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Air transport group says cheap oil will not mean lower airfares just yet

IATA chief executive officer Tony Tyler said in a statement that for the global industry as a whole, “travellers as well as shippers will see lower costs in 2015 as the impact of lower oil prices kick in.”

Christinne Muschi/Reuters

The trade group representing the world's airlines is raising its forecast for industry profits this year and next on the back of cheaper fuel prices. But other cost pressures on Canadian carriers in particular might limit any benefit their customers see from lower fares and reduced surcharges in the months ahead.

The International Air Transport Association said in a briefing in Geneva Wednesday that it expects member airlines to post collective profits of $19.9-billion (U.S.) this year, higher than its previous projection. That's roughly double what they earned in 2013.

It predicts industry earnings will swell a further 25 per cent to $25-billion next year as the cost of jet fuel falls and the economy improves in key parts of the world, prompting carriers to lower fares and cargo rates by 5 per cent or more after inflation.

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IATA chief economist Brian Pearce told reporters that the falling price of oil is "unambiguously good for consumers," adding that travellers will benefit either by lower fuel surcharges or other pricing changes. He said oil's lower price in daily trading won't trickle down to air fares immediately. In part, that's because airlines typically buy jet fuel at set prices months in advance.

"It takes time for these things to work through the system," said Chris Murray, an analyst who tracks airlines for AltaCorp Capital in Toronto. "Frankly, I figure that fares will only really start getting in line to where fuel prices are probably in the second half of 2015."

Industry consultant Robert Kokonis of Toronto-based AirTrav Inc. says he believes some relief for consumers should start coming by mid-January. He cautioned, however, that Canadian-based carriers face additional cost pressures that may limit their ability to lower prices.

For example, Air Canada buys its fuel in U.S. dollars, which gives it less purchasing power as the Canadian dollar falls. The loonie has dropped 4 per cent against the greenback since the spring and is expected to erode further. Most aircraft leases are also paid in greenbacks, as are some international maintenance contracts.

"It's created real exposure [for Canadian airlines]," Mr. Kokonis said. "Whatever gain the carriers are making on the fuel end, at least in Canada, it's also jacking up the cost on the foreign currency line. So if there is some giveback to travellers, it won't be quite to the same degree as what we have seen [historically]."

For Air Canada during 2013, every one-cent change in the cost of buying a U.S. dollar affected its pretax income by an estimated $48-million (Canadian). Meanwhile, based on volumes for the same year, every movement of $1 (U.S.) a barrel in the average price of jet fuel resulted in an approximate $26-million (Canadian) change to its fuel bill.

For the global industry as a whole, "travellers as well as shippers will see lower costs in 2015 as the impact of lower oil prices kick in," IATA chief executive officer Tony Tyler said in a statement. "The industry outlook is improving."

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The $25-billion (U.S.) in earnings on revenues of $783-billion projected for the industry nevertheless represents a slim 3.2-per-cent profit margin, Mr. Tyler said, noting Starbucks will make as much from selling seven cups of coffee as an airline will make selling an average ticket.

"There are a number of risks in today's global environment – political unrest, conflicts and some weak regional economies among them," he said. "A 3.2-per-cent net profit margin does not leave much room for a deterioration in the external environment before profits are hit."

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About the Author
Quebec business correspondent

Nicolas Van Praet is Quebec correspondent for the Report on Business. He joined The Globe and Mail in 2014 after eight years at the National Post, where he covered the North American auto industry crisis and several other major stories. More


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