Canadian Airlines' Pricing Pressure Could Force Further Capacity Cuts

Includes: ACDVF, WJAVF
by: FP Trading Desk

The pricing environment for Canadian airlines remained under pressure in April and may lead to further capacity reductions this year, according to Raymond James analyst Ben Cherniavsky.

Mr. Cherniavsky said in a note to clients Monday:

According to our research, the lowest available fares for domestic flights six weeks forward fell dramatically on virtually every route across the country for both Air Canada (AIDIF.PK) and WestJet (OTC:WJAVF). It confirms that the slight uptick we observed in the index last month was indeed ephemeral.

The pricing declines continued despite both Air Canada and WestJet reducing their capacity growth plans for the year. WestJet said earlier this month it plans to reduce its 2009 growth rate by between 3% and 5%.

Mr. Cherniavsky said:

Unless the environment suddenly and unexpectedly improves, we believe WestJet may be compelled to make further-albeit modest-downward adjustments to its 2009 capacity plans. The same can be said of Air Canada, although it has already downsized significantly.

Mr. Cherniavsky did, however, note that the year-over-year comparisons on price are “significantly” influenced by the fact that this time last year the industry introduced sizable fuel surcharges in the domestic market, which have subsequently been eliminated.

“The implication being that although fares (including fuel surcharges) are off dramatically for the airlines, so are fuel costs,” he noted.

Mr. Cherniavsky rates both stocks a “market perform,” but said he may become more bullish again on WestJet if he sees any further share price weakness or material improvement in the underlying industry fundamentals.