January 20, 2008 / 1:26 AM / 10 years ago

Canadian airline sector poised for downturn: analyst

3 Min Read

<p>Air Canada passengers wait in long lines for boarding passes at Pearson International Airport in Toronto November 16, 2007.Mike Cassese</p>

CALGARY, Alberta (Reuters) - Canada's airline industry looks set to finally join the downturn in the United States, an analyst said on Friday as he cut his outlook on the country's major carriers, Air Canada and WestJet Airlines Ltd.

Of the two, Air Canada, with its higher cost structure, will be particularly hard hit by lofty fuel prices and a slowing economy, Raymond James analyst Ben Cherniavsky wrote in a report projecting a tough 2008 for the sector.

He predicted a return to red ink for Canada's biggest carrier this year.

Cherniavsky also downgraded WestJet to account for higher crude oil price assumptions.

The analyst chopped his 12-month price target on Air Canada to C$7 from C$13.50 and maintained an "underperform" rating.

He downgraded WestJet to "market perform" from "outperform" with a new target price of C$20, down from C$27.

Air Canada B series shares tumbled, 62 Canadian cents, or more than 6 percent, to C$9.33 on the Toronto Stock Exchange on Friday. They have fallen by half in the past 12 months.

WestJet sank 55 Canadian cents, or 3 percent, to C$17.50. That represents an increase of more than 18 percent in the past year.

Both carriers benefited in 2007 from a strong domestic market and high demand for travel, which yielded strong load factors as both increased their capacities.

By contrast, U.S. airlines have struggled for months amid the worsening economic outlook and stubbornly high oil prices. Some have reduced their capacity.

"We believe it is going to be increasingly difficult for Canada's domestic airline environment to maintain its extraordinary resilience," Cherniavsky wrote in the report, entitled "2008 Outlook: Buckle Up!"

He said the country's virtual industry duopoly leaves the potential for fare increases, but he questioned the ability of airlines to keep boosting fares with the economy poised to weaken and capacity set to increase at the highest rate in four years.

"We believe that something has got to give," he said. "If it is not going to be fuel prices or the mounting pressures on economic growth, then we expect that it will ultimately have to be capacity growth."

Another analyst sees things differently for WestJet.

Versant Partners' Cameron Doerksen this week raised his rating on the Calgary-based airline to "buy" from "hold," with a 12-month target of C$23.50.

He pointed out the stock has fallen more than 20 percent since the start of 2008 and urged investors to take advantage of the sell-off and build positions.

Among positive factors for the company in 2008, WestJet is expected to enter into code-share arrangements with international carriers, boosting revenues.

In addition, fourth quarter 2007 and first quarter 2008 are expected to be up year-over-year, Doerksen wrote.

($1=$1.03 Canadian)

Reporting by Jeffrey Jones; Editing by Renato Andrade

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