12/22/2011 07:31 EST | Updated 02/21/2012 05:12 EST

Why It Costs So Much to Get Home for the Holidays

Expanding the availability of low-cost air travel would be one of the most progressive policies that the federal government could undertake. Our outdated airline regulations are bad for consumers, bad for Canadian businesses, and bad for prospective airline industry employees.

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Over the course of the last three decades, Canadians have become far more connected to the rest of the world. The opportunities presented by declining air travel costs are immense. Air travel used to be a luxury, but is now generally accessible to middle-class families.

This doesn't mean that we should be complacent. After all, while air travel has become more widely affordable than at any time in our history, it is still beyond the means of many low-income people. This is due in large part to government policy. The higher prices Canadians pay for air travel also harms Canadian businesses, which are saddled with higher operating costs. These costs also get passed on to consumers in the form of higher prices.

In order to reduce the cost of air travel, the federal government will have to revise punitive regulations and fees on the airline industry. Otherwise, our high air travel prices will continue to push Canadians to fly out of U.S. airports, and will undermine our economic competitiveness. Change is long overdue.

A recent report by discount air travel website measured the cost of travel to popular destinations from Canadian airports and American airports near the Canadian border. Unsurprisingly, the three cheapest options were U.S. airports: Bellingham, Washington ($285); Detroit ($380); and Burlington, Vermont ($394). The cheapest Canadian airports were Kelowna ($415), Quebec City ($454), and Regina ($456). The three biggest airports -- Pearson ($543), Vancouver International ($530), and Pierre Elliott Trudeau ($527) -- all came in near the bottom. Frankly, the only surprising finding was that Buffalo only managed to rank seventh ($476).

A quick look at the survey of prices from U.S. airports conducted by the website paints an even starker contrast. The study was conducted during June rather than August, which makes for a slightly unfair comparison.

After all, June is high season. This, as well as a different bundle of destinations, likely accounts for the fact that the average price from Bellingham was nine per cent higher in this survey. Despite these factors, the cheapest Canadian airport, Kelowna, would rank 64th on the list. Toronto would rank 99th. The only U.S. airports the survey determined to be cheaper than Pearson are in Hawaii and Alaska. The cheapest airport, Long Beach, California, had an average price of $223, less than half the price of the second cheapest Canadian airport, Quebec City.

While the cost discrepancies may not sound earth-shattering, they have a significant impact on consumer behaviour. The most notable example is the leakage of passengers from Toronto's Pearson Airport to Buffalo Niagara International Airport (BNIA). The BNIA is 170 km Southeast of Pearson, which is roughly a two-hour drive. Multiple bus companies provide low-cost travel to Buffalo to service Canadian passengers.

The airport handled 1.9 million one-way trips by Canadians in 2009 alone. That accounted for 36 per cent of its traffic. This situation isn't unique. In the same year, a total of 4.6 million one-way trips were made from 14 U.S. airports by Canadian passengers. One estimate indicates that this costs Canada $1.1 billion per year in lost economic activity.

But, more importantly, not everyone can afford to drive to the United States to save money on airlines. Many of them will instead drive, take a train or bus, or not travel at all.

One major reason that U.S. airports tend to have lower airfare is that the U.S. airline industry is far more competitive than its Canadian counterpart. The biggest player in the U.S. airline industry has a 16.3 per cent market share. In Canada, by contrast, Air Canada had a 57 per cent market share in 2009, and WestJet came in at 36 per cent. Other airlines accounted for just seven per cent.

While Porter Airlines has injected some much needed competition into domestic air travel, the market is still effectively a duopoly, which allows the dominant players to keep fares high. WestJet used to routinely underprice Air Canada because of its more efficient operations, but the company has realized that it can charge just as much, if not more, than Air Canada on many routes given the lack of competition.

This lack of competition is due almost entirely to two regulations: a 25 per cent foreign ownership cap for Canadian airlines, and the prohibition of "cabotage" -- the ability of foreign carriers to provide transportation between two domestic destinations. The goal of these policies is to shield Canadian companies against foreign competition. However, competition happens to be quite good for consumers. These regulations pit the big airlines against consumers -- and it's not hard to figure out who wins that battle.

The other major reason why flying from Canada is more expensive than flying from the U.S. is that Canadian air travellers pay higher taxes and fees. The most notable difference is that unlike U.S. airports, Canadian airports pay rent to the federal government. According to the Association of Canadian Travel Agencies, Canada is the only country where the federal government charges airports rent. Canadian airports pay $280 million in rent to the federal government annually. Pearson contributes roughly 50 per cent of these rents. This has resulted in the second highest landing fees of any airport on earth -- $8203 to land a Boing 747 (2004). These fees get passed on directly to the consumer.

In order to increase the affordability of air travel, and to recapture the foregone economic benefits from consumers who fly through the U.S., the federal government should work towards liberalizing the airline industry. Here are three steps to doing so:

1) Follow the recommendations of the Report commissioned by the Competition Policy Review Panel, which called for an increase of the foreign ownership cap from 25 per cent to 49 per cent.

2) Attempt to reach a reciprocal agreement with the U.S. to allow cabotage on both sides of the border. Failing that, it would be worth exploring unilaterally allowing U.S. carriers to operate domestic routes in Canada. While this would be met with opposition from domestic airlines, there is no compelling reason to force higher prices on consumers in order to protect Canadian corporations.

3) Eliminate airport rents. While this would cost $300 million in foregone revenue, a report commissioned by the Canadian Airlines Council found that this would be partially offset by a $50.3 million increase in other tax revenues. Moreover, it would stimulate an estimated $720 million in economic activity annually. That means more jobs for Canadians. Lower costs to consumers and more jobs created by the airline industry is a win-win situation.

Expanding the availability of low-cost air travel would be one of the most progressive policies that the federal government could undertake. The most insidiously regressive policies are those that make a service completely unaffordable to people of modest means. Canada's airline regulations fall under that category. Our outdated airline regulations are bad for consumers, bad for Canadian businesses, and bad for prospective airline industry employees.

It is time to end the government-protected duopoly in the airline industry. Protecting Canadian airlines from foreign competition amounts to protecting low-income people from being able to afford airline tickets. It's time to open up the skies for consumers.