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Airline stocks that were struggling at the start of this year are still in the dumps and WestJet Airlines Ltd. is struggling the most.

Shares of the Calgary-based low-cost airline have fallen 25 per cent in 2018, which includes this week’s 11-per-cent nosedive, amid disappointing first-quarter results and a simmering labour dispute. WestJet pilots on Thursday voted in favour of a strike following the Victoria Day weekend if no collective agreement is reached.

That stock performance is considerably worse than Air Canada’s 10-per-cent decline and the 14-per-cent slide among the five U.S. airlines in the S&P 500. What will it take to get WestJet shares flying again?

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It’s important to recognize what has been going wrong. The initial dip in WestJet’s share price, which we identified at the start of the year as a potential buying opportunity (oops), has clearly steepened.

To see why, scan just about any of the recent research notes from analysts. Many are losing their patience with the stock as WestJet struggles with a number of moving parts that challenge its long-term business model that is based on high efficiency and low cost.

Kevin Chiang, an analyst at CIBC World Markets, cut his recommendation to “underperformer” earlier this week, from “neutral.”

He cited five reasons for the downgrade: WestJet’s competitive advantages over Air Canada, including its culture and balance sheet strength, are either shrinking or have been eliminated; the airline continues to raise its cost estimates; the airline has admitted that 2018 is a transitional year as it launches Swoop, its ultralow cost airline; unionization is adding labour risk; and confidence in WestJet’s ability to meet some of its financial targets is eroding.

“While we believe WestJet’s strategy is sound and that it does need to expand its network, the airline is in a period of heightened execution risk,” Mr. Chiang said in his note.

He’s not alone. Analysts at Cormark and AltaCorp also cut their recommendations on the stock this week. And Ben Cherniavsky, an analyst at Raymond James – who was bullish earlier this year – is now skeptical about WestJet’s upbeat forecasts.

“We view management’s guidance as aggressive and worry about the potential for another near-term disappointment if current headwinds persist,” he said in a note.

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The shrivelling optimism is no doubt buttressing many long-held views among investors that airline stocks are to be avoided. But there is no disputing that these stocks can make good trading opportunities given their remarkable volatility.

If you look at WestJet over the past decade, there have been several ups and downs. The stock fell 63 per cent from December, 2007, to November, 2008, (the financial crisis), but then rallied 67 per cent by January, 2009.

The stock fell 56 per cent from December, 2014, to February, 2016, (coinciding with the steep decline in the price of oil, which walloped the economy in WestJet’s home base of Alberta). The stock then rallied 85 per cent by October, 2017.

The current downturn, which began in October, has knocked the shares down 29 per cent – so far.

The big question for investors is whether this is just another downturn to be exploited, or something more pronounced.

To halt the decline and get its shares started on their next rebound, WestJet will need to deliver some good news.

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Resolving a labour dispute with its pilots, who have now given their union a strike mandate, will ease pressure on bookings and could deliver some confidence in management’s revenue targets.

But more important to the airline’s long-term success, WestJet has to demonstrate that it can navigate through the current upheaval and emerge stronger. Not only is it adding an ultra-low cost airline, it is also going higher end with international routes and new Boeing 787 Dreamliners for these longer flights. These changes are transforming WestJet into a very different-looking airline.

For investors who don’t mind roller-coaster rides, the overwhelmingly negative sentiment toward WestJet looks intriguing. But they’re going to need a good reason to believe that the current downturn is over.

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