Enerjet News

CTA Review

Date: February 26, 2016

Enerjet has reviewed the Canada Transportation Act Review published on February 25, 2016, and we appreciate the considerable effort of David Emerson and the other contributors to this comprehensive report. With respect to those portions of the Emerson Report that deal with passenger air service, we offer the following comments:

The Emerson Report notes that passenger air service in Canada is characterized by high costs and high airfares and concludes these factors contribute to limiting passenger travel within Canada and between Canada and other countries. It also suggests that lack of stimulation and competition in this sector contributes to the high cost of air travel by blocking the economies of scale that would otherwise come with a higher volume of air traffic. The Emerson Report concludes these high costs are ultimately a burden on the Canadian consumer. We believe this particular conclusion accurately documents and validates an opinion fomenting among Canadians for years: Canadians pay too much for air travel, and their options are too limited.

Mentioned briefly in the Emerson Report are the harmful indirect costs to Canadians of high-priced air travel. We think there was potential for the Emerson Report to be more vocal on this topic. Agencies such as the Air Transportation Action Group (ATAG) have published statistics that make evident the billions in GDP, the millions in tax benefits and the thousands of jobs all of which are constrained by the absence of competitive costs and airfares1. In the presence of more competitive passenger air travel, more Canadians would have jobs, more local economies would grow faster, and the Federal and Provincial Governments would collect more tax revenues on the higher GDP inputs.

Up to now, solutions to our costly and restrictive situation have been obscured by a widespread belief that Canada should forever be resigned to expensive air travel due primarily to our expansive geography and widely dispersed population. This belief has been propagated by the beneficiaries of high fares - the agencies, companies and organizations who pick Canadian Travelers' pocket books and then simultaneously deny there is a ready solution. We note that in 2015 the Globe and Mail reported that Canada's two major airlines were ranked #1 and #2 for the total fees charged to passengers per distance travelled, when measured against all other airlines in the world2. This is in keeping with the Emerson Report's observations that the security fees charged to travelers exceeds the cost of provisioning the security, airport improvement fees (AIF's) are spiraling upward, and remarkably high airport rents are commonplace - all of which gets passed through to consumers in the form of airfares. The Emerson Report ‘outs' these solution deniers that heretofore defended the status quo, by proposing straightforward recommendations to improve competitiveness and reduce costs.

The most prominent aviation recommendation of the Emerson Report is to raise the limit on foreign ownership from 25% to 49%. While this is laudable, we believe it could go farther. Both of Canada's major airlines have already availed themselves of sophisticated financial instruments as work-arounds to the existing 25% limit, as noted in the Emerson Report, so a move to 49% would only just allow emerging airlines a way to catch up. Other smaller Commonwealth countries such as Australia and New Zealand allow up to 100% foreign ownership without notable problems. We believe a direct result of this is evident in Australia, a country similar in size, population and economy to Canada where air travel is 34% higher per capita than in Canada.3 We are firm in our belief that the dominant position of Air Canada and WestJet as investment grade transportation sector equities in the relatively small Canadian capital market necessitates the use of foreign capital as a balancing factor to attract the best-practices of low-cost airlines to Canada support competition and thereby improve competition for airfares.

The Emerson Report states:

"The OECD Service Trade Restrictiveness Index ranks Canada in the bottom third of major economies as "less trade friendly" for air transport...However, there is room to increase competitiveness, as evidenced by the high load factors and the record profits of the two largest carriers, as well as the fact that Canada is the only major air market without an ultra-low-cost carrier. Such carriers have been highly successful in every other major aviation market, as they generate significant traffic, offer the best average returns on investment, and provide increased connectivity and choice, at lower prices."4

In the Appendix, Emerson also states:

"The Review has heard that Canada's small investment market makes it difficult, if not impossible, for small operators to grow, and for new competitors to enter the market. The Canadian market is dominated by the two largest carriers that together control more than 80 percent of the domestic market (see Figure 6, below). During consultations, more than one stakeholder referred to Canada as "the land that ultra-low cost carriers have forgot," and a lack of competition is consistently cited among the reasons Canadians generally face higher airfares."5

Other Emerson Report recommendations for improving the competitiveness in passenger air travel are right-minded also, and we encourage the Government of Canada to give immediate consideration to them all.

 


 

  1. ATAG report "The Economic and Social Benefits of Air Transport 2008"
  2. The Globe and Mail "Keep these 15 airline stocks on your radar" March 9 2015
  3. World Bank "Air Transport, passengers carried 2011-2015"
  4. Volume 1, page 195
  5. Volume 2, page 155