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Airlines flying higher as they regain pricing power

An Air Canada jet is seen on a runway.


An improving economy is lifting the fortunes of the world's airline industry, positioning Canada's two largest carriers for strong showings in 2011.

Air Canada and WestJet are filling seats at higher ticket prices as they take advantage of the travel sector's dramatic rebound. Forced to chop airfares during the slump of 2009, the two carriers were able to raise prices last year as recession-weary consumers returned to the skies.

Even though the momentum is expected to slow in 2011, Air Canada and WestJet have regained their "pricing power," making them able to fill planes without resorting to sharply discounted seat sales.

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In a notable achievement for an industry accustomed to red ink, share prices for major global carriers rose an average of 28 per cent last year, according to the International Air Transport Association.

Just 21 months ago, Air Canada became a penny stock as the Montreal-based carrier struggled to survive. Executives abandoned business-class cabins in 2009, shunning the front of the plane even when major global carriers dangled big discounts to lure them back. Some cash-strapped corporations suspended international travel.

But premium traffic staged a comeback in 2010, along with robust sales in economy class. IATA is forecasting that global airlines will post a combined $9.1-billion (U.S.) in profit this year, after making an estimated $15.1-billion in profit last year - a remarkable turnaround from a total of $26-billion in losses in 2008 and 2009.

The bounce back is being reflected in better yields, which measure average ticket prices collected to fly one passenger one mile, National Bank Financial Inc. analyst Cameron Doerksen said on Thursday.

Since fares won't be dropping much, if at all, for busy travel periods this year, airlines are anticipating that consumers will be making earlier bookings than in the past. "The idea is to try to condition the consumer to stop waiting until the last minute to purchase their ticket," Mr. Doerksen said. "Airlines hope to sell more inventory of tickets in advance of the flight so there isn't the need to deeply discount at the last minute."

WestJet's third-quarter yield rose to 17.1 cents from 16.7 cents, while Air Canada's increased to 17.7 cents from 17.4 cents. Revenue per available seat mile, or RASM, a key industry measure of unit revenue, is also on the mend.

Seat sales will still be held in 2011, though they will be scaled down and have more restrictive travel periods than in the past, industry experts say. For instance, current seat sales are valid for travel until April 20, meaning carriers are able to charge significantly more for the hectic summer season.

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Calgary-based WestJet's traffic climbed 12.9 per cent last year to 15.6 billion revenue passenger miles, and its seat capacity rose 11.1 per cent. The carrier's 2010 load factor, or proportion of seats filled by paying customers, was 79.9 per cent, up from 78.7 per cent in 2009.

Air Canada's traffic, including results from regional affiliate Jazz Air, increased 8.3 per cent to 51.9 billion revenue passenger miles last year, and its seat capacity rose 7 per cent. Air Canada's 2010 load factor was 81.7 per cent, compared with 80.7 per cent in 2009.

Shares in Air Canada, which narrowly averted bankruptcy protection in 2009, surged 168 per cent over the past year while WestJet stock rose 16 per cent.

"Markets are taking a positive view on airline financial prospects," IATA said, noting a broad-based traffic recovery in North America, Europe, Africa, Latin America, the Middle East and the Asia-Pacific region.

Privately owned Porter Airlines Inc. also posted impressive traffic results in 2010. The Toronto-based regional carrier's traffic jumped 88 per cent to 589.9 million revenue passenger miles last year, while its load factor climbed to 54.2 per cent from 47.9 per cent.

The trick for airlines is to raise fares just enough to boost revenue, but not so much that they scare away too many customers.

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In December, WestJet's traffic increased 10.9 per cent, but its load factor slipped to 80.3 per cent from 81.7 per cent in the same month of 2009. "WestJet is trying to push through some higher pricing, and whenever you do that, you tend to have lower load factors," Mr. Doerksen said. Still, WestJet's latest December was better than in 2007, when its load factor was 79.3 per cent.

BMO Nesbitt Burns Inc. analyst Claude Proulx expects WestJet to report fourth-quarter share profit of 15 cents (Canadian), up from 10 cents in the final quarter of 2009.

Air Canada's December load factor slipped to 80.8 per cent from 81.2 per cent, but its monthly traffic gained 7.2 per cent to 4.1 billion revenue passenger miles.

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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