Air Canada shaves airfares as battle with WestJet heats up

The last time yield fell as steeply at Air Canada was in 2009, when the country was gripped in recession and travellers were deterred by costly air travel. Credit/Canadian Press

WestJet is growing into a bigger thorn in the side of Air Canada, experts said Thursday, after the country’s biggest carrier disclosed numbers that suggest it’s shaving dollars off ticket prices to keep pace with its smaller rival.

“Yield,” a metric that reflects fares paid by passengers, dropped five per cent in the latest quarter, Air Canada told investors this week — a decline that was worse than expected.

‘Excessive supply’

The last time yield fell that much was in 2009, when the country was gripped in recession and travellers were deterred by costly air travel.

Despite recession concerns in some corners, airline experts said the economic backdrop this time around isn’t nearly as bad – indeed, demand in the latest quarter was “robust” according to Air Canada.

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Instead, airfares are under pressure because of “excessive seat supply” being offered by Canada’s carriers, analysts at Raymond James said in a research note.

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Filling planes

WestJet has led the charge in adding routes and seats this year, taking advantage of sharply lower fuel prices to launch growth plans both inside and outside of the country’s borders.

That’s put Air Canada on the defensive in a battle for market share.

“Air Canada continues to add capacity at a rapid pace,” experts at financial services firm Canaccord Genuity said Thursday.

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The window on lower airfares may close soon, though, experts at BMO Capital Markets said.

The downward pressure on airline prices will begin to peter out in the final few months of the year, they predicted. “We anticipate that capacity growth will moderate” – especially if oil prices recover some ground.

There is a major caveat, however: WestJet may just be getting started on its growth agenda, something that could lock Canada’s two biggest carriers in pitched war for market share well into next year.

“We see the potential, based on current fleet plans, for [capacity] growth to return to elevated levels in 2016,” BMO’s analysts said.

Airline experts at Canaccord Genuity added: “This seems like a risk to industry pricing … especially in a weak economic environment.”

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In this case, an airline’s “risk” represents a lower ticket fare for an airline’s customer.

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