Transport Committee on May 7th, 2024

[The Chair, Liberal, Peter Schiefke]

I call this meeting to order.

Welcome to meeting number 113 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 16, 2024, the committee is resuming its study on the state of airline competition in Canada.

Before we begin, colleagues, I'd like to remind you and all those in the room of 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 microphones at all times. As indicated in the communiqué from the Speaker to all members on Monday, April 29, the following measures have been taken to help prevent audio feedback incidents.

All earpieces have been replaced by a model that greatly reduces the probability of audio feedback. The new earpieces are black in colour, whereas the former earpieces were grey. Please only use the approved black earpiece. By default, all unused earpieces will be unplugged at the start of the meeting. When you are not using your earpiece, please place it face down on the middle of the sticker that you will find on the table for this purpose, as indicated. Please consult the cards on the table for guidelines to prevent audio feedback incidents.

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 that we can conduct our business without interruption and protect the health and safety of all participants, including our interpreters.

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

I'd now like to welcome our witnesses for the first hour. Appearing before us, we have, from the Department of Transport, Craig Hutton, associate assistant deputy minister of policy, and Jennifer Little, director general of air policy.

With that, I will turn it over to both of you for opening remarks. You have five minutes.

[Craig Hutton, Associate Assistant Deputy Minister, Policy, Department of Transport]

Thank you, Mr. Chair, for inviting me to speak to this committee today on a topic as important as air travel. I'd like to begin by acknowledging that the land on which we gather is the traditional unceded territory of the Algonquin Anishinabe people.

I welcome this opportunity to highlight key aspects of competition in Canada's air sector.

I am pleased to be joined today by Jennifer Little, the director general of air policy at Transport Canada.

The Canadian air sector is a key enabler of economic activity and is vital to connecting people, businesses and communities across Canada.

The economic framework for commercial air services was deregulated in the 1980s to permit market forces to drive innovation, supply and the price of air services. Competition is a key driver of efficiency and affordable airfares. Today, Canada's air sector consists of a number of domestic air carriers of various sizes that serve international, national and intraregional markets. In addition to the domestic carriers, the deregulated Canadian air services market is open to numerous players, such as many international carriers that can provide passenger services into and from Canada.

A key characteristic of air services in Canada, and a primary goal of the Canada Transportation Act, is that the market dictates supply and demand and ultimately the prices of airfares that carriers charge. Canadian air carriers, as private companies, are therefore able to make their own business decisions to remain viable and competitive. Within this overall framework, the government has taken further steps since deregulation to encourage competition and connectivity in our air sector.

One of the key policy initiatives for the air sector over the past few years was the creation of the Transportation Modernization Act, which received royal assent in 2018. This allowed for both an increase in foreign ownership limits in Canadian carriers and the establishment of a new process for the review and authorization of joint ventures in the industry.

Foreign ownership limits were increased from 25% to 49% with a goal of encouraging additional investments to support new entrants, including ultra-low-cost carriers, increasing competition and providing a greater pool of capital for existing carriers to improve and expand product offerings and services and to innovate.

This new flexibility led to the emergence of several ultra-low-cost carriers, including Flair, Canada Jetlines and Lynx. ULCCs offer positive impacts for Canadians by applying downward pressure on the airfares offered by larger carriers on popular routes and by catering to price-conscious travellers through low base fares.

The COVID-19 pandemic placed significant strain on the air sector in Canada and globally, testing the industry as a whole and creating significant financial challenges for carriers and airports. To address the most acute financial pressures during the pandemic, the government put in place important measures to protect air industry jobs and maintain services to communities throughout Canada. These include the Canada emergency wage subsidy, the waiving of airport rent at larger national airports system airports, and the remote air services program. These programs were integral to maintaining competition in the industry as air travel rebounded following the pandemic.

Nevertheless, as we emerge from the acute impacts of the pandemic and approach near full recovery, some operators continue to encounter operational and financial challenges. The exit of Lynx in February and some industry consolidation, including the merger between WestJet Airlines and Sunwing, indicate that the marketplace is continuing to go through a transformative period to better align supply with demand.

In addition, postpandemic, larger operators such as WestJet and Air Canada have reduced operations on regional routes in favour of longer-haul and international flights. While this shift has enabled smaller regional and niche carriers to pick up some of the routes that have been left behind by the legacy carriers, we know that regional connectivity remains challenging in certain parts of the country. As we get further away from the pandemic, we are seeing modest improvements in routes and airfares available regionally; however, Canadians travelling regionally are sometimes faced with limited choices and higher airfares.

As for Lynx, its loss is regrettable for the industry and those affected. Ultimately, Lynx accumulated heavy debt and could not secure further investments. We recognize that effective competition, including from ultra-low-cost carriers, brings more affordability to air travel. We also continue to study market dynamics and look for ways to encourage competition in the marketplace. To this end, we welcome suggestions from this committee. This committee's study comes at an opportune time, as Canada's air industry continues to recover, adjust and evolve from the heavy impacts of the pandemic.

That concludes my opening remarks. I'm happy to address questions from members of the committee.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Hutton.

We begin our line of questioning today with Mr. Williams.

Mr. Williams, the floor is yours. You have six minutes, sir.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you, Mr. Chair.

Thank you to the department for being present today.

We've had a couple of great meetings talking about airline competition in Canada. This study was kicked off because we saw the loss of Lynx, which was a competitor in our airline duopoly in Canada. Of course, 80% of it is controlled by Air Canada and WestJet.

Even though we don't have them here today, we had Flair here last time. I have spoken to Porter Airlines, which I believe is one of the greatest competitors in Canada and a Canadian success story. When we looked at barriers to competition, one thing that Porter focused on was real estate, which means slot usage and gate allocation. The problem we're seeing in Canada, specifically because we have only a few large airports, is that gates and real estate at the airports seem to be dominated, just as we have with airlines, by the big players.

I want to talk about capacity. I'll focus on Pearson, which is the largest airport in Canada. Pearson capacity, or what we call movements per hour, which refers to the number of aircraft landing and taking off, was restricted during the pandemic to 75 movements per hour versus prepandemic levels of 90. This was initially due to various resource constraints within the system. However, it is currently being suppressed by Nav Canada limitations. Rectifying this would allow Porter, as one of the competitors, a greater ability to operate at preferred times. It's also possible to have new airlines enter and compete.

What are we doing about increasing this limitation and competition at the gates as a whole?

[Craig Hutton]

With the slot allocation model, it is airports that are responsible for the allocation of slots. In terms of us speaking with airports, as you might know, one of the things we did coming out of the pandemic was strike an operations committee with the four largest airports in the country, as well as our largest carriers and other ecosystem players such as CATSA and CBSA, to look at the efficiency of the system as the sector continued to recover. Slot allocation has come up over time in those conversations, and we have a couple of airports in Canada that are slot constrained. Pearson is one of them. However, even though airports have a responsibility to allocate slots in negotiations with carriers, where there are official slot constraints, as in Toronto, they are required to make sure that there's sufficient space for new entrants if they're coming into the market.

[Ryan Williams, Conservative, Bay of Quinte, ON]

They're required to, but I think you can understand that airlines don't always abide by the rules.

In terms of your department making recommendations for changes, we've had Bill C-52, which looked at customers themselves. However, in terms of making specific recommendations that airports should abide by, even looking at where the Competition Bureau could interfere with this, has your department ever made recommendations that could see more of those gates opened up?

[Craig Hutton]

One other thing that Bill C-52 makes reference to is an important aspect of some of the changes we are proposing. It would enact the air transportation accountability act, which would guide the relationship between air service providers within the ecosystem. Where carriers wish to negotiate with service providers on certain levels of service, or vice versa, and where an airport may be looking for a certain flexibility from service providers, that would come to a negotiated settlement between the various parties. That's going to bring more transparency to the level of service that each service provider is offering—

[Ryan Williams, Conservative, Bay of Quinte, ON]

Mr. Hutton, I think that's fantastic.

The government really has given up, it seems, on Bill C-52. It's sitting at second reading. Why has the government committed to more aggressive APPRs in Bill C-52 but not done anything to see these provisions implemented?

[Craig Hutton]

The member is referring to the air passenger rights regime, which is an important change in the air sector for ensuring that travellers understand the rights they have when travelling within the air network, but also for ensuring that carriers are clear on their obligations to their passengers. The air protection regime offers that level of visibility and was a significant, as you mentioned—

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you, Mr. Hutton.

It's unfortunate that the government hasn't put this forward, because perhaps it will look after consumer rights.

I want to go back to gates and slots. What we're hearing from Porter Airlines is that incumbent airlines will often only release slots they won't operate during any given season when it's too late for them to be effectively used by others. For example, slots for July only just became available at Pearson. Porter would be interested in using these, and it could expand their base, their flights and their customer service, but they can't get access to them. Planned renovations at terminal 3 are only going to disrupt that, meaning that we're going to have fewer gates and that, more and more, we're probably going to see gates dominated by the big carriers.

Again, I'll ask this of your department. Are we doing anything to address this major anti-competitive measure and the ability to have a major airline expand and provide more service to Canadians?

[Craig Hutton]

Slot allocation, as I mentioned, is the responsibility of the airports. Where there's an official slot constraint, it's incumbent on an airport to ensure that there's sufficient space for new entrants.

More generally, one of the reasons we strike up discussions with the industry on a regular basis, all players in the industry, is to identify issues like these when they come into focus. Then we're able to provide assistance as a department, and we have.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Hutton.

Next we have Ms. Koutrakis.

Ms. Koutrakis, the floor is yours. You have six minutes.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you, Mr. Chair.

Welcome to our witnesses from Transport Canada. It's great to see you here again.

I believe we must have a robust, healthy and competitive airline industry in Canada that serves Canadians well, and at reasonable prices, regionally, nationally and internationally. To achieve that requires the right balance between financially strong large Canadian airlines, regional airlines, niche airlines and foreign competitors, plus the right legal and regulatory environment. Of course, there are conflicting and reasonable interests on all sides. This is not an easy balance to achieve, and it cannot be solved by simplistic solutions, which often make things worse, in my view.

Having said that, as the policy people from TC, do you believe we have reached a reasonable balance in Canada, and if not, where do you think Canada is deficient?

[Craig Hutton]

With respect to the balance you note, it is a very delicate balance to make sure, on the one hand, that factors are in play that ensure a competitive marketplace exists and that travellers are assured a safe and efficient flight. On the other hand, we want affordability and sufficient players within the marketplace to ensure the price point Canadians are looking for in their domestic and international travel.

In terms of finding that balance, it is always in flux to a degree, and I certainly think that since recovery, we haven't yet found a new balance in the marketplace. A number of new entrants entered the marketplace just prior to COVID, including Flair Airlines, and we saw Lynx enter the marketplace over the course of that time. We have also seen expansion by existing players. Porter is currently undergoing an expansion. These are all encouraging signs that the marketplace is welcoming and is still testing some of these models as they come into the Canadian marketplace.

I think it still bears some careful watching, to see how the market will support expansion plans and support ultra-low-cost carriers. At the same time, we're ensuring that passengers are able to understand what their rights are in a very complicated marketplace and that they can have a flight experience and traveller journey that are consistent from one region to another.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you for your answer. More specifically, what are Transport Canada and the government implementing in terms of policy to make sure we achieve that balance? What is Transport Canada doing to help in that regard?

[Craig Hutton]

The change in foreign ownership rules just prior to the pandemic, which rose from a 25% threshold to a 49% threshold, was significant and makes sure that airlines have sufficient access to capital to support their operations. It's a very capital-intensive business to be in, and recognizing that, the government made this important change. As a result, we did see some new entrants, and we have since seen some further expansion plans.

The government has also been working very closely with the industry on a regular basis. As I mentioned, our airport recovery operations committee meets monthly, and it was meeting up to twice a week during the pandemic to help with recovery and to troubleshoot issues where we knew different players within the air ecosystem were having challenges in meeting the recovery of demand. That has continued to be a focus for all of us within the industry, to make sure we can support that returning passenger demand.

As your colleague mentioned, challenges around slot allocation at airports and the provision of CATSA services have been the focus of the air operations committee. That collaboration piece has been really important to finding a new balance within the industry.

I would say that Bill C-52 is another significant step towards ensuring that there is a balance within the industry, that there is transparency around service levels between partners within the air sector so there is consistency in how those services are provided, and that there is transparency for passengers so they understand what levels of service they can expect and how the industry is performing.

Finally, we want to make sure there is data sharing between industry players.

[Annie Koutrakis, Liberal, Vimy, QC]

I hate to interrupt you, but on the point about relaxing foreign ownership rules with the hope that it will reduce prices for Canadian travellers, that hasn't happened. What do you say to people who hear your testimony today and say that it's great industry stakeholders and partners are talking, but prices remain high? How can you make the Canadian passenger feel secure and have confidence that with everything you are trying to do at Transport Canada and with the partners, you will achieve that result? It doesn't seem to be happening right now.

[Craig Hutton]

Thank you for the question. It's a very important one for travellers.

I think the entrance of ultra-low-cost carriers is a dynamic that has proven to keep prices more affordable in important markets in Canada. We have seen that dynamic play out. As we see the expansion of existing players like Porter, which are entering markets and serving markets they haven't served before, that might serve as a competitive pressure on air carriers that have traditionally served those markets.

I will also point out that I think there is an important role for small carriers to play in intraregional markets in picking up some of the traffic that some of the larger players are perhaps no longer picking up. Again, there is a competitive pressure from smaller players that are present and that may see opportunities where they didn't before, given the crowded field of larger carriers.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Hutton.

Mr. Barsalou‑Duval, you have the floor for six minutes.

[Xavier Barsalou-Duval, Bloc, Pierre-Boucher—Les Patriotes—Verchères, QC]

Thank you, Mr. Chair.

Thank you to both witnesses for being with us today.

Mr. Hutton, you just talked about the opportunities for smaller carriers to take over routes left behind by the larger carriers.

I'm thinking in particular of the Quebec market and how it's evolved over the past year. You say that the small carriers could take over the market freed up by the large carriers, but quite the opposite is true at the moment. Large carriers are not returning to areas they have stopped serving, and smaller carriers have dropped routes and cut services due to financial hardship. As a result, large and small carriers are cutting services, and ultimately we're seeing a decline in services.

What are your thoughts on this? Do you intend to help the regions provide adequate air transportation at some point?

[Craig Hutton]

That regional market issue has preoccupied us at Transport Canada and has also guided us in some of the discussions that we're having at regional levels.

As you've pointed out, the regional markets in particular areas of Canada, such as northern Quebec and Atlantic Canada, have continued to be challenging for a number of reasons. The first is that the return of demand has been slower. Overall, the domestic market in Canada has not yet returned to prepandemic levels even though we see international traffic, for example, exceeding prepandemic levels. In the intraregional markets, it has been even more challenging than that overall domestic demand; the demand hasn't been there like it was before.

There has also been a challenge on the labour side with a shortage of pilots and other highly skilled positions within the ecosystem, such as mechanics, that are important for supporting small air operations. These are things that we've heard from carriers, and particularly from small carriers, in servicing these markets. The ability to pick up the skilled labour they need has been one of the top challenges they're facing.

In terms of the intraregional dynamic, we are watching things closely, such as the Government of Quebec's program that offsets a portion of the ticket for passengers. The provincial government has stepped up and is offering a potential measure, and we are watching the results of that closely.

[Xavier Barsalou-Duval, Bloc, Pierre-Boucher—Les Patriotes—Verchères, QC]

Thank you.

That's precisely the next point I wanted to raise. The Quebec government has tried things. It even set up a committee on regional air transportation in an attempt to find solutions. It has taken some initiative, including putting programs in place. They have had mixed results, but at least the Quebec government has tried them.

We get the impression that, in this area, the federal government is not participating in the discussion. However, air transportation is first and foremost a federal jurisdiction.

Can we expect the federal government to take action to help the regions that need support to ensure viable and adequate air transportation?

I don't know about you, but I consider it an essential service.

[Craig Hutton]

The issue being pointed to is a very complex one. It is difficult to find a balance between, on the one hand, ensuring the overall marketplace for air carriers works to a degree where the prices, innovation and actions of carriers are driven by the marketplace so we can be assured of affordable prices, and, on the other, ensuring that we see services and connectivity in the region the member is referring to. In terms of measures that may assist, I think with the Quebec program, we're looking at the results, and certainly it's a local solution to a regional issue that may have lessons for us elsewhere.

We've spoken with the smaller players about the challenges they have been facing over the last number of weeks, which include working with the larger carriers and how they may serve as feeders to them. There are sometimes challenges with that from an IT perspective. There's a challenge just from a capacity point of view in understanding and meshing the businesses so that they're able to synchronize their services with larger carriers.

These are all questions that have been raised with us recently—

[Xavier Barsalou-Duval, Bloc, Pierre-Boucher—Les Patriotes—Verchères, QC]

I'm sorry to interrupt you, but I'd like to ask you another question.

I assume the minister received an invitation to appear before the committee today. Do you know why he hasn't agreed to join us?

Is it because of the federal government's inaction on the problems experienced in the regions?

He didn't want to face the music, and that's why he asked you to appear in his place.

Am I right?

[Craig Hutton]

The minister is quite committed. I think he has proven his commitment to the success of our air sector in Canada by introducing and supporting legislation and other measures that have helped support the competitiveness of the sector. In terms of Canada's air sector and the traveller within the air sector being supported, that is top of mind for him. In fact, later this week, he's hosting an air accessibility summit in Ottawa to talk about important accessibility needs within the air sector for travellers who require assistance in using the system.