14

PRICE, PRODUCTIVITY AND FINANCIAL PERFORMNCE IN THE TRANSPORTATION SECTOR

Air Transport Industry

This section does not present in detail the performance of individual carriers. Instead, the analysis is mainly concerned with the overall performance of the industry. The definition of this industry used for this analysis is limited by data availability; for the purpose of this section, the industry is made up of most of Level I and II air carriersNote 13 operating in 1999, namely Air Canada, Canadian Airlines, Air Nova, Air Ontario, Ontario Express, Air BC, Inter-Canadien,Note 14 Canadian Regional, Air Transat, Canada 3000, Royal Air and WestJet. The last four carriers are now included in the productivity and cost analyses. This group of air carriers accounts for 85 per cent of the industry's total revenues, generating total revenues of $11.5 billion in 1999, a 10 per cent increase over 1998 revenues.

Price and Output Indicators

In 1999, the air transport industry benefited from an increase in prices and in demand. Industry prices increased by 5.3 per cent, and passenger and freight services both grew by 4.4 per cent, with most growth occurring in the second half of the year. Most of the factors that affected industry performance in 1998 were no longer present. The last phase of air navigation fees was completed in 1999, and these fees, which replaced the Air Transportation Tax (ATT), affected the price performance of Canadian airlines. This was significant for regional and discount carriers in short-haul markets. From 1997 to 1999, carriers' prices in these markets rose by 9.5 per cent. Without the navigation fees, carriers' prices would have increased by one per cent. Consumers in the end faced marginally higher air transportation costs, since the navigation fees replaced the ATT.

From 1994 to 1999, the output of the air transport industry increased by 54 per cent, but average industry prices increased by only 5.8 per cent. The prices of domestic passenger services rose by 2.4 per cent; were it not for the air navigation service fees, domestic passenger prices in 1999 would have been about the same as in 1994, further stimulating domestic demand, which actually increased by 35 per cent at any rate. The transborder markets are the only segment that experienced growth in both price and output: Prices increased by 39 per cent and output increased by 73 per cent. The 1999 fares in other international markets remained lower than those paid in 1994, but they have been growing in recent years, by 2.9 per cent in 1998 and 2.4 per cent in 1999. While demand for foreign travel to markets outside the United States exhibited an average increase of almost 10 per cent a year, growth in overall demand slowed to four per cent in recent years.

Airline revenues from freight activity increased by 34 per cent between 1994 and 1999, thanks to a 31 per cent increase in the volume of air freight. Air cargo rates grew only by two per cent.

Between 1994 and 1999, air carriers' prices rose at rates exceeding by 0.2 per cent the economy's rate of inflation. The cost to airline users did not go up, since the increase in carrier prices was offset by the elimination of the air transportation taxes.

During the first six months of 2000, output grew by 3.5 per cent, and prices increased by 4.9 per cent.

Cost Structure

The split between variable and capital costs changed little in the last year; variable costs stood at 82 per cent of total costs, and capital costs comprised 18 per cent of total costs. However, during the last six years, there were some major shifts within the variable cost group. Labour costs represented approximately 22 per cent of total costs in 1999, about the same as in 1997, but were 2.2 percentage points lower than 1994's labour costs. Fuel cost share was down to 12 per cent of total costs in the aviation sector in 1999, from a 15 per cent share in 1997.

Other variable costs represented a cost share of 48 per cent in 1999, significantly higher than the 43 per cent share of 1994. Increases in navigation and landing fees were largely responsible for this change: Those fees doubled from their mid-1990s level of three per cent of total costs.

The capital cost share accounted for some 18 per cent of total costs, having dropped back to 1996 levels from the 20 per cent share it held in the mid 90s. Airline capital costs declined because airlines divested themselves of and disposed of assets. The value of fixed assets owned by Canadian airlines fell from $4.4 billion to $3.2 billion from 1994 to 1999, as airlines moved increasingly to leasing. Leasing costs made up 54 per cent of total capital costs in 1999; in 1994, they accounted for 40 per cent.

Productivity and Unit Cost Indicators

Between 1994 and 1999, total factor productivity of the air transport industry as a whole increased by 17 per cent, with major gains in 1996 and 1997. Productivity dropped 3.8 per cent in 1998, but regained 2.4 per cent in 1999, to return to near-1997 levels. As Figure 14-2 shows, the broader base of analysis alters the trends only marginally.

Since 1994, the air industry's unit costs have increased annually by 0.4 per cent. In 1998, lower productivity and major increases in factor prices contributed to unit costs rising by 7.7 per cent. In dollar terms, this added almost $1 billion to the cost base of the airlines. In 1999, unit costs increases were limited to 1.6 per cent. Factor prices, most notably labour and capital, continued to rise, but the impact of the 4.1 per cent increment in factor prices was mitigated by productivity gains. Total costs for industry dropped by $18 million in 1999. Some carriers experienced significant cost increases in 1999. Thanks to major cost reductions in 1996 and 1997, industry costs, at $72 million, were lower in 1999 than in 1994. In comparison, from 1991 to 1994, the air transport industry realized cost reductions of about $750 million.

Financial Performance

In 1999, the operating income of the Canadian carriers rose by $157 million. While most years, the average operating ratios of the two main airlines - Air Canada and Canadian Airlines - stayed above 98 per cent, the burden of past losses - $2 billion since 1991 - became unbearable and led to a major restructuring of the industry.

In 2000, Air Canada's profitability was adversely affected by non-recurring charges associated with the restructuring process and by higher fuel costs. The carrier reported an operating loss of $101 million for 2000, which was largely caused by non-recurring items totalling $282 million, including one-time labour expenses of $178 million related to a new collective agreement with pilots, $32 million to plan for the pilot strike threat, and $72 million to integrate customer services.Note 15 Excluding the non-recurring expenses, Air Canada had an operating income of $181 million, as shown in Table 14-9, with an operating ratio of 98.3 per cent.

The independent carriers - Air Transat, Canada 3000, Royal Air and WestJet - showed mixed financial performance, with some being profitable and some not so successful. As a group, they had an average operating ratio of 96 per cent in 1999, down from 98 per cent in 1998.

The consolidation of the air industry is continuing. Recently, Canada 3000 announced the purchase of Royal Air.

Effects of Higher Fuel Prices

In 1997, the airline industry paid, on average, 28.4 cents a litre for jet fuel. This analysis assumed that fuel prices rose 11 cents to reach 39.4 cents by 2000, a 39 per cent increase and 55 per cent from lower 1999 prices reported by Air Canada in its 2000 fourth quarter report. This would have led to an increase in total costs of 5.9 per cent since 1997. If users absorbed all of the higher fuel costs, in the absence of any offsetting factors, transport prices would need to rise by 6.1 per cent. The estimates of price increases in the first half of the year seem to indicate that the industry has either not passed along the fuel cost increases or have offset the increase through efficiency gains.

PRICE, PRODUCTIVITY AND FINANCIAL PERFORMNCE IN THE TRANSPORTATION SECTOR

Rail Industry

Trucking Industry

Bus Industry

Air Transport Industry

NOTES:

13 More detail is available on Transport Canada's Web site (http://www.tc.gc.ca/Actsregs/ct-ltc/ct1.html).

14 In 2000, a number of these carriers had been consolidated, (e.g., Air Canada and Canadian Airlines; all Air Canada's affiliates) Inter-Canadien was no longer operating.

15 Air Canada official press release, February 2001.