WHALEN and FUSS: More regulation — the last thing Canada’s air travellers need

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Recently, citing “feedback” from Canadians, WestJet backed down from its plan to add more seats to certain aircraft — a move that would have reduced space for travellers. The episode also prompted calls for stricter regulation of Canada’s airlines, with one headline suggesting there’s a “regulation gap” in the industry.

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The frustration is understandable. Plagued by high prices and lack of choice, air travel in Canada is dismal. But stricter regulation is the last thing Canada’s air travellers need.

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Air travel is a highly-regulated industry. To some degree, this is understandable, as governments have an interest in ensuring safety in the skies. However, government’s regulatory role should be confined to just that — safety. Government should not be in the business of telling airlines (or any other business) how to best serve their customers. There are at least three reasons why.

Government over-reach

First, government does not have the required information to determine what best serves customers. In other words, only the airlines should determine where to fly, what price to charge, and what on-flight amenities to provide, primarily by testing such concepts with customers.

Second, government doesn’t receive feedback and can’t be held accountable in the same way an airline can — if customers dislike the seat configuration of WestJet or any other airline, they can go elsewhere, which signals to airlines they should adjust their approach (or risk reduced sales or even going out of business).

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Third, and perhaps most importantly, government regulation adds costs to businesses. Air travel in Canada is already expensive compared to our peer countries in part due to regulatory burdens.

So, how can the government help improve air travel in Canada?

Limiting competition

Simply put, rather than adding more regulation, the federal government should reduce regulations around “cabotage” and foreign ownership. By helping increase choice and competition, the government can help drive down prices and provide more options for air travellers. Cabotage refers to government restrictions on the ability of foreign airlines to fly within Canada. Currently, according to the federal Canada Transportation Act, only airlines based in Canada (essentially, those that have majority Canadian ownership) can fly routes between Canadian destinations. By preventing foreign airlines from operating routes within Canada (Toronto to Vancouver, for example), the government restricts competition and limits consumer choice, which ultimately leads to higher ticket prices. Experts agree this is a key reason why Canadians pay among the highest prices in the world for domestic airfare.

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The federal government also limits foreign ownership of Canadian airlines to a maximum of 49%, and no individual foreign investor can own more than 25% of voting shares. These rules restrict the ability of new airlines in Canada to raise the necessary investment capital to compete in the Canadian market, and deprive established airlines potential sources of capital that could improve service.

The recent WestJet controversy worked out exactly as it should. The airline proposed a change, customers rejected it, and WestJet reversed course. Inserting the federal government into this relationship with ever-more regulation would make things worse, not better. When it comes to both cabotage and foreign ownership restrictions, Ottawa has an opportunity to serve air travellers and airlines alike by regulating less, not more.

Alex Whalen and Jake Fuss are economists at the Fraser Institute.

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