BOEING 737’S SILVER LINING
Return to air could lower fares
TORONTO Plane tickets were even pricier than usual this summer, the busiest season for air travel, amid high demand and a global capacity crunch caused by the grounding of the Boeing 737 Max fleet and a spate of airline bankruptcies.
Now analysts are questioning whether high demand will be enough to sustain elevated prices and yields once the Boeing 737 Max fleet, grounded in March after two crashes that killed all 346 passengers, is re-approved for flight later this year or early in 2020.
Airline fares soared 10.3 per cent in August year-over-year after rising 4.6 per cent in July, according to Statistics Canada, which credited the groundings for the boost.
Analysts do not expect prices to decline suddenly when Boeing re-emerges, as it will take Canadian airlines months to reintroduce the jets into service.
This week, Air Canada announced it removed the jets from its schedule until Feb. 14, WestJet Airlines Ltd. scrubbed them from its holiday schedule and leisure airline Sunwing won’t reintroduce them until May 2020.
Still, the reintroduction could eventually put pressure on pricing since it will add significant capacity worldwide, said Robert Kokonis, president of consultancy AirTrav Inc.
When the jets were pulled from the skies after the tragedies in Indonesia and Ethiopia, about 325 of the 737 Max fleet were operating daily, including 24 for Air Canada and 13 for WestJet. Since then, Boeing delivered roughly 70 more jets and produced another 300, Kokonis said, meaning about 700 aircraft will be reintroduced into commercial service in the next year.
“At three to four flights per day, that’s half a million seats back into the global marketplace,” he said. “That will be a yield bubble that will somewhat burst.”
On top of the groundings, financial trouble spelled the end for airlines including South Korea’s Air Philip, Britain’s Thomas Cook (four of its airlines went under), Iceland’s Wow Air, France’s XL Airways and Denmark’s Primera Air. While not all of these had routes to Canada, some did, leaving passengers clamouring for seats on Canada’s local airlines, Kokonis said.
This comes at a time of solid demand for all North American airlines, CIBC analyst Kevin Chiang noted in a report this week.
“We continue to see a healthy demand environment for air travel, which is keeping load factors elevated with strong pricing,” Chiang wrote.
AltaCorp analyst Chris Murray also noted the strong demand when evaluating the trend of higher prices.
“Lots of folks are travelling,” Murray said, adding the airport authorities are saying they had “tremendous” traffic this summer.
But for the airlines there’s a flip side to the higher fares — higher costs.
In order to accommodate demand, airlines have been flying larger planes on domestic routes, spending big on schedule changes and, in some cases, giving up routes, Murray said. While Boeing plans to compensate airlines for the problems — it estimated a US$5-billion charge in July — it’s not clear exactly how much.
Murray anticipates Air Canada will be slower than most to return the planes to service since it has delayed hiring and training pilots for the jets, a completely new type of plane for the airline.
“Just be very cautious about the pace at which we can ramp to the full fleet size,” Murray said.