When Joseph Fooks and his parents decided to fly to New York for a long weekend, they could have headed to Pearson International Airport, a mere 30 minutes away from their home in Richmond Hill, Ont. Instead, they packed up their new Lexus SUV and made the three-hour drive across the border to Buffalo Niagara International Airport.
The Fooks family wanted to take advantage of JetBlue's $89.70 (U.S.) one-way fares between Buffalo and New York. They figured they would save a combined $600 (Canadian) on their round-trip by flying from the United States, compared with the cost of taking an Air Canada flight from Toronto.
"Every dollar adds up," said Mr. Fooks, 25, clutching his boarding pass at the gate. "The savings on the plane tickets cover our entire three nights' hotel stay in New York."
In search of similar deals, one in six Canadians flying to a U.S. destination are now turning their backs on Canada's airports and taking advantage of cheaper American fares.
The trend is picking up speed. Over the past decade, the number of trips taken at U.S. airports by Canadians has more than doubled, according to an analysis of 14 American airports by The Globe and Mail.
Last year, a record 2.3 million Canadians flew to or from the U.S terminals studied by The Globe. The loss of those passengers hurts Canada's domestic airline industry, but it also has had a much wider impact. Local companies are losing the revenue that airport traffic generates. Businesses with far-flung operations are facing higher flying costs for employees who use Canadian airports. In an age where a top-notch air hub is seen as a vital ingredient in attracting enterprises to a region, Canada's leading airports are finding it challenging to increase their passenger traffic.
The leakage of passengers to U.S. airports is costing Canada at least $1.1-billion a year in economic output, according to AirTrav Inc., a Toronto-based consulting firm. The drain is also raising questions about the federal government's policy toward air travel. For years, Ottawa has treated large airports as cash cows to be milked for revenue. But the surging number of Canadian travellers flying from U.S. airports suggests that the government's desire for airport revenue is ultimately self-defeating and a hindrance to economic growth.
The federal government has resisted pleas for change, although Kristine Burr, assistant deputy minister of policy at Transport Canada, told a Senate committee in October she recognizes that airports and airlines "feel the cost structure in Canada is onerous relative to what is in place in the United States."
She said lower U.S. airfares are, in part, the result of assistance for airports from all levels of U.S. governments, and added that cheaper American ticket prices hold benefits for Canadians as well. "One could argue that the discipline of knowing that there are options across the border is to some extent keeping airport costs somewhat competitive here in Canada, too," Ms. Burr said.
That viewpoint earns little sympathy from Fred Lazar, a business professor at York University's Schulich School of Business, who blames Canada's high airfares on the "ground rent" that Ottawa charges major airports, as well as layers of taxes and security fees imposed by government.
Mr. Lazar warns that Canada is at risk of becoming a backwater for international air travel, as high fares drive away travellers. Airports should be seen as spark plugs for economic growth, he said. With the United Arab Emirates, the United States and China investing heavily in their airports, he asks: "Where will Canada end up?"
Airports taking a hit
The impact of Canada's airport policy can be seen from west to east. In British Columbia's Lower Mainland, Canadians are driving to Bellingham, Wash., and Seattle in search of bargain flights. In southern Alberta, residents are taking a shine to Montana air terminals instead of driving to Calgary. In Manitoba, passengers are bypassing Winnipeg International Airport in favour of flying from Grand Forks, N.D., and Fargo, N.D.
With three-quarters of this country's population living within roughly 160 kilometres of the Canada-U.S. border, it has long been easy for Canadians to nip across to seek cheaper fares. But the extent of the current exodus is unprecedented. The number of one-way trips made by Canadians at 14 key U.S. airports hit a record 4.6 million in 2009.
Airports across Canada are feeling the pinch. Despite surging levels of air travel worldwide, annual passenger traffic at Canadian airports has declined 3 per cent on routes between Canada and the United States over the past 10 years.
Even Canadian airports far away from the border aren't immune to the trend. Air terminals in Minnesota are poaching passengers from Thunder Bay, Ont., despite the drive of more than six hours to get from the Northern Ontario city to Minneapolis.
Scott McFadden, president of the Thunder Bay International Airports Authority, said the rule of thumb used to be that a U.S. airport had to be within three hours driving distance of Canada to entice Canadians. That rule no longer holds. He worries about the effect on local businesses as more Canadians choose U.S. terminals. "As airport operators, we're in the business of economic development. What you're seeing is the Canadian government taxing our industry, driving away customers to find U.S. alternatives," he said.
The parking lot of the Buffalo airport bears silent witness to the willingness of Canadians to go where travel is cheaper. On one recent afternoon, four out of 10 cars in the lot had Ontario licence plates. The Buffalo airport handled an estimated 1.9 million one-way trips by Canadian passengers last year, or about 36 per cent of its total traffic.
The success of the upstate New York airport comes largely at the expense of Toronto's Pearson International Airport. "When people go to Buffalo to take planes, that's not creating jobs at Pearson, that's not cabs coming here and that's not hotel rooms being booked here," said Lloyd McCoomb, president of the Greater Toronto Airports Authority, which runs Pearson. "If you're taxing people to the point where they're leaving the country to use American airports, American pilots, American taxis and American rental cars, how is this helping Canada?"
Similar concerns are being voiced in Montreal, which faces escalating competition for travellers from the airport in Plattsburgh, N.Y., which opened in 2007 at a former U.S. air force base. The new airport has even erected bilingual signs to help lure Quebeckers away from the airports in their home province. "Canada treats us as cash cows, but the U.S. views their airports as enablers, as economic engines for local economies," said James Cherry, president of Aéroports de Montréal, which is also losing customers to Burlington in Vermont.
An increasing number of travellers now barely set foot in Canada even if both their home and their destination are in this country. Cameron Johnston, a frequent flier based in London, Ont., drove to Detroit to catch a flight to Seattle, then flew a short connecting route to Victoria to attend a medical conference. His "cross-Canada" trip was conducted nearly entirely outside the country. "I always use the Detroit airport, unless there is no way I can avoid Toronto," he said.
Ottawa's revenue river
To be fair, Ottawa isn't the only culprit in the leakage of so many Canadian air travellers to U.S. airports. With only Air Canada and WestJet offering coast-to-coast service, Canada lacks the fierce competition among smaller airlines that forces down fares in the United States.
But direct and indirect government levies remain the biggest reasons for Canada's sky-high fares. Ottawa charges millions of dollars in rent on the federally owned land that major airports operate on; it also imposes security charges, fuel excise taxes and sales taxes. The various levies and charges have steadily risen in recent years and now account for up to 70 per cent of the total fare on domestic flights.
"Ottawa's footprint from taxes and fees is much too big," said AirTrav president Robert Kokonis. "Canada's airports, airlines and ultimately the travelling public deserve a better deal."
It wasn't always this way. In fact, Ottawa used to own and run the country's major airports. That began to change in 1992, when the federal government, eager to bring down its massive deficit, started transferring responsibility for operating large airports to local groups. It shifted management from Transport Canada to not-for-profit, community-based authorities and other entities over an 11-year period.
The airports quickly became a sizable source of revenue for government. From 1992 through 2009, the 14 leading Canadian airports paid a total of $3.3-billion in rent to Ottawa.
Ottawa does put money into airports, but not nearly to the extent it taxes them. Jacobs Consultancy Canada Inc. estimates that the federal government has invested $4.1-billion in the country's air transport sector from 1999 through 2009. But Ottawa garnered $7.1-billion in revenue over the 11-year period. The result is a net benefit to government coffers of $3-billion.
In contrast, the U.S. lavishes support on its airports. Most airports in that country don't pay rent or municipal taxes. They also have the ability to raise money through tax-free bonds. As well, they have access to $3.5-billion (U.S.) in an annual Airport Improvement Fund, operated by Washington, that earmarks money for capital spending.
Canada's major airports enjoy none of those advantages. They even have to pay taxes on their airport improvement fees because Ottawa views those fees as revenue, although the money that is raised goes to terminal expansion projects.
Ottawa granted airports some relief when it revised the rent formula under then-transport minister Jean Lapierre in 2005, but it vastly underestimated how much it would collect under the new scheme. Calgary International Airport, for instance, had been forecast to pay $10-million (Canadian) this year and $15-million in 2015. Instead, it expects to pay $22-million this year and more than $34-million in 2015. Pearson, which holds the dubious distinction of charging the world's highest fees for planes to land, paid more than $140-million in rent last year.
For Ottawa, airports have become a lush source of revenue, a situation that rankles Canada's aviation industry. Canada's leading airports have benefited from growth in domestic traffic over the past decade, as well as new routes to destinations in the Caribbean, Asia and Europe. The key U.S. market, however, has been a disappointment, as millions of potential passengers flee across the border to take advantage of lower fares.
"We have to nurture Canada's airport network, but Ottawa still looks at it as a revenue stream rather than as an economic generator," said William Restall, chairman of the Canadian Airports Council and president of the Saskatoon Airport Authority.
Plugging the leakage
The gap between Canadian and U.S. airports will widen, given that U.S. President Barack Obama has pledged to spend a further $50-billion (U.S.) over six years on transportation infrastructure, including building new airport runways. By comparison, Ottawa has spent a mere $535-million (Canadian) for improvements at airports since 1995, and all that money has gone to smaller terminals, leaving larger airports to finance their own expansions.
Ottawa appears unmoved, saying there are no immediate plans to address the cross-border bleeding. Ms. Burr, the assistant deputy minister at Transport Canada, told the Senate committee that "the U.S. is a huge market with many more passengers and many more airlines." She called it "a fact of life" that "ours is a vast country geographically, but a much smaller one in terms of population. Therefore, Canadian airlines have higher costs than those in the United States."
But the gap between Canadian and U.S. airfares has never been as large as it is now. Canada's aviation leaders see a crisis brewing, so they're ramping up their lobbying for dramatic reforms.
If Ottawa cancelled airport rent, eliminated security charges on tickets, axed the excise tax on fuel and reimbursed funds related to debt financing for air traffic control, Canada's aviation sector would receive a much needed shot in the arm, said George Petsikas, president of the National Airlines Council of Canada. "Air travel is globally competitive, and we are in a fight for our lives," he said, urging Ottawa to overhaul its aviation policy.
Easing the tax burden would lead to lower airfares and added flights. Together, those would generate an extra 3.7 million trips annually at Canadian airports, said York University's Prof. Lazar, who has studied the issue of heavy taxes on behalf of the airlines council. He said the creation of airport and airline jobs and spinoff benefits could contribute from $2-billion to $4.6-billion a year of additional economic output.
Low-cost carriers such as JetBlue of New York and Denver-based Frontier Airlines say they will consider entering Canada if Ottawa were to scrap airport rent, allowing airports to lower landing fees. Consumer advocates say the emergence of U.S. low-cost airlines in Canada would increase competition and reduce airfares on Canada-U.S. routes. A narrower gap in airfares between the two countries would entice more Canadians to look to their home airports.
For now, though, customers such as Pam Sebestyen and her husband, Nelson Yu, will continue to drive from Ontario to upstate New York to take advantage of cut-rate U.S. tickets. "Too expensive from Toronto," she said, waiting to board a JetBlue flight from Buffalo to Boston. The couple, both 33, calculated that a plane trip from Hogtown to Beantown would have cost them at least twice as much as the Buffalo-Boston route.
"The taxes are such expensive chunks of the fares if you fly from Canada," said Ms. Sebestyen, dressed in a bright red coat with 'Canada' emblazoned in big white letters on the back. "It's a good deal here in Buffalo."