Canadian Airlines: Fuel Prices Compound Troubles

Includes: ACDVF, WJAVF
by: FP Trading Desk

A stronger loonie won’t be enough to offset the recent run-up in fuel prices at Air Canada (AIDIF.PK) and WestJet (OTC:WJAVF), which led to an earnings estimate downgrade for both at Raymond James Wednesday.

Raymond James recently increased its average WTI estimates for 2009 to $56.12 a barrel, up from $48.05, and for 2010 to $80, up from $65.

Making matters worse this year is the ongoing pricing pressure at the carriers as they try to stimulate demand with lower fares, according Ben Cherniavksy, Raymond James analyst.

As such, Mr. Cherniavsky lowered his price target on WestJet to C$10 a share, from C$15, after decreasing his earnings per share estimate for this year and next from C$1.35 and C$1.15 to C$1.00 and C$0.57 a share, respectively.

He said he also expects Air Canada to report an EBITDAR of C$643-million in 2009 and C$589-million in 2010, from C$1.04-billion and C$1.08-billion respectively.

He said in a note to clients Wednesday:

In short, we believe there is still too much capacity in the domestic market for the current economic environment and fuel price reality. These considerations, especially when they are combined with the on-going turmoil at Air Canada and the major strategic shifts being implemented at WestJet, compel us to maintain a ‘wait and see’ approach to these stocks.

Due to the ongoing uncertainty at Air Canada, Mr. Cherniavsky has his target price for the airline still “under review.”