Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 1 - Evidence, October 4, 2011
OTTAWA, Tuesday, October 4, 2011
The Standing Senate Committee on Transport and Communications met this day at 9:31 a.m. to proceed with its study on emerging issues related to the Canadian airline industry.
[Translation]
Senator Dennis Dawson (Chair) in the chair.
The Chair: I call the meeting to order and I would like to thank you for being here.
[English]
This morning we are continuing our study on the airline industry. Appearing before us, on behalf of Air Canada, is Duncan Dee, Executive Vice-President and Chief Operating Officer; David Waugh, Director, Bilateral International and Regulatory Affairs; and Joseph Galimberti, Director, Government Relations.
One of the last times my friend Mr. Galimberti appeared before the committee, it was mentioned that we had effectively worked together, but probably seven years ago. I want to put on the table that we do know each other. I have never dealt with either Mr. Galimberti or Mr. Dee on Air Canada files in my previous life. I would like to make that clear to avoid any kind of suspicion.
[Translation]
Duncan Dee, Executive Vice-President and Chief Operating Officer, Air Canada: Honourable senators, thank you very much for the opportunity to meet with you today on this very important topic. I would like to thank you for launching your current study on emerging issues related to the Canadian airline industry.
Government in general is long overdue for a review of our industry, and should gain as much knowledge as possible of the market forces underpinning the critical service we provide and infrastructure we support.
The Canadian airline industry is profoundly significant to the Canadian economy. In 2010, Air Canada alone carried almost 24 million passengers, employed 24,700 Canadians, generated revenues in excess of $9.7 billion, and totalled $8.4 billion in domestic expenditures, which directly generated $3.3 billion of Canada's GDP.
[English]
Even those large numbers likely understate Air Canada's significance to the Canadian economy. When factoring in indirect and catalytic economic impacts, Air Canada's impact on GDP and Canadian employment becomes much greater. The direct contribution to GDP is $3.3 billion. The indirect and induced contribution to GDP is a further $3 billion. The catalytic contribution to GDP is $5 billion to $19 billion. This gives a total impact of $11 billion to $25 billion per year. We directly employ close to 30,000 Canadians and indirectly support the employment of a further nearly 40,000 Canadians. This gives a total economic impact, including catalytic contributions, of 124,000 to 278,000 jobs in Canada.
The work of this committee is so welcome and encouraging to those of us in the industry because the government does not presently have, and has not for decades had, a single, cohesive policy position regarding commercial aviation in Canada. The last attempt at enunciating something approaching a vision for airlines alone — and a fairly limited attempt at that — was the two-airlines policy of the 1980s and early 1990s. This policy sought to divide international route rights between Air Canada and Canadian Airlines, with the objective of artificially keeping two Canadian air carriers alive. For rather obvious reasons, this is no longer a relevant policy tool today.
[Translation]
Since that time, although a series of well-intentioned documents and directions like the recent "Blue Skies'' policy have been periodically introduced, they have sadly been undermined by the absence of a broader aviation policy framework.
Unfortunately, the practice of introducing and implementing international aviation policies as stand-alone initiatives, as opposed to component pieces of an overarching national strategy for the industry at large, has not resulted in a long-term vision for our industry and the strategic role we play in the Canadian economy.
The same lack of direction is evident in policies governing airports in Canada. Since the national airports policy was introduced in 1994 and Canada's major airport facilities were divested to local airport authorities, no substantive policy revision has taken place.
[English]
As a result, aviation infrastructure in Canada is disjointed, poorly understood, full of divergent interests working at cross purposes, and loaded with unjustifiably high infrastructure and service costs that actively discourage growth and artificially depress markets.
The situation is so bleak that, as of today, not one U.S. discount carrier serves any Canadian airport, with some instead choosing to establish operations at airports such as Buffalo Niagara, Niagara Falls International, Plattsburgh International and Bellingham International to attract Canadian traffic. On a per passenger basis, the infrastructure costs, landing fees, airport improvement fees, air navigation charges and security charges at these four facilities are 229 per cent lower than at the Canadian facilities with whom they compete. Canadian passengers are predictably responding to that disparity. By 2015, as many as 3.4 million Canadians could be traveling out of these four facilities alone, with an associated direct negative impact to the Canadian economy of $2.3 billion.
[Translation]
To go back to international air policy for a moment, this component piece of Canada's aviation policy is unfortunately also negatively impacted by the fact that international airlines are making exactly the same calculation as the Canadian passengers I just mentioned, but they are just doing it from a different perspective.
The decision process for executives from those airlines, evaluating the Canadian market purely on the basis of commercial opportunity, is pretty easy to determine; do you use a high value asset, like a Boeing 777 to serve a Canadian market with high infrastructure costs? Or do you deploy your fleet to serve a welcoming, generally U.S. market of similar population base with lower controlled infrastructure costs — an operating advantage you can use to stimulate traffic and grow your business?
[English]
The conclusion of that thought-exercise is an obvious one. When one sees that, despite the recent open skies deal with the European Union, only incremental increases in capacity to Canada by European carriers have materialized, and that multiple unused frequencies continue to exist in the current bilateral liberalized agreements with established trading nations such as China, India, Russia, Australia and Brazil, it quickly becomes clear that international airlines are deciding every day to deploy their resources elsewhere. Unfortunately, the only countries or international carriers really clamouring for increased access to Canada are those in which the national airlines are, firstly, vertically integrated into government policies designed to aggressively pursue tourists and connecting traffic and, secondly, able to leverage their cost advantages — gained through operating in home markets in which utilization of significantly below-market-cost foreign workers is commonplace and trade unions and pensions are alien concepts — to annex the Canadian market, turning Canada into a spoke of their hub. Attracting enthusiastic attention from this kind of predator is not the sign of a healthy economic marketplace.
[Translation]
It should be noted that, in stark contrast to Canada, other international jurisdictions have devoted considerable resources to cohesive policy strategies and have enjoyed the benefits associated with a favourable domestic operating environment and strategic expansion of international aviation agreements.
Following the German air transport initiative in 2003, the German government and industry stakeholder have taken key steps to increase efficiency and reduce operating costs associated with activities such as immigration and security.
The United States government has a comprehensive six-year infrastructure plan for transportation, which explicitly includes various support for the air transport industry.
In Dubai, massive government investments have been made in aviation infrastructure development while a reduced cost structure derived from relaxed labour regulations and a favourable tax environment further support a competitive operating advantage.
[English]
In Singapore, the government identified air transport as a key pillar of its economic growth strategy as far back as the 1970s and have developed their national airport and associated surface transportation links at public expense.
In Hong Kong in 1990, the government undertook the development of a $20-billion public-private partnership and reclaimed over 12 square kilometres of land for their new airport — a development that features a multi-modal transport network ensuring smooth flow of passengers and goods between the airport and the Chinese mainland.
In Turkey, as early as 2002, the government took a view that international tourism could be a powerful source of economic growth and employment and that an innovative and creative air transport policy that supported passenger travel was required. The Government of Turkey then set about modernizing existing airports, building new airports and developing surface transportation links to those facilities.
Not coincidentally, all six of the previously mentioned countries are home to one or more significant and successful global airlines and one or more global hub airports; and all enjoy the considerable resultant economic benefits.
[Translation]
That same potential does exist in Canada. Pearson International is of comparable market size to Dallas-Fort Worth and Atlanta, but only serves 32.3 million passengers a year.
Vancouver is comparable to Minneapolis-St. Paul (serving 24.4 million passengers annually) and Denver (serving 47.5 million passengers annually), but only serves 17.9 million passengers a year.
Montreal is comparable to Baltimore (serving 29.8 million passengers annually) and Seattle (serving 36.6 million passengers annually), but only serves 12.2 million passengers a year.
[English]
For our part, Air Canada certainly has room to grow, through our portfolio of untapped route rights, fleet youth, and flexibility to respond to market demands pending new aircraft deliveries, industry-leading on-board products and award-winning service. We are specifically well positioned to compete and to succeed by funnelling connecting traffic from the U.S. through Canadian airports onward to Europe and Asia.
We are, however, much like I am sure you will hear from the other large airlines in Canada that will appear before you, regularly stymied by the high cost of operating at Canada's airports. Elevated infrastructure and service charges inflate the "hurdle costs'' associated with the initiation of a new service; and, unfortunately, limited growth domestically and internationally is a direct inevitable result.
With this firmly in mind, I would humbly suggest that the most critical outcome of the study in which you are currently engaged be a firm recommendation that the time has come for the Government of Canada to commit to the development of a single, cohesive policy framework that integrates Canada's aviation stakeholders into a united vision for the future. Emphasis should first and foremost address the high cost to the Canadian environment with a view to reducing infrastructure costs and fees to the direct benefit of the travelling public, while establishing modest passenger growth targets that industry and government can move cooperatively toward. A relatively modest 20 per cent passenger increase in Canada would yield an estimated $5.7 billion in direct and indirect benefits to the Canadian economy. Clearly, that opportunity exists. What we need now is an understanding of how government and industry can work together to get there.
Thank you again for the opportunity to present. I am happy to take your questions.
[Translation]
The Chair: Thank you, Mr. Dee. I am going to take this opportunity to introduce the members of the committee. Senator Martin from British Columbia, Senator Mercer from Nova Scotia, Senator Eaton from Toronto, Ontario, Senator Verner from beautiful Quebec City, Senator Boisvenu from the Province of Quebec, Senator Cochrane from Newfoundland and Labrador and the deputy chair of the committee, Senator Greene from Nova Scotia.
You have certainly given the new members of the committee a broad overview of the situation the committee will be grappling with in the coming weeks. Thank you for doing that, Mr. Dee.
[English]
Senator Eaton: I am a big fan of Air Canada; I fly it weekly. I love what you do. However, if we made recommendations that the government drop things like ground rent, fuel excise tax and airport improvements, what do you think the cost benefit would be to the Canadian passenger on your carrier?
Mr. Dee: Thank you for being a regular customer of Air Canada.
In terms of the direct cost benefit analysis, several academics, including Dr. Fred Lazar at York University and others, have prepared studies in the past that have talked about multiples of economic activity that would be generated by the dropping of things like ground rent. We have conservatively estimated that the economic activity generated would be a four-fold multiplier. In the case of ground rent, we have several international routes that would be marginal in terms of profitability. Ground rents cost us upwards of $250 million per year off the top with no direct benefit to Air Canada or our customers keeping in mind that the ground rent is for facilities that have been not only already built but also paid for multiple times. Routes that we have looked at in the past that have never been able to make it, such as flights to India, one of the fastest growing economies in the world, would generate significant economic benefits that would far exceed the $250 million collected directly through the ground rents.
Senator Eaton: Do you see ticket prices dropping 20 per cent or 30 per cent on average? How would the consumer benefit?
Mr. Dee: We carry approximately 33 million customers per year, and $250 million goes to the ground rent. If you do a simple calculation, it would not be a significant amount per passenger. However, we are talking about $250 million. Our profits at Air Canada in a good year would be $250 million, if we were able to change the economics of operating in Canada. One of the key driving forces that we have seen in recent times is the growth of U.S. border airports. Senator Martin is probably familiar with Bellingham airport. Senators from Montreal would be familiar with Plattsburgh airport. Those from Toronto would be familiar with Buffalo airport. Those airports do not have regimes such as ground rents. Being able to offer flights at a lower cost and being able to generate more economic activity, creates a larger pool of passengers, which, in effect, would lower costs overall. In that way, you are generating economic activity. The figures that I cited, for example, show that Vancouver is nowhere near its potential, given the size of the city in terms of the number of passengers. Generating that type of activity through new flights to India and other parts of the world, which currently are not being served, would help in terms of lowering costs overall. You are distributing infrastructure costs that are fixed over a larger number of passengers per year.
Senator Eaton: The other thing you mentioned briefly is that other countries do not have our labour costs. Does Air Canada have defined pensions, for instance, for its employees? I think that is becoming a very sore point for a lot of companies right now. Obviously, it would be part of the cost of a ticket, is it not?
Mr. Dee: Absolutely. Labour costs are the second largest single cost after fuel, so it is a significant input cost.
We are quite proud that, as a company, we continue to offer defined benefit pensions to our existing employees. Unfortunately, we compete against Canadian competitors who do not even have pensions at all. Some of our Canadian competitors contribute into RRSP schemes or things of that nature but do not have traditional pensions.
We have tried to negotiate with our unions, and we have succeeded in one area, which is for future employees to change the plan — in the case of the CAW, through an arbitrator's decision — into a defined benefit/defined contribution combination, like a hybrid plan. Those are certainly expensive.
We have inherent costs operating in Canada because of things like our infrastructure costs and labour laws, which we are not trying to change. We are merely asking for recognition of that and for the fees we can control, such as airport fees and ground rents, to be taken into consideration in the assessment of the competitiveness of our industry.
Senator Mercer: Mr. Dee, thank you for being here, along with your colleagues.
I am confused about one of your answers to Senator Eaton. I, too, am concerned. I am not against making a whole bunch of changes in how government interacts with airlines and the fees that are charged. However, you say that the U.S. airports have charges that are 229 per cent lower than in Canada. Senator Eaton's question was about what will be the reduction in the price of a ticket. You said there will not be a big drop. You then made reference to the bottom line and the return to shareholders as opposed to the return to passengers.
For the passengers going to Plattsburgh, Bellingham, Buffalo, or from Ottawa to Syracuse, and so on, how do you expect to attract those people back if you will not change the ticket price significantly? If I lived in Toronto, why would I not take the less-than-an-hour drive to Buffalo to save hundreds of dollars, just to say that I flew on Air Canada? You have to give me an incentive to do that and reduce the price significantly. In your answer to Senator Eaton, you said that the reduction would not be significant.
Mr. Dee: Senator Eaton mentioned ground rent, which is obviously one of the fees that go into it.
Let me give you an example that illustrates this well. A few years ago, when we launched a low-cost brand called Tango, we said we would put out a $1 fare. Once we added on the airport improvement fees, surcharges, taxes, all of the fees and charges that we were mandated to collect, the $1 fare ended up being around $79.
To give you an example, a U.S. carrier charges $2.50 and a maximum, I believe, of $5 for security fees. There is a debate right now in the U.S. as to whether or not that limit should go up.
In Canada we charge $7.50 domestically, and it goes up to $15 internationally. The security processes we undertake in Canada are no different from those in the United States. However, because they are able to generate so much more traffic, they are able to spread it out over a larger pool and thereby lower the costs.
We are saying that if we are able to lower the input costs, such as airport rents and things of that nature, to a more acceptable level, then we would be able to take those dollars and invest them in new flights, which would thereby generate greater traffic, which would allow us to spread the costs over a larger number of people, which would lead to lower fares.
If you compare seat sale advertisements from the 1970s, for example, to seat sale advertisements today, there are many routes in this country where the fares have not changed a dollar from where they were in the 1970s, whereas fuel has exponentially grown in costs, as have labour costs.
Senator Mercer: I appreciate that. I do want to ask you a question later on about predatory pricing; however, I want to concentrate on cost reduction.
You mentioned the German Air Transport Initiative of 2003. The German government and industry stakeholders have taken steps to, in your words, increase efficiency and reduce operating costs associated with activities such as immigration and security.
How did they do it? How much did they reduce costs by? Were the savings passed on not to the bottom line of the airline but to the passengers?
Mr. Dee: In the U.S.?
Senator Mercer: No, in Germany.
Mr. Dee: If you take a look at what has gone on in Germany, you have seen a rise in the number of low-cost carriers that are serving Germany and that are growing in Germany. That is the end result. With the arrival of these low-cost carriers and the ability of existing carriers to charge lower fares, that has an eventual positive impact on German consumers.
We have not seen that type of activity in Canada. To give you an example, in the case of Toronto we have some of the most expensive landing fees in the world. To land the same plane in Buffalo versus Toronto, in some cases you are looking at double, sometimes more, to land the exact same aircraft. If you are able to lower that cost through greater efficiencies and through the elimination of the ground rent, then obviously those costs will flow back to the customer with greater economic activity and with larger numbers of routes, which would generate more customers.
Senator Mercer: If we were to do all of this and it would look attractive for low-cost operators to now compete in Canada, it seems to me that will be a huge benefit to Air Canada. That is a comment as opposed to a question.
I want to return to a comment in your statement about pending new aircraft deliveries. Have you ordered new aircraft? If you have, where are you buying them from?
Mr. Dee: We have 787s on order from Boeing. There have been some delays in the delivery program, but they should be arriving in the next couple of years.
Senator Mercer: It is all Boeing?
Mr. Dee: Right now, yes.
Senator Mercer: None from a Canadian manufacturer?
Mr. Dee: The last order we placed was for wide bodies, which, as you know, senator, Canada does not produce. Narrow-body replacements for our existing A319s and A320s will be considered in the years ahead. To the extent that a Canadian manufacturer, such as Bombardier, is able to get aircraft online — such as the CSeries, which has been touted as a replacement for a narrow-body Airbus product — we would certainly consider it, at the right cost and at the right time.
At this point in time, our focus on deliveries is on wide bodies. We are the largest operator of Canadian-built aircraft on the planet, along with our regional partner, Jazz. We operate Dash 8s and Canadair regional jets.
Senator Greene: Thank you very much. I appreciate your presentation. I thought it was excellent.
In looking into the future and to what this committee will be recommending — and I am on the side of change — do you see that we need to tweak the existing model or change it radically?
Mr. Dee: I do not think we need radical change as much as we need a more cohesive approach to air transportation.
For the last few years, regardless of the stripe of the government, the focus has been on small slivers of the policy framework. In the case of the 1980s and 1990s, it became the two-airline policy, which was to keep Canadian Airlines and Air Canada flying. That shifted to concerns about Air Canada becoming too dominant. After that it became the Blue Sky Policy, which only dealt with the international air access piece of the policy framework.
What we are calling for is a more global approach so we can take a look at this industry from start to finish and look at all of the challenges — not just cost but also opportunities and frameworks that affect our industry. You would be surprised that among the things we are concerned about are things like transit visas. We are competing with parts of world, like Europe for example, which do not have transit visa regimes because their laws allow them to transit passengers without seeing a European customs officer. We do not have that luxury in Canada.
When we compete, for example, between Brazil and Japan or Brazil and places in the Middle East, we cannot as easily transit people in Canada as a European carrier would. They end up allowing people to transit through their countries without having to apply for a transit visa, whereas we do. In some cases those costs are added to the cost of the ticket.
We are looking for a global approach to air policy that looks at all of the various pieces of government policy that affect our industry — tourism, business traffic and economic development. It is a whole host of things.
As Senator Mercer pointed out, we also have an aerospace sector in this country that has a piece of that pie. All of those elements should be part of a global policy.
Senator Greene: Is there a movement amongst other countries to create a global policy?
Mr. Dee: Absolutely. There are many examples, and I gave six in my remarks. Countries such as Singapore, for example, have looked at aviation as a key element of their economic goals. This is from the 1970s.
Senator Greene: Is there a movement amongst other countries to create a similar global policy rather than a competitive one?
Mr. Dee: Do you mean a joint policy?
Senator Greene: Yes.
Mr. Dee: Not really. Airlines, unlike other industries, are still subject to significant restrictions. Top of mind is foreign ownership restrictions. We are not like the auto sector or others where you can have global or continental policies surrounding airlines.
There is a European policy in terms of air access, but in terms of a global trade policy surrounding airlines there is not one, primarily because of legacy rules like the Chicago Convention, which governs ownership in the airline industry and the way countries treat each other's airlines through bilateral designations.
Senator Greene: As you look around the world and at what other countries are doing and what their individual global policies are, are there examples you can cite where you would rather operate under their system than ours? For example, would Air Canada be better off under the American system, under the German system, et cetera?
Mr. Dee: There are positives and negatives to any system. We are not saying adopt all of what is going on in the U.S. or all of what is going on in Europe. We have the benefit, because we do not have an existing framework, to cherry- pick the best and become the best.
What many countries have done, whether it is Singapore, Dubai or even France, is they have looked at themselves and said, "We want to be the global hub. We do not want to be a spoke; we want to be a hub.'' They have built policies around that.
This committee may want to look at those examples more directly and invite people from those countries to provide you with their perspective or even see what they are doing there. The global hub that they have built in Paris is incredible. They have been able to do it with direct cooperation between the airlines and the airports.
In this country airports were built with little airline input. Minister Doug Young, a couple of years ago, after the fact, said one of his biggest mistakes was the devolution of the airports, because they built these giant buildings with little rhyme or reason as to why they were built. That is in the past. There is nothing we can do about it now.
In the case of the Charles de Gaulle airport in Paris, that airport was built with Aéroports de Paris, the airport operator, and Air France working together and building a facility that was to the spec of the airline to build their hub. If you see that airport in operation, it is incredible. In addition to flowing traffic between the world and Paris and other centres in France, that is a global intersection. You can go anywhere on the planet to anywhere else on the planet through Paris Charles de Gaulle. That is one if the things we would love to do in Toronto, but we still are not there because of the costs and the infrastructure that we have.
Senator Greene: Should the airlines be on the boards of airports?
Mr. Dee: The current rules do not allow it. Obviously we would like greater input, and whether that is in the form of board representation or a formal mechanism through changes to airport governance would be positive.
There are cities in the U.S, for example Detroit or Charlotte, North Carolina that have huge airline hubs with no real economic reason to exist. The cities of Detroit and Charlotte are not huge destinations for people, but they have been able to build huge hubs there, U.S. Air in Charlotte and Delta-Northwest in Detroit, or even Minneapolis, because of greater influence that airlines have had on the development of airports and a lot more cooperation. That is something we have missed in this country.
Senator Greene: I agree.
Senator Martin: Senator Greene touched on an area I definitely wanted to probe more about, but thank you for those answers. I think we have quite a challenge in Canada in terms of our geographic size and trying to even just get around within Canada, as Canadians. You speak about this international hub or the vision to create Toronto or Vancouver — and perhaps in Canada we can think about two or three hubs versus one because of the sheer size of our country. The other thing that has come up again and again throughout the sessions is the divide between these urban hubs versus the other airports. I was in Whitehorse last summer, and it was a different experience there than what you would have in Vancouver, Montreal or Toronto.
In terms of a global framework, I wonder what challenges we would have in coming up with something like that when we have these distinct differences with the urban and rural hubs in Canada. How would we overcome and create a global framework that would meet and address the needs of these distinct types of airports we have in Canada?
Mr. Dee: You have hit the nail on the head in terms of one of the significant challenges we, as an industry, face. If you look at Air France, for example, which is building a spectacular international network, or Lufthansa, which is also building a spectacular international network, as you pointed out, they focus in on one main hub. In the case of Air France, it is Paris; in the case of Lufthansa, it is Frankfurt; and in the case of British Airways, it is London.
In Canada we have Vancouver, Toronto and Montreal as our largest three hubs, by virtue of their size as cities, but we also have smaller hubs, as you describe them, in places like Edmonton, Calgary, Winnipeg, Halifax, St. John's.
Senator Martin: Whitehorse.
Mr. Dee: Exactly. I could name them all.
The Chair: There are 26 national airports. They would all like to say they are hubs.
Mr. Dee: We have this significant challenge.
We are blessed, actually, with this geography in Canada. The most geographically convenient transit point for a South American traveller to get to both Europe and Asia is Toronto. The closest point in North America to Asia is Vancouver. We are not talking about favouring one hub over the other but generating economic activity and traffic to not just support one hub but all three hubs.
The U.S., just like us, has a spectacular geography, but they have multiple hubs in the places you would least think. Many people would not pinpoint Charlotte, North Carolina, as an aviation hub, but it is. In the U.S. Northeast, the New York area, you have La Guardia, which is a domestic hub, and J.F.K., which is an international hub, and you have Newark, which is an international hub. Less than an hour's flight away, you have Philadelphia, which is also an international hub. Not too far from there, you have Detroit. From there, you have Minneapolis and Chicago, Atlanta, Denver, Los Angeles and San Francisco, which are huge hubs taking advantage of geography and local markets.
Canada, because where people in this country have come from, has tremendous links to the world, and that is what we are talking about. Your question was about harnessing that for domestic activity. On our flight from Toronto to Tel Aviv, for example, or from Toronto to Frankfurt, only about 40 per cent of that flight is actually local Toronto residents. Many of those people have flown in from the Sault Ste. Maries of the world, or the Windsors or elsewhere in Ontario or even the Prairies to get to Toronto and from there elsewhere. Those international hub flights also benefit small communities by making those communities accessible to trade and commerce.
I do not know if I have answered your question, but the only way we can make Toronto work is if we can have domestic spokes or routes feeding into Toronto and, from that point, flying anywhere on the planet.
Senator Martin: Thank you. My question was actually more about how we look at the reality of Canada and these multiple hubs and the distinct differences in urban and rural centres and develop a global framework that could realistically address all of those concerns in Canada. It also speaks to a further analysis of the examples you cited with the six jurisdictions. Geographically, we are closest to the U.S., but we have other challenges that they do not. It is an opportunity, because I do favour change and development and improvement, but looking at other frameworks and seeing which aspects could apply in Canada considering the existing challenges we have. I think you and others will be very important to lend those kinds of insights, which is why you are here today, and perhaps further information or analysis that you have done could be sent to our committee for consideration.
I have one other question which speaks to another question about there is not a global or international framework per se, but it is a competitive industry. I know that everyone around the table at times has paid more for quality. Canada cannot compete in terms of prices with certain jurisdictions. My question is regarding customer service and training of Air Canada employees and whether there is an annual focus on professional development and the kind of training that could be done to ensure that the service that customers are getting on Air Canada is, in fact, I will say superior or equal to what they are getting in other airlines. If the service is impeccable and to the level of people's satisfaction, I think people will pay more, to some extent. I am not speaking for everyone, but quality versus anything else. What kind of professional development or focus do you have with your employees?
Mr. Dee: On your first point on rural versus urban and the geographic diversity of Canada, the U.S. has a program called the Essential Air Services program, which subsidizes rural air transportation to hub cities. In places like Massena, New York, and places south of Ottawa that are very near, some of these airports are actually benefiting from the Essential Air Services program, which provides a certain degree of subsidy to allow for connectivity. That might be a consideration for the committee to look at in considering global policy.
In terms of customer service and training, yes, we do recurrent training of our employees. Some years we do it more than others. One thing I would say is that whenever we are compared to our North American peers, which is the most comparable peer group for us, the U.S. legacy air carriers such as U.S. Air, United and Delta, we tend to compare quite favourably. We are quite proud of that. Can we be better and do more? Absolutely.
I think one of the challenges we faced in the last few years is we have had so much upheaval from the time we purchased Canadian Airlines to the integration to 9/11 to all of these things that have basically crept up on us without prior notice, and we have had a workforce that has had to deal with this. We have actually done quite a bit better than we have in the past, and we are certainly looking for ways to improve. You are right that one of the areas we need to focus on is training and customer service training and what the training industry likes to talk about in terms of customer touch points and how we can better interact with customers.
There are many examples I can cite where we have led the industry. We have an award-winning and internationally recognized concierge program, for example, for our VIP customers. We have won the award for the best flight attendants in North America in the last couple of years because our flight attendants have gone above and beyond. There are areas where we have seen improvements, but there is still a long way to go.
[Translation]
Senator Boisvenu: Thank you, Mr. Dee. I would like to extend my thanks to your colleagues. Your brief is very, very interesting, especially since I am one of the new members at this table, and I must say that my knowledge about the airline industry is strictly limited to my experience as an Air Canada client since 1976. How long have you been in the aviation industry?
Mr. Dee: I started with Air Canada in 1993.
Senator Boisvenu: So I am more experienced than you — as a client.
Mr. Dee: Just a tad, yes, absolutely.
Senator Boisvenu: I have had a few dalliances with other airline companies, but I have always come back to Air Canada because I think you have one of the best services in Canada. That being said, you must have followed the Dorval-Mirabel saga in Montreal, right?
Mr. Dee: Yes.
Senator Boisvenu: As an expert in aviation and as an Air Canada executive, would you say it was a setback or a positive adventure?
Mr. Dee: To avoid putting myself in a tough spot, I would like to point out one thing about the debate between Dorval and Mirabel. The debate slowed down Montreal's development as an air traffic hub. Having two separate airports for six million people did not help. But, since the closure of Mirabel as an airport for passengers and since passenger services were centralized at Dorval, the managers of Aéroports de Montréal have greatly improved the situation in Montreal. We are now seeing the development of a true hub in Montreal, at Dorval.
If I can make a small clarification, I think the policy of dividing traffic between Mirabel and Dorval was a failure, not necessarily for local economies in the smaller regions of Mirabel and Dorval, but for Montreal's development as an international air service hub.
Senator Boisvenu: In your brief, you talked about travellers starting to go to nearby airports in the U.S. I actually know travellers who go through two check points, in Montreal and in Plattsburgh.
Mr. Dee: Yes.
Senator Boisvenu: Did this migration occur after the revaluation of the Canadian dollar?
Mr. Dee: Absolutely.
Senator Boisvenu: Of course, when the Canadian dollar was worth 60 cents American, people were less likely to fly to the United States and to pay in American dollars. Did that have a significant impact?
Mr. Dee: It had an impact, but we saw the migration of passengers even before that. However, it has become much more common since the Canadian dollar gained parity with the American dollar.
Senator Boisvenu: The Quebec and Canadian industries have been faced with the same revaluation of the dollar. We saw that, when the Canadian dollar was worth 60 cents American, it was like a drug for the companies, and for a long time it really prevented them from improving productivity.
In light of this client migration to the United States, does the Canadian aeronautical industry need to carry out a productivity exercise, like the Canadian manufacturing industry was forced to do to be competitive with the American industry?
Mr. Dee: It is important to point out something about the aviation industry: a large part of our costs are in American dollars. For example, fuel is paid for in American dollars. The aircraft are paid for in American dollars. Most of our aircraft are built in Europe or in the United States, and so their nominal value is in American dollars.
Senator Boisvenu: Is having the Canadian dollar on par with the American dollar of benefit to your company?
Mr. Dee: It is more beneficial for the aviation industry than for the manufacturers. But there are advantages and disadvantages. For example, when the Canadian dollar is strong, Canadians travel internationally. We do not see that when the Canadian dollar is weak.
This summer, with the economic difficulties in Europe, we did not see as many Europeans travelling to Canada, but we saw that Canadians were travelling to Europe; Quebeckers are travelling to Europe much more often than before, when the Canadian dollar was weak.
We cannot compare ourselves too much to manufacturers in Canada because, for one thing, a large part of our costs are in American dollars, and for another, the Canadian consumers who make up a large part of the market — half of our clients — are encouraged to travel internationally when the Canadian dollar is strong.
Senator Boisvenu: Does Air Canada get more out of domestic or foreign travel?
Mr. Dee: Air Canada's business affairs are divided into three parts: one third of our revenues comes from the international market; one third is from the domestic market; and one third is from the American market. For the past two or three years, the Canadian economy has obviously been much stronger than the European or American economy, and that becomes more important to our profitability.
Profitability has become less important in the United States because of economic problems. But it depends on the cycle. A few years ago, the American economy was very strong and we saw a much more significant contribution from the United States.
Senator Boisvenu: Congratulations on your French.
Mr. Dee: Thank you.
[English]
Senator Cochrane: I believe you said that 17 years ago we developed the National Airports Policy. Has there been no revision of it since?
Mr. Dee: That is correct.
Senator Cochrane: It has been 17 years. What efforts has Air Canada put forth in addressing this issue to government officials?
Mr. Dee: That is an excellent question. We have spoken to many ministers since that time to look at the National Airports Policy. Obviously, the policy that was instituted 17 years ago, which effectively devolved the responsibility of airports to local airport authorities, was a major change in the way that airports were managed in this country. Prior to that, they were managed directly by Transport Canada and paid for by the taxpayer. After that period, responsibility was devolved to local airport authorities, which were effectively autonomous from government.
We are not looking for the government to take over the airports again. When we look for changes to the National Airports Policy, we are not focused only on airports. We look at how airports and airlines could work together better. As Senator Greene mentioned, we need to look at governance to see whether there are ways, not necessarily through better board representation from airlines, to develop more formal mechanisms for airlines and airports to work together, for example on spending priorities. We have some very beautiful airports in this country but if you look at their relative attractiveness from an operating perspective, they are not as attractive as they should be. There is a better way to work together so we can make Canada a better place in which to grow the airline industry, as opposed to just watching other jurisdictions do so.
Senator Cochrane: We all feel that way. We want to make airlines better and we want to create more presentable areas for passengers coming to and from our country and travelling to other countries. I am talking specifically about you people. What specifically have you done to see whether a revision to the National Airports Policy is taking place? Have you achieved anything with your views as you expressed them here today? Have you achieved anything in the past?
Mr. Dee: In terms of changes to the National Airports Policy, we obviously have not succeeded in any significant changes. In the last few years, airport authorities, in particular at Toronto airport, have lowered some of their costs in response to requests from the airline industries; so things have improved in that sense.
Have we been able to change policies in a significant way? No, unfortunately.
Senator Cochrane: Unlike Canada's national ports, airport authorities do not have a piece of legislation to govern their operations. Instead, they are subject to ground leases that are audited by Transport Canada. Is that not the fact?
Mr. Dee: There is a national airports act. Yes, the ground leases govern the interactions, I suppose, between Transport Canada and the airports.
Senator Cochrane: In your opinion, would airports be better governed through legislation that clearly sets out the duties and responsibilities of airport authorities?
Mr. Dee: I would have to consider that further because we have not really considered that.
Senator Cochrane: Air Canada is a member of Star Alliance.
Mr. Dee: Yes.
Senator Cochrane: Star Alliance is one of the largest alliances in the aviation industry. In your opinion, should companies in global alliances be allowed to merge and become global companies and achieve the economies of scale as seen in other global sectors? Does Air Canada have plans to further develop its links with other member airlines of Star Alliance?
Mr. Dee: The issue of allowing members of global alliances to merge is governed by multiple foreign ownership restrictions. Canada restricts foreign ownership to 25 per cent, and many countries in the world restrict ownership to that percentage and up to 49 per cent. Much of that has to do with the traditional definition of "designation.'' A country's airline is designated on the basis of the nationality of that airline. Mergers cannot really happen until the whole global framework for defining "ownership'' has changed; and that is rooted in the Chicago Convention.
David Waugh is our Director of International Affairs, and perhaps he can expand further on the notion of nationality and global alliances.
It should be a short answer. In an ideal world, would we like to be able to buy airlines in other countries and merge with airlines in other countries, like other businesses do? Likely the answer would be yes. However, there are multiple considerations, which Mr. Waugh can expand upon, before we can even get there. It is not just a question of Canada doing that but multiple jurisdictions acting in concert to allow that to happen across borders.
David Waugh, Director, Bilateral International and Regulatory Affairs, Air Canada: It is important to notice that it is a bit of a web of international agreements overall, with the Chicago Convention having been established in the 1940s. It is important to remember that if Canada were to make changes, that would not necessarily buy you any success on the international scene, because many other countries would have to make similar changes. As Mr. Dee pointed out, many countries have similar regulations and rules, whether it is 25 per cent or 49 per cent. Many countries have not taken that step to fully flexible foreign ownership.
Mr. Dee: British Airways and Iberia, from Spain, have effectively merged, but that is within the confines of Europe. Whether we would be able to do that between a Canadian airline and a European or U.S. carrier is something that not just Canada, but also the U.S., Europe and others, would have to decide upon.
The Chair: Before we go to the second round, perhaps I could ask a question and provide a comment at the same time.
To answer part of your question, we have had seven ministers of transport in nine years. He would have had to have repeated his question to different ministers on the same subject. I have been here for close to seven years, during which time there have been six different ministers of transport.
It is difficult to find long-term commitment. At the same time, if you look at the last 15 years, we have probably had 10 ministers of transport but only two or three ministers of finance. The Minister of Finance is looking at the industry, I would think.
This will be a question and a comment. Do you think the Department of Finance sees the airline industry and the airport as a source of revenue, and would that be part of the problem?
Mr. Dee: That is an excellent question. I think the Department of Finance does not just see the airline industry as a source of revenue; it sees our passengers as a source of revenue. If you take a look at the taxes that our passengers have to pay, the only other competitors they have are smokers and folks who buy alcohol. We are treated in the same way as sin taxes are levied in this country.
If you buy an airline ticket, you pay an air security tax, which goes to CATSA, and an air navigation fee, which goes to NAV CANADA. You pay the HST over these, and airport improvement fees as well, which HST is levied upon, and so on. By the time you have added it all up, we are probably taxed as much as a bottle of Scotch is. In terms of how the Department of Finance sees us, for sure it sees us as a cash cow, but it also sees our passengers as a cash cow.
The mentality, unfortunately — not just in Canada but in many other parts of the world, although Canada happens to be one of the most glaring examples — is that many folks who watch television on Sunday nights now watch programs like Pan Am, celebrating the days gone by of air travel, when air travel was the reserve of the rich. The mentality of many taxing authorities around the world is that we can tax airline passengers because they are rich.
Air travel is very democratic now. People fly across this country for all sorts of reasons, and not just the wealthy. The wealthy customer pays as much tax, unfortunately, as the not-so-wealthy customer. Those are issues that, hopefully, the committee will look at and try to take care of.
Senator Eaton: Mr. Dee, to go back to Senator Greene's original question, I am stunned that you do not want to become a board member or a stakeholder. For instance, I am thinking of Pearson airport. Is it because you want to not take responsibility for some of the decisions that the airport authority makes?
Mr. Dee: Senator, I would love to run Pearson airport, if I could. The problem we face, for example, is that if Air Canada gets one seat on the board of Pearson airport and our term is three years, and after that it is a representative of another air carrier or, heaven forbid, a foreign air carrier —
Senator Eaton: I do not see why all stakeholders are not represented on the airport authority, and I will tell you why. We all remember what happened to London airport last year with the two inches of snow on the ground and all these poor passengers. I am thinking that something like that might happen to Pearson, Trudeau or Vancouver airport. It always seems to me that the airlines do not want to take responsibility for the hundreds of passengers who are there. They are not allowed to leave because of weather, terrorism, or whatever. The airport authority kind of says, "Well, we are not really prepared.''
Where does your responsibility stop in terms of passengers? Is it when they step on the plane or when they step into the airport and check in?
Mr. Dee: As soon as they buy their ticket, they are our customers. Whether they have an issue at the airport because of weather or what have you, we have always taken our responsibilities in that regard seriously. In the case of London, for example, we were the first airline to operate into Heathrow after the runways were cleared. Obviously, our responsibility is not the clearance of a runway but taking care of those customers and ensuring that they get to their destinations as quickly as possible.
There are certain things that we have no control over, unfortunately. One of them is the weather. Last year we saw the volcano eruption in Iceland, which grounded traffic across the Atlantic. Those are things that affect us. However, even in those instances we were communicating with our customers. I was doing multiple interviews myself to communicate with customers and try to provide them with as much information as we could, given the circumstances.
In terms of people stuck at airports, we have not seen that situation in Canada, luckily, over the last few years. However, whenever we have had issues like that in the past, we have done our best to address those issues and take care of our customers to the best of our ability under the circumstances.
Unfortunately, in some instances — without defending what went on in the U.K. — when you have that many people stuck in one place, there are no hotel rooms for them to get to because all of them are booked.
Senator Eaton: Many people cannot afford them, either.
Mr. Dee: Right. In some cases, people were in the middle of trips and they did not even have their baggage with them because they were stuck somewhere. It is hard for us to be critical of everything that went on, but in our direct experience, we try to help our customers.
Senator Eaton: I am not asking you to be critical. I am just saying that if you and the other major airline — I guess it is WestJet — who operate out of, for instance, Pearson, actually sat on the board of the airport authority, you might be able to put some cohesive practices and solutions together if you were all sitting around a table and you were all responsible.
Mr. Dee: I would not necessarily rule that out. That is not something we would necessarily oppose. We would have to have a look at the governance of the airport authorities writ large to see whether they would present any conflicts and whether there would be any difficulty in managing those types of relationships.
Senator Eaton: Right now you are in a silo situation, are you not?
Mr. Dee: Absolutely. We do interact with the airports regularly, but you are right; sometimes, sadly, we operate in silos.
[Translation]
Senator Verner: Mr. Dee, thank you for accepting our invitation to join us this morning. I would like to follow on what Senator Martin was saying about medium-sized airports in regions that are less populated than the famous MTV — Montreal-Toronto-Vancouver — such as Quebec City, which is the area I am from, and Winnipeg and Calgary. I agree with you about the democratization of the use of this method of transportation.
I really think that travelling by air is no longer the privilege solely of people who have the means to do so. In this context, what recommendations do you have for the committee for serving the populations around medium-sized airports, in medium-sized regions? I am thinking of the Quebec City region, among other places, where we saw the number of passengers increase by 15 per cent between 2009 and 2010.
Mr. Dee: I think the Quebec City airport is an excellent example of a growing airport. For instance, it has begun offering flights to the United States, which was previously not the case, and also to Europe during the summer. The Moncton airport is going through a similar transformation, as it is beginning to offer flights to destinations that had never been part of its service before.
On the one hand, it is necessary to take into consideration the economic situation of the areas serviced by those airports. On the other hand, the role air transport plays in economic development also has to be taken into consideration. So, as we say in English —
[English]
Which comes first? Is it the cart before the horse or the horse before the cart?
[Translation]
Does air transport generate economic activity, or does economic activity generate more flight connections?
I think that some countries have achieved success by looking into this issue. For instance, as I mentioned earlier, the United States has a specific program for airports in remote areas, but not necessarily for medium-sized airports like the one in Quebec City. However, I have seen medium-sized cities become air transportation hubs. What I recommend is a study of those examples.
I mentioned cities like Charlotte in North Carolina. Charlotte is not a city that attracts a lot of international traffic, but it is a very important US Airways hub. Can Quebec City hope to become such a hub in the future? That remains to be seen. Charlotte did not become a hub only because of economic forces, but rather because the community was willing to work with an airline like US Airways to build a hub, which has become an important one over the years.
[English]
Senator Mercer: I will continue with a couple of my colleague's thoughts concerning the issue of airlines sitting on the boards of airports. It behooves one that a favourite game at airports is that it is the other guy's fault. For example, if the bags did not arrive, it is the airline's fault. If the bags did not arrive on time, it is the airport's fault. You remove some of that plausible deniability that happens. My friends at Macdonald-Cartier International Airport have heard me on this subject a number of times.
The Chair: Actually, they are listening to you right now. I remind members that this committee is televised.
[Translation]
I just want to remind everyone that this committee meeting is being televised. I want our viewers to know that we are now debating and studying issues related to the Canadian airline industry.
[English]
Senator Mercer: There has been little discussion about, and I was surprised that you did not make any reference to, the question of freight, although you talked about commerce in general terms. Where Senator Greene and I come from, the most important thing that happens at Halifax Stanfield International Airport is freight, with the export of fresh fish, in particular lobster in the fall, which is a traditional meal at the holiday time in parts of Europe. Perhaps you could comment on this. We have seen freight in the Air Canada spectrum and what its future growth might be.
As well, Senator Greene raised the issue of how airports are managed, which you have talked about as well. I am not in the habit of finding excuses for government, this government, in particular, to not do something. However, if we make a recommendation that they remove the existing taxes and levies, the government must find a way to replace that revenue to do what you want done. The levies that go to airports help to build the terminals that make your customers feel safe and comfortable. That still must happen. All of the things that are being paid for elsewhere, for example security, et cetera, must still be paid for. It is easy for us to sit here and listen and for you to say that the Americans, Europeans and others do not have to pay such levies so you should not have to pay them. However, where would the money come from? You need to say that but you also need to link it to economic growth because I think there is a direct link, going back to the original question that Senator Eaton asked about the benefits to passengers. Also, what is the benefit to shippers? The Halifax Stanfield International Airport is considered an important aspect of the Port of Halifax. When we talk about the Port of Halifax and freight, we talk not only about ships but also about airplanes. Can you comment on that?
Mr. Dee: We operate Air Canada Cargo, although we do not have a dedicated freighter fleet. Cargo is carried in the belly of our regular flights. I guess the reason we have not spent as much time on cargo as we have spent on passengers —
Senator Mercer: Cargo does not complain.
Mr. Dee: Cargo does not complain; and we have not lost the bags of many lobsters, yet. However, that is an important point. Cargo is a significant portion of our business. Unfortunately, in years past, we have looked at operating a dedicated freighter fleet. We had a trial period when, as we say in the business, had a wet lease, whereby you take both the aircraft and the crew of freighters and run them from places like Halifax and elsewhere to destinations around the world.
One of the things that greatly affected that operation was the economic downturn. A leading indicator in economic downturn is a downturn in air freight, which we saw clearly. Unfortunately, the timing of our air freight operation was such that it was one of the first things affected. It is an important part of our future. Canada is one of the few G8 countries in the world without its own dedicated cargo fleets plying the skies every night. We use passenger planes to ship cargo. One of the biggest carriers of seafood from Halifax Stanfield International Airport is Air Canada on our flights to London, for example.
Unfortunately, air freight in the last few years has been such that cargo, in particular from Asia, has been very uni- directional. We have seen a lot of goods come in on flights to Canada, but not much going in the opposite direction, because many of our exports do not tend to be time sensitive or require air transport. Some of our resource exports, for example, travel by other means, like shipping.
To the extent that the economy would permit, it is an aspiration of Air Canada's that we look at a freighter operation in the future. Whether that happens in the immediate future or not is tough to say.
Senator Mercer: A couple of years ago Air Canada closed its flight attendant operation in Halifax. Flight attendants are no longer based in Halifax; they are based elsewhere, like Toronto or Montreal.
Those of us who fly through Stanfield International Airport find ourselves sitting often with flight attendants going back and forth to their assignments. Have you gone back and examined this? Has it worked the way you wanted it to, from the company's point of view? Does it continue to be a subject in the labour negotiations with the three unions that are involved in this process?
Mr. Dee: The flight attendant base was actually closed a couple of years ago. I was not there for the short period when it was closed, so I cannot comment directly on the decision.
Senator Mercer: Positive liability again.
Mr. Dee: There was positive liability on that part.
The thing we saw at that time, and the justification for the closure, was that the base had attrited to a point where keeping the base in Halifax was deemed uneconomical.
Has it worked? We generally sense that, given the provisions we have put in place for the flight attendants that were affected, not moving them but helping them commute from their homes in Halifax to their workplaces, whether it be Montreal, Toronto or elsewhere, has largely not been an issue that we have seen since the closure of that base. Is it the subject of labour negotiations in recent times? No, it has not been.
Senator Mercer: It is very difficult for families to move, flight attendants with two or three children to pick up and move from a place with a reasonable cost of living, like Halifax, and ask them to move to Toronto where prices go through the roof. That is a comment.
I want to talk about the Billy Bishop Toronto City Airport. In my previous life, I flew to Toronto's city centre airport at least weekly. I used to fly Air Canada. Then Air Canada closed their operations there, which puzzled me because I never flew on an empty plane between Ottawa and Toronto city centre. Porter took over the operations and did very well. I have flown on their airline a number of times to Toronto city centre.
You are now back in the business. One of the criticisms I have had since I have been on this committee, and I have been on this committee since I have been in the Senate, was the tendency for Air Canada to adopt a predatory pricing regime. That is, you find a competitor that is taking away some of your business because they are a low-cost operator and you drive them out of business by pricing that particular flight down to or lower than theirs, and they shrivel up and leave. I have not seen it yet with Porter, because Porter has been very aggressive. However, for that flight your prices have come down from anywhere to the Toronto city centre. How much have you been able to recover from your previous traffic that you had prior to leaving Toronto city centre several years ago?
Mr. Dee: We currently are only able to operate, because of slot constraints at that airport, between Montreal and Toronto city centre. We are not able to offer flights to any other destinations. In terms of recovery, that operation has certainly met and, in some cases, exceeded our expectations. However, we have not been able to see what we could do. From Ottawa to Toronto city centre, for example, we do not currently operate.
Senator Mercer: It seems to me that for every action there is a reaction. You took an action, and the reaction was that someone filled the void.
Senator Cochrane talked about this, and Senator Dawson referred to making representations to government. I cannot let the opportunity pass that your either outright or quiet opposition to the expansion of Emirates access to Canadian airspace for flights to and from Dubai seems short-sighted, as far as I am concerned. It is short-sighted from an industry point of view. You want to grow the industry, while opposing them expanding theirs. You will get the same push-back from other people elsewhere.
I would also draw your attention to the side effect that that kind of opposition had on our military operation in Afghanistan, by losing access to Camp Mirage. The people in Dubai were saying it was directly related to the negotiations of airspace and air travel for their airlines.
This is serious business. This has cost the government — it does not matter which government it is — and Canadians millions, if not billions, of dollars and created some serious problems for our military operations while we were winding down our operations in Afghanistan. I urge you to think about that, about what the consequences will be of some of these oppositions.
Senator Greene: I have two unrelated questions. The first one comes from Senator Mercer's question about the money and where it ends up. If we reduce the taxes and fees it has to be replaced by something, somewhere.
Does it really have to be replaced? My understanding is that the rent and taxes that come into the industry from the passenger basically are siphoned right out of the industry because those rent and taxes really do not pay for anything at all.
Mr. Dee: No. That is exactly the point. In many jurisdictions around the world the fees collected actually go toward the service being purchased.
In the U.S., for example, when you pay an immigration fee to enter the U.S., which is collected on your airline ticket, that fee goes to pay for the activity that is undertaken to inspect you by the customs officer. In the case of transport security, it is the same principle.
In Canada, unfortunately, many of the fees and charges that are collected on air travellers goes right into general revenues. There is no direct correlation between the service supposedly purchased by the customer and the service they receive. In some ways, they might as well call all of these fees one single tax as opposed to calling them separate taxes, because the taxes collected and the services received do not correlate.
Senator Greene: That was exactly my understanding.
You mentioned earlier that you did not want to go back to the days — and I think everyone around the table agrees — where the federal government owned all the airports. I was wondering about municipalities. It seems to me that often municipalities are at war with their airports at various times, yet the airport could be a major economic tool for the development of a municipality. You said that with regard to Charlotte, which is a wonderful example.
Have you given some thought to whether municipalities ought to own the airports? If they did, it seems to me that they would have the same economic interests as the airlines would: more tourists, economic development, et cetera.
Mr. Dee: When the airport authorities were first conceived, the idea was to make them closer to their local interests. There are some examples, primarily in the United States but also elsewhere, where municipalities, or at least municipally controlled, or in some cases state-government-controlled entities, do run airports. In New York, the Port Authority of New York and New Jersey, which is an agency of both state governments, runs the three large airports and others, but principally JFK, New York and La Guardia. Those examples have been quite effective. In some cases, municipalities themselves have directly run the airports through municipal airport boards.
There are several governance examples that have been successful around the world. Canada chose a system that is a little less clear in terms of accountabilities. Airport authorities have boards that are appointed by different groups. No one really has a majority. A look at airport governance examples around the world would shed some light on how other countries have had different experiences in running their airports.
[Translation]
Senator Boisvenu: Mr. Dee, I want to congratulate you again on your very clear and constructive remarks.
My first question is about the difference in the profitability of American and Canadian airports. You mentioned a difference of 229 per cent in Canada compared with the United States, which is considerable. Obviously, the bigger the client base, the more costs are shared. What is the breakdown between the percentage of operating costs related to customer base and those related to regulations? Client base could go up by 20 per cent, but, if regulations are not dealt with, the increase may have zero effect.
Mr. Dee: I think that the two are closely related. For instance, in terms of immigration regulations, as I said, in Europe, the transit is not done for travellers at the airport. Passengers do not have to apply for a visa at European airports, while in Canada, they do.
Also, there is a large Japanese community in Brazil, and there is a lot of travelling between Brazil and Japan. Many Brazilians of Japanese origin regularly travel between Japan and Brazil. One of the problems for that group is the rule requiring that passengers obtain a special visa to go through Canada, when commuting between Brazil and Japan, even if the passengers intend to stay in Canada for no more than a few hours while waiting for their connecting flight. Those types of regulations may reduce the number of travellers who choose Canada as a layover location.
Unfortunately, costs may also reduce the amount of air traffic that uses Canada as a starting point or a layover for flights.
As for the breakdown, I would say that it is difficult to come up with a percentage and say that 50 per cent is due to regulations and 50 per cent to costs. Both factors actually have an impact on travellers and encourage them to find ways to reach their destination without going through Canada.
Senator Boisvenu: You analysis summarizes the situation very eloquently. However, why is it that you did not take your recommendations further? Your status report is excellent, but you have made few recommendations on such issues as what direction the government or the company could take in the future. I would like to know why you did not cover that in your brief.
Mr. Dee: I think we are prepared to put in the time to develop solutions. Those solutions will be developed by consulting not only Air Canada, but also all the other airline industry players. There are some very positive solutions for Air Canada, such as lease elimination, better known as ground rent. There are other elements to consider, as Senators Cochrane and Eaton pointed out, such as changes to airport governance. Those recommendations could be useful to the industry.
As for other specific solutions, we are prepared to work with you on finding those in the coming months.
Senator Boisvenu: So you preferred not to discuss everything at the same time.
Mr. Dee: We do not want to make any assumptions about the committee's activities.
Senator Boisvenu: Globalization has really hit the airline industry hard, has it not?
Mr. Dee: Yes.
Senator Boisvenu: A number of companies have merged with companies from other countries. So we are not just talking about national reorganization, but also about international reorganization.
It was recently announced that American Airlines' profitability is in jeopardy. What do you see happening in terms of international organization? In Canada, we went from a number of companies to one or two. Will we someday end up with five airlines globally? How do you feel about that?
Mr. Dee: As Senator Cochrane said a few moments ago, there is currently a trend toward mergers in the airline industry. However, national regulations stand in the way of mergers. For instance, Air Canada could not buy an American airline because of certain American restrictions. Similarly, an American company could not buy Air Canada owing to the same type of restrictions. Without changes to those regulations, the only way for mergers to take place in the airline industry is through international alliances such as Star Alliance, Oneworld, based in the United States, and SkyTeam, founded by Air France.
In the medium term, we expect mergers in terms of alliances, but we do not expect there to be any mergers or mutual acquisitions of airline companies, because the regulations are currently standing in the way.
[English]
Senator Martin: Thank you for the insights that you are providing. I wanted to follow up a comment you made briefly, regarding the impact that the airline industry has on other industry sectors. I recall having a stakeholders meeting in B.C, where Tourism Whistler came and talked about wanting increased flights and realizing the importance of the health of our airline industry and its direct impact on them and on the tourists that come up to Whistler. That goes across the board to every other part of Canada where we want to attract tourists. The representatives of cruise ships mentioned that what happens in the airline industry is linked directly to their success. As well, they mentioned their support of the Blue Sky Policy and the whole idea of increasing flights and bringing as many people as possible to Canada. It is really connected to the economic vibrancy of our country.
Have you had such stakeholder conversations? Have there been joint studies regarding the kind of economic impact that can be achieved through certain additions or improvements to your industry? Whatever more we are asking for, these economic impacts could be achieved. Are there such studies; and what are you doing in that regard?
Mr. Dee: In terms of interaction with the tourism sector and other stakeholders in our industries, absolutely we have regular conversations. We work closely with the cruise lines. For example, not only do we bring customers to the cruise lines by flying them in, but also we sell cruises through our subsidiary Air Canada Vacations, for example.
It is important to recognize that when you travel around the world, one thing noticed in many places is one of the few recognizable Canadian brands that promotes Canada as a tourism destination — Air Canada. For example, you will see our ticket office in Buenos Aires promoting Canada as a tourist destination. When local tourism operators talk about greater air access, it is important for them to recognize that the only carriers that promote the domestic tourism industry are the home country carriers. Singapore Airlines around the world does not promote Canada as a tourism destination because it promotes Singapore.
In Canada, unfortunately, in the last few years, there has been almost a divide and conquer approach whereby international airlines promise the moon and say they will bring tourists from their home countries to spend their millions of dollars in your tourism sector. Unfortunately, many countries advocating this access do not represent countries with a large population; and history has proven them wrong. Wherever international airlines have had greater access, in many cases they have not necessarily brought many tourists at all. In fact, the opposite has happened. They have taken tourists from those countries and brought them back to their home countries and made their home countries into tourism meccas.
We work closely with the tourism sector. I am a member of the tourism association board. We try to address each other's concerns. One of the key areas where we have significant agreement, whether the cruise ships, the airlines, the hotel operators, or the other tourism industry players, is the need for lower cost structure for the aviation sector to attract more traffic not only to Canada, and especially not from Canada, but also to Canada and through Canada.
I mentioned earlier to Senator Verner that one of the big markets we have seen in the last few years is Brazilians of Japanese origin who travel regularly between Brazil and Japan. In the past, Canada has been an attractive transit point for them. Would it not be great to have these people spend a couple of days here and experience Canada so they can realize that our multicultural country has an important Japanese community with links not only to their home countries ancestrally but also to their new countries, because we also happen to have an important Brazilian community in Canada. Those things become less and less possible when you have costs that prohibit us from competing against other countries, who suggest going through Dubai or Singapore to fly to Japan. They tell people to go through somewhere other than Canada so they can do it cheaply and without a visa.
Senator Martin: It is more expensive for Canadians to travel to other parts of Canada than to go to the United States for a vacation. What about the challenges for travel within Canada and what you may be doing with the provinces to promote interprovincial and inter-territorial travel among Canadians? I have seen the Newfoundland and Labrador ads, which are effective, but I have yet to go there. Every time I see the ads, they call to me as a Canadian. I hear Canadians say that they should travel in Canada first but it is sometimes less expensive to go south. Are you doing anything with the provinces to promote tourism in Canada?
Mr. Dee: That is a great example because some of the Newfoundland and Labrador's Ministry of Tourism ads have a small tag line that says: "You can fly to Newfoundland and Labrador on Air Canada.'' The domestic marketplace in Canada is extremely competitive. We have strong players in the form of WestJet and, in a more regional way, Porter, who contribute to the dynamics of the competitive marketplace in Canada. When you talk about it being cheaper for Canadians to fly to Las Vegas than to Newfoundland and Labrador, it speaks to the sad reality of the expensive infrastructure in this country. It makes no sense that people can fly from Vancouver to Las Vegas more cheaply out of Bellingham than out of Vancouver. My family members or relatives in Vancouver drive 45 minutes to Bellingham Airport and leave their cars. They can park for a day at Bellingham more cheaply than they can park at Vancouver International Airport. They go to Las Vegas or Mexico or elsewhere around the world. Short of seeing some real changes to the cost of doing business in Canada in the form of these fees and charges, these things will continue.
When Canada has such strong domestic players like WestJet and Air Canada competing against each other and people are still seeing cost differentials between Canada and the U.S, we have to ask why that is. A recent article in the newspapers talked about the dispute arising from the opening of the J. Crew outlet in Toronto and its prices being 25 per cent or 35 per cent more expensive than they are in the United States. The Minister of Finance made an excellent point when he said that one of the inputs to the higher prices is tariffs. The tariffs in the airline industry are airport rents, fees and taxes, which explain why Canadians tend to pay more. U.S. airlines in particular will tanker their fuel into Canada rather than fill up their aircraft in Canada to avoid fuel excise taxes. We do not have that privilege when we fly between Toronto and Moncton. We have to pay domestic fuel excise taxes. Those are the things we need to underscore. Just as J. Crew has to jack up their prices 35 per cent to make it profitable for them to sell a sweater in Toronto, we need to increase our prices to cover the costs of doing business in Canada.
[Translation]
The Chair: On that note, I would like to thank you for being here today.
I would also like to repeat Senator Cochrane's request.
[English]
Would you have an opinion on an airport act? I also encourage you to follow up on what Senator Boisvenu asked if you have an opinion.
[Translation]
I think that you and your two colleagues are staying to listen to the committee's discussions. So, if you have any recommendations, feel free to let the clerk know as the committee's work moves forward. As you know, that is something we will be doing in stages.
The first stage will most likely consist of an interim report on airports, anything related to airport legislation, managing boards, governance and presence. In addition, you may send us written answers to any of the questions that have not been asked.
[English]
We have a National Airports System of 26 airports. Contrary to real life, people are not created equal. We have a National Airports System and we tease about the fact that we have a subcommittee called MTV — Montreal Toronto Vancouver. MTV basically has 75 per cent of air travel, as much for your industry as for the industry per se. The other 23 airports are treated with the same type of structure. I cannot image that Air Canada would want to sit on the boards of 26 airports but there might be interest in having a stronger presence at the three biggest airports. Mr. Dee, I would like you to address that question because it is the first one the committee will address should the National Airports System be revisited. As Senator Cochrane said, it was set up 17 years ago. Although it was a good idea, it does not contain a sunset clause, which is often included in the legislation for the purpose of future review. The succession of ministers looking at the NAS believes that some improvements have to be made. We will rely on your comments to ensure that this committee has the guidance to make the best report possible.
[Translation]
Thank you very much. Tomorrow evening, we will be meeting with one of your competitors, WestJet, at 6:45 p.m. We will be meeting in room 2 of the Victoria Building.
(The committee adjourned.)