A High Flying Investment for Your Portfolio
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Many investors will take one look at airlines and wonder whether I've properly secured my oxygen mask. It's one of investors' most criticized industries for its high capital costs, labor strife, massive debt loads, and exposure to fluctuating fuel prices. But sometimes, you can still make profits in this sector. When airlines trade far below typical airline fundamentals, or the stock does not properly price in competitive advantages, investors can make money on airline stocks.
The good type of airline
Today the airlines preferred by investors tend to be the new breed of discount airlines. These airlines can pick and choose more profitable routes and do not have many of the same costs associated with the legacy carriers. Not only are they more stable, but they are also growing and making acquisitions. American favorite Southwest Airlines (NYSE: LUV) purchased rival Airtran in a $1.4 billion cash and stock deal, as the airline plans to increase the size of its network. Already, many customers prefer flying Southwest over larger carriers for its lower fares and fewer fees.
North of the border lives another discount carrier with growing ambitions. Calgary-based Westjet (TSX: WJA) is now expanding across Canada and into the U.S. According to The Wall Street Journal, the airline bought eight slot pairs at New York's LaGuardia Airport, allowing Westjet to operate eight roundtrip flights there per day. What started as a regional western Canada airline now has a nationwide presence that allows it to serve more customers.
It may surprise you to learn that Westjet is non-union. The employees, however, did collectively vote to allow a short-haul carrier, and union speculation does bubble to the surface every few years. At Westjet, more than 80% of employees own shares in the airline, according to The Calgary Herald. Attempts from outside unions to organize Westjet failed in both 2003 and 2006. According to the chairman of Westjet's employee association, there is no interest in forming a union, and in the article, a company official commented that the employees "act like owners who have a stake in the company."
Positive labor relations are important in business, especially when that business is as labor-intensive as an airline. While Westjet's employees seem satisfied with their position as owners and workers of the company, rival carrier Air Canada (TSX: AC.A) (TSX: AC.B) demonstrates how poor labor relations can turn ugly.
At Air Canada, labor problems boiled over in March, when workers mocked Federal Minster Lisa Raitt with fake applause after her support of a ban on an Air Canada union strike. According to CBC, workers at the Toronto Pearson Airport staged a "wildcat strike" in protest in late March, shutting down part of the airport and canceling or delaying hundreds of flights. Needless to say, travelers were not happy with the disruptions, and confrontations between workers and travelers became unruly at times. The dispute was only recently settled in binding arbitration after the Canadian government enacted back-to-work legislation, believing a full shutdown of Air Canada would threaten the Canadian economy.
In this case, the damage to Air Canada's reputation in the eyes of customers is Westjet's gain, as these customers evaluate how they will travel in the future.
To the skies
Based on all of these factors, it is no surprise that owners of Westjet stock are doing well. The stock is making new highs and is almost back to pre-recession levels. Unlike many other airlines, the company is profitable, has a positive book value, and pays a dividend.
With market capitalization of only $2.2 billion, the airline still has much room to fly, and its recent acquisitions reflect this strategy. Westjet is well on its way to becoming the Southwest Airlines of Canada. That's certainly good news for its shareholders.
TulipSpeculator1 has shares of Air Canada and will explain why in a future article. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.