Airline industry still reeling from pandemic faces new challenge of soaring fuel prices

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The airline industry, still reeling from the COVID-19 pandemic, is facing a new challenge as soaring fuel prices drive up the cost of travel.

Jet fuel prices are shooting up along with the cost of oil, driven higher by sanctions on Russian crude exports and uncertainty over supplies. Fuel prices rose by 27.5 per cent last week to more than US$141 a barrel, an increase of 96 per cent from a year ago, according to S&P Global Commodity Insights.

Annick Guérard, chief executive officer of Montreal-based airline Transat AT Inc. TRZ-T, said soaring fuel costs could drive airfares higher while the travel sector struggles to recover from the collapse caused by the pandemic. Transat, which has been hit hard by COVID-19 and the current fuel crisis, reported disappointing financial results Thursday for its first quarter ended Jan. 31.

Ms. Guérard said Russia’s invasion of Ukraine has not yet affected bookings to Europe, but increases to airfares are likely. “In response to this fuel crisis, we are adapting, of course, our pricing structure,” she said on a conference call with analysts, without providing details.

A Transat spokesman said airfares or the surcharge that accounts for fuel prices will go up “as needed.” “We have not changed our price structure yet,” Christophe Hennebelle said by phone.

Fuel is one of the biggest expenses for airlines. In 2020, Transat spent almost $260-million filling the tanks of its passenger jets, about 20 per cent of its revenue.

Willie Walsh, director-general of the International Air Transport Association, said fuel could soon make up half of a typical airline’s costs. “Absorbing such a massive hit on costs just as the industry is struggling to cut losses as it emerges from the two-year COVID-19 crisis is a huge challenge,” Mr. Walsh said.

Peter Fitzpatrick, an Air Canada spokesman, declined to discuss how fuel prices will affect airfares, citing regulatory constraints. Like Transat, Air Canada charges customers an “airline surcharge” that is partly driven by fuel prices. “A number of factors go into airline ticket pricing apart from fuel and fixed costs, including but not limited to, competition, demand, third-party navigation, airport and other charges, marketing considerations and the type of traffic that a route serves,” Mr. Fitzpatrick said.

Investors are already worried. Air Canada’s share price has declined by 16 per cent since Russia invaded Ukraine on Feb. 24.

Denise Kenny, a spokeswoman for WestJet, which is owned by Onex Corp., said her airline has not increased fares. “Nor have we made any deliberate change to our systems in response to the rising cost of fuel. Our [seat prices] are automated to adjust based on demand and prices can increase due to demand for flights being higher than the supply,” she said.

Transat, meanwhile, has taken additional money from the federal government’s bailout program and is seeking more as the Montreal-based leisure carrier tries to recover from the pandemic.

Transat’s loss increased to $114-million, or $3.03 a share, in the first three months of fiscal 2022, compared with $61-million ($1.60) in the same quarter a year ago, as the Omicron variant caused the airline to cancel 30 per cent of its January flights. Revenue rose to $202-million from $41-million, Transat said Thursday.

“While we were in the midst of a strong recovery, with November and December results matching our targets, the emergence of the Omicron variant brought our sales to a temporary halt between mid-December and early February,” Ms. Guérard said. “Subsequently, and particularly after the easing of restrictive measures at the borders, bookings picked up again, for both winter and summer, which augurs well for the coming months.”

Transat borrowed an additional $43.3-million from the federal government to repay customers whose flights were cancelled in the pandemic. This is on top of $310-million announced last year. “We made more than $310-million in [refunds],” said Patrick Bui, Transat’s chief financial officer.

The airline also deferred by several months an increase in the interest rate on part of its emergency government loan, which has risen to a total of $743-million from $700-million. “There are ongoing discussions with the federal government for additional funding,” Transat said in a statement accompanying its financial results.

WestJet Group announced last week it would buy Sunwing Travel Group, taking over Transat’s direct competitor in the holiday package business. Ms. Guérard said the deal would reduce competition and give WestJet an even greater share of that market.

“We certainly do not see this as good news for customers as it will significantly reduce competition in the market, especially in key markets such as Western Canada, where concentration would be very high,” Ms. Guérard said.

WestJet did not disclose a price for the deal, which must be approved by government regulators.

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