Investors looking for North American airlines would typically think of the biggest carriers, all U.S.-based, that dominate the industry. But each of the two major airlines in Canada offers investors a unique choice about which model of the airline industry investors are interested in investing in.
The big legacy carrier
Originally a government-owned airline, Air Canada is Canada’s largest carrier, and among the largest airlines in the world. The airline dominates Canada’s international travel segment, has entered the Star Alliance alongside United Continental Holdings Inc (NYSE:UAL), and is modernizing its fleet by spinning the older aircraft off into a new low-cost subsidiary.
But while Air Canada looks strong in size, it has been run through bankruptcy like other legacy airlines, and it continues to face problems relating to uneasy worker relations and a massive pension liability. Shares slid to under a dollar in mid 2012, but recovered into the CAD$3 range before sliding back into the CAD$2 range after disappointing Q1 earnings and capacity concerns.
While Air Canada has the problems associated with legacy carriers, it stands to benefit from a leading position in international routes compared to rival Canadian carriers. To further strengthen its international presence, Air Canada is adding capacity in the international and overseas flight segments.
One area of particular interest is Air Canada’s new low cost unit, Air Canada rouge (with a lowercase r), which will have lower-priced flights from Canada to Europe among its offerings. International flights should see a boost during an economic recovery as leisure and long distance business travel picks up. As a result, investors looking to bet on Canada’s legacy carrier and its ability to benefit from an economic recovery may be interested in shares of Air Canada.
The airline challengers
In the U.S., Southwest Airlines Co. (NYSE:LUV) has made major moves into the larger American air travel market after expanding from being a Texas-only airline in its early days. While other carriers have declared bankruptcy (sometimes multiple times), Southwest Airlines Co. (NYSE:LUV) has shown nearly 40 years of straight profitability and even rewards its investors with a small dividend.
In Canada, WestJet is taking on the giant Air Canada following much of Southwest Airlines Co. (NYSE:LUV)’s path. WestJet has undergone rapid expansion, kept its house in good financial order, and pays a larger dividend than Southwest Airlines Co. (NYSE:LUV).
But not everything is the same between the two airlines. WestJet is a rare non-union airline, while Southwest Airlines Co. (NYSE:LUV) is heavily unionized (but has managed to maintain good worker relations). Southwest Airlines Co. (NYSE:LUV) is also a much larger airline by market capitalization, and it recently completed a merger with Airtran to increase its size.
WestJet plans to continue expansion, with possible future plans including increasing international flights and the option of an eventual merger. In the meantime, WestJet is continuing what is being called its “March to the East” as the airline looks to join rivals in operating flights out of the Toronto City Airport.
The airline is also launching a new regional airline called Encore, which it expects to add capacity to the WestJet. Initial fears of overcapacity drove down shares of WestJet and Air Canada, but as the Vancouver Sun reports, WestJet’s CEO Gregg Saretsky is comfortable with the expansion. Investors looking for airline industry growth without the issues of a legacy carrier should consider a position WestJet to benefit from future expansion.
WestJet is not alone in challenging Air Canada’s dominant market position. A smaller company called Porter Airlines is making moves in the Canadian market as well. The airline is set to begin its first jet flights pending the approval of jet aircraft at the Toronto City Airport. However, Porter remains a privately owned airline, not available for investment by average investors.
Porter cannot match the size of Air Canada or WestJet, but even at its relatively small size, it can add capacity to a market where capacity fears are already starting to spread. Expansion at the Toronto City Airport would add capacity in the Toronto area and possibly lower prices at the Toronto Pearson Airport used by Air Canada and WestJet.
Keeping this in mind, investors in Air Canada and WestJet will need to watch Porter for increasing capacity and competition in the Canadian market over the coming years.
Airlines of the north
Canada’s airlines allow airline investors to diversify beyond the U.S. market, while still investing in North America and collecting some benefits from an U.S. economic recovery. Additionally, the presence of both Air Canada and WestJet gives investors a choice between a traditional legacy carrier and an expanding, industry-challenging airline. I personally own Air Canada shares in the higher-risk section of my portfolio, and I’m considering beginning a WestJet position as a more financially stable airline investment.
The article A Look at Foreign Airlines, Part 2: Canada originally appeared on Fool.com.
Alexander MacLennan owns shares of Air Canada. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security.The Motley Fool recommends Southwest Airlines. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
