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Montreal-based Air Canada is the largest airline company in Canada in terms of fleet size and passengers carried. Unlike most airline stocks, Air Canada had delivered market-crushing gains prior to the pandemic and has survived the extremely challenging pandemic times. It is still dealing with headwinds like increased fuel prices, equity dilution and reduced customer spending. In 2022, the stock has lost a little over 29%. So, is the Air Canada stock a good buy after this recent dip?
The market feels as a result of these short-term challenges, Air Canada might have limited upside potential in the near term but in the longer term, it will be able to capitalize on the growing demand for air travel very well.
Impending Liquidity Issue
Is Air Canada Stock a Good Buy After Its Recent Dip Right Now?
One of the most concerning factors regarding Air Canada stock is that it might have to face liquidity issues in the coming times if it continues burning cash for a longer time. Being a capital-intensive company, it has got some significant debt components on its balance sheet. Moreover, because it was one of the worst-hit ones during the pandemic it had to take up a huge amount of debt to keep its operations going. The company has around $16.9 billion worth of long-term debt and lease liabilities on its balance sheet till the last quarter. Therefore, sustaining millions of operating losses every quarter might be a challenging affair for its upcoming times.
The market expects these losses might continue for some more time. This is because restarting operations after the pandemic hasn’t been easy. Flying costs for Air Canada have increased substantially as well because the jet fuel prices have crossed the $100 mark and these days the company has to re-route its flights as the Russian airspace has gone out of its radar post the Russia-Ukraine conflict. Several other lingering issues and uncertainties such as the lack of a sufficient number of passengers or staff shortages have also made it much more difficult for the company to recover its flying costs.
Air Canada is currently managing its debt well but this arrangement does not seem sustainable. The company’s latest 12-month interest coverage ratio that determines its interest-paying capability is -3.2x i.e. in the negative zone. Also, its enterprise value-to-EBITDA ratio which determines the probability factor of buying a company is also negative at 13.30.
Demand for Air Travel
The pandemic had largely interrupted the short-term outlook of the global air travel industry. As per Bain & Company, the ongoing hindrances have reduced the industry’s recovery rate from 73% to 71% in 2019 and its revenue is also expected to decrease to $475 billion from $488 billion. The current trend suggests the demand for air travel won’t return to the pre-pandemic levels until the second quarter of 2025. However, the long-term prospects of the industry are still intact.
This might be because of many reasons. Firstly, there are still several countries that are facing the outbreak of the virus. Also, reduced business travel is taking place these days as most organizations have switched to the remote working model. Moreover, the travel restrictions for international travelers as well as the reduction in people’s purchasing power due to decade-high inflation levels have been forcing people to postpone their vacation plans.
Air Canada being one of the country’s largest airline operators, will be able to capitalize on the increased travel demand in the long run. However, in the short term, in order to acquire a larger base of passengers, it should endeavor to lower its massively hiked ticket prices. Besides, as it has multiple revenue streams it can grow its cargo business to improve its profitability issues.
Concerns Regarding a Recession
The aggressive hiking of interest rates in recent times to curb the increasing inflation levels has led to a risk of a looming recession across the world. Economic cycles are said to have a huge impact on the trend of air travel and therefore if a recession occurs the air travel industry might be hurt once again thus delaying its pandemic recovery further. This is because in recession times most people usually cut their non-essential and discretionary expenses which include air travel expenses.
After the omicron variant-related travel restrictions had affected the company’s operations in the first quarter, Air Canada had expected the air travel pattern to improve in the coming quarters. Now, if a recession comes along the reduced air travel can drive the valuation of the airline company even lower thus hurting the investor’s wealth even more.
However, it is still not possible to predict whether the world is actually approaching recessionary times. To this day many investors still feel the fear about recession is being overblown and the post-pandemic recovery is actually taking place, especially around the North American markets.
Air Canada closed on June 29 at $17.07 and the average target price for the stock is $28.79 which is a potential upside of almost 70%.
Is Air Canada Stock a Good Buy Right Now?
Air Canada is a good stock for anyone who can put their money in it for a longer tenure. Though the risk levels associated with this stock are definitely in the higher range the market still believes ones the difficult times are over the company will be once again rewarding its investors with outsized market returns. However, if you are a short-term investor who does not want to undertake much risk then this stock won’t suit your portfolio requirements.
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