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Air Canada (AC.B), WestJet Airlines Ltd. (WJA): What Fare Hikes Mean for These Airlines

Intense competition in the airline industry led to instability, as the airlines fought market share battles with fare decreases. As major carriers consolidate, however, price wars are becoming less frequent, and are even allowing some carriers to raise prices. But for a price increase to succeed, other carriers have to follow. This time around, it appears that they have.

Air Canada (TSE:AC.B)

As in most industries, when one carrier raises prices, its customers tend to jump ship to another. This is especially true if the product is highly commoditized, as in the case of air travel. Since there are laws against outright price fixing, airlines must rely on other carriers seeing the benefits of a fare increase, instead of maintaining lower fares to mop up market share.

According to USA TODAY, there have been 10 attempts to raise fares so far this year, with only two being successful; both were performed by Delta Air Lines. Delta recently rolled back one fare increase after United Continental was the only other carrier to match it. 2013 has been a fairly unsuccessful year for fare increases compared to 2011 and 2012, where nearly half of the attempts were successful.

Transborder flights
With Canada being the largest trading partner with the U.S., it is no surprise that flights across the U.S./Canadian border matter to major airlines. Although these flights do see significant demand, airlines nonetheless strive to make money on them in the face of competition. United Continental Holdings Inc (NYSE:UAL) and Star Alliance partner Air Canada (TSE:AC.B) took a major step toward this goal by raising fares on transborder flights by approximately $10.

With such a poor record in 2013 for fare increases, the odds would tend to favor the latest United Continental Holdings Inc (NYSE:UAL)/Air Canada (TSE:AC.B) fare increase getting rolled back. But this fare increase is “gaining some traction” according to USA TODAY, which reports that WestJet Airlines Ltd. (TSE:WJA)US Airways Group Inc (NYSE:LCC), and American Airlines (a subsidiary of parent company AMR Corporation (OTCMKTS:AAMRQ) ) have at least partially matched the increase. Having all major competitors on board is critical to a successful fare increase. I’ll break down why each one matters in the following sections.

WestJet Airlines Ltd. (TSE:WJA)

This airline has been a thorn in Air Canada (TSE:AC.B)’s side since its founding, and has grown to become a major Canadian competitor for flights within North America. Operating as a discount carrier, WestJet Airlines Ltd. (TSE:WJA) typically gains market share by using its superior cost structure to undercut Air Canada (TSE:AC.B)’s fares.