May 2, 2008 / 8:29 PM / 9 years ago

UPDATE 1-Air Canada shares slip after analyst's downgrade

(Adds details and closing shares price)

CALGARY, Alberta, May 2 (Reuters) - Shares in Air Canada ACa.TO slipped nearly 3 percent on Friday after an analyst put a “sell” recommendation on the stock and warned that rising fuel prices could slash profit at the country’s largest airline.

Jacques Kavafian, an analyst at Research Capital, moved his recommendation down from a “buy” and lowered his target for the shares to C$6 from a previous C$14.50.

Air Canada class A shares closed down 25 Canadian cents at C$8.20 on the Toronto Stock Exchange after earlier touching as low as C$7.87. The shares have dropped 49 percent in the past 12 months.

Kavafian said in a note to clients that he expects Air Canada to post a loss of 71 Canadian cents a share when it reports its first-quarter results on Thursday.

The average loss forecast for the period among analysts polled by Reuters Estimates is 77 Canadian cents a share.

Kavafian wrote that Air Canada’s fuel costs have likely risen to 95 Canadian cents a litre from 77 Canadian cents, and that maintenance costs have also climbed.

He said that while the airline and its main rival, WestJet Airlines Ltd (WJA.TO), could raise fares to compensate for higher fuel costs, it’s harder to do that in the cutthroat international market.

“Air Canada may have difficulty raising fares on approximately half of its business that is generated from international markets,” Kavafian wrote. “Its main competitor, WestJet, generates 100 percent of its revenue from North America where it is easier to raise fares.”

Earlier this week WestJet said its first-quarter profit jumped 76 percent as higher loads and a strong economy cushioned it from rising fuel prices, though the carrier said it may add a fuel surcharge or boost prices to cope with rising jet fuel costs.

Kavafian suggested Air Canada can offset higher costs by boosting existing fees for cancellations or ticketing changes, and introducing new charges, such as charging passengers for a second checked bag. It can also boost fares and cut capacity. ($1=$1.02 Canadian) (Reporting by Scott Haggett; editing by Peter Galloway)

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