Turbulence greets Air Canada’s new capacity guidance policy
Air Canada’s decision to stop providing capacity guidance was a shot across the bow at short-term investors, but the shrapnel is hitting long-term investors too.
The airline’s stock fell for the second day in a row Thursday after it said it will no longer release capacity forecasts and will also stop providing monthly operational data. The stock has now lost 15.9 per cent of its value since Tuesday.
Chief executive Calin Rovinescu was blunt about his rationale for reducing guidance, saying he’s “not running this company for the benefit of short-term investors.”
“We’ll see what the stock price does,” he said on a conference call with analysts Wednesday.
“If short- term investors don’t like this, I can encourage them to leave. We’re running this company for the benefit of our longterm stakeholders, and that means we’re going to be providing information that we consider relevant to how we manage the company.”
But Eric Nuttall, a portfolio manager at Sprott Asset Management and an Air Canada shareholder, said providing less information to investors is never going to be received well.
“It shows a degree of ignorance when it comes to the capital markets,” said Nuttall, who has held the airline’s shares for about a year.
“I appreciate their intent on focusing people on longer- term fundamentals, which will eventually get people to realize how undervalued the stock is, but I can’t think of a situation where less information has ever been taken positively.”
If Air Canada was worried that its guidance and monthly updates were being taken out of context, it should have provided i nvestors with more information, not less, he added.
“Educate the investor on what they should be looking at and how they should be looking at it, don’t deprive them of information with which to make an informed decision.”
Air Canada has long been undervalued compared to its U. S. peers and is currently trading at a price- earnings ratio of 2.5 compared to a U. S. airline average of 7.2, according to National Bank.
That is partly because investors are worried that the Canadian airlines are adding too much capacity into a weak market, particularly in Western Canada. Both Air Canada and WestJet Airlines Ltd. maintain that their expansion plans are rational, but their recent stock price declines — 30 per cent for Air Canada and 25 per cent for WestJet year- to- date — indicate investors aren’t so sure.
However, eliminating guidance and monthly updates could only serve to increase investor confusion, analysts said.
“The withdrawal of the guidance is likely to be problematic for investors and the investment community as it is likely to contribute to an increase in dispersion around the estimates and increase the uncertainty in what is already a complex and volatile story,” AltaCorp analyst Chris Murray said in a note to clients.
National Bank analyst Cameron Doerksen agreed, calling the decision “a significant departure f rom past practice and industry norms” that may actually increase share-price volatility.
IF SHORT-TERM INVESTORS DON’T LIKE THIS ... (THEN) LEAVE.