Canadian airlines soaring: report
Airfares will fall for the third consecutive year in 2016 due to weak fuel prices, growing capacity and the threat of new competition, but this won’t make much of a dent in Canadian airlines’ profits, according to a new report.
Despite a weak domestic economy, “the air travel industry’s future is exceedingly bright,” says the Conference Board of Canada outlook, released Wednesday.
Pre-tax profits at the Canadian airlines hit an estimated $ 1.6 billion in 2015, the highest level on record.
“The combination of booming demand for air travel and the drastic reduction in material costs has proved to be the most positive event to strike the industry in a very long time,” the report says.
While combined profits are expected to decline slightly to $ 1.5 billion this year, “this is a reflection more of how strong conditions have been in the industry rather than how weak they will be in the future,” it adds.
In the four years between 2016 and 2020, the industry is expected to earn $ 7.5 billion in cumulative profits — more than twice as much as it earned in the 15 years from 2000 to 2015.
Meanwhile, consumers have seen airfares fall steadily since 2014. The Conference Board expects the decline to continue this year as the drop in jet-fuel prices — down 53 per cent since the beginning of 2014 — creates “enormous pressure” to cut fares.
In addition, the possibility of new ultra-low-cost carriers entering the Canadian market will also constrain fare growth in the near term.
Investors have been concerned that Air Canada and WestJet Airlines Ltd. are adding too much capacity in a weak economic environment, particularly in oil-producing regions like Alberta.
As a result, both airlines are currently trading at a significant discount to their U. S. peers, even though both argue that their capacity additions are rational and focused on the best-performing routes. In Air Canada’s case, 90 per cent of its capacity growth this year is aimed at international markets.
This appears to be the right strategy, as overseas travel has more than made up for a decline in the number of Canadians flying to the U. S. because of the weak loonie, the Conference Board says. The number of Canadians flying overseas grew an estimated 10.1 per cent last year, for a total gain of 33 per cent since 2010.
However, the biggest boost for Canadians airlines has been the jump in the number of American visitors to Canada, which has increased by more than 20 per cent since the middle of 2011 to a record of over 4.5 million in 2015.
“Healthier international demand, coupled with the fact that Canadian airlines can now tap more foreign markets than ever before, will provide the final piece that solidifies the industry’s expansion over the next five to six years,” the Conference Board says.
“Even though profitability is projected to subside over the forecast, the Canadian air transportation industry remains in the middle of its best decade in history.”