OPINION: Competition Bureau right that Canada should open skies for competition

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Here’s a statement few Canadians will disagree with: Air travel in Canada is expensive and frustrating.

But there’s hope. According to a recent report from the Competition Bureau, a law enforcement agency that reports to the federal government, the key solution is to increase competition among airlines.

Government policies are the primary reason for the lack of airline competition. Specifically, excessive regulatory barriers and restrictions on foreign airlines limit choice and increase ticket prices.

Currently, the federal government prohibits foreign airlines from operating domestic routes within Canada’s borders. For example, a German airline such as Lufthansa is permitted to fly from Frankfurt to Toronto, but is barred from flying passengers from Toronto to another Canadian city. The result? There’s little competitive pressure for Canadian airlines to lower their prices for domestic air travel.

The European Union offers a stark contrast. After the EU removed restrictions on member-state airlines to operate in all EU countries, low-cost carriers such as Ryanair entered the market, flight frequencies increased and airfares dropped 34%.

The Competition Bureau examined the EU model and said Canada should relax restrictions on foreign airlines to improve service quality and bring down ticket prices.

Our recent study at Fraser Institute similarly suggests the federal government negotiate deals with other countries to allow foreign airlines to operate within Canada in exchange for allowing Canadian airlines to operate in those countries — a win-win for Canadian consumers and Canadian airlines.

But the federal government should not stop there. High taxes and fees comprise a large portion (25%-35%) of airfare costs, driving up ticket prices. In Canada, fees for airport improvement, security, landing and other charges are all largely uncompetitive with peer countries. And Canadian fuel taxes and sales taxes drive prices up further.

Why are the fees so high? While several government policies play a part, Canada’s outdated airport ownership structure remains a key factor. The federal government owns the land upon which our large airports are built and charges the not-for-profit airport authorities rent (as high as 12% of airport revenue). In 2023, the government received $487 million in rent charges from airports. In response, the airports levy fees on passengers to recoup these costs.

Improving the policy environment to reduce taxes and fees to levels more competitive with peer countries should be one lever Ottawa pulls to address sky-high airfares. Moreover, Canada should also — based on the successful airport ownership structures in Europe, Australia and New Zealand — sell its remaining interests in airport leases and allow for-profit organizations to own and operate airports in Canada.

Finally, Ottawa should ease the regulatory burden on the airline industry while maintaining strong safety standards. The United States undertook a successful deregulation effort in the 1970s and 1980s, which helped create more competition and choice, lower airfares and safety improvements.

Canadians face high airfares and have few choices to fly within in Canada, mainly due to bad government policy. It’s past time for Ottawa to make bold reforms to open up competition and reduce travel costs for Canadians.
 
Jake Fuss and Alex Whalen are economists at the Fraser Institute