Cheaper fuel, stronger loonie help airlines take flight

Low fuel costs and a strengthening Canadian dollar are proving to be tailwinds for Canadian airlines, leading analysts to boost their earnings estimates ahead of next month’s quarterly results.

In the second fiscal quarter West Texas Intermediate, the benchmark oil price for U.S. crude, averaged US$48.18 per barrel, a drop from the first quarter which saw prices hovering around US$51.84 per barrel, according to Bank of Montreal Capital Markets analyst Fadi Chamoun. In a note to clients sent Tuesday, Chamoun estimated that West Texas Intermediate will average US$46.97 per barrel for the rest of the year.

Chamoun raised the target prices for both Air Canada and WestJet on Tuesday, citing “favourable jet fuel prices and a strengthening Canadian dollar.”

Air Canada’s target price was raised from $20 to $25, while WestJet’s saw an increase from $25 to $26.

Last week, Air Canada shares soared to their highest in more than 10 years after the company announced its earnings before interest, taxes, depreciation, amortization and aircraft rent (EBITAR) would exceed the average analyst consensus estimate of $475-million. Calin Rovinescu, the airline’s president and chief executive, said in a statement that the boost was driven by higher revenues and lower-than-projected fuel costs.

At the same time, Air Canada announced it set a company record for most passengers flown in a single day, with 166,850 people flying with the carrier on June 29.

Walter Spracklin, an analyst with RBC Dominion Securities, wrote in a note to clients that the raised EBITAR combined with strong passenger numbers reaffirmed his view that Air Canada shares are undervalued.

“(Air Canada) remains our single best idea in transportation today, and we reiterate our top pick rating,” he wrote.

Meanwhile, some analysts remain cautious about WestJet’s strategy opting for growth in both ultra-low-cost and longer-haul segments.

“In the case of WestJet Airlines, we remain concerned about the level of execution of the wide-body program, which is vastly more complicated and susceptible to risk than the initiative to launch the ultra-low-cost carrier,” wrote AltaCorp Capital Research analyst Chris Murray in a note to clients.