BUSINESS

Airlines Profits Set To Take Off On Low Loonie, Cheap Fuel

09/25/2015 08:23 EDT | Updated 09/25/2016 05:12 EDT
Steve Parsons/PA Archive
An Air Canada plane taxi's towards the Southern runway at Heathrow Airport
Lower fuel prices and a lower Canadian dollar are combining to create winning conditions for Canada's air carriers with pretax profit at airlines expected to hit record levels this year, according to a new report.

The airlines are enjoying a profit windfall from the falling price of airline fuel, says a report from the Conference Board of Canada. Researcher Kristelle Audet is predicting pre-tax profit could rise 50 per cent to surpass $1 billion, a significant jump in an industry known for its narrow profit margins.

"We expect it will be a one-off," Audet, senior economist with the Conference Board, said in an interview with CBC News. "Airlines may pass part of the gain from lower fuel prices onto the consumer, but eventually their costs for aircraft maintenance and other costs will rise."

While the impact of lower fuel prices may be short-lived, the effects of a loonie hovering around 75 cents US are likely to linger.

Benefits of low loonie

The low dollar has brought a surge of travellers to Canada to take advantage of a cheaper holiday. And it's not just Americans – the dollar has fallen against the Chinese yuan and the British pound.

"International travel to Canada from the U.S. and other destinations is up seven per cent in the first half of the year," she said. "While the dollar was at parity with the U.S. dollar there was no growth and as soon as it started sinking people starting coming."

Having the Canadian dollar at 75 cents US has also discouraged Canadians from driving across the border to get onto nearby U.S. flights, as U.S. fares aren't such a bargain. This time last year, the loonie was at 92 cents US.

So while the Canadian economy may be turning in a lacklustre performance, with predictions of 1.2 per cent growth this year, the airline industry is forecast to expand by 5.2 per cent, according to Audet.

The sluggish economic conditions aren't discouraging Canadians from air travel, Audet said. In fact, they're taking more trips within Canada with traffic growing by 9.7 per cent.

Fare war on horizon

Only Alberta has seen a decline in air travel – as layoffs roll in, fewer people are travelling to the province.

On the horizon is good news for consumers – a fare price war that could well pull airfares to London lower, Audet says.

Air Canada and WestJet have both announced increased service to London airports during the peak season beginning in 2016.

That means there could be a fare war on that route, she said.

Air Canada has been especially active in ramping up its international market share, adding flights to New Delhi, Dubai and Brisbane. It also increased flights to U.S. destinations, taking advantage of U.S. carriers pulling out of some markets.

The outlook for profit margins for Canada's air carriers next year depends on what happens to fuel prices and how low the dollar remains. Audet says the airlines likely won't be enjoying a fuel price windfall next year and are likely to face higher employee costs.  But she expects capacity will keep growing by 1.7 per cent as consumers continue to fly.