Just as the long-awaited rebound in air passenger traffic finally picks up speed, surging oil prices are threatening to quash it.
Airline revenues have been on the mend since the recession in 2009, but the growing recovery in passenger numbers will be threatened if fares rise to compensate for higher fuel prices, the International Air Transport Association warned Thursday.
IATA said it's concerned about jet fuel prices, which climbed along with the oil rally and have been further fuelled by "political turmoil in Egypt and fears of a domino effect on other oil-producing states in the region." Contracts for benchmark West Texas intermediate crude remained above $90 (U.S.) a barrel on Thursday, sharply higher than the $40 in early 2009, though lower than the record of $147 in July, 2008.
Given that spending on airfares has a ripple effect in other areas, such as hospitality and tourism, reduced passenger traffic would dampen the still-fragile economic upturn.
For now, IATA is sticking with its forecast of a $9.1-billion (U.S.) profit for global carriers this year, down from $15.1-billion in profit last year but a vast turnaround from the $9.9-billion loss in 2009. The wild card will be how much airlines will be able to either incorporate higher fuel bills into advertised base fares, or slap new surcharges on tickets.
In September, 2008, Air Canada and WestJet Airlines Ltd. dropped North American fuel surcharges, only four months after they were implemented. Since then, Canada's two largest carriers have used a formula that rolls fuel charges into their base fares in North America.
Air Canada's pricing already imposes fuel surcharges on overseas routes, and those extra fees could rise if jet fuel prices continue their ascent, say analysts, who add that it is a tricky balancing act for carriers to raise fares without scaring off customers, especially price-sensitive vacationers.
Passenger fares and yields – the average price paid by one passenger to fly one mile – rose about 10 per cent in 2010, according to IATA, which noted that the return of business travellers led the way for the industry's comeback.
National Bank Financial Inc. analyst Cameron Doerksen said WestJet had a strong January, though its load factor – the proportion of available seats filled by paying customers – slipped as the Calgary-based carrier attempted to push through higher average fares and yields.
WestJet's January load factor retreated to 77.8 per cent, compared with 78.8 per cent in the same month last year. But its January traffic increased 9.7 per cent to 1.37 billion revenue passenger miles, while its seat capacity grew 11.2 per cent to 1.77 billion available seat miles.
Porter Airlines Inc.'s load factor in January jumped to 51.7 per cent from 44.1 per cent, ushering in what Porter president Robert Deluce expects will be another year of expansion. The Toronto-based regional carrier's traffic escalated 36.8 per cent while its seat capacity rose 16.7 per cent.
Montreal-based Air Canada will report its fourth-quarter financial results next Thursday.
David Goldstein, chief executive officer at the Tourism Industry Association of Canada, said improvements to travellers' airport experiences should help maintain passenger traffic. He expects changes announced Thursday by Ottawa to streamline airport screening will reduce the frustrations of lengthy lineups and scale back the hassles for business and leisure travellers.
Brent Jang