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, based on a new report from Raymond James Ltd.
The fierce competition forwards and backwards airlines is unquestionably not new, but analyst Ben Cherniavsky argues that WestJet’s launch of Encore flights from Toronto to Boston the 2009 week – the regional carrier’s first cross-border route – supplies a “glaring example” from the impact this turf war has on fares.
Raymond James’ analysis found that Toronto-Boston fares at Air Canada and Porter Airlines fell around 65 percent the day that Encore entered this mixture.
Related
- Lower fares won’t enter method of Canadian airlines’ ‘incredibly bright’ future, report saysLower airfares not affecting United states airlines’ performance: report
-
-
-
Although lower fares should help stimulate demand, “the net impact to incumbent profits it’s still materially negative,” Cherniavsky wrote in a note to clients.
“We feel that WestJet’s relentless drive to displace Air Canada’s high-cost, high-fare capacity with its low-cost, low-fare capacity presents a kind of paradox to investors,” he added.
In short term, WestJet’s strategy “puts pressure on yields and margins across the system,” developing a headwind for both airlines’ stocks, which are currently trading at a significant 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 problems for Air Canada that people feel are extremely difficult to surmount in light of its prevailing cost and balance sheet disadvantages,” he wrote.
As an effect, Cherniavsky rates WestJet “market perform” and Air Canada “underperform.”
