When Cash Cows Fly

Canada has embarked on a path of unprecedented global openness in trade and commerce. News of free trade talks has become common place and Canada is increasingly diversifying its trading partners in favour of the emerging economies of the 21st century. However, Canada’s air transport policy ensures the door to the world is not yet fully open and the personal connections that underpin global commerce are held up by restrictions and unnecessary expense. As well, two decades of incomplete reforms endanger Canada’s soft power agenda and hit Canadians in the pocketbook. Until Canada addresses major issues in its aviation industry consensus on Canada’s true commitment to globalization will remain elusive.

A Closed Canada?

Although Canadian airports like YVR, YYZ or YYC are clean, well managed, and aesthetically pleasing a simple trip through most of them is embarrassingly expensive. Behind this gouge is the fact that the Federal Government uses airports as a cash cow instead of viewing them as purely public goods and vital pieces of trade infrastructure. Last year alone, Canada lost over 5 million passengers to dilapidated government funded airports in the United States due to the exorbitant airport fees charged to travelers using Canadian airports. According to the Canadian Airports Council (CAC) Canada ranks 106th in the world in terms of price competitiveness for air travel.

Canadian Airport Structure

The current funding and management structure of Canadian airports was the result of a piecemeal spinoff program implemented to deflate a bloated federal government in the early 1990s.  The National Airports Policy (NAP) involves major airports across Canada being run by local not-for-profit boards, with services provided by corporations like NAV Canada and Crowns like CATSA. The Federal Government retains overall responsibility for regulation in the industry.  Individual airport authorities lease the property from the Federal Government but must raise money themselves to pay for expansion and improvements, with the exception of sparse direct funding programs like the Economic Action Plan. In effect, airport authorities are tenants of facilities they must build and pay for themselves. On top of high fees paid to the Federal Government most major airports must also give local municipalities annual lump sum payments in lieu of taxes.

The Cash Cow

On top of the rental fees built into ticket prices, passengers must foot the bill for airport security and navigation services. As well, excise taxes, $0.04 per litre, on aviation fuel and GST/PST/HST on ticket sales help to keep prices high. TheAir Travelers Security Charge ranges between $7.12-12.71 per passenger, per flight while navigation fees add between $7.50-20.00 to the cost of a ticket.  Overall, in 2011 the Federal Government collected $1.1 billion for navigation services, nearly $300 million in airport rent (with nearly half coming from Toronto Pearson), and $450 million in security charges and $125 million in excise taxes on jet fuel. Maclean’s Magazine cited a statistic that it costs US$20,885 to land an Airbus A330 at Toronto Pearson, while costing only US$12,367 to land the same aircraft at Tokyo’s Narita International Airport and US$13,114 at Frankfurt International Airport. Toronto Pearson holds the dubious honour of being the most expensive airport for landing airliners.

Federal policy has caused Canada to hemorrhage millions of passengers to the United States for years.  Long treks to Bellingham, Buffalo, Burlington, and Minot have become commonplace and the cost savings, particularly for families, make it worth the extra trip. Savings can be well over $1,000 for a family of four. Airports in these American centres are expanding, while the Canadians’ dollars support thriving airline service industries in these cities.  According to the CAC the 5 million passengers that chose U.S. airports over local Canadian airports cost the economy $512 million and snuffed out 3,465 jobs with indirect losses increasing to $1.11 billion and killing 8,890 jobs.

What Will Help?

In order for Canada to realize its global potential policymakers must address the easier fixes in the short-term and then look at solving the larger structural issues with the industry.  Slashing fuel excise taxes, rent and security charges will help relieve the pressure immediately.  With respect to the issue of navigation and security, passing on the cost of public goods to the general public is fundamentally fair because they benefit citizens as a whole. Furthermore reducing Federal rent collection will likely relieve pressure on air travelers and help prices drop. Finally, creative solutions involving sub-national governments including giving airport authorities the power to issue tax free bonds or local tax breaks may be viable.

In the longer term policymakers must confront the major issue of competition in the airline industry.  This includes moving towards a truer concept of open skies, including the opening of cabotage (internal transport) rights to foreign airlines and a move away from protecting Canadian companies.  Shielding airlines based in politically sensitive cities only works to hurt consumers and undermine Canada’s global openness in the long run. Overall, there is not much room for optimism for reform in this area. Given the protectionism globally for airlines, reformers can be said to be stuck in a “Mexican Standoff” of sorts with first movers risking much to gain little. What is known, however, is that consumers will stand to greatly benefit if reform can be coordinated like it was in the European Union.

Soft Power

Canada has embarked on a strategy of courting emerging economies for the 21st century and has been extremely active in negotiating Free Trade Agreements with many nations around the world, most recently starting talks with Japan. However, the real action in promoting international business connections happens on a face to face level. All the glitzy, high-level photo ops mean little if the real movers and shakers of international commerce face restrictions on building connections to Canada. Completing the reform of Canada’s airline industry started two decades ago can help Canada realize its global potential and become a hub for international commerce in the 21st century. Canada’s soft power lies in exposing as many people as possible to its open society and healthy business environment; the more foreigners with a connection to Canada, whether through repeated visits, education, or investment will increase the chances of Canada truly becoming a commercial heavyweight and a power player in this new century.