Brief by the National Airlines Council of Canada

Representing Canada’s four largest air carriers - Air Canada, Air Transat, Jazz Aviation LP and WestJet - the National Airlines Council of Canada (NACC) is pleased to submit its recommendations to the House of Commons Standing Committee on Finance for the 2011 Federal Pre‐Budget Consultations. Our mission at the NACC is to ensure that safe, sustainable and competitive air travel is available to Canadian consumers.

A. EXECUTIVE SUMMARY

The NACC recommends that the federal government undertake a comprehensive review of the aviation cost structure in Canada with a view to achieving a fair tax and regulatory regime that will allow the travel and tourism sector to compete on a level playing field with the rest of the world.

It is recommended that such a review would:

1. 1) Assess the aviation industry’s role as a key contributor to productivity growth and examine measures to enhance the sector by reducing structural cost burdens including direct and indirect taxes, fees and charges such as airport ground rents, the excise tax on aviation fuel and the Air Travelers Security Charge (ATSC);

2. 2) Evaluate the federal government’s current user‐pay policy applicable to critical aviation infrastructure with respect to its impact on the aviation sector’s competitiveness and continued ability to support overall economic growth;

3. 3) Examine the current tax policy framework with a view to recovering costs from all who benefit and not exclusively users;

4. 4) Study measures to support and enhance industry efforts at innovation and growth;

5. 5) Enhance the competitive position of Canadian‐based airlines to stimulate productivity growth and compete in an integrated global marketplace.

B. ECONOMIC CONTRIBUTION OF AIRLINES TO PRODUCTIVITY AND ECONOMIC GROWTH

The member airlines of the NACC represent the underpinnings of Canada’s domestic and international air services network, and as such are major facilitators of national economic activity and commerce, and key components of Canada’s multi‐billion dollar travel and tourism industry.

Collectively, NACC member airlines carried more than 50 million passengers and directly employed almost 43,000 people in 2010. Total revenues of the four airlines exceeded $17 billion and their estimated total economic output impact was $27 billion.

These activities generate significant benefits to the economy and facilitate the growth of many other important sectors through secondary and external impacts. When these impacts are factored in, it is estimated that the aggregate economic benefit of the Canadian airline industry is estimated at $35 to $45 billion in GDP or 2.1% to 2.8% of Canada’s GDP, and provides gainful employment to over 113,300 Canadians from coast to coast.

C. NACC RECOMMENDATION

D. ELEMENTS OF NACC‐RECOMMENDED AVIATION POLICY FRAMEWORK REVIEW

1) TAX POLICY FRAMEWORK REVIEW

The principal long‐standing economic challenge for Canada’s aviation sector is the current tax policy framework applicable to the industry. Since its inception, the NACC has advocated for a comprehensive review of direct and indirect taxes, fees and charges imposed by various levels of government on our operations, and most notably on our passengers. These include airport ground rents, excise taxes on aviation fuel and the Air Travelers Security Charge (ATSC).

The Federal Government alone has collected directly and indirectly almost $7.3 billion from the aviation industry over the last decade, yet unlike most other modes of transport, airlines and their passengers bear the bulk of the sector’s infrastructure costs including airports, air traffic control services and security pre‐screening.

This form of double taxation on an industry that pays its own way without taxpayer money, and actively supports and helps create economic growth and tens of thousands of jobs goes against established economic theory. For a sector that produces such secondary and external economic benefits, taxation is the wrong policy and simply exacerbates the structural cost burden for the industry.

According to a study by Dr. Fred Lazar, Canada’s four largest airlines might experience an increase of 2.3 million to 2.9 million passengers each year if ground rents, the ATSC and the excise tax on jet fuel are eliminated, and NAV CANADA is reimbursed for its annual costs for servicing the $1.5 billion debt it took on when it was privatized in 1996. Eliminating these taxes might lead to an additional economic output generated by the NACC members of between $952 million and $3.5 billion. The potential economic benefits from eliminating the taxes are substantial, both for NACC member airlines and the Canadian economy as a whole.

The government’s user‐pay policy applicable to critical aviation infrastructure is almost two decades old and needs to be actively reviewed with respect to its impact on our sector’s competitiveness and its continued ability to support overall economic growth. As the air transport system creates economic value and enhances productivity for large segments of the economy, it is the NACC’s view that the costs of this system should be borne by all those who benefit in this respect, and not just exclusively by direct users.

2) SUPPORT FOR LONG‐TERM COMPETITIVENESS AND STRATEGIC DEVELOPMENT

For Canada’s airline industry, success lies in its ability to compete globally within a fiscal policy framework that supports its efforts at innovation and growth.

Each decision to impose or increase or expand the scope of a tax may be viewed on its own as small and benign, but the combined result is anything but harmless. Indeed, a survey of 10 selected domestic flights for each of Air Canada and WestJet shows that the aggregate impact of a host of government policies accounts for 16% to 40% of the total fares, with the relative impact being larger for the lowest fares.

As a result, the number of Canadian air passengers travelling to the United States to fly out of US border airports has increased dramatically. According to a Hotel Association of Canada’s Travel Intention Survey, in 2010, 21% of Canadian leisure travellers took advantage of the considerably lower aviation taxes and fees in the U.S. by crossing the border to fly out of an American airport.

The trend is growing and the stakes are high for Canada’s airlines, airports and downstream economy.

There are sound economic and policy reasons for ensuring the air transport industry thrives in Canada and that Canadian air carriers succeed in the North American and international markets. Changing the policy course from one where the air transport industry is viewed strictly from a fiscal position, to one where it is recognized as a key contributor to productivity growth requires cutting the costs faced by this industry.

The federal government must choose the course of action that will ensure Canadians will be connected directly, conveniently and efficiently into global networks, thus enhancing their mobility, both for business and leisure, and their ability to transport and receive goods from all parts of the world.

A much more enlightened set of government policies is needed if the members of the NACC are to be able to continue to compete in global markets and capture the opportunities available. Without the continued success and growth of these airlines, no Canadian airport is likely to join the ranks of international gateways or regional hubs, with their significant economic benefits for Canada. Furthermore, productivity growth in Canada will be negatively impacted, creating a host of other problems for the government and the country.

In summary, the NACC recommends that the federal government implement a new strategic aviation policy with the primary objective of enhancing the competitive position of Canadian‐ based airlines to stimulate productivity growth and compete in an integrated global marketplace.