Competition Bureau recommends allowing up to 100% foreign ownership of ‘domestic-only Canadian airlines’

John Gradek, Faculty Lecturer at McGill University, Aviation Management, joins BNN Bloomberg to discuss the Competition Bureau's airline market report.

Canada should roll back restrictions on foreign ownership for domestic airlines, a new report from the Competition Bureau recommends.

Released Thursday, the report on the air travel industry advocates for a “leverage (of) international capital and experience to strengthen domestic competition,” including through raised ownership caps for investors outside Canada.

The bureau recommends raising the cap for single-investor foreign ownership to 49 per cent for airlines in general, up from 25 per cent, and to 100 per cent for “domestic-only Canadian airlines,” a move that would involve creating a “new class of airline” that it says has proven successful in Australia’s air travel industry.

“With the right policy changes, governments can create the conditions for new airlines to grow and compete – and give Canadians access to more affordable, reliable options for flights,” competition commissioner Matthew Boswell said in a release.

Aviation expert John Gradek says the issues identified in the report aren’t “earth-shatteringly new,” and while the recommendations put forward are interesting, the question becomes whether there is political momentum to pursue them.

“I’m not sure whether the Canadian government or the Canadian population really does have the appetite,” he told BNN Bloomberg in an interview Thursday.

The case for competition

A competitive market for air travel would deliver “major benefits” for Canadians, the bureau says, from lower prices to better customer experience.

“When just one new competitor flies on a route between two cities, airfares go down by nine per cent on average,” the report reads.

As it stands, a majority of domestic passenger travel through Canada’s major airports, between 56 and 78 per cent, flows through just two airlines: Air Canada and WestJet. Over time, those two have polarized their market share to the east and west sides of the country, respectively, meaning that even competition between the two has declined, the report says

Part of the problem is a restrictive environment for international competitors, the bureau says, both in terms of limits on non-Canadian airlines running domestic flights, and on foreign business investment, which it says could be a critical boon to smaller, new competitors.

“Reconsidering these restrictions would unlock new capital sources for Canadian airlines. This in turn will stimulate greater competition and innovation in the domestic market,” the report reads.

In a statement released Thursday, the Canadian Anti-Monopoly Project (CAMP) wrote that it welcomed the report’s assessment.

“CAMP endorses the bureau’s clear acknowledgement that Canada’s airline market is not delivering for Canadians,” the think tank’s executive director, Keldon Bester, said in a release.

“The cozy duopoly that divides the country rather than competes for it needs immediate and meaningful government action.”

But Gradek notes that lacking competition is especially pronounced in smaller markets, which may prove less enticing to foreign airlines than high-traffic routes between major cities.

“If you happen to live up in Prince George, British Columbia, or North Bay (Ont.), or Yarmouth, Nova Scotia, you know, you’re watching on the sidelines when it comes to pricing behaviour,” he told BNN Bloomberg.

“[Foreign carriers] will be on those routes where they can make the most money … Is North Bay going to be looking for Singapore Airlines, (or would) Stephenville, Newfoundland, be looking to see British Airways flying there? I doubt it.”

The Canadian Airports Council (CAC), which represents more than 100 airports nationwide, argued in a Thursday statement that opening up domestic routes to foreign airlines would not solve Canada’s competition problem.

“A foreign carrier is not going to service our smallest towns and thin volume routes,” said CAC president Monette Pasher in a release.

“We need to package the right policy solution for the specific problem at hand.”

Failure to launch

The bureau notes that some signs of growing competition have emerged. Smaller airlines Porter and Flair are each approaching 10 per cent of total domestic passenger share, though the report says those gains “remain fragile,” and have come with considerable struggle in the marketplace.

“New airlines face daunting challenges both entering the market and growing into competitors that last long term,” the report reads. “Some barriers for these entrants just naturally occur. But others could be addressed through policy changes.”

On the industry level, the bureau recommends policy aimed at lowering costs from “user fees,” or portions of ticket revenue of up to 30 per cent that pay for infrastructure like security, navigation and airport terminals.

By reducing that cost burden, discount airlines could attract a customer base with lower rates, but the report also notes that an alternative funding model like increased government subsidies would only shift the burden elsewhere.

Following the release of the report, WestJet expressed support for reducing user fees, writing in a statement Thursday that Canada’s “uniquely high” costs are “undermining affordability and deterring competition in Canadian air travel.”

The airline said it “welcomes a holistic review of the user-pay model,” including an immediate freeze on federal air-travel fees while opportunities to reduce them are explored.

Aside from financial concerns, logistical resources like takeoff slots, gate access and check-in counters may be unfairly allocated to existing airlines, creating another barrier for entry to the market.

“Levelling the playing field to provide equitable access would help new entrants take off,” the bureau writes.

In a statement Thursday, Flair Airlines commended the report, identifying the allocation of takeoff and landing slots, airport fees and “exclusive commercial arrangements” that benefit older airlines as key barriers to new entrants to the market.

“These long-standing challenges must be addressed to open the skies to true competition,” the statement reads.

Opportunities also exist in smaller secondary airports, which the report says could be a better foothold for new market entrants if allowed to service international flights, instead of the current system that limits them to one major airport per region.

Porter Airlines said it “saw value” in the recommendation in a statement to CTVNews.ca Thursday, also expressing support for raising the single-investor foreign ownership cap, though it noted that “additional changes to foreign ownership and market access require much greater scrutiny,” and argued against unilaterally granting foreign airlines access to domestic routes.

“This should not be considered without reciprocal access to other countries for Canadian airlines, but this, again, benefits the largest players with greater resources and brand recognition,” the statement reads.

CTV News has reached out to Air Canada for comment on the report’s findings and recommendations but has not received a response.

Headwinds for northern communities

The bureau notes that some of the communities hardest hit by air travel challenges are in Canada’s North, where for many, flights are “a vital lifeline, not a luxury.”

Comparatively small demand for routes to remote communities mean that investment is lacking and costs are high, despite the necessity for air travel to access health care, employment and social connections. Environmental concerns like inclement weather only complicate matters further.

Among the report’s recommendations is to establish a national working group on remote air transportation to improve quality and accessibility alike. Travel policy needs to be more tailored to the North, they say, with special focus on eliminating regulatory costs for northern carriers, upgrading runways to accommodate more kinds of aircraft and providing communal facilities that more than one airline can use.

“Governments play a vital role in ensuring northern and remote communities have reliable and affordable air services,” it reads.