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 hello won’t release capacity forecasts as well as stop providing monthly operational data. The stock has now lost 15.9 percent of their value since Tuesday.
CEO Calin Rovinescu was blunt about his rationale for reducing guidance, saying he’s “not running the corporation for the benefit of short-term investors.”
If short-term investors don’t like this, I can encourage them to leave.
“We’ll see what the stock price does,” he explained on the conference call with analysts Wednesday.
“If short-term investors can’t stand this, I’m able to encourage them to leave. We’re running the corporation for that benefit of our long-term stakeholders, and that means we will be providing information that people consider highly relevant to how we manage the organization.”
But Eric Nuttall, a portfolio manager at Sprott Asset Management as well as an Air Canada shareholder, said providing less information to investors isn’t going to be received well.
“It shows a diploma of ignorance when it comes to the capital markets,” said Nuttall, who has held the airline’s shares for around a year.
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“I appreciate their intent on focusing people on longer-term fundamentals, that will eventually get people to realize how undervalued the stock is, however i can’t think of a situation where less information has ever been taken positively.”
If Air Canada was worried that it is guidance and monthly updates were being taken out of context, it ought to have given investors with more information, not less, he added.
“Educate the investor on what they must be taking a look at and just how they must be taking a look at it, don’t deprive them of knowledge with which to create an educated decision.”
Air Canada is definitely undervalued when compared with its U.S. peers and it is currently trading in a price-earnings ratio of two.5 over a U.S. airline average of seven.2, based on National Bank.
That is partly because investors are worried that the Canadian airlines are adding an excessive amount of capacity into a weak market, specifically in Western Canada. Both Air Canada and WestJet Airlines Ltd. maintain that their expansion plans are rational, however their recent stock price declines – 30 per cent for Air Canada and 25 % for WestJet year-to-date – indicate investors aren’t so sure.
However, eliminating guidance and monthly updates could only actually increase investor confusion, analysts said.
“The withdrawal from the guidance will probably be problematic for investors and also the investment community because it is likely to contribute to an increase in dispersion round the estimates and boost the uncertainty with what is already a complex and volatile story,” AltaCorp analyst Chris Murray said inside a note to clients.
National Bank analyst Cameron Doerksen agreed, calling the choice “a significant departure from past practice and industry norms” that may actually increase share-price volatility.
