Air Canada follows WestJet lead in pocketing fuel savings
Sorry disgruntled WestJet customers, Air Canada won’t be cutting you much of a break either.
The country’s largest airline said Wednesday it will ensure its airfares remain “competitive” with other carriers — namely WestJet — but Air Canada has no plans to move first and pass the benefits of lower fuel costs through to lower ticket prices.
“The reduction in fuel costs absolutely benefits Air Canada in the short term, and subject to ongoing volatility we expect to take full advantage,” Calin Rovinescu, chief executive, said on a conference call.
Rovinescu said the extra cash pocketed by Air Canada will help pay down debt, be reinvested to improve services and flights and ultimately benefit the bottom line.
“This is a highly competitive business with thin [profit] margins, and we fully intend to be price competitive on fares while also maintaining our focus on sustaining profitability,” Rovinescu said.
Jet fuel, the largest expense for Air Canada like all airlines, has fallen nearly 40 per cent in recent months as oil prices have crashed.
Hold the line
WestJet signaled last week its intentions not to pass “any” of the benefit of lower fuel prices into lower airfares. The move to hold the line despite the dramatic drop in costs is a departure from previous steep drops in jet fuel, experts say.
“Historically, airlines have typically quickly adjusted their pricing to reflect lower input costs and thus ended up passing the economic benefit of the declining fuel price to consumers,” Kevin Chiang, a transportation stock expert at CIBC said last week.
“WestJet was clearly resolved to hold onto most of the benefit,” Chiang said.
“We’re not planning massive [airfare] price reductions,” Gregg Saretsky said on a conference call. “As long as the demand environment stays strong, we’re planning on allowing that [extra cash] to move right to our bottom line,” the exec said.
Rovinescu said jet fuel prices, which are strongly correlated to oil price movements, remain volatile. Oil prices have rallied from the low $40 (U.S.) a barrel range in the last week to above $50. WTI crude was trading 3.5 per cent lower again on Wednesday in New York, at $48.24/barrel.
“It represents our largest and most unpredictable cost,” Rovinescu said. “For just four months now, fuel prices have been lower and – not unexpectedly – remain volatile.”
“It’s too early to predict at this stage where fuel prices will be in the long term,” the Air Canada exec said.
The International Energy Agency said this week it expects oil prices to remain below $75/barrel over the next several years.
Canadian airlines are facing less of a windfall, they say, compared to American carriers because of the downswing in the loonie – more Canadian dollars must be spent buying fuel priced in U.S. dollars.
Air Canada executives noted Wednesday, though, that their fuel costs are still meaningfully lower.
Fuel purchases “are currently at a much lower cost … despite the impact of the weaker Canadian dollar,” Michael Rousseau, chief financial officer, said.
“The fuel price benefit is likely to be partially offset by the weaker Canadian dollar, but the fuel price effect looks likely to be, by far, the larger impact,” David Tyerman, analyst at Canaccord Genuity, said in a recent research note.
WATCH: WestJet reported a 34 per cent increase in profit last week thanks in part to falling fuel prices. But the carrier isn’t planning to cut customers in at all.
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