Photo courtesy of Air Canada

Chalk up another win, thanks to Canada’s weaker dollar and lower oil prices. The Canadian airline industry saw record profitability in 2015, in large part due to the very factors that are sending much of the rest of the Canadian economy spiralling.

For 2015, the pre-tax profits for Canada’s airlines hit a record $1.6 billion—a number which is expected to “remain healthy” over the next four years, according to The Conference Board of Canada’s latest Canadian Industrial Outlook: Canada's Air Transportation Industry.

"The two biggest economic stories of 2015—low oil prices and a weaker loonie— have wreaked havoc on Canada's economy but have been a net positive for Canadian airline transportation,” says Todd Crawford, Senior Economist at the Conference Board. "However, it's not all blue skies. Canadian air carriers are also contending with a weak domestic economy, which should restrain consumer spending and business travel. At the same time, new competition, particularly in the ultra-low-cost carrier segment, is heating up."

For airlines, lower oil prices meant huge savings last year—fuel purchases can represent as much as 10 per cent of an airline’s entire annual operating budget. Additionally, with the pressure the loonie has put on American purchases, there was less incentive for Canadians to fly out of U.S. airports. Travellers returning to Canadian airports has also had a positive impact on airline profitability.

Travel from the U.S. is also on the rise, providing the biggest boost for the Canadian airline industry. In 2015, there were slightly more than 4.5 million air trips to Canada from the U.S., a new record, and a number that should continue to grow over the next four years.

But while airlines should expect to see healthy profits for the next four years, the industry should expect a slowing in the growth rate.

The introduction of new “ultra low cost” carriers in Canada will put pressure on airlines to keep their fares low. Average fares dropped 3.7 per cent in 2015 and should continue to decline this year before experiencing a “modest” growth in 2017.

Also limiting profitability is the decrease in Canadians flying to the U.S. In 2015, this number fell for the first time since 2009; further declines should be expected this year.

Lower fares and decreased international travel by Canadians coupled with an anticipated increase in oil prices should all serve to slow airline profitability in the coming years. The Conference Board of Canada estimates that after reaching an estimated $1.6 billion record in 2015, the airline industry’s pre-tax profits should reach $1.5 billion this year.

Accommodations

The picture in the accommodations sector isn’t quite as rosy as that of the airline sector. Profit margins should grow by 4.2 per cent by the end of 2016, but that’s a number that is well below the average rate of growth over the last five years.

“Despite the low loonie, the number of U.S. visitors to Canada did not grow as fast as expected last year. However, Canada’s accommodation industry should see a better year in 2016, as Americans are expected to react more favourably to a lower dollar.” 

This year, the accommodations industry should expect to see more travellers from Asia and Europe due to the favourable currency exchange rate. Also, as economic conditions continue to improve within Canada—outside of the Prairies—the low Canadian dollar should also stimulate more domestic travel. This increase in global travel should serve to increase occupancy in the coming year.

Additionally, as hotel investments made during the last five years begin to pay off, revenue should start to outpace costs, further driving up profit margins. Revenue growth is expected to hit 6 per cent in 2019 and remain there through 2020.

For more information, visit www.conferenceboard.ca. 

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