Air Canada vs. WestJet

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 |  Includes: ACDVF, WJAVF
by: FP Trading Desk

WestJet Airlines (OTC:WJAVF) and Air Canada (AIDIF.PK) continue to slug it out in the domestic airspace, but it looks like Canada's national air carrier will eventually lose out if it cannot find a solution to its higher costs relative to the competition.

Since Air Canada changed its management, the airline with notorious customer service has aggressively pursued a more pleasant travel experience while offering substantial discounts in an attempt to stave off bankruptcy.

Fadi Chamoun, UBS analyst, said in a note Wednesday:

While this approach seems to be working for now, it is at the expense of profitability. Without drastic restructuring of its cost base, we are yet to be convinced that Air Canada can lower its cost disadvantage versus WestJet.

Unfortunately for Air Canada, Mr. Chamoun projects a loss per share of C$6.03 in 2009 and C$2.46 in 2010 on continued weak demand and tight liquidity. Failing to convince a crucial segment of its unionized workforce to agree to a new labour agreement, including a suspension of pension payments, does not help either.

Mr. Chamoun maintains a Sell rating on the stock with a price target of C$.50.

Meanwhile, the near-term picture for WestJet is clouded by Air Canada's sales push. Canada's largest budget airline saw revenue per available seat mile drop 16%-18% in the second quarter of 2009.

In the near term, WestJet is expected to look for a balanced approach between lowering pricing and scaling back capacity growth to maintain profitability. However, in the medium-term WestJet will likely win the day with its low-cost advantage and new initiatives (code-sharing, new loyalty programs) that will underpin growth, he said.

Mr. Chamoun maintains a Buy rating, but has dropped his price target to C$14 from C$15. He has also dropped his EPS estimates in 2009 by 34% to C$.62, and 14% to C$1.08 in 2010.