While Canada continued to struggle with a weak economy, Canadian airlines were flying high in 2016. The economic climate provided ideal conditions, including lower fuel prices and an attractive exchange rate for foreigners, to drive a year of strong profitability for Canadian airlines, according to The Conference Board of Canada’s latest Canadian Industrial Outlook:

Thanks in part to the low value of the loonie, American interest in Canada catapulted last year. Early estimates indicate that some 5.5 million Americans flew to Canada last year.

Moving forward, while airlines should continue to see increased demand, the overall growth rate should slow, as the perfect storm of factors driving tourism to Canada will slowly dissipate.

"The outlook for Canada’s air transportation industry will remain strong in 2017, but some of the main tailwinds that benefited the industry over the past two years, primarily low fuel costs and the weaker loonie, will slowly reverse starting this year,” said Todd Crawford, Principal Economist at the Conference Board. "However, this reversal will not be severe enough to threaten the industry’s profitability and demand for the industry’s services will continue to grow."

In part, the growth rate for Canadian airlines could be affected by an increase in oil prices. Fuel makes up approximately 30 per cent of airline costs, so the low fuel rates over the past years have been tremendously beneficial for airlines. But oil prices are starting to rise significantly this year. Oil prices are expected to average US $54 in 2017, a nearly 25 per cent increase over last year’s average of US$43.

The value of the Canadian dollar may also present a challenge for Canadian airlines. In part, a higher Canadian dollar could remove some of the incentive to travel to Canada. A higher dollar could also create more competition for Canadian airlines, as Canadians once again start to fly from bordering U.S. airports.

Other factors that could affect demand for travel according to the Conference Board of Canada, is the increasing “protectionist mood” in high-income countries, which could adversely affect global trade, thereby dampening the demand for business travel.

Also impacting Canadian airlines are low-cost carriers, which have helped drive down airline fares. The Conference Board of Canada predicts that while fares will continue to remain subdued over the next five years, they should start to increase slightly. For 2017, average airfares are expected to increase by 0.5 per cent.

Overall in 2017, Canada’s airline industry is expected to grow by 2.4 per cent to reach a total of $1.5 billion.

For more information, visit www.conferenceboard.ca. 

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