The real air rage is airfares - Macleans.ca
 

The real air rage is airfares

How taxes and fees are pushing up prices, scaring off foreign airlines, and making Canada a miserable place to fly


 
The real air rage is airfares

Andrew Vaughan/CP

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 five 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.


 

The real air rage is airfares

  1. “But convincing Ottawa to give up roughly $1 billion in annual tax revenue won’t be easy in an age of budget deficits”- Putting the Canadian industry on an equal footing with U.S. and other foreign competitors would probably actually increase revenue, but instead of coming from the lease of vacant land it would come from income taxes paid by people who are employed, plus the spin-offs of that employment. It would also benefit the Canadian consumer by enhancing competition when airlines like JetBlue enter the market. But that would require the “vision” thing that the Canadian government lacks.
    Excellent article, by the way.

  2. I don’t necessarily disagree with the article or Rawind’s point that increased traffic will lead to cheaper fares and therefore more flights and economic activity – but I can’t help notice that some of the reasons cited for Canada’s higher fees are counterbalanced in the US by government subsidy. Canadian airports pay rent, US airports are (mostly) government owned. Canadian passengers pay for security, American government covers part of the cost. One could make the argument that everyone in the US helps subsidize air travel costs that are paid entirely by the passenger here. The benefits may outweigh the costs and obviously people are voting with their feet (although 30% of Canadians sounds high – maybe 30% of Canadian travellers?), but, as they say, I’m just sayin.’

    On a related note – if airports are paying rent, why do they also have to pay the municipalities grants in lieu of property taxes as well? Wouldn’t that be the property owner’s responsibility, i.e. the feds?

    • One of the facts that we, as humans, don’t like is that there are no free lunches. Whether we pay for something directly, through taxes, or some combination arranged into the wonderful club sandwich metaphor above, we’re all going to pay for it somehow.

      • I hate to pay for a lunch I don’t want.

  3. We are getting shafted royally out here in la la land. No wonder so many of our relatives, friends and acquaintances are flying out of Bellingham or SeaTac at Seattle. Driving there is a treat at $1.42/litre what with transit taxes, carbon taxes and so on piled on.

  4. Prime Minister Harper
     
    If your government is serious in its desire to ensure the continuation of safe reliable service from Air Canada you must rescind the Air Canada Public Participation Act and allow Air Canada to compete on a level playing field with competitors on both the domestic and  international markets.
     
    Your government should also consider revising downward the crippling fees extracted from companies providing aviation services in Canada. As you know a large percentage of the Canadian population live within a day’s drive of the American border and therefore have access to American airports and airlines that are not subject to the excessive fees that are levied by the Federal Government. Adopting a more reasonable fee structure would be a benefit to all Canadian Airlines and their employees, not just Air Canada.
     
    If the Government of Canada were to take positive action to address the issues mentioned above, Air Canada and its employees would be better positioned to succeed in the collective bargaining process and more easily achieve a mutually acceptable agreement. This would negate the need to enact draconian legislation as your government has proposed in Bill C33.
     
    I am a retired Air Canada Captain with 42 tears of experience. (9 years RCAF and 33 Years Air Canada)  I have been an active member, volunteer and financial supporter of the CPC since the merger of the Canadian Alliance and PC’s. My association with Conservative organizations has been on going since the 1979 Federal Election that resulted in a minority PC government.
     
    My association with the CPC is at risk of being terminated as a result of the inept management of almost all matters relating to commercial aviation on the part of your Government.
     
    It is my hope that you will look for solutions that are more in keeping with those of a genuine Conservative.
     
    Sincerely……..David Topping (Air Canada Captain retired)
     

  5. Ground rent.  Money to municipalities in lieu of property taxes.  Security.  Fuel taxes.

    To me, these all sound like legitimate costs.  It sounds like the problem isn’t that air travel up here is too expensive.  What’s actually happening is that the Americans (and most of the rest of the world it seems) are subsidizing air travelers.   Why???   Air travel is a huge contributor to greenhouse gases.

    Let’s make the air industry pay its fair share of costs – just like everyone else.

  6. Canadian flights are already competitive to international destinations. Flying to Europe from Toronto is as cheap as from any American airport. The problem is transborder flights from Canada to the U.S. On those flights, passengers pay both higher Canadian international fees and taxes plus high American international fees and taxes, including esoteric fees like agricultural inspection. Flying from Buffalo or Bellingham, you just pay the domestic American fees and taxes. Getting rid of ground rent and fuel taxes won’t have an appreciable effect on making Pearson as cheap as Buffalo for a flight to Florida.

  7. I might add that the people who drive to Buffalo or Plattsburgh are the least profitable passengers for the airlines. It’s not like they’re making any money on people who are looking for the lowest possible fare. The business class and full-fare economy passengers that actually make the airlines money aren’t going to drive two hours to an American airport. The problem is less serious for the airlines than might appear at first glance. For the airports, it’s more of a problem since everybody pays the same fees.

    • I totally agree, flying from Buffalo to a US airport is a domestic flight and will always have less fees and taxes than a flight from Toronto to the US. As long as Canada is a different country from The States, this will always be the case. I truly believe the Canadian airlines like to talk out of both sides of their mouth. To Canadian citizens they want to blame Ottawa, even though facts show ground fees are less than 1% of a ticket price; on the other hand these same carriers like the fact that the high operating cost in Canada keeps the low cost US competition out. We all need to be very cautious what we wish for, if Jetblue and Soutwest we’re able to make the financial picture work in Toronto, they would totally destroy Air Canada and Westjet. Then we would have no true Canadian scheduled carrier left. Face it, a Southwest with their low cost and very large fleet and routemap in the US would render the high cost carriers in Canada obsolete as competitive companies. Sometimes high fees have a good side effect… Canadian jobs!!!

  8. Don’t know about now but at one time, only Air India had more employees in the world per plane than did Air Canada. We are now flying out of Detroit!

  9. Regardless of what is causing the Canadian vs American price discrepancy, the recession has forced Canadians to look for discounted air travel rather than the convenience of a local flight. Prices continue to increase on everything and few of us have managed  to get wage increases at all, let alone increases that keep pace with our increased cost of living. With a shrinking disposable income…airline and national loyalty have become casualties. This trend will continue to be the case, as long as middle class Canadians continue to lose financial ground on a daily basis. We are heading back to a time when air travel will be the domain of only  the very rich. In the interim, while we can continue to afford the luxury of air travel, my husband and I will continue flying out of the US rather than Canada.

  10. I really hate paying to be poked, prodded, and pilliaried by some perverse prick, who in another life, would be seen as a molester, particularly when none (zero, nada, zilch) of the terrorists were male or female over the age of 50, or children, or non muslims, etc. etc.  Start profiling now.  Do security properly or don’t do it at all.

    At a minimum, train the molesters not to sport a leering grin when they are prodding their hapless victims. Even my urologist, who checks for cancer in unmentionable places, is more discrete and seems to enjoy it less.

  11. I fly from the US because it is cheaper as it is subsidized by the US government. This is the same outfit that is Trillions of dollars in debt. But, until the light goes on in the US, I’ll take advantage of US taxpayer subsidized flights.

  12. I am planing to fly from USA from this year. Some time the difference for international flights can be up to $500.00 dollars. 5 millions Canadians chose to fly from USA, Its time for change in Canadian Aviation Industry. Good article..

  13. It is because we have ‘free’ healthcare ))