May 22, 2008 / 12:14 AM / 10 years ago

Air Canada sees fuel costs hurting air travel

MONTREAL (Reuters) - High fuel prices that are consuming a growing proportion of income at Air Canada will likely hurt demand for air travel, the airline’s chief executive said on Wednesday.

<p>An Air Canada plane prepares for take-off at Montreal's Dorval Airport, April 1, 2003. Air Canada is looking for ways to offset record high fuel prices that are consuming a growing portion of its income and will likely hurt demand for air travel, the airline's chief executive said on Wednesday. REUTERS/Christinne Muschi</p>

Montie Brewer, Air Canada’s president and CEO, said the rapid rise and volatility of fuel prices was a concern at the country’s biggest airline, which is pushing ahead with plans to use newer, more fuel-efficient aircraft.

“The severity of it will impact customer demand. We’ll see how much the customer can absorb and still plan on traveling,” he told reporters after the company’s annual meeting.

Brewer said every $3 rise in the price of a barrel of crude adds $75 million to Air Canada’s annual fuel costs, and fuel now accounts for some 31 percent of the airline’s operating cost base, up from 25 percent last year.

In the first quarter, Air Canada’s fuel expenses rose 22 percent to C$715 million ($726 million) from C$585 million a year earlier, and fuel costs are now roughly twice what is spent on wages and salaries.

On May 15, Air Canada eased back on its fuel surcharges, brought in just a week earlier, after domestic rival WestJet Airlines Ltd brought in lower extra fees.

Air Canada also plans to starting charging customers a fee for a second checked bag on certain North American flights.


Brewer told the annual meeting that Air Canada’s fleet renewal program is a key part of its plan to combat high fuel prices. The average age of aircraft in Air Canada’s fleet is less than nine years.

Fleet ages for U.S. legacy airlines range from 10 to 18 years, but are much lower for newer carriers, according to the website.

Air Canada, the world’s 14th largest commercial airline, has taken delivery of 14 Boeing Co 777s, and expects to have 18 in the fleet by early 2009.

“For 2008, we anticipate the 777s will account for more than 17 percent of our capacity, triple their production in 2007,” Brewer said.

Brewer said Air Canada was seeking compensation from Boeing for delays in the delivery of its fuel-saving 787 Dreamliner, but he declined to provide details.

The Dreamliner program, delayed in April for the third time, is some 15 months behind schedule. Air Canada has 37 firm orders and 28 options for the Dreamliner.

Air Canada took delivery earlier this year of the last three of 60 EMB-190 jets it ordered from Brazilian aircraft maker Embraer.

Air Canada’s class A shares were off 48 Canadian cents or 5.5 percent at C$8.18 on the Toronto Stock Exchange on Wednesday afternoon. The stock has lost more than half its value since being issued at C$21 in late 2006.

Brewer blamed the poor stock price performance on a lack of liquidity in Air Canada shares and declines in valuations for comparable North American airlines.

Earlier this month, Robert Milton, the CEO of ACE Aviation Holdings Inc, which owns 75 percent of Air Canada, said surging fuel prices cut odds that Air Canada would be sold in the near future.

ACE, formed from the restructuring under bankruptcy protection of Air Canada, is set to wind itself up over the next six months.

Under Canadian law, at least 75 percent of Air Canada must be held by Canadians or permanent residents of Canada, which limited prospects for a foreign takeover of the airline.

($1=$0.98 Canadian)

Reporting by Robert Melnbardis; editing by Janet Guttsman

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