|February 13, 2006
Airlines – Plans to navigate the turbulence ahead
|The country's airlines could find themselves flying into reality in 2006 after enjoying a relatively prosperous period last year. Despite
high jet fuel prices, the country's two largest airlines -- Air Canada and WestJet Airlines Ltd. -- were handed a gift last March when
former discount competitor Jetsgo Corp. was forced into bankruptcy by a handful of its creditors. But the good times -- if there is
indeed such a thing in the airline industry -- are already showing signs of waning.
Ben Cherniavsky, an analyst at Raymond James, wrote in a recent airline industry report that rising interest rates coupled with higher
energy costs may start to crimp the travel plans of price-sensitive passengers. This softening demand would come at a time when
airlines are again adding seats to the market.
ACE Aviation Holdings Inc., the parent company of Air Canada, started the year by spinning off part of its regional subsidiary, Jazz, as
an income trust. The deal, which raised $235-million, was modelled on the successful spin-off of ACE's Aeroplan loyalty program
last year, but has so far failed to match Aeroplan's soaring unit price.
Nevertheless, Robert Milton, chief executive of ACE, said he hopes to spin-off another Air Canada subsidiary by the end of 2006. This
time it will be Air Canada Technical Services (ACTS), which does maintenance work and overhauls of airplanes for Air Canada and a
growing list of third-party airlines.
Meanwhile, Air Canada continues to make strides in realizing its new business strategy. The airline is expected to continue adding
capacity to domestic markets and transborder markets this year, with a focus on regional jet flying. On the international front, Air
Canada recently unveiled new business-class products, such as lie-flat seats.
As well, the airline is rolling out a system of graduated fares, which encourage passengers to pay more for tickets by bundling fares
with extra services, to its international markets. A similar system has been available for North American travellers for several years.
One potential trouble spot could come from Air Canada's employees, many of whom are bitter about the steep concessions made
during Air Canada's restructuring. They are scheduled to negotiate renewals of certain contract terms this year and several employee
groups are demanding some of ACE's recent profits be given back to them. While the employees do not have the right to strike this
round, the negotiations threaten to strain an already difficult relationship between Air Canada and its unions.
The carrier is heading into 2006 with several new opportunities. After retiring the last of its older Boeing 737 aircraft, it now boasts the
youngest fleet in North America and is poised to save money on jet fuel (the new planes are more fuel efficient) and aircraft
As well, more than 90% of WestJet's planes are now equipped with leather seats and live television sets for each passenger.
WestJet is hoping the new products will help it steal a portion of the business travel market away from Air Canada.
Meanwhile, WestJet is also working on implementing a new reservation system -- similar to Air Canada's -- that bundles its fares with
services, encouraging passengers to "buy-up" when purchasing their seats. However, WestJet recently said the launch of the new
system could be delayed until as late as 2007 because of technical issues.
Down the road, WestJet says its new reservation system will be used to form partnerships with other airlines. Clive Beddoe,
WestJet's chief executive, said he is interested in partnering with smaller airlines in Canada in order to develop a de facto regional
feeder network for the airline. He has also expressed interest in forming partnerships with low-cost carriers in the United States,
which would help drive more traffic on to WestJet's Canadian routes. David Newman, an analyst at National Bank Financial, said in a
recent research note that two potential candidates are Denver-based Frontier Airlines, which has said it is planning flights to Canada,
and New York's JetBlue Airways.
Source: Chris Sorensen - Financial Post