Transport Committee on April 30th, 2024

[The Chair, Liberal, Peter Schiefke]

Thank you very much.

Next, we have Ms. Koutrakis.

The floors is yours for five minutes, please.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you, Mr. Chair.

Welcome and thank you to our witnesses for appearing before our committee today.

Mr. Gradek, I'm going to start with you.

You've written about junk fees, which tend to form a significant part of discount airlines' revenues. Can you speak to what junk fees are, how they impact competition between larger and smaller air carriers, and how they impact consumers?

[John Gradek]

I didn't invent the term “junk fees.” I'll just leave that to other pundits to claim ownership.

When we talk about junk fees, they're characterized as fees that are over and above whatever you pay as your base fare in an airline context. You pay for seat selection, a carry-on bag or a checked bag. People have considered those as junk fees, and they've been around a long time. They haven't been around just weeks, months or even years; they've been around for decades. Airlines have used them to create what we have traditionally called “fences” to make sure that, in fact, when you buy a fare, you will understand there are conditions associated with that fare. If you want to change your fare, itinerary or dates of travel, it's going to cost you something. Now that cost has the “junk fee” moniker associated with it, but they've been around a long time.

What has happened now is a proliferation of junk fees. That is really the moniker that has been applied to low-cost carriers looking to improve their financial performance by what I would call chunking out the services they would normally build for passengers. Now you're paying x dollars for your first checked bag and x-plus dollars for your second checked bag. If you want a seat at a window, a seat on the aisle or a seat with more leg room, those are all charges that have now become part of the modus operandi of ULCCs.

When you, as a customer, buy an airfare between Toronto and Vancouver on Flair Airlines, you see a ticket price and it's x—whatever the dollar amount happens to be. When you make the booking, they try to sell you up with a bunch of other conditions: checked bags, carry-on baggage, seat selection, meals and all kinds of amenities they want to throw at you. Those are the fees that sometimes make up the actual dollars you pay as a customer for that trip on a carrier such as Flair. The fees can be significant. In fact, Flair has admitted that over 40% of its revenue is based on its junk fees that are out there in the marketplace.

Junk fees are an important part of the business. They will not go away. My bet is there will continue to be a proliferation of these fees into the future.

[Annie Koutrakis, Liberal, Vimy, QC]

Thank you very much.

Professor Moore, economies of scale must be critical to airlines' survival in the long run unless they offer something truly unique, like a niche market. Larger networks are typically more efficient and offer more travel options to passengers. Keeping that in mind, from your perspective, what are the factors that make the smaller airlines more vulnerable in Canada and elsewhere? Is it the same situation in countries across the globe?

[Karl Moore]

I'll defer to some of my colleagues who would know more about that. I'll put them on the spot.

Do we have a volunteer?

[John Gradek]

Thanks, Karl.

I much appreciate that.

When you talk about the proliferation of these carriers and how they operate, carriers tend to have a certain life in Canada that, unfortunately, is short. In the U.S., Spirit, Allegiant and Frontier have been around for a number of years, as has Southwest. The modus operandi for a low-cost carrier in a given aviation environment is such that, when you talk about whether we can learn from those countries in terms of how they operate versus how we operate ULCCs in Canada, the answer, of course, is yes.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Ms. Koutrakis.

Mr. Barsalou‑Duval, you have the floor for two and a half minutes.

[Xavier Barsalou-Duval, Bloc, Pierre-Boucher—Les Patriotes—Verchères, QC]

Thank you, Mr. Chair.

There seems to be a consensus among the witnesses regarding the burden of the taxes and government fees added to the price of airline tickets. That brings something to mind.

The model we are talking about is a user-pay model, where the passenger pays the real cost of travelling that way. If we used other models such as by subsidizing air travel, we would end up funding the trips people take for pleasure, whether to lie on the beach or visit the Eiffel Tower or the tower of Pisa.

That means that the trips taken by people who are privileged enough to be able to afford to travel would be subsidized by the entire population.

Mr. Roy, do you think that is a desirable model?

Are there ways of reducing those fees without going in that direction?

[Dr. Jacques Roy]

I am not opposed to the user-pay principle. Air travel is a very expensive mode of transport. It is only natural that users should pay, especially if they are going to lie in the sun, as you said.

On the other hand, I would make a distinction between those people and people who live in the regions, in Sept-Îles, Îles de la Madeleine or Baie‑Comeau, for instance. They need air travel. It is an essential service if they need to travel for personal or medical reasons and so forth. The federal government should look into that.

There are pairs of cities in Canada that are underserved. Sometimes Air Canada is the only option, if it has not yet completely withdrawn from those markets. There is simply no other airline to replace it. If there is one, those companies are vulnerable and are struggling.

It is time for the federal government to look into this issue and learn from how things are done in other countries, in the United States and Europe, because the market simply doesn't work.

[Xavier Barsalou-Duval, Bloc, Pierre-Boucher—Les Patriotes—Verchères, QC]

Mr. Ebrahimi, would you like to add anything?

[Mehran Ebrahimi]

I completely agree with my colleague, Mr. Roy.

I would add that we have to consider the user-pay principle very broadly. We also have to remember that air travel is generally a productive sector. For every dollar invested in the sector, two, three or four dollars go back into the economy. In other words, it is not right to pay people to go lie on the beach. There is a whole range of related economic activities. That's why airports are often hubs. They generate economic activity and companies set up shop there.

Once again, the user-pay principle means that some people have the right to travel by air while others do not. In other words, in a democratic country such as ours, there is an unfair selection that allows some people to enjoy air travel while others have to stay home. To my mind, that is not acceptable.

The situation can be improved. There are things that can be done so that people who want to travel by air can do so. It is a chicken-and-egg situation. If air travel is inaccessible and too expensive, people will not use it. The fewer air passengers there are, the lower the demand and, if demand is low, the carriers will not offer service to remote regions.

[The Chair, Liberal, Peter Schiefke]

Thank you, Mr. Ebrahimi.

Next, we have Mr. Bachrach. The floor is yours for two and a half minutes.

[Taylor Bachrach, NDP, Skeena—Bulkley Valley, BC]

Thank you, Mr. Chair.

Mr. Roy was talking about essential travel from smaller, regional markets. This is a topic that's very germane in the region I represent, where most of our airports are served only by Air Canada. We have a huge price discrepancy when it comes to flying out of different centres.

From two of our communities, Smithers and Prince Rupert, to fly to Vancouver, you can pay as much as double on Air Canada what you pay flying from Terrace to Vancouver. The only difference is that the Terrace market has WestJet service as well, so Air Canada competes with WestJet and, as a result, the prices are far lower.

In smaller communities, there isn't room in the market for two carriers. I'm wondering what the policy options are. Is a public subsidy like the one Quebec has put in place the only option, or are there other policy measures that can ensure relatively affordable and fair air travel between these smaller communities and larger centres?

Maybe I'll ask that of Mr. Roy, since he was the one who was talking about it.

[Dr. Jacques Roy]

I can answer that question.

I think there are two possible approaches.

In Quebec, travel is of course subsidized through discounts, but we have to look at the supply and see if it is sufficient. Can someone get a return flight on the same day? Are there enough affordable flights for people who want to travel to visit family or for medical needs?

That takes work. The market has to be thoroughly analyzed and then we have to decide whether it is acceptable or whether we have to take action. In order to take action, a different approach is needed than simply thinking that competition will solve everything, because that does not work. I have been studying regional air travel in Quebec for 20 years. We always come to the same conclusions and find the same problems.

Perhaps the federal government would have to take a certain kind of approach—I would not go so far as to suggest regulation. It could learn from how things are done elsewhere so that Canadian air travellers can have an acceptable level of service.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Bachrach.

Mr. Muys, the floor is yours. You have five minutes, please.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

Thank you, Chair, and thank you to all the witnesses.

Professor Moore, I want to follow up on your comments about secondary airports as a potential avenue for reduced fares for Canadians.

Hamilton International Airport is in my constituency. It's an example where you have proximity to a population of arguably five or six million people within an hour's drive. In fact, it was the WestJet eastern hub for a while until it moved to Toronto.

You talked about the decline of secondary airports. Do you see, as we get further from the pandemic, perhaps a rebound in the use of secondary airports? What is the government doing that's hindering that? What can it do to improve that situation?

[Karl Moore]

A part of it is the airport managers who use data from IATA to figure out.... Montreal is growing a lot. Airport managers said, “Look, if people are flying to Toronto, then on to Rome, let's just have a Montreal-Rome flight.” You show the data, and you see that it makes sense. You go to Air Canada and Alitalia and say, “Here's the data. You should offer these flights.”

There's a place for outstanding airport managers like that to go out there with their people and sell what they have to the airlines and get them to provide service. Again, you could get forwarded to Europe or the United States. You have more options than just within Canada. I think there's a role there for those people to do that.

Also, if you want to go for low cost—and secondary airports tend to be lower cost—if it's a low-cost carrier that likes that model, then you have to make the rest of the model work as well, and that gets back to the fees issue. You can't just remove a little bit of the cost but a substantial..., so that you can really say, “Instead of $1,000, it's $500, and we can still make money at it.”

It helps to be at Hamilton as opposed to Pearson for a number of reasons. That can be put forward, but I think there's a role there for reducing the fees as well so that the ultra-low-cost model is more attractive, is doable and is a business.

[Dan Muys, Conservative, Flamborough—Glanbrook, ON]

I had a similar experience to your friend in Abbotsford, going through Hamilton. It's a smaller lineup.

Let me ask a question, Mr. Gradek. You've been before this committee a number of times, I believe, but I recall once in November 2022. I don't expect you to remember exactly the context, but we were having a discussion about coming out of the pandemic and problems at airports. You referenced the European Union model as one where the regulatory regime is more efficient than what we have in Canada.

I'm wondering if you could expand upon that in the context of this study here.

[John Gradek]

When we talk about the regulatory regimes in which airports, airlines and the rest of the aviation community work, I think you want to make sure that you're looking into a regime that removes as many operational and financial constraints as possible to ensure that you're giving the airlines and the airports a chance to survive.

We talked about the taxes this morning. That's a significant one. It's a level playing field if you were to replace it, but that's the price you have to pay to play in this game in Canada.

I think you want to try to understand the overall government policy of how we work as an integrated system across all of these components: airplanes, airlines, airports, CATSA and NavCan. All of those players have to work together. Unfortunately, in Canada, we still seem to have a situation where the data that we need in order for us to really make effective decisions around how the business operates is still not being shared properly. The Europeans and the Americans have done an exceptional job in terms of making sure that the players have the means to share data, future data in terms of where their plans are going and how things are going.

Right now, we're having a problem in Canada getting all of these players to share data to make the job a lot easier in planning what this business will look like. The Montreal airport is going through a $4.5-billion expansion. Pearson is going to go through x billion dollars' worth of expansion. Unfortunately, I'm not sure whether all the cards are on the table for some of the other players to make sure they're making the right decisions.

[The Chair, Liberal, Peter Schiefke]

Thank you very much, Mr. Muys. You're just on time at four minutes and 58 seconds. Wonderful.

Next we have Mr. Badawey.

Mr. Badawey, the floor is yours. You have five minutes, sir.

[Vance Badawey, Liberal, Niagara Centre, ON]

Thank you, Mr. Chair.

I'm going to go with Mr. Gradek with respect to my questioning.

I would like to get a bit more granular on the business side of how to make this happen with respect to a more healthy environment for our airline sector. I'll preface my comments by saying that, having spent many years in business, although subsidies are always, I guess, a go-to for government as well as others to take advantage of, what's more important in the business world is to have—I think Mr. Gradek touched on it—better and more strategic policies in place by government to allow for better decision-making within the private sector.

Canada is a big area with a small population. Therefore, what I'm going to concentrate on, Mr. Gradek, is integrating our supply networks. We looked at fluidity with respect to moving people and trade. Based on that fluidity, we looked at having more cost-efficiency built into the system. Of course, a lot of that depends on the policies that are put in place by government. On the operational and capital side, it's about sustainability and not isolating the movement of goods and/or people, but actually integrating the movement of goods and people and therefore integrating our supply chains, integrating our networks. As well there's recognizing where those regional hubs are, where those markets are, and the strengths of each. As well there are the supply chains, people and goods, logistics, integrating supply networks. Finally, with that, there's the integration of a multimodal network that exists in Canada but has never been taken fully advantage of when it comes to that integration. Therefore, once again, there's the fluidity and the cost-efficiency.

With all that said, Mr. Gradek, I want to give you the opportunity, based on your experience, to comment on how to bring all that together and then have the proper policy put in place by government to allow for a more robust airline network.

[John Gradek]

You're touching on something that's been close to my heart for the last couple of years, following up the national supply chain, policy papers and the view about what's wrong with our supply chains in Canada. Airports are an integral part of that supply chain.

One thing that we have seen is that we keep pointing the finger at the government for a lack of integrating capability across all the different players out there. The world of supply chain has changed significantly and it's going to change even more. We're going to move into very much a digital world. We're going to be moving into a world in which, as I mentioned a few minutes ago, data is going to be the important driver of decision-making and of efficiency in our supply chains.

I'm a wholehearted supporter of the need for us to have an integrated view of how stuff moves across this country and of making sure we're using the right of mode of transportation to move stuff from point A to point B. Our international partners depend on it. Our export economy depends on it. If we don't do it, we're going to be playing second fiddle to a number of international organizations that have done a better job of integrating.

Yes, there is a need. How that need gets expressed and how we do it....

The national supply chain officer is an interesting concept, but it's more of a band-aid at this point in time.

We need some effective processes in place that industries can adhere to, so we can measure how well we're doing as compared to what our competitors are doing, and whether we are moving the needle in terms of improving our efficiency and effectiveness when it comes to supply chain network management.

We haven't done that yet.

[Vance Badawey, Liberal, Niagara Centre, ON]

Thank you, Mr. Gradek.

What I'm getting out of those comments is the expectation to go to the supply chain office and do two things. One is that, when they are bringing forward their supply chain logistic strategy, it includes not just the movement of goods but also the movement of people,

On the capital side, with respect to strategic investments, for example, the HFR or high-frequency rail is now going to separate moving people and goods onto two separate pieces of infrastructure and therefore create more fluidity and more possibility for that integration between the different modes of transportation.

I guess the next question, Mr. Gradek, is with respect to the need to be focused also, especially with air, not only on domestic travel, but on binational travel with our American partners, as well as international travel. Of course, that's going back to our comments about the integration of a multimodal network.

What are your thoughts on that?

[John Gradek]

Talking about the way we operate across borders is key. In the conversations I've had with U.S. transportation officials, they are keen to look at—some how, some way—harmonizing the practices across our border. They know that we are in a state of flux in terms of what the Canadian government's policies are. I think it's time for us to make sure that we have at least an integrated North American strategy that deals with the supply chain issues that we all know exist.

Yes, there is an opportunity. We shouldn't be wasting it, but the clock is ticking. We have to make sure that we have policies in place that in fact promote effective and very efficient supply chain network policies across the borders, at least.

[Vance Badawey, Liberal, Niagara Centre, ON]

Thank you, Mr. Gradek.

I appreciate your comments. This is near and dear to my heart as well. Our discussions with our American colleagues over in Washington not only look at strategic policy that we can harmonize but also look at strategic investment set from the capital side to better integrate our transportation systems. I thank you for that validation.