Barack Obama's ‘Don’t Do Stupid Stuff’ applies here
The U.S. Hedge Funds are having a field day with their super sophisticated algo-trading platforms stealing AC shares from investors who have stop losses on their shares, bought on margin or are being spooked by trolls, many of whom are employed by the funds. At the same time, trading liquidity (shares traded as percentage of float) is lowest when compared to the four largest U.S. airlines (see OTB’s posts on this subject – its most informative). As I mentioned in previous posts, Air Canada has significant cash-on-hand to navigate through this crisis. The general rule of thumb for airlines is to carry cash and cash equivalents equal to 20 percent of annual revenue. While the U.S. carriers are carrying considerably less than this target, Air Canada at the end of last year was carrying, an unusually high percentage, about 34% of annual revenues.
As for managing through this crisis, what was initially an obstacle to the Airline’s growth plans, has turned into an advantage. Prior to the crisis, Air Canada had nine percent of its total fleet grounded with its 400 pilots being “paid” by Boeing. To accommodate the grounding, the Airline extended the leases on the airplanes to be replaced. Leases were negotiated with flexible end-dates, at the Company’s option. So Air Canada has had a head start in substantially reducing capacity by having 24 MAX aircraft already grounded, returning lease-extended aircraft, parking unencumbered aircraft, pushing back capex and initiating aggressive Company-wide cost cutting programs. Moreover, Air Canada recently reached an agreement with Boeing, a settlement estimated at over $1 billion. The goal is cash preservation. The Airline is not going bankrupt, as many on this Board want you to believe, and they are not seeking a government bailout.
The major cost item for airlines is fuel, and significant savings will be realized. Last year’s total fuel bill was $4,347 million (including fuel expense related to regional airline operations). Huge savings will be achieved through significantly lower fuel costs (recall Air Canada wasn’t hedging) and volume consumed. Additionally, aircraft up-gauging and fewer frequencies result in additional significant fuel savings. These lower fuel costs will no doubt be locked-in for the next couple of years.
The hedge funds (and other large buyers) are buying AC shares because they know the company is well-managed, very liquid, and will exit this crisis much stronger than its competitors. They see tremendous upside. Why else would they be buying?
The ability to mislead people is greatly underestimated.
– Charlie Munger