Many value investors have sworn off the airline sector, citing Warren Buffett’s numerous bearish comments over the years.
That logic has been recently refuted by the Oracle of Omaha himself, with Buffett announcing major stakes in four large U.S. airlines.
The bull case for the sector might even be stronger for Canadian airlines, particularly Westjet Airlines Ltd. (TSX:WJA). Canada’s skies have several advantages to an investor, including only two major players serving most domestic routes. These routes are well supported by both business and leisure travelers alike. Canada’s major cities are just too spread out too far to make other alternatives practical.
Westjet specifically has done a nice job building customer loyalty, especially in Western Canada. Ask around in Calgary and you’ll likely hear a lot of nice things about Westjet’s level of service. This is an underrated moat.
Despite noticeable economic weakness in Western Canada, Westjet still boosted its top line by close to 3% last year. It has done a nice job diversifying its revenue base by adding things like paid wi-fi, seat upgrades, and checked luggage fees.
It also has done a nice job keeping its costs down, specifically by focusing on a few airplane models and thus far avoiding unionization. Its costs on a per-mile-flown basis are about 25% less than Air Canada’s (TSX:AC).
Finally, Westjet’s valuation is extremely compelling. Despite coming off a bad year where earnings fell from $2.92 to $2.45 per share, Westjet still trades at under 10 times earnings and pays a dividend of 2.5%. It also only marginally trades above book value.
