OTTAWA -- Lower oil prices and the weaker Canadian dollar boosted the Canadian airline industry's bottom line to record levels in 2015. Even though industry profitability is expected to subside from the record highs starting in 2016, pre-tax profits will remain very healthy over the next four years, according to The Conference Board of Canada's latest Canadian Industrial Outlook: Canada's Air Transportation Industry.
"The two biggest economic stories of 2015—low oil prices and a weaker loonie— have wreaked havoc on Canada's economy but have been a net positive for Canadian airline transportation," says Todd Crawford, Senior Economist at the Conference Board. "However, it's not all blue skies. Canadian air carriers are also contending with a weak domestic economy, which should restrain consumer spending and business travel. At the same time, new competition, particularly in the ultra-low-cost carrier segment, is heating up."
"Despite the low loonie, the number of U.S. visitors to Canada did not grow as fast as expected last year. However, Canada's accommodation industry should see a better year in 2016, as Americans are expected to react more favourably to a lower dollar".
- Canada's airline industry's pre-tax profits are expected to hit $1.5 billion in 2016.
- At current oil prices, Canada's air transportation industry realizes huge savings that, in turn, has pushed profitability to record levels.
- The low-flying loonie has more Canadians travelling out of domestic airports and continues to attract foreign visitors to Canada.
- The decline of the Canadian dollar relative to major currencies also provides a boost for the accommodation industry.
- Profit margins for Canada's accommodations industry are expected to remain relatively low reaching 4.2 per cent by the end of 2016.
The lower Canadian dollar has been a boon for Canadian airlines. The weaker loonie lowers the incentive for Canadians to fly out of U.S. airports as the cost of doing so is now significantly higher. Moreover, fewer Canadians are flying to U.S. destinations and opting to stay within Canada for pleasure travel. Last year, the number of Canadians flying to the U.S. decreased for the first time since 2009. With the value of the loonie currently well below the average of 2015, further declines in 2016 are likely.
The biggest boost for the airline industry from the weaker currency, however, has come from the jump in the number of U.S. visitors flying to Canada. In 2015, the number of U.S. trips by plane reached a new record at slightly more than 4.5 million. The number of U.S. visits to Canada will continue to increase over the next four years, though the rate of growth is expected to slow from the pace seen over the last two years.
Fuel is the industry's largest expense. As such, the dramatic drop in oil prices has had a positive impact on the airline industry's bottom line. However, the benefits are expected to begin to trail off over the next two years. Although the underlying price of crude oil is not forecast to return to its highs over the forecast period, fuel prices are expected to rise between 2016 and 2020, driving up industry costs.
In addition, the possibility of new entrants into Canada's air transportation industry will constrain price increases. Following a drop of 3.7 per cent in 2015, prices will decline by a further 1 per cent this year before increasing modestly starting in 2017. This, combined with an expected increase in fuel prices will reduce the industry's revenue growth from 4.3 per cent in 2015 to 1.6 per cent in 2016.
After reaching an estimated $1.6 billion record in 2015, the industry's pre-tax profits are expected to hit $1.5 billion this year.