Air Canada rose the most in more than five months on speculation that the carrier will follow its biggest competitor, WestJet Airlines Ltd., in charging passengers for their first checked bag on some flights.
WestJet passengers traveling on economy fares within Canada and to the U.S. will pay C$25 ($22.60) for the first checked bag, according to a statement today. The fee will apply to bookings starting today for travel on or after Oct. 29, the Calgary-based carrier said.
The fee “opens the door for Air Canada to follow suit,” possibly as early as today, Walter Spracklin, an analyst at RBC Capital Markets, said in a note to customers. The added revenue, assuming that the fee applies to 4 million passengers, would boost Air Canada’s valuation by C$1.84 a share, Spracklin said.
“While Air Canada currently charges for first bags on U.S. trans-border segments, similar to the U.S. mainline peers, management has been reluctant to do so on domestic routes where WestJet previously did not do so,” he said. The Toronto-based analyst’s ratings are the equivalent of buy for Air Canada and hold for WestJet.
Air Canada’s widely traded Class B shares climbed 5.9 percent to C$8.98 at 12:30 p.m. in Toronto after a gain of as much as 7.3 percent, the biggest intraday since April 4. WestJet rose 5.9 percent to C$32.50 after reaching C$32.89, an intraday peak since the company went public in 1999.
Air Canada is “always monitoring industry developments such as this with great interest,” Isabelle Arthur, a spokeswoman for the Montreal-based company, said in an e-mailed message. “We will evaluate it going forward.”
WestJet said its new policy will probably affect about 20 percent of passengers. Travelers to international destinations such as Mexico, the Caribbean, Central America and Europe will continue to be able to check a first bag at no charge.
Bag fees will probably boost WestJet’s per-share earnings by 7 cents in the fourth quarter and 40 cents for all of 2015, Helane Becker, a Cowen & Co. analyst in New York, said in a note to clients. She raised her WestJet estimates to C$2.35 a share for this year, from C$2.30, and to C$2.95 for 2015, from C$2.55.
WestJet is expected to earn C$2.32 a share this year and C$2.68 in 2015, the average of 15 analysts’ estimates compiled by Bloomberg.
“A first bag fee will be significantly accretive to earnings,” Fadi Chamoun, an analyst at BMO Capital Markets in Toronto, said in a note to clients. “The demand environment is currently strong.”
Becker, Chamoun and AltaCorp Capital’s Chris Murray all said they expect Air Canada to match the WestJet increase.
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