Air Canada: Extended Travel Restrictions Could Tank Air Canada (TSX:AC) Stock More

 Here is the article. 

Here are highlights:

1. AC earns 22% of its passenger revenue from the U.S. transborder
2. Second quarter - reduce capacity 97.7% in the second quarter
3. Burning 20 million a day, 80% of last year profit - $3.55 billion
4. First six months of 2020 - 2.8 billion, next six months of 2020, 1.5 billion
5. In second quarter, it raises 5.5 billion in capital, thereby increasing its liquidity to $9.12 billion

Things are getting tougher for Air Canada (TSX:AC). The Canadian government extended the travel restrictions at the Canada-U.S. border by a month, till September 21. The Canada-U.S. borders have been closed for discretionary travel since March 21, resulting in six months of reduced capacity for North American airlines. The news sent AC stock down 1.35%.

AC earns 22% of its passenger revenue from the U.S. transborder. With the border closed for six months, it had to reduce the capacity of U.S. flights by 97.7% in the second quarter. It will see similar capacity reductions in the third quarter as well.

Air Canada’s mounting losses

In my previous article on AC, I was bearish on the stock, because the airline is likely to operate at just a fraction of its capacity for the entire year. The airline is burning $20 million cash every day, which has vanished almost 80% of its last three years’ combined profit of $3.55 billion. It has already lost $2.8 billion in the first six months and could lose another $1.5 billion in the next six months.

AC is doing almost everything to save cash. It has adopted a three-step approach to cut $1.3 billion in costs and delay bankruptcy:

• It has slashed 50% of its workforce in June, which would halve its second-biggest expense after fuel.
• The airline is retiring 75 aircraft, which equates to more than 30% of its overall fleet. It is also willing to cancel orders for new aircraft if needed. I believe this need will soon arise.
• It is raising cash from every possible source, such as stocks, debt, loans against aircraft, and credit facility. In the second quarter, it raised $5.5 billion in the capital, thereby increasing its liquidity to $9.12 billion.
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The rocky runway to recovery

While its three-step approach will help AC reduce its cash burn, the recovery will only begin when its planes take off from the runaway. The airline saw some demand for domestic travel and cargo. But that is not enough to begin the recovery. It needs international long-distance flights because they make most of the profits.

Any recovery in international travel will most likely begin in 2021. AC expects international travel to return to the pre-pandemic by 2023. Many analysts find three years to be an overly optimistic estimate. But even if we go by this estimate, AC will take seven to 10 years to see any profit.