Sky-high Airfares: Bad News for Holiday Fliers

Sky-high Airfares: Bad News for Holiday Fliers

Back in 2008, the world's AIRLINES were in survival mode. Fuel prices had soared and consumers were cutting back. With analysts openly fretting about whether Air Canada might once again crash-land in bankruptcy court, mass layoffs of front-line staff and an array of new fees and penalties were but the most visible changes impacting travellers. Some foreign carriers took even more drastic measures to cut costs, ripping out entertainment systems and even ordering passengers not to flush toilets, lest they burn precious fuel in the process.

The mood in the skies these days couldn't be more different. Over the past year, carriers have been able to drive down costs, fill their planes to the brim, and chart a path to stellar financial results. In November, Air Canada's operating income quadrupled to $327 million, while WestJet's third-quarter profits jumped 72 per cent to $54 million. So far this year Air Canada's share price has surged 176 per cent, to $3.70, while WestJet recently instituted its first-ever quarterly dividend to investors.

But if Christmas has come early to the industry, for passengers heading home for the holidays this year, it's translated into steeper fares. "The leisure class is coming back because people feel better about the world, and business travel is coming back because corporations are feeling better about the world, and the combination means airlines are saying, 'Hey, we can charge higher fares again,' " says Chris Murray, an airline analyst at PI Financial Corp. "That's likely to continue." So get ready, because the days of ultra-cheap airfares are over.

How fast are fares rising? There's no easy answer, since seat sales and laddered pricing mean airfares are difficult to compare from one flight to the next, let alone from one year to the next. But Maclean's asked FlightNetwork.com, Canada's second-largest online travel site, to sift through its historical data to see how fares have changed. The company examined 29,000 flights on six major domestic routes, and found that on some hauls, such as Toronto to Vancouver and Vancouver to Calgary, the average fare in 2010 is up 17 per cent over 2009. (For example, a one-way flight from Vancouver to Toronto, just before Christmas, costs $475, including taxes. Last year a round-trip flight during the same period cost less than $500, taxes included.)

Other increases in the analysis were more muted. Fares from Halifax to Ottawa and Ottawa to Toronto were up just one and four per cent respectively. But on all the routes, the trend has been for fares to rise. "I was surprised by the results myself," says Naman Budhdeo, FlightNetwork.com's founder and CEO. He expects there will be more price competition in certain markets - starting next year Air Canada will begin running flights from Toronto to Montreal from the Toronto Island airport, putting it in direct competition with Porter Airlines. But on the whole, he believes a strengthening economy will give airlines an edge in setting prices.

In a similar study for the North American market as a whole, Dallas-based FareCompare.com looked at flights between the 50 largest North American cities, including Toronto, Montreal and Vancouver. According to company CEO Rick Seaney, base prices in mid-October were up nearly 17 per cent over the year before. As for transoceanic international flights, they've rebounded even more, rising 30 per cent over the last year.

It is important to remember just how brutal the market was for the airline industry last year. To attract frugal passengers, airlines slashed fares to levels not seen in years. But by doing so, they also trained passengers to expect low prices going forward, which makes fare increases now that much harder to swallow - especially since for many Canadians it still feels like we're in recession. Still, the carriers are filling their planes. For instance, both airlines are enjoying high load factors, a measure of the percentage of seats filled by paying passengers. Last quarter, WestJet reported a load factor of 79.6 per cent, while Air Canada had a load factor of 80.3 per cent.

Another reason fares are likely to continue rising is that WestJet has settled into a relatively comfortable duopoly with Air Canada, similar to what used to exist between Air Canada and defunct Canadian Airlines. The two companies together control 93 per cent of the market. "The WestJet that we all remember at launch is not the WestJet we have today," says Douglas Reid, a business professor at Queen's University who studies the industry. "They've become more like Canadian Airlines." Indeed, on some flights WestJet is now the more expensive option. As of last Friday, a one-way flight from Toronto to Winnipeg a week before Christmas could be had for $179 on Air Canada, while the same flight through WestJet was $279. Neither price includes taxes.

WestJet has also taken the lead in adding new fees, something that would have been anathema only a couple of years ago. Last month WestJet moved first to charge passengers $20 to check a second bag, with Air Canada following suit the next day.

If WestJet appears less and less like a discount airline, that's also because Air Canada has moved to bring its costs more in line with its rival. Under CEO Calin Rovinescu, Air Canada plans to carve $530 million out of operating costs by 2011. So far it's over halfway there. Last quarter the company said it operated 3,700 more flights and carried 400,000 more customers with the same fleet it operated the year before. With both airlines now running tighter, more profitable operations, they're less inclined to engage in fare wars.

Travellers shouldn't expect a saviour in the form of another airline entrepreneur willing to gamble on launching a new national carrier to take on the existing duopoly. Over the last decade a number of upstarts have hit the market with ultra-low fares, forcing Air Canada and Westjet to respond in kind. Jetsgo became famous for its $1 fares on certain flights, but after steep losses it abruptly shut down in 2005. But much has changed since then, says Murray. While an upstart could once buy a small fleet of old airplanes and run them on the cheap, with oil prices now at around US$80 a barrel, new, more fuel-efficient aircraft are needed in order to turn a profit. And manufacturers have backlogs stretching into 2016 for new aircraft.

Still, not everyone is convinced airfares are climbing in Canada. "We saw the airlines exercise a little bit of pricing power in the domestic market earlier this year, but that was skewed by the fact that fares were so depressed by the recession," says Ben Cherniavsky, an airline analyst at Raymond James who maintains an index of airfares. "More recently, we have seen no convincing evidence of rising airfares in the Canadian domestic market. Flying is still much cheaper than it was two years ago."

As for the airlines themselves, Air Canada and WestJet urge caution in looking at price increases. In a statement, Air Canada representative Angela Mah said, "fares are dynamic and are an overall function of economic forces, supply, demand, etc. Air Canada aims to be price competitive in every market." Meanwhile, Westjet says, "it's important to remember that we spent the better part of the last 12 to 18 months in a recession. You would expect to see lower fares under such conditions and so, by comparison, 2010 is obviously going to appear higher."

In the eyes of industry observers like Karl Moore, a professor in the Desautels Faculty of Management at McGill University who studies airlines, recent fare increases have to be taken in context. Not only are fares relatively cheap by historical standards, compared to airlines in the U.S., WestJet and Air Canada offer far better service for the price. And an airline industry that stays in the black is good for the economy overall. "I think [Canadians] have to realize that to have an airline industry in this country, they have to make some money. In the good times they need to make money, because when times are tough, we don't want them to go bankrupt."

Just don't expect passengers to take much comfort from that as airlines jack up fares and fees.

Prepare for takeoff

A survey of 29,000 flights between six major Canadian cities over the past two years found fares rising on every route. Experts predict the trend will continue as the economy strengthens.

Percentage increase, 2009-10 2009 avg. price 2010 avg. price

Toronto - Montreal 7% $267 $285

Toronto - Vancouver 17% $428 $500

Vancouver - Calgary 17% $248 $291

Calgary - Montreal 13% $394 $447

Montreal - Halifax 7% $292 $313

Halifax - Ottawa 1% $301 $303

Ottawa - Toronto 4% $224 $234

Maclean's December 13, 2010