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Declining dollar plays havoc with airline stocks

Jan. 29, 2014, Montreal - Canada's largest airline and travel company stocks were hit hard Tuesday over concerns about the impact of the falling loonie.


January 29, 2014
By The Canadian Press

Shares in Air Canada closed down 12.3 per cent, Air
Transat owner Transat A.T. was off eight per cent and
WestJet fell more than four per cent — all of them in heavy to
very heavy trading.

 

Air Canada's shares fell $1.07 to $7.63 on volume of more than 12.3 million shares, four times its daily average.

 

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WestJet was off $1.06 to $24.83 on some 1.4
million shares, also four times its daily average, while Transat was
down 84 cents to $9.57 on 342,000 shares, more than double its daily
average.

 

By comparison, Chorus Aviation was off just three cents at $3.69 in lighter than average trading.

 

The sell-off for the three largest companies
came following published reports citing Air Canada CEO Calin Rovinescu's
comments about the dollar, several analyst reports highlighting the
impact of the currency devaluation and at least one downgrade.

 

The Canadian dollar closed Tuesday at a fresh 4 1/2 year low, down 0.35 of a cent at 89.64 cents US.

 

The decrease has placed significant pressure on
airlines because fuel and airplane costs are paid in U.S. dollars,
although some of the fuel is hedged to protect against fluctuations.
Fuel prices, one of the largest costs for an airline, are up 8.9 per
cent over the last three months in U.S. dollars, but up 13.2 per cent in
Canadian currency.

 

"We have a massive exposure to
the US dollar and seeing the kind of precipitous drop that we've had in
the last little while is significant," Rovinescu told reporters Monday.

 

Air Canada Vacations, Transat and Sunwing have
added $35 per passenger currency surcharges while Sunquest has raised
package costs to offset higher hotel costs.

 

Rovinescu said the airline has not made any
announcements on fare increases, which are affected by competitive
market conditions.

 

Each one-cent change in the loonie has a
$33-million impact on Air Canada's pre-tax operating income before
airplane costs (EBITDAR) and a $14-million operating impact for WestJet.

Chris Murray of AltaCorp Capital
said there are limits to how much of the currency impact the airlines
are able to absorb over the long term.

 

"We expect currency may remain a headwind for
2014, which will require some adjustment, mainly in fares to relieve
some of the cost pressure. Currently demand expectations and forward
booking curves are remaining supportive of fare increases," he wrote in a
report.

 

Glenn Engel of Bank of America Merrill Lynch cut his price target for Air Canada to $8 from $9.75, and WestJet to $28 from $32.

 

Analyst Walter Spracklin of RBC Capital Markets said the sell-off was overdone and presented a buying opportunity for investors.

 

"The bottom line is that currency
fluctuations, cold weather in Canada (and fat finger trades ahead of the
third-quarter results) are not reasons to sell Air Canada stock, in our
view," he wrote.

 

"Factors to be monitored closely are traffic,
yield and cost-cutting progress — which based on the most recent report
results from both the monthly stats and our proprietary yield tracker
show that these are moving in the right direction."