Sky’s The Limit: Soaring Costs in Canada's Aviation Industry
Imagine this: you’re an out-of-province university student, and you fly between home and school three, maybe four times a year. These costs add up, and each subsequent plane ticket seems to hit your wallet harder. What’s causing domestic airfare to remain so expensive in Canada, and can Canadian airspace be made more consumer-friendly?
Although base airfares in Canada have historically remained at similar prices (Figure 1), Canada is among the most expensive countries to fly in. In 2017, Canada was ranked 65 out of 80 countries in terms of flying affordability. Comparatively, our neighbours down south were ranked as significantly more affordable at 30th. Though airfares saw a dip in response to the COVID-19 pandemic, prices have quickly risen again as demand for air travel has recovered nearly 85% of pre-pandemic amounts.
The main cause for lacking affordability is the fees imposed on airports and airlines, which are passed onto consumers but also discourage competition. Lacking viable competitors, the national duopoly of Air Canada and WestJet have pricing power to maximize revenue from airline-issued ancillary fees, adding to the already burdensome cost of air travel compared to our neighbours south of the border.
The Cost of Canada’s User-Pay Model
Exacerbating the already high base fare pricing is the rise of ancillary fees that have been passed onto fliers. For example, Air Canada’s ancillary revenues grew from $0.7 billion CAD in 2013 to approximately $1.2 billion in 2018, almost doubling over the five year period. Similarly, the proportion of WestJet’s ancillary revenues to overall revenues grew from 8.9% to 10.0% in the same timeframe. While airlines are squeezing more money out of fliers through seating, baggage, and amenities charges, government-and-airport-mandated fees are an even bigger culprit. Currently, an average of 35% of the cost of a Canadian air ticket consists of these mandatory charges such as airport-improvement, air-navigation and security fees.
These exorbitant additional payments can be attributed to the “user-pay” model that Canadian airspace infrastructure is built on – simply put, the expenses of maintaining operations are essentially passed on through airports and airlines solely to customers. Within Canada’s “National Airport System'', most airports are managed by non-profit airport authorities, who are responsible for paying rents to the Canadian government. These rents, which cumulatively reached $419 million in 2022-2023, have increased over 40% within ten years. However, the majority of these lease collections are not reinvested into airports, with only around 9% of airport revenues being allocated towards federal airport development through the Capital Assistance Program (ACAP). Because these airports are responsible for rent payments, while also funding the lion’s share of maintenance investments, they recoup capital in the form of various charges. For instance, Toronto Pearson’s $35 airport improvement fee for departing passengers is much greater than the standard US$4.50 ($6.16) at U.S. airports. Security fees, which increased by 33% in May 2024, now add another $9.95 to all domestic travellers.
Competition is Grounded
Furthermore, the cost of flying in Canada is also sky-high for airlines, as well, which translates to increased fares. While carriers pay fees for landing, gate and terminal usage, baggage facilities, air navigation services, and aircraft aprons, among other charges, these expenses are far higher than those of our American counterparts. Most notably, the federal excise tax on aviation fuel is 4 cents per litre, over 150% more expensive than the States.
For example, Pearson charges Air Canada around $1,500 to land a Boeing 737 Max, $7.49 for every domestic passenger on board, and $2.91 for every minute the plane is at the gate. As these fees continually increase due to rising debt and pressure for airport authorities to pay the Canadian government, the uptick is ultimately passed onto the consumer.
These high costs, making Canada one of the most expensive nations to fly in, limits external competition – which in turn insulates Air Canada and WestJet. Ultra-low-cost and low-cost carriers (ULCCs and LCCs) in America including Frontier, Spirit, JetBlue, and Southwest, which routinely serve Canadian airports for international flights, are heavily disincentivized from entering the Canadian airspace market. Instead, said carriers are content with flying to and from American airports, including hubs such as Buffalo, Bellingham, and Detroit, near Canadian borders.
While foreign competition is a non-factor, in-house LCC alternatives have emerged as options for Canadians. More importantly, their lower-cost offerings place downward pressure on the prices Air Canada and WestJet can demand. However, maintaining these LCCs and ULCCs has been a challenging endeavor, not only in Canada but internationally overall; a study of the European market found an LCC failure rate of 77% between 1992 and 2012. This stark reality also holds true in Canada, where expansive geographical nature and sparse population density add to challenges. In addition, Canadian airline ownership restrictions make it difficult for small airlines to access enough operating capital within a highly-seasonal industry - affiliated investor groups are capped at 25% of ownership.
All of these variables, along with high costs of flying, have contributed to the demise of many LCCs in Canada – airlines that have limited pricing and financial flexibility due to compulsory flying expenses. Recently, Swoop Airlines became re-integrated into WestJet operations in 2023 after the LCC initiative failed to be operationally feasible, while Lynx Air ceased operations in February 2024. Currently, Flair Airlines (ULCC) and Porter Airlines (LCC) are two of the only remaining commercial-scale carriers competing against Air Canada and WestJet, which was acquired by private equity firm Onex in 2022.
Arguments For User-Pay
Although flying in Canada is clearly costly for consumers, there is debate as to whether this is actually a bad thing. Those that support the current Canadian system point to how the majority of citizens do not fly regularly. Thus, by directing taxpayer dollars towards funding air infrastructure, every citizen would be essentially subsidizing costs for the minority portion of regular air travellers. While the Canadian government subsidizes sectors such as agriculture and energy, many feel that those who are able to afford airfare should be footing the bill.
On the other hand, there are also arguments asserting that affordability comparisons to the United States aren’t fair – not only due to the subsidization US airports and airlines receive, but also because of the differences in geography and population density. In 2023, 37 people per square kilometer inhabited the US, compared to a paltry 3.93 in Canada. It makes sense that a smaller market would spend less on maintaining air travel options, and charge more expensive rates as a result.
Furthermore, the environmental impact of flying is more harmful than that of travelling by bus or rail. If air travel carries adverse environmental ramifications, should costs be levied to discourage consumers from flying over alternative transportation methods?
Arguments Against User-Pay
Besides high costs for travellers, arguments against user-pay maintain that air travel infrastructure is an essential service and warrants taxpayer funding to make flying more affordable. These financial barriers discourage small and medium businesses from growing in Canada – which involves sending employees to staff offices across the nation, deploying more sales teams on trips, and shipping products from coast-to-coast. Air travel can be seen as a catalyst for growth in GDP and professional employment, and thus an essential service that should be publicly subsidized. Similar positions are also made regarding tourism as an economic driver, especially travel on an interprovincial basis.
Future Implications
Ultimately, consumers shouldn’t expect drastic change moving forward, with Canadian leadership dedicating little investment towards reducing air travel expenses. Even if a government viewing air travel as worthy of public funding was instilled, implementation within such a large-scale space would be limited in scope and impact. As rent continues to rise for airports, additional fees will only increase, resulting in dwindling competition from LCCs and international carriers. Enacting legislative measures to drive partial adjustment, a more realistic solution, would shift a bigger portion of the cost burden to the government. Policies aimed at expanding competition, both domestic and foreign, could also ease the costs consumers face.
However, the combination of expensive services and consolidated providers is not only limited to the airline space. Sectors including telecom, insurance, and banking are also heavily controlled by oligopolies in Canada. While business strategy is often associated with singular businesses and their profit-seeking objectives, strategy also carries major ramifications in our day-to-day livelihoods through public sector infrastructure. In this area, strategy is intertwined with economics and public policy to execute governmental vision, leading to outcomes relevant to our daily livelihoods. From a strategic lens, individuals can gain a more comprehensive understanding of how our world runs by analyzing decisions made from people in power – for better or for worse.