Air Canada Drops Most in 11 Months on Capacity Concern

  • Carrier gets downgraded as Raymond James cites expansion
  • Economy `is the biggest challenge,' says WestJet finance chief

Air Canada tumbled the most in 11 months as concern mounted that a deteriorating economy will hurt profits while the country’s biggest carrier and competitor WestJet Airlines Ltd. add flights and routes.

Air Canada fell 9.2 percent to C$8.10 by the close of trading in Toronto Thursday, its biggest single-day drop since Feb. 11. WestJet recovered from an intraday drop of as much as 3.5 percent to gain 0.5 percent amid a late rebound in the benchmark Standard & Poor’s/TSX Composite Index, while regional carrier Chorus Aviation Inc. decreased 1.3 percent.

“There’s a perception that too much capacity is being added into a market where demand may be weakening,” said Cameron Doerksen, a National Bank Financial analyst.

Raymond James analyst Ben Cherniavsky downgraded Air Canada to underperform from market perform Thursday. The firm is the only one among 16 surveyed by Bloomberg to give the carrier the equivalent of a sell rating. Citing “the company’s expansionary strategy and heavy” capital-spending plans, Cherniavsky cut his price target to C$7 from C$12. The next lowest target is C$13.

System-wide capacity at WestJet will increase 8 percent to 11 percent, the Calgary-based carrier said in November. Canada’s second-largest carrier is poised to begin flights to London’s Gatwick Airport from six Canadian cities in May.

While Air Canada hasn’t disclosed 2016 capacity projections, “all signs point to a significant increase,” Doerksen said, citing new long-distance routes and the planned delivery of Boeing Co. 787 Dreamliner aircraft.

Slumping Oil

Economic damage from slumping oil prices has led more forecasters to predict that the Bank of Canada will cut interest rates next week to spur growth.

“The macroeconomic environment is the biggest challenge that we’ve got,” WestJet Chief Financial Officer Harry Taylor said Thursday at an AltaCorp Capital conference in Toronto. “We’ve seen some softening in Alberta, one of our core markets.”

Air Canada has adjusted by moving some flights from Alberta cities such as Calgary and Edmonton to markets that require additional capacity, Chief Financial Officer Mike Rousseau said at the conference.

“On a system-wide basis we’re not seeing anything to be concerned about,” he said. “Certainly with a diversified airline like Air Canada, you’ve got some areas which are overperforming and some areas which are underperforming.”

(Corrects first subheadline to remove wrong characterization of stock decline.)
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