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Analyst clips Air Canada’s wings as airline cuts routes

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Whither Air Canada? Analysts are beginning to take another look at Air Canada after the airline's announcement late yesterday that it's suspending several unprofitable routes and cutting back on planned seat capacity as fuel costs surge.

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Analyst Tasneem Azim of UBS Securities Canada today cut her 12-month price target on Air Canada stock to $3.75 from $4.25, and her estimates for earnings per share this year to 13 cents from 34 cents.

As of May 1, The Globe and Mail's Tara Perkins reports today, the airline is pulling routes it sees as no longer profitable at current levels of fuel costs. Over all, Air Canada will be offering fewer seats that it had planned by slashing routes and the frequency of flights, and by using smaller planes.

"We believe there is downside risk to our estimates from higher fuel costs," Ms. Azim, who has a "buy" rating on the stock, said in a report.

"While [Air Canada] may continue to raise base fares or fuel surcharges to absorb higher fuel costs, in doing so it runs the risk of discouraging demand. The airline will likely consider further capacity adjustments should fuel prices continue to accelerate."

Added Jacob Bout of CIBC World Markets, whose price target is $5.50: "Given the volatility in fuel prices and ongoing macroeconomic undertainty, we believe it is prudent for [Air Canada] to pare down its capacity growth in an effort to maintain its elevated load factor, which is key for [Air Canada] to increase its fares/fuel surcharges to offset rising costs."

Markets mixed Global markets are mixed again today, but rebounding in North America, as investors weigh developments in Japan, where emergency workers are racing to stop a nuclear calamity. Here's how Scotia Capital sums it up: "A new low in [the U.S. dollar v. the yen], a G7 meeting, rumours over official intervention, a nuclear threat and the Middle East are the focus today."

Asian markets slumped, European markets rose, and North American stocks climbed.

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Oil prices also rose, as did the yen , whose surge against the U.S. dollar threatens to put added pressure on an already deeply troubled Japanese economy. The yen pulled back somewhat from a postwar high on speculation among traders that officials would intervene in the markets.

"Risk aversion continues to be the name of the game overnight, as despite fears of possible central bank intervention the Japanese yen, along with the Swiss franc, surged overnight on repatriation and safe haven flows as the proverbial dam broke, and a wave of US dollar selling hit both currency pairs," said CMC Markets analyst Michael Hewson.

"Given the strength of the move overnight any unilateral Bank of Japan intervention would in all likelihood end in failure, and given the Fed's current policy of loose monetary policy it's hard to see how even concerted intervention can make a difference in the face of such concerted repatriation of yen."

As Globe and Mail Asia-Pacific reporter Andy Hoffman writes today, currency traders believe the Japanese government, insurers and other companies will have to repatriate billions of yen invested abroad. And as our Washington correspondent Kevin Carmichael writes, Japan's response to the crisis is likely to drive up U.S. interest rates.

Inflation up in U.S. Inflationary pressures in the United States may not be as fleeting as the Federal Reserve has suggested.

Consumer prices in the United States climbed 0.5 per cent last month, pushed up by higher food prices and costs at the gas pump. The annual inflation rate is now 2.1 per cent, its highest in 10 months.

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The so-called core rate, which strips out volatile items, rose more than projected, by 0.2 per cent, bringing the annual pace to 1.1 per cent.

"Gasoline jumped 4.7 per cent, extending its yearly gain to 19.2 per cent," said senior economist Sal Guatieri of BMO Nesbitt Burns. "If you're thinking of dieting, now's a good time to start: Food and beverage prices leaped 0.5 per cent for the second straight month, and are up 2.2 per cent the past year."

He also noted broader increases in airline fares, medical costs and auto prices.

"We had expected core inflation to average 1.1 per cent this year and 1.3 per cent next year, and to stay below the Fed's presumed price-stability range of 1.6 per cent to 2.0 per cent," Mr. Guatieri added.

"However, this report suggests some modest upward revision is in order, even though high unemployment and modest wage gains should continue to keep a lid on generalized inflation. Still, price pressures might not be as 'transitory' as the Fed believes."

The U.S. central bank will be foreced to be a bit more wary given the latest readings, and, said economist Alistair Bentley of Toronto-Dominion Bank, "careful that higher commodity prices don't feed into inflation expectations and ultimately higher core inflation."

Paul Ashworth, the chief U.S. economist at Capital Economics in Toronto, agreed: "February's U.S. CPI report reveals that food and energy prices are rising rapidly in response to the surge in commodity prices, while the downward trend in core inflation is apparently over."

Foreigners snap up Canadian bonds Foreign investors are loving Canadian bonds.

Non-residents grabbed another $13.3-billion of Canadian securities in January, Statistics Canada reported today, largely because of a continued appetite for bonds.

"Acquisitions of Canadian bonds by foreign investors amounted to $10.1-billion in January, following a record high investment of $95.9-billion in 2010," the statistics gathering agency said.

"Federal government bonds accounted for just over half of this activity in January, largely Government of Canada two-year benchmark bonds."

Foreign investors also took up $1.8-billion in provincial bonds, Statistics Canada said.

"With these inflows enough to easily fund all of Canada's government deficits, it's no wonder that a) the loonie pushed above par to start the year and remains there, and b) long-term government bond yields have stayed below their U.S. counterparts," said BMO Nesbitt Burns deputy chief economist Douglas Porter.

Mr. Porter noted that Japanese investors grabbed $1.1-billion of Canadian bonds in January, bringing their total for the past year to $6.1-billion or 6.3 per cent of all foreign purchases.

By the end of last year, the Japanese held almost $45-billion of Canadian bonds, or 7.8 per cent of the total held by foreigners.

After the Kobe disaster, Japanese investors dumped $1.4-billion of Canadian bonds in the second quarter of 1995, but this time "even large-scale repatriation by Japan of Canadian bonds would likely be readily absorbed by other buyers."

The bottom (line) Lululemon Athletica Inc. today posted solid fourth-quarter results as profit climbed to $54.8-million or 77 cents a share, basic, from $28.5-million or 40 cents a year earlier.

The yoga wear retailer's revenue surged 53 per cent to $245.4-million.

"We ended one of the best years in lululemon's history with strong Q4 results that extended the consistent sales growth and margin expansion that we enjoyed for each quarter of 2010," said chief executive officer Christine Day.

"The exceptionally strong sell through of our Q4 product line leaves us with short term unmet demand in the first quarter due to a low inventory position. However, the strength of our business model and growing guest demand for our product give us the opportunity to accelerate our store and e-commerce channel growth in 2011 and to establish ourselves as the number one women's athletic wear brand.

"While we will see some cost pressures in 2011, we are confident in our ability to maintain our business model through disciplined management, operating efficiencies and leverage on higher sales."

Lululemon projected first-quarter diluted earnings per share of 36 cents to 38 cents, and revenue of $175-million to $180-million. For the year, it forecast diluted earnings per share of $1.90 to $2, and revenue of $885-million to $900-million.

Moscow's biggest problem? Forget the Russian mob and other things you may have heard about doing business there. According to the chief executive officer of Goldman Sachs Group Inc., the biggest hurdle to making Moscow a financial centre is ... constant traffic jams.

Deputy Finance Minister Dmitry Pankin told Bloomberg News that at a meeting two days ago between Lloyd Blankfein and President Dmitry Medvedev, the Goldman chief said the biggest problem was a "bottleneck from the airport to the city centre."

Boyd Erman's Morning Meeting It's one thing to talk about an initial public offering. It's another thing to actually pull one off in current markets, Streetwise columnist Boyd Erman reports today.

In Economy Lab today

As an indication of how important the Chinese market is to the future of cinema, it's hard to beat the case of "Red Dawn," Mitch Moxley reports from Beijing.

In Personal Finance today

Despite the risk of rising interest rates, most mortgage brokers still say variable-rate mortgages are the better deal, Rob Carrick reports.

There are various red flags that will alert the watchful taxman to put your return under a microscope, writes tax expert Tim Cestnick. Here are some tips to help you avoid an audit.

Angela Self offers some advice on how to weigh the purchases we want to make today against our goals for the future.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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