Airlines in Canada and round the world are using discounted airfares to stimulate demand, trading fuller planes for lower yields as the economy weakens.
Air Canada and WestJet Airlines Ltd. reported strong load factors in January, with both airlines filling 80.1 per cent of the available seat capacity recently.
But strong load factors don’t necessarily mean a powerful bottom line if the airline needs to cut ticket prices to fill seats. This results in lower yields, or the average fare paid per passenger, per mile flown.
On a worldwide basis, the International Air Transport Association (IATA) said 2015 was the best year for global passenger traffic since 2010, largely because of lower ticket prices.
The volume of passengers carried by all airlines rose 6.5 percent year-over-year, with load factors hitting an archive annual high of 80.3 per cent. Airfares, meanwhile, fell five percent after adjusting for the higher U.S. dollar.
“While economic fundamentals were weaker in 2015 compared to 2014, passenger demand was boosted by lower airfares,” the association said in a statement.
WestJet, in particular, continues to be struggling to adapt to the impact of Alberta’s oil-price-fuelled slowdown, which CEO Gregg Saretsky described as “sudden” and “deep” on a business call now. About 25 per cent of the airline’s business comes from the province.
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This has forced WestJet to discount ticket prices to stimulate demand as it works to shuffle some of its planes to other regions, like British Columbia and Ontario, in which the economy is healthier.
By the third quarter of 2016, WestJet expects to possess reduced its capacity in Alberta by five percent compared to a year earlier, but in the meantime it’ll have to help keep offering seat sales to create demand, Saretsky acknowledged in Tuesday’s call.
The CEO said he expects yields to fall about seven per cent within the first quarter as a result of lower fares, but added the discounted routes will stay profitable.
“The discounting, while it’s taking yields and unit revenue performance down, is still generating profits, so none of the items we’re doing is generating losses,” he explained.
“We are attempting to escape from standing on sale around we are, so that as capacity moves out (of Alberta) I think you will see that change.”
In the meantime, WestJet shouldn’t waste a lot of time fretting about yield or revenue per available seat mile (RASM), said airline consultant Robert Kokonis.
“I think it’s easier to fill some of the seats at a cost that’s still above break-even and buttress their top line and be worried about RASM and yield once things recover,” said Kokonis, president and md of Toronto-based AirTrav Inc.
Air Canada will report its fourth-quarter and full-year results on Feb. 17.
kowram@nationalpost.com
Twitter.com/KritineOwram
