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Inside the Market Shares in WestJet, Air Canada fall as investor concerns over 737 Max 8 aircraft spread beyond Boeing

The rear of an Air Canada Boeing 737 Max aircraft arriving from Toronto is seen while on approach to land at Vancouver International Airport in Richmond, B.C., on Tuesday, March 12, 2019.

DARRYL DYCK/The Canadian Press

Boeing Co. and other aviation stocks fell sharply as more countries grounded its 737 Max 8 aircraft and worries spread that other players in the industry – including Canada’s two major airlines – could face negative financial consequences.

Boeing Co. fell 6.2 per cent Tuesday, and has now fallen more than 11 per cent and lost US$26.6-billion in market capitalization since Sunday’s crash of Ethiopian Airlines Flight 302.

WestJet Airlines Ltd. and Air Canada had a greater share of 737 Max planes in their fleet at year-end 2018 than any other publicly traded U.S. or Canadian airline stock, according to analysts at Cowen and Co. LLC.

While Southwest Airlines has a greater number of the Max aircraft, and more on order for 2019, it also flies almost twice as many planes as Air Canada and four times as many as WestJet.

WestJet closed at $19.92, down 3.2 per cent, and Air Canada closed at $32.04, down nearly 4 per cent Tuesday. Both hit their session lows at day’s end. Southwest Airlines Co. dropped 2.3 per cent, but Delta Air Lines Inc., which has no Max planes in its fleet, dropped less than 1 per cent.

Sunday’s crash of a Boeing Max 8 aircraft in Ethiopia, claiming 157 lives, was the second fatal crash of the plane model in less than five months. Worries about why a brand-new airplane has failed twice in such a short period have led several countries – but not, as of late Tuesday, the United States or Canada – to ground the aircraft.

“Regardless of what Boeing, the airlines or our government officials say – the prevailing angst about this crash and the uncanny way in which it resembled the crash of Lion Air Flight JT 610 last fall will make the flying public a little more nervous about boarding this specific plane until more details emerge,” Ben Cherniavsky, analyst with Raymond James, said in a note.

Mr. Cherniavsky said that for Air Canada, which has 26 Max aircraft on order, many of the planes are scheduled to be replacement aircraft for the airline’s existing Airbus fleet. So, “any deferral of the Max should be manageable for Air Canada’s operations in the near term.” While the Boeing Max are larger than the Airbus planes they’d replace, Mr. Cherniavsky thinks it wouldn’t be so bad if Air Canada slowed its rate of growth in “available seat miles,” a measure of capacity that can affect pricing. “The Max also has more range and flexibility than Air Canada’s incumbent narrow-body plane,” he added.

The implications for WestJet are similar, he said. WestJet has 25 Max aircraft on order and they are due to replace some of the airline’s older 737 Next Generation aircraft. As such, any deferral could also be manageable in the near term. “That said, this would limit some of management’s flexibility to expand capacity by extending the life of the older planes if they so desired.”

The matter may be resolved by Boeing soon, but investors seem to be pricing in some measure of disruption for both Boeing and the travel industry at large. In addition to the airlines, air-leasing companies and aircraft parts makers tied to Boeing and the Max line saw their shares fall Tuesday.

Travel booking companies fell as well, with Expedia Group Inc. dropping 1 per cent and MakeMyTrip Ltd., an Indian travel agency that trades on the U.S. Nasdaq, falling 4.5 per cent.

“It is impossible to handicap what the authorities, politicians, airlines and customers will do as a reaction to the tragedies and / or grounding of the MAX fleet,” Cowen analyst Helane Becker wrote in Tuesday’s note, adding that American Airlines Group Inc., United Continental Holdings Inc. and Southwest have large enough fleets to be able to manage disruption by adjusting schedules, keeping older aircraft in service longer and cutting short “unnecessary retrofitting” of planes.

“Our major concern is related to changes in future bookings as a result of the tragedy,” said Ms. Becker, whose coverage includes the two Canadian airlines. Southwest saw “a significant decline in bookings” after an April, 2018, engine failure left a passenger dead, the first fatality at a major U.S. airline in nine years. Southwest then had to discount fares to drive demand, she said.

“This is an important time for the airlines as we head into the peak travel season given the importance of [the second and third quarters] in terms of overall profitability,” she said.

The single-aisle 737, the world’s most-sold commercial aircraft, is central to Boeing’s future. The Max line is the fastest-selling jetliner in the company’s history with more than 5,000 orders booked and a backlog valued at nearly US$500-billion at list prices.

Tuesday, DZ Bank became the first brokerage in nearly two years to place a “sell” rating on Boeing stock, while setting a price target of US$333 – the lowest on Wall Street. Brokerage Edward Jones also downgraded the stock to “hold” from “buy,” saying the accidents could result in additional expenses, some order delays and pressure on financial results.

The United States will mandate that Boeing implement design changes by April, but said the plane was airworthy and did not need to be grounded. Boeing defended its aircraft and said it has “full confidence in the safety of the Max.”

publicly traded u.s. and canadian

airlines’ Exposure

737 Max series as percentage of total fleet

in service as of 2018*

Total aircraft

737 Max series

% 737

Max

Airline

Number of aircraft

391

Air Canada

4.6%

18

330

Alaska**

n/a

0

1,551

American

1.3%

20

750

Southwest

4.1%

31

1,329

United

0.7%

9

177

WestJet

6.2%

11

*Does not reflect current number of planes in service

**Has planes on order

Note: Delta, Allegiant, Hawaiian, JetBlue, Spirit, Mesa,

SkyWest and Volaris have no exposure to the 737 Max series.

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: cowen and company

publicly traded u.s. and canadian

airlines’ Exposure

737 Max series as percentage of total fleet

in service as of 2018*

Total aircraft

737 Max series

% 737

Max

Airline

Number of aircraft

391

Air Canada

4.6%

18

330

Alaska**

n/a

0

1,551

American

1.3%

20

750

Southwest

4.1%

31

1,329

United

0.7%

9

177

WestJet

6.2%

11

*Does not reflect current number of planes in service

**Has planes on order

Note: Delta, Allegiant, Hawaiian, JetBlue, Spirit, Mesa, SkyWest and Volaris have no exposure to the 737 Max series.

JOHN SOPINSKI/THE GLOBE AND MAIL

SOURCE: cowen and company

publicly traded u.s. and canadian airlines’ Exposure

737 Max series as percentage of total fleet in service as of 2018*

Total aircraft

737 Max series

Airline

Number of aircraft

% 737 Max

391

Air Canada

4.6%

18

330

Alaska**

n/a

0

1,551

American

1.3%

20

750

Southwest

4.1%

31

1,329

United

0.7%

9

177

WestJet

6.2%

11

*Does not reflect current number of planes in service

**Has planes on order

Note: Delta, Allegiant, Hawaiian, JetBlue, Spirit, Mesa, SkyWest and Volaris have no exposure to the 737 Max series.

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: cowen and company

With a report from Reuters

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