Air Canada stock set for takeoff (but fasten your seatbelts)

Discussion in 'Air Canada | Aeroplan' started by guinnessxyz, Oct 13, 2012.  |  Print Topic

  1. Air Canada stock set for takeoff (but fasten your seatbelts)
    By MARTIN MITTELSTAEDT

    Improving fundamentals boost airline's outlook but continued gains will depend on a stronger economy


    The fortunes of Air Canada, the country's largest carrier, could be on the mend, presenting investors with a high risk, high return trading opportunity.
    Signs that something good may be happening are reflected in Air Canada's advancing share price. Stock in the once beleaguered airline has been taking flight, changing hands recently at around $1.50 a share, nearly double the spring low of 78 cents.
    Some pros contend the rise may only be the prelude to far sweeter gains. Analysts at two of Canada's biggest banks – Tim James at TD Securities Inc. and Walter Spracklin at RBC Dominion Securities Inc. – have one-year price targets at $3, implying the shares could double again if the rally plays out as they hope.
    To be sure, investors who are considering taking a flier on any airline should take a deep breath and ask themselves if they really want to go there. The airline industry has a reputation as a wealth destroyer. Carriers often go bankrupt, vapourizing investors' money.
    Air Canada restructured through insolvency in 2003 and, in the United States, American Airlines is currently under creditor protection, the most recent in a long list of carriers to avail themselves of bankruptcy proceedings.
    Given the risks that airlines face, it isn't surprising that the two analysts place Air Canada in their "speculative " category of investments.
    But the tradeoff for high risk is the potential for big gains, and that may be the case for Air Canada.
    "It's not often that I will be kind of pounding the table for an airline as an investment opportunity, but there are times when that investment opportunity can make some very attractive upside returns and this, we believe, is one of those times," Mr. Spracklin says.
    His Internet monitoring of Air Canada's fare pricing has been showing a "very favourable" rising trend in recent months. The monitoring checks 1,000 domestic, cross border and international fares each week and provides an up-to-the-second survey of the carrier's pricing power. "This is a sustained increase in fares and perhaps the most important trend that we're seeing because it is the one that impacts profitability the most," he says.
    In a recent note to clients, Mr. James at TD praised Air Canada for its September traffic, which rose at its strongest pace since March. Another crucial metric, the airline's load factor, or the percentage of seats with paying customers, improved to a record. "The strength was broad-based, with all regions posting strong traffic growth and load factor improvement."
    Air Canada also received good news from an arbitration ruling last week that went in its favour, lowering the cost of services provided by Chorus Aviation, its regional carrier better known as Jazz. Next year, the company could get further upside from the highly anticipated launch of a new, low cost subsidiary specializing in the leisure trade.
    "We believe that recent developments at Air Canada demonstrate resilient demand and progress at reducing costs and improving efficiencies," he said.
    Air Canada does have knocks against it. One major long-term worry is its pension liability, pegged in the latest published figures at more than $4-billion. But recent contract changes to the plans have probably reduced the shortfall to a bit over $3-billion.
    Like many pension plans, Air Canada's has been hit by the sharp decline in interest rates, which reduces the return on investments in retirement accounts. The pension headache, however, would become far more manageable if and when interest rates rise back to more normal levels.
    Investors should keep in mind the highly cyclical nature of airlines. If the economy tanks, so does airline profitability.
    To be fair, a stronger economy has the reverse effect, leading to high returns. The added kicker for Air Canada is that any upturn strong enough to take interest rates higher will provide both pension relief and the likelihood of a strong boost to earnings.
    Even Mr. Spracklin, the table-pounding bull, cautions that the carrier shouldn't be viewed as a buy-and-hold investment. He calls the shares a "compelling trading opportunity" that is highly leveraged to an improving economy.
     
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  2. mtlfire

    mtlfire Gold Member

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    I almost bought in at .80 cents. But have held off, but I think it will be trending upwards.
     
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  3. marcwint55

    marcwint55 Gold Member

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    SMART INVESTORS WILL AVOID AIRLINE STOCKS UNLESS THEY ARE FOR SHORT TERM TRADES. HISTORICALLY THEY ARE TERRIBLE LONG TERM INVESTMENTS.
     
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  4. mtlfire

    mtlfire Gold Member

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    Definitely. I prefer dividend stocks for long term. But I think AC could provide for a nice return of the short run and between bankruptcies. If had jumped in a few months ago at .80 I would have made about a 75% return. Of course, its more play money than retirement planning.
     
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  5. southender
    Original Member

    southender Silver Member

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    Am I 'hedging, MP style' if I buy the stock and fly the airline :D
     
  6. just make sure you don't get a crash landing on the stock. :p
     
  7. tomh009
    Original Member

    tomh009 Gold Member

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    Most of the profits in the airline business are made by ... Boeing and Airbus.
     
  8. Air Canada’s new discount airline isn’t a new airline at all


    Details continue to emerge about Air Canada’s soon-to-be-unveiled low-cost airline, for which it plans to hire 50 pilots and 150 flight attendants. Four aircraft are scheduled to enter service in June, flying to vacation destinations in the Caribbean and Europe, and competing against existing tour operators like WestJet Vacations, TransAt and Sunwing. Success is unlikely.
    Don’t think of this as a new airline launch—it isn’t, really. Rather, it’s a bid to lower costs in Air Canada’s existing business. Right now, the carrier’s employees enjoy better compensation and benefits than their discount counterparts. Because of that, Air Canada “has a much higher cost structure than its competitors,” says Cameron Doerksen, an analyst with National Bank Financial. That spells trouble on vacation routes, where customers prize low ticket prices above all else. Air Canada consequently faces uncompetitive margins on many routes—and simply can’t turn a profit on others.
    For years, the company sought to lower costs. Unions resisted—and when CEO Calin Rovinescu again mooted a discount operation in April 2011, they revolted. Aided by federal Labour Minister Lisa Raitt, who effectively stripped the unions of their ability to strike, Air Canada prevailed earlier this year. Federal arbitrator Douglas Stanley sided with the company, writing in his decision that he accepted “Air Canada needs to establish a low-cost carrier to ensure its competitive future.” Stanley imposed a new labour agreement on the pilots, removing the final roadblock.
    [​IMG]
    Air Canada now plans to migrate unprofitable or barely profitable routes to the low-cost airline, where margins should improve. Aircraft are to be drawn from its existing fleet, reconfigured for more capacity. And they’ll be staffed by fresh employees who are paid less, have fewer benefits, and enjoy more flexible work rules. “I view it more as a negotiation tactic with their unions on the mainline,” says Marc-David Seidel, a professor at the Sauder School of Business.
    With a separate management team and distinct brand, Air Canada’s discount operation will incur significant additional operational and marketing costs. Discount carriers save money by using a single class of plane—Air Canada will have two. “A lot of the costs which exist today will be exactly the same: the fuel, the landing fees at airports, air traffic control fees,” says Robert Kokonis, president of consulting firm AirTrav Inc. So passengers shouldn’t expect cheaper flights.
    Successful discount airlines “have a culture that was focused from the get-go on being a highly efficient, lower-cost airline,” says Doerksen. Mainline carriers attempting to replicate that often fail, as did Air Canada with two quasi-discount airlines (Zip and Tango) launched in the early 2000s. Seidel believes unions will resent this latest effort, with negative implications for Air Canada’s core business as an international carrier—a domain where higher customer service is expected. “I do see it making their mainline labour relations even more adversarial,” he says. “Creating an adversarial relationship with the people providing that service doesn’t help.”
     
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  9. tomh009
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    tomh009 Gold Member

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    Where is the story from? Can you post a link?

    I do agree that AC is unlikely to start a price war with this new operation. It's a reduction of costs, not prices.
     
  10. mtlfire

    mtlfire Gold Member

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  11. It actually makes ACV much more competitive as they can sell more seats on an effective charter carrier instead of the mainline. That will get them even better wholesale prices from hotels they use as it allows them to book even more people on a given package.
    it was from CDN business as noted by mtlfire above.
     
  12. tomh009
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    tomh009 Gold Member

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  13. Stephan

    Stephan Silver Member

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    “Air Canada needs to establish a low-cost carrier to ensure its competitive future.”

    Why bother with this? As it stands, AC is already on track to be that LCC. Or perhaps is it the ultimate goal to integrate AC into a new LCC based on the FR model? Certainly, there seems little interest in improving service standards on the current business model. Just start fresh and see if we can lower the overall standards even more! At least the comment:" don't expect lower airfares" hits the nail nail on the head.
     
  14. That's a load of garbage. AC has modernized their mainline fleet and continues to do so; their service levels are up over what it was 10 years ago. Their J product is the best in NA and pretty good overall. The 787 fleet will mark a new era for them and they are going to increase long haul comfort even more on all their widebodies as that new plane rolls into their fleet. I have been flying this beast called AC for well over 40 years and millions of miles; I have flown most of the other major airlines in the world as well and AC for all its warts still mantains my loyalty as well as millions more like me. Proof is the BIS they report evey month.

    Instead of looking to the downside figure out how to benefit from what they offer and you maybe surprised.
     
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  15. tomh009
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    tomh009 Gold Member

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    I agree with guinnessxyz; AC really does have good service now (no, not perfect, and always you can run into grumpy individuals -- humans are like that) and the hard product is very good. Not the best in the world, but very good indeed when measured by North American airline standards.

    Which really means I am even more disheartened by the Tango fare changes. I spend a lot of time on AC, by choice, and it makes it more difficult for me to upgrade, thanks to my corporate travel policy. But AC needs to succeed from a business perspective as well, so I do understand the rationale for the changes.
     
  16. Stephan

    Stephan Silver Member

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    I guess we disagree. Glad you feel it is such a value proposition for you. However, as tomh009 states, the Tango fare enhancement is disheartening and, in my opinion, another in a long list now of devaluations of this program especially for corporate travelers. AC still has a healthy advantage in size and market share primarily due to its monopoly on many routes and government backing. Service is hardly the driver here.
     
  17. anaother fantasy......AC has no government on any routes;Canada has open skies

    My assumption is that AC will negotiate rates with their corporate clientele that ensure T+ is the minimum fare code for many of their travellers.
     
  18. ACMM
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    ACMM Gold Member

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    ... and you are wrong there.
     
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  19. Stephan

    Stephan Silver Member

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    Wow, do you really believe that? Now you've lost me...do we live in the same country? Why do you think VS has YQ charges? Why is Emirates not in Vancouver, but is in Seattle? Why are there not more options out of Canada to destinations also served by AC?
     
  20. Government backing in my vernacular means subsidized routes. Government support against unfair competition is a different issue. The Persian Gulf airlines are state owne non taxpaying airlines with huge fuel subsidies and no ariport fees. Its the same as the Chinese dumping cheap steel into the NA market. The government has a duty to rotect Canadian jobs something you obviously don't care about. That's how the "support" is measured.
     
  21. boyzfly

    boyzfly Active Member

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    AC has fallen behind in product as American Carriers have upgraded. Now AC has demolished its FF program, why would anyone fly them unless someone else is paying the bills?
     
  22. Stephan

    Stephan Silver Member

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    Again, it is easy to be number one, when there is no one else that you are competing with. AC is considered "too big to let fail" - if you want to use recent terminology - hence the government's stand in the last strike. Where is your compassion for AC employees there? And why on earth would I, as a consumer, favour protectionist policies when they only result in reduced choice and lack of competition? If AC is so wonderful, let it stand on its merits against real competition. Your view is rather simplistic isn't it. Are your arguments about job security not equally valid to the UAE? Should they not be worried about competition on their routes?
     
  23. Stephan

    Stephan Silver Member

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    Well, I suspect if you ask the average J or F passenger (and maybe even Y) on EK out of YYZ, why they took the flight, I suspect they'd say it was because of perceived service and value.
     
  24. And maybe its because they give you a free visa while all other Canadian pax on other airlines need to pay hundreds of dollars. I have a friend who lives in DXB and refuses to fly either of them as he prefers KLM in F/J. You also dodged the real discussion about Canadian jobs if they are given open skies with their subsidized labor,fuel and airport costs. Not withstanding their state ownership, a state that is autocractic with a poor legal system.
     
  25. AC's unions badly needed a kick in the a$$. They are old school street fighters and the world has changed. DB benefits plans and overpaid staff (in that industry) were hurting Canada's economy with strike threats against the biggest carrier. The government acted accordingly but not out of any specific favor to AC. Remember these guys are western rednecks and WJA is non union so they also want to ensure it stays that way.
    AC can stand against any competition if the playing field is level .

    The UAE brings in young people from 3rd world countries and pays them next to nothing which is still much more than they can make at home. The gulf airlines only allow foreign airlines in to the point they loook like 3rd world carriers with the lounge psace they allocate etc. I can tell you have no clue about this subject.
     

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