Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 5 - Evidence, December 6, 2011
OTTAWA, Tuesday, December 6, 2011
The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to study emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[English]
The Chair: This morning we are continuing our study on the Canadian airline industry. Appearing before us today from the International Air Transport Association are Mr. Douglas E. Lavin, Regional Vice President, North America, and Cyriel Kronenburg, Director, Airport and Air Traffic Charges for North America.
Douglas E. Lavin, Regional Vice President, North America, International Air Transport Association: Honourable senators, thank you for the opportunity to speak to you in support of your study on emerging issues related to the Canadian airline industry. I apologize in advance for my throat. I have the same cold the chair has. I submitted my formal testimony to the committee last week. However, with your permission, I would like to summarize some key points in that testimony and respond to questions.
For those who may not know, the International Air Transport Association, or IATA, is a global trade association headquartered in Montreal that was created in 1945 by a special act of the Canadian Parliament. We have approximately 70 offices around the world and 1,400 employees. Over the past 60 years, IATA has developed the commercial standards that enable today's interconnected and interoperable international air transport system. Our mission is to represent, lead and serve the international airline industry. We represent 230 international carriers around the world, including Air Canada and Air Transat.
Air transport plays a key role in driving global economic development and long-term economic growth. Aviation contributes over $3.5 trillion to the world's economy or 7.5 per cent of global GDP, generates 32 million jobs, and carries more than 2 billion passengers and 43 million tonnes of cargo annually.
Not surprisingly, Canada's economy also enjoys great benefits from aviation. A recent IATA study determined that aviation contributed $33.3 billion or 2.2 per cent of Canada's overall GDP and supports over 400,000 jobs. Canada's airlines alone contribute $7.6 billion, support 82,000 jobs, and carry 52 million passengers and 556,000 tonnes of freight a year.
However, as impressive as these numbers are, we believe they could be much better if the Government of Canada had a sustainable aviation policy. Rather than promoting this growth engine, the Canadian government imposes one of the highest government tax and fee regimes in the world on the aviation industry. The government has treated the industry as a cash cow, collecting over $3 billion in the last 10 years in taxes and fees beyond the cost of services provided to the industry.
This year, the World Economic Forum ranked Canada number one for quality aviation infrastructure, but one hundred and twenty-fifth out of 133 countries in terms of levels of air transport taxes and charges, with 133 being the worst country.
The biggest contributor in this tax burden is the $2.5 billion collected to date in Crown rent from the nation's 26 largest airports. It is far in excess of the book value of the airports at the time of their transfer to the private sector back in the 1980s. The $250 million annual Crown rent paid by these airports alone results in Toronto Pearson being the most expensive airport in the world to land a plane. Airports have no choice but to pass these costs on to airlines in terms of higher landing fees, which in turn must pass costs on to their passengers.
Unfortunately, Crown rent is not the only item on the government's taxation menu. High property taxes, navigation charges, security charges, fuel uplift taxes and airport improvement fees all make it extremely costly for airlines to operate in this country. These costs resulted in between 4.5 million and 5 million Canadian passengers crossing the border last year to take U.S. flights not saddled with these high taxes and charges. Passengers departing Canadian airports often pay between 60 and 75 per cent above the airline's base fare to cover taxes and charges, compared to between 10 and 18 per cent in the U.S. I recently asked a U.S. low-cost carrier why they did not fly to Canada and they said, "We already do. We fly to Burlington."
These high costs have contributed directly to Canada dropping from eighth to fifteenth most visited country since 2002. The Tourism Industry Association of Canada, TIAC, estimates that bringing Canada back into the top 10 would produce 46,900 extra jobs and $5.2 billion in new economic activity. While many factors contribute to this slippage, high aviation costs and fewer flights do not encourage more travel to Canada.
Other governments recognize the value of aviation to their economy and keep taxation low while making investment in infrastructure and other critical components of the aviation ecosystem. Countries like Singapore, Hong Kong, China, Korea and rising economies in the Middle East have all instituted policies and programs to promote rather than inhibit aviation. There are also governments that have been persuaded that taxing aviation is bad economic policy. In 2008, the Government of the Netherlands decided to impose a departure tax in an effort to raise $412 million, but abolished the tax after seeing a $1.6 billion decline in economic activity. Similarly, the Irish government imposed an air travel tax expected to raise $165 million but has now announced it will significantly reduce that fee because it cost $594 million and 3,000 jobs.
In October of this year, IATA joined with the National Airlines Council of Canada, the Hotel Association of Canada, the Tourism Industry Association of Canada and the Canadian Airports Council to host an Aviation Day in Ottawa to highlight this challenge and discuss ways to encourage the government to adopt a sound aviation policy that supports rather than impedes this incredible growth engine. There are some hopeful signs, including the government's November release of a new federal tourism strategy. However, more work needs to be done. It is for that reason the work of this committee is so important.
We urge the committee to capture in its report the need for a sound Canadian aviation policy that includes the following components at a minimum: the discontinuance of Crown rent on Canadian airports, a full review of the tax burden on aviation in Canada compared to competing countries, a call for Ontario and B.C. to remove their illegal taxation on international jet fuel, a call for municipalities to lower property taxes on airports, a review of costs and charges for security and immigration, and a federal investment plan to stimulate infrastructure development.
Based on our experience around the world, we can say with confidence that the implementation of such a policy will increase sector growth, tax revenue, passenger satisfaction, and the number of well-paid jobs supporting aviation. Thank you for the opportunity to brief you today. We look forward to responding to your questions.
Senator Greene: Your presentation is music to my ears. It is wonderful, and I think we ought to just adopt it into our report.
Of the 230 airlines that you represent and the countries that they call home, you say that we rank one hundred and twenty-fifth in terms of airport taxes and charges. Who would be number one, or which countries would be in that top five that have the lowest taxes?
Mr. Lavin: I think that was in our opening statement. Do you have that, Mr. Kronenburg?
Cyriel Kronenburg, Director, Airport and Air Traffic Charges for North America, International Air Transport Association: I will find the top five, but they are mostly countries in Europe, Asia and the Middle East. I can get you the exact top five in a few minutes.
Senator Greene: That would be great.
With your familiarity with respect to how your members do business, first, what kind of an organization is it? How much do you know about your members' cost structures?
Mr. Lavin: We know a tremendous amount, particularly in terms of government-imposed cost structures. We know very much about their fuel costs. We do a lot of work around the world in reducing their fuel costs and on straightening their routes, helping them with governments to straighten their routes going across countries and across the world to cut down on their fuel costs. Fuel is their number one cost; but in this country, taxation has a very significant impact.
Senator Greene: In terms of fuel, I would imagine that fuel costs for all the airlines are about the same because it is a world price. Is that right?
Mr. Lavin: I think that is correct. It is really a matter of how they utilize their fuel, and then how the air navigation service providers provision for navigation. Some countries are much more efficient in their navigation. For example, China is incredibly inefficient in navigation because China, for some reason, does not like airlines flying over military bases even if they are five miles up. Therefore, they do a lot of crooked lines and burn a lot of fuel.
Senator Greene: I imagine another cost that would be pretty much the same across all your members would be the cost of the airplanes themselves.
Mr. Lavin: Subject to the free market and what they negotiate, absolutely.
Senator Greene: So would the main differential be taxes and fees, et cetera?
Mr. Lavin: I think that is correct.
Mr. Kronenburg: Within most airlines, airport and navigation costs are between 10 and 20 per cent of their bottom line costs. The problem is that fuel is such a large factor. The other big factor is staff. Most airlines have such difficulty addressing the fuel, and it is so volatile at the moment, that you are automatically forced to look at that very small base of your costs to have any influence on your bottom line cost base.
That is something we have been involved in a lot throughout the world, because it is very difficult for individual airlines to control that aspect. For example, Royal Jordanian will not negotiate their rates and fees and taxation burden with the Canadian government; they are looking at us to do that on their behalf, and that is the case with most other airlines.
You will know that the Air Canadas and WestJets of the world will have their story straight in Canada. We are trying to help the other members in countries like Canada and our own members address this burden that they have.
Senator Greene: I imagine that if an airline wanted to compete on cost — on the price of a ticket, rather than service or other things like that — the only areas where it could do that would be with respect to if it was flying out of or into a jurisdiction with low taxes and fees.
Mr. Lavin: I think that is right. The fact that it is 10 to 20 per cent should minimize that. We are talking about airlines that are historically unprofitable and never cover their costs of capital, so the 10 or 20 per cent cost associated with taxation is a deal breaker, as you can see in this country, in terms of airlines that would otherwise fly here but for these high taxes.
Senator Greene: If you were to pick a model — the Netherlands, Singapore or wherever — and plunk it down in this country, which ones would you suggest we look at?
Mr. Lavin: Certainly, there are countries around the world that look at it as an engine for growth. I think Singapore, Hong Kong and countries in the Middle East recognize that value of growth. However, if you wanted just to compare what the United States — your closest neighbour — does in terms of taxation to what Canada does, the statistics are startling. Perhaps Mr. Kronenburg could go through a few of those.
Mr. Kronenburg: We see a growing trend throughout the world where governments, tourism agencies, are starting to look at aviation as an enabler to their business and their economy. In the Caribbean, what you see a lot is that airlines are given revenue guarantees or even given fees per passenger to come in and help them establish a tourism sector.
In China, for example, you saw a lot of public money going into the construction of airports around the Olympics. Basically, their entire investment went into the Olympics and airport infrastructure.
In Brazil, at this point, you see the same. In the last five years, they invested $2 billion or $3 billion in their aviation infrastructure. They are looking for private capital as well. We have seen President Obama put in about $780 million in the last big stimulus fund targeted toward airports.
You see a lot of countries around the world putting money into that system instead of taking it out. Here in Canada, the balance is negative. There is no federal money flowing into airports; instead, it is taken out through rent.
Is there an ideal model? I do not think there is. We see flaws in every country. Some countries do it better than others; some have ways of stimulating their airlines that we are not always happy with. However, bottom line, we are looking for a policy.
Countries like Hong Kong and the Netherlands do it well; but even a small country like Panama, which has no natural aviation market, has the most successful airline, Copa, in Latin America. That is purely because the government sees them as an enabler to their economy. They would not have done what they do without the Panama Canal and Copa.
I think that is the difference. It is about having Transport Canada, the Department of Finance and the sector work together and create a policy that sets the scene for the next 20 years, instead of just year after year going in and battling over all these little individual things that make up why Canada is losing ground. Every time we go in, we are told we cannot do this or we cannot do that, but we are never sitting down and saying, what is it that we are going to do; what is the policy going forward? The tourism strategy was a great first step, but it lacks that aviation component. We need to sit down now with the sector and work on that aviation component to the tourism strategy. That is what we are looking for.
[Translation]
Senator Boisvenu: Thank you very much for being here. Your brief is excellent. It is very well organized, and I find the criticisms to be positive. I have a few questions for you. You say that the situation in terms of the competitiveness of Canadian airports started deteriorating in the 1980s. Is that right?
[English]
Mr. Lavin: It deteriorated, yes, in terms of the Crown rent.
The positive side was that the government turned over the airports to private entities and allowed them to make the investments necessary to improve the infrastructure of the airports. The negative side was the way that the Crown rent was exacted from the airports as a payment for the property and the airport itself. As a result, over time, the airports have been paying this and it is really forever. There is no end to this payment. The airports have overpaid in terms of what the book value was back in the 1980s when this first happened. As a result, the airports are now literally just writing a cheque off the top line, and the airports have no choice but to pass that on to the airlines and, in turn, to the passengers.
[Translation]
Senator Boisvenu: Are those decisions not somewhat contradictory? It is always said that private businesses are more efficient than government. Government airports were transferred to private companies, and that move does not seem to have been a success. Was that decision not contradictory?
[English]
Mr. Lavin: I do not see the contradiction, because the airports themselves, based on our experience — and Mr. Kronenburg will correct me if I am wrong — became more efficient once they were privatized and much more responsive to their customers, both the passengers and the airlines, but the overhang was what the government took out every year and continues to take out. It is not an efficiency issue; it is literally an issue of writing a cheque for no services whatsoever. That is what we are faced with now.
[Translation]
Senator Boisvenu: So, the problem has to do with the administration of the industry rather than with infrastructure?
[English]
Mr. Lavin: Correct.
[Translation]
Senator Boisvenu: Your suggestions also seem interesting. Did you list them in order of priority? You list five measures on page 6. Is there one of them in particular that the government should adopt in the short term to foster business competitiveness?
[English]
Mr. Lavin: It is the first one, absolutely.
[Translation]
Senator Boisvenu: If I were to provide an analogy of Canada's aviation industry, I would compare it to the Montreal Canadiens. It has a very strong defensive line, but a very weak offensive line. Is that a fair comparison?
[English]
Mr. Lavin: That is absolutely correct. Thank you.
Mr. Kronenburg: The problem with the airports in Canada has not been the privatization itself. They have been successful and that is very clear in the Travel & Tourism Competitiveness Report. They are number one in the world when it comes to infrastructure. The problem is like when you take a mortgage, you buy a house and after the mortgage is done, which was after they paid their $2 billion in book value, they handed the keys back to Transport Canada and then started paying rent over the house that they just bought. That is the problem. We have always said from the beginning that it has been a positive development, but at a certain point you need to end that tie where that money flows out.
I think the same thing happened to NAV CANADA. NAV CANADA is a very successful private enterprise. They have done very well. Their cost went down the minute they separated from the government. We gave them the Eagle Award three times for their performance and how they operate in the global environment. There is one big downside to it. It is all paid by the users, where, in the United States, $3 billion flows from public money into the operations of the Federal Aviation Administration, FAA.
You can be as efficient as you want, but if as a country you are competing with a neighbour where public money is flowing into the same system, it will be very difficult for Air Canada, WestJet and Air Transat or for U.S. operators coming into Canada to compete.
When it comes to the first ask, the Crown rent is the one we have been addressing and will continue to address because it is a big portion. It is 20 per cent of an airport's bottom line cost and therefore is very important to the airport and to the airlines.
On a broader scale, the main ask should be to sit around a table with the industry and work on a policy. We have been asking for that for too long, and it has been denied for too long. This is the time to look at what we contribute as an industry and how we can better utilize that towards growth in Canada. That is what we should be doing very quickly.
[Translation]
Senator Boisvenu: On page 3 of the French document, in the second paragraph, you say that Canada is ranked first in terms of infrastructure quality. However, it is almost at the very back of the pack when it comes to competitiveness, at least in terms of the tax burden. I see this situation as almost tragic. If nothing is done in terms of developing an aggressive policy on competitiveness, could the situation get even worse?
[English]
Mr. Lavin: Certainly, you could be at the bottom of the heap; congratulations. I would say it could get worse because the aviation industry remains one of the most competitive industries in the world, so there are winners and losers. If you continue to set up this barrier to growth, it could only continue to get worse. The aviation industry does not wait for markets to open; they go elsewhere and they will continue to go elsewhere, and with Open Skies and other issues there are more opportunities to go other places. If this stays in place, you will likely see less connectivity than you do now.
Senator Eaton: That is very interesting. I find, having had the airlines here, your testimony rather confusing. Mr. Kronenburg, China and Brazil of course are putting billions of dollars. They are developing countries. I do not think that is a fair comparison. The U.S. has terrible financial problems, appalling financial problems now. Hong Kong has always been an airport hub since I started travelling in the 1960s.
I want to get back to airport governance. You talk about the heavy taxation burden, which none of us around this committee disagrees with. We have the airport people, the GTAA, the Greater Toronto Airports Authority, for instance, who come and tell us they are a model for governance. The airlines — Air Canada, WestJet — tell us that the taxation burden is appalling. I ask the airport people and the airlines whether our airport governance could not be improved: If the airlines had a seat at the table, if you people had a seat at the table of the larger airports in this country, would it make a difference to the taxation burden? Could you not alleviate it somewhat or change it or have a stronger input? They tell me, "No, no, we do not want a seat at the table; our governance is perfect." I have strong doubts about that. Do you have anything you would like to say on airport governance in this country?
Mr. Kronenburg: To be honest, the model here is not perfect, but it is good compared to the rest of the world.
Senator Eaton: I do not care about the rest of the world. How could we in this report make it better?
Mr. Kronenburg: We could change the governance model and put airline representation in the board. I am sure that the Canadian airlines would like to see that. We would absolutely support that. I am sure the airports would have their view about it, but would it change the situation on taxation and rent? No, it would not. It would address the amount of spending an airport does. It would address the strategic direction of an airport. It would allow more airline input.
However, to give you an example, GTAA just announced a new CEO, and in the process of the CEO search they sought input from Air Canada, WestJet and Air Transat as to whom to pick. That is the right way to go. The new CEO is very familiar with the airport and airline industries. He came from Hong Kong. The thought process within the airports is changing. They are moving more towards partners, as are the airlines. That is one reason we started the coalition together with the Canadian Airports Council, with the Canadian airline association and with TIAC and the hotel association. For too long we have been put against each other as individuals and have not looked at the bottom line problem that our industry faces.
Senator Eaton: You do not think that if you got together — if the airport governance was changed and airlines and perhaps representatives from IATA and security people got together — you would make a stronger lobbying group to Transport Canada than the odd shot fired from disparate groups?
Mr. Kronenburg: We have tried that. We have been at the point where neither Finance nor Transport was willing to talk about Crown rent any more. It is not being understood why it is a problem. We have done it as a group and we have done it individually, but this is the point where we need to address what it really does to the economy of Canada. That is what we are trying to do now and with the Aviation Day.
When you look at the governance, taking Montreal as an example, 24 per cent of the bottom line cost is Crown rent. Another 16 to 18 per cent is property in lieu of taxes. You cannot change those two, regardless of the governance of the airport. You are always addressing that remaining 40 per cent. Of that remaining 40 per cent, if 60 per cent is debt service, you are trying to work on changing airport costs of a very small portion of the overall. The same applies to GTAA and Vancouver.
Senator Eaton: Is it all federal tax or are there some provincial taxes?
Mr. Kronenburg: There is a combination. Property in lieu of taxes is provincial, and Crown rent is federal. We have fuel tax, which is provincial. It is interesting because it is a tax levied on international fuel uplift, even though the Government of Canada signed the Chicago Convention, which says you should not be taxing fuel uplift for international flights. The provinces said, "We do not care what the federal government signs. We are taxing international fuel." We have tried to address this, and the provinces do not care. Those are things we are trying to address, and the bottom line is the sandwich of fees. In the end we are trying to eat the sandwich.
Senator Eaton: If you have recommendations you would put into this report from your point of view, would you send them to the chair?
Mr. Kronenburg: Yes, absolutely.
Senator Eaton: I have one last question. Since 9/11, have security and its measures hurt the aviation industry? Right afterwards there was blowback, but is security still an issue for airlines?
Mr. Lavin: Yes, security is a huge issue in terms of costs and efficiency. We deal with it all the time. We argue that security is a government function and should not be paid for by the passengers or airlines. It is an interesting point in terms of Canada. If you look at the security fees in Canada compared to the United States — and as a U.S. citizen I cannot imagine more inefficiency and higher spending than in the United States on security — Canada's fees are two or three times that of the U.S. It begs the question of what requires these high fees.
Senator Eaton: Why are they so high?
Mr. Lavin: We work closely to try to convince them to focus on what they are doing in terms of inefficiencies. For example, after December 25 and the incident in Detroit there were three- and four-hour delays in Toronto for security lines and other things. One thing we argued for in Canada is the NEXUS card, which I am sure a lot of you have. If they have checked you out from an immigration standpoint, should they not give you benefit going through the security line, increase efficiencies, throughput and cost? There are a lot of issues.
I am not the expert on where specific inefficiencies in the Canadian Air Transport Security Authority, CATSA, are in this regard, but the numbers do not add up as you look across the border.
Senator Cochrane: Besides the cost, tell me about security. Do you feel we have the right security within our airports now? I am looking at the area where you enter. We have had complaints that security is still not up to par where we want, even though there have been so many questions and changes. Tell me about security.
Mr. Lavin: The biggest problem with security — and it is not unique to Canada — is that the security system you see now was designed primarily in the United States 30 or 40 years ago to prevent people from hijacking planes to Cuba. They have not modernized it. If you recall those days in the past, you walked through the same kind of magnetometers. There are different things where you are taking off shoes, belts and other things, but they are looking for bad objects, not bad people.
Airlines have to provide tremendous amounts of information to the government on every person who flies on a plane before they get on the plane. Security officials have information on every person that goes through. Why do we treat the 80-year-old grandmother the same way as someone who may be coming from an area where there has been terrorism activities? It is very difficult to understand why they do it that way.
From an IATA perspective, we focus on Checkpoint of the Future. It is a concept that we hope and believe can be in place in the next 10 years. You essentially have three different tunnels that you go through. You are a regular person in the public that they do not have any information on, you are a known traveller, or you are someone they have information on that is somewhat problematic. They treat each one differently. We believe the technology will be in place in 10 years where you can literally walk through the tunnels without taking your computer out, taking off your shoes or putting anything on a ramp or magnetometer. We are working with the Canadian government, the International Civil Aviation Organization, ICAO, and others to do that. The long and short of it is that it is an old system not designed for what the challenge is today.
Senator Mercer: Senator Greene said it was a good report. I agree with him. My only concern is when we get to the end of this we are probably going to agree on all the recommendations. The one person who is not at the table to help us is Minister Flaherty. It will require changes, and I see a problem with him looking at a revenue stream that we are suggesting stop, or may suggest stop.
I want you to clarify something for me. I am confused by the terminology. Perhaps some of the people watching on television are as well. Can you explain the tax part of the Ontario and British Columbia tax on foreign fuel and fuel uplift you have referred to? Then we can comment on the fact they are ignoring an international agreement that the Government of Canada signed.
Mr. Lavin: The basic concept is fuel uplift. The Chicago Convention was developed after World War II and is basically a treaty that manages international aviation. We believe they rightfully decided that for airlines leaving a country — let us say Air France flies into Montreal, uplifts fuel and leaves the country going to back to France — the concept is you do not tax that fuel in a commodity situation. France would not tax your fuel as Air Canada lands in Paris, uplifts the fuel and leaves going back to Montreal. The idea is to have a level playing field. On domestic fuel in the United States, you can tax fuel. For example, you can tax fuel on a domestic flight between Cleveland and Washington, D.C., because it stays within the jurisdiction. However, because of the very nature of international aviation, you keep it as a level playing field.
Senator Mercer: Someone is paying tax on the fuel.
Mr. Lavin: Yes.
Senator Mercer: Using your example of Air France, they fill up in Montreal and if Quebec is not taxing, they pay no tax on that fuel. However, when they get to France they pay tax on it?
Mr. Kronenburg: The whole concept is you do not pay tax on international fuel. The reason is you are overflying so many different countries that if you uplift in Canada and you are flying across Iceland, Ireland and the U.K. on the way to France, it would be controversial to tax the uplift here for the whole stretch and the reciprocity from France going back.
There is a domestic fuel tax. There is a federal excise tax on fuel — about four cents per litre — which is applied to domestic aviation.
Senator Mercer: How much money do British Columbia and Ontario make on the deal?
Mr. Kronenburg: Ontario is about $50 million a year at this point; British Columbia, I think, is about $17 million or $18 million. British Columbia had announced they would drop it about three years ago, and they never put it in the budget. It was an announcement made by the government.
Senator Mercer: Revenue stream again.
Mr. Kronenburg: It was right after the elections, and all of a sudden, it was gone again. It was announced to be dropped because of the fact that Vancouver was losing ground, as a competitive issue, against Seattle.
Senator Mercer: That leads to my next question. I was curious to find that Toronto ranks number one in terms of the most expensive airports in the world to land at. That is one of the things I am sure Toronto does not aspire to.
Where do Trudeau, Macdonald-Cartier here in Ottawa and Vancouver fit into that? Are there other Canadian cities in the top 10 or top 20 expensive places to land? We know Pearson is number one.
Mr. Kronenburg: It is difficult to make an exact apples-to-apples comparison because the names of fees and taxes are so different. Toronto was always very easy for us because it was so much higher than others.
However, when you compare overall turnaround costs, out-of-pocket costs for an airline to come into an airport and leave again, Vancouver, Toronto and Montreal are all in the top 20 of highest costs in the world. Mostly, that is driven by rent and by the Air Travellers' Security Charge, ATSC. Those two are 40 per cent to 50 per cent of that total cost.
Senator Mercer: Okay, say we have accepted every one of your recommendations, passed our report, the Government of Canada has said you have done a terrific job and they have adopted everything we have recommended. How can we guarantee that I, as a traveller, will get a better deal?
How do we guarantee that Air Canada or any airline will not move their price up? What if they say we can drop the ticket price by $200, but we are only going to drop it by $100 and give the other $100 profit to the airline or to someone else that is biting into that too? How do we guarantee that things will change if we go along with the recommendations that we continually hear? You are not the first people to tell us this tale of woe.
Mr. Lavin: We are not an airline, so we cannot describe to you how an airline does its pricing model or how it would set its ticket prices. However, we can give our opinion, based on history around the world. First, the millions being siphoned away from these carriers because of Crown rent cannot be invested in new routes, new planes or other economic growth activities.
You mentioned Minister Flaherty being the challenge. I understand that his line will disappear that has the $250 million in Crown rent. However, the bottom line is simple math; based on history, we can demonstrate that his number will be higher. He will get more than $250 million in tax revenue from other sources, from the growth associated with that, than you would otherwise.
Senator Mercer: We need that information so that when we present the argument — we are with you here or I think we are with you — when we go to Minister Flaherty or whoever the minister of the day is, he or she has to be able to see that.
Mr. Lavin: We have about five studies that can show you that definitively in real world terms, in terms of what happens around the world.
Senator Mercer: That is what we need.
The Chair: If you can send those studies to the clerk, they will be circulated. We will be able to use them in our report.
Senator Greene: I do not need a supplementary question because you asked it at the end, which was that in order for our report to be successful — assuming we follow your recommendations, and I do like them — success means that we change some minds. In order for us to be able to do that, we have to show there is a better world out there; that is why we need your reports.
I do have another question but it is not a supplementary, so I can wait.
Senator Martin: I had various supplementary questions too, and the questions were excellent from my colleagues. Thank you for a clear presentation. My questions tie into what Senator Mercer was speaking to in part of his time. First, are all your members just airlines?
Mr. Lavin: Correct.
Senator Martin: You are advocating for your members, and one of your roles is to speak with legislators and look at policy changes. I am looking at the other role that you play, which is providing leadership for your members by developing standards, practices and procedures, et cetera. Our committee could publish a report with great recommendations, based on what we have heard from stakeholders, and government could make policy changes that we think will improve the industry.
As the organization that has airlines as the membership, would you speak to how effectively you can affect those positive changes among your members? You have airlines that are not Canadian-owned, but you are looking at best practices that are being used around the world. How agreeable are airlines in Canada to adopt these best practices or to make the kinds of changes that would be necessary?
If a policy change takes place, the members themselves have to work toward that change. What role would you play? How effective have you been to date, and how effective would you be in implementing these future changes?
Mr. Lavin: In terms of standards, we have been setting standards for the last 50 years, even to the point where we used to set standards on how many carrots you would get in each meal on an airline. Before deregulation, IATA had that kind of role.
After deregulation, one of our primary goals is to remove government barriers to let airlines operate like other businesses. We firmly believe, and I hope most of you do, that the free market in this situation is probably the best opportunity to get airlines to follow certain standards. We do set standards, but we are not the government. They are a member of our association and we support them; for example, we set the standard on e-tickets for around the world. As you know, now you cannot get a paper ticket; IATA set that standard and we brought the airlines along to follow those e-ticket standards.
Regarding your question about ticket prices, in addition to the growth that you would have in terms of these policies and procedures, if it is less expensive to land a plane here and less expensive to operate here and the market justifies it, there will be more airlines and choices; and most likely, based on our experience, there will be lower costs of tickets.
Remember, in the last eight years globally, ticket costs have gone up 0.7 per cent. The cost of living went up 2.1 per cent. Tickets prices are not really the problem, but everybody is looking for reductions in their ticket costs. In this situation, we believe this market is big enough to justify more competition.
Airlines compete; that is what they do. There are not that many things they can compete on any more, particularly with government taxes, because, as you said before, in terms of fuel taxes and other things, they are stuck. They are looking for things to compete on. They compete on passenger service and on ticket prices. Those are two of the few places. If you remove the barriers and let them compete, they will compete.
Senator Martin: I was specifically looking at how airlines should be improving their own efficiency and whether the airlines have done enough on their part. Is that an ongoing process, and are we doing a good job compared to other airlines and working toward efficiency at all levels?
Mr. Lavin: It depends on your definition of efficiency. We are proud of our two members here in Canada, Air Canada and Air Transat. We would hold them up favorably against any other member we have. There is operational efficiency, and Air Canada is a leader in that regard, particularly with the environment here. Passenger experience and other things are all very positive. Other airlines offer different services and compete for different customers, and that is how the market works. We are proud of our Canadian members.
Senator Greene: This is a small question but it is related to the governance issue and many other things.
In your little paper here you say the good news for Canada is that it ranked first in the world with regard to air transport infrastructure quality.
We have had testimony from other witnesses, primarily the pilots, who have said the airports themselves are Taj Mahals; they are wonderful places for passengers — there are fountains and all kinds of things like that — but the actual infrastructure with regard to flying in and out, to attaching the airplanes to terminals, landing, et cetera, is lacking in this country. Could you reply to that?
Mr. Kronenburg: It is all dependent on what the perspective is. I did not see that testimony so I cannot tell you whether that pilot has flown elsewhere.
Senator Greene: They have.
Mr. Kronenburg: My region is North and South America, and from all the airports I have gone to, and I have flown myself a lot, I can tell you that Canada is on the top. Not a lot of countries are as good as Canada when it comes to actual infrastructure, regardless of whether it is the terminals or runways. NAV CANADA is recognized throughout the world as a leader in navigation service provision. Many of the systems working throughout the world were developed here in Canada. Bombardier is a leader in the world.
Canada's infrastructure is really excellent. Yes, you will always find things that are not good with it and there are definitely areas that could be improved, specifically given the weather challenges that Canada has. However, overall, I would not say that they are not up to par. I think it is a very well-developed country.
Senator Greene: One of your members, Air Canada in particular, does not fly into just the major airports in Canada; they fly into northern airports, where the challenges are quite a bit different. Do you represent Air Canada with regard to all of those issues as well?
Mr. Kronenburg: I do not think we are that involved in their particular challenges when it comes to those airports, but Air Canada Jazz is under the Air Canada umbrella and a member of IATA. We have always taken a position wherever Jazz wanted us to do that.
As to the challenge with the northern airports and their problems, if you could tie them back to the economic aspects in the U.S. you have something called an essential air service where basically on a federal level passengers contribute to a fund that is redistributed to help airlines and airports in underdeveloped areas operate. Here in Canada NAV CANADA is forced to supply a tower in Yellowknife regardless of whether there is a business case for that or not. That is not NAV CANADA's fault; that is the way the system works. Again, you are burdening the entire sector. It is a challenge we see in other countries, such as Brazil and France, where it is a bigger country with underdeveloped regions. It is a key element.
When it comes to the bottom line for a carrier like Air Canada, WestJet or Air Transat, if they want to operate, they are competing with carriers not just for the passenger flying in and out of Canada but also for that transfer passenger. What will we see when this is a successful study? One of things you will see is that the passenger who comes from Frankfurt and needs to go to Panama no longer transfers in Chicago because he has visa issues; he goes to Montreal and picks up a flight to Panama. That does not directly impact Montreal because the passenger does not stay there, but the passenger buys catering and fuel, the airline has staff, so the catalytic effects of that passenger coming through Montreal are significant. That is where Air Canada, Air Transat and WestJet have a problem because they cannot make that work in the current model. They are trying very hard, but the cost level is too high to make that work. That is why many passengers still connect in Detroit, Chicago or New York. They choose that because of the fact that it is even cheaper to operate in New York than to connect into Toronto.
The Chair: Speaking of NAV CANADA, next Tuesday morning we will hear from John Crichton, President and Chief Executive Officer of NAV CANADA.
(The committee continued in camera.)