WestJet Airlines Ltd. is developing a “paradox” for investors by escalating its turf war with Air Canada, putting pressure on yields and margins at both airlines, with various new report from Raymond James Ltd.
The fierce competition forwards and backwards airlines is obviously not new, but analyst Ben Cherniavsky argues that WestJet’s launch of Encore flights from Toronto to Boston this year’s week – the regional carrier’s first cross-border route – supplies a “glaring example” in the impact this turf war sports fares.
Raymond James’ analysis learned that Toronto-Boston fares at Air Canada and Porter Airlines fell around 65 percent your day that Encore entered this mix.
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Although lower fares should help stimulate demand, “the net impact to incumbent profits will still be materially negative,” Cherniavsky wrote within the note to clients.
“We believe that WestJet’s relentless drive to displace Air Canada’s high-cost, high-fare capacity featuring its low-cost, low-fare capacity presents a kind of paradox to investors,” he added.
In temporary, WestJet’s strategy “puts pressure on yields and margins inside the system,” creating a headwind for airlines’ stocks, that are currently trading in a considerable discount for their U.S. peers.
In the long term, however, WestJet “has been almost universally successful at creating value for shareholders, while invariably creating structural harm to Air Canada that people feel are extremely difficult to surmount considering its prevailing cost and balance sheet disadvantages,” he wrote.
As a result, Cherniavsky rates WestJet “market perform” and Air Canada “underperform.”
