STATEMENT OF
CAPTAIN KENT HARDISTY
EXECUTIVE VICE PRESIDENT
AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
BEFORE THE
HOUSE OF COMMONS
STANDING COMMITTEE ON TRANSPORT
ON
The Viability of the Airline Industry in Canada

APRIL 3, 2003

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. As well, I am a pilot for Air Canada Jazz. With me today are ALPA’s Senior Representative for Government Affairs in Canada, Art LaFlamme, and Captain Steve Linthwaite who is a member of the Negotiating Committee representing ALPA’s bargaining unit at Air Canada Jazz.

The Air Line Pilots Association, International (ALPA) represents more than 66,000 professional pilots who fly for 42 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.

ALPA believes it is in the public interest to have a national flagship airline that provides domestic and international service to all Canadians.

Simply put, with Canada’s dominant carrier in bankruptcy protection, the airline industry in Canada is in crisis and requires major surgery. ALPA, which represents the pilots at Air Canada Jazz, has recognized this, and we have been actively at work with the Company over the course of the last several weeks to find solutions that will attempt to utilize the productivity of their company so that it can adapt to the changing economic environment. And, it would appear, by necessity, the Government of Canada will be a participant in this process. For that reason, we believe that it is doubly important that our views be known, and we thank you for the opportunity to make these submissions.

In our view, the current circumstances, which are obviously aggravated by the tragedy of September 11, 2001, the sagging economy and, now, the war in Iraq, highlight the fact that the present policies do not serve the interests of the industry. 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. In ALPA’s view a healthy and viable industry is one that is profitable, accessible, and affordable. In addition, as an organization that represents employees who spend their careers in the industry, we think it important that the Government recognize a further important industry value – stability.

These objectives must be reached with a balancing of market-based solutions and direct intervention by the Government that is appropriate to the specific circumstances facing us today. In this regard, we believe that the Government simply does not have the luxury of inaction, and, particularly if the current efforts at restructuring are unsuccessful, the current environment requires strong intervention by the Government may need to step in on an emergency basis. Significant assistance to Air Canada will may be necessary immediately to ensure the survival of this vital transportation system, which is Canada’s only remaining network carrier. 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 would produce incentives for airlines to service remote areas; airlines, and in particular, Air Canada, should not be expected to subsidize this important goal. Further, we believe that 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. 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.

On the other hand, ALPA remains convinced that the market allocation of air services is the single most efficient manner of business for airlines. A return to regulation, although tempting in these circumstances, would not be appropriate. Enhancing the productivity of the companies our members work in is, we believe, the principal challenge facing the industry, and this simply cannot be accomplished by Government control, however well-intentioned. In addition, we believe that the processes of collective bargaining, which have served the industry well, should be the basis upon which the terms and conditions of employment are established.

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. 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.

Stabilization Measures for the Airline Industry

Is it reasonable for airlines to absorb the financial shocks associated with war, international terrorism and even global epidemics? The demise of Canada 3000 is an example of how a substantial entity in the airline industry can be de-stabilized in short order. In the summer of 2001, Canada 3000 was a thriving and growing airline, poised to become the second major carrier in Canada. However, in the aftermath of the September 11th terrorist attacks, and with the ensuing economic downturn in the airline industry, Canada 3000 lost momentum quickly and ultimately went bankrupt, putting out of work almost 5,000 employees, and leaving thousands of travellers stranded around the world or with worthless tickets. It is extremely unsettling for Canadian workers and passengers to go through the loss of an airline of any magnitude. The Canada 3000 example is one of only a medium-sized airline going under, and yet the ripples were felt all over the country through the huge loss of jobs, stranded passengers, and worthless tickets. The financial failure of Air Canada would create chaos. There is not nearly the capability or the capacity in the rest of the airline system to meet the travel needs of Canadians, both domestically and internationally.

We ask you to note that the infrastructure cost for a network carrier, such as Air Canada, is considerably higher than for a point-to-point operation. Only a network carrier will serve both small centres and as well as international routes. While we do not suggest that Air Canada be protected from competition, the fact of the matter is that the existence in the market of point-to-point carriers erodes a network carrier’s ability to perform the international and smaller centre flying, which is the hallmark of the full service carrier. An airline such as Air Canada is more than just the sum of its parts. It cannot simply be replaced with a multiplicity of new entrants. We believe that the Government ought to bear this important economic fact of industry life in mind when it considers stabilization measures for Air Canada in order to ensure the continuation of the valuable service that it provides.

Government assistance must not only be sufficient to meet the needs of the Company’s reconstruction, it must also be timely. The Federal Government had announced in the Fall of 2001 that it would provide financial aid to airlines affected by the events of September  11th. However, when Canada 3000 was obviously in a financial crisis, the Government could not move quickly enough to provide much-needed assistance. ALPA believes that this is an area where considerable improvement is both possible and necessary, particularly given the circumstances in which we find Air Canada.

In ALPA’s view, it is shortsighted to believe that such "market corrections" are good for the airline industry. Quite to the contrary, such airline failures make the travelling public nervous and less willing to commit their hard-earned money to the purchase of tickets on airlines. For workers, the effects are devastating, as huge numbers of workers lose their livelihoods, and thousands of families are financially blindsided without any notice.

Airlines operate on a slim margin in the best of economic conditions. In order to smooth out the cycles in the industry, and in order to sustain a vibrant Canadian airline industry, it may be necessary for the Government to put in place a stabilization program that could be drawn upon by Canadian airlines in emergency or exigent circumstances.

Access to such a program should be through clearly articulated eligibility guidelines, which themselves cannot be so onerous that the fund is in fact inaccessible. In particular, performance conditions attached to the receipt of financial assistance must not require that the applicant airline’s employees bear the bulk of the economic burden through wage and benefit concessions. It would be simply unfair for workers to be forced to pay the price for their employer’s survival and growth.

Further, when an application for assistance from such a stabilization program is made, there would need to be a quick Government response mechanism, and preferably, an ongoing consultation process with the participants in the industry. The very nature of an emergency or exigent circumstance is that there is a great urgency to the need. If it takes the Government weeks or months to respond, a precarious situation can spiral out of control and go beyond redemption before any meaningful measures can be taken. The Canada 3000 example is a case in point.

We suggest that in order for the Canadian airline industry to be more stable, and to ensure that there is airline competition, it is necessary, as a measure of last resort, that there to be some level of Government stabilization assistance available in emergency situations. Without such assistance, we can envisage further losses of consumer choice in air travel, and continuing disruption and chaos for the travelling public.

Service to Small and Remote Communities

An area of related concern is the loss of air transportation services to some remote communities. As of January 2003, Air Canada, including AC Jazz, was permitted to stop providing air services to unprofitable locations in Canada. If smaller carriers also find that it is economically unfeasible to serve some destinations, it may become necessary for the Canadian Government to consider providing subsidies to carriers to ensure that there is transportation available to link remote communities to larger centres from which further connections may be made to a hub.

The U.S. model for ensuring the provision of air travel services to remote or rural communities is the Essential Air Service program. It was established in 1978 when the airline industry was de-regulated. The program was 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. In 1999, eighty-nine communities all over the United States were receiving subsidized services on smaller regional carriers.

There are precedents for transportation funding initiatives including the significant subsidization of ViaVIA 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.

In the aftermath of airline re-structuring in Canada and the September 11, 2001 tragedies, it has become clearer than ever that aviation is integral to the Canadian economy. It is often the most reliable and cost-effective means of moving goods and people around our vast country.

In Canada, Air Canada lost close to $1.3B in 2001 and, although indicating small profits in two quarters, suffered significant losses in 2002. Air Canada Jazz recently cited a 30 per cent decrease in traffic. Air Canada is burning cash at $2-million every day. Clearly this situation cannot be allowed to continue. This state of affairs is part of a much larger trend. North American airlines lost a staggering US$6B in 2001 and even more in 2002. Unfortunately, results to date together with the impact of the war in Iraq and the SARS epidemic has seen this trend worsen even further. United Airlines and U.S. Air have already entered into bankruptcy protection, with U.S.A Air emerging from it on March 31, 2003.

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. As the airline industry retrenches, aircraft, engine and avionics deliveries orders are down significantly. The aerospace industry is a major player in Canada’s economic well-being. In 2001, the aerospace industry reported revenues of $23.2B of which $17.8B were from exports ($15.2B of these exports were to the U.S.). It employed 83,600 highly paid and skilled workers in 2001; however, this fell from a high of 91,500 in 2000, and there are indications that further layoffs are taking place.

After years of impressive growth, 2002 saw a significant downturn in revenues, exports and employment. Canadian companies such as Bombardier, CAE and Pratt & Whitney Canada remain very vulnerable to reductions in airline traffic. Their financial fortunes have suffered significant setbacks.

In part, the doldrums of the North American aviation marketplace are the legacy of the September 11 attacks, questionable airline management practices and the sagging economy. However, 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 generally add 7% to 40% to ticket prices, and even more in some instances.

It is noteworthy that even though Canada’s economy has been stronger than the U.S. economy, last year passenger traffic declined 10.2% in Canada as compared to 9.9% in the U.S. Higher ticket prices, due in large part to these fees, taxes and charges, together with the "hassle factor" perception of travelling by air, have resulted in significant reductions in passenger traffic. In particular, it is perverse and unfair that passengers should have to finance national security through the Air Travellers Security Charge. Clearly, the status quo is not sustainable within the airline industry itself, nor in the many industries that support it.

Air Travellers Security Charge and other security costs

The Government acted on the recommendation of this Committee by reducing the Security Charge. However, the reduction was only 40 percent on domestic flights and it remains unchanged for transborder and international flights. The "user-pay" concept is entirely inapplicable in the current circumstances. 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. Of the Cdn $7.7B identified to improve security in the December 2001 Budget, it is remarkable that only the Cdn $2.2B for aviation security is targeted for repayment through a user charge. In this case, the user is the air travelling passenger. There have been no similar charges for users of marine ports or border crossings where extensive and costly measures have been incorporated to facilitate the flow of goods into the United States.

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 one that does not pay heed to the straits in which the industry finds itself. In 2001, the eight largest airports took in from airlines and passengers $765 million in revenues from airport improvement fees and terminal and landing fees. However, the large airports are required to pay rent to the Federal Government. This amounted to $250 million last year and will increase another 9.2% in 2003. Notwithstanding that it collects this rental income, the Federal Government does not cover any costs for operating or maintaining airport infrastructure. One may ask who does? The airports are required to 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, or at the very least, establish rates of rent that reflect the current state of the industry.

It is noteworthy that even though Canada’s economy has been stronger than the U.S. economy, last year passenger traffic declined 10.2% in Canada as compared to 9.9% in the U.S. Higher ticket prices, due in large part to these fees, taxes and charges, together with the "hassle factor" perception of travelling by air, have resulted in significant reductions in passenger traffic. In particular, it is perverse and unfair that passengers should have to finance national security through the Air Travellers Security Charge. Clearly, the status quo is not sustainable within the airline industry itself, nor in the many industries that support it.

Aircraft Financing

It is not helpful to the airline industry that they must pay more for Canadian-built aircraft than their U.S. competitors. Canadian export financing programs allow U.S. regional airlines to purchase Bombardier aircraft at a lower price than can Canadian regional airlines. In addition, American tax laws and accounting rules reduce the costs faced by U.S carriers when acquiring aircraft as compared to their Canadian counterparts. It is ironic that a Canadian carrier flying a Bombardier regional jet on a transborder route has paid more for the aircraft than its U.S. competitor on the same route flying the same aircraft type and model. It has been reported that Air Canada and its regional airline, Jazz, would greatly like to increase the number of regional jets and modernize their fleet of turboprop aircraft. Given the financial difficulties facing Bombardier, it would seem that the Canadian Government should facilitate such a purchase. ALPA encourages the Government to allow Canadian carriers to benefit on the basis of equality with foreign buyers through programs similar to those offered to U.S. or other foreign counterparts. ALPA understands the need to promote the export of Canadian products, but given the state of the industry in this country, ALPA believes that an equivalent approach that benefits Canadians should be adopted. In addition, ALPA believes the tax and accounting rules in Canada need to be amended to be equivalent to U.S. requirements for in the purchasing purchase or lease of aircraft.

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. These we do not place at the feet of the Government.

However, at a basic level, the aviation infrastructure recently established by the Canadian Government, highlighted by the devolution of airports and the commercialization of the 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. As the current situation demonstrates, these increases in costs occur 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.

Further compounding this dilemma is the inability of the airlines to reflect these costs in their ticket prices in light of greater competition from other transportation modalities. Given these factors, along with the "hassle factor" of travelling by air in the post 9/11 world, it is no wonder that traffic is down and especially so on the shorter routes, where travelling by car or rail may be viable alternatives.

The new Canada Airports Act which is now before Parliament is welcome in that it requires airports to conduct their affairs with increased transparency and accountability and to have stakeholder representation on their Boards of Directors. Similarly, NavCanada has comparable measures in place. 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.

ViaVIA Rail

ALPA is particularly concerned with the unfair competition provided by ViaVIA Rail to airline short-haul routes. In addition to the annual subsidy exceeding $300M, ViaVIA Rail was provided with $402M this year to replace aging equipment and facilities. VIA has purchased new passenger cars and high speed locomotives. With this equipment, VIA has expanded its service and charges ticket prices that do not accurately reflect the true cost of the service. ViaVIA Rail spent $559 million last year, of which only $254 million came from outside revenue sources. In other words, the taxpayer provided the other $305  million, which amounts to 55 cents of every dollar spent by VIA. Transportation competition must be fair and equitable across all of the modes. It is patently unfair to encourage one mode of transportation over another through Government subsidies.

No Undue Liberalization of International Air Services Agreements

A number of industry observers have suggested that Canada should consider allowing foreign air carriers to carry Canadian cabotage (i.e., domestic) traffic. In addition, the Canada Transportation Act Review Panel has recommended that Canada, the United States and Mexico enter into negotiations to establish a North American common aviation area.

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.

There is also no indication that either the United States or Mexico is considering eliminating their respective prohibitions on cabotage. The United States, in particular, has repeatedly stated that it has no intention of opening its domestic markets to operations by foreign carriers. Thus, the prospects for achieving a North American 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 is the maintenance of Canadian ownership and control. ALPA continues to support that principle. The size of the Canadian market imposes certain constraints. It remains a challenge to balance a strong and viable Canadian presence in an increasingly global market with 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 airlines that took advantage of the increased foreign ownership limit should 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.

ALPA is particularly anxious that there should be strong safeguards in place, before any increase in foreign ownership is permitted, in order that effective operational control of all aspects of an airline remains in the hands of Canadians. Setting the limit on a purely numerical basis at 49% would not likely achieve the purpose of ensuring domestic control. In a publicly-held corporation, possession of a 49% share holding gives a shareholder effective control of the enterprise simply because it is extremely unlikely that the remaining 51% would be held by only one other entity. In particular, ALPA is concerned that were a foreign airline to gain 49% control of Air Canada or any other domestic airline, that airline would seek to create "efficiencies" off-shore. It may do so by requiring that such things as maintenance be done in the home country; or, in the context of a code share arrangement, it may determine that an international route previously operated by both a domestic and a foreign-owned airline would be more profitably served by the foreign one. This would result in the significant loss of Canadian skilled and professional jobs, loss of profitable air routes, and the ultimate loss of control over the airline’s profitability, thus making it simply a shell Canadian company. Hence, it is necessary that there be a clear definition of what genuine Canadian control of an air carrier entails before consideration is given to handing over up to 49% control of the shares of a Canadian airline to foreign ownership.

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. 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 traveling public, and for the reasons outlined in this submission, ALPA’s recommendations are as follows:

Stabilization Measures for the Airline Industry

• ALPA believes that in order for the Canadian airline industry to be more stable, and to ensure that there is airline competition, it is necessary, as a measure of last resort, that there to be Government stabilization assistance available in emergency situations.

Service to Small and Remote Communities

• ALPA recommends that funding mechanisms similar to the U.S. Essential Air Service program be given serious Government consideration.

Financial Policies Affecting the Airline Industry

• ALPA recommends that the Government to abandon the Security Charge in its entirety and to absorb all additional post-9/11 security costs now being borne by the industry.

• ALPA recommends that the federal fuel excise tax be eliminated.

• ALPA recommends that the Federal Government cease to collect rents from airports, or set those rates at a level that reflect the state of the industry.

• ALPA encourages the Government to allow Canadian carriers to benefit equally with foreign buyers through programs similar to those to to promote export of Canadian built aircraft. In addition, ALPA believes the tax and accounting rules in Canada need to be amended to be equivalent to U.S. requirements in for the purchasing purchase or lease of aircraft.

• ALPA recommends that legislation be passed by Parliament that would require airports and NavCanada to have a system of protection or insurance from fee increases during downturns in the economy.

• ALPA recommends that transportation competition must be fair and equitable across all of the modes and Government subsidies dodo not encourage one mode of transportation over another.

No Undue Liberalization of International Air Services Agreements

• ALPA believes that it would be impractical and unwise for the Canadian Government to permit foreign airlines to conduct cabotage operations in Canada.

Foreign Investment and Domestic Control

• ALPA recommends that changes to foreign ownership rules 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, changes should only be made with the safeguards that have been outlined here in place, and capable of operating effectively to protect the interests of Canadians.

ALPA thanks you again for the opportunity to appear before you today to make our views and recommendations known to the Committee. We would be pleased to respond to any questions you may have.