Airfare Must Descend

Since the first commercial passenger flights at the turn of the 20th century, aviation has advanced global integration in many ways that few other technologies have. By transporting people around the world in a quick and efficient manner, modern aircraft has allowed for cultural diffusion and economic globalization.

However, Canada’s ability to forge stronger connections with other countries is somewhat threatened by its restrictive airline regulations, which not only protect domestic airlines, but also limit competition from foreign operators. These stipulations ensure high operating costs for airlines and reduce options available to consumers (compelling them to pay higher prices), pleasing neither business nor the public.

There are, for instance, two especially prohibitive and protectionist rules mandated by the federal government that facilitate inefficiency in the Canadian aviation market. First, the Canadian Transportation Agency (CTA) requires Canadian ownership of domestic carriers. Second, Canada’s “cabotage” laws decree that only Canadian airlines may transport passengers between airports within Canada. As a result, two firms dominate Canadian airspace: Air Canada and West Jet. Together, these companies control roughly 90 per cent of Canada’s aviation market.

It may seem as though these regulations would have a savings effect, since insulating Canadian carriers from foreign competition allows them monopoly access to flights within the country. However, the Canadian market is not large enough to support these firms under the current regulatory framework and new airlines could scarcely hope to achieve economies of scale, which would reduce costs and prices in the end. Yet, by facilitating competition via foreign carriers, the federal government could ensure lower fares, if not efficiency gains.

More importantly, if other countries scrapped their cabotage regulations, which restrict the ability of foreign airlines to flying between two points within a country, international competition would likely drive both prices and costs down and Canadian airlines could access new markets. Nevertheless, unilaterally abolishing these restrictions would still push down the costs and prices associated with air travel.

Increased competition from foreign carriers would additionally reduce Air Canada’s political influence. The Canadian airline’s market share affords it lobbying power without much of a counterweight. In fact, some associate Ottawa’s decision to reject Emirates Airlines from operating direct flights between Toronto and Dubai to Air Canada’s political influence.

Supposing the federal government eliminated cabotage regulations, the high cost of operating in Canada would preclude many foreign airlines from entering the Canadian market. In 2012, for instance, the Conference Board of Canada claimed that about five million Canadians opt to cross the American border by land to fly from airports in the United States. They concluded that high labour compensation, fuel costs, aircraft prices, airport fees, and navigational expenses explain why Canadian flights are, on average, 30 per cent higher in price compared to equivalent flights operated from the United States.

Higher costs in Canada have already encouraged many foreign airlines to exit. JetBlue, a low-cost American carrier, refuses to fly to and from Canadian cities, despite having a license, as high costs prevent it from making any profit without sacrificing their low-price airfare.

What is the result of Canada’s strict aviation rules?

The Frontier Centre for Public Policy found that for 5400KM flight, Canadian consumers pay $1,499.62, whereas American’s pay $934.72. (Europeans paid $525.72).

Reducing the rents charged to airports and the mess of taxes and surcharges placed on flights would assuredly reduce costs. However, in order for lower costs to translate into reduced prices, the federal government must eliminate barriers to entry. This would allow new firms to undercut the cost of existing ones, placing downward pressure on prices. Thus, by cutting costs and enabling competition, Ottawa could make flying more accessible for consumers and businesses while increasing choice for flyers.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

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