JAY GOLDBERG: Time to deregulate Canada’s domestic airline industry

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As families make their plans for March break and many dream of being able to fly to ski destinations to hit the slopes, potential Canadian travellers run into affordability issues as soon as they look into booking flights to domestic holiday destinations.

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One of the reasons flying in Canada is so expensive is because domestic travel is dominated by just two airlines. In fact, 52% of all flights going in and out of Toronto’s Pearson Airport, Canada’s busiest airport, are Air Canada flights alone.

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That number is undoubtably higher for many of Canada’s smaller airports, which don’t see nearly as much international travel. According to the Competition Bureau, Air Canada and WestJet account for between 56% and 78% of domestic passengers at major airports in Canada.

Competition lacking

With just two airlines offering flights on many routes within Canada, it’s little wonder why prices can get so expensive. Without competition, Air Canada and WestJet can jack up flight prices, leaving consumers with little choice but to pay through the nose.

Why is there such dominance in the Canadian airline industry by just two airlines, particularly for domestic travel?

Canada still has old school cabotage laws when it comes to domestic flights. In everyday language, that means the federal government permits foreign airlines to fly in and out of Canada, but not to operate flights domestically.

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Only Canadian airlines can operate flights within Canada. That’s a key reason why travelling here at home is often as expensive, if not more so, than travelling abroad. Canada has a huge competition problem in the airline industry, and loosening the restrictions on foreign airlines being able to operate flights within Canada is the obvious answer.

Consider evidence from the European Union. Back in the 1990s, the EU removed its cabotage restrictions for member-states, which permitted airlines not based within the EU to operate flights within the EU. The results include ticket prices going down by 34%, after adjusting for inflation, and more flights being operated, allowing for more price and timing choice for consumers.

It’s also quite a challenge for new airlines, including budget airlines, to start up here in Canada because of foreign ownership rules. The Canada Transportation Act limits foreign ownership of Canadian airlines to 49%. As well, no one individual foreign investor can own more than 25% of an airline’s voting share.

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Getting enough capital to start an airline is far from easy. With such significant limits on foreign ownership, it’s not hard to see why Air Canada and WestJet have such minimal domestic competition.

As if choosing between two major airlines wasn’t bad enough, evidence shows they’re increasingly flying different routes, leaving many travellers with just one option to choose from.

Air Canada has been limiting its travel in the western part of Canada, while WestJet’s footprint in Canada’s eastern provinces is limited. The Competition Bureau says Air Canada now competes with WestJet on just 61% of Air Canada’s routes, while WestJet only competes with Air Canada on 77% of WestJet’s routes.

Canada’s duopoly problem is therefore quite often a monopoly problem.

Bringing airfares down

According to the Competition Bureau, adding one more competitor airline on a particular route reduces airfares by roughly 9%. Allowing foreign airlines to fly domestically and loosening the rules around foreign ownership of Canadian airlines would undoubtedly see multiple new competitors enter the fray.

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And, if the European Union example is anything to go by, prices could decrease by much more than 9%. That may only be a starting point.

The time has come to shake up Canada’s domestic airline industry. The feds need to act to make domestic travel more affordable by allowing foreign airlines to fly here at home and loosening the rules surrounding foreign ownership of Canadian airlines.

The moment for deregulation is upon us.

Jay Goldberg is the Canadian Affairs Manager at the Consumer Choice Center

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