Pandemic-Hit Air Canada (TSX:AC) and WestJet Stocks Await Financial Aid

Summary

• The Canadian airlines’ operations and financial reports have been severely impacted due to COVID-19.
• Air Canada’s (TSX:AC)) revenue decreased by 89 per cent year-over-year.
• Private equity investments of ONEX Corporation (TSX:ONEX), which owns WestJet airlines, declined in the last two quarters.

The aviation sector is seeing a moderate recovery as economies gradually reopen amid the ongoing pandemic. The International Air Transport Association expects airlines to spend an average of US$ 5 billion to US$ 6 billion per month in 2021. The Canadian airlines have also been severely impacted due to COVID-19. Prime Minister Justin Trudeau is likely to announce a relief package for the aviation sector but has not yet made any official statement. Air Canada (TSX:AC), the country’s largest airline, wants Ottawa to relax travel rules, which states that people coming from abroad must be quarantined for 14 days to contain the spread of the virus. WestJet Airlines, another popular airline owned by ONEX Corporation (TSX:ONEX), saw many cancellations in recent months.

Air Canada (TSX:AC)

Sector: Industrials

Industry: Transportation

Before COVID struck, Air Canada served nearly 40 million customers annually. It operated 1,500 daily flights to around 200 destinations and was a founding member of the Star Alliance, a global airline alliance with 26 members and 40 affiliates.

In 2016, the company reported C$ 14.7 billion in total revenue, with passenger services contributing roughly 90 per cent of it. But all that changed in 2020, when pandemic completely decimated the demand for airlines.

The carrier has taken a series of stringent measures to mitigate the impact of the virus on its daily operations. It is planning to finalize an initial order of 25,000 rapid COVID-19 test kits from Abbott for voluntary employee testing. This rapid test kit, which can produce results in less than 20 minutes, was recently approved for use by Health Canada.

The resurgence of COVID-19 cases across the country is pushing people to learn to live alongside the virus. Under these circumstances, the airline has been pursuing on building relationships and maintaining a layered approach to keep its employees and customers safe.

Glancing at Air Canada’s Q2 Earnings

In the second quarter 2020, the company recorded negative EBITDA (earnings before interest, taxes, depreciation, and amortization) of C$ 832 million, as compared to positive EBITDA of C$ 916 million same quarter last year. The airline reported an operating loss of C$ 1.555 billion in its latest quarter, as opposed to an operating income of C$ 422 million in Q2 2019.

Operating expenses (excluding amortization, depreciation, and special expenses) decreased to C$ 2.462 billion, down 64 per cent year-over-year (YoY).

The company’s current market capitalization stands at C$ 4.75 billion. Air Canada reported total revenues of C$ 527 million in its second quarter ended on 30 June 2020, a decrease of 89 per cent YoY. The airline did not pay out any dividend in this quarter. As per data on the TSX, its current price-to-book (P/B) ratio is 2.324.

Air Canada Outlook

The carrier has decided to cut down its third quarter 2020 capacity by almost 80 per cent (from the same quarter in 2019). The airline is working to dynamically adjust its capacity and take other measures as required to account for health warnings, travel restrictions, Covid-19 rapid testing and customer demand.

ONEX Corporation (WestJet Stock/ TSX: ONEX)

Sector: Financial Services

Industry: Asset Management

WestJet Airlines has multiple aviation operations in Canada and across the world, including scheduled and charter air services and tour packages, etc.

The carrier, which previously traded on the Toronto Stock Exchange under the ticker ‘WJA’, was bought by investment and asset management company Onex Corporation in December 2019. Apart from WestJet, Onex’ diverse investments include firms like Advanced Integration Technology, ASM Global, Celestica, etc.

WestJet's newly inducted aircraft, the 787 Dreamliner, will now maneuvering five-times weekly between Vancouver and Toronto.

ONEX Key Numbers

Onex Corporation’s current market cap stands at C$ 5.75 billion. The company paid out dividend of C$ 0.10 in the third quarter of 2020. It reported net earnings of C$ 689 million in second quarter ended on 30 June 2020. Its current price-to-book (P/B) ratio is 0.686 while price-to-cash flow ratio is 9.20, as per key data on TSX.

The company’s investments in private equity in Q2 was C$ 3.5 billion, down by 12.5 per cent from the fourth quarter ended on 31 December 2019 of C$ 4.0 billion.

During the second quarter of 2020, ONEX’ investing segment recognized a net gain from private equity investments of C$435 million. But during the first half of 2020, Onex’ investing segment totaled a net loss from private equity investments of C$209 million.

The company will declare its results for nine months ending 30 September 2020 on November 13.

COVID-19 Impact on Onex’ Private Equity Investments

Reeling under the pandemic, the fair value assessments of ONEX’s private equity investments were impacted as follows:

1. Higher weightage was given to valuation approaches, which reflected current market analysis.
2. Cash flow outlook used in discounted cash flow calculation models were updated to present the known and expected impacts of the crisis, which resulted in an overall decline in estimated future cash flows.
3. Risk premiums signaled by equity and credit markets due to the uncertainty around the long-term impacts of COVID-19 were taken in account.

As a result of the above concerns, certain private equity investments acquired by the company led to the significant value declines, said ONEX in its interim financial report.