Hawkair President Jay Dilley sat down for a Q&A about the low dollar, competition, fuel prices, and the economy. Here’s a condensed version of the conversation:
We’ve seen some big announcements from competitors lately, cancelled routes, shifting capacity, lease returns, what’s happening in the market?
The Canadian economy has been growing at 1% GDP while competitors have been adding 8-12% capacity into the market. It’s unsustainable if the gap remains persistent and we’re seeing signs of a structural change which means trying to find ways deal with a prolonged slump.
Our competitors have domestic, cross boarder and international routes that act as a natural hedge to localised economic cycles. As a result of the challenges in Alberta, uncertainty around projects in BC, we’ve seen yield compression as load factors declined. Price was used to stimulate demand in the markets but we’re at the point where the price lever doesn’t work anymore. The industry is shifting to the supply side. That’s why you’re seeing cancelled routes, deferred delivery of aircraft and lease returns on aircraft.
Oil is under $30 a barrel, isn’t this a good thing?
It’s a topical question that can’t be looked at in isolation. Competitors, the economy and the dollar are all intertwined. So the short answer is not right now. The drop has caused serious harm to the economy with thousands of hard working Canadian losing their livelihoods and businesses scrambling to survive. Less people are travelling for both business and leisure. While oil prices have gone down, many can’t afford to travel due the job losses and it’s coupled with everything else having gone up in price: rent, leases, wages, and taxes.
You mentioned the dollar, so how is this impacting the industry?
The Canada US exchange rate has been decimated over the past two and half years, back in mid-2013 we were basically on par. The drop is significant for us as we pay most of our expenses in USD. The 40% collapse in the exchange means a lot of airlines are paying 40% more for their aircraft and parts.
With airlines facing headwinds, what’s in store for the rest of 2016?
It’s ugly out there. Our two publicly traded competitors have had their stock prices drop 41% and 51% over the past year. It’s a tough market, everyone is going to try and navigate through it in different ways.
We see excess capacity causing further pressure on yields. Yield compression and lower load factors will exacerbate the RASM problems while ex-fuel CASM will continue to increase. It’s been hyper-competitive for a while but these conditions make it that much worse.