Air Canada’s (TSX:AC) Feud With WestJet Spells Doom for Shareholders
Last week, Air Canada (TSX:AC) and WestJet got into a very public spat on Twitter. It started when WestJet announced that it had committed to issuing full refunds to everyone whose travel had been cancelled due to COVID-19. Air Canada replied that that had been its own policy all along. Shortly thereafter, AC’s Twitter feed filled up with people who said that the company had not, in fact, given them refunds.
This incident is more significant than it appears. While it’s well known that Air Canada is experiencing financial problems this year, it looks like it has some serious PR issues as well. It’s actually possible that these PR problems could make the financial problems worse. I’ll explore that in just a minute. First, though, let’s look at the refund question in more detail.
Massive PR issues
An airline not giving refunds to customers who had had their flights cancelled could find themselves getting bad press. As it turns out, that’s exactly what’s happening with Air Canada. In August, it was revealed that AC had racked up the most refund complaints of any foreign airline in the United States. That story was well publicized, with coverage in Forbes, the CBC, and other outlets.
Since then, the company has gone on the defensive, saying that it is giving refunds. Social media, however, tells a different story. As previously mentioned, passengers on Twitter took issue with Air Canada’s claim that it had been giving refunds, saying that they hadn’t received theirs. Additionally, the r/aircanada subreddit is full of stories of people not even receiving vouchers … let alone cash refunds. It looks like passengers still aren’t thrilled with Air Canada’s refund policy. And that could lead to some serious problems before the year is over.
A company running out of cash
As I’ve documented extensively in past articles, Air Canada is rapidly running out of cash. It has about $5 billion in cash, with another $3 billion or so in liquid assets. That’s enough to keep it afloat for a while. But airlines are very capital intensive. Each quarter, it runs enormous fixed costs that don’t go away, even when planes are grounded. In the second quarter alone, AC had $149 million in interest expenses. On top of that, it has pension obligations, plane maintenance costs, and more.
Throw an avalanche of refund requests into the mix, and things could get pretty dire. Unfortunately, Air Canada may eventually have no choice but to honour them. Back in March, a law firm called Evolink filed a class-action suit against Air Canada and other airlines over refunds. If that goes ahead, then the airline could be forced to pay out refunds that it hasn’t paid yet. That would make the company’s cash bleed even worse, increasing the likelihood that it will need a bailout to stave off bankruptcy. For all these reasons and more, Air Canada shareholders are in for a rough ride for the remainder of 2020.
The post Air Canada’s (TSX:AC) Feud With WestJet Spells Doom for Shareholders appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Twitter. The Motley Fool owns shares of and recommends Twitter.
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