Air Canada's stock (AC.TO) has been on a run since hitting pandemic lows last year, up nearly 96 per cent since March 2020 as of Tuesday, but one analyst says the Delta variant poses heightened risk to the airline's recovery.
RBC Capital Markets analyst Walter Spracklin lowered Air Canada's rating – from outperform to sector perform – and also downgraded the bank's price target for the company from $28 to $25 due to the threat of new variants.
While Spracklin says Air Canada's management team "has done an impressive job" navigating the pandemic and has positioned the company well for the future, "we are increasingly mindful of the heightened risk that new variants pose to the recovery."
"Given the rate at which mutations have been recorded in the COVID-19 virus, we view continued global transmission as the primary driver behind the emergence of new variants. In turn, we see increased potential for these new variants to negatively impact global air travel demand," Spracklin wrote in a note to clients released Tuesday.
"As such, and until global vaccination rates meaningfully progress, we see the threat of new variants increasing the risk profile of (Air Canada) shares in the near term."
The latest statistics from the International Air Transport Association (IATA), an industry group which represents 290 airlines around the world including Air Canada and WestJet, show that the travel recovery stalled in August. IATA says the slowdown, which fell from July, was due to government restrictions imposed in response to the Delta variant.
Total global demand for air travel in August, as measured in revenue passenger kilometres, was down 56 per cent compared to August 2019, driven by a slowdown in domestic travel around the world. International demand also slowed, falling 69 per cent compared to August 2019 levels.
"The rapid slowdown in the domestic traffic recovery in August, owing to a spike in the Delta variant, shows how exposed air travel continues to be to the cycles of COVID-19," IATA's director general Willie Walsh said in a statement. He urged governments to continue providing financial regulatory support to the industry, as well as apply a risk-based approach to managing borders.
Spracklin says IATA's latest statistics reinforced the view that the Delta variant has impacted travel demand "and is likely to weigh on the surge in 'pent-up demand' that many anticipated would materialize in Canada in August, September and October."
"Pent-up demand appears to have peaked in both Canada and the U.S.," Spracklin wrote.
Spracklin says Air Canada's rating could improve if the threat of new variants subsides and if the government eases international travel protocols that "add a layer of complexity to international travel."
Air Canada's stock was trading at $23.73 as of 12:45 p.m. ET, a decline of nearly 2 per cent compared to Monday's close. The stock is still up more than 95 per cent when compared to the pandemic low of $12.15 hit on March 19 last year.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.