2017 outlook for Canada’s air transportation industry remains strong

Ideal conditions continue to fuel strong profitability for Canadian airlines this year according to The Conference Board of Canada’s latest Canadian Industrial Outlook: Canada’s Air Transportation Industry. However, growth is expected to be more subdued going forward as temporary factors that have recently boosted industry demand 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,” says 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.”

HIGHLIGHTS

• Higher oil prices will lift the cost of jet fuel and weigh on industry profitability over the forecast.

• The low-flying loonie will continue to make Canada a cheaper destination for both foreign and domestic travel.

• Canada’s airline industry’s pre-tax profits are expected to reach $1.5 billion in 2017.

With fuel prices accounting for as much as 30 per cent of industry costs, the dramatic drop in oil prices in past years had a positive impact on airlines’ bottom line. However, the benefits are expected to begin to trail off over the next two years as fuel prices are forecast to rise, driving up industry costs. Oil prices have already risen significantly from their lows and are projected to average US$54 in 2017, up from US$43 last year.

Despite generally weak economic conditions last year, Canadian airlines experienced the strongest demand on record in 2016. The low value of the loonie made travel to Canada relatively cheap and was a key reason why the number of Americans flying to Canada is estimated to have reached 5.5 million in 2016. However, the Canadian dollar is expected to appreciate modestly but steadily over the next 5 years.

This will remove some of the incentive for foreign travellers to visit Canada and will make the cost for Canadians wishing to fly out of the U.S. airports less expensive. An added risk for the industry could be the increasingly protectionist mood taking hold in several high-income countries which could curtail global trade and dampen demand for business travel.

The threat of new low-cost carriers will keep price increases subdued for the next five years, but even modest gains would be an improvement over the falling prices seen in the past two and half years. Following a drop of 3 percent in 2016, prices are expected to rise by 0.5 percent this year.

Overall, Canada’s air transportation industry pre-tax profits are expected to grow another 2.4 percent in 2017 to reach $1.5 billion