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Air Canada stock rides upward draft

Special to The Globe and Mail

00:00 EDT Wednesday, September 11, 2013

Air Canada has emerged as one of the country's top performing stocks, rising by more than 50 per cent in the past five weeks, as investors bet on the airline's expansion plans and ability to reduce costs.

The stock climbed 5.5 per cent on Tuesday and is up 12 per cent since the company announced last Thursday plans to refinance its long-term debt at a lower cost because of an improved financial position and reported a record August load factor. The boost in traffic comes as the airline unveils its new low-cost carrier, called Rouge, and expands to include new routes and additional capacity on existing ones.

Air Canada benefits from its leadership position as the only Canadian airline covering Europe, Latin America and key Asian destinations in addition to North America. This gives the airline exposure to many lucrative business travel markets, said Cormark Securities analyst David Newman.

Building on that advantage, the airline is expected to save millions in interest costs from its plan to refinance $1.1-billion in debt, and secure further savings through other cost-cutting measures, Mr. Newman said.

Some of those measures include using new aircraft with more seats to lower costs per passenger. The airline also said aircraft rent expenses fell in the second quarter, and it plans to transfer some of its less-fuel-efficient Boeing 767s to its Rouge division.

"Airline fundamentals remain solid, and Air Canada is on a flight path to a 15-per-cent unit cost reduction from fleet renewal, much lower supplier and other costs," Mr. Newman said in an e-mail on Tuesday. "The fleet renewal and other revenue initiatives could transform the airline into more of an international carrier, with extended reach."

Air Canada said on Sept. 5 that it plans to refinance about $1.1-billion of its outstanding senior notes to stretch the maturity of its long-term debt and lower costs of financing. On the same day it announced its August load factor - a key industry measure - increased to 89.5 per cent, a record for the month and up 1.6 percentage points from a year earlier. The results include Rouge, which began operations July 1, as well as its regional airlines.

Rival WestJet Airlines Ltd. reported an August load factor of 87.9 per cent, down a percentage point from the year before. While both stocks have risen so far this year, Air Canada has far outpaced WestJet. That said, Air Canada has been on a much more volatile path over the past few years.

Air Canada shares were trading around $20 in 2007, before plunging to below $1 during the 2009 global financial crisis. The stock has been bouncing between $1 and $3 over the past couple of years, before taking off in early August. On Aug. 7, it jumped 25 per cent in one day after announcing surprisingly strong earnings, which led a number of analysts to raise their price targets.

Since then, Air Canada's shares have been among the top 3 per cent in terms of performance on the TSX, according to Bloomberg data. Air Canada shares are also expected to be reintroduced to the S&P/TSX composite index later this month, after being removed in December, 2011. The index is reshuffled quarterly, based on such measures as liquidity and market capitalization. A return to the TSX main index would increase demand from index-led funds.

Still, that's not enough to convince all investors. Some have raised concerns over rising fuel prices and currency fluctuations.

"I have a bias against industries that are so highly cyclical, capital intensive and highly unionized ... There are a lot of things that can impact airline stocks. They tend to be economically sensitive from so many viewpoints," said Michael Sprung, president of Sprung Investment Management, who likens the investment to junior mining stocks.

"If you hit it at the right time of the cycle and are very astute I guess some people can be successful at trading these things. But as more of a value investor, I try to stick with things that I can analyze a little more thoroughly."

Air Canada (AC.B)

Close: $3.28, 17¢

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