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Top 1000

Why airline stocks — and Air Canada in particular — are soaring

Even Warren Buffett, who once famously called airline investing a "death" trap, is buying

Top 1000 Rank #26 | 2016 Revenue $14.7 billion | 2016 Profit $876 million

To see the full Top 1000 rankings, click here.

Investing in an airline and getting bumped from a flight have traditionally left one feeling much the same—dazed, bloodied and cheated. For years, airline stocks burned investors due to their high costs, vulnerability to fuel prices and frequent bankruptcies. Warren Buffett once called airline investing "a death trap" and his own stints in the sector "temporary insanity."

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Air Canada's story has followed a similar arc. The company's financial problems, including high debt and huge pension funding shortfall, were amplified by the financial crisis, destroying 96% of its market capitalization in under two years. For the second time in a decade, bankruptcy loomed (the first time being in 2003, when shareholders were wiped out).

But then a funny thing happened to the airline sector in general, and Air Canada in particular: They became investible.

Airlines improved efficiency, while consolidation reduced the number of major U.S. carriers from nine to four. Buffett's Berkshire Hathaway is now invested in all of them. He recently said he's hopeful the airlines got a "bad 20th century out of the way."

Air Canada's bad century—give or take—started to turn around in 2009, under the leadership of Calin Rovinescu. He led a makeover that included cutting costs, taming debt and slashing the pension liability. As the carrier grew more profitable, so too did owning its shares. The stock has risen more than 20-fold from its 2012 low, and is up by more than 80% in the past year alone. Despite the strong run, Air Canada is trading at a forward price-to-earnings ratio of about 6—a bargain compared to its U.S. peers.

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