8. Air

The Minister's Committee on Air Policy Issues, the actions of Canadian Airlines in the first year of a four-year recovery plan, the withdrawal from domestic service of two operators using jet aircraft, and the redistribution of traffic between the Dorval and Mirabel airports marked the year.

In response to today's time pressures and transportation needs, the air sector is playing an increasingly important role in enhancing Canada's business, trade and tourism interests at home and abroad.

This chapter presents an overview of air services - regional, national and international - operating in Canada.

Major Events in 1997

Legislative and Regulatory Framework

Air Transportation Regulations

The Canadian Transportation Agency published proposed amendments to the Air Transportation Regulations, particularly in the area of international charter air services and sought comments from interested parties. The Agency also consulted informally with stakeholders on the elements of an administrative monetary penalty system as an additional tool for enforcing these regulations. Both initiatives were continuing at year's end.

Aviation Fuel Excise Tax Rebate Program

The federal government put into place a four-year Aviation Fuel Excise Tax Rebate Program under which airline companies carrying on business in Canada would be able to obtain a rebate of up to $20 million a year on aviation fuel excise taxes. In exchange, they would give up their entitlement to claim losses against income subject to tax, for up to $10 of their accumulated tax losses for every $1 of rebate received. In addition, companies could later choose to repay the rebate received and fully reinstate the losses they had previously exchanged.

Minister's Committee on Air Policy Issues

In November 1996, the Minister of Transport became an active participant in efforts to reach an agreement on a restructuring plan for Canadian Airlines International Ltd., which required concessions from its suppliers, creditors and work force. As part of the federal contribution and to encourage union support, the Minister agreed to establish a committee to examine air policy issues and, specifically, concerns raised by the unions regarding the future of the airline industry.

The Minister invited 11 associations representing key stakeholders in the airline industry to nominate a total of 21 persons from among their members to sit on the committee. These were representatives from unions, airlines, airports, pilots, shippers, consumers, tour operators, travel agents and the tourism industry. Transport Canada provided the Chair as well as secretariat services.

The committee met monthly from March to October 1997 in the presence of a number of observers from interested federal government departments. Meetings consisted of information gathering, review of briefs submitted by members, discussion on topics identified by the Minister and by members, and the preparation of a report to the Minister.

The committee's report, signed by all committee members and reflecting the opinions expressed by members, was presented to the Minister in November. Given the diverse views of the participants, no consensus was reached on either the current direction of the Canadian airline industry or recommendations for its future direction.

Committee members gave their general support, however, to a number of concepts:

• Economic deregulation must not negatively affect safety.
• Canadian ownership and control requirements should be maintained.
• New entrants should be subject to a financial fitness test to increase their likelihood of remaining in operation.
• The impact of taxes, charges and user fees on pricing, growth and international competitiveness should be studied.
• It is by "growing" that the industry will be healthy and viable.

Union members on the committee continued to believe that some regulation of market entry, capacity and prices was required, as well as labour protection measures and higher levels of public accountability.

Public Conference on Air Policy Issues

To complement the work of the committee and to expand the consultative process, the Minister of Transport requested the Public Policy Forum to organize a public conference involving a wider range of stakeholders and experts. The conference, entitled The Flight Ahead, was held in Toronto in November 1997 and attracted 150 representatives from air carriers, unions, airport authorities, consumer groups, travel associations, pilots, shippers, tourism associations, the investment community, academics, the media, and officials from the federal and provincial governments. The report of the conference, published in December, expands on the issues raised by the Minister's committee.

Traffic Distribution Between Dorval and Mirabel Airports

September 15, 1997 was the official day of transfer of scheduled international services to Montreal from Mirabel to Dorval. The aim was to consolidate all scheduled services (domestic, transborder and international) at one airport with the purpose of improving and facilitating connections in Montreal. The role of Mirabel, while remaining open to all types of service, will be to specialize in passenger charter services and large aircraft cargo operations. The decision of
Aéroports de Montréal to modify the traffic distribution which had been in effect since 1975 was contested in court. It was the Québec Court of Appeals which overturned the lower court decision and allowed the changes to take place.

International Initiatives

Bilateral Negotiations

In 1997, Canada held bilateral air negotiations with a number of foreign governments, many of which resulted in an expansion of Canadian carrier opportunities and an opening up of new markets. During the year, negotiations were held with Belgium, Chile, Cuba, Fiji, the Netherlands, Kuwait, Ukraine, New Zealand, Russia, Iceland, Switzerland, Japan and China. There were also negotiations with the Scandinavian countries, where three identical bilateral agreements govern services with Norway, Sweden and Denmark.

A first-time air agreement was concluded with Ukraine. Existing agreements with Scandinavia, Fiji, Cuba, Belgium and China were amended to include expanded new rights. The agreement with China resulted in increased capacity and a new route for all-cargo services between Canada and China. Expanded capacity was also achieved in the Canada-Japan market. A new memorandum of understanding was reached with Iceland. Amendments to the arrangements governing air services between Canada and Taiwan have made possible an expansion of Vancouver-Taipei services by Canadian Airlines International and Mandarin Airlines.

During 1997 the Minister used his authority to designate Canadian carriers to exercise Canada's bilateral route rights to fly scheduled air services to a number of countries. Table 8-1 lists carriers selected in 1997.

Intransit Pre-clearance

In April, Canada and the US reached agreement on the establishment of intransit pre-clearance for international air travelers arriving in Canada and destined for the US. Upon arrival at a Canadian airport, these passengers would be allowed to bypass Canadian customs and proceed directly to US customs before connecting to their US flights. This "one-stop" clearance process is more attractive to international travelers than the traditional "two-stop" process.

Canadian airports and air carriers hope to increase the levels of intransit traffic using Canadian gateways on trips to and from the United States. As a first step toward implementing intransit pre-clearance across Canada, a pilot project was set up in June 1997 at Vancouver International Airport. During the first six months, about 25,000 international passengers used the one-stop clearance process.

In return for US agreement on intransit pre-clearance, Canada has agreed to develop legislation that would enhance the ability of US customs and immigration inspectors to apply US law in pre-clearance facilities at Canadian airports.

Transit Without Visa

In August, the Department of Citizenship and Immigration introduced a "transit without visa" test program at Vancouver International Airport. This program allows eligible international travelers to the US to transit through Vancouver without carrying a Canadian visa, provided they carry the necessary US visa. Initially, citizens of Taiwan, Thailand, the Philippines and Indonesia are eligible.

Pre-clearance at Ottawa

In July, a new US customs pre-clearance facility opened at MacDonald-Cartier International Airport at Ottawa, the seventh Canadian airport with such a facility. Pre-clearance allows transborder travelers to be processed into the United States before the departure of their flight, as a means of facilitating their arrival at the US airport, particularly if they have connecting flights to catch.

Interim US Airspace Fees

In May, the US Federal Aviation Administration (FAA) announced that interim fees for airlines flying over US territory or through US-controlled airspace would begin in June. The Air Transport Association of Canada (ATAC) calculated that the fees would cost Canadian carriers some $50 million per year. The Canadian government, reflecting the concerns of Canadian air carriers on the high cost and short notice of the fees, requested that formal consultations take place with the US government in an effort to delay the fees until the problems could be resolved. When the US government declined to make any changes, ATAC challenged the fees in US Superior Court on behalf of Canadian air carriers.Note 1

Anti-Trust Immunity

In June, the US Department of Transportation granted anti-trust immunity to Air Canada and United Airlines, allowing them to better co-ordinate the services they offer to the public. This anti-trust immunity is similar to that granted to Canadian Airlines International and American Airlines in 1996.

Code-Sharing

In November, Canada and the US came to a negotiated agreement on "third country code-sharing". Under code-sharing agreements, passengers are ticketed under one airline but travel on another airline sharing the code of the ticketing carrier. The Canada-US agreement permits Canadian air carriers, for example, to co-ordinate flights with their foreign partner airlines by code-sharing on flights between Canada and the foreign country that go to, from or through the US. This will allow Canadian airlines to better integrate their transborder and international networks with those of their alliance partners. US carriers received reciprocal rights.

Multilateral initiatives

International Civil Aviation Organization

As host country to the International Civil Aviation Organization (ICAO), located in Montreal, and as a permanent member of the Council, Canada was active in all aspects of the work of this organization. Aviation safety and security were ICAO's chief areas of concern and study in 1997, with work continuing on the economic regulation of international air carriers, the environmental impacts of aviation emissions, and the legal liability of international air carriers concerning passengers and cargo.

Asia Pacific Economic Co-operation

In June 1997, Canada hosted the meeting of the transportation ministers of the Asia Pacific Economic Co-operation (APEC). At that meeting, the Group on More Competitive Air Services was reactivated and tasked with prioritizing and examining:

• air carrier ownership and control,
• tariffs,
• doing business matters,
• air freight,
• multiple airline designation,
• charter services,
• airlines' co-operative arrangements, and
• market access.

A report for submission to APEC's transportation ministers is to be prepared by mid-1998.

Industry Structure

Canada's commercial air service industry continues to be dominated by Air Canada and Canadian Airlines International and their respective corporate and commercial affiliates. These two carriers offer domestic, transborder and international services, in competition with each other and with other domestic and foreign carriers.

A second tier of Canadian carriers - Air Transat, Canada 3000, Royal Aviation and Sky Service - offers transcontinental, international and inter-regional long-haul services year round. The primary activity of these carriers is to provide air transportation to tour operators that sell air-only and packaged travel (combined with lodging, meals, etc.) designed to meet the needs of the leisure traveller. The activity of these carriers tends to shift seasonally to the areas of greatest demand: Europe in the summer months, and the United States, the Caribbean and Latin America in the winter months.

For a time in 1997, three additional carriers offered services with jet aircraft in the domestic market: Greyhound Air (operated by Kelowna Flightcraft Charter Ltd.), Vistajet and WestJet. After both Greyhound Air and Vistajet withdrew from service in September, there remained only WestJet, which operates a fleet of six aircraft between cities in Western Canada.

There are a number of smaller carriers that operate in all regions of the country and that offer passenger and cargo services, as well as dedicated courier and on-demand charter services.

Canada has an active helicopter industry offering various general and specialized services throughout the country. In the general aviation sector, there is also business aircraft and a large recreational aviation community. There are flying schools in all parts of the country.

Table 8-2 lists aircraft of selected Canadian carriers in passenger services.

Table 8-3 provides the number of Canadian air licences held by carriers in 1997, broken down by carrier's nationality.

Figure 8-1 lists air personnel licences and permits by province.

Air Services

Domestic Market

Changes

In September 1997, Kelowna Flightcraft ceased operating on behalf of "Greyhound Air" between Vancouver, Kelowna, Calgary, Edmonton, Winnipeg, Hamilton, Toronto and Ottawa. Laidlaw Transportation Inc. made the decision to withdraw from air services as a condition of purchasing Greyhound Canada Transportation Inc. Greyhound's air services were in operation for a total of 15 months.

A new discount carrier, Vistajet, entered the market in 1997 using a Boeing 737 aircraft between Toronto, Ottawa, Windsor and Thunder Bay, and later Winnipeg and Calgary. Service began in April and continued until the company ceased operations in September.

Canadian Airlines introduced the 55-seat Fokker F-28 in the Toronto-Ottawa-Montreal market on some flights, previously served with 100-seat Boeing 737s. The 737s were reassigned to serve the Western Canada triangle of Vancouver, Calgary and Edmonton and transborder services. This move was part of a general redeployment of its fleet in the airline's four-year recovery strategy announced for the period 1997-2000. Canadian Airlines also transferred some services to its regional affiliates.

Other Airlines

In its second year of operation, WestJet, a Calgary-based discount carrier operating Boeing 737 aircraft, continued to limit its services to markets with flights lasting less than two hours. To the seven cities it was serving in 1996 (Calgary, Edmonton, Vancouver, Victoria, Kelowna, Regina and Saskatoon), WestJet added Abbotsford and, for a time, Winnipeg.

In addition to Air Canada and Canadian Airlines International, transcontinental services continued to be offered by Air Transat, Canada 3000 and Royal Aviation.

The only carriers to offer integrated services throughout all of Canada are Air Canada and Canadian Airlines International, which do this through a combination of their own services, those of regional affiliates and subsidiaries, and commercial agreements to code-share with a limited number of small independent carriers.

Preliminary statistics suggest that domestic passenger traffic increased by nine per cent in 1997 over 1996. Table 8-4 lists the top 20 domestic scheduled and charter-serviced markets for 1996.

Table 8-5 shows the changes in domestic enplaned and deplaned passenger traffic between 1988 and 1996.

Regional Services

Scheduled passenger and cargo services are provided in all regions, including Northern Canada, by the regional affiliates and subsidiaries of Air Canada and Canadian Airlines International and by a number of independent air carriers. With some notable exceptions, services are provided with turboprop aircraft.

Figure 8-2 shows the regional breakdown of domestic passenger (enplaned and deplaned) traffic.

A significant portion of intra-regional air services was provided by the regional affiliates/ subsidiaries of Canadian Airlines International and Air Canada. In a number of markets, services were transferred from the regional affiliates of the major carriers to smaller operators. Examples include transfers from Air BC to Central Mountain Air, Canadian Regional to Air Georgian, Air Alliance to Aviation Quebec Labrador; Inter-Canadien to Régionair.

Intra-regional air services were also provided to major population centres by WestJet (serving Western Canada and B.C.) and Vistajet (serving several points in Central Canada from April until it ceased operation in September).

Newfoundland and Labrador were additionally served by Inter Provincial Airways; while Air Inuit and First Air (including Air Creebec) and a number of smaller operators also provided air services within Quebec.

The major communities in Northern Canada are served by Canadian Airlines International and Air Canada through their regional affiliates and commercial partners and by a number of independent air carriers which also serve smaller points: operating from Yellowknife, Norman Wells and Inuvik serving the Western Arctic region were Aklak Air Ltd, North-Wright Air Ltd., Buffalo Airways Ltd., Air Tindi Ltd. and Northwestern Air Lease Ltd.; operating from Arviat and Rankin Inlet serving the Central Arctic region were Calm Air and Keewatin Air; operating from Iqaluit serving the Eastern Arctic region were First Air and Baffin Air.

Services were affected during the first quarter of 1997 by a nine-week strike by pilots of Air Canada's regional affiliates (Air BC, Air Ontario, Air Alliance and Air Nova).

Transborder Market

Air Services

The number of air services in the transborder market continued to increase during 1997. Thirty-two transborder markets received new air services, bringing the total of new scheduled services to 107 since the signing of the "Open Skies" Agreement in February 1995. Transborder traffic is expected to have increased by five per cent over 1996. A key to this growth was the end of the two-year restriction on US air carriers from flying to Vancouver and Montreal, which was part of the 1995 deal. The last restriction on US carriers to full access to Toronto continued in effect until February 1998.

Figure 8-3 shows traffic growth over the past 10 years. Table 8-6 lists new air services in transborder markets, and Table 8-7 summarizes the passenger traffic for scheduled, regional and charter operations, as well as the market shares held by Canadian and US air carriers. Annexes 8-1 and 8-2 show this market's entry, exit and ongoing activity in services by air carrier nationality and points served.

Number of Seats

The number of seats flown in the transborder market is now running about 36 per cent above levels existing before the "Open Skies" Agreement. The two major Canadian carriers contributed to the increase in transborder capacity in 1997 when Canadian Airlines International redeployed some of its domestic fleet for its transborder services, and Air Canada expanded its transborder services using the CRJ Regional Jet aircraft and some larger aircraft. Figure 8-4 shows the scheduled services capacity in this market but does not include that of charter air services, nearly all of which was provided by Canadian air carriers.

International Market

Air Services

Several changes took place during the year to international air services:

• In May, Canadian Airlines International announced code-shared air services over Miami to El Salvador and Guatemala with its partner, American Airlines.
• In May, Air Canada launched its trans-Pacific scheduled air service between Toronto and Osaka, Japan.
• In July, Air Canada began service to Ukraine on a code-share.
• In the summer, Mexicana began scheduled service between Toronto and Mexico City.
• In the summer, Lacsa began service between Toronto and San Jose via Havana.
• In September, the vast majority of international air services at Montreal were relocated to the Dorval terminal from Mirabel.
• In October, Royal Jordanian Airlines terminated service to/from Canada.
• In October, Air India suspended flights to Toronto.

Although Mirabel International Airport was designated for charter air services as of September, two air carriers were still operating scheduled air services from there at year-end. These were Cubana, with twice-weekly air services to Havana, and Air Transat, which began its first scheduled air services to France with twice-weekly flights to Paris through Charles de Gaulle Airport.

Preliminary statistics indicate a nine per cent increase in passenger traffic in 1997 over 1996. In 1996, total traffic increased 4.9 per cent over 1995 levels. Table 8-8 shows international passenger traffic from 1991 to 1996, including both passenger traffic carried on same-plane air services between Canada and countries other than the US, and passenger traffic carried on scheduled, charter and regional air services. The figures exclude passengers connecting to international air services in the US.

Marketing Alliances

During 1997, Canada's two international scheduled air carriers continued to use marketing alliances to extend or reinforce their presence in international markets where they would not otherwise provide direct service. In a marketing alliance, air carriers co-ordinate their scheduling, marketing and product distribution and each carrier can sell tickets on the entire system, including the points they do not serve, by linking with other partners through code-sharing. As a result, competition is increasingly occurring between groups of air carriers operating within a marketing alliance. Table 8-9 shows the participation of Canada's airlines in marketing alliances.

Annex 8-3 lists the international air services provided to and from Canada as of the end of 1997. These include foreign markets served by Air Canada and Canadian Airlines International, as well as Canadian markets served by foreign air carriers. This appendix also provides a partial listing of foreign markets served by Canada's charter air carriers. It shows that there are 42 countries currently receiving same-plane, scheduled air services from Canada. Canadian air carriers serve 29 of these countries.

Air Cargo

The booking of cargo frequently involves an intermediary such as a cargo agent, freight forwarder or consolidator. Cargo agents are retailers who sell cargo transportation to shippers on behalf of a carrier, while freight forwarders and consolidators act on behalf of shippers as forwarding agents, or consolidate shipments from various shippers to take advantage of reduced freight rates.

Canadian airlines carry air cargo primarily in the belly of their passenger aircraft, which makes it an additional source of revenue for a relatively low incremental cost. A limited number of other carriers provide all-cargo capacity, and some of these are dedicated to contract carriage for the major North American courier companies.

All-cargo air services into Canada are provided exclusively by foreign air carriers, namely Air France, Lufthansa, Cathay Pacific Airways and Korean Air Lines. Other foreign carriers provided charter cargo services, notably when specialized handling equipment was required.

Table 8-10 shows the participation of Canadian air carriers in transborder courier operations. It should also be noted that a significant portion of cargo moving on air waybills is actually trucked between Canada and the US.

Air Cargo International Trade

According to international trade data, the value of international freight handled at Canadian airports in 1996 was approximately $48 billion (excluding shipments via US airports), with imports valued at $30 billion and exports around $18 billion (Table 8-11). Canada's main air trading partners are the US, the Western European nations (mainly the United Kingdom, France, Germany and Switzerland) and the Pacific Rim countries (mainly Japan, South Korea and Taiwan).

Transborder Trade

Canada's trade with the US using air transportation services was $24.4 billion in 1996, of which $14.4 billion was imports. Main imported commodities were telecommunications equipment ($3.0 billion or 21 per cent of total air value in trade by air from the US), electronic computers ($2.8 billion or 20 per cent), transportation equipment (17 per cent) and other equipment (12 per cent).

Total Canadian exports by air to the US were valued at $10 billion. Main commodities exported were aircraft equipment ($2.2 billion or 22 per cent of total trade by air to the US), office machine equipment (19 per cent) and telecommunication equipment (15 per cent). Special transactions accounted for ten per cent of exports by air.

As illustrated in Figure 8-5, Ontario dominated (with a share of over 50 per cent) in both exports and imports, followed by Quebec and the Western provinces.

Trade With Other Countries

Canada's trade with other countries using air transportation was comparable to the Canada/US air trade: total value was near $24 billion and imports dominated at $15.3 billion, while exports reached $8.2 billion. Ontario and Quebec dominate Canadian air trade with overseas countries, Ontario having a share of over 55 per cent, and Quebec a share of 27 per cent.

As shown in Table 8-12, the main destinations for Canada's exports using air services were the Western European countries ($4.7 billion or 58 per cent of total air exports to overseas) and the Pacific Rim countries ($2.2 billion, a 27 per cent share). Commodities imported to Canada by air came from Western European countries ($7.0 billion or 46 per cent of total air imports from overseas) and the Pacific Rim countries ($5.9 billion or a 38 per cent share) (see Table 8-13).

General Aviation

The term "general aviation" describes all private-sector aviation other than air transport services, including flight training, specialty air services and business aviation. It represents 53 per cent of aircraft activity at airports with control towers although much of the activity is at non-towered airports. Another indicator of the size of the general aviation sector is the number of Transport Canada licences in effect. Table 8-14 shows aircraft movements at towered airports for 1992 to 1996. Table 8-15 shows personnel licences and permits issued in 1997.

Specialty Air Services

Specialty air services provide many services that are vital to the Canadian economy. These include activities that provide direct support to Canadian industry, such as airborne fire-fighting, aerial inspection and construction services, and geophysical surveys. Specialty air services are the one segment of the aviation industry subject to the North American Free Trade Agreement.

Business Aviation

As part of business aviation, approximately 150 private operators use a fleet of some 230 privately owned and registered aircraft to provide their own businesses and joint ventures with an alternative to commercial air services. This sector is showing strong recovery from the downturn of the early 1990s, with reported hours of operation up by as much as 20 per cent. More than 850,000 passengers were carried by business aircraft during 1997. The growth in the industry was marked by an upgrading of the fleet, including the addition of longer range business jets, reflecting the increasing globalization of business activities.

Recreational Aviation

Recreational aviation is carried out by private-sector enthusiasts who participate primarily for the pleasure of flying. This group represents the biggest segment of civil aviation, with over two thirds of Canada's pilots (over 41,000) and three quarters of Canada's aircraft (over 22,000).

Consultations between Transport Canada and the recreational aviation community have resulted in the development of a national Recreational Aviation Policy, published in 1996, which covers such matters as:

• establishment of a recreational pilot permit,
• a streamlined process for aerobatics in amateur-built aircraft,
• an expanded definition of "ultra-light aeroplane",
• new provisions for owner maintenance,
• provisions for Instrument Flight Rules (IFR) operation of amateur-built aeroplanes,
• new licensing standards for ultra-light pilots, and
• discussions of a new "sport plane" category.

Figure 8-6 shows the profile of the recreational aviation fleet.

Price and Output Changes

Between the mid-1980s and the mid-1990s, domestic air passenger services were subject to price increases superior to the rate of inflation which caused demand to plummet significantly. However since renewed competition in the industry has led to a more extensive use of discount fares, as well as greater discounting of fares from the basic economy rates. This produced an effective reduction in domestic prices by 13 per cent between 1991 and 1996. The price performance over recent years within the domestic industry contributed to a recovery in demand for domestic air services, which surged by 15.2 per cent in the
two-year period 1995 - 1996. In the first half of 1997, the drop in domestic prices was of the order of three per cent. Demand continued to grow, increasing by ten per cent.

From 1992 to 1996, the price of all international air services showed no material change, but demand rose by 34 per cent. Over that period, the transborder market was Canada's most dynamic market despite price increases double those of the general inflation rate. Demand was stimulated by booming Canada-US trade activities and by the introduction of new services following the "Open Skies" Agreement. In spite of upward price pressure, demand for transborder services continued to be strong.

In other international markets, much of the increases in demand can be attributed to stimulation from lower prices as well as developing markets in Asia Pacific. Since 1991, the increased use of discount fares has contributed to the 20 per cent decline, in real terms, of the price of non-transborder international air services. In the first half of 1997, the price of all international services rose by 3.8 per cent, led by major increases in the price of transborder services. Despite these price pressures, demand for transborder and other international services continued to be strong, advancing in the first half of 1997 by 15 per cent.

Overall, between 1992 and 1996, output of the Canadian air transport industry advanced at a rate of five per cent a year, compared with 3.5 per cent for the economy.

Table 8-16 shows the price and output changes in the airline industry.

Financial Performance

Revenues/Expenses

In 1996, total operating revenues of the Canadian air transport industry reached $10 billion. Air Canada and Canadian Airlines combined, including their affiliates, generated $8 billion, representing 80 per cent of the total. Other large carriers shared eight per cent of total industry revenues and the remaining 12 per cent was generated by smaller carriers (Figure 8-7).

About 88 per cent of the industry's total operating revenues are from passenger transportation. Cargo accounts for eight per cent. The remaining four per cent is from other flying services and incidental air transport services related revenues (Figure 8-8).

While charter services only contribute 11 per cent to larger carriers' total passenger and goods revenues, they generate about 88 per cent of the total revenues of smaller carriers. For the industry as a whole, about 80 per cent of air passenger and cargo transportation revenues are generated by scheduled services and 20 per cent by charter services.

In the period 1993 to 1997, total combined revenues of Air Canada and Canadian Airlines increased by 35 per cent. Domestic passenger revenues grew by 29 per cent, but were outperformed by the 57 per cent growth in international passenger revenues. Since the implementation of the Canada-US "Open Skies" Agreement in 1995, increases in carriers' new transborder routes and traffic contributed to a significant growth in international revenues (Figure 8-9). Cargo and other revenues only grew by 11 per cent in the four-year period.

The industry average operating ratio (operating expenses over revenues) increased to 97.4 per cent in 1996, from 95.8 per cent in 1995, primarily due to higher fuel prices. With narrow operating profit margins, the financial performance of the air industry is sensitive to changes in input prices.

In 1996, the share of labour costs did not change with a 25 per cent share of industry revenues.Note 2 Total fuel costs increased by $215 million and fuel's share in total operating revenues increased to 16 per cent in 1996 from 14 per cent in 1995. Other operating expenses accounted for almost 60 per cent of operating revenues. Notable items are marketing (13 per cent), aircraft rents (seven per cent), depreciation (six per cent) and landing fees (three per cent), and food and beverage costs (between four and five per cent).

From 1990 to 1994, employment fell by 17 per cent, followed by a five per cent gain in 1995 and 1996. Labour productivity rose by 31 per cent between 1992 and 1996, much more than the six per cent increase of the business sector over that time. Canadian air carriers' unit labour costs increased significantly (18 per cent) between 1988 and 1992, but dropped by 13 per cent between 1992 and 1996.

Table 8-17 shows the cost structure and efficiency indicators in the airline industry.

Total factor productivity of the airline industry hit a low in 1991, at 15 per cent below 1986 levels. Since then, it has risen 4.5 per cent a year, with a strong performance in 1996 (8.2 per cent). Between 1991 and 1996, air transport industry unit costs have declined by 11 per cent, representing a cost reduction exceeding $1 billion. In 1996 alone, the industry reduced its costs by some $450 million.

Profitability

Although the profitability of the air industry improved in 1997 it has not fully recovered from substantial losses incurred in the early 1990s.

In 1996, the industry's financial performance was significantly affected by the operating losses of some large carriers; the average operating margin ratio dropped to 2.6 per cent from 4.2 per cent in 1995 (Figure 8-10). In order to improve profitability and remain viable, these under-performing airlines had to undertake major restructuring measures. Notably, Canadian Airlines has over the past year implemented a four-year operational restructuring plan; Royal Aviation also undertook a major restructuring in 1996 and has since improved its profitability.

In 1997, both Air Canada and Canadian Airlines (including their affiliates) showed improvements in operating profits.

Investments

After committing large investments in 1991, total capital expenditures by the two main airlines dropped sharply in the following four years, due to life cycles of flight equipment, over capacity during recession, and poor financial results (Figure 8-11).

Air Canada reverted the downward trend in 1996 with a $607 million investment in flight equipment and other properties. In 1997, combined total capital expenditures of Air Canada and Canadian Airlines amounted to $471 million.

NOTES

8. ANNEXES