CIBC Changes Estimation Process for Airlines Rising Fuel Costs

The rapid appreciation of jet fuel has led CIBC World Market’s analyst Chris Murray to change the way he estimates the cost of fuel going forward for Canadian airlines.

In a note to clients he said:

We believe that given the significant uncertainty for both benchmark WTI pricing as well as refining margins that the most appropriate approach going forward is to reflect the pricing implied by heating oil futures curves as a proxy for future prices of kerosene jet fuel.

Since 1999, kerosene jet fuel and heating oil prices have a correlation in excess of 0.995 with an average tracking error of less than 2%, he said. The change, however, now has him projecting $132 per barrel jet fuel prices for 2008 and 2009, leading to a downgrade of the price targets for both WestJet Airlines Ltd. (WJAVF.PK) and Air Canada (AIDIF.PK). Mr. Murray lowered his price target on Air Canada to C$15 from C$19, and at WestJet to C$24 from C$26 a share.

However, the recent sell off of WestJet caused Mr. Murray to also upgrade the Calgary carrier from a “sector performer” to a “sector outperformer,” the same rating he has on Air Canada. He said:

We believe current valuations are not reflective of [WestJet’s] future potential.