U.S. travellers seeing cheaper airfares — is Canada next?

While cheap airfares south of the border have piqued passenger interest, Canadians may soon be getting some deals of their own, albeit for different reasons.

In a conference call yesterday, WestJet announced it would be introducing discounts for fares to and from Albertan hubs like Edmonton and Calgary to help combat a sharp cut in demands on the back of a struggling oil industry.

“We didn’t start to see much softness in our yields and our bookings until late (in the fourth quarter), and it was sudden and it’s gotten very deep,” said Gregg Saretsky, WestJet’s chief executive officer, during the call discussing the Alberta-headquartered airline’s profits, which fell by 27 per cent in the final three months of 2015 to $63.4 million.

Stateside, passengers have seen deep discounts as a result of the falling cost of fuel and record profits for airlines. In January, the average round trip in the U.S. hit a three-year low of $210, a 14 per cent drop from the same month a year ago according to data from Hopper – an app that uses big data to predict and analyze airfare.

But before Canadians get too excited about low oil prices translating into cheaper airfare, they need to understand the differences between the U.S. and Canadian markets, says Robert Kokonis, president and managing director of airline consultants AirTrav Inc.

“Whereas U.S. carriers reap 100 per cent of the benefit of reductions in fuel prices, Canadian carriers have to pay for fuel and other expenses like aircraft leases in U.S. dollars,” he explains. “To whatever extent they make money on the upside of fuel, they lose to the downside of the exchange rate – it’s all relative.”

According to Kokonis, a $0.01 per litre change in fuel price affects WestJet’s bottom line by about $14.1 million and every $0.01 change in the U.S./Canadian dollar exchange rate operating costs change by around $4 million.

These fourth quarter 2015 results include a pre-tax loss on foreign exchange of $10.1 million.

“You’ve got to put things in context, which is … for years and years, the airline industry made like nothing – 2007, which was the most profitable year in the airline industry that decade, the 260 members of the International Air Transport Association made a collective income net margin around 1.72 per cent, operating margins are around 5 or 6 per cent,” says Kokonis. “That’s very slim margins even in the best of times.”

So over the past couple of years the airline has tried to address passengers concerns about airfares by unbundling: Want to pack a bag? Pay separately. More legroom? There’s a price for that. Print your tickets at the airport? That’s another fee. Want a meal on a shorter flight? Bring a credit card. And so on, ad nauseum.

The point being that all this unbundling has insulated airfares from the effects of fuel cost and exchange rate, while ultimately adding to profits.

“I do not believe passengers in either country will see lower prices unless the economies stagnate,” says Fred Lazar, an aviation analyst and professor at the Schulich School of Business.

He notes that U.S. carriers are still doing a good job of controlling capacity.

“In Canada, the decline in the value of the Canadian dollar has offset some of the positive effect of lower oil prices,” says Lazar. “So passengers here as well are not likely to benefit.”

In short, if passengers are wondering what cheap fares will look like, they’re looking at them.

“With all these ancillary fees and unbundling, it’s up to customers to vote with their wallets if they like it or not,” says Kokonis.