The fates of Canada two largest airlines appear to be moving in different directions, according to Tasneem Azim, UBS analyst.

Air Canada’s exposure to the upswing in international and premium travel is expected to accelerate its earnings this year, she said.

On the other hand, however, WestJet’s earnings are expected to be dragged down through 2012 as a result of its rapid expansion plans, Ms. Azim said Tuesday in a note to clients.

As such, she said she was boosting her price target on Air Canada to $4 a share, from $2.75 previously, after the country’s largest carrier reported a record September load factor Monday.

At the same time, she lowered her earnings estimates for WestJet by 16% through 2012 with the expectation that its expansion will continue to put pressure on its load factors and yields.

“Notwithstanding recent deferrals, WestJet’s capacity expansion through 2012 remains significant in our view,” Ms. Azim said. “Although we expect traffic trends to improve going forward in line with general economic growth, we believe capacity growth will likely dilute the benefit of such trends.”

But Ms. Azim said there were opportunities for WestJet’s management to redeploy some of the $1-billion in cash the airline stockpiled during the recession. She said a share buyback or a one-time special dividend utilizing some of the cash could be accretive by 7% or 12% respectively.

“In light of current economic uncertainty, we believe it is unlikely that WestJet will redeploy its excess cash in the near term (6-9 months). Over the long term however (i.e. the next 12 to 18 months), we would expect greater economic stability to present management with the opportunity to redeploy excess cash and return value to shareholders,” she said.

She also noted that WestJet remains her top pick in the Canadian airline industry because of its inexpensive valuation, cost advantage and cash flows. She has a $17 a share price target on it.

- Scott Deveau