Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 7 - Evidence, March 6, 2012
OTTAWA, Tuesday, March 6, 2012
The Standing Senate Committee on Transport and Communications met this day at 9:33 a.m., to continue its study of emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[Translation]
The Chair: I call this meeting of the Standing Senate Committee on Transport and Communications to order.
[English]
This morning we are continuing our study on the Canadian airline study. We are pleased to welcome Ambarish Chandra, who is an assistant professor of business economics at the University of Toronto's Rotman School of Management. Mr. Chandra has studied the phenomenon of Canadians who choose to fly out of U.S. airports.
Thank you for taking the time to talk to us this morning, Mr. Chandra.
Ambarish Chandra, Rotman School of Management, University of Toronto, as an individual: My name is Ambarish Chandra, and I am an assistant professor of business economics at the University of Toronto. By way of introduction, I received my PhD in economics from Northwestern University in 2006. From 2006 until last year, I was a professor at the University of British Columbia in Vancouver. My research examines firm competition and consumer behaviour in a range of industries, such as media, gasoline, automobiles, airlines, as well as, of late, the U.S.-Canada exchange rate and cross-border issues.
I am glad to be here today to discuss issues relating to the Canadian airline industry. I would like to divide my comments into three parts. First, I will describe the phenomenon of Canadians choosing to fly out of U.S. airports rather than Canadian ones. Second, I will discuss the reasons for this behaviour and why it has been growing of late. Third, I will provide my opinion on what, if anything, can be done about the situation.
On the first point, there is now a lot of evidence that a growing number of Canadians are choosing to fly out of U.S. airports rather than Canadian ones when travelling to destinations in the U.S. or internationally. Media reports on this practice are widespread, but it is actually hard to get definite numbers on how large this phenomenon is. In my own research, conducted partly with my former colleague Keith Head, at UBC, we have tried to estimate the extent of this practice. Using information from the Canada Border Services Agency, as well as from StatsCan, we have tried to estimate the number of Candians flying out of U.S. airports on an annual basis. If you look at appendix 1, which I hope you have, it is a chart that shows you the growth in the fraction of Canadians who choose to fly out of U.S. airports. This number is the blue series on that graph that ranges over the last 20 years. What each number represents is simply, of the number of Canadians who choose to drive to the United States by car for a trip of at least one day or more, what fraction of those Canadians reported flying out of a U.S. airport. This is a self-reported number. It is not entirely reliable, but it is more or less reliable. StatsCan does a pretty careful job of choosing a sample and providing sample weights. We are quite confident, especially in the growth of this figure.
If you look at the blue line, it shows that this fraction of Canadians choosing to fly out of U.S. airports has gone from 1 per cent in 1990 to over 7 per cent today. If you actually express that in real numbers, more than 600,000 air trips are taken by Canadian residents out of U.S. airports rather than Canadian ones. That is in the last year.
Airlines in the U.S. are increasing their offerings at low-cost U.S. airports located near Canadian cities. There has been rapid growth in the offerings from airports such as Burlington, in Vermont, Bellingham, in Washington, and Buffalo, near Toronto, all of it targeted toward Canadian residents. U.S. Airlines are also strategically offering flights targeted almost entirely to Canadian, rather than to U.S., residents. Alaska Airlines recently added non-stop service to Hawaii from Bellingham airport. These low cost U.S. airports offer updated information on travel to and from Canadian cities. If you were to go to their websites, they offer you real-time data on border wait times, travel to their airports, bus service, train service, et cetera. They are clearly targeting Canadian residents. These practices have not escaped the attention of Canadian airports and other organizations that rely on air travellers in Canada. About a year ago, my colleague and I were approached by senior management at Vancouver International Airport who were concerned by the growing number of B.C. residents, Lower Mainland residents in particular, who were choosing to fly out of airports in Washington State. They commissioned a survey of these residents to ask them their reasons for doing so, and it is very clear. All of the travellers said that they were responding to higher airfares in Canada compared to lower airfares in the U.S. I have no doubt that other airports in Canada are similarly concerned about the loss of passengers to rivals in nearby U.S. cities.
It is important to realize that the growth of cross-border fliers has repercussions not only for Canadian Airlines but also for other businesses in Canada that rely on travellers, including parking and concession services at Canadian airports, hotels near airports, taxi companies in big cities and, of course, local and provincial governments, and, ultimately, the federal government, that collect tax revenue based on these travellers.
I would like to comment on what I believe are the reasons for this phenomenon. The first and most obvious is the exchange rate. The Canadian dollar is quite strong by historical standards. It has been above parity for most of the last two years, or close to that level, with respect to the U.S. exchange rate. If you refer to appendix 1, I have plotted, in the red series, the value of the U.S.-Canada exchange rate. This is information that is well known. After being quite undervalued in the early part of the decade, the loonie appreciated sharply, starting in 2002. There was a drop again in 2009, but it is back up to above parity. You can see that these two series more or less track each other in the last decade. That is, the number of Canadians travelling out of U.S. airports has grown in conjunction with the exchange rate, but it is not entirely driven by the exchange rate. The drop in the Canadian dollar, in 2009, did not reduce the number of travellers flying out of U.S. airports. That suggests there is more than just the exchange rate at play here.
The second reason is that airfares from Canadian airports to U.S. and international destinations tend to be higher than for comparable flights from U.S. airports. There are two reasons for this. First, it is generally believed that airports need to pay higher taxes, higher airport improvement fees, and landing fees for operating out of Canadian airports. As I will point out in a minute, this is not necessarily supported by the data. Second, there is considerably less competition on most routes out of Canadian airports, whether for domestic, transporter, or international flights. As a result, the fare difference between flying out of U.S. airports, rather than Canadian ones, can be enormous.
If you refer to appendix 2 for a second, it provides data on how much this premium for flying out of Canadian airports is. Appendix 2 is relative prices to the top five U.S. destinations. What I have done there is use actual, very detailed airfare data from the three big Canadian airports, as well as from their closest U.S. rivals, and plotted the premium that Canadian airports or, effectively, Canadian airlines charge.
For example, the red line shows the premium for flying out of Toronto rather than Buffalo for flying to the top five destinations where Canadians in Toronto tend to fly. You can see that the premium was about 60 per cent in 2002. It grew to more than 100 per cent in 2007, which effectively means it was more than twice as expensive to fly out of Toronto as it was to fly out of Buffalo to the top five destinations of Canadians. That figure has dropped in the last few years but it is still almost 75 per cent, which is enormous. There is no doubt that travellers are responding to this fare difference.
The premium is not as high for Vancouver and for Montreal but it is still considerable. It is still over 25 per cent and more like 30 per cent for both of those airports.
Incidentally, I have plotted the fares for the top five destinations from each of these three airports. The places that Canadians would fly to out of Toronto are, of course, different from the places Canadians would fly to out of Vancouver. People living in Vancouver tend to go to California or Hawaii. People living in the eastern part of Canada tend to go to Florida or New York. Regardless, we have taken all that into account and those are the high premiums we have to pay when flying out of Canadian airports.
Appendix 3 provides details on the source of the fare difference between Canadian and U.S. airports, and effectively out of these airlines. Looking at the first chart in appendix 3, which is the fare at Chicago O'Hare, from Vancouver and its two competing airports in the U.S., as well as from Toronto and its competition in Buffalo, first, the fare difference is huge, as shown in the previous figure. However, most of that fare difference comes from the underlying charge that the airline is imposing and not due to government charges and not due airport improvement fees. As you can see, the difference there between U.S. and Canadian airport charges is actually minimal.
These airport charges are only airport improvement fees. They do not take into account landing fees because we do not have data on what those landing fees are. I believe that Canadian airports charge higher landing fees because they apparently have to pay higher rents. That is something you may well have heard about in the last few weeks. I cannot comment on that. We do not have publicly available data to comment on that. However, there is still plenty of evidence showing that airlines themselves are charging much higher airfares out of Canadian airports to the same destination. This is true if you were to compare Vancouver to the two airports in Washington State. If you look at Toronto versus Buffalo, the same pattern is obvious there. Most of the difference in the final fare is due to the difference in the charge the airline imposes, not in terms of taxes. I will not go through the other charges, but there is more evidence showing the same is true for flights out of Montreal and flights out of Vancouver.
I would like to now discuss my opinion on what can be done about the situation, if anything. The first point I would like to make is that if U.S. airports and airlines are offering greater services to Canadian travellers, then that is unambiguously a good development for us. To the extent that the loonie has played a role in this development is also a positive step for us.
Despite the national conversation that has taken place in the last few weeks, it must be noted that a stronger dollar is almost always a net benefit for Canada, even though I acknowledge that it might be a negative development for some regions and some firms. Overall, if you consider the entire Canadian economy, the extent to which it benefits consumers and keeps inflation in check outweighs the loss to some firms that might be exporters.
My second point is that there are basic structural reasons to explain why airline competition is lower in Canada, both in domestic and international travel. It is useful to compare Canada's situation with that of other countries. Canada has one large carrier, Air Canada, and one midsize carrier, WestJet. Together they make up more than 90 per cent of the market. The other carriers are close to insignificant in terms of competition.
Successfully operating a large airline requires a substantial scale of operations and Canada's population is simply not large enough to support two large national carriers. We saw this clearly when Air Canada and Canadian Airlines were both in the market. It was very hard for them both to operate successfully. By contrast, the United States, with a population that is 10 times that of Canada, can support six to eight large airlines and they do. That is despite the recent consolidation that has happened in that country.
The situation is different in European countries, which generally do not have the population to support more than one national airline either. However, the small geographic size of European countries, along with better rail networks, implies that this is not an important issue. Flights that are at least an hour in length will almost always cross international lines in Europe, which means that there will be competition from multiple carriers. Flights shorter than that will almost always have good competition from high-speed rail networks. That means overall airlines in Europe face considerable competition.
Canada is in a uniquely unfavourable situation with regard to airline competition. The population is not large enough to support more than one big carrier, yet our land mass is the same size as that of the United States. The east- west dispersion of the population, as well as our relative geographic isolation from other countries, only compounds the problem.
As a result, there simply is not enough competition in the domestic airline sector to bring prices in line with those in the U.S. or elsewhere. This problem is not restricted to the domestic sector but it overflows into foreign travel as well. Canadians who live outside the large cities almost always need to connect through a larger hub in Canada, which provides a huge competitive advantage to Canadian Airlines and essentially to Air Canada. It enables them to charge considerably higher fares to international destinations as well. For this reason, I believe Canada needs to be especially willing to take bold action to support competition in the airline sector.
The first step I would propose is relaxing rules against cabotage, which is the practice of foreign transport companies providing domestic services. More specifically, I believe that Canada should allow foreign airlines to operate point-to-point flights within Canadian cities if they should desire. This proposal would permit U.S. carriers, as well as European carriers, to operate between Montreal, Toronto and Vancouver, where they already have operations. News reports indicate that European carriers would be interested in providing these services if permitted to do so. It is not obvious that U.S. carriers would respond as well. Because they have a strong hub-and-spoke nature of operations they may choose not to respond, but it is an option worth considering.
To be clear, most countries do not generally permit cabotage but, as I have noted, Canada is in a unique situation and we need to consider unconventional measures that may not be necessary in other countries. The United States and most countries in Europe would have little to gain from relaxing rules against cabotage, but Canada stands to gain a lot. For that reason I would consider unilaterally relaxing rules against cabotage even if other countries did not follow suit. This would have substantial benefits to Canadian travellers.
I acknowledge that this proposal would face strong political obstacles and also strong objections from Canadian airlines. Therefore, my second proposal is less bold but hopefully more feasible.
Currently cabotage rules also prevent Canadians from taking connecting flights on U.S. carriers between cities in Canada. For example, a Canadian living in Vancouver is not permitted to fly on an American carrier and then continue from Chicago to Montreal or Toronto. The argument is that is akin to providing domestic service within Canada. However, this illustrates the perversity of airline policy. If it is indeed cheaper for U.S. airlines to provide connecting service through U.S. cities, that is to fly passengers across the border twice to have them connect, change planes and transfer their bags, if it is cheaper for U.S. airlines to do that than for Canadian airlines to offer direct service within Canada, then we should encourage Canadian travellers to pursue those itineraries.
Ultimately, public policy in Canada should be designed to benefit Canadian citizens and taxpayers, not the interests of large private corporations. I would strongly urge this committee to consider relaxing rules against stopover flights at U.S. airports which currently prevent U.S. carriers from providing competition to Canadian carriers. As with my proposal above, I believe that Canada should consider unilaterally relaxing these rules even if there is no move by the U.S. to do so.
By way of conclusion, I would like to discuss the real effects of high airfares in Canada and what that implies for our citizens. Appendix 4, domestic kilometres flown per capita, which is just a simple table, shows the number of passenger air miles flown domestically by Canadian residents compared to Americans. This number is on a per capita basis, so they adjust for the much larger population in the U.S.
The chart shows that the number of per capita miles flown by Canadian residents is less than half of what it is in the U.S. This is not something that is due to the geographic distribution of the population. If anything, that should lead to more Canadians flying, not fewer. There may be a few reasons for this, such as lower interprovincial integration in Canada or perhaps language barriers. My belief is that one very important factor that is likely to be driving this huge disparity between Canadian and U.S. rates of travel is simply the higher airfares we pay in Canada. My belief is that these higher airfares lead Canadians to fly less than our U.S. counterparts and, when we do fly, we pay much more.
We should be clear about the costs of these high fares and low travel numbers. Canadians are flying less to see friends, family and loved ones, but they are also flying less for business and for work. Government policy that protects one industry ends up hurting all the other industries and businesses that rely on air travel. This refers not just to industries such as hotels and airports which provide support services for the airlines, but also to consumers. By consumers I mean leisure as well as business travellers. I have no doubt that any measures taken to increase airline competition in Canada will be opposed by domestic airlines but I believe that these measures will be supported by everyday Canadians and by the wider business community.
To be perfectly frank, governments in Canada have shown an unfortunate tendency to side with the airline industry against the interests of Canadian consumers. The choice is clear: If we continue to design public policy to favour this industry, we should not be surprised by higher airline prices in Canada, lower rates of travel by Canadian residents and, ultimately, more Canadians going south across the border to fly from U.S. airports.
The Chair: Thank you, Mr. Chandra.
Senator Eggleton: It looks like you would sacrifice Air Canada and a domestic industry to allow foreign companies to come in and take passengers in Canada. Have you looked at the impact of that on employment and on the aerospace industry? You said that it will have positive effects if there is more competition in terms of the leisure and business travellers, but what about the downside of this? Have you examined that part?
Mr. Chandra: There certainly would be a downside, but I believe it would be minimal. At most, foreign airlines would consider flying only between large Canadian cities. They would not have the resources or the operations to offer service between small Canadian cities. We are talking essentially about flights between Vancouver, Montreal and Toronto.
Even if there is a downside to Air Canada, government policy should be about protecting the interests of Canada as a whole and not the interests of a private corporation, and fundamentally, Air Canada is a private corporation. We should be deciding policy to benefit all Canadians, whether travellers or the support industries that rely on them. All industries that rely on air travel currently are being hurt by the low rates of travel and the high fares in this industry.
Beyond that, you mentioned employment. If U.S. or European carriers were to offer services between Canadian cities, that would not decrease Canadian employment because they would have to hire Canadian workers to operate flights and manage gate operations out of these cities. It would not increase employment in foreign countries but would increase it right here in Canada. They would fly out of Canadian airports, pay Canadian tax and landing fees to Canadian governments and hiring Canadian workers. On that score, I would not worry about employment at all.
I certainly agree that Air Canada and other airlines here would oppose this move. Fundamentally, if we are designing policy to benefit the country as a whole, we should not put so much weight on the interests of one private corporation.
Senator Eggleton: Yes, except that a lot of the management and administration would take place at a head office outside the country, so there would be job factors coming into play, not just the people on the ground doing the service. You can comment on that.
I would also like to ask you something else. This is a vast country, and we have always been concerned about people in remote locations of this country being able to move about. Would we not make it an awful lot worse for them because foreign companies will not be interested in doing trips up north or between remote communities in this country? In effect, we would be cutting them off from the rest of Canada.
Mr. Chandra: It comes down to the current structure of providing service to remote locations. As I understand, although it is not clear from the data available publicly, Air Canada and the domestic carriers essentially are charging premiums on the heavily travelled routes in order to subsidize service to other routes. A better way to design policy in this regard would be for the government to explicitly subsidize those routes that we believe would be under served by airline competition and to allow fierce competition on the large routes between the large Canadian cities rather than allow the current incumbent airlines to charge premiums on these routes.
I agree that foreign airlines would not be interested in providing services to remote communities, nor should they. However, if that is important from the standpoint of policy, the government should subsidize domestic airlines in Canada to provide those services rather than have them implicitly take a subsidy from the heavily travelled routes and apply it to the lesser travelled routes.
Senator Eggleton: I do not know if these Canadian companies can survive cabotage. There may not be as many of them around to do those services that you are talking about subsidizing by the government.
Mr. Chandra: I do not think this might be as dramatic as you might think. We are talking about allowing a few foreign carriers to fly between the large cities in Canada. Domestic airlines in Canada still have a huge advantage — they are Canadian companies. Air Canada has the name, the logo and a long history of a relationship with flying passengers. Not only will that not disappear, but also it will not even be hurt. This proposal would simply provide a certain level of competition to them on certain routes.
Senator Eggleton: They are the routes where they make the money.
Mr. Chandra: We have to restrict how much entry there is on these routes. I am sure they would oppose this, but I do not believe this would hurt them much.
Senator Eggleton: Your charts show airline charges at border airports such as Buffalo and Seattle. Where does the ground rent come into it? I do not see ground rent on the chart. Would that come out of the airline company charges? In other words, do the airports charge that and other charges to the airline companies? Maybe a lot of the stuff that the government does is reflected in that.
Mr. Chandra: Absolutely it is. I do not have that on the chart because we do not have the data on what the ground rents are and what rents the airports are charging the airlines. The information is not publicly available. No doubt they are charging high rents, which our separate research shows. I am sure you have heard that as well.
Senator Eggleton: The Americans do not get that.
Mr. Chandra: That is true. A bit of that difference is overblown as well and Canadian airports protest too much.
It is true that it is a large source of what is driving this, and it is hard to break down separately.
Senator Eaton: I have several points. Would a better high-speed railway infrastructure between cities like Montreal, Toronto, Ottawa, Calgary and Edmonton be considered competitive to Air Canada?
Mr. Chandra: The more efficient and feasible it is for travellers to take those trains the more competition there would be, absolutely.
Senator Eaton: It would be a good thing?
Mr. Chandra: Absolutely.
Senator Eaton: What are Air Canada's and WestJet's labour costs compared to those of American airlines? Are they comparative?
Mr. Chandra: They do not provide these numbers separately for us to analyze but from what I can tell, they are somewhat higher than U.S. airlines but more or less in the same ballpark.
Senator Eaton: Cabotage would be convenient if you are flying to France, for example, because you would not have to take Air Canada to Montreal and then Air France to Paris. Air Canada has more room to become more competitive financially if it had to do so.
Mr. Chandra: I believe it does. You have probably had executives from Air Canada and other airlines testify before you. There is no doubt that they might complain about the ground rents at airports and the higher labour costs. I have no doubt that those factors are important and driving up costs in Canada. However, as long as there is not enough competition, there will always be something that they can point to explain the source of the difference. The more competition there is, the more all of these firms will be forced to find ways to solve this problem and exert pressure on their suppliers and partners to be more competitive. As long as there is a duopoly, there will be less incentive for them to find ways to shave these costs. Perhaps reducing ground rents at airports could be considered.
Senator Eaton: They all said to us that even if ground rents were reduced, it would not mean that they would lower their fares.
Mr. Chandra: Of course. Let us say we eliminated ground rents today. Fares probably would fall somewhat but not by as much as a truly competitive industry would have them fall by.
[Translation]
Senator Boisvenu: I commend you for your presentation, it was really interesting. I agree with you, Canada cannot compete with the United-States on an equal footing. We have demographic and geographic conditions that are totally different.
I think your presentation shows us very creative insights, and I congratulate you for it. We will have to leave the beaten path. We cannot compete with the same tools.
The graphs in your submission remind me of a feeling I had when the airlines came to us and implied that the cost differential between Canadian and U.S. rates was due to the government.
According to your graph, the Canadian and American government fees seem more or less equivalent, and also the landing fee. But this doesn't explain the large difference in costs between Vancouver and Seattle. If we look at the costs of airlines companies, the difference is enormous.
Are there any differences between the administrative costs of a Canadian airport and those of an American airport?
Take for example the boards of trustees. For the Canadian airports, don't the trustees have fabulous jobs, although maybe overpaid? Don't collective agreements also offer over the top conditions in this sector, and therefore the difference between Canadian and American costs would be linked only to the administrative costs of airports? In the past, the administration of airports was a responsibility of the government. It was then divested to non profit organizations. Did the people in charge give themselves working conditions that are better than in the United States? The difference between costs might lay there, and the government is not necessarily at fault.
[English]
Mr. Chandra: It is quite possible that these are the differences. It is hard for me to say because all we could do is provide the breakdown according to the publicly available data. As I said in response to a couple of other questions, there are airport charges and I am sure implicitly some government charges that drive this difference in what I am referring to as airline company charges. It is hard to say.
Beyond that, the larger question you raised about maybe overpayment or inefficiency fundamentally at these airports or airlines I believe is quite possible, but I could not say without looking more carefully at the data and we do not have the data.
[Translation]
Senator: This is a minefield. Are you proposing open skies?
[English]
Mr. Chandra: Not entirely open skies. In a true open skies agreement, there are apparently nine freedoms of the air that international organizations have described and considered. The ultimate freedom would actually allow foreign carriers to operate unlimited flights within a domestic country, to pick up passengers and drop them off between airports unrestricted.
The first proposal, which I acknowledge is bold, is allowing foreign carriers, let us say U.S. carriers, to combine the operations they currently have at airports in Canada. They are allowed to fly to Montreal and Vancouver. They are just not allowed to fly between those cities. That is not going as far as pure open skies, but it is certainly a big step forward. Currently, they are not allowed to even market a ticket that would have you fly from Montreal to Chicago to Vancouver. They are not allowed to offer that for sale, even though you or I as consumers could buy those separate segments independently from an airline. However, because it is not sold as a combined ticket, it is not the same PNR, bags cannot be transferred, and fundamental fares are higher.
All I am saying is allow foreign airlines to offer that service. If Canadian airlines could not compete with a foreign airline that would implicitly be paying much higher charges to transfer passengers through a third country and to transfer their bags and cross the border twice, then that is something that we have to permit. We have to say this is still a huge advantage to Canadian airlines that are permitted to fly direct and, if they cannot compete with this alternative that is fundamentally more expensive, then there is something seriously wrong here.
[Translation]
Senator Boisvenu: Some witnesses have raised the question and they almost asked the government to solve it. However, you say part of the solutions would also come from the airlines themselves?
[English]
Mr. Chandra: The airline companies will not unilaterally provide a solution. They will be encouraged to and forced to if they face more competition, and they do not face enough competition right now to feel any need to respond to any change.
Senator Doyle: At our last meeting, I mentioned that the federal Minister of Transport and his officials had been here meeting with the committee and said that maybe we as a committee should be looking at studying the number of international airports that we have in Canada, perhaps with a view to reducing the number of airports to a collection of hubs in Canada. Do you see any adverse economic impact if that were to happen? Would it affect the price of an airline ticket in the long run?
Mr. Chandra: It is hard to say, to be honest. There are too many variables at play to be able to say something without a very careful study. The hub network works well in the U.S. compared to the alternative, but that is primarily because of the geography of the country, the way is population is laid out and the historical reasons how airlines have operated there. It is less strong and less important, I would argue, in other countries. My impression is that Canada has less of a need for a strong hub and spoke network the way the U.S. has, but it is a very complicated question to answer without a lot more analysis. I would not go further than that.
Senator Doyle: The U.S. carriers offer lower prices simply, you are saying, because they have low per landing fees and security charges and improvement fees and so forth. We all know that is the case. Does it also have to do with the fact that the American government has better government policy that regulates the operations of their airports as compared to our airports? Does the American government, for instance, get involved to any large extent in infrastructure funding and so forth that would lower the costs of fees in the U.S. as compared to Canada?
Mr. Chandra: Not that it is immediately apparent. An actual reason, and this is not any pernicious reason, is that airlines require a large scale to operate. The scale of operations does not permit, as I said, more than one big carrier in Canada. Even WestJet is really just a mid-sized carrier. It has 35 per cent of the market. The U.S. is large enough to support fierce competition between many large carriers, and that, in my opinion, is the first order of reason why we see lower airfares in the U.S.
Incidentally, that is true in many sectors. In many Canadian industries, we have lower competition because we just do not have the scale of operations. It is the same with mobile or cell phone networks. I do not want to ascribe some sort of inefficiency or conspiracy reasons to these firms. It is the natural outcome of the fact that if they do not have a large enough scale of operations, they will not be able to drive costs down to the level that larger markets can. One of the benefits of being in a large market, and you see this now with the EU, is that the larger the market, the more firms can spread costs over more consumers and actually drive prices down. It is hard to do that in Canada.
Senator Mercer: We appreciate your presentation. In a truly capitalist world, I think your recommendations would fit nicely. Some of my colleagues would love that.
Our responsibility as legislators is to legislate and, through this report, make recommendations that will affect all of Canada from coast to coast to coast. The formula that you have put before us to allow foreign carriers to fly on domestic flights would probably be good for those of us who fly some of the profitable flights or routes that are there now. However, that is not our job. Our job is to ensure that all Canadians have access to as reasonably costed airfare or air travel and facilities as possible, which means we have to fly to places that are not as profitable.
You have not offered us a blend here. Pure competition is a wonderful thing when you see it, and I appreciate that, but you cannot have pure competition when you force people to fly to Resolute Bay or Gander or to Sydney, Nova Scotia, or to Rouyn-Noranda. When you are forcing airlines to consider those routes as a necessity for the operation of the country, both personally and economically, I do not see how this works. Is there a blend that I have missed here?
Mr. Chandra: There might be. I would make two points. The first point is, you said that my proposal would essentially benefit travellers flying between the large cities. It is more than that. There are enormous benefits in ways we do not see.
The first order effect would be lower fares and more people flying between the large cities. However, think of all the businesses that depend on these travellers — hotels, taxi companies, and support services — that would benefit in these large cities. It is not just a question of people having lower airfares. It is also a question of all of the additional jobs that would be generated when people fly and consume these services. That is hard for me to estimate, but, as a first order suggestion, there are all of those additional jobs and opportunities that will be generated from greater business and leisure activities. We have to keep that in mind. It is not just about travelers.
The second point is important. You are right, if we require Canadian carriers to fly to destinations that would otherwise be unprofitable, it would be unfair for them to face competition from other carriers that do not have to fly to those destinations. That is why I would argue, as I mentioned before in response to a previous question, if it really is the model that we are requiring Canadian carriers to fly to these unprofitable destinations, we should change the model and subsidize travel to those destinations. We should provide a per passenger subsidy to fly to those destinations that makes up the difference between the cost of providing the service and the fares passengers are willing to pay. That is actually the model employed in the U.S. There are a number of flights to and from pretty remote destinations in the U.S — Upstate New York, Alaska, and other parts of the country — where the government explicitly offers a subsidy per passenger. That is a cost to the government, but it would be recouped by the greater tax revenue from having more passengers fly on the larger routes.
Senator Mercer: With respect to the rents charged to airlines and airports, that money goes into the general revenue of the government. That is true, and it is a concern that the finance minister must have when he considers recommendations from us or somebody else to get rid of that.
Are you suggesting that perhaps we suggest that the fees charged in those profitable runs be used to subsidize operations in the less profitable runs? Toronto, Montreal, Vancouver, Calgary, Halifax, and Winnipeg end up subsidizing other runs in other cities?
Mr. Chandra: Where the funds come from is a hard decision to make, and I am not well placed to comment on that. They could come from those sources, general funds, or the greater taxes and revenues we would hope to collect from foreign carriers flying these routes, as I propose. However, I do believe that it is a much more efficient way. If we believe that airlines would not automatically provide service to areas that we, as Canadians, believe should be provided service, we should subsidize those routes, wherever the funds come from, rather than requiring these airlines to provide service and getting them to charge higher fares on the larger routes.
[Translation]
Senator Verner: Thank you for coming here this morning. Your presentation was very interesting.
Considering the present economic data, if you had to look at a ten-year period, what would be the risk or the threat for the large airports situated not far from the border?
I noticed in your last paragraph an indication that you tend to give more importance to the industry than to the consumers. Today, consumers are knowledgeable. They have a dollar at parity with the American currency. Of course, a great number of them go to the States. For a ten year period, if we wanted the consumers to benefit from the parity, what would you say is the threat for these large airports?
[English]
Mr. Chandra: I think the threat will continue. If you were to look back at appendix 1, the growth in Canadian travellers flying to U.S. airports has continued, despite the loonie dropping briefly in 2009. The loonie has now been, for the last two years, at more or less at the same level as it was in 2008. Despite that, the growth has continued. It is 7 per cent of Canadians who drive down to U.S. that fly out of U.S. airports. By my estimate, that is 600, 000 Canadians. I only recently got the data for 2011, and it appears to be substantially higher.
It is growing.
We have crossed a threshold where now the strength of the dollar may not even be so important. Canadians are aware of these options in the U.S. The U.S. airports are aware that Canadians are, frankly, underserved by their own domestic airports, so we are seeing a growth in bus services to and from U.S. airports. We are seeing, as I said, airports posting data on border times and explicitly targeting Canadians. (Inaudible) and Alaska Airlines offered service from Bellingham, which is an airport Americans would not fly out of. Not enough Americans live in that part of Washington State. It is explicitly to target Canadians. That is a good thing. We are being underserved by our current airline situation, and we, as consumers, should look out for our interests. If that means flying out of the U.S., we should do that.
I think it will continue. The stronger the loonie gets, the more it will be the case, but, even if the loonie were to stabilize at this level or drop a little bit, this phenomenon will continue to grow.
I think it is positive. Travellers — consumers — have to look out for their interests, and they will.
[Translation]
Senator Verner: If, as happened a long time ago, the loonie were to tumble and a real difference with the American dollar developed, do you think the issue of parity would cool the interest of the Canadian travellers?
[English]
Mr. Chandra: I do not think so. Looking back at appendix 1, in 2009, immediately after the financial crisis, the loonie fell from around parity to below 80 cents on the U.S. dollar. That is a 20 per cent drop in four or five months. It is a dramatic drop, but we understand now why that happened.
Fewer Canadians would have wanted to shop in the U.S. because prices were no longer competitive.
However, if you look at my figure, the fraction of Canadians who chose to fly out of the U.S. airports continued to grow. It is because we have, to some extent, crossed a threshold where the loonie is less important now. Even when it can depreciate for short periods, there is enough infrastructure and enough resources in place through private transportation companies, like bus and rail companies, to provide service to transport Canadians to these U.S. airports. They will continue to do so.
Senator Merchant: I think you said that there was a difference in premiums between Vancouver, Toronto, and Montreal. Did you give us an explanation as to why?
Mr. Chandra: First of all, the premiums are all very high. I do not mean to suggest that it is somehow a good deal to fly out of Vancouver or Montreal, as opposed to Toronto. It is still a bad deal for Canadians to fly out of any of these airports if they could go to U.S. airports.
Toronto was, for a short period, very expensive, almost twice as expensive as flying out of Buffalo.
It is a relative premium, compared to the related U.S. airport. It could be that Buffalo was especially cheap.
City of Toronto is an expensive airport to fly out of. They have recently completed renovations. They are essentially charging prices to cover the cost of those renovations. It is the busiest airport in Canada, so landing fees are correspondingly high.
If you look at the most recent data, from 2010, the premiums are still high for Toronto, but they are converging with the other two airports, at a level of 30 to 50 per cent, which is still very high.
I would not read too much into that premium from Toronto. It might be driven by the fact that the corresponding U.S. airport is much cheaper.
Senator Merchant: They have had a lot of renovations in Toronto, but airports are always doing renovations. I am not sure it is always necessary.
I will be a little parochial for a minute. I live in Saskatchewan and you talked about competition. We have two airlines that fly in and out of Saskatchewan, WestJet and Air Canada. Is there a big difference in the prices they are charging? Is there a difference between the WestJet prices and Air Canada prices?
Mr. Chandra: I could not comment for the simple reason that frankly it is hard to do research on airline prices in Canada. Statistics Canada does not release data on airline prices. I do not know why. I do not know if it is a decision by them or by the government, such as a regulation that prevents them from doing so.
By contrast, in the U.S. there is excellent data on all airfares paid by all passengers available publicly that researchers can use and have used to study this industry in order to make comments and criticisms about how the industry operates. I would argue it actually improves airline efficiency and competition.
We do not have that in Canada. There is no publicly available database that researchers can use on airfares that are charged. Short of going to online search engines like Expedia or actually typing in numbers, we do not actually have a historical database so I cannot comment on that at all.
Senator Merchant: The other thing we have noticed is that the schedules of the two airlines are parallel. Therefore it is really frustrating because you cannot get a flight out of Regina. Three times a day they fly in and out, unlike people who live in Toronto who can take a flight every hour to go somewhere, yet neither of the airlines seem to be trying to serve the public in a way that offers an alternative. There is really not much choice as to how to get in and out. If the prices are no different, then I do not know how competition is working to any advantage for us out there.
Mr. Chandra: I completely agree. I do not have an easy fix. Even the suggestions I make would not actually impact airports in Saskatchewan and unfortunately there is not much competition from the U.S. side either that would at least drive prices down. There are no big U.S. airports close to cities in Saskatchewan. There is really no easy fix there.
As a basic first step, I tried to propose at least bringing down fares for the larger coast-to-coast routes where it is a little more feasible to actually adopt something, but it is hard to imagine actually what feasible fix one could apply for in the situation you describe.
Senator Merchant: I am very sorry to hear that. Is it because of the population or the location?
Mr. Chandra: The population and, given the location, it is not large enough to support a third carrier. A carrier like Porter would not find it profitable.
Senator Merchant: High-speed rail, thank you very much.
Senator MacDonald: Mr. Chandra, thank you for coming here this morning. I loved your presentation. It is very clear-headed. As long as you have access to the data you need I believe you can come up with some sound conclusions.
You mentioned some problems with getting information in order to come to some conclusions. You mentioned the airline prices, reliable database, and I think you referred to landing fees previously.
Can you give us a list of the areas, besides those two areas I just mentioned, where the lack of reliable data inhibits your ability to provide the analysis that you wish to provide and I believe we wish to hear?
Mr. Chandra: Those are really the two most important areas. If we had more data we and other researchers could do a lot more to really drill down into more fundamental reasons for price differences between the U.S. and Canada, or other countries, and also offer more prescriptions. If somebody were to provide breakdowns of landing fees and ground rents at the 5 to 10 larger airports in Canada that would be extremely useful.
On the second point that I made in response to the previous question on airfares, I do not know if this policy has been done to protect domestic airlines. Statistics Canada has not revealed data on industries where there are a small number of players and in the airline industry that is just a few players and that may be why they do not do it. We have no way of telling what airfares Canadians pay for flying even between the large cities, so it is very hard to actually compare prices paid for flights in Canada versus the U.S.
That is why the charts I showed you are for premiums to U.S. destinations, not Canadian. The Americans actually collect data on fares paid from Canadian cities to U.S. destinations and make that available so we can analyze it, but obviously they do not collect, nor should they collect, data on domestic Canadian airlines. I do not know if anybody does but it is certainly not available. I would be a very enthusiastic supporter of the idea of collecting and making available more data. It would actually help researchers provide a lot more in terms of solutions and possible fixes.
Senator MacDonald: One thing we are fairly well informed of now is that landing fees are a big inhibiter for foreign carriers coming to Canada. Our understanding is that Pearson Airport has the highest landing fees in the world and is one of the most expensive airports in the world to land. We all travel a lot internationally and one thing I have noticed, when you go to one of the major airports around the world, is the number of carriers from all over the world. When you go to the Canadian airports, such as Toronto, Montreal or Vancouver, there is a noticeable dearth of foreign carrier planes on the tarmac. Most, but not all, are dominated by Air Canada.
Mr. Chandra: On that point, you are right; the landing fees are very high at Pearson and at some Canadian airports. Despite that more carriers would like to enter and provide service to Canadian airports, but the decision last year to prevent Emirates from doing so was most unfortunate. That could only have been a positive development for Canadian travellers and for the Canadian economy to have more options to fly to international destinations in the Middle East and connect from there to elsewhere. Despite high landing fees more foreign carriers would like to enter and we are preventing them from doing so, which I find very strange.
Senator MacDonald: As do many of us, I believe.
Senator Eggleton: I hope you get more data you are looking for to break down the airline company charges, because it seems that there are charges in there that the U.S. airline companies do not have. It may be relevant to government, over and above what those other government ones are, and they may be relevant to fees and rent and so forth. To get a good comparison we need that data.
I would like to ask about the people who go to American airports, whether you can break it down between people who are travelling for pleasure versus people travelling for business, and what are the catchment areas? How far will somebody drive to one of those border points such as Buffalo? They may come from Hamilton, Niagara, maybe some of them from Toronto, but would they come from as far as Sudbury? I wonder what the catchment area is because of the size of the population in Canada that is exposed to that possibility of driving to the border. Do you have any thoughts on that?
Mr. Chandra: I do have the numbers, but not specifically for those airports. I could probably run that and get back to you.
As you may remember when we last met at the other committee with respect to cross-border tariffs and exemptions for Canadians, I mentioned we actually had detailed data on how far Canadians are willing to drive to shop in the U.S., not necessarily fly out of U.S. airports. From what we could tell, even though it is a growing phenomenon, the data shows it is mostly people who live close to the border. The costs of actually driving three or four hours each way are substantial. For Buffalo Airport, even without looking at the data, I would guess these people are mostly coming from Hamilton and Niagara as you mentioned, and the GTA basically, but not much further than that. It is quite costly.
Senator Eggleton: Would it be a two-hour time break?
Mr. Chandra: Two hours each way. The interesting thing about airports is if you are a family of four it is still that same two-hour cost, but you multiply the savings by four.
Your first question was about leisure versus business. From what I can tell, this is largely driven by leisure travellers, by Canadians travelling for pleasure and not for work primarily. If it is for work often your employer pays for the flight so you are not paying the fundamental costs. However, the phenomenon is growing. I have done it myself when I was living in Vancouver. The fare differences are enormous and there is no justification for paying more than twice as much if it can be avoided.
Senator Eggleton: You have talked about the person who wants to go to Vancouver from say Toronto but wants to go through Chicago and how difficult that is to do. I can understand some appeal to getting that changed. However, are you also suggesting that foreign airlines, whether it is American Airlines or British Airways, could cover Toronto-Montreal or Toronto-Vancouver?
Mr. Chandra: That was my first suggestion. I agree that in the current climate, it would be hard to implement, but I still believe it is important to state it.
The second suggestion is to not have point-to-point service, which you described, that allows U.S. carriers to provide the service of connecting you through a U.S. city. They are already doing that, but they are not allowed to market it to Canadians.
You and I can buy tickets between Canadian airports through a U.S. city, but we would have to buy two separate tickets, which becomes too expensive. If you allowed the U.S. airlines to officially market that as a package, it would bring down their costs, and they would be more likely to match or undercut Canadian Airlines.
Senator Eggleton: My concern is not so much that but is more about getting foreign airlines to fly Canadian city to Canadian city.
Mr. Chandra: I acknowledge that is a much harder issue to suggest. That is why I believe the second suggestion should be much easier to implement.
Senator Zimmer: I have a brief question picking up on your comment about the United Arab Emirates.
Your presentation was excellent — candid, precise and to the point. I agree with you that the U.A. Emirates should have been allowed but they were not. Could you expand further on the reasons? Was it Canadian about competition? Do you have any idea of the reasons?
Mr. Chandra: From what I can tell, I would imagine there is plenty of lobbying going on behind the scenes, essentially from Air Canada because they are worried about foreign competition. That is the only conceivable reason. Frankly, that decision did not get us anything. It did not provide us with the competition that we badly need, and it ended up reducing our access to airports in the Middle East. They slapped visa requirements on Canadian travellers to the UAE. I do not see any benefits to us from that. I can see only a downside from that decision. The only possible benefit would be to the agents that did not have to see more competition from it. I would imagine there is some of that going on, but it is hard to say directly.
Senator Zimmer: Thank you for your comments. I wanted that recorded in Hansard.
Senator Unger: I have two unrelated questions. The first is regarding the trend that is being established with Canadians travelling cross-border. Once a trend is firmly established, how hard is it to reverse?
Mr. Chandra: I think it is hard. As I mentioned in response to a previous question, despite the Canadian dollar dropping in value sharply in 2009, we did not see a corresponding drop in Canadians flying out of U.S. airports. In fact, it accelerated it. As I mentioned before, we have crossed a threshold where it is part of the thinking of travellers that this is an existing option. There have been more and more support services growing to provide access to this option; and I think it will continue. Obviously, at some point there will be some saturation, as you mentioned, and people will not be willing to drive five or six hours to go to the U.S. In the near term, there is no reason to believe this will slow down.
Senator Unger: If the trend took five years to establish, it could take double that to reverse.
Mr. Chandra: Quite possibly, yes.
Senator Unger: My other question is regarding online bookings, which Canadians have accepted as a good way to book. I assume it was a cost-saving measure for the airlines because they promoted it, and yet their costs continue to rise, and that is not a benefit. There is a benefit, per se, in that some find it more convenient to book online. Presumably the airline could reduce reservations agents but their costs continue to rise.
Mr. Chandra: That is true, but we would have to know the state of the world that would have existed had this not happened. In other words, airline costs have continued to rise, but that does not necessarily mean they would not have risen even more in the absence of online booking. It is hard to say.
Online booking is good for consumers because it enables them to compare airfares and it is good for the firms because it gives them more data on who the consumers are and what they do. Also, it allows them to extract more money from travelling consumers. That is a common practice that we see in other markets; it is not unusual. However, it does not mean necessarily that fares will drop as a result of online booking.
Senator Unger: Your presentation was excellent.
[Translation]
Senator Boisvenu: Here is my first question: what would be the main reason for the slow growth of the airport industry in Canada? Please give me a reason.
My second question is this: you say that cabotage would be the main solution. If we allow it, what impact would it have on the growth of Canadian companies in foreign markets? Would there be a risk to Canadian airlines' competiveness and profitability?
[English]
Mr. Chandra: On the first question about growth, you asked for a single reason. It is hard to provide a single reason for growth not being greater. One possible explanation is simply that airlines do not need to grow much more unless they face competition. They are not always under stress to find new routes, new passengers and new services to offer to travellers.
On the second point, domestic airlines would oppose any move like the one I have suggested because greater competition is not good for them, might drive down their profits and hurt their bottom line. I would argue that we should not be concerned solely about their profits but about the benefits to Canada as a whole.
Another point I would like to make is that we have come to accept foreign competition as a good thing in many areas. Even though it hurts some domestic firms, overall it benefits Canadian consumers to the extent that it outweighs the losses to Canadian firms. We have seen that in manufacturing, electronics and the importation of food. Things have changed. We now agree that foreign competition is a good thing. Compared with most industries in Canada, who have to deal with foreign competitors on a daily basis, the airline industry is remarkably sheltered. It does not have to worry about foreign competitors at all within the country and has to worry about them only to a limited extent internationally. Only the Star Alliance carriers can provide competition to Air Canada because it is a partner only with Star Alliance, which means that Delta, British Airways and Air France do not offer the level of competition that we would expect in Canada. Why would we agree that international competition is good for Canada and yet refuse to even consider it in the airline sector?
The Chair: Mr. Chandra, thank you very much for your presentation; you impressed the senators today.
I remind the audience and honourable senators that our next meeting will be on the morning of Tuesday, March 13. We do not have any witnesses for tomorrow night. Next Tuesday, we will hear from Mr. David Goldstein, President and Chief Executive Officer of the Tourism Industry Association of Canada; and Mr. Russell Payson, President of Sky Regional Airlines Inc.
I would also like to remind members of the steering committee that in five minutes, we will meet upstairs.
(The committee adjourned.)