United Continental Holdings Inc (UAL), Southwest Airlines Co. (LUV): A Look at Foreign Airlines, Part 2: Canada

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Investors looking for North American airlines would typically think of the biggest carriers, all U.S.-based, that dominate the industry. But each of the two major airlines in Canada offers investors a unique choice about which model of the airline industry investors are interested in investing in.

The big legacy carrier

Originally a government-owned airline, Air Canada is Canada’s largest carrier, and among the largest airlines in the world. The airline dominates Canada’s international travel segment, has entered the Star Alliance alongside United Continental Holdings Inc (NYSE:UAL), and is modernizing its fleet by spinning the older aircraft off into a new low-cost subsidiary.

United Continental Holdings Inc (NYSE:UAL)

But while Air Canada looks strong in size, it has been run through bankruptcy like other legacy airlines, and it continues to face problems relating to uneasy worker relations and a massive pension liability. Shares slid to under a dollar in mid 2012, but recovered into the CAD$3 range before sliding back into the CAD$2 range after disappointing Q1 earnings and capacity concerns.

While Air Canada has the problems associated with legacy carriers, it stands to benefit from a leading position in international routes compared to rival Canadian carriers. To further strengthen its international presence, Air Canada is adding capacity in the international and overseas flight segments.

One area of particular interest is Air Canada’s new low cost unit, Air Canada rouge (with a lowercase r), which will have lower-priced flights from Canada to Europe among its offerings. International flights should see a boost during an economic recovery as leisure and long distance business travel picks up. As a result, investors looking to bet on Canada’s legacy carrier and its ability to benefit from an economic recovery may be interested in shares of Air Canada.

The airline challengers

In the U.S., Southwest Airlines Co. (NYSE:LUV) has made major moves into the larger American air travel market after expanding from being a Texas-only airline in its early days. While other carriers have declared bankruptcy (sometimes multiple times), Southwest Airlines Co. (NYSE:LUV) has shown nearly 40 years of straight profitability and even rewards its investors with a small dividend.

In Canada, WestJet is taking on the giant Air Canada following much of Southwest Airlines Co. (NYSE:LUV)’s path. WestJet has undergone rapid expansion, kept its house in good financial order, and pays a larger dividend than Southwest Airlines Co. (NYSE:LUV).

But not everything is the same between the two airlines. WestJet is a rare non-union airline, while Southwest Airlines Co. (NYSE:LUV) is heavily unionized (but has managed to maintain good worker relations). Southwest Airlines Co. (NYSE:LUV) is also a much larger airline by market capitalization, and it recently completed a merger with Airtran to increase its size.

WestJet plans to continue expansion, with possible future plans including increasing international flights and the option of an eventual merger. In the meantime, WestJet is continuing what is being called its “March to the East” as the airline looks to join rivals in operating flights out of the Toronto City Airport.

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