A Heavier Regulatory Burden Will Hurt the Airline Industry and Passengers

Economic Note showing that imposing on carriers the duty to compensate passengers in situations beyond their control would lead to reduced profitability for airlines, higher ticket prices, and reduced regional service

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This Economic Note was prepared by Gabriel Giguère, Senior Policy Analyst at the MEI. The MEI’s Regulation Series aims to examine the often unintended consequences for individuals and businesses of various laws and rules, in contrast with their stated goals.

In 2023, then-Transport Minister Omar Alghabra announced that Canada would have the toughest air passenger compensation system in the world.(1) Following the adoption in June of that same year of Bill C-47, which among other things aimed to reinforce this system, the Canadian Transportation Agency (CTA) launched public consultations. The briefs submitted by the various parties are currently under review.(2)

The reform proposed in the context of this consultation would modify certain rules related to compensation. Among other changes, it would impose on carriers the duty to compensate passengers in situations beyond their control.(3)

The new approach is the following: an airline company compensates passengers—in addition to reimbursement for unused tickets—when circumstances are not deemed “exceptional.” It could thus have to pay out compensation of at least $400 following a cancellation or a delay of more than three hours—even if it is in no way responsible(4) (see Figure 1).

This heavier regulatory burden imposed on airline companies increases the uncertainty surrounding their activities, which will ultimately raise their operating costs. To see how, we need only compare the compensation circumstances and the burden of proof under the current framework with those of the newly proposed framework.

Compensation Circumstances

Under the current regulatory framework, passenger compensation in case of a flight disruption (cancellation or delay of more than three hours) applies only when the cause of this disruption is attributable to the airline company.(5) In other words, if the cause is external to the company, there is no fault, and it therefore does not need to pay compensation.(6)

Of course, reimbursement of tickets or new reservations may be offered, but without compensation, since the situation is beyond the carrier’s control.(7)

One of the modifications to the current framework proposed by the CTA is the elimination of the distinction between fault and lack of fault on the part of the air carrier in the delay or cancellation of a flight, replacing it with a so-called “exceptional circumstances” category. This is a catch-all category, which includes all the situations in which an airline would not have to compensate passengers. However, the definition is unclear, and the list incomplete, thus creating additional uncertainty regarding those cases in which compensation will have to be paid.

An airline company could have to pay out compensation of at least $400 following a cancellation or a delay—even if it is in no way responsible.

Indeed, it is stipulated that the following cases do not constitute exceptional circumstances, and so a company must both reimburse and compensate passengers should they arise:

• “Technical problems that are an inherent part of normal airline operations”;
• “Any situation the airline knew about, or should have known about, when it sold the ticket to the passenger”;
• “Any action, or failure to act, by the airline or others with which the airline has a contractual relationship.”(8)

These three criteria illustrate the scope of the CTA’s discretionary power in the determination of fault and the way that this can create uncertainty for air carriers.

For example, if it is very cold and de-icing the aircraft takes an unusually long time, does this qualify as an exceptional circumstance? If weather conditions are particularly harsh and the availability of workers assigned to this airport service is limited, the carrier could have trouble justifying a delay that exceeds three hours. Yet, this measure is essential to passenger safety, and a de-icing contractor’s labour shortage cannot be attributed to airline companies.

The government of Canada has received numerous warnings regarding the risk of a cost explosion related to managing complaints and compensation in the context of the new plan.(9)

Reversing the Burden of Proof

Another objective stated by then-Minister Alghabra was to assume the airline is responsible in case of a long flight delay or cancellation, unless proven otherwise. This is a major change of dynamic, for until now, it was up to the passenger or the competent authority to demonstrate the carrier’s fault.

Such a reversal of the burden of proof creates an increased incentive for passengers to systematically submit complaints, which will turn up the financial pressure on carriers.

A Heavier Regulatory Burden

The new federal regulation is likely to raise the number of cases of compensation.(10) This will inevitably lead to an increase in operating costs and financial charges for the airline sector, and reduced profitability for airlines.

At first glance, it might seem that these additional costs will be absorbed by companies, but a deeper analysis suggests instead that these will ultimately be passed on to passengers, especially in the longer term.

Expect Higher Ticket Prices

It is very unlikely that companies will absorb these costs in their entirety, and this will be felt from the moment the new regulation comes into effect. They will be passed on to air travellers through higher ticket prices.

The adoption, in 2019, of the Air Passenger Protection Regulations (APPR) has already led to cost increases for carriers. The Canadian Transportation Agency estimated up to $27.50 of additional costs per passenger related to the application of the APPR.(11) The modifications currently proposed would add some $512.4 million of extra financial pressure over ten years, which would lead to airfares being more expensive than they otherwise would have been.(12)

These cost increases will materialize through a form of cross-subsidy: all air travellers will pay more for their plane tickets so that a minority can be compensated for delayed or cancelled flights.

All air travellers will pay more for their plane tickets so that a minority can be compensated for delayed or cancelled flights.

Yet, we must not forget that passengers must already pay a multitude of often hefty fees related to the regulatory framework.(13) They do not need this additional burden that the federal government is set to impose on them.

This financial pressure is on top of other government taxes and fees, notably airport rents, which have an impact on the airport improvement fees charged to passengers. To this is added the sales tax, the aviation fuel excise tax, and security fees collected on each plane ticket.(14)

Reduced Regional Service

The proposed changes to the existing framework could also lead to a reduction in the number of connections, notably on routes where an exceptional event beyond carriers’ control could more easily occur and compromise the profitability of a flight, which would then operate at a loss. Certain remote regional destinations risk being abandoned, or the number of flights between a regional airport and a province’s major city could be reduced. This could happen even if carriers want to maintain the connection, because the reduced profitability stemming from this new government intervention would no longer compensate for the costs incurred.

The connections most exposed to significant delays—notably due to weather conditions in northern regions—could be penalized by this regulatory tightening. This would have the effect of reducing mobility for the communities concerned and limiting travel and tourism opportunities for the Canadian population in general.

For example, if an airline company experiences a delay of three hours and one minute without being able to demonstrate its exceptional nature, it will have to pay out at least $400 of compensation per passenger.(15) For a regional flight of about a hundred seats (such as Montreal-Saguenay), with 85% of seats filled, this would represent around $33,000 of compensation for a single delay.(16) According to an approximate estimate, some 61 incident-free return flights would be required to recoup these costs incurred because of the new regulation.(17)

Yet, regional service has been dwindling for several years already, down 34% between 2019 and 2024(18) (see Figure 2). This trend is also accompanied by a 10.1% drop on the IATA connectivity index for regional airports in Canada.(19)

A subsequent decline in regional service would not be surprising, given that these routes could be considered too risky financially. If the compensation rate is particularly high for a route that is not very profitable, why would a carrier continue to offer this service and risk major losses?

But this is not all: the additional burden imposed by the new regulation would, in the end, have consequences for the sector’s competitiveness.(20)

Reduced Competitiveness

In addition to the possible reduction of regional service, the competitiveness of Canadian companies when it comes to the supply of flights over Canadian soil could also be compromised, their prices being pulled upward by the new federal regulation. This regulatory change would thus disadvantage our carriers compared to their American counterparts, since Canadian passengers would have access to less expensive tickets for flights on the other side of the border. In an integrated North American market, this measure could encourage consumers to turn toward foreign companies operating out of airports across the border (Plattsburg, Burlington, Buffalo, Seattle), which are not subject to the same compensation constraints.(21)

Conclusion

The modifications to the Air Passenger Protection Regulations proposed and studied by the Canadian Transportation Agency—notably the great uncertainty surrounding the cases when compensation will have to be paid—would increase the financial pressure on air carriers, and ultimately raise airfares.

The potential reduction in regional service connecting rural communities, as well as the decrease in competitiveness of flights from Canadian airports compared to those taking off from American airports located close to the border, would be harmful both for Canadian travellers and for the airline industry, which justifies abandoning the proposed reform.