Canada's two largest airlines are raising fares to make up for a lower Canadian dollar, in one of the first tangible signs that a falling currency is adding costs to business.
Air Canada tried to boost fares on domestic and transborder flights two or three times in the past three weeks, but none of the increases stuck because WestJet Airlines Ltd. kept its fares steady, Air Canada's chief commercial officer Ben Smith said Tuesday.
But Calgary-based WestJet acknowledged Tuesday that it raised fares 2 per cent across the board on Jan. 30 after delaying as long as it could. Executives said there may be more increases to come, depending on further declines in the value of the Canadian dollar and whether consumer demand suffers.
"Until recently, it's WestJet that has been holding back," Mr. Smith said after a speech to the Canadian Club in Toronto by Calin Rovinescu, Air Canada's CEO. "You had the whole industry raising fares – all U.S. carriers, ourselves – and they don't stick because we [had] one holdout."
The fare increases are one way the two airlines are adjusting to changes in the currency that raise the cost of jet fuel, which represents about one-third of their expenses. The boost to prices comes as they add capacity and face spending of more than $10-billion (U.S.) combined on new aircraft, some of which are already being delivered.
"We are running WestJet like a business," WestJet CEO Gregg Saretsky told analysts and reporters on a conference call. If it makes sense to change fares again because of currency impacts, he said, "we'll make whatever changes are smart for the business, respecting the impact on demand."
Mr. Rovinescu said in his speech that Air Canada forecast some of the weakness in the currency, but not a 90-cent dollar.
The airline had already begun cost-cutting and introduced new "revenue-enhancement initiatives" and it has a currency-hedging program and about $1-billion in U.S.-dollar revenue that will help offset the dollar's decline, Mr. Rovinescu said.
Mr. Smith said Air Canada can add or subtract seats on routes quickly by switching a flight to an Airbus A321, for example, from an A319. That adds 53 seats to a flight.
WestJet said its philosophy is to make fares as transparent as possible, which means it will increase fares, rather than levying surcharges. The airline did not match the $35 currency surcharge introduced by Air Canada Vacations, Sunquest and others last month.
But it's also considering charging travellers for the first bag they check, something it doesn't do now.
Mr. Saretsky said WestJet doesn't appear to be gaining any advantage in the market from letting passengers check their bags for free.
WestJet posted a record profit of $268.7-million (Canadian) or $2.03 a share in 2013, up 11 per cent from $242.4-million or $1.78 a year earlier. The airline raised its quarterly dividend 20 per cent to 12 cents a share.
The airline turned around a key ratio in the fourth quarter, said industry consultant Robert Kokonis, president of AirTrav Inc.
WestJet's revenue was 15.59 cents per available seat mile, or nearly 3 per cent better than in the third quarter. That was better than the 2.6 per cent rise in costs per available seat mile, a positive trend that likely helped WestJet's share price rise 85 cents to $25.70 in trading Tuesday, Mr. Kokonis noted.
Costs will rise in 2014, the airline warned, because of the drop in the dollar and engine overhauls that are being moved ahead. First-quarter costs, excluding fuel and employee profit-sharing, are expected to rise between 3.5 and 4.5 per cent from year-earlier levels.
Fuel costs should range between 95 and 97 cents a litre, up between 2 and 4 per cent.