Air Canada and WestJet vs. the Canadian Dollar

Two airlines face a new challenge from a currency slide.

Feb 6, 2014 at 11:37PM

After seeing its stock rise more than 400% alongside many fundamental improvements in the airline, Air Canada (TSX:AC.B) was hit hard in late January by an unexpected event. No, it wasn't a collapse in Canadian air travel demand, lackluster earnings, or a revelation of some book-cooking scheme. The culprit was Canada's currency itself.

The drop
As the Canadian dollar declined from parity with the U.S. dollar, seen over a year ago, the Canadian dollar closed 2013 around 5% lower. This was not a major issue: Air Canada built a modest decline in the Canadian dollar into its own forecasts.

But 2014 has brought another drop and a much faster one. Concerns about a weak dollar policy from the Bank of Canada knocked the currency to a four-year low as it fell below $0.90 USD. After reaching nearly $10 on Jan. 23, Air Canada shares were slammed by the currency concerns falling below $7 before rebounding into the mid-$7 range. Shares of Canadian rival WestJet (TSX:WJA) were also hit by the drop in the Canadian dollar falling more than 10% off their peak.

Why the Canadian dollar matters
When investors consider the risks of the airline industry, foreign currency exposure is usually not the first to come to mind. But for Air Canada and WestJet, the value of the Canadian dollar is a big deal.

While revenues are primarily collected in Canadian dollars (although international sales do help balance currency exposure), expenses are primarily in U.S. dollars. Oil is priced in U.S. dollars, and so are many aircraft leases and purchases. Additionally, Air Canada's large debts, although under control at this time, are largely denominated in U.S. dollars, meaning a drop in the Canadian dollar means larger interest payments and larger total debt levels.

How bad?
The fall of Air Canada and WestJet shares began after the latest currency slide, but picked up speed as an article in the Globe and Mail noted the extent of the effects of a weak Canadian dollar.

Air Canada noted in its 2012 Annual Report that for each $0.01 change in the Canadian dollar, the airline would lose $33 million in yearly operating income. Although from the 2012 report, an analyst from National Bank Financial still considered the estimate fairly accurate saying, "The sensitivity would be slightly different in 2013, but I don't believe significantly so,".

While it's tougher to get an estimate for the additional costs at WestJet, the airline is almost certainly negatively affected for many of the same reasons as Air Canada.

Fare increases
U.S. airlines have been working on increasing fares in the wake of industry consolidation, greater pricing power, and a less cutthroat marketplace. In fact, higher fares played a major role in the doubling of Delta Air Lines' (NYSE:DAL) fourth-quarter profit. While U.S. based airlines still have more to work with in this arena as American Airlines Group is stitched together, Air Canada and WestJet are looking to fare increases as a way to weather the currency storm.

Long seen as the discount airline for the Canadian market, WestJet announced a 2% fare increase across the board following the decline in the Canadian dollar. This is clearly an opportunity for Air Canada to swoop in with its own fare increases. A report in the Globe and Mail notes that Air Canada has tried to raise fares multiple times on certain transborder routes, but WestJet refused to match the increase, causing them to ultimately fail.

Now it appears that WestJet is more willing to increase fares, as WestJet CEO Gregg Saretsky noted, "We are running WestJet like a business," to analysts in a conference call. Saretsky went on to say, "We'll make whatever changes are smart for the business, respecting the impact on demand." With the billions in fares sold each year, even a modest increase in fares could go a long way to making up the currency related losses.

Buying opportunity?
Air Canada and WestJet are still significantly below their levels prior to the drop in the Canadian dollar. However, fare increases can make a large difference in making up the gap. WestJet launching a systemwide fare increase is a positive, as it gives Air Canada greater room to make up for greater costs.

As a result, I remain bullish on shares of Air Canada and WestJet, and view this sell-off as an opportunity to acquire shares at a better price.

Finding the next Air Canada
Air Canada was a huge gainer and remains up more than 300%. Now, The Motley Fool has another great pick for 2014 that could repeat Air Canada's multi-bagger performance. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report, "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Alexander MacLennan owns shares of Air Canada, American Airlines Group, and Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, long May 2014 $31 calls on American Airlines Group, and long January 2015 $17 calls on American Airlines Group . This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers