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Baggage is loaded on an Air Canada plane at Toronto Pearson Airport's Terminal 1 in Toronto on August 14, 2013. (Deborah Baic/The Globe and Mail)
Baggage is loaded on an Air Canada plane at Toronto Pearson Airport's Terminal 1 in Toronto on August 14, 2013. (Deborah Baic/The Globe and Mail)

Air Canada stock soars 13 per cent as costs fall Add to ...

Shares in Air Canada soared more than 13 per cent Friday following news that the airline expects its costs to come in lower than anticipated.

The airline’s class B shares closed up 52 cents, at $4.49 on the Toronto Stock Exchange, on very heavy volume of 10.3 million shares. The closing price was just pennies shy of the daytime high of $4.51 — the highest level it’s been since the stock dropped below $5 in October 2008.

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Late Thursday, Air Canada said it now expects its third-quarter adjusted cost per available seat mile to be between three and 3.5 per cent lower than a year ago. The decrease compared with a drop in adjusted cost per available seat mile of 1.5 to 2.5 per cent projected in early August.

Several banks raised their target price for the shares following the announcement.

CIBC World Markets said the revised guidance by the airline indicates that Air Canada is making good progress on its cost-cutting plan. It raised its target price to $5, from $4.75.

As a result, CIBC also updated its estimates for Air Canada’s adjusted earnings in the third quarter, which ended Monday, as well as for 2013 as a whole.

National Bank Financial also maintained its outperform outlook for the shares, raising its target price from $3.75 to $4.75.

Although it forecast that earnings would be stronger than earlier expected, National Bank cautioned that long-term investment in Air Canada is still “speculative.”

“Indeed, we continue to have longer-term concerns over downward yield pressure as a result of increased competition and as Air Canada itself adds significant new capacity on international routes in the coming years,” the bank said in a note.

“Nevertheless, over the short to medium term we expect the stock to move higher.”

BMO Capital Markets also said it was maintaining its rating of outperform for the stock, and increasing its target price to $5 from $4.

“While the stock has risen 35 per cent in the past month, the company is only starting to realize the benefits of its fairly sizable CASM (fuel and other unusual items) reduction opportunity over the next several years,” it said in a note.

“We believe this would strengthen the company’s competitive position and open up new revenue growth opportunities, particularly in international markets.”

RBC Capital Markets added that the airline is in the early stages of a “transformational change” that will increase its profitability over the long term.

It raised its target price to the highest among the banks —$5.50, from $4.

“We continue to believe that AC is in the early innings of a transformational change in its business model and we see substantial upside to our target price,” RBC said in a note.

It added that several risks can bring the target price lower, including sensitivity to the economy, exposure to volatile fuel prices and the risk of terrorism and epidemics.

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