Canadians are overpaying to travel by air because of government policy. Fuel taxes and sector-specific regulations increase the cost to travelers, and airport authorities are burdened by the terms of their operating leases with the federal government. Ottawa should enact reforms across the aviation supply chain to reduce the cost of flying for consumers.
THE STUDY IN BRIEF
Federal government policies are a major cause of high costs throughout the aviation supply chain, often leading Canadians to waste time and money by seeking lower fares at nearby US airports, or not travel at all. High fuel taxes and onerous foreign ownership and airline-specific policies are harming the competitiveness of airlines. Meanwhile, airports have been transformed from the rundown state they were in when operated by the federal government to become world leaders in customer service and quality. However, Canada's airports are now handicapped by federal government policies that result in otherwise higher costs for travellers.
If Canadians are to have the most economically efficient aviation system possible--crucial for such a geographically vast country--the federal government should enact a comprehensive set of policy reforms across the aviation sector.
The federal and provincial governments should reduce, or eliminate, remaining aviation fuel taxes. The federal government should also gradually loosen foreign ownership restrictions on Canadian airlines, eliminate both company-specific burdens and protection for Air Canada, and attempt to renegotiate open skies agreements with the United States and the European Union to open the right to operate on domestic routes to all international airlines.
Twenty years ago, Canada was a global leader in moving airports from government to private operation. While the federal government still owns the major airports proper, it signed operating leases with not-for-profit airport authorities. These airport authorities make long-term commitments that the looming end of leases may soon jeopardize, necessitating Ottawa to take action soon. The federal government should sell its remaining interest in the leases at airports it owns either to the not-for-profit airport authorities that currently operate them or to for-profit corporations. Such sales could make investors, airlines, travelers, and taxpayers all better off.
Rather than regulating privately owned airports, government policy should focus on increasing competition in the sector. For example, if the City of Toronto approves the extension of the runway at the Billy Bishop Toronto City Island Airport and allows jets of all types that meet noise requirements to operate there, that would benefit travelers by enhancing competition locally and beyond.
Ottawa should treat airports and airlines like regular businesses, remove sector-specific taxes and ownership and operation regulations, and let our Canadian aviation companies compete on the world stage.
As the second most geographically vast nation in the world and with a small, open economy, Canada is dependent on air transportation like almost no other country.
Yet Canada's air transportation system is heavily taxed (Cherniavsky and Dachis 2007) and uncompetitive compared with other modes of transportation and with air transportation systems in other countries. In a World Economic Forum report (Blanke and Chiesa 2013), Canada ranked behind only the Dominican Republic, Senegal, and the famously aviation-taxing United Kingdom (1) for the weight of its fees and airport charges on air transport.
The high cost of air travel is leading many Canadian travellers to fly instead through the United States--the Canadian Airports Council estimates that, in 2011, Canadians took 4.8 million trips through a US airport, as opposed to using a domestic airport (Canada 2013b). Many other Canadians choose to use other modes of travel or to not travel at all. These higher costs are passed on to Canadian businesses and consumers, potentially reduce tourism in favour of lower-cost destinations, and harm the Canadian economy. As trade increasingly takes the form of services that require people to travel (Schwanen 2014), Canadians may be losing international opportunities and choosing not to pursue domestic business that is too expensive to reach. More than a third of global international trade by value is carried by air, so the high cost of transporting it to Canada effectively acts as a punitive tariff that shuts Canadian businesses out of potential markets (Hummels and Schaur 2012). As well, the high cost of air travel in Canada also squanders the specific advantages afforded by the country's geographic location, as the most direct air routes between the Americas and many locations in Asia and Europe are over Canada.
THE NEED FOR AVIATION POLICY REFORM
Transport Canada can best meet its mandate of creating a policy framework for an efficient transportation system by reducing barriers to competition, lowering taxes that do not meet user-fee principles, and levelling the playing field in the aviation sector.
The federal government should loosen the regulatory burden on Canadian airlines--particularly Air Canada, the largest domestic airline--which increases the cost of doing business. In addition to removing policy impediments that are specific to Air Canada, Ottawa should also end its actions that protect that company specifically, such as providing pension-funding relief and intervening in its labour negotiations. Ottawa should also eliminate aviation fuel taxes and encourage greater competition among airlines by eliminating foreign ownership restrictions.
Further, since economic efficiency requires that the federal government pursue competitive neutrality, with no special taxes or other arrangements for particular sectors, it should remove the ground rent that airports pay and subject them instead to the corporate tax system that applies in the rest of the economy. I estimate that such a move, coupled with the sale of Ottawa's remaining leasing rights to and ownership of Canadian airports, could immediately increase federal government revenues by anywhere from $6 billion to $42 billion on a one-time basis. The auction of the federal government's airport assets could net even more if bidders were able to find new ways to increase the profitability of those assets.
Eliminating the federal lease of airports would especially benefit consumers. Because they are nonprofit corporations, airport authorities have been using Airport Improvement Fees that passengers pay, rather than equity investment, to provide some pre-financing of largely debt-fuelled expansion. Long-term investors seeking an equity stake, such as pension funds, in airports might be better suited than passengers to financing future long-term capital expenditures. As well, local competition among privately owned airports--particularly if enforced by the Competition Bureau through Australian-style airport data disclosure, rather than heavy-handed fee regulation--could be an effective way to deliver lower costs, better services, or both, to consumers. Local governments --Toronto, for example--could also enhance competition by approving requests for airport development and expansion.
If Canadian governments were to take steps, such as reducing fuel taxes and other burdens on airports and airlines, to improve the cost competitiveness of the Canadian aviation supply chain, it would set the stage for Canada's airlines to compete in a globally competitive arena and situate Canada as the northern crossroads for aviation.
A FRAMEWORK FOR CANADA'S AVIATION POLICY
The federal government, through Transport Canada, is the main actor in setting Canada's aviation policy. Thus, for Canada to have a globally competitive aviation sector that provides the most efficient service to Canadians and visitors, the federal government must take the lead on policy reforms. It could start by examining Transport Canada's mandate--as part of the review of the Canada Transportation Act due in 2015--and how best to achieve it.
The main strategic goal of Transport Canada's national transportation policy is a declaration that "... a competitive, economic and efficient national transportation system that meets the highest practicable safety and security standards ... is essential to serve the needs of its users, advance the well-being of Canadians and enable competitiveness and economic growth in both urban and rural areas throughout Canada." (2) Such a lens of analysis is useful for policy areas such as travel visas, how the aviation sector enables trade, security, regional development, and much more. Previous studies have highlighted key recommendations in those areas, such as finalizing international Air Transport Agreements, (3) reducing the visa requirements for connecting international travellers, and simplifying and reducing the cost of tourist visas (Gill and Raynor 2013). In particular, as policy priorities, the federal government should expand the Transit without Visa program to citizens of more countries and more airlines, and introduce an Electronic Travel Authorization (ETA) system, as Australia already has done, to replace its manual visa process. (4)
Despite the urgent need for such reforms, however, the focus of this Commentary is on whether the federal government's policies with respect to airlines and airports are encouraging economic efficiency and improving the ability of Canadian airports and airlines to compete internationally. To that end, I focus on ownership and operating costs, fuel costs, and airport charges, which account for 60 percent of the difference in costs for air passengers in Canada and the United States (Gill 2012).
THE NATURE OF COMPETITION IN AVIATION
Airlines are network economies, with hubs and spokes. Building a bigger hub can make the overall network more efficient, but creating only a single large hub could lead to less competition...