Air Travellers' Security Charge (ATSC) and Low Cost and Regional Air Carriers : 3

Exhibit IV-1.
Summary of the Percentage Increase in Fares Due to the ATSC by Distance Category for Low Cost Carriers on Routes between ATSC Listed Airports

#### Distribution of Airfares

The distribution of airfares available for each fare type was determined by weighting the fare for a given type by the number of passengers and accumulating over all routes operated by Low Cost carriers. The distribution of airfares paid by passengers was also estimated by making some assumptions regarding the proportions of tickets sold in each fare category.

Exhibit IV-2.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Served by Low Cost Carriers

Exhibit IV-2.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Served by Low Cost Carriers (Continued)

Exhibit IV-2.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Served by Low Cost Carriers (Continued)

Exhibit IV-3.
Distributions of Walk-on, "B"/"M" and Low Fares for Low Cost Carriers

The distributions of Walk-on, "B"/ "M" and Lowest fares available are illustrated in Exhibit IV-3. Over half the Lowest fares are in the \$200 to \$400 range and all are less than \$800. Most "B"/"M" class fares are between \$200 and \$800, while the most common Walk-on fares is between \$600 and \$800, and 25% are over \$1,000.

The distribution of airfares paid by passengers flying on Low Cost airlines was estimated by applying estimates of the proportions of tickets represented by the three fare groups. Several airlines provided data on the numbers of tickets sold by fare class, and others provided estimates of the proportion of tickets sold which were within 15% of the Lowest fare. Based on the information provided, it is estimated that:

• Walk-on fare represents 10% of tickets;
• "B" or "M" class fares represent 40% of tickets; and
• Lowest fare represents 50% of tickets.

Using these percentages, the distribution of fares on Low Cost carriers was estimated and is shown in Exhibit IV-4. Most OD passengers on Low Cost carriers (62%) pay between \$200 and \$400 for their ticket. At this fare level, the ATSC represents an increase of between 6.4% and 13.6% increase in the total fare. Very few passengers pay less than \$200, while 23% of passengers pay between \$400 and \$600.

Source: Derived from data collected in study (see Section II-B)

Exhibit IV-4.
Estimated Distribution of Airfares on Low Cost Carriers

### C.  City Pair Markets Served by Regional Air Carriers

The Regional carriers surveyed in this study serve roughly 850 city pairs. About 600 of these city pairs involve just one or no listed ATSC airports and are therefore not subject to the ATSC (see Exhibit IV-5). These Regional carriers carry almost 70,000 OD passengers per week (September 2002) and a further 20,000 connect to other destinations. Roughly, 48,000 or 71% of the OD passengers on these carriers are required to pay the ATSC. As noted in Section II-C, approximately 5% of available seat-kilometers of Regional carriers are provided by Regional carriers not surveyed and who serve routes where the ATSC is not applicable. Thus, for all Regional carriers, approximately 67% of OD passengers are subject to the ATSC.

Many passengers using Regional carriers (10,285 or 15% of surveyed carriers) are flying to remote communities where there is no reliable year round transportation by surface mode. Of these, 1,540 passengers are flying to remote communities and are required to pay the ATSC. This excludes passengers flying to/from remote communities who are connecting to flights to other ATSC listed airports.

Exhibit IV-5.
Number of OD Passengers per Week on Surveyed Regional Air Carriers for City Pairs by Applicability of ATSC and Accessibility of Airports

 ATSC Applicable No. of ATSC List Airports Number of OD Pairs OD Passengers per week Total Remote Airports Yes 2 250 47,998 71.3% 1,471 14.3% No 1 300 12,779 19.0% 5,233 50.9% No 0 299 6,498 9.7% 3,581 34.8% Sub-total 599 19,277 28.7% 8,814 85.7% Total 849 67,275 100.0% 10,285 100.0% Source: Derived from data collected in study (see Section II-B)

A summary of the fares and increase in fares due to the ATSC by distance category on routes subject to the ATSC is presented in Exhibit IV-6. Information by city pair and carrier are presented in Exhibit IV-7 and detailed information is provided in Appendix D.

Exhibit IV-6.
Summary of the Percentage Increase in Fares Due to the ATSC by Distance Category for Regional Carriers on Routes Between ATSC Listed Airports

Exhibit IV-7.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Subject to the ATSC Served by Regional Carriers

Exhibit IV-7.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Subject to the ATSC Served by Regional carriers (Continued)

Exhibit IV-7.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Subject to the ATSC Served by Regional carriers (Continued)

Exhibit IV-7.
Airfares, ATSC Percentage of Fares, Passengers and Difference in Travel Times for OD Pairs Subject to the ATSC Served by Regional carriers (Continued)

About 250 of the city pairs served by the Regional carriers are between ATSC listed airports and are therefore subject to the ATSC. The ATSC represents an increase of 8.9% in the Low fare and 4.4% of the "B"/"M" class fare when averaged over all OD passengers on these routes. A breakdown of these routes is as follow:

• Routes less than 500 km account for just over 50% of passengers paying the ATSC, with the ATSC ranging from 5.9% to 10.9% of the fare for most passengers.
• Routes between 500 and 1,000 km account for almost 35% of passengers paying the ATSC, with the ATSC ranging from 3.0% to 7.1% of the fare for most passengers.
• Routes greater than 1,000 km account for almost 15% of passengers paying the ATSC, with the ATSC ranging from 2.2% to 5.0% of the fare for most passengers.

For the city pairs where the ATSC has the greatest effect, the travel time advantage of flying is least. Short haul city pairs where the ATSC represented more than 10% of the Lowest fare accounted for 27% passengers on Regional carriers; for these city pairs, the ATSC resulted in an average 13.2% increase in the Lowest fare and travel time by surface mode was only 1.8 hour longer. On three routes, the ATSC resulted in a 25% increase in the Lowest fare and the difference in travel times was only 30 to 80 minutes. On the medium and long haul routes operated by Regional carriers travel times by surface modes were much greater and for a number of these city pairs, air is the only year round mode of transport.

The numbers of city pairs and OD passengers and the airfares for markets served by the 32 Regional carriers surveyed not subject to the ATSC are summarized in Exhibit IV-8. Detailed data on these city pairs are provided in Appendix D. The 599 city pairs not subject to the ATSC comprise 70% of the city pair markets served by these carriers, but only 29% of the OD passengers they carry. Of the 599 city pairs served not subject to the ATSC, 422 of these are only accessible by air. Travel times by surface mode, when possible, are often long despite the short distances and result in large travel times saving by air. Airfares for the same distance category and fare type are similar to those for city pairs subject to the ATSC.

#### Distribution of Airfares on Routes Subject to ATSC

As for the Low Cost carriers, the distribution of airfares available for each fare type, and the distribution of airfares paid by passengers were estimated.

Exhibit IV-8.
Summary of Numbers of City Pairs, Passengers, Airfares, and Travel Time Difference for Markets Not Subject to the ATSC

The distributions of Walk-on, "B"/"M" and Lowest fares for services offered by Regional carriers where the ATSC is applicable are illustrated in Exhibit IV-9. Lowest fares in the \$200 to \$400 range are very common, few Lowest fares are greater than \$600 and almost 10% of Lowest fares are below \$200. The Walk-on and mid "B"/"M" class fares are spread out over the range from under \$200 to over \$2,000, with the most common being in the \$400 to \$1,000 range.

Exhibit IV-9.
Distributions of Walk-on, "B"/"M" and Lowest Fares for Regional Carriers on Routes Subject to ATSC

The distribution of fares paid by passengers flying on regional airlines was estimated by applying estimates of the proportions of tickets represented by the three fare groups and is shown in Exhibit IV-10. The same proportions of tickets for each fare group was used as for the Low Cost carriers, i.e., 10% for the Walk-on fare, 40% for the "B"/"M" class fare, and 50% for the Lowest fare. Over 37% of fares for OD passengers are in the \$200 to \$400 range where the ATSC represents an increase in the ticket price of between 6.4% and 13.6%. For 5.6% of tickets the fare paid is less than \$200 and for these passengers the ATSC represents a 17% increase in the average fare of \$163.

Exhibit IV-10.
Estimated Distribution of Airfares on Low Cost Carriers on Routes Subject to ATSC

### D.  Time Trends in Air Traffic

The purpose of this section is to provide insight into the implications of the ATSC by way of a review of trends in air traffic from January/01 through August/02. The extent of the analysis is constrained by the availability of data and the short time period since implementation of the charge. Information is limited because of concerns on the part of carriers about disclosing confidential information useful to competitors, limitations on airline resources and lack of standardization concerning data concepts and formats.

The analysis and interpretation of the data is also complicated by the interaction of the many factors at play. For example, the ATSC is only one factor affecting traffic in the second and third quarter of 2002. Other factors include:

• The continuing effect of the events of September 11, 2001, the decline in air travel demand due to security concerns and the timing of a recovery in the demand for air travel;
• Introduction of new security provisions at airports;
• Changes in the industry due to the failure of a number of important air carriers;
• Realignment of airline services and airfares due to competition and changes in industry structure, particularly the growth of services provided by Low Cost carriers, the availability of lower fares and the resulting stimulation in demand; and
• Changes in the economy affecting demand.

A simplified approach to the review of trends in air traffic has been adopted. The analytical procedure is to compare the trend in air travel over five months (April through August) in 2002 compared to the same five months in 2001. The purpose is to:

(i)  Account for the strong seasonal patterns of air travel demand in Canada;

(ii)  Avoid the discontinuity in the time series data caused by the events of Sept 11/01; and

(iii)  Highlight the possible effect of the imposition of the ATSC on April 1, 2002.

With respect to the first two points, it is recognized that a degree of uncertainty surrounding both issues remains with the analysis. For example, seasonal patterns vary somewhat year-to-year due to the statistical properties of the time series. Secondly, while the terrorist attacks on September 11, 2001 appear to have resulted in a drop in the demand for air travel (about 7 to 8% for the first 8 months of 2002), the time profile for a possible "bounce-back" in demand for air travel is less clear. For example, a recovery in the demand for air travel towards pre-September/01 levels during the April-August '02 period could offset to some extent, the negative effects of the ATSC.

April was selected as the base month for the comparison. While the ATSC came into effect on April 1, 2002, it is suggested that a market response to the increase in air travel cost would not have been felt until May. A delayed response is expected because many passengers purchasing tickets for travel in April would have purchased before April 1, particularly given prior knowledge of the charge. In fact, it is suggested that the full effect of the ATSC would not have worked its way through the market for several months.

#### 1.  Low Cost Carriers

The 20-month period ending in August, 2002 has been a turbulent one for the air carrier industry, particularly for the Low Cost carrier segment. The main points are as follows:

• In early 2001, the emergence of Canada 3000 as a major player in the domestic market through the acquisition of first Royal Aviation and then Canjet;
• The tragic terrorist attacks of Sept 11/01. The immediate impact was a sharp decline in air travel. In October 2001, the number of passenger kilometers performed by Air Canada's Mainline services dropped by 16.4%, compared to a year earlier (1,616 million compared to 1,933 in 2000);
• The failure of Canada 3000, which ceased operations in November 2001;
• The start-up of Tango in November, 2001, Canjet and Jestgo in June 2002 and Zip Airlines in September 2002; and
• Westjet's continued expansion throughout the 20-month period (Westjet's RPKs increased by roughly 50%, much of it on the medium and long routes made possible by the acquisition of the longer range B737-700s).

The limitations of the available data due to these changes in the industry are particularly troublesome for the analysis of Low Cost carriers. For example, there is no time series information on flights operated under the banner of Air Canada's Tango, a key operator over the last 12 months. Further, a large segment of the market served by Low Cost carriers is performed on Air Canada's Mainline services both before and after the introduction of Tango. For these reasons, the examination of time trends for Low Cost carriers was broadened to include all of Air Canada's Mainline domestic services along with Westjet, Canada 3000, Canjet, Royal Aviation, Air Transat and Jetsgo.

Revenue passenger kilometers (RPKs) are used as an aggregate measure of air travel demand. Data on domestic RPKs were obtained from press releases of Air Canada, Westjet and Jetsgo. For the other carriers, estimates were developed from planned available seat kilometers (ASKs) contained in the OAG database and assumed load factors.

It should be noted that aggregate measures of output are of only limited value in situations where markets are in rapid change and restructuring. Unfortunately, this would appear to be the case: between 2001 and 2002, new markets have been explored by Westjet and Jetsgo, Air Canada has restructured services for low fare passengers from Mainline flights to Tango services mainly through Toronto, and services provided by Canada 3000 are no longer available. Changes in market structure are not necessarily reflected in an aggregate measure of output such as RPKs; this means that the use of RPKs may not reflect an "apples-to-apples" comparison of market response.

Compared to other aggregate measures of output, RPKs is attractive because it reflects the overall performance of the transportation function in terms of both the volume of passengers and distance. Other measures have some shortcomings. For example, measures of capacity (e.g. available seat kilometers) reflects carriers' capacity management capability as well as changes in output; further, OAG capacity data represents planned capacity, as opposed to actual capacity, "as flown". While in normal times there is a close relationship between planned and actual capacity (2% to 3%), in exceptional situations (e.g., September 2001) there can be a large difference.

The number of enplaned passengers is a poor aggregate measure when the structure of airline networks and services is changing. For example, a change in service patterns to concentrate services around a major hub (e.g. Tango at Toronto), will increase the number of connecting "passengers" without necessarily reflecting any change in the number of origin-destination passengers. For this reason, airport oriented statistics can be particularly misleading indicators of market performance[3].

As shown in Exhibit IV-11, the year-over-year comparison in RPKs suggests that for 2002, overall passenger traffic for Mainline and Low Cost carriers trailed 2001 levels by about 7%.

Exhibit IV-11.
Domestic RPKs Performed by Mainline and Low Cost Carriers for 2001 to August 2002

The five-month comparison of 2002 versus 2001 shows that for the Mainline and Low Cost carriers, growth in RPKs for 2002 was somewhat weaker than in 2001 (Exhibit IV-12). In 2002, growth in traffic for May, June and July was lower than for 2001 (5.2%, 3.6% and 3.9%, respectively). However, August traffic reached 152% of April volumes, the same as in 2001 and typical of the seasonal pattern of medium and long haul Canadian air travel.

The slower traffic growth for May, June and July 2002 is consistent with the expected effect of the ATSC. However, the magnitude of the slowdown is difficult to attribute to the ATSC as other factors have been at play. For example, the mix of markets and services provided by the Mainline and Low Cost carriers has changed significantly between 2001 and 2002 but has not been explicitly accounted for in the analysis. Other factors might include economic conditions and/or a possible "bounce-back" of travel demand from the events of September 11/02.

Exhibit IV-12.
Comparison of Trends in RPKs for Mainline and Low Cost Carriers

Indeed, a comparison of economic conditions in Canada shows a significant improvement in 2002 compared to 2001. Exhibit IV-13 presents a comparison of GDP and Statistics Canada's Canadian Composite Leading Indicator over the 5-month period April through August. Both of these variables consistently show stronger growth in 2002 compared to 2001, for all of the four months.

Exhibit IV-13.
Comparison of Trends in Economic Conditions

#### 2.  Selected Short Haul City Pair Markets

Information concerning specific short haul markets was available from carriers providing passenger information by route. A selection was made of the larger short haul markets subject to strong competition from highway transportation. The expectation is that these markets have lower fares and as a result, would be subject to greater price elasticity compared to other markets where distances are greater, highways not as direct, or where ferry services are required.

The selected city pairs include city pairs of less than 500 km, with a volume of more than 5,000 seats per week and subject to strong highway competition. The ATSC applies to all of the of the selected short haul markets. The results of the analysis are shown in Exhibit IV-14.

For the first half of 2001, passenger traffic in the East was growing strongly but with an apparent seasonal decline in July and August. In selected Western short haul markets, it appears that traffic was declining sharply over the five months April to August/01, perhaps due to economic factors. The events of September 11 caused passenger traffic to decline in all markets. However, it seems that Western markets recovered somewhat during the winter months while Eastern markets did not recover until the spring.

Exhibit IV-14.
Trend in Passengers for Selected Short Haul City Pair Markets

As shown in Exhibit IV-15, the trend in passenger traffic markets in Western Canada over the April to July period of 2002, declined in every month, and by July the traffic relative to April was about 11% lower than 2001.

In Eastern Canada, growth in passenger traffic in 2002 was stronger than in 2001 for May and June but then dropped in July where traffic levels relative to April were 3.8% below the 2001 level.

Exhibit IV-15.
Comparison of Trends in Passengers for Selected Short Haul Markets

Economic conditions for the two regions during the 20 month period was investigated using employment and retail sales as proxies for economic activity[4]. With some exceptions, economic conditions improved over the 5-month period of 2002, compared to 2001 in both Regions (Exhibit IV-16).

Another factor affecting the difference between the selected city pairs is the fact that airfares in the selected short haul city pairs in Western Canada are lower than in Eastern Canada (see Exhibit IV-17). Because of the way the ASTC is structured as a flat fee, the influence of the ATSC on air travel demand should be greater where fares are lower.

As shown in Exhibit IV-17, the Lowest fares (including all taxes and surcharges) for the selected city pairs in Eastern Canada are some 25% higher than the Lowest fares for selected markets in the West. The difference is much greater in the case of Walk-on fares and particularly the "B/M" class fares (72% and 114%, respectively).

The difference in the "B/M" airfares is significant, particularly in the light of the number of passengers using them for short haul trips. Assuming a typical distribution of fares of 10%, 40% and 50% for Walk-on, "B/M" and Lowest fares respectively, the average fare is \$283 in the West versus \$493 for the East, a difference of \$209 or 74%.

Exhibit IV-16.
Comparison of Trends in Economic Conditions in Eastern and Western Canada

Exhibit IV-17.
Comparison of Airfares in Selected Markets

The magnitude of the difference in airfares is significant in terms of the implications of the ATSC on passenger traffic. The ATSC represents an increase in the average fare on the selected routes of 9.3% in the West versus 5.1% in the East. In other words, because of the difference in fare levels, the impact of the ATSC in selected short haul markets in the West could be expected to be almost double the impact in selected short haul markets in Eastern Canada.

The distance between the city pairs is also greater for the selected pairs in the East by 47 km or 18% (Exhibit IV-18). The shorter distances for selected short haul city pairs in Western Canada may account for some of the difference in airfares. Further, the shorter distances for the selected short haul routes in Western Canada also means that automobile travel is more competitive with air. A more competitive market should translate into a more sensitive market response to the introduction of the ATSC.

Exhibit IV-18.
Competition with Automobile in Selected Short Haul Markets

#### 3.  Other Regional Markets

An analysis was also conducted for city pairs served by Jazz (other than those considered as part of "selected short haul city pair markets") and smaller carriers operating in Southern Canada, and services of carriers in the North. The trends in traffic are shown in Exhibit IV-19.

Exhibit IV-19.
Trend in Traffic for Other Regional Markets

The trend in passenger traffic for markets served by selected southern carriers on routes less than 500 km is similar to the trend for selected short haul markets in Eastern Canada. However, a different picture emerges for services in the North and for longer routes and other carriers operating in Southern Canada.

In the North, there has been strong growth in ASKs, spurred by competition between First Air and Canadian North. In the South, ASKs were relatively flat in 2001 and declined in the first half of 2002, followed by an increase in July/02.

The possible implications of the ATSC in other regional markets were considered by comparing the trend in passengers and ASKs for 2002 with the previous year (see ExhibitIV-20).

For markets less than 500 km served by selected southern carriers, the trend in passenger traffic (over the April to July period of 2002) declined by about 3%, relative to 2001. For markets between 500 and 1,000 km for those carriers, passengers rose in May 2002 relative to 2001, but decline in the following two months.

The fact that the ATSC does not apply to the majority of Northern markets or markets served by "Other Southern Carriers" is reflected in the trend analysis. For both these groups of carriers, the trend in passenger traffic was greater in 2002, compared to 2001 (5% and 1% for Northern and Southern carriers, respectively).

Exhibit IV-20.
Trends in Traffic in Other Regional Markets

3  Transport Canada has recently released monthly airport data on enplaned/deplaned passengers at the 25 Top airports in Canada. While this information is invaluable to airport planners, it is of limited value in tracing the possible impact of the ATSC on the services of Mainline and Low Cost carriers because the data:

i)  is airport oriented (see discussion above);
ii)  includes all carriers as opposed to just Mainline and Low Cost; and
iii)  includes all trips, not just those subject to the ATSC.
For these reasons, the Transport Canada has not been used. [Return]

4  Neither the Composite Leading Indicator nor monthly Gross Provincial Product at the Provincial level are available from Statistics Canada [Return]