all the travel bans across the globe. One of the world’s most famous airlines, Canada’s very own Air Canada (TSX: AC) witnessed a severe decline in its stock during the pandemic and almost reached bankruptcy. Until the WHO announced COVID-19 as a global pandemic, Air Canada had reported 27 straight profitable quarters. Since the lockdowns began, the airline firm had four quarters of severe losses. In the first quarter of 2021 alone, Air Canada lost $1.3 billion. During the dreadful quarter, Air Canada burned through $14 million of cash every day. Even though the Canadian Government provided a $5.9 billion bailout package, Air Canada’s stock continued to be in the doldrums. At the time of writing this post, Air Canada stock is trading for $26.95. Let’s find out more.

Should You Buy Air Canada Stock?

Air Canada received a massive Federal bailout recently. As per the terms of the deal, the federal government took a $500 million stake in Air Canada stock at around $23. As the third wave of COVID-19 ravaged Canada, the airline company continued to bleed and went through a brutal spring. However, as more and more people are getting vaccinated, there is still hope for some decent business during the summer travel season. However, if the vaccination program doesn’t get executed as planned, Air Canada runs the risk of missing out on the entire summer travel season. 

Here are some priorities for Air Canada right now:

Maintaining liquidity

Air Canada’s management needs to put liquidity level sustenance at high priority levels. The company’s management is examining the situation and securing financing arrangements as necessary to recover. The revolving credit facilities worth $600 million and $200 million were extended up to April 2023 and to December 2023, respectively. While 2021’s first quarter was brutal, the second quarter didn’t improve on it by much. The cash burn rate is expected to be around $13 million to $15 million daily. These estimates are not inclusive of the eligible refunds for non-refundable fares that are currently in process.

Ticket refunds are a major issue

After the Federal government issued the bailout package, Air Canada was then asked to issue refunds to customers. Air Canada can draw payments for the refunds from the bailout package from the $1.404 billion refunds credit facility.

These refunds will be funded by an allocated section of the bailout funds. The good news is, this will make the refunds cash neutral towards Air Canada’s liquidity. 

Air Canada’s management doesn’t have a clear idea of how many customers might retain their travel vouchers or request a cash refund for the non-refundable tickets. Because so many people were forced to stay indoors constantly because of the lockdowns, people can be expected to travel once the lockdown is lifted and can be expected to retain their travel vouchers. It can’t be predicted with absolute certainty though.

Travel must be restarted

Because of the bailout package, Air Canada is luckily sitting on a lot of cash. However, it is still on shaky grounds. It’s safe to say that unless and until Air Canada can start flying passengers around once the travel and tourism sectors have fully restarted, the airline is unlikely to see profitable quarters in the foreseeable future.

Should you buy/sell/hold Air Canada stock? 

Investors who are looking for a firm to buy long term stocks might actually do well with Air Canada stocks. Because of the severe dent in the aviation sector because of the pandemic, Air Canada’s stock might actually be undervalued right now. Before the pandemic, Air Canada stocks were trading around $50 per share. They are currently trading at around $25 per share. Long term investors are bound to do well with Air Canada stock as the lockdowns aren’t going to be in place forever and the planes will take to the skies very soon.

During the last decade, shares overall have risen by as much as 1,000% for a compound annual growth rate (CAGR) of 27.2%. What it means is that if you invested $10,000 in the company in 2011, it would be worth $112,522 today. Air Canada stock seems to be a good option for a long term hold, even if you have a small amount of cash kept aside.

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