WestJet’s turf war with Air Canada creates ‘paradox’ for investors: Raymond James analyst

WestJet Airlines Ltd. is creating a “paradox” for investors by escalating its turf war with Air Canada, putting pressure on yields and margins at both airlines, according to a brand new report from Raymond James Ltd.

The fierce competition between the two airlines is certainly nothing 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 is wearing fares.

Raymond James’ analysis discovered that Toronto-Boston fares at Air Canada and Porter Airlines fell as much as 65 per cent your day that Encore entered this mixture.

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Although lower fares should help stimulate demand, “the net impact to incumbent profits will still be materially negative,” Cherniavsky wrote in a note to clients.

“We believe 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 the short term, WestJet’s strategy “puts pressure on yields and margins across the system,” creating a headwind for both airlines’ stocks, that are currently trading in 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 trouble for Air Canada that we believe are nearly impossible to surmount in light of its prevailing cost and balance sheet disadvantages,” he wrote.

As a result, Cherniavsky rates WestJet “market perform” and Air Canada “underperform.”