Landing the right reform for air travel

Air travel has long been a growth sector in most economies. In Canada, however, this sector is stifled due to poor public policy with regard to airports and airlines. This has led to repeated complaints about a situation which encourages Canadians to cross the border to fly out of smaller American airports.

Canadians cross the border because of the price difference due to numerous taxes, fees, and airport rents, which are related to the particular way airports are operated in Canada.

In the 1990s, the federal government transferred the management of airports to private non-profits through long-term leases. Saddled with rents to pay to the federal government, these airport authorities must spend money to maintain and improve airports that they will never own. The costs are passed on to Canadians indirectly through higher landing fees, which increase the base fares they pay.

This management structure is so burdensome that when combined with the numerous taxes imposed by the federal government, Canada ranks 130th out of 138 countries with regard to ticket taxes and charges imposed on airports. This situation explains the position of the Canadian Senate and the recent Emerson report which argue that in order to improve Canadian competitiveness, it is necessary to privatize the country’s airports and reduce fees.

As beneficial as this step would be, however, there are also two other major impediments to a thriving air travel sector in Canada.

The first impediment is the restriction on foreign ownership. At present, foreign ownership of Canadian airlines is limited to 25% of a company’s shares. This limits the ability of firms to raise capital to make the investments required to improve the quality of their services as well as their productivity. It also limits competition, since foreign companies cannot easily enter the Canadian market to compete with incumbents.

A recent example is that of low-cost Jetlines, which cannot enter the Canadian market because its financial backers are American and European. At present, it is left hanging in the hope that the federal government will raise the foreign ownership ceiling.

The second impediment is the restriction on “cabotage,” which is the ability of foreign airlines to fly between Canadian cities. At present, only Canadian airlines can service routes between two Canadian cities. This is a restriction on competition, which means higher prices for Canadians. It also limits the ability to ferry passengers between cities in order to boost international traffic, as it is impossible for a foreign airline to start in Montreal, pick up some additional passengers in Toronto, and then head to its final destination. The liberalisation of cabotage elsewhere, especially within the European Union, has led to important fare reductions for passengers.

Studies of the effects of air travel liberalisation with regard to ownership and cabotage suggest considerable gains for consumers in the form of lower fares. Even modest reforms can lead to substantial gains in air traffic.

The evidence being pretty clear, the federal government should consider a comprehensive reform that would encompass a change to the management of airports, and the easing of foreign ownership and cabotage restrictions.

Alexandre Moreau est analyste en politiques publiques à l'Institut économique de Montréal. Il signe ce texte à titre personnel.