The Real Air Rage

The Real Air Rage

It's been five years since U.S. low-cost airline JetBlue Airways applied for, and received, a licence to fly to Canadian cities like Toronto, Montreal and Vancouver. And yet there has yet to be a single JetBlue flight venturing north of the border. Why? "It's hard to stimulate travel with low fares while operating in a high-cost environment," says airline spokesperson Allison Steinberg.

JetBlue isn't the only airline that says flying in Canada is too expensive. Over the years, a host of foreign airlines, from Hong Kong's Cathay Pacific and Israel's El Al to Virgin America and Frontier Airlines, have either shelved expansion plans or stopped flying to Canada altogether because of a panoply of aviation taxes and fees in this country, which have contributed to airfares that are, on average, up to $120 more expensive than in the United States, according to some estimates. When coupled with a soaring loonie, the result is an increasingly uncompetitive industry. "There has been a significant increase in airfares," says Fred Lazar, an associate professor of economics at York University. "Now fuel prices have driven that somewhat, but so too have operating costs at airports." For instance, last year it cost US$20,885 to land an Airbus A330 at Toronto's Pearson International Airport, among the world's most expensive airports, according to data provided by the International Air Transport Association (IATA). By contrast, it cost just US$12,367 to land the same plane at Tokyo's Narita International Airport and US$13,114 at Frankfurt International Airport.

It's a reality Canada's domestic airlines and their passengers know all too well. Last week, hundreds of Canadians faced the prospect of a major strike at AIR CANADA, potentially throwing their March break travel plans into chaos. Big and bloated, Air Canada has been struggling to convince skeptical employees to make labour concessions in a bid to make the airline more cost-competitive with foreign rivals. With a potential strike by mechanics and a lockout of pilots looming, Labour Minister Lisa Raitt stepped in this week with legislation barring strikes or lockouts, citing the potential impact of a work stoppage on the country's fragile economy.

The irony is that the government's own policies are partly to blame for Air Canada's predicament. CEO Calin Rovinescu has said the airline could save as much as $1 billion annually if it were able to pick up and move to the United States, where the taxes and fees imposed on the industry are far lower. That's about the same amount Air Canada sought in labour concessions from employees during its 2003 restructuring. Ottawa is treating the industry "like a cash cow, instead of a powerful draught horse," warned IATA chief executive Tony Tyler during a recent speech in Montreal.

The impact of our pricey skies is most easily seen south of the border. As many as ?ve million Canadians (15 per cent of the population) drive to U.S. airports to take advantage of lower airfares in cities like Buffalo, N.Y., Burlington, Vt., or Bellingham, Wash. A recent survey by the Hotel Association of Canada found that 30 per cent of Canadians say they plan to make the trek to the U.S. to fly next year. "That's embarrassing," says George Petsikas, the president of the National Airlines Council of Canada, which represents Air Canada, WestJet, Transat and regional carrier Jazz. "You would think we were a Third World country when it comes to aviation, when in fact it's the exact opposite. But it's all pointing to the fact that the system is too expensive. People are voting with their feet."

So why, exactly, is it so expensive to fly in Canada? Petsikas refers to it as "a club sandwich of taxes, fees and surcharges." And only some of them are spelled out when you buy your ticket (though are now being included in advertised prices due to new regulatory rules). By far the biggest "tax" on the industry is Ottawa's current scheme of charging tens or hundreds of millions a year in ground rent to airports--the legacy of a federal government decision in the 1990s to spin off the infrastructure to non-profit airport authorities. The country's eight largest airports paid a total of $241 million to Ottawa in 2010, with nearly 50 per cent of that coming from Toronto's Pearson. By contrast, airports in the U.S. remain largely government owned and operated, and therefore don't make similar lease payments. Ottawa maintains that the current scheme isn't onerous, accounting for less than one per cent of the cost of an average ticket. "Airport rent represents a fair return to taxpayers for the economic opportunity provided to airport authorities to manage airport operations," says Maryse Durette, a spokesperson for Transport Canada.

But that's just one layer of the sandwich. A 2008 report by InterVISTAS Consulting Group found that, unlike in the U.S., Canadian airports also pay a significant amount of money to municipalities in lieu of property taxes (because they are on federal lands) and are not allowed to issue bonds that are tax-free to pay for expansion projects or facility upgrades. Canadian passengers must also pay for the cost of providing airport security (fees were raised, depending on the route, by between $2.58 to $8.91 per passenger a few years ago to pay for new body scanners) and for air navigation services. In the U.S., by contrast, the government foots at least part of the bill for both.

Add it up, and government policies account for anywhere from 16 per cent to 40 per cent of domestic airfares charged by Air Canada and WestJet, notes a report written last year by York University's Lazar. Another study, by the World Economic Forum, ranked Canada 125th out of 139 countries when it comes to competitive ticket taxes and airport charges.

But convincing Ottawa to give up roughly $1 billion in annual tax revenue won't be easy in an age of budget deficits. As a result, the industry is trying to convince Ottawa of the potential for economic growth if airport rents, security fees and taxes on jet fuel are scrapped. Lazar's report estimated that the industry could see an increase of as many as 2.9 million passengers annually and boost economic output by as much as $3.5 billion.

There are also calls to borrow a page from places like Dubai, which views its airline industry as a key pillar of the economy and has tried to establish itself as a hub for global air traffic. "Canada is well-suited geographically to be that type of international hub," says Daniel-Robert Gooch, the president of the Canadian Airports Council, citing the country's proximity to the huge U.S. market and connections to Asia and Europe.

The complaints seem to be gaining traction in some parts of the country. In B.C., Premier Christy Clark's government recently scrapped its carbon tax on jet fuel for international flights, collectively saving airlines flying through Vancouver between $12 million and $16 million a year. The move, designed to make B.C. more competitive with airports south of the border, is especially significant given that drivers in Vancouver are paying a motor fuel tax of 23.5 cents per litre on top of the B.C. carbon tax, which will rise to 6.67 cents a litre on July 1. "Carriers in other countries have choices in where they fly," Gooch says. "And whether they come to Canada is dependent on whether they think it makes sense for them financially." In the meantime, air travellers will just have to dig a little deeper.

See alsoAIR TRANSPORT INDUSTRY.

Maclean's March 26. 2012