RE:Raymond James Canada’s ferociously competitive airline sector will benefit from the sudden drop in fuel prices, especially Air Canada, which has the highest costs, said Raymond James Ben Cherniavsky
“We maintain the fundamental view that the competitive dynamics of Canada’s airline sector resemble more of a ‘zero-sum’ battle for market share than a ‘comfy duopoly’ in which all players magnanimously share in the collective spoils,” says Mr. Cherniavsky. “There is no other way, in our view, to explain the relatively aggressive capacity growth in the domestic market or the proliferation of each carrier’s brand into different market segments (WestJet into Plus and Encore and Air Canada into Rouge).”
And while he expects the carrier with the lower cost - WestJet - to make long-term gains largely at the expense of Air Canada, the recent dramatic drop in fuel prices provides significant cost relief that should benefit everyone in the industry.
These lower costs – along with recent share price weakness (down 30 per cent over the last three months vs. 12 per cent for the XAL airline index) have convinced Mr. Cherniavsky upgrade Air Canada from to “market perform” from “underperform” and maintain his $7.50 (Canadian) price target. The analyst consensus price target is $12.32, according to Thomson Reuters.