Raymond James Analyst: Expect Positive Earnings Impact from Airline Fuel Surcharges

Despite a gloomy outlook for the industry offered Monday by the International Air Transport Association, Raymond James analyst Ben Cherniavsky remains surprisingly upbeat about Canadian airlines and the impact their new fuel surcharges will have on their earnings.

Even though Raymond James’ energy team raised its oil price forecast once again this week, Mr. Cherniavsky said he was maintaining his ‘outperform’ rating on WestJet Airlines Ltd. (WJAVF.PK) and his ‘market perform’ on Air Canada (AIDIF.PK).

In a note to clients on Tuesday he said:

We believe the purchase of this latter stock is suitable for aggressive investors who are comfortable betting against the current macro forces plaguing the sector. However, on a risk adjusted basis we still believe that WestJet shares are far more attractive.

After substantially increasing his earnings estimates for both airlines last week with the implementation of their new fuel surcharges, Mr. Cherniavsky moderated that outlook somewhat Tuesday on the revised fuel estimates. 

When he originally raised his earnings estimate on May 28, Mr. Cherniavsky did not raise his price targets, saying it would be “imprudent” to do so with oil prices trading at a high of C$135 a barrel. He did, however, raise them Tuesday, saying his new price target is C$23.75 a share for WestJet, up from C$19, and C$10 a share for Air Canada, up from C$8.

However, due to the higher fuel price estimates he now says he expects earnings of C$1.98 a share in 2008 for WestJet, and C$2.29 and C$2.48 respectively. 

For Air Canada, he dropped EBITDAR estimates for Air Canada to C$1.3-billion in 2008 and C$906-million in 2009, from C$1.66-billion and C$1.4-billion respectively.