Edmonton Journal

Airline profits will fall in 2018 as rising costs outdo higher revenues: Conference Board

- ROSS MAROWITS

Canada’s airline profitabil­ity, which reached a 20-year high last year, is expected to soften due to higher fuel and labour costs, according to a Conference Board of Canada report.

Airline pre-tax profits are forecast to drop 27 per cent to $1.32 billion as increasing costs outpace higher revenues that are forecast to approach $32 billion.

Canadian airlines posted their highest revenues and profits last year since the board began collecting data in 1997.

“Some of the main tailwinds Canada’s air transporta­tion industry has benefited from in the past two years, primarily low fuel costs and a weaker loonie that is bolstering U.S. and foreign demand, will slowly reverse themselves over the next five years,” stated Conference Board economist Sabrina Bond.

Still, she said that shouldn’t put the industry’s expansion and profitabil­ity at risk as air travel demand continues to grow because of strengthen­ing employment in Canada and the United States.

The Conference Board said fuel, which accounts for about a third of airline costs, will rise while employee costs will grow as new or expanded routes will require the hiring of 6,000 more people over the next five years. By 2022, the industry is expected to generate about $1.37 billion of pre-tax earnings on nearly $38 billion of revenues.

The Conference Board said a continued expansion of domestic and global capacity has been a key driver of the improved revenues for the industry’s largest airlines.

Strong demand and growing connecting traffic through its three hubs in Canada are expected to result in another good year in 2018, Air Canada CEO Calin Rovinescu said in February.

Canadian airports served 139.4 million passengers last year, up 5.4 per cent from 2016 and 37 per cent higher than a decade ago. The loonie’s softness helped boost internatio­nal air travel in 2017, when a record 5.7 million U.S. residents flew to Canada last year.

Most of the gains in U.S. travellers were serviced by Canadian airlines, which now supply seats for two-thirds of U.S. visitors.

The number of non-U.S. internatio­nal travellers increased to a record 6.7 million last year. While Europeans remained the largest group, more visitors from Asia, particular­ly China and India, have narrowed the gap. Canadian airlines added 5.9 per cent more seats to internatio­nal destinatio­ns in 2017, which represents a 60 per cent growth over the last five years.

A strong Canadian economy contribute­d to a 4.2-per-cent increase in domestic travel by Canadians as nearly 77 million passengers flew within the country.

The Conference Board expects the Canadian airline industry’s growth will continue, but at a slower pace as a forecasted modest appreciati­on in the Canadian dollar will remove some of the incentive for foreign travellers.

Global airline net profits are expected to reach a record US$38.4 billion this year, defying the traditiona­l cyclical downturn that comes about every eight years, says Julie Perovic, the senior economist for the Internatio­nal Air Transporta­tion Associatio­n.

Robust operating margins in North America have contribute­d about half of the industry’s profitabil­ity over the last couple of years.

The last downturn was in 2009, around the time of the global financial

Some of the main tailwinds Canada’s air transporta­tion industry has benefited from in the past two years ... will slowly reverse themselves over the next five years.

crisis, but she said there probably isn’t a need for concern at the moment.

“We’ve seen quite strong global economic growth or GDP over the past couple of years and we feel that that is going to continue into 2018 and it’s going to help us sustain further growth in air travel markets,” she told an IATA conference this week in Montreal.

Global demand is expected to slip to around six per cent from 7.5 per cent in 2017.

Still, jet fuel is expected to rise a little more than crude to about US$74 per barrel from US$65 last year. Non-fuel costs, including labour, are forecast to more than double from two per cent in 2017.

 ?? THE CANADIAN PRESS/AP-FRANK RUMPENHORS­T/DPA VIA AP FILES ?? The Conference Board said Canadian airlines will need to hire 6,000 more people over the next five years, resulting in the spike in employee costs. Fuel is also forecast to increase. However, it said the industry’s expansion and profitabil­ity won’t be...
THE CANADIAN PRESS/AP-FRANK RUMPENHORS­T/DPA VIA AP FILES The Conference Board said Canadian airlines will need to hire 6,000 more people over the next five years, resulting in the spike in employee costs. Fuel is also forecast to increase. However, it said the industry’s expansion and profitabil­ity won’t be...

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