Observations from the Western Canadian Aviation Forum

Blog, Transportation, Steve Lafleur

The Winnipeg Airports Authority was kind enough to invite me to participate in their Western Canadian Aviation Forum. While it is a policy conference, most of the presenters are from industry and government, which provides a slightly different perspective than conferences that are primarily populated and presented by academics and scholars. I’ve accumulated a few observations over the past two days that I’d like to throw out for consideration.

First, every single person I’ve encountered understands the value of liberalizing the airline industry. Recent reports from the Standing Senate Committee on Transport and Communications, the Conference Board of Canada, the Canadian Chamber of Commerce, and the Frontier Centre have all argued for liberalization. There is a consensus between industry, scholars, and government researchers, yet there has been little movement on the file. Points of particular agreement include the need to eliminate the more than $250 million in crown rents the federal government collects annually from airports, and the need to reduce foreign ownership restrictions to ensure that Canada’s airline industry is adequately capitalized. Unfortunately, Canada’s airline policy (or defacto policy direction) has been the opposite of the American approach: our government seems to care more about protecting the industry than consumers.

Second, despite the above mentioned consensus, Transport Canada bureaucrats continue to fabricate arguments against liberalization. In particular, they point to the fact that there is still excess capacity in the airline industry as a sign that we don’t need liberalization. To paraphrase comments by speaker John Byerly, a Deputy Assistant Secretary for Transportation Affairs at the U.S. Department of State:

“I don’t buy it. I’ve been part of these negotiations. I spent 31 years in government. I’m a product of bureaucracy. If there’s one thing government officials are afraid of, it’s giving up control.” “Do bureaucrats have superior knowledge to markets?”

Third, we need to have a serious national debate over who should bear the costs of air travel. For instance, in the United States, airports are subsidized because governments view them as “spark plugs” for economic activity, while the Canadian government views them as “toll booths.” On the one hand, I am in favour of internalizing costs to the extent possible. On the other hand, I don’t believe the airline industry should be a cash cow. Ultimately, the government needs to recognize the opportunity cost of chasing passengers to the United States. Having roughly 5 million Canadian passenger trips originating from US border airports deprives the federal government of tax revenue, and Canadian airports (and surrounding regions) of economic activity.

Fourth, and following on the last point, we need to determine whether and why losing those  5 million passengers is actually important. After all, if the US government wants to subsidize Canadian passengers, it can be seen as a nice gift. Moreover, when Canadians spend money in the United States, it comes back to Canada eventually. That’s just how currency works. My primary concern is the deadweight loss from uncompetitive airline policy. There is a cost (both in money and time) to Canadians driving several hours to fly out of the United States. Additionally, those costs price many potential customers out of the airline market. Moreover, having several ground trips to the United States simply to connect to flights puts additional stress on Canadian highways and border crossings. These are costs that existing reports have not addressed.

Fifth, coming back to fees, is the question of how to pay for security. One presenter argued that airline security costs should be paid for from general government revenue, rather than through passenger fees. His arguments are that: (a) the risk of terrorism is an externality, (b) terrorism is fungible (“if they’re not bombing planes, they’re bombing something else”). Point (a) is fairly persuasive on its own. After all, airline security isn’t just about passengers, as we’re acutely aware. Point (b) is one I hadn’t thought of. After all, if planes didn’t exist, there’d be a greater demand for train bombings, etc (to put it crudely). Planes are merely sopping up terrorism investment, which is a boon to the treasury. When I solicited opinions on this point, Marc Scribner from the Competitive Enterprise Institute pointed out that general revenue funding in the United States has enabled a massive, inefficient expansion of air security spending. That is a fairly compelling counterargument. Perhaps we ought to take the advice of Glen Hodgson from the Conference Board of Canada, who argued that the real solution is to privatize air security so that companies will have to bid on airport security contracts, rather than having a single government monopoly. Moreover, if we’re going to have an airline security charge, it should be earmarked for security, rather than accruing to general revenue.

Sixth, how do we pay for airports? Currently, airports are run as non-profit organization that pay ground rents to the federal government. The trouble is that they aren’t able to use shareholder equity for capital expansions, as private companies do. To quote Mary Jane Bennett, who wrote Frontier’s recent report on Canadian airports: “The current not-for-profit model results in today’s airport users funding tomorrow’s upgrades.” Selling airports to private operators (like we’ve done with our award winning air traffic control system) is something we should seriously consider.

Seventh, it’s interesting to note that Canadian airports, which move roughly 80 million passengers annually, pay nearly $300 million in ground rents annually. Via Rail, which moves 3.8 million passengers per year, receives roughly $300 million per year in subsidies. One might think of this as an indirect transfer from a fast, high capacity transportation mode, to a slow, low capacity transportation mode. That seems rather silly.

Eighth, air service to small centres could become substantially more expensive as the aviation industry shifts away from building smaller planes. One presenter suggested that the industry will likely cease production of jets with capacities of under 60 passengers (or some similar number), due to a lack of demand. This would likely increase the cost of remote service, which could require difficult choices in the future. I have no knowledge of this particular issue, but it sounds like a plausible concern. I asked the presenter if he had a solution for this problem, and neither of us could come up with a simple one.

These are discussions we should be having. I’m happy to see that the Winnipeg Airports Authority hosting this event, but we need to have many, many more such discussions — and the political class needs to recognize the political opportunity from focusing more on consumers, rather than the industry.