(The following story by Brent Jang appeared on the Globe and Mail website on September 2.)
TORONTO — North America’s airlines, railways and trucking companies are struggling to keep pace with surging oil prices, bearing some of the pain of higher fuel bills while scrambling to implement ever-increasing fuel surcharges.
Air Canada and WestJet Airlines Ltd. have raised fuel surcharges twice this summer to combat soaring jet fuel bills, and they’re weighing the pros and cons of yet another boost to ticket prices, wary of angering consumers and losing market share. Air Canada will “adjust fares to reflect economic realities while ensuring we remain competitive in every market we serve,” said spokeswoman Laura Cooke.
Fuel surcharges are built into base fares at both carriers.
Aeroplan Income Fund, which is 85.6-per-cent owned by Air Canada parent ACE Aviation Holdings Inc., introduced a $15 fuel surcharge yesterday for one-way flights in Canada and the United States. Aeroplan also said it will raise the reward booking fee charged by its agents to $30 from $25 on Oct. 1.
“Fuel is our second-largest operating expense after salaries and wages, and as the price of oil continues to spiral upward, we need to be increasingly vigilant about keeping our costs down in all areas of the operation,” Air Canada said in a memo to its employees yesterday.
Effective yesterday, Air Canada began posting daily oil price closes in its employee memos — a reminder of how high jet fuel prices threaten to wipe out profit.
Crude oil prices rose 53 cents (U.S.) to $69.47 a barrel yesterday, amid the lingering effects of hurricane Katrina. U.S. companies with planes, trains and trucks have been unable to fully guard against skyrocketing oil prices. For cash-strapped U.S. carriers in particular, rising energy costs are ruining what many airline executives had hoped would be a robust recovery with passengers returning to the skies.
There is a time lag between when oil prices jump and when airlines increase ticket prices, costing the carriers money, said Desjardins Securities analyst Nadi Tadros.
Demand for airline seats has been strong this year, but could falter as consumers delay their travel plans, analysts say.
Air Canada recently began a program to hedge its monthly fuel needs, hoping to gradually build its hedges over the next two years until nearly half of its energy bills are hedged. WestJet spokeswoman Gillian Bentley said the carrier doesn’t have any plans to lock in oil futures contracts, but it will continue to monitor energy markets.
Canadian National Railway Co. and Canadian Pacific Railway Ltd. have formulas for raising their fuel surcharges, but diesel prices are still climbing faster than the companies’ ability to pass on the higher expenses to customers. Both railways have fuel hedging programs.
CN has Gulf Coast railways damaged by hurricane Katrina. “We’re going to have additional costs, but in terms of revenue, we expect to be a player on reconstruction. And some revenue may be simply delayed rather than lost,” said CN spokesman Mark Hallman.
In the trucking sector, “there could be a looming crisis in the supply chain” if retailers and other firms balk at paying extra fuel surcharges, said Stephen Laskowski, a vice-president with the Canadian Trucking Alliance.
Customers would adapt to surcharges if oil prices rose gradually, but with spikes over the past year, it’s making it difficult for truckers already operating on thin profit margins, Mr. Laskowski said.
Income trust analyst Harry Levant said transportation trusts face a harsh third quarter because of the “rapid escalation of energy costs has happened so quickly.” Trusts will seek to continue making monthly distributions to unitholders, but they will be under pressure to maintain previous levels of payouts, he said.