Canada’s high flight taxes hurt our economy

Canadian airfare prices are generally fairly competitive, but excessive taxes and surcharges are pushing customers across the border.

With 75% of Canada’s population living only 90 minutes from the U.S. border, many Canadian airports compete for passengers with their northern American counterparts. And price is one of the biggest competitive advantages of airports trying to attract more passengers. This cross-border competition is not, per se, a bad thing. Quite the contrary.

Airfares to North American destinations (among others) are significantly higher if one departs from a Canadian airport rather than its regional American competitor. On a national scale, the difference between comparable Canadian and American roundtrip flights averages $428 per passenger, according to the Canadian Airports Council.

If I, for example, wanted to fly from Montreal to Fort Lauderdale on April 15, 2014, with Air Canada, taking the lowest possible fare, I would end up paying 36 % more (i.e. $247) than if I had left from Plattsburgh, NY ($182), for that same trip, on that same day. It is no surprise, then, that between 80% and 85% of passengers at Plattsburgh Airport are Canadian. In other Canadian cities, such as Toronto and Vancouver, many passengers choose to depart from Niagara Falls and Bellingham Airports, respectively, for similar reasons.

What is to blame for the cost difference between Canada and the U.S.? Mainly, taxes and surcharges. In the example I just gave, the Air Canada base fare was actually lower than its American competitor. Now, this is not the case for every route, on any given day.

But Canadian taxes and fees are more than twice as high as U.S. taxes and fees for many equivalent flights. These additional charges account for roughly a quarter of the Canadian airfares. In fact, the Conference Board of Canada calculated that 40% of the price difference between Canadian and American airfares is due to airport fees and navigational fees alone. Other charges include the GST, provincial sales tax and security charges, as well as the fuel surcharges included in the base fare.

This excessive taxation has a steep cost. Estimates show that Canada’s airline industry is losing approximately five million travellers annually who choose to cross the border to begin their journeys from an American airport, largely due to the difference in prices. This trend is costing Canada nearly 9,000 jobs and $2.4 billion in economic output.

How to fix the problem? A solution could be to eliminate airport rent to increase passenger traffic. As it stands, airport authorities pay the government a rent proportional to the airports’ revenues, instead of its profits. Thus, an airport must increase the prices of its services when its revenues increase in order to cover the higher rent payments.

Fully transferring ownership of airports to the non-profit airport authorities, or charging them a symbolic rent of $1 per year, is another proposed solution.

Yes, it would deprive Ottawa of the $280 million it collects each year from those rents, but this would be mitigated by an extra $50 million in revenue from increased passenger traffic, according to one study.

To recover these losses in revenue and much more, the federal government could sell airports off to private investors. Ontario Teachers' Pension Plan, for example, owns minority stakes in Birmingham International Airport, Bristol International Airport, Copenhagen Airport and Brussels Airport.

Bottom line: It is high time we cut those taxes and fees. It would benefit the Canadian economy as a whole, and give a break to Canadian customers.

Michel Kelly-Gagnon is President and CEO of the Montreal Economic Institute. The views reflected in this column are his own.

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