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Airlines and the Yukon government

In last week’s column I made the case that there are two things Yukoners need from the airline industry. The first is intense competition to get us the lowest fares possible...

In last week’s column I made the case that there are two things Yukoners need from the airline industry. The first is intense competition to get us the lowest fares possible, since low transportation costs improve our standard of living and also make it easier to do business and create jobs in the Yukon. Think of tourism, business travel, out-of-territory mine workers, luring new firms and workers to the North, and so on.

The second thing was that, if we are going to have two or more airlines, one of them should be local player Air North. Why local? Because if there is a local airline we know they will always be competing hard, which is not necessarily true if we are an obscure feeder route for a pair of national airlines.

Why Air North? Because in the face of two national airlines, there will be no new Whitehorse-based jet airline that will spring up if Air North fails. Air North also employs over 150 people, mostly in the Yukon. Those jobs go south without Air North. There are also the advantages that hundreds of Yukoners have money invested in Air North and that an airline with a local hub can do charters to places like the Canada Games and Las Vegas from time to time.

It’s easy to say we want both intense competition and Air North as a survivor. But how should we make sure we get them? Especially if our two desired policy outcomes start to conflict, which might happen if three-way price competition drives fares so low that Air North struggles.

This is tricky territory for governments. Let’s look at some of the options.

A discredited and old-fashioned approach is just to subsidize the local company. This approach is old-fashioned and controversial, but still popular with lots of governments. The federal government does this with lots of companies in Canada, with the lists put together by angry analysts on the left and right, too long to include here.

The problem is that “emergency” or “one-time” subsidies tend to become permanent as they lessen the need for the company to respond to real market pressures. One of the amazing facts to emerge from the Greek debt crisis is the startling inefficiency of that country’s national railway. In 2009, according to the Financial Times, it had revenues of 174 million euros and lost (somehow) 937 million euros.

Not that the Greeks are alone. The Canadian government sank billions into Atomic Energy of Canada, including $1.7 billion between 2006 and 2009, before selling the commercial reactor part of the company to SNC Lavalin for $15 million last year (plus future royalties, if any).

So we probably don’t want to get in a situation where the Yukon government is subsidizing airlines.

Fortunately, the economics of airlines give us a couple of levers to think about. Airlines focus on both their prices as well as their load factors. An airline can live with lower prices if its planes are full.

This opens up interesting possibilities for the Yukon government to do something useful. It could let the competing airlines push fares down to the benefit of individual Yukoners (and government travel budgets), but it could play with how it allocates its own travel among the airlines.

First of all, the government would mandate that its employees would fly on the cheapest fare possible to Vancouver or Calgary. One hears disturbing rumours around the YTG waterholes that it is relatively easy for a travelling government employee to steer themselves onto a more expensive flight if it has more convenient connections or baggage transfers. One also hears rumours that some employees mail in their boarding passes on the national airline to get around the ban on frequent-flyer point collection. If either of these yarns is true, YTG purchasing managers should probably crack down and make sure employees really are encouraging competition and protecting taxpayers by travelling as cheaply as possible.

Secondly, the government should monitor the split of its travel between Air North and other airlines. It can steer capacity, assuming the price is competitive, to Air North to keep that airline’s load factors in the green. These load factors are critical. According to an Air North newsletter, the fuel cost per passenger on the new Boeing 737-400 is almost 40 per cent lower if the plane is 80 per cent full instead of 50 per cent full. That’s around 40 litres of fuel on the Vancouver run, which shows you that an airline charging a certain fare could be losing money with low load factors and profitable with higher ones.

Some people, mostly living in Toronto or Montreal, will complain that this kind of government favouritism is unfair. It possibly even gets us into trouble with the Canadian Agreement on Internal Trade. Normally, as an economist, I have a lot of sympathy for these arguments. But air travel is too critical to the Yukon to leave the economists in charge.

Furthermore, before we cave in to pressure from economic purists in the provinces, we should ask them why Yukoners have to pay the prices of economically distorting policies that benefit their citizens? Yukoners pay extra for eggs thanks to the egg marketing boards. Extra for cheese thanks to dairy marketing boards. Extra on Korean-made Kia vehicles popular in the Yukon. We don’t have a lot of Yukon egg outfits, dairy farms or car plants that benefit from these policies, of course.

There may be a lesson from former Newfoundland premier Danny Williams here. His populist antics didn’t win him any Nobel Prizes in economics, but he pretty clearly had the best interests of Newfoundlanders in mind.

(Full disclosure: I have no investments in Air North, but may have small holdings in Air Canada or WestJet via mutual funds whose managers were foolish enough to invest their clients’ money in the airline industry).

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.