“U.S. airlines are reaping the full benefit from falling oil. Canadian airlines are not because of the weak [Canadian dollar],” WestJet spokesman Robert Palmer said in an email. “We buy fuel in U.S. dollars and we’re getting killed on foreign exchange. In fact, our foreign exchange expenditures cut very sharply into any savings we might realize from falling oil.” However, Cormark Securities analyst David Newman estimates that each US$1-per-barrel decrease in the price of oil boosts Air Canada’s earnings before interest and taxes by $25 million and WestJet’s by $8 million. To put that in perspective, the price of oil has fallen approximately US$40 from its June high of just over US$100 per barrel. - Kristine Owram Airline profits set to soar, but Canadians may not see lower fares for a while Republish Reprint Kristine Owram | December 10, 2014 | Last Updated: Dec 10 4:45 PM ET Slumping oil prices are expected to boost global airline profits by 25% in 2015, but Canadian travellers won’t necessarily see a corresponding drop in fares. Lower crude prices and stronger global GDP growth will help the airline industry to a collective net profit of US$25-billion in 2015, up from a projected US$19.9-billion this year, according to a semi-annual forecast from the International Air Transport Association, released Wednesday. Travellers “will benefit substantially” from this stronger industry performance, IATA said, predicting that the average return airfare will fall 5.1% in 2015 after adjusting for inflation. “Stronger industry performance is good news for all,” Tony Tyler, IATA’s director general and CEO, said in a statement. “It’s a highly competitive industry and consumers — travellers as well as shippers — will see lower costs in 2015 as the impact of lower oil prices kicks in.” However, Canadians may have to wait longer than most before they see lower fares. Both Air Canada and WestJet Airlines Ltd. have stressed that a weaker loonie partially offsets the impact of declining fuel prices, as jet fuel is sold in U.S. dollars. We buy fuel in U.S. dollars and we’re getting killed on foreign exchange “U.S. airlines are reaping the full benefit from falling oil. Canadian airlines are not because of the weak [Canadian dollar],” WestJet spokesman Robert Palmer said in an email. “We buy fuel in U.S. dollars and we’re getting killed on foreign exchange. In fact, our foreign exchange expenditures cut very sharply into any savings we might realize from falling oil.” However, Cormark Securities analyst David Newman estimates that each US$1-per-barrel decrease in the price of oil boosts Air Canada’s earnings before interest and taxes by $25 million and WestJet’s by $8 million. To put that in perspective, the price of oil has fallen approximately US$40 from its June high of just over US$100 per barrel. Both WestJet and Air Canada have also said that they won’t cut fares at the expense of profit margins. “We’ve always been a rational competitor,” Ben Smith, Air Canada’s president for passenger airlines, said on the company’s third-quarter conference call last month. “We are strongly focused on margin expansion and adding to shareholder value, so you will continue to see us manage toward that.” So far, they’ve stuck to their word, even though jet-fuel prices in Canadian dollars have fallen nearly 30% since their peak last January, according to RBC analyst Walter Spracklin. Fuel is the single biggest expense for airlines — accounting for approximately one-third of operating costs — but RBC’s “Fare Tracker,” which scours the web for ticket prices, shows no evidence that fares are falling. In fact, WestJet’s fares rose 2.2% in the first two months of the fourth quarter, while Air Canada’s climbed 0.4%. “With lower fuel expense, the opportunity to give some of the additional benefits the airlines are deriving back to consumers is present,” Mr. Spracklin wrote in a recent note to clients. “However, we have so far seen no evidence of this and have seen no material changes in the pricing environment — which we note is against a backdrop of a very strong demand environment.” Fares will tend to trend down with fuel prices, but it’s usually a quarter or two before you have the full impact This is partly because there tends to be a lag between lower fuel prices and cheaper fares, and many people book their trips well in advance, said AltaCorp analyst Chris Murray. “The advanced bookings have been pretty strong so far, and a lot of those bookings were probably priced at a time when everyone was expecting US$90 or US$100 oil,” Mr. Murray said in an interview. “Over time, fares will tend to trend down with fuel prices, but it’s usually a quarter or two before you have the full impact.” Investors in airline stocks, on the other hand, are already benefiting from falling crude prices. Air Canada’s shares are up 25% in the past month, while WestJet’s have risen 11%. business.financialpost/2014/12/10/airline-profits-set-to-soar-but-canadians-may-not-see-lower-fares-for-a-while/
Posted on: Sat, 13 Dec 2014 04:01:11 +0000