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Airline industry failures not a blip

Increased fuel and ticket prices could lead to a decline in visitors
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Going Down? Struggling and bankrupt airlines have a negative effect on tourism in Whistler and the rest of British Columbia.

Canada is no stranger to airlines going under. In recent years Canadians have seen the end of Canadian Airlines, Canada 3000, Jets Go, and Harmony Airways.

Each bankruptcy has left people stranded, and forced others to make alternate travel arrangements. While you can argue that competition is still healthy between Air Canada and WestJet, keeping fares low for travelers, fewer companies means less choice for consumers.

Airlines go out of business for a variety of reasons. Some, like Canada 3000, couldn’t weather the losses the airline industry suffered after the Sept. 11, 2001 terrorist attacks. Others were mismanaged, couldn’t compete with discount airlines, or were caught with high payrolls and unpopular routes after the airline industry was deregulated and new air carriers took to the skies.

The most recent spate of airlines bankruptcies — four since March 31, including Hong Kong-based Oasis, and U.S. carriers Aloha Airgroup, ATA Airlines, and Skybus Airlines — are largely being blamed on rising fuel prices. Fuel prices were also partly credited for the merger of Delta and Northwest Airlines, as well as the need to pool company resources to stay competitive.

According to the U.S. Air Transport Association, every dollar increase per barrel of oil equals about $465 million U.S. in additional costs for U.S. airlines. Since the start of 2007, the price per barrel of oil has increased from about $72 to $106.

The failure of Oasis was particularly tough, stranding upwards of 40,000 passengers in Hong Kong, London and Vancouver — many of them students attending schools in the U.K.

Some critics says the bankruptcies are a blip, the result of discount airlines flying too close to their margins to be able to absorb a rise in fuel prices.

With fuel prices expected to continue to increase in the short term, less competition for various markets, and other economic factors weighing on the industry, the cost of airline travel is going up — and according Associate Professor Marc-David Seidel of UBC’s Sauder School of Business, the cost will likely stay up.

That’s bad news for the province and for Whistler, Seidel said.

“What we’re seeing is the impact of a losing economy, rising fuel prices, intensified competition, and the increasing demand,” he said. “It’s leading to continual failures, restructuring, and mergers like we’re seeing with Delta and Northwest.

“It’s definitely creating an environment where we can expect prices to go up and travel to go down. Particularly in the context of Whistler and U.S. travel, there’s a strong possibility it will be decreasing even further because the price is higher to get there. The fact the economy isn’t doing that well right now adds to the concern.”

Seidel says it’s possible that higher airline prices could work in Whistler’s favour if people living within driving distance of the resort can’t afford to fly and decide to vacation close to home.

“Overall it’s not looking that great right now for Whistler,” he said. “There are a few things that Whistler can do, and the biggest thing is to look at the overall experience for consumers and tourists… and finding a way to tap into local markets, and reach across into neighbouring states and provinces.

“Another potentially big market is travelers from China, which is opening up travel restrictions to various destinations. That would be a very wise market to capture… and Vancouver and Whistler are well positioned to do that.”

While Europe could also be a strong market, given the relative strength of the Euro and British pound compared to the Canadian dollar, Seidel says that leaves Whistler competing against dozens of other similar mountain resorts that are closer to home.”

Seidel sees the current situation with higher pricing and fewer airlines continuing for a long time.

“(These bankruptcies) are not a blip, they’re just part of the long term trend and it’s been the trend since the late 1970s for the airline industry, since deregulation. We’re just now seeing the impacts with the fuel prices at record highs and the economy slowing down, but it’s definitely not a short-term blip.”

One area that has been hard hit recently is business travel. Seidel says the adoption of new communication technology and teleconferencing has reduced business travel considerably — once a staple of the airline industry.

“These days businesses are looking at other options for communication instead of the usual face to face meetings, and they only travel when it’s absolutely necessary,” he said. “And when businesses do travel, most are using the same discount airlines as other people and not booking everyone into business class.”

Seidel doesn’t believe that higher airline prices will impact visitors travelling to Vancouver and Whistler for the Olympics, but says the travel industry can’t rely on a one-month event to repair the damage to the long distance travel market.

As to whether countries and airlines might return to the old days when airlines were nationalized, subsidized and/or heavily regulated — taking money in exchange for running regular service to remote areas of Canada, for example — Seidel doesn’t believe that will happen.

“We’re just going through an economic cycle,” he said. “We’ll see a new wave of carriers founded, and a new wave of failures, but I don’t anticipate going back to the days before regulation. The industry doesn’t have any interest in that.”

According to a new study by the Conference Board of Canada on the Canadian airline industry, air carriers are expected to make a profit of roughly $150 million in 2008 — around one per cent of total annual revenues, which doesn’t leave a lot of breathing room. Industry costs are expected to rise by about 6.5 per cent annually over the next five years due to higher fuel prices and labour costs. Competition is also keeping prices low, making it difficult to profit.

The Conference Board also expects continued growth in sales and labour productivity to continue, allowing airlines to stay one step ahead of rising costs but keeping margins thin through 2012.