AIR LINE PILOTS ASSOCIATION INTERNATIONAL CANADA
155 QUEEN STREET ÿ SUITE 1301 ÿ OTTAWA, ONTARIO K1P 6L1 (613) 569-5668 FAX (613) 569-5681
March 11, 2004
THE HOUSE OF COMMONS STANDING COMMITTEE ON TRANSPORT
The Necessity for an Across-the-board Review of Air Policy in Canada
I am Captain Dan Adamus and I am here representing the Air Line Pilots Association, International. I am the Vice-President of ALPA’s Canada Board. As well, I am a pilot for Air Canada Jazz. With me today is ALPA’s Senior Representative for Government Affairs in Canada, Art LaFlamme.
The Air Line Pilots Association, International (ALPA) represents more than 64,000 professional pilots who fly for 42 airlines in Canada and the United States. Both as our members’ certified bargaining agent and as their representative in all areas affecting their safety and professional well-being, ALPA is the principal spokesperson for airline pilots in North America. ALPA therefore has a significant interest in the economic health and well-being of this industry.
Simply put, with Canada’s major carrier in bankruptcy protection, the airline industry in Canada is in crisis and requires major surgery. ALPA, which represents the pilots at Air Canada Jazz, has recognized this, and we have been actively working with the Company over the course of the last several months to find solutions so that it can adapt to the changing economic environment. However, these efforts likely will be for naught if the status quo continues. For that reason, we believe that it is doubly important that our views be known, and we thank you for the opportunity to make these submissions.
In our view, the current circumstances, which were obviously aggravated by the tragedy of September 11, 2001, the sagging economy, SARS and the war in Iraq, highlight the fact that the present policies do not serve the interests of the industry. There are too many seats chasing too few passengers; the Competition rules are not effective in preventing predatory pricing; the Government of Canada continues to view the airline industry and passengers as a cash cow; government-mandated monopolies, airports and NavCanada, continue to raise fees when the airline industry can least afford it; and many remote communities are not well-served. To use an aviation term, the industry is in imminent danger of spiraling down out of control.
While we believe that strong medicine is needed, ALPA is not, however, advocating a return to the days where the Government controlled access and fares on each and every city-pair route in the country and where the Government owned and operated airports and the air navigation system.
In ALPA’s view a healthy and viable industry is one that is profitable, accessible, and affordable. In addition, as an organization that represents employees who spend their careers in the industry, we think it important that the Government recognize a further important industry value – stability. These objectives must be reached with a balancing of market-based solutions and Government regulation that establishes order in the marketplace and is appropriate to the specific circumstances facing us today.
In this regard, we believe that the Government simply does not have the luxury of inaction. Additionally, Canada’s small population, the nature of its geography and the reliance of many Canadians in both urban and smaller and remote communities on air transportation requires a policy direction that would produce incentives for airlines to service remote areas. Further, we believe that it is imperative that Canada maintains its national interest in ensuring that it has a domestic airline industry that meets its unique needs and conforms to its national policies. We believe that maintaining current domestic ownership requirements as well as retaining the current bilateral basis of international air service agreements can best achieve this.
Former Transport Minister David Collenette released in February 2003, Straight Ahead – A Vision for Transportation in Canada. This document, in our view, missed the mark entirely. It was rooted in the weeks following the collapse of Canadian Airlines and the bankruptcy of Canada 3000 where Air Canada became for a brief period the dominant carrier. Transport Canada reacted with short-term and ineffective measures. A fresh start is required. Canada’s population is relatively small with respect to its size. What has worked elsewhere, particularly in the U.S., given the size of its market, cannot be assumed as the way to proceed here. A Made in Canada solution is required. We strongly believe Parliamentarians and, in particular, this Committee should lead a debate among all stakeholders in conducting this overhaul of air policy in Canada.
This submission sets out ALPA’s concerns regarding the Government of Canada’s policies in relation to the industry in which our members work and earn their livelihood. The issues are complex and the problems are not easily solved. It will take the concerted efforts of the Government of Canada and the stakeholders in the industry to correct the problems of today and meet the needs of the future.
ALPA believes that entry into the marketplace is too easy, allowing poorly financed airlines to start up without regard to the public interest. The result is excess capacity and below-cost operations. Canadian aviation history since deregulation in the 1980s is littered with the financial wrecks of airlines that have come and gone. A new entrant must be required to meet meaningful standards that are rigourously enforced. We believe that the Government, before providing a licence to a new entrant, must consider the following criteria: current capacity in the system, financial viability of the new entrant, and the public interest.
It is worth noting that the day Canada 3000 ceased operations, the Competition Tribunal announced that it was about to release a decision in favour of Canada 3000 and against Air Canada with respect to the illegal anti-competitive use of the Air Canada Tango brand. Too little, too late. Since then, the government has amended the legislation to strengthen the powers of the Competition Commissioner. However, these changes have proven to be ineffective. ALPA remains concerned that the approach is entirely reactive and that there is no timely enforcement of the competition rules. Therefore, in order to ensure a healthy competitive framework in the airline industry, ALPA recommends that the Competition Commissioner be given the resources to actively investigate complaints from any credible source and the powers to effect timely enforcement of the competition regulations.
Service to Small and Remote Communities
Is Canada greater than the sum of its parts? We ask this because current policies are resulting in accessible and affordable transportation being well-provided between major urban centres and not to and from small and remote communities. An area of concern is the loss of air transportation services to some remote communities. If smaller carriers find that it is economically unfeasible to serve some destinations, it may become necessary for the Canadian Government to consider providing incentives to carriers. Alternatively, it may be necessary for the Canadian Government, as a condition of entry to the marketplace, to ensure that there is transportation available to link remote communities to larger centres from which further connections may be made to a hub.
The U.S. model for ensuring the provision of air travel services to remote or rural communities is the Essential Air Service program. It was established in 1978 when the airline industry was de-regulated. The program was a response to the very real concern that in a de-regulated environment air carriers would cease offering scheduled air service to communities with low traffic levels. Through it, and with the help of federal subsidies, smaller communities are able to retain a link to the national air transportation system. In 1999, eighty-nine communities all over the United States were receiving subsidized services on smaller regional carriers.
There are precedents for transportation funding initiatives including the significant subsidization of VIA Rail, the funding of highway improvements and railway crossing improvements and, in the specific context of the aviation sector, the Airport Capital Assistance Program. The purpose of the latter program is to assist eligible applicants in financing capital projects related to safety, asset protection and operating cost reduction. We recommend that similar funding mechanisms for the airline industry be given serious Government consideration.
Financial Policies Affecting the Airline Industry
It is ALPA’s view that the myriad of taxes, charges and additional costs that the Government has imposed upon the airline industry have had a significant and negative impact upon its viability. At a time at which, by any measure, the industry is in a state of crisis, the policy direction reflected by such imposed costs is seriously misplaced and unfair.
In the aftermath of airline re-structuring in Canada and the September 11, 2001 tragedies, it has become clearer than ever that aviation is integral to the Canadian economy. It is often the most reliable and cost-effective means of moving goods and people around our vast country.
Aviation ties this country together and is important to the economic well-being of Canada. It employs tens of thousands of highly skilled workers who live in hundreds of communities across Canada paying taxes. Canadian companies such as Bombardier, CAE and Pratt & Whitney Canada remain very vulnerable to reductions in airline traffic. Their financial fortunes have suffered significant setbacks.
In part, the doldrums of the North American aviation marketplace are the legacy of the September 11 attacks, questionable airline management practices and the sagging economy. However, a great portion of the industry’s woes is being caused directly by the federal Government, which has created a significant and negative impact upon the viability of Canadian airlines by its imposition of a myriad of taxes, charges and additional costs that eat away any potential profit. These costs are generally on a par with sin taxes for tobacco and liquor.
Higher ticket prices, due in large part to these fees, taxes and charges, have resulted in significant reductions in passenger traffic. In particular, it is perverse and unfair that passengers should have to finance national security through the Air Travellers Security Charge. Clearly, the status quo is not sustainable within the airline industry itself, nor in the many industries that support it.
Air Travellers Security Charge and other Security Costs
The Government acted on the recommendation of this Committee by reducing the Security Charge. However, the reduction was only 40 percent on domestic flights and it remains unchanged for transborder and international flights. The "user-pay" concept is entirely inapplicable in the current circumstances. It is important to recall that on September 11th the terrorists were not targeting the air transport system, but were utilizing it to turn aircraft into weapons of mass destruction against the general public and Government and corporate institutions. Of the Cdn $7.7B identified to improve security in the December 2001 Budget, it is remarkable that only the Cdn $2.2B for aviation security is targeted for repayment through a user charge. In this case, the user is the air travelling passenger. There have been no similar charges for users of marine ports or border crossings where extensive and costly measures have been incorporated to facilitate the flow of goods into the United States.
It remains ALPA’s view that security at airports is in the broader public interest and as such should be funded through general tax revenues and not solely by the travelling public. ALPA again encourages, as it has repeatedly, the Government to abandon this levy in its entirety and to absorb all additional post 9/11 security costs now being borne by the industry.
Fuel Excise Tax
It is important to note that when the Government introduced this tax more than 20 years ago, it was to be a temporary measure. ALPA strongly suggests that now is the time for the Government to eliminate this punitive tax.
The Federal Government functions as landlord at most of Canada’s major airports, but it does not pay heed to the straits in which the industry finds itself. In 2001, the last year for which data is available to ALPA, the eight largest airports took in from airlines and passengers $765 million in revenues from airport improvement fees and terminal and landing fees. However, the large airports are required to pay rent to the Federal Government. This amounted to about $250 million last year. Notwithstanding that it collects this rental income, the Federal Government does not cover any costs for operating or maintaining airport infrastructure. One may ask who does? The airports are required to do so — passing on the costs to the airlines and travelling public. Airlines are a vital segment of the Canadian transportation infrastructure and the Canadian economy, but the Federal Government feeds off it rather than cultivating it wisely as a valuable national resource. ALPA feels strongly that the Government must stop collecting rents and that airports be required to pass on these savings through reductions in airport fees.
It is not helpful to the airline industry that they must pay more for Canadian-built aircraft than their U.S. competitors. Canadian export financing programs allow U.S. regional airlines to purchase Bombardier aircraft at a lower price than can Canadian regional airlines. In addition, American tax laws and accounting rules reduce the costs faced by U.S. carriers when acquiring aircraft as compared to their Canadian counterparts. It is ironic that a Canadian carrier, flying a Bombardier regional jet on a transborder route, has paid more for the aircraft than its U.S. competitor on the same route flying the same aircraft type and model. Air Canada and its regional airline, Jazz, would greatly like to increase the number of regional jets and modernize their fleet of turboprop aircraft. It would be sensible for the Canadian Government to facilitate such a purchase. ALPA encourages the Government to allow Canadian carriers to benefit on the basis of equality with foreign buyers through programs similar to those offered to U.S. or other foreign counterparts. ALPA understands the need to promote the export of Canadian products, but given the state of the industry in this country, ALPA believes that an equivalent approach that benefits both Canadian workers and the traveling public should be adopted. In addition, ALPA believes the tax and accounting rules in Canada need to be amended to be equivalent to U.S. requirements for the purchase or lease of aircraft.
Airport & NavCanada Fees
As is well-known, the costs of operating an airline have increased dramatically due to market factors outside the Government’s control, such as the increase in insurance premiums and the price of fuel. These we do not place at the feet of the Government.
However, at a basic level, the aviation infrastructure recently established by the Canadian Government, highlighted by the devolution of airports and the commercialization of the air navigation system, have resulted in higher costs to the airline industry. Contrary to the accepted market principles regarding pricing and supply and demand, airports and NavCanada are required to raise their charges to offset reduced traffic volumes. As the current situation demonstrates, these increases in costs occur precisely when airlines are least able to afford them. We draw to your attention that the policy of industry self-funding of infrastructure is not present in any of the other transportation modalities to anywhere near the extent it is in place in the airline industry. While such a policy may not have as harsh consequences during periods of economic growth, at times of economic hardship it merely exacerbates the airline industry’s problems. Simply put, it is a recipe for crisis, and it is not fair.
At the recent air policy conference, Air Currents, in Ottawa last January, as reported in the Globe and Mail, former Transport Minister Doug Young said he regrets handing control of Canada's airports over to the regional agencies that run them as non-profit organizations because these authorities are gouging travelers and building palatial terminals without due regard for costs. He also said he regrets handing federal air navigation services to Nav Canada, another non-profit organization that he believes lacks the motivation to control costs. He further said of airport authorities and NavCanada that there is no incentive for people to be good managers.
The new Canada Airports Act, which was before the previous session of Parliament, was deficient in that it did not require airports to conduct their affairs with adequate transparency and accountability. The current lease agreements and the proposed legislation do not have the requirement to have stakeholder representation on their Boards of Directors. Neither do they have controls, such as appeal mechanisms on inappropriate and unfair fee increases. The NavCanada legislation does have these safeguards and should be emulated when the Canada Airports Act is re-tabled before Parliament. What is missing from the Acts of Parliament regulating airports and the air navigation system is the requirement to have a system of protection or insurance from fee increases during downturns in the economy.
No Undue Liberalization of International Air Services Agreements
A number of industry observers have suggested that Canada should consider allowing foreign air carriers to carry Canadian (i.e., domestic) traffic. In addition, the Canada Transportation Act Review Panel has recommended that Canada, the United States and Mexico enter into negotiations to establish a North American common aviation area.
ALPA believes that permitting foreign airlines to conduct cabotage operations in Canada is both impractical and unwise for a number of reasons. Allowing a foreign airline to operate in Canada is quite different from allowing, for example, a foreign automobile maker to establish a manufacturing plant in Canada. That plant would have to operate as a Canadian company, subject to Canadian immigration, tax, language, labour, environmental and other laws. Cabotage operations by foreign airlines, on the other hand, suggest mobile workplaces (the aircraft) subject to foreign, not Canadian laws.
Thus, the notion of providing cabotage rights to foreign airlines is at odds with basic principles of Canadian law, such as the notion that businesses that operate in Canada’s domestic market employ Canadians in those operations and apply Canadian labour laws to them. Permitting foreign airlines employing foreign workers subject to foreign labour laws to operate in our domestic market would place Canadian carriers at a competitive disadvantage and displace Canadian workers from high value jobs.
There is also no indication that either the United States or Mexico is considering eliminating their respective prohibitions on cabotage. The United States, in particular, has repeatedly stated that it has no intention of opening its domestic markets to operations by foreign carriers. Thus, the prospects for achieving a North American common aviation area are, as a practical matter, non-existent and we believe that Canada’s resources should be directed to pursuing policies that have a real chance of strengthening our airlines.
Foreign Investment and Domestic Control
One of the basic principles of Canadian air transportation policy is the maintenance of Canadian ownership and control. ALPA continues to support that principle. The relatively small size of the Canadian market imposes certain constraints. It remains a challenge to balance a strong and viable Canadian presence in an increasingly global market with service at home that meets Canadians’ expectations. It is difficult to conclude that foreign carriers could contribute meaningfully to that process.
The "Canada Transportation Act Review", which was issued in 2001, recommended that airline ownership restrictions be relaxed, and that the limit on foreign ownership of voting shares of Canadian airlines be raised from 25% to 49%. However, the only rationale presented in the Review in support of this recommendation was that raising the foreign ownership limit may facilitate access to foreign funds. We do not believe that the control over these resources should be relinquished on that basis. The Review noted in passing that airlines that took advantage of the increased foreign ownership limit should still need to demonstrate that effective control of the airline resided in Canada. No suggestions were made as to how that would be accomplished.
ALPA opposes a relinquishing of Canadian control of its airline industry. Canadians have invested heavily to establish the transportation infrastructure of this country, and it would not be appropriate for foreign investors to have control over the direction of airlines, which are a major component of that infrastructure.
It is imperative that Canada maintains its national interest in ensuring that it has a domestic airline industry that meets its unique needs and conforms to its national policies. In order to accomplish this goal, it is important that direction and effective operational control remain in Canadian hands. It is ALPA’s recommendation that changes to foreign ownership rules should be considered only if the current Canadian air policy framework has clearly failed to provide for a viable and competitive domestic market, and even then, only with the safeguards that have been outlined above in place and capable of operating effectively to protect the interests of Canadians.
In ALPA’s view a healthy and viable industry is one that is profitable, accessible, affordable, and, we must stress, stable. Therefore, in order to promote a healthy, competitive airline industry that operates both in the best interests of the workers in the industry and the Canadian travelling public, and for the reasons outlined in this submission, ALPA’s recommendations are as follows:
We believe that the Government, before providing a licence to a new entrant, must consider the following criteria: current capacity in the system, financial viability of the new entrant, and the public interest.
ALPA recommends that the Competition Commissioner be given the resources to actively investigate complaints from any credible source and the powers to effect timely enforcement of the competition regulations.
Service to Small and Remote Communities
ALPA recommends that incentives be offered to carriers and/or that it be made a condition of entry to the marketplace to ensure that there is transportation available to link remote communities to larger centres.
Financial Policies Affecting the Airline Industry
ALPA recommends that the Government abandon the Security Charge in its entirety and absorb all additional post-9/11 security costs now being borne by the industry.
ALPA recommends that the federal fuel excise tax be eliminated.
ALPA recommends that the Federal Government cease to collect rents from airports and that those savings be passed on to airlines and the traveling public.
ALPA recommends that Airport legislation be passed to ensure airport authorities are transparent and accountable and that there is an appeal mechanism for inappropriate or unfair fee increases.
ALPA encourages the Government to allow Canadian carriers to benefit equally with foreign buyers through programs similar to those to promote export of Canadian built aircraft. In addition, ALPA believes the tax and accounting rules in Canada need to be amended to be equivalent to U.S. requirements for the purchase or lease of aircraft.
ALPA recommends that legislation be passed by Parliament that would require airports and NavCanada to have a system of protection or insurance from fee increases during downturns in the economy.
No Undue Liberalization of International Air Services Agreements
ALPA believes that it would be impractical and unwise for the Canadian Government to permit foreign airlines to conduct cabotage operations in Canada.
Foreign Investment and Domestic Control
ALPA recommends that changes to foreign ownership rules be considered only if the current Canadian air policy framework has clearly failed to provide for a viable and competitive domestic market, and even then, changes should only be made with the safeguards that have been outlined here in place, and capable of operating effectively to protect the interests of Canadians.
ALPA thanks you again for the opportunity to appear before you today to make our views and recommendations known to the Committee. We would be pleased to respond to any questions you may have.