Lower fares won’t get in way of Canadian airlines’ ‘incredibly bright’ future, report says

Airfares will be seduced by the third consecutive year in 2016 because of weak fuel prices, growing capacity and the threat of recent competition, however this won’t make much of a dent in Canadian airlines’ profits, based on a new report.

Despite an inadequate domestic economy, “the air travel industry’s future is quite bright,” says the Conference Board of Canada outlook, released Wednesday.

Pre-tax profits at the Canadian airlines hit approximately $1.6 billion in 2015, the greatest level on record.

“The combination of booming demand for airline travel and the drastic reduction in material costs has been proven as probably the most positive event to strike the in a very long time,” the report says.

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While combined profits are likely to decline slightly to $1.5 billion this season, “this is really a reflection much more of how strong conditions have been in the instead of how weak they’ll be in the future,” it adds.

In the four years between 2016 and 2020, the industry is expected to earn $7.5 billion in cumulative profits – a lot more than double the amount because it earned within the Fifteen years from 2000 to 2015.



Meanwhile, consumers have seen airfares fall steadily since 2014. The Conference Board expects the decline to continue this year as the drop in jet-fuel prices – down 53 per cent forever of 2014 – creates “enormous pressure” to chop fares.

In addition, the possibility of new ultra-low-cost carriers entering the Canadian market will also constrain fare development in the near term.

Investors happen to be concerned that Air Canada and WestJet Airlines Ltd. are adding too much capacity in a weak economy, particularly in oil-producing regions like Alberta.

As a result, both airlines are presently trading at a significant discount to their U.S. peers, despite the fact that both reason that their capacity additions are rational and centered on the best-performing routes. In Air Canada’s case, 90 per cent of their capacity growth this season targets international markets.

This seems to be the best strategy, as overseas travel has a lot more than made up for a decline in the quantity of Canadians flying to the U.S. because of the weak loonie, the Conference Board says.

The number of Canadians flying overseas grew an estimated 10.1 per cent last year, for a total gain of 33 per cent since 2010.

However, the biggest boost for Canadians airlines continues to be the begin the amount of American visitors to Canada, which has increased by a lot more than 20 per cent because the middle of 2011 to a record of over 4.5 million in 2015.

“Healthier international demand, coupled with the truth that Canadian airlines can now tap more foreign markets than in the past, will give you the final piece that solidifies the industry’s expansion within the next 5 to 6 years,” the Conference Board says.

“Even though profitability is projected to subside over the forecast, the Canadian air transportation industry remains in the center of its best decade in history.”

kowram@nationalpost.com