- News Release 2002-091 -

Backgrounder

Air Travellers Security Charge 

Introduction

This document provides basic information about the Air Travellers Security Charge, including an update on matters relating to revenues and expenditures as of November 2002. This information facilitates the Government’s review of the charge by providing a basis for consultation with interested parties.

Origin and Purpose of the Air Travellers Security Charge

In response to the events of September 11, 2001, Budget 2001 allocated $7.7 billion through 2006-07 for a comprehensive plan to enhance personal and economic security for Canadians.

This amount included $2.2 billion to make air travel more secure in accordance with rigorous new national Transport Canada standards, including the creation of a new federal air security authority, the Canadian Air Transport Security Authority.

To fund the enhanced air travel security system, the budget announced the Air Travellers Security Charge, to be paid by air travellers starting April 1, 2002.

Review Process - Status as of November 2002

Budget 2001 provided that revenue from the charge would be maintained in line with expected expenditures on the enhanced air travel security system through 2006-07.

The Government is committed to reviewing the charge over time to ensure that revenue remains in line with the costs of enhanced security. The Government has indicated that if revenue is projected to exceed planned expenditures through 2006-07, the charge will be reduced. The review is broad enough to consider technical issues related to the application of the charge, including its structure, provided that revenues cover costs and no one pays more.

The Government has begun the process of reviewing the charge. Revenue and expenditure information is being analyzed, and updated forecasts are being developed. Technical issues pertaining to the application and administration of the charge are under consideration, and outside parties have been engaged to provide specialized expertise.

Consultations with the air transportation industry and interested individuals are an integral part of the review process. To this end, the Government is actively seeking written submissions. This backgrounder facilitates the review process by describing the current situation and providing a platform for continued consultations with stakeholders.

Structure and Operation of the Charge

The legislative basis for the charge is the Air Travellers Security Charge Act, enacted as part of Bill C-49, which received Royal Assent on March 27, 2002.

For air travel within Canada, the total cost of the charge is $12 per emplanement, to a maximum of $24 per ticket. For transborder air travel to or from the continental United States, the charge is $12 per emplanement in Canada to a maximum of $24 per ticket for two or more emplanements. For other international air travel the charge is $24.

For domestic air travel and for transborder air travel that originates in Canada, the total cost of the charge includes the goods and services tax (GST) or the federal portion of the harmonized sales tax (HST). The GST/HST does not apply to transborder air travel that originates outside Canada or to other international air travel.

For domestic air travel, the charge applies only to flights between the 89 airports, listed in the schedule to the Air Travellers Security Charge Act, where the Canadian Air Transport Security Authority is responsible for the delivery of air security services. Travel to or from smaller airports not on the list of 89 airports is not subject to the charge.

For air travel purchased in Canada, the charge came into effect on April 1, 2002, for emplanements on or after that date. For air travel purchased outside Canada, the charge took effect on April 1, 2002, for emplanements in Canada after May 31, 2002. This means that no purchases of air travel prior to April 1, 2002, were subject to the charge, and a further transition period was provided for purchases outside Canada.

In addition, as announced on April 19, 2002, the unique circumstances of charter air travel and tour operators were recognized, with the provision of transitional relief in respect of air travel contracted for before April 1, 2002, and paid for before May 1, 2002.

The charge is payable by the purchaser of air travel and is collected by the air carrier at the time of payment for the air travel. Air carriers must remit the charge to the Canada Customs and Revenue Agency at the end of the month following the month when the charge is collected. For example, amounts collected by air carriers in April 2002 were due to be remitted at the end of May 2002.

Development of the Charge

The total cost of the enhanced air travel security system is expected to be $2.2 billion through 2006-07. The charge was designed to provide an amount of revenue equivalent to these expenditures over the budget planning period.

In the fall of 2001, Transport Canada developed a forecast of domestic, transborder and international air passenger traffic for 2002. Working from this forecast, and given the uncertainty following the events of September 11, 2001, prudent assumptions were used to generate an estimate of air passenger traffic for purposes of determining the appropriate rate for the charge. In this regard, a level of air passenger traffic 10 per cent below estimated average traffic in 2001 was used as the base assumption.

No growth in revenue was assumed for future years, reflecting the uncertainty surrounding air passenger traffic at the time the charge was developed, as well as the difficulties associated with assessing its revenue-generating capacity.

In this context, for purposes of determining the rate for the charge, it was necessary to move from the gross level of air passenger traffic to emplanements subject to the charge, i.e., to exclude connecting flights, passengers in transit and flights from non-listed airports. A discount factor of 25 per cent was used to estimate emplanements subject to the charge.

Based on this estimate of chargeable emplanements, the rate for the charge was set at a level sufficient to generate the required revenue of roughly $445 million per year, less $15 million in the first year to reflect one-time transitional factors.

Revenue From the Charge

Revenue from the charge is reported monthly in the Fiscal Monitor, which is published by the Department of Finance Canada. Revenue for the first four months of operation (April through July 2002) totalled roughly $122 million, composed of monthly remittances of $20 million, $28 million, $34 million and $36 million, plus an estimated $1 million per month from the GST/HST.

These initial results reflect a number of factors. Early months tend to be affected by transitional factors associated with the implementation of the charge as noted above, while summer months tend to be a peak travel period. With only four months of data and a number of factors influencing collections, there is still a considerable margin of error associated with extrapolating revenue on a full-year basis.

On balance, however, monthly collections do not indicate an excess of revenue over the budget estimate. Based on collections to date and making allowance for seasonality, revenue from the charge on an ongoing full-year basis may be expected to be in a range from $400 million to $420 million per year, compared to the estimate of $445 million per year in the budget. Revenue for fiscal year 2002-03 is expected to be lower due to timing and transitional factors, likely in the range of $350 million to $370 million, compared to the $430-million estimate in the budget.

The Department of Finance will continue to closely monitor monthly collections with a view to re-evaluating the full-year revenue base as new data become available. Each additional month provides valuable information that helps to establish more firmly the potential full-year revenue.

Air Passenger Traffic

The Aviation Forecast Centre at Transport Canada has recently delivered a preliminary, updated forecast for growth in air passenger traffic through 2006, based on information on the origin and destination of passengers. While the forecast remains subject to consultation with industry clients of the Aviation Forecast Centre, the preliminary results are as follows:

The preliminary, updated forecast has the benefit of observed air travel patterns since the unprecedented events of last fall. Total air passenger traffic for 2002 is now expected to modestly surpass the level that was used in preparing Budget 2001, reflecting a slow but steady recovery in air passenger traffic in Canada. As well, growth in air passenger traffic is projected for future years.

Notwithstanding that the level of air passenger traffic for 2002 is now expected to exceed the estimated level that was used to prepare Budget 2001, revenue to date, as previously noted, remains below the budget estimate. This suggests that the correct discount factor to be applied to the gross level of air passenger traffic to derive chargeable emplanements may be greater than was assumed at the time the charge was under development.

Updated Revenue Forecast

Based on collections to date, ongoing full-year revenue from the charge is estimated to be in the range from $400 million to $420 million per year. Applying Transport Canada’s preliminary, updated forecast for growth in air passenger traffic to the mid-point of this range would result in a revised revenue forecast that totals about $2.2 billion through 2006-07, equal to the original estimate of total revenue set out in Budget 2001. The net effect is that expected growth in air passenger traffic offsets the reduced estimate for full-year revenue based on lower-than-expected collections to date.

Expenditures on Enhanced Air Travel Security

Budget 2001 provided Transport Canada with additional funding to strengthen its capacity to set regulations, review standards, and monitor and inspect all air security services. Specific initiatives undertaken by Transport Canada include funding for security improvements to aircraft design and one-time payments associated with increased security immediately following the events of September 11, 2001.

Also as part of Budget 2001, the Canadian Air Transport Security Authority (CATSA) was created to consolidate the delivery of a number of key aviation security services under a single new federal authority. CATSA is a Crown corporation reporting to the Minister of Transport.

Effective April 1, 2002, CATSA assumed the costs of aviation security services within its mandate, including pre-board screening of passengers and baggage, the acquisition, deployment and operation of explosives detection systems, financial support for policing at key locations at Canadian airports, and contracting for Royal Canadian Mounted Police (RCMP) officers on selected domestic and international flights. CATSA’s activities include the assumption of the costs of screening services previously the responsibility of air carriers, providing the carriers with ongoing savings of about $70 million per year.

Transport Canada and CATSA have indicated that expenditures on enhanced air travel security are expected to be consistent with the budget estimate of $2.2 billion through 2006-07. While some reallocation and re-profiling of expenditures among fiscal years may be necessary, total expenditures over the budget planning period should not be affected.

Accounting for the Capital Costs of the Enhanced Air Travel Security System

The Air Travellers Security Charge was set at a level to recover the expected $2.2-billion cost of enhanced air travel security through 2006-07 on a cash basis, consistent with the Government’s current method of accounting.

In the Economic and Fiscal Update of October 30, 2002, the Government indicated that it was planning to move to full accrual accounting in the Budget 2003. This could have consequences for the budgetary costs of the enhanced air travel security system through 2006-07.

Under full accrual accounting, capital assets are amortized over several years rather than being expensed in the year of acquisition. To the extent that the capital costs associated with the enhanced air travel security system could be recognized over a longer period of time, budgetary expenditures through 2006-07 would be lower than the expenditure track set out in Budget 2001.

The relative impact of full accrual accounting on expenditures over the five-year period would depend on a range of factors, including the amount of capital that is employed, when the capital assets are put into service and the amortization schedule for depreciating the capital assets. Further work, in conjunction with CATSA, will be required to more accurately determine the amount of the potential cost adjustment.

The box below provides further details on accrual accounting, as outlined in the Government’s Economic and Fiscal Update delivered on October 30, 2002.

Technical Issues

The introduction of a new charge can be expected to generate a number of technical and administrative concerns pertaining to its application. The Government has already announced transitional relief for charter air travel and tour operators, as well as special consideration for air travel donated through charities. Industry and stakeholder submissions that identify and address technical issues will form an important part of the consultative process.

Third-Party Input

The Department of Finance has engaged third parties to examine both the revenue forecasting process and the actual amounts of revenue and expenditures recorded to date.

Dr. Geoff Gosling, an aviation system-planning consultant, will review the air passenger traffic forecasting models at Transport Canada and the revenue-forecasting model at the Department of Finance. Dr. Gosling’s role is to consider the integrity and reasonableness of the forecasting process and to provide an opinion in this regard.

The Office of the Auditor General of Canada (OAG) will review revenue from the charge and expenditures on enhanced air travel security. The OAG is working with all of the organizations involved with the enhanced air travel security system, including Transport Canada, the Canada Customs and Revenue Agency, CATSA, the RCMP and the Department of Finance.

Independent consultants have also been engaged by the Department of Finance to undertake specialized projects that will assist in considering the structure and assessing the application of the charge.

Sypher:Mueller, an aviation consulting firm in Ottawa, is collecting data on low-cost and regional air carriers in Canada. It will develop a database that includes information on routes and fares. Air carrier participation in this project is voluntary, with data requirements supplemented by standard industry information sources where necessary. This study will help to provide a better understanding of the services offered by regional and low-cost carriers and will illustrate the application of the charge across these segments of the air transportation industry.

Dr. David Gillen, a professor at Wilfrid Laurier University, is conducting a literature review of elasticity of demand for air travel. This study will consolidate the available information in this area with a view to assessing potential market responses across various segments of the air transportation industry.

These third-party projects will be completed in the fall and will be released publicly to assist in the consultation process.

Next Steps

Industry stakeholders and interested Canadians are encouraged to submit written representations concerning the Air Travellers Security Charge. Receipt of submissions prior to December 31, 2002, will help to ensure timely review of the charge.

- News Release 2002-091 -