Air Canada, WestJet raise fares to offset rising fuel costs but not across the board

Eric Shackleton, THE CANADIAN PRESS
TORONTO - Rising fuel costs are forcing Air Canada (TSX:AC.A) along with its American counterparts Northwest Airlines, United Airlines and Continental Airlines, to raise their fares.

Peter Fitzpatrick, a spokesman for Air Canada, said Monday "some of our fares have gone up. I don't have any specific market-by-market or across-the-board numbers ... as each market is different."

But he said "we have adjusted our prices and we have had some fare increases ... generally we aim to remain competitively priced."

A spokesman for Calgary-based WestJet Airlines Ltd. (TSX:WJA) also acknowledged fare prices have risen on "some" of its routes in response to the higher fuel prices.

However, both of the Canadian airlines said the fares have actually gone down on some highly competitive routes.

WestJet spokesman Richard Bartrem pointed to the route between its eastern hub in Toronto and Quebec City, a new destination for the airline this year. He credited the arrival of competition for Air Canada on that route for a decline in rates.

On Monday, Northwest said it was matching fare increases announced last week by Continental and United, and signalled that belt-tightening measures are on the way, too.

Oil has been selling at record highs above US$100 a barrel, pushing up the cost of jet fuel and cutting into the income of airlines.

UAL Corp.'s United Airlines and Continental Airlines Inc. raised some round-trip fares as much as US$50 heading into the weekend.

Fitzpatrick said "fuel is our single largest expense. Last year we spent $2.5 billion on fuel."

Air Canada, he said, calculates "that about every $1 change in the price of a barrel of oil impacts our operating income by $26 million."

At WestJet, a $1 change in the price of a barrel oil has about a $5-million impact on the bottom line, Bartrem said.

Fitzpatrick said "our goal is to match or beat the lowest fare in every market. Some markets actually have seen lower fares introduced."

Within Canada, Air Canada's biggest competitor by far is WestJet. However, Montreal-based Air Canada also competes with foreign airlines on transborder routes to the United States and international routes to other countries abroad.

Doug Steenland, chief executive of Northwest Airlines Corp., said the airline will spend US$1.7 billion more on fuel than it expected when it emerged from bankruptcy in May.

"Airfares have to go up, and our passengers will need to pay more. Airlines simply cannot absorb these cost increases," Steenland told workers in a hot line message recorded over the weekend.

Higher prices will result in fewer passengers, Steenland said, and the size of the airline will need to reflect that.

"First we have to tighten our belt. We need to find ways to preserve cash by reducing capital expenditures and operating costs. Fortunately, we have over $3 billion of cash on hand."

Steenland did not elaborate on what cost-saving measures he had in mind. Northwest spokeswoman Tammy Lee said Steenland wasn't talking about aircraft orders, which include Boeing's new 787 and regional jets.

"Our planned aircraft deliveries are financed on favourable terms and adding them to the fleet makes even more sense in a world of high oil prices because they are more fuel-efficient than the aircraft they will be replacing," she said.

Northwest shares dropped 59 cents, or 6.2 per cent, to close Monday at $8.92.

On the TSX on Monday, Air Canada A shares closed down 21 cents, or more than two per cent, at $8.90. WestJet shares closed at $17.70, down 26 cents.

The Canadian Press, 2008