Airline profits expected to fall

Despite rising flight demands, 20-year high for Canadian airlines to ebb in next 5 years as fuel, labour costs spike, report says

MONTREAL— 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 bene- fited 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 U.S. 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 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.

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 during a February conference call.

Canadian airports served139.4 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. Most of the gains in U.S. travellers were serviced by Canadian airlines.

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 $38.4 billion (U.S.) 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.

Global demand is expected to slip to around 6 per cent from 7.5 per cent in 2017. Still, she said rising costs are a key concern.