Versant Partners Analyst: Lower Fuel Costs Won't Help Travel Industry

The slowing economy and a Canadian dollar below $0.80 makes travel to sunny destinations this winter a much less attractive prospect. Compared to this time last year when the loonie was close to par or better versus the greenback, it effectively costs 30% more to travel to the U.S., plane tickets aside.

Despite an unsurprisingly optimistic outlook from the travel industry, very weak consumer confidence clearly means some people will choose to stay home – and this is clearly weighing on shares of the country’s largest airlines.

But shouldn’t lower fuel prices be helping ease this pain? While they are a big help, Versant Partners analyst Cameron Doerksen does not think the downward move in fuel costs will be able to offset weaker revenues.

He downgraded WestJet Airlines Ltd. (WJAVF.PK) from “buy” to “hold” and cut his price target from C$14.50 to C$11.50. This represents an upside of roughly 12%. However, if the stock continues to decline, say to C$9 per share, the analyst said it would present an attractive long-term buying opportunity.

“In the context of what potentially will be softer demand, WestJet is increasing capacity to sun destinations this winter,” Mr. Doerksen told clients, adding that this plan was probably put in place when the winter travel outlook was far warmer. “At the very least, we believe that any increases in demand for travel will come at the expense of lower airfares,” he added.

The analyst said WestJet’s additional capacity of roughly 30% to sunny spots like Mexico marks a major contrast with the U.S. market where virtually every carrier is cutting.

Lower fuel prices did produce a higher fiscal 2008 earnings per share forecast from the Versant analyst, from C$1.05 to C$1.18. However, his estimate for 2009 falls from C$1.20 to C$0.87.