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This year has seen significant volatility for Air Canada (TSX:AC) and the rest of the airline sector. The COVID pandemic may be coming to an end, and business travel may eventually be able to increase. Still, the airlines are struggling with new problems brought on by inflationary pressures and an impending recession.
Due to its international concentration, Air Canada is more exposed to global markets, which could suffer more significant losses from the upcoming Fed-mandated economic collapse. The situation for air transport companies couldn’t be direr as one terrible climate led to another.
Currently, the share price of Air Canada is sitting at $18.25. AC shares could have easily formed some sort of bottom after Tuesday’s roughly 7% one-day increase. In any case, the reality that Air Canada stock is still at its low point for the majority of 2020 stands.
This year has been challenging for Air Canada and the other risky names. AC stock has decreased by almost 19% so far this year. This is slightly worse than the TSX Index, which has lost about 16% of its value since its peak at the beginning of the year.
I would have lost $189 if I had invested $1,000 in AC stock at the beginning of the year. Such losses are, in fact, often consistent with the markets. Between January and March of 2020, when shares fell from $50 to the low teens, most of the damage was done.
No breaks for AC stock: From pandemic headwinds to a recession
There’s little doubt that investing in Air Canada will take time. Unfortunately, individuals who bought AC shares on the rise in late 2020 or early 2021 or on the decline in 2020 are probably sitting on significant losses. Although the “pandemic-will-end-soon” concept may have been confirmed, the rate-driven recession that followed now looks inevitable.
The airlines typically fold like a paper bag during economic downturns, as they have in the past. Investors must be prepared to face yet another round of headwinds before the tides finally shift. Fortunately, if no additional COVID lockdowns are planned, the worst appears to already be behind the air travel companies.
Lockdowns imposed by the government are essentially the worst case for the airlines. Even if the destruction of travel demand caused by stagflation, inflation, or a recession may not be suitable for Air Canada’s recovery chances, I believe that such businesses now have much more confidence than they did in the gloomy months of early 2020.
Besides, I consider Air Canada a deep-value proposition, but only for those prepared to put up with wild swings for at least another three years.
Air Canada: Doing its best amid headwinds
Air Canada, compelled to adjust to the difficult times, has reason to be hopeful about the future. The management of Air Canada received the worst possible hand. Nevertheless, I think they’ve handled it well, despite what the stock price behavior might indicate.
Demand for overseas travel, the overall state, or the pandemic is outside Air Canada’s control. Costs are something it can regulate. As borders continue to open up throughout the world, the airline can still only function at a small capacity (20% for domestic flights). Still, I believe preventing a comeback in international air travel will be difficult.
Travelers can make reservations towards the end of the day. All that matters right now is whether they have the extra cash available to do so. With shares trading for just 0.6 times price to sales, I’d argue that the worst may have already been included, given the mildness of the impending slump.
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