Upgrade Canaccord Genuity analyst Matthew Lee expects the recent spike in oil prices to provide a significant additional challenge for the Canadian airline sector.
“Given that fuel cost is the largest operating expense to airlines (20-25 per cent), the appreciation of prices will serve to be a meaningful headwind for profitability as demand recovers,” he said. “While airlines have traditionally passed this cost through to consumers, we believe that given the light booking activity (especially for business travellers), airlines may have to absorb more of the cost.”
In a research note previewing earnings season, Mr. Lee said a recovery in capacity is progressing as he expected, however he warned traffic remains two quarters behind American peers.
“While the Canadian border is now open for international visitors and VFR/Leisure travel appear to be recovering, the delay in return-to-office mandates likely implies a slower-than-expected business recovery,” he said. “On the cargo front, demand continues to be robust with ecommerce trends and disrupted ocean supply chains providing tailwinds.”
Accordingly, Mr. Lee declared “cargo remains king,” benefitting Cargojet Inc. and Exchange Income Corp.
“While commercial travel is certainly improving, we continue to prefer the cargo space where ecommerce tailwinds are likely to propel growth even as the added demand from supply chain disruptions abates,” he said. “We are also bullish on essential travel, which appears to be nearly back to full steam. Given our macro view on the industry, we expect that CJT and EIF are likely to deliver robust fundamentals in Q3 with CHR seeing a slightly slower recovery and AC remaining somewhat more challenged. With that said, we continue to see AC as an attractive source of torque to the rebound in travel and leisure longer term.”
He raised his target for Cargojet shares to $240 from $230, keeping a “buy” rating. The average on the Street is $250.58.