Canadian airline profits to lose altitude

MONTREAL — Canadian airline profits will lose altitude over the next few years as growing revenues are eaten up by rising fuel and labour costs, a Conference Board of Canada report said Monday.

MONTREAL — Canadian airline profits will lose altitude over the next few years as growing revenues are eaten up by rising fuel and labour costs, a Conference Board of Canada report said Monday.

Pre-tax profits are expected to fall by about one-third to $785 million in 2011, down from $1.2 billion last year.

Profits will remain in the $700 million to $800 million range annually for the next three years, the report said.

Following two years of decline, costs are expected to increase by more than nine per cent in 2011, mainly due to higher oil prices and increased hiring and wage rates.

“The profits we recorded last year are way above what’s sustainable and we won’t see that again any time soon,” said Conference Board economist Maxim Armstrong.

Labour costs will rise after being cut 17.5 per cent from 2009 as a result of a 7.1 per cent reduction of employees and a 5.8 per cent cut in the average wage.

Fuel, which accounts for about 30 per cent of airline costs, is expected to hover around US$100 per barrel through 2011 and 2012 before increasing to US$120 by 2015, while the Canadian dollar is forecast to remain around parity with the U.S. greenback.

The board based its forecast on a Statistics Canada survey of the country’s public, private and regional air carriers.

Canada’s main airlines including Air Canada (TSX:AC.B), WestJet (TSX:WJA), Transat AT (TSX:TRZ.B) and Jazz (TSX:CHR.B), but there were 712 airlines in the country in 2010. Most were small, seasonal, northern or regional carriers.

Air Canada announced plans last week to cut some unprofitable routes to the United States and within Canada as it trims capacity growth because of sustained high fuel costs.

Cameron Doerksen of National Bank Financial welcomed a tentative agreement with pilots but said labour negotiations with other employees and higher fuel prices represent near-term headwinds for the airline’s shares.

“Nevertheless, we still expect stronger traffic and higher yields will lead to better bottom line results for Air Canada in 2011,” he wrote in a report.

Air fares, which fell by an average of 7.5 per cent during the recession, have been rising and should increase by about 1.8 per cent in coming years. That’s still below the overall rate of inflation.

Intense competition limits the ability of carriers to pass along big price increases.

Airline sales are expected to keep growing as businesses loosen budget constraints and consumer confidence grows.

Revenues recovered in 2010 to their pre-recession levels and are expected to rise 5.9 per cent this year and 6.3 per cent a year on average through 2015.

The Conference Board, a private-sector forecaster based in Ottawa, said the increased number of international travellers to Canada in recent months from emerging countries and the United States was especially encouraging.

After dipping below 100 million in 2009, the number of passengers arriving at Canadian airports increased to 105 million in 2010. That was slightly above the pre-recession level.

Domestic travel grew by just 1.6 per cent and should remain the primary source of growth for the industry since it represents about 60 per cent of all Canadian travel.

The number of U.S. travellers visiting Canada increased by 18 per cent between May 2009 and November 2010, bringing it to the highest level since July 2008.

Visits from other foreign travellers also grew. European visitors were up 4.2 per cent while those from Asia increased by 11 per cent.

Tourism from China and India increased by 32 and 25 per cent respectively.

“They are all expected to emerge and become richer and that means that the consumers have more money to travel and Canada is one of the destinations,” Armstrong added in an interview.

These new travellers will help to offset a decline in Japanese visitors that was predicted even before the earthquake and tsunami. These deadly events are expected to depress travel from Japan even further in the coming years.

In a separate report, the association that represents international scheduled carriers recently said it expects member net profits will decrease almost by half to US$8.6 billion from US$16 billion earned in 2010.

The International Air Transport Association (IATA) revised its industry outlook downwards on March 2 due to high oil prices caused by political unrest in the Middle East and northern Africa.

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