Canada's airlines and airports are gearing up to fight Ontario's plan to more than double the tax on aviation fuel, arguing it will increase the number of Canadians travelling out of U.S. airports where taxes and fees are substantially lower.
The tax will rise from its current level of 2.7 cents a litre to 6.7 cents by April 1, 2017, under the Ontario budget that will be reintroduced Monday. It's the same budget presented in May by the Liberal government of Premier Kathleen Wynne, which went from a minority government to a majority after a June election.
"This is unbelievably punitive," Ben Smith, Air Canada's chief commercial officer, said in an interview. "It's very bad not only for us, for travellers. It's bad for Toronto and it's bad for Ontario, and not just bad for Air Canada, bad for any airline that does significant amount of business in Ontario."
The tax increase comes as airlines face increased volatility in jet-fuel prices because of the crisis in Iraq, and as they continue to adjust to the decline in the value of the Canadian dollar, which has also hit airlines because the price of fuel is measured in U.S. dollars.
At the full hit of 6.7 cents a litre, the extra tax will cost Air Canada $50-million annually, Mr. Smith said, but he and other industry officials pointed to the impact it will have on air traffic.
An estimated five million Canadians head across the border annually to fly out of U.S. airports or on U.S. airlines, with about three million from Ontario. That's in part because fares are cheaper, but taxes and fees are a key element of the higher Canadian fares.
"Good air transportation is critical to any economy – Canada is no different – and we've effectively priced ourselves out of the marketplace," said Scott McFadden, president of Thunder Bay International Airport Authority in Thunder Bay.
Travellers are voting with their wallets, said Mr. McFadden, who estimates about 30,000 to 40,000 people annually drive from his part of the province to Duluth, Minn., or Minneapolis. The Thunder Bay airport handles about 780,000 passengers a year.
"It's really difficult to make an argument that it's more convenient to get in a car and drive for three and a half, four hours [to Duluth] or six hours in the case of Minneapolis," he said.
Someone taking a Thunder Bay-Toronto-Tampa, Fla., flight would pay a fare of $758 return with fees and charges of $153.34 included. A flight from Duluth to Tampa via Minneapolis would cost $352 (U.S.) with $65.49 in fees and charges.
Susie Heath, a spokeswoman for Ontario Finance Minister Charles Sousa, said the estimated revenue of $135-million (Canadian) from the tax during the next three years will be spent on public transit and transportation infrastructure.
The fuel has been taxed at a rate of 2.7 cents a litre since 1992, Ms. Heath said, which is significantly lower than the tax on gasoline and diesel fuel.
Ontario's move is the opposite direction taken by British Columbia, which eliminated its aviation fuel tax on international flights in the 2012 provincial budget and credits the move for contributing to decisions by 22 airlines to add flights into and out of Vancouver.
Mr. Smith of Air Canada said the tax is a blow to the airline's effort to make Pearson International Airport in Toronto a hub for international travel that will draw business travellers from Boston, Philadelphia and other eastern and northern U.S. cities who are flying to Asia or other non-North American destinations.
"I already have a huge disadvantage versus those cities because of airport rent, because of all the other taxes we currently pay," Mr. Smith said. One of Air Canada's drawing cards is that it offers the only daily service to Haneda airport in Tokyo from North America, but passing on an increase in the aviation tax will make it more difficult to attract U.S. travellers, he said.
"This is basically putting a roadblock in front of economic development," he said. "Any city that punches above its weight in aviation and gets all the benefit for their home market would never do this."
Editor's note: A previous version of this story said the Ontario budget was first presented last month, when in fact it was presented in May.