Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 6 - Evidence, November 30, 2010

OTTAWA, Tuesday, November 30, 2010

The Standing Senate Committee on Transport and Communications met this day at 9:32 a.m. to continue its study on emerging issues related to the Canadian airline industry.

Senator Dennis Dawson (Chair) in the chair.


The Chair: Honourable Senators, I declare this meeting of the Standing Senate Committee on Transport and Communications in session. Thank you for being here today.

This morning, we continue our study of the Canadian air transport sector.


Appearing before us this morning on behalf of Atlantic Canada Airports Association are Keith Collins, President, Atlantic Canada Airports Association and CEO of St. John's International Airport; and David Innes, Treasurer, Atlantic Canada Airports Association and CEO of Fredericton International Airport.

Keith Collins, President, Atlantic Canada Airports Association: Thank you and good morning, senators. Thank you for the invitation to speak with you this morning regarding your timely study of emerging issues in the Canadian airline industry, in which airports play an integral role. Over the past few weeks, we have been following the testimony by our industry partners with great interest.

The Atlantic Canada Airports Association is made up of 14 airports that link our region to the rest of country and the world. Our goal is to have a strong, viable, successful and well-connected Atlantic Canada.

We would like to touch on a number of important things today, including: the significance of having a competitive aviation environment in Canada; why air access is such a critical factor to business growth in Atlantic Canada; the fiscal realities that exist in maintaining safe and secure airport infrastructure; and last but certainly not least, the pride we have in operating airports on behalf of our communities.

Our region is a unique one in Canada, made up of four provinces, one of which is an island, P.E.I., and one of which has a major island component, Newfoundland and Labrador. They rely heavily on air transportation to keep people, goods and the economy moving.

In Atlantic Canada, air transportation is even more vital to our economic agenda than other modes of transportation. This is because our region's rail system is limited and not present in all provinces, and our major cities are more than a 10-hour drive from other major Canadian centres. Our region has experienced remarkable economic growth and diversity in the past decade. That growth has been both facilitated and accelerated by the expansion of air service in the region.

While we have a relatively modest population base of 2.3 million people, we welcome over 5 million visitors to our region every year, which makes tourism an important sector in the economic generator in Atlantic Canada. Our 14 airports move more than 6.5 million passengers per year, which is three times the total population of the region. That numbers has grown by an average of 5 per cent annually since 2002.

We are not only moving passengers and cargo in and out of Atlantic Canada; we are enabling the growth of our local economies. Our airports together generate over $2.6 billion in economic activity every year, supporting just under 17,000 person years of employment and over $500 million in wages alone.

Our airports are the links to our towns and cities, but they have also become gateways to markets and destinations throughout the world for companies that do business in our provinces. Take, for example, St. John's, where I am from. With the expansion of the offshore oil and gas industry and the growth in tourism, our city has been booming. New companies are setting up business throughout our capital region to capitalize on the expanding opportunities. This growth has also impacted our airport.

We completed a terminal expansion in 2002 to provide the capacity to accommodate 900,000 passengers per year, which we expected, based on previous growth rates, would see us comfortably through 2010. However, we have grown at unprecedented levels in St. John's; this year we will handle more than 1.3 million passengers and traffic is still growing in step with the Newfoundland and Labrador economy.

The Fredericton region is another case in point, where my colleague is from. The new economy in Fredericton is driven by businesses that operate in a global marketplace. Good examples are the IT and consulting engineering firms that have grown out of that city's universities to become major employers. These businesses exist by offering a very specialized product to clients that are literally all over the world.

The point I am making from these examples is that today's business competes in a fast-paced global economy. Companies no longer have to be located in large national or international centres to compete, but they do require efficient access to regional, national and international destinations. The businesses that have located in our cities require ease of access throughout Canada to the U.S. and Europe to conduct their business.

Atlantic Canada's economic survival depends on the ability of our businesses to compete in this global marketplace. Our airports provide this fundamentally important access, as did rail and seaports in the past. In fact, we argue that airports have truly become the economic centre of the regions we serve and critical enablers of regional economic expansion.

Our airport organizations remain committed to providing that vital service, and it is because of this that we have grown. We have worked closely with air service providers to add new routes and airline capacity throughout our region.

When divestiture of airports began over a decade ago, there were many unknowns. Community operated airport authorities rose to the challenge and have operated the airports in a businesslike fashion. The growth we have seen in the past decade is a testament to what can be accomplished by making communities more accountable for their success. It is evident that the model of having airports operated by the communities has worked, in our opinion, as passenger traffic at airports in our region has grown by between 20 per cent to as high as 50 per cent over the past 10 years.

Our authorities operate airports as a business. We have diversified revenue streams by establishing business parks, growing retail services, developing cargo business and attracting new airlines. We have invested heavily in our airports' infrastructure to ensure that there is adequate capacity to accommodate both airline and passenger demands, to maintain operational integrity and to keep our economies moving forward.

While we agree that divestiture of airports was the right thing to do for both air service development and economic development, but, over a decade later, many challenges remain and we believe it is time to correct the model.

You have head of our many challenges from our Canadian airport partners and the airlines. We echo their thoughts that the most significant challenge facing Canada's aviation industry is that it has become uncompetitive. The price of flying in Canada is too high. No doubt, senators would have seen the article in the business section of The Globe and Mail over the weekend talking about that very topic.

A number of costs compound the final ticket price seen and paid for by the air traveller, including airport rent, fuel taxes, HST, the Air Travellers Security Charge, NAV CANADA fees, and the airport improvement fee. With the exception of the NAV CANADA and airport improvement fees, these costs are government fees and taxes which are ultimately borne by the consumer.

Our airport model in Canada is also in sharp contrast to the model implemented by the United States government. That government makes direct strategic investments in its airports and leverages these investments to facilitate economic growth. The U.S. government provides support for capital projects at both big and small airports and at a level that currently amounts to just over $2 per passenger per year. Similar strategic airport investments are also being made by other developed and developing countries that have recognized the economic leverage available at their airports.

However, in Canada, support for capital projects is limited to small community airports and is not available for our national airports. While being part of Canada's National Highway System is a cornerstone in obtaining federal funds, being part of the National Airport System excludes federal support.

The net result is that Canada is at a competitive disadvantage for air transportation in comparison to the rest of the world. In fact, a recent World Economic Forum study ranked Canada 114th out of 130 countries in terms of cost competitiveness in the travel and tourism sector. In our view, this is simply not acceptable for Canada.

This is resulting in leakage of traffic to airports located across the border. In Atlantic Canada, especially New Brunswick, our airports and airlines struggle with price competitiveness daily as they compete for business with Bangor, Maine. It is estimated that the Fredericton airport alone loses more than 25,000 passengers per year to Bangor. This represents a significant financial loss to the Canadian economy in terms of airport and airline revenue.

Twenty-six airports are deemed as part of our National Airport System as designated upon transfer. If an airport had over 200,000 annual passengers or was located in a capital city or in a strategic location, it was deemed to be nationally significant and therefore part of the National Airport System. There were seven such airports located in Atlantic Canada, four of which could be classified as small with fewer than 500,000 passengers annually. These small NAS airports have significant capital expenditures, and the revenue collected from traffic volumes is just not sufficient to sustain their capital-intensive assets.

It is fair to say that at time of transfer of the airports to the Canadian airport authorities, the cost of these obligations and the required revenues to operate and maintain airports was not fully realized by anyone. Clearly the challenges these smaller airports would face financially was not understood. It has become clearer as a number of these smaller NAS airports are not able to maintain their capital infrastructure requirements.

Small NAS airports are struggling to raise the necessary capital for infrastructure improvements to keep up with airside safety-related projects. Runways, taxiways and aprons are becoming increasingly costly to maintain and upgrade. These airports require sustainable, predictable federal funding for essential safety-related airside capital projects.

There are only five airports in Canada located on federal land with passenger traffic of less than 500,000 and four of them are in Atlantic Canada. These airports are currently working with Transport Canada to find a solution to their safety-related infrastructure deficit.

I would like to take this opportunity to bring forward a perspective of some of the non-NAS smaller airports, regional and local airports located in our region, however this issue is not unique to our region in Atlantic Canada.

Local and regionally operated airports have significant challenges in raising the capital required to operate their capital- intensive airports. They rely on infrastructure programming through Transport Canada called the Airports Capital Assistance Program or ACAP. This program has been in place since the transfer of airports from the federal government. Since 2000, it has been funded on average of approximately $38 million dollars annually. The funding has not increased in over 10 years, but as we all know, the cost of doing business has risen considerably.

For example, the cost to repave the standard 7,500-foot runway is currently in the range of $10 million. This represents the 50 per cent cost increase since the year 2000 while ACAP program funding has remained constant. There are approximately 200 ACAP-eligible airports across the country. It is an ongoing challenge for these airports to access the limited funds that are available to them. For many of those airports, ACAP is their own source of capital.

Over the course of these hearings, there have been a number of references to customer service and the overall airport experience. I would like to close with a few thoughts on how customer service is integral to everything we do.

As CEOs of airports, safety, security and consistent airport experiences are always top of mind. Our airports take great pride in serving our customers. We have programs to gather customer feedback, and the vast majority of our airports take part in some form of industry benchmarking surveys to measure customer service at their airports. For example, the Halifax Stanfield and Fredericton airports participate in the world-class Airport Service Quality or ASQ survey. Some other airports participate in the InterVISTAS Customer Satisfaction Benchmarking Program while still others like St. John's track their own performance through statistically significant research conducted at their airports once or twice a year. These surveys provide valuable feedback on where one airport compares to another, and as CEOs, we are able to use this information to identify and work on areas where there may be weakness.

When it comes to the customer experience at airports, airport authorities have a complex business model to manage, but it is a job we take very seriously. It involves active management of more than 20 touch points that directly influence the passenger's experience at our airport. These touch points represent various organizations including airlines, government agencies such as CATSA and the CBSA, security providers, baggage handlers, car rental agencies, food and beverage suppliers, retailers, parking lot attendants, visitor information kiosk personnel, and taxi drivers, just to name a few.

Our job is to create a seamless experience across all of these separate service providers. We work with our airport partners to respond to our customers' expectations and are proud of the work we do. For example, the Greater Moncton and Halifax Stanfield airports have been leaders in offering the nationally certified SuperHost customer service training to all airport suppliers at their airports. Both of those airports have been recognized provincially for their efforts in certifying 100 per cent of staff in this training program.

I will not sit here and say that we always get it right as it is a complex set of relationships to manage, but we do strive to deliver consistently excellent customer experiences at our airport, and that involves many organizations working together to the benefit of air traveller.

In closing, I would like to restate the need to fine-tune our airport model in Canada. Over the past decade, we have invested in our infrastructure, expanded our business and diversified our revenue streams. However, in order to have a more competitive aviation system in Canada, the airport model must evolve. This includes finding ways to adjust the pricing model to address passenger traffic leakage to U.S. airports and investing in our airport infrastructure to support our communities and facilitate further economic growth in the region.

Senator Mercer: Thank you, witnesses for being here. Mr. Innes, good to see you again.

I have a number of questions. I am from Atlantic Canada and I understand some of your issues. I have been in many of the airports that you have mentioned. One of the issues you brought up was the 20 touch points that influence the passenger experience. First, this is a very good list, one we will be using time and time again. It is actually something that we would like to use to measure the service provided.

This is curb-to-curb service. Our travel experience starts when we get out of the car, or bus, or whatever when we arrive at the airport. Our experience ends when we get into a vehicle to leave our destination airport. One of the issues that I constantly ask about is taxi licences. Do you know of a model that works well for taxi licences? Some airports have a multi-licensing scheme, where every taxi in the city can buy a special licence to service the airport; others have a single sole- source contract with one company.

Mr. Collins: Both models are now operational in Atlantic Canada. In St. John's our preference has been to find a single supplier and to sign an exclusive arrangement with that taxi provider. In doing so, we have a degree of control over the qualities of both the vehicles and the drivers. We can ensure that there are a number of taxis available after midnight. In many cases in St. John's, the arrival times are between midnight and 3 a.m. and having a number of taxis available at that time is important.

We have opted for the exclusive taxi contract. However, it requires that a taxi company have a sufficient volume of cars and drivers to provide 24/7 service. Where that is not possible in some smaller communities, they have opted for the multiple taxi company model.

Senator Mercer: Some airports in Atlantic Canada have been forced to close, for example, in St. Leonard, Edmundston and one in Newfoundland. Yarmouth airport is somewhat open and somewhat closed, depending on how you look at it.

Can the federal government do anything to ensure that these airports, where a large capital investment has been made over the years, continue to operate? Yarmouth airport is somewhat closed, yet 5 million visitors come to the Atlantic region every year. Yarmouth was an entry point until they stopped the ferry service from Maine. Is there anything that we can do to help that situation so that those small airports have a better chance of surviving?

David Innes, Treasurer, Atlantic Canada Airports Association: Your first question, Senator Mercer, about taxi service is probably one of the most complex service issues and the smaller the airport, the worse the problem.

At our airport in Fredericton, for example, if you left it open to the free market to get a good taxi company, then there would be no cabs late at night and no cabs on the weekends, when the pubs are operating with the students. There are many more students to be hauled around at that time than on weeknights.

That being said, we have invested a lot of money and effort in providing a taxi service that is acceptable to people while trying to ensure that we have a cab there for a reasonable amount of time. As a small airport, when a flight arrives we typically have 50 people getting off an airplane. Some nights three people want a cab; other nights, 20 want a cab. We try to have a system in place that ensures that all those people get the cabs that they need. However, there are some unhappy customers from time to time and some unhappy taxi drivers from time to time — again, the smaller the airport, the more complex the problem. Most small airports would be satisfied with breaking even on that. However, we manage it because if you do not manage it, then it is an unacceptable part of the passengers' experience.

With respect to air service at small airports, you mentioned St. Leonard, and so on. It is as much a problem with the availability of carriers to provide service as it is the availability of the facility. Most of those airports have gone by the boards because there was no one there to provide any service. Regarding service in Yarmouth, even when it was economic, the single carrier there chose not to provide service to Yarmouth and simply moved that service up to Halifax. It is more a lack of availability of carriers and a marketplace for those carriers to thrive than it is a facility issue. If there were carriers, the facility issue would be solved — not that there is not a facility issue for small airports, because there is.

Senator Mercer: My final question is with respect to cargo. We continue to talk about passengers, but at Stanfield airport in Halifax cargo is a large component. Surprisingly, a large percentage of the cargo at the entire port of Halifax, including airport, rail and shipping, goes through the airport. December is always our busiest month, mainly shipping lobster to France. However, you have not talked much about the cargo opportunities.

There are certain fees that go along with cargo, but it is not the same price structure as passenger travel. Do you see opportunities for cargo — and, Stanfield seems to be doing okay — in the other airports in the Atlantic region?

Mr. Collins: Two of our members, Halifax and Moncton I think, have done a strong job in leveraging the cargo business. In part it is because of good management and partly because it is part of their geography.

Having access to multi-modal transportation opportunities from air, rail and highway sometimes helps. In Moncton, for example, they can unload a large aircraft, put it on the back of trucks, and three hours later is it is Central Canada or on the Eastern Seaboard. Those are opportunities that they have leveraged well, as has Halifax. Having access to multi-modal transportation options certainly helps. I think both those members of our association have done quite well.

We do not have quite the same opportunity in St. John's. For the most part we are an importer of cargo for consumption within the province rather than an exporter at this time. We do not enjoy the proximity to the Eastern Seaboard and Central Canada markets that the people in New Brunswick enjoy. It varies, but those airports that see the opportunity have done a good job of leveraging them and attracting more business.

Senator Housakos: Thank you, gentlemen, for being with us this morning. My question is in connection with an issue that was raised by the Minister of Transport when he appeared before us last October. He raised the issue and the question, among many, relates to national airports in Canada.

Regarding the current regime that is in place, in your opinion, should all the airports be treated under the same criteria or should the regime be tailor-made more to the specific concerns and needs of various regional airports?

The other question I have connected to this is how many of the 14 airports in the Maritimes are designated international airports or fall under the national 26 international airports? In your opinion, is this current regime efficient? Does it make sense, in your opinion? Do you think it needs to be restructured or revisited?

Mr. Collins: With regard to your first question, it strikes me that the 26 airports that have been designated, for various reasons, as part of the National Airport System should be viewed the same way in the sense that if they were deemed to be part of the national strategy, then they should be seen that way and given that respect.

That said, in that 26 airport list, you have quite a variance in terms of size and location. While they are all seen as being part of the national strategy, the needs vary. The needs of Pearson International Airport vary from those of Fredericton or Gander, for example. They need to be treated equally but different, based on their unique requirements. Those requirements will vary across the country and across airports of varying sizes.

Mr. Innes: There are seven NAS airports in the Atlantic region of the 14 airports that are in our association. My view is similar to that of Mr. Collins. Certainly, in 1993 or 1994, when the National Airports Policy was published, there were certain assumptions made with respect to the criteria of what was and was not a NAS airport. That has been modified modestly over time, and it could be well looked at again.

Whether you believe that Canada should have a National Airports System and what that system or national airport system should look like, it always seems to me that the fabric of the country is defined by the national transportation system within it, and that the country has an opportunity to define that. I think it does.

I am not sure that the criteria of NAS, the responsibilities, and the ground lease that NAS airports live with, are entirely appropriate or reasonable, especially if it is treating all airports the same within NAS. We have the same essential ground lease as Toronto and Montreal. Our ability to fulfill the national role in our community is a little more hampered than the larger airports.

In terms of definition of what the system looks like, it probably is not that far off the mark. In fact, in terms of defining the requirements for being a NAS airport, there are many opportunities for that to be modified.

Senator Housakos: Of the 14 airports in Atlantic Canada, only five have annual passenger volumes of 250,000 or more. Does this not suggest a possible overcapacity, noting that New Brunswick has three NAS airports within a close proximity of each other?

What would Transport Canada have to do in order to respond to some of the concerns in Atlantic Canada, for example, on the NAS regime that is in place?

Mr. Innes: I will talk about what we are as an airport authority. We set up a business model to pay our bills and to invest $1 million a year in our airport. We operate under that model. We have found, after 10 years in the business, from year to year we are cash positive, even with our traffic level, which is 275,000 passengers this year. We are in a cash positive position yearly and we have not had a year where we have not been.

We find, however, there are big capital projects that we run into every occasionally and these projects must be done, and that is where we will run into problems in our business. In fact, the long-term expenditure that we should be making is probably closer to $1.6 million rather than $1 million. We have finished a study this year. That is where we are in terms of our business model. That is the amount of money we are short.

In saying that there are too many airports, in fact we deal with that question a fair amount. As Mr. Collins said in his paper, the old Fredericton is business and government; the new Fredericton is IT and consulting engineers. At one point there were 1,000 people working in consulting engineering offices in Fredericton. It has the fifth largest number of consulting engineers of all of the cities in Canada. It is an oversized industry for the size of the community, and in fact, those people make their living throughout Canada and all over North America. That is our export product and that product needs quick access to an air transportation system. If you move the airport a couple of hours further from the city, then one contract at a time or one employer at a time will start to move those employees out. It is important for our community to have quick access to Toronto particularly and to the world in general.

The nature of our economy has changed, and it is important to have good access. Whether or not there could be a combination of airports, we have looked at this with Saint John. We look for opportunities to work with Saint John and Moncton. To some extent we have a province or a good part of the region where in fact there is a lot of competition between airports. If you have a service to New York, then everyone uses your service to New York. If you have a service to Cancun, everyone in the province uses your service to Cancun. There is a bit of unintended cooperation and a lot of competition and the system does not work that badly.

Senator Frum: Gentlemen, in the context of this conversation about keeping our industry competitive, I was struck by one of the numbers in your presentation, which was the number where you said that the cost of building a runway has increased 50 per cent in 10 years and it is now $10 million. Could you help us understand why it is so expensive, what is the cause of that increase and whether or not that is an Atlantic number, a national number and how that is compared to the U.S.?

Mr. Collins: The number we shared I believe is from Atlantic Canada. If you look at what has happened in the past 10 years, and how that would translate into the cost of a runway, you would need to look at the various components. Certainly if you look at the price of oil, the extensive use of liquid asphalt in paving runways has gone up multiple times over that period of time. As well, if you look at cost of construction generally in the country, it has gone up. As it relates to airport construction, with its unique requirements, it has gone up even beyond that. It is simply a matter of looking at the breakdown of the major cost components of runway construction or of repaving.

Senator Frum: Does that include a labour component?

Mr. Collins: There is a labour component as well.

Senator Frum: Is that responsible for the increase, would you say?

Mr. Collins: I would be guessing. I will get the information for you, but I do not have it at my disposal right now.

Mr. Innes: We have gone through this process with our runway and the only disproportionate growth in cost is in bitumen. There is a lot of asphalt and a lot of bitumen. Those runways are 6,000 feet long, 200 feet wide, and one foot deep.

Senator Frum: You also say on the positive side that the traffic at your airport has increased as much as potentially 50 per cent in the last decade, so despite all of the negatives we have been discussing here you have actually seen tremendous growth. How do you explain the growth?

Mr. Collins: It varies by province, but Atlantic Canada has experienced a diversification of the economy. Certainly in terms of St. John's, which I can speak to with more clarity, the oil and gas sector has brought substantial benefits to the economy. In addition, our tourism sector has been buoyed not just by our tourism ads but also by the opportunities within the province. In the case of St. John's in particular, we estimate that 55 per cent of our total traffic each year is business travel.

If you are in Montreal and you want to go to Toronto on business you can fly, you can drive or you can take the train. If you are going to St. John's on business, you are going to fly. Much of our growth has been buoyed by increased business travel. The split off 55-45 shifts a bit during the summer when there is more leisure travel. It is a combination of a buoyant economy and as we look to recruit new airlines to serve St. John's, they understand the opportunities. The act of providing additional capacity to an airport in fact increases demand for air travel as well. If you make it easy, people will travel more often.

I believe that is what has happened in St. John's and it is a similar story to what has happened elsewhere in the Atlantic Canada although it varies from airport to airport and province to province.

Mr. Innes: The businesses growing in the Fredericton area are those that are dependent on air transportation. There has been some price reduction over the last decade in terms of ticket price and that stimulated demand, but I think the industries growing in our economy are the ones that use airplanes.

Senator Cochrane: You mentioned five federal airports in Canada that have less than 500,000 passengers and that four of these airports are in Atlantic Canada. Would you identify these airports so we can have that information on our record?

From your perspective, are there certain issues or challenges that these airports face?

Mr. Innes: The airports involved are Fredericton, Saint John, Charlottetown, Gander and Prince George, British Columbia. The Prince George airport is obviously outside the region. We are five NAS airports with less than 500,000 passengers, and we have been discussing our issue with Transport Canada for the last 12 months.

Frankly, our issue is that when we have these large air-side and safety related projects, we have a hard time making those investments that we should make for the safety of the passengers and the users. We are not talking about looking for money to build terminals; we are talking about runways, taxiways and those sorts of things. We have had an issue and a discussion going on with Transport Canada for the last 12 months to resolve that problem, and I hope we are making some headway with it.

Senator Cochrane: I am from Newfoundland and I am particularly interested in Gander. I know that they are having problems because many of the passengers have to drive to Deer Lake to get a flight, which is a three- or four-hour drive.

Mr. Innes: The issue, as was mentioned in the paper, is because there is a clause in the Airport Capital Assistance Program that if you are on federal land, you are excluded from this program. Because we are airports that are essentially owned by the Government of Canada and are on federal government land, we are excluded from the possibility of receiving capital assistance for our projects.

Deer Lake airport, for instance, which is not a NAS airport but is as large as the Fredericton airport, because it is not on federal land, it is eligible for assistance. Because we are owned by the Government of Canada, we are not eligible for assistance from the Government of Canada.

Senator Cochrane: That is interesting, thank you.

Do you think that there is a viable option for increasing domestic competition?

Mr. Collins: For a number of years, we have had two domestic carriers, Air Canada and WestJet, serving St. John's and serving it well and effectively. About a year ago, we added Porter Airlines, which provides service to Halifax, Ottawa and on to Toronto Island.

What we found with the addition of the third domestic carrier is what we call "the Porter effect," where fares came down by about 25 per cent almost on day one. That means you can pretty well get a seat to or from St. John's on one of the three domestic carriers when you need it.

As I mentioned before, if you make it easier and convenient for people to travel, it increases a demand for travel. If you make it easier, people will travel more often. If you affect the price point with increased competition, people will travel more often. We have seen that in St. John's.

In that sense, the addition of a third domestic carrier has had a positive effect on the service to the travelling public, both in terms of capacity and choice of routes, as well as in fares. There was a similar impact when a third carrier was added elsewhere in the country.

Senator Cochrane: Air Canada is a member of Star Alliance, and United Airlines, an American company, is a member. This alliance is one of the largest in aviation industry. Should companies in global alliances be allowed to merge, become global companies and achieve the economies of scale that we have seen?

Mr. Innes: It is not necessarily a bad thing. I do not mean to doublespeak it, but I think that specific alliance can work as well for smaller communities as it does for anybody else. As I understand the new relationship between Air Canada, United and Continental, it works for us and it makes services and potential services available to our community that may not be available without it.

It is not necessarily a bad thing. In the absence of any change in policy related to competition across national borders, these kinds of relationships may be a way of moving the agenda forward. I would not be totally negative about it.

Senator Cochrane: Does United come into St. John's?

Mr. Collins: United and Continental are in the process of finalizing a merger. Continental has been providing daily service from St. John's to Newark, New Jersey, for the past six years. Officially, when the merger is completed, they will be known as United, but they will provide the same service.

Senator Martin: I am from the other coast, from Vancouver. I find your advertisements very interesting, as I have not had the opportunity to explore the East Coast.

I am curious about the Atlantic regional cooperation that takes place among the airports. Naturally, some will be more vibrant. As you speak about the numbers, there is tremendous growth, but the growth will be minimal or stagnant in some airports because of location and numbers.

Would you speak a little bit about the kind of cooperation there is within the region, and in what way that has benefitted or assisted some of the smaller airports — resource sharing, et cetera?

Mr. Collins: Let me speak to how we work as the Atlantic Canada Airports Association. The association has been in operation for six or seven years. It consists of the 14 airports; it also consists of representation from Transport Canada, as well as the four Atlantic provinces.

We find our discussions at our meetings tend to be broader than just talking about airports, although there is a tremendous amount of information sharing and collaboration happening between airports. I think what we have seen, as well, is an increasing level of collaboration between the four Atlantic governments in terms of looking to attract tourists to Atlantic Canada.

When tourists come to Atlantic Canada, they can choose where they want to visit. However, there have been efforts between the four provincial tourism departments to find ways to attract more travel into Atlantic Canada.

I am on the board of our St. John's destination marketing organization, whose role is to attract conferences, tourists and other people into St. John's. What we are finding is that airport CEOs have become much more engaged with their communities in terms of looking to attract travellers, whether it be business or leisure travellers, and to facilitate the travel by adding capacity.

As airport CEOs in Atlantic Canada, we understand we exist to serve the community. That invariably gets us engaged in various activities in our cities and towns that look at attracting visitors and improving the economy. We find ourselves worrying about more than what happens at airports; we understand our role as an enabler in the region and have stepped up to that plate as well.

Mr. Innes: Our essential mission is to operate an airport and facilitate air service, so we are activists with our various community agencies to ensure that no stone goes unturned in terms of availability of air service to our community.

Speaking to your first question, we work with the airports in our province and region, and the country, to share information and expertise. It is a cooperative community. In fact, I think we have learned over the years that there is more to be gained by cooperation.

Senator Martin: That leads me to a question in terms of sharing resources. What happens with smaller airports where it will be challenging for them to diversify their resource base? You spoke of diversifying the revenue streams. Naturally, that is possible in the bigger airports, but are there other opportunities, such as an Atlantic general fund? If smaller airports are reliant on one source of capital, government funding, how do they diversify their resource base so they can meet the needs beyond government funding?

Mr. Innes: Airports are a high fixed-cost business. To have a runway for one airplane is the same as having a runway for a thousand. To plow a runway for one is the same as plowing for 10 runways. Your costs are largely fixed and your revenue is based on the amount of traffic. It is directly related to the number of passengers you have.

At the small-scale end of the industry, which I am at, you are always challenged. The need for us and our airport is we cannot afford to go on investing only $1.1 million. We have to get up into that extra little bit, or we have to grow our revenue sufficiently to do that.

There is only so much you can do as a small airport. We will not open a shopping mall in our airport as in Vancouver. People just walk through, get on a plane and away they go. They do not linger at all. In fact, our business model is based on them not lingering. We can do things with our land and our parking and we can raise our rates and this sort of thing, but there are limits.

When we started this five-airport issue, we talked to the airports that had 500,000 passengers, Moncton and London, Ontario, and we talked to them across the country, and asked if they had this problem. Once they got to the 500,000, they said they did not have this problem, but below that number, there is this problem of being short of the proper scale to enable us to operate.

Senator Martin: This question is somewhat unrelated, but this morning I attended a breakfast event with an Asian business association, and we were talking about the re-emergence of the Asian market. We discussed how this market moves in waves. I head how Koreans are intrigued by the Atlantic region, the geographical landscape; the history really speaks to some sort of synergy and similarity with the Asian landscape. We naturally think of Europe as the closest market to the Atlantic provinces, but I assume that the Asian market on the other side is also a place to consider. These very specific, unique regional textures make Canada unique. Big cities are all over the world, but Canada is unique because of places like the Atlantic provinces and other parts of Canada. Tourism is one area of potential growth in Atlantic Canada.

Senator Merchant: Good morning to both of you. I would like to focus on the part of your presentation that said that Canada ranked 114th out of 130 countries in terms of cost competitiveness in the travel and tourism sector. That is a huge problem. The newspaper said that Toronto had the dubious distinction of charging the highest landing fees of any airport in the world.

You talked about the leakage we have to the nearby airports in the U.S. It is a huge problem, and we have heard this from many presenters. How can we manage this? Cost is important to people, and when they look at their travel budget, they will not go to places that are so much more expensive. What thoughts do you have for managing this?

Mr. Collins: I suspect there are a number of factors that would play into Canada's ranking out of 130 countries, and I am sure none of us are happy with where we are ranked. No one likes to see Canada in the lower quartile or decile of anything.

With respect to the topic of your study, we have mentioned it throughout and others have mentioned it in their testimony, the place to start is the issue of airport rent charged to NAS airports. I am not sure if there is a firm policy stated, but I think it is fair to say that any airport currently paying rent, if relieved of that burden, would flow those savings back to the carriers that service their airport. If that translates into lower fares for travel in or destined to Canada, that is a start.

Mr. Innes: The traffic leakage problem is getting worse as time goes on, and in the last few years it has become very noticeable at our airport. I was at a meeting yesterday morning in New Brunswick, and a person who I was meeting with who flies all over the world and flies business class to Europe told me he went to Bangor six times from Moncton last year to get flights because the prices in New Brunswick were just too high.

The leakage of traffic is not confined to people going south on vacation but is a general situation, and so we are losing a lot of traffic and revenue due to it.

To make it better there must be a good examination of the air transportation business in general in Canada and how it is viewed. In my view, it is totally out of balance with other modes of transportation. The people of Canada subsidize road transportation, rail passenger transportation, marine transportation, yet look to air transportation for revenue. That really must stop, whether it is in rents or whether it is in municipal taxes.

Last year I think the municipal tax bill of the Montreal airport from the City of Montreal was in excess of $50 million. The people in Fredericton end up paying that tax bill because Air Canada ends up paying it. We have Air Canada service, and so every air passenger in Canada ends up paying these high bills.

Somewhere along the line, air transportation must be considered in balance with the other transportation modes and not have this special status of supplying money to governments.

Senator Merchant: Do you think the fierce competition in the U.S. helps them to keep their base fares down? That is also an aspect.

Mr. Innes: I think competition is pretty fierce in Canada. I just think that the price points are higher in Canada because the costs are higher. We have been talking to U.S. carriers to come into Canada, and they just say, "No, thank you. It is too expensive. In our case, we think we will serve Canada from Bangor," and they have.

Senator Housakos: Let us take an airport like Halifax as an example. If you were to eliminate the airport tax, eliminate the airport rent that is paid to Transport Canada, eliminate the municipal taxes, eliminate the security fees paid, what would be the discounted percentage rate that your passenger would be saving? If we eliminate all those costs you talk about, what would be the savings to our citizens on an average flight? Would it be 4 per cent, 10 per cent? Would it be $30 a ticket, $100 a ticket? Will it be 50 per cent?

Mr. Collins: Assuming that the airlines passed the savings on to the traveller, then the savings could be substantial. I am not sure that I can speak to Halifax as an example, but, in terms of proportion, I would hazard a guess that if the municipal taxes, and so on, were removed, you could probably expect to see something in the area of a minimum discount of 25 per cent.

Senator Housakos: What would be the other issues concerning the higher cost compared to what our competitors are offering south of the border? Beyond those fees, what are the additional discrepancies between what we face in the marketplace compared to the U.S. side?

Mr. Innes: NAV CANADA fees would be one. I think there are security fees in the U.S. but not here. They put $2.02 into the capital program of American airports. I forget the numbers, but the landing fees in Chicago are probably one third of what they are in Toronto. All of these costs end up somewhere. The cost of the airports end up in the landing fees and that is a good place to look.

Senator MacDonald: I want to go back to the National Airport System that was set up in 1994. There seemed to be two criteria for setting it up: capital city or the volume in the airports.

Looking at the list of airports in both sections, and the way you have them classified, what are the advantages, both structurally and economically, of being in the NAS versus the local or regional airport system?

I raise that because I know that some airports do not want to go into the national system because they say it will cost them too much. Are their airports in there that, perhaps, would be better off in the local system?

Mr. Innes: The fundamental disadvantage is the 250-page ground lease by which we must live and the fact that the Government of Canada owns the land and the airport, and, as a business, you do not have access to that resource. The advantage is that the Government of Canada owns the airport and it will be there for a long time.

Senator MacDonald: You mean in the local system.

Mr. Innes: Yes.

Senator MacDonald: Are there any operational advantages of being in the National Airport System in terms of volume or levels of traffic?

Mr. Collins: No. I was smiling when you asked the question because I think the primary benefit to the airports would be reputational — that is, you are seen as part of the national strategy in transportation. There is a benefit, as Mr. Innes says, to the government in that you have identified a group of airports that are strategic for the entire country. Beyond the reputational benefits of an airport being seen as part of the national strategy, there are not many practical day-to-day benefits.

Senator MacDonald: In terms of operational costs, particularly in a tight market, if you were under the local and regional umbrella you would probably prefer to stay there.

I am thinking of two airports with which I am familiar. One is Saint John, New Brunswick; the other is Sydney, Nova Scotia. When I look at the map, the only one that is part of the National Airport System in Nova Scotia is Halifax. You have three in New Brunswick, although Halifax is located in the larger province and, geographically, that city is separated from all the other airports.

Would Saint John, New Brunswick, be better off under that system?

Mr. Innes: I do not want to speak for the Saint John airport. I think they would be open to having that discussion.

Senator MacDonald: Are they trapped in the system because of their volume?

Mr. Innes: Yes, and Sydney is, too. However, Deer Lake has more than 200,000 passengers. It exceeds the old criteria, but it is not part of the national system.

Senator MacDonald: If it fits under the criteria, why is it not be part of the national system?

Mr. Collins: That is a good question.

Mr. Innes: I expect they chose to stay out of the national system.

Senator MacDonald: According to the criteria, they could not choose to stay out, could they? They must go in, is that right?

Mr. Innes: Yes.

Senator MacDonald: You said there were 14 airports. I am looking at the list and see only 13. Which airport is not in there? Would it be Yarmouth?

Mr. Collins: Yarmouth should be on the list.

Senator MacDonald: It is not.

Mr. Collins: Is Miramichi there?

Senator MacDonald: Yes. Thank you.

Senator Plett: You cited all the reasons why it is so much more costly to fly in or out of Canada than in other countries and why we are ranked 114th out of 130. I am from the province of Manitoba and we experience the same problem with leakage to places like Grand Forks and Fargo.

I am not sure that the answer is as simplistic as what has been suggested. We are comparing ourselves to the United States. We have one tenth of the population in an area larger than the United States. I do not know how we can ever compete with the United States on air traffic prices short of, as the United States does, having many subsidies.

We heard the other day that most of these airports do not pay airport taxes. However, that must come out of the revenue then of the United States treasury and it would have to come out of our treasury. The answer to the problem is not taking it from one pocket and putting into another because, at some point, we want to balance our budget. We are running a deficit budget and I am not sure, where adding these taxes to the general revenues of the country solves the problem.

I would like you to touch a bit more on that because I do not think the answer is as simple as has been suggested.

Mr. Innes: I understand what is happening close to me, for instance, in Presque Isle, Maine. We lose some traffic to Bangor and some traffic to Presque Isle, Maine. Presque Isle, Maine, is a pretty small place and it has a fairly good air service. From one end of this country to the other, there is nothing that compares to Presque Isle, Maine. Many small U.S. communities have that type of service.

We have a smaller country with less population. It is a bit of a string bean of a country without many large cities, you are right. However, somewhere on the bottom end of the scale, we are not providing air service in communities the size of those that the United States provides.

We looked at Montana at one point because they have six cities with between 15,000 people and 150,000 people, not unlike New Brunswick. If you look at what is going on in Montana with respect to air service as compared to what is going on in New Brunswick with air service, it is a remarkable difference.

I think we must respect scale, but I think we should recognize that we have both a cost issue and an air service issue in this country.

Senator Plett: Are the airlines flying into Presque Isle, Maine, making money?

Mr. Innes: They would not be flying in if they were not.

Senator Plett: I think they would. I do not think Air Canada is making money at every airport into which they fly. Requirements are made of them so that if they want to fly in to certain places, they must service other places. You are the experts.

Mr. Innes: I would love to know into which communities they are flying that they are not making money.

Mr. Collins: Me, too.

Senator Plett: So would I, but I would also like you to get us a more exact figure on, as Senator Housakos asked, how much this airline ticket would cost if we took all the taxes off. That figure has to be available and I would be curious to know the exact figure. Obviously, as you suggested, Mr. Collins, that savings would have to be passed on, but I am not quite as confident as you are about that happening.

Anyway, I have made my point. I think we have a competition issue in Canada. We have really only two domestic airlines, and now Porter is getting into it.

Throughout most of your presentation, I thought you were giving us a success story because it really is in my opinion. You have cited an average growth of 5 per cent since 2002, yet you claim that the high cost of air travel in Canada is adversely affecting competitiveness in Atlantic Canada's airports.

I would like you to touch on how you reconcile these two statements. To me one is saying that you are really successful and the other is saying that it is tough to do business.

Mr. Collins: Thank you for that question and for noticing in the remarks that I was talking about quite a success story. It is quite remarkable how the four provinces in Atlantic Canada have grown and have prospered and have done things to help themselves do that.

We are saying that in part the air access and service that we have provided has helped that growth occur, because it does not happen without air access. All we were signalling in our comments is that we would like to keep that moving in the right direction. We do not think we have peaked in terms of what is possible in either of our airports, or in Atlantic Canada, and we are simply advocating that we do two things. We advocate removing the cost impediments that exist not just for our region but for the country to the extent that that will translate into lower fares and therefore more travel. This also will address, on the part of some of the smaller NAS airports and some of the small non-NAS airports, their need to access capital for fundamental safety and operational needs.

Senator MacDonald: Mr. Innes, you were talking about the traffic into small communities in the United States. How much of that is related to the fact that they already have airport infrastructure in place and have had it in place for 50 or 60 years? The cost of establishing an airport in any small community would be prohibitive today. How much is related to that cost?

Mr. Innes: Some of it is, but there is much more money for airport development on the U.S. side than on the Canadian side. We have had perfectly good airports that have not been able to keep their air service. The bigger issue in the small communities in the U.S. is the Government of the United States has a small community air service program and U.S. Airways is making money in Presque Isle but not without some help.

Senator Plett: I now have an observation rather than a question.

The Chair: I heard the word "final" a few times. It is true some of your questions are stolen at the beginning, but next time I can put you on the list earlier.

Senator Plett: Point taken; I will not say "final" quite as quickly. I would like to make an observation. It was suggested a meeting or two ago — and Mr. Innes alluded to it somewhat — and I would never say which of our colleagues suggested it, but it was suggested that maybe we have three international airports in Canada. My observation is that those three potential international airports are the biggest problem we have in the airline industry.

The Chair: It was more a comment than a question you may want to add a comment.

Mr. Innes: I suppose two of them could be St. John's and Fredericton.

Senator Merchant: I have a newspaper before me, and the airfare breakdown shows that a round trip ticket from Toronto Pearson to Washington Reagan has gone up from $430 to $560. The taxes make the difference in the ticket. Some people have asked how much of a difference it would make. Then they have a ticket from Montreal to Fort Lauderdale, and the comparison is made with Plattsburg to Fort Lauderdale and the ticket with Air Canada is $517.44, and the other is $322.83, so that is not all the additional charges because that is a great difference, from $517 to $322. It is not all in the charges. Where is that other difference?

Mr. Innes: A major portion of my life has been spent explaining to people why it costs so much more to fly from Fredericton than from Bangor, and the stories I hear on a daily are that it was $700 to Savannah from Bangor and $1,700 from Fredericton. These are the cost comparisons that customers present to me.

Senator Merchant: I do not understand where the difference is, because the fees do not amount to that much.

Mr. Innes: I believe the fees are input costs. I think they are in there but not tagged on to the end.

The Chair: Before closing, I would like to thank our witnesses for their presentation. As you see, this subject is a hot one with senators.

I would like to remind members that the next meeting of the committee will be on Tuesday, December 7, but I am told by my vice-chair that there is a strong possibility we will inherent Bill C-28, anti-spam legislation, so the steering committee might have to readdress some of our planning for the next few weeks if we receive that bill over the next few days.

(The committee adjourned.)

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