GN fuel increase catches northern airlines by surprise

First Air and Canadian North, seen here at Rankin Inlet’s airport, have added fuel surcharges and plan for an increase in cargo rates, following the GN decision to increase the price of aviation fuel in Nunavut on Nov. 1. (PHOTO BY JANE GEORGE)

Managers of the two major airlines serving Nunavut got a big shock Oct. 27.

That’s when the Government of Nunavut announced the price of diesel and gasoline would drop Nov. 1, but that the price of aviation fuel would rise by 10 cents a litre.

Tracy Medve, president of Canadian North, first learned about the change in price when she read the GN news release.

And Chris Ferris, First Air’s vice-president of marketing, said he only heard about the price hike when a reporter called for comment about the GN announcement.

“We found out with the rest of the territory,” Ferris said. “It was a bit surprising to find out with less than a week’s notice. There wasn’t an opportunity to recoup costs for flights after Nov. 1.”

Medve estimates that the GN decision will cost Canadian North at least $1 million over the next 12 months.

“That’s not pocket change,” she said. “We had no way of knowing that they were doing this. We had no notice about that, which makes it really tough.”

The two airlines raised their passenger fares last week — Canadian North added a $25 fuel surcharge per flight leg on Nunavut community routes. Canadian North also increased an existing fuel surcharge on Iqaluit and trans-Arctic flights from $25 to $35 per flight leg.

First Air increased its fuel surcharge on fares, based on the routes’ distance.

The fuel surcharge means an increase of about $10 per flight leg on short-haul flights, such as from Iqaluit to Kimmirut or from Rankin Inlet to Whale Cove. For longer and High Arctic-bound routes, the fuel surcharge will increase by between $25 to 50 per flight leg.

Cargo rates will rise later this month — on Nov. 15 for First Air.

An increase also lies in store for cargo shipped on Canadian North. That could involve either a fuel surcharge or a per kilogram cost increase.

Medve said she isn’t sure why the GN decided to raise the price of aviation, fuel because its price in the South has dropped since April by 12 to 13 cents.

Still, overall in 2011, Canadian North has faced rising fuel costs over the past year, she said.

The blended cost of aviation that the airline uses to calculate how much it pays for fuel — a combination of how much it costs overall for Canadian North to fuel up in the South and in the North — rose 19 cents a litre from January to April.

During that period, the cost of fuel bought in Nunavut remained the same because the territory had already set its fuel price.

From April to now, that blended rate dropped by about 13 cents per litre as fuel costs dropped in the South.

This gave Canadian North an overall blended cost increase of seven cents per litre.

But the additional 10-cents-per-litre price increase is too late to budget for, Medve said.

And Medve said she doesn’t know what could lead the Nunavut government to raise the price of aviation fuel, because it’s not due to the cost of the product.

“We weren’t privy to any of the reasons,” she said.

The short notice was also problematic, she said, because many people have already bought their tickets for travel into 2012.

Medve would have liked to have talked to GN officials before the decision to increase the cost of fuel was taken, “but it’s a bit too late now.”

“We will never recover,” she said. “It’s hard to imagine that GN would expect airlines not to pass the increase along to their customers.” One of the biggest of those customers is the GN itself.

GN travel contracts account for about 20 per cent of traffic at Canadian North, and all those contracts have fuel riders attached to them.

This means the airline can pass on the rising cost of fuel right back to the GN, she said.

“By increasing the fuel cost to us, it automatically increases the amount the GN has to pay for fuel. So they’re effectively increased their own cost — ‘they giveth and they taketh away’ from themselves,” Medve said.

The solution to make ends meet isn’t to buy more fuel in the South, where it’s cheaper, she said.

“Sometimes the payload of the airplane means it’s at its maximum take-off weight or beyond maximum landing rate so can’t take on more fuel,” and, other Canadian North aircraft, such as the Dash 8’s based in Iqaluit, never come south, she said.

The GN decision to increase the cost of aviation fuel will affect about 10 million litres of fuel, Medve said — “10 million litres that we don’t have any discretion over getting at a cheaper rate.”

For First Air, the change also raises its cost of operations by the additional amount it will pay for “millions of litres every year,” Ferris said.

The end result is that for both airlines, the GN’s surprise fuel hike will make it difficult for the airlines to make money.

And to an imminent rise in cargo prices, people in Nunavut who never fly will also start paying more for other items, such as food.

Generally, Nunavut is more vulnerable to increases in fuel costs, due to its distance from distribution hubs, small population and its transportation network, which relies on small aircraft to move freight.

According to a report issued last March from TD Economics, Canadians can expect average food prices to rise seven to eight per cent over the rest of 2011.

Now, even with the predicted five-to seven-per cent drop in food prices from the Nutrition North Canada subsidy program, people in Nunavut will still face more price increases.

With files from Sarah Rogers