Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 9 - Evidence, March 1, 2011
OTTAWA, Tuesday, March 1, 2011
The Standing Senate Committee on Transport and Communications met this day at 9:32 a.m. to study emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[English]
The Chair: This is the Standing Senate Committee on Transport and Communications. Thank you for your attendance.
Today we continue our study on the airline industry. Appearing this morning are Fred Lazar, Professor, Department of Economics, York University; and David Redekop, Principal Research Associate, the Conference Board of Canada. Thank you for appearing.
Professor Lazar, please proceed with your introductory remarks. Following your remarks, I will invite Mr. Redekop to make his presentation, which will then be followed by questions from our members.
Fred Lazar, Professor, Department of Economics, York University, as an individual: Thank you for the invitation to appear before the committee. I will try to keep my remarks short.
Three fundamental issues need to be considered in the formulation of government policies for the aviation industry — when I talk about the aviation industry, I include both airlines and airports. First is the importance of this industry to the Canadian economy; second is the shortcomings of federal government policies for this industry in the past; and third is the importance of a level playing field for global competition in this industry.
It has been well documented over the past 15 or 20 years that the aviation industry plays critical roles in the economy. This industry is essential for economic progress in an increasingly global community and marketplace. The industry makes possible the rapid movement of people and goods to markets around the world. It generates many valuable economic benefits.
Productivity growth continues to hover near the top of the federal government's economic policy agenda. Without higher and sustained rates of productivity growth, the government will have difficulty achieving its fiscal goals and maintaining its social programs. The aviation industry, particularly the Canadian airlines, is a key sector in spurring productivity and economic growth as it generates significant externalities throughout the economy.
Consequently, there are sound economic and policy reasons for ensuring that this industry thrives in Canada and that Canadian carriers succeed in the North American and international marketplace.
In the table in my presentation, I highlight the relative sizes and growth of three airports: Toronto Pearson International, Vancouver International and Dubai International. If Toronto and Vancouver airports had the same number of passengers per capita as Dubai airport, their passenger totals would be about five and four times as large as their actual passenger totals. The economic impacts of such larger passenger totals would be enormous, running into the tens of billions of dollars and tens of thousands of jobs.
Can the differences among these three airports, particularly between the Canadian airports and Dubai, as an example — I could have picked other airports in addition to Dubai — be explained by government policies? The answer is yes. The governments of Dubai and Abu Dhabi have recognized the critical importance of the aviation sector for their economies, and both have actively promoted the growth of this sector. The Government of Canada, on the other hand, has imposed a number of user fees on this sector.
During the past 10 years, the federal government has extracted from the aviation industry $2.6 billion in ground rents; $3.1 billion in Air Travellers Security Charges, ATSCs; and has saved approximately $1.2 billion in interest and principal payments as a result of transactions with NAV CANADA and Toronto Pearson International.
The federal government's policies have gone well beyond these various taxes. The infrastructure policies of the government, initiated in the early 1990s, led to the creation of airport authorities and NAV CANADA as quasi not- for-profit organizations. None is subject to any form of regulation, although each one has a high degree of monopoly power.
Last year, to gauge the effects of these various taxes and fees added by airlines operating in Canada, I selected 10 routes operated by Air Canada and WestJet and looked at the impact of these taxes. The results are in tables 2 and 3 in my presentation.
The results are as follows: For Air Canada, the cumulative effects of the taxes and fees range between 16 per cent and 33 per cent of the total fares. The impacts tend to be largest for the lowest fares, and they tend to be largest in the provinces that have a sales tax on their air travel. For WestJet, the cumulative effects are even larger, between 21 per cent and 41 per cent.
Changing the policy course from the current one, where the aviation industry is viewed strictly from a fiscal position, to one where it is recognized as a key contributor to productivity growth requires cutting the costs faced by the industry. Furthermore, if Canada is to benefit from the continued growth of the aviation industry, competition and global competition must be fair. A level playing field in the industry is critical, as this will impact the future evolution of hub airports and route networks.
In Table 4 of the presentation, I compare Toronto Pearson International and Vancouver International to other key Star Alliance hubs around the world. Neither of these Canadian airports ranks high on the list in terms of either the total number of passengers or passengers per capita. If either one could reach just the level of passengers per capita of some of the secondary hub airports — for example, Copenhagen, Vienna, and Brussels — traffic levels would be substantially greater at both of these airports. There is ample scope, therefore, for these two airports to become much larger and more prominent hubs in the global network.
What might be the repercussions of success or failure of Toronto and Vancouver becoming tier 1 global hubs?
Consider the effects of a 5 per cent increase in the number of passengers at Toronto and Vancouver and a 3 per cent decrease in the numbers. Using the 2009 passenger totals, a 5 per cent increase could result in an aggregate increase of over 2 million passengers, which would result in 24,000 more jobs, $2.4 billion more in economic output, and $320 million more in taxes. Of course, there would also be large catalytic effects on productivity growth. This case does not take into account growth in passenger traffic at other Canadian airports as a result of the expansion of the hub carriers' networks and a greater connectivity possible for Canadians as a result.
The 3 per cent decrease would result in an aggregate reduction of 1.4 million passengers, with a loss of 14,500 jobs, $1.4 billion in economic output, and $100 million in taxes. Is a decrease of 3 per cent too pessimistic? Perhaps, but keep in mind the experiences of St. Louis, Pittsburgh and Cincinnati during the past decade, where the hub carriers shut down these airports. Also, consider the cases of several major U.S. airports during the past decades that experienced traffic decline each year. Therefore, growth is not inevitable.
Canada's international airports and their hub carriers have the opportunity to attract more global flow traffic, resulting in growth, Canadian job creation and local and national economic spin-offs.
Transport Canada in its 2006 paper, A New International Air Transportation Policy: Consultation with Stakeholders, stated:
Air transportation is an essential tool to connect Canadians with one another and the world: it directly contributes to a dynamic economy moving people and goods, supports tourism and economic development, produces significant social value by connecting all parts of Canada, creates and maintains specialized, highly paid employment throughout Canada, and supports Canada's trade agenda.
These objectives cannot be achieved if we outsource our aviation industry. Connectivity across Canada and between Canada and the rest of the world will not be the goals of foreign airlines. Canadian carriers should not be protected to achieve these objectives. However, they should be given the opportunity to compete fairly and on an equal footing with all other airlines.
Thus, the Canadian government needs to pursue a two-pronged strategy. First, it must re-examine all of its policies that impact this industry directly or indirectly and make the changes necessary to promote Canadian airlines and airports. The starting point for the new policy direction is the termination of the ground rents, the ATSC and the excise tax on jet fuel.
At the same time, it should take a lead role to ensure that air transport agreements, ATAs, whether bilateral or open-skies varieties, set out the framework for a level playing field. The government should consider including in these agreements countervail and dumping provisions similar to the ones in the NAFTA and the General Agreement on Tariffs and Trade, GATT. These provisions would level the playing field for Canadian airlines and airports by eliminating the competitive distortions to the market that result from aggressive subsidization policies by a small number of foreign governments.
David Redekop, Principal Research Associate, The Conference Board of Canada: Thank you for the invitation to appear before you today. The Canadian airline industry is facing many issues. While the recession has ended, we believe, for the air transport industry, it faces long-standing challenges that will continue to hinder its profitability and development. The Conference Board of Canada does a quarterly outlook on the air transportation industry, and its latest outlook forecasts profit margins for this industry to remain below pre-recession levels through to 2014. Even in the best of times, profit margins are less than 4 per cent for this industry. The most recent Conference Board of Canada outlook for the air transportation industry states that "rising fuel costs and limited price appreciation are expected to keep industry profits constrained through 2014."
It is against this backdrop that I wish to focus on two long-standing issues affecting the growth and profitability of Canada's air transportation industry. The first issue is a decline in international competitiveness due to significantly higher taxes and fees that Canadians and carriers pay when flying outside the country in particular. The second issue is the lack of transparency amongst charter carriers particularly concerning their flight programs, which has contributed to several problems for Canadians and governments, including the failure of operators and the subsequent stranding of Canadians abroad.
Professor Lazar has alluded to the loss of international competitiveness amongst Canadian airlines. I will give you practical examples. Canadian airports and carriers are facing a new set of competitors for Canadian air travellers. U.S. border airports such as Plattsburgh, Syracuse, Niagara Falls and Bellingham are aggressively targeting Canadians. The Plattsburgh International Airport even promotes itself as "Montreal's U.S. Airport." Its website welcomes you in French and English. You can operate that website in either French or English.
Other U.S. border airports are equally as aggressive in trying to attract Canadian air travellers. Carriers such as Alaska Airlines and Spirit Airlines are eager to take advantage of the opportunity that the Canadian government has presented to them. This opportunity is a result of the disparity between the taxes and fees that Canadians and carriers pay in the United States versus those they pay in Canada. Canadians are charged up to 80 per cent more in taxes and fees when flying to the United States from Canada versus flying from a U.S. border airport.
Permit me to give you just one example of the disparity that exists between the taxes and fees that a Canadian would pay to fly from Montreal to Fort Lauderdale versus flying from "Montreal's U.S. Airport" in Plattsburgh.
The lowest WestJet or Air Canada base fare, without taxes, as of February 25 for a flight from Montreal to Fort Lauderdale, leaving April 7 and returning April 14, is CAN $238, not including taxes and fees. The same direct flight on Spirit Airlines from Plattsburgh has a base fare of US $258, so the Air Canada and WestJet fares are approximately $20 less. Air Canada and WestJet, therefore, have a lower base fare than Spirit Airlines. The taxes and fees, however, for the Spirit Airlines flight are US $37.40. The Canadian taxes and fees are $68.84, or 84 per cent more than what the U.S. is charging. It gets worse. The U.S. government would impose an additional fee per passenger of US $50.72 for the Montreal flight. This is a fee that the U.S. government charges or imposes on all international carriers landing in the U.S. When you include the U.S. government imposed fee, Canadians flying from Montreal to Fort Lauderdale would pay a total of $119.56 in taxes and fees for that one ticket, compared to $37.40 if they flew from Plattsburgh. That makes a difference, and it has made a difference for Canadians. It represents more than a 200 per cent difference in taxes and fees involved in flying from Montreal versus Plattsburgh.
U.S. airports and carriers have been quick to take advantage of this disparity between Canada and U.S. air travel fees and taxes. According to an October 2010 survey that our commission did for the Conference Board of Canada, an estimated 200,000 Canadians drove to a U.S. border city this past winter to catch a flight to their Florida destination. A recent survey commissioned by the Hotel Association of Canada found that 21 per cent of Canadian leisure travellers had travelled by car to a U.S. airport last year to take a trip using less expensive airline tickets purchased for U.S. or foreign travel. This figure is up from 18 per cent a year ago, so it is growing.
The siphoning off of Canadian air travellers by U.S. airlines has intensified in recent months. Alaska Airlines is offering, for the first time, direct flights to Hawaii from Bellingham, Washington, a community with a population of less than 80,000 people. Their target is clearly Vancouver, Lower Mainland and Victoria, British Columbia. It is not Bellingham because it is not a big enough city to support that.
Another example of the dilemma facing Canadians carriers and airports is Spirit Airlines' announcement in October 2010 that they would provide three non-stop flights per week between Niagara Falls International Airport and Fort Lauderdale. The acting chairman of the Niagara Frontier Transportation Authority is quoted as saying that the new service "will provide first class service and pocketbook friendly low fares that are sure to be popular with residents in the Niagara region and southern Ontario."
I raise this issue of an imbalance in taxes and fees as the situation is likely to get worse if action is not taken. The more Canadian travellers choose to use a U.S. airport, the fewer travellers there will be in Canada from whom to collect taxes and fees. To cover rents and other expenses, airports will have to increase fees to the remaining passengers to meet revenue targets. This in turn creates a downward spiral in which an ever-increasing number of Canadians will choose to use U.S. border airports to fly to their U.S. or international destinations to avoid the higher taxes and fees. That is already occurring in greater numbers, and it will continue to grow unless action is taken. The imbalance in taxes and fees between what Canadians pay in Canada versus at a U.S. border airport is a documented fact of which governments are well aware. Unfortunately, there has been little to no action on the government's part to address this imbalance issue.
The second issue I would like to address is the lack of transparency amongst charter carriers. Charter carriers operate differently than the scheduled carriers such as Air Canada, WestJet, American Airlines, and so forth. I bring this forward because it concerns antiquated procedures employed to grant approvals for charter flights. This has many implications of which most people are not aware. It is peculiar to charter carriers. While travellers, carriers and governments can access current data on the schedules and seek capacity for scheduled carriers such as Air Canada and WestJet, this type of information does not exist for Canadian charter carriers. This lack of transparency has contributed to a chronic overcapacity amongst charters to southern destinations during the winter season, in particular, poor service for Canadian travellers and, in some cases, the dislocation of Canadians as a result of operator failure.
The Canadian Transportation Agency, CTA, is responsible for reviewing and granting flight applications for Canadian charter carriers. Under the current system, charter carriers can obtain CTA approval for flights using a variety of methods, including faxing schedules for approval, obtaining verbal approvals for quick decisions, submitting an electronic schedule or by other methods. No meaningful electronic system is in place for stakeholders such as governments, charter carriers or travellers to obtain reliable and consistent information on the total capacity and schedules for charter carriers. It takes mere minutes to determine flight schedules and seat capacity for destinations served by scheduled carriers such as Air Canada and WestJet. Obtaining similar information for charter carriers in Canada takes weeks and several person hours of cobbling together — and, I personally do that myself — disparate pieces of information.
Increasing the level of transparency amongst charter carriers of their flight schedules and seat capacity would help in cleaning up some of the poor practices that some charter carriers inflict upon unaware Canadian travellers. Better transparency of charter carriers' "real" schedules and capacity may also help to reduce the chronic state of overcapacity that exists. It may also help reduce the failure rate of tour operators, which has, in the past, left governments scrambling to repatriate stranded Canadians.
Tour operator failure is almost an annual occurrence. The most recent failure of a tour operator occurred in April 2009, when Conquest Vacations ceased operations after 37 years of serving Canadians. Price wars amongst operators were one of the factors cited by the company for its ultimate demise. Price wars are common amongst tour operators due to the chronic oversupply of seats. While Canadians obtain bargain prices for package holidays, the failure of operators has become a common event. A year earlier, Zoom Airlines closed its doors. Some months later, Zoom Airlines' agency and tour operating arm, Go Travel Direct, went under. In March 2007, Harmony Airways shut down. A failure of a carrier or operator has occurred almost every year for the past four years.
It is our belief that these failures can be traced in part to the lack of transparency amongst charter carriers of the level of capacity they are planning. This in turn leads to an oversupply of seats and, as Conquest Vacations indicated after its demise, price wars. The lack of transparency and an oversupply of seats have also resulted in practices that do not serve Canadian travellers, for example, the growing number of what the industry calls double-drop or one-stop flights.
How some charter carriers operate is an interesting issue. I am happy to bring to light some of these issues because most Canadians are unaware. They are only aware once they arrive at the airport and find out what has happened. The problem is that Canadian travellers are not aware of these double-drop or one-stop flights. For example, let us say that you go to Toronto Pearson International Airport — and this is real because I work in the industry — believing you are booked on a flight from Toronto to Santo Domingo, Dominican Republic, only to learn that the plane will first stop in Punta Cana instead of Santo Domingo. You are not aware of this when you book; you are not told about it. The reason for the double drop is that the charter carrier did not have enough passengers booked for a Santo Domingo flight only — again, overcapacity in the industry.
Another example of poor business practices being employed are flights that are supposed to occur that do not occur. You go to the airport, for example, for a 10 o'clock flight. There are not enough passengers, so you are pushed to a 2 o'clock or a 3 o'clock flight. You are unaware of this until you arrive at the airport. You then have to sit around for four hours because there are not sufficient passengers to make that flight happen.
We believe that a properly designed electronic system of approvals for charter carriers is needed. It does not solve all the issues, but it at least allows everyone in the industry, namely, carriers, governments and travellers, to see what the real schedules are and what the charter carriers are doing or not doing. A properly designed system will not immediately solve these chronic oversupply issues at all, but it will help the situation. We believe that a new electronic approval system for charter carriers is the first step to achieving a more rational level of planning for this segment of the air transportation industry. The schedule carriers have had such a system in place for many years. It is time for charter carriers to have a similar timely and transparent flight approval system in place.
The Chair: Thank you for two interesting presentations.
Professor Lazar, you have been quoted at this committee by many witnesses in the past, so many of the questions that were addressed to them will be addressed to you today. I have four questioners, starring with Senator Plett.
Senator Plett: Thank you. I will try to keep my first round of questions to just a few. I have a number of questions and cannot address them all in the first round.
Mr. Lazar, you compared the airport in Dubai to Toronto's and Vancouver's. You said that we were well back of them in capacity going into the cities. You used the example of a 5 per cent increase in the number of passengers and what that would do to our airports versus a 3 per cent decrease. I would like both of you to answer this. I am not sure why we would have a 3 per cent decrease, but I can see why we would have a 5 per cent increase.
Can these airports presently accommodate a 5 per cent increase? I ask that because I travel back and forth from Winnipeg to Ottawa every week. Most of us travel every week. There are four direct flights from Winnipeg to Ottawa daily: two with WestJet and two with Air Canada. I fly Air Canada more often than WestJet, but I do use both of them. Rarely is there a seat open, so they are flying with full airplanes. A number of flights go through Toronto.
About two days ago, I came back from Trinidad on a committee meeting. My wife and I came back together from Trinidad and split in Toronto. She went on to Winnipeg, and I came here to Ottawa. I am mentioning this because when we flew into Toronto, we had to circle the airport for quite some time because they were too busy. When we landed, we both intended to make our connections. However, both of our flights were late. We were sitting one gate away from each other as we were both flying with WestJet. Both of the flights were late coming in, supposedly for the same issue. They were circling the airport; I am not sure why. When I was on my flight, we had to wait an extra half hour because we were waiting for passengers coming from another flight that was also late. No seats were available on my flight when we finally did leave.
If we increase the number of passengers by 5 per cent, what does that do to the system that we have now, where I believe that all the airplanes are full? I do not believe they are flying half-full airplanes. They do not do that on our flights from Winnipeg to Ottawa. In a month's time, Air Canada will be adding a third direct flight because the demand is there. Can we handle a 5 per cent increase?
Why would you be saying that we might have a 3 per cent decrease when we did not have that decrease during the recession?
Mr. Lazar: Yes, we can handle the increase. At this time, the problems at any of the major airports across the country do not involve either runway or gate capacity. The problem you describe was probably more a weather-related delay and problems in air traffic rules governing Toronto. I have been in those situations before. I have flown into Chicago O'Hare International Airport under similar weather conditions. O'Hare International can handle a lot more traffic per hour than Toronto, and that is simply a reflection of different air traffic rules in those two cities.
Is there a capacity constraint at the airports? My answer would be no. Is there a capacity constraint with the airlines? Again, the airlines try to fill as many seats as possible; an empty seat is lost revenue. They also try to fill as many seats as possible at the best possible fares. If they do not achieve these goals, as Mr. Redekop mentioned, they are operating with very thin margins. With one or two empty seats or one or two seats sold at an unusually low fare, that flight is no longer profitable. That is the goal of the airlines. They are doing better now than they have in the past. Do they have the capacity? Yes, they do. If they can operate the planes another hour a day, they can increase their capacity across their system by roughly 8 per cent to 10 per cent. They are not doing this, because the demand is not there either in the number of passengers or the fares that they can charge these passengers. That is the answer to your first question.
With respect to the decline, my purpose here is to point out that we need the right policies in place because as the global aviation industry continues to evolve, we will find probably 20 to 30 global or tier 1 hubs. These will be major airports that will connect continents. They will be the major airports of the world, and they will have links all over the place. If we do not have the right policies, then the two airports in Canada that are most likely to join those ranks, namely, Toronto and Vancouver, will not join those ranks. As a result, with less connectivity and fewer spokes from these hubs, the airports tend to retrench. They become less attractive for the hub carriers and for travellers at these airports.
The possibility is that if the hub carriers do not have a chance to compete on a level playing field, if our policies continue to penalize the airports and the airlines, Canada will not have a tier 1 hub. Our major connections will be through other airports in the U.S., Europe, the Middle East and Asia. This will have negative repercussions system- wide and for the economy. That is why I looked at the possibility of a 3 per cent decline, and that is not even the most pessimistic case.
Again, I cited St. Louis, Cincinnati and Pittsburgh. At one time, they were major hub airports — St. Louis for Trans World Airlines, TWA; Cincinnati for Delta Air Lines; and Pittsburgh for US Airways. TWA has disappeared; US Airways has wound down the operations in Pittsburgh; and also Delta Air Lines in Cincinnati. If you look, their traffic has declined markedly over the past 10 years with negative implications for those cities.
I do not think we would face such a dire scenario in Canada. However, they do point out what can happen if hub carriers change their policies or the hub carriers do not succeed in those cities.
Senator Plett: I will move on to another question. I will not debate this with you. I do want to say, however, that the weather was absolutely perfect in Toronto and it had been where I was coming from. Maybe these airplanes departed late, but I have no way of knowing that. It was certainly not because of the weather in Toronto. It is quite a common occurrence in Toronto for us to arrive late and depart late. It is not nearly always weather related. To me, it is congested in Toronto. You cannot arrive in and depart from Toronto on time. I despise flying into Toronto for that reason and will do anything I can to make a direct flight.
Anyway, be that as it may, you talked about ground rent and other fees that Canada charges where the United States subsidizes. I believe in a user-pay system. I do not want to pay for another senator or someone else flying. If we do away with ground rent, then you are suggesting that the taxpayer obviously subsidize the airlines and that I pay for your flying. I am not sure that I support that.
If we do take away these issues and start subsidizing, is that not an artificial way of allowing an airline to make money through subsidies? They should be able to make it on their own, should they not?
Mr. Lazar: Again, we can debate whether it is a subsidy or not. Let me compare two industries, a network industry, such as the airline industry, and the auto industry. The auto industry is not a network industry. It does not produce externalities for the economy. If you go with the auto industry, it will benefit some suppliers and have positive employment effects, but it does not generate the network externalities and productivity improvements for the economy.
A network industry — and airlines are one of three or four such key industries in each country — produces these positive externalities. Could we live without an auto industry in Canada? Yes, we could. Could we live without a transportation industry in this country? No, we could not. Therefore, the industry produces positive externalities and productivity growth. Economic theory is very straightforward on this; you do not tax industries that generate positive externalities. There is even argument that you subsidize them.
I will not claim eliminating the ground rents or that the ATSC is a form of subsidy. If we eliminate them, we are not subsidizing the industry, but we are not imposing a tax on an industry that produces significant positive externalities.
Senator Plett: Who pays the rent, though?
Mr. Lazar: The rent is just a way of generating cash for the government. The original argument that was made for the rents is that the taxpayer deserves to earn a return on the investments they made in these airports in the past. However, when the airports were transferred to the airport authorities, most of them were in dreadful condition and significant investments had to be made just to improve the standards and quality of the airports, let alone expand their operation. It is a nice hidden tax.
With respect to the Air Travellers Security Charge, the airline industry is the only industry that is subject to a user fee. It is not imposed in any other industry. The reality is that we are talking about national security. If something happens to this industry, it impacts the entire economy, not just the airline industry. If we go back to 9/11, the repercussions there spread across the entire U.S. North American economies. The damages done to the airlines were a fraction of the economic losses to the North American economy.
Therefore, network economies should not be subject to unusual or unnecessary taxes. That is the main point that I am trying to make.
Senator Merchant: From what I understand, then, to follow on this, it is unfair for the airline industry to have to provide national security, because you are saying that the security tax is really a national security issue.
Mr. Lazar: Yes.
Senator Merchant: I understand that and agree with you. On the airport authorities, you made mention of the fact that there is no oversight. Can you expand on that? Are there improvements that we can make there? These bodies are not really reporting to anyone but themselves. Referring to your study, can you tell us how this has worked out? Could you expand a little please?
Mr. Lazar: We had this meeting about 10 years ago, and I think I was involved with the review of the Canada Transportation Act of 10 years ago. At that time, I would have argued that the airport authorities from day one and even 10 years ago should have been subject to some type of regulatory oversight. We have examples of other countries where their airports' fees and investments are regulated.
At this time, the major investments have already been undertaken. Were they extravagant? In some cases, probably yes. Did they consider the stakeholders? Probably not, but it is too late to undo what has been done in the past. If you subject them to regulatory oversight at this time, there is probably not much value. All you will do is generate cost for all parties.
However, on corporate governance, I believe there is room to make changes. The way the directors of these airports are selected leaves much to be desired. There probably is under-representation of the key stakeholders, namely, the airlines and the travelling public. Local communities and provincial governments are well represented, but they are not major stakeholders. I would change corporate governance of these airports to allow greater representation by other stakeholders — again, the airlines, employees and passengers. As well, I would make sure that these directors have term limits and that you have much greater independence between the directors and governments on these boards.
Senator Merchant: That is enlightening. You study these things.
Following on your comments about the taxes that the federal government obtains from the industry, can the federal government afford to forgo the monies that they collect? Would the spinoff benefits that you mentioned balance off the loss of revenue to the federal government?
Mr. Lazar: I believe that would be the case. Again, the federal government is facing a huge deficit, and it is a legitimate question that you pose as to whether they can afford to forgo maybe $700 million to $1 billion in annual revenues from this sector. Are there better ways of reducing taxes, or are there better ways of spending the money?
As I pointed out, productivity growth is critical. The government should be looking at their tax and spending policies in several ways: one, to try to reduce that deficit over time — as the economy improves then greater efforts can be made; two, to ensure there is efficiency in the way government operates; three, to ensure that we have the right mix of social programs, and that is really a political decision at the end of the day; and, four, to try to stimulate productivity growth.
I have been involved in debates on productivity growth for 25 years. I have heard every argument made. We try these policies; none have worked. The reason for that is that economists, by and large, do not really understand the process. Therefore, we look at network industries that have positive externalities and stimulate productivity growth — and, as I said, the airline industry is one of three or four — and governments should focus on what they can do to stimulate these industries. I have gone through calculations that suggest that even if the government forgoes these revenues, within a period of years, the benefits from higher productivity growth and economic growth will start to repay these investments, and the returns will continue indefinitely from that point on.
Senator Merchant: This is a longer-term picture; it is not in the short term. We have to think long term.
Mr. Lazar: You will not forgo $700 million to $1 billion in revenue tomorrow and expect to recover it all in 12, 18 or 24 months. That is impossible.
Senator Merchant: I am wondering about the charter carriers. Are there other examples of how charters operate, for instance, in the U.S., that are different and have positive results for the traveller?
Mr. Redekop: The industry in Canada is much more similar to that in Europe than that in the U.S. You do not find many charter carriers in the U.S. I cannot even think of one. I am sure they exist. That is not a fair or good comparison. It is better to compare with what happens in Europe.
The UK Civil Aviation Authority, from my perspective, is much more involved with the industry. The approval process is much better and more transparent with who is doing what; the information is accessible. Charter carriers in the U.K. are only approved for flying a certain number of passengers; they are required to hold an Air Travel Organiser's Licence, ATOL. That is not the case in Canada. I am not suggesting that that should occur in Canada, but the regulations and the role of the UK Civil Aviation Authority are much deeper and extensive in the U.K. than ours are in Canada. The U.S. just does not operate the same way as we do here.
Senator Frum: Professor Lazar, I want to ask you a question, but Mr. Redekop, if you want to respond as well, that is great.
At the end of your presentation, we understand clearly how you feel about the rents and taxes, and then you added that the federal government should look at the funding of infrastructure. Could you elaborate on that a little more? How do you propose infrastructure be funded?
Mr. Lazar: In response to Senator Merchant's question, I said that five or ten years ago, before some of these massive investments in the airports had been undertaken, there might have been a greater role for the federal government to play. Many of these investments have been made. There will be smaller investments going forward.
However, I will make two comparisons, one with the U.S. The airports in the U.S. benefit in two ways: one, they are able to issue tax-exempt bonds to finance their expansion, which gives them a cost advantage; and, two, most of the money the Federal Aviation Administration, FAA, receives through the various taxes that it imposes on travellers goes back into the system. The FAA plays an important role in helping to fund airport expansion.
I will take the case of the United Arab Emirates, because they have been in the news lately. The governments of Abu Dhabi and Dubai together are spending somewhere in the order of $30 billion to $40 billion to expand their airports. The airport authorities will not be charged the full cost, and they will not pass these on to the airports because they look at the whole aviation sector holistically and as a way of developing their economies.
Here in Canada, we do not support our airport authorities. We do not make it easier for them to borrow to expand. We do not give them access to various types of government programs. Instead, we tax them. That is the basic point I am trying to make.
Senator Frum: Again, with our major competitor to the south, if we are not using the same system, we are penalizing ourselves.
Mr. Redekop: You covered it really well.
Senator Frum: On your point about making Toronto and Vancouver hubs, putting the excessive rent and tax issues aside, if you eliminated all those things tomorrow, you would have to do other things to make Toronto and Vancouver hubs, I imagine. Chicago and Los Angeles will not be happy if Vancouver and Toronto start becoming aggressive in that way. What are the other barriers, aside from the taxation barriers, that have prevented these cities from growing as hubs?
Mr. Lazar: The cost structure has been one factor. Apropos to what Mr. Redekop mentioned, there is good reason for the U.S. low-cost carriers not operate into Vancouver and Toronto, especially Toronto. It is simply too costly for them. They stop at the U.S. border. That tells you right away that there is a cost issue. I believe someone pointed out that Toronto ranks somewhere among the top 10 or 15 airports worldwide in cost of use.
The other issue is, again, level playing fields and fair competition. Can Air Canada and WestJet compete and survive against U.S. carriers, European carriers and Asian carriers? I believe they can. I believe they are well managed; their products are quite good. WestJet has expanded consistently and considerably over the past 15 years and continues to expand. Air Canada has had its ups and downs, but we will have more competition, particularly from Asia; you can point to the U.A.E. carriers, but it will come from the Chinese carriers as well, where their governments play a much more active role in promoting them.
I am not suggesting that our government should play an active role in supporting either Air Canada or WestJet, but it must play an important role in ensuring that competition is not distorted.
Senator Frum: As a hub, you are just a way station connecting people going from place A to place C. You are place B in the middle; those people are not travelling to Canada because a hub is just a transit point.
You mentioned that we are geographically well positioned. Is that really the case? If the final destination for people from Asia or Europe is the U.S., I am not sure what would be attractive about stopping in Canada. Perhaps our geography does not help us at all.
Mr. Lazar: It does help us. There is not service throughout all of North America and throughout all of the U.S. directly from Asia. There is service to 10 or 12 major airports, and from those, you must connect to rest of the U.S. You can fly to Vancouver or to Toronto and have access to basically the entire U.S. market.
If you look at it geographically, given that the world is not flat, Vancouver and Toronto are very well positioned from a travel-time perspective to connect Asia to North America and South America. It is a matter of the hub carriers, notably Air Canada, being able to expand operations. Air Canada is putting out more spokes; it is partnering with Star Alliance. WestJet is now partnering with the other alliances. There will be more links between Asia and North America and Asia and South America. We need to ensure that the airports are cost-competitive and that the Canadian carriers are not facing unfair competition from airlines in other parts of the world that are trying to do exactly the same, namely, connect traffic flowing from one continent to another.
Senator Frum: Within the Star Alliance, it is a very cutthroat business, which means some of the partners that Air Canada would have would strongly discourage the growth of the airports in Toronto and Vancouver.
Senator Mercer: Thank you for being here. I appreciate your presentation.
Dr. Lazar, I do not want to direct what your next research should be, but with respect to capacity and job generation at airports it, would be great to see case studies that show that if we increase capacity at our airports, we will have spinoff effects in the communities. Some chambers of commerce have done those studies. In Nova Scotia, the report on the activities of the Port of Halifax often includes a report on the activities of the airport because the airport is considered part of the port. That would be helpful.
I was interested in your answer to Senator Plett's first question about capacity. You said that there is capacity. How many more passengers would we need at Toronto Pearson before we look at major expansion there? If we did a major expansion at Toronto Pearson and had relieved taxes and ground rent there, as some people have suggested we should, how would we pay for the capital costs of that expansion?
Mr. Lazar: In the expansion of Toronto Pearson, they added a third east-west runway and a second north-south runway, so they added considerable capacity on the ground. They also considerably expanded the gates. I believe that when they started this massive redevelopment project, they assumed that they could handle upwards of 50 million passengers a year. They are currently operating at about 32 million to 33 million, so even if we discount their projection to 45 million, they can easily increase by about 40 per cent before hitting the capacity of the airport.
If they got closer to 40 million passengers a year, which is about 25 per cent more than they currently handle at that airport, they would then undertake the next phase of expansion. The capacity does exist. The delays that do happen are likely to be delays related to weather and air traffic, not capacity delays in terms of too few runways or too few gates.
Senator Mercer: Some airports around the world, including Heathrow Airport in London, are permanently under construction. I do not know when the construction began at Heathrow, but I do not think it will ever end. Every time I am there, there is construction happening.
Mr. Redekop, the issue of charter airlines and tour operators is interesting. You commented on poor business practices. It is difficult for us to legislate good management practices. The marketplace takes care of that. Our job is to ensure that there is protection for the customers.
A number of provinces have regulations to protect passengers in the event of the failure of tour operators. Do you think that those protections are adequate? Do they need to be expanded? Should they be national in scope as opposed to only provincial?
Mr. Redekop: There is protection, but it is after the fact when people are in trouble. My comments were more directed toward preventing those difficulties.
It is a good suggestion to have those protections as national as opposed to provincial. Provincial governments may argue over that, but at least it would be consistent across the country. There are many inconsistencies in many industries across the country, so that would be a step forward.
My comments were more related to ensuring that everyone understands what is happening in the industry, such as making consumers aware of double drops and of how much capacity exists by carrier. That does happen in the U.K. There have been overcapacity situations in the U.K., but that has been rectified by the marketplace. That was possible because of more transparency there. We have an antiquated system of approvals in Canada that can be relatively easily improved by technology, and it would have many benefits.
Senator Mercer: Since we began the odyssey of transferring airports to local authorities, which was a major shift in how the industry operated, we have had time to observe what has worked and what has not.
Do you think we should build a regulated review of the process into the system so that we do not ignore this?
This situation is becoming critical for certain airports such as Montreal, where the competition coming from Plattsburg and other airports south of the border is increasing substantially. However, we do not have a built-in mechanism to do an automatic review so that we can respond to this. Whatever changes we recommend, if the government were to implement them, we know that in five years' time, those recommendations should probably be reviewed as well.
Mr. Redekop: You do not need a review. You need government policy-makers to listen. It is well known. The chairman of Transat, Jean-Marc Eustache, is quoted as saying that there is a problem when it costs them three times as much to land at Toronto Pearson than it does at Charles de Gaulle Airport in Paris. He is on record saying that. That is a problem. Canada has dropped from being a top-10 tourist destination to less than that over the last five years or so.
This industry has never called for the abolition of fees and taxes; they simply want fair treatment. Where are the equivalent taxes for buses or for rail transportation? They do not exist. Where is the security tax for them or the infrastructure improvement fees for them? They want a level playing field.
Senator MacDonald: Gentlemen, it is great to have you here. You bring a lot of broad knowledge to the table, and we appreciate it. I have a number of questions, and I will try to get through them quickly.
Going back to the last 20 years, and the establishment of airport authorities and NAV CANADA as a template for managing our airports and our resources, what is your assessment of it, disregarding the fee structure?
Mr. Lazar: If we had this discussion in the early 1990s, our suggestion at that time was that if you are going to privatize, then privatize. These not-for-profits do not make much sense. If you look at the Vancouver Airport Authority, it has one of the highest operating profit margins of any type of company across Canada. Privatize, and then subject them to price regulation so that they do not get carried away with various projects and exploit the combination of their monopoly position and taxing powers.
Senator MacDonald: How does the system we have in this country compare to the systems used around the globe? Is it an exception or a rule, as a template?
Mr. Lazar: It almost fits in the middle. In the U.S., their airports are not privatized. They are owned by either local or state governments, so they are not subject to any particular oversight. In the U.K., they have privatized, as well as in Australia. They are subject to differing degrees of regulation. In other parts of the world, they are government-owned, so there is no regulatory oversight.
You have a mixed bag of models globally. Canada falls in the middle in the sense that we have not completely privatized; we have set up not-for-profits and never subjected them to any type of regulatory oversight.
Senator MacDonald: Going back to the early 1990s, if you were given a clean slate, how would you structure it?
Mr. Lazar: At that time, I would have said let the airport authorities become public companies; issue shares to finance their expansion; and because they have monopolies over their markets, have a regulator in place — similar to what we have for pipelines across this country — to have reviews of their pricing every three to five years, to either approve or disapprove their investment plans and pricing.
Senator MacDonald: Is it too late to get there?
Mr. Lazar: Yes, because the major investments have been made. As I said before, the airports that were transferred to the airport authorities were, by and large, in dreadful condition. The government had not maintained the investment in these airports, so massive investments had to be made to upgrade the quality of the airports and then to expand them. We still have expansion in a number of airports, but the major investments have already been made.
Senator MacDonald: You mentioned the hub carriers; you saw Toronto and Vancouver as having an important role to play as hub carriers with respect to traffic from Asia to North America and South America. If we can call it an advantage, do we have the same leverage with transatlantic traffic to the subcontinent and Europe? Does Canada have the same ability to fill that capacity?
Mr. Lazar: Yes. If you look at the U.S. carriers, they serve a number of European destinations from their hubs. From different cities in the U.S., they connect via their hub. The European carriers will serve a limited number of destinations in North America from their hubs.
Toronto can connect, by one stop, almost any place in North America to most cities in Europe. In fact, through the various other airlines operating into Toronto, Toronto is well positioned to connect just about any place in North America to just about any place in Europe. It is as well positioned as New York, Chicago or Atlanta.
Senator Meredith: Thank you for your presentations today. They are enlightening in terms of the industry, the challenges being faced and how you are expecting the government to play a role in all of this.
Professor Lazar, over the last 30 years, there has been a duopoly with Air Canada, formerly Canadian Pacific, and now WestJet — and also with the small role that Porter Airlines is playing in the marketplace. In your opinion, has this created competition and fair, reliable service for Canadians?
Also, you talk about the international aspect — of us attracting international carriers to land here and so forth and to provide greater service to Canadians in the domestic market. What is your opinion on that?
Mr. Lazar: The domestic market does have more than ample competition. We have to be realistic, given the size of our domestic market and forgetting about connections beyond Canada. The market is simply not large enough to sustain more than what I would call the two and a half carriers, Porter Airlines being the half as they only operate in Eastern Canada.
When the industry was deregulated, starting in the mid-1980s, many economists — I was not one of them — were under the delusion that we could support large numbers of domestic carriers; they pointed to the U.S. as an example. The U.S. market, which is much larger than ours, can only support three major carriers — US Airways will probably eventually merge with American Airlines — and a small handful of low-cost carriers. The same situation is true in Europe, which has a much larger market.
It is totally unrealistic to expect that we will get many more players in the domestic market, and I do not believe the market being poorly served because we have only two and a half.
If you look at the base fares alone — forget about the taxes — and compare them over time, you find that air travel continues to be a bargain in this country, at least at the bottom end. We may not always get the lowest fare or a seat on our most desirable flight, but air travel is still a relative bargain.
Senator Meredith: Should Canada expand its agreements on an international scale? We have agreements with the U.S., the European Union and Asia to attract those travellers to our market.
Picking up on questions by Senator Frum and Senator MacDonald about the hub, in the next three to five years, how ready are we to move into attracting larger carriers to land where Canada is strategically situated to be able to attract people coming from Asia into Vancouver and from Europe into Toronto?
Mr. Lazar: I believe that the airports are capable of accommodating a substantial increase in traffic. Toronto is fully capable; Vancouver is going through another round of expansion. They should be able to accommodate. Cost is a major consideration.
Should Canada go into a more open skies agreement? My response to that is absolutely yes. However, I would add the qualification that, like our trade agreements in other areas, we should include provisions such as subsidy codes, dumping codes, safeguards and, as we have in NAFTA, perhaps side agreements on the environment and labour.
The U.A.E. is an interesting case. Their labour laws are very restrictive, and I do not think Canadians would be supportive of them. I would argue that we want to include some type of minimal standards in our agreements on the environment, labour and other areas to make it a level playing field. We could deviate, but if we are to open up the markets, let us give our carriers a chance to compete.
The last point I want to make is that it is not just a matter of attracting foreign carriers; it is more important to increase the opportunities for our Canadian carriers. The more they add spokes from their hubs, the greater the importance and role of these hubs will be and the greater the connectivity throughout the country. For each spoke Air Canada or WestJet adds to their hubs, they can then increase frequencies on other spokes into those hubs. The hub and spoke network is a dynamic operation, and when you strengthen part of it, you strengthen all of it; if you weaken part of it, you risk the entire hub network collapsing.
Senator Meredith: Mr. Lazar indicated that the government should eliminate the excise tax and landing fees. Mr. Redekop said that we are not talking about an abolition of these fees; the industry has never asked for that. However, you want a tier 1 hub, and these are conditions to getting this hub situated in Canada. You indicated that airlines are not landing here because of the landing fees that they have to pay, and that this is affecting their bottom line. You want a level playing field, for example, taxation on the trains or buses, et cetera. Could you elaborate on that for me?
In light of that, Mr. Redekop, Canadians are always looking for a deal. If the airfare to Florida is $600, but we can get it for $500, we will drive to Niagara Falls. Others have appeared before us saying that this will happen. You cited the Plattsburgh situation where people will cross the border, and American airlines are taking our travellers.
How will we alleviate this situation? You talked about the lack of competition within the domestic market and so forth, Mr. Lazar; I am addressing this question to both of you.
Mr. Redekop: We know there is a problem when Alaska Airlines sets up shop in Bellingham to take Vancouverites to Hawaii. It is obvious what they are doing there. This situation occurs throughout the U.S. border states. It is not just in Bellingham, but also in Syracuse, Niagara Falls, Detroit, and so forth, and it is growing. This is lost revenue for the airlines, airports, and governments. The taxes and fees that the governments and airports would have received are now going partially to the U.S.; it is not occurring in Canada.
That is what is being argued here. This is not a level playing field. When I mentioned the trains and buses and so forth, I was not advocating taxing them to the same extent because that would make everything worse. It was just an example of how airports, airlines and air travellers have to bear these fees and taxes that do not occur elsewhere in the transportation industry. It is not a level playing field there either. We will also be less attractive as a hub.
Professor Lazar talks about Toronto possibly becoming a hub for North America to Europe. That will not happen under the current system because it is too expensive to fly into Toronto Pearson International. Mr. Eustache has made that very clear. The numbers are there. Everyone knows about this; there is no mystery here.
We have to fix the taxes and fees system because, in the end, everyone is losing on this — the governments, the airports, et cetera. We are losing revenues from tourists who are not coming here and because Canadians are going in increasing numbers south of the border to fly. This has not been elaborated upon to any significant degree in the economic studies of which I am aware. However, there are obvious losses in fees and taxes to Canada as a result of what is happening, and everyone is aware of this.
Senator Fox: I have the same line of questioning as Senator Meredith. If we do not have a level playing field today, it is pretty much due to our own actions and policies, as I see it.
If we did establish a level playing field — I assume with the U.S. and the European countries as the first target — what would happen to the financing of our local airports? There would be a loss of revenue somewhere in the system. I am not sure what would happen at that stage.
Mr. Redekop: I think there would be a net gain in revenue. It has to be proven, but, first, those Canadians who are going in increasing numbers to the U.S. would now fly out of Canada; second, we would get more foreigners coming into Canada.
Senator Fox: Basically, we are not suggesting to eliminate all these costs but to reduce them to a level that is consistent with competition in, for example, Paris.
Mr. Redekop: The air industry has never said to eliminate them.
Senator Fox: When you say "aggressive subsidization policies by a small number of foreign governments," which ones do you have in mind?
Mr. Lazar: Again, if you look at various Asian governments, starting from the Gulf states and moving east from there, China will start pushing their aviation industry and their airlines. Again, in the Gulf states, there are massive investments in infrastructure where costs are absorbed by the governments, not by the airlines or their passengers.
Senator Fox: What kind of leverage would we have in negotiating an agreement with these countries?
Mr. Lazar: We already have agreements and capacity restrictions in place. I think the Canadian carriers would be quite happy to see the capacity restrictions ease, as long as you included codes in the agreement comparable to what we have in our multilateral trade agreements — or our trilateral agreements in North America — on definition subsidies, countervail actions, dumping and safeguards so that the playing field is level. If we give the Canadian carriers a chance, I believe they will succeed. There is no assurance of that, but I am confident they will have a good chance of succeeding globally.
Senator Fox: In most cases, many of these trade remedies have proven to be lengthy and cumbersome. Do you have faith in these mechanisms in the short term as opposed to the long term?
Mr. Lazar: Do we have an alternative to them? What is the alternative? Unilateral actions, and basically we get into sort of beggar-thy-neighbour policies, as we have seen in the past year, where every country wants to depreciate their currency vis-à-vis the U.S. dollar and the Chinese yuan. Unilateral actions do not work. That is why we have gone the multilateral route and why we have these trade agreements. They are not perfect, but they are far better than not having anything in place.
Senator Fox: If we want to conclude an air transport agreement with the Chinese, would we have much leverage to introduce this kind of measure in that air transport agreement?
Mr. Lazar: Would we get far against the Chinese? They might include them, though they might go ahead and just ignore them, assuming we would not retaliate. That suggests that perhaps Canada should take a lead role in trying to develop larger regional agreements or multilateral agreements specific to the industry.
Senator Fox: In what kind of time frame do you think that could be done?
Mr. Lazar: I do not really know.
Senator Fox: It seems you can act on the first prong of your strategy more readily than the second one.
Mr. Lazar: We have all these air transport agreements in place. We all have some capacity constraints, so that gives us breathing room to try to include other codes in them. We will have success in some agreements but not in others.
Going the regional, multilateral route will be more time consuming. It could be three or five years — I do not know — but we will have to move in that direction because, as China starts ramping up its industry, more problems will occur.
Senator Fox: In this committee, we have heard people talk mostly about Montreal, Toronto and Vancouver. I do not think you mentioned much about Montreal. What do you see in the future for the Montreal airport in this context?
Mr. Lazar: If I knew the internal planning of Air Canada, I could give you an answer, but I do not know what their plans are. I think they have built up Montreal's international traffic over the past few years. I do not know if they will continue to do so.
It is difficult for an airline such as Air Canada to operate multiple hubs in a country this size. The U.S. carriers will have maybe two or three hubs each, but they have a much larger market. How many truly major hubs can Air Canada support? I would think two at most. Montreal would then have to be a secondary hub. That said, I cannot speak for the airline.
Senator Fox: Do you have any comment on that, Mr. Redekop?
Mr. Redekop: No.
Senator Plett: The airlines that seem to have been the most successful are the ones that are making many changes internally. When you fly now at the back of an airplane, you are lucky to get a bag of peanuts and a glass of water. If you take a second bag, they charge you for it, and so on.
The other day, I met with the president and CEO of a company that owns four regional airlines. He made an interesting observation. Mr. Redekop, I would like your response to it. He said that the reason WestJet and Southwest Airlines are doing well versus some of the other airlines such as Air Canada is because they use only one type of airplane. His regional airlines do the same. However, Air Canada has a range of airplanes. Therefore, with promotions within Air Canada, for example, and training pilots, there is a huge chain reaction when a person is taken off a smaller airplane and put into the co-pilot seat on a larger one. With WestJet, Southwest Airlines and some of the airlines that are doing well, they have one type of airplane only, and my friend says that that is one of the biggest reasons for the success of those airlines.
Do you have any comment on that?
Mr. Redekop: Why does WestJet not fly to Asia? They do not have the airplane. If you want to be an international carrier, you need a variety of planes, such as those that can fly transatlantic over to Asia. Air Canada and WestJet are different carriers. They have different objectives and serve different markets. It is comparing apples and oranges. Southwest Airlines does not fly internationally, either.
Senator Plett: They would then only need two airplanes, not a range of them. Air Canada uses a range of airplanes to fly domestically, not internationally. I fly them all the time. They use a range of airplanes to fly domestically.
Mr. Redekop: They do use a range of airplanes; it is a legacy. Air Canada is a good company and has served Canada well for many decades. However, they have also had issues. Getting down to two types of airplanes is an internal management issue. They know what they are doing. Most of the airlines know what they are doing, but they have to deal with many different issues.
The idea of multiple carriers or planes is really a non-issue, as far as I am concerned. You cannot compare WestJet and Air Canada. I think it is misleading to do that because they are very different airlines with different objectives.
Senator Plett: I will accept the final answer, except that you did compare many of the different airlines. Therefore, I think it is only fair for me to do the same.
In any event, I will go to Mr. Lazar. Talking about some of the fees, the ground rent and so forth, I support the suggestion you made. If we could turn the clock back, you suggested privatizing the airport authority. I think that would be a marvellous idea. However, a public company has shareholders who demand you make a profit. If you do not make a profit and you do not intend to make a profit, how will you get around that and not do exactly what the airport authority is doing now by charging rent? You would have to do the same. I would suggest that shareholders are more demanding on making a profit than is government.
In this particular case, as much as I support private industry, I think that would bump up the fees and not reduce them.
Mr. Lazar: I do not think that would be the case because the airport authorities are not government-owned. They are not-for-profit agencies independent of the government. As I pointed out, Vancouver is one of the most profitable companies across this country. They will not call their net income "profits," but, in fact, that is what it is. If we had privatized and subjected them to regulatory oversight, then we might not have had the type of massive investments that have been made.
Being from Toronto, I look at Toronto Pearson International. Did it have to invest $7 billion in that expansion? Is the design of Terminal 1 the best design? The answer to both of those questions is no. If it had been a private company, could the Chrétien government of that time have dumped a $900-million expense on them to buy out the owners of Terminal 3? The answer is no.
On shareholders and regulatory oversight, you probably would have had different investment programs for and different designs of these airports. The cost structure at the airports probably would not have been very different — most likely less — and their operations would have been as efficient, if not better.
Senator Plett: I would certainly agree with you, sir, that Toronto Pearson is drastically overpriced for some reason. We use Vancouver and Montreal, and for some reason their fees are less than Toronto. I am struggling with the idea that it is because of the system we have created. I would suggest it is more because of the people in charge of Toronto's airport. I am not sure.
However, certainly, I agree with the chair in my last comment that we need to do something about Toronto Pearson to make that more attractive. However, as Mr. Redekop said, I should not use apples and oranges to compare airplanes. I think we are using apples and oranges to compare Vancouver and Toronto Pearson because Vancouver is not doing the same as Toronto Pearson, yet it is the other hub.
Senator Merchant: I will get a little personal and regional here because I come from Regina. We are a capital city, but we also have Saskatoon, which is now a larger city than Regina. We do not seem to be able to hold onto the flight that had started between Regina and Ottawa. As I say, I am getting personal here.
The Saskatoon flight was in operation for well over a year, maybe two years. The Regina flight started last spring around May and stopped in September. I imagine there are reasons for that. I am talking about Air Canada only because WestJet did not have a non-stop flight to Ottawa.
The Regina and Saskatoon flights were always full. They want to use Toronto as their hub; they would rather have Regina-Toronto-Ottawa or Saskatoon-Toronto-Ottawa. Of course, we bypass Toronto and go through Winnipeg. That is why so many flights go out of Winnipeg. Winnipeg is the only city in a province of one million people, whereas Saskatchewan has two cities in a province of one million people. Is it our fate not to have a direct flight? Why do you think Air Canada is so prepared to inconvenience us by making us go through Toronto?
Mr. Lazar: There are important dynamics to creating a hub and spoke network. The more spokes you add, the more frequencies you can add; and passengers want frequencies. You would like to have a non-stop flight from Regina to Ottawa, but you would also like to have three or four of these non-stop flights both ways each day so that you are not restricted. The traffic does not warrant this. The aircraft can be better used on other routes. Even though the flight was full, when considering the revenue yield, you will find that the airplane probably could have generated greater revenues being used elsewhere. I suspect that is why Air Canada did that.
In the U.S. and Europe, more and more traffic from the smaller urban centres is being directed into the major hubs to connect globally. It has cost advantages and certain network advantages for the airlines and, at the end of the day, advantages for travellers.
Yes, you could have had one non-stop Regina-Ottawa flight, but now you have more daily options to get to Ottawa, albeit one stop, than the one non-stop you might have had before.
Senator Merchant: We have only very limited options going through Toronto. I believe there is one flight in the morning, one at mid-day and one in the evening.
The Chair: We will have witnesses from Air Canada appearing before the committee; they will be happy to address that issue.
Senator Merchant: Thank you.
The Chair: I do not know about your fate, but you will have the targeted audience in front of you pretty soon.
Senator Meredith: I am always looking at the economy and at how Canadian businesses survive the competitive global economy. In talking about the opportunities, maybe both of you can comment on the economic benefits of having the airline industry open to more markets in Asia, South America and Europe; the effect on the Canadian tourism sector in attracting more visitors; and growing small businesses that depend on visitors, especially for their livelihood. Can you speak to that and to what role we should play to ensure that happens in short order.
Mr. Lazar: From my perspective, to attract more traffic, we need more open skies agreements and more liberalized agreements with the appropriate safeguards to ensure that Canadian carriers have the ability to compete and succeed. You do not want to disadvantage them. Another idea is to make it less costly for airlines to operate at Canadian airports. That is quite important. Throughout all this, we cannot overlook the fact that depreciation of the Canadian dollar has worked against us as well. We cannot do much in that area, so we set that aside.
I want to make one final observation, if I may, on the U.S. border airports. I do not know what the leakage has been to those airports, but some estimates put it as high as $2 million. We tend to overlook the fact that on many flights, whether Air Canada or WestJet, five to ten passengers per flight can make the difference between turning a profit and losing money. When we experience this leakage, whether to U.S. border airports or to airports in other parts of the world, it means that a number of flights in Canada are unprofitable. Therefore, those flights will be dropped, which has secondary consequences. It means that many connecting flights into those hubs also become unprofitable; and then they are dropped. It has a cascading effect. We have leakage to U.S. airports of about $2 million and leakage to other airports because of our policies and costs. However, the actual damage to the Canadian aviation industry is far greater than those numbers.
Mr. Redekop: On the other side, we see many foreigners coming to Canada via the U.S. because of the capacity and flights between the U.S. and Asia and Europe. Chinese and Japanese people might come to Canada, or they might not because their first stop is in the U.S. We are not as attractive for their expenditures. Increasing the markets and the number of flights can only benefit us. Perhaps we will be one of the top 10 tourism destinations again.
The Chair: Professor Lazar and Mr. Redekop, I thank you for your presentations and answers.
Before closing I remind members that we will meet tomorrow at 6:45 p.m. to hear from Michael Tretheway, President of InterVISTAS Consulting Inc.
(The committee adjourned.)