Could Air Canada (TSX: AC) shares reach $ 0?


Air Canada (TSX: AC) (TSX.AC.B) suffered a serious blow in the stock market crash of COVID-19. Having dropped 63.4% since the writing of this report, it has been one of the TSXThe biggest losers. It’s not hard to see why. As a passenger airline, Air Canada cannot make money if people do not fly.

With 90% of its flights canceled, its revenues are almost certainly in decline. However, the airline seems to be part of the difference with more cargo flights.

Revenues are therefore unlikely to decline as much as the volume of passengers suggests. However, it is a company whose main activities are practically closed. Overall, the situation is not pretty.

And it could get worse. As I wrote in a recent article, Air Canada has huge interest charges and relatively little cash on hand. If COVID-19 trip cancellations take longer than expected, the company could consider its second bankruptcy in 20 years.

We are already hearing that Air Canada passengers have been denied reimbursement because the airline did not have the money to pay them. If this information is true, the financial future of the business could be jeopardized. In this case, the stock could become worthless – or move closer to it, as we saw in 2009.

How a headline can “go to zero”

Before going any further, it is important to note that stocks listed on the TSX can not technically go to zero.

The TSX has certain listing requirements for industrial companies. One of them is a market capitalization of $ 50 million and at least $ 4 million of publicly held stocks. These standards cannot be met with a share price of $ 0. So a business would be written off even before literally went to zero.

However, certain things can have the same consequences for shareholders – one of which is bankruptcy where the company runs out of money after the bondholders are paid off.

When this happens, shareholders no longer have any rights to any residual value. A business in this situation will likely be struck off. As a result, shareholders may end up with worthless shares that cannot be sold on the public markets.

It’s the same financial impact as holding zero dollar stocks. Nor is it theoretical: it did happen with Nortel Networks after its bankruptcy proceedings. The company being stripped of its assets, it was delisted from the TSX at $ 0.185 per share at the time of writing.

Could this happen to Air Canada?

Having established that stocks can become functionally worthless – and that this has happened in the past, we can move on to the big question:

Could AC suffer this fate?

Based on the high level of debt and the virtual closure of the business, this certainly seems possible. AC cannot make its annual $ 500 million interest payments without bringing in cash. The only option would be to sell assets, which would leave him with no resources to get back online in the recovery.

AC had about $ 6 billion in cash and cash equivalents on its latest balance sheet, but I doubt it will last during this crisis. As noted earlier, there are too many signs that the company is short of cash.

That said, if Air Canada were to face an existential threat, I suspect that the government would eventually intervene to bail it out. As an indispensable service, the government would provide assistance instead of letting it die. It really happened in 2009, and I suspect it would happen again in the worst case today.

Crazy contributor Andrew Button has no position in any of the titles mentioned.


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