GOVERNMENT RESPONSE TO THE REPORT OF THE STANDING COMMITTEE ON TRANSPORT, AN INDUSTRY IN CRISIS: SAFEGUARDING THE VIABILITY OF THE CANADIAN AIRLINE INDUSTRY

 

 

 

 

 

 

 

TRANSPORT CANADA

 

JULY 2003

 

 

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GOVERNMENT RESPONSE TO THE REPORT OF THE STANDING COMMITTEE ON TRANSPORT, AN INDUSTRY IN CRISIS: SAFEGUARDING THE VIABILITY OF THE CANADIAN AIRLINE INDUSTRY

 

On April 11, 2003, the Standing Committee on Transport (SCOT) tabled its second report, An Industry in Crisis: Safeguarding the Viability of the Canadian Airline Industry. 

 

In order to respond to the Standing Committee’s recommendations presented in the report, it is important to outline the federal government’s policy framework as well as review the evolution of the Canadian airline sector over the past decade.

 

Prior to the National Transportation Act (NTA), 1987, taking effect, Canada’s legislation provided for comprehensive controls over entry, exit, levels of service, routes, operating equipment, passenger fares and cargo rates.  Beginning with the introduction of the NTA, which was later replaced by the Canada Transportation Act (1996), market entry was no longer based on the standard of public convenience and necessity but rather on market demand.

 

In 1992, the federal government began to lease major Canadian airports to local Airport Authorities.  In 1994, the Minister of Transport announced a new air transportation strategy for Canada, which called for the commercialization of Canada’s 26 largest airports and its air navigation system, as well as the divestiture of small and regional airports to local interests.  Under this strategy, the federal government relinquished its role as “operator and financier” of key transportation infrastructure, in order that new managers and owners could operate these assets “in a more commercial and cost-efficient manner.”

 

These policies worked to promote a more dynamic and competitive marketplace.  The subsequent introduction by low-cost carriers of no-frills, low-fare air travel has benefited business and leisure travellers and has changed the competitive landscape of the aviation industry in Canada.

 

The strong growth in air travel experienced in the latter half of the 1990’s slowed significantly in late 2000 as a result of the economic slowdown and the financial difficulties in world markets and high-tech sectors.  Since then, there have been a number of shocks affecting air transportation in Canada and around the world.  The events of September 11, 2001, the recent war in Iraq, and the outbreak of Severe Acute Respiratory Syndrome (SARS) have exacerbated an already difficult demand situation and reinforced recent trends, including reduced business travel and more cost-conscious travellers.

 

The trend toward lower fares is eroding full service carriers’ market share and pressuring airline yields.  In Canada, WestJet and, more recently, Jetsgo, CanJet and Skyservice continue to expand in the domestic market.  As of May 2003, these carriers had a cumulative market share of 29 percent.

 

International full-service airlines are restructuring to meet the challenges of the changed environment and many, particularly in North America, have sought bankruptcy protection.  This was the case recently with Air Canada, which filed under the Companies’ Creditors Arrangement Act (CCAA) on April 1, 2003.  Through the restructuring process, these airlines are working to reduce costs such as labour, product distribution and leases.   

 

Cognisant of the current challenges facing the aviation industry, the federal government remains fully committed to an efficient, safe and competitive industry, which is an integral part of its Straight Ahead vision.

 

The federal government’s response to the Standing Committee’s four recommendations is presented below.

 

Recommendation 1

The federal government wind-up the Canadian Air Transport Security Authority and establish a multi-modal Transportation Security Authority.  The operating costs of this Authority, as well as expenses associated with providing safety and security, should be funded out of the Consolidated Revenue Fund.  This Authority should report annually to Parliament on the state of transportation security within Canada.

 

The federal government is confident that the security of the transportation system can be delivered through existing structures and initiatives.

 

In response to public demand, the federal government moved quickly to address the transportation-related security challenges of a post-September 11 world, while maintaining its focus on cross-modal issues and supporting an integrated approach to transportation security.

 

The initiatives undertaken by the federal government went beyond exclusively aviation-related measures and addressed broader public security issues that required coordination across federal government departments.

 

On December 12, 2001, the federal government signed the Smart Border Declaration with the United States.  This agreement, which has resulted in a careful and thoughtful integration of Canada-US security measures at the border, increases the level of security while facilitating the flow of goods and passengers across the border.

 

The federal government also continues to collaborate with other jurisdictions and with industry stakeholders to enhance the security of road and rail traffic.  Technological enhancements, such as explosives detection systems, intelligent pass systems incorporating biometrics and intelligent transportation systems, are currently being studied with the goal of identifying the best technologies available.

 

At the international level, the federal government continues to work closely with the

United States and with other countries and organizations, including the International Maritime Organization and the International Civil Aviation Organization, to develop a more secure international regime that enhances security while facilitating the efficient flow of people and goods in the air, maritime and surface modes.  It is also working with the provinces and territories, the private sector and US authorities to promote transportation worker screening processes and credentials that facilitate secure and efficient cross-border flows, enable market access and complement harmonized border inspection processes.

 

On January 22, 2003, Minister Collenette announced a five-year package of initiatives of up to $172.5 million to further enhance the security of Canada’s marine transportation system and maritime borders.  Specific projects include increased surveillance and tracking of marine traffic, including “near real-time” identification and tracking of vessels in Canadian waters; screening of passengers and crew on board vessels; new detection equipment in ports to screen containers for radiation; new funding for the enhancement of emergency response teams and the creation of permanent investigator positions at major ports; enhanced collaboration and coordination among government departments and agencies; improvements to port security by creating restricted areas and requiring workers within these areas to undergo thorough background checks; and the development and implementation of new security requirements in line with recent recommendations of the International Maritime Organization.

 

Transport Canada’s first priority after September 11, 2001 was to take immediate action to enhance the security of Canada’s already safe aviation system.  Initiatives included intensified screening of passengers and baggage, stricter controls on access to aircraft and increased police presence at major airports.  At the same time, the department immediately began to look at longer-term security enhancements.

 

In Budget 2001, the Government allocated $7.7 billion through 2006-07 to enhance security.  Of that total, $2.2 billion was committed for enhanced air travel security, to the benefit of Canadians using the air transportation system.  The Canadian Air Transport Security Authority (CATSA) was established on April 1, 2002 and is responsible for delivering a number of key aviation transport security services, including the pre-board screening of persons, the property in their possession or control, and their baggage.  In addition, under the Canadian Air Transport Security Authority Act, CATSA is required, on an ongoing basis, to demonstrate that consistent, effective, and highly professional service is being delivered at or above the standards set by federal regulations.  CATSA is required under the Financial Administration Act to submit a corporate plan annually to the Minister of Transport.  This plan is approved by the Governor in Council on the recommendations of Treasury Board, and subsequently a Corporate Plan Summary is tabled in Parliament.  CATSA’s first annual report has been submitted to the Minister of Transport.

 

The federal government remains committed to providing Canadians with a safe and secure transportation environment, and CATSA remains an integral part of this commitment.  CATSA’s governing legislation contains sufficient flexibility to provide for expansion of its mandate.  At the same time, the federal government is monitoring and assessing the developments and lessons learned from other jurisdictions where multi-modal security agencies have been established.

Recommendation 2

The federal government eliminate the Air Travellers Security Charge.

 

In Budget 2001, the Government introduced the Air Travellers Security Charge (ATSC) to be paid by air travellers to fund the $2.2 billion that was committed to support enhanced security measures in the airline sector.  The measures introduced by the federal government are critical to ensure that Canada continues to have one of the safest and most secure air transportation systems in the world.  They also assisted in restoring confidence in air travel and helped position Canadian airports and carriers at the leading edge of air travel with respect to security.  Through the creation of CATSA, the federal government relieved Canadian carriers of the significant financial responsibilities they previously had with regard to the management and delivery of pre-board screening.

 

The enhanced air security measures benefit directly and principally air travellers who use the Canadian air transportation system.  The charge was established at a level sufficient to fund the enhanced security system through 2006-07.  All of the revenues generated from the charge (including any applicable GST/HST) are allocated to pay for the enhanced security measures. 

 

The federal government committed to review the charge over time to ensure that revenues remain in line with planned expenditures through 2006-07.  In the federal government’s most recent Budget, tabled in the House of Commons on February 18, 2003, the charge for air travel within Canada was reduced from $12 to $7 for one-way travel, effective March 1, 2003.  This represents a reduction of more than 40 percent that benefits all domestic travellers in Canada.

 

The federal government will continue to work with industry and travellers to ensure that the operation and administration of the charge are carried out in the most efficient manner possible.

 

Recommendation 3

The federal government suspend rental payments by airports for a two-year period and the airports shall pass the rental savings to air carriers.

 

The proposal made by the Standing Committee of suspending rent for two years would have a significant impact on the fiscal framework.

 

However, in recognition of the immediate pressures experienced by Airport Authorities as a result of the war in Iraq, the outbreak of SARS and Air Canada’s CCAA filing, the federal government recently announced that it would provide short-term relief in the form of a rent deferral for a 24-month period.  The deferral will be equivalent to the percentage reduction in passengers from April 2002 to April 2003 for each leased National Airports System (NAS) airport currently paying rent, with a guaranteed minimum deferral of 10 percent.  The 10 percent minimum provides equitable relief for all rent-paying airports, since three of them (Halifax, Calgary and Edmonton) have registered increases in passenger traffic during that period.  The rent deferral is effective July 1, 2003 through June 30, 2005, and is repayable interest-free over 10 years, commencing in 2006.  Notable reductions in traffic were recorded in April of this year, due to the full impact of the war in Iraq and SARS.  This measure will help relieve the financial pressures faced by leased airports because of declining revenue sources by an estimated

$73 million for the 24-month period, given that airports have no ability to establish other sources of revenue.  Airports that will benefit from the deferral are Toronto, Vancouver, Montreal, Ottawa, Winnipeg, Victoria, Calgary, Edmonton and Halifax.  Relief at major airports will reduce the financial stress on the air industry sector.  The federal government also announced a two-year deferral of outstanding annual chattel payments, commencing in the 2003-04 fiscal year, in order to assist the eleven NAS airports that do not currently pay rent.  Like the proposed rent deferral option, chattel payments will be deferred for a two-year period at no interest.  This measure will reduce liquidity pressures of $7.2 million (deferred payment) over fiscal years 2003-04, 2004-05 and 2005-06. 

 

With less pressure for airports to increase their fees, the federal government is confident that these measures will benefit the Canadian airline industry as a whole.

 

At the same time, in response to stakeholder concerns, Transport Canada is undertaking a full review of its long-term rent policy for airports.  The rent policy review examines the impact of rent on the financial viability of both airports and the domestic airline industry, how best to determine that taxpayers are receiving fair value for the assets leased to Airport Authorities, and how the Canadian airport transfer experience compares to international initiatives.  All stakeholders, including the Airport Authorities, Air Canada and other airlines, are being consulted as part of the review process.

 

Not all transferred airports currently pay rent.  In fiscal year 2001-02, eight authorities (Toronto, Vancouver, Calgary, Montreal, Edmonton, Ottawa, Winnipeg and Victoria) paid rent totaling $250.6 million.  Of this total, 95 percent was paid by the first four authorities.  Of the airports transferred to Airport Authorities, six (Halifax, Thunder Bay, St. John’s, Regina, Saskatoon and Quebec City) have begun or are scheduled to begin paying rent within the next four years (between 2003 and 2006).  The remaining NAS airports are scheduled to pay rent sometime after 2010.  Rent collected by the federal government is used to offset parliamentary appropriations required for the operation of Transport Canada.

 

It should be noted that initial rent terms and conditions, including the rent to be paid and payment schedules, resulted from negotiations between Transport Canada officials and individual Airport Authorities.  Because the Airport Authorities were not required to buy the land and facilities at these airports, a rental formula was agreed upon to ensure that Canadian taxpayers received reasonable compensation for the use of the property, the business transferred, and a recognition of investment in airport infrastructure.

 

 

Recommendation 4

The federal government, for a two-year period, reduce by 50% the federal aviation fuel excise tax rate.

 

Fuel excise taxes are paid by all modes of transportation (e.g., trucks, rail, buses).  The federal excise tax on aviation fuel and diesel fuel is 4 cents per litre (compared with 10 cents per litre on gasoline).  The lower rate of tax on aviation and diesel fuel recognizes the importance of fuel costs in longer distance commercial transportation and the competitiveness of the transportation sector.  The excise tax on aviation and diesel fuel has not been increased since 1987.

In addition, fuel for use on aircraft engaged in an international transportation service is exempt from the tax.  Federal excise taxes are only paid on fuel used on aircraft operated domestically.

Fuel excise taxes are an important source of revenue for the federal government.  Revenues from fuel excise taxes, including the excise tax on aviation fuel, go into the Consolidated Revenue Fund, which is used to support a broad range of federal programs that are enjoyed and valued by all Canadians – for example, benefits for seniors, transfers to the provinces to fund health care and post-secondary education, and national defence.