The Canadian Economy is going through a tough time since the beginning of the current year. With the oil prices going down and the estimated over-valuation of the housing market by the Bank of Canada, Canadian economy is experiencing a big threat.
As Terence Corcoran, FP Comment Editor & Financial Post Magazine Editor of National Post, points out “The price of oil is more than just a surprise. It’s an economic shock.” And he is quite right. For the past seven months, oil prices have gradually gone south, and now it costs 50% less than its original price. This has affected the country’s economy and has resulted in a relative decline of the Canadian dollar.
But that is, by no means, an isolated financial data. It has the power to affect the economy, government budget and even realign the international struggle for power in the long run. On the other hand, there are some areas where the ever dropping prices of oil will have some direct and more immediate effect. These include airfare of all the leading Canadian airlines.
Fuel characteristically accounts for 30% – 40% of airlines’ total expenses and that makes fuel one of the biggest costs. So, at a time when oil prices have plummeted t by more than 50%, everyone can expect a downward turn in airfares too. But so far the airlines are giving no such indications. Ever wonder why?
You see, it all boils down to basic economics – demand and supply. Unless the Canadians stop paying the prices that the airlines charge, the airlines will continue with their previous fare.
But again, the Canadians seem to have no intentions to curtail their airfare purchase. In fact, the real picture is quite the opposite of that. Last year, both WestJet Airlines Ltd. and Air Canada announced that they have experienced a record demand for airplane seats.
In another way, this is a great time for most Canadian carriers. Unlike their U.S. counterparts, they do not have a contract in place to purchase jet fuels at a certain price. Sure, some of them still keep the option open as a sort of insurance policy in case price goes higher.
Air Canada, A Montreal-based airlines have reportedly told the press in an email that the airline purchases fuel using U.S. dollars and this “recent relative decline in the Canadian dollar has had an unfavorable impact.”
Analyst David Newman of Cormark Securities said that today’s oil situation will result in hundreds of millions of dollars of savings for Air Canada. So, “airlines finally have an opportunity after many, many years of improving their bottom line and return on invested capital. So they’ll take advantage of this and try to generate cash flow and be in a permanently — or at least quasi-permanently — better position.”
Westjet, on the other hand, responded with enthusiasm. WestJet spokesperson Robert Palmer told the press that if the price of oil keeps dropping they will be able to continue lower fares. He also stated that in the current seat sale they are offering some of the lowest fares they have ever offered.
WestJet also elaborated that the oil price alone cannot affect set pricing. There are other factors such as currency changes, competition, market conditions, etc. WestJet sets fare after closely evaluating every factor, and they will continue to do so in the future.
So to sum it up, even if the oil price has taken a nose dive, the Canadians may not see any significant drop in the airfare anytime soon. Even though, if this situation continues, the airlines may have to lower their fares eventually.