An ongoing spike in jet fuel prices will have to be passed on to passengers – at least in part – even as competition ramps up among discount carriers, says the new president of budget airline Swoop.
Bob Cummings, named head of the WestJet Group’s ultra-low-cost subsidiary last week, said in an interview that budget carriers aim to minimize the impact of labour and fuel costs on airfares, but that market forces can’t be ignored.
“We’re always adjusting, almost real time, to those market forces when input costs to go up. And they really do need to be passed through in order for the company to be financially healthy,” he said Monday, his first day on the job.
“We’ll be doing everything we can to minimize that and have affordable fares.”
Fallout from Russia’s invasion of Ukraine, including sanctions and oil import bans, helped push up the price of jet fuel by 129 per cent year over year to nearly US$153 per barrel by April 8, according to the International Air Transport Association. The price has dropped slightly since.
Fuel costs amount to a major headwind for airlines in the coming quarters, National Bank analyst Cameron Doerksen said in a note to investors last week.
Cummings, who joins Swoop after a three-and-a-half-year stint away from the company following 13 years as a WestJet executive, nonetheless expects bookings to surpass pre-pandemic levels this summer.
Other hurdles include rapid domestic expansions by rivals Flair Airlines and recent entrant Lynx Air as well as ongoing COVID-19 testing requirementsand a global pilot shortage.
Flair Airlines was down to one aircraft a year ago, but expects to have 20 Boeing 737s in its fleet by the end of June as the Edmonton-based airline adds routes across the country.
Calgary-based Lynx, formerly known as Enerjet, aims to operate 148 flights a week on more than a dozen routes by July, all within Canada, according to its CEO.
Meanwhile Swoop plans to serve 33 destinations this summer, roughly half of them in Canada. It has added five new U.S. cities: New York, Chicago, San Francisco, Los Angeles and Nashville, Tenn. Flying those routes will be 16 Boeing 737 narrow-body jetliners, including six set to arrive by summer’s end.
“With the pent-up demand … we’re confident with respect to filling those planes,” Cummings said.
Demand for travel among Canadians is rising after two years cooped up under COVID-19 restrictions, but the bigger booking numbers could plateau if fuel costs are passed on to passengers through higher fares, said John Gradek, head of McGill University’s aviation management program.
“Typically what the airlines have done in the past with these types of fluctuations is they’ve put fuel surcharges on their sales to try to recoup some of this increased expense of fuel, and this of course gets passed on to the consumer.”
However, a competitive environment among discount airlines may convince them to mull different tactics, such as eating a portion of the fuel cost.
“Which carriers are strong enough to do that – have the ability to absorb those price levels?” Gradek asked. “It’ll increase your cash burn, it’ll affect your profitability.”
Flair faces challenges of its own.
The Canadian Transportation Agency (CTA) ruled in a preliminary determination last month that the airline “may not be controlled in fact by Canadians and, as such, Flair may not be Canadian” – a violation of federal law.
Miami-based investor 777 Partners acquired a 25 per cent stake in Flair in April 2019, the companies said in a joint release that year.
Canada’s federal transport regulator said in its March 3 decision that 777 has assumed the majority of risks and benefitxjmtzyws of Flair’s operations, taken control of the board of directors and left the airline dependent on 777 for aircraft financing and leasing.
“After considering all of the facts together, the agency finds that 777’s influence over Flair is dominant and that 777, therefore, may have control in fact of Flair,” the CTA wrote.
Flair, which has asked for an 18-month exemption to the rule, is confident it conforms to legislation that allows no more than 49 per cent ownership of a Canadian airline by foreign entities. The Canadian Transportation Act also states no one foreign player can own more than a quarter of the carrier or exert effective control over it.
“To the extent that there is any uncertainty about that, we are very happy to work with the CTA and others in government to resolve it,” Flair CEO Stephen Jones said in a phone interview from New Zealand on April 6.
Cummings said the federal regulator should not grant Flair an exemption.
“Our expectation is that Transport Canada will uphold that (law) and that they will deny the exemption extension.”
The Swoop president also said a Competition Bureau investigation continues into allegations of predatory pricing at his airline and parent WestJet, launched after Flair complained it was being crowded out from several smaller markets.
“There’s still an ongoing process,” he said of the probe, which began in 2018.
