He also highlighted the importance of the Bank of Canada’s recent interest rate cut, because it came amid a declining growth outlook for the Canadian economy. Mr. Cherniavsky also pointed out that the rate cut caused the Canadian dollar to further weaken, which will lead to higher airline operating costs and lower demand for travel abroad.
From what I can see, the following demand trends are positive for Canadian carriers:
1. More Americans travelling to Canada
2. Fewer Canadians cross-border shopping for travel to US warm weather destinations
3. Lower fuel costs, net of dollar devaluation
4. Increase in US-Europe and US-Asia passengers as AC can discount more heavily in US market
5. More Canadian business travellers, especially manufacturers in Central Canada, now that currency puts them back into the game
The following expense trends are negative for Canadian carriers:
1. Higher US ground expenses
2. Higher aircraft purchase costs and lease expense (where the latter are denominated in USD which is usually the case)
The currency issue is limited to the CAD-USD relationship. The EUR/CAD is basically unchanged, and if anything, Europeans who might have looked to the US for a vacation may opt for Canada instead because Canada is a better deal of land costs.
Canada-Asia and Canada-Europe cargo rates will also be lower than US rates, which should mean a larger flow of US origin/destination freight trucked between YYZ/YUL. International freight forwarders always arbitrage by gateway, meaning they will lower their overall costs between continents by sending traffic to lower cost gateways.
Mind you, I expect AC's Q4 to be chock full of non-cash write-offs. AC will write off the on-going currency devaluation to the greatest extent possible - as required by GAPP rules. Non-GAPP, I expect, will be profitable.