Air Canada and Corporate Welfare

The regulation of the Canadian air industry is supposed to ensure that the public has access to safe, reliable flights at the lowest cost. This mandate has been perverted. The regulatory regime now subsidizes the employees and owners of Air Canada at the expense of the taxpayer and travelling public. Nothing drives home this point better than the current dispute with the United Arab Emirates over landing rights in Canada for its two national airlines, Emirates and Etihat.

These two airlines requested the right to service Toronto more often and to offer flights to Vancouver and Calgary. If these requests had been granted, Canadians would have saved money, benefited from greater convenience, or both.

These benefits are evident from the fact that the Emirates Airbus 380 (the largest passenger plane in existence) flying now twice a week between Toronto and Dubai is nearly always sold out. The large number of Canadians of Indian and Pakistani origin find Dubai a very convenient gate way, offering many daily flights from there to the Indian subcontinent.

Dubai also has good connections to other countries in the Mideast and Africa, which are the destination of many tourists and business travellers from Western Canada and especially oil experts from Alberta. All of these flyers would be able to avoid stopovers in Toronto and enjoy shorter travel times in the air.

The reason for the refusal by the government to grant these UAE airlines
more landing rights in Canada is that it would cause Air Canada to lose millions of dollars in revenues and profits because, to keep its current passengers from flying with these airlines, it would have to lower fares, improve service and offer schedules more convenient for customers. These costs reflect the value of the benefits, which Canadians would have enjoyed if regulators had decided to allow UAE airlines access to Canada. The value of these lost benefits represents a subsidy to Air Canada.

This subsidy is a clear case of corporate welfare, even if it does not show up in any government budgets. It violates the spirit of free trade and is equivalent to prohibiting the import of any good just because it would cause Canadian producers to lose money. It therefore is a violation of existing international free trade agreements.

International relations are a game of tit for tat. The government of the UAE has just done the tat. It has cancelled Canada’s privilege to use the Camp Mirage airport near Dubai as a staging area for the war in Afghanistan. The shift of these military flights to other locations will cost taxpayers millions, all because regulators protected the interest of Air Canada.

Air Canada is likely to have argued against the landing rights for the UAE airlines on the grounds that they benefit from unfair government subsidies. If this is true, Canadian consumers should rejoice in receiving these subsidies from the taxpayers of the UAE. However, since such subsidies are illegal under international agreements, a complaint lodged with the World Trade Organization would lead to their elimination.

But it is not clear that these airlines are subsidized. They may just be more efficient and less burdened than Air Canada with pensions, wages and work rules extracted by unionized labour in the past. Dealing with the financial problems caused by these conditions should not be the responsibility of Canada’s travelling public or taxpayers in general.

How can we explain the regulatory decisions that provide subsidies to Air Canada at the expense of the Canadian public? Research has shown that the design and operation of regulation often is hijacked by the regulated industry to serve its own interests rather than those of the public. One of the reasons for this result is that advice to the regulators predominantly comes from the people in the industry, who are the best experts available but who also know what the industry’s coveted interests are.

Politicians also influence regulatory rules and decisions since they know that any policies that affect adversely the interests of Air Canada result in the loss of votes from the employees and other beneficiaries of Air Canada while the public is either ignorant of or not interested in casting their votes in opposition to these policies.

It is high time that Ottawa stops corporate welfare going to Air Canada through its regulatory decisions, allows full international competition and limits the use of its powers to ensure the safety of passengers. Air Canada has an excellent brand name, management and staff. It can and will survive, if not prosper, without government protection.

Herbert Grubel
Professor of Economics (Emeritus), Simon Fraser University
Senior Fellow, The Fraser Institute