Mr. Kavafian has placed a “hold” rating on shares in Air Canada and 12-month target price of C$12 on the stock, after it opened at C$13.90 Thursday.
“Air Canada is not yet solidly profitable even though it currently operates in a duopoly at high load factors,” Mr. Kavafian said. “We believe this is because it is not charging enough for its seats by matching WestJet’s (OTC:WJAVF) prices to retain its customers.”
Canada’s largest airline has a 40% cost disadvantage to its main rival Westjet Airlines Ltd. and yet has only a 4% yield premium, he estimates. Air Canada’s current strategy is costing it “hundreds of million of dollars per year in lost profits,” he said, adding that a better strategy may be to differentiate itself from WestJet by upgrading its product, adding frills and selling seats at higher prices.
He also said he expects that the almost C$7-billion Air Canada has committed to capital expenditures in the next five years will be paid for by increasing its debt.
“We believe Air Canada will continue losing market share to WestJet in the domestic market while the U.S. market is slowing down,” he wrote.
He said he anticipates earnings per share of C56¢ in the second quarter and C$1.49 for 2007 as a whole.