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Why Ebola Should Scare Westjet Airlines Ltd. and Air Canada Investors

While traveling to Japan recently, I got a bit of a reality check about the dangers of Ebola.

For the most part, it was a pretty routine border crossing. The lineup was long, everyone was businesslike, and we all were just trying to get out of there so we could get to our next destination. I waited for a half-hour, answered a few questions for the customs agent, and promptly got my passport stamped.

There was just one thing that was different — Ebola. Between getting off the plane and customs, there were at least a six separate posters warning about the dangers of the illness. Every staff member in the airport was wearing a protective mask and rubber gloves. And if you had even traveled to affected areas in Africa, a quarantine zone had been set up so a doctor could check for symptoms. So far the system seems to be working, since Japan has yet to announce a single case of the disease in the country.

Ebola has the potential to do damage to all parts of our economy if it gets out of hand, but the hardest hit sector would potentially be the airlines. Should investors of Air Canada (TSX: AC.B) and Westjet Airlines Ltd. (TSX: WJA) be worried about it?

The realities of Ebola

Currently, it appears the disease has largely been stopped in its tracks in Africa. A few cases have filtered out of the continent, including a four people eventually catching it in the United States. The original carrier has died, two nurses who were caring for him have made full recoveries, and the fourth victim is still fighting the disease.

The U.S. has a population of more than 300 million people, with only four people catching the disease. Not only does this show what a remarkable job the nation’s healthcare workers have done, but it also shows just how insignificant this story is in the grand scheme of the entire economy.

I think most observers understand that. What’s important is thinking about a couple of other factors. The virus is contained now, but what happens if even 100 or 1,000 Americans end up catching it? Those types of numbers are still small, but they run the risk of further contamination, which will really cause markets to get upset. Thus, at this point, it’s the potential that matters more than the reality.

Perception is reality

What does this mean for Canada’s two largest airlines? Not much, until either a case is reported in Canada, or the disease starts to affect more people outside of Africa.

What it really comes down to is sentiment. If passengers feel safe, they’ll continue to fly, and it’ll be business as usual. But if the disease spreads and people start to feel unsafe, they’ll stay far away from traveling. Investors just have to look at decreased air travel immediately after 9/11 as proof. As soon as customers feel unsafe, they’ll stay away. It doesn’t matter how many staffers at the airport wear rubber gloves.

If the whole situation blows over, it could be an interesting time to own airline stocks. Travel continues to be popular, and increased wealth around the world means more people can afford to do it. Oil prices have cratered, which in turn lowers the price of jet fuel. And new planes are more fuel efficient, which helps keep costs down on longer international flights.

But that’s if Ebola blows over. It’s likely that it does, but investors have to know the risks of investing in airlines at this point. The downside risk dwarfs the upside potential. Which is why I’d avoid the sector, at least for a little while.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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