After years of avoiding the sector like I avoid brussels sprouts, it appears investors are now comfortable risking money in the airline space again.
Warren Buffett had a lot to do with this. The Oracle of Omaha took large positions in some leading U.S. carriers a couple of years ago, and rumours currently have him mulling a total takeover bid of one airline. This specific airline changes on a day-to-day basis, of course.
Buffett liked the airline’s use of technology and smart management to help keep prices up as well as overall demand trends for the sector. Airlines are getting much better at charging for extras, too. And consolidation in the U.S. market has led to just a handful of names dominating.
The same situation has played out in Canada, with the two leaders commanding the skies. If you want to invest in the sector today, should you choose Air Canada (TSX:AC)(TSX:AC.B) or WestJet Airlines (TSX:WJA)? Let’s take a closer look.
Air Canada
Air Canada is our nation’s largest airline, serving more than 200 airports around the world and transporting some 50 million customers. 2018 saw it generate more than $18 billion in revenue and almost $1.2 billion in operating income.
The turnaround since the 2009 financial crisis has been nothing short of remarkable. Air Canada has dug itself out of a hole almost everyone assumed would end in bankruptcy, expanded capacity (especially to overseas markets), increased ancillary revenue by charging for things like checked baggage and internet connectivity, and largely stopped getting into price wars with WestJet.
Needless to say, investors were pleased with the result. In fact, the stock has been the TSX’s best performer over the last decade.
But perhaps cracks are starting to appear in its armour. EBITDAR margins have been headed consistently lower over the last few years, impacted by higher costs. Both fuel and labour costs have been marching higher. Although the company does have strong liquidity, a recession could hit it hard.
WestJet
WestJet has also delivered strong growth over the last few years. It has dramatically increased its regional airline, operated more flights to the United States, and has cautiously dipped its toe into the overseas market by offering flights to Europe.
However, 2018’s results were somewhat weak. The top line grew by about 6%, but net income plunged from $2.38 to $0.80 per share. And with its new fleet of 737-Max planes grounded, WestJet has suspended 2019’s guidance. Nobody really knows when these planes will be back in the sky.
Still, WestJet has a lot going for it. It has a strong balance sheet, more growth potential than its rival, and investors can collect its 2.9% yield while waiting for the stock to recover. And since WestJet shares haven’t performed very well over the last couple of years, they likely have better price appreciation potential than Air Canada.
Which should you choose?
I own WestJet shares and continue to think the company has a bright future. After expanding further into Europe, it should turn its focus to Asia, which is a massive opportunity. I think the company could easily double its revenues in the next 10 years, and it has a demonstrated history of being able to keep costs under control.
But in the short term, I continue to like Air Canada. The company is firing on all cylinders and I like its move to re-acquire Aeroplan. It has also done a nice job of keeping costs in check, and its balance sheet looks great. And I really like its presence in the international travel market, which should continue to show strong results.
