Air Canada stock has risen by more than 50 per cent in the past five weeks.The Globe and Mail
Raymond James analyst Ben Cherniavsky prefers shares in U.S. airlines over Canadian ones, but says buying Air Canada stock is a way to capitalize on improving sentiment in the sector.
Air Canada shares have doubled in price since August to more than $5.25 and outperformed the broader Toronto Stock Exchange, but Mr. Cherniavsky said in a note on Tuesday they should rise to $7. He said Air Canada should enjoy a reduction in non-fuel costs per available seat mile, a key measure of an airline's ability to profit, and is more exposed to strong international markets than rival WestJet Airlines Ltd.
Investing in the boom-or-bust airline sector is not for the timid. Airlines face massive costs and debts and are very sensitive to changes in consumer spending habits. Carriers around the world are known for their regular descents into bankruptcy protection, wiping out shareholders in the process.
"For trade-orientated investors who are constrained to Canada," Mr. Cherniavsky said, "we have recently been recommending Air Canada's shares as a good proxy for capitalizing on improving sector sentiment."
Mr. Cherniavsky is less keen on WestJet. The airline is in the middle of implementing a host of changes that include $100-million in cost containments, new fare bundles and code sharing on top of a new unionization movement and pilot contract talks that have dragged on.
He says these "yellow flags" make him cautious about the stock as it hits new highs above $26.
"We worry that too much rapid change could compromise WestJet's treasured brand and culture and, in turn, erode market share," Mr. Cherniavsky said. "We also believe the risk of taking on too many initiatives too quickly could stretch the management team's resources at a time when they are already playing short-handed (i.e., looking for a new COO and CIO)."
Mr. Cherniavsky has a $25.75 price target on WestJet shares, which he rates "market perform." He has an "outperform" rating on Air Canada.
The average analyst target on Air Canada is $5.78 and $28.44 on WestJet, according to Bloomberg data.
Eric Atkins