Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 4 - Evidence, October 19, 2010


OTTAWA, Tuesday, October 19, 2010

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.

[Translation]

The Chair: Honourable senators, I would like to call this meeting of the Standing Senate Committee on Transport and Communications to order. This morning, we are going to begin the study of emerging issues related to the Canadian airline industry that is before our committee.

[English]

This constitutes the beginning of our examination of this study and will set the stage for our work over the next few meetings. This morning we are pleased to welcome before the committee officials from Transport Canada. Here on behalf of the department are Kristine Burr, Assistant Deputy Minister, Policy; Brigita Gravitis-Beck, Director General, Air Policy; Isabelle Trépanier, Director, National Air Services Policy; and Michel Villeneuve, Director, Transport Statistics, Economic Analysis.

[Translation]

Ms. Burr, you have the floor. Then we will proceed with questions.

[English]

Kristine Burr, Assistant Deputy Minister, Policy, Transport Canada: First, I would like to thank the committee for studying the emerging issues of the Canadian airline industry. This industry has a high profile, but its workings are complex and can be easily misunderstood.

[Translation]

We have prepared a comprehensive deck that you may find helpful for your further study of the sector. We will leave copies with the clerk. I will not delve into its details here, but I will occasionally refer to it to brief you about the industry, the policy and economic context in which it operates, and its foreseeable challenges.

Let me start with the policy context. Canada's air carriers are all private sector companies that operate under a deregulated economic framework within Canada's borders. This means that, in Canada, market forces primarily determine what and how air services are delivered and how they are priced.

[English]

Air carriers providing Canada-U.S. transborder and other international air services do so within a framework of international bilateral air agreements, or treaties, and 73 per cent of our agreements can be considered open agreements. I will come back to that later.

As you may be aware, the negotiations of international air transport agreements worldwide are conducted on a bilateral basis following principles set out in 1944 in the Chicago Convention — the Convention on International Civil Aviation. The Chicago Convention is founded on principles of non-discrimination and the sovereign right of states for the management of their airspace. Built into this bilateral system is the requirement for national carriers to be substantially owned and controlled by interests from their home country.

Under our four-year-old Blue Sky international air policy, Canada works to lift economic restrains in those agreements that could impede Canada's interests. International air relations are always a work-in-progress. We negotiate with a view to securing additional services for Canadians that will be sustained over time and will ensure reciprocal benefits. Further information about Canada's Blue Sky policy is included in Annex 5 of the deck we have provided.

Canada's air carriers work in partnership with several not-for-profit entities, notably the 26 airports that make up Canada's National Airports System, NAS. The operation of the NAS airports, as they are known, has been commercialized with a view to responding more closely to local needs. However, for these 21 airport authorities, lands are federal assets under long-term leases with the Crown.

NAV CANADA is the second of the not-for-profit entities that represents the airlines' universe. It is a private sector owner and operator of Canada's air navigation system. The Canadian Air Transport Security Authority, or CATSA, is the Crown corporation responsible for delivering Canada's air travel security.

The services provided by these entities appear to travellers as line expense items alongside the air carrier's base fare on a ticket. We have included on slides 45 and 46 of the deck examples of how these tickets appear. These additional costs arise from the fact that carriers collect them on behalf of the other entities and then flow them through to the passenger. This in turn reflects the fact that, in Canada, the business of air transportation is largely self-funded. These line items, as well as other fees, are often not included in a ticket's base fare, which has been a subject of considerable debate from time to time, as I am sure you are well aware.

[Translation]

Canada's business model reflects the devolution that the federal government began in the 1990s, as it evolved from being an owner and operator of transportation assets to its current role as mainly an overseer and regulator of transportation undertakings and activity.

[English]

Other players within the system include Transport Canada, which develops and provides policy and legislative guidance, and the Canadian Transportation Agency, CTA, which implements and enforces economic regulations governing the air carrier industry as well as accessibility requirements for the disabled.

Regulatory oversight today is lighter than many years ago, but it includes matters such as licensing and consumer protection. Under the Canada Transportation Act, consumers can seek redress with the Canadian Transportation Agency if they believe an air carrier has failed to respect its own terms and conditions of carriage.

I would be remiss in describing the policy and legislative context for the industry if I did not also mention that it includes safety and security consideration. Under the Aeronautics Act, the Canadian Air Transport Security Authority Act and other enabling pieces of legislation, regulations are in place to ensure that air transportation is conducted safely and securely. Transport Canada is the regulator in these matters. That said, the focus of my remarks today will be on the economic perspective.

Framed by this policy context, the industry operates in a dynamic economic environment. The passenger air travel business is highly seasonal. Here in Canada most of the revenues for air carriers, and by default those of its partners, are generated in the spring and summer. Revenues earned during these seasons largely offset the high costs that characterize the air carrier industry. Fuel powers this industry and is the largest and most volatile of its operating expenses.

Passenger airlines and specialty carriers also provide significant cargo capacity for perishables, such as fresh foods and medical supplies, as well as high-value goods, such as specialized equipment and diamonds. International air freight, led by Asia, is forecasted to drive overall world air cargo growth through 2027. Air cargo represents an important component of airline revenues and is especially important to Canada's northern and remote regions.

[Translation]

The fortunes of the air carrier industry are very much aligned with the economy, because the demand for air services is derived directly from general economic and socio-economic activity. For this reason, the industry is considered an excellent barometer for the state of the economy. As you know, the economy was severely impacted by the global financial collapse two years ago, resulting in the worst recession since the Great Depression of the 1930s. Business slowed, and air carriers responded by limiting or paring back capacity. Costs were controlled to the extent possible but still needed to be covered. So seat sales, which can generate revenue but at the expense of higher fares and profitability, became regular occurrences.

[English]

As reflected by our strong dollar, Canada has been spared somewhat from the worst of the recession's impacts, due to our relatively strong financial system, fiscal stimulus and being blessed with many of the resources that the world wants right now.

However, even two years after the collapse of the world's financial system, the economic recovery is still fragile, and at present consumer and business confidence are wanting.

Indeed, the Conference Board of Canada and the International Air Transport Association indicated in September that only this year did the industry in Canada and North America begin to return to very modest profitability, owing largely to the industry's cost-control efforts. However, the industry's fortunes move with the economy, and thus the future remains somewhat uncertain in the near term, although many believe that over the longer term air travel will continue to expand as the Asia-Pacific and African economies grow.

In the near term, expectations are that the pricing and revenue climate will remain challenging, as air carriers deal with a travelling public that not only has fewer discretionary dollars to spend but also now expects seat sales with regularity. This means industry margins and profitability will likely remain modest at best. Only the most operationally and financially adroit will be able to withstand the discipline of competitive market forces.

That raises the issue of competition, which has many facets. Internationally, there is the question of fair competition on a level playing field, especially when other states continue to be actively involved in the ownership and operation of their industry. Even domestically, given the size of our marketplace, questions are being raised about whether competition is always the best mechanism to bring discipline to the marketplace and ensure that air services are both viable and sustainable.

The challenging pricing and revenue climate also raises the prospect of industry consolidation and alliances. Both could translate into economies of scale and greater efficiencies, but the outcome may be that only certain airports and their communities would reap the benefits from becoming a hub of the combined air carriers' operations, while others in less populated regions become the ends of the spokes to those hubs.

As slides 37 to 40 show, Vancouver, Calgary, Toronto's Pearson and Montreal's Trudeau are thriving as hub airports, reflecting the critical mass of the population they serve. However, seasonality, high costs and low margins of the air carrier business mean that other communities may not be able to attract or sustain direct services of any volume, unless and until those communities grow to have their own sufficient critical mass. Industry consolidation and alliances can raise questions regarding market power and market access that are worth studying, given the vastness of our country and how our population is distributed.

In addition, in the future, the costs associated with minimizing the environmental impacts of aviation are expected to rise. The International Civil Aviation Organization is engaging states in a dialogue to limit and reduce the impact of the aviation industry's emissions on the environment. An agreement was reached in October that will see governments and the industry work together globally toward carbon neutral growth beginning in 2020. Domestically, our air carriers are doing well. Under a 2005 memorandum of understanding, fuel efficiency has improved by more than 1.9 per cent annually. This industry-government commitment is being expanded, and we are now in the process of developing a new action plan for the future. Again, this emerging issue will not be without costs to our airlines, airports and other related service providers.

Demographic considerations are also at play. I would refer you to slide 21 in the deck. The first cohorts of baby boomers have just entered retirement age. This puts pressure on succession planning for highly trained labour such as pilots and aircraft mechanics. Training for these vocations is long and expensive, and Canada's industry will have to compete for that labour with other countries facing the same problem. Demographics will also impact the service aspects of the industry, as aging travellers will likely present more accessibility issues.

[Translation]

Last, there is the growing interest in air passenger rights. Certainly there are inherent rights to which everyone is entitled, related to delivery of a contracted service. But with air service being sold like a commodity, expectations regarding contractual entitlements increasingly extend to all aspects of service quality and delivery. An airline's performance depends on a number of factors, many of which are not within its control. Delays may be attributable to uncertain weather or security procedures. The current debate requires a careful assessment of competing factors that takes into consideration the integrated nature of the system and flight patterns.

[English]

In conclusion, there are more than a few bumps on the horizon: a difficult pricing and revenue climate; industry consolidation and alliances; environmental impacts; the demographics of an aging population; safety and security considerations; and consumer rights. All of these things present emerging issues for Canada's air carrier industry, and none is without cost considerations. For an industry that realizes only thin margins even at the best of times, these things pose real challenges.

We are open to your questions. May I add that we certainly welcome your review of the sector at this particular point in time? As I hope my introductory remarks have indicated, it is a timely moment to be looking at the air sector in Canada.

[Translation]

The Chair: You, of course, know that the transport minister will be appearing before the committee tomorrow. So we will have the benefit of a good overview of the administrative and political workings.

The members of the committee have chosen a topic of public interest. Therefore, I would like to point out that this committee meeting will be televised. Participants will be able to catch themselves on television at around 3 o'clock in the morning, in their hotel rooms, if they had to travel here. Please note that everything said here today will be on the record and televised.

The deputy chair of the committee, Senator Housakos, will ask the first question.

[English]

Senator Housakos: Welcome to our guests this morning, and I thank you for your informative overview. I am pleased to see the department finds the study relevant. We hope to do good work and make our contribution to bettering your work and the public interest.

Should foreign competition in Canada be welcomed in a domestic market, from the department's point of view? Should we be limiting foreign ownership in the airline industry in Canada? What would be the best way to offer Canadians a better service at a more competitive rate, which, I think, is the bottom line for the Canadian public? They want the best service at the best rate, and those desires are coupled with the government's concerns about ensuring that all the regional interests in the country are served. Can you give me your opinion on that?

Ms. Burr: First, under the Chicago Convention, as I mentioned in the introduction, there are requirements that national carriers be owned at least 51 per cent generally, certainly under control of national interest. We are in the process of amending our requirements on foreign ownership. That is consistent with the recommendations of the competitiveness panel that was chaired by Mr. Wilson last year. We are now in the process of waiting for the Canadian Transportation Agency to adjust its regulations. We would be moving to 49 per cent foreign ownership. That would presumably offer more investment opportunities into Canadian airlines for foreign interests.

As to the question of foreign competition, we are regularly pursuing Blue Sky opportunities that are as open as possible. However, the Blue Sky policy is founded on several principles, including reciprocity of interests. There is always a balancing act between the interests of Canada and the interests of our partner country. We have about 73 per cent open agreements right now. That includes our largest partners, both the EU, which was negotiated recently, and the United States. There is an attempt always to provide as open and competitive an arrangement as possible. Once you have an open sky agreement, the airline is free to operate with virtually no restrictions from an economic perspective. Of course, there are always safety regulations that must be respected. As I mentioned earlier, Transport Canada and CATSA are the primary regulators for safety and security.

Senator Housakos: Another question I have is with regard to the Flight Rights Canada program that was instituted. We traded in the Air Travel Complaints Commissioner process in reviewing complaints from customers and looking at customer service. How has one program compared with the other? Has the elimination of the commissioner been a hindrance when it comes to customers being able to file their complaints and those complaints being looked at carefully?

Ms. Burr: Considerable sections of the Canada Transportation Act deal with consumer rights. There is access to the regulatory body, the Canadian Transportation Agency, when customers feel they are dissatisfied with the services provided by the airline, particularly with respect to the terms and conditions that are supposed to be outlined clearly on the ticket. This is a subject of some debate, as I am sure you are aware. Many people feel we should go to a more expansive regime. However, when we look at what is offered by other countries, we feel that generally the provisions in the act are similar and in some cases perhaps more satisfactory than the process in the EU, which has a more legislated structure.

In the case of the United States, the provisions in their system require recourse to the courts, which is somewhat difficult as well. Being able to go to the CTA is a good middle ground.

I will ask Ms. Gravitis-Beck, who has worked on this quite a bit, to comment on any comparison to the earlier model we had here in Canada.

Brigita Gravitis-Beck, Director General, Air Policy, Transport Canada: Perhaps I could also respond to your question on Flight Rights Canada. That program was introduced as a communications vehicle to help improve the understanding of the Canadian public about the approach that already existed in the Canada Transportation Act, as Ms. Burr indicated. It also included a code of conduct, which was voluntarily adopted when it was first introduced by all of Canada's particularly large carriers domestically.

Subsequent to that, all of the carriers took very much to heart the discussion that was occurring publicly, and they brought those voluntary code of conduct approaches into their terms and conditions of carriage, which then made them subject to the same kind of complaint process and rigour that the Canadian Transportation Agency applies to any complaints it gets with respect to services that are incorporated in terms and conditions of carriage.

There has been some real advancement in bringing some of the elements of Flight Rights Canada that were not previously in the terms and conditions of carriage of our main carriers to their terms and conditions. When Bill C-11 was being discussed, there was much consideration of whether the elimination of the commissioner's role would hamper the complaints process. I think the transportation agency brought forward information indicating that the level of complaints increased after the commissioner's position ended and as familiarity with the process increased. Between that and the Flight Rights initiative, our hope is that the public is more aware of the approach that exists and of their rights to complain if they do not feel their service has been appropriate or within the rules that the carrier has set out.

Senator Housakos: My last question is with regard to the governance of our airports. Transport Canada through the years has divested itself of direct control of airport authorities. They have become more than arm's length; they are quite independent bodies currently. Has that approach served us well in being able to balance customer service, competition in the marketplace and some authority over the airport, as Transport Canada should have, and over these huge assets we have in this country, which are our international and local airports? I know that is a broad issue, but perhaps you can give us an overview of that.

Ms. Burr: That is a very broad question. It is fair to say that commercializing the airports, especially the top eight NAS airports — but all of them really — has unleashed a lot of energy and entrepreneurial spirit right across the country. I know there are some concerns occasionally that the airports are somewhat overly enthusiastic in investing in expansion, and the costs get transferred to the air sector or the airlines. However, the fact remains that they have probably invested in infrastructure at a level that the federal government, if we had continued to run the airports, could never have done in the time frame we are talking about.

The challenge of that balance between respecting the cost to the carriers versus the interests of the airports as economic generators within a local community or regional community is a balance. We are told repeatedly that airports are sensitive to the fact that if they price themselves too high as far as the airlines are concerned, airlines will go somewhere else. I guess there is a bit of a challenge that way that keeps the balance in play.

As far as we are concerned, at this point in time, although we had introduced airport legislation a few years ago, it died on the Order Paper, and we have not gone back and attempted to revive that legislation. That is unfinished business to some extent, but at the same time, each of the airports operates within lease arrangements that were negotiated at the time of the transfer. They are fairly comprehensive. A set of expectations laid out in the lease allows the airport authority to operate in a business-like way. Generally, this is viewed as a model that has worked quite well.

The Chair: I think Senator Cochrane had a supplementary question.

Senator Cochrane: Yes, I did. Thank you for appearing this morning.

I want to go back to the Air Travel Complaints Commissioner, which my friend has been questioning you about. When was that position terminated?

Ms. Burr: I will have to get you the actual date, but it would probably be around 2003 or 2004, I would think.

Senator Cochrane: You have spoken about the rationale for that decision, but have you gone back and looked at that rationale to see if that was the right decision at the time?

Ms. Burr: Not really. We have tended to focus more on the general question of whether the passenger bill of rights model fits within our regulatory and legislative context right now.

Senator Cochrane: Does it?

Ms. Burr: Our sense is that the model we have works fairly well. Certainly the agency takes its responsibilities seriously when it comes to customer complaints.

Ms. Gravitis-Beck: Could I add to that comment? One of the elements that was important in Bill C-11, the revisions to the Canada Transportation Act, was the requirement that the agency continue to report on the results of those complaints on an annual basis as part of its annual report; the transparency to the public and awareness of the nature of complaints and the number of complaints received is an important feature of the regime that is currently in place.

Senator Cochrane: Since then, we have a new process that attempts to deal with travellers' complaints. How long this has been in place, and what sorts of issues does the process cover?

Ms. Gravitis-Beck: This process has been in place for at least eight years, perhaps longer. It has evolved from almost a test for informal complaints being channelled and dealt with before more formal mediation and arbitration processes were applied, if complaints escalated.

The informal process was initially started by the agency as a bit of a pilot, a test, and it evolved because it was seen as quite effective and successful for dealing with complaints in a fairly effective and quick way. It gave people with concerns relatively more rapid and inexpensive feedback than going through the more formalized mediation and arbitration processes that also exist in the Canada Transportation Act but are really reserved for more major or systemic complaints.

The regular, more normal course of business issues that may arise with a passenger, such as lost bags or a sense that perhaps pricing is not appropriate, are issues that the informal process can deal with quite well. Under that process, passengers who have a complaint are first expected to raise it with their carrier, because the carrier's terms and conditions are a contractual obligation with its passengers; and if they do not get satisfaction from their carrier, that complaint is then brought to the Canadian Transportation Agency, which acts as an intermediary between the company and the individual who brought the complaint. Based on their experience, they assess the reasonableness of the complaint and attempt to find a resolution if, in fact, the issue is a reasonable and appropriate one.

Again, in terms of what they report publicly, they do report on a number of complaints that they deal with; they report on the general nature of those complaints and what kind of categories they fall into; and they also speak to the few complaints — and it is a very few — that do get escalated into the more formal process if they cannot be resolved and if they really are systemic issues that probably require a broader hearing.

Senator Cochrane: How many complaints would you receive annually?

Ms. Gravitis-Beck: It is the Canadian Transportation Agency that receives those, and it is an arm's-length agency from Transport Canada. Transport Canada does not receive those complaints. We can provide you with the exact numbers. It is in the order of 600 to 700-some-odd complaints a year, I believe.

Senator Cochrane: Are some complaints more prominent than others?

Ms. Gravitis-Beck: I believe that with the Canadian Transportation Agency, historically lost bags are a recurring complaint, as well as concerns about delays or cancellations.

Senator Cochrane: They are resolved mostly through the Canadian Transportation Agency?

Ms. Gravitis-Beck: That is correct.

Senator Cochrane: I would like to come back later on, Mr. Chair.

The Chair: Yes. The agency will be appearing before the committee in November, so you will have the occasion to ask them the same type of question directly.

Senator Plett: Thank you, Ms. Burr. It is a pleasure seeing you again. We met a few days ago.

My question is based on the price of airline tickets domestically. We have primarily three airlines that fly domestically in Canada, and they seem to be able to operate at all different levels of prices. I know that Air Canada has at least three prices, depending what time of the day I book my flight and so on. With WestJet, I can walk up to the counter and buy a ticket for the lowest Air Canada price at any time of the day. Although I do not have the opportunity to fly Porter that much because they fly mostly in the East, I am told they are the same.

What role does Transport Canada play in regulating any prices? Is there any regulation? Can they simply charge whatever they want, and we accept that?

Ms. Burr: Since about 1988, the government policy has been to try to ensure that the system is as market-based as possible. At this point in time, we do not become involved at all in any airline pricing decisions. The philosophy here is that this is a business model. As you have described, there are different business models, and the airlines rise and fall to some extent on the health and practicality of their business models.

What often happens with airlines is that if you buy a ticket further out, it will be cheaper; and as you get closer in to the date you are going to fly, for many of the major carriers, the so-called legacy carriers, the ticket is more expensive, for sure.

Senator Plett: However, Air Canada has some different prices depending on the type of ticket: Tango, Tango Plus, and Latitude. I can buy a ticket today for two weeks down the road and they will ask me what kind of a ticket I want. The seat is generally the same seat no matter what price I pay. They do not just do this going out; they have a different price structure as well.

Ms. Burr: I think there is a real science to it. They have people working away on what works best for them. In all seriousness, though, the department's philosophy over the last few years has been that it works best if the airlines are making those kinds of business decisions; and hopefully consumers, especially where there is choice, can decide for themselves whether they want to fly with one carrier or another.

Senator Plett: Certainly I am a supporter of free enterprise. I am also a supporter of the philosophy that if it backfires on a company and it gets into financial difficulties, we are not too quick there to bail one out over the other. Other than that, I do support that.

Is there room in Canada for more entrants into domestic air travel? We have the three carriers. WestJet and Air Canada fly across the country. Porter only flies in parts of the country. Is there more room for domestic air carriers?

Ms. Burr: Many of the decisions around carriers going into a market are tied to the economic activity within a specific community or region. You can certainly see a case where as economic conditions improve, we could see scope for new entrants in certain regions of the country that reflect the economy and its level of vitality.

We have seen over the past few years in this country a certain number of failures within the Canadian domestic airline environment. We have seen about 13 failures over the last 10 years, and I think 7 charter airlines have come and gone. There is no doubt that it is a volatile sector and very much an indicator of economic conditions at any given time.

Senator Plett: I do not think you can necessarily give us a definitive answer here, but I live an hour and a half from Grand Forks and a couple of hours from Fargo. Many Canadians live close to American airports. It seems that if I want to fly to Mexico and I want to drive an hour and a half to Grand Forks, as opposed to 45 minutes to the Winnipeg airport, I might be able to save myself a few hundred dollars.

As a country, are we obligated to get involved in something like that? Is there anything we can do to stop the bleeding to the United States from our passengers going across the line to buy their tickets?

Ms. Burr: I imagine you will have a number of airlines and airports coming in to talk to you. I think it would be fair to say that they feel the cost structure in Canada is onerous relative to what is in place in the United States. To some extent, the costs at some of the neighbouring airports right across the country — Seattle, Burlington, Fargo, et cetera — reflect a different business model in the United States. The American government provides assistance to some of its airports, as do states and municipal governments.

The other factor, which is a fact of life, is that the U.S. is a huge market with many more passengers and many more airlines. I think that drives down unit costs a great deal, as well. Therefore, it is a different model than we have here in Canada, but at the same time, one could argue that the discipline of knowing that there are options across the border is to some extent keeping airport costs somewhat competitive here in Canada, too. I know that some of the airports coming to talk to you will tell you that they are concerned about competing with the airport a few hundred kilometres away across the border.

Senator Plett: Some of the airports or airlines still have some clear instructions for us as to what they would like to see happen, do they not?

Ms. Burr: I think you will hear quite a bit.

Senator MacDonald: Thank you, witnesses, for being here this morning. I want some clarification. You mentioned the 26 airports in the National Airports System. What criteria are used to decide which airports should be in that system? Some of them are quite obvious, such as the big airports in the urban centres. However, what criteria are applied, what are the advantages of being on that list, and what are the disadvantages of not being on that list?

Ms. Burr: I think that at the time the National Airports Policy was established and the NAS system was put together, one of the criteria was that the capital city of each province and territory would be included. It is not purely volume-driven. As you mentioned, senator, clearly some airports are on the list because of their size. However, over and above that, the others in the group are primarily the provincial and territorial capitals, and in some cases clearly they would not be on the list if they were not a capital.

We ask the airport community from time to time how they feel about being a NAS airport or not. Generally we are told that they like the idea of being in that select group. The downside is that they do or they will pay airport rent at a particular given time; it is tied to their lease arrangements and when they negotiated their lease with the federal government. A number of them, particularly the smaller ones, are currently not paying any rent but may come on stream in 2012 and 2014 and beyond.

Senator MacDonald: The airports on the list are not paying rent?

Ms. Burr: Not all of them.

Senator MacDonald: What are the advantages of being on the list?

Ms. Burr: Those on the list are certainly viewed as being sort of the senior airports of the country, if you will. It might be time to revisit the list and determine a different configuration.

There is sort of a natural division within even the Canadian Airports Council. There is a large airport committee and a smaller airport committee made up of NAS airports. Therefore, even within the community of 26, distinctions are made tied to size.

Senator MacDonald: When were these 26 determined? How often are they reviewed, or are they ever reviewed?

Ms. Burr: We have not really reviewed them. Do you recall when the policy was introduced?

Ms. Gravitis-Beck: It was in 1996.

Ms. Burr: It has been around for a little while.

Senator MacDonald: I cannot help but notice when looking at Atlantic Canada that there is one in Charlottetown and there are two in Newfoundland — St. John's is the capital and Gander is an international airport. However, there are three in New Brunswick and only one in Nova Scotia. Nova Scotia has the largest population in Atlantic Canada, and Cape Breton is the second largest urban centre in Nova Scotia, yet Sydney Airport is not on the list.

I am curious why it would be left off this list, particularly when I reflect on the changes that occurred with VIA Rail in the 1980s when Montreal-based VIA Rail determined that the passenger rail service would be discontinued between Sydney and Truro. Based on the criteria, it seems to me a place like Sydney would be on this list. Why is it not?

Ms. Burr: Sydney is not a provincial capital, and although it is an important airport in its region, it is probably not of the volume that would argue for its being in the National Airports System. That does not mean it is not an important airport. We have over 300 airports in this country. Certainly, Sydney would presumably be considered an important one within the Atlantic region.

Senator MacDonald: I am curious as to why it would not be included in that original list.

Ms. Gravitis-Beck: The NAS airports evolved from airports that were previously owned by Transport Canada. Some airports were never owned by Transport Canada. Part of the process of the National Airports Policy was to devolve the most significant of the airports. As Ms. Burr mentioned, those included the capitals and airports that at that time had passenger volumes over 2,000 annually and were federally owned. A combination of those criteria became the arrangements for lease arrangements and so on under the National Airports System.

There is another significant thing under the National Airports System. We talk about the advantages and whether it is an advantage or disadvantage, but the assets of those airports, which include the land and the buildings, revert to the federal government once the leases terminate. Again, there is a sort of recognition of public interest and strategic importance of this mix of airports across the country to ensure there continues to be some federal involvement or grounding in terms of those airports.

Senator MacDonald: I am not saying I am advocating it. However, I do know people at the airport authority there, and I will speak to them to see what their take is on this. They are always struggling, and I am just curious about how much this affects the viability of the airport in the long run. It might not.

Ms. Gravitis-Beck: I do not think being a member of the National Airports System creates an advantage in terms of viability or success. It really is based more on history, but it also creates a bit of a marketing opportunity for those airports to promote their services.

However, equally, we have airports such as Abbotsford and Hamilton that are sizable airports and are not part of the National Airports System because they do not have the history that I referenced. They equally set themselves up and market their services internationally and do not feel constrained by being outside of that.

Senator MacDonald: I will have to do a little more investigation on the ground and get some feedback from them. I guess I will have more questions in the future.

Senator Mercer: Sydney is the capital of Cape Breton.

Senator Cochrane: Could the committee members get a copy of the guidelines that determine how these 26 airports are designated?

Ms. Burr: Yes, we can get you something on that.

The Chair: Please give it to the clerk and the clerk will distribute it among the members.

[Translation]

Senator Fox: I want to begin by thanking the witnesses for their presentations, which I found very interesting.

My first question is along the same lines as Senator Plett's and has to do with ticket prices. We get the sense that no one is responsible for ticket prices and that it is all left to the free market to decide. I am sure that when the airlines appear before the committee, they will tell us that pricing has a lot to do with airport taxes.

At this time of year, thousands of Canadians leave Montreal to go to Florida. They have the option of going to Plattsburgh and taking an Allegiant Air flight to Miami or Fort Lauderdale for $29. They can also leave from Burlington on a JetBlue flight for as little as $79. Of course, these passengers can choose to leave from the Montreal airport and fly with WestJet, Air Canada, Delta or American Airlines, whose prices, although competitive, are similar and end up being significantly higher than their previously mentioned counterparts.

So going to Plattsburgh or Burlington holds a certain appeal for Quebeckers, especially those living on Montreal's south shore. I would think that is cause for some concern.

Second, I get the sense that it costs less to buy a return ticket to Montreal in Fort Lauderdale or Miami than to buy it in Montreal. Correct me if I am wrong.

It is not true that no one is responsible. At some point, policy issues come up. You are responsible for the policy side of things. I am not saying that you are responsible for high ticket prices, but someone is responsible for all that. It is not just the free market controlling it all, because the free market offers flights at $29, $79 and more than $400 departing from Montreal. It feels as though no one is responsible.

You have NAV CANADA, which operates every day. I am not sure whether you have any control over NAV CANADA, but NAV CANADA has the power of life or death over airports. Take Mirabel, for example; NAV CANADA put an end to its operations. We constantly receive complaints from Canadians who want to know what we are doing to hold airport authorities accountable.

For instance, residents in the Montreal borough of NDG complain about flight paths. They seem to have an extremely difficult time voicing their concerns and problems in a tangible way. The accountability issue is not clear to me, nor is it clear to me whether you have any authority over NAV CANADA or airport authorities.

Third, I want to bring a very specific case to your attention. You own all the land that has been leased to airport authorities under, I believe, emphyteutic leases. Those airport authorities are therefore emphyteutic lessees of extensive areas of land. I am thinking specifically of the Mirabel region, which receives requests every month for land on which to build an industrial park for small and medium-sized businesses. There is not a single small or medium-sized business in Quebec that is going to invest family money to build infrastructure on land that is subject to an emphyteutic lease. Investors want to buy a piece of land, grow their business and eventually pass it on to their children. I am sure that the same problem comes up in other parts of the country.

Obviously, Transport Canada is the one responsible for this, but is there no way to address local needs and recognize that certain regions of the country have extra acres of land? Is there no way to say that you will allow the Montreal airport authority to resell its land so businesses can build there? Once again, if you are talking about small and medium-size businesses, your experience may be different than mine. Based on my experience in Quebec, there is not a single small or medium-size business that would invest family money in a building that it would have to hand over to an airport authority in 20, 30, 40 or even 50 years.

Ms. Burr: First of all, we recognize that ticket prices in the United States are often cheaper than in Canada. As I mentioned earlier, that is due to the country's sized and the wide range of its airline offerings. There is also the fact that ours is a vast country geographically speaking, but a much smaller one in terms of population. Therefore, Canadian airlines have higher costs than those in the United States.

That is the only answer I can give you right now. We realize that there are individual costs here in Canada, such as the lease. There are other costs as well, which I mentioned, but it is also important to realize that the United States is a larger market with a larger airline industry. We work with NAV CANADA from time to time, but we do not have as close of a relationship with them as we do with the airports specifically. NAV CANADA is a private corporation that was established by an act of Parliament, and its regulations focus more on security, not daily operations.

Last, could you repeat your question about our role as airport owner?

Senator Fox: Yes. Transport Canada, which owns all the infrastructure and land surrounding airports, has leased them out to airport authorities for, if I understand correctly, prolonged periods under agreements known as emphyteutic leases. The airport authority occupying the land under the emphyteutic lease cannot resell the land to businesses wanting to set up shop in industrial parks, for example, which do not currently exist because of this problem. The mayor of Mirabel would tell you that he receives these kinds of requests on a weekly basis, but there is no land left in his industrial park. He would like to be able to buy some land from Transport Canada, but he cannot because he has to go through the Montreal airport authority, which will say that it is leasing the land and can lease it out only under an emphyteutic lease. When you have a company looking to invest several million dollars to build a plant or a head office, the fact that the company cannot own the land where the plant or head office is located is a major roadblock. The company will set up shop elsewhere.

Ms. Burr: We have discussed the issue of the lease term with certain airport authorities. In some cases, we negotiated an extension of the lease term with the airport authority so it could make arrangements with third parties.

Senator Fox: Does that mean you are willing to sell?

Ms. Burr: Not to sell, but to extend the lease.

Senator Fox: Therein lies the problem. That is unacceptable for a small or medium-size business. Generally speaking, a small or medium-size business is not going to invest in land it does not own.

Ms. Burr: There is always the option of keeping a certain amount of land for future needs.

Senator Fox: I understand.

Ms. Burr: It depends on each airport's situation. That may be something we can examine a bit more closely.

[English]

Ms. Gravitis-Beck: Sometimes when lands are surplus to the immediate requirements for an airport operation, the airport finds it useful to have those lands as a source of income, and they are able to attract renters. I understand there are some that are looking for a more permanent arrangement that can be passed down from generation to generation, but there are many businesses that find it opportune to be able to function on a long-term arrangement to do their business, whether it is a 20-year or a 30-year lease. They increase revenue.

Senator Fox: I know that for Bombardier, Pratt & Whitney Canada and L-3 Communications, that is fine for them; they are big multinational companies and they can do that. If I am looking at small to medium-sized business, Lord knows how much land we have around some of those airports — certainly in the case of Mirabel — that do not affect airport operations because those are already so limited. You have allowed the leasing to major expansion, which I think is fantastic for Bombardier and so on, right on the airport premises, about 500 feet from the tarmac. That is great for them. That is super.

However, outside of those zones, much closer to the main arteries and roads, there is a lot of land that has absolutely nothing to do with airport operations, and that could be resold and designated for industrial park purposes. However, there does not seem to be any willingness on the part of whoever is responsible. It is hard to find out who does this, and I am not sure whether it is up to Transport Canada or Aéroports de Montréal to do that. Aéroports de Montréal will say, "We leased it; therefore, we have to release it," and Transport Canada will say, "We have already leased it to Aéroports de Montréal; therefore, we have no control over it." Therein lies the conundrum, which I would like you to unravel for me. It does not have to be today, but at some time.

[Translation]

Isabelle Trépanier, Director, National Air Services Policy, Transport Canada: I want to follow up on your first question about ticket prices. I am originally from Montreal, and I can understand the appeal of some of the U.S. cities you mentioned. I have family members who sometimes consider taking those flights. But I also understand that a number of factors influence the decision of whether to buy a ticket in Montreal, Quebec City or Plattsburgh. Service level comes into play. Often, there is one flight a day leaving Plattsburgh; those are low-cost carrier flights, where passengers pay for their luggage, alcoholic drinks and all those extra costs.

Senator Fox: Such as Air Canada.

Ms. Trépanier: As Senator Plett mentioned, I believe, it depends on the type of ticket: Tango, Tango Plus. So there are all these different service levels, as well as flight times and airports. If you land in Orlando, it may not necessarily be at the international airport; you may land somewhere other than the city's main airport.

So service level comes into play. It is also important to remember that in the United States, certain airports and certain airlines serving those airports have received assistance from the local, municipal or federal government. So there are a number of factors involved, including the value placed by passengers on the time spent getting to those airports; that is part of the compromise.

Senator Fox: Thank you.

[English]

Senator Martin: Thank you very much for your presentation today. I want to ask one question that is more domestic and regional and another looking at the international picture.

I travel to the Yukon, which is north of Vancouver, where I live. In Vancouver, I can talk about the Asia-Pacific access and the U.S.-Canada situation that Senator Plett mentioned, about the bleeding that goes down to the U.S.

Going up North, I once flew on Air Canada, or Jazz, and then returned on Air North. My sense of the local carrier, the effectiveness and the importance of that — As you said, we are living in a country that is vast. I was born in Korea, and Canada is 100 times the size of South Korea. To get to destinations, we are limited in our choice, and flying is a necessity for us. Access for Canadians in remote or smaller locations to be able to get to other destinations and vice versa is an issue.

From my experience on that Air North, it seemed that there was a real sense of community; everyone seemed to know one another. I do know how economically successful they have been in that they carry themselves. Like you say, there are challenges for every carrier in this volatile industry.

What role do you see for provinces and municipalities in terms of the kind of support or role that they can play in ensuring there are local carriers for their citizens?

Ms. Burr: A number of provinces do provide subsidies for northern services in their provinces, and British Columbia is one of the provinces that support a number of services or, conversely, smaller airports, so the subsidy may go to the airport as opposed to the airline. I believe Manitoba and Ontario do the same. Quebec has also provided some support for service to smaller communities.

Senator Martin: Does Transport Canada have effective or clear working relationships with these provincial bodies? Are there partnerships, ongoing agreements, et cetera?

Ms. Burr: Not directly. We work with all the provinces and territories through the federal-provincial-territorial mechanism, which has meetings a couple of times a year. We consult on broad policy issues then.

The other area where we interact is a standing committee chaired by Ms. Gravitis-Beck. It involves phone calls a couple of times a year so that people share information on an informal basis under this umbrella of the federal-provincial-territorial network. That seems to work quite well.

Senator Martin: I can imagine the challenges for carriers in providing services in Canada. On a smaller scale, I am with Rogers, and we finished a study with "Digital Canada" as its title. Rogers did not have service in the Yukon, so I did not have access to my BlackBerry. In Canada, we are facing these challenges at all levels. I think the relationship with provincial and territorial partners will be important for Transport Canada as well.

My interest then moves to the international picture. Being in Vancouver, last year I was at an announcement of the Blue Sky agreement with South Korea. You mentioned the other Blue Sky agreements that exist.

The title "Blue Sky" sounds expansive, and it is a welcoming concept. Could you share with us maybe what the public and we around the table should know about the advantages, the benefits and the economic impact of a Blue Sky agreement for Canada?

Ms. Burr: It is tailored to the Canadian reality in that while we are pursuing as open an agreement as possible every time we sit down in a negotiation, we also recognize that because we have such a large country and the population is so dispersed and there are many remote and smaller communities, our model is not quite the same as, for example, the American model, which is total open skies with whoever wants to sign an agreement with them. Their market is 10 times larger than ours, with many large cities as destinations.

The Blue Sky policy is very much committed to an open negotiation wherever possible, but as I mentioned earlier, it is based on reciprocity. In other words, we are trying to ensure that we get benefits back for the Canadian industry. In addition, we will look at variations within the Blue Sky model so that there is not exactly a cookie-cutter approach; they are each tailored to the individual negotiation.

Senator Martin: I understand that. I was curious whether you could give us some specific examples of the kinds of benefits that we have received from certain Blue Sky agreements. Are you able to speak about any of the specifics?

Ms. Burr: Ms. Gravitis-Beck would like to do so.

Ms. Gravitis-Beck: I have a couple of points. First, as you were saying, there is an important communications perspective or openness that is communicated with the Blue Sky policy, and it was actually a critical element in opening up negotiations with the European Union. As you can imagine, just in terms of relative market size, Canada was very interested in having that negotiation as it represented our second-largest group of traffic partners, and yet the Europeans had many other choices and priorities, and large parts of the globe were also important to them. The signal that was sent with the Blue Sky policy created a much greater interest for the Europeans to engage with us than might have been the case otherwise; basically it took us down the road to the arrangement we were able to reach with them, which is a fairly open one.

I will use this term with some caution, because I do not want to be a proponent of protectionism, but the other thing that comes with the Blue Sky policy is that Canada's deregulated approach that we have described, how we manage our industry, where carriers are expected to be self-sufficient, to survive on their own and set pricing so they will be viable, is not universal. In many parts of the world, carriers and airports are still state-owned and still have subsidies that affect their bottom line. Part of the purpose of a Blue Sky negotiation is to ensure that our carriers can compete fairly with their counterparts, and sometimes that involves trade-offs and balances.

The other element that we always look at is the opportunity for sustainable new services to be created. That arises in a couple of ways. One is that bringing in a new entrant may increase competition, but our hope is that always the market is sufficiently robust that that competition will be sustainable and continue. What we would like not to have happen is that we bring in more foreign participants, but it results in other partners in the same marketplace retrenching or withdrawing, so that there is no net gain to the consumer.

We look very hard and think carefully about whether our industry is able to compete fairly. It comes back to the reciprocal consideration as well. Do we get reciprocal benefits in the other country? Equally, are we likely to establish sustainable services that will increase choice for Canadians as opposed to just displacing existing services?

Senator Martin: Yes, I absolutely agree. As a Canadian and as a flyer, having been in different airports, for me, just being able to see our Canadian flag or the presence of Air Canada is reassuring for a Canadian in foreign airports. In essence, it is sort of an ambassadorial role that Air Canada can play.

I was quite frustrated during the summer. Again, this is a personal example. I was in Los Angeles on the same West Coast, trying to get back to Vancouver. I would have had to wait for two days to get from Los Angeles to Vancouver. Instead, I had to fly to Montreal just to get out of that airport that day. I was able to go to the Air Canada lounge and speak with Air Canada employees. That was a bit of a relief to me. However, this can be frustrating at times. It is important for us to be proactive in ensuring that we provide the services for Canadians at home and abroad. Thank you for being here today.

Senator Mercer: Thank you, witnesses, for appearing here this morning. I hope that as we go through this study we will see you again, or others from the department. As we begin to learn about the problems, our questions will be more specific than they might be today.

With regard to the various airports, whether it is the 26 that make the list or other airports, is a standard used to measure the level of service that is given? I am concerned that the level of service from one airport to another can be dramatically different. The level of service here at the Ottawa airport is not at the same level as Pearson in Toronto or Stanfield in Halifax. Is there a method of measuring that? If so, are the results of that measurement made public?

Ms. Burr: Are you thinking of indicators like delays or throughput?

Senator Mercer: This is where the complication comes in. Everyone has different responsibilities inside the airport. The airline is responsible for some things, but the airport itself is responsible for other things. The overall management of the facility concerns me. Stanfield airport is well run, so it is always clean. The people who are running the airport itself are on top of what is going on. There are quite a few volunteers at the airport servicing the tourism industry.

However, when you come to Ottawa, you do not get that same level of service. If we compare Ottawa with something larger than Halifax, such as Toronto, even there the level of service is similar to what you get in Halifax.

Is there no standard that judges how successful an airport has been in servicing the entire customer? The customer does not care who is responsible. When I get out of the taxi at the Ottawa Macdonald-Cartier Airport, I do care. However, the ordinary customers who walk through the door are flying on WestJet, Air Canada or Porter, and they do not care who is responsible for the delay. They do not care who is responsible for the fact that I come out of the airport in Ottawa and there are 85 people standing in line in minus-25 weather waiting for a taxi. All they care about is the fact that they are getting bad service.

Ms. Burr: We do not track those kinds of service indicators at this point in time. If the Canadian Airports Council is coming to make a presentation to you, you might want to ask them whether they are looking at anything across the board. We are not tracking that.

In another mode, in the marine mode and in the gateway context, we have started working with many of the players to measure fluidity and performance indicators that will tend to help us measure how well we are doing in integrated supply chains into Canada. We are starting to develop methodology to measure performance much more in a cargo or freight perspective in another mode. That is not to say we should not be looking at that issue over time, but at this point in time we are not doing so.

Senator Mercer: Thank you. I think it is just frustration with the varying services that you get across the country.

My final question is about small airports. Smaller airports are tools for economic development in many regions. Since we have divested ourselves of most airports to local airport authorities, and with the problems in the airline industry, many of these airports no longer have regular passenger service in and out of them.

Have you gone back and looked at this issue since we have gone through this process? There is no sense in arguing whether it was a good or a bad process; it is now done. Have you gone back and looked at this from an economic point of view to see what effect it has had, particularly on smaller regions? In my province of Nova Scotia, we have the airport in Yarmouth and the airport in Sydney. They are both important airports. Sydney has regular service; Yarmouth does not, although I hear a new carrier will start doing some stuff in Yarmouth. In New Brunswick, you have Saint-Léonard, which was a regular scheduled stop but is no longer.

Have you gone back and looked at that and said, "We have had this experience now. Were we right? If we were not right, what can we do to help fix that?"

Ms. Burr: In about 2004-05, the department undertook a study on small airports across the country. We would be happy to make it available to the committee.

Senator Mercer: Please do.

Ms. Burr: It tended to show that it all comes back to economic activity and the degree to which there is enough business in an area to support and attract carriers. Especially as we have invested in highways in Atlantic Canada, particularly those new national highway system investments in recent years in New Brunswick, the study showed in a number of cases that people are capable of driving quite a long way if they can find a low-cost carrier. Senator Fox was referring to that in going to Plattsburgh or Burlington.

The same is true for other regions in Canada. We found examples where, if WestJet went into an airport, all of a sudden passengers were prepared to drive an hour or two to get to where a low-cost carrier was offering a better price on service. There is a lot happening within a particular region.

The study would at least give you a sense of some of the factors we looked at. We could see there was a certain degree of consolidation. If one airport, such as Charlo, was declining, you might look to Bathurst and see that traffic was increasing. You have to look at that to see why change is taking place.

Ms. Gravitis-Beck: The other thing in that study that was a useful parameter was the acknowledgement that different players had different roles: Some of the smaller airports were important for local firefighting for air and forestry; others had medevac facilities; and others were more important for local, general aviation. There was a real mix of interests and roles.

Part of the value of that task force was in trying to recognize that the provinces and the municipalities had a particularly important role to play with respect to some of those smaller airports, given the specialized nature of their functions that were more closely related to provincial or municipal jurisdictions.

As Ms. Burr mentioned, there was the opportunity for those players to work together a bit to look at how they could ensure the survivability and practical functioning of their airport relative to their neighbour, who might have a different specialty, and how perhaps the players needed to talk together and look at ensuring they all found their niche.

Senator Mercer: Did you involve Industry Canada in that study? As I said before, these airports are an economic tool that could drive economic development. It would seem to me that Industry Canada would have an interest in that.

If there was no airport in Yarmouth, certain industries would not be interested in going to Yarmouth. With an airport there, however, it makes it a more attractive prospect.

Ms. Burr: At the time, I believe we shared the study with the part of Industry Canada that deals with tourism. They are quite interested in airline services as a catalyst for increasing tourism. We also shared it with the Atlantic Canada Opportunities Agency, which has great interest as well in economic development in the region.

The Chair: Senator Cochrane has a short supplementary before I give the floor to Senator Johnson.

Senator Cochrane: I am on the same wavelength as Senator Mercer.

Senator Mercer: As always.

Senator Cochrane: There would be economic activity if we had the airline there. I am looking at smaller communities. This is the objective these communities are looking for. Is there anything they can do to get service reinstated once it is gone? To whom do they go?

Ms. Burr: Since this is private-sector-led decision making, it may be that if one carrier pulls out, another carrier in the region would be interested in coming in. As I mentioned earlier, we do not intervene when there is a retrenchment. However, you will often see civic bodies or business associations at the local level come together to try to encourage a carrier to come in.

It comes back to economic activity. I recognize that it is a bit of a chicken and egg situation when you are in the local community and you are trying to attract a carrier. In the study I mentioned, we have good examples of low-cost carriers being prepared to come into regional airports and provide service. The other question is whether there can be an alliance between a few communities that want to band together to attract service.

Senator Johnson: We talked earlier about open skies. Can you tell me how many agreements we have with other countries? Do you have a number?

Ms. Burr: There are 35. To be clear, that includes the countries within the EU and the U.S.

Senator Johnson: Have these been effective in benefiting our airlines?

Ms. Burr: Yes. Certainly, we have a longer track record with the United States than with the EU. We already had good agreements with a number of the major European countries, but there are certainly opportunities for expansion into countries that we were not as active with in the past.

Ms. Gravitis-Beck: Your question is whether they have been beneficial to our carriers. There is also the question of whether they are beneficial to our airports. We look at both because the more open arrangements we have, the more opportunities our airports have to market their services, and they do market them actively. On the West Coast, the amount of energy and investment that goes into building relationships with China, for example, and some of the Asia-Pacific countries is substantial. It is all done with a view to bringing new services over. Those are enabled by the framework we have.

Senator Johnson: When those agreements are being worked out and fashioned, how much credence is given to the area itself where they land? Is it important to know where they get to land and for how long they get to land in our country? Is it the same, for example, with the EU now? That is a new agreement, right? Do they all get the same number of flying days into Canada and at which airports? That is all negotiated, right?

Ms. Burr: I will let Ms. Gravitis-Beck answer that.

Ms. Gravitis-Beck: Our agreement with the European Union is a relatively open one, which means that carriers can fly to whatever cities they want at whatever frequency they want in terms of direct flights between Canada and the EU. We also grandfathered those agreements that were more open; there were a few that are at the full limit of an open skies agreement.

Senator Johnson: What is the full limit?

Ms. Gravitis-Beck: That means not only open direct flights, which means carriers are able to fly to any city, at any rate, with a lot of flexibility. It includes open pricing regimes and open co-chairing arrangements. It also includes the ability to fly to third countries; you fly from one country to a second and on to a third or via a third. It also includes generous cargo rights in terms of being able to do cargo transport direct from one country to another without having a base in your home country.

Senator Johnson: In terms of new agreements, would the allowing for cabotage be a significant factor in someone gaining a fair open sky agreement with Canada, or will we expand these agreements in that respect?

Ms. Gravitis-Beck: One of the Blue Sky policy elements is very specifically that cabotage is not included. At the present time, our framework does not entertain the possibility that we would negotiate cabotage. Cabotage would allow a foreign carrier to pick up carriers in Canada and fly between Canadian points, acting like a Canadian carrier.

Senator Johnson: Will we be expanding the cabotage?

Ms. Gravitis-Beck: At the present time, as I say, the policy framework does not allow for that. As Ms. Burr mentioned, under the Chicago Convention —

Senator Johnson: In terms of emerging issues?

Ms. Gravitis-Beck: Under the Chicago Convention, there is still an emphasis on national carriers representing the country in terms of overseas flights.

Whether there is a need for cabotage in Canada would be a substantial policy decision that would have questions for our carriers, our airports and the degree of competition. Again, looking at the size of our country and the size of our marketplace, there are players, and I am sure you will hear from some of them who believe that we more or less have a saturated domestic marketplace and that if we were to bring in others, they would cherry-pick the good routes that help subsidize some of the smaller routes in our important regional networks.

There are many questions, and at the present time, the policy framework does not allow that. Also, our stakeholders would want to weigh in on this substantially if it were ever under serious consideration.

Senator Johnson: Have you been putting together any new ideas with respect to the future and what is happening in the industry globally for Canada with regard to more and more airlines accessing our country and being allowed to do so?

Ms. Burr: A point you will probably hear about from some of the players is something we are starting to look at, which is whether it makes sense to look at regional hubs. It comes back to the fact that we have a multiplicity of airports often on a regional level; they cannot all be major international hubs, but they can be key players, key elements in a regional network. Especially as we look at a world that is becoming increasingly a global village, how does Canada protect its interests going forward? How do we make sure that we are competitive in a North American context and then internationally?

Senator Johnson: That would make sense given the size of Canada. We could look at that. I guess you will be pursuing more liberal agreements with the Asian markets, for example?

Ms. Burr: Yes. We had good luck about five or six years ago in broadening our agreements with both China and India, using the Asia-Pacific Gateway umbrella as a bargaining argument, if you will.

With the downturn in the last couple of years, we have not seen as much uptake as we would have liked in Asia. However, as the economies start to recover, we are certainly getting signals, especially from China, that a lot of interest is being expressed by Chinese carriers for increasing their service into Canada. There is still room under the current agreement. We would be happy to sit down with the Chinese again to look at more opportunities.

Ms. Gravitis-Beck: Just to reinforce that, particularly with our Asia-Pacific partners, usually Canada is much more interested in greater openness than they are ready to accommodate that. For us, a big part of our engagement with them is really to maintain the relationship and to ensure that they appreciate that we continue to wish to see greater openness. It is like a constant effort to look at whether it is a question — in some cases it is a question of degrees; there seems to be comfort with perhaps moving in an incremental fashion. Part of our effort is to maintain that effort to try and advance.

Senator Johnson: I am sure if anyone can, it is your crowd, right? Thank you.

Senator Plett: I have been looking at your breakdown of airfares in your slides on pages 45 and 46. I have a few questions on that.

Air Canada is the only airline out of the three we have talked about here — Porter, WestJet and Air Canada — that has a fuel surcharge. It makes up 23 per cent of the total airline ticket. WestJet is the only airline that has a U.S. airport fee. I am assuming Porter may not fly into the United States.

An Hon. Senator: It does.

Senator Plett: It does not have that fee. WestJet does not have any HST. I am assuming maybe that is because their base is in Calgary; I am not sure. Could you tell me why there are differences here, why some airlines have certain fees and others do not?

Ms. Burr: I do know that Air Canada does not charge a fuel surcharge on domestic flights, from what I recall. I see this is Vancouver-Beijing. For WestJet, the ticket that we chose is to Palm Springs, so that would explain why the American surcharge is there.

Senator Plett: So this is just two specific routes?

Ms. Burr: Yes.

Senator Plett: Would WestJet have a fuel surcharge on international flights?

Ms. Burr: They fly transborder. I do not know.

Ms. Gravitis-Beck: Every carrier decides on how it will present its fuel cost. It depends a little bit on the circumstances at the time. In cases when global markets are particularly high, surcharges are implemented when there are huge spikes in fuel prices, in general.

It also reflects the fact that in some cases carriers have particular arrangements, whether hedging arrangements or others, which means that their fuel prices are a little bit higher or may be different from those of others and they want to reflect and capture them on the price of the ticket. Off the top of my head, I do not know what WestJet's policy is or whether it is representing something in the ticket price.

Senator Plett: Thank you.

Senator Housakos: I have one last question. I was wondering if you can tell us what, if any, contentious issues there might be between Transport Canada right now and the various airport authorities across the country?

Also, as we launch into this discussion and this study as a committee, maybe you can guide us as to what areas we should be focusing on vis-à-vis the current set-up of this administrative model of airport agencies and how Transport Canada's relationship with them is, how well they currently respond to the needs from an administrative perspective, customer service and servicing the suppliers that they service.

I understand that is a broad question, but maybe you can help us narrow in on some of the areas that we as a committee should focus on, and if there are some contentious issues, perhaps you can identify them so we are cognizant of them as we go forward.

Ms. Burr: I would say generally that we have pretty good relations with the airport authorities, not to say there are not areas where we have discussions from time to time. That is just normal. We do consult with them regularly. They invite us to their conferences to give speeches and whatnot, but they also come in to see Transport Canada in Ottawa. When we are out on the road, we will often stop and have a tour to see how things are evolving at some of the airports.

When they come in to see you, I think they will tell you that the cost structure is too high. They have concerns around some of the fees and levies that are imposed on the airports and airlines generally in the aviation sector in Canada.

As I have mentioned before, our model is somewhat different from the American model. As a result, our airports are generally pretty modern and up to date. Certainly all the large airports have invested heavily over the last few years. You will find that there are real capacity constraints when you look at a lot of the American airports, which are funded differently. They receive funding from government, much more than our airports do. As a result, with economic constraints and other pressures on governments, there probably has not been as much investment in the last little while as our colleagues at the United States Department of Transportation, for example, would like.

We have a different model. Sometimes that means that the system works better in Canada. Sometimes it may mean it works better in another country. In general, our model has allowed a great deal of investment, led by the airport authorities themselves. That speaks to the overall policy having worked fairly well.

Senator Housakos: Have they become less reliant on funding from the government? Are they becoming more efficient in generating their own revenue internally as the years go by?

Ms. Burr: I would say the larger of the NAS airports are very self-sufficient. There is some question now around some of the smaller NAS airports that are perhaps not as able to generate all of their requirements through airport improvement fees or charges to the air carriers. It is just a question of size. We are mindful that some of the smaller NAS airports are not as able to be totally self-sufficient. However, up until now we have expected them all to be mostly self-sufficient.

Senator Housakos: When we pose the question to them and they respond that the cost and fees are too high, how do we respond, and what do we ask?

Ms. Burr: You might want to ask them for suggestions on what could be done. It is an ongoing debate. I would submit that the Canadian model has served the industry quite well over the last few years. That does not mean that it needs to stay exactly the same. Maybe it is time we looked at some of the elements of the model, but, certainly, commercialization has unleashed a great deal of potential and entrepreneurship on the part of the airport authorities. That is all for the good.

Senator Fox: Do you have the power of directive over NAV CANADA and the airport authorities?

Ms. Burr: We do not have that in the sense of the minister issuing a directive, as he would to a Crown corporation, for example. NAV CANADA operates at arm's length to the government. Under the Aeronautics Act, we always have scope to impose requirements from a safety perspective. However, on the economics side, it is arm's length.

Senator Fox: What about on the policy side?

Ms. Burr: Not really, no. Under the lease, we have a program team that monitors lease activity, but again, we are somewhat arm's length from the day-to-day issues.

The Chair: I have a question about the United Arab Emirates negotiations. I do not want to get into the details or the politics of it but into the process. Who deals with an issue like that? Where do negotiations start, and when they fail, how do they restart and who talks to whom?

Ms. Burr: The actual negotiation of air agreements is shared between Transport Canada and the Department of Foreign Affairs and International Trade. We have a chief air negotiator who is generally appointed from the Department of Foreign Affairs and International Trade, and he or she reports to the deputies of both DFAIT and Transport Canada but is supported by a team of policy advisers who are from the Transport Canada.

Ordinarily, in any given year we have a list of about 10 to 15 negotiations that are scheduled at the convenience of both countries, Canada and the other country. Sometimes we make overtures to other countries; sometimes they make overtures to us. We try to set up a schedule and see whether there is room for expanding our current agreement.

In the case of the United Arab Emirates, as is well known because it has been in the public domain, they are very interested in expanding their activities in Canada. Over the last few months there have been discussions with a view to looking at a broader package. Unfortunately, the outcome of the discussions was not acceptable to either party, so the discussions have been terminated for the time being. That is not to say that we would not reconvene at some point in the future, but nothing is scheduled at the moment.

The Chair: Thank you. I just wanted to get the issue on the record so that people who are listening will know what that the situation is.

I would like to thank the witnesses for their presence this morning. As you heard from the members, there is a strong interest. It is reciprocal, as you said at the beginning, and it will be important for us, as Senator Mercer suggested, to ask you to come back somewhere along the process on more direct issues.

We have two or three housekeeping issues. One is an invitation from members of the European Parliament who will be in Canada on November 4 and who would like to meet with some of the members of the Transport Committee to talk about issues pertaining to electronic container issues, namely, how to supervise electronically what is happening in containers. It is on a Thursday, from 4:30 to 5 p.m. The clerk will be sending you a note. It would be helpful if you can answer to be sure we have a minimal presence at that meeting.

Just to give you a heads-up on future meetings, as I mentioned, the minister will be appearing tomorrow night before the committee. Next week we will have, subject to confirmation, the National Airlines Council of Canada on Tuesday morning. On Wednesday, October 27, we will have the Air Transport Association of Canada, which will give us an overview of the issues we have to deal with.

Somewhere down the line, we will have more discussion about how we want to proceed, the sequence on future studies, how we subdivide the current study into different issues and how we want to deal with that.

Senator Mercer: People should note the room change for our evening meetings now. We are not in Centre Block; we are in Victoria Building. I would not want people showing up in the wrong room.

The Chair: Thank you, Senator Mercer for that good message. Unless there are other questions, the committee is adjourned.

(The committee adjourned.)