The Motley Fool

Have Canada’s Airlines Finally Figured It Out?

Last week, Air Canada (TSX: AC.B) took delivery of its first of 37 Boeing 787 Dreamliners. The company plans to have it, along with 14 more of the new planes, in service by September.

The Dreamliner is a very impressive airplane. The body of the plane is made with state of the art carbon fiber technology and a impressively complex electrical system. It offers larger seats, more overhead compartment room and a 45% bigger cargo area than other planes in its size range. And it does this while burning up to 20% less fuel.

It wasn’t all a smooth ride for Boeing’s new plane. After going into service in 2011, the plane was plagued by mechanical problems. The Federal Aviation Administration even grounded the planes in January 2013, telling Boeing its plane wouldn’t be allowed to fly in the U.S. if the problems weren’t fixed. In March, the FAA gave the plane a thumbs up, and the company finally started delivering planes to its North American customers.

Air Canada has the perfect routes for these new airplanes. The company plans to use them on many of its routes to Asia. Currently, most routes use the much larger Boeing 777, a plane with about a 40% larger capacity than the Dreamliner. The 777s use quite a bit additional fuel, and planes often fly only three quarters full because there simply isn’t the demand to fill the plane entirely. The Dreamliner is the perfect choice for these medium demand routes.

As Chinese and Indian consumers get more disposable income, they will start to fly more. A very obvious destination is Canada, since many have relatives that have already made the move to our country. Air Canada wants to increase its presence in those markets so it can take advantage of this upcoming trend.

Is this the beginning of airlines actually being attractive investments?

It’s been a tough last decade for Air Canada. After its bankruptcy in 2004, the company narrowly avoided a similar fate just eight years later. It had to deal with record high fuel prices in 2008 and the biggest economic slowdown in the last 60 years in 2009. It fought hard to reduce union benefits, knowing it had to get costs under control.

And for the most part, it succeeded. Air Canada is well positioned going forward.

Meanwhile, Westjet (TSX: WJA) has just chugged along, delivering some remarkably consistent results for an airline. The company slowly expanded from its Western Canadian roots, first heading across the country, then to the United States, Mexico, and the Caribbean. This summer, it will crack the European market for the first time, flying into Dublin, Ireland.

Travel has almost replaced buying a new car or a fancy house as the go-to luxury item for a lot of consumers. Spending time abroad used to be reserved for just the wealthy or eccentric. These days, it seems everyone you meet has stories about time spent in other countries. The world has never been so accessible for someone who wants to go see it.

Billionaire investor Warren Buffett famously said that the airline industry was a “death trap” for investors. One look at the bankruptcies that have plagued the sector over the past 20 years would confirm that. But going forward, I’m not sure the Oracle of Omaha is right about airlines’ future. They’re finally starting to get a lot of things right.

Take a look at ticket prices, as an example. Fare wars used to be commonplace. Now? When was the last time you heard about a fantastic deal to fly anywhere? Airlines are being much smarter in figuring out upcoming demand, meaning huge amounts of empty seats aren’t even available to discount anymore. Airlines have figured out that fare wars simply aren’t worth it.

Besides, there’s plenty of demand to go around. Both Air Canada and Westjet have recently set records for load factors, meaning their planes are more full than ever. As Canadian cities continue to grow, so will demand for not only domestic flights, but also international flights that don’t connect through Toronto or New York. This is why the Dreamliner is so important to Air Canada.

But most importantly, the Dreamliner represents something else — perhaps the dawn of a new era in Canadian aviation. If things keep chugging along at the current pace, airline stocks could be an attractive investment for years to come. Demand is there, costs are going down, and airlines have made many other operational improvements. Most importantly, fares are staying high. The future looks bright for Canada’s airlines.

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Fool contributor Nelson Smith has no position in any stock mentioned in this article. 

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