Sky High Prices: Why it's so Expensive to Fly in Canada and How to Change This
Photo by John McArthur on Unsplash
As a coat of white snow enveloped Vancouver this holiday season, hopeful travelers searching for a flight out of the city were met with massive delays. The airport was a logistical nightmare. Airlines scrambled to get their customers onto alternate flights, while stranded passengers questioned whether they would see their loved ones during the winter break. While this situation turned even the most festive individual into a grinch, the out-of-control prices of flights were much more troubling and telling of a continued issue - the high cost of air travel in Canada.
While flights from Vancouver to Toronto are usually a couple of hundred dollars, the holidays saw flights priced over $5,000. This, of course, is an unprecedented situation; however, even in less tumultuous times, Canada sees much higher flight prices than many other regions of the world, such as south of the border in the States or overseas in Europe.
To understand why Canadians see such high flight costs, we must first examine the civil aviation industry. More specifically, we must understand what it means to be deregulated and why Canada doesn't have a low cost airline, unlike many other countries.
With the ‘National Transportation Act of 1987’ Canada followed in line with other major countries, declaring that the airline industry was to be deregulated. This meant that the Canadian government no longer owned and controlled a national airline, opening the industry to profit maximizing businesses and competition. In an idyllic world, this act would allow for a perfectly competitive market, wherein prices are commensurate with consumer demand such that consumer surplus is maximized. With more companies in the market, the pricing of economy class tickets would theoretically approach marginal cost for each seat. This theoretical model quickly breaks down in Canada, however, where consumers looking to purchase major domestic flights are faced with a duopoly environment. Over 80% of the market is held by WestJet and AirCanada, which does not allow for a competitive environment needed to drive prices down.
We can model these airlines' economic relationship through the framework of ‘Cournot competition’, where each company decides in advance the quantity of flights they will produce and subsequently reaches a Nash equilibrium position. Given that Canada’s market only has two players, in the Nash equilibrium airlines choose flight quantities that maximize profits based on the modeled reaction curve of the other company, rather than maximizing the overall surplus.
In Cournot competition, as the number of companies participating increases, the price approaches marginal cost and mimics a perfectly competitive market. We see this with European airlines, where intense competition drives prices down to the absolute minimum, making tickets much more economical for consumers.
So why isn't there more competition in the Canadian air industry? A requirement of a competitive market is a low barrier to entry. Clearly air travel requires an incredibly high level of upfront financial and human capital, making market entry very difficult. While this is true for all nations, Canada’s barriers to entry are particularly thorny due to a mandate requiring at least 51% of an airline to be owned domestically. Given the high risk level of starting a new airline, it has been argued that Canada doesn't hold enough capital to finance such risky investments. Therefore we see incumbents continue to dominate the industry.
Although the lack of capital can partially explain the higher prices, another factor that renders the Canadian market unprofitable for low-budget airlines is the country’s geography. Low-cost airlines such as Spirit in America or Wizz in Europe rely on flying between highly populated cities. They are profitable by harnessing the economies of scale resulting from the purchase of one large fleet of identical planes and becoming very good at one service area, rather than the full-range of service airlines, as is the case with Air Canada. With add-ons for everything from luggage to food, combined with many cost cutting tricks like flying out of smaller airports, these low cost companies can be profitable.
As Canada is one of the largest and least densely populated countries in the world, this poses an issue for this business model. There just aren't enough people and major city hubs, causing most routes to be unprofitable. The natural route would be to allow American brands such as Spirit to open into the Canadian market and offer competitive prices on major routes such as Vancouver to Toronto. This would force Canadian airlines to compete and lower their ticket prices. However because of restrictive government policy such a market entry would not be allowed. This begs the question, is airline industry protectionism by the government actually harming Canadian consumers by keeping our ticket prices high?
Before you lose hope and think Canada is fated to continue to see high prices, the pandemic has provided perfect conditions for new companies. When planes were cheap and people were scared of travel, the barriers to entry suddenly, albeit temporarily, shrunk, giving way to fertile ground for new companies. Just a few months ago Canada Jetlines had its maiden flight, marking Canada's most recent attempt at a low budget airline. Bankruptcy of airlines is very common, but hopefully Canada Jetlines and other budding low cost carriers will be able to withstand the turbulence of high fuel costs and reduced airline staff.
While there is a clear argument in favour of increased deregulation for the Canadian airline industry, by that same token, one can cite many benefits to increased government oversight. During the pandemic, we saw billion dollar bail-outs for mainstay companies, such as AirCanada; however, even in normal times the aviation industry is subsidized by the government. Since the government is already so intertwined with the aviation industry, should they help protect Canadian consumers and keep air travel more accessible? For instance, they could leave the prices of chartered planes and business class tickets to the whims of the markets, while setting price ceilings for economy class tickets. This would solve the problem of ticket prices soaring into the thousands during peak-periods, as we saw during this past holiday season.
While travel may not be a right, it is comparable to public transportation. Imagine if rush-hour bus fares were ten times the price, commensurate with demand. While such prices may be more efficient and increase government revenues, they would not be deemed fair. Similarly, in our increasingly globalized world, domestic air-travel is an increasingly necessary service, one that should not be merely accessible to the rich. As prices continue to rise, especially during peak-periods, the Canadian government ought to begin imposing price-ceilings on economy class tickets to uphold domestic flight accessibility for the average Canadian citizen.
Whether the government increases regulation or decreases rules and barriers to entry for new lower cost airlines, it is clear that something needs to change within the Canadian aviation industry. With more competition and caps on maximum economy fares, we may be able to see lower cost flights trending closer to major European and American low cost airfares. For now though, we are stuck daydreaming about low-cost alternatives.