Things looking up for WestJet and Air Canada
December 14, 2005
MONTREAL (Reuters) - Canada's top two airlines, Air Canada and WestJet, are flying fuller planes to higher profits, even as U.S. mainline carriers struggle toward an uncertain future through a mountain of debt and multiple bankruptcies.
Earlier this past week, Air Canada, a unit of ACE Aviation Holdings Inc., and no-frills carrier WestJet Airlines Ltd. both posted record passenger traffic figures for November.
The bitter rivals are benefiting from what National Bank Financial analyst David Newman calls a "rational, but competitive, duopoly in Canadian skies" since the demise of discount carrier Jetsgo in March.
In particular, their load factor rose again in November to record levels for that month. The key measure -- the ratio of seats sold on average on the airlines' planes -- improved even though the carriers added to fleet capacity as they broaden their reach across Canada and into the United States.
Montreal-based Air Canada's traffic figures grew largely on transborder routes to the United States and on international traffic across the Atlantic and Pacific.
The November load factor at WestJet was the Calgary, Alberta-based airline's best in more than seven years for that month, and according to Tim James, an analyst at Octagon Capital, it may be a sign of higher pretax profits to come.
"We believe that WestJet will see continued year-over-year growth in EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) over the next nine quarters," James wrote in a research report.
He believes WestJet is undervalued relative to both its historical earnings and EBITDAR multiples, and when compared with comparable U.S. and European discount carriers. He has a C$17 target on the stock.
WestJet shares were off 19 Canadian cents at C$12.19 on the Toronto Stock Exchange on Friday. The stock is some 42 percent down from its high of C$21 set in January 2004.
ACE shares fell 40 Canadian cents to C$37.25 on Friday. They are down about 19 percent from their C$46 peak in June 2005, but about 77 percent above the C$21 they began trading at in October 2004 after Air Canada's complete revamp.
ACE shares were issued on the completion of Air Canada's 18-month restructuring under bankruptcy protection, which left the old Air Canada shares virtually worthless.
At BMO Nesbitt Burns, analyst Claude Proulx thinks ACE shares are undervalued and he has a C$48 target on the stock.
After deducting C$2.1 billion from ACE's enterprise value to account for its holding in partially spun off customer loyalty program Aeroplan, ACE trades at roughly a 12 percent discount to British Airways and Spain's Iberia, based on estimates for the Canadian company's EBITDAR, Proulx wrote in a recent research note.
While Air Canada and WestJet rule Canadian skies, a few things can cloud the outlook for the months ahead.
Flying ever-fuller planes can put a strain on customer service, as passengers have to cope with delays, getting bumped from their flights, or snafus with baggage.
In a message to employees on Thursday, Montie Brewer, the president of Air Canada, said the airline did not meet its internal customer satisfaction goal in November.
"Overall, there's lots of room for improvement with the way we interact with our customers, whether on board or at the airport," Brewer said.
Air Canada, which won more than C$1 billion of concessions from its unions during its restructuring, faces contract talks next year and workers are already disgruntled about a plan to dole out C$300 million of capital to shareholders.
At WestJet, a key question is whether it can produce the same traffic and profit gains next year, when the Jetsgo insolvency effect will have dissipated.
Then there is their ongoing legal battle in which Air Canada accuses WestJet of using corporate espionage to try to gain an upper hand on route management.
None of the allegations has been proved in court, but WestJet boss Clive Beddoe may have to defend the company's practices before a judge.
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