Falling loonie sends airline stocks into nosedive
Decline ends rally Air Canada and WestJet have been enjoying
TORONTO — Canadian airline stocks nosedived Tuesday on fears the rapid decline in the loonie would undercut the earnings of Air Canada and WestJet Airlines Ltd.
The Canadian dollar fell below 90 cents against the U.S. greenback as worries about emerging market economies continued.
The decline also rippled into the Canadian airline sector, putting an end to the rally that shares in Air Canada and WestJet enjoyed until the market turmoil of late last week.
As a result, Glenn Engel, Bank of America Merrill Lynch analyst, downgraded both carriers, noting they have more expenses tied to U.S. dollars — from fuel to aircraft — than revenue.
Air Canada, for example, estimates every one cent decline in the value of the loonie results in a $33-million drop in its operating income, he said. Engel downgraded Air Canada to underperform, and lowered his price target to $8 a share from $9.75.
He also dropped WestJet to neutral and reduced his price target on the stock to $28 a share from $32.
Air Canada’s shares fell 12.3 per cent Tuesday to close at $7.63, erasing much of the positive momentum the company gained last week after announcing it had eliminated its pension solvency deficit.
WestJet shares saw more modest declines, down 4.1 per cent to close at $24.83.
Engel noted Air Canada had more than $3.5-billion of U.S.-denominated debt on its books, which could lead to a writedown when fourth-quarter results are delivered on Feb. 12, or in the first quarter of 2014.
WestJet, on the other hand, had negligible U.S. liability, but he said both carriers have significant aircraft capital expenditures in U.S. dollars this year, including roughly $1 billion at Air Canada and $560-million at WestJet.
The carriers are facing increased competition at home and abroad, he added. But David Newman, Cormark Securities analyst, said the sell-off has been overdone.