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A passenger walks past an empty Air Canada check-in counter at Vancouver International Airport. Darryl Dyck/The Canadian PressThe Canadian Press

Caution signs are flashing for Air Canada shares as worries grow over rising fuel costs, labour strife and plans to launch a discount leisure division.

While the decision to raise airfares has taken the sting out of soaring oil prices in the short term, travel demand later this year will be lower than expected should energy costs and higher ticket prices scare away some travellers.

The projected slowdown in traffic growth, labour discord over pensions and uncertainty about plans to start a low-cost carrier don't bode well for the country's largest airline, said RBC Dominion Securities Inc. analyst Walter Spracklin. On Wednesday, he chopped his 52-week target price for Air Canada to $3 from $4.

Last Friday, the Air Canada Pilots Association (ACPA) cancelled a ratification vote on a tentative labour agreement, after hundreds of union members complained that management is seeking to create a lower wage scale for pilots at the discount arm. New hires would have to join a defined-contribution pension plan, which does not provide a guaranteed level of payment upon retirement.

While Mr. Spracklin said he is "very respectful of what can be very difficult negotiations," he warns that tension will mount in the weeks ahead as contract talks heat up between management and unions representing pilots, flight attendants, customer service agents and mechanics.

Air Canada chief executive officer Calin Rovinescu said in an interview on Friday that the Montreal-based carrier needs to tackle challenges to ensure the company's long-term survival.

He emphasized the high stakes in a YouTube video this week to employees. Existing defined-benefit pension plans "present very significant challenges for Air Canada going forward. There's no question about it," he said, noting the carrier's $2.1-billion pension solvency deficit "is still at a very, very high level."

Mr. Spracklin reduced his estimate for Air Canada's 2011 EBITDAR (earnings before interest, taxes, depreciation, amortization and aircraft rent) to $1.21-billion from $1.39-billion.

WestJet Airlines Ltd. shares also face headwinds as the Calgary-based carrier copes with surging fuel prices and tries to keep planes full amid higher airfares. Mr. Spracklin cut his 52-week price target on WestJet to $16 from $17.

PI Financial Corp. analyst Chris Murray has maintained his targets of $17.50 on WestJet and $5.25 on Air Canada.

He sees longer-term potential in Canada's two largest carriers, but in the case of Air Canada, he said labour talks and escalating fuel bills will dampen an already volatile stock in the short term. Mr. Murray rates WestJet as "average risk" and Air Canada as "speculative risk."











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