There’s no denying the fact that Air Canada (TSX:AC) is one of the most exciting reopening plays on the TSX today. Its management team has recently undertaken some strategically intelligent moves. These have greatly improved the company’s outlook compared to just a few months ago. Indeed, temporary layoffs, cutting down local routes, and growing its cargo business are all great. Investors also seem to like the recent Air Transat deal.
That said, investors may want to remain cautious with their recovery picks right now. Here are two reasons why Air Canada stock could see some turbulence on the horizon.
Jet fuel prices are also on a growth trajectory
An S&P Global Platts report states that U.S. jet fuel prices hit their 13-month high in February. Jet fuel hit $1.67 per gallon, a 12.76% year-over-year change. This is quite the upward move, considering oil prices are coming off pandemic-driven lows. Rising oil prices are generally great for energy stocks. However, companies that use a tremendous amount of fuel like Air Canada, not so much.
With fuel costs a big ticket line item for Air Canada, this company is exposed to commodity prices. The good news is that flights have not yet resumed, and the airline has time to hedge out a lot of this exposure. However, the probability Air Canada will be profitable out of the gate really has come into question in light of where fuel prices are right now.
As the company brings its capacity online, investors will be paying close attention to margins. I think this could be a significant headwind investors should start considering now.
Canada is late to the game on vaccines
Air Canada stock remains a highly-touted economic reopening play. As such, vaccine rollouts matter more for airlines than most other sectors.
Accordingly, the fact Canada is currently sitting around 40th on the world stage in terms of vaccinations is troubling. Canada lacks domestic production capacity, which has led to delay in vaccine deliveries. In recent weeks, the country saw reduced, or worse, cancelled orders of vaccines. That’s certainly not bullish for the reopening thesis.
Indeed, vaccinating the entire country is a huge task. We live in one of the largest countries in the world. This makes it a logistical nightmare to get vaccines to where they need to be. However, as a G7 nation, many Canadians are expecting more out of their government right now.
Should the rollout accelerate, Air Canada stock could do quite well. However, the fact Canada is lagging the world in this department is not a good predictor of near-term stock price performance. Investors should keep a close eye on this key catalyst as well.
Air Canada is going to remain under some short-term pressure until regular air travel resumes.
With mutant vaccine-resistant strains on the horizon, there’s still some time before Air Canada returns to generating pre-pandemic revenues. While there is a lot to like about the firm, investors will be keeping a keen eye on jet fuel prices and vaccine rollouts while investing.
I think this is a stock with a tonne of potential. However, there’s also a meaningful amount of risk. Investors should size positions accordingly.
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned.
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