Why are Airfares so High in Canada?

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There is no doubt that Canadians pay some of the highest airfares on the world. Indeed this is evident especially when looking at domestic flights which a study done by Kiwi.Com (an air travel site) stated that Canadians pay on average $50 CAD per 100km. There are a few reasons for this, one of them being the duopoly within Canada.

A study done by Kiwi.com (in USD)

Since the early 2000s, Canada’s airline industry has been dominated by two major players; Air Canada and WestJet.  This was a result of a number of acquisitions and mergers that many of the largest airlines did. For example, in 1989, Wardair was acquired by Canadian Airlines and then in 2000, Canadian airlines was acquired by Air Canada meaning that only two major airlines existed within Canada.

This is distinctly evident within the airline’s pricing. For example, a one-way ticket from Vancouver (YVR) to Toronto (YYZ) on Air Canada costs $406 CAD versus a Los Angeles (LAX) to New York (JFK) flight which costs $203 CAD on American Airlines. These are both reputable airlines and similar distances yet the price difference is astonishing.

 

Although one could argue that there are other airlines within Canada (e.g.) Air Transat or Newleaf, the reality is that these airlines have limited capacity and don’t operate intercontinental flights and still offer less than 10% of domestic seats.

 

There are a number of reasons why competition is still very limited. In an ideal free market, a new airline or airlines would naturally start up to compete against the current duopoly and therefore cut prices. However, it is far more complicated than this, for example, the capital required to start an airline is enormous (an average 737 has a listing price of 100 million dollars). The high cost of entry into the market isn’t helped by the Government of Canada’s laws dictating that foreign ownership of an airline cannot exceed 25% or the CTA’s $25 million license to get an air operators certificate.

Canadian Airlines was purchased and merged into Air Canada in 2000

 

Moreover, Canadian carriers have a history of buying up other airlines, look no further than Air Canada and its subsidiaries/acquisitions which have included: Canadian Airlines, Wardair, Canadian Pacific Airlines, Pacific Western Airlines, Air BC, Air Ontario, Air Nova and Air Georgian. This is the same issue which has plagued telecommunications in Canada, and is also the reason why Air Canada is enjoying some of its most profitable years on record.

 

One would think that as a result, Air Canada and WestJet would be fighting tooth and nail to undercut each other. While this is true for their service levels, in which they strive to compete, it isn’t true for price. An example of this was the baggage fee which WestJet introduced in 2014 and less than a week after, Air Canada also stated that they were going to also introduce this. Although there isn’t enough known evidence for collusion, it is certainly clear that neither of the airlines feel like undercutting each other in price. They keep their prices exactly the same for the same flights. This just goes to show how neither carrier wants to undercut each other in price.

This image shows both Air Canada and Westjet flights from Vancouver to Toronto.

 

Based on the problems, there are a number of ways that can fix this market failure. One of those would be to get rid of the restrictions regarding foreign investment. This would help start-ups find more investment dollars abroad where foreign capital is more abundant. Indeed, there are already start-up airlines within Canada, however, these airlines have been plagued with delays from lack of capital to ATC (Air Transport Certification) problems. A fresh influx of foreign capital would certainly increase the pace at which these carriers’ setup.

 

Another way that the government could reduce the barrier to entry would be to lower airport fees. Most of the airports in Canada (unlike some countries) are publically owned and controlled by a public board. Airports in Canada also charge very high landing fees as a recent study by the WEO (World Economic Forum) Concluded that of 138 countries, Canadian airports are ranked 8th in the world for most expensive landing fees. This problem ultimately has a larger impact on smaller airlines who have less of a cash base. The disadvantage to this is that airports claim that they do need those fees in order to maintain themselves, yet when looking at other highly ranked airports around the world (e.g. Hong Kong HKG), their fees are still low relative to Canadian airports. Based on this, one can conclude that lowering fees a bit would be beneficial to both consumers and new airlines.

 

Finally, the federal government could enact laws that prevent mergers of large airline. This can be done in two ways. The more passive would be having the government pass legislation to prevent future mergers (i.e. if Air Canada and WestJet decided to merge, they would not be allowed to). The more active approach would be to break up the largest airline in Canada (Air Canada) and spit it back into smaller carriers. Although this would probably be very effective in increasing competition, there would probably be heavy backlash from the airline. It would also be very complicated. Yet, either approach would play a role in stopping the duopoly currently happening or getting worse.

 

Although it may seem like Canada will never have a proper competitive airline market like other regions, there still may be hope. In the next year, Canada Jetlines is planning to start services using a ULCC (ultra-low-cost carrier) model. Similarly, Newleaf has already started operating low cost flights and Enerjet is working on creating a new discount carrier. Finally, Westjet and Air Canada have both announced that they are going to react by introducing LCCs within Canada. With all these changes happening right now, it will be interesting to see how Canadian passengers will benefit.

Canada Jetlines will start flights in summer 2018.

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