WestJet Airlines Ltd. (TSX:WJA) recently reported another very strong quarter and month for traffic growth, but as I look at the stock’s year-to-date performance of -13.5%, I am left debating whether the good times for airliners are coming to an end.
We are certainly coming off very good times, especially for Air Canada (TSX: AC)(TSX:AC.B), whose stock has soared 145% since the beginning of 2016 off strong demand and strong cost-cutting and efficiency initiatives.
Here are three reasons I think the airliners are a bad investment at this time.
Oil prices are rising fast
The price of oil has risen dramatically. It is 26% higher than a year ago and 32% higher than six months ago. While this is not a surprise to anyone paying attention to the oil and gas markets, and while this is very good for oil and gas companies, it is a blow to the airline business.
For Air Canada, fuel represents 22.5% of the company’s total operating expenses, so this is significant.
Consumer debt
While the unemployment rate has hit record lows in recent months, putting the consumer in a favourable position to continue to boost demand for travel, consumer debt loads have me worried.
Rising interest rates
With interest rates rising and set to rise further, this has the potential to really impact the consumer’s pocket, leaving less money for travel.
So, while WestJet’s reported March load factor of 85.6% compared to 84.1% in March 2017 is a bullish data point, I see trouble looming.
Air Canada
Going back to Air Canada, 2017 was another great year for the airliner, despite a few headwinds, such as rising oil prices.
EPS came in at $0.22, blowing past expectations that were calling for EPS of $0.14, as profit more than doubled in the year amid increasing traffic and better profitability.
Earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent, or EBITDAR, once again came in higher than expectations, and at $521 million, they were 14.5% higher than the same period last year. And this despite the fact that the company’s biggest expense, fuel, was up big compared to last year.
Operating expenses rose 8% as a result of capacity additions and rising fuel prices. Fuel cost per litre increased 13.8% compared to last year.
While Air Canada continues to do the right things, investors should remain cognizant of the fact that this business is a very cyclical one with big capital requirements and a heavy debt load.
The key risks remain the economy, a weakening of the consumer, and rising fuel prices.
