By Matthew Chasmar

Edited by Peter Jiang

In February 2024, the low-cost airline Lynx Air ceased operations, shocking its passengers and leaving travellers stranded across North America. Lynx was but one of several new entrants to Canada’s airline market, hoping to bring much-needed competition through lower fares. Yet none of these startup airlines achieved much success: Swoop operated for five years before being absorbed by its parent company, WestJet, while Canada Jetlines has struggled. Flair Airlines remains standing, but is mired in financial woes and legal troubles. With its collapse, Lynx joins a long line of predecessors – including Canada 3000, Roots Air, Jetsgo and many more – all of whom tried and failed to establish a successful low-cost airline in Canada.

Today, the Canadian airline industry is dominated by two companies:  Air Canda and WestJet. In 2022, these two airlines combined represented 64% of the domestic airline market. This lack of competition allows the incumbents to charge higher fares on many routes, with Canadian airfares being higher than almost anywhere else in the world. Canadian travellers are unsatisfied with the incumbents in other ways, such as declining on-time performance. High fares raise costs for consumers and businesses alike, making it harder for Canadians to visit family, travel for fun or for work, and otherwise explore their own country.

This is an issue that is starting to catch policymakers’ attention. The federal Competition Bureau, which oversees Canada’s competition laws, has released the draft terms of reference for an upcoming market study into the competitiveness of Canada’s airline industry. This study will direct important scrutiny at the Canadian airline market, and hopefully provide a blueprint for future reforms. Among the reforms considered by the study should be two crucial changes with the potential to foster greater competitiveness among Canadian airlines: reducing infrastructure user fees and allowing greater foreign ownership of airlines.

In other markets, low-cost airlines have lowered fares and shaken up the competition. Literature from the United States suggests that when these airlines enter a market, higher passenger numbers and noticeably lower airfares are the result. Research from India and Europe suggests a similar downward effect on airfares from low-cost airlines in those jurisdictions. The prime example of a low-cost airline is Ireland-based Ryanair, a European airline whose business model is built on basic service and low fares – with any additional features costing extra. It and its contemporaries are not glamorous, and often have poor reputations. Yet their focus on cheap fares have made them popular, with Ryanair being Europe’s largest airline measured by market capitalization.

Yet despite the spread of low-cost airlines in other countries, their success in the Canadian market has been limited, with these new entrants facing high barriers to market entry. Canada’s large, sparsely populated geography, makes the economics of operating an airline here particularly difficult compared to other markets. However, many barriers are directly related to the way that the way that the Canadian aviation industry is funded, governed and regulated. Policy changes are needed to lower these barriers and encourage greater competition in Canada’s airline market.

The first of these barriers is the high aviation infrastructure user fees charged to airlines, which are passed down to consumers. According to data collected by The Globe and Mail in 2022, the average Canadian air traveller pays, per ticket, an airport improvement fee of $42, and a government air traveler security charge of $25.91. For low-cost airlines, whose business models are based on the cheapest possible fares, these charges are especially challenging as they limit how low fares can go.

High infrastructure user fees are a consequence of the fact that Canadian airport authorities and Nav Canada (the national air navigation services provider) are organized as nonprofits. These organizations charge user fees to cover their costs, which include (in the case of airport authorities) rent paid to the federal government. Comparable fees in the United States are significantly lower, as most airports in that country receive greater amounts of government funding. Increased federal investment in airports including, potentially, a continuation of airport rent waivers issued during the pandemic would allow for lower user fees, reducing costs for consumers.

Secondly, limits on foreign ownership restrict startup airlines’ access to capital. Changes to the Canada Transportation Act passed in 2018 raised the foreign ownership limit on Canadian airlines from 25% to 49%. However, no more than 25% of the voting interests in an airline may be owned directly or non-directly by any single foreign investor, and foreign airlines cannot own more than 25% of a Canadian airline. Despite these changes, it is still difficult for Canadian airlines to obtain foreign investment, as regulators must be satisfied that foreign investors have not obtained de facto control over the airline. For instance, Flair Airlines, which received investment from a Miami-based investor, faced scrutiny from the Canadian Transportation Agency before the regulator ruled that Flair complied with foreign ownership rules in 2022.

Foreign ownership limits could be raised further to improve airlines’ access to capital. This has been done in other markets – Australia and New Zealand allow 100% foreign ownership of airlines that fly only domestic routes, though they cap such ownership at 49% for those that fly internationally. In Australia, these rules have enabled the launch of several foreign-owned airlines, most notably Virgin Australia (formerly Virgin Blue) which has emerged as a significant player in the Australian airline industry.

It is important to note that this policy has not been a silver bullet for the Australian airline market, which still suffers from serious competitiveness challenges. For example, in April, Bonza – a startup low-cost airline wholly-owned by the same investor behind Flair Airlines – ceased operations. Bonza’s collapse caused the Australian Competition and Consumer Commission to call for greater competition-oriented reforms. Nevertheless, if done in tandem with other changes, reforming foreign airline ownership could have a positive impact on airline competition in Canada.

It should also be noted that governments restrict foreign airline ownership not merely as an economic measure, but also to protect their own sovereignty. If the security risks of opening airlines to more foreign investment from any source was seen as too great, the measure could be limited to investors from trusted Allies, such as the Five Eyes. This would be consistent with the broader trend towards “friendshoring” that has been embraced by Canada and other countries.

In sum, cheaper airfare in Canada and with it, relief from high costs for businesses and consumers will only come about with changes to how Canadian aviation is funded and regulated. Greater federal support for airports, and loosening foreign ownership restrictions, are two key measures that can help bring about this change.

Matthew Chasmar is a Juris Doctor and Master of Global Affairs candidate at the University of Toronto. He completed his undergraduate degree at Huron at Western University, where he majored in Political Science. His academic interests include Canadian transport and urban policy, as well as international law and related policy areas.