The Agenda with Steve Paikin (Audio) - Why is Air Travel in Canada so Expensive?

Episode Date: December 6, 2024

Do Canadian travelers pay more for air travel than their counterparts in other countries? If so, what is driving the high cost, and is increased competition the answer? We unpack the complicated price of your airline ticket.See omnystudio.com/listener for privacy information.

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If so, what might be driving the higher cost? And is increased competition a possible answer? To help us unpack the complicated price of your airline ticket, we welcome, in Calgary, Alberta, Jake Fuss. He's director of fiscal studies at the Fraser Institute. In Montreal, Quebec, Jacob Charbonneau, co-founder and CEO of FlightClaim. That's a claims processing firm. In the nation's capital, Andrew Gibbons, vice president, government relations and regulatory affairs at WestJet,

and Manette Pasher, president of the Canadian Airports Council. And we're delighted to have you four on TVO tonight to help us understand why we pay what we pay when we travel by air in this country and abroad. Andy, I'm gonna go to you first. Why are the issues in the airline sector as they relate to the regulator and the government

apparently coming to a boil these days? Hi, Steve, thanks for having me. I think they're coming to a boil these days. Hi Steve, thanks for having me. I think they're coming to a boil because post COVID, we're in an affordability crisis, we're in an inflation crisis, and fundamentally aviation has a user pay model that asks Canadian travelers to pay the fees associated with their infrastructure,

their security and all other areas of their journey. And increasingly, this is inconsistent with other modes of travel. And the problem that is occurring is that a large segment of the population is being priced out of the opportunity of experiencing air travel. And everyone wants affordability and everyone wants air travel to be democratized. So I think there's an emerging view that this is being threatened and of course there's disagreements on what the answer to that should be and what the prescription should be but I think that's why things are coming to a boil.

We'll look into some of that as we continue our conversation. Manette, how would you answer that question? Yeah, I mean I think we have a good model here in Canada, but of course, everything could always use some improvements. And I think, you know, that's why we've been working with the government and asking governments of any stripe to improve the regulatory burden. You know, each new regulation that's added adds cost to the system. And I think because we've chosen a user pay model in Canada instead of a taxpayer model, obviously that puts more burden on the actual users of the system.

And that's what we see in this country. And I think we need to look at aviation and say, you know, this isn't a system that's just for users. It's an essential good. Like people want to travel by air. People need to travel by air. We need it for our supply chain. So I think we need to strike that right balance of what is users and someone going on a sun trip

and what is essential to our Canadian economy. Jake, do we need some policy reform here? I think absolutely. I mean, if we look at our system right now, we don't have a lot of competition in the airline sector. And on top of that, I think more so than there actually being a problem with a user pay Model which I would actually disagree with in terms of switching to a taxpayer model I think actually looking at how we own and operate our airport systems in across Canada is actually a huge problem as well Currently, we have a not-for-profit authorities that pay rents to the federal government Other countries around the world if you look at Auckland Airport or Sydney Airport, these are actually privately owned airports

that are for-profit, sometimes publicly listed, that are much better able to control their costs over time. And I also think we put in a lot of restrictions and rules from the federal government on airlines and on airports in Canada that actually make it very hard for us to lower prices for consumers over time. Jake, can you just follow up on that and help our viewers and listeners understand better

the difference between a user pay model and a taxpayer model and which you would prefer and why? Sure, so a user pay model is typically where you have the consumers directly pay for the costs of the services, for the upgrading of infrastructure. So all of those costs are going to be borne in your actual ticket price that you're paying at the end of the day. So airport authorities, for instance, will have things like airport

improvement fees that are actually added on to your bills. So these can be anywhere from about $25 per passenger all the way up to over $40 per passenger. But there's other fees and taxes that are also assessed on top of that. Whereas a taxpayer model would typically be you're subsidized by governments or some of that cost of the infrastructure is actually paid for by taxpayers

and not the entire cost is actually borne by the users directly. So I think there's a lot of drawbacks actually in the taxpayer model. There might be some aspect of having infrastructure being paid for by taxpayers, but generally you don't want taxpayers to actually be subsidizing somebody else using flights over time as well, because then they're not actually the ones benefiting from those flights from business travel, for instance, from Toronto to Montreal.

Somebody in rural Manitoba doesn't make a lot of sense for them to actually be subsidizing another person's flight costs. So that's why I think there's a bit of a drawback there, and that's why I think there should also be a discussion about how we're owning and operating airports and getting more competition in this space. Jacob, how do you see it?

Well, obviously, I think there's some decision that have been made when we privatized Air Canada back in 1988, so more than 36 years ago, in two ways. So for the user pay model, so every fee is sent back to the customer, but also we decided to have less player in Canada, but strong player, which means that now we end up with essentially a dual pool of airlines, which means less competition and less improvement on the price. Okay, Jake, do you think, excuse me, not Jake, I wanna go to Andy on this. Is it fair to say that basically your airline

and Air Canada have basically divided up the country and having fewer big players. I should add Porter to the list, but Porter is more of a regional thing than a national carrier like you and Air Canada are. Having fewer big players, do you think that's been the better way to go for Canada? Well, I don't accept the premise about dividing the country, Steve. I was just in Atlantic Canada last week. We launched new routes in Newfoundland and Labrador.

We're connecting them to Europe for the first time in five years. I was in Halifax where we announced the return of transatlantic flights to Paris. So actually across the Eastern Canada, we've been adding strategic flights over and over again since we've launched our growth strategy. So I just don't accept that. We're a national airline. We have key investments everywhere. In terms of how many large players there are, you know, 1996 when WestJet started, you know, that wasn't because anyone in Ottawa passed the law. It wasn't

because anyone wrote a report. It was because our founders felt the Canadians were paying too much to travel. And we are the company that has democratized air travel in Canada. And we're very proud of that. So our standing is quite unique in this discussion. Nothing has stopped Porter from ordering their airplanes and attempting to build a national competitor. And nothing has stopped Lynx and other entrants from coming into the market. So we've actually seen our domestic market share slightly go down,

and Air Canada's has actually gone down over the last few years. Our dominant carrier in Canada is Air Canada, and their market share is less, I think, than it's ever been. So there is strong competition in this market, and we're continually innovating both our product side and where we fly. But no, we haven't left any part of the country as WestJet. Monette, what's your view on whether we have enough players in this country to keep prices where consumers

would like to see them? Yeah, I mean, I would agree with Andy in that we, you know, we're seeing more competition now in our air sector than we've ever had before. And I think that's good news for Canadians. You know, the more competition that we have on routes, the more we see prices go down. You know, we used to call it the West Dead effect.

Lately, it's the flare effect. And I think whenever we see more than one carrier on a route and we see Porter expanding, like this is good news. And I think that will lead to lower fares over time. You know, our airports represent communities across this country. And to be clear, I'm not advocating for a taxpayer model at all.

I'm just saying we need to strike the right balance. Our view is that this model in Canada works quite well as a user pay model. So I do think that there's always room for improvements and tweaks. Well, we're gonna see how well it works when I talk to Jacob about because he's with flight claim and the backlog of complaints with the Canadian Transportation Agency is fairly robust.

Let me ask you Jacob how easy or hard it is to make a claim for compensation when you've had a problem. Oh it's not it's not really easy in all cases. So the system is quite broken here in Canada. So we need to understand that when a passenger get a flight disruption, he has to go through and ask for compensation to the air carrier, which are both judge and jury. So they make a decision to pay or not.

But it's also money that's come out of their pocket. And there's some loophole right now into the regulation and a lot of place for interpretation. And as well, there's no... it's like if we put speed limit on the road, but there's no one monitoring if the airlines follow those policies. It's working with the CTA, but only based on complaint. So when passengers actually go through and ask to the CTA to review the file, well now they have 84,000 files in the backlog with more than 18 to 24 months of wait. So for those air passengers that want to go through that process and it's about 91% of the Canadians that won't go through their

claim process because it's too long, it's too complicated, they don't even know if they are entitled to that compensation, well they will have to wait that that amount of time to get that compensation. So it's like if we encourage a little bit the bad behavior of our airlines right now. And do you want to come in on that? I sure do. I think the only thing I'd agree with Jacob on

is that the two-year wait time at the CTA is completely unacceptable for our guests. So just so your viewers know this and you, Steve, 98.5 of complaints that our company receives never see the regulator. They're dealt with within 30 days. You are either entitled to compensation or you are not. There's a very, very small percentage that feel compelled to go to the regulator. And we've been pushing Ottawa for a couple of years now to improve their administration. So we don't want anyone waiting one day more than they should for compensation.

And I just reject that we're a bad faith actor here. That's not correct. We solve complaints within 30 days. We're mandated to do so and we're pleased to do so. But it's a bigger problem. The problem is that these rules are confusing and they're confusing to interpret for us and they're confusing to interpret for the guests.

But also we don't want what happens in Europe. We don't want a $6 billion insurance scheme that doesn't improve service. The goal should be singularly how do we make sure that air travel is the most accessible, is accessible, is efficient, and there's value for travelers. So our goal is to improve the system so that we don't have a discussion about a backlog. There should be no backlog. There should be very, very few complaints. That's everyone's goal,

but if we don't improve the system, that's not gonna happen. If we just continue to airline bash, guess what? That's not gonna happen either. So I think everyone's got to unite here on what the actual goal is of the system. Well, let me for, you know, just for the heck of it here, tell you what the Canadian Transportation Agency

had to say about all this, because they put out a statement about their attempts to put together updated regulations, which they hope will improve things. And I'll ask our director Sheldon Osmond to bring this up, and I will read along for those listening on podcast. The agency says, it's important to note

that the Canadian Transportation Agency has held a first phase of consultations on proposed changes to the Air Passenger Protection Regulations in the summer of 2023, during which it received significant substantive input, including from airlines as well as consumer organizations, passenger advocates, academics, and the general public. The Canadian Transportation Agency has to take all of these comments into consideration while preparing proposed amendments to the Air Passenger Protection Regulations. The next step is for a draft of the proposed regulations to be published in the Canada Gazette Part 1

for another round of public consultation. Following this, the Canadian Transportation Agency will have to consider the submissions that it has received. There is no timeline for when the draft proposals will be made public. Jake, react to that if you would. Sure. Well, I think one of the biggest problems right now is that customer complaints actually reached an all-time high earlier this year. And I think a big actual reason why that's occurring is because of a lack of competition in our airline sector. If you have more competition

and you don't like a specific airline and you have complaints about that airline, then you can actually go to another airline to actually be better serviced, for instance. But in Canada, we have very few options for that. And I think the main reason why is really two actual aspects in terms of federal policies. First, there's actual rules that are placed on what we call

cabotage rules in Canada. So international airlines are not actually able to operate within Canada by flying from one city to the next. So if they fly to Toronto, for instance, they either have to return back to the country that they came from or go to another country. They're not allowed to then fly to Vancouver, for instance. Should we change those rules? I think absolutely. If we look at Europe, for instance, they actually have what we call full cabotage. So an Irish airline, for instance, can operate inside of Germany and they can fly to another

German city without having to fly back to Ireland. And the same thing vice versa for a German airline would be able to operate within Ireland. And then the second actual restriction that's placed as well is in terms of foreign ownership of airlines in Canada as well. So foreign investors can only own up to 49% of Canadian airlines currently and individual foreign investors can only own 25% of Canadian airlines. This actually is a very high barrier to entry because you need significant capital to actually compete in the airline sector, especially for low-cost carriers and new entrants into

the market. So this actually adds to a lot of the cost that's going on in the Canadian airline sector as well. Okay, let's get some feedback on this. Manette, I'm going to go to you first. This notion of cabotage, that you could actually be opening up the airwaves over Canada a lot more, encouraging more inner city flights by international carriers, that would be more competition, that would bring prices down. What do you say?

Yeah, first Steve, I just wanted to weigh in on the APPR because this is something that's impacting communities and it's impacting communities already across this country and we need government to get it right. So I say, take your time, you know, take their time hearing from industry, hearing from communities, because what's in place right now is too expensive for the industry.

And it's not striking that right balance of protecting passengers, but also making sure that the sector can thrive. We're seeing communities across the country that have air service three times a week. Their service is being cut because the risk is too high to some of our low-cost carriers like Flare. I've seen that happen this fall and we're going to see more of that happen if these changes come into place. So I would say take your time, study this and make sure we get that right. Now on Cabotage.

your time, study this and make sure we get that right. Now on cabotage? Yeah on cabotage, you know this is something that's been studied extensively. We need to be very careful in what we're looking at in Canada. Of course we want more competition and of course we want the right competition that works for our marketplace. Like we need to look at this objectively. We're not Europe, right? And air travel is a volume game. You know, our population is 40 million. It's about the same size as the state of California, but we're 25 times the landmass. So if we're to bring some of these other carriers in, some of them state funded, you know, what would that mean to our existing carriers? I think, you know, we need to look at all these aspects and make

sure that we're making the right decision for communities across Canada. We have population bases that are really spread out, that don't have the connectivity that they need now for their economies to thrive. So these are very complicated questions that need to be studied and considered very closely. I see Andy nodding his head. So let me, before getting Andy to weigh in, go back to Jake and say, you know, if Minnette's right, and it's not a level playing field out there

because some of our domestic carriers are competing against state-owned enterprises, there is an unfairness in that. Do you have any concerns about recommending wider, more open cabotage when it may not be a level playing field? Not necessarily, because ultimately the goal is to actually lower costs for consumers over time. Now, ultimately, you are going to compete on a unlevel playing field with certain state-owned operators,

but the actual end goal is to lower prices for consumers by allowing more competition in the market. And governments can also choose, you know, make regulations in terms of what they're allowing in terms into the country in terms of different international airlines as well. So they have a they can have a role to play there. But I don't buy the argument of a population density in Canada. If we look at a similar country like Australia as well, they have a much more competitive system for their airlines with low-cost carriers in their country as well. And they have a very similar population density like I mentioned. So yes, Europe is obviously influenced by their population density and they have a lot of competition in that market. But part of that is also allowing a lot of international airlines into the market to actually

lower prices for consumers over time. Andy, come on in on that if you would. Yeah, just on APPR, a quick note if you don't mind. You know, these proposals that they've put forward on APPR and cost recovery, honestly, I've worked in aviation for 20 years. I've never seen proposals more rejected than these two that have been proposed. And not by airlines, by communities, by airports, as Manette says, by premiers.

No one wants to increase the cost of travel at this time. Everyone, of course, wants to protect consumers, and so do we. But these, I just want to be clear, those proposals have been so thoroughly rejected and discredited in their ability to actually fix what's wrong, and that's why they haven't proceeded. On cabotage, look, that's a trade issue. I hope that Jake advocates for our right to fly between American cities. You know, we want to be as strong as

possible, as profitable as possible. And I just reject this Canadian mentality that the answer to Canadian aviation is something found somewhere else. We need to lower the cost of production for us, we need to improve our ability to be profitable. And as an order of magnitude, if you look at Canada, Steve, there's seven million Canadians that take flights from border airports. And the reason is not that WestJet doesn't have a good product that's of high value, or our candidate or anyone else.

It's because of taxes and regulations. So we need to fix that. And if you look at Lynx Airlines went bankrupt early this year, they didn't, you know, if anyone thinks Lynx Airlines would exist today, if Emirates could fly between Halifax and Toronto, I mean, it's absurd, right? So we need to fix the core. We shouldn't be talking about what colour the blind should be in the bedroom when the foundation of the system needs critical work.

Let me do a fast follow up with you as well, Andy. And that is, would it be, well, I won't characterize the question. Let me just make it very open-ended. What would you think about the possibility of WestJet being majority owned by international players and not Canadians? We haven't been rigid on foreign ownership historically.

Some of these rules and laws are outdated and probably need a good refresh. But the issue is one of reciprocity, Steve. I mean, you're not asking me does West Shed have ambition to buy a portion of an American airline so that we could be one of the strongest in North America? And I think that speaks to some of the mentality and Canadian culture around our business. Okay, I'll ask you. You want to buy a piece of American Airlines? Well, my point is that these rules should be reciprocal. Yeah, of course, we are entrepreneurial.

We don't want to stop growing and we want to serve as many people and provide as much value as we can. So, you know, I think everything's on the table for our future. Okay, here's something from the competition bureau. And again, this is from Matthew Boswell, the Commissioner of Competition, who sent this in an email and we'll put this on the record for everybody's edification.

Sheldon, the graphic if you would. Air travel is a critical service and we know many Canadians are frustrated by the cost and quality of the service being provided domestically. To better understand competition issues in the industry, we launched a market study to examine what changes can be made to improve competition in passenger air travel in Canada. Our focus is to determine whether a lack of competition is driving these issues and on the steps governments can take to make it easier for new businesses to compete and innovate. It is too early to determine what our conclusions might be, however once the study is complete we'll publish a final report with recommendations

to all levels of government to improve competition in the airline industry. Okay, let me go to Jacob. I haven't heard from you in a bit. Do you want to weigh in on this issue and tell us whether you believe? Well, what do you read into that statement from the competition bureau?

Yeah, kind of agree. When we look at the punctuality level of our airline here in Canada and North America, we're always on the low bottom tiers of punctuality and we're not trying to improve that much. When we look at our neighbors down south in the U.S., the airline are way more punctual and they're trying to improve because there's way more competition. So the overall competitiveness will make an impact on the overall service that the customer gets. Okay, let's talk travel distances here. And how do we want to approach this? Okay, Andy, let me get you in first on this. Montreal to Iqaluit's 2,000 kilometers.

I bet you a lot more people would like to see the far north of this country. But of course, that is a route not particularly well-traveled. And as a result, I'm guessing it costs a fortune. Do you know off the top of your head how much Montreal to Iqaluit would cost? We're not fortunate enough to serve that route so it's not one that's in my uh rolodex of current fares in my brain but um look domestic domestic travel can be expensive in Canada.

I'm going to guess it's 2500 bucks. I it might even be more than that. Might be 3000. Is there, I don't know, is there anything you think ought to be done? I don't know whether it's taxpayer subsidy or it's some other idea that could encourage Canadians to see more of their own country as opposed to you know sometimes it's 300 bucks to go to London, England for example. Yeah and this is at the heart of our submission to the Competition Bureau that the government should work very

actively to reduce their fees. So we came out in the spring and we said, airport rents should not be collected. We said government fees should be frozen. And part of the reason for that is what we hear from communities, what we hear from communities is why does the government tax our essential mode of transport while rail and marine and the confederation bridge and others are frozen. So we're not subsidy seekers, but there's a fundamental question here for rural and remote and smaller communities, which is the inequity between how that transportation is treated by the government and how other modes are. You said

off the top of the show, you live in downtown Toronto, work in downtown Toronto, you have plenty of options to get to Ottawa and Montreal. of the show, you live in downtown Toronto, work in downtown Toronto, you have plenty of options to get to Ottawa and Montreal, you can drive, you can take the bus, you can take via, you got a host of options before you. If you live in Fort St. John, British Columbia, or Wabush or Goose Bay or Iqaluit, it is air that is your essential mode. So these communities are starting to say, why are we treated differently? Why are why is our essential

mode something that the government of Canada generates revenue from? So increasingly people are saying that's just not right. And that's why we've called for a review of the whole thing because we just think it needs a full rethink. Monette, how would you do things differently in order to potentially encourage Canadians to see more of their own country

because it would be less prohibitively expensive to do so. Yeah, I think this is less about, you know, someone being able to take a vacation and more about the really vital role air travel plays in our country. You know, if you look at Nunavut, it's 25 fly-in, fly-out communities or you look at Labrador, like they need that air access in order to be able to do medical appointments, to get their goods delivered in their communities. This is essential air service. It's their only way in and out.

So I do think, you know, it's not up to airlines to provide that service if they can't make the business work. I think that's part of this that needs to be looked at to say what part of air travel is a social good and what role does government play in that essential service in order for these communities to have the access that they need and the goods and services that they need. Other countries have essential air service programs for example, it's something we've never had in Canada.

Our airports were privatized 30 years ago and we've never seen the government put in an essential air service program for some of our smaller communities in the North that really do require it. So I think there is many things that we could look at. That's one, so is an infrastructure program for some of these smaller airports.

They created the airport capital assistance program 30 years ago when they privatized airports as they recognized that some of these small airports wouldn't be able to pave their runways and do some of this work and it wouldn't be commercially viable. You know, it's 30 years later and the $38 million in that program does not go a long way, it might pave one runway. So I think we're challenged in terms of infrastructure investment into our essential airport assets when you're talking about small airports in rural communities they really do require

partnership in that. Jacob have you got a view how we could improve this? Yeah I do agree with Monat we We cannot rely on private company to offer essential services down north. Obviously there should be regulation around it and some government program. Okay, we've got just a few minutes left here and Jake, let me get you on this. Do we need a new regulatory environment

around the airline industry in this country? And if so, what's job one? Yes, I definitely think we need to change how we're regulating the environment. And I do agree with Andy's earlier comments about fees and taxes being a very prohibitive cost right now to airlines. And ultimately, those costs are being passed on to consumers. So I think we need to revisit how we're actually handling our fees and taxes in that sector because there's just a myriad of taxes and fees that are added on top of that. And then we also need to look at our foreign ownership regulations, the capitaj rules as well

in Canada, and ultimately getting to how our airport authorities are actually owned and operated. Looking to the example of other countries like New Zealand and Australia that actually have a different model and some European countries as well, where a lot of these airports are actually privately operated. They have better incentives to actually lower costs for consumers over time.

And this actually leads to more competition, better prices for consumers, and an overall better air travel experience in terms of cost and quality of service as well. Andy, I take your point that we don't want to unilaterally disarm in this country unless we know that we're going to get equal treatment in other countries as well. Let me just ask you finally whether, I mean the king of tariffs is about to come into office in a couple of months.

Can you imagine us making any progress on these kinds of cross-border issues, given the inflammatory tone that's coming out of Washington these days? Maybe in another life I was a professor of international affairs, but look, it's a period of uncertainty for everyone. But look, we are the number one air carrier in so many US markets. And the Canadian economy is so dependent on US tourists. So everyone hopes and expects that that's going to continue unabated because so many jobs are dependent on it. And we've expanded so much between the Canada and the US in the last year from Saskatchewan

and Winnipeg and the two Alberta airports. So everyone is dependent on this relationship, whether it's inbound tourisms or any other products. So, you know, we can't just hope for the best. I think everyone's engaged in the conversation and making sure that the other things that we depend on from our neighbors continue. Manette, last 30 seconds to you.

It actually, well, let me put it this way. We've been worried so much about what will happen to the auto industry, what will happen to agriculture in this country, what will happen to numerous other goods that are traded over the border. I hadn't even thought about airline tickets. If Donald Trump once put 25% tariffs on everything, does that mean airline tickets as well and what does that potentially mean? Yeah, I mean I think think we're, we're all watching what's happening with those tariffs. And I think we'll be watching that closely. But I wanted to take my last 30 seconds to talk

about our airports being privatized and and what was just raised. I think people need to realize that our airports in Canada were already privatized. They were privatized 30 years ago. They're already commercial entities. The only difference between here and Australia is that the operational surpluses from our airport revenues actually go back into the infrastructure and not into shareholders' pockets.

We've extensively studied this. And I think, you know, our model is advantageous. There's some in Australia that would love to see what happens here in Canada because we have a higher capital intensity ratio. The difference between here and Australia is they don't have our winters and I'm sure you've seen Calgary and Edmonton have already had snow and you know it is a big portion of our cost in terms of our airport costs. So I think there's many good elements of our airport model And I think when we're only about 12% of the cost of a ticket of the average ticket in Canada,

I think the issue is as government adds regulation, it's adding cost and adding complexity to our system. And we need to look at this overall and say, how can we make this better for consumers? That was a little more than 30 seconds Minnette, but you said it so well, I'll let you get away with it. I wanna thank all four of you for coming on to our airwaves tonight and helping us out with this.

Jake Fuss from the Fraser Institute in the top left corner, Andy Gibbons from WestJet in the top right corner, Manette Pasher from the Canadian Airports Council in the bottom left, and Jacob Charbonneau, flight claim. It's great to have you all on TVO tonight. Thank you. Thank you.

Thank you. Thank you. Thanks.