St. Patrick's Day Sale
As the Canadian airline industry continues to recover from pandemic-related disruptions, investors are closely watching how this sector evolves as consumer spending habits start to be called into question.
With consumer spending remaining robust overall, the airline sector is one that’s continued to see robust performance. But as the charts below show, market participants are clearly viewing Canada’s two largest airlines very differently.
Let’s dive into why this may be the case, and which may be the better buy moving forward.
Air Canada
Air Canada (TSX:AC) remains Canada’s largest airline, offering an extensive domestic and international network. The company has made significant strides in regaining pre-pandemic passenger volumes and improving profitability. As travel demand has surged, Air Canada has focused on operational efficiencies, cost control, and expanding its cargo and loyalty program revenues.
Air Canada dominates Canada’s airline industry, holding a larger market share compared to WestJet. This provides the company with pricing power and economies of scale. Unlike WestJet, Air Canada has a well-established global network, generating revenue from lucrative international routes.
In addition, the company’s revamped Aeroplan program has been a significant revenue driver, increasing customer retention and spending. Air Canada Cargo has capitalized on global supply chain challenges by expanding its freight operations, contributing to diversified revenue streams.
Furthermore, the airline has implemented cost-saving initiatives to improve margins, crucial for long-term financial stability. With its dominant position and well-structured business model, Air Canada continues to be a preferred choice for travellers and investors alike. The company’s commitment to customer experience and operational excellence further strengthens its long-term growth prospects.
WestJet
WestJet, acquired by private equity firm Onex Corporation (TSX:ONEX) in 2019, is Canada’s second-largest airline. The airline takes a more regional and low-cost carrier approach, focusing on affordability and customer experience. Since becoming a privately owned entity under Onex, WestJet has taken steps to optimize its business model, including expanding international routes and re-establishing a more competitive stance against Air Canada.
WestJet operates a leaner business model and often offers lower fares, which makes it attractive to budget-conscious travellers. The airline has been increasing its long-haul and premium service offerings, including new routes to Europe and the Caribbean. Being privately held under Onex allows for more strategic, long-term decision-making without the pressure of quarterly earnings reports.
In addition, WestJet has a strong presence in Western Canada and remains a preferred airline for many regional travellers. The airline has been investing in fuel-efficient aircraft, which can help mitigate the impact of rising fuel prices.
WestJet’s focused approach to affordability and customer satisfaction has allowed it to compete effectively against larger carriers. Its expansion into international markets further strengthens its competitive position.
So, which airline stock is the winner?
In my view, the market has appropriately priced in a premium to WestJet, given the company’s low-cost model and much better efficiency metrics overall.
That said, Air Canada’s valuation remains very enticing for deep-value investors, and it’s a key reason why this stock has taken off in the past.
The thing is, Air Canada’s performance in this post-pandemic boom is indicative of some broader issues that may plague this stock for some time to come. Thus, I think the only appropriate choice for long-term investors right now remains WestJet, by way of Onex.
