“Let’s all meet in Honolulu. It’s cheaper than flying home to Toronto”: the problem with Canadian air fares

Commentary, Mary-Jane Bennett (historic), Transportation, Uncategorized

Ottawa’s air policy focuses on taxes and restricts competition. The policies are costly, in Canadian job loss to the United States, G.D.P., economic growth and ticket price to consumers.

Canadians have spent tens of millions of dollars travelling during the holidays. Many have discovered that simply choosing a U.S. over a Canadian airport saves a lot, on average by $428 round-trip per person according to the Canadian Airports Council. For a family of four, that means a saving of over $1700.

Every year almost five million Canadians travel to U.S. airports to take advantage of reduced airfares. Another one and a half million consider the option. New York’s Plattsburgh International Airport, located one hour south of Montreal and having experienced triple growth since 2008, now markets itself as ‘Montreal’s U.S. Airport.’ Canadians make up 75 per cent of passengers at that airport, 85 per cent at New York’s Niagara Falls International Airport and 62 per cent at Washington State’s Bellingham International Airport, one and a half hours from Vancouver.

It is estimated that a daily 747 translates into 400 airport jobs. With the current loss of 11,000 Canadian jobs due to passenger drain, the lack of policy is having a profound effect on the economy.

Believe it or not, neither Air Canada nor WestJet is to blame. U.S. airline tickets are cheaper for two reasons. First, the Canadian ticket price is ratcheted up with federal taxes, fees and surcharges. Second, the base fare, that is, the price before the tax add-on, is cheaper in the U.S. by about 30 per cent. The lack of airline competition is a significant factor.

Ottawa collects about a billion dollars a year from the jet fuel tax, airport ground rents, Air Transport Security tax and NAV CANADA fees. The reduction or elimination of these taxes is not only necessary but fair.

Given that airports are now privately run, it is no longer fair to collect the jet fuel tax which was introduced to subsidize airports. At about fours cents a gallon, not only is the jet fuel tax out of line with its U.S. one cent equivalent, the tax gets re-invested in airports in the U.S. In Canada, it goes directly into the treasury.  

Ottawa collects about $270 million from Canada’s eight busiest airports in ground rents. The Senate’s June, 2012 report, The Future of Canada’s Air Travel: Toll Booth or Spark Plug?, claims the rents are a factor in Canadian passenger loss.   

The Air Transport Security tax (ATST) charged Canadian passengers is the highest in the world. It adds about $400 million per year to the treasury.

The tax should be reduced for various reasons. In recognition that 9-11 was not an attack on airlines but on the country, the U.S. heavily funds security costs. In Canada, however, passengers fully fund air security. Second, the tax has its highest impact on the Canadian short-haul industry and the regional airports and markets it serves. Third, there has been substantial over-recovery of revenue in relation to CATSA’s operation costs, amounting to $325 million as estimated by transportation expert, InterVISTAS.

Fairness requires an adjustment to the air navigation fees, NAV CANADA. Not only is air navigation fully funded in the U.S., but the Canadian air navigation fee structure includes reimbursement for assets already fully paid.

If these federal add-ons to the ticket were eliminated or reduced, about two million passengers would return to Canadian airports estimated the Conference Board of Canada.

The base fare price – that is, the ticket price before the tax, fee and charge add-on – is about 30 per cent higher in Canada than on a U.S. equivalent route.

Competition from other airlines has “a major influence on airline fares” concluded the 2001 Canadian Transportation Act Review Panel Report. It pointed to the emergence of competition from Southwest Airlines in the U.S. as accounting for an estimated 40 per cent savings in fares. The International Institute of Transportation and Logistics reported European Union fare reductions of about 30 per cent through competition.

On international routes, Canada is perceived as having the most anti-competitive and protectionist air policy in the developed world. By contrast, the U.S. realized early on that the economic best interests of the country and its consumers were best served with wide competition.

On domestic routes, Ottawa could facilitate competition and reduce ticket price by allowing a foreign carrier to provide domestic flights. Termed right of establishment, the carrier would employ Canadians and be subject to Canadian taxes and regulations. The creation of Virgin Blue (now Virgin Australia Airlines) under this policy resulted in Australia experiencing some of the lowest domestic air fares in the world.

If airline fees are to be reduced, boosting national travel and stimulating job creation, Ottawa will have to abandon its addiction to taxes, fees and surcharges and tackle its anti-competitive airline policy. Only then will consumers see a reduction in airline ticket price.