September 18, 2008 / 1:52 PM / in 9 years

Air Canada, rivals chop fees as fuel prices ease

CALGARY, Alberta (Reuters) - Air Canada said on Thursday it will be the first major North American carrier to drop its extra fee for a second piece of checked baggage in response to the recent drop in fuel prices.

<p>Air Canada passengers wait in line to check baggage at Pearson International Airport in Toronto in this June 17, 2008 file photo. The airline has dropped an extra fee for checking a second piece of baggage on its flights because fuel prices have moderated from record levels, the country's biggest airline said on Thursday. REUTERS/ Mike Cassese</p>

Air Canada also said it will start incorporating all fuel costs into its advertised fares on North American flights, rather than tacking them on separately as surcharges.

Domestic rivals, WestJet Airlines Ltd and Porter Airlines Inc, quickly followed suit by removing their own fuel surcharges.

With Canada’s economy slowing and a round of staff and capacity cuts looming, Air Canada’s move is more a signal of its desire to boost competitiveness than a sign that tough times in the sector are coming to an end, an analyst said.

It had joined numerous other airlines in implementing a C$25 ($23) charge for extra bags this spring as oil prices headed to highs above $147 a barrel. Crude has since dropped by a third to below $100.

Air Canada said it will scrap the fee on September 23.

“It is fair to say that we are always going to be competitive in our markets. Because we have seen some retreat in the fuel prices of late, we’ve made the decision to reinstate our previous baggage policy,” Air Canada spokeswoman Angela Mah said.

It has been adding a fuel surcharge of C$20 to C$60 per one-way fare on Canadian and U.S. routes.

WestJet, the country’s No. 2 carrier, did not impose extra baggage fees, but had set fuel surcharges. It removed them on Thursday, saying it too was responding to lower fuel prices.

With its moves, Air Canada likely did not want to be seen as anti-consumer by being alone in the market in charging for extra bags, said Rick Erickson, head of airline consultancy RP Erickson & Associates.

“With consumer confidence dropping and with the economy slowing down, certainly in central Canada and Atlantic Canada, Air Canada’s trying to be as attractive as they can with a product to offer what’s likely to be a smaller group of consumers,” Erickson said.

The airline, whose stock has been under severe pressure along with much of the industry, said in June it will cut 2,000 jobs and 7 percent of its capacity in this autumn and winter schedules to cope with record fuel costs and the weaker economic outlook.

Its biggest cuts will be in routes between cities in Canada and the United States.

Erickson said it is unlikely the lower fuel costs will mean a big jump in third-quarter profit, with oil having just fallen below $100 a barrel this week, but it could be a big story for the fourth quarter.

Shares in Air Canada jumped 21 Canadian cents, or nearly 5 percent, to C$4.55 on the Toronto Stock Exchange. They are down more than 60 percent since the start of the year.

WestJet fell 23 Canadian cents, or nearly 2 percent, to C$13.38. It has dropped 40 percent in the same period.

($1=$1.07 Canadian)

Editing by Rob Wilson

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