How airlines are cutting fares to offset the weak economy and boost demand

Posted by: privatefinancetips in BLOG, Financial Advisor Mar 27, 2016

Airlines in Canada and round the world are using discounted airfares to stimulate demand, trading fuller planes for lower yields as the economy weakens.

Air Canada and WestJet Airlines Ltd. reported strong load factors in January, with both airlines filling 80.1 percent of their available seat capacity recently.

But strong load factors don’t necessarily mean a powerful bottom line when the airline needs to cut ticket prices to fill seats. This leads to lower yields, or the average fare paid per passenger, per mile flown.

On a worldwide basis, the International Air Transport Association (IATA) said 2015 was the best year for global passenger traffic since 2010, largely as a result of lower ticket prices.

The volume of passengers carried by all airlines rose 6.5 per cent year-over-year, with load factors hitting a record annual high of 80.3 per cent. Airfares, meanwhile, fell five percent after adjusting for that higher U.S. dollar.

“While economic fundamentals were weaker in 2015 compared to 2014, passenger demand was boosted by lower airfares,” the association said inside a statement.

WestJet, particularly, has been can not adapt to the outcome of Alberta’s oil-price-fuelled slowdown, which CEO Gregg Saretsky described as “sudden” and “deep” on the business call now. About 25 % of the airline’s business originates in the province.

This has forced WestJet to discount ticket prices to stimulate demand as it activly works to shuffle some of its planes with other regions, like Bc and Ontario, where the economy is healthier.

By the 3rd quarter of 2016, WestJet expects to possess reduced its capacity in Alberta by five percent over a year earlier, on the other hand it’ll have to keep offering seat sales to generate demand, Saretsky acknowledged in Tuesday’s call.

The CEO said he expects yields to fall about seven percent in the first quarter because of lower fares, but added that the discounted routes will stay profitable.

“The discounting, while it’s taking yields and unit revenue performance down, continues to be generating profits, so none of what we’re doing is generating losses,” he said.

“We are trying to escape from being on sale around we’re, so that as capacity moves out (of Alberta) I think you will observe that change.”

In the meantime, WestJet shouldn’t waste a lot of time fretting about yield or revenue per available seat mile (RASM), said airline consultant Robert Kokonis.

“I think it’s better to fill a few of the seats at a price that’s still above break-even and buttress their top line and be worried about RASM and yield once things recover,” said Kokonis, president and managing director of Toronto-based AirTrav Inc.

Air Canada will report its fourth-quarter and full-year results on Feb. 17.

kowram@nationalpost.com

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