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(Fred Lum/The Globe and Mail)
(Fred Lum/The Globe and Mail)

Think airlines make for horrible investments? Think again Add to ...

Airline stocks are typically turbulent investments, but they have recently started taking on some appealing qualities for the longer-term investor, analysts say.

Although Walter Spracklin at RBC Dominion Securities downgraded his recommendation Wednesday on Air Canada and WestJet Airlines Ltd. to “sector perform” from “outperform,” he sees some fundamental changes that make airline stocks more attractive.

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Even as the airlines face heightened competition, with the introduction of the new WestJet Encore regional service and Air Canada’s discount carrier Rouge, the stocks are maintaining their sheen.

“We believe that there is a positive, secular shift ongoing in the airline industry, that is making airlines more investible securities, as opposed to the past,” Mr. Spracklin said in an interview.

But investors should still expect a little bumpiness, as airline stocks remain at their recent highs, he added. On Wednesday, he suggested that now may be a good time to sell some shares to take advantage of their lofty gains. In the last year, Air Canada stock’s price soared 280 per cent higher, while WestJet shares rose 80 per cent, he noted.

Analyst Chris Murray of PI Financial, however, stuck to his “buy” recommendation Wednesday on Air Canada shares, noting particularly the airline’s apparent interest in possibly becoming the first Canadian carrier to take advantage of a complicated debt structure previously open to U.S. airlines. Enhanced equipment trust certificates (EETCs) could be a source of new capital, conveniently coming at a time when Canadian airlines are expanding with new regional and discount-carrier offshoots.

“Air Canada is likely to be the first Canadian airline to tap this market, and it is also likely that a number of other Canadian airlines may consider the EETC structure for future aircraft purchases,” Mr. Murray noted in a report.

Yet, underlying this favourable view are some basic changes in the industry.

First, as Mr. Spracklin at RBC notes, there are the newer classes of airfares. No longer is it just business class and economy. Now different levels of economy class, plus the option at check-in to splurge a few hundred dollars at the last minute on more legroom and other upgrades, allow airlines to earn that little bit extra.

Second, airlines have been increasingly able to better match the number of flights and available seats to market demand. This has meant fuller flights, measured in the industry as load factors, and these have been soaring to record highs for Air Canada and WestJet.

Third, Air Canada’s last round of settlements with its unions were “groundbreaking,” Mr. Spracklin said. “They threw the dice with a final offer of arbitration and they won. As a result, they’ve gotten an opportunity to cut costs like they’ve never cut before. And no wonder you’re seeing major restructuring announcements like Rouge, and you’re going to see a much more attractive cost dynamic at Air Canada.”

In short, the financial community sees a much firmer foundation beneath airline stocks. But they haven’t completely lost their knee-jerk characteristics. Volatility should still be expected, even if major swings in stock prices could become more a thing of the past.

“We’ve got Porter [Airlines] coming out and announcing we are going to be a third player. Avian flu is another risk. The economy is still kind of weak. It’s still airline stocks. Let’s not kid ourselves here. These are still stocks that react in a volatile way to new or disruptive information,” Mr. Spracklin said.

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