The risks are clear. Air traffic fell from a cliff. Liquidity rates are shockingly high. The government’s bailouts are almost certain.
However, the current discount in share prices could largely offset these risks. This stock is rarely on sale, but this could be your chance.
Air Canada is a wonderful stock
Before the pandemic started, Air Canada was crushing the market. In just eight years, the stock has increased 60 times value. An investment of $ 10,000 has become $ 600,000. Sales and profits are increasing year by year. In 2019, the company controlled approximately half of the Canadian indoor air market.
COVID-19 then struck. Air traffic has dropped. With a large base of fixed cost assets, even a slight drop in revenue has an inordinate effect on profits. With demand down more than 50%, losses are piling up quickly.
Have a look on Delta Airlines. Warren Buffett was one of its major shareholders last year. Like Air Canada, its share price rose through the roof. Today the airline burns more than US $ 50 million in cash a day just to stay afloat.
Delta is approximately three times the size of Air Canada. If cash use rates are similar, Air Canada could lose more than US $ 15 million everyday.
Here’s the good news: Air Canada had US $ 4.5 billion in cash and cash equivalents on its balance sheet in the last quarter. It is one of the highest cash levels in the industry relative to its market size. This will allow him to survive for months on almost zero income.
Is it time to buy?
There is no doubt that the current air transport slowdown is painful. Worse, the decline in demand from airlines will almost certainly persist for months. Some analysts do not expect a return to normal before at least 2021, assuming that we will not have a COVID-19 resurgence the next winter season.
But air travel is not going away. In fact, the last bear market, as painful as it may be, could potentially help financially strong operators like Air Canada.
For decades, airline betting has been a losing proposition. The battles for market share have evaporated any chance of long-term profit. But things have changed. A few years ago, Warren Buffett invested billions in the industry, although he avoided it throughout his investment career.
What brought about the change? Consolidation.
In the past decades, dozens of companies have competed on all major roads. Today, only a handful of companies dominate the market. Almost 80% of the American market is now controlled by four companies; approximately 70% of the Canadian market is controlled by only two companies. WestJet has a 34% market share, while Air Canada has 46%.
In this slowdown, smaller competitors with limited access to capital will exit the market. Carriers like Air Canada and WestJet will fill the void. And if there’s anything we’ve learned about the airline industry in recent years, it’s that consolidation brings higher profits.
The coming year will be volatile for airline stocks, but those that survive will have a brighter future than ever. Given its financial strength, Air Canada appears to be one of the few survivors. Patient investors could be greatly rewarded.
Many investors fear a market collapse. However, long-term investors should accept this crash, as bear markets can potentially save you millions. So if you’re tired of reading that other people are getting rich on the stock market, this could be a good day for you.
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