Cheaper fuel, stronger loonie helping airlines take flight

Analysts raise target prices for WestJet, Air Canada amid falling oil prices

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 widebody 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.

Brian Pearce, chief economist with the International Air Transport Association, said the low cost of fuel — which he adds is the airline industry’s most significant cost — was a key driver in the global average airfare dropping 20 per cent between 2014 and mid-2016. However, customers shouldn’t expect another drop in fares as a result of recent lower-than-expected prices.

“Oil prices are relatively stable so I think we’re seeing both airline unit costs and fares starting to level out,” Pearce said.

“Airlines are facing other costs at the moment, such as labour costs which are starting to rise and more expensive airports …. Looking at those cost developments, it doesn’t look as if there’s going to be any significant fall.”

The price of shares of both major Canadian airlines jumped on Tuesday, with Air Canada increasing by 1.9 per cent to $20.76 and WestJet increasing by 1.9 per cent to $24.91. Both companies will release financial results from the second fiscal quarter on Aug. 1

DARRYL DYCK/THE CANADIAN PRESS FILES Air Canada and WestJet’s shares rose Tuesday as analysts held favourable views of their earnings prospects. Air Canada stands out in particular with its higher revenues and a record number of passengers in a single day. Still, fares may not drop as airlines face some rising costs.