G & M Market Watch: Air Canada stock downturn puzzling
Friday, March 20, 1998
By Eric Reguly
GO figure.
Air Canada is flying high. Its balance sheet and profit are strong,
armies of business travellers are paying small fortunes for seats only a
few inches wider than economy seats and the price of fuel, the biggest
cost after labour, is plummeting. Why, then, is the stock on the wane?
After an impressive run in 1997, the shares, which traded yesterday at
about $13, have lost about 11 per cent since the start of the year. They
reached a high of $15.40 in early December. Shares of the leading
airlines in the United States, meanwhile, continue to gain altitude. US
Airways is leading the pack with a gain of almost 17 per cent since
January, raising the one-year total return to 188 per cent. AMR,
owner of American Airlines, has gained more than 10 per cent since
January and Southwest Airlines is up 25 per cent.
David Gersovitz, an independent transportation analyst in Toronto,
believes fears of an economic slowdown in Western Canada at least
partly explains the Air Canada stock slide. Low commodity prices, he
noted, have pushed British Columbia to the brink of recession and
rock-bottom oil prices are clobbering Alberta. Combine this with the
weak Canadian dollar, which has bestowed luxury status on weekend
trips to the United States, and you have the makings of a weak first
quarter, he said.
There is another possible explanation for Air Canada's lousy market
performance: New equity. Traders say speculation that a fresh issue is
in the works seems to be hanging over the stock. Some analysts are
hard-pressed to think of more plausible explanations.
"Air Canada is going well, and I have a positive outlook for the
industry, so there could be a technical reason behind the shares'
performance," said Ray Neidl, an analyst in New York with ING
Barings Furman Selz.
The rumours are not good for shareholders of either Air Canada or its
main rival, Canadian Airlines, which came back from the dead last
year with its first profit since 1988. It is eager to strengthen its balance
sheet with an equity issue of its own, but is terrified Air Canada will get
there first and soak up all the demand.
The problem with the new-issue theory is that Air Canada denies it is
true. A company spokeswoman said there are no plans for an issue of
any description this year because the airline is generating enough cash
on its own; at last count, its cash reserves were about $800-million.
Shareholders should be relieved. Air Canada's last financing effort
turned into a fiasco of epic proportions. In 1995, it raised almost
$500-million in one of the biggest bought deals in history. While Air
Canada got the cheque from the sale of the non-voting shares and
convertible bonds, the deal did nothing to improve the airline's
reputation. Its timing and size surprised the market and the price was
lower than expected, driving down the value of existing shares. The
underwriting syndicate, led by Nesbitt Burns, got stuck with a ton of
unsold stock after angry institutional investors balked at taking the
whole issue.
In spite of the weak performance of Air Canada shares in recent
months, the outlook for the airline is encouraging. An economic
slowdown in B.C. and Alberta is bound to have some negative effect,
but most of the airline's domestic business comes from the booming
eastern markets. According to Standard & Poor's, the debt ratings
agency, the airline controls 64 per cent of the domestic flights from its
Toronto hub and 69 per cent of flights between Toronto and Montreal.
More importantly, it has been a prime beneficiary of the open skies
policy between the United States and Canada. Air Canada runs at least
1,300 flights every week to 42 American cities. In late 1994, just
before the open skies agreement was negotiated, its U.S. network was
less than half its present size. Even better, U.S. airlines have shown little
interest in ramping up their service to Canada.
The outlook for Canadian Airlines is less rosy. Although the worst is
over -- the shares have gained more than 80 per cent since the start of
the year -- the airline is underfinanced and needs to renew its jet fleet
and passenger handling services at airports. An economic downturn in
its Western Canadian base could destroy any chance of launching an
equity issue in the next year or so. The transpacific routes could also
take a beating if the Asian crisis deepens.
While the market for air travel is growing, there may not be enough
room for two full-fledged national airlines in the long run. The distances
may simply be too great and the population too small to keep Air
Canada, Canadian Airlines and the growing number of charter airlines
in business. Air Canada would love to see Canadian Airlines scale
back its network and is probably delighted that a commodity-driven
slowdown is emerging. Any weakness at Canadian Airlines can only
strengthen Air Canada. For investors, Air Canada looks the better
long-term bet.
Market Watch readers can leave phone messages at (416)
585-5399, or send E-mail to ereguly@globeandmail.ca
theglobeandmail.com |
