9 AIR TRANSPORTATION

MAJOR EVENTS IN 2006

GOVERNMENT

The Government of Canada undertook a number of initiatives in 2006, including proposed new and amended legislation; the negotiation of several international (bilateral) air transportation agreements; a new international air transportation policy; improvements to airport infrastructure; and air travel safety and security measures.

LEGISLATION

Three pieces of legislation were introduced in 2006. Bill C-6 was proposed to amend the Aeronautics Act to increase the penalties that could be imposed under that Act, allow certain regulatory infractions to be confidentially reported on a voluntary basis, and permit the Canadian Forces Airworthiness Investigative Authority to carry out flight safety investigations. Bill C-11 was introduced to amend the Canada Transportation Act. Air provisions would enable the Canadian Transportation Agency to ensure that advertised prices for air services include sufficient information to allow a consumer to readily identify the cost of an advertised airfare. It would also integrate the complaints function of the Air Travel Complaints Commissioner into the everyday operations of the Agency. A proposed Canada Airports Act was introduced as Bill C-20, which would provide an accountability framework for Canada’s largest airports, as well as a modern corporate governance regime for the airport authorities. Bill C-47 was introduced following recommendations from the Standing Committee on Official Languages to change the Air Canada Public Participation Act to ensure that official languages obligations continue to apply to Air Canada and its various affiliates as they existed prior to restructuring. Bill C-4, known as the International Interests in Mobile Equipment (aircraft equipment) Act, which had been introduced in 2005, received Royal Assent during 2006 but by year-end had yet to be fully implemented. The legislation facilitates and encourages international financing using the value of aircraft equipment as the security for payment.

INTERNATIONAL AIR POLICY

In November, the federal government announced a new international air policy, a “Blue Sky” policy, emphasizing the negotiation of open skies-type international air transportation agreements, when in Canada’s interests. Open skies agreements remove restrictions in terms of pricing, frequency of service, capacity, destinations served, code-sharing, services to and from third countries and stand-alone cargo services. The Blue Sky policy reflects the evolving nature of the global aviation market and follows on the success of Canada’s negotiation earlier in 2006 of an open-skies type agreement with the United Kingdom. Canada also negotiated a number of other international (bilateral) air transportation agreements, including those with Portugal, Algeria, Croatia and Serbia. At year-end, Canada was party to 70 international (bilateral) air transportation agreements.

In 2006, as a complement to the Blue Sky Policy, the international air cargo transshipment program was extended to all Canadian airports subject to application requirements and approvals. The program was previously intended to promote the use of small and under-utilized airports. In 2006, Edmonton International Airport was approved as a transshipment airport. The program allows air carriers to transship international cargo or combine cargo transshipments with other services for which they are licensed through Canada to third countries. Similar transshipment programs were previously introduced at Mirabel (1982), Hamilton (1987), Windsor (1993), Gander (2000) and Winnipeg (2004).

SMALL AIRPORTS VIABILITY

In September 2004, the Council of Transport Ministers agreed that the viability of small airports is a shared responsibility. A federal–provincial–territorial task group was subsequently created to define the mission of small airports and to identify options for future actions. The Air Issues Task Force presented its final report to the Council of Ministers Responsible for Transportation and Highway Safety in September 2006, and the report is now posted on the Council of Ministers Web site at www.comt.ca.

The report lays out the Task Force’s findings regarding the missions and roles of small airports in Canada and recognizes that a “one size fits all” solution does not exist. The Task Force indicates that the viability of small airports is linked to a number of factors, including the distance to other airports and transportation alternatives. The Task Force members further note that local jurisdictions are best placed to support a local airport if it represents a community asset and priority.

Safety

In terms of safety, the Canadian Aviation Regulations (CARs) were changed to require airports to assess the risk of wildlife strikes based on their individual situations. As well, an Implementation Procedures for Licencing (IPL) Agreement between Canada and the United States came into effect in December. This agreement permits pilots holding certain licences or certificates from either country to obtain a licence or certificate from the other country if certain requirements are met. It also enhances safety through standards in pilot competence. The IPL agreement was the result of extensive cooperative work between Transport Canada and the U.S. Federal Aviation Administration that evaluated and compared each other’s pilot licensing standards and procedures with a view to compliance with standards in the respective countries.

Security

In terms of security, changes to the CARs were proposed to support the implementation by Transport Canada and the Canadian Air Transport Security Authority of a new biometric-based Restricted Area Identity Card, which is issued to personnel working in the restricted access areas of the country’s airports. Details and draft regulations were also announced relating to Canada’s air passenger assessment program, known as “Passenger Protect.” Under this program, action would be taken to prevent persons who pose an immediate threat to aviation security from boarding a commercial aircraft and would include the creation of a list of persons who may pose an immediate threat to aviation security should they attempt to board a flight. Security measures were also put into effect that limit liquids, gels and aerosols in a passenger’s carry-on baggage. The federal government also contributed funding to the International Civil Aviation Organization’s Security Awareness Training Program.

INDUSTRY

In 2006, Canada’s air carriers undertook initiatives to overcome cost and revenue challenges. The price of fuel continued to be a key cost challenge for air carriers. The world price for crude oil reached a high of US$78 midway through the year and was overall high in historical terms, despite a receding at year-end. The impact was significant, as it made fuel the largest single operating cost element for Air Canada, ahead of labour costs. For a carrier like Air Canada, every increase in the price of crude oil of one US dollar reduced its operating income by US$28 million. To mitigate the impact of fuel price increases, air carriers engaged to various extents in a fuel price hedging strategy to try to negotiate contracts for future fuel prices with more certainty. The appreciation of the Canadian dollar vis-à-vis the US dollar helped to mitigate the impact of the fuel cost increases, as the price of fuel is set in US dollars. Carriers also faced other cost challenges, such as increases in landing fees at airports, particularly at Toronto’s Lester B. Pearson International Airport, Canada’s busiest airport.

In a year where cost control was a concern, it was a challenge for Canada’s air carriers to generate revenue levels sufficient to cover costs in an environment where low fares remained the norm. With Jetsgo no longer in the market, Air Canada, WestJet and the interlining combination of Harmony Airways and Canjet were the remaining key air carriers operating networks of national scheduled air services. In September, Canjet stopped providing scheduled air services, opting instead to concentrate its operations on non-scheduled charter air services. Some re-balancing of scheduled air service capacity was observed in the marketplace for scheduled air services. This resulted in some pricing stability for the scheduled service operators remaining in the markets previously served by Canjet. In October, Porter Airlines commenced operating scheduled air services between downtown Toronto’s City Centre Airport and Ottawa and in December added Montreal. This provided competition in scheduled air services to Air Canada and WestJet in these two markets.

Some innovative fare schemes were introduced in 2006, such as volume pre-purchasing options and, in the case of Air Canada, the unbundling of its fare structure, which permitted consumers of its products to add or subtract features from the fare, such as advanced seat selection or checked baggage allowances, for example.

Major Events in 2006

Infrastructure

Industry Structure

Price, Productivity and Financial Performance

Freight Transportation

Passenger Transportation