UBS Analyst: Bearish Demand for Canadian Airlines

While WestJet Airlines Ltd. (WJAVF.PK) and Air Canada (AIDIF.PK) reported better-than-expected operating results for the first quarter, a UBS semi-annual survey of corporate travel managers indicates bearish demand trends are on the horizon, says the firm's transportation analyst Fadi Chamoun.

In a note to clients, Mr. Chamoun also said:

We believe that while the market has successfully absorbed recent fare increases, the significant incremental increases in yields required for softening higher fuel costs may be more difficult to achieve given slowing economic growth and further growth in capacity.

Mr. Chamoun notes that Westjet’s valuation has become more attractive in the context of the company’s “strong medium-to-long-term strength, and strong financial profile,” and his neutral rating “reflects near–term earnings risk and high expectations.” As for Air Canada, Mr. Chamoun reduced his price target to C$9 from C$10. He said:

Air Canada’s valuation remains unattricative because of high earnings risk, particularly given its exposure to potentially slowing business travel demand.