Show Transcript
The federal government finally unveiled a long-awaited aid deal for Canada’s largest airline. But the support comes with a number of strings attached. Anthony Okolie speaks with David Mau, Portfolio Manager, TD Asset Management, about the implications of the bailout for Canadians and the industry.
Print Transcript
- David, yesterday Air Canada and the Canadian government agreed on a pandemic bailout. What were some of the key highlights for you?
- A couple of things that stood out for me was the actual size of the bailout. The government is going to provide up to $5.9 billion to Air Canada in the form of loans and equity. So that's a bit larger than I expected, which is actually a good thing, because with the amount of liquidity that they're going to have now, Air Canada will be able to operate without any further needs for capital well into-- up until at least the end of 2022, and probably well into 2023. So it actually is quite positive.
The other thing that surprised me was the $500 million equity stake that the government is going to take in Air Canada. So that's about 6% dilution to existing shareholders. Not necessarily a bad thing, again, because I think what the government wants to do is, they believe in Air Canada over the longer term. And they-- with the equity stake, they want to be able to participate in the upside.
- And you talked a little bit about the equity stake. From an investor standpoint, are there any other implications of the provisions? Obviously they'll be taking on this massive loan. What other implications could this have on investors?
- Yeah. I mean, I think when you look at the conditions that the government has imposed-- things like restrictions on executive compensation, restrictions on dividends and share buybacks, and asking Air Canada, or requiring Air Canada, to not enact any further layoffs, so they want to keep the workforce at least at the current level, those are all kind of standard. There's nothing too surprising about those conditions. The loans that the interest rates carry, that Air Canada is getting, is lower than the interest rates on Air Canada's existing loans, so that's another good thing.
I think what's important to mention is that, as a part of the deal-- and I mentioned the 6% equity stake that the government is taking in Air Canada. Well, Air Canada is also going to get warrants to buy up to another 14% of Air Canada over the next few years. So I think that's an important signal to a market, that the government is going to be there for Air Canada over the longer term. So I also take that as a positive.
And when you look at how Air Canada's share price has reacted this morning, the stock's down about 2%, which is much less than the implied equity dilution. So I think the market and investors are receiving this bailout package news quite well.
- OK. So how does this bailout package impact the average Canadian who flies Air Canada?
- Yeah. So one of the main conditions was that Air Canada would provide cash refunds to anyone who had a flight canceled as a result of COVID, whether the passenger themselves canceled it, or the airline canceled it. So that provision, that fund, is up to $1.4 billion. So anyone who wants a refund-- who wants a cash refund-- that couldn't previously get it is now eligible to get it. So obviously, that's important for consumers who have kind of been stuck in limbo for the past year because they had their flights canceled but they couldn't get their money back. So that's an important aspect.
Another thing is, as part of the conditions of the deal, Air Canada is going to resume most, if not all, of the routes that they've canceled to smaller regional areas. So that will be important for people who are living kind of further out in rural areas, or in the Maritimes, where flights have been completely canceled. So instead of now, if they need to fly somewhere, they would have had to drive four, five, six hours to another major center where there were flights available, they'll have those flights that they previously had available to them back.
- Now let's talk a little bit about the pandemic and the vaccine rollout, which of course has been much slower than expected in Canada. We've certainly seen rising case loads recently, more variants. Is there a case to be made for picking up airline stocks despite these headwinds?
- Yeah, I think so. I mean, airline stocks have recovered quite a bit from the lows back in last March and April. I think it'll still be a few years for air travel activity to fully recover, so over time I think that the travel industry will continue to grow and exceed pre-pandemic levels. So I mean, while the environment is difficult now, I don't think it's going to last forever. And for long-term investors, I think there is still a case to buy and own airline stocks.
- And of course, Canada now is outpacing the US for new COVID-19 cases per capita. And we also trail well behind the US in vaccination rates. Do you see better relative value in the US airline stocks versus Canada?
- I mean, look, the US airline stocks do trade at, I guess, at a lower relative valuation. And I would argue that that's because, like you said, Canada has lagged in terms of vaccinations. And travel activity in the US has actually recovered much more than what we've seen here in Canada.
But I mean, I would argue that because Canada has lagged, there is greater upside potential in the Canadian stocks. And I think as Canada ramps up vaccinations and we remove more of the uncertainty in this environment and get more visibility, Canadian airline stocks have a good opportunity to outperform the US airlines.
- So given all we know-- and I know you've touched on this earlier-- when do you see airlines returning to pre-pandemic levels?
- Yeah, that's the million dollar question, I think. And look, the answer is nobody knows, but it all depends on the pace of vaccinations, and if we see new variants come out, and how each country, globally, handles opening their borders. I think most industry people are suggesting now 2024, maybe 2025, is when things get back to kind of 2019 levels. I generally tend to agree with that time frame. And I think beyond 2025, the industry will actually see net new growth. So by 2026, 2027, air travel is actually going to be even more than what it was in 2019.
- That's something we'll certainly be keeping our eye on. David, thank you very much for joining us.
- Yeah. You're welcome.
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- A couple of things that stood out for me was the actual size of the bailout. The government is going to provide up to $5.9 billion to Air Canada in the form of loans and equity. So that's a bit larger than I expected, which is actually a good thing, because with the amount of liquidity that they're going to have now, Air Canada will be able to operate without any further needs for capital well into-- up until at least the end of 2022, and probably well into 2023. So it actually is quite positive.
The other thing that surprised me was the $500 million equity stake that the government is going to take in Air Canada. So that's about 6% dilution to existing shareholders. Not necessarily a bad thing, again, because I think what the government wants to do is, they believe in Air Canada over the longer term. And they-- with the equity stake, they want to be able to participate in the upside.
- And you talked a little bit about the equity stake. From an investor standpoint, are there any other implications of the provisions? Obviously they'll be taking on this massive loan. What other implications could this have on investors?
- Yeah. I mean, I think when you look at the conditions that the government has imposed-- things like restrictions on executive compensation, restrictions on dividends and share buybacks, and asking Air Canada, or requiring Air Canada, to not enact any further layoffs, so they want to keep the workforce at least at the current level, those are all kind of standard. There's nothing too surprising about those conditions. The loans that the interest rates carry, that Air Canada is getting, is lower than the interest rates on Air Canada's existing loans, so that's another good thing.
I think what's important to mention is that, as a part of the deal-- and I mentioned the 6% equity stake that the government is taking in Air Canada. Well, Air Canada is also going to get warrants to buy up to another 14% of Air Canada over the next few years. So I think that's an important signal to a market, that the government is going to be there for Air Canada over the longer term. So I also take that as a positive.
And when you look at how Air Canada's share price has reacted this morning, the stock's down about 2%, which is much less than the implied equity dilution. So I think the market and investors are receiving this bailout package news quite well.
- OK. So how does this bailout package impact the average Canadian who flies Air Canada?
- Yeah. So one of the main conditions was that Air Canada would provide cash refunds to anyone who had a flight canceled as a result of COVID, whether the passenger themselves canceled it, or the airline canceled it. So that provision, that fund, is up to $1.4 billion. So anyone who wants a refund-- who wants a cash refund-- that couldn't previously get it is now eligible to get it. So obviously, that's important for consumers who have kind of been stuck in limbo for the past year because they had their flights canceled but they couldn't get their money back. So that's an important aspect.
Another thing is, as part of the conditions of the deal, Air Canada is going to resume most, if not all, of the routes that they've canceled to smaller regional areas. So that will be important for people who are living kind of further out in rural areas, or in the Maritimes, where flights have been completely canceled. So instead of now, if they need to fly somewhere, they would have had to drive four, five, six hours to another major center where there were flights available, they'll have those flights that they previously had available to them back.
- Now let's talk a little bit about the pandemic and the vaccine rollout, which of course has been much slower than expected in Canada. We've certainly seen rising case loads recently, more variants. Is there a case to be made for picking up airline stocks despite these headwinds?
- Yeah, I think so. I mean, airline stocks have recovered quite a bit from the lows back in last March and April. I think it'll still be a few years for air travel activity to fully recover, so over time I think that the travel industry will continue to grow and exceed pre-pandemic levels. So I mean, while the environment is difficult now, I don't think it's going to last forever. And for long-term investors, I think there is still a case to buy and own airline stocks.
- And of course, Canada now is outpacing the US for new COVID-19 cases per capita. And we also trail well behind the US in vaccination rates. Do you see better relative value in the US airline stocks versus Canada?
- I mean, look, the US airline stocks do trade at, I guess, at a lower relative valuation. And I would argue that that's because, like you said, Canada has lagged in terms of vaccinations. And travel activity in the US has actually recovered much more than what we've seen here in Canada.
But I mean, I would argue that because Canada has lagged, there is greater upside potential in the Canadian stocks. And I think as Canada ramps up vaccinations and we remove more of the uncertainty in this environment and get more visibility, Canadian airline stocks have a good opportunity to outperform the US airlines.
- So given all we know-- and I know you've touched on this earlier-- when do you see airlines returning to pre-pandemic levels?
- Yeah, that's the million dollar question, I think. And look, the answer is nobody knows, but it all depends on the pace of vaccinations, and if we see new variants come out, and how each country, globally, handles opening their borders. I think most industry people are suggesting now 2024, maybe 2025, is when things get back to kind of 2019 levels. I generally tend to agree with that time frame. And I think beyond 2025, the industry will actually see net new growth. So by 2026, 2027, air travel is actually going to be even more than what it was in 2019.
- That's something we'll certainly be keeping our eye on. David, thank you very much for joining us.
- Yeah. You're welcome.
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