June 20, 2010 / 2:34 PM / in 7 years

BAY STREET-Expectations are high for Canadian airlines

* Economic recovery forecast to propel Air Canada, WestJet

* Outlook for Air Canada seen strong, though risky

* Porter Airlines seen back for IPO in fall

By Nicole Mordant

VANCOUVER, June 20 (Reuters) - For an industry seemingly always in the grips of a crisis or on the verge of one, the airline sector in Canada is looking remarkably unruffled and upbeat.

Shares in Air Canada ACa.TO ACb.TO and WestJet Airlines Ltd WJA.TO, Canada’s two biggest carriers, are both up by more than 20 percent in the past year and analysts are forecasting big gains in the next 12 months.

The boost for the sector is coming mostly from a recovery in the domestic and global economy and is a sharp turnaround from last spring when Air Canada was on the brink of bankruptcy and WestJet was showing double-digit falls in profit.

“Things are a lot better than a year ago. (Airline) demand has come back quite a bit in Canada and globally,” said Canaccord Genuity analyst David Tyerman.

“This is a very economically-sensitive sector, more so than most,” Tyerman said.

First- and business-class travel, which is up to five times more lucrative for airlines than economy fares, dried up as companies slashed perks as the recession bit in 2008 and 2009.

With business confidence and world trade now picking up, the number of passengers traveling in premium class seats is slowly rising -- up 7.6 percent globally in the first quarter, according to the International Air Transport Association.

That is good news for Air Canada, which makes most of its money from passengers in the front of the plane.

Analyst expectations are high for Canada’s biggest carrier, a year after it narrowly side-stepped bankruptcy protection for the second time this decade by managing to raise more than C$1 billion ($980 million) at the 11th hour and sealing airline-friendly labor contracts with employee unions.

“In Air Canada, you are buying a very levered play on the economy,” said RBC Capital Markets analyst Walter Spracklin.

“For an investor who understands the risk profile ... it is the perfect investment,” he said.

Air Canada has raised funds several times in the past year to reduce its heavy debt load and now has a “reasonable level” of cash, Tyerman said.

FULLER PLANES, BEARABLE FUEL

Eleven analysts, on average, forecast Air Canada’s stock will reach C$3.96 in the next 12 months, more than double the C$1.92 its widely held B shares closed at on Friday.

In addition to to enjoying fuller planes and bearable fuel prices like other global carriers, Canadian airlines have fewer capital spending and maintenance cost demands this year because their fleets are new, analysts said.

Expectations for low-cost carrier WestJet, Canada’s second biggest airline, are not as ambitious, partly because its stock weathered the recession better. It was one of the few North American carriers to remain profitable throughout the slump.

Analysts like WestJet’s strong balance sheet, its new, experienced chief executive and its growth plans. On average, they expect WestJet’s stock to reach C$16.59 in a year’s time, 29 percent above its C$12.85 close on Friday.

One recent dark spot in the airline sector is the decision by small, upstart carrier Porter Aviation Holdings to pull its planned initial public offering because of lukewarm investor appetite.

Analysts said, however, that weak stock market conditions, which have wreaked havoc with other recent IPOs, are to blame.

“If (Porter‘s) second quarter and third quarter (results) look reasonable, I think there is no reason in the world they won’t go back out the door mid-November,” said Robert Kokonis, managing director of airline consultancy AirTrav Inc.

Any positive story on the airline industry has to come with a strong health warning about the myriad of crises that could derail a recovery -- ash clouds, pandemics, terrorism and regulation to name but a few.

Indeed, no less an authority than billionaire stock picker Warren Buffett, who once put cash into US Airways, has warned against investing in the sector in general.

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines,” he wrote to investors in 2008.

“If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

$1=$1.02 Canadian

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