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While Air Canada (ACa/TSX) continues to benefit from a strong domestic market, some softness for its U.S. transborder business is causing the airline to shift additional capacity to Canada this summer, Versant Partners analyst Cameron Doerksen said in a note to clients.

Air Canada reported disappointing first quarter results on May 11, prompting him to lower his recommendation on the shares to «hold» from «buy» and his price target to $17.60 from $21.50.

Mr. Doerksen cited higher-than-expected labour and maintenance costs as the primary reasons behind the weak result.

«Although we are not negative on Air Canada shares, we believe that WestJet shares are the better investment vehicle for playing the current strength in the Canadian airline industry,» he said in a note to clients.

Raymond James analyst Ben Cherniavsky also lowered his price target to $15.50 from $21 and has a «market perform» rating on Air Canada shares.

He reiterated previous concerns that the airline could see cost increases, the current industry up-cycle could be nearing its end, Air Canada has rising debt levels, labour unrest is a possibility as 2009 contract renegotiations approach and the shares are at a premium valuation.

Mr. Cherniavsky also prefers WestJet Airlines Ltd. (WJA/TSX).

RBC Capital Markets analyst Nick Morton is far more optimistic with an «outperform» rating, however he lowered his price target to $21 from $26.

He also noted that if fuel prices continue to climb, the fact that WestJet is unhedged could cause it more damage than for Air Canada, which is partially hedged to such changes.