AIR LINE PILOTS ASSOCIATION INTERNATIONAL CANADA

AIR LINE PILOTS ASSOCIATION INTERNATIONAL CANADA

155 QUEEN STREET ÿ SUITE 1301 ÿ OTTAWA, ONTARIO K1P 6L1 (613) 569-5668 FAX (613) 569-5681

May 2, 2005

Submission to:

THE HOUSE OF COMMONS STANDING COMMITTEE ON TRANSPORT

Regarding:

Air Liberalization and the Canadian Airports System

I am Captain Kent Hardisty and I am here representing the Air Line Pilots Association, International. I am the President of ALPA's Canada Board and a pilot for Air Canada Jazz. With me today is Vice-President Captain Dan Adamus and ALPA's senior staff representative in Canada, Art LaFlamme.

The Air Line Pilots Association, International (ALPA) represents more than 64,000 professional pilots who fly for 41 airlines in Canada and the United States. Both as our members' certified bargaining agent and as their representative in all areas affecting their safety and professional well-being, ALPA is the principal spokesperson for airline pilots in North America. ALPA therefore has a significant interest in the economic health and well-being of this industry.

We have appeared before this Committee several times over the past few years and have repeatedly communicated our positions on the viability of the airline industry as well as on Canadian air policy. Many of our recommendations have been accepted by the Transport Committee, but the government has repeatedly failed to follow up on those recommendations in any meaningful way. The government continues to treat the industry as a cash cow and employs piece-meal measures that treat the symptoms and not the root causes of the industry's financial woes. The recent failure of Jetsgo highlights the ineffectiveness of current government policy.

ALPA has repeatedly communicated its position regarding liberalized air policy to the Standing Committee on Transport--in both written submissions and oral presentations. We are opposed to any initiatives that would permit foreign operations within Canada's domestic market (cabotage) or that would relax foreign ownership requirements and effectively trade control of Canada's airline infrastructure to foreign interests. Given the current state of the industry, operations by foreign airlines in our domestic markets would be virtually certain to prove fatal to our Canadian domestic airline sector. Entertaining proposals that would seek to open our markets to U.S. and foreign carriers in the current aviation environment makes little sense in our view. Despite record passenger load levels, the airline industry in North America remains an economic basket case by any measure, with bankruptcies and failures all too frequently front page news. Thousands of airline workers in both Canada and the United States have suffered displacement and a lowering or loss of wages and working conditions. The travelling public is confronted by uncertainty and disruptions as air carriers reorganize under bankruptcy protection or fail outright.

Depressed revenues and higher costs continue to undermine the industry's immediate prospects for recovery. As costs continue to rise, airline managements seem unable to pass those costs on to the consumer. Still, the Canadian government continues to levy excessive direct and indirect tax burdens upon the airlines. Airport rents, airport improvement fees, navigation fees, and security costs are all passed on to the airlines, which in a highly competitive market are unable to pass those costs in turn on to the customer.

Meanwhile, airlines are almost compelled to continue to engage in destructive fare wars in an effort to either gain or retain market share, thereby further weakening the bottom line. New-entrant airlines exert additional downward pressure on revenues by undercutting established carriers' fares. Simply put, at the moment there are too many seats chasing too few passengers. To use an aviation term, the industry is in imminent danger of spiraling down out of control.

While we believe that strong medicine is needed, ALPA is not, however, advocating a return to the days where the Government controlled access and fares on each and every city-pair route in the country and where the Government owned and operated airports and the air navigation system. We recognize that Canada's prosperity is tied to the global marketplace. Canada needs to lay the foundations for a healthy and viable airline industry that results in affordable and accessible domestic and international networks. Further liberalization without fixing the fundamentals will only worsen what is already a grim situation.

In this regard, we believe that the Government simply does not have the luxury of inaction. Additionally, Canada's small population, the nature of its geography and the reliance of many Canadians in both urban and smaller and remote communities on air transportation requires a policy direction that maintains its national interest by ensuring that Canada has a domestic airline industry that meets its unique needs and conforms to its national policies. We believe that maintaining current domestic ownership requirements as well as retaining the current bilateral basis of international air service agreements can best achieve this.

This submission sets out ALPA's concerns regarding the Government of Canada's policies in relation to the industry in which our members work and earn their livelihood. Most of what we state here we have said before. However, we believe those positions bear repeating. The issues are complex and the problems are not easily solved. It will take the concerted efforts of the Government of Canada and the stakeholders in the industry to correct the problems of today and meet the needs of the future. A Made in Canada solution is required. In ALPA's view, Canadian policymakers should seek to create the conditions that permit a profitable, accessible, affordable and stable Canadian airline industry. These objectives must be reached with a balancing of market-based solutions and Government regulation that establishes order in the marketplace and is appropriate to the specific circumstances facing us today.

We do not believe that foreign control of our airline sector or operations by foreign carriers within our domestic marketplace are part of the solution. Canadians have worked too hard and at great cost to build the aviation infrastructures in our country. That proud legacy is far too rich to be given or frittered away.

Market Entry

ALPA believes that entry into the marketplace is far too easy, allowing poorly financed airlines to start up without regard to the public interest. The result is excess capacity and below-cost operations. Canadian aviation history since deregulation in the 1980s is littered with the financial wrecks of airlines that have come and gone, the most recent being Jetsgo. Jetsgo lost more than $55 million dollars in the eight months prior to its grounding and has $108 million in liabilities, including most of the $30,000 collected from each of the company's pilots as a "training bond". This is the most recent in a long line of airline failures littering the business and social landscapes of Canada. Yet, the owner of Jetsgo, Mr. Leblanc, who has been at the helm of three major airline failures, wants the court to approve resumption of operations. That it might be possible is astounding and demonstrates the total inadequacy of air policy legislation in Canada. Such failures leave a trail of unpaid debt and worthless tickets not to mention the dashed hopes and aspirations of the employees and their families of these failed airlines. A new entrant must be required to meet meaningful standards that are rigourously enforced. We believe that the Government, before providing a licence to a new entrant, must carefully consider the following criteria: current capacity in the system, financial viability of the new entrant, and the public interest.

Service to Small and Remote Communities

Is Canada greater than the sum of its parts? We ask this because current policies are resulting in accessible and affordable transportation being well-provided between major urban centres but not to and from small and remote communities. A particular area of concern is the loss of air transportation services to some remote communities. If smaller carriers find that it is economically unfeasible to serve some destinations, it may become necessary for the Canadian Government to consider providing incentives to carriers.

A possible model for ensuring the provision of air travel services to remote or rural communities is the U.S. Essential Air Service (EAS) program. That program was established in 1978 when the airline industry was de-regulated as a response to the very real concern that, in a de-regulated environment, air carriers would cease offering scheduled air service to communities with low traffic levels. Through it, and with the help of federal subsidies, smaller communities are able to retain a link to the national air transportation system. EAS in the United States currently ensures commercial air services to 146 communities, 36 of which are in Alaska.

There are precedents for federal transportation funding initiatives, including the significant subsidization of VIA Rail, the funding of highway improvements and railway crossing improvements and, in the specific context of the aviation sector, the Airport Capital Assistance Program. The purpose of the latter program is to assist eligible applicants in financing capital projects related to safety, asset protection and operating cost reduction. We recommend that similar funding mechanisms for the airline industry be given serious Government consideration.

Financial Policies Affecting the Airline Industry

It is ALPA's view that the myriad of taxes, charges and additional costs that the Government has imposed upon the airline industry have had a significant and negative impact upon its viability. At a time at which, by any measure, the industry is in a state of crisis, the policy direction reflected by such imposed costs is seriously misplaced and unfair.

Aviation ties this country together and is important to the economic well-being of Canada. It employs tens of thousands of highly skilled workers who live in hundreds of communities across Canada paying taxes. A great portion of the industry's woes is being caused directly by the federal Government, which has created a significant and negative impact upon the viability of Canadian airlines by its imposition of a myriad of taxes, charges and additional costs that eat away any potential profit. These costs are generally on a par with sin taxes for tobacco and liquor. Air travel in this modern technological age is not a luxury and the government's regressive taxation approach to aviation needs to be overhauled.

Air Travellers Security Charge and other Security Costs

The "user-pay" concept is entirely inappropriate on matters of national security. It is important to recall that on September 11th the terrorists were not targeting the air transport system, but were utilizing it to turn aircraft into weapons of mass destruction against the general public and Government and corporate institutions.

It remains ALPA's view that security at airports is in the broader public interest and as such should be funded through general tax revenues and not solely by the travelling public. ALPA again encourages, as it has repeatedly, the Government to abandon this levy in its entirety and to absorb all additional post 9/11 security costs now being borne by the industry.

Fuel Excise Tax

It is important to note that when the Government introduced this tax more than 20 years ago, it was to be a temporary measure. ALPA strongly suggests that now is the time for the Government to eliminate this punitive tax.

Airport Rents

The Federal Government functions as landlord at most of Canada's major airports, but it does not pay heed to the straits in which the industry finds itself. However, the large airports are required to pay rent to the Federal Government - about $250 million last year alone. Notwithstanding that it collects this rental income; the Federal Government does not cover any costs for operating or maintaining airport infrastructure. Rather, the airports must do so - passing on the costs to the airlines and travelling public. Airlines are a vital segment of the Canadian transportation infrastructure and the Canadian economy, but the Federal Government feeds off it rather than cultivating it wisely as a valuable national resource. ALPA feels strongly that the Government must stop collecting rents and that airports be required to pass on these savings through reductions in airport fees.

Airport & NavCanada Fees

As is well-known, the costs of operating an airline have increased dramatically due to market factors outside the Government's control, such as the increase in insurance premiums and the price of fuel.

However, at a basic level, the aviation infrastructure established by the Canadian Government, including devolved airports and a commercialized air navigation system have resulted in higher costs to the airline industry. Contrary to the accepted market principles regarding pricing and supply and demand, airports and NavCanada are required to raise their charges to offset reduced traffic volumes. These increases in costs are occurring precisely when airlines are least able to afford them. We draw to your attention that the policy of industry self funding of infrastructure is not present in any of the other transportation modalities to anywhere near the extent it is in place in the airline industry. While such a policy may not have as harsh consequences during periods of economic growth, at times of economic hardship it merely exacerbates the airline industry's problems. Simply put, it is a recipe for crisis, and it is not fair. What is missing from the Acts of Parliament regulating airports and the air navigation system is the requirement to have a system of protection or insurance from fee increases during downturns in the economy.

Airport Governance

The Canada Airports Act, which was before a previous session of Parliament, was deficient in that it did not require airports to conduct their affairs with adequate transparency and accountability. The current lease agreements and the proposed legislation did not have the requirement to have representatives of stakeholders such as airlines and unions on Airport Boards of Directors. Neither were there controls, such as consultation requirements and appeal mechanisms, on inappropriate and unfair fee increases. The NavCanada legislation does have these safeguards and should be emulated when the Canada Airports Act is re-introduced before Parliament.

No Undue Liberalization of International Air Services Agreements

A number of industry observers have suggested that Canada should consider allowing foreign and, in particular, U.S. air carriers to carry Canadian (i.e., domestic) traffic. ALPA believes that permitting foreign airlines to conduct cabotage operations in Canada is both impractical and unwise for a number of reasons. Allowing a foreign airline to operate in Canada is quite different from allowing, for example, a foreign automobile maker to establish a manufacturing plant in Canada. That plant would have to operate as a Canadian company, subject to Canadian immigration, tax, language, labour, environmental and other laws. Cabotage operations by foreign airlines, on the other hand, suggest mobile workplaces (the aircraft) subject to foreign, not Canadian laws.

Thus, the notion of providing cabotage rights to foreign airlines is at odds with basic principles of Canadian law, such as the notion that businesses that operate in Canada's domestic market employ Canadians in those operations and apply Canadian labour laws to them. Permitting foreign airlines employing foreign workers subject to foreign labour laws to operate in our domestic market would place Canadian carriers at a competitive disadvantage and displace Canadian workers from high value jobs.

Allowing cabotage, both on a unilateral and reciprocal basis, would be ruinous to the Canadian airline industry, and result in reduced services to medium and smaller communities across the country. There is also no indication that the United States is considering eliminating its prohibitions on cabotage. The United States has repeatedly stated that it has no intention of opening its domestic markets to operations by foreign carriers. Thus, the prospects for achieving a Canada/U.S. common aviation area are, as a practical matter, non-existent and we believe that Canada's resources should be directed to pursuing policies that have a real chance of strengthening our airlines.

Foreign Investment and Domestic Control

One of the basic principles of Canadian air transportation policy has been the maintenance of Canadian ownership and control for Canadian airlines. ALPA continues to support that principle. The relatively small size of the Canadian market imposes certain constraints. It remains a challenge to maintain a strong and viable Canadian presence in an increasingly global market as well as service at home that meets Canadians' expectations. It is difficult to conclude that foreign carriers could contribute meaningfully to that process.

The "Canada Transportation Act Review", which was issued in 2001, recommended that airline ownership restrictions be relaxed, and that the limit on foreign ownership of voting shares of Canadian airlines be raised from 25% to 49%. However, the only rationale presented in the Review in support of this recommendation was that raising the foreign ownership limit may facilitate access to foreign funds. We do not believe that the control over these resources should be relinquished on that basis. The Review noted in passing that those airlines that took advantage of the increased foreign ownership limit would still need to demonstrate that effective control of the airline resided in Canada. No suggestions were made as to how that would be accomplished.

ALPA opposes a relinquishing of Canadian control of its airline industry. Canadians have invested heavily to establish the transportation infrastructure of this country, and it would not be appropriate for foreign investors to have control over the direction of airlines, which are a major component of that infrastructure.

It is imperative that Canada maintains its national interest in ensuring that it has a domestic airline industry that meets its unique needs and conforms to its national policies. In order to accomplish this goal, it is important that direction and effective operational control remain in Canadian hands. It is ALPA's recommendation that changes to foreign ownership rules should be considered only if the current Canadian air policy framework has clearly failed to provide for a viable and competitive domestic market, and even then, only with the safeguards that have been outlined above in place and capable of operating effectively to protect the interests of Canadians.

Conclusions

In ALPA's view a healthy and viable industry is one that is profitable, accessible, affordable, and, we must stress, stable. Until the fundamental deficiencies in Canada's air policy framework are fixed, ALPA believes it would be ruinous to further liberalize aviation in Canada. Therefore, in order to promote a healthy, competitive airline industry that operates both in the best interests of the workers in the industry and the Canadian travelling public, and for the reasons outlined in this submission, ALPA's recommendations are as follows: