Air Canada is Canada’s biggest domestic and international airline. It has several divisions, including a discount division (Tango) and Air Cargo, a transport division. Amid a large debtload and a struggling economy, Air Canada entered CCAA bankruptcy protection. The company emerged in 2006 as a publicly traded entity on the Toronto Stock Exchange.

Why Is It Cheap?

A recent guest on Market Call summed up Air Canada’s position nicely the other day. He compared it to a warrant on the economic recovery, rising only when we’re certain of the economy being out of the crapper. Being the airline with the business sections on their planes means they’re much more economically sensitive than a lower cost competitor like Westjet. The airline business is a tough business and the market has no patience for mediocre operators like Air Canada.

Plus, have you flown Air Canada? The difference between them and Westjet is night and day.

Industry Outlook

I literally cannot think of a worst industry to invest in than airlines. Fixed costs are huge, competition is cutthroat, employees are unhappy because they get paid squat and when something goes wrong people die. Customers view airlines as a commodity and aren’t willing to pay a premium to fly one carrier over another. This environment breeds price wars and those aren’t pretty for investors.

Dividend

Not a chance. Do any of the airlines pay a dividend?

Balance Sheet

From a book value perspective, the company doesn’t look half bad. Book value is $5.10 a share, however a large portion of that is made up of intangible assets. Debt is a manageable $3.6B, especially considering the company holds $1.6B of cash and short term securities. It trades at a substantial discount of Westjet on a book value basis. From a quick glance at their other competitors balance sheets, Air Canada is very attractive on a book value basis.

Earnings

2009- ($0.18)

2008- ($10.25)

2007- $4.25

2006- ($0.83)

I didn’t bother to check back to before the company was in bankruptcy protection. Earnings are not pretty.

Insider Activity

I cannot find that information for Air Canada. The sedi.ca website is pretty close to worthless as far as I’m concerned. If anyone knows a good source for insider activity on Canadian stocks, please let me know.

Price Appreciation

As you can see, the stock has done nothing but go down since the re-issue back in 06. There is lots of room for the stock to go up once the economy picks back up again. A price target in the $6-8 range isn’t unreasonable.

Summary

The airline industry is tough to invest in. The company isn’t currently profitable, nor will they be anytime soon without the underlying economy recovering. Westjet is a much better operator, one that is actually profitable. Consumers vote with their wallets when it comes to picking an airline, and the minority that don’t prefer the company’s main competitor.

While the short term outlook doesn’t look good, I believe that this company will outperform the market by a wide margin once the economy improves. When that happens is the tricky part of the guess. Air Canada is getting a spot on my watchlist.

Disclosure: I do not own shares in any companies mentioned in this post.

Tell everyone, yo!