To say that Air Canada (TSX: AC) is having a rough year would be an understatement. Shares of Canada’s main airline are down nearly 65% from the all-time high of $52.71 CAD. Analysts are already weighing in on the possibility of another bankruptcy, which the company faced 17 years ago when it filed for protection under the Companies’ Creditors Arrangement Act.
“By the end of May 2020, most airlines in the world will be bankrupt,” said market intelligence agency for the aviation and travel industry Centre for Aviation (CAPA) in a recent report.
It’s already June and the country’s largest airline is still standing strong. While it is facing more headwinds, an in-depth look at the company reveals that it will very likely weather the crisis.
Here are three reasons why Air Canada is a solid bottom picking candidate.
Air Canada Is a Fundamentally Robust Company
Unlike the airline companies south of the border that required a $25 billion bailout to stay in business, Air Canada is doing just fine largely due to its strong balance sheet.
From 2015 – 2019, the company more than doubled its cash and short-term investments from $2.76 billion to $6.04 billion CAD. Last year, Air Canada printed a record high in sales to the tune of $19.13 billion.
The soaring revenue and the building of cash positions over the years allowed the company to put together a warchest of cash and short-term investments worth $7.1 billion in March, just before the pandemic crippled the airline industry.
They’ve been doing all the right things. They’ve been checking all the boxes with the pension liability, with bringing down costs and streamlining their operation, bringing Aeroplan in. So, they’ve done all of these things and we’re going to see the benefits of that for years to come.
Unlike the overleveraged US airline companies, Air Canada is prepared to face the worst of the pandemic. It also helps that the management is taking the right steps to ensure the survival of the company.
Air Canada Is Making the Right Moves to Weather the Pandemic
Even with a strong balance sheet, the survival of Air Canada is not guaranteed. Airlines require massive capital as it burns through cash at a fast rate due to high operating expenses and fixed costs. In March, the Montreal-based airline burned through $22 million cash per day.
In addition, demand for international travel, which accounts for 70% of Air Canada’s revenue, is expected to remain subdued in the next few years. In the first quarter of this year, the company reported a loss of $1.05 billion. Last month, the airline said that it expects capacity in the third quarter to drop 75% compared to the same stretch last year.
Air Canada is profusely bleeding. The good news is that company executives are actively taking measures to cover the wounds.
The company has cut over 20,000 jobs earlier this month, which effectively downsized the airline by more than half. Air Canada has also deferred capital spending. On top of that, it will expedite the retirement of nearly 80 older aircraft to further decrease cost structure. All in all, the cost reduction steps have enabled the company to save over $1 billion.
To bolster cash flow, Air Canada raised $1.6 billion through a stock and convertible debt sale. The Montreal-based firm also has the option to draw down an additional $200 million from a revolving credit facility.
Air Canada appears to have the liquidity to get through the “darkest period ever” for commercial aviation.
Air Canada Is a Buy on Dips As the Company Is Unlikely to Go Bankrupt
While Air Canada is but a shadow of its former self, it is very unlikely to belly under again. It has the cash and the assets to overcome the pandemic. As for investors, AC is a solid buy on dips.
The airline had been heavily buying back its own shares up until March 2020. Since 2015, the company has invested over $800 million in its share buyback program. In 2019 alone, AC spent $378 million repurchasing its own shares.
If worse comes to worst, the company wouldn’t hesitate to sell its own shares even at a loss to tap into liquidity. That means it is very likely that the low of $9.26 in March can still be breached.
We’ll likely see another massive selloff if a second COVID-19 wave hits the country. Should that happen, the buy zone for long-term investors is between $4 and $6 CAD.
The fundamentals suggest that Air Canada will fly again. But for now, investors should brace for more pain.
Kiril is a CFA Charterholder who is passionate about the financial markets and analyzing different opportunities for investors. He specializes in researching and reporting on equities, ETFs, mutual funds as well as commentary on different market trends.