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At this time last year, Giovanni Bisignani, head of the International Air Transport Association (IATA), was predicting that 2010 “is as good as it gets.


January 9, 2012
By Brian Dunn

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At this time last year, Giovanni Bisignani, head of the International Air Transport Association (IATA), was predicting that 2010 “is as good as it gets. It will be the peak of the cycle. 2011 will be a much tougher year.”

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WestJet has a leg up on Air Canada and Air Transat, who are not going into secondary markets. PHOTO: WESTJET


 

Fast forward to today and the message hasn’t changed, with the IATA again warning of tough times ahead.

IATA director general and chief executive Tony Tyler also notes the European Union’s carbon emission trading system would add to the financial pressures on airlines despite an offer of free permits, which he criticized as “linguistic gymnastics.”

The European Union will require all airlines flying into or out of the 27-nation bloc to be included in the scheme that forces polluters to buy permits for each metric ton of carbon dioxide they emit above a certain cap. That would impact both Air Canada, Air Transat and Sunwing Airlines among other charter operators.

IATA has already warned that a weak global economy would prompt a 29 per cent fall in airline profits in 2012 and cut the industry’s profit margins to a wafer-thin 0.8 per cent from 1.2 per cent this year.

“We are not seeing a recession,” says Tyler. Still, global growth is closely tied to the financial performance of airlines. Whenever growth has slipped below two per cent, the airline industry has lost money, he adds.

The IATA forecasts industry profits in 2012 will fall 29 per cent to $4.9 billion from $6.9 billion this year. Stagnating cargo flows in recent months also point to weaker markets going forward into next year, the IATA says.

The outlook is somewhat better for Canadian carriers, according to Rick Erickson, president of Calgary-based RFP Erickson & Associates.  He says both demand and bookings remain relatively strong.
“Commercial aviation travel is important to the Canadian market and that’s not going to change. The key variables which remain outside the airlines’ control are the economy, the dollar, fuel prices and weather.”

Consumer confidence in Canada remains high and people will travel to sunspots this winter as long as the Loonie remains close to parity with the greenback, says Erickson. The delivery of the first seven of 30 Boeing 787 Dreamliners to Air Canada is being delayed again until the first half of 2014 from the fourth quarter of 2013. The delay clearly hurts Air Canada’s international growth plans, Erickson adds.

“And to lower their operating costs, they need to get their low-cost model up and running. All WestJet’s capacity growth has gone into sun destinations which has chipped away at Air Canada’s market.”

About 18 months ago, WestJet deferred aircraft orders to about three or four a year, which means no new destinations in Canada, says Erickson. Instead, the company is looking at secondary markets such as Winnipeg to sun spots like Las Vegas, which may cannibalize some of its other routes. But WestJet has a leg up on Air Canada and Air Transat, who are not going into secondary markets.

As for Air Transat, Erickson doesn’t see much growth. Instead, he predicts they’ll ride out the uncertainty on international markets by not taking any risks.

The analyst is pleasantly surprised by Porter Airlines which continues to add aircraft and new destinations.

“I thought Air Canada would hurt them when they went into Toronto Island, but they’re going after secondary markets like Thunder Bay which seem to be performing well. They’re also the biggest risk taker of all the airlines, by testing new markets like Burlington, Vermont.”

While labour issues at Air Canada will continue through 2012, its low-cost model is a critical part of its business plans, says financial analyst Cameron Doerksen at National Bank Financial, Montreal. As for growth opportunities, he says both the domestic and trans-border markets are flat.

“Where they’ve had success and will continue to grow is Latin America and trans-Pacific. They’ll also benefit through joint ventures with their Star Alliance partners.”

Turning to WestJet, Doerksen sees growth coming from more sun destinations and its code-share alliance with American Airlines and possibly with Delta Airlines.

“Transat has clearly struggled over the last few quarters which may be due to overcapacity on the routes they serve. And Porter doesn’t appear to be weaker since Air Canada started flying out of Toronto Island.

They have the capacity to add frequencies domestically with their new slots at the airport and they’ve mentioned adding service to Philadelphia and Washington, D.C.”


Brian Dunn is a Wings writer and columnist.


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