Foreign investment limits ‘overly restrictive’ for Canadian airlines, says Laurier economist

Posted: Aug 04, 2016

WLU economist says limits to foreign investment for Canadian airlines no longer relevant

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The current 25 per cent limit on foreign ownership for Canadian-based airlines is based on decades-old thinking, and came into place during the Second World War, says economist Bill Morrison. (CBC)

Advocates in Canada are calling for the federal government to raise limits on foreign investment for airlines. And one expert thinks that’s not a bad idea.

“It’s pretty hard to come up with an argument for them not to raise it,” said Bill Morrison, who is an associate professor of economics at Wilfrid Laurier University, and has studied the aviation industry in Canada for years.

“The main danger is a political danger, not an economic one,” he said.

‘The main danger is a political danger, not an economic one’– Bill Morrison, economist, Wilfrid Laurier University

Outdated rules

International air traffic treaties and agreements today follow rules that are almost unchanged since the Second World War.

The focus is still on national security and airspace, things that don’t apply the same way today in a world with a privatized air travel industry, he said.

“We don’t have flag carriers anymore,” said Morrison. “We’ve been moving towards more broad liberalization in the aviation industry.”

Today there are fewer national airline companies and less emphasis on national airlines. Fifteen airlines including Air Canada have gone private and today there are fewer than 50 airlines world wide that are state-owned.

Limits to Low cost

Ultra-low cost airlines like NewLeaf, which took off for the first time this summer, are growing in popularity. Designed to serve secondary markets and regional airports, the companies offer flights from smaller airports like Hamilton, Abbotsford, B.C. and Moncton, N.B., rather than Toronto to Vancouver.

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Bill Morrison, Associate Professor of Economics at Wilfrid Laurier University, say’s there’s no real argument against raising the foreign ownership limit. (Wilfrid Laurier University)

The 25 per cent limitation on foreign ownership means new and smaller companies are severely limited on where they can get the capital to start flying. For those advertising as “ultra low-cost,” access to foreign markets is crucial.

“Lower cost of capital lowers your cost as a business,” said Morrison. “For those airlines to come into being or expand, they need access to capital, and foreign ownership is just international capital.”

Creative solutions

And larger companies like Air Canada and West Jet have found ways around the restriction to continue receiving support from foreign investors, said Morrison.

He says Air Canada formed ACE Aviation Holdings Inc. for that very reason

“They issue shares to that holding company, and those shares are held by foreign investors. ACE is regarded as a Canadian company, and so it doesn’t count as foreign ownership.”

“Foreign investors own about three quarters of the investment in ACE, but on the books they only own 17 per cent of Air Canada’s equity,” he said.

These solutions have allowed the airline to grow with support from international investors, something a number of domestic airlines can’t without a reconsideration of restrictions from the federal government.

Growing competition

The airline industry is just one of many in Canada that has little competition from restrictive federal regulations, and Morrison suspects that while the call for change has been growing, there will still be those who argue against the idea.

“You can bet Air Canada does not relish the idea of increased domestic competition.”

And though the call for change is being led by the airlines themselves, he suggests that the ultimate winner is the consumer.

“People who like the convenience of going to a regional airport and avoiding the 401 are better served when we have smaller airlines like that,” he said. ” I would count myself as one of those people.”

“If smaller regional airlines would come in to Waterloo Regional Airport, its going to provide a service that we don’t currently have.”

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