The Conference Board of Canada report, issued Wednesday, said that about five million Canadians now cross the U.S. border by land every year to fly out of American airports.
Higher airfares and fees and taxes in Canada, as well as differences in wages, aircraft prices and industry productivity makes it 30 per cent cheaper to fly out of the U.S.
For example, a flight to New York City leaving Thursday morning from Toronto costs $337 on Air Canada (TSX:AC), but a flight leaving from Buffalo on JetBlue costs $226 — 33 per cent less.
Fees and taxes make up about 40 per cent of the difference in airplane ticket costs between Canada and the U.S., the Conference Board said.
And while other factors — such as lower aircraft costs and better labour productivity in the U.S. — are beyond government control, the think-tank says small reductions in the airfare differential could lead to traffic gains for Canadian airports and carriers.
It estimates that changes to Canadian policies alone could bring more than two million passengers a year back to Canadian airports.
Federal Finance Minister Jim Flaherty told reporters Wednesday that Ottawa is "concerned" about the issue. Transport Minister Denis Lebell "has been working on a consultation project with the airlines, with the airport authorities in Canada to try to see what we can accomplish," Flaherty added.
The Conference Board analysis focused on Vancouver International Airport, Pearson International Airport in Toronto, and Montreal-Trudeau International Airport, along with their cross-border competitors.
"The fact that Canada's largest airports are losing traffic to cross-border competitors matters because it undermines their role as national and international hubs," said David Stewart-Patterson, the Conference Board's vice-president of public policy.
"When a Canadian hub airport loses passengers, it can lead to reduced flight frequencies, higher travel costs and poorer service for all Canadians."
One key difference between fares in the two countries is that in Canada, airports and navigational systems are mostly paid for by users — and have recently been upgraded, the Conference Board says.
Meanwhile in the U.S., user fees do not cover those costs, the report said, adding that major investment in U.S. airport infrastructure and an accompanying increase in fees, subsidies or both will be required in the near future.
The report acknowledges that reducing airport fees and taxes would reduce revenues for Ottawa in the short term, but much of the loss could be recaptured by a spike in revenues generated by an increase in traffic in Canada.
"Cuts in Canadian fees and taxes will not be effective, however, unless airports and airlines co-operate in passing through the benefits to passengers," said Stewart-Patterson.
NDP MP Olivia Chow called Wednesday for Ottawa to lower airport rents, saying the government is using rents, taxes and fees as a "cash cow."
Citing a 2011 report from the Canadian Airports Council, Chow said "passenger leakage" is costing the economy some 11,000 jobs and $1.4 billion in lost GDP, while the loss to tax revenue is estimated at $240 million.
"Even if you lower (rents) by some percentage, you gain back from the taxes because you're creating jobs in Canada, so 11,000 jobs produce $240 million in tax revenue," she said.
"It evens out. It means that Canadians don't have to drive across the border, you're creating jobs in Canada and you're making it back from the tax revenue from the people working."
Also on HuffPost