Canadian Airline Stocks December 2022 – Which Rebound Play Is Best?

Posted on December 7, 2022 by Dan Kent

You'd be hard pressed to find an industry harder hit by the COVID-19 pandemic than Canadian airline companies.

For one, travel came to a complete standstill as borders were closed and international travel was halted. To add to this, travel is often booked well in advance. So not only was the forward outlook for Canadian airline stocks crushed, but it also had to dish out some hefty refunds to customers who couldn't go on the trips that had been planned.

In fact, some required government bailouts in order to pay refunds.

But now that the economy is open, the question many investors are asking is are these Canadian stocks and airline carriers worth the gamble, or have they been materially impacted by the pandemic?

In this piece, I'll go over 3 Canadian airline stocks, and discuss whether or not they're worth investing your hard-earned money in today.

Transat stock (TSE:TRZ)

Transat (TSE:TRZ) has been a popular company in the media and Canadian market over the last couple years. Why? Well, it has gone through a series of failed acquisition attempts by both Air Canada (TSE:AC) and surprisingly telecom company Quebecor (TSE:QBR.B).

In April of 2021, Air Canada and Transat agreed to terminate the proposed acquisition and more recently Quebecor CEO ended talks with Transat on a potential acquisition as well.

So, as it stands, Transat is going to be kicking around for a while unless another offer comes in. Which, considering the WestJet and Sunwing deal, it is a possibility. So, what exactly does the company do?

Transat specializes in the marketing and distribution of holiday travel. It not only offers vacation packages to places like the Caribbean but hotel stays and general airline services under the Air Transat brand.

The pandemic hit the company extremely hard, and the fact it owned a hotel division seemed to be a double whammy. So much so that on May 20, 2021, the company discontinued its hotel division due to a lack of liquidity.

Transat closed out Fiscal 2021 with revenue of $124.82M. Considering it posted revenue of $2.9B in Fiscal 2019, this should show you why the company needed a $700M government bailout in late April 2021 to continue its operations. With rising fuel costs, there is the potential that Transat's bottom line could be hit even further even as travel restrictions ease.

The company's balance sheet continues to deteriorate as debt stacks up and capital depletes. It's safe to say in order for Transat to see revenue growth it needs people to absolutely flock back to travel in 2022. And, this does look to be the case, as trailing twelve month revenue as of late 2022 sits in the $1.1B range.

However, I wasn't too much of a fan of Transat even pre-COVID. I believe there are many more operationally efficient companies in the airline industry here in Canada. Two of which I'm going to go over next.

Air Canada stock (TSE:AC)

If you're looking for popular Canadian airline stocks, look no further than Air Canada (TSE:AC). In fact, this was one of the most popular airline stocks in the world at one point due to the rumored economic recovery. Traders on both the TSX and exchanges south of the border made this company one of the most heavily traded in North America for short stints of time.

Air Canada is Canada's largest airline. Prior to the COVID-19 pandemic, this is an airline that was providing passenger services to over 50 million people a year. Not only does it operate regional flights here in Canada, but to the international market and vacation destinations as well.

The pandemic rocked the company hard, as it saw revenue collapse from nearly $18B in 2019 to just $5.3B in 2020. The company had posted positive free cash flow for 3 years running prior to the pandemic, but losses piled up in 2020, resulting in negative FCF of over $3.5B.

In fact, the situation got so dire that Air Canada began to borrow money against its fleet for short-term liquidity.

Air Canada was one of the most efficient airlines in the world prior to the pandemic, providing investors with industry-leading ROE, ROA, and ROIC numbers.

It's no surprise that up until the market crash in 2020, Air Canada had provided overall returns for investors in excess of 2,360% since mid-2011. In fact, it was one of the best-performing stocks on the Toronto Stock Exchange.

In terms of airline bailouts, Air Canada got the premium package. Not only did the government open up the potential for nearly $5.4B in low-interest loans, but it also took an equity stake in the company of $500M.

So, as the company shored up liquidity it was all but guaranteed to survive the pandemic and get back on track. But, there's no doubt this company's balance sheet has deteriorated, and investors must be aware that this is not the same Air Canada as before.

The company's retained earnings balance of $3.5B from 2019 has all but evaporated and now sits with a deficit. Debt has ballooned, with nearly $13B in long-term debt.

To put this into perspective, this is over $8B higher than 2019 levels. An investment in Air Canada does have some promise today considering the inevitable boom in travel bookings and return to normalcy.

However, the company will likely take multiple years to stabilize its financial position, and this is key for investors to understand. An investment made today in Air Canada will require patience, and likely a 5-year timeline at minimum.

Onex stock (TSE:ONEX)

I will admit, Onex (TSE:ONEX) in terms of Canadian airline stocks is cheating a bit. The company is a large asset manager with $40B+ in assets and over 38 years of operations. But, it does still own one of the biggest airlines in the country, and that is Westjet.

The company also owns or has owned a stake in some other valuable businesses including Celestica, Purolator, Canadian Securities Institute, and Cineplex.

Onex's business model is likely to confuse some investors. Because it is an asset manager, when its investments go up in value, it gets to report that as an increase in overall earnings.

However, as we've all witnessed, investments are far from a straight line upwards. So, it's earnings can get quite sporadic. What you really need to look at in terms of growth from Onex is its book value per share. And speaking of which, it has grown by 3.76%, 36.26%, and 8.04% over the last 3 years, some fairly solid returns.

Onex's purchase of Westjet just one year prior to the COVID-19 pandemic was nothing more than bad luck, as it was viewed at the time as a solid acquisition. In fact, I was a shareholder of Westjet, and I viewed them as the best airline in the country.

The company is still trading below book value at 0.5 times, and although it may not be a pure play in terms of airline companies, there is no question it will benefit from an economic reopening on not just its Westjet investment, but others as well.

Of note, Westjet recently agreed to acquire Sunwing Vacations and and Sunwing Airlines. This will move to expand the airlines reach if it should close.

Overall, Canadian airline stocks are likely to have rocky times ahead

If you're willing to take on a bit more risk, a pure-play Canadian airline stock could be for you. If I were to pick one right now, it would be Air Canada. I've never been a fan of Transat, and I really think the company could struggle coming out of the pandemic.

However, if you're looking for a bit of an "all in one" recovery play that has some airline exposure to it, Onex provides solid value.

Check out the top Canadian silver stocks.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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