Passengers to be hit in the pocket as airlines cope with rising fuel prices

MONTREAL - Canadian travellers should brace for a wave of higher fares and new charges this summer as airlines struggle to cope with soaring fuel prices, industry observers said Friday.

Air Canada (TSX:AC.A) started the ball rolling by announcing plans to charge its lowest-fare customers $25 to check a second bag on North American flights.

"The consumer has to pay in the end, there's no other way around it," FareCompare.com chief executive Rick Seaney said in an interview.

He said airlines, particularly in the U.S., can't continue to post massive quarterly losses in the face of dramatic increases in their largest operating expense.

The new charge for Air Canada bookings made after May 15 will start July 15 for passengers who buy Tango and Tango Plus tickets.

Customers can still receive a discount when travelling without checked luggage.

The new policy will not affect international travel, which will continue to allow two checked bags within weight limits at no additional cost. North American flights connecting to international travel also aren't affected.

"In an environment of record high and unrelenting fuel costs it is more critical than ever that the airline reviews its product offering to ensure it can continue to offer everyday low fares," stated Duncan Dee, the airline's chief administrative officer.

Canada's largest airline is also reviewing its baggage policy to determine if the maximum size or weight of bags should be reduced.

WestJet (TSX:WJA) and Air Transat (TSX:TRZ.A) said they have no plans to charge to check a second bag.

The charge at Air Canada follows the lead of several U.S. carriers, including at least one that plans to charge to reserve a window or aisle seat.

Fares in the United States have increased by three to six per cent since September, with another five per cent tacked on this week.

Delta CEO Richard Anderson said airlines need to raise fares by 15 to 20 per cent to break even if oil hits US$120 per barrel.

Seaney predicts summer travel is going to be very expensive for U.S. travellers, and that Canadians aren't immune.

"Over the next four weeks, you'll see an increase and I think you'll see them pull back a little bit mid to late summer when the softness starts to occur," he said of Canadian fares.

Rival WestJet, which eliminated fuel surcharges in 2005, said it is monitoring the situation but has "no definitive plans" to increase fares at this time.

"There is the potential to see increased prices this summer if this continues," spokesman Richard Bartrem said from Calgary.

Transat spokesman Jean-Michel Laberge said the airline has no plans to increase the surcharges updated in February.

Airline analyst Jacques Kavafian of Capital Research Corp. said Canadian airlines have been able to cope so far because a 10 per cent growth in the number of domestic passengers has absorbed the higher fuel costs. Also helping is the stronger loonie which has shielded Canadian airlines from U.S.-priced fuel.

Canadian airlines still increased fares by four to six per cent last year.

"I think they are going to keep increasing fares to compensate for the rising fuel price," Kavafian said.

He said airlines will continue to look for new revenue sources to mitigate the fuel increases, and consider ways to improve fuel efficiency.

Air Canada has reduced its fuel consumption by 24 per cent since 1990 by renewing its fleet. WestJet has enjoyed 34 per cent fuel savings by switching to Boeing 737 Next Generation planes with bent wing tips.

They have taken a series of steps to save fuel, including the use of fewer engines to taxi on tarmacs, satellite navigation systems to ensure more direct routes and lighter catering trolleys.

Brussels Airlines this week began to slow the speed of some of its aircraft. Cutting the speed of its Avro regional jets by 15 to 20 kilometres per hour is expected to save $2 million per year, but add only a minute or two to short haul flights.

Air Canada has already reduced the speed of some aircraft. Onboard computers allow Canadian airlines to program planes to fly the most cost-efficient way. Some flights slow down mid flight if tail winds put them ahead of schedule.

The drive for fuel efficiency has also prompted Brussels Airline to consider updating its fleet by purchasing Bombardier's (TSX:BBD.B) new CSeries. The aircraft promises 20 per cent fuel savings by using composite materials and a new engine.

"Every manufacturer that presents today an aircraft that has a better performance ratio and that consumes less fuel will produce a winner on the market," airline spokesman Geert Sciot said in interview.

Some European low-cost carriers may be the models of future charges. They charge for airport check-ins not made by Internet, all luggage, and the use of credit cards.

"You can be rest assured that every bean counter at every airline has looked at every possible thing," Seaney said.