Andrew Willis: Coming from the lows of 2020, it’s tempting for investors to catch a ride on airline stocks as they make their way back up. But coming back from the worst operating environment in the history of the industry doesn’t come without turbulence…
For one, there will be major discrepancies between regional and international revenue sources. And Air Canada is an example of a business structure that’s vulnerable in this kind of environment.
Equity analyst Burkett Huey explains that before the pandemic hit, Air Canada had a strategy known as ‘Sixth Freedom Traffic’ to serve mostly U.S. nationals on long-haul international flights - picking up Canadians along the way…
But until other countries can catch up on vaccination distribution, being tethered to such international travel arrangements will be a weakness. Now, we’re seeing short-haul leisure travel making up most of the traffic today – an area where Air Canada operates – but where it will struggle to be profitable as it shares costs with its international operations.
We forecast it could take until 2024 for Air Canada to pick up where it left off in terms of passenger capacity, but we see the recovery accelerating next year. And while currently trading around a fair value, it’s not a bad time for long-haul investors to get on board.
For Morningstar, I’m Andrew Willis.
