Airlines grapple with rising fuel costs
AIR CANADA, WESTJET COULD INCREASE FARES IN RESPONSE TO HIGHER OIL PRICES: ANALYSTS
• After a year that saw strong growth and low fuel costs, Canada’s two largest airlines could face headwinds in 2018 thanks to a recent rally in jet fuel prices, a move some analysts say could lead to increased fares.
According to S& P Global Platts, global jet fuel prices as of Dec. 29 hit US$81.3 per barrel, an increase of 21.1 per cent from the same time in 2016. As of Wednesday, Platts said jet fuel prices had hit US$82.76 per barrel.
Matthew Kohlman, a senior managing editor at Platts, said the benchmark spot price of jet fuel — based on an assessment of U.S. Gulf Coast fuel — is the highest it has been since December 2014. While jet fuel prices tend to spike in December because of increased travel, Kohlman said a major factor behind the surge is the increase seen in the oil complex in general. On Thursday, U. S. West Texas Intermediate ( WTI) crude closed at US$63.80, up 23 cents and the highest since December 2014.
Michael Rousseau, Air Canada’s chief financial officer, told an Alta- Corp Capital investor conference in Toronto on Thursday the company saw similar trends a year ago — fuel prices surged in late 2016, putting pressure on the Air Canada’s earnings in the first quarter of 2017.
“We still delivered r ecord (second quarter and third quarter) results,” Rousseau said. “Fuel has gone up in the last little while. We’ll continue to try and raise prices when the opportunity presents itself. We’re not conservative about trying to raise prices ... we’ll manage through it.”
Rousseau said Air Canada previously hedged up to 40 per cent of its fuel on a quarterly basis, spending between $50 million and $55 million on fuel hedging per year.
“We looked at the marketplace and virtually none of our competitors hedge anymore,” Rousseau said. “We said, ‘ Why are we spending $ 55 million to do that?’ So we slowed down our hedging program in Q4, and currently we’re not hedged at all.”
WestJet Airlines chief financial officer Harry Taylor told the conference he could not say whether the company is considering fare increases, but that the rising cost of oil could benefit the economy in Alberta, where the airline is based.
“As long as the price of oil is driving the price of fuel up, the Canadian economy tends to benefit from higher oil prices and certainly the province of Alberta does,” Taylor said.
“For an Alberta business, that is significant. We think we have a bit of a natural hedge.”
In 2017, low fuel costs and a strengthening Canadian dollar provided tailwinds for both Air Canada and WestJet, prompting analysts to boost earnings estimates throughout the year.
“In mid-2017, the market was littered with low fares as a result of an intense competitive environment and low jet costs,” Cowen analyst Helane Becker wrote in a 2018 airline industry outlook note this week.
“These fares are not sustainable in the current environment of rising oil prices, since jet fuel is currently above US$2 per gallon (65.83 cents per litre) for the first time since mid-2015… higher jet fuel costs are likely to limit upside revisions to estimates, but the current environment leads us to be more optimistic than we were a year ago.”
Becker said the outlook for airlines remains bullish for 2018 as airlines have better control of non-fuel costs.
“Jet fuel costs are clearly increasing, but at the end of the day higher fuel costs affect all airlines equally,” Becker wrote. “The response is usually slower capacity growth and higher ticket prices.”
Macquarie Research analyst Konark Gupta said in a note Thursday that while WestJet’s traffic in December exceeded expectations, there is “meaningful downside risk to (fourth-quarter earnings- per- share) estimates due to the recent rally in fuel prices.”
“The recent rally in fuel prices is also an incremental headwind, but WestJet could mitigate some of this risk with its greater exposure to Alberta and oilsands,” Gupta wrote.