May 20, 2020 Senate of Canada National Finance Finance Committee Chair Senator Percy Mockler: [email protected] Deputy Chair Senator Éric Forest: [email protected] NATA Briefing Note- Impact of COVID Travel/Gather Restrictions on Northern and Remote Air Operators Viability and Ongoing Sustainability and the need for ongoing financial support. Dear Chair and Deputy Chair of the Senate Finance Committee; The Northern Air Transport Association was formed over 40 years to support the economic development of northern and remote Canada with safe and sustainable air transportation. On behalf of our members we respectfully submit this Briefing note that explains the need for federal support of Canada’s northern and remote air transportation system. All Canadian businesses have been significantly impacted by COVID-19 and airlines have been particularly hard hit. Both national and regional carriers are reporting year over year traffic declines of 95% or more and this is creating huge industry losses for one or more of the following reasons: • Some carriers have ceased flying entirely, but still have overhead expenses to pay; • Some carriers are still flying but with far less flights than before, they can’t pay all of their overhead expenses from the operating margins on the reduced number of flights; • Some carriers are operating flights at less than direct operating costs (DOC’s) in response to a need for a minimum level of essential service. Canada is a huge country with a small population and the Canadian transportation network, including and especially air, is a vital piece of our economy. Not unlike the national electrical grid and household electricity, Canadians sometimes take the travel network for granted. We might not spend much time thinking about the power company, but we do expect the lights to go on when we flick the switch. Similarly, when we want to travel to any part of the country, we expect to be able to find a transportation provider to get us there. If the power service has a failure we notice right away and similarly, when there is a threat of a cut-back in transportation, it immediately reminds us of the importance of our transportation network which must reach all regions of our country and requires the services of road, rail, water and air carriers, both small and large. Today, Canadian airlines are struggling in the face of COVID-19, but are doing their best to maintain the integrity of the network even though many are incurring huge losses. Collectively, the air transportation industry has reached out to federal and regional governments for financial assistance. Canada northern and remote areas are no exception. Northern and remote Canada accounts for over 40% of Canada’s land mass. Many northern communities have no road access and with only a handful of paved runways, northern air carriers provide a unique but essential component of Canada’s air travel network. In addition to their transportation role, many northern air carriers have both Indigenous and non-Indigenous ownership, and they provide significant northern employment and other regional economic benefits. In combination, all of these factors make northern air carriers an essential component of both the northern economy and of day to day life in the north. Because northern air carriers provide a unique suite of services and local economic benefits that could only be replaced by another northern carrier, local carrier survival in the face of COVID-19 is essential to the well-being of the north. For this reason, territorial governments reached out to the federal government to provide funding to help ensure survival and the provision of essential services. Carriers are hopeful that the Northern Essential Air Services Program in combination with the Federal Wage Subsidy Program and other federal and territorial business assistance programs will provide much needed and sufficient financial assistance to keep losses at a manageable level until demand begins to recover. Demand for air travel is expected to take years to return to anything close to pre-pandemic levels, so it is likely that the aviation industry will require some level of financial support for an extended period of time. In view of this, northern air carriers are encouraging federal and territorial governments to extend relief programs as required and to take steps to ensure that relief dollars are allocated efficiently and fairly. The notion of a proactive approach to air service viability is not novel or new. Air Canada was owned by the Canadian government until 1988 and all Canadian air services were regulated until 1987 when services in southern Canada were deregulated. Economic protection in the north was relaxed in 1996 and by 2005 the north was fully deregulated. Other countries, including the United States, Norway, Sweden, Finland, Denmark, Australia, and Russia currently have or did have programs to support air services to remote regions. All Canadians have benefited from airline competition in a growing and healthy economy although economist RP Erickson identified some challenges for northern air carriers in a 2015 report to the CTA Review Panel. In his paper Erickson says: “The reality of 10 years of airline deregulation in Canada’s North are the foremost challenges currently facing Canada’s major northern air carriers. The larger southern based airlines are competing aggressively on major trunk routes to southern gateway airports with no obligation to provide regional or local service beyond northern gateways.” Gateway air routes are the jet routes between the territorial capitals and “gateway” cities in the south. Major gateway routes for the three territories are Whitehorse-Vancouver, Yellowknife-Edmonton, and Iqaluit-Ottawa. Gateway route revenues have a direct impact on the viability of and pricing on the northern regional routes because they provide significant cross-subsidization through the sharing of infrastructure and other overhead costs. It would be completely accurate to say that without gateway route revenue, passenger and freight costs on regional routes would need to be significantly higher in order for those routes to remain viable. It would also be safe to say that northern gateway routes represent an insignificant portion of mainline carrier traffic and revenue and thus have little impact on overall viability. While there is little appetite from air carriers to go back to a regulated environment, the reality is that demand for air travel has taken a fifty-year plus backslide, reverting to levels where economic regulation was required in order to ensure viability. Just like a car race, when the caution flag comes out, the competitive free-for-all is paused and all cars are bound by a new set of rules. The entire airline industry is clearly in need of financial help now and for an extended period of time, so it stands to reason that the relief provider should “put out the caution flag” in order to ensure that relief dollars are used to fund survival rather than competition. There is no doubt that required financial relief under the Northern Essential Air Services Program could be reduced significantly (in one case by almost 30%) in order to achieve the same result, if steps were taken to protect gateway route traffic and revenue. The electrical power grid provides a good illustration of the situation that northern air carriers find themselves in today as a result of the coronavirus pandemic. A fifty-year backslide in travel demand has rendered essential northern air markets unviable without subsidy and mainline competition on the gateway routes only serves to increase the cost of the required help. With large fixed costs and a huge drop in demand that will persist for months, if not years, it is clear that virtually all Canadian air carriers are in need of immediate and prolonged financial assistance in order to ensure the viability and integrity of Canada’s entire air transportation network. The industry needs a “Canada First” solution that recognizes: i) The value of Canadian air carriers to Canada’s economy and the quality of life of Canadians; ii) The essential role that northern air carriers play in providing service to from and within the north as well as their role in the northern economy and the quality of life for northerners iii) The recognition that most carriers will need reduce their pre-pandemic scale in order to operate viably in the post-pandemic world iv) The need for carriers to work together to ensure that their services complement one another so that travelers may transition between networks as seamlessly as possible. We recognize that the coronavirus pandemic is creating unprecedented challenges for all Canadian businesses as well as for all levels of government. Northern air carriers are appreciative of all of the assistance provided to date and we are all making adjustments to our operations to reflect current demand and our expectations of the post-pandemic marketplace. We understand that the ability of taxpayers to fund airline financial relief is limited and so we are encouraging federal and territorial governments to work with all air carriers in order to ensure the integrity and survival of Canada’s air transportation network. The following map illustrates Canada’s large land mass and the large number of isolated communities that require steps be taken to ensure that the entire northern and remote transportation grid remains intact through this unprecedented crisis. There needs to be bold action by the federal government to ensure the integrity of Canada’s northern and remote air transportation grid. Glenn Priestley Executive Director 613-866-2374 Senator Margaret Dawn Anderson (NWT): [email protected] Senator Pat Duncan (YK): [email protected] Senator Dennis Patterson (NU): [email protected] Senator Patricia Bovey (MB): [email protected] .