Ottawa's tax missiles shooting down airlines

Toronto is filling up with putrid heaps of rotting garbage, thanks to a strike by municipal workers, but for the city's residents, there's a bright side. At least they can still get the hell out of there. There are, mercifully, no pickets going up at the airport this summer, no risk of Air Canada's flight attendants or pilots walking the line during the most critical season for the travel industry.

The country's biggest airline reached a détente with unions with a nudge from Ottawa, which sent a mediator in to sort out a tricky dispute over the pension plan. The feds, having bailed out the auto industry, clearly don't want another major business falling into bankruptcy protection – especially one that employs more people than the Canadian units of General Motors and Chrysler put together. So a strike has been averted. That's the good news.

The bad? Labour peace doesn't guarantee Air Canada's future. Fares are dropping but the passengers still aren't showing up. In May, 20 per cent of the airline's seats flew empty. And its costs are too high – not least because the same government that apparently wants to save it is also devoted to milking it (and other airlines) dry. What kind of policy is this?

Airlines and their customers have long complained about how much they pay in taxes and airport fees. But there's merit to the grumbling. The C.D. Howe Institute studied the issue two years ago and found that Canadian airlines face higher rates of tax than their U.S. competitors – significantly so in the case of domestic flights. For passengers, this shows up most starkly on short flights: a 50-minute jaunt from Kelowna, B.C., to Vancouver on WestJet, priced at $79, balloons to $111 once fees and GST are tacked on. How many consumer products carry a 40 per cent tax burden?

Those are the items that customers see. What they don't see are the buried costs, like the fees that help fund rental payments to Ottawa, which in the mid-1990s handed over airports to non-profit authorities. Pearson International, the largest and busiest airport in the country, pays more into the federal treasury than it does in wages to employees. To pay for that (and to fund the debt on grandiose new Terminal One), it also has some of the highest landing fees in the world.

The latest data from Transport Canada show just how far the arm of government reaches into the air travellers' pockets. In fiscal 2008, the feds took in $859-million in transportation fees and charges, excluding fuel taxes. But virtually all of that money comes from air travel. About 80 per cent is from airport rents and the security charge.

When other levels of government are counted, the taxman's take from the air transport system is about $1-billion, the C.D. Howe estimated. Ben Cherniavsky, the Raymond James analyst who co-authored the study, says that since it was published, nothing significant has been done to ease the tax load. "It seems to me like it would be the easiest, fairest and least controversial way for the government to help out Air Canada. I don't know why they are so obtusely blind to this."

Part of the problem for the industry is that its lobbying effort has been in disarray. A year ago, WestJet, Air Transat, Air Canada and its Jazz Air affiliate got so frustrated that they quit their industry group, the Air Transport Association of Canada. (ATAC staggers on, but the four airlines have now started their own splinter association.) But until recently, there was also no urgency to the problem. The tax burden may have been heavy but Air Canada and WestJet were still able to get bums in the seats. Then came the recession.

The prognosis is for a slow recovery. IATA, the industry's global body, forecasts airlines are likely to lose $9-billion (U.S.) this year and revenue will fall 15 per cent – twice as far as after 9/11. International business travel has plunged. And suddenly, there's the spectre of rising oil prices (again). Airlines are caught in an awful squeeze: The economy's bad enough to keep people from buying tickets but good enough that oil prices have doubled from their December lows. Some economists, like former CIBC World Markets strategist Jeff Rubin, believe the return to $100-a-barrel oil is not far off, and that much higher prices loom.

In his new book, Mr. Rubin argues that the age of expensive oil will usher in huge changes for the airline business. Fewer people will fly; many airlines will go broke from paying for aircraft that they can't use. His forecast seems too bleak – but still. If Ottawa wants healthy airlines, it could start by admitting that the airline tax regime it crafted in a different era won't cut it in the next one.