Air Canada Downgraded on Economic Weakness
By Jonathan Ratner, Financial Post | Oct. 21, 2011
UBS has cut its price target on Air Canada shares in half from C$3.00 to C$1.50 and reduced its rating to neutral from buy in anticipation of a prolonged period of slow economic growth and more moderate capacity improvements.
Analyst Tasneem Azim also highlighted the risks posed by labour negotiations and the potential for the airline's pension deficit to grow by approximately C$1.6-billion in 2012.
"We would expect such an event to further undermine Air Canada's already stretched liquidity position by inflating leverage ratios and placing greater pressure on cash flow should pension funding requirements increase," Ms. Azim told clients.
"We have always maintained that Air Canada's significant operating leverage cuts both ways, and in the context of broader macroeconomic uncertainty we are content to move to the sidelines."
The analyst also trimmed her price target on WestJet Airlines Ltd. to C$16.50 from C$20, but continues to rate the shares a buy. She assumes the airline will see relatively flat load factors over the next two to three years.
So while Ms. Azim acknowleges the challenges associated with investing in airlines space in the best of times, let alone in times of economic uncertainty, she believes WestJet offers one of the most attractive risk-reward profiles on a global basis - if you want exposure to the airline sector.