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number cruncher

What are we looking for?

Most airline companies posted solid gains in 2014 despite the Ebola outbreak and unfavourable economic conditions. With lower fuel prices, most airlines may be poised for strong growth in the near future. My colleague Rob Belanger and I thought we would take a look at the sector.

The screen

We started with worldwide airline companies larger than $1-billion in market capitalization.

EV/EBITDAR (enterprise value divided by the earnings before interest, taxes, depreciation, amortization and rent) is used to determine the value of a company. Since 36 per cent of the world's airline fleet is currently leased, either "dry" (plane only) or "wet" (plane, crew and fuel) it is imperative that we include rent in the calculation. A low ratio indicates a company could be undervalued and we only included companies that had a positive EV/EBITDAR.

The load factor is the revenue per passenger kilometre divided by the available seat kilometres. It is an efficiency measure of how much of an airline's passenger carrying capacity is used.

The break-even load factor is the percentage of seats the airline must sell to cover its costs. Escalating costs push up the break-even load factor, while increasing prices that passengers must pay for airline services push it down.

We sorted our companies from the largest to smallest based on the load factor spread, which is the difference between the load factor and the break-even load factor, and the difference had to be greater than negative five.

Operating profit margin (OPM) is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. A high number is preferable and the OPM had to be positive to be included in our screen.

The yield per passenger kilometre represents the average amount that a passenger pays to fly one kilometre, expressed in cents per kilometre.

What did we find?

Aeromexico leads all our companies with the lowest EV/EBITDAR. The airline connects Mexico with 600 daily flights to 80 destinations and 20 countries.

Easyjet is one of Europe's leading airlines, employing 8,000 people and flying over 200 Airbus aircraft. The company is at the top of our screen in the load factor spread category.

Two companies lead the pack under passenger yield – WestJet and Air Canada.

Investors should contact an investment professional or conduct further research before buying any of the companies listed here.

Michael Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients.

Worldwide airline companies