Airlines “making a killing” with lower fuel prices

Mar 29, 2016 | News

By: Jean Sorensen

VANCOUVER — North American airlines are going from “getting killed” to making a killing as lower fuel prices are powering profits to record highs.

But fuel prices also still remain as the largest concern lately for North American carriers. While oil prices have hit a 12-year slump, recently there has been a slight rise, 150 delegates attending the 2016 Airline Distribution conference March 22-24, sponsored by the UATP heard.

“I have been to so many openings where we were getting killed and we were losing money left and right,” Ralph Kaiser, UATP’s president and CEO, said in his opening address. That’s not the situation today with North American carriers. “Profits are up and I hope every airline is making money – even if there has been a bit of an up-kick in the oil prices.”

Kaiser said fuel prices were an integral part of operating costs but one which airlines had no control over. They had a dramatic impact in structuring an airline’s bottom line. Kaiser provided statistics that showed on average fuel costs were only 19% of an airline’s operating cost in 2016 on average, compared to 40% in 2015, and 30-35% in 2014. IATA figures show that 2016 fuel prices are 40% below the international price when compared to that of last year.

IATA profit figures for North American carriers also showed the significant impact of lower fuel prices as that sector of the industry collectively posted double-digit profits, higher than any other region during the 2015 period. And projections are that the trend will carry forward in 2016, leading the rest of the world. In 2015, North American carriers collectively had net profits of $19.4 billion, and in 2016 the figure is projected at $19.2 billion. The drop could be attributed to the slight rise in fuel prices. Other global regions reported single digit profits, while areas such as Africa and Latin America posted losses.

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During a later roundtable discussion, Air Canada, Cathay Pacific, and WestJet representatives spoke about keeping a watchful eye on fuel prices, but also currency exchange rates which were impacting operations. While the weak Canadian dollar was a concern when purchasing in U.S. dollars, carriers were generally optimistic that the same weak Canadian dollar was triggering a strong 2016 travel season to Canada.

Nick Hays, vice-president Canada for Cathay Pacific called the weak Canadian dollar a “double-edged” sword; buying in Canadian dollars presents a disadvantage but the low Canadian dollar was a definite advantage in bringing more passengers to Canada. “It has made travel to Canada more attractive,” said Hays.

WestJet’s Brad Turner, director of sales strategy and distribution, said the weak Canadian dollar did place pressure on the carrier’s cost, not just fuel prices but other goods and services and costs of flying to the U.S. “The upside is more travel to Canada,” he said, adding WestJet is looking at a strong summer leisure and travel market and has seen strong winter traffic.

Turner said that the low oil prices have also hit travel from Alberta and Saskatchewan – two provinces where the oil patch generates both business and leisure travellers – but that the airline has been able to diversify and shift that capacity to Eastern Canada and Europe.

The airline is hoping that it can bring the same business model that it pioneered in Western Canada to other international and long-haul markets. “We will always be the high-value, low-cost carrier,” he said.

Air Canada’s Duncan Bureau, vice-president of global sales, said that fuel costs are continuing to have a phenomenal impact on Air Canada’s performance. Air Canada’s challenge as it goes forward is to maintain a balanced performance during the highs and lows that fuel prices impact on the industry today so that the airline can continue its capital cost investments projected in the future, he said.

Air Canada reported net income for 2015 profits of $1.222 billion or $4.18 per diluted share compared to 2014 adjusted net income of $531 million or $1.81, adding $691 million or $2.37 per dilute share to its yield. WestJet, in  2015, reported an all-time high net earnings of $367.5 million or $2.92 per fully diluted share, up 16 and 19% respectively as compared to its 2014 adjusted results.

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