Transport Committee on April 30th, 2024

[The Chair, Liberal, Peter Schiefke]

I call this meeting to order.

Welcome to meeting number 111 of the House of Commons Standing Committee on Transport, Infrastructure and Communities.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Tuesday, April 18, 2024, the committee is commencing its study of the state of airline competition in Canada.

Before we begin, I'd like to remind all members and other meeting participants in the room about the following important preventative measures.

To prevent disruptive and potentially harmful audio feedback incidents that can cause injuries, all in-person participants are reminded to keep their earpieces away from the microphone at all times. As indicated in the communiqué from the Speaker to all members on Monday, April 29, all earpieces must be replaced by a model that greatly reduces the probability of audio feedback. The new earpieces are black, whereas the former earpieces were grey. Please only use the black, approved earpieces. By default, all unused earpieces will be unplugged at the start of a meeting. When you are not using your earpiece, please place it face down, as indicated, on the middle of the sticker for that purpose—you will find it on the table. Please consult the cards on the table for guidelines to prevent audio feedback incidents.

Colleagues, the room layout has been adjusted to increase the distance between microphones and reduce the chance of feedback from an ambient earpiece. These measures are in place so we can conduct our business without interruption and protect the health and safety of all participants, including our interpreters. Thank you, all, for your understanding and co-operation.

Today's meeting is taking place in a hybrid format. In accordance with the committee's routine motion concerning connection tests for witnesses, I'd also like to inform you that all witnesses have completed the required connection tests in advance of this meeting and have passed those tests.

I'd now like to welcome our witnesses.

Appearing as an individual, we have Mr. John Gradek, faculty lecturer and program coordinator, aviation leadership, School of Continuing Studies, McGill University—my alma mater. He is joining us by video conference.

Welcome to you, sir.

As an individual, we have Mr. Karl Moore, associate professor, also from McGill University.

Welcome to you, sir.

As an individual, we have Jacques Roy, who is a full professor at HEC Montréal. He is joining us by videoconference.

We also have Mehran Ebrahimi, who is the director of the International Aeronautics and Civil Aviation Observatory and a professor at the Université du Québec à Montréal. He is also joining us by videoconference.

Welcome, gentlemen.

We will now begin with opening remarks.

For that, I will turn the floor over to Mr. Gradek.

You have five minutes, sir.

[John Gradek, Faculty Lecturer and Program Coordinator, Aviation Leadership, School of Continuing Studies, McGill University, As an Individual]

Thank you very much.

Thank you, members of the House of Commons Standing Committee on Transport, Infrastructure and Communities, for extending the invitation to me and my fellow colleagues in academia to speak to you today on the state of airline competition in Canada.

My comments on the subject come from close to 50 years of either working in the bowels of the industry or teaching managers around the world the dos and don’ts of how to best achieve respectable financial and operating performance in the industry. It might be said that I've observed the highs and lows of Canada's evolution with deregulation, starting in 1985 with our infamous freedom to move white paper; in 1987, the Canada Transportation Act; privatizing Air Canada; and many more, including, of course, the evolution of many commercial air carriers in Canada.

The state of airline competition in Canada has evolved significantly in recent times, exemplified in the eyes of the Canadian air traveller by the reduction in the operations of numerous operators that have branded themselves as either low-cost or ultra-low-cost carriers. Is that measure of activity really the right proxy we should be using to determine whether or not we are a hot spot for aviation competition? I asked that question rhetorically in a recent article in The Hill Times: Is there a crisis in Canadian civil aviation? The answer should be, no, there is no crisis. The industry is just going through what has been characterized as its usual bumps in the road—bumps in airline evolution.

Carriers have been launching themselves with great fanfare, with lower airfares introduced, to the glee of Canadian air travellers. There are great expectations being created for expansion to bring air service and lower fares to both the primary and secondary markets. Even greater benefits of multiple new carriers with similar strategies were launched. That's great news for Canadians who are, by nature, lovers of low airfares.

However bright the honeymoon phase, and within relatively short order, the competitive reality is that Canadian commercial operations affect the financial viability of these Canadian upstarts. The number of Canadian air travel markets in which these operators traditionally operate has been the same where Canada's established duopolies operate. Very few new Canadian metro centres have had the benefit of this increased competition. Very few metro centres in Canada have multiple airports and have the ability to support multiple carriers trying to build frequency. New carriers have built up presence on top of existing services, and price competition could only limit competitive response for so long.

As traditional carriers reacted to this competition and reduced fares along the way, new carriers needed to reduce fares consistently to maintain their competitive gap. The race to the bottom is on. We all know how this story ends. It's ended there time and time again since the early 1990s.

The federal government of the late Honourable Brian Mulroney, in the tenure of the late Honourable Don Mazankowski, had great ideals for the evolution of the Canadian airline industry—as enshrined in the Canada Transportation Act for many years—wherein competition and market forces both within and among the various modes of transportation are the prime agents in providing viable and effective transportation services. Unfortunately, the paucity of domestic air travel markets has made these ideals very difficult to obtain.

Canadian air travellers need a better set of measures of effectiveness when it comes to evaluating the state of airline competition in Canada. That starts off with a better set of attainable, realistic and viable opportunities.

Thank you very much.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Professor Gradek.

Dr. Roy, you now have the floor for five minutes.

[Dr. Jacques Roy, Full Professor, HEC Montréal, As an Individual]

Good morning.

First, I would like to thank the members of the committee for inviting me this morning to share with you my thoughts on the topic being studied.

I fully agree with Mr. Gradek's remarks.

As you know, we professors are used to discussing a topic for three hours, so I'll deviate from my text a little because I can't do it in five minutes.

I'd like to touch briefly on three themes: Canada's domestic market—Mr. Gradek spoke at length about this—regional transport and airports, my favourite subject that I'd like to say a few words about.

First, let's talk about Canadian domestic transport. For as long as I can remember, there's always been, essentially, Air Canada. For a long time, there was also a second carrier based in the west, Canadian Airlines International. The two competitors merged in the early 2000s.

Initially it was a bit of a forced marriage, but that merger later opened the door to WestJet, which was launched in 1996 as a low‑cost carrier. WestJet enjoyed phenomenal growth between 2000 and 2016. In fact, its market share rose from 6% to 41%. This has obviously interested a lot of new players, who have decided to become low‑cost carriers as well.

Then the Jetsgos of this world got into the game, which had a rather tragic end. Even Air Canada launched its Tango service and Zip subsidiaries. Everyone wanted to take over the low‑cost carriers.

Lastly, WestJet itself realized the limitations of this model, because there are very few city pairs in Canada capable of supporting the presence of a discount carrier with aircraft like the Boeing 737. The market makes this Southwest Airlines model of low‑cost, short‑haul, point‑to‑point service very difficult to replicate in this country.

To grow, WestJet has had to open up to new markets and move into international ones, away from the conditions for success of low‑cost carriers.

Today, new players are in the market, but we see that they are experiencing difficulties. These new players include Lynx Air and Flair Airlines, which continue to offer services. Porter Airlines is also looking for market share in certain niche markets.

Air Canada maintains its dominant position today. WestJet has lost almost 10% of the market to other carriers.

I'll now briefly address the issue of regional competition. The situation is even worse because the small number of passengers obviously means that carriers will use smaller aircraft, which means higher costs per seat. If there is difficulty filling the aircraft, the cost per passenger is higher, so fares are higher overall.

Countries around the world are realizing this problem and have set up programs to help. This is the case in the United States, Australia and Europe. In Canada, there are no assistance programs, but there were during the pandemic. In Quebec, the provincial government chose to set up an assistance program to reimburse a percentage of the price of airline tickets and offer subsidized tickets, if you will, for leisure travellers or tourists from major cities.

I would like to close with a word about airports. We sometimes wish that low‑cost American carriers would come and offer some competition to enable our travellers to get to American destinations. However, we often learn that these carriers are somewhat reluctant to come to the country because of all the taxes that are applied and the high fees, particularly at airports.

Members of the committee, I think it's time for the government to take another look at airport governance. We realize that airport improvement fees are constantly increasing, that infrastructure and project costs and future investments are enormous. I think the government should take another look at its intervention model.

The airport authorities have perhaps been given a little too much leeway, and it's time to review their leases.

If you would like more details, you will find them in abundance in my latest book, which is on the subject.

I will be pleased to answer any questions you may have.

Thank you.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Dr. Roy.

Mr. Ebrahimi, you now have the floor for five minutes.

[Mehran Ebrahimi, Director and Professor, Université du Québec à Montréal, International Aeronautics and Civil Aviation Observatory]

Good morning.

Thank you very much for inviting me to participate in this meeting.

I agree with everything my colleague and friend Mr. Gradek said and with what my colleague Dr. Roy said.

At the observatory, we look at the Canadian situation, of course, but also the global situation. A comparison is constantly being made between the evolution of our system and that of other systems around the world. It's with this in mind that I'm speaking.

It should be noted, however, that the issue of competition isn't the same in Canada as it is elsewhere in the world. Think of our neighbours to the south, the United States, or our European friends. There are a number of reasons for this, first and foremost distance. In Europe, an airline can fly from Paris to Barcelona four or five times a day. In Canada, because of the distance, a rotation between Montreal and Vancouver cannot be done five times a day. So there's a kind of natural limitation.

There's also the issue of climate. Our climate means that airline operability and our infrastructure are a bit special. In addition, my colleague Jacques Roy very aptly mentioned population density, which isn't high enough here for the number of users to be equivalent. There's also a more sociological element, namely that airplane culture is less prevalent here than among our American and European friends. Add to that the issue of taxes, which has already been mentioned. You're looking at as much as $150 in airport taxes, government taxes, and so on. Right from the get‑go, this affects prices. It's important to bear in mind that the notion of competition in Canada is unique for these reasons.

There's also a certain lack of consistency here. One of the things that plays an important role, in addition to what my colleagues have quite rightly mentioned, is the availability of niche markets. This means that the major companies have their niche markets. However, smaller companies are suffering as a result. They're not able to get into niche markets. In addition, we mustn't forget that two major airports in Canada, Montréal‑Trudeau and Pearson, will be doing major work within 10 years, which will reduce the number of markets available and reinforce this kind of concentration among the major carriers.

It should also be pointed out—and we may have the opportunity to come back to this—that the role of the airlines is really important, but the issue of infrastructure must be integrated into the thinking. As my colleague Dr. Roy mentioned, there is a problem with consistency and governance at our airports, which is causing major difficulties. We're not investing enough in airport infrastructure.

Take the U.S. government, for example: In the first weeks of the pandemic, it stepped in with colossal support for airlines, as well as major investments in airports. This amounted to between $40 billion and $50 billion. For our part, all we did during that period was initially force our airports to stay open. During that period, their revenues declined by about 95%. As a result, even airports with positive balance sheets ended up in debt.

The Canadian government's investment in all airports does not exceed $500 million.

This kind of lack of consistency means that important competition instruments or levers don't work. Of course, it's in this context that small companies have a harder time positioning themselves and that competition becomes problematic.

[The Chair, Liberal, Peter Schiefke]

Thank you very much.

Concluding our opening remarks today, we have Professor Moore.

Professor Moore, the floor is yours. You have five minutes, sir.

[Karl Moore, Associate Professor, McGill University, As an Individual]

Thank you very much.

It's a pleasure to be here in Ottawa. People from Montreal generally don't say that, but it's the centre of the world for the Canadian Parliament and system, so it's part of the experience economy to be here.

My background is that I grew up in Toronto. I taught at Oxford for many years, and, about 27 or 28 years ago, I started working with British Airways and with Lufthansa. I have done many courses with IATA, which is the International Air Transport Association headquartered in Geneva and in Montreal. I have done a lot of work with foreign airlines, so I bring that perspective, which I know my colleagues have as well.

Canada is a different place; it is unusual in a couple of different ways. It's a different place in terms of the size of the country, a small population and winter. You are Canadian parliamentarians, so this is not a surprise. We have winter here in Ottawa. These factors make huge differences.

You might say that Australia and Chile have big countries with small populations. We have it harder than they do. One of the things we really do have a problem with is government taxes and regulations. We will get back to that in a minute.

We have three big cities—Toronto, Montreal and Vancouver—from a population viewpoint. My brother's family in Calgary may forgive me; I apologize to them. In Vancouver, it is not only the size, but connecting us with Asia. These are huge issues we have to wrestle with. We're different.

We also have a lot of foreign airlines that fly to Canada. From Europe, you think of British Airways. Lufthansa flies to Montreal, Toronto and other places across the country. We have the U.S. airlines, including Delta Air Lines. Its international parts division is run by Alain Bellemare, a McGill grad, a Canadian who used to run Bombardier. A huge number of flights come into our major cities from the U.S., so we have much competition, more than we might realize on the surface.

COVID happened. It was the worst time in aviation history, which seems like an overstatement, but that history really only started with the Wright brothers flying, so it's not going back to the Roman Empire. COVID was the worst time. We did not support airlines very well in Canada compared to the U.S. and Europe.

I remember visiting WestJet. I don't know if it's still true, but they had six plaques of airlines that have gone bankrupt in Canada. They did that to keep WestJet employees aware of the history here in Canada. It's terrible for airlines. Some of that goes to Air Canada's dominance and now WestJet's, but we also have Porter with fairly deep pockets and a lot of interesting new planes. They had the great asset of the island airport. I flew there last week because I wanted to be in the heart of Toronto. You're at the island. You take a moving sidewalk. You take a free shuttle, and you're there. It's great, but they are now flying out of Pearson because the planes are too big for the island airport.

The biggest problem here is taxes. I took 48 McGill students to Morocco and Cairo in March. I'm getting prices right now to go to Kenya next year. I saw that $1,458 plus taxes made it $2,340. It went from we could afford it to we could not because of hundreds of dollars of taxes.

I have a radio show; I interview CEOs. I have interviewed the last four CEOs of WestJet, the last four CEOs of Air Canada, the CEO of Air France twice, KLM and so on. I have talked to many executives in the industry. There's little support for airports in Canada. This is the government's, Ottawa's, fault—or “approach” if I want to back off a little bit—and the government can improve this dramatically.

I have three key takeaways.

We have geography that's different from the rest of the world. We have to be aware of that, which we are; we're Canadians. We have huge taxes and fees. One of my neighbours works for IATA, and I have done a lot of work with them. We could not find a country of any any size in the world that has the kind of burden we have. We may have missed one, but when we looked at the U.S., the EU countries, Australia and other places, they are not remotely at the same level.

We need low-cost carriers, LCCs, but how do they survive with all the fees the government places on them? Do we need more competition? Yes. What we need less of are burdensome taxes, airport fees, etc. from broadly speaking—not to blame you—the government.

I end with five seconds left. I feel excessively proud of myself.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Professor Moore.

We will begin our line of questioning today with Mr. Strahl.

You have six minutes, sir.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

Thank you very much, Mr. Chair, and thank you to all the witnesses for their testimony.

I want to go back to Professor Moore. He managed his time very well, but I wonder if he has more to say about what we just heard about the Canadian traveller bearing the highest taxes and fees in the world when it comes to our airfares.

We saw that, in the last budget, the government increased the security charge. I believe that comes into effect tomorrow, where our security charges will go up to more than twice what is paid for an international flight out of the United States.

I guess my question is, what's the low-hanging fruit? What are the taxes and fees the government can look to reduce or bring into line with our international competitors right off the hop?

Do we need to fundamentally alter the way our airports are run? Are there ways to look at reducing fees that will immediately benefit passengers who are looking for lower airfares?

[Karl Moore]

The airports, for all their faults, are well run. I sit down with the CEOs every couple of years. They're spending a lot of money at Pearson and Trudeau airports to improve them. They need to do that.

I think it's a matter of just reducing the fees and the government taking on the responsibility that most governments around the world take toward funding the industry and funding airports particularly.

I don't know if my colleagues have any comments to add to that.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

Thank you.

I did want to talk to Professor Ebrahimi.

You talked about taxes and levies being $150 to start. To get out of the gate, before you've stepped onto the aircraft, the airline's into a ticket for $150.

How can an ultra low-cost or even a low-cost carrier be expected to compete in a marketplace where a round-trip ticket is $300, even between, say, Calgary and Abbotsford, or a short, 1,000-kilometre distance like that?

How can we ever have more competition when the taxes and fees are almost double or triple the advertised prices that some of these low-cost carriers have?

[Mehran Ebrahimi]

You are absolutely right, sir.

This problem is primarily related to taxes. The philosophy here in Canada is to tax the user‑payer. I think that's a very bad philosophy. If we taxed airlines and passengers to try and provide adequate infrastructure, I might even say that it's for a good cause, but that's not even the case.

If I take the case of the Montréal‑Trudeau International Airport, about $140 million or $150 million, or close to 12% of its revenue, goes into the federal government's pocket in this way.

To come back to your question specifically, I can say that, when we look at competition elsewhere, in other countries, we see that it's not the traditional airlines that are creating competition. It's local players, including companies that offer low fares—very low fares—that are stepping in.

The main selling point of these companies is to offer attractive prices. When, from the outset, they have to start at $150, that means that the price they offer, by definition, will be increased by that amount, which will increase, as you mentioned.

In a way, we are cutting off these companies from the outset, and we can't give birth to medium‑term companies, as my colleague Mr. Gradek so aptly mentioned. They hold on, but at some point it doesn't work. These taxes are really a major obstacle if we are to hope that low‑cost companies will emerge in this country on a permanent basis.

[Mark Strahl, Conservative, Chilliwack—Hope, BC]

Thank you.

Professor Roy, you stated in a news article that “if you want to become a millionaire, you start [as] a billionaire—then you buy an airline”. Others mentioned the need for deep pockets.

Do you think the foreign ownership restrictions that are in place in Canada should be looked at to allow for deep pockets from around the world to perhaps help out low-cost carriers or new entrants into the Canadian market or should we maintain our current foreign ownership restrictions?

[Dr. Jacques Roy]

Thank you for the question.

There are a lot of issues related to that foreign ownership limit. In my opinion, it isn't necessary to remove that limit.

There are enough rich people with deep pockets in Canada to actually invest in airlines. I don't think we need to open up this constraint.

That would also have all kinds of implications for bilateral agreements. For instance, if we were to do that, would our partners such as the United States and other countries also be prepared to follow suit?

Getting back to the issue of taxes, for argument's sake, let's say all carriers have to pay those taxes, so the rules of the game are fair. The taxes are high but at the same time it is reasonable for users to pay a price that actually reflects the services they receive.

My concern—

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Roy.

[Dr. Jacques Roy]

To conclude—

[The Chair, Liberal, Peter Schiefke]

I'm sorry, the time is up.

Next we have Mr. Rogers.

You have six minutes, sir.

[Churence Rogers, Liberal, Bonavista—Burin—Trinity, NL]

Thank you, Chair, and welcome to our witnesses today. It's great to have you here with all your experience and knowledge on some of the topics we're discussing in terms of competition.

Professor Moore, you talked about how Canada is a large country with a large geography where we have terrible weather at times and it impacts airlines. We saw some of that a couple of winters ago.

The biggest piece that I see flying from Newfoundland and Labrador to Ottawa on a regular basis is the challenge of getting into rural and remote areas, and not exactly totally remote, but very rural like Atlantic Canada, for instance. Most of the flights for me for the past couple of years have been in three segments: Ottawa to Montreal or Toronto, then to Halifax, then to Gander. So it's basically a full day of travel by the time you arrive.

The problem with that is that only one airline is going in there and that's Air Canada, that is now subletting to provincial airlines. There's no WestJet. There's no Porter. There's no Sunwing, except on a seasonal basis, charter flights or something along those lines.

There used to be a time when you could get into Gander at two or three or four different times a day, but not anymore. Have you seen a competition trend for regional airlines at smaller airports in Canada over the past few years, or even a few decades? Has that declined? Is it very different than what it used to be?

[Karl Moore]

I think you're right, Mr. Rogers. There are two trends. One is that one way of saving money is to fly out of second-tier airports. My brother lives in Abbotsford, and I remember flying out there, then to Calgary and on to Montreal. And it was great because they said, hi, Gary, to my brother. He still had to go through security, but the guard knew him. And there were three gates or something. It was a lot less expensive, a lot more accessible. It was great if you live on the east side of Vancouver. It actually saved you lots of parking fees and time.

So that's one element, and that's one way we can save money, but you need to have.... And you wouldn't have second-tier airports so much in the Maritimes. You do in Montreal, Toronto, that sort of thing, but you don't there, and we've seen a decline.

Part of it is the airlines are businesses. I'm a business professor; forgive me. The idea is to make money. Now, you can make excessive amounts of money, but given what happened in COVID and the lack of support compared to other countries, they've had huge financial issues to deal with, and they're going to fly where the money is, to a considerable degree. Now, that means it's going to be more expensive to fly to some parts of the world. I flew recently to the Yukon, and it was very expensive because of the lack of demand.

Part of it is the reality of the demand. WestJet has pulled back, to a certain degree, from eastern Canada to focus more on the west, under its new CEO. He's an ex-senior executive from Lufthansa. He knows Europe and he has a competitive approach.

[Churence Rogers, Liberal, Bonavista—Burin—Trinity, NL]

That destroyed the competition factor in Atlantic Canada—

[Karl Moore]

Part of it—

[Churence Rogers, Liberal, Bonavista—Burin—Trinity, NL]

—which has led to some very high prices. Flying from Halifax to Gander and return is costing more than $1,000 on a return trip. It's way above where it used to be.

[Karl Moore]

If there is demand, sir—

[Churence Rogers, Liberal, Bonavista—Burin—Trinity, NL]

That's the lack of competition. People complain in our region that competition is desperately needed to force Air Canada to drop its prices.