Air Canada has Too Much Baggage

If you’ve owned an airline stock before, or are considering buying one today, consider yourself brave.

Without question, airlines can make for a decent trade, but they're hardly ever a good long-term investment.

Warren Buffett once said:

If I'd been at Kitty Hawk in 1903 when [the first airplane] took off … I owed this to future capitalists to shoot it down. Karl Marx couldn't have done as much damage to capitalists as [airplanes] did.

Airlines have always been a lousy business. Historically, the industry has increased their capacity during the worst possible time. Then, demand falls off. Even worse, the high cost of labour and fuel squeeze profit margins fairly thin.

However, every asset has a price.

Recently, we kicked the tires on Air Canada. Despite the resurgence in demand from “revenge travel” since the Covid-related lockdowns ended, Air Canada’s stock still curiously trades at the same price that it did in March 2020.

Revenues are back to pre-Covid levels. Last year, sales grew by 30% compared to 2022, hitting $21.8 billion. The stock trades at a very inexpensive 6x earnings multiple. Before Covid, its valuation was closer to 7.5x earnings. To put that into context, the S&P 500 trades at 22x earnings (almost 4 times more expensive).

Air Canada may be cheap, but it’s inexpensive for a reason.

This is not a shareholder-friendly company. Since Covid, Air Canada has diluted its shareholders by flooding the market with 40% more shares. With more shares outstanding, that means less profit for each individual shareholder. And it hasn’t paid a dividend for years.

Last week, Air Canada cut its profit forecast for 2024. Previously, the company expected to earn $3.7 to $4.2 billion in pre-tax cash flow. Now, it looks more like $3.1 to $3.4 billion. The reason given was excess capacity and heightened competition.

Let’s not forget either that Air Canada filed for bankruptcy protection in 2003.

Air Canada is a posterchild for Warren Buffett’s quote above. It’s not a name we would add to any client’s portfolio. Instead, we continue to buy dividend-paying stocks that will benefit from multiple expansion as interest rates fall.

-by Jeff Pollock

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