Flawed analysis – QMI Agency, December 12, 2014

2014-12-15

(Abridged version, for full text see French) An article from Agence QMI in the Journal de Montréal and the Journal de Québec on December 12, 2014 contains inaccuracies and requires corrections.

The reporter infers that financial instruments used by Air Transat to hedge against aircraft fuel cost variations are less efficient than those used by its competitors. His analysis is flawed. In an email we sent on December 12, we wrote, in substance:
 

  • Futures contracts are indeed hedging instruments, and paragraphs 3 and 4 of the article are inaccurate (compressed and paraphrased from the French).
  • Aircraft fuel prices are indeed going down, when expressed in US dollars. But over the last year, the Canadian dollar has weakened considerably, and this has offset the impact of much of the oil prices drop for companies reporting in Canadian dollar (compressed and paraphrased from the French).


On the aforementioned points, a precision was published by both media on December 13, which we find incomplete. The reporter wrote that “… the price of fuel is also impacted by the Canadian dollar.”

The main thrust of the article and its headline are problematic and may indicate a lack of understanding of the travel market dynamic. The piece reads: “No price reductions in sight at Air Transat – The drop in oil prices paves the way for reduced travel fares in the coming months, but Transat will not be able to match its competitors. The tour operator admitted as much in a conference call held yesterday… “

In our email of December 12, we wrote:
 

  • The article’s lead and its headline are inaccurate. It would have been acceptable for the reporter to write that Transat may not benefit from reduced fuel costs, thanks to the fall of the Canadian dollar and its hedging program (like other carriers). But no link can be established with selling prices, which are defined by supply and demand. Consequently, the headline and paragraphs 1 and 2 of the article are inaccurate. And obviously, the company admitted nothing of the sort. (compressed and paraphrased from the French).


In effect, in the travel industry, operators sometimes need to sell a portion of their inventory below unit cost to limit losses. Airline seats and roomnights earmarked for precise dates are a perishable product. Consequently, any operator will accept to sell at a loss of $100, rather than lose $1,500 on an empty seat and room. In other words, selling prices do not fluctuate based on costs, but based on sales, as industry observers know. In a way, tour operators’s primary challenge is to keep costs under prices, rather than keep prices above costs, as prices are determined by market forces.

In the article, the reporter makes two points, both false and without merit: that Transat will be unable to reduce selling prices, and that the company admitted as much. Tellingly, in an email received December 12, the reporter did not address this question.

Finally, the article contains a factual error which has been corrected on December 13: cost reductions for the 2012-2014 period amounted to $55 million, not $75 million.

By continuing to use this site, you agree to the cookies used, for example, to improve your browsing experience and to personalize the content of the Website. For more information and/or to change your current cookie settings, please refer to our Cookies Policy.