TRAN Committee Report

INTRODUCTION

Over the past decade, Canada’s aviation industry has undergone vast changes. It has evolved from a duopoly between Air Canada and Canadian Airlines International (CAIL), the merger of Air Canada and CAIL, the rise of regional operators such as WESTJET, the emergence of Air Canada from bankruptcy protection and the recent demise of Jetsgo.

In the case of Canada’s airports, the National Airports Policy of 1994 designated 26 (these handle over 90% of the total passenger traffic) of the 726 certified airports in Canada as the National Airports System (NAS) and transferred 23 of them, as not-for-profit entities, to Local Airport Authorities (LAA’s) on 60 year leases. Transport Canada’s role in the airports system has evolved from owner and operator to landlord and regulator.

Within this context, Canada has been liberalizing its air policy since 1987. The sale of Air Canada and the deregulation of airlines were major developments. Canada’s “Open Skies” agreement with the United States, signed in 1995 after five years of negotiation, was also a key development in the history of Canadian air policy. Most regard this liberalization development as a great success with nearly 60 new transborder routes opening shortly after open skies was signed, air traffic between Canada and the United States doubling, and airfares generally being significantly lower in real terms today than prior to deregulation.

In spite of these developments, Canada has fallen behind the rest of the world in terms of liberalization of air policy. In 1992, the European Union established a common aviation market, the most liberal air policy imaginable, and is currently negotiating one with the United States. Elsewhere, countries have raised the foreign ownership limits on airlines above Canada’s current limit of 25%. The United States now has nearly 70 air bilateral agreements that are more liberal than its “open skies” agreement with Canada.

In addition to passenger services, cargo services will be part of the liberalization agenda in Canada. Air cargo services have a large economic impact supported by the increasing reliance on global supply chains and just-in-time inventory management practices. Demand for air cargo services world-wide is growing at twice the rate of the economy and faster than demand for passenger air services.

The Canadian government is considering negotiations to update the present Air Services Agreement with the United States as well as negotiating increased air liberalization agreements with other countries.

With regard to airports, there has been a great deal of discussion as to the level and even the appropriateness of the rent paid to the federal government under the lease agreements. The Authorities believe that the rents are too high and based on outdated formulae. The Auditor General in October 2000 noted that Transport Canada could not demonstrate that the deals for transferred airports were equitable, uniform, consistent and fair. The Standing Committee on Transport (TRAN) also criticized government rent policy and called for a rent freeze. Transport Canada has completed a review of airport rents but to date the studies and their findings have not been made public.

In addition to the rent issue, airports have also been the subject of questions with regard to their governance procedures, fees they charge and lack of accountability.

The Government of Canada asked the Standing Committee on Transport (TRAN) for assistance in reviewing the need for further liberalization of the aviation industry. In undertaking this review, the TRAN conducted hearings across Canada and heard from a large number of stakeholders on this issue. In addition, as part of this review, the Committee also studied issues associated with the Canadian airports system.

The Committee’s observations and recommendations are based upon the premise that this is an interim report and that more study is required before a final report and recommendations can be reported to Parliament.