Industry Committee on Jan. 31st, 2008

[The Chair, Conservative, James Rajotte]

I call to order the 16th meeting of the Standing Committee on Industry, Science and Technology. Pursuant to Standing Order 108(2), we are continuing the committee's review of Canada's service sector.

We have two panels, with an hour for each. We have three organizations for the first panel.

The first organization is the Air Transport Association of Canada. We have the president and CEO, Mr. Sam Barone. We also have the vice-president of policy and strategic planning, Mr. Fred Gaspar.

The second organization is the Canadian Trucking Alliance. We have the senior vice-president, Mr. Graham Cooper. I understand we also have a second individual, Mr. Ron Lennox, vice-president of trade and security.

The third organization we have is the Supply Chain and Logistics Association Canada. We have the president here with us today, Mr. Bob Armstrong.

Welcome to all of the witnesses. Each of your organizations has up to five minutes for an opening statement. We will start with Mr. Barone, and then immediately after your presentations we will go to questions from members.

Mr. Barone, begin when you are ready.

[Sam Barone, President and Chief Executive Officer, Air Transport Association of Canada]

Thank you, Mr. Chairman.

Good morning, ladies and gentlemen. My name is Sam Barone, and I'm the president and CEO of the Air Transport Association of Canada, representing Canada's commercial aviation industry.

I would like to first thank the members of this committee for inviting us here today and to congratulate you for your initiative to examine the state of Canada's service sector.

It is probably fair to say that no service sector operates under as much scrutiny and is as vital to Canada's economic interests as our air travel industry. Every day our members connect tens of thousand of Canadians and their products to each other and the world. Put simply, commercial aviation is a vital input into every segment of the economy in Canada.

With this perspective in mind, I would like to share some thoughts with you about how we can best ensure the ongoing availability of world-leading fare and service options for Canadians.

As many of you will already know, Canada's commercial aviation industry is enjoying an upswing in fortunes over the recent past after a decade of often difficult restructuring. Even in these very good times, however, ours is still a volatile business that is highly vulnerable to global economic and geopolitical shocks. With high fixed costs, low margins, and oil hovering at around $100 U.S. a barrel, we must remain vigilant to ensure the sustainability of a healthy aviation sector in Canada.

While carriers have succeeded in reinventing themselves in response to the new permanent reality of a low-cost air travel model, our ability to sustain that service standard, especially in light of growing economic pessimism, is being dragged down by a highly punitive, industry-specific taxation regime that limits investment in new service and fare options for Canadians--goals that, as I suspect you might agree, ought to guide the policy framework for our sector.

The airport rent regime, for example, along with other input taxes drains approximately half a billion dollars a year out of our sector. Every year the Government of Canada collects between $200 million and $300 million in rents from not-for-profit airport authorities for simply having the facilities that they entirely built and paid for on crown land.

As you well know, these airports were transferred in the 1990s as a deficit-cutting measure. Transport used to lose millions of dollars a year running these airports and had no financial means to invest in the upgrades that these increasingly old facilities would require. Once they transferred the responsibilities to these local airport authorities, they absolved themselves of all financial responsibilities while guaranteeing themselves perpetual rents. Unlike any other landlord-tenant relationship, the tenants--more accurately, our customers, the passengers--of the airports are the ones who pay all the costs, including the cost of building the place.

I began my remarks by referring to the strategic importance of our sector to Canada's broader economic interests. Committee members would do well to ask themselves about the effect of such punitive aviation taxes on our tourism and hotel sectors as well as other key service industries.

In addition to rent, the air traveller security charge represents another critical element of taxation policy deserving of reconsideration. The air transport security charge now has a surplus, according to the Department of Finance, of over $80 million. Since its inception in 2002, it has taken $200 million in excess revenues.

The fuel excise tax is another industry-specific tax policy that has to be reconsidered. Originally introduced in the 1980s as a deficit-fighting measure, this surcharge imposes a 4¢-per-litre levy on jet fuel, which is four times that in place in the United States. With fuel as one of our top costs, we estimate that the Government of Canada, on this fuel tax alone, took $100 million. This is at a time when we have $12 billion U.S. outstanding on new aircraft on order.

We should help lower the costs of doing business to encourage a healthy, competitive industry, which should be taxed as all other sectors are, on the outputs of their business activities--namely, profits and wages.

In various policy statements, programs, and initiatives, we hear the right kind of messaging that is very much reflective of what we are calling for here today. Advantage Canada, the Pacific gateway strategy, Transport Canada's own blue skies initiative, slogans such as “A strong economy, a strong Canada”--these are all designed to aid and leverage Canada's international competitiveness.

What we can't figure out, Mr. Chairman, is why these high-minded programs and the principles they are based on are not applied to our sector. Other countries, such as Singapore and the UAE and Dubai, have all figured out the strategic importance of their aviation sectors by addressing their fiscal and policy frameworks first.

Let's recall that we're talking about a tangible and direct contribution to Canada's GDP. Every time a foreigner flies on a Canadian carrier, we are an exporting industry, which shows up on the balance of payments. Canada, on the other hand, chooses to treat its aviation sector as a cash cow.

I hope, Mr. Chairman, that I have shown you a vision of how fiscal and taxation policy in our sector can and should be changed to promote growth and innovation and investment--in short, to promote an advantage for Canada in domestic and global aviation. Policy can and should be used as a strategic instrument to enhance Canada's place in a competitive world and to keep Canadians connected to each other and the world.

With that, Mr. Chairman, I thank you once again for inviting me here today, and I look forward to the panel's questions.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Barone.

We'll go now to Mr. Cooper, please.

[Graham Cooper, Senior Vice-President, Canadian Trucking Alliance]

Thank you, Mr. Chairman.

Good morning, ladies and gentlemen.

I'll say just a quick word about the Canadian Trucking Alliance. We are a federation of Canada's seven provincial and regional trucking associations, collectively representing over 4,500 motor carriers coast to coast. CTA is the voice of the Canadian trucking industry on policy, legislative, and regulatory issues at both the national and international levels.

I will say just a few words about the structure of the trucking industry. Trucking in Canada is made up of for-hire carriers, private carriers, owner-operators, and couriers, and it's an almost $60-billion-a-year industry. The for-hire sector, comprising over 10,000 carriers, accounts for about half the industry's total revenue. Overall, the industry employs more than 400,000 people, including 260,000 drivers. There are just over 600,000 commercial trucks on the road, and half of these are classified as heavy trucks, including about 200,000 tractor-trailers.

Trucking is Canada's dominant freight mode, accounting for an estimated 70% of domestic shipments by value. Trucks carry almost two-thirds of Canada-United States trade, 50% of exports, and 75% of imports. Cross-border transportation represents over 40% of the industry's revenue stream.

Trucking is a derived-demand industry, and therefore economic conditions in domestic and international markets are reflected in the industry's freight volumes and financial performance. The high value of the Canadian dollar, combined with the general weakening of the U.S. economy, the resulting reduction in Canada exports to the U.S. and the manufacturing downturn, particularly in central Canada, are all having a profound impact on the trucking industry in most parts of the country.

In January 2008, the proportion of manufacturers stating that they would decrease production over the next three months stood at 33%, a nine-point increase from October 2007. This was partially offset by 19% of manufacturers who expected to increase production during this period. Nonetheless, the balance of opinion for production prospects was the most negative since January 2002.

It is in the cross-border market that the Canadian trucking industry is being particularly hard hit. From November 2006 to November 2007, Canada's total exports to the U.S. declined by 3.8% and imports by 1.9%. However, these aggregate figures do not tell the whole story. Trucking specializes in the carriage of relatively lower-weight and higher-value products when compared with other freight modes. In fact, just five commodity groupings of manufactured or partially manufactured goods traditionally represent over three-quarters of total exports by truck to the U.S. A comparison of export statistics for November 2006 and November 2007 shows year-over-year decreases of 4.4% in the industrial goods, 3.7% in machinery and equipment, 5.9% in automotive products, and 9.9% in other consumer goods.

I'll say just a word on the cost pressures on the industry. Diesel fuel represents the second-largest component of the trucking industry's cost base next to labour. Commercial diesel volumes are massive, with over 16 billion litres consumed annually in Canada for road use. On every litre sold, the federal government collects 4¢ in excise tax. As Mr. Barone has mentioned, the federal excise tax on motor fuels, which was introduced in the 1980s ostensibly as a deficit-fighting measure, has since that time clearly outlived its stated purpose. Unlike the GST, the excise tax on commercial diesel fuel is not a flow-through tax and therefore achieves little but to boost the government's general revenues, but in so doing it heaps an additional input cost on the trucking industry. The Canadian Trucking Alliance has long argued that this type of tax is both unjustified and regressive. It should therefore, in our opinion, be overhauled and treated as a flow-through tax similar to the GST or, preferably, be abolished altogether.

The continually rising price of diesel fuel has in recent years created an enormous burden for the trucking industry and its customers. Using retail prices as a reference point, the average price in Canada has risen from 75.9¢ per litre in 2004 to 113.2¢ per litre on January 15, 2008--just about two weeks ago--an increase of 49% over a three-and-a-half-year period, and this is after the 2¢ reduction in the GST during this period.

While motor carriers have been able to pass some of this increase on to their customers through fuel surcharges, current economic conditions in the industry make this increasingly difficult to accomplish.

Competition is fierce, largely as a result of excess capacity--what has been referred to as too many trucks chasing too little freight--in the current economic environment. As a consequence, rates are at best stagnant and in many cases are discounted just to keep trucks on the road.

Industry margins, traditionally thin, are being squeezed even more as many carriers find it increasingly difficult to fully offset the rising cost of diesel fuel by way of fuel surcharges.

I have just a concluding comment on the issue of border security. Truck transportation security programs, particularly at the U.S. border, continue to result in duplication, overlap, and ever-increasing costs. Like the exporters whose goods we carry, the trucking industry is concerned that the cost of moving goods continues to be driven up by security measures that are developed and rolled out in isolation from one another. The big picture, and an appropriate balance between security and trade efficiency based on an assessment of risk, seems to have been lost.

The trucking industry fully understands how the Canada-U.S. trade picture has changed since September 2001. It has, in fact, played a key role in trying to maintain the balance between efficient trade and enhanced security by participating in a wide range of Canadian and U.S. border security programs. However, more than six years after 9/11, it is becoming apparent that Canada and the U.S. have created an array of programs that don't always dovetail with one another. And the situation seems to be getting worse.

Thank you, Mr. Chairman.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Cooper.

We'll now go to Mr. Armstrong, please.

[Bob Armstrong, President, Supply Chain and Logistics Association Canada]

Good morning, Mr. Chair and members of the committee. Thank you for the invitation for a chance to talk a bit about the supply chain and logistics services sector.

Our association has about 1,000 members across Canada. They're not corporate members; they're individual members who pay their own dues and come to SCL to continue to enhance their own career, learn more about the industry, and get education, and the like, so that they network with their peers.

In Canada, about 1.8 million people are employed in our logistics industry, so it's a very significant industry in this country. As you heard earlier, there are over 400,000 employed as truck drivers alone. There are over 400,000 who work for users. That's people who are in manufacturing, retail, and wholesale who are the logistics side of those. They could be the warehouse operators, jobs like that, but they're in the logistic supply chain side of those companies. But there are also 235,000 who are employed as service providers to the industry, and many of my members, of course, are service providers.

Canada, as a trading nation, requires a global and a national supply chain and logistics network that is efficient and cost effective if we're going to continue to compete in the global market.

I'm going to be very brief this morning, because my colleagues from air transport and trucking have given you a lot of the technical information. I just want to make you aware of a few of the challenges we face in the supply chain and logistics sector in Canada.

The challenges tend to be, first, awareness of logistics as a profession, education, border infrastructure, national infrastructure, reduction of interprovincial trade barriers, the lack of promotion of foreign trade zones in Canada, and more investment that's needed in the Canada Border Services Agency.

From an awareness perspective in general, awareness of the supply chain as a profession and as a large-scale employer is lacking in our country. Service providers have difficulty recruiting enough potential employees into the sector, and this needs to be addressed by both government and relevant departments. Raising awareness at the secondary school level will help to get more students interested in supply chain careers, allowing them to take advantage of the post-secondary education programs and classes that institutions are struggling to fill.

I can tell you that we accredit a lot of colleges across Canada. We do accreditation programs to help them with their supply chain and logistics programs, and what's appalling is that they can't fill them. Just last week, Humber College cancelled their supply chain program because of a lack of students. It's kind of scary.

At present, supply chain could actually be called the default career, not ranking in amongst students' usual choices when graduating from high school. From an educational point of view, attracting our young people to enter a career in logistics is a long-term challenge. New Canadians who are fluent in multiple languages and have foreign degrees or certification need assistance in getting integrated into our industry. Shortages in trucking and international freight could be alleviated by attracting qualified and trained individuals from other countries through government assistance equivalency evaluations. A comprehensive approach to promote the supply chain as a career must be formulated and properly funded in order to maintain a well-staffed and efficient industry.

On the infrastructure side, both personal and commercial travellers are severely dependent upon border infrastructure, particularly on land but also as regards sea and ocean freight. It's vital that the federal government continue working towards support in these areas as there are simply not enough land lanes, for example, to facilitate the process of crossing the border, as you heard from the trucking association.

From a small and medium-sized business enterprise perspective, they need a lot of help. How do they grow their import-export business when they have these complex new security regulations? The cost of compliance has actually become prohibitive for a lot of Canadian companies. There should be an emphasis on the reduction of interprovincial trade barriers and on harmonizing regulations regarding safety standards, driver hours, and the like across our country.

There should be more investment in the Canada Border Services Agency so that we can have a streamlined customs entry and regulation program. The CBSA is understaffed.

In closing, Canada should be promoted as a trade gateway or a North American logistics hub, with thriving foreign trade zones to drive our goods deeper into the heartland. What we really need is a national supply chain and logistics strategy to support logistics skills and development. Ideally, Canada should be the gateway for goods moving into and out of North America.

Our manufacturers, plain and simple, don't have the skilled workforce nor the necessary technology to do it on their own. That's why they outsource to third-party logistics service providers. It is imperative we ensure that our supply chain and logistics services sector is the very best it can be.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Armstrong.

We'll now begin with a six-minute round of questions. We'll start with Mr. McTeague.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Thank you, Mr. Chair.

Thank you, witnesses, for being here. Many of you I know and have worked with in the past.

I'm going to start with you, Mr. Armstrong. You seem to have a lot in common with Mr. Cooper and the trucking industry.

You talked about the need to strengthen the Canada Border Services Agency. You feel it's understaffed. You suggest that there's better need for skilled workers. I'm wondering if the jobs in your industry are going unfilled.

Do you see a better sense of investment in federal infrastructure at borders as being part of the response to the need you've cited? Mr. Cooper, perhaps you could also give us a better illustration of some of the difficulties your members are facing as they try to cross the border. What specifics do you recommend to this committee?

Mr. Armstrong.

[Bob Armstrong]

From my perspective of serving on a lot of committees—and so does Mr. Lennox—our CBSA is struggling to maintain a service level that's adequate. It's getting scarier because the border is getting stickier.

The reality is that it is understaffed. Now, with all the employees having to take the gun training courses, and failing, our biggest concern, members of the committee, is what's going to happen next summer. Traditionally, the CBSA hires thousands of university students to man the booths in the summer. Well, it can't put them out there as much now because of the gun situation, and it has a lack of employees of its own who are trained.

We're really afraid of what we haven't seen yet. Last summer, as Mr. Lennox and Mr. Cooper can tell you, we had huge lineups at the border, generally going into the United States. But I submit to you that it's going to happen this year in our country.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Cooper, and then Mr. Lennox.

[Graham Cooper]

Thank you, Mr. McTeague.

I'll just make a very brief general observation, and then I'll ask Mr. Lennox to give you a little bit more detail.

Your question, in terms of physical infrastructure, is certainly one issue, and that is an issue being talked about a great deal, Windsor probably being the best example that we can think of. There's also, if you will, a systems infrastructure and the wide range of programs that I made reference to in my opening statement.

I would like Mr. Lennox to fill in a few of the details for you.

[Ron Lennox, Vice-President, Trade and Security, Canadian Trucking Alliance]

Thank you.

I'll speak for a minute about cost. That is a really big concern for us.

We have all these new programs that have been rolled out—supply chain, security programs, and advanced manifest programs to submit information electronically to customs authorities, and so forth. We have programs for haz-mat security. We have programs for port security that affect truck drivers servicing those ports.

None of those programs comes without a cost. We have carriers who have spent hundreds of thousands of dollars on programming to submit their manifests to the United States. If they want to use a third-party service provider, there's a cost per manifest. There are costs involved in training staff, training truck drivers, and training office staff.

These costs keep escalating. As the programs keep rolling out, it would appear that, one after another, the costs keep going up. These costs have to be borne by trucking companies, and we do the best we can to pass those on to our customers.

The other comment I'll make has to do with traffic. As Mr. Cooper mentioned, traffic is down at most of the major commercial crossings right now. Certainly, over the last five or six years, traveller traffic has been down sharply as well.

The big concern we have right now is what's going to happen when it goes back up to what I will call “normal” levels. I'm really concerned that we won't be in a position to move freight adequately and quickly across the border, if we get back up to where we were, say, five or six years ago.

Thank you.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

I am going to raise some of the issues that you've raised with respect to fuel, Mr. Barone and Mr. Cooper, and no, I won't get into gas or taxes.

If I understand it correctly, Mr. Cooper, you have a problem with the level of taxation on diesel, which I understand to be--the federal excise tax I think is 4¢; in my province it's 14.7¢, and obviously I don't want to point fingers here, but much of that 4¢ is remitted if you're a business, and the GST, of course, is every three months. Specifically, I guess, in terms of the price increase, particularly in winter months, it must be very difficult for your members.

This also brings Mr. Barone into the question as well. There seems to be little availability for jet fuel, particularly in western Canada, in our chair's region. New mixtures, new requirements, particularly environmental requirements, create an undue strain I think on both your industries.

Do you have any suggestions in that regard as to how we can help accommodate those changes? Obviously, we have a restriction in the amount of fuel that is made available, and what is made available is at a very high price over and above government impositions of taxations or added cost as a result of what you just mentioned.

[Sam Barone]

Mr. McTeague, could you just elaborate a little bit more in terms of the...?

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Jet fuel? I understand the availability of jet fuel in western Canada is far more difficult to come by, particularly in British Columbia and Alberta. Refineries out there are not capable of meeting certain specifications. Much of the jet fuel that your members use in western Canada actually has to be imported from the United States to meet the demand. I see the demand is going up there.

Are there any suggestions you can give this committee, or is it something you may want to come back to the committee on at some point down the road?

[Sam Barone]

I think in general terms, where we have restricted supply, our first objective is to meet our schedule, and we will ferry fuel and get fuel wherever we can get it. Especially in British Columbia--the jurisdiction there--the excise taxes are a bit punishing. We would always welcome partnering with government on how to open up the supply lines that would get us better access, especially during the winter months. Fuel is approximately 30% of our total cost base. So we would definitely welcome exploring additional opportunities.

[The Chair, Conservative, James Rajotte]

Mr. Cooper, briefly.

[Graham Cooper]

Thank you.

I have just a couple of brief comments, Mr. McTeague.

As I mentioned in my opening statement, the issue as far as the industry is concerned is that when we compare the federal excise tax on diesel fuel--and indeed gasoline, for that matter--with, for example, the provincial taxes that you've made reference to, one of the differences, of course, is the use to which governments put that money. If you look at the reinvestment rates at the federal level, they're significantly lower than at the provincial level.

As you know, in our conversations and dealings in the past, one of the things the industry is concerned about is the state of Canada's infrastructure. I think it would be, if I might use the term, more palatable to the industry if it felt that 4¢ was doing something worthwhile. As we move into an era of discussion of carbon taxes and those sorts of things--environmental charges and the like--perhaps that 4¢ might be used for those sorts of things, as opposed to general revenue.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. McTeague.

We'll go to Madame Brunelle.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Good day, sirs. Thank you for joining us.

Mr. Cooper, can you tell me what type of motor carriers the Canadian Trucking Alliance represent? Does it represent large fleet owners, or small trucking operations? I ask the question because you said that exports had declined by 3.8%. We all know what impact rising oil prices have had, coupled with the rising dollar that has achieved parity with and even overtaken the US dollar. Are you concerned that some small trucking operations and some of the companies that you represent might go out of business?

[Graham Cooper]

In answer to the first part of your question, our organization, as I mentioned, regroups over 4,000 motor carriers, large and small. In Canada, about 90% of trucking companies have fewer than five trucks. It is predominantly an industry made up of small companies. There are the big companies, obviously, that you see on the highway, and you know who they are nationally as well as provincially.

I would say that in terms of the hardships the industry is facing, it's evenly spread. There is an old expression, “the bigger they are, the harder they fall”, and we've seen that in the past. I don't think there's any particular disadvantage to smaller companies, other than the fact that perhaps, in an extended period of downturn, they may not have the deep pockets that some of the larger companies have and the access to capital to keep them going and so forth.

However, we found many of these smaller companies have been able to find niche markets because, by virtue of their smaller size, they are perhaps able to be a little quicker on their feet, if I can use that term. For example, you'll find some smaller companies in this area along the St. Lawrence that will have four or five trucks and will specialize only in cross-border transportation. They may employ, as a result of that, a higher proportion of aboriginal Canadians than you would see in other companies because those aboriginal Canadians have more flexibility in terms of operating in the U.S.

The question of business failures, bankruptcies, mergers is always there. As I mentioned in my comments, in the current situation where we have excess capacity and what's colloquially being called too many trucks chasing too little freight, the expectation would be that perhaps there might be some rationalization. Whether that is a large company buying a small company or a small company going out of business, those kinds of risks always exist in terms of this kind of economy.

At this point, I don't perceive an undue risk for the smaller companies. As I mentioned, depending on the region and the size of the association, we will have a large number of smaller companies as our members, some with one, two, and three trucks. We try to look after their interests as well.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you.

Mr. Barone, you spoke about your problems and your small profit margin. What percentage of your passengers are leisure travellers and what percentage are business travellers? I ask the question because I have to believe that the fact our Canadian dollar has achieved parity surely has less of an impact on business travellers whose situation may be more stable? Can you give us a breakdown of your passenger segments?

[Sam Barone]

Thank you, Madame Brunelle, for your question. I very much appreciate it.

In terms of the composition of our passenger segments, if you will, we have different segments in general. Of course, we have business travellers, who travel on business class fares and/or economy fares. We also have another market segment called the visiting friends and relatives. Then we have the leisure class passengers, who travel in terms of general markets stemming from the airline business.

In general, more than 90% of the passengers our member carriers carry around the world are in the leisure class, visiting friends and relatives. They are more of the price-sensitive, price-elastic segments of the air travel market in economic terms.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

I would have thought that business travellers accounted for a much larger passenger segment, what with globalization. I am surprised by what you are telling me. I would have thought that people who travel a great deal on business, often because parent companies are...Someone may work in Montreal, but the parent company might be located somewhere in the United States. I thought this type of passenger accounted for a much larger percentage of your operations.

[Sam Barone]

I don't disagree at all, actually. If I understand you correctly, those passengers do give us higher margins in general, because on the type of fares they travel, they usually want the most flexibility in terms of being able to change their ticket or the times of day they travel, and so on. Usually the passengers travelling for leisure and those visiting friends and relatives travel at times that are more convenient—not to themselves, but they do shop around for fares. So there's a trade-off between frequency and fare options in terms of the scheduling.

In general, to your point, there are some markets internationally, such as Geneva, New York, Frankfurt and Düsseldorf, and Paris that are big markets that can sustain all business class services. But in general the market is such that if you're not filled up at the back of the aircraft, it's very difficult to make money.