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How Deal-Seeking Canucks Could Cripple Canadian Airlines

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A flight announcer gets the call that the plane is ready to board. He looks at the phone that will connect him to the loudspeaker. He places his hand on the receiver then decides against it.

He looks up and addresses the group in his un-amplified instead. Why not? There aren't many passengers flying out of London International Airport in Southwestern Ontario these days, and even a whisper might be enough for everyone to hear.

Hundreds of chairs sit without occupants. Maybe the airport's passengers are in Toronto. Or Buffalo. In all likelihood though, they're in Detroit.

Less than a handful of passengers, three actually, get up from their seats and walk over to the desk. They speak with the attendant as if he's just another passenger waiting for his flight. There's no sense in formalities in a four person conversation. Eventually, they go down a hallway to where their small Dash-8 lays waiting beyond two propped open doors. The departure hall is left completely vacant.

And this day is no anomaly.

About 4.8-million Canadians travelled to the United States for cheap flights in 2011. That number is not inconsequential. It represents 20 per cent of all land border crossings into the U.S. that year and 15 per cent of Canada's population. That's equivalent to losing a Boeing 737 worth of deal-seekers to the U.S. every 20 minutes for an entire year. And they are deal-seekers. A study conducted by the Canadian Airports Council, concluded that Canadian travellers place less value on their time if it leads to a better price across the border. And more often than not, it does.

Especially now that a strong Canadian dollar has made cheap prices across the border more attractive as conversion rates eat up less of the price differential. Because of a smorgasbord of taxes imposed by the Canadian government, the U.S. government, airports, air carriers and NavCan, the cost of a ticket can easily reach unjustifiable prices for a passenger. A passenger driving across the U.S. border, on the other hand, foregoes all fees absorbed when flying into American destinations.

These include a U.S. Federal excise tax, agriculture fee, immigration user fee and a United States customs fee. In fact, half of the additional taxes and fees are a result of U.S. additions and not Canadian policy, according to the Conference Board of Canada.

Airport heads and aviation councils are concerned about the sustainability of the airline industry in Canada. Because of the significant business leaking across the border, many of Canada's airports are sacrificing passenger traffic and revenue. They said that if nothing is done, the problem will get worse year after year, making some Canadian airports economically unjustifiable. But it isn't just airports taking a hit -- the government is sacrificing millions of dollars in lost tax revenue from fleeing travellers every year.

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The doors to the conference room at Toronto's Intercontinental Hotel open right at 8 a.m. on Tuesday, March 20. Nearly 100 chairs hold some of the biggest players in Canada's aviation industry. Like the NHL All-Star game of aeronautics, the Crosbys and Ovechkins are crammed row after row into chairs that face a main stage. Somewhere in the audience is Brigita Gravitis-Beck, director general for Transport Canada. A few seats away is Liberal Senator Dennis Dawson. A couple seats from him is Anthony Pollard, president of the Hotel Association of Canada.

Pollard would later speak about leakage as a symptom of Canada's lessening competitive status as an international destination for tourists. He would say that because of increased ticket prices over other countries, tourists might choose the U.S., or perhaps Australia.

The rest of the seats are filled with presidents, CEOs and directors of Canada's airports, transport councils and its governing bodies.

With Warren Everson, senior vice president of policy for the Chambers of Commerce, running slightly behind because of foggy weather, Mike Seabrook and John Korenic take their place on the stage between two large screens. The monitors read, "One of Our Airports is Missing." The text refers to the name of the conference but also alludes to the number of people leaking to the U.S. The 4.8-million passengers is equal to the number of passengers flying out of Ottawa Macdonald-Cartier International every year.

"It's like if you woke up in the morning and the Ottawa airport had vanished," CAC president Daniel-Robert Gooch, would later say. "Think of the jobs, the connections to the community and all the wages that would be lost by the disappearance of an airport that size. Yet we're losing that every year from people driving to the U.S."

Seabrook, the vice president of London International Airport, and Korenic, director of aviation marketing for the Vancouver airport authority, would tell the audience that in 2010, travellers fleeing the country in search of the lowest price on airfare, cost Canada's gross domestic product $1.1 billion in losses. The government lost a further $190-million in tax revenue. But they would express that it isn't just capital driving south of the 49th, it's also Canadian jobs. The leakage that year meant 8,890 lost jobs, they told the audience.

***

One floor up from London's deserted departure hall, Seabrook, who spent his earlier days dreaming of becoming a pilot, now spends most of his time overseeing the operation of Canada's ninth busiest airport. The miniature models of various planes lining his windowsill suggest he has never lost his passion for aviation. In 2011, Delta Airlines, an Atlanta based carrier, withdrew its service to London's airport. In 2012, United Airlines was the only U.S.-based service flying from London.

"I'm worried about it if we don't do anything," said Seabrook. "It keeps getting worse and these U.S. airports are investing a lot of money on their infrastructure."

In fact, in 2012 London was leaking almost 70 per cent of its business, and trans-border shopping increased nationwide by 600,000 people from 2010 to 2011 alone. As far as leakage is concerned, London's 747,000 passengers lost to the United States are a significant piece of the pie. Hamilton is losing slightly more passengers. About 808,000 people from their market are going across the border in search of deals. Vancouver is slightly worse off, losing most of its 953,000 passengers to Bellingham -- a city just south of Vancouver in Washington State. Worst of all is Toronto. In 2011, Canada's largest air hub lost 1.8-million passengers to the United States.

And American border airports have increasingly been there to reap the benefits.

After Seabrook, Marc-André O'Rourke, director of the National Airlines Council of Canada would say that in 2009, Bellingham's passenger traffic increased by 18 per cent. Niagara Falls' went up 56 per cent and Plattsburgh's airport saw a whopping 126 per cent increase in passenger traffic. This comes despite overall U.S. passenger traffic declining by five per cent. Airport officials all agree that this added traffic is coming from the north. Much of this has to do with the refusal by low-cost carriers to operate within Canada. Because of an increasing Canadian presence in the U.S., the incentive to serve a Canadian market is just too low, the CAC would later say. It just isn't worth it when the passengers are coming to them and operating costs are more expensive in Canada.

U.S. airports are not subtle when it comes to making this known. On any given day, a commuter taking Vancouver's SkyTrain may encounter a banner on the side of the Canada Line train advertising the "LOWEST FARE" from Bellingham International Airport in Washington. Other airports are making significant infrastructural investments in the hopes of capturing the large influx of Canadians. Duluth, Minnesota, for example, recently undertook a $65-million project that includes a new passenger terminal, an aircraft apron, an entrance roadway and parking areas. Less subtle is Plattsburgh International Airport, which has billed itself as "Montreal's U.S. Airport." Or more conveniently for the Quebec crowd, the text, "Aéroport Internationale de Plattsburgh," can be found on its welcome sign. The announcements are even made in both French and English. Fitting, considering 70 to 80 per cent of passengers hold Canadian passports.

Online, websites like canflyus.com try to convince everyday Canadians to fly from Buffalo or the American side of Niagara Falls -- not that the Canadian side offers passenger service. The website displays an image of a young, happy faced individual in a Toronto Maple Leafs jersey walking through an air terminal with a T-shirt clad woman with a picture of a Canadian flag. Some text on the page reads, "Our airports are served by a variety of airlines, including low-cost carriers that don't operate in Canada."

Some airports don't have to try to lure Canadians, though. Scott Wintner, spokesperson for Detroit Metropolitan Wayne County Airport, said that his facility sees much of Southwestern Ontario as part of their business area.

"We don't make any effort to lure travellers from Toronto. We don't do any marketing whatsoever. Let alone in Canada," said Wintner. "From our perspective, we consider a good chunk of Ontario to be part of our local community."

Enough traffic crosses the border in Southwestern Ontario to warrant several airport shuttle services. London alone has Aboutown and Robert Q Travel, which operate hourly shuttles between Toronto, London, Windsor and Detroit. Vancouver, Toronto and other Canadian cities all have similar services. As CEO of Windsor International Airport, Federica Nazzani manages the airport worst affected by leakage in the country. In 2012 Windsor leaked 99 per cent of its entire business to Detroit -- or 230,000 passengers per year. Windsor is not served by a single U.S. based carrier. It never has been and under current conditions, it likely never will.

"We don't even have an opportunity to get to the table," said Nazzani. "There's absolutely no reason for them to serve Windsor because they're already getting 99 per cent of our traffic."

The low-cost carriers like Spirit Airlines and Southwest Airlines, operating minutes from the border, are indicative of a larger problem for Canadian airports. And because these low-cost carriers don't operate in Canada, travellers are justifying the one to three hour drive to save up to half the fare more often than not. These carriers are continuously buying larger aircrafts capable of flying greater distances, said the CAC. Spirit recently ordered nearly 100 Airbus A320s, a short to medium range aircraft. This not only means they are expanding with one of the youngest fleets in North America, but also that they will be able to travel to destinations as far as Hawaii, making them even more appealing to travellers.

"We need to level the playing field," said Nazzani. "Airports are some of the best investment vehicles that Canada has. Forget bonds, forget the public markets, you've never seen a vehicle that yields the kind of return airports do for the Canadian government."

But the Canadian industry continues to be milked like a "cash cow," according to airport managers and councils. Transport Canada said the government chose a user-pay principle through a market-based approach. They said this method enables the industry to achieve greater economic efficiencies over the long term.

The CAC and airport managers are reluctant to blame one specific cause for the problem, but said that a major contributing factor has been the system by which Canada runs its airports. In 1994, the National Airports Policy divested all of Canada's airports under Transport Canada's control to private ownership. It began leasing the federally owned land to local airport authorities and levied additional taxes on top of that. The government employed a similar revenue based tax bracketing system used for income taxes so airports like Toronto's Pearson International contribute more than do airports like Lethbridge County Airport. Last year, this rent accounted for almost $245 million in revenue for the government, said Transport Canada. Some airports heads have suggested that this incentivizes airports to keep their revenue low to avoid higher tax rates.

"The more rent you generate, the more you're penalized," said Tom Ruth, chairman of the CAC and CEO of Halifax Stanfield International Airport. "Anything we do to de-stimulate business is not a good thing."

Unlike the publicly funded airports in the United States, Canada does not reinvest these funds back into aeronautical infrastructure and development. In fact, only one commercial airport in the U.S. (Branson Airport in Missouri) is privately funded and operated.

Transport Canada said that this is because the U.S. air transport market is at least 15 times larger than in Canada, allowing for larger economies of scale. They said that airport rent constitutes less than one per cent of the cost of a ticket and, "is not likely to be a key factor in a traveller's decision to choose a U.S. airport."

The National Airlines Council of Canada said the government needs to recognize aviation as an economic engine and facilitator of growth in Canada. They cited Turkey and Singapore's recognition of this factor as being the reason behind significant airport construction in the past. Singapore is now among the top 20 busiest airport hubs in the world. NACA also recommends that the government reduce or eliminate ground rent, airport improvement fees and fuel taxes. By eliminating the fuel tax in Ontario alone they estimate a tourism increase of up to 29,000 additional travellers each year and up to 1,015 additional jobs.

"Many countries, particularly in the Asian countries, their governments at the highest level realized that air transportation is critical to global competitiveness," Ruth said later. "This is something that the CAC thinks we need to quickly work with the government on."

To facilitate these changes, the CAC said they need to get the attention of the prime minister and the minister of finance so they can work collaboratively with airlines, airports and tourism organizations.

Back in London the sun has only been up for about an hour and people are already lining up to get out of the city. Janani Sankar and James Kryklywy wait for the shuttle that will take them to Detroit. They are going to Chicago for the weekend.

London International does offer two daily flights to the Windy City but when Detroit can offer the return flight for just $88 U.S. and Aboutown charges $136 for the roundtrip journey, that's about $224 -- or just over half of the $429 round-trip from London.

"If we have to fly to the States, generally we fly out of Detroit," said Kryklywy.

The shuttle pulls away and off goes less than a fraction of a percent of London's business. Away from YXU the shuttle goes. Then past YQG. Two passengers lost by the Canadian industry and two more reasons for low-cost carriers to bypass service in Canada. The next day, Aboutown has 20 more people bound for the Motor city.

"It's definitely an issue that's growing," said Ruth. From big cities like Vancouver to smaller ones like Saint John, Canadians continue to leak across the border for cheap flights. About 4.2-million Canadians fled across the border in 2010 in search of cheaper flights. About 4.8 million did so the year after that. This year, that number is expected to grow once more. If this is left unresolved, some CAC board members fear for the future of the industry in some cities altogether.