Bad federal policy increases airfares in Canada

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Canadian air travel can be summed up in a few words: poor service, high prices and little choice. As a federal election looms, Canadians should understand that bad federal policy is largely to blame.

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According to the International Air Transport Association, Canada ranks 101st out of 116 countries for the cost of air travel. And it’s not as if service is great: customer complaints against Canadian airlines grew more than sixfold from fiscal year 2018-19 through 2022-23.

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Why are ticket prices so high?

For starters, taxes and fees imposed by governments and airports account for 25 to 35 per cent of airfare costs in Canada. For example, “airport improvement” fees average $32.20 per departing passenger at Canada’s largest airports — compared to $6.47 in the United States and $16.38 in Australia (all figures here and below are in C$). For air traffic control (ATC), airlines pay charges based on distance, geography and other factors, and these costs are passed on to consumers. In a typical example, to fly a Boeing 777 in Canada, airlines must pay an estimated $802 in ATC fees, compared to between $192 and $478 in the United States and $493 in Mexico.

Moreover, Canadians pay between $9.46 and $34.42 per ticket in “security” fees, compared to $7.65 for Americans and $4.80 for Australians. Canada’s “landing” fees — charged by the airports based on the weight of the plane — are among the highest in the world and 35 to 75 per cent higher than at U.S. airports.

Our high fees result in part from Canada’s flawed airport ownership structure. The federal government owns the land on which Canada’s major airports are built, and leases it back to not-for-profit airport authorities that pay rent — up to 12 per cent of airport revenue — to Ottawa. The airports impose fees on passengers to recoup this revenue.

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Taxes and fees aside, another reason for high airline charges is lack of competition. Crucially, the federal government prevents foreign airlines from operating domestic routes within Canada, which severely limits choice and competition. While the government allows a foreign airline such as Lufthansa to fly from Frankfurt to Toronto, it prevents Lufthansa from flying passengers from Toronto to another Canadian city. As a result, there’s little competitive pressure for Canadian airlines to lower their prices for domestic air travel.

The European Union, in contrast, removed such restrictions for member-states beginning in the 1990s.  The result? More competition, including from new low-cost carriers like Ryanair, a 34-per cent decline in ticket prices, more flights and more cross-border. The entry of new low-cost carriers alone helped lower airfares by 20 per cent.

Given the sorry state of air travel in Canada, our new study identifies four ways the federal government can improve competitiveness and lower airfares.

First, it should reduce taxes and fees to be more in line with those in other countries. Second, it should negotiate deals with other countries, including the United States, to allow foreign airlines to operate within Canada in exchange for Canadian airlines operating in those countries. This would help both Canadian consumers and Canadian airlines. Almost 10 years ago, a federal government report concluded restrictions on foreign airlines increased air travel costs and had outlived their usefulness. It recommended Canada work towards an “open common market for air services” with peer countries. The key is reciprocity: if U.S. airlines, for example, are allowed to access the Canadian domestic market, Canadian airlines must have access to the U.S. market.

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Third, the federal government should follow in the footsteps of Europe, Australia and New Zealand, sell its remaining interests in airport leases and allow for-profit organizations to own and operate airports.

Finally, the government should reduce the regulatory burden on the airline industry while maintaining strong safety standards. On this front, Canada can emulate the successful U.S. deregulation of the late 1970s and 1980s, when widespread reform produced more competition, more consumer choice, lower fares and safety improvements.

Canadians will likely head to the polls sometime this spring. If the next federal government wants to help improve the quality of air travel, increase consumer choice and lower airfares, it should reform Canada’s antiquated airline policies.

Financial Post

Jake Fuss and Alex Whalen are economists at the Fraser Institute.

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