At A Glance
- Each year, roughly five million Canadians cross the United States border on land in order to fly from U.S. airports.
- Cross-border air fare shopping is being driven by a “perfect storm” of many different factors, including wages, productivity, fuel prices and taxes, asset prices, and airport and navigation fees. Together, these are providing a 30 per cent cost advantage to U.S. carriers.
- Changes in Canadian policies could bring 2 million or more passengers per year back to Canadian airports.
- As national and international hubs, large Canadian airports rely on traffic density in order to achieve the benefits of network economies. Lost traffic means both higher travel costs and reduced connectivity for all Canadians.
Canadians have long complained about the prices of goods and services being lower south of the border. In response to this, many Canadians cross the border regularly for the purpose of seeking out lower-priced goods, such as clothing, electronics, food, or even gasoline.
More recently, there has been increasing interest in “cross-border air fare shopping,” where Canadians travel by car or bus to a nearby U.S. airport in order to fly to another destination. These are often leisure passengers travelling as families or groups, which are able to realize savings on multiple air fares. Through a collaborative effort with its Canadian airport members, the Canadian Airports Council has estimated that more than five million Canadians are flying from cross-border airports each year.
The relatively high air fares in Canada are often blamed on fees and taxes levied by the federal (and to a lesser extent) provincial governments. Those fees and taxes are certainly a large and significant contributing factor. However, other factors are also at play, such as air carrier productivity levels and U.S. aviation policies and fees.
This report attempts to quantify the key contributing factors to the air fare differentials while providing a rough estimate of the number of Canadian passengers flying from U.S. airports, in lieu of Canadian airports (leaked rather than induced passengers). The analysis largely focuses on three Canadian airports: Vancouver International Airport (YVR), Toronto Pearson International Airport (YYZ), and Montréal-Trudeau International Airport (YUL), along with their cross-border competitors.
Our research finds that there is indeed a large gap when comparing these cross-border air fares with their Canadian equivalents. But no single factor can be identified as the overwhelming cause for this gap. Rather, a large number of relatively small factors all contribute to the gap, with the result being a loss in passengers for Canadian airports, along with their business revenues and related government tax receipts.
The analysis is based on an examination of the cost structures of the Canadian and U.S. air carriers that operate out of these airports. In particular, data from Air Canada, WestJet, Allegiant Air, AirTran Airways, JetBlue Airways, Southwest Airlines, and Spirit Air were compared. In addition, the fees charged by the relevant airports were considered in the analysis. The table below provides a summary of the overall Canadian and U.S. carrier cost differential (not including the additional taxes that are levied on top of the base fare).
Summary of Canadian and U.S. Carrier Cost Differentials
| ||Contribution (per cent) ||Notes |
|Labour compensation ||10 ||This is not an across-the-board advantage for U.S. carriers. |
|Wage rate ||5 ||Lower for the ultra low-cost carriers: Allegiant, AirTran, and Spirit. |
|Labour productivity ||5 ||All U.S. carriers outperform in terms of available seat miles (ASMs) per employee. |
|Fuel costs ||10 ||System-wide fuel costs are lower for U.S. carriers. |
|Fuel price ||10 ||After-tax price is lower for U.S. carriers system-wide only, due primarily to lower fuel taxes. For given routes, it is only an advantage for those competing against routes originating in Ontario, due to the unfavourable fuel tax treatment in that province. |
|Fuel productivity ||0 ||Southwest leads but Allegiant underperforms due to aging fleet. With Allegiant out of the picture, there is a slight U.S. advantage on average. |
|Aircraft/asset ownership ||25 ||Leasing and depreciation costs are lower for U.S. carriers. |
|Aircraft/asset prices ||15 ||Because utilization is only slightly higher, lower aircraft/asset ownership costs are more likely attributed to prices. |
|Utilization ||10 ||Aircraft utilization is slightly better for U.S. carriers, though this alone underestimates the productivity advantage. |
|Other ||55 ||Consists of any costs not included in the above factors. |
|Airport fees ||25 ||Airport fees such as landing and terminal fees are generally significantly lower in U.S. airports. This is due in large part to the policies that airports are subject to in each country. |
|Navigational fees ||15 ||The Federal Aviation Administration (FAA) partially funds navigational services through the air ticket tax so does not show up in carrier costs, unlike fees charged by Nav Canada. In addition, Nav Canada is fully funded by fees while the FAA receives a subsidy. |
|Residual ||15 ||Any other costs such as marketing, insurance, etc. |
|Total ||100 ||Results in close to five cents per ASM, or 30 per cent cost advantage for U.S. carriers. |
Source: The Conference Board of Canada.
When adding fees and taxes that apply to the base fare, we find that Canadian fees and taxes contribute to roughly 40 per cent of the total air fare difference in the markets that we examined. However, U.S. fees and taxes also play a significant role. Fees such as the U.S. Agriculture Fee, the U.S. Immigration Fee, and the U.S. Customs Fee apply only to transborder and international flights, meaning that Canadians avoid these fees when they drive across the border in order to take a domestic flight from a U.S. airport. A truly neutral policy would not discriminate between one flight or another in this way, given the fact that the U.S. domestic flight in this case still requires a border crossing by the Canadian passenger.
While Canadian fees and taxes contribute to about 40 per cent of the total air fare difference in the markets that we examined, U.S. fees and taxes also play a major role. In other words, no single factor dominates.
As is apparent from the table as well as the analysis of additional fees and taxes, no single factor dominates. This does not mean that tackling any single factor will have no effect. In fact, it is partly due to that attitude that the overall differential has been allowed to creep up and become a significant factor for Canadians to consider when choosing their origin airport. Although additional analysis and information on the specific local origins of these Canadian cross-border air fare shoppers would be required to be more specific estimates, we estimate that a reduction in the fare differential equivalent to the portion that is caused by Canadian policies would result in at least two million more passengers per year for Canadian airports. While a reduction of fees and taxes would reduce government receipts in the short term, much of this would be recaptured through direct and indirect tax revenues generated by the additional traffic originating in Canada.
In addition to cutting taxes and fees, Canadian governments could:
- Alter the way in which taxes and fees are generated. This includes revisiting the airport rent formula as well as the structure of the Air Travellers Security Charge. For example, the federal government could shift airport rents from a rising marginal share of revenue to a flat share of revenue, or even a fixed fee.
- Gain a better understanding of the base cost advantage of U.S. air carriers. While some of the base cost advantage may be a function of a larger and denser market, some of the advantage can be attributed to the policy environment and bankruptcy legislation. The airline industry is by its nature a global one, and different rules for the domestic market hinder the ability of domestic carriers to compete with international carriers.
- Pursue opportunities to harmonize the treatment of air passengers with U.S. authorities. Much of the difference in after-tax fares stems from U.S. aviation policy. Canadian policy-makers should pursue all opportunities to minimize these disparities in the context of the Open Skies agreement and talks related to Canada–U.S. perimeter security.
Meanwhile, the Canadian aviation industry itself must show that it is serious about taking the issue where it has some control of its own. Some potential industry approaches include:
- Turning per passenger charges into a pool of fees that carriers can spread more discriminately. It is well established that air carriers practise yield management, the benefit of which has been higher load factors and higher overall efficiency. In fact, Canadian and U.S. air carriers are generally achieving load factors of 80 per cent or higher. Fewer empty seats mean lower costs for passengers. However, when fees are charged directly to the passenger, air carriers have no ability to vary these fees across their passengers.
- Commit to passing through to passengers part of the benefit of any reduction of airport rents. If Canadian airports believe that they are losing traffic in part due to the higher prices that they must charge to cover rent payments made to the Government of Canada, they could offer a direct cut in the airport improvement fee in exchange for an equivalent reduction of rents.
Lastly, while this report makes an attempt to estimate the number of leaked (rather than induced) passengers due to tax and fee disparities, we would need better first-hand knowledge of the characteristics of the Canadians who are choosing cross-border airports. This might be done through a border intercept or other survey that determines specific local origins of those passengers as well as their reasons for route and destination choice.
In addition, more analysis should be conducted to determine the wider impacts of leaked traffic. When a Canadian airport loses a passenger to a cross-border airport due to an unlevel playing field, this is not just a concern for that airport. YVR, YYZ, and YUL are all national and international hubs, providing connectivity within, to, and from all of Canada. As such, they depend on density to achieve and provide the benefits of network economies. Any lost traffic will result in poorer connectivity not just for their local catchment area, but for all of Canada.