TRAN Committee Meeting

Notices of Meeting include information about the subject matter to be examined by the committee and date, time and place of the meeting, as well as a list of any witnesses scheduled to appear. The Evidence is the edited and revised transcript of what is said before a committee. The Minutes of Proceedings are the official record of the business conducted by the committee at a sitting.

For an advanced search, use Publication Search tool.

If you have any questions or comments regarding the accessibility of this publication, please contact us at accessible@parl.gc.ca.

Previous day publication Next day publication

37th PARLIAMENT, 2nd SESSION

Standing Committee on Transport

EVIDENCE

CONTENTS

Thursday, May 1, 2003

0910

The Acting Chair (Mr. Stan Keyes (Hamilton West, Lib.))

Mr. John Crichton (President and Chief Executive Officer, NAV CANADA)

0915

0920

0925

The Acting Chair (Mr. Stan Keyes)

Mr. Jim Gouk (Kootenay—Boundary—Okanagan, Canadian Alliance)

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

0930

Mr. Jim Gouk

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

0935

Mr. Jim Gouk

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

Mr. Jim Gouk

Mr. John Crichton

The Acting Chair (Mr. Stan Keyes)

Mr. Jim Gouk

Mr. John Crichton

The Acting Chair (Mr. Stan Keyes)

Mr. John Crichton

The Acting Chair (Mr. Stan Keyes)

0940

Mr. John Crichton

The Acting Chair (Mr. Stan Keyes)

Mr. John Crichton

The Acting Chair (Mr. Stan Keyes)

Mr. Roger Gaudet (Berthier—Montcalm, BQ)

Mr. John Crichton

0945

Mr. Roger Gaudet

Mr. John Crichton

Mr. Roger Gaudet

Mr. John Crichton

Mr. Roger Gaudet

Mr. John Crichton

Mr. Roger Gaudet

Mr. John Crichton

The Chair (Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.))

Mr. Larry Bagnell (Yukon, Lib.)

0950

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

0955

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

1000

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

The Chair

Mr. Jim Gouk

Mr. Stan Keyes

Mr. Jim Gouk

The Chair

Mr. John Crichton

1005

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

1010

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

1015

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

1020

Mr. John Crichton

The Chair

Mr. William Fenton (Vice-President, Finance; Chief Financial Officer and Treasurer, NAV CANADA)

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

1025

The Chair

Mr. William Fenton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. James Moore (Port Moody—Coquitlam—Port Coquitlam, Canadian Alliance)

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

1030

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

1035

Mr. John Crichton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. William Fenton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. Joe Fontana (London North Centre, Lib.)

The Chair

Mr. Joe Fontana

1040

Mr. John Crichton

Mr. Joe Fontana

Mr. John Crichton

Mr. Joe Fontana

Mr. John Crichton

Mr. Joe Fontana

Mr. John Crichton

Mr. Joe Fontana

Mr. John Crichton

The Chair

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

1045

Mr. Larry Bagnell

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

Mr. Larry Bagnell

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. John Crichton

The Chair

Mr. Joe Fontana

The Chair

Mr. John Crichton

The Chair

CANADA

Standing Committee on Transport

NUMBER 024

2nd SESSION

37th PARLIAMENT

EVIDENCE

Thursday, May 1, 2003

[Recorded by Electronic Apparatus]

¿ (0910)

[English]

The Acting Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good morning, colleagues.

Our order of the day pursuant to Standing Order 108(2) is an examination of the viability of the airline industry in Canada.

Our witnesses this morning are from NAV CANADA, John Crichton, president and CEO; and Bill Fenton, vice-president, finance; chief financial officer; and treasurer. Welcome back to the committee.

Gentlemen, you've been before the committee before. We'll get a presentation from you, and then we'll move to questions from committee members. Please begin when you're comfortable.

Mr. John Crichton (President and Chief Executive Officer, NAV CANADA): Thank you.

Mr. Chairman, members of Parliament, good morning. Bonjour, mesdames et messieurs.

Thank you for inviting me to appear before the committee as part of your study on the current state of the aviation industry in Canada.

For more than seven years now the key NAV CANADA stakeholders--government, airlines, general aviation, and unions--have worked together in a continuing effort to build a safe, efficient, and cost-effective Canadian air navigation system. We continue this work today under industry conditions that would have seemed unimaginable to most industry observers just a few short years ago. The urgency of the situation has not been lost on this committee, a concern that was evident in the report you issued several weeks ago. That report included specific recommendations on airport rents, the fuel excise tax, and the air transport security charge.

As well it indicated the committee's intention to look at air navigation fees. I am here to assist you in that task. I will provide background information on our service charges, and some comparisons with the tax regime they replaced, as well as other charges in the industry and the consumer price index. I will conclude with a look at the current industry downturn and its impact on NAV CANADA, including a brief discussion of the implications for our service charges.

But, first, I would like to provide a brief profile of NAV CANADA, the nation's provider of civil air navigation services. We are a private, non-share capital company with 100% of our financing from the public debt markets. We have issued some $2.2 billion in bonds, which are publicly traded. NAV CANADA is dependent on revenues generated from service charges applied to airlines and the owners and operators of aircraft. We do not charge passengers directly, nor do we charge airports. There are no government subsidies or guarantees extended to NAV CANADA. The only exception to this is the decision by the Government of Canada following the 9/11 terrorist attacks to provide to the entire aviation industry war risk and terrorism insurance in the absence of such coverage in the world insurance markets. Our company is governed through a stakeholder board of directors. The structure of the board ensures extensive involvement by stakeholders in the affairs of the organization.

NAV CANADA's top priority is the safety of air navigation across Canada and in the north Atlantic. We are regulated by Transport Canada in respect of safety, in a manner similar to which Transport Canada regulates air carriers.

The professionals who work for NAV CANADA--air traffic controllers, flight service specialists, operational support specialists, electronic technologists, engineers, and others--are focused on ensuring safe, uninterrupted traffic flows. That involves daily collaboration with customers to reduce air traffic delays, which in turn reduces customer costs and improves the efficiency of the system. In just one example, we recently introduced a software-controlled display aid, which both improves safety and allows more efficient use of the converging runways at Calgary International Airport. As a result, more aircraft can use the runways during IFR weather conditions. Because of this the Calgary airport has put off its planned construction of an additional runway, saving our mutual customers many millions of dollars.

NAV CANADA has also developed an international reputation in the development of ANS technology. We recently announced the licensing of three of our products to the U.K.'s National Air Traffic Services, our counterpart in Great Britain. These contracts will see technology, already developed in Canada by NAV CANADA, bring in millions of dollars, which will offset our costs and help control the level of fees we charge in the future.

From the start NAV CANADA was conceived as the kind of organization that would focus on safety and efficient flight operations, minimizing unnecessary costs in the process. That is one of the reasons we have a corporate structure and legislated financial mandate that prohibit individuals from profiting. Because there are no shareholders, there are no dividend payments. While bond financing comes at a price, it is substantially less on an ongoing basis than a share capital company would have been. In practical terms this means that the company attempts to balance revenues and expenses, operating on a break-even basis. Our service charges are essential to this entire process.

¿ (0915)

The Civil Air Navigation Services Commercialization Act, CANSCA, sets out the charging principles by which we must abide. They include key elements such as safety, non-discrimination, financial transparency, limits to charges in the north, and other key principles. CANSCA also spells out our announcement requirements for any changes to service charges, and it mandates a 60-day consultation process as well as an appeal provision. NAV CANADA is restricted by CANSCA from setting its charges above the level that allows us to meet our financial requirements for the provision of ANS services. Moreover, these financial requirements are defined in CANSCA for greater certainty. CANSCA requires us to apply any non-aeronautical revenues, such as from the sale or leasing of technology and equipment, to reduce those financial requirements. Any excess revenue must, as a consequence, be returned to customers, normally in the form of lower future fees. Conversely, any shortfall must be borne by customers in the form of higher future fees.

How do NAV CANADA service charges compare to the old air transportation tax, ATT, which they replaced? How have they evolved since March 1999, when they were fully introduced? In September 1999, not long after our fees were fully introduced, they were lowered by 11%. Despite the impact of the post-9/11 downturn, they are still 3% below their original level. They are currently about 35% less than the old ATT, which was paid by passengers to the federal government. For example, on a typical $500 round-trip ticket from St. John's, Newfoundland, to Toronto, the old air transportation tax would have been $34.60. Our fees, if applied on a per-passenger basis assuming a load factor of 75%, would amount to $22.82.

Let's compare this to the evolution of the air transportation tax from the period of its inception in 1974 to 1997 when it began to be phased out. In that timeframe the tax increased by 1,000%, while the consumer price index rose by just over 200%. There is a chart in our materials that compares the evolution of our charges with the consumer price index in recent years. As you can see, the CPI growth has exceeded the growth in our charges by at least 10 percentage points over the last four years.

Let's look briefly at how our charges compare to those of the major airport authorities in Canada. As I have said, NAV CANADA's charges are still 3% below the level at which they were introduced. On the other hand, those of the Vancouver, Toronto, Montreal, Ottawa, Winnipeg, Calgary, and Edmonton airports have gone up, as a group average, anywhere from 76% to 141% from 1997 to 2003, depending on the type of aircraft being used.

How do our fees compare with other ANS organizations around the world? The answer is very favourable. We have some of the most competitive fees in the world, as you will see in the charts in our slide package provided to you this morning. One of the main reasons for this is the cost efficiencies that have been achieved by NAV CANADA since 1997. Following the privatization, from 1997 to 2001, NAV CANADA undertook a significant restructuring, which involved a workforce reduction of 1,000 employees, along with consolidation of regional offices and streamlining of administrative and other functions. At the time of privatization overhead and administrative costs amounted to 22% of operating costs. Today they amount to 9%. Cumulative savings up to August 31, 2002, have amounted to $427 million, passed on to customers in the form of lower rates.

¿ (0920)

We have also managed to reduce costs even further as part of our program to mitigate the impact of the current industry downturn. Following the terrorist attacks of September 11, we saw a significant decrease in air traffic volumes. The decrease amounted to 10% in 2001-02 compared to the prior year. Despite some growth compared to last year, traffic is still trailing the period previous to the terrorist attacks by close to 7%. We now fully expect the war in Iraq and the SARS issue to further depress traffic and thus our revenues. In response to these conditions our approach has been to continue to reduce discretionary costs, by $42 million in 2001-02 and a further $34 million this year; to draw down our rate stabilization, or rainy day, account, by $75 million to a deficit position; and to increase service charges to within 3% of their original level. We implemented salary and fee reductions for managers, executives, and board members in 2001-02. We have now implemented a further freeze in management and non-union salaries to August 2004. We have proposed a wage freeze of some $43 million for unionized staff for the period prior to August 31, 2002. We've negotiated supplier discounts and are accessing new non-aeronautical revenues.

Mr. Chairman, the level of our fee increases since 9/11 needs to be put in perspective. For example, a 1% increase in our fees would translate into the following per-passenger increases on a one-way ticket: 8¢ for Ottawa-Toronto, 19¢ for Toronto-Edmonton, and 21¢ for Halifax-Calgary. I am not trying to minimize the impact of an increase in NAV CANADA fees. Indeed, NAV CANADA has gone out of its way to ensure that this is a last resort. Our approach is to increase fees only when absolutely necessary for the integrity of the air navigation system and only in the context of a balanced program to effectively manage our own costs and look for other sources of revenue.

However, this challenge has grown along with the combined impact of those negative industry trends. We are now facing a cumulative deficit since 9/11 of $176 million by August 31 of this year. The company has decided that the prudent course is to begin recovering this deficit by an approach that balances revenues and costs in the 2003-04 fiscal year. With this approach the cumulative deficit would be recovered over a five-year period. Our rate stabilization account would be replenished up to its original $50 million within that period. This will involve a further increase in service charges, which we intend to announce by about May 15 for consultation as provided for in CANSCA, to be implemented August 1, 2003. The amount of that increase will depend upon several factors, such as the updated traffic outlook and our success in clearing the way to enter into a lease-leaseback transaction, which would yield significant other revenue for the company. This type of transaction presents an opportunity for significant relief at a critical time in the industry and has already been completed by five other ANS organizations in other countries; namely, Germany, Holland, Switzerland, Australia, and Austria. The main outstanding matter is the resolution of a withholding tax issue with the federal government, and we are hoping that this will be settled in the near future. Meanwhile, our cost reductions continue, with a freeze in non-operational hiring, significant additional reductions in discretionary costs, the management salary freeze I mentioned earlier, and the proposed wage freeze for unionized employees.

On a final note, there is no one in the aviation industry today that can understate the serious nature of the current financial crisis. I know that in my career it's the worst I have ever seen. That's why we are doing all we can at NAV CANADA to mitigate the impact on our customers and on the company. At the same time the industry has always recovered from its downturns in the past, and I see no reason to doubt that recovery will eventually come. But until it does, we at NAV CANADA will do our part, while continuing to ensure the safety and integrity of the air navigation system for our customers and for Canadians.

¿ (0925)

Thank you again for this opportunity, and I would be happy to try to answer questions, Mr. Chairman.

The Acting Chair (Mr. Stan Keyes): Thank you very much, Mr. Crichton, for your presentation.

I should explain to the committee that the member for Hamilton West is sitting in as the chair this morning because our chairman, Joe Comuzzi, is at a meeting until about 9:50 this morning. I don't doubt for one moment that he has that meeting because on my way in this morning I saw him walking in the rain to that meeting. So it has been verified.

I want to thank you, Mr. Crichton, for the services of John Morris, your director of communications, and Michelle Bishop, your manager of government and public affairs, who are sitting in the audience today. They have been most helpful and accessible to members who have any questions or concerns. So I want to thank them as well for their input to the members of the committee.

I'll reserve my questions for the end.

Mr. Gouk, do you want to begin?

Mr. Jim Gouk (Kootenay—Boundary—Okanagan, Canadian Alliance): Sure, Mr. Chairman.

Having spent 22 years in this particular industry, it's interesting to see the evolution as it takes place now, because a lot of things have changed since I left.

Maybe we could start with Air Canada, because that has a lot to do with our asking you to come before us. Could you tell us in round figures approximately how much Air Canada is in arrears to you right now, what their ongoing regular fee is, and what percentage of your overall revenue stream comes from them?

Mr. John Crichton: Air Canada represents about 28% of our total revenue. The amount of money owing to NAV CANADA by Air Canada at the time of the CCAA filing was just under $45 million.

Mr. Jim Gouk: What is their regular fee? How would they normally pay, weekly, monthly? How does it work?

Mr. John Crichton: The normal course up until April 1 had been that our billings were made at the end of every month, and the bills were due and rendered. However, there was an interest-free grace period of 45 days. That is now 30 days. Essentially, the average receivable is about 45 days from date of flight, if I could put it that way, and we have now made that interest-free period 30 days. But for certain customers who are experiencing financial difficulties we do impose accelerated payment terms. At the present time we are working out with Air Canada an accelerated payment plan, which we hope to be able to get mutual agreement on. We don't have it as yet, but we are in active discussions with them on that.

Mr. Jim Gouk: But what would be the norm for either a weekly or monthly fee from Air Canada?

Mr. John Crichton: For Air Canada it's $4 million to $5 million a week.

¿ (0930)

Mr. Jim Gouk: As you have said in your presentation, if you have excess revenues, you pass them back to the customers, but if you have shortages, that has to be reflected in fee increases. If you are out 28% of your revenue, then you have to have about a 35% increase in your fees to balance that out.

Using your formula, based on a 75% load for $500 worth of airfare, on a $1,500 ticket you would have to increase the NAV CANADA fees by about the original amount of the airline security tax, $26, which everyone seemed to think was rather devastating to the industry. Do you see any way around that in the short term if you don't start getting your revenue flows from Air Canada?

Mr. John Crichton: I think I should make it clear that we are not out 28% of our revenue. We are out about $45 million, which, in the context of our annual revenue of $900 million-plus, is a one-time bad debt expense, if I could put it that way. On an ongoing basis from the CCAA filing Air Canada is to be paying its bills in the ordinary course of business. So we have a one-time event. If we were to recover it over a five-year period, which we normally would in a case like that, its impact on future fees would be about 1% .

Mr. Jim Gouk: I note that. I'm more concerned about your loss of revenue stream at this point in time. Given that your reserves are gone, if you do not start getting these payments from Air Canada, then on an ongoing basis they represent, as you said, 28% of your revenue.

Mr. John Crichton: I think that's somewhat hypothetical. If Air Canada continued to operate but wouldn't pay us, we would not accept that.

Mr. Jim Gouk: I understand that.

Mr. John Crichton: We would take steps to enforce payment. We have no reason to believe that's going to happen. Certainly, the court order makes it very clear that we and other suppliers are to be paid in the ordinary course of business going forward, and we have no reason to believe that we won't be. We certainly are taking all prudent steps to ensure that we are, and we have a number of ways and means of ensuring that and obtaining security to ensure that happens.

Mr. Jim Gouk: Somebody suggested that I shouldn't be so pessimistic. The reality is that you have to look at a worse-case scenario and then build from there. In a worse-case scenario that would be the impact. You must be looking at a variety of scenarios. Obviously, if something catastrophic were to happen to Air Canada, there wouldn't simply be a big void there that would stay forever. Undoubtedly, other carriers would come in.

How urgent is it for you at this point in time to rebuild your reserves so that you can do some balancing as this transition takes place? Are you basically out of reserves for that purpose now?

Mr. John Crichton: That's a good point. The reserve account that I referred to is the rate stabilization account. We had been carrying around $50 million. Prior to 9/11 we had stress tested it, and it seemed to be a reasonable number to take the kinds of shocks the industry usually experiences every few years. No one ever dreamed of what 9/11 was going to mean. Obviously, we have learned that particular reserve was inadequate. We have other reserves. We have debt service reserves. We have a $750 million line of credit, which we haven't touched, and so on. However, in terms of operating the business on an ongoing basis, at some point we need to get things back in balance.

As I indicated, we are about to incur a cumulative deficit of about $176 million. At some point we have to adjust the rates to start recovering that. We think the prudent way to do that, taking into account all factors, is to recover that over a five-year period and not to try to recover it all overnight. The company does, as I say, have those other reserves. We have the ability to recover those costs, but not all at once. We think that's quite acceptable from our business point of view. It is, I think, a responsible way to try to deal with the crisis that we and our customers are in.

¿ (0935)

Mr. Jim Gouk: I would assume that a significant portion of your cost is for labour.

Mr. John Crichton: Yes. About 72% of our operating costs are salaries and benefits. It's quite high.

Mr. Jim Gouk: You have a number of unions, several of which are under contract negotiation at this time. What kind of impact does that have on you?

Mr. John Crichton: It is one of the missing pieces of the puzzle, if you will, in our current mitigation plan. We requested that the bargaining agents accept a wage freeze up until the end of last August. With the exception of two small unions, so far we have not been able to reach agreement with them on that. It's obviously a very significant amount of money. If the freeze goes through up until the end of August, that's about $43 million in savings right there, and that's obviously needed. Those agreements in most cases are subject to mediation or arbitration, and we will eventually get a resolution of them. Then we'll know the answer to that part of the equation.

Mr. Jim Gouk: If any component of your organization is shut down due to a withdrawal of services by a union, it basically shuts down the air transportation industry in Canada. What is the status of essential service rulings within those various union groups?

Mr. John Crichton: There is a provision under the amended Canada Labour Code for the Canada Industrial Relations Board to make a determination before a strike can go ahead as to whether or not a withdrawal of services would create an immediate danger to public health and safety. The main union we went through that proceeding with is the Canadian Air Traffic Control Association. That process is not quite complete. It ended up requiring that an aeronautical study be conducted, as required under the aviation regulations, as to whether or not such a withdrawal of services could be done safely. That study was completed and submitted to the CIRB on April 1. The study found that it could not be done without increasing the risks to safety in an unacceptable manner. The CIRB is presently considering that study and the next course of action. We don't have a firm date on when they will render a decision, but I would expect that sometime in June we should get close to a final resolution of that issue.

The Acting Chair (Mr. Stan Keyes): Thanks, Mr. Gouk.

Mr. Jim Gouk: If I could just clarify a point, notwithstanding a mediator's report, which is due imminently, no labour disruption could take place until the essential service report is finalized.

Mr. John Crichton: Yes. There is still a fair bit of process required at the CIRB. It would depend on their ruling. If they find that the safety issue is valid, as the aeronautical study says, then presumably there wouldn't be any withdrawal of services.

The Acting Chair (Mr. Stan Keyes): Thanks, Jim.

Colleagues, I might draw your attention to the NAV CANADA deck that was provided to you, particularly page 20, where we have an illustration of the impact of fee increases by NAV CANADA. For example, for Ottawa-Toronto, with a 75% load factor of 132 seats on the aircraft--you can correct me, Mr. Crichton, if I'm wrong--if you were to impose a 1% fee increase per passenger, it would amount to 8¢.

Mr. John Crichton: That's correct, Mr. Chairman. We used the 1%. So if it were 10%, it would be 80¢.

The Acting Chair (Mr. Stan Keyes): So for less than the price of a Tim Hortons' coffee in the morning, the viability of NAV CANADA would be more solid if 10% or 80¢, for example, is all that NAV CANADA needed to get itself on a firm financial footing again without the risk of continuing to incur any kind of deficit and a return to a non-profitable status. Is 10% the figure you're looking at, or is it 3% or 20%? What would put you on that firm footing again?

¿ (0940)

Mr. John Crichton: Unfortunately, Mr. Chairman, I'm not at liberty today to go into what that fee would be. As I indicated in my remarks, the exact number will depend on two main things at this point in time: one is our updated traffic outlook and the second is whether or not we believe that the QTE lease transaction will go through. I would simply indicate that on the low end there is a single digit and on the high end there is a double digit depending on what the assumptions are. Unfortunately, due to securities laws and other issues, I can't be more specific than that today.

The Acting Chair (Mr. Stan Keyes): That's understandable.

The only alternative to increasing by a percentage the cost per passenger, whether it's a single digit or a double digit, as you say, would be a request to the federal government to try to ease the pain of NAV CANADA. Is that even on the radar screen for NAV CANADA?

Mr. John Crichton: We have a request before the federal government now, which is under active consideration, to facilitate this lease transaction. There is a minor amendment required to a tax provision, which is already in place for the aviation industry. We're simply trying to get it to extend to our particular situation. That would be an enormous help, and it wouldn't cost the government or the taxpayers anything. As I say, that is now under very active consideration.

The government is helping everybody on the war risk insurance issue.

We purchase a number of goods and services from the federal government. These are contractual undertakings, and they come up for renewal every year. There is usually a COLA clause, CPI, etc. I'm not asking them to lower what we pay them, but perhaps they could restrain from collecting the CPI for a year or two. It would certainly help the cause. But we are not coming to the government for a bailout.

I must say, and I'd stress to the committee, that NAV CANADA does not have a liquidity crisis. NAV CANADA is very strong financially and ongoing. Our customers have a liquidity crisis, very much so. If the government is going to give assistance in the form of real money, perhaps it should go to the customers. As you have seen from our presentation, I think we've done a pretty good job of managing our costs, and by any measure we're quite efficient . We do not have a liquidity crisis. But for other reasons, which we all know, our customers do. In terms of cash assistance or whatever it might be, to them that would be the most productive. I think we can manage through this if our customers can be made reasonably healthy.

The Acting Chair (Mr. Stan Keyes): As you are probably aware, this committee has been very active on that front and has made recommendations to the government on how we can help the airline industry.

Mr. Gaudet, s'il vous plaît.

[Translation]

Mr. Roger Gaudet (Berthier—Montcalm, BQ): Thank you, Mr. Chairman. It's the very first time I'm attending a meeting on the Air Transport Industry.

How many employees do you have at NAV CANADA?

[English]

Mr. John Crichton: We have 5,500 and change.

¿ (0945)

[Translation]

Mr. Roger Gaudet: OK! And your revenue is $900 million per year.

[English]

Mr. John Crichton: I believe that last year's revenue was approximately $900 million.

[Translation]

Mr. Roger Gaudet: You mentioned that you have an accumulated debt of $176 million.

[English]

Mr. John Crichton: We were projecting at the end of this fiscal year, which is August 31, an accumulated deficit from the prior year and this year of about $176 million. So that's two years' worth of losses since 9/11.

[Translation]

Mr. Roger Gaudet: What are the main reasons for this deficit? Did it appear only after 9/11?

[English]

Mr. John Crichton: The main reason is the drop-off in traffic, which was precipitated by September 11. It has continued steadily along and in fact has been exacerbated in recent months by the Iraq war, the Air Canada issue, SARS, and so on. That has had a tremendous negative impact on our revenue. We're a company that basically tries to set the rates we charge in accordance with our costs. Our revenue took a nose-dive. As a basic infrastructure provider, we have relatively fixed costs. It's not easy for us to adjust our costs downward. For instance, you can picture an air traffic controller sitting in front of a radar screen. Whether he is looking at ten, nine, eight, or seven airplanes on that screen, our costs don't change very much because we still need to have the controller there and the radar, the communications system, and the flight data processing systems working. We need all of that to work whether there are seven or ten airplanes. We don't have an ability to quickly lower those costs very much. Having lost that revenue has had a dramatic impact on our bottom line.

[Translation]

Mr. Roger Gaudet: In our report we make four recommendations concerning air transportation security among which are the following: The elimination of the Air Travellers Security Charge, the suspension of rental payments by airports, and a reduction by 50% of the federal aviation fuel excise taxe rate. If the government would meet your request how much would that bring into your coffers?

[English]

Mr. John Crichton: I believe that the recommendations this committee made actually don't directly affect NAV CANADA. They would assist our customers financially. I personally am not in a position to quantify the value. I think this committee is probably in a better position than I am. I believe there are probably several hundred million dollars in value from your recommendations. Obviously, as I said earlier, that would be a help to the liquidity position of our customers. It would put them in a much healthier position and in a better position to pay all of their operating costs, including our costs.

The Chair (Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.)): Mr. Bagnell.

Mr. Larry Bagnell (Yukon, Lib.): Thank you, Mr. Chair.

I promise not to talk about Air North, Mr. Chair.

After September 11 we had a very unfortunate situation occur. As you know, all the planes came to Canada. But there was a really bad situation in Whitehorse. Probably through miscommunication and the flashing of the hijack button, there was a supposition that those planes were being hijacked. So they came into Whitehorse with American military jets in tow, which of course terrified the population. Without giving away any secrets to the terrorists, I'm wondering if there have been improvements in the system of communications with regard to hijacking and the connection between the military and the company offices--that happened to be Korea and Anchorage--so that the likelihood of such a disastrous miscommunication occurring again would be reduced.

¿ (0950)

Mr. John Crichton: Mr. Bagnell, I'm quite familiar with that situation. I was present in our command centre when it was going on, along with the military people, and we were talking directly to Colorado Springs at the time. I think there was a miscommunication in the sense that it turned out to be some finger trouble in the cockpit and perhaps a language barrier between the Korean Air Lines pilots and the air traffic controllers in Anchorage. That is really how it got going. I think that as the situation unfolded, given the particular events of that day--and this came just two hours after the last airplane had hit the Pentagon--people weren't taking any chances. There was uncertainty as to whether or not that aircraft was under hijack.

Mr. Larry Bagnell: My question was whether any changes have been made.

Mr. John Crichton: I can't speak for the military. There are some changes underway, I understand, in terms of selecting appropriate emergency transponder codes. But I don't have the expertise to be able to say exactly where that stands right now. It's an airline operating issue. But I do believe that there are steps afoot to make sure that when those codes are put up, there's some degree of certainty that they are for real.

But it was, I think, the combination of a human error and then a language barrier in terms of trying to sort it out on that particular day. There was a lot going on, and a lot of people were not making any assumptions.

Mr. Larry Bagnell: What are the total expenditures to run NAV CANADA today compared to what it cost the government? Has the budget increased? If it cost the government $500 million to run NAV CANADA, is it $510 million or $490 million today? What is the approximate figure?

Mr. John Crichton: You can't make a comparison because the government's style of accounting was completely different from our accrual system of accounting. The government didn't actually have a set of books. For instance, a lot of the costs that were incurred in government were not solely within Transport Canada. They obtained services and support from many other government departments. However, the government did estimate just prior to the privatization that it was costing general revenues about $200 million a year to make up the difference for what was being collected from the air transportation tax, which was assigned against the air navigation costs. The government estimated that was a couple of hundred million dollars less than their costs per year.

We have reduced the cost of the service since we took over. As I indicated in my presentation, if you look at our fees today and if you express them on a per-passenger basis, you'll see that they're about 35% less than what the old air transportation tax was.

Mr. Larry Bagnell: So would it therefore follow that the costs for running NAV CANADA are less?

Mr. John Crichton: Absolutely. The old air transportation tax was supposed to finance the ANS. From its inception in 1974 until it was repealed when we took over, it was growing at five times the CPI. I believe that in the package we provided there is a chart that indicates that if you assumed that the ANS stayed in government and that same rate of costs continued, you'd find that the costs in government would be nearly double what they are today with us.

¿ (0955)

Mr. Larry Bagnell: How would the cost of the remuneration for the top echelon of senior management compare to when it was in government?

Mr. John Crichton: It's more.

Mr. Larry Bagnell: Even though your costs in general have gone down, those costs have gone up.

Mr. John Crichton: Absolutely.

Mr. Larry Bagnell: Why would that be?

Mr. John Crichton: We're a private company, and to be--

Mr. Larry Bagnell: If a person is doing the same job, why would we be paying more?

Mr. John Crichton: No, they're not doing the same job at all. This is a private company run on commercial business principles with a board of directors and a professional senior executive team. We have to attract and retain key executives, and in order to do that we have to be competitive in the marketplace. I have beside me Bill Fenton, our chief financial officer, who I think is one of the best chief financial officers in Canada. In order to keep him in this company and do the good work he is doing, I have to pay him at a competitive price.

Mr. Larry Bagnell: So you're saying that when the government does a task that is identical to the private sector, they hire less qualified, cheaper people. In your business the implications could be on safety. Here's a task transferred from the government to the private sector. You're still managing 20 employees or whatever you're doing. It's the same task, providing air navigation service. You're saying that in the private sector you pay this much more. Either the government is hiring less qualified people or the private sector is paying too much. I don't understand how you can pay more for the same task.

Mr. John Crichton: It's not the same task. In the privatization the entire structure of the business has changed, and the accountabilities and responsibilities of the managers have changed dramatically. That is not a criticism of anybody. But within government things are done in a totally different fashion, and the accountabilities and responsibilities are completely different.

Mr. Larry Bagnell: The responsibilities are different. You said that your costs have gone down, so you are actually managing a smaller budget. If you have less responsibility, wouldn't you require less remuneration?

Mr. John Crichton: Of the 1,000 employees who left during the restructuring, over 200 of them were management. In fact, on a per-capita basis more managers left than non-managers. So we streamlined and restructured the whole business.

I don't know what to tell you. There is lots of privatization around. I suppose you could look at CN. Paul Tellier took over CN, and I'm sure he made a lot more money than the individual who was there when it was a pure crown corporation. He has an executive team that makes a lot more money, too. Look at what they've done. We're simply doing the same thing. I think it's entirely consistent with any large private corporation.

Mr. Larry Bagnell: So if you had streamlined, you could have actually saved money on management. You said that you've cut out a lot of management.

Mr. John Crichton: We did. We took out $100 million a year in operating costs.

Mr. Larry Bagnell: I'm sorry, I missed Jim's questions, and I don't know if he asked this. I like your plan here, on your second last page, of all the things you have done. That's great. I'm just chatting about the increase in fees. The fixed costs for all the other private sector businesses that have taken these big hits, such as tourism and airlines, haven't gone down, either, but I don't think any of them have been able to increase their hotel room rates or their airline rates. I would think that they have had to find ways other than by increasing fees to survive this unfortunate decline in revenues. That would differentiate them from your plan, which includes an increase in fees.

À (1000)

Mr. John Crichton: As I indicated in my opening remarks, we have not simply relied on increasing fees. We have put in place a very strong cost-reduction program.

Mr. Larry Bagnell: I said that I liked that part of the plan.

Mr. John Crichton: We have put off balancing the remainder with fees for some time, actually. That's where the $176 million deficit comes from. But we cannot put that off forever. As the charts will show you, we have done a heck of a good job at reducing fees over the years. You cannot keep reducing fees or freezing fees at those levels forever. At some point one has to increase those fees a little bit. That's the point we're at now, and that's what we're going to have to do. I think that's a very balanced approach. I think it's still tremendous value by whatever measure or comparison you want to make.

Mr. Larry Bagnell: Thank you.

The Chair: Thank you.

Mr. Gouk, on a quick question.

Mr. Jim Gouk: I have just a quick comment to put things in perspective as much for Mr. Bagnell as anything else. I started working for the air navigation system in 1969 in the Pacific region. We had four-and-a-half management employees, and you could get things done. Over the period of the 22-and-a-half years I worked for them, that grew by over 300%. After having grown by over 300%, you couldn't get a damn thing done. Mr. Crichton can correct me if I'm wrong, but I think there used to be seven regions, and they now have it down to two. So they have gotten rid of a lot of people. They have put the responsibility for making decisions on a small number of people, and, by God, you had better pay them more if you're going to ask them to do that. When you have a few people making decisions, people know where to go. That was one of the problems under the old system. That's one of the reasons it had a $200 million deficit and why it's operating so much better now. So we need to keep things in perspective. We are talking as a committee about problems in the airline industry and who needs to change and how they need to change. I don't want to leave the impression that we need to tell NAV CANADA that they need to grow by 300% in their management area so that they can be more like the government was. God forbid.

Mr. Stan Keyes: Mr. Chairman, I just want to thank Mr. Gouk for his support of solid government policy.

Mr. Jim Gouk: I missed that, Stan. Is that a good thing?

The Chair: Would you like to carry on the conversation? I'll back off.

Some hon. members: Oh, oh!

The Chair: I apologize for being late. If you've answered this question, I'll get it from the transcript. Can you just explain where you derive your revenue from?

Mr. John Crichton: The majority of our revenues, Mr. Chairman, is derived from charges that we assess for the air navigation service we provide to people who own and operate aircraft. Ninety-five per cent or more of those revenues come from commercial air carriers, both Canadian and foreign. Only 3% or 4% come from what we call general aviation or privately owned aircraft, that type of thing. We have been generating other non-aeronautical revenues lately. As I indicated, we're having some success in selling to other countries some of the technology we've developed, and we hope to grow that portion of the revenues quite a bit in the coming years. But it's essentially from aircraft operations. Most of the revenue comes from a movement-based fee. The privately owned small aircraft just pay a flat annual fee of about $60 a year.

À (1005)

The Chair: Do you handle the military planes that are flying and that type of thing? Do you monitor those?

Mr. John Crichton: We provide service to military and other state aircraft. We do not charge them. When we privatized the system, it was agreed that the military wouldn't charge civilian aircraft at their airports, and we wouldn't charge theirs. But we have the right to charge civilian aircraft to use military services. There was an exemption for state-owned aircraft.

The Chair: What would the average charge be between Toronto and Vancouver?

Mr. John Crichton: I can't give you--

The Chair: Just name a location to location.

Mr. John Crichton: You named a longer haul route. On page 20 of the slide deck you'll see Toronto-Edmonton. It's a Boeing 767. That's a fairly large airplane. The current charges for that flight would be $2, 286. Sorry, I don't have the material with me to figure out what that would be per passenger, but I think it would be in the $18 to $20 range, or half that. Maybe that's on a round trip. We can provide that to the committee. We have charts that provide a complete breakdown for all kinds of aircraft on short, medium, and long haul; their seating capacities; the assumed load factors; and what the charge would be on a per-passenger basis.

The Chair: The airlines recover that because they charge the passengers a $20 fee.

Mr. John Crichton: It varies from airline to airline. Some assess a lower charge for a short haul. I think WestJet has $5, $10, and $15, depending on whether it's short, medium, or long haul. It's the airline's choice to surcharge that. We don't charge them on a per-passenger basis. It's just a function of the aircraft, weight, and distance. Most airlines, not all, have decided to surcharge it. But that's their decision.

The Chair: So it doesn't matter what kind of aircraft. It's a flat charge.

Mr. John Crichton: No. In terms of commercial carriers, it's a function of the size of the airplane, the weight of the airplane, and the distance flown. So the larger the airplane, the higher the unit rate. That's simply a reflection of the value of service because the larger airplanes have more seats on them. But it all smooths out on a per-seat basis, more or less, in the system.

The Chair: Is that synonymous with the way the United States operates?

Mr. John Crichton: No. The U.S. domestically still has the ticket tax that we used to have years ago. They have a 10% tax on every airline ticket, with no ceiling on the tax, by the way. We had a ceiling. They have no ceiling.

The Chair: So for a $5,000 ticket it would be $500.

Mr. John Crichton: That's right.

The Chair: That's pretty steep. So we're more competitive than the Americans.

Mr. John Crichton: Absolutely. The cost of running the FAA, which runs the air traffic control system, over the same six years that we've been privatized has gone from $8 billion a year to $14 billion a year.

The Chair: That's taken out of general revenue.

Mr. John Crichton: They get an allocation of that ticket tax. But it doesn't pay all the costs, so an allocation of general revenues is required.

The Chair: So their transportation system picks up some of the costs of their air traffic control system, whereas ours is pretty well recoverable through the charge to the customer by the airlines.

Mr. John Crichton: Our fees cover our costs. Some airlines pass that through as a surcharge. Some don't. Some just take it into their costs, like they do any other costs.

The Chair: Which airlines don't?

À (1010)

Mr. John Crichton: I think some of the smaller ones don't. Most of the foreign carriers don't. I'm sorry, Mr. Chairman, I don't have the list. There are a number who don't surcharge it.

The Chair: Let's say a KLM 747 leaves Toronto, and they're only going to be over Quebec and some of the eastern provinces, and then they're on their way across the ocean. Is that a fixed charge?

Mr. John Crichton: No. It's related to the weight of the aircraft and the distance flown. The distance flown will vary from day to day depending on the wind and where the oceanic tracks are set up. It won't vary that much.

Typically, you'd leave Toronto and fly up the St. Lawrence River valley or perhaps a little north of Ottawa here depending on where the wind is and where the oceanic entry tracks are. You're either over Newfoundland and Labrador or maybe a little south in the Gulf of St. Lawrence.

The Chair: In your report, Mr. Crichton, you talk about the deficit you're facing, and I would imagine that a good part of it is due to the Air Canada non-payment and then the creditor protection. Is that correct?

Mr. John Crichton: The deficit we're estimating at the end of August is $176 million, and $45 million of that would be attributable to the Air Canada filing. The rest is essentially a reflection of the reduction in traffic that started after 9/11 and has continued.The reduction in traffic, of course, reduced our revenue, and hence the deficit.

The Chair: Perhaps I can be more precise. You're not talking about a reduction in passenger traffic. You're talking about a reduction in plane traffic.

Mr. John Crichton: Exactly, in the movement of aircraft. The two are linked, obviously. As the demand for passenger traffic fell off, the number of aircraft flying also fell off as the airlines adjusted their capacity downward to meet the lower demand from their customers.

The Chair: Explain the leaseback proposal that you have, if you would, please.

Mr. John Crichton: It's known as a QTE. That stands for qualified technological equipment. In the United States the tax code provides for varying write-off periods or depreciation for owners of different types of equipment. The code provides what they call a QTE, which allows for a five-year write-off for the owner of certain types of equipment.There's a more favourable write-off for aircraft. This makes the U.S. a very competitive market in which to finance equipment because the lessors tend to share that more favourable tax treatment with their lessees. This transaction is actually a lease-leaseback. We never give up title. But we can share with the U.S. investors, which are typically very large financial institutions, household names, some of that benefit that comes from the provisions in the U.S. tax code for faster depreciation. Many of these types of transactions are done all the time. In the air navigation system world, five other countries have already done them, and several others are underway as we speak. That's essentially how it works from a financing point of view.

The Chair: The equipment doesn't move. It's in place. It's already purchased and paid for. The company sells it to an American concern, and title goes back and forth. You enter an agreement to lease it back at x number of dollars a month.

Mr. John Crichton: It's actually a lease-leaseback in our case. The title never changes. We retain title.

All of the payments under the lease are fully defeesed up front.

À (1015)

The Chair: They are what?

Mr. John Crichton: All the money that is required over the term of the lease to be paid to the lessor we have in cash, and it is put in trust right up front. We never have to worry about it. But there is a residual amount that comes to us, which is our share, if you will, of the benefit of the tax write-off.

The Chair: This is another band-aid solution.

Mr. John Crichton: No, I wouldn't call it a band-aid. It's a one-time way of obtaining money and realizing value. It's not going to happen all the time. Certainly, from a timing point of view it could--

The Chair: It can't happen. Once you sell it, it can't happen again. Two years from now you're not going to be able to lease your equipment and raise capital.

Mr. John Crichton: It's a unique situation. But the timing is quite good because we and our customers need that kind of assistance. It is a normal commercial type transaction that any company would enter into. It's an innovative way of doing financing. It has tremendous benefits. It doesn't have any impact on the operation of the system whatsoever. It's a plain, everyday transaction as far as we're concerned. It couldn't come at a better time. That's what we'd like to do. As I say, ANS providers in other countries have done them and are continuing to do them. It's a good “no cost to anybody” solution. There's no cost to the Canadian taxpayer and indeed no cost to the U.S. taxpayer because all the taxes are eventually paid. They're just deferred a bit.

The Chair: What dollar amounts are we looking at?

Mr. John Crichton: Mr. Chairman, I can't give you precise amounts, but we are looking at perhaps a couple of hundred million dollars in benefit here.

The Chair: If we analyze that transaction, you're going to raise money.The reason for doing it would be because another jurisdiction has an accelerated write-off contrary to our accelerated write-off. I'm trying to be succinct in putting it into perspective. Instead of depreciating at $100 a year, you can depreciate it at $1,000 a year because of the capital cost allowances in that country compared to our country. It's the same thing for truckers. Truckers are always here saying that they can't depreciate their trucks fast enough in Canada compared to the U.S. They're basically talking about the same thing, aren't they?

Mr. John Crichton: That's essentially it.The U.S. tax code provides for an accelerated write-off and ours doesn't. There is a benefit over time in the value of money that will be produced from that. We're simply accessing that.

The Chair: If we take that into the United States--and that relationship isn't as great as it should be today--are we not depriving the American taxing authorities of $200 million or $250 million in tax revenue to benefit Canadian business?

Mr. John Crichton: No.

The Chair: Why not?

À (1020)

Mr. John Crichton: The U.S. taxes on this whole transaction are all paid, Mr. Chairman. They're just paid over a longer period of time. Indeed, we think they actually collect more tax than they otherwise would.

Bill, you may want to comment.

The Chair: Just a minute, let me see if I have this. You have a profit in the company of $100. You enter into this transaction, and you're able to depreciate some equipment you buy for $100. That capital cost allowance negates the profit, yes or no.

Mr. William Fenton (Vice-President, Finance; Chief Financial Officer and Treasurer, NAV CANADA): That would be correct.

The Chair: All right. Say there's a firm in the United States that makes $100, and they're going to pay their tax on that $100, which is appropriate, of, say, $30. Because we allow this transaction to go on, they don't pay the $30 tax.

Mr. William Fenton: They do eventually. It's just the timing issue.

The Chair: So it's a tax deferral.

Mr. William Fenton: It's just a deferral. It's not a net tax out of the U.S. tax system. In fact, it puts a bit more money into the tax system at the end of the term of the lease.

The Chair: Do we have some kind of statement from the U.S. taxing authorities that they welcome this type of thing?

Mr. William Fenton: Yes. Extensive material has been developed in the U.S. to enhance this. In fact, a couple of proposals are in front of the U.S. Congress right now to enhance this program. It is also part of the U.S. tax policy to provide incentives and tax savings to the financial institutions that enter into these transactions.

The Chair: Mr. Fenton, if we had the same accelerated depreciation clauses on capital cost allowance in Canada, there would be no need to go into the United States for financing.

Mr. William Fenton: That's correct.

The Chair: If we enter into that transaction, how is withholding tax applicable?

Mr. William Fenton: Under Canadian law you have to withhold tax on rental payments. We're one of the few countries in the world that have that. The cost of withholding the tax would offset the benefit we would otherwise receive. Currently, in Canadian tax legislation there is an exemption for aircraft and aircraft equipment. We're asking the federal government to simply add us to that current exemption.

The Chair: I'm sorry, would you say that again, please?

Mr. William Fenton: Under the Canadian tax code, when you make cross-border lease payments to the United States, you have to withhold tax.

The Chair: Is it 10% or 15%?

Mr. William Fenton: Depending on the asset, I think it's closer to 15%. That cost would negate the benefit we would otherwise receive on this transaction. The benefit is in the 10% range. So when you get withholding tax in the 10% to 15 % range, the transaction would not proceed with that withholding tax clause. The other countries that have done these do not have that withholding tax problem, and they have proceeded with these transactions.

Today in the Excise Tax Act there is an exemption for aircraft equipment and aircraft. That was put in by the government back in 1991 to give airlines access to the U.S. capital markets. It is very effective, and most of the large carriers have taken advantage of that for the simple reason, as you point out, that they don't have that opportunity here in Canada. We're asking simply to--

The Chair: Include the air navigation end.

Mr. William Fenton: Practically speaking, the equipment on the aircraft is the equipment we talk to. So we're just at the other end of that communication equipment cycle.

The Chair: The Americans don't have any problem with that.

Mr. William Fenton: No. In fact, they are encouraging it. One of the things it does is stimulate the sale, leasing, and development of technology, and a lot of this technology is developed in the first instance in the U.S.

The Chair: That would give you the revenue to cover your deficit.

Mr. William Fenton: Yes. As you mentioned a moment ago, we have, hopefully, a one-time problem--September 11, the Iraq war, and now SARS. You look at the quantification of that, which is about $176 million, and at what we think the benefit is, a couple of hundred million dollars. We are trying to deal with that one-time problem with a one-time solution. That provides tremendous relief for the past. Then we drive on and get back to business going forward in the normal way.

À (1025)

The Chair: To close off on the lease package, you have to get a favourable ruling from Manley to include that stuff, and that's a goal.

Mr. William Fenton: That's correct.

The Chair: Is there anything you think this committee should do?

Mr. John Crichton: Mr. Chairman, if the committee could recommend from a policy point of view that the government consider our request favourably, that would be quite helpful. I would stress that the matter is under very active consideration with the government right now. We don't have a final decision yet, but they are actively considering it. Anything that the committee could do to encourage our request would be very helpful.

The Chair: I think it would be very helpful if you were to explain to the people with whom you are doing business in Finance that this would not reflect unfavourably on Canada with our friends in the United States.

Mr. John Crichton: Indeed, we have, Mr. Chairman.

The Chair: We have to get people back flying on airplanes in Canada. We can't go through many more of these crises.

Mr. Moore.

Mr. James Moore (Port Moody—Coquitlam—Port Coquitlam, Canadian Alliance): It's good to have ministers read reports, too.

The Chair: Yes.

I don't think anybody understands the serious nature of what we are faced with. We made some recommendations two or three weeks ago that are band-aid solutions--two years, one year, and so on--just to get the thing back on track. I'm approaching industry to do a huge ad campaign, which I hope you folks would participate in, to get Canadians back to feeling confident about using our airlines to travel, to take advantage of the lower rates, and to keep our fees down. For some reason or other we got way the hell out of competition, and we have to get it back.

In listening to you folks, you're right at the leading edge. What is it that you think we can do?

Mr. John Crichton: Mr. Chairman, I wish I could be more helpful to you, but, actually, in our business we respond to demand. We're not in the business of creating it.

The Chair: You must have some idea, Mr. Crichton. I can't believe that you can head up the organization without contemplating at different times how to improve it.

Mr. John Crichton: I used to be in that part of business.

The Chair: I know you were.

Mr. John Crichton: I think what we're seeing is a very unprecedented and unfortunate confluence of negative events, starting with 9/11 and progressing to the economic havoc and instability that caused, particularly in North America, which has fed on itself. You've seen as well the rise of the low-cost carriers both in Canada and the U.S. That has made life very difficult for the large, full-service, higher cost carriers, which have been around for decades. You have a weak U.S. economy, which was feeding that mix. We then have the continuing war on terrorism and the war in Iraq and the buildup to that. We have bankruptcy filings by United Airlines, USAir, and now Air Canada. Now there is SARS. If you package all of that up, there is certainly no way since the Wright brothers that you will ever find anything that even approaches those things. The good news is that in terms of the war, SARS, and hopefully the terrorism issue, these are things we're going to get through. The major carriers are going through a restructuring period now in terms of their costs. I think that will eventually work itself through.

I would just leave with a note of optimism on that subject. If you look at the history of air travel, say, over the last 40 years, it has consistently grown on average 5% to 7% a year. You have the cycles where it goes down. We had the oil embargoes, the recessions, the Gulf War, and these other things. But in the long haul, until somebody finds a way to move any one of us from point A to point B over a long distance other than in an airplane, we are going to continue to see growth in aviation. I think growth will return here once we can get past some of these current difficulties. We will get back on track. But we are going through a terrible time right now to get through this period.

À (1030)

The Chair: Using your great expertise in this industry--and you're not going to be held to account--what is this terrible period, and when do we expect it to start to resurrect itself?

Mr. John Crichton: The war is over, hopefully. Hopefully, SARS is dying out. There seems to be good news coming out of Toronto. It may not be so good in China yet. Hopefully, we can get those things out of the way. The U.S. industry seems to be restructuring. United Airlines now seems to have gotten an agreement with its unions, American Airlines got an agreement with its unions, and Air Canada is starting that process. Barring some other unforeseen negative events and assuming that the economies in the U.S. and Canada start to rebound a bit, we're hopeful that toward the end of this year we may see a return to a growth trend. It's going to take a couple of years, I think, to get people back and for the airline industry to become healthy.

The Chair: At what point does NAV CANADA start to break even again without a fare increase?

Mr. John Crichton: We could not break even without a rate increase. That's why we need to do it.

If you mean at what point in traffic growth, right now it would have to go overnight to double-digit traffic growth, which is not likely to happen, to get us back on track.

The Chair: You have to provide the service whether there is one plane or ten planes.

Mr. John Crichton: Exactly. Our job is to run it as efficiently as we possibly can. We have to be there when we have to provide that service. There is absolutely no question about that. We have to make sure that the safety standards are absolutely first-class. We as managers have to make sure that we are doing that efficiently, and that's what we're trying to do.

The Chair: This lease arrangement would give us the interim support so that you wouldn't have to increase the navigation fee at this particular time to assist the regeneration of the air industry. Is that correct?

Mr. John Crichton: We wouldn't have to increase it as much.

The Chair: Oh, I see, as much.

Mr. John Crichton: It wouldn't remove the need, but it would certainly make a dramatic reduction in what it otherwise would have to be.

The Chair: This will be my last question. If you got the favourable ruling from Finance, that would be basically a contribution from the federal government of how many millions?

À (1035)

Mr. John Crichton: It's not a contribution, Mr. Chairman. It doesn't cost Canadian taxpayers or the Canadian government a cent.

The Chair: I understand that, but it's not revenue that they would normally receive in the normal course of business.

Mr. William Fenton: The deal wouldn't go ahead without it, Mr. Chairman, so they wouldn't get it. It just wouldn't exist.

The Chair: No, I understand that.

When they get the favourable ruling, there's a tax break. What's that tax break? The Ottawa Senators went through the same thing.

Mr. William Fenton: No, this is not a structure in the tax system to remove or defer any tax in Canada. This is--

The Chair: No, I didn't say that. All I'm saying is that in order for us to assess how much we have to assist this industry--and we don't have the money to put out the same as you folks--we want to know what the dollar figure is if the tax law is changed to accommodate what you want to do.

Mr. William Fenton: That will allow us to go ahead with the transaction, and the benefit is a couple of hundred million dollars.

The Chair: We've already given $80 million on the security. Up to a certain point in time security was charged to the airlines. After a certain time the passenger picked up the cost of the security, and the airlines ceased paying the airports a security charge. That was $80 million. All we are trying to do is keep a running score of how much the federal government is coming to the assistance of the airline industry to get them mobile.

Mr. John Crichton: Mr. Chairman, you are trying to keep a scorecard, and I agree. But it's important to understand in the context of this transaction that there is no cash cost to the Government of Canada or Canadian taxpayers. This is an administrative amendment to allow something to happen that otherwise would not happen. By making it happen we in fact are bringing $200 million into Canada for circulation for the assistance of people flying by air, which otherwise wouldn't exist. This is not reaching into the pocket of Canadian taxpayers, not for 1¢.

The Chair: Let me make an analogy, Mr. Crichton. We made the recommendation that in order to assist the airline industry for the next two years, the airports should not be charged the rent that was paid to Transport Canada. That was $245 million or $285 million. There was no money changing hands. They just don't pay the rent.

Mr. John Crichton: That's my point. To take that example, if the government accepts this committee's recommendation on the airport rent, my understanding is that the general revenue fund of the federal government will have $250 million less per year in revenue than it otherwise would have. So you are out money. You are out cash. The government is net out of cash that amount of money each year. In our transaction the government is not out anything. It is creating the environment for us to bring $200 million in through an administrative amendment to the tax code. But if they don't make the amendment, they will not get any money. There won't be any money to collect in tax. So they're not giving anything up. But by making the amendment, we're bringing to it. It's a different issue, I think, than your recommendation on airports because the government is presently collecting that money. They're not collecting any money on our transaction right now, and they never will if we don't make the amendment. So it's a big difference, and I think it's important. What we are asking for does not cost the taxpayer or the government a cent.

The Chair: I agree with your first premise that it doesn't cost taxpayers a cent. I don't see it costing the taxpayer a cent on the airports, either, because there's some confusion as to whether we should charge rent at all. But that's neither here nor there. The airlines will scream and yell and complain all the way to the bank, but the--

Mr. Joe Fontana (London North Centre, Lib.): Mr. Chairman, can I ask a supplementary question?

The Chair: Yes.

Mr. Joe Fontana: Once you make these administrative changes, John, and you bring in $200 million, where will the $200 million go? Is there another part of the equation? As the chairman has indicated, the government will get $200 million that it presently doesn't have. Is that correct?

À (1040)

Mr. John Crichton: No.

Mr. Joe Fontana: Or you will.

Mr. John Crichton: We will.

Mr. Joe Fontana: What will you do with the 200 million bucks? You're going to give that to the airlines in some way, shape, or form in terms of support.

Mr. John Crichton: Mr. Fontana, any revenue that we bring in goes against our cost. We net it against our cost. So when we set our rates, which are based on our cost, we have reduced our cost essentially by $200 million, and therefore the amount of the rates we have to charge has....

Mr. Joe Fontana: How much of a decrease in the fees is the $200 million on a percentage basis?

Mr. John Crichton: I can't give that to you precisely, but I would say that in the current context of what we're looking at, this transaction is a double-digit impact. So it's very significant. If the value is in the $200 million range, then what we're looking at is roughly $200 million less that we would take from the customers in fee increases, which, given today's environment, would be a very nice thing to do, given how everybody is hurting.

Mr. Joe Fontana: These administrative changes of $200 million on the tax side, where is it coming from? Is that new generation of revenues? Who's actually paying for that? Is that a consumer charge? Is that just new revenue that's being generated from an entirely different area?

Mr. John Crichton: That's just new revenue for us, non-aeronautical revenue. It comes from U.S. investors, essentially.

The Chair: Mr. Bagnell.

Mr. Larry Bagnell: Thank you, Mr. Chair.

I'd like to make a couple of comments first. I don't think you should be so 100% positive as financial managers about all the down times being over. You talk about the economy. The Americans have just spent $75 billion on a war. The ramifications will come through. You talk about SARS. With our world becoming more globalized, that makes incidences like that more likely, not less likely. You talk about terrorism. There hasn't been an airplane incident or an incident in the tourism industry since September 11. One incident could cause more havoc. There has been very little time in human history when there hasn't been a war, so I don't think they're all over.

I'm delighted with what you've done in reducing the costs since you were transferred from the government. You stopped the inflation in the fees. In your deck of slides you show a comparison with other countries. I think all of that is great.

But just to play the devil's advocate, with regard to this very abnormal and tragic situation for the airline industry, which the chairman talked about, if the government were to suggest that there should not be any increase in fees at this time, hypothetically, what might your plan be to deal with that situation with regard to revenues?

Mr. John Crichton: If the government asked us not to increase our fees, I would have to ask the government to give us the money, then. We're a private company, and we have a requirement to break even at some point or other. We have to--

Mr. Larry Bagnell: The point I was making earlier is that all these other private companies are in this dramatically tragic situation, and we're not bailing out Air Canada or every hotel in Canada. They've also had to adjust to dramatically reduced revenues. They're certainly not going to get a cheque from the Government of Canada, and they're private companies.

Mr. John Crichton: As I indicated earlier, we are trying to solve this issue in our own way. We just had a long chat about one way the government at no cost could dramatically help that by making an administrative change.

Mr. Larry Bagnell: I'm totally in support of that.

Mr. John Crichton: I don't quite follow what you're saying. Are you saying, then, that Imperial Oil and Shell should not be allowed to charge the airlines whatever it costs them to produce jet fuel if you're going to tell us that we can't charge the airlines what it costs us to provide air traffic control and run the air navigation system?

À (1045)

Mr. Larry Bagnell: There are a lot of citizens who would like us to do something about fuel prices. The industry committee is carrying out a review of fuel prices starting this afternoon, I believe.

Mr. John Crichton: But we're an essential supplier--

The Chair: What's the increase going to be if the tax ruling is favourable? What do you anticipate the rate increase to be on the roughly $20 that it is now?

Mr. John Crichton: Mr. Chair, I can't give you the precise number for a number of reasons, but it would be a single digit.

The Chair: That's anywhere between one and nine.

Mr. John Crichton: That's right.

The Chair: If it's nine, that's 50%.

Mr. John Crichton: I don't follow your last comment.

The Chair: It's $20 across the board for the navigation fee that the airlines charge. Let's say it's a single digit and let's take the maximum, which is nine. That's about 50% of $20.

Mr. John Crichton: I can't confirm or deny your numbers, other than to confirm that a single digit is between one and nine. On page 20 of the deck there is a chart that shows short, medium, and long haul and what a 1% increase is. For instance, for Ottawa-Toronto 1% is 8¢.

Mr. Larry Bagnell: Are you talking about 29% or $29?

Mr. John Crichton: We're talking percentages.

The Chair: So you're talking about a single digit percentage increase.

Mr. John Crichton: Yes.

The Chair: I thought you were talking about a single digit rate increase.

Mr. John Crichton: We're talking about rates in terms of percentages, at least I thought we were.

The Chair: So then the maximum is about $2 on the $20.

Mr. John Crichton: It's sensitive to the route you're looking at, Mr. Chairman. The medium haul is 19¢. If you take that as your average, 1% is worth 19¢, so 10% would be $1.90, and 9% would be that much less.

The Chair: Unless you have some other wisdom....

Joe Fontana.

Mr. Joe Fontana: I understand, John, where you're coming from, if NAV CANADA could or would reduce their fees in order to help the airline industry.... You're obviously in a downturn. You're affected as much as anybody else. If the airports don't have to pay rent, that means that the government is going to have to come up with the money. That's what you said, that if you don't have this favourable tax thing, which I think makes an awful lot of sense.... Assuming somebody were to say that in order to help, somebody's going to have to come to the table with $200 million, your answer was that somebody is going to have to pay for this. That's where you get into whether or not the taxpayer eventually, no matter how the government decides to help the airline industry.... If it wanted to, it could do a fuel excise tax reduction and a rent reduction for airports, and it could lessen the NAV CANADA fees. It can do a whole bunch of things. At the end of the day somebody is going to have to pay. It's either the taxpayer or we can look to creative ideas, such as the one you've just put on the table on how to reduce some of your costs, which will be passed on to the airlines and will hopefully help out. So it's useful information.

The Chair: Thank you very much.

Mr. John Crichton: Thank you.

The Chair: The meeting is adjourned.