Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 5 - Evidence, November 30, 2011


OTTAWA, Wednesday, November 30, 2011

The Standing Senate Committee on Transport and Communications met this day at 6:45 pm to study emerging issues related to the Canadian airline industry.

Senator Dennis Dawson (Chair) in the chair.

[Translation]

The Chair: Honourable Senators, the Senate Standing Committee on Transport and Communications will come to order.

[English]

This evening we are returning to our study on emerging issues related to the Canadian airline industry.

Today we have before us Mr. Joseph Sparling, President from Air North; and Mr. Stephen Nourse, Executive Director from the Northern Air Transport Association. From the Air Line Pilots Association, we have Captain Dan Adamus, President, Canada Board; Captain Brad Small, Vice President, Canada Board; and Captain Sylvain Aubin, Master Executive Council Chairman, Air Transat.

Mr. Sparling, we will start with you. Following your presentation we will take an opening statement from Captain Adamus and move on to questions from the members. The shorter the questions, the longer the question period will be. We will listen to you and I am sure we will enjoy whatever you are saying. I will probably not interrupt you, but that will be for you to judge and need to execute. Please proceed.

Joseph Sparling, President, Air North: Honourable senators, I will talk about northern air carriers.

Northern air carriers are the primary providers of transportation within the North and between the territorial capitals in the Southern gateways. Northern air carriers not only provide vital services to, from and within the territories, but they also are an integral and important component in the northern economy.

During 2009, northern air carriers transported more than 830,000 passengers and almost 150 million pounds of cargo to, from or within the North. Additionally, northern air carriers account for almost 1,700 territorial jobs, more than $76 million in annual territorial payroll, more than $1 million in territorial property and business taxes, and more than $50 million in annual non-payroll spending with hundreds of local businesses in the three territories.

The direct economic impact of northern aviation also provides many multiples of its value in indirect economic benefits to the territories, including payroll and income taxes as well as consumer benefits.

Transportation is an integral and essential component of any economy. In the North, air transportation is especially important because distances are large and alternative modes are generally not available. While it is easy to see how transportation facilitates economic growth and development, it is also easy to overlook the fact that transportation can be part of economic development.

I believe that the role of northern aviation and northern air carriers needs to be recognized and accounted for in federal and territorial policies and strategies designed to strengthen the northern economy.

Just to put our operating area into perspective, here are some geographical and economic statistics with respect to Canada's three territories, our 10 provinces and also with respect to Alaska, our northern neighbour. These have all been provided to you in a handout, but I will summarize them.

The data shows that Yukon Territory, Northwest Territories and Nunavut together make up almost four million square kilometres or about 40 per cent of Canada's land mass. Their combined population is just over 100,000, which is about one third of 1 per cent of Canada's population.

Alaska is less than half the size of the three Canadian territories but has almost seven times the population. Canada's population density is 5.5 people per square kilometre in our provinces, 0.3 people per square kilometre in Northern Canada and 0.42 people per square kilometre in Alaska.

There are approximately 65 communities in Northern Canada that receive scheduled air service, but of these only eight are served by jet aircraft. There are only 10 paved runways in all of Northern Canada. Alaska has 212 community airports, of which 61 have paved runways. Anchorage, Alaska, would rank in the top 10 Canadian airports in terms of airport traffic and in the top 20 Canadian cities with respect to population.

Total real GDP of all three territories combined is just over $6 billion or about 0.5 per cent of Canada's GDP. Alaskan GDP is $41.7 billion.

A recent study by Oxford Economics indicates that, in Canada, airlines directly account for about 0.5 per cent of GDP, and aviation, including catalytic effects, accounts for about 2.8 per cent of GDP. The same study indicates that airlines directly account for 0.5 per cent of jobs in Canada, and aviation, including catalytic effects, accounts for about 3.3 per cent of jobs in Canada. Northern carriers alone directly account for more than 2 per cent of territorial GDP and more than 3 per cent of territorial jobs, all before secondary and catalytic effects.

The significance of northern air carriers may be illustrated by observing that in Canada today there are just eight airlines providing scheduled domestic passenger service with jet equipment, and five of those carriers are northern.

Air Canada, Jazz and WestJet — I will call those the mainline carriers — are the largest carriers in Canada, and together they account for most of Canada's domestic passenger traffic.

Air North, which is Yukon's Airline, Canadian North, First Air, Air Inuit, and Calm Air, which I will call the northern carriers, are all northern air carriers and, in combination, are only a fraction of the size of the smallest mainline carrier, but they do share some common characteristics.

In general, the primary routes for the northern carriers, in terms of both traffic and revenue, are the north-south extra-territorial jet routes between the territorial hubs and the southern gateway cities. These routes are integrated with turboprop routes serving communities within the territories. Freight is an important component of both route networks, particularly the turboprop routes. Most turboprop operations and some of the jet operations use combi- configured aircraft. All of the turboprops operate onto gravel runways, and some jet operations are conducted onto gravel runways as well.

The northern airlines need to be well equipped to meet the unique seasonal weather and economic challenges that are found in the North. In doing so, they provide significant employment in the North, and they are required to make significant investments in northern infrastructure.

Four of the five air carriers described above are owned by northerners, and their shareholders include more than four different First Nations.

The northern ownership aspect may be illustrated by using Air North as an example. The following data shows that more than 1 in 15 Yukon residents has an equity stake or an employment stake in Air North. That is about 6.6 per cent of the population.

Recently, there has been increased interest in the economic aspects of aviation in Canada, including the economic footprint of aviation, the cost of aviation in Canada, the impact of increased competition on aviation in Northern Canada, and the growth and development of northern economies.

Specific studies include the following: The Economic Impacts of the Member Carriers of the National Airlines Council of Canada, by the Schulich School of Business; The Implications of Competition in Canada's Northern Air Transportation System, by InterVISTAS Consulting; Canada's Not-So Friendly Skies, by the Frontier Centre for Public Policy; High Arctic Transportation Cost Study, by LPS Avia Consulting; The Economic Benefits from Air Transport in Canada, by Oxford Economics; and Why Air Transport is a Critical Asset for Canada, by IATA.

My read of the foregoing studies, with the exception of the InterVISTAS study, which was not available, produced the following key observations: First, aviation makes a significant contribution to any economic region through jobs and spending involved with aviation and aviation support activities. Second, secondary economic benefits are also significant and they accrue through lower fairs and increased access. Third, fare differences usually result from cost differences, and cost differences often result from cost environment differences. Canada is a relatively high-cost environment with respect to aviation. Fourth, regional economic benefits will be maximized by the provision of affordable and efficient air transportation from within the region rather than from outside of the region.

In the past, most northern communities were served as part of a traditional airline hub-and-spoke route network, with the hub located in the South. In this situation, economic benefits accruing to the North were very limited as the entire transportation infrastructure and most of the employees were based in the southern hubs.

By establishing transportation infrastructure hubs in the North, northern air carriers have helped northern economies to grow by providing employment and establishing infrastructure in the North. The net effect of this has been to cause cash to stay in the North and to flow into the North rather than flowing out of the North or bypassing the North. These efforts by northern air carriers provide significant economic benefits to the territories.

The economic benefits that accrue from a transportation infrastructure hub are significant and indisputable and may be illustrated using the Yukon market as an example. The establishment of a transportation infrastructure hub in Whitehorse, by Air North, Yukon's Airline, in 2002, led to a more than 2 per cent increase in private sector jobs in the Yukon. Air North employees now represent almost 2.5 per cent of the private sector Yukon workforce. Air North has 75 per cent of its employees located in and 85 per cent of its payroll dollars earned in the Yukon. This includes pilots, flight attendants, maintenance personnel, cargo, catering, ramp and passenger services personnel, along with call centre, marketing, administrative and management personnel.

Were the airline to relocate its operations hub to a southern city, it would then have only about 60 Yukon employees or 25 per cent of the total number, and only about 15 per cent of its payroll dollars would be earned by Yukon employees.

Again, using the Yukon market as an example, it can be seen how lower airfares can provide economic benefits by increasing travel. During 2010, based upon our average yields, the average airfare in or out of the Yukon was 29 per cent lower than it was in 2001.

Yukon airfares, including those within the Yukon, compare very well with those found on similar routes in the South. Furthermore, since 2001, domestic traffic has grown by 76 per cent. Almost all of the growth in traffic was price-stimulated as people can afford to travel more often and more people can afford to travel.

By bringing the cost of travel drown, Yukoners have had more money in their pockets to spend on other goods and services and visitors have arrived in the Yukon with more money to spend on goods and services while in the territory.

The establishment of business infrastructure is particularly important to northern economies, which are primarily resource-based. It is important to ensure that when the resources are gone, there is more than tailing piles left behind. A look at the downtown landscapes of Iqaluit, Yellowknife, Whitehorse and Anchorage would illustrate the relative maturity of the economies in each region.

While I would not likely get complete agreement from Yukoners that we would like to see downtown Whitehorse look like downtown Anchorage, most would probably support an increase in economic activity to support improvements in health care, education and other publicly funded infrastructure.

The establishment of an airline infrastructure hub in the North goes somewhat against the grain in terms of normal business practices. In the North, costs are higher, infrastructure is limited, the labour pool is limited and competitive opportunities are limited. These factors provide a fair bit of incentive to locate your infrastructure in the South rather than in the North and to focus on larger markets.

Alaska Airlines provides an interesting illustration. The airline was founded in 1932 in Anchorage but eventually found it necessary to relocate most of its infrastructure to Seattle in order to pursue growth opportunities and to improve operating efficiencies.

Today, only 19 per cent of Alaska Airlines' traffic is within Alaska or between Alaska and the lower 48 states. Alaska Airlines has much in common with Canadian northern air carriers with the exception of local ownership. It is the local ownership factor that tends to keep Canadian northern air carriers focused on northern markets.

Stated quite simply, our shareholders are our customers. The significance of this was illustrated to me at our AGM several years ago when, after announcing a healthy profit for the year, one of our shareholders observed that perhaps our airfares were too high.

At Air North we describe our corporate objectives as endeavouring to operate safely and successfully while respecting the interests of our customers, our employees and our shareholders in exactly that priority. This means that growing much beyond the boundaries of our northern market is not in the plans for us at this time. Instead, our objective is to be a successful northern operator.

How do we define success? I would say that you are successful if your customers are happy with your product, your employees enjoy working for you and you are making money.

For airline consumers in our market, price seems to be the primary factor influencing customer satisfaction. Convenience and service count also, but they do not seem to be as important as price.

Technology has made the world smaller and more accessible for almost everyone. Even in the North, most communities have television and many have Internet and cell phone service as well. Northern airline consumers have become more demanding in today's modern world and they have come to take for granted low fares and plenty of flight choices, even in smaller, higher-cost northern markets.

To meet the demands of today's northern air travelers, we need to provide pricing that is comparable to pricing in other markets that are similar to ours. If we are going to make any money, we also need to make sure that our costs are in line with those of larger carriers operating in larger markets.

The cost-related challenges that we face as a small air carrier in a small northern market may be generally categorized as either environmental or market-specific. The environmental challenges are largely beyond our control, while the market-specific challenges relate to our size and the size of our market. We have had to develop strategies to deal with both.

Some of the aviation studies mentioned previously indicate that Canada is a relatively high-cost environment with respect to aviation. Northern Canada is also a high-cost environment relative to the rest of Canada with respect to aviation. Environmental cost challenges specific to the North include high fuel costs resulting from transportation costs incurred moving fuel large distances from the refinery to northern markets; outdated and inadequate airport infrastructure that precludes the use of more efficient aircraft; a shortage of skilled labour to fill aviation jobs in the North; inadequate navigational aids and weather reporting, which cause flight turn-backs or diversions; and high construction and operating costs for infrastructure in the North. Market-specific cost challenges are as a result of limited and seasonal business volumes, which result in below-average asset utilization and a limited revenue base to amortized fixed overhead expenses.

Some of our strategies to deal with both types of cost challenges include increased cost over our entire supply chain. Using fuel as an example, we purchase our jet fuel in the South, barge it up the coast, truck it to Whitehorse, store it in our own tank farm and dispense it from our own trucks. We operate our own flight kitchen and de-icing operations in Whitehorse. We also do most of our own maintenance, including C-checks at our Whitehorse facility. We endeavour to develop non-flying revenue streams and profit centres. Next year we expect fuel sales and ground handling to generate almost 10 per cent of our total revenues. We endeavour to increase our aircraft utilization and revenues through charter flying activities. We are working with local educational institutions to ensure a supply of skilled labour. We try to increase our reach by seeking alliances with mainline and other carriers so that northerners can have relatively seamless access to domestic and international route networks. We engage in lobby efforts to encourage the modernization of aviation infrastructure in the North, and we take steps to ensure that we maintain a maximum market share in our region. This particular strategy is clearly the most important one for us and also the most difficult one to get the results that we want. Stated quite simply, if we are going to keep our hub in the North, we need to make sure that we own that hub.

The foregoing discussion was intended to briefly acquaint you with northern air carriers in general and with some of the challenges that we face in our markets in particular. From the discussion, it is pretty apparent that most of our challenges are cost-driven and only partly within our control.

While this discussion was about northern air carriers trying to achieve success in the domestic market, it could just as well have been about Canadian air carriers trying to achieve success in the global market. Northern air carriers comprise only a small part of our domestic market, just as Canadian air carriers comprise only a small part of the global market, but northern air carriers are good for the North just as Canadian air carriers are good for Canada. In order for either of us to maximize our success and the associated regional benefits, we need to encourage the development of federal, provincial and territorial policies that recognize and support the role that aviation plays in Canada's economy.

Captain Dan Adamus, President, Canada Board, Air Line Pilots Association: ALPA's nearly 3,000 members in Canada are the pilots who fly for nine Canadian air carriers: Jazz, Air Transat, CanJet, Kelowna Flightcraft, Calm Air, Bearskin, Wasaya, First Air and Canadian North. As you can see, our membership covers all major types of operations in the aviation industry in Canada from overseas carriers to cargo operators, northern operators and regional carriers. They are based from coast to coast. As front-line aviation employees, ALPA members have great expertise and interests in all facets of the aviation industry in this country.

ALPA has followed with great interest the testimony that has been presented before you. As pilots, we are service providers as well as service users like you. We interact with many of the witnesses that you have heard prior to us. For example, airlines are clients of the airports and the air traffic system. We, as pilots or in our personal lives, use the airports and the security providers such as CATSA and the Canada Border Services Agency.

In listening to those witnesses, we have noted common themes. Much of the testimony has gone over well-tilled ground, including fuel excise tax, airport rents, security, security fees, airport improvement fees and the economic viability of the industry. Those issues are real and vexing. They have been thought about, talked about and debated in numerous forums, including this one. They are perennial, stubborn problems that plague this industry. ALPA has strongly held views on all of those subjects, views that we would like to share with you today. Like many of the witnesses who have appeared before you, ALPA finds it deplorable that aviation is regarded as a cash cow for federal coffers.

The add-on fuel excise tax is one more cost added to the air transportation system in Canada. Like income tax, this was intended to be a temporary tax. Simply put, it should be removed. With respect to airport rents, many witnesses from the airport sector have decried the amount of rent that is paid, again into the federal coffers. Of course, high rents get passed to everyone else in the food chain. High rents mean high landing fees. Toronto Pearson Airport's landing fees are among the highest in the world. Landing fees are part of airline expenses that will eventually find their way into the cost of a ticket.

Security fees are one of our favourites. ALPA views the security fee as one more unwarranted tax on the aviation industry. We feel that aviation security is no different than national security and, like national security, should be funded from general revenues. The most infamous act of terrorism, the tragedy of 9/11, is an excellent illustration. The harm done and deaths suffered in the city of New York far exceeded those on the aircraft. The aircraft was the tool; terrorism was the objective. Why, then, would only aviation passengers fund this national security concern?

We are all familiar with airport improvement fees that are now added to every ticket that you purchase. These fees raise money for capital improvements to the airport. Most passengers view the airport as the terminal, whereas flight crew members view the airport as the runways, taxiways, manoeuvring areas and the supporting communication and flight guidance infrastructure.

What gets improved when airport improvement fees are spent? We as flight crew members would like to see a larger portion of the fees spent on improving airport infrastructure. Some of you have queried the witnesses about late flights and recurring delays. Some of these delays may be in part because an airport has not been modernized or equipped with the latest or best technology, although it may have a Taj Mahal terminal. Let me offer Ottawa International Airport as an example. There is no Category II runway in Ottawa. A Category II runway allows for landings and takeoffs in the lowest visibility conditions.

Many terminals are now luxurious, containing shopping centres, boutiques, mini spas and many other amenities on which a passenger can spend time, but we think that the best terminal is the one in which you have to spend the least time.

Security is of vital interest to our members. No other aviation workers are more intimately involved than the flight crew when an aircraft is targeted by terrorism. We have been generally pleased with the progress made in this area, but we have suggestions for improvement. ALPA is a proponent of streamlining security by the use of expedited screening for trusted travelers. Trusted travelers would be those people who have had vigorous security checks, such as the holders of Nexus cards or Restricted Area Identity Cards, RAIC. We are also in favour of using behavioural recognition techniques, that is, using our resources to look for people with evil intent rather than to look for prohibited articles only.

On the economic viability of the industry, ALPA members are men and women employed in the aviation industry and therefore have a vested interest in the viability of the industry. Our livelihoods depend on it, so we want to see the industry thrive.

Today, in keeping with your stated objective, I would like to also address those issues that we think are the emerging issues related to the airline industry. The emerging issues that we see look to the future of the Canadian airline industry. To some degree, they are interconnected. I would like to speak to the issue of foreign pilots in Canada, bilateral agreements and pilot return, retention and recruitment.

There is a trend among some Canadian air carriers to augment their flight crew contingent on a seasonal basis with foreign pilots. Foreign pilots have been hired at Sunwing, CanJet and what was Skyservice. In some cases, the foreign pilots fly the carriers' Canadian-registered aircraft; in others, the Canadian carrier uses both foreign aircraft and crew.

Foreign workers require a permit to work in Canada. Employers wishing to engage foreign workers can assist them in obtaining this permit by making an application to HRSDC for a labour market opinion, or an LMO. The guidelines for the foreign worker program stipulate that eligible foreign workers are allowed to work in Canada for an authorized period if the employer can demonstrate that they are unable to find suitable Canadians or permanent residents to fill the jobs and that the entry of the workers will not have a negative impact on the Canadian labour market. The employers in these cases stipulate that the pilots must be type-rated, which is different than having a licence, on a certain model of aircraft. Rather than hire non-rated pilots and train them, the carrier applies to have foreign pilots fill the positions on a seasonal members basis.

We are of the opinion that there is not currently a shortage of pilots in Canada. Rather than utilizing the labour market opinion to fill genuine personnel shortages, the program is being used to create economic advantages as the carriers can eliminate training costs and hire a pilot only seasonally.

May I give you an example of the testimony before you of Mr. Hugh Dunleavy of WestJet? You may recall that he spoke of WestJet's growth to 100 aircraft, the same type of aircraft, Boeing 737NGs, for which some operators say they are unable to hire pilots. He stated that over the next few years they had another 38 aircraft on order. That is 38 aircraft. He made no mention whatsoever of any problem recruiting pilots to fly WestJet's 737NG aircraft.

Regarding the United Arab Emirates, ALPA is in agreement with the government's decision to refuse to grant additional access to Canadian markets. That decision is in keeping with the capacity clause of the agreement, which states, in part, that the agreed services are to bear a reasonable relationship to the requirements of the public for transportation on the routes at a reasonable load factor.

Although Canada can and does benefit from certain Blue Skies agreements, such as those with the United States and the European Union, if Canada is to retain a viable Canadian airline industry, it must continue to negotiate bilateral air agreement traffic rights that are based on reciprocity and mutual benefit, where there is a fair and equal opportunity for both parties.

For there to be a viable Canadian airline industry, it will need a reliable source of high-quality pilots to fill the flight decks. That brings to the fore a combination of emerging issues for the airline industry in Canada, that of pilot retirement and retention, and training and recruitment. We are all aware of the aging cohorts of baby boomers entering or approaching the age of retirement. The new service brings us stories on that looming problem almost every week. The problem is highly visible and problematic in the airline industry as it, too, has a high proportion of boomers within its ranks.

Did you know that there is no retirement age in Canada's aviation regulations? Retirement age provisions are usually found in the collective agreements between the air carrier and its pilots or in the policy documents of carriers without collective agreements. Currently, at most of the ALPA properties, the age has been 65. At Air Canada, it is still 60. The age 60 rule at Air Canada has been challenged before the Canadian Human Rights Tribunal and is the subject of continued litigation. There is also a human rights challenge to the age 65 rule at Jazz. These issues are as of yet undecided by the tribunal.

The International Civil Aviation Organization, or ICAO, fairly recently changed the international standard from 60 to 65. ALPA is in favour of a mandatory retirement age that is freely bargained between the parties, subject to those international provisions by ICAO.

Recruitment and training of airline personnel is another emerging issue for your consideration. The higher number of people due to retire, combined with an under-supply of youth entering the industry, will bring significant challenges for the aviation industry in Canada. Several recent studies by ICAO, IATA, Boeing and HRSDC predict that there will be a serious global pilot shortage. There will only be an adequate supply of pilots if there are sufficient applicants and graduates opting for a commercial pilot career.

Recent studies have found that what attracted students to the career was the love of flying, followed by prestige and the opportunity to travel, but many students do not complete training, citing financing and a low pay structure for entry-level positions. A student may spend as much as $70,000 to obtain qualifications to find a starting salary in the $18,000 a year range.

There is minimal funding or financial assistance to student pilots. For example, Canada Student Loans are available only to those students enrolled in post-secondary degree or diploma programs. Many students opt for the more traditional route of attending an independent flight school, where no loans are available. Most often they are self- financed through parental support or bank loans. The tax deduction for training varies, but generally one can only claim flight training hours if the student is enrolled in a commercial course.

Without an appropriate number of students entering the industry, in combination with the pending retirements, we may actually see the day when air traffic in Canada will have to rely on foreign pilots.

Thank you for your time. I would be pleased to answer any questions.

The Chair: Thank you, Mr. Adamus. I will start by introducing my colleagues from the Senate. Senator Zimmer is from Manitoba; Senator MacDonald is from Cape Breton; Senator Mercer is from Halifax; Senator Braley is from Ontario — he has some property in British Columbia, I heard today in the Senate; Senator Greene is from Nova Scotia.

[Translation]

Senator Verner is from Quebec City; Senator Boisvenu is from the Province of Quebec.

[English]

Senator Martin, who will be asking the first question, is from British Columbia.

Senator Martin: Thank you for your presentations. I thought you really outlined the challenges as well as the opportunities in the North.

I was pleasantly surprised to hear that you have had a 76 per cent increase in domestic travel since 2001. My first question is what increase has there been from the international market? That leads me to my second question regarding Blue Skies. Being on the West Coast, with the Asia-Pacific Gateway, what increase have you seen in the international market?

Mr. Sparling: I can only tell you, anecdotally, on our flights, we are seeing more and more international travelers. Certainly we do not have a way to quantify where the passengers originate from other than that close to half of our bookings originate from outside the Yukon Territory. That is one statistic we do have. We probably could find statistics that indicate how many passengers will book from outside of Canada. Again, anecdotally, we seem to be seeing on our web bookings an increasing number of addresses that are outside of the country. I do not know whether that is an increased interest from international travellers or just we are getting the word out and people are becoming more familiar with us so they know how to find us.

Senator Martin: I think it could be a combination of both. Looking ahead, is there opportunity for the tourism market from, for example, Asia-Pacific? It is such a unique experience to come to Canada. I know that I am intrigued, as a West Coaster, by the advertisements for Newfoundland and Labrador. The Yukon Territory and the territories themselves could, in the future going forward, be potential tourism markets as well.

That is a question that leads into what you were talking about, Mr. Adamus, regarding Blue Sky and having measured growth because we want that reciprocity in there. I heard a recent presentation from B.C. regarding wanting more Blue Sky or Open Skies agreements because the Asia-Pacific Gateway presents a great opportunity.

Could both of you speak a bit regarding Blue Sky and, if it is negotiated well, what that could mean for tourism — the increased traffic and opportunities there?

Mr. Sparling: I will make a quick comment on that and then turn it over to Mr. Adamus.

First, before we get to negotiations and this sort of thing, let us talk about the basic economics. The maximum benefit comes to Canada if the service can be provided by a Canadian carrier. We could be talking about Canadian or northern carriers, because the arguments are exactly the same. If the local carrier is unable to deliver the product at an affordable price, then it has the potential for stifling the economy. The challenge is on the carrier to be able to provide a competitive product.

Bilaterals are another thing. If we were to go for a complete Open Skies agreement, where anyone could fly any place they want, my suspicion is that Canada would come up short because we are such a small piece of the puzzle. Everyone that was buying an air ticket would be sending their cheque out of the country.

For a foreign traveller coming to Canada travelling with a foreign carrier, you do not see any benefit until their feet hit the ground in Canada. When a foreign traveller comes to Canada travelling on a Canadian carrier, economic benefits begin to accrue to our country when they first buy their ticket. I think it is important that Canada be competitive as an aviation environment. We want to ensure that Canadian carriers can be competitive.

Some of the research I have done between Canada and the United States, and some of the studies that I have described here, indicate to me that an average American carrier has at least a 10 per cent cost advantage over a Canadian carrier. When you are talking about turboprop carriers or jet carriers, their costs will vary depending on their size and the scope of their operation. However, on average, an American carrier has about a 10 per cent cost advantage over a Canadian carrier.

You have to ask yourself, why would that be? We are all flying the same airplanes, they all burn gas, we all hire pilots and we all have to maintain them. It is because of the cost structure in Canada relative to that of the United States. We have to ensure that Canadian carriers are in a good position to compete.

With respect to the bilaterals, normally what you do — as I understand them — is you somehow decide in the bilateral negotiation that the Canadian carrier will look after about half of the traffic and the foreign carrier will look after the other half. Perhaps Mr. Adamus knows more about that than I do; we have not been involved in that.

However, you want to negotiate some fairness in the agreement. You do not want to give the foreign carrier more traffic, more ability to do business than you do a Canadian carrier.

The Chair: Mr. Adamus, do you want to add a comment?

Mr. Adamus: Certainly. I agree a lot with what Mr. Sparling had to say. There must be something in it for the Canadian carrier.

We have a bit of experience in this. We were lucky to be an official observer during the Canada-EU Open Skies discussions. The Blue Sky document spells it out fairly well. There must be reciprocity and equal sharing of the traffic rights.

If you look at the United Arab Emirates situation, it is coming in one direction. Air Canada has not even elected to fly over in that direction because they say there is simply not enough traffic. Between Etihad Airways and the Emirates, they offer three flights a week each, and our figures show they are not even running at 65 per cent capacity. You must ask yourself: Why do they want more access into Canada? We have a pretty good idea why, but I think everyone should ask that question.

Senator Martin: I have another question concerning the North. I understand that Canada's First Nations people have significant equity in the largest of the northern-based air carriers, including Air North. What, if any, influence does that ownership have on your commercial mandate?

My second question is: Is it oversaturated? You named quite a few of the carriers in the North, but is there a demand for the service providers or is the market saturated?

Mr. Sparling: First, with respect to the First Nations component, speaking from our own airline standpoint, the Vuntut Gwitchin First Nation has a 49 per cent interest in our airline.

The history behind their investment is that they achieved their land claim settlement and basically put their money in the bank under what they described as a self-imposed moratorium. They did do not want to start investing until they felt they were ready to invest. When the time came to invest, they approached us.

They began seeking strategic investments. They regarded an investment in the airline that provides service to their community, since it has no road access, as the first and most strategic investment they could make. At the time, my co- founding partner was dying to get out of the business, so it was fairly straightforward. They wanted to buy; he wanted to sell.

I think they are very happy with their investment. They started off acquiring 20 per cent and they later acquired another 19 per cent. The arrangement was they would make an initial investment and if they were happy with it, they had an opportunity to complete the purchase. They completed the purchase ahead of schedule, so I think it may be regarded as a very successful First Nations investment. That was question one.

Senator Martin: Yes, question two was the market and the oversaturation.

Mr. Sparling: As northern carriers, when you put all your eggs in one basket, you have to be protective of that basket. I think there has been a lot of discussion; in fact, the InterVISTAS study dealt with increased competition in the North, as the mainline carriers have begun to take an interest in northern markets.

In our own particular market, Air Canada was the incumbent carrier; we were the new entrant into the market. In the Yellowknife market, you first saw Jazz and then WestJet enter the market. In Iqaluit, Jazz was in the market for a little while.

I know that the northern carriers found it to be a problem when there were new entrants into the market; it diluted their market share. In our own market, if our market share was diluted, we would have to seek other markets to fly; and the other opportunities are all in the South. If you have to start flying in the South, what is the point in keeping your infrastructure in the North? It is a real problem.

The other point that has been raised by the northern carriers is that there is at least a bit of cross-subsidization between the jet routes into the territory and the turboprop routes within the territory. We certainly see it. The jet routes are the ones that produce all of the revenue and most of the profit; the turboprop routes hold their own.

If we take a hit in traffic on the jet routes, it does have an impact on our ability to provide cost-effective and efficient service on the regional routes. I do not think the mainline carriers have any interest in flying the regional routes within the North. Therefore, I think the role that the northern carriers play in providing a completely integrated service needs to be factored in as well.

Senator Mercer: Mr. Adamus, I have a couple of questions; the first one is a practical question. In your opening comments, you told us who your members were. Absent from the list are WestJet and Air Canada. Could you give us an explanation of that?

Second, I am not surprised by the high number of people due to retire, but I was surprised about the under-supply of youth entering the industry. You say it will bring significant challenges for the aviation industry in Canada. I am surprised, because the airline industry has always had that sort of sex appeal, maybe not from a business point of view but from the point of view of being a pilot or a flight attendant, because of some of the perceived benefits of all of that. Perhaps you could elaborate on that and tell me where I have gone wrong in my thinking.

Mr. Adamus: The Air Canada pilots have their own association. I believe they spoke to this committee some time ago. The WestJet pilots are not unionized. We would love to have both of those pilot groups in our association.

As for young pilots, I agree with your comment about the sex appeal. That is probably why I got into this business almost 30 years ago. It was the urge to fly. If you looked at the movies and read the papers, there was a lot of money to be made. Unfortunately, that is not the case today. Pilots have taken quite a hit in this industry over the last few years, especially since 9/11. There have been many bankruptcies, and usually the first folks to take the haircut after a bankruptcy are the employees. We are not even close to where we were in the past, and we are working a lot more as well.

I also mentioned that the cost to get into flying is substantial. The entry-level pay of $17,000 to $18,000 per year is tough to swallow.

My neighbour's son is a 19-year-old who wanted to get into aviation. He spent a lot of time talking to me. After looking at the numbers, he is going to become an electrician. He looked at it and said that with the cost of becoming an electrician versus a pilot, and what he could potentially make, he will go into the trades. That is the reality now.

Senator Mercer: He will make more than $18,000 per year even before he gets all his papers as an electrician.

It seems to me that, as you referred to, many bankruptcies post-9/11 should leave, logically, many pilots available. If the airlines are no longer flying and there is a reduction in the number of planes in the air, that means that there should be a number of pilots flying those planes who should be available. Where have they gone?

Mr. Adamus: That is a good question. There were a lot of unemployed pilots in Canada, and there still are. A lot of them have gone looking for work and a lot of them are over in the Middle East. Asia has also picked up a number of our pilots.

I cannot give you actual numbers, but we had a couple of board meetings in the last few days, and the question was asked: Does anyone here have a friend or an acquaintance who is flying in the Middle East? Everyone does. Everyone knows someone who is over there. Although it is a job and they are providing for their families, they want to be back in Canada. There is no better place in the world to live than Canada, and they want to be back here, but there are no jobs.

Senator Mercer: Mr. Sparling, you talked about there being 10 paved runways in the North. We have heard copious quantities of testimony about the high cost imposed on the industry by taxes and user fees. Who paid for those runways initially?

Mr. Sparling: Mr. Nourse would probably have a more accurate answer than I would.

Stephen Nourse, Executive Director, Northern Air Transport Association: All of the paved runways that are currently in the Arctic system, with the exception of Rankin Inlet, were actually all paved by the federal government prior to devolution. The territorial governments have done very well with their limited resources in maintaining the assets up there, but they have just not had the capital funding available to do anything in terms of paving any of the other airports.

Senator Mercer: Who paid for Rankin?

Mr. Nourse: A lot of that was paid for by the federal government because it is now a forward operating base for the F-18s. They required it to be paved.

Senator Mercer: The air force paid for it?

Mr. Nourse: There was a substantial contribution, yes.

Senator Zimmer: Before I ask my question, I would like to ask a supplementary on Senator Mercer's second question about where all the pilots have gone. Many of them go to private jets after that, do they not?

Mr. Adamus: I am not aware of any actual numbers on that. I think most airline pilots would like to stay in the airline environment. There are some decent jobs flying private jets, but for the most part you are on call 24/7, and a lot of pilots would like to have a bit more stable life.

Senator Zimmer: I will ask your permission if I can use your speech and make quotes from it. You have hit every point I think I have made in the last month: fuel tax, airport rents, landing fees, security fees and aviation fees. I agree with you 100 per cent. Although you are much better looking than I am, I thought I was speaking. I would like to use a lot of your speech to ask the questions, if I can have your permission.

Mr. Adamus: Absolutely.

Senator Zimmer: What are the most significant challenges facing Canadian air carriers in the coming years, and has the Air Line Pilots Association, International made any recommendations to its airlines on steps to address these challenges?

A lot of these air carriers are serving up North and it is a public service. Are they receiving any federal funding to support the public service they are providing?

Mr. Sparling: No, there are no subsidies for any of the airline operations in the North.

Senator Zimmer: Absolutely nothing?

Mr. Sparling: No.

Senator Zimmer: Have you made any requests for federal funding?

Mr. Sparling: No. I do not believe that it requires a subsidy. I think there are probably better ways to spend the money. Spend the money to start paving runways, make sure the infrastructure is there, maybe recognize the role that northern and Canadian air carriers play in the aviation industry. I think it is a valuable part of our economy. Rather than giving carriers a subsidy, I think we need to do something about the cost structure of aviation in Northern Canada, and in Canada in general.

We face all the same generic problems that Mr. Adamus outlined, plus a few more of our own because of where we are. If we want to see, in particular, the northern economies strengthen, grow and develop, we have to start paving runways and putting money into infrastructure in the North, because you need the transportation system in order to have a healthy economy. Aviation is the transportation system, since there are no roads.

Senator Zimmer: What influence does ALPA have on the plans for future growth domestically and internationally? Do you have any plans to develop that?

Mr. Adamus: We, as the pilots, really do not get involved in the airline's decision-making process on where or when they are going to fly. We will certainly help out if we are asked, but for the most part we are flying the aircraft, so we are not really involved in those decisions.

Senator MacDonald: Captain Adamus, I was intrigued by the questions you raised about the number of certified pilots that are being produced in the country.

What is the average cost of producing a pilot in this country? How many certified flight schools are there in the country?

Mr. Adamus: The cost to become a pilot varies depending on which route you go. You could go through a private school. The figure that we used, from start to becoming a commercial pilot, is upwards of the $70,000 mark. If you went to an aviation college, you are paying college tuition fees. For some colleges, depending on which province you are in, there is a subsidy. The provincial government does subsidize a little bit, but that is over a three- or four-year program, and you are probably looking well in excess of $100,000 at that point.

How many flying schools are there in Canada? I do not have that actual number, but as far as flight colleges, I am going to throw out a number of fewer than 10.

Senator MacDonald: Would they be the equivalent of a community college in terms of the structure?

Mr. Adamus: Some of them, yes. Some of them are actually a university. The University of Western Ontario, in London, has an aviation program.

Senator MacDonald: The students would go and be eligible for student assistance?

Mr. Adamus: In those programs, yes.

Senator MacDonald: I am just curious, because I have this in my own family. What percentage of pilots would be ex- military people?

Mr. Adamus: I do not have the figure.

Senator MacDonald: Would it be substantial?

Mr. Adamus: No, definitely less than 50 per cent. Our military just is not that big.

Senator MacDonald: I am just shocked that someone would start out at $17,000. I would not feel comfortable with someone flying me around who was being paid $17,000, quite frankly. That is a lot of responsibility.

Mr. Adamus: That is actually an improvement from many years ago. I know of an airline where you could fly for free just to get your hours. They would maybe give you the odd meal here and there, but they did not even pay you. We have improved a little bit. That is the nature of this business.

On the subject of pilot salaries, we feel the airlines are simply not charging enough for the ticket. However, they have a bit of an excuse because a good percentage of that ticket is made up of these taxes and user fees that I talked about. If we got rid of those, we could charge an amount that the airline themselves can take a little bit more, pay the pilots appropriately and everyone is better off. However, the government has to step up to the plate, and enough of viewing the airline industry as a cash cow.

The Chair: Mr. Sparling, the chair does not often ask questions, but you mentioned you did not seek support for your funding. In the week that American Airlines filed for bankruptcy protection, in the year when I do not know how many companies both in Canada and North America have filed for bankruptcy or gone bankrupt, in the 25-year cycle of so many companies, including companies like Air Transat and many companies disappearing from the airline industry, it is an industry in which investing does not seem to be the most appealing and certainly has not appeared to be the most successful.

We can go back to Pan Am, which used to be one of the great companies in the world. They cannot even succeed as a television show. It is an industry in which a person like you, who has decided to invest, I find that very courageous, but the success stories of investors in the airline industry, Liberia, national airlines for European countries have gone bankrupt, and people like you still invest in a market like the North? I am just curious: Do you know something we do not know?

Mr. Sparling: I co-founded the airline in 1977, and we have grown very slowly and carefully. We have a very conservative business philosophy. It is not a gold mine. It typically achieves a grocery store rate of return.

The airline industry has always had an excess of supply over demand in terms of investors. People invest in the airline industry for more than just economic return; they invest because they enjoy it. I am a pilot. I enjoy the flying, I like the business. I probably could have found a more profitable career for myself, but having said that, the company has been profitable for all but a couple of the last 34 to 35 years. I enjoy going to work every day.

The Chair: One senator whom I will not name said that it is probably because you are more stubborn than some of the other people.

[Translation]

Senator Boisvenu: I have a few quick technical questions for you. Earlier, Mr. Sparling, you stated that Americans have a 10 per cent operating cost advantage over their Canadian counterparts, did I hear you correctly?

[English]

Mr. Sparling: I have done some research into the operating costs of various Canadian and U.S. carriers, and I am finding for comparable carriers there seems to be an average of at least a 10 per cent differential in cost of operation.

If we might use WestJet as an example, they are perhaps the benchmark for a lower-cost carrier in Canada. Their costs are 12 or 13 cents a seat mile. There are many carriers in the United States that are 10 or 11 cents a seat mile. That is a 10 per cent or better differential.

[Translation]

Senator Boisvenu: You have some experience in Northern Canada. Can you tell us if there is a difference in costs between air transport in the North and air transport in the South, for example, a flight from Montreal to Toronto or from Toronto to Vancouver? Are maintenance costs higher in the North, particularly with regards to runway upkeep, as you were saying?

[English]

Mr. Sparling: There are a number of reasons that our northern operators' maintenance costs would be higher. One would be because of the inadequacies of the runways, using the Boeing 737 as an example. That is one of the few jet aircraft that is capable of operating onto gravel runways. All of the northern carriers would love to upgrade their equipment to a newer generation aircraft, but they do not make the newer generation aircraft that are capable of operating on gravel. We are operating aircraft that are more expensive to operate.

Another aspect to that question would be that gravel runways tend to damage the aircraft. You will incur more maintenance costs. Even on our turboprops, we incur a lot of rock damage on the propellers. Our propellers seldom make it through their full life without having to go to the shop to have some stone damage repaired.

The other aspect is the cost of building and operating a hangar in the North. Your heating costs are huge compared to operating the same facility in the South.

[Translation]

Senator Boisvenu: What portion of this 10 or 12 per cent differential is due to our climate? I am from Northern Quebec, near James Bay and I can assure you that we had to travel in snowy conditions six months of the year. Costs related to severe winter conditions, such as de-icing planes, and snow removal on runways, do these costs have anything to do with the large differential between American and Canadian operating costs? What percentage of the costs is due to Canadian winters?

[English]

Mr. Sparling: I would think not. The statistics that I have looked at are basically the published statistics for the mainline carriers. I look at Air Canada, WestJet and Jazz. In the U.S., I have looked at Southwest and most of the mainline carriers in the U.S. I would not think that the cost differential is climatic difference.

The typical fuel cost of a Canadian carrier is higher than a U.S. carrier. The only thing I can attribute that to is the taxes that we pay on our fuel that they do not pay on their fuel. Why else would our fuel be more expensive than theirs, on average?

[Translation]

Senator Boisvenu: One of the issues that I am most interested in, is the next generation of pilots. You have heard of the École nationale d'aéronautique in Longueuil that trains a large number of air mechanics. The school has partnership agreements with private sector companies such as Air Canada and Boeing. These companies invest in technical training to ensure a steady stream of trained technicians in the future.

Can your industry form some kind of association with aviation colleges, perhaps going so far as to financing them in part, in order to have some input in the training of tomorrow's pilots by lowering costs and by associating with colleges and universities that train them?

[English]

Mr. Adamus: We have representatives that sit on some boards at aviation colleges to give suggestions for the training curriculum. However, funding the actual programs is not something we have looked at. I do not think it is the role of a pilots' association to fund it straight out. I cannot see the connection there.

[Translation]

Senator Boisvenu: Without saying that your association has some responsibility in this matter, I am sure this issue is of concern to you. Could you promote the idea with Air Canada and others — around ten aviation companies operating in Canada have been identified — that they could work together with colleges and universities in order to train pilots? I believe that the École nationale d'aéronautique in Longueuil has been very successful with regards to training, quality training of Quebec companies' future manpower. Could you at least promote this idea with large companies so that they invest in training? Formal training seems to be entirely in the hands of learning institutions and companies do not seem to want to invest.

[English]

Mr. Adamus: Yes, our association does have what we call an education committee. Representatives go to schools trying to promote the aviation industry, to get youth interested in it. Again, we can only do so much. If you do not mind, Mr. Aubin will answer that question.

[Translation]

Captain Sylvain Aubin, Master Executive Council Chairman, Air Transat, Air Line Pilots Association: For example, Air Transat proposes a program to hire a certain number of Chicoutimi CEGEP graduates As a company, we have participated in the past and the Executive Council has encouraged this. Of course, we also have to take into account the present practices surrounding foreign pilots. This is also an issue. It is difficult for employers, given the current economic setting, to subsidize initial training and on top of that, to train pilots for the types of aircrafts that they fly, when other companies hire foreign workers that are fully qualified and trained. This creates a substantial gap as you can well imagine. But yes, it could perhaps be an excellent idea.

Senator Boisvenu: I have a question concerning aircrafts and their lifespan. Ten or fifteen years ago, we thought that the problems related to the quality of equipment and air carriers would have been resolved by now. You seem to be describing a rather dramatic situation requiring emergency measures.

In your opinion, where are we now with respect to the day when we will have to make substantial investments both in aircrafts and in infrastructures if the situation remains the same over the next couple of years?

[English]

Mr. Sparling: If your question pertains to gravel runways, that will need to be addressed relatively quickly. Mr. Nourse has been involved in some of the aging aircraft working groups. Perhaps he can comment on that.

Mr. Nourse: Ten years ago would have been a good time to start. The newer Boeing 737s are getting to be 30 years old. They can absolutely be maintained safely, but that comes at a cost. As well, there are other associated costs. They burn a lot more fuel; they produce a lot more emissions. Their time has gone. We are probably a little late in getting going on them, to be quite honest.

The Chair: Senator Mercer, the library analyst told me that he would be finding you the numbers for the training facilities.

Our next meeting will take place on Tuesday, December 6 at 9:30. We will hear from Douglas Lavin, Regional Vice President, North America, and Cyriel Kronenburg, Director, Airport and Air Traffic Charges for North America from the International Air Transport Association. Following that, we will have an in camera meeting to consider future business of the committee when we return in January.

Senator Zimmer: Can I ask one short question?

The Chair: Yes.

Senator Zimmer: You talked about the aging of the aircraft. The skin of an aircraft expands and contracts with the altitude. About 20 years ago, when a 737 was landing in Hawaii, a little boy sitting in first class looked up and saw the skin peeling back at 12,000 or 15,000 feet. It peeled right back to economy class. They lost one flight attendant, but the rest of the people were pinned in. They brought the plane down to 10,000 so they could breathe. Seven minutes later, they landed safely.

Is there a danger that, with too much expansion on the rivets, the skin of aging Boeing 737s could peel back? Have these aircrafts now passed that time?

Mr. Nourse: Generally speaking, no. The Canadian fleet, particularly the combi fleet, is considerably younger than that plane. That particular aircraft was very high-cycle. In that environment they were landing and taking off every 30 minutes. Because of the distances involved, the average northern combi bird flies, in some cases, two to three hours per cycle. We have been diligent in searching out younger air frames because of maintenance costs. We are not to that point yet, which is why I say we can definitely be safe.

Also, subsequent to that incident, a considerable number of airworthiness directives came out. There have been many lap repairs, reinforcements and increased inspections to ensure that we do not have another convertible.

Mr. Adamus: To come back to my comment about the airlines not charging enough for a ticket, I have in front of me a ticket, which I can provide photocopies of to the committee. The ticket is for a flight from Toronto to Manchester for $49. Taxes on top of that would be $525. That is an example of what I am talking about.

The Chair: You can provide that to the clerk. If you have further examples, please provide them to the clerk and they will be passed on to members.

(The committee adjourned.)