Lower taxes, fees could bring 2 million air travellers back to Canada: report

Canada's airline industry simply can't compete with a U.S. industry that offers flights that are on average 30 per cent cheaper than those originating here -- and Ottawa needs to level the playing field, according to a new report out Wednesday.

The report from the Conference Board of Canada estimates that five million Canadians cross the border each year to catch flights out of U.S. airports.

There's no one single reason why airfare is so much cheaper in the U.S., rather it's what the Conference Board calls a "perfect storm" of factors, including higher industry wages in Canada, higher taxes and higher air navigation fees for Canadian carriers.

“A large number of relatively small factors all contribute to the gap, with the result being a loss in passengers for Canadian airports, along with their business revenues and related government tax receipts,” states the report, titled Driven Away: Why More Canadians are Choosing Cross Border Airports.

Some factors are beyond the control of Canadian officials -- such as the existence of more low-cost carriers in the U.S., which increases competition and drives prices down, and the extra fees American airports charge for flights that originate outside the U.S., which don't apply to domestic flights.

Still, David Stewart-Patterson, the Conference Board's vice-president of public policy, said Ottawa has the power to significantly reduce airfare costs in Canada, which could bring an estimated two million travellers back to Canadian airports annually.

"The reality is there is about 40 per cent of the difference in price that we could control within Canada, that we could deal with. Some of that flows through how the federal government charges rent to the airport and how that flows into things like airport improvement fees," Stewart-Patterson told CTV News Channel.

But if the fees are cut, there needs to be a guarantee that the savings will be passed along to airlines, and then to passengers, he said.

The report acknowledges such changes would likely result in an initial reduction in tax-generated revenue to the federal government. But Stewart-Patterson said the subsequent spike in travellers choosing to fly on Canadian carriers would more than compensate for the difference.

And increased passengers and flight traffic would actually improve Canada's system overall, the report said.

"Changes in Canadian policies could bring 2 million or more passengers per year back to Canadian airports. As national and international hubs, large Canadian airports rely on traffic density in order to achieve the benefits of network economies. Lost traffic means both higher travel costs and reduced connectivity for all Canadians," the report stated.

Stewart-Patterson estimated that the return of two million travellers to Canada would result in a 6 to 7 per cent increase in volume at each of Canada's three largest airports: Vancouver International Airport, Pearson International Airport in Toronto, and Montreal-Trudeau International Airport.

One key difference between fare prices in the two countries is that in Canada, airports and navigational systems are mostly paid for by users -- and have recently been upgraded, the report pointed out.

Meanwhile in the U.S., user fees do not cover those costs. However, the report suggests U.S. airport infrastructure will require a major upgrade in the near future, and fees will likely have to increase as a result.

In addition to cutting taxes and fees, the Conference Board of Canada report recommends Ottawa take the following action to level the playing field between Canadian and U.S. airlines:

Change the way in which taxes and fees are generated. This includes revisiting the airport rent formula as well as the structure of the Air Travellers Security Charge. For example, the government could shift airport rents from a rising marginal share of revenue to a flat share of revenue, or even a fixed fee.

Gain a better understanding of the base cost advantage of U.S. air carriers. While some of the advantage may be a function of a larger and denser market, some of the advantage can be attributed to the policy environment and bankruptcy legislation.

Pursue opportunities to harmonize the treatment of air passengers with U.S. authorities. Much of the difference in after-tax fares stems from U.S. aviation policy. Canadian policy-makers should pursue all opportunities to minimize these disparities in the context of the Open Skies agreement and talks related to Canada–U.S. perimeter security.