Air Canada (TSX:AC) recently announced its refund offer to passengers, which it agreed to in exchange for $5.9 billion in government aid. And honestly, it looks pretty good. Offering full re-imbursement for passengers whose flights were cancelled due to the pandemic, the company is being more generous than ever before. In this article, I’ll explore how Air Canada’s new refund offer impacts both passengers and investors. I’ll start by exploring exactly what’s being offered, then proceed to possible financial impacts.
New policy: Refunds with no questions asked
Air Canada’s new refund offer has a lot more than it seems at first glance. As you might expect, all Air Canada passengers whose flights were cancelled after February 2021 can now get refunds. This is what consumers initially demanded, and what the government asked for as a bailout condition.
But Air Canada’s offer goes far beyond that. In addition to cash refunds to customers who haven’t received anything yet, AC is now offering cash for customers who have already accepted vouchers. The company’s initial policy when COVID-19 forced it to close routes was to offer vouchers instead of cash refunds. Stressing its precarious financial position, the company said it had no other choice. It did offer full cash refunds in limited circumstances. But once you had accepted a voucher, it was game over.
Not anymore. Under Air Canada’s new policy, you can convert your cash voucher into a refund to your original payment method. So, if you booked a $1,000 flight on your credit card, had it cancelled, and accepted a voucher, you can now get the $1,000 straight back to your card. Of course, you’ll have to give up the voucher in order to do this. But in cash-strapped times, where you’re barely allowed to fly anywhere, the cash seems like a much better option.
Implications for investors
Air Canada’s refund policy has two main implications for investors: one positive and one negative.
To get the bad news out of the way: this new refund policy means AC could fork out a lot of money on refunds. Since February 2020, Air Canada has already paid $1.2 billion in customer refunds. With vouchers now convertible to cash, that figure could go a lot higher. Since COVID started, Air Canada has typically lost about $1 billion per quarter. A sudden flood of cash refund requests could possibly trigger its biggest quarterly loss yet.
Now for the good news.
All of this refund stuff comes with a $5.9 billion pile of cash attached. Remember, Air Canada did all of this to satisfy the government. In exchange, it got a $5.9 billion bailout. Even if Air Canada has to fork over $1 billion in refunds directly because of this policy, that’s still $4.9 billion in cash it has gained, at low interest, to cover future costs. Could it place new plane orders, or buy out another airline? With $5 billion in extra cash, anything is possible. So, if we look at Air Canada’s refunds in their full context — that being the $5.9 billion low cost financing — then it’s a good thing for the company.
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