Air travel economics put territorial government in a carbon tax bind

Not only is Air North attacking the incumbent in the airline business, but now the feisty insurgent is also trying to muscle in on the Yukon economics market.

Now I know how Air Canada feels.

Not only is Air North attacking the incumbent in the airline business, but now the feisty insurgent is also trying to muscle in on the Yukon economics market.

I’m talking about the economics column in Air North’s latest in-flight magazine, penned by the airline’s president, chief pilot and economist-in-chief Joe Sparling.

The column is so good, it made me wonder: does anyone bother reading the magazine’s other 57 pages of non-economics filler on Yukon lifestyle topics?

This isn’t the first time Sparling has made a foray into economics. Previous insights include the fact that if you spend a dollar on Air North instead of an Outside airline, much more of your money stays to create local jobs and circulate in the Yukon economy. According to an earlier Air North study on the impact of its local hub, its jet service supports 14.1 Yukon jobs per 100 departures versus a figure of 1.4 for its competitors.

That’s 10 times the local job impact.

Another Air North insight was how the lower airfares caused by greater competition have stimulated more people to visit the Yukon. Air North reported in 2009, for example, that average airfares were 25 per cent lower than in 2001, before its jet service started. Traveller numbers were up an impressive 60 per cent.

I shudder to think what our tourism numbers would look like without Air North in the sky offering cheap airfares.

Sparling’s latest economic thinking relates to the concept of “price elasticity,” and what this means for government fees and taxes on air travel. Price elasticity is a technical term for how people buy less of something when its price goes up, and vice versa.

Sparling believes that demand for air travel is highly elastic. Based on Air North monitoring of purchase patterns as fuel prices and other factors have moved prices up and down in recent years, he estimates that a one per cent increase in airfares will cause a one per cent decline in air travel. This will then be matched by an equivalent decline in visitors to the Yukon and the money they spend here.

Some costs are out of our control, such as global aviation fuel prices and the value of the Canadian dollar. The latter is important since fuel prices are driven by the US dollar.

However, our governments control important economic levers too. Many industry analysts have criticized Canada for having high airport fees. The World Economic Forum ranked Canada 130 out of 138 for ticket taxes and airport charges in 2015. The former chief of the International Air Transport Association said that the Canadian government sees “aviation as a cash cow” and not an economic driver.

Most big airports in Canada, including Vancouver, pay big rents to Ottawa. The federal government collected over $300 million in 2014-15. An estimated five million Canadians a year slip across the border to fly on US flights, which are often cheaper due to lower fees and taxes.

Airlines also complain about the impact of fuel taxes imposed by the federal and provincial governments. Ontario has more than doubled its aviation fuel tax since 2014, for example.

Now, the big question is carbon taxes. The new Yukon Liberal government campaigned on a carbon tax for the Yukon.

This puts them in a bind. The whole point of a carbon tax is to make fossil-fuel related activities more expensive and to encourage people to reduce such activities.

But air travel is a strategic industry for the Yukon. Not only is it important to quality of life and attracting people to live here, but it is also critical for the tourism and mining industries. Having a deliberate policy to make air travel more expensive is totally at odds with other parts of the party’s election platform, such as diversifying the economy and fostering economic growth.

Joe Sparling sums it up as follows: “While we have little control over fuel prices and exchange rates, we can and should do our best to encourage our governments to refrain from treating aviation as a cash cow and instead recognize it as an industry that stimulates economic growth and enhances the quality of life for local residents.”

Unless the Yukon Liberals find some way to square this circle, we may see government reducing tourist numbers and making mining more expensive on the one hand while simultaneously spending millions on the departments of tourism and mining to supposedly encourage the industries.

One option is to exempt air travel from the Yukon carbon tax. But that will be criticized by environmentalists for letting a major source of carbon emissions off the hook. Furthermore, if all the strategic Yukon industries get exemptions, then “non-strategic” Yukoners like you and me may get annoyed at being the only ones paying the carbon tax.

Watch the upcoming budget to see how our new government manages to weave through all these complicated political pylons.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.

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