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Fuel tax hike will put Ontario at disadvantage: industry

July 21, 2014, Montreal - At a time when other provinces are moving to encourage airline traffic by decreasing or eliminating aviation fuel taxes, Ontario's decision to hike them will likely boost air fares and put the province at a competitive disadvantage, airline and airport officials say.


July 21, 2014
By The Canadian Press

In a budget tabled last week by Ontario's newly elected Liberal
government, Premier Kathleen Wynne has proposed to phase in a
four-cent-per-litre increase in the aviation fuel tax to 6.7 cents by
2017. The current tax of 2.7 cents per litre has been in place for more
than two decades, but would rise by one cent per litre each year.

 

The increase, which the government has pledged as part of
$29 billion it has dedicated to transit and transportation
infrastructure uprgrades in the next decade, is expected to add an
estimated $100 million in costs for airlines — cost that will likely be
passed on to consumers through higher fares.

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"It will cause the ticket prices to go up but
you might not notice it because it's a small portion…of the fuel
bill," said David Tyerman of Canaccord Genuity.

 

For Air Canada, the estimated $50 million in
addition costs represents a fraction of the more than $11 billion it
spends annually on fuel, salaries, currency fluctuations and other
factors, said Tyerman.

 

Airlines constantly adjust prices
for cost increases and declines, but unlike fuel prices and currency
fluctuations that can change rapidly, this tax increase is predictable
and will be easier to plan for in advance, the analyst added.

 

However, the association that represents Canada's largest air carriers said the tax increase will put Ontario at a disadvantage.

 

"I suspect maybe other provinces feel they are
more competitive now," said Marc-Andre O'Rourke, executive director of
the National Airlines Council of Canada.

 

He said Ontario's rate would be "completely out
of whack" with other provinces and would be one of the highest fuel
taxes in North America. The association is calling for the increase to
be put on hold while the implications are studied.

 

British Columbia became the latest province to
eliminate its international fuel tax in 2012, joining New Brunswick,
Alberta, Quebec and Saskatchewan. Newfoundland and Labrador has no fuel
tax for international flights but charges tax for flights to the United
States. Manitoba has the highest rate at 3.2 cents, but nothing for U.S.
and international cargo flights.

 

B.C.'s move to eliminate the fuel
tax to match nearby jurisdictions in Alberta, Washington state and
California cost the government $12 million in annual revenue. But a
report said it generated an estimated $20 million in new payroll and
consumption tax revenue in the first year resulting from expanded
international flights into the province, said Elizabeth Thomson, public
affairs officer for the Ministry of Transportation and Infrastructure.

 

While some provinces have eliminated fuel taxes
on international flights, they all charge for domestic flights, ranging
from 0.7 to 3.2 cents per litre. At 6.7 cents, Ontario would be more
than double its provincial neighbours. Most U.S. airports charge little
or no fuel taxes.

 

O'Rourke said the province may not receive the
full benefit from the tax increase because airlines may decide to fuel
at airports outside Ontario to save money.

 

Douglas Hartmayer, director of public affairs
for the operator of airports in Buffalo and Niagara Falls, N.Y., sees
the tax boosting business on his side of the border.

 

"I think that anything that widens the gap and
makes it more expensive to fly from Canada vis-a-vis Buffalo is going to
drive more people to airports in the United States," Hartmayer said.

 

More than 2.3 million Canadians a
year are believed to use the Buffalo airport, a two-hour drive from

Toronto's Pearson International Airport, Canada's busiest travel hub.

 

Most of the cost difference between Canadian and
U.S. airfares is attributable to federal tax, fees and surcharges, said
Susie Heath, press secretary for Ontario Finance Minister Charles
Sousa. She said Ontario's fuel tax is significantly lower than what is
charged at airports such as London Heathrow and Paris de Gaulle.

 

"We know that these changes affect different
communities in different ways, which is why we're working with the
Ministry of Transportation to ensure that we are providing relief to
vulnerable communities, especially those in remote and northern areas."

 

A study led by Fred Lazar, associate economics
professor at York University's Schulich School of Business, concluded
the tax hike will hurt the provincial economy, cut jobs and drive away
tourists.

 

He said the provincial GDP would fall between
$67 and $97 million in 2017, resulting in a decrease in up to 2,907
full-time jobs and discourage at least 292,000 air travellers.

 

Lazar calculates the tax will increase air fares between $1.25 to $12 per ticket depending on airport and destination.

 

That would hamper Air Canada's efforts to make
Toronto's Pearson Airport a North American gateway and hurt the smaller
airline, Porter Airlines, which uses Billy Bishop Toronto Centre Airport
as its network hub.