Oil costs will kill bargain airlines, Milton warns
ACE chief says high fuel prices mean no-frills carriers will lose their advantage; admits Air Canada is suffering but well-positioned
BRENT JANG -- TRANSPORTATION REPORTER
July 1, 2008 Toronto Globe and Mail
MONTREAL -- Passengers are witnessing the end of an era of cheap airfares as record-high oil prices erode travel demand and reshape the world's airline industry, says Robert Milton, chief executive officer of Air Canada's parent company.
Discount carriers are suffering more than most, but all airlines are feeling the heat from oil prices that have surged beyond $140 (U.S.) a barrel, Mr. Milton said yesterday after ACE Aviation Holdings Inc.'s annual meeting in Montreal.
"This one is a truly global issue, and I think you're going to see a lot of airlines disappear," he said. "The ones who are going to really have a problem are the airlines that have been trying to sell a low-fare proposition."
Some carriers, especially those in Europe, revolutionized the industry with cheap regional fares, but with jet fuel bills soaring, the no-frills business model has come under attack.
"Those airlines can't offer low fares to that degree which will stimulate net new traffic because the fuel cost component of offering a fare is so high now that they just can't get to that level of stimulation," Mr. Milton said.
Canada's last discount carrier, Jetsgo Corp., shut down operations in March, 2005, bringing a halt to promotional one-way base fares of $1 (Canadian).
Mr. Milton said Montreal-based Air Canada is suffering some pain, but it is better positioned than U.S. rivals because it operates a newer fleet that's more fuel efficient than most American carriers.
Two weeks ago, Air Canada CEO Montie Brewer announced that the country's largest airline will pare seat capacity worldwide by 7 per cent in its fall and winter schedules, as well as shed up to 2,000 jobs.
After exiting bankruptcy protection in 2004, Air Canada has been phasing in more fuel-efficient new planes, including 349-seat Boeing 777s for long haul and 93-seat Embraer 190s for short and medium haul. In May, the airline introduced fuel surcharges, which also affects consumers who redeem their Aeroplan miles for reward flights.
While acknowledging the challenges ahead for Air Canada, Mr. Milton said the airline has survived tough times in the past, overcoming the double-whammy of the Sept. 11, 2001, terrorist attacks in the United States and the severe acute respiratory syndrome (SARS) outbreak in 2003 in Asia and Toronto.
SARS "was the real crisis" at Air Canada because "nobody would go to Toronto, and nobody wanted to come to Canada," said Mr. Milton, recalling how air traffic fell between Asia and Canada - punishing Air Canada at its Toronto hub.
ACE, which is winding down as a holding company, owns 75 per cent of Air Canada. By the end of this year, ACE plans to either sell its remaining stake in the airline to an outside buyer or do some kind of share transaction that would lead to ACE common shares disappearing from the Toronto Stock Exchange.
"Clearly, the market conditions make things more difficult. But over all, our focus remains doing right by the ACE shareholder, and that principally at this stage means having the right outcome as it relates to Air Canada," Mr. Milton said. "We're optimistic that we can do the right thing and benefit the shareholders."
Industry analysts say Air Canada and WestJet Airlines Ltd. are in good shape to weather the current storm.
Calgary-based WestJet began as a no-frills airline in 1996 but no longer gives regularly scheduled deep discounts, evolving into a carrier that now offers some perks, including sprucing up its plane interiors to include leather seats and seat-back TV screens.
With oil prices skyrocketing, "I view it as yet another difficult event that the industry has to go through," Mr. Milton said. "This is a deeply cyclical business that will for evermore be like this - there will be periods of good times and probably more periods of difficult times, and this is just one of those very difficult times."
During the ACE annual meeting, shareholders approved a resolution that gives the holding company the flexibility to reduce the number of directors to five from the current nine serving on the board.
ACE sold off its remaining interests in Groupe Aeroplan Inc. and Jazz Air Income Fund in May, but maintains its majority stake in Air Canada and 22.8-per-cent interest in ACTS Aero Technical Support & Services Inc.
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