Warren Buffett once said, “if I get the urge to invest in airlines, I call an 800 number, and I say, ‘Hello, my name is Warren, and I’m an air-o-holic…and then they talk me down.’ ”

Then again, WestJet Airlines Ltd. is an addiction Buffett might not want to shake. Its stellar record since taking off in 1996 was recently underscored by an excellent first quarter of the 2015 financial year: Earnings per share jumped 59%, cash flow from operations increased 300%, and the dividend was increased 17% compared with the same quarter last year. The results were boosted by a sharp drop in fuel costs and the introduction of first-bag charges in late 2014.

WestJet has managed to avoid the failures or near-failures of large airlines, including Delta, American Airlines and Air Canada. Their problems are chalked up to high debt, bloated expenses, strong labor unions and volatile fuel costs.

But some airlines have figured out winning formulas. They manage costs and assets better, squeeze more money from customers and work productively with unions. Of course, industry consolidation and the 50% growth in airline passengers over the past 10 years hasn’t hurt, either.

But some operators have managed to do it better than others. In the United States, the name of Southwest Airlines comes to mind, and in Canada, WestJet Airlines has established an outstanding track record reflected in the share price. Southwest is up 200% over the past five years and WestJet 120%, easily beating the broader markets. But there’s more good news to come.

 “New School” Airline

WestJet is the second-largest Canadian airline, and since it began in 1996 has grown exponentially—carrying 19.7 million passengers last year, or a more than 3,000% increase from its first year. It’s booked C$2 billion in profits with the only setback occurring in 2004, when high fuel prices and cutthroat competitor pricing resulted in a small loss.

Since inception, the company had an annual average return on equity of 14.2%, which has only dipped below 10% on four occasions.

Profit margins also have been remarkably stable (see profit margin graph). This stability was matched by other top operators such as Southwest, but not by old-school airlines such as Delta.

WestJet Secrets

The recipe seems simple: Keep the planes full, fly them often, charge passengers as much as you can and keep costs down.

The graph “WestJet Efficiencies” shows how effective the carrier was over the past decade keeping its planes full and growing its revenue per “available seat mile.”  Revenue includes not only the ticket price but also charges for items such as baggage, seat reservations, fuel surcharges, and meals and entertainment.

WestJet also managed to contain costs remarkably well, as demonstrated by a gross profit margin that stayed between 30% and 40% since 1998, dipping below 30% only twice.

WestJet is not alone in running an efficient and consistently profitable airline. The graph “EBITDA Margins 5-Year Average” illustrates the average five-year EBITDA margins of three-old school airlines with typically high cost structures compared with three new-school airlines that are flexible and nimble.

The balance sheet remains in good shape, with the debt-to-capital ratio at a manageable 39%.

Reuters consensus expectations now indicate growth in earnings per share of 49% for the full year with single-digit growth expected for 2016.

Risks Remain

As Warren Buffett observed, airlines carry substantial risk. One key risk is the ease with which airlines can add capacity and put pressure on competitors. Air Canada, which has gained traction since it returned to profitability in 2012, may provide additional competition to WestJet. However, WestJet has proved it’s a tough competitor.

Fuel costs make up almost a third of WestJet’s operating costs. This was a major swing factor for airline profits, but by starting fuel surcharges, WestJet passed much of the risk on to passengers.

A Good Value

WestJet is refreshingly cheap in an otherwise expensive market. The forward enterprise value/EBITDA and price-to-earnings ratios are 4.1 times and 8.2 times, respectively, which are not only cheap in absolute terms but also at a considerable discount to the other low-cost airlines.

WestJet has a 2.4% dividend yield, which is expected to grow 14% per year for the next three years. The safety of the dividend is supported by an excellent track record, a low payout ratio, a strong balance sheet and reasonable operating cash flows.

Although the dividend yield on WestJet is relatively low, we expect the dividend to grow rapidly, and the stock price should rise as investors realize that the company is undervalued. Buy below C$27.