Canadian airfares expected to fall in second half

After months of raising ticket prices, Canadian airlines have finally hit the threshold where higher fares are dragging on demand, according to Ben Cherniavsky, Raymond James analyst.

This will almost certainly be a boon for consumers, with both Air Canada and WestJet Airlines Ltd. already lowering prices on flights to help stimulate demand, he said.

Fortunately for the the airlines, falling fuel prices and the continued strength of the Canadian dollar should offset this top line erosion in the second half, Mr. Cherniavsky said.

Both Air Canada and WestJet reported declines in their June load factors, or average amount of seats filled on their planes, after their capacity increases outpaced their traffic growth during the month.

“The very aggressive fare increases that Canada’s airlines have recently implemented finally appear to be having a negative impact on demand,” Mr. Cherniavsky said in a note to clients.

“As a result, we expect WestJet and Air Canada to respond with some downward adjustments to fares. This already appears to be happening, according to our domestic air fare survey results last month,” he added

While those lower prices will certainly impact unit revenues, Mr. Cherniavsky said he has changed his model to assume oil prices of US$95 a barrel in the second half, down from his previous estimate of US$105 a barrel.

At the same time, the continued strength of the Canadian dollar should provide some relief for Canadian carriers with the bulk of their expenses in U.S. domination, including fuel.

“All told, the various changes outlined above effectively translate into ‘a wash’ for our forecasts, with lower oil prices more or less offsetting some expected revenue shortfalls,” he said.

As such, Mr. Cherniavsky maintained his “market perform” rating for Air Canada and his $3 a share price target, and his “outperform” rating for WestJet and its $17.50 a share price target.

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