Billionaire investor Warren Buffett isn’t a fan of airlines. Here’s what he had to say about the sector back in 2002:
If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in. You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success. I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: ‘My name is Warren and I’m an aeroholic.’ And then they talk me down.
While I’m hardly worthy of disagreeing with the Oracle of Omaha, I think Buffett is making a mistake. Like any sector, it’s possible for investors to profit from airline stocks, by buying the best in the sector or by buying any of its competitors during a time where the market undervalues the sector. It’s not a whole lot different than any other sector.
Yes, the airline industry needs huge capital requirements to buy planes upfront, but current low interest rates certainly help. Strong management can keep costs down, and building up scale is effective as well, as evidenced by all the mergers among U.S. carriers.
In Canada, there’s one airline that consistently outperforms the rest, and it’s Westjet (TSX: WJA). Unlike competitor Air Canada (TSX: AC.B), Westjet is consistently profitable, pays a dividend, and is always voted as the best operator in Canada. Personally, I will pay more to fly with Westjet if given the option.
Here are three reasons why Westjet is the Canadian airline most worthy of your investment dollars
1. Best management
As mentioned above, Westjet is a better operator than Air Canada, and this is primarily due to the intelligence of management.
Westjet exclusively flies Boeing 737 jets, and the advantage of this is constantly understated. It helps decrease the workload of mechanics, since there’s only one type of plane they need to know. But more importantly, it limits Westjet to just Canada’s main cities, ensuring enough demand that the company would make money. There’s always going to be demand for travelers to go from Calgary to Toronto.
Westjet kept things simple by making sure it was competitive on price on these main routes, while competitors Air Canada and Air Transat (TSX: TRZ.B) have to subsidize money-losing routes with profits from their main routes. It’s hard to pull the plug on a money-losing route, especially if you’re the only carrier on it. The uproar would be huge.
2. Better staff
Another extremely intelligent move Westjet management pulled off was keeping staff from unionizing. The benefits from this are huge, as Air Canada has almost been held hostage by its union for years.
And yet, from this traveler’s point of view, Westjet employees seem happier than competing employees. This is confirmed by management, who constantly stress that the staff has fun at work. It’s not very often management will tell employees to take their job less seriously, but Westjet employees manage to make flying fun.
Westjet employees also don’t have to deal with as many add-on fees as Air Canada employees do. By giving customers perks like one checked bag for free, Westjet ensures that customers are happier, which makes things easier for the staff.
3. Stronger financials
The final reason why Westjet is Canada’s best airline to invest is the financial strength of the company. Westjet is not only consistently profitable — it has turned a profit for 35 consecutive quarters — but its balance sheet is strong as well. The company is currently sitting on $1.25 billion in cash, and only $690 million in long-term debt.
Earnings are predictable enough that the company pays a 2% dividend. Westjet’s financials are the strongest in the industry in Canada, and perhaps even North America. Meanwhile, their largest competitor was in bankruptcy protection in 2003 and just narrowly avoided it in 2009.
Foolish bottom line
Airline stocks have been under pressure lately as the weakening Canadian dollar causes fuel prices to go up. Still, demand for air travel isn’t about to go away. Retiring baby boomers have both the disposable income and the time to travel. As long as airlines manage to keep costs down, they can remain profitable. Westjet has shown it’s the best at doing so. It’s the best airline in Canada.
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Fool contributor Nelson Smith does not own shares in any company mentioned in this article.