Even as demand for plane tickets soars, Air Canada AC-T still loses – handing investors a gut-wrenching setback at a time when they should be congratulating themselves for betting on a quick rebound in air traffic.
Can the stock emerge from its latest tailspin in time for, ugh, a recession?
The share price has fallen more than 22 per cent this year, closing at $16.39 on Tuesday.
That marks the stock’s lowest level since 2020, when lockdowns made far-off vacations a distant dream and handed enormous losses to Air Canada and its global peers in the airline industry.
Though pandemic restrictions have eased and travellers have flocked to the skies again, airline stocks are again being walloped, most recently as chaotic delays and unsustainable line-ups at airports have led to consumer frustration and flight cancellations.
Last week, Air Canada announced that it was cancelling 154 one-way flights a day in July and August, representing about 15 per cent of its schedule, in response to these bottlenecks.
The setbacks come at a time when soaring inflation and rising interest rates are raising concerns that the global economy could be sliding into a recession, further dimming the outlook for airline stocks.
The stakes are high, because the sector can be notoriously volatile when operating conditions shift.
SAS AB, the Scandinavian airline, made this point clear on Tuesday when it filed for bankruptcy protection in the United States, burdened by conditions it shares with many of its peers: Lockdowns earlier in the pandemic hit the airline’s revenues and raised debt levels, leaving it vulnerable to setbacks during the recovery.
The point here: Air Canada is by no means an anomaly within the airline sector.
Indeed, British Airways, Deutsche Lufthansa AG and Air France-KLM, to name just three, have also cancelled flights despite strong demand. And other stocks are down: The S&P 500 Airlines Industry Index, which includes American Airlines Group Inc., Delta Air Lines Inc. and United Airlines Holdings Inc., has fallen 20 per cent this year.
While that might not provide much incentive for buying Air Canada shares, the current lows are worth checking out for a couple of reasons.
First, the recovery in airline traffic is real, which bodes well for industry profits next year if airlines and airports can fix the problems now weighing on flight schedules and disgruntled passengers.
The International Air Transport Association recently upgraded its outlook for the sector. The IATA expects global losses to narrow to US$9.7-billion this year, compared with a previous forecast for a loss of US$11.6-billion. That’s a huge improvement from a global loss of US$138-billion in 2020.
North America is a bright spot, thanks largely to the strong U.S. domestic market and recovering traffic to Latin America and across the North Atlantic. The IATA sees airlines in this region returning to profitability this year, with a profit of US$8.8-billion.
“While recession concerns, inflation, and the Russia/Ukraine conflict are key risks facing the global airline industry, air passenger traffic continues to recover from the pandemic lows,” Kevin Chiang, an analyst at CIBC Capital Markets, said in a note last week after the IATA released its forecasts.
Second, the current bout of flight cancellations – which aren’t affecting Air Canada’s international flights beyond the United States – could actually work in favour of airlines if a recession is brewing. The idea here is that the cancellations might smooth out the recovery, rather than taking investors on a head-spinning surge followed by a demoralizing plunge if demand contracts with the economy.
“Delays in Canadian passport issuance and shortage of third-party airport staff are potentially creating a travel backlog, thereby extending the demand curve,” Konark Gupta, an analyst at Bank of Nova Scotia, said in a note last week.
Cancellations are clearly weighing on investor sentiment at a time when the economic outlook is growing darker. But as long as demand holds up, Air Canada should get through the turbulence.
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