Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 8 - Evidence, March 2, 2011
OTTAWA, Wednesday, March 2, 2011
The Standing Senate Committee on Transport and Communications met this day at 6:45 p.m. in the context of its study of emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[Translation]
The Chair: Good evening, honourable senators. I declare this meeting of the Standing Senate Committee on Transport and Communications open. Thank you for your attendance.
[English]
This evening we are continuing our study on the airline industry. We are pleased to welcome Michael Tretheway, President, InterVISTAS Consulting Inc., and Executive Vice-president and Chief Economist for InterVISTAS Consulting Group.
Mr. Tretheway, you have the floor. Following your presentation, we will proceed with questions. I want to remind everyone that this committee is televised, not that anyone would do anything that is embarrassing, but you are always better off warned.
[Translation]
Michael Tretheway, President, InterVISTAS Consulting Inc. (Canada): Mr. Chair, my daughters are almost fluent in French, however I am not. I think it would be better for all involved if I were to speak English tonight.
[English]
I am Michael Tretheway. I am President of InterVISTAS Consulting Canada and Executive Vice-president and Chief Economist of the InterVISTAS Consulting Group. I am also an adjunct professor at the University of British Columbia, where I taught transportation management and economics from 1983 to 1986, and have been an adjunct professor ever since.
I am an economist. I have a PhD in economics. My specialty has been transportation and tourism economics.
I was asked by the committee to come and meet with you and answer questions. I did not ask to appear and have no particular message to deliver. I want to be clear that I am not here on behalf of the clients of InterVISTAS. However, I think it is probably appropriate for you to know who my clients are, in case you want to discount anything I might say.
You will find that my clients include almost everyone involved in the air transportation and rail sector here in Canada. Most, if not all, of the airports in Canada, large and small, are clients of ours. The provincial tourism ministers have been clients of ours on air transportation issues, as have many of the destination marketing organizations and tourism operators in Canada.
Many airlines in Canada and abroad have also been clients. They include WestJet; Porter; Air Canada; Air New Zealand; Virgin Blue; Qantas; Cathay Pacific; Emirates; Copa Airlines in Panama, which is the world's third most profitable airline; Lufthansa; SAS; United; and others. I have also done contract consulting for the Competition Bureau here in Canada, as well as in New Zealand, on both aviation and rail issues. The Canadian Transportation Agency has engaged me on both rail and aviation issues, and Transport Canada has engaged us for a number of studies covering all the modes.
I would like to make a few brief, positive remarks. Canada's aviation industry consists of the airports, the airlines, the air traffic control provider NAV CANADA, and their suppliers and customers. It is an industry I think we should all be proud of.
Many of the reforms that Canadian government policy has done, such as deregulation, privatization, the transfer of air traffic control in the airports, have been hugely successful policies. One of the most important aspects of aviation, of course, is safety. Aviation is the safest mode of transport by far. The improvements in aviation safety have been dramatic over the last 20 years.
On the environmental front, aviation has reduced its carbon emissions per passenger kilometre by 70 per cent since the introduction of jets. New aircraft, such as the 787 that will become part of Air Canada's fleet in the near future, promise additional carbon reductions in the range of about 15 per cent to 20 per cent, and some of the new technologies offer further carbon reductions that will be in the range of 15 per cent to 40 per cent. Bombardier's C130 aircraft, for example, promises roughly a 15 per cent reduction in carbon emissions; the A320 Neo that has just been announced will probably be in the 50 per cent range; and the potential new narrow-body aircraft — some people talk about a Boeing 797 — can achieve reductions that could be as high as 40 per cent, depending on the technology that they invest in.
I would like to make two other comments. The first is about airport policy. Twenty years ago, I was an adviser to the minister of transport when he was contemplating a policy to transfer airports. Old folks like me need to think back to how awful the airport system was in the 1980s. I remember the terminal in Ottawa, for example, where you could hardly move. We had severe runway congestion in both Vancouver and Toronto with aircraft sometimes waiting as long as an hour. Runways were needed. We had hopelessly crowded terminals. In Vancouver during the Asian peak, it was almost impossible for people to get to their gate because there was too little space in the old terminal. At Toronto, Terminal 1 was falling apart and Terminal 2 needed major repairs and replacement. I remember arriving in the Edmonton airport, where once they had to turn off the escalator because the arrivals hall was so congested. It was discovered the Moncton airport had seven layers of roof, all rotting, and a runway that often could not be used because of damage. The Comox airport was underserved and had essentially what was almost a trailer for an airport terminal. Montreal and Edmonton had split their traffic into two airports; and their markets suffered as a result.
However, since the airport authorities were created, they have invested over $10 billion in airport infrastructure, mostly without any help from the federal government. There has been some safety-related investment in small airports, which was a wise investment by the government. This has improved dramatically customer service. Last week, five airports in Canada were announced on the Airport Service Quality Survey, a global survey of customers at airports, as being among the best in the world. Quebec City and Ottawa are the best in their class. Halifax, which is often rated number one, was rated second. Vancouver, which is often rated number one, was voted the most improved airport, although it was already near the top.
If I have any regrets about the policy of the federal government in respect of airports, it would be that the federal government and increasingly local governments view aviation as a cash cow. This problem has resulted in decreased competitiveness, with Canadians now driving across the border in ever-larger numbers to initiate their air travel.
The second area I want to highlight is the great benefit that Canada has received from its open skies agreement with the United States. The first phase of this was in 1995, and it dramatically increased U.S. travel and tourism. I was a vice- president of the Vancouver International Airport at the time, when we actually increased our number of passengers at the airport by 2 million, which is a 20 per cent increase over the previous number. It was pointed out by many at the time that open skies would result in the failure of Air Canada, but in fact exactly the opposite has occurred. Air Canada positioned itself to serve the transborder market and today is by far the largest air carrier flying between Canada and the United States, dominating all other carriers. It has also developed hubs in Canada at Toronto, Montreal and Vancouver; and even airports like Edmonton, Calgary, Ottawa and Halifax are moving Americans to Europe and Asia through Canadian hubs operated by Air Canada.
If I have any regrets on the side of airline policy in Canada, it is that despite the huge success of the open skies agreement with the United States, Canada has chosen to follow a protectionist policy with respect to other areas.
It is also important to recognize the important role of air cargo. Part of the second phase of our open skies agreement contains a technical issue called "cargo co-terminalization," which was not included in the 1995 open skies agreement and was a must-have element of a full open skies agreement, which we eventually reached in 2005 with the U.S. This is a standard element of all open skies treaties.
In Canada, there is great fear that if we grant the United States, and vice versa, cargo co-terminalization rights, it would put the Canadian air cargo carriers out of business. Once again, this fear turned out to be ill-founded. At the time, InterVISTAS did a study that showed that, at worst, cargo co-terminalization would affect about 5 per cent of Canada's air cargo business. Five years later, we see that it has had no effect. The services provided by Canada's domestic cargo carriers are competitive; they keep our businesses competitive; they move supplies to vital institutions, such as hospitals; and they keep our trade connected, both within Canada and elsewhere in the world.
We have an aviation industry of which we can be proud. Of course, we can do better, but I hope this committee recognizes the successes we have achieved with our policies.
I have come with a number of studies that InterVISTAS has done in aviation. I had planned to read out their titles, but there are so many of them that perhaps I will stop now and answer any questions you may have. Thank you for inviting me to come tonight.
The Chair: Thank you, Mr. Tretheway. You were invited because you have been quoted in reports and by other witnesses as being an outside source that we could hear form to originate new ideas for this committee.
Senator Mercer: I will take something you said about your background and take a different angle than we have been able to do in the past. We have not had someone before us whose background is in both aviation and rail.
I have been on the committee a little longer than some of my colleagues, so I am familiar with some of our work on rail. One thing we talk about in rail is the integration of rail from a passenger point of view and from a cargo point of view; and you have mentioned the importance of air cargo.
Is there a model of integration, from passenger and cargo points of view, of aviation and existing rail or rail where spur lines have been built to accommodate new airports since rail was built?
Mr. Tretheway: On the passenger side, there are many such examples, particularly in Europe and to some extent in Asia. I would say that one of the best exemplars would be the Charles de Gaulle Airport in Paris. A number of regional air services are actually rail services. I once booked a flight on Air France from Brussels to Geneva. I thought I was on an Air France flight, but in fact there were two separate train trips from the Brussels airport to Charles de Gaulle and from Charles de Gaulle to Geneva. The airports in Amsterdam and Geneva have integrated well passenger rail with airports. Those countries have geographies that favour the use of rail for short distance and short-medium distance services.
Canada has a different type of geography, but certainly there could be an important role in that model. For example, the airport at Dorval sits alongside the rail line between Ottawa and Montreal. When the high-speed rail system is built between Edmonton and Calgary, it will go right by, and should go right through, the Edmonton and Calgary airports.
With respect to freight, there is less integration of rail freight with airports largely because rail favours heavy bulk commodities, and aviation is on the opposite spectrum. I comment that 35 per cent of world trade actually moves by air, when measured in dollars; but when measured in tonnes, it is a little under 2 per cent.
Some airports have integrated rail to some extent, such as Sydney Airport in Australia. Sydney Airport in Botany Bay is right next to the container terminal that serves the Sydney region in New South Wales. They move air cargo between them. Hong Kong is another example that has integrated air cargo not only with rail but also with road and ferry systems because a great deal of cargo moves in the Pearl River Delta by ferry, and some air cargo will move onto ferries.
Senator Mercer: This is the first opportunity we have had to explore this area. You are probably right in suggesting that it is best to continue to talk about passengers as opposed to freight when discussing integration. However, I want to continue the discussion of cargo.
I am from Halifax. When the Port of Halifax reports its gross cargo numbers, it does not just report what is going out from containers from the bulk grain terminals in the Port of Halifax; it also reports goods leaving the Halifax Stanfield International Airport, because it is a major exporter, particularly of fresh fish. Around Christmas, flights are lined up going to France with lobster, which is a common delicacy for the French at that time of the year.
We all consider ourselves experts on the problems in passenger travel because we are frequent flyers and visit many airports ourselves. However, we do not have the same expertise with respect to air cargo. What are the major issues with respect to air cargo in Canadian airports?
Mr. Tretheway: There are several issues. First, it is important to understand that, geographically, Canada is in an almost perfect location to move air cargo from the NAFTA economy into both Europe and Asia.
We do have some obstacles. One of the obstacles is that the air traffic control fees actually discourage the international air cargo carriers. Air Canada, for example, moves cargo in the belly, but we do not have any major Canadian air cargo carrier that operates freighters around the world. Therefore, Canada relies on cargo lift from foreign and American air carriers.
Many of the airports in Canada — Gander, Halifax, Edmonton, Calgary, Winnipeg, Vancouver, Prince George — all see opportunities to attract these freighters flying over Canada en route to the U.S., and to some extent Mexico, to land here for a technical stop for refuelling and to take on Canadian goods for export to Europe, for example. However, the way the air traffic control fees are set up, it is actually cheaper for these carriers to just fly over Canada. If they land, their air traffic control fees will more than double. It is a significant amount, and it actually discourages carriers.
Prince George, for example, has lengthened its runway because there is a huge opportunity for it to service freighters going between Asia and the United States, with a stop there where Canadian goods can actually be added on or topped up into the freighter that is going beyond. However, the air traffic control fees are an obstacle.
Our bilateral air treaties are also quite restrictive. We do not have an international air cargo industry to protect. We have a successful domestic industry, but we do not operate heavy cargo jets that go to Europe and Asia, or even to the United States and Mexico. An economy like ours, which has great export opportunities and no air cargo carriers to service it, would be well served by opening up our cargo market to foreign carriers to make stops here because it is right on the route to Canada and the United States.
While passengers in the United States do not want to stop necessarily in Canada while the plane refuels — they want to go on — cargo does not care. Its ears do not pop when it makes an extra landing. Therefore, there is a big opportunity for that.
In terms of open skies for cargo, we use some technical terms — the fifth and seventh freedoms — which I think would be of great benefit to Canadian communities and exporters. We also need a better foreign trade policy.
Senator Plett: Can you explain what you know about Winport and whether that is not intended to attract some of the cargo you were talking about flying across the country?
Mr. Tretheway: By Winport, do you mean Winnport Logistics that was established some years ago and only operated for a short period of time, or do you mean the more general cargo airport concept?
Senator Plett: Winnipeg's Winport that they are establishing for a cargo centre.
Mr. Tretheway: That is the future Winport and not the older one. Those are different stories.
Once again, I see huge potential for Winnipeg. It is always a tie between Winnipeg and Hamilton as to which airport is the largest freighter airport in Canada. Toronto is the biggest airport with tons of cargo, simply because the belly space of the big aircraft has a lot of cargo. However, when it comes to freighters, Hamilton and Winnipeg vie for the number one position.
Winnipeg is in an ideal location to move cargo from east of the Mississippi through Winnipeg going on to Asia, or over the pole going into South Asia. It has some opportunities as well for cargo going on to Europe, especially off the West Coast, as do airports like Vancouver, Edmonton and Calgary.
Again, the air traffic control fees are a bit of a challenge. They discourage U.S., European and Asian airlines from making stops in Canada. I think airport rents add significantly to the cost of the airports on a per passenger basis. For example, when you look at the difference between Canadian and U.S. airports, in terms of not only rents but also property taxes and other things, it is $20 per passenger and $40 on a round-trip basis.
On the air cargo side, you will find a similar impact. It causes about a 10 per cent to 15 per cent increase in airport charges. Cargo is highly competitive and will truck across the border for a difference of one or two cents a pound on any given day, and cargo is probably even more sensitive to the fees and charges than passenger travel.
There are huge opportunities if we can solve the competitiveness problem for the airport, both on air traffic control and airport charges via rents, property taxes and things like that, as well as simply giving the rights to foreign carriers to fly through. A China airline, for example, would not right now be able to make a stop in Winnipeg en route to the United States in order to pick up cargo from Canada going to the U.S. or vice versa, adding Canadian cargo on the return flight back to Asia.
Senator Merchant: I have a few questions that arise from your presentation. First, you spoke about the environmental issues. Comparing the different modes of travel and using certain indices — you would know what to use — how does air travel rank against rail, bus or automobile?
Mr. Tretheway: My remarks will sound heretical, but they are actually well-founded and based on an important research study that was done for the Royal Commission on National Passenger Transportation in the 1990s. For short- haul travel, rail, if powered by electricity generated through clean means — not by carbon-based means — will have the lower emissions impact relative to aviation. However, as soon as you get to a distance of about 400 kilometres, aviation has lower emissions than rail does.
Many people find that surprising. However, we have to remember that intercity passenger rail is a heavy rail technology. Heavy rail is very efficient for moving 100-car to 120-car freight trains, but not so good for moving 6-car passenger trains.
If you add to the environmental impact what must be invested in the actual infrastructure, aviation wins hands down. With rail, you have to build the line all the way across because it usually has to be separate from the freight lines. Aviation requires only a couple of kilometres of runway and is much less expensive.
If we rank all the modes, for example, on a cross-country trip, the winner on an environmental basis will usually be bus; air and automobile will tie; and rail will be the most polluting technology on those distances.
Senator Merchant: You were instrumental in advising the Minister of Transport, I think you said, early when they were setting up the airports.
Mr. Tretheway: I would not say instrumental, but I advised him.
Senator Merchant: Some witnesses have expressed disapproval of the way airport authorities are being run in that they are not really accountable to anyone. How do you feel about that?
Mr. Tretheway: I have a number of views about that, and I wrote a paper on the subject. It was published in a book by the Brookings Institution Press about Canadian airport policy.
It is my view that Canada's airports, as not-for-profit organizations, have performed remarkably well. They have burdens because of the rents and increasing property taxes imposed on them. However, they solved the problem of the decay of aviation infrastructure of the 1980s. It was not being invested in.
Having been part of the management team of the Vancouver airport and advisor to many others, I think they have done well in being open and transparent, in comparison to the not-for-profit airports in the United States. The issue is that Canada decided not to use private sector airports. Private sector airports are very accountable. The private sector is motivated by profit line. Therefore, most airports around the world except for North America are private now. Governments deal with that by putting a regulatory system in place that looks at their profits. Australia, for example, is doing a major review now. There are major reviews in the United Kingdom every five years. Everyone knows what the game will be because the regulators will come in on airport charges.
In Canada, we have not-for-profit societies; therefore, they do not have share capital or shareholders. The alternative would have been to have them operated by government, but that is what we were trying to get away from at that time. Governments have other priorities, such as health care and education. Airports grow at about double the rate of the economy, and on the air cargo side at about triple the rate of the economy, and will continue to need investment. However, governments have other priorities.
I think the record has been good. There are other models that could work better. One is to move to a privatization model, which would likely generate between $10 billion and $20 billion for the Government of Canada in hard cash. Then you can put a regulatory regime alongside the airports, if it is needed, that will deal with issues of transparency and accountability.
Senator Merchant: Recently, Canada has had a falling out with the United Arab Emirates. What does that do to the industry?
Mr. Tretheway: Yes, I do have some thoughts, and I will disclose first that we were engaged by Emirates airlines to do an economic impact study for them. It was a follow-up on work we did globally for the International Air Transport Association on the impact of aviation on economies. My view is that Emirates is not a threat to any Canadian-based airline. No Canadian airline flies to the United Arab Emirates or beyond. We looked at the 40 destinations that are beyond Dubai that are served by Emirates. None of them is served by Air Canada and certainly not by WestJest, Air Transat, Comair or anyone else. They do not fly there or beyond. It is hard to see how this would have any impact.
Our study has been criticized because we talked about the jobs that would be created if Emirates got additional rights. People said we did not count the jobs that would be lost at Air Canada. Actually, we did. The jobs that were lost were trivial. We figured that, at best, 4 per cent of the traffic that Emirates would carry would have been on an Air Canada flight. Air Canada goes to Frankfurt. That traffic can be exchanged over to Lufthansa to go on to Dubai, Mumbai, Cape Town or wherever. Air Canada does not go to those destinations. Very little traffic would be at risk.
However, Emirates would have a huge impact on Lufthansa, on KLM and on British Airways. The policy the government is pursuing appears to be protecting one set of foreign airlines against another foreign airline. I do not understand the motivation. Maybe one explanation is that it is now in Air Canada's interests to support Lufthansa. Maybe they share revenues. However, is it good policy to set up a regime where our carriers protect one foreign carrier against another? I do not see any appreciable traffic risk for Air Canada. The notion that Emirates would fly people from Toronto or Calgary to Dubai and then back-haul them to London or Frankfurt is ridiculous. That would double the travel time. It is incredible for me to understand what all the fuss is about.
The Chair: You mentioned a few reports that are public. If they are not translated, we cannot table them at the committee. However, could you pass the ones you just quoted on to the clerk? Some of the information in them could be useful in the preparation of our report.
Mr. Tretheway: I probably have about 50 I could send you.
The Chair: Please send only the ones that you referred to. It would be appreciated.
Mr. Tretheway: I will send the Emirates paper, the paper for Brookings, and the paper on competitiveness of Canadian airports versus U.S. airports.
The Chair: Thank you.
Senator Housakos: Thank you, Mr. Tretheway, for being here this evening and for sharing your time and knowledge with the committee.
We have come to the conclusion that some airport authorities are better managed than others, and some have higher debt loads than others. A number of them have pretty substantial debts. Everyone seems to have come to the conclusion that airport authorities have created nicer, customer-friendly centers. Some people even call our airports "Taj Mahals of airports." In view of that, do you think the debt load as a result of that in some cases justifies such large investments when compared to the returns we get back for those investments?
Mr. Tretheway: It is easy for people to see the large debt and say, "Oh, we have Taj Mahals." I do not see that in Canada. One example is the Vancouver airport. There has been some inflation since 1996. However, in 1996, we opened a new runway for $100 million and a new international terminal for $250 million. Maybe we should double that for the huge construction inflation we have had in Western Canada since then.
A few years later, San Francisco airport opened a new runway and a new international terminal. They spent over U.S. $1 billion. This was when the Canadian dollar was about 62 cents. What was done in San Francisco was hugely more expensive for the same amount of capacity versus what we invested in Canada.
There are two reasons why Canadian airports have a lot of debt. First is that there is overhang of projects that were not done in the 1980s because federal governments simply could not do them. We had a decade's worth of investment to catch up on as well as the new investments of the 1990s. Canada's airports ended the 1990s with a lot of debt because we did two decades worth of work in 10 years.
The second thing is that we have to remember that our airports are not for-profit entities. For example, Auckland Airport in New Zealand is private. When it had major capital projects, it had half equity capital and half debt. Therefore, it has half the debt load that Canadian airports have. In Canadian airports, there is no access to equity. The only to access equity is by charging high prices and building up retained earnings. The airports try not to do that except when they have to get financing for capital projects. In my Brookings paper, I said that if Canada had gone with a private sector model, there would have been three consequences: We would not have complaints about fees and charges because we would have had a regulator. Second, the debt of Canadian airports would have been a lot less. Third, we would not have had airport improvement fees. Those fees only arose because Canadian airports did not have access to equity capital.
The Vancouver airport was the first to charge an airport improvement fee. We had $350 million we had to spend on capital programs. We were transferred from the government with zero dollars. We went to the banks, who immediately said, "There is no way we will give you 100 per cent debt financing here. If you put on an airport improvement fee, we will match every $10 with another $10 or $20 worth of debt."
Auckland Airport simply issued equity capital and then got some debt for that.
Senator Housakos: My second question is in regard to competition. Many in Canada say we have a system of duopoly between Air Canada and WestJet, and obviously Porter has come into the equation in the last little while. In your opinion, is there sufficient competition now in the marketplace for customers? If not, what more can the federal government do to enhance the competitive situation in this market?
Mr. Tretheway: I will give you my opinion. I know many of my clients disagree with this.
We have some good airlines here in Canada. I want to be clear about that. It is not just Air Canada and WestJet. Air Transat, Porter, Calm Air, Central Mountain Air, Hawkair and Provincial Airlines all play important roles in our air transportation system.
We have some good competition on a number of the heavily travelled routes. WestJet and Air Canada compete well with each other on many of those routes. Porter is providing competition, although there are a limited number of routes it can operate with that aircraft. We have to remember that the Toronto Island Airport is now essentially at capacity, and expansion of service is out of the question for the indefinite future.
Where we really suffer in Canada is a lack of a second national, regional air carrier. In markets like Australia, which is a much smaller market than Canada, and in markets like Brazil and so on, you actually see competing regional air carriers operating. We do not have that in Canada.
You asked what could be done to enhance competition. I would have to say the single best way to enhance competition would be to remove the foreign ownership restrictions on airlines — again, a heretical concept. Australia and New Zealand, economies that are much smaller than ours, have no foreign ownership restrictions for domestic-only airlines. If you want to fly from Australia to Europe or Hong Kong, that is different. You have to be Australia-owned to be designated. However, if you want to set up an airline within Australia, it does not matter where the financing comes from. The Australians looked at it and said it does not matter to them where the money comes from. It will still be Australian residents who will be the pilots, the flight attendants, the mechanics and the customer service agents, and they will be operating Australian-registered aircraft that adhere to Australian safety rules and Australian inspections.
The first thing Australia got is Mr. Branson from the Virgin Group investing in an airline, which is, this week at least, called Virgin Blue. There are rumours the name will be changed within the next few days. It has been a successful airline. As well, Singapore investors invested in a regional airline in Western Australia, which is their equivalent of our Arctic, being very sparsely populated.
Right now, the most foreign investment you can have is 25 per cent, and that discourages anybody from investing here in Canada. I would add one other comment about this. I am a little confused about the Canadian policy. The policy says the most foreigners can own of a Canadian airline is 25 per cent. Yet, when one airline came out of bankruptcy here in Canada a few years ago, when you actually looked at the equity at the time, I do not know what the exact number was, but it was probably 85 per cent foreign-owned. The debt, which was foreign debt, got converted into Canadian equity, and they dealt with this by what some called "accordion shares," saying the foreigners get scrunched up to only voting 25 per cent. The actual money was foreign money, and I just do not understand that. If one airline can have foreign equity capital access, why can others in Canada not?
Senator Housakos: My next question pertains to fees and taxes. Witness after witness has come before this committee highlighting how one of the biggest reasons we do not have a competitive edge is the taxes and the fees and the airport taxes and all the rest of it. I am trying to get my head around that. We have had different answers when we have asked about the bottom-line saving per ticket per customer in this country if we eliminated all taxes and fees. We have had answers ranging from 10 per cent to 30 per cent. I question that, and I would like your view on it. I am not so certain that just the taxes and the fees alone will solve the problem that exists, compared to the U.S. market, which has the economy of scale and a large volume of people compared to the Canadian marketplace. I would like to have your view on those taxes and fees. Is it as significant an issue as everyone professes it is? When we have asked the question, we have no guarantees that if these fees were reduced or eliminated the savings would be transferred down to the consumer by the airline companies.
Mr. Tretheway: Let us deal with the facts first. We did a study where we looked specifically at the taxes for Montreal, Vancouver and Toronto. I believe most of these results will transfer to the other major airports in Canada. The impact will be smaller for the smaller ones. For Toronto, we looked at all the differences in government charges.
For example, in the United States, almost none of the airports pay rent. The Washington, D.C., airports pay rent, but it is like $6 million a year. Toronto pays $175 million a year. We looked at property taxes. Most U.S. airports do not pay property taxes. Property taxes are an increasing problem, especially for Canada's smaller airports. You can talk to the airport people in Sault Ste. Marie and Gander about property tax issues for airports. In the United States, when airports issue bonds, those bond owners actually do not pay taxes on the interest. It is municipal bond financing, and that produces a significant benefit of a couple of dollars per passenger vis-à-vis Canadian airports. Many of the U.S. airports can levy property taxes to generate money from the community to go into the airport, whereas in Canada we do the opposite.
If we look at all the differences between Canada and the United States, for Toronto, the difference came out to $26 per one-way passenger. That is the impact. The average domestic fare in Canada is about $150. That would give you an impact of somewhere between 10 per cent and 15 per cent if we could basically put Canada on the same footing as the United States airports and air traffic control system. In Vancouver, that impact is $21 per passenger, and in Montreal it is $22 per passenger.
On a round-trip basis for a family of four, that is a significant amount of money. For business travellers, to be honest, it hurts, but it will probably not cause them to drive across the border to Bellingham, Washington, or to Plattsburgh, New York. However, when it comes to leisure travel, for example, that impact adds up, and that is why we see increasing numbers of people driving across the border there.
The second question you asked is whether there are any guarantees that, if we do this, it will be reflected in the ticket price. That is actually a difficult and complicated question to answer. You have to talk to the airports in particular about that, but also the airlines, because there are taxes on the airlines as well, such as carbon taxes.
I can say that the most likely outcome is that most airport operators would probably look at this as having a choice of passing it all on as savings or taking part of it to start paying down their debt. By paying down the debt, they actually create savings in the future because they will be saving interest costs and will not have to borrow so much for the next round. My guess is that the airports, if given the flexibility to do what they think is optimal for their market, will probably choose to use some of the money to pay down debt and some of the money to reduce their fees and charges on passengers and airlines.
As to whether you could require that as kind of a quid pro quo, such as, "We will make the policy changes, but, in exchange, it all has to go to passenger or fee reductions," you could bargain with them on that. Offer them privatization in exchange for full pass, and I bet you will get a bite on that hook.
The Chair: Can you tell us the status of the San Francisco airport? Is it state-owned, city-owned or private?
Mr. Tretheway: I believe San Francisco is city-owned. In the United States, probably the most common form is city- owned airports. Some, like Miami and Milwaukee, Wisconsin, are owned by counties, for complicated jurisdictional reasons.
Then you have some that are authorities, which is one of the reasons Canada went with the authority Crown model. For example, there is an airport in Fort Worth and in Dallas; it was not going to be owned by Dallas, because the airport is between the two cities, serving both. They created an airport authority, and the two cities have members on the board of directors. The Port Authority of New York and New Jersey would be the same way.
Senator Meredith: Thank you, Mr. Tretheway, for your comments thus far. We are intrigued by the wealth of information you bring to us this evening.
To pick up on Senator Housakos' question with respect to tariffs, others have appeared before us and talked about the reduction or the elimination of these tariffs and fees, which would lead to tier 1 hubs, whether it be Vancouver, Toronto or Montreal.
Can you elaborate a little more on that? What would be the perfect model if you were to recommend this to the government?
Mr. Tretheway: What do you mean by tariffs? Do you mean the airport rents and property taxes?
Senator Meredith: Yes, the rents and the fees.
Mr. Tretheway: First, I would like to make a comment on one fee the government charges, which is the Air Travellers Security Charge. In Canada, our view is that the beneficiaries of increased aviation security are aviation travellers, so they have to pay 100 per cent of the cost of security. Therefore, we have the Air Travellers Security Charge, which was overcharged at first because the government overestimated the cost. Then they reduced it, but it is still substantial.
On 9/11, in the tragic events of that day, far more people died in office buildings than died on aircraft. Terrorism is a national threat. It is not a benefit to air travellers. It is a threat against us, our families and our society.
Other types of security are paid for out of the general treasury because they benefit everyone. I do not understand why Canada has an approach where the security system is funded exclusively on the backs of air travellers, even though everyone benefits. Canada is the only country in the world I am aware of that has this approach.
I think it is appropriate for air travellers to make a contribution to that, but I do not think it is right that we have a policy that views this as a benefit. I actually hear people in government saying that this is a benefit to air travellers so they pay all of it. I would highly recommend a new approach on the Air Travellers Security Charge — maybe a 50-50 sharing would be appropriate.
If we were to eliminate, for example, airport rents in order to be completely competitive with the United States, it would go a long way, but not all the way, to eliminating the cross-border air travel. My estimate is that the diversion of air travel — Canadians driving into the U.S. or Americans flying to a U.S.-border airport and then driving across the borders, or people from Europe flying into the United States and then driving across the border — probably means we are losing somewhere between 3 million and 4 million passengers per year.
For example, at the Vancouver airport, we know that before the airport policy changed, we were losing 1.5 million passengers. Now that the airport has doubled in size, that would be equivalent to 3 million. That is probably down to about 1.25 million that the Vancouver airport is losing to Seattle and, to some extent, Bellingham.
If we were to eliminate airport rents, get the property taxes right on the airport and do some other things around these fees and charges that are outlined in the study InterVISTAS did, which I will provide to you, I think we would probably recover half of that — maybe 40 per cent or 45 per cent. It will not be all of it, for sure, because one of the problems air transport has is the other type of border crossing fees.
This is not a security fee. Security is for screening, intelligence and things of that nature, whereas when you cross the border, you have to go through Canada and U.S. customs, so there are fees and charges. The United States, in particular, has taxes on international travellers; domestic travellers do not pay.
People in Vancouver flying to the United States — or better yet, Americans who want to come to Vancouver, Winnipeg, Moncton or Fredericton — have a choice of flying domestically to a border airport or flying all the way. They will still have to pay the international tax out of the Canadian airport; but if they drive across the border, neither Canada nor the United States assesses any customs fees on rail, bus or car travellers. It is only aviation that has to pay that. Some of us in aviation view that as a little bit unbalanced.
Senator Meredith: You mentioned open skies. In emerging markets in Asia, what is your recommendation with respect to the role we should be playing in getting more of these policies to attract more airlines to come here and, going back to tourism, bring more tourists into Canada?
Mr. Tretheway: It is my strong opinion that if we had true open skies agreements with the Philippines, Taiwan and Singapore, we would see increased air travel. Probably saying overnight would be too strong, but in the case of Taiwan, it would probably be within a week. If you gave a normal airline planning period of about a year or a year and a half for airlines to plan and reschedule their aircraft to make their schedules all fit and so on, I think we would see a dramatic increase out of those economies right away. We would out of China, as well. China is a more difficult country to get an open skies treaty with. I do not know of any country that has an open skies treaty with China at the moment. However, the other countries most definitely would get a strong increase.
Some of you may have heard about Singapore Airlines. Singapore Airlines used to fly into both Vancouver and Toronto. That is when Air Canada used to fly there. Air Canada decided it did not want to fly there anymore, so it pressured the government to cancel the treaty.
Singapore still wanted to fly, so I do not understand this. It is Air Canada's right, in its commercial interest, to choose not to fly anywhere. I would discourage the government ever to pressure Air Canada to fly anywhere it did not want to; it is a commercial decision. However, if Air Canada makes the commercial decision not to do that, why does the foreign airline now have to leave and tourism suffer right away?
When we cancelled the treaty with Singapore, what was left in place is that Singaporeans were flying via London into Canada, because you could not fly non-stop; you had to come one way or another. They were only allowed to fly three times a week to Vancouver.
That does not work. Today airlines need to have daily service. You cannot attract the business travellers if you do not have a daily service. The meeting got done on Tuesday, a couple of days early, but I have to hang around until Thursday until the next flight. If it is only three times a week, you have to wait one or two days or maybe you will be lucky on the day you want to go. You cannot sell business tickets that way. It has to be daily service. Singapore Airlines cancelled that service.
They tried to keep it in place. Here is the interesting thing. They were operating with 90 per cent load factors. Ninety per cent of the seats on average were full, which means most of the flights were going out completely full. For some flights, like December 25, you cannot get people into those seats except airline employees flying on passes.
When some financial pressures came, Singapore Airlines had to decide what to do. It had to cut someplace. We cannot make Canada work, so cut it. Some people said it cut the service because of the economic conditions at the time. It cut the service because it could not make three-times-a-week service work.
In my view, Singapore Airlines is highly likely to return to this market if we give it the right to fly daily. I suspect it would eventually increase that to double daily, and that would be a big tourism benefit to Canada. Singapore Airlines will bring people in from places like India. Canada has a huge population of people who have family and other connections in India. They would come in here.
That would not be competition for Air Canada, Air Transat or WestJet; that would be competition for other foreign carriers. Cathay Pacific and Emirates bring some of that traffic in through their three-times-a-week service into Toronto. This is good. You get the foreign carriers to compete to the benefit of Canadian tourism and Canadian exporters because those airlines all focus on cargo, much more than do North American carriers.
Senator Meredith: That leads to your critique of airline policy and protectionism. Will you elaborate on that? What recommendations have you made to the industry, and what role could the government play in that?
Mr. Tretheway: I believe that the record on open skies with the United States has been tremendously successful, and we have open skies or near open skies agreements with some other countries. We have good service to the United Kingdom, for example. Open skies works fairly well. It has worked very well for the United States and is working very well for Europe, New Zealand and Australia.
When Canada's Blue Sky Policy was announced, we all thought it would be great. First, we liked the colour better, and it sounded a lot like open skies. However, there is a clause that says the government could decide not to engage in real open skies treaties, and most of the treaties we have negotiated since then are restrictive.
One of my favourite examples is Panama. Copa Airlines in Panama is the third most profitable airline in the world, and it has indicated that it would like to fly to Canada. We have a treaty with it that allows it unlimited rights to fly to Canada from any airport except Panama City. Name another airport in Panama.
I believe that Canada should support open skies. Protectionism has not prevented carriers from going into bankruptcy. WestJet has not gone into bankruptcy, but WestJet is not protected in any market. It flies in Canada in full competition. It flies across the border to the United States with full open skies. It does fine without protectionism. In spite of protectionism, many of our other airlines either no longer exist or have gone through bankruptcy at least once and quasi-bankruptcy at least once.
I do not see that protectionism will protect them from bankruptcy. I see huge benefits, and I see that when we have had open skies treaties our airlines did a very good job. Air Canada is the best airline across the border. It has the most services to the most cities and provides very good quality service. Air Canada is a very good carrier into Great Britain. I think it is the largest North American airline flying into London. It carries people from the United States through Canadian airports and into London. It works.
Senator MacDonald: Thank you for coming, Mr. Tretheway. This is illuminating, and we are all enjoying it.
I want you to elaborate on something you said toward the end of your initial statement. You spoke about the absence of Canadian cargo carriers and said that we also need better foreign trade policy.
Mr. Tretheway: Foreign trade zone, yes.
Senator MacDonald: You said "foreign trade policy." Could you elaborate on exactly what you mean by that?
Mr. Tretheway: First, for clarification, I was saying that Canada does have very good cargo carriers. We have Morningstar Air Express and Purolator, et cetera. We do not have intercontinental cargo carriers that fly long-range aircraft out of Canada with cargo in freighters. That is what is missing.
I am sorry if I said foreign trade policy; I meant foreign trade zone policy. A foreign trade zone is a place where goods can land — a Canadian airport or port, and potentially a highway crossing as well — without entering the Canadian economy. It is somewhat like being in bond, although there are some subtleties around this. The important thing is that while they are in the foreign trade zone they do not have to pay duty and, most important, they do not have to pay GST.
Senator MacDonald: Do you mean a free trade zone?
Mr. Tretheway: Yes. We call them foreign trade zones because to some people free trade zones have implications around non-application of environmental and child labour laws and so on. We use the term "foreign trade zone," which is just about customs and so on.
In Canada, we have a very complicated policy that is difficult for people to work with. The key thing that is missing for us is the ability to add value to products that come into Canada before they are re-exported. We can currently add up to 10 per cent value to goods that come into Canada before re-exporting, but that is not enough.
A good example of this is sports apparel. The fastest growing segment of the apparel industry is sports apparel. Various countries manufacture basic jerseys and so forth. In order to serve the NAFTA economy, they want to bring the partially completed garments into a foreign trade zone where they will remain until an order is placed. A given club may want a particular style of jacket with its logo sewn onto it, and perhaps stripes for the officers of the organization. We cannot do that in Canada because our policy does not allow more than 10 per cent value added. That is ironic to me, because I thought the point of this was to generate jobs in Canada.
Those goods are sent from Asia into U.S. foreign trade zones, where they get those rights and privileges. It is not that we are trying to protect Canadian manufacturers. These are goods that are already going to the United States. We just want them to come through Canada.
A policy was put in place while Mr. Martin was the finance minister, which was a good first step. However, there were two 10 per cent limits. Only 10 per cent can enter Canada eventually, at which time they would pay duty and HST, and only 10 per cent value can be added. Those proportions must be increased. If we could get them into the 25 per cent or 50 per cent range, foreign trade zones in places like Winnipeg and Halifax would really take off.
Senator MacDonald: I never want to assume what someone's personal philosophy is, but you seem to me to be a free-market kind of guy. I know I am. You talked about how the private sector model worked in other countries. I have no doubt that it would work well in cities like Vancouver and Toronto, but what would be the implications for smaller, privately owned airports in the country?
Mr. Tretheway: We can look at another economy, like Australia. There are many similarities between Australia and Canada. We are a bit bigger, both in geography and in population, but the difference is not that great. We have similar legal systems, although Quebec has a different one.
Australia has privatized all its airports. The big airports have been very successful. By the way, the federal government of Australia got $4.5 billion for Sydney Airport, which is a nice deficit reduction strategy. Australia privatized the small airports as well. The federal government did not get much money for them, but it gave the smaller airports access to equity capital. As a result, they do not have airport improvement fees. They have good capital programs. The record is generally quite good in Australia. The one area that has not worked so well is automobile parking at Sydney Airport, but that is another story. It is not regulated.
Senator MacDonald: You mentioned the quality of Air Canada's service and the number of times it flies into Britain. I have flown there a few times lately. I want to bring this back to the concerns about the U.A.E when this stuff first popped up. The senators around this table do a lot of flying. Like any other Canadian, I get frustrated with Air Canada at times, but I am happy that we have one world-class international carrier in this country. It is important that we have one.
Although we may both like the idea of open skies in principle, what would open skies do to the status of our international air carrier?
Mr. Tretheway: Again, I will look at what happened with open skies in the United States. Everyone was afraid that it would put Air Canada out of business and that the U.S. airlines would come to dominate the market, but that was not the case. Air Canada developed an astute and effective strategy to penetrate the U.S. market in terms of the breadth of service, the type of aircraft they used — which, by the way, were largely Canadian-built aircraft, the regional jets and the turboprop aircraft from Bombardier. They had a really good quality product; they knew how to market it well; and they entered into alliance agreements. There are some elements of alliance agreements that I think are important.
In the industry, we talk about Canadian point-of-sale versus U.S. point-of-sale. Canadians will likely often choose a Canadian carrier when they fly to the United States, but U.S. people may choose a U.S. carrier. One reason is, "I want to build up my frequent flyer points." Air Canada engaged in frequent flyer point sharing schemes with Continental and United, which on that basis really helped them compete quite well.
I do not think there are any guarantees that if we really opened up our market, we would have one outcome or the other. What I can say is that Air Canada has actually done quite well. I think WestJet has done extremely well, which is also another really good quality service we have here in Canada.
In the end, it all depends on management, the vision they have, how they implement it and their access to equity capital in order to deliver it. I think the record for Canadian air carriers, passenger and cargo, has been very good. There are no guarantees, of course.
When I look across the border at the U.S. carriers, I think all of them except American Airlines, it seems, went into bankruptcy, and they had very few aircraft on order. Air Canada, to its credit, has aircraft on order. They have 787s that will replace older aircraft they have, which is good, and also for expansion. I do not see that with the U.S. air carriers. The U.S. air carriers are not in a position to try to take over the Canadian market; they do not have the aircraft to do so.
Senator Zimmer: By the way, you are very refreshing, especially with your answer to Senator Meredith. I liked your answer about the fees. We ask it all the time: Why is the passenger always nailed, every time? Hotels and banks do it too; they touch your money and they nail you.
I liked your answer when you said it is not just the airline passenger who is paying the fee or should pay it; it is the rest of the community. I like your 50-50 answer.
You raised the name Sir Richard Branson and Virgin Airlines. I like the phrase you used; he is one smart bugger. He is very successful. In your view, what is he doing right that others are doing wrong?
Mr. Tretheway: That is a broad question because he has so many companies. I do not want to put myself forward as an expert on business strategy generally, but a couple of his many airlines have been clients of mine over the years, Virgin Atlantic and Virgin Blue. I have observed some things. One of the key things you can say about Mr. Branson — and his whole family of companies — is that he really understands marketing. He really understands branding and how to brand properly.
This may sound silly, but in Australia, he did not call his airline Virgin Australia but Virgin Blue. This still escapes me, but Australians think it is extremely funny. Apparently, a redhead in Australia is called a bluey. Virgin has red aircraft, so they called it Virgin Blue. It is like English humour. They laugh, but I do not get it. He understood the Australian marketplace and what it would take to be successful. He understood price points and the power of the brand and marketing. He knows how to evolve his airlines. He starts out here, but he knows you cannot stay with that strategy forever. You evolve; the market evolves and; people start to expect different things. I think that is important.
He also generally seeks markets where he has more flexibility and access to equity capital. Australia was a good move for him because he could invest there with British money. Indeed, it was not all British money that he brought into Australia — he used some Australian money — but he used money from other places as well. He had a good equity strategy by focusing on markets where he could actually come in with equity capital from those countries that want to invest in airlines.
The reality is not every country's financial communities want to invest in airlines. In North America, airlines are not investment grade, so our community does not want to invest in them. However, in other economies, such as the United Kingdom, Singapore, Ireland, Greece of all places — I guess there is a shipping connection there — they are all willing to invest in airlines. Why restrict your market to equity investors who do not want to invest in non-investment grade? Get people who understand the business.
Mr. Branson was also successful in attracting the right people to his organization. With a number of the executives that he hired, he went out and got some of the best people. Canadian airlines do that as well. Both WestJet and Air Canada have very talented people working for them, but Mr. Branson has an edge. I do not know whether that is a sufficiently evasive answer.
Senator Fox: I want to go back to the foreign trade zones or free trade zones, whatever the proper phrase is. It seems to me that while the concept exists on paper, anyone in this country who goes to the Canada Revenue Agency is told everything is in place so you can actually set up a free trade zone, but I do not know anyone who has been successful in doing so. Montreal Mirabel at one point wanted to do a free trade zone, and everyone said it was all there, but it did not seem to come together. Then you say there is a limit of 10 per cent in added value.
It seems the policy-makers in this country do not really want foreign trade zones. If they really wanted them, we would have a higher added-value possibility before re-export without hitting the taxes. There does not seem to be a political will to do these zones, yet they seem to be attractive.
Would there be a problem within the NAFTA to having a free trade zone with exporting to the U.S.? Would they see that as some kind of undue advantage?
Mr. Tretheway: NAFTA will not have any problem with this. The U.S. has foreign trade zones, and Mexico has them as well, so it is part of the system.
There are some subtle issues. You have the Auto Pact: Is there Canadian content in the car or not? There are some subtleties there. You are part of the policy-making process here in Canada, so that is why I include you in the policy- maker problem, but I like to see you as the policy-making opportunity.
I understand partly why parts of government say we have a foreign trade zone policy. The legislation was put in place in I think the year 2000. It went a long way. In many ways, it is more advanced than the U.S. In the U.S., you actually have to put a fence around foreign trade zones. In Canada, we went with a modern 20 per cent concept, which is an auditable accounting system. It does not matter whether it is inside or outside the fence, as long as after the fact we can audit and make sure everything that came into your facility either went out or went into Canada and paid the duty and HST. Then you can allocate work to a job shop downtown, out to the suburbs or someplace in rural British Columbia or wherever. Canada is good that way.
The problem we have in Canada is twofold. First, there was a commitment at the time of the legislation that the government would develop marketing materials for our foreign trade zone system and simplify the application process. They did not do that. They were supposed to be doing this in the fall of 2001, and of course 9/11 happened, so the resources that what was then Revenue Canada was implementing in these policies had to go to other border and security issues. They never got back to this.
Second, it is really complicated. If you want a foreign trade zone licence, you have to get an export development zone permit, then you have to get a sufferance warehouse permit, and then you have to get an export of processing services licence on top of your bonded warehouse licence. It is like you have to apply for anywhere between three and seven different authorities, all on different applications. Some of these require posting of bonds. It is just a mess.
I used to try to market all of this on behalf of the Vancouver airport as well as other airports. The problem we came across all the time is that people were really excited and said they would like to do this. People were interested in a foreign trade zone in Sault Ste. Marie and in bringing containers across Canada and positioning them on top of the ice by the I-75 auto corridor; 70 per cent of the auto plants are within a 10-hour drive of Interstate 75, which terminates at Sault Ste. Marie, Ontario. However, when we start to explain how it will actually work, they say, "Thanks, but no thanks." This is very complicated.
I can go over to Seattle or Tacoma, and they will just expedite an application for me. I do not have to pay property taxes there and so on. It is too complicated. We need simplification, and we need to change those two 10 per cent restrictions.
Senator Fox: If we were to look at this in our report and make a recommendation, what should be the essence of that recommendation?
Mr. Tretheway: The essence is for Canada to have a simple, understandable and effective foreign trade zone policy to encourage the development of jobs in Canada for servicing the transportation of goods into the NAFTA economy and to create Canadian jobs by adding value to goods entering the NAFTA economy.
Senator Mercer: I want to go back to freight for a second. You talked about air traffic control and landing fees being the deterrent for international freight flights stopping in Prince George, for example. Could you refer us to a study, not necessarily one that you have done, but perhaps that someone else has done, a more in-depth study of this particular problem? This is the first time this problem has come up in this study, to my knowledge, and I would like to pursue it further, if we could have our researchers do an analysis of it.
Mr. Tretheway: I am only aware of internal documents within some of the airports. They are not formal studies. They are sort of briefing notes that they have for themselves.
My recommendation would be that you might consider inviting the airport manager at Prince George Airport. He actually used to be the marketing manager at the Hamilton airport. The Hamilton airport has also looked at this issue, as has the Gander airport. Those three airports are all current or former clients of mine.
It is not the airport landing fee; it is the air traffic control fee. There is an overflight fee. There is a treaty between the Canada and the U.S. that basically discounts the overflight fee. If you make a landing at a Canadian airport, you have to pay the full overflight fee, and then you have to pay what they call a terminal fee. The combination of those fees makes it cheaper to fly over Canada and truck it out of Canada down to the United States.
Senator Mercer: You would think that Gander would be the one that would want to change this most rapidly, because it has lost so much of its refuelling business.
Mr. Tretheway: Gander sees this as being in its strategic interest, but it is hard for an airport of that size, with that level of resources, to be able to fund a study like this.
The Chair: Thank you, Mr. Tretheway.
I would like to remind our audience that the committee is studying the emerging issues related to the Canadian airline industry. Appearing before the committee this evening was Michael Tretheway, President of InterVISTAS Consulting Inc.
Before closing, I would like to remind honourable senators that the next meeting is Tuesday morning, March 8, at 9:30, to hear from the Regional Community Airports Coalition of Canada. Thank you for your presence.
(The committee adjourned.)