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Air Canada (AC.B-T) is suspending a number of unprofitable routes and slashing planned seat capacity as it grapples with soaring fuel costs.
The airline’s move, revising a capacity forecast published just five weeks ago, highlights the extent to which fuel costs are straining the industry. It also illustrates the sector’s increasing willingness to make tough calls in order to protect profits, with a number of U.S. airlines having made similar revisions recently.
Air Canada is suspending flights effective May 1 on a number of routes that it says are no longer profitable with fuel prices this high. Those include Ottawa to Thunder Bay, Ottawa to Washington Dulles, Montreal to Washington Dulles, Calgary to Chicago, Calgary to San Francisco, and Calgary to London, Ont.
Air Canada’s move essentially means that it will offer fewer seats this year than previously planned, by cutting routes, flight frequencies, or using smaller planes. It also said that it will continue to evaluate and adjust its fares and fuel surcharges. As of Tuesday, the company rolled into its base fares fuel surcharges that it recently introduced on trans-border flights.
The changes affect less than 1 per cent of Air Canada’s total flights, which amount to about 1,300 a day, and the total number of seats available will still be higher than last year.
But analysts said the announcement is a sign the airline is willing to take measures necessary maintain its profit margins.
“This is pretty good discipline, something that the industry has been notoriously lacking in the past,” said Canaccord Genuity Corp. analyst David Tyerman.
Airlines with too much capacity often resort to slashing fares to fill the seats. But profit margins have come under new pressure as oil prices have jumped. U.S. crude was $97.98 US a barrel on the New York Mercantile Exchange on Wednesday.
Air Canada now expects capacity to grow by 4.5 percent to 5.5 percent in 2011, compared with last year. That’s down from the 5.5-percent to 6.5-percent range that it had published on Feb. 10, 2011. The reduction will be achieved “with minimal impact on customers,” Air Canada said.
Higher fuel costs have “clipped the wings of the industry all around the world,” said Raymond James analyst Ben Cherniavsky, adding that Air Canada’s load factors dipped a bit in February, likely causing the airline to rethink its assumptions.
“As soon as your loads drop, your ability to raise prices goes down, and they need to keep prices up because fuel is a problem,” Cherniavsky said.
Every $1 increase in the price of oil reduces Air Canada’s operating profit by $25 million on an annualized basis, according to the airline. It spent about $2.6 billion last year on fuel, which is its single biggest expense. At the moment, Air Canada has fuel surcharges on international flights, but not on domestic routes.
Rival WestJet (WJA-T) has already cut its capacity expectations three times in the past year and a half, though not in 2011, Mr. Tyerman pointed out. A spokesperson for WestJet said it has no plans to revise its capacity numbers.
Earlier this month, American Airlines’ parent company said it expected its capacity in 2011 to be 1 percent lower than previously communicated.
The International Air Transport Association recently cut by $500 million US its 2011 profit forecast for the global industry to $8.6 billion, citing oil prices. But it left its outlook for the profitability of carriers in North America unchanged at $3.2 billion, saying that early cuts the industry had already made left it room to raise prices.
With files from reporter Tim Kiladze