Airline Earnings Will Be Hit by Rising Fuel Costs

Persistently high fuel prices are expected to drag on the earnings of the country’s largest airlines, according to Chris Murray, CIBC World Markets analyst.

CIBC’s 2008 estimates for crude oil prices was recently increased to $91 a barrel from its previous estimate of $80. Likewise, Mr. Murray noted that jet fuel refining margins continue to trend upward, and he increased his estimates for refining spreads to $22 a barrel from his earlier estimate of $15.

In a note to clients on Wednesday Mr. Murray said:

Fuel will continue to remain an issue for the airlines as it represents approximately one quarter of operating costs. The Canadian airline group continues to retain the ability to raise fares to offset higher fuel prices as continuing evidence shows demand for air travel remains strong.

However, he did reduce his price target for WestJet Airlines Ltd. (WJAVF.PK) from C$27 to C$26 a share. He also reduced his Air Canada (AIDIF.PK) price target to C$19 a share from his bullish C$22 stance, and the airline’s parent company, ACE Aviation Holdings Inc. [ACE.B/TSX], to C$31 from C$36 a share.

Mr. Murray’s target price for Jazz [JAZ.UN/TSX] remains unchanged at C$10, with fuel costs being a pass-through cost to Air Canada as part of the regional carrier’s capacity purchase agreement.