Airlines may boost fares as oil prices rise

TORONTO 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, up 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, he 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 AltaCorp Capital investor conference in Toronto on Thursday the company saw similar trends a year ago — fuel prices surged in late 2016, putting pressure on Air Canada’s earnings in the first quarter of 2017. “We still delivered record (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.”

Rousseau said Air Canada previously hedged up to 40 per cent of its fuel consumption on a quarterly basis, spending between $50 million and $55 million on fuel hedging per year. It has since moved away from hedging, a common practice that allows firms to lock in prices to protect themselves from rising fuel costs.

WestJet Airline 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.”