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Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 2 - Evidence, October 19, 2011


OTTAWA, Wednesday, October 19, 2011

The Standing Senate Committee on Transport and Communications met this day at 6:50 p.m. to study emerging issues related to the Canadian airline industry.

Senator Stephen Greene (Deputy Chair) in the chair.

[English]

The Deputy Chair: I call this meeting of the Standing Senate Committee on Transport and Communications to order. My name is Steve Greene and I am the deputy chair of this committee, replacing Senator Dawson, who is normally in the chair.

The committee is continuing its report on the airline industry. Appearing before us this evening is Tracy Medve, President of Canadian North airline.

Welcome, Ms. Medve, and thank you for taking the time to be with us this evening. We will begin with your presentation and then we will move to questions from the members of the committee.

Tracy Medve, President, Canadian North: Thank you very much. I appreciate the opportunity to address you this evening. I do have some prepared comments, which will take maybe about 15 minutes to go through. I tend to speak a little quickly so I will try, for the sake of the translators, to slow down the pace. If I get going too fast, someone can rope me in.

I thought it would be important to start with a little bit of background about our airline. It is an interesting story and it puts some context around the comments that I want to make this evening.

Canadian North is a 100 per cent Aboriginal-owned company. We are owned by a company called NorTerra. Our parent company is owned 50 per cent by the Inuvialuit Development Corporation, which is the Inuvialuit of the Western Arctic, and 50 per cent by a company called Nunasi Corporation, which is owned by the Inuit of Nunavut.

While the airline under various prior southern owners has served the North for more than 80 years, under our current ownership structure our mandate is very northern centric. We have a mandate to provide safe, reliable air transportation services across the North. We do have a mandate to make a profit, and we also have a mandate to provide jobs and career opportunities for the beneficiaries of the two land claim owners of our airline.

It is important to understand that the airline is funded by bank debt and equity just like any other privately owned company. Land claims money did not go into the making of Canadian North or any of the other four subsidiaries owned by NorTerra. It is a northern investment with northern owners and northern customers.

Canadian North provides scheduled services to 13 communities across the Northwest Territories and Nunavut. We operate our scheduled service from two basic southern gateways of Edmonton and Ottawa and operate from two key northern hubs, Yellowknife and Iqaluit, providing essential transportation for economic activity, medical patient transport and the carriage of perishable foods, among other things.

The company also provides extensive workforce transportation charters across Southern Canada to service the oil sands in Alberta, three diamond mines in the Northwest Territories, and gold and iron ore mines in Nunavut. We have invested over $30 million in recent years to develop our infrastructure to support new operations in the Baffin region of Nunavut alone. We have also commenced a program of bringing into service newer-generation 737-300 aircraft to service primarily our charter traffic.

The company directly employs 650 people, of which 14 per cent are either Inuit or Inuvialuit. We also contract extensively in the North with contractors whose employee contingent is in excess of 80 per cent Inuit or Inuvialuit. In 2008, which is the last time we actually did the economic study, our annual production was $214 million and our stimulus to GDP was estimated at $160 million.

Each year we carry hundreds of thousands of both scheduled and charter passengers and millions of kilos of cargo, including perishable foods. We operate with a fleet of nine Boeing 737-200s, two and soon to be three 737-300s and four Canadian-made de Havilland Dash 8s. We cover the largest geographic footprint of any domestic carrier in Canada with flights operating as far North as Alert and across Southern Canada from Vancouver to Newfoundland.

The focus of this presentation will be narrowed to include comments relative to northern infrastructure issues and a few observations on the current competitive landscape in the North and how our infrastructure shortcomings are negatively impacting potentially our ability to continue to provide vital air service beyond our northern hubs.

It is indisputable that air transportation and economic development are closely connected. In the North this is particularly so given the lack of alternative seasonal transportation modes, barges, ships and ice roads, to most or all communities. It is also true, however, that the economic and operational challenges for northern carriers to provide this vital link are considerably greater than for carriers in the South. While we face a myriad of issues every day just because of the complex nature of any airline business, a key issue that requires our collective attention is the need for appropriate air transportation infrastructure in the North.

There are a variety of shortcomings in the northern air transportation environment that currently impact our operations. Inadequate ramp space, which restricts operations and creates an increased hazard on the ground for our passengers and our aircraft; restricted air terminal building space, which often causes flight delays and terrible congestion problems; insufficient fuel storage capability, particularly in the Eastern Arctic communities, which regularly results in flight cancellations, flight diversions and expensive fuel tankering; insufficient number of automated weather observation stations, or what you may have heard called AWOS, across the Arctic. Weather data in the North is very sparse and the area that we cover is huge. Many locations in the North rely on community airport radio stations, or CARS, to provide weather reporting service. Most of these operate for only limited hours and often have staffing problems that further reduces their operational hours. This has resulted in numerous cancelled flights or diversions, both of which add to the cost of the transportation product that we are trying to provide in the North. Weather reporting in the North would obviously be greatly enhanced by the installation of more AWOS with video capability, and it would allow us to have 24-7 coverage, without related staffing issues that we face now.

Another issue is runways that are too short to accommodate larger and more cost-effective aircraft, thereby exacerbating the cost-of-living issues that exist in the North, and finally gravel runways. Currently there are only six paved runways in the Northwest Territories and Nunavut combined, representing a mere 10 per cent of total runways in those two territories.

Out of all the issues we face, my presentation today will focus on the need to address the matter of gravel runways. You might ask why that is so important. The problem is the lack of modern jet aircraft certified to operate onto gravel runways, which means basically that we are forced to continue using older aircraft in our fleet to provide scheduled and economically important charter services to the North. These aircraft have high fuel consumption rates relative to more modern fleet types, and it is becoming increasingly more challenging to operate and maintain these aircraft in an economical fashion. The aircraft are safe but the cost of keeping them safe continues to escalate. The costs are, by necessity, passed on to our customers. We are in a bit of a revolving door here.

The 737-200 is the most modern jet aircraft capable of operating onto gravel runways. The oldest of these aircraft in our fleet was built in 1976, the newest in 1987. There is no new-generation jet aircraft certified to operate onto an unprepared surface. None will be built, and if they were to be built none of the northern carriers could afford to acquire them. Boeing, the manufacturer of the 737-200, charges us currently between $500,000 and $600,000 to put a serial number of a particular aircraft on the supplemental type certificate, which is the document that certificates a 737- 200 to operate onto gravel. The gravel kit itself, the thing that helps us to be able to operate physically on to the runway, is another half a million dollars. That cost for certification is for our gravel kit that was certified more than 30 years ago, which is to be installed on an aircraft which may fetch less than $2 million in the open market today. Imagine the amortization costs for a new-generation certification that would have such a small demand that only northern carriers basically in Canada and some of the circumpolar regions would require such an aircraft. The costs would be astronomical.

Non-gravel runway surfaces are obviously expensive to implement and maintain, so this is the other side of the issue. However, it is in our collective best interests to find a cost-effective and cost-shared solution to this issue. As I have said, the aerospace manufacturers are unlikely to accept the challenge of certifying a modern jet aircraft for gravel operations because worldwide demand for this capability is very low and the cost to the interested carriers would be prohibitively high. Consequently, the preferred solution would be to find a surface covering that would meet the aircraft manufacturers' standards for paved runway operations as well as provide a low-cost runway maintenance solution. Gravel runways are not inexpensive to put in, but they do have a benefit in terms of maintenance because once they have undulations in them, and so on, you just put a grader on them and flatten them out. You cannot do that with a paved runway. As long as a single gravel runway remains in the North, the need for older jet aircraft will continue. It has to be an all-or-none solution that we find to this issue.

What does this all mean for northerners if we do not find a solution? It means they are it destined to fly on older generation aircraft, which are becoming increasingly more expensive to maintain and burn at least 20 per cent more fuel than some newer-generation aircraft. All this adds up to higher costs for northern carriers, which must be passed on to their customers.

This higher-cost reality has the added downside that we are not able to be as cost competitive as southern carriers, who are not constrained by their environment from utilizing fuel efficient and modern aircraft. Canadian North has demonstrated its willingness to upgrade its fleet with the introduction of a newer-generation 737-300, but the opportunity for us to move completely away from the older generation 200 does not exist at this time. This lack of competitiveness is further exacerbated by the fact that much of our fuel in the North is acquired in the North, making it more expensive than the average fuel cost for our southern competitors.

At the outset, I said I would make some comments about our competitive landscape in the North and why gravel runways are a key to jeopardizing efficient and affordable air transportation for the North beyond our northern hubs. How is this a connection, you might ask? The relationship is this: The traffic at our northern hubs represents about 0.004 per cent of the total enplanements amongst major airports in the country based on 2008 data, but I would suggest that it is no different today. We have higher costs of operation due to operating environment constraints, as discussed above. We provide essential service to many communities beyond our northern hubs on small, long, thin routes. We move medical patients, perishable foods, workers and families, to, from and within the North. Many of the communities we serve from our northern hubs have populations of fewer than 1,000 people each. All the freight we carry into the North is more or less one-way freight; nothing to speak of comes South again in terms of cargo. The weather is harsh and we de-ice our aircraft almost 12 months out of the year, another increase in cost over what the southern carriers have to endure. We do this because our owners live, work and raise their families in the North and air service is vital to them and their futures.

We have made a significant and important commitment to the North, which is to serve the North, which is a very small market. Our opportunities for growth there are limited. As a result, we are extremely sensitive to any increase in the level of competition. We recognize the importance of trying to provide northerners with cost-effective transportation, but our ability to do this is hampered by many of the things I have discussed. All of this is challenged when we face competition from large southern carriers who enjoy the benefits of large markets served with modern fuel-efficient aircraft, operated in warmer climates, filled with less expensive fuel, who select to serve only the easy part of our market and leave us the harder job of providing a full scheduled network across all of the North.

Competition is a delicate balance between ensuring consumers receive the best price possible and creating an environment where eventually many of the competitors are unable to stay in business with the inevitable result that prices rise to a more realistic level as capacity diminishes and the quality and level of service declines. We want a sustainable air transportation marketplace for the entire North. We feel there is a good opportunity for the development of federal and territorial strategies and policies that would recognize the important role that northern air carriers play and serve to help sustain ongoing service across the entire Arctic region. These strategies and policies should encourage and support the establishment of air transportation hubs that have already been set up by northern carriers, such as Canadian North.

We believe that a northern aviation strategy should do several things. It should recognize the value of northern travel imports and exports; ensure that northern marketing initiatives feature northern air carriers as the gateway carriers to the North; subject to competitive pricing, of course, ensure that government travel purchases are used to support northern carriers; encourage and facilitate alliances between mainline carriers and northern carriers at our southern gateways as opposed to at our northern hubs; and make the modernization of northern aviation infrastructure a priority.

These strategies and policies would benefit all northerners. It is certainly quite possible to have the best of all worlds for northerners, we believe: modern aircraft, northern-based hubs, competitive fares and network access to the rest of the world.

That concludes my formal comments, and I am happy to answer whatever questions you might have.

The Deputy Chair: That is very good. Thank you very much. I would like to begin by introducing our committee. To my immediate left is Senator Mercer from Nova Scotia, Senator MacDonald from Nova Scotia, Senator Martin from British Columbia, Senator Zimmer from Manitoba, Senator Verner from Quebec, Senator Boisvenu from Quebec, and Senator Cochrane from Newfoundland.

Ms. Medve: Newfoundland is a lot like the North. You know what I am talking about.

Senator Mercer: First, I appreciate your presentation. Thank you for coming here. To put it in context, I have been to the North. I have been to Whitehorse, Yellowknife, Rankin and Iqaluit. I was brave enough, on the most recent visit, to visit all of them in February, which is a good opportunity to see them at their best.

Ms. Medve: You have seen the South/North, then.

Senator Mercer: A couple of questions out of your presentation intrigued me. You talked about your fuel costs being extraordinarily high. If I heard you correctly, you were purchasing your fuel in the North as opposed to purchasing your fuel in the South. You originate a fair number of flights in the South, and I know here in Ottawa is one place where your flights leave on a regular basis. Obviously, you have to refuel at some point. Do you not try to refuel in the South as opposed to the North?

Ms. Medve: Yes, we do, and I talked about fuel tankering. The issue there is, for example, the Ottawa-Iqaluit flight is three hours one way. Depending on the load that we are carrying, the payload between cargo and passengers, there is a minimum amount of fuel we are required to carry from a regulatory point of view. Aircraft all have a maximum takeoff weight. It is the weight of the aircraft, the weight of the passengers, cargo and their bags, the minimum fuel that we have to carry. If there is any room left over, between all of that and the minimum takeoff weight on the airplane, we can add the cheaper southern fuel, and we will take it so we can draw less fuel in the North. The problem is that we often have very rotten weather. Our landing alternates are very far apart. If it is bad weather, we then have to carry additional fuel from the South that may get burned, and so on.

We do try to do it. Three of our four Dash 8s are based in Iqaluit. They take all their fuel from Iqaluit North. We try to pick up fuel in Iqaluit, as it is the cheapest. We very often are dealing with no storage facilities in some of the Eastern Arctic communities, so it is difficult to do it in an economic way. Most of our fuel is taken from northern stations.

Senator Mercer: One of the challenges is there is no port in the North. There is talk by successive governments to put in a port in Iqaluit so ships can dock as opposed to sitting off shore and barging whatever product. It creates a problem, and I appreciate that.

Cargo becomes even more important when we talk about air travel to the North. Passengers are important, but you are not going north without filling every available spot with some cargo. What is the percentage of your business between cargo and passenger travel?

Ms. Medve: In our airline, if we just focus on the scheduled part of our business, because our charter business is primarily passenger charter, so on the scheduled side, of the 50 per cent that it is, it is about 30/20. It is a big and growing part of our business. As I said, the issue there is that we operate our 737s in what is called a Combi configuration, so the bulkhead can move and you can carry more or less volume of cargo on pallets. We try to change that to suit the passenger load and the cargo to maximize the payload on the airplane. The problem is we are very often carrying rocks and water south as a means of ballast to make the centre of gravity on the airplane appropriate because there is nothing coming south.

Senator Mercer: It is okay if some of those rocks are diamonds.

Ms. Medve: I am always happy when my guys say we have some mining material to carry back and it is in the form of rocks. It makes my day when someone will pay us to do that, but it does not happen all that often.

Senator Mercer: In the last few months, we have heard of a number of safety incidents in the North. It has been across the North and not isolated in any one location. In one incident, we were lucky that the military happened to be in the neighbourhood when it happened. It was wonderful. As someone who is an expert in operating in Northern Canada, does this point to a safety concern across the North, or it is just the luck of the draw that we have had this number of incidents in this short period of time?

Ms. Medve: To answer your question fully would invite me to speculate on the causes of those incidents.

Senator Mercer: I appreciate that.

Ms. Medve: They are all in the hands of the Transportation Safety Board at this moment. We do not know the causes, so I really cannot comment on that.

Senator Mercer: Are you concerned about safety as an ongoing concern in the operation of not just your airline but also the other airlines that operate north of 60?

Ms. Medve: I cannot comment on the other guys. What can I tell you is this: We operate to the same standards as all the southern carriers in terms of regulatory compliance. We have to. It is not a choice. It is something we take very seriously. We have a fully operational safety management system program in place.

Since we do a lot of flying for some of the oil sands companies, the diamond mines, gold mines and so on, we are audited. We have auditors in our building this week from one of our big oil customers, for example. We are audited eight or ten times a year by external auditors. We do take it very seriously, and I think that is all we can do.

This is inherent risk in operating aircraft. The safest way for them to be is on the ground, but obviously that does not work. There is a risk. I think it is a manageable risk. We have a very good safety record at this moment, but I do not think you can ever take that for granted. We are focusing on making sure that we do not become complacent and that we learn from whatever we might, once the investigation into the incidents that have happened recently in the North comes out. Hopefully there will be information they can provide to us that will be good guidance for us to improve our safety record even more.

[Translation]

Senator Boisvenu: Thank you for being here, Ms. Medve. You are very courageous. I know that, being from the North-West region of Quebec where air transportation is always a problem because of demography.

There is a human side to your work that intrigues me. What career path did you follow in order to become president of the company you are now managing?

[English]

Ms. Medve: It was kind of not a direct route to my current position. I trained as a lawyer and graduated in the early 1980s. I had articled in the Northwest Territories, and then I articled in the South. Then I woke up one day and I was a lawyer for the government in Regina. I thought, "Oh, my, this is not what I had in mind." It was very hard to find work, if you can recall, in the early 1980s. It was very difficult for anyone to find work, including lawyers. As the grasshoppers were jumping at me in Regina, I decided to call a family friend who ran a little airline in Saskatchewan where I grew up and went to school, and I begged a job. That was in 1985, and I went initially to work as his in-house counsel but very quickly got into other parts of the business. He was bought out by a company that you may be familiar with called Time Air that eventually became one of the airlines of what was then Canadian Regional Airlines and eventually formed Jazz and that whole story.

I then started an aviation management consulting company with a friend and business partner for about 15 years. We were hired by NorTerra to do the acquisition of Canadian North on their behalf and so provided consulting work for them over the years. Then the opportunity came up for this job, and I applied and took the job in 2007.

[Translation]

Senator Boisvenu: If I know anything about air transportation, it is because I have lived in the James Bay and Hudson Bay region. It is a region you are familiar with. For the last 30 years, the rates have skyrocketed while the quality of carriers was dropping. In the old days, we flew on board the D-C9s of the big airlines. Today, it is with regional aircraft.

In your work, did you see the same evolution, that is to say a definite increase of rates and a drop in quality in terms of aircraft serving the Canadian North-West?

[English]

Ms. Medve: I would answer you this way: I think we have all experienced huge cost increases. It is part of the reason why I am saying that gravel runways mean we are operating older-generation aircraft, which burn a lot of fuel. Our fuel cost went up 20 per cent this year, which is 20 per cent on airplanes that are 20 per cent less efficient in fuel burn than the not absolute new-generation jets but even the 737-300. That is just fuel costs. The cost of maintenance, the cost of air navigation services, the cost of food — everything has gone up. If you look at what happened to airfares over that time, they have consistently gone down. My point is that it makes it very difficult to provide good service across the North, but I think we have really done a pretty good job. We are competitive. Ourselves and First Air are the primary competitors in all markets in the North. Our Dash 8 product is a very good product. It is a relatively modern aircraft. We have hot ovens and serve hot meals to our customers on our jets. Tell me where you get that anywhere else in the world. We have done a great job.

The challenge for us is when some of the larger carriers, like Air Canada and WestJet, come into our northern hubs at Yellowknife and Iqaluit and do what I call "cherry-picking." Air Canada might fly to Yellowknife but not to Iqaluit because the market is too small. We have a small marketplace, increasing costs, a limited market base and downward pressure on fares. It makes it difficult for us to continue to provide a trans-Arctic service. We are a privately owned company. We are not subsidized in any way. It is out of the pockets of our shareholders that we do this. We have done a good job of maintaining the service levels under unrelenting pressure on the cost side. Unless we get the gravel runway fixed, I do not know what we will do.

[Translation]

Senator Boisvenu: I wanted to discuss with you the topic of gravel runways. It is a sort of dead end for you. Your aircraft keep getting older, and it is very expensive to acquire the newer aircraft that could land on these runways. It is the same situation in Northern Quebec, where we still have a number of gravel runways. Do you think that in the near future you will hit a wall? You must have an idea of what to expect?

[English]

Ms. Medve: There is a small glimmer of hope in my mind. Some companies are working on coming up with a kind of surface that we can put on the existing gravel runways that might meet the manufacturer's standards for paved runway operations. It will be expensive and costly to get the manufacturers on side; and I do not know who will bear that cost. I fear the carriers might have to do that. They are charging $500,000 to $600,000 to make a paper change, if you will, to certify the airplane. The cost has been amortized over 30 years so I can only imagine what it will cost in the end. I still think it is our best hope to moving beyond operating the airplanes we have now.

One alternative, perhaps not the best one, is that some of the more modern airplanes, the Dash 8400 for example, have an adaptable gravel kit. The cost of those airplanes is quite high. They do not travel as quickly as a jet. Any of you who have travelled in the North know the distances that we have to fly. They are not the best cost alternative, if you will. It is a compromise. The best thing we can collectively turn our minds to is to try to find a surface that will work.

The other issue I invite you to consider is that some of the runways we serve are connected with the diamond mines — BHP Billiton, Diavik and Snap Lake in the NWT and Baffin Iron Ore in Nunavut. They are all gravel strips at this time. Will those companies be motivated to work on this project if they think they have to fund them entirely on their own? Probably not. It might be in the best interests of economic development in the North if territorial governments and whoever else might contribute can turn their minds to working with industry to develop a solution on a cost- shared basis of some kind.

If the mines cannot make it economical to have their strips paved or install some form of pavement, then we will continue to operate older aircraft on the older strips. We have to use them in a combination of scheduled and charter work. Otherwise, we cannot get the utilization on the airplane high enough, which means the cost becomes too expensive because the fixed costs are amortized over fewer hours. We all need to hold hands and go through this together to come up with the best solution.

[Translation]

Senator Boisvenu: Would you say that air transportation in Northern Canada is an essential service, as opposed to the South, where it is not so much an essential service?

[English]

Ms. Medve: I invite you to try getting from Yellowknife to Cambridge Bay without an airplane.

Senator Boisvenu: On Ski-doo.

Ms. Medve: Airplanes are absolutely essential. People cannot have their babies in the North; they have to come south to have their babies. How do they get out of Pond Inlet or Igoolik or any of the communities that we serve unless it is by plane? It is essential. They have to fly to do the things that we take for granted, like going to the dentist. Although the populations are small, northerners fly more often than southerners do because they have to. You may feel sorry, in a way. We have had these incidents in the North and people still have to travel by airplane because they have no choice.

The Chair: I would have to say that any airline that serves hot meals deserves our support.

Senator Cochrane: You mentioned earlier that your mandate was to make a profit. Are you making a profit?

Ms. Medve: Yes, we make a profit, although not every year. We just came through a horrendous time in 2009 with the economic meltdown. We also went through a terrible time when we were aligned years ago with Canadian Airlines. Canadian North was an operating division of Canadian Airlines when it was acquired by NorTerra. When Canadian Airlines was merged with Air Canada, we lost our co-chair, which had quite significant implications for us. We have been through a couple of rough patches, but we have managed to struggle through with support from our parent company. We are still here.

I cannot understate the level of difficulty to maintain that state. To put the competition comments in context, four main carriers, First Air, Canadian North, Air Canada and WestJet, serve the Yellowknife market. There are 20,000 people in Yellowknife. At one point, given the huge overcapacity in that market, WestJet was selling tickets at $50 for a one-way flight between Yellowknife and Edmonton. We were left trying to match that price, but the cost of the flight is nowhere near $50. Yet, passengers expect a safe airplane; they expect the pilot to know where he is going; they expect the flight attendants to speak French and English; in the case of the northern carriers, they expect a hot meal; they expect their bags when they get there; and they expect to be on time. Then they get off our airplane and take a cab to downtown Edmonton for $50. Who knows what kind of maintenance record the car has; half the time the driver does not know where he is going; he might not speak English; and he might not handle your bags, but do not try to not tip him. When was the last time you tipped a flight attendant? The industry has done a good job of providing value for the money that people expect to pay. However, it is terribly challenging. I have a lot of grey hair and buy a lot of hair dye by the truckload.

Senator Cochrane: I understand that Canadian North has a code-sharing arrangement with a number of airlines. Tell us how this arrangement works.

Ms. Medve: There are two that we have currently. One is with Air Canada, and I will explain a little bit about that. We have tried for years to have a code-share arrangement with Air Canada from our southern gateways, Edmonton and Ottawa. The idea is they would be hubs for us in the south where Air Canada — it could work with WestJet the same way — would feed us at those hubs. We would take the passengers into the North and spread them across our network. That is how any code-share works in any part of the world where you share passengers. It avoids having to fly another airplane north, if you will. We were never successful at that.

Early last year, Air Canada decided they were going to start flying into Iqaluit. No one would help them with their ground handling. Finally they did contact us and said, "If we entered into this code-share and commercial agreement, would you handle us in Iqaluit?" We agreed.

We handled their passengers and did their ground handling for them for their one flight into Iqaluit. We entered into a code-share where their code could be put on our airplanes from various southern points, like Vancouver, Calgary, Winnipeg and other cities across the country. Air Canada flew into Iqaluit for a little over a year and at the end of July they withdrew service. That code-share will come to an end at the end of this year.

We do have another code-share with a company called Calm Air. It is a well-established carrier that operates out of Thompson, Manitoba. We fly into Rankin Inlet — which is in the central part of Nunavut — and Calm Air, operates across that Kivalliq Region already. The code-share arrangement is for us to provide connection services with our jet basically east-west because we do not fly into Winnipeg-Rankin. We would bring passengers into Rankin Inlet and under the code-share arrangement they would be able to get on a Calm Air flight and go to the communities in the Kivalliq Region. That is how those arrangements work.

Senator Cochrane: You say Air Canada pulled out of the arrangement you had at the beginning. Was it because of lack of passengers or lack of profit?

Ms. Medve: I cannot really tell you whether it was lack of profit. It was not lack of passengers. They had lots of bodies on their airplanes, but I think they were seeing a high percentage — I would say two thirds or more — flying on Aeroplan redemptions. They were not really paying to fly. They were just redeeming Aeroplan points, and so it was not profitable for them to continue. It is like a puppy comes in and poops on your carpet and runs outside. They came in, dropped the prices to where they are not compensatory given what we have to pay for fuel and labour, and then pulled out of the market because they could not make it work financially. That is the story on Air Canada.

Senator Cochrane: Air Canada reduced their fares as well?

Ms. Medve: It is a typical game. It is like WestJet coming in and selling tickets for $50. What happens in that circumstance is that there are too many seats in the market. The carriers trying to break into the market will come in and do a very low price. What happened was that Canadian North pulled out some of our frequency from that market. We could not afford to keep flying as many flights as we were and actually survive. The other northern carrier, First Air, also pulled 10 flights a week out of that market in 2010. It is all about balance. It is supply and demand. The supply was too high and the price was too low and it was not sustainable. The northern carriers were forced to reduce the number of flights into those communities in order for the number of seats to be reduced and for the price to come to a level that was more sustainable. That is what happened in Iqaluit. It goes on today in Yellowknife. Certain times of the year there are still too many seats in that market. There are four carriers there and that is how it works.

That is my point about the competitive aspect of it. I would argue they can afford to subsidize money-losing seats between the North and the South because they have huge networks in the South that we do not have the advantage of in our northern networks.

Senator Cochrane: Tell me about the airport rents. Do they have an impact your bottom line?

Ms. Medve: In our world, airport rents are not as big an issue as they would be in the South at the Toronto airport, for example. Our biggest issue is, for example, when Air Canada decides they are coming to Iqaluit — if you have been to the Iqaluit airport you know it is a madhouse most days — they come in the middle of the day. Now we need counter space. The counter space is about as long as this table right here. We have that many carriers. The airports are small. We have one position for security, so everyone was going through security at the same time. Our flights were late. It causes all kinds of problems. The ramp congestion issues are fierce. I would say in Iqaluit it is much better now. There have been some adjustments over the time. We have that same issue in Rankin Inlet. You cannot go in there at certain times of the day because there is just not enough ramp space.

There was a plan to make some changes to the Rankin Inlet ramp, and just the ramp area costs are $32 million, to give you an idea of the magnitude of cost issues we are talking about. In Cambridge Bay, there is a plan to pave the runway, which is only 5,000 feet of gravel at the moment, but not even talking about the runway, just to make some adjustments on an interim basis is $34 million. You can imagine what the cost will be. The carriers will end up having to pay for those infrastructure improvements. I recognize that. We do need to do something about it, because the ramp congestion issue causes hazards.

Senator Cochrane: If the carriers are going to have to overcome all those costs, where are they going to get all the money?

Ms. Medve: If you can get an answer to that, it would be appreciated.

Senator Cochrane: Will fares go up?

Ms. Medve: The cost gets passed on.

Senator Cochrane: It will be almost impossible to fly.

Ms. Medve: It could be. We need to find ways to do it as economically as possible. As our costs rise, we do try and pass some of that on to our customers. There are competitive forces that do not allow us to do that. It is always a bit of a tug-of-war, but there is a huge investment required in the North and we will not get around it. We have to find a way to make it work. There are no alternatives but to get on an airplane if you want to move.

Senator Zimmer: Thank you for your presentation. It was a nice blend of candour and humour. You touched on competition a moment ago. Who do you consider your major competitors? I knew a man about 30 years ago in Winnipeg named Bill Wehrle who used to own Perimeter Aviation. I think they combined with Calm Air or something. Who do you consider your major competition?

Ms. Medve: Our major competition in the North is First Air. Our major competition between Ottawa and Iqaluit — well, not so much now; First Air and Canadian North provide that leg — but it used to be Air Canada, until the end of July. Between Edmonton and Yellowknife, which is a prime route for us, it is WestJet and Air Canada.

Senator Zimmer: You are getting it from all sides?

Ms. Medve: Pretty much.

Senator Zimmer: You are really caught in the middle.

Ms. Medve: Yes.

Senator Zimmer: You talked about some of the challenges you face in the coming years, but what steps are you taking to address these challenges? You have talked about it a bit, but go beyond what you have talked about. What are your plans for future growth in your passenger, cargo, and charter operations?

You are providing a critical service in this country in the North, and you receive no funding, grants or support from the federal government; is that correct?

Ms. Medve: That is correct. Canadian North is owned by NorTerra, a privately owned company, and we are run like any other privately owned company, no subsidies or anything of that sort.

In terms of growth plans, that would be sharing information with you that is proprietary to us. Some people say to me, "Why do you not start flying into some of the southern destinations and get those big guys back?" Am I going to do that with my 737-200, at 20 per cent more fuel costs? I cannot do it cost-competitively. Also, my mandate is to focus on the North. That is where we want to provide our service.

I will tell you why NorTerra would even be interested. When Canadian Airlines served the North through its operating division, Canadian North, it was flying between Ottawa and Iqaluit. I think it was during the time when American Airlines had an investment in Canadian Airlines, and the airplane they were using to do that service was needed elsewhere in their southern network. They just discontinued service between Ottawa and Iqaluit, which left our competitor in the happy little world of being the only one providing service between Ottawa and Iqaluit. Of course you can imagine what might have happened to prices.

Our owners, who live in the North and who are our customers, said, "This is not very good, if we have our transportation infrastructure destiny in the hands of southerners who do not really understand that if I am not flying here, I cannot go." They wanted to be in control of that.

That is really our mandate, to focus on that. However, the growth opportunities are pretty limited. Where else are you going to go? It is not like the South, where you can drop your prices and then start flying four more times a day to try to increase your revenues. Inuvik has 3,000 people. I would have to go there four or five times a day to try to stimulate demand. It does not work like that in the North. It is too small and it just does not work the same way.

It is a challenge for us to talk about any kind of major growth in that market. We really need to concentrate on being able to provide our service in a cost-effective manner. We are challenged in doing that now, primarily because of the type of airplanes we have to fly.

Senator Zimmer: This is more of a comment than a question, but could you provide us with what you think we could recommend in our report to help you in achieving your objectives for the future?

Ms. Medve: I would say that if I closed out my career in this airline having achieved nothing more than finding a way for us to be able to move beyond those older-type jets by having the runway issue solved in some way, that would be a good achievement and that would be a good thing for the people of the North. It would move them off having to necessarily rely on older-generation aircraft. The people who fly more per capita than anyone in the country are constrained in terms of what they have to fly on as a function of that. I think this would be a big step forward.

The weather observation station and some of that other stuff is not that difficult to fix. We just need to get on with it. We need to have some rationality about the cost and how that will be covered. It is about allocation of scarce resources; I get that. Everyone is asking you for something. We are just one person in the line.

What is the value of air transportation to the North and to the economic development of the North? I would argue that it is out of proportion to some other areas. Northern development, with the resources that are there, is important for the whole country. Although the population is less than 100,000 people and the costs are greater than in the South, we need to perhaps allocate a greater percentage of the resources to get it right and to set that infrastructure in place for the future.

Senator Zimmer: I must try one of your aircraft soon, if it is just for the hot meal.

Ms. Medve: I hope you will.

Senator Martin: I first want to thank you for your presentation. I agree with my colleague's description of the word "courageous." I find that what you are describing, the challenges you are facing and what your company is doing quite courageous. Who better to serve the people of the North than a company that is owned by people of the North and who best know the community? I empathize with you and want to cheer for you in that sense.

My colleagues have asked a lot of the questions that I was going to ask. I have one question that builds on what Senator Zimmer asked with regard to future growth and development.

You talk about northern development, and I am sure there are many stakeholders. There is the territorial government, with the provinces, the municipalities, and some of the other key stakeholders. You are a private company. In terms of the sharing of the vision for the North, have there been meetings where this conversation has taken place to talk about northern development and transportation, the aviation industry being one of the key pillars of that development?

Ms. Medve: There have been, and there are various forums for this. You have CanNor, which is there to try to promote the North. You have all the INAC policies and programs. There is a lot of focus on the North and there is a lot of effort being made there.

Sometimes it seems like there are too many bits and pieces for any of it to make sense or for anything to move forward in a coherent fashion. You cannot talk about the North without talking about air transportation, because it is such a vital part. However, as soon as you talk about air transportation, you are going to have people talking about roads, bridges, ports, railways and whatever other modes of transport there are.

We are only one voice. I do not think it is for lack of an understanding of the importance. I think it is really more a struggle around how we prioritize these things. I think it is important that air transportation has the right infrastructure in the North. Someone else might come along behind me and say that if we do not start paying attention to having roads, ports and railways, we will always be dependent on air transportation, and that is not an invalid argument either.

I do not think it is because of a lack of dialogue. The problem is just enormous. The geographic area is enormous, the population is small, and the dollar cost is high. How do we do all this? There is no simple solution and no one right answer. I am just here to highlight one area. If we have to focus on one thing, that might be a good target for us all to shoot at.

Senator Martin: Tonight, listening to your presentation, it makes me appreciate this study and the importance of this section on the North and a private company that is operating there.

Again, the greatest determining factor is probably the bottom line for everyone, including the customers who want to pay the lowest fare for where they need to go. I wondered about their sentiments towards a company like yours that is not subsidized, that is owned by the North, and that is doing relatively well in a fiercely competitive market. Are those sentiments there? I know that that does not directly assist you, but I also want to just acknowledge that people must be proud, to some extent, of what you are doing

Ms. Medve: It is an interesting thing. There is some very fierce loyalty to our airline, as there would be to our competitor. However, it is also interesting that when WestJet came into Yellowknife they dropped the price to an unrealistic level, and people around town were high-fiving, saying, "I knew you northern carriers were sticking it to us all this time, and now here is the proof." It is very interesting because you try to explain that it will not stay that way. You will not continue to pay those prices, even with WestJet. I guarantee it. I will give you my first-born if I am wrong on this, but I know I am not. It is going to take time. It is interesting. In certain areas I think people do appreciate it, and I think they remember. We are the little guy that has come in here and, over the years, grown quite a bit, certainly in the last 11 years since it has been northern-owned. I think they do remember what it was like when there was only one provider and the cost was higher than it is today.

Sometimes they get frustrated with us, too, and there are all of those issues that come with being in the service business. It is interesting. There are different perspectives on it. It is the same thing as when Air Canada went into Iqaluit; one of the analysts that the CBC uses all the time said, "It serves those northern carriers right; they should not be charging those fares. They deserve everything they get from these guys coming in." Fourteen months later, guess who is leaving town? You cannot provide that service for that cost. You just cannot do it.

Senator Martin: I wish you all the best. I think articulating these unique challenges and important points is important for the study. Thank you for being here.

The Deputy Chair: I have a couple of small questions before we move to the second round and Senator Boisvenu. First, how many airports in the North do you fly into that have gravel runways?

Ms. Medve: On our jet route, the only scheduled community where we have a gravel runway serviced by the jet is Cambridge Bay and a community called Kugaaruk. The smaller communities that are served with our turboprops are all gravel. There are only six paved runways in the whole North. That would be Inuvik, Norman Wells, Yellowknife, Rankin Inlet, Iqaluit.

The Deputy Chair: How many other airports do you fly into besides those six?

Ms. Medve: There are 13 communities in total that we serve.

The Deputy Chair: If all, or most, of those airports were in the South, they would be under the authority of an airport authority, a not-for-profit airport authority, whose responsibility would be to raise the money to look after the runways, et cetera. What should the funding mechanism be in the North to look after those runways?

Ms. Medve: The Government of Nunavut and the territorial government are responsible for the airports in their respective territories. As you know, those territorial governments receive a lot of funding through the federal government, and there are all kinds of devolution discussions that complicate all of this. It is difficult to know. Some of the southern airports have gone to an airport improvement fee program. I guess, like income tax, this was meant to be in place for a limited time. Yet, it has become a way of life, as have airport improvement fees. Anyone who travels in the South always pays them. Although southern airports are not-for-profit, they do tend, I would argue, to carry nice, fat surpluses.

The Deputy Chair: Those airport improvement fees do not go to the airports, though. They go right to the federal government.

Ms. Medve: They are used for airport development, runway extensions and those kinds of activities, in each airport.

[Translation]

Senator Boisvenu: I will repeat what my colleague has said. People who work in the North and in difficult conditions, as you do, should be viewed as heroes in Canada.

I have a question for you, and in Quebec it's called the "question that kills." Do you think that Canada should adopt a framework policy on competition that would apply to the so called exclusive carriers in the North, to prevent predatory operations by companies that don't belong to the community and that often will spell disaster for other companies, when you must limit services and lay off employees that you will later rehire? It is a serious problem in remote locations, where obviously it is difficult to find work for the population.

Do you wish that Canada or the Department of Transport, or whoever has authority to grant flight clearances, had a stricter competition policy in the North in order to prevent collapses that would affect the communities?

[English]

Ms. Medve: Your question is very valid. It is a hard one to answer because I would not want to advocate a move back to a regulated transportation world. I think that would be a hard position to sustain. What I would say, as perhaps a middle ground, is that I think competition in the North is important. I think it keeps us honest and on our toes, and it helps to keep the prices as low as they can be. However, as I said, it is always a balance. I think it would be nice to see a competitive environment where there were some restrictions for the North. We had that at one time in the deregulation evolution — something along the lines of at least having to look at the potential economic impact of a carrier coming in. I think that was in keeping with the way the regulations were, in between deregulation, partial deregulation and full deregulation. At least say to a competitor that wants to come in, "You cannot just do the easy stuff. You cannot just fly to Yellowknife. If you are going to come into that world, then you had better plan to fly to Cambridge Bay, Rankin Inlet and Baker Lake. You have to add to the network there in some fashion." I think that raises the stakes. It puts more skin in the game. I think it would help competitors take a realistic look at it and say that it is not really the game they want to be in. There are two possibilities there, as opposed to just saying it is just northern carriers. Let us at least have to ask permission, maybe, or to justify that you will not tip that balance of competition to the point where it is a disservice to the very people competition is meant to try to help, which are the consumers. Right now there is no requirement to do that. I think there probably should be.

Senator Mercer: I will try to be brief. I do want to follow up on some suggestions others have made. You have talked, a number of times, about WestJet and Air Canada coming in and dropping the price, in what I commonly refer to as predatory pricing. This is not something that is restricted to the North. They do it in the South all the time. They have done it to regional airlines all over the place. We have seen it in Atlantic Canada. We have seen it in Toronto City Centre Airport.

You suggest that if you are coming into the North and you want to fly to Iqaluit, which could be a profitable centre, then you have to agree to pick up two or three of the less profitable ones, which would mean that introducing predatory pricing by Air Canada or WestJet would be less attractive.

Do you think that we, as a committee, as we go along on our study, should consider making that kind of a recommendation? I do not think we are into making more regulations here, but recognize the fact that predatory pricing puts airlines who are servicing communities that need to be serviced at an extreme disadvantage. I cannot imagine how much money you have lost — or how much money you did not make is perhaps a better way to put it — when Air Canada did predatory pricing to Iqaluit and WestJet did predatory pricing to Yellowknife. Do you think that is something we should consider?

Ms. Medve: I do think that. I think we all have to be very careful about the kinds of recommendations that might be made. I do not necessarily think it is the best idea to say that if you serve here you must serve others, but something where you have to look at the impact overall at a higher level, because to come into a very small market and increase the competition in that way has such a more profound effect in a small market than it does adding one more carrier in Toronto, for example. It is really magnified.

I think a more preferred approach would be to look at what this might do, not just to the community of Yellowknife, for example, but for the service across the North. It is an essential service, we have talked about that; what might be jeopardized by that? Where could we ultimately end up? If we allow this to happen, then guess what, six months or eight months down the road the people in Yellowknife no longer have a morning flight because the northern carriers have had to pull out because they cannot make it work.

There could be some kind of an investigation of that, even by someone relatively independent, who determines that this is not going to hurt things or this will be good for the consumers of the North, for the long run, not just for today, because we know you can come in and drop prices and make people happy for a short time. The investigation needs to be on a sustainable basis to be for the long run.

Senator Mercer: It is interesting that we have not talked about this this evening. One of the issues in the North of course is sovereignty and ensuring that we plant our flag in all the right places and that we have people going to the North, as well as looking at the North as one of the great last frontiers for development, whether it be in minerals or whatever.

I remember my first trip to the North many years ago. We landed on a runway somewhere in the NWT. It was springtime and I thought I was going to get seasick on the runway, it was so wavy. I understand what you meant by that.

Should we be thinking of the development and switching from gravel to asphalt or some sort of pavement as an issue that helps us improve our claim and sovereignty in the North as opposed to just simply making it better for your airline or another to use those airports?

Ms. Medve: I think absolutely. It is not just about the service we are trying to provide. It is about a long-term view of what the North will be like and how anyone will be able to provide the kind of service there that is needed. There are mines up there, for example, the Newmont mine at Doris Lake. In the winter we fly onto the frozen lake with our Boeing. It is a fantastic airplane, do not get me wrong; it is a very cool airplane, but it is getting old. That mine is very prolific. It will be there for another 25 years.

The Baffinland project at Mary River on the north end of Baffin Island is a $4 billion to $6 billion project for them to build it out, to take that iron ore, which is 65 per cent pure when they take it out of the ground. It is a 35- or 40-year mine. We need to have the infrastructure in place that will be able to help them to continue to produce the economic activity around that for all of those years. That is what I am talking about. It is not just about Canadian North; it is for the whole thing.

Senator Mercer: It is like everyone else who does not fly a lot, they think everyone is going on a pleasure trip. Those of us who fly every week know it is not necessary pleasure; it is hard work.

Ms. Medve: It is sometimes not pleasurable either.

Senator Mercer: It is amazing how far Senator Zimmer will go for a good meal.

Ms. Medve: Everyone should have the chance to visit the North anyway.

The Chair: That was a wonderful last question and a tremendous answer. We thank you very much for participating in our report. We intend to publish it at the end of June. I hope you will stay tuned. This is being televised, as many of our hearings are. You might be interested in hearing what our future witnesses have to say.

Good evening. Thank you very much.

(The committee adjourned.)