Airfares will be seduced by the 3rd consecutive year in 2016 due to weak fuel prices, growing capacity and also the threat of new competition, however this won’t make much of a dent in Canadian airlines’ profits, based on a brand new report.
Despite a weak domestic economy, “the air travel industry’s future is exceedingly bright,” says the Conference Board of Canada outlook, released Wednesday.
Pre-tax profits at the Canadian airlines hit an estimated $1.6 billion in 2015, the greatest level on record.
“The mixture of booming interest in airline travel and also the drastic reduction in material costs has been proven as the most positive event to strike the industry in an exceedingly long time,” the report says.
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While combined profits are likely to decline slightly to $1.5 billion this season, “this is a reflection more of how strong conditions will be in the rather than how weak they will be in the future,” it adds.
In the 4 years between 2016 and 2020, the is anticipated to earn $7.5 billion in cumulative profits – a lot more than twice as much because it earned within the 15 years from 2000 to 2015.
Meanwhile, consumers have experienced airfares fall steadily since 2014. The Conference Board expects the decline to continue this year because the stop by jet-fuel prices – down 53 per cent since the beginning of 2014 – creates “enormous pressure” to chop fares.
In addition, the potential of new ultra-low-cost carriers entering the Canadian market will also constrain fare development in the near term.
Investors have been concerned that Air Canada and WestJet Airlines Ltd. are adding an excessive amount of capacity in a weak economic environment, specifically in oil-producing regions like Alberta.
As a result, both airlines are presently trading in a significant discount to their U.S. peers, despite the fact that both reason that their capacity additions are rational and centered on the best-performing routes. In Air Canada’s case, 90 per cent of their capacity growth this season is aimed at international markets.
This seems to be the right strategy, as overseas travel has more than made up for a decline in the quantity of Canadians flying to the U.S. because of the weak loonie, the Conference Board says.
The quantity of Canadians flying overseas grew approximately 10.1 percent last year, for any total gain of 33 per cent since 2010.
However, the largest boost for Canadians airlines has been the begin the amount of American visitors to Canada, which has increased by more than 20 per cent since the middle of 2011 to some record of over 4.5 million in 2015.
“Healthier international demand, coupled with the truth that Canadian airlines are now able to tap more foreign markets than in the past, will give you the ultimate piece that solidifies the industry’s expansion over the next five to six years,” the Conference Board says.
“Even though profitability is projected to subside over the forecast, the Canadian air transportation industry remains in the middle of its best decade ever.”
kowram@nationalpost.com
