The extent to which highly cyclical stocks such as Air Canada (TSX:AC) will rapidly rebound following the completion of this economic recession we find ourselves in remains to be seen. As with many recessions, companies like Air Canada typically see significant stock market declines followed by v-shaped stock price increases as the economy recovers and consumers resume their spending and travel habits.
This period of economic instability has already caused a significant amount of pain for airlines because of government mandates service shutdowns. Until borders open on a large scale and international flights resume their previous schedules, cash flow problems are likely to continue for airlines, exacerbating liquidity issues due to high levels of debt and ongoing necessary capital spending needed to maintain airlines’ fixed assets.
These concerns pose a longer-term risk to transform into solvency issues, should mandated travel bans continue longer than analysts expect.
In such low utilization environments, airlines such as Air Canada have proven to be poor investments and tend to struggle until key metrics such as lad factors recover.
That said, as we’ve seen with how this sector reacts to previous crises, the recovery in this sector following recessions typically does resemble a V-shape, making predicting a bottom potentially lucrative for investors willing to ride the short-term volatility.
As of right now, predicting where the bottom will be precisely is not an exercise I view as profitable, as there could potentially be more near-term downside. I will remain on the sidelines accordingly.
Invest wisely, my friends.
