In recent months, the airline sector has gotten very hurt from the pandemic lockdowns, and many investors were doubting the future of airplanes (ahem, you can read about Buffet’s sale of airlines here). Around April, the general consensus around airlines and international travel in general was quite bleak. With no end in near sight and mainstream airline bookings reduced dramatically, you’d have been crazy to put money into shares. However, when there’s blood on the street, that’s when it’s time to invest.
Employment numbers are better than projected, along with consumer savings, sentiment, and just yesterday, US retail sales were reported 17% higher than previous month. As the months go by, we can slowly start to see that a post-pandemic future is closer than we previously thought, and the economy is recovering (albeit on the back of the Fed). With this in mind, shares of airline stocks went from looking like a no-go to now looking like a heavily-discounted equity with huge potential.
With that being said, today we will be featuring the almighty Air Canada. Known as the largest and flagship airline of Canada, Air Canada essentially has a monopoly north of the border. Right now, shares are trading for around a 50% off discount, and that discount promotion could be going for a while. According to Fitch Ratings, a Chicago ratings agency, they’ve actually downgraded their outlook on projected recovery time for international travel, believing that it’ll actually take longer than expected to recover from this virus. Not great news for Air Canada, as only 30% of revenues actually come from domestic flights, and so the company kind of needs international travel.
To add on to the not so great news, Air Canada has cut their operations in half according to their announced summer schedule. Now, why would someone invest? Again, when there’s blood in the streets, that’s when it’s time to invest. Look, the short term airline outlook isn’t great, but think 4-5 years from now. Are you seriously telling me that you’re never going to use an airplane again? For a majority of us, we don’t have access to private jets. So when we want to go on vacation, how can we do that without commercial airlines? Yes, it’ll be a stock that you’ll most likely have to hold onto for a couple years before you see an actual rebound back to full price, but by then your money would’ve more than doubled. Most Canadians that have ever travelled on a plane have flown Air Canada, and you can bet that they’ll continue flying Air Canada, there isn’t much competition.
Prior to the Coronavirus, Air Canada had shown consistent growth in terms of passenger volumes (as depicted by the graph). We can clearly see that each year, the volume of passengers had grown starting in 2011. Had 2020 went normal, who's to say that that trend wouldn't have continued?
Yes, people are worried that the virus will change the way that people will ultimately travel, but the question is: what alternative is going to overtake commercial flights? How can someone travel from Toronto to Dubai to Moscow more efficiently and cost-effectively? In my humble opinion, I just don't see another form of travel surpassing the comfort and effectiveness that commercial travel provides.
You also have to remember, people have short attention spans. In history, we've seen the great financial detriments that buying on credit can do, and yet people still do it. Right now people might be scared of getting the coronavirus from travelling on a tight airplane, but how about when this whole thing blows over?
Stock markets are going crazy as of late. In the next coming months, anything can happen really. Volatility is through the roof. However, looking ahead into the future, we can say that the majority of common folk will return to commercial air travel, and so in a way, Air Canada can be considered a pretty safe bet for maximum profits.