J. Clifford Mackay
President and Chief Executive Officer
Thursday, September 22, 2005

Thank you very much, Mr. Chairman.  Good afternoon.  I am very happy to appear before you today, on behalf of the Air Transport Association of Canada, to speak to the critical issue of the unprecedented price of fuel and its impact on the air transport sector. 

ATAC represents the commercial aviation sector in Canada. With approximately 300 members, we represent virtually all scheduled carriers as well as flight schools, regional aviation organizations and other stakeholders.

My comments will focus on three areas:

• providing some context for today’s fuel costs and a sense of the impact to member carriers and their customers;
• identifying government’s role in the overall cost picture; and
• suggesting solutions which this committee may wish to consider recommending to government.

So, exactly how has the fuel picture changed for Canada’s commercial air service providers in the last twelve months?  Well, for starters you simply need to understand two key facts; fuel is the second largest expense for air carriers, after labour and last year the average cost of that fuel rose from $29 US dollars per barrel to $38 US dollars per barrel.  This year’s prices are even more dramatic, with figures as high as USD$60 per barrel.  As you can appreciate, Mr. Chairman, when your unit costs double in two short years the impact to customers is unavoidable.

In Canada, large airlines are doing their best to cope.  Air Canada – who have stated publicly that every dollar increase in the price of oil impacts their bottom line to the tune of approximately 28 million dollars – has been forced to raise fares and amend their baggage policy to limit the damage.  WestJet, too, along with other carriers, have raised their fares to respond to the situation.  WestJet has also announced a limited fuel hedging strategy to limit their exposure to future increases and Air Canada has its own fuel risk management strategy in place designed to hedge approximately 50% of its own fuel requirements.

Smaller air service providers, on the other hand, have less flexibility for dealing with the shock of fuel price increases.  Commercial aviation has always been and will probably always continue to be a low-margin, capital-intensive business in this country, in particular.  For many of these smaller companies, they simply do not have the capital required to exercise similar mitigation strategies.  They are simply more exposed to the vagaries of the market

The cost of crude, alone, is not the only cost driver, however.  As this committee will know, federal and provincial governments add special aviation fuel excise taxes to the cost of each litre of fuel.  Federally, air service providers are paying an extra 4¢ per litre in for this tax.  Depending on the province you’re in, there can be anywhere from an additional 1¢ to 5¢ per litre in provincial aviation fuel excise taxes, as well. 

In fact, since 1999, the federal government has collected over $300 million in Fuel Excise taxes.  Some estimates call for over $100 million dollars to be collected this year alone.  Clearly, it is improper for the federal government to be reaping a financial windfall from this situation while the economy suffers – particularly in light of the fact that this tax was first introduced by Michael Wilson for the specific purpose of fighting the federal deficit.

So what’s to be done?  In my mind, Mr. Chairman, the government of Canada should focus on its stated objective of improving Canada’s competitiveness and economic efficiency.  To do so however, it must abandon the short term thinking of maximizing tax revenue and pursue a policy agenda which truly fosters growth, efficiency and innovation.

In the aviation sector, particularly, I can tell you that $100 million dollars in additional costs is a huge burden for the industry to bear.  Higher costs mean fewer flight options at higher rates.  It’s that simple.

So the question is, is the government prepared to reduce aviation Fuel Excise taxes – as the Standing Committee on Transport has called for – to improve the competitiveness and efficiency of air travel in Canada or would it rather collect huge amounts in fuel taxes – to add to the huge amounts it already collects in airport rents – to fund other programs.  So far, the decision is to continue collecting the full tax bill, to the detriment of Canadian travellers and shippers who rely on a healthy and competitive air industry to keep Canadians and their economy connected to each other and the world.

I would respectfully suggest that a more visionary and sustainable approach, however, would be for government to recognize that it is improper to tax the inputs of doing business – such as the cost of jet fuel – and focus instead on taxing the outputs of commercial activities, namely, profits and wages.  This approach more closely aligns the interests of industry and government.  The current approach, on the other hand sets up the government as a winner and industry and Canadian travellers as the losers.  It is an untenable situation in the long term which runs counter to the announced competitiveness and innovation agenda of this government.

With that Mr. Chairman, thank you.  I look forward to your questions.