Air Canada - Westjet - Porter (Torstar - 01 Jan 14)

[Kip Powick]

After years of turbulence, Canadian airlines are finally soaring high, looking at expansion plans as they acquire new planes.

In the spring, Air Canada is set to take its first delivery of the long-delayed Boeing 787 Dreamliner, which is expected to open up new routes. WestJet Airlines will bring its regional carrier Encore to the east in the spring with new Q400 turboprop planes.

And Porter Airlines is still waiting to hear, likely in February, on whether Toronto city council will grant conditional approval to lift a jet ban and permit a runway extension so it can operate Bombardier’s new CSeries planes from the island airport in 2016.

Because Porter is privately held, it doesn’t report its earnings, but both Air Canada and WestJet have reported profits — and their shares prices are both up significantly.

Air Canada’s shares started 2013 at $1.78, and hit $8 in December. WestJet’s shares traded just below $20 last January, and were over $28 in December.

“The profitability of the two companies, so far, is up nicely,” said Canaccord Genuity analyst David Tyerman. “I think a lot of it comes down to being disciplined. If the cost of providing services goes up, then they raise the fares, because they need to.”

That certainly isn’t good news for consumers looking for cut-rate seat sales.

“I think there will be skirmishes in certain markets, but broadly across the whole market, I don’t expect huge changes,” said Tyerman.

York University business professor Fred Lazar thinks there could be more favourable fares as the airlines add capacity with fleet renewals, including new Boeing 777s for Air Canada. “Will this lead to aggressive pricing? There is that risk” if airlines start to chase higher load factors — an industry measure of how full planes are — with fare wars, Lazar said.

However, price slashing can create a downward slide for the bottom line, which can lead to airlines going belly up, as has happened many times in the past.

“This is a strange industry. As airlines are more successful in keeping costs down, they tend to be more aggressive on pricing. And then a year or two of good profits, it is expansion times,” Lazar said.

While fuel prices have stabilized, the weakening Canadian dollar is a growing concern, especially since most aviation costs, including equipment, are in U.S. dollars.

Air Transat president Jean-Marc Eustache said on a recent conference call that his company, which sells vacation packages to southern destinations, could soon levy a currency surcharge of $25 to $30.

“When the price is $1,500 Canadian, let’s say that we put a surcharge of $25 Canadian, I don’t think at the end of the day the consumer would say, ‘Oh, no, I will not travel for $25 Canadian,’ ” Eustache told analysts.

Tyerman argues that the airline industry has never been a highly profitable industry, and if costs are not recovered, carriers can’t buy new planes.

“They’re making strides to better profits, but they are hardly gouging us,” he added.

Low-cost carrier WestJet has enjoyed steady growth, and in 2013, it began efforts to court business travellers with the introduction of premium economy fares.

Its regional carrier, Encore, launched in June out west, and will move to eastern Canada by the end of second quarter next year. Communities have already begun to pitch the airline on why WestJet should they choose their cities — with some destinations to be announced in late January.

WestJet will also begin flying across the Atlantic for the first time next summer, with seasonal flights between St. John’s and Dublin. Because the airline only operates the Boeing 737 plane, which doesn’t have a long range, it can’t offer flights from Toronto or Montreal to Dublin.

About 50 per cent of those flights are already sold, said WestJet CEO Gregg Saretsky, as the airline tests European waters. “We’re selling above our costs, and we’ll make a profit,” he said, disputing the argument that at only 136 seats the airline cannot succeed against those that operate wide-body planes.

While WestJet is looking at other European cities, Saretsky said the company continues to study acquiring a wide-body fleet, but has no specific timelines.

Although WestJet is not planning any alliances with Dublin-based discount carrier Ryanair or Aer Lingus, Saretsky anticipates some travellers may fly onto other destinations in Europe on those airlines.

WestJet will compete with Air Canada’s new leisure carrier, Rouge, which operates direct flights between Dublin and Toronto.

As Air Canada receives new planes, including Boeing 777s and Boeing 787s, it is transferring its older aircraft to Rouge to use on flights to Europe and sun destinations.

Air Canada has announced that it will use the 787s on the Toronto to Tel Aviv route as well as Toronto to Tokyo’s Haneda airport, which is closer to the city than Narita airport.

Another potential game changer in the Canadian aviation industry is the Porter Airlines proposal to operate CS100 jets from Toronto’s island airport.

City staff has urged Toronto councillors to defer any decision until 2015, though deputy mayor Norm Kelly is pushing for an earlier vote, possibly in February.

Air Canada CEO Calin Rovinescu has made it clear that the country’s largest carrier would want access to the airport if jets are permitted. “We would absolutely, categorically, expect to fly our jets there,” he told The Star in an October interview.

WestJet has also indicated it would like to operate out of the airport, even though no takeoff and landing slots are available now.

In January, WestJet will set up new crew bases for pilots and flight attendants in Toronto and Vancouver — which officials say is necessary, especially since much of their flight schedule is now in central Canada.

The move hasn’t been well received by some employees, with renewed talk about possible unionization. In November, the pilots voted 58.7 per cent to reject a contract, with 96 per cent of pilots casting a ballot.

Saretsky insisted that a new contract can be reached, noting that the last time around, pilots also rejected the first offer. “It took a second attempt to get over the finish line,” he said. “We’ll get back to it in the new year.”

However, a group of pilots have formed the WestJet Professional Pilots Association, specifically aimed at winning union certification.

Saretsky said the union drive isn’t the first and probably won’t be the last for the airline.

“The unions, they are a business, and they are looking to add union dues to their bottom line, and we’re pretty fertile ground because none of our people are unionized,” he said.

“At the end of the day, our employees will need to decide whether they offer a better option for representation than what our employees have today, which is an in-house association,” he said.

WestJet needs to have its employees in other locations as the network grows, and has more seat miles generated to and from Toronto than elsewhere in the country.

“You have to put your resources where your guests are and your planes are,” Saretsky said.

Last year, a series of bad snowstorms in Toronto forced the airline to fly crews from Calgary to operate the planes, causing long delays to get the network back up and running.

“It’s also less costly for us because we had to put up hundreds of flight attendants and pilots in hotels and pay them per diems, and now they will actually be where the work is,” he added.

The Canadian Union of Public Employees is working to organize WestJet’s flight attendants.

The drive, begun in the spring, continues with the goal of getting 50 per cent plus 1 of the airline’s 2,800 flight attendants to sign a union card.

“I feel very confident,” said CUPE union organizer Ricardo Miranda. “Nothing is guaranteed. At the end of the day, the numbers will speak for themselves.”

Miranda expects to be working on the drive likely for another six months before the union will reach its threshold.

Saretsky insisted that its philosophy of “owners care” becomes even more important as the company grows, with nearly 10,000 employees now.

He argued that unions would take the place of the employee voice in the current relationship, essentially injecting a third party.

“I think WestJetters probably aren’t big fans of that as a prospect,” he said.