Canadian consumers are paying the price for Ottawa's aerospace subsidies
If Ottawa wants to embrace subsidy backed ventures, it should do so wholeheartedly. No more exceptions
A "positive development." That's how Ottawa described a recent deal between Bombardier and European aerospace stalwart, Airbus. Under the deal, Airbus gets controlling interest in Bombardier's latest offering, the C Series aircraft. The airplane has been a source of friction between Canada and the U.S. The reason? Subsidies.
Bombardier rival and American manufacturing giant Boeing had previously accused Bombardier of accepting millions in "unfair" subsidies: subsidies that allowed Bombardier to undercut Boeing on price, thereby stealing market share. The Trump Administration recently sided with Boeing, slapping Bombardier with steep duties.
Bombardier's dependence on subsidies from Ottawa is long-standing.The aerospace giant has, for over half a century, relied on taxpayer cash to boost its balance sheets. Ottawa justifies its actions citing the national interest; subsidy-backed growth – we are told – benefits all Canadians. Unless of course, other countries follow suit. That's when our politicians sing a different tune.
Agreement with United Arab Emirates
The aviation dispute with the United Arab Emirates (U.A.E.) proves this point. The Arab nation inked an air service agreement with Canada in 1999. Under the agreement, Emirati carriers — all of which are state owned — could service Canadian cities six times a week. Canadian airlines were free to reciprocate.
Shortly after the agreement was signed, the U.A.E. pushed for more access, citing increasing demand. Ottawa resisted and a diplomatic stalemate ensued: one that continues to this day.
Ottawa's explanation for its refusal was that capacity was meeting demand. The real reason? Subsidies.
Air Canada convinced lawmakers that its balance sheets were threatened by state-owned Emirati airlines. More competition would, after all, force Air Canada to drop its fares meaning less revenue. Lawmakers acquiesced and the status quo was preserved.
Governmental support of subsidized growth is, it would seem, a selective affair. Handouts to local businesses are acceptable, while handouts to foreign ones are not. Opposing subsidy-backed Bombardier is "protectionist." But the same reasoning doesn't apply where Emiratis airlines are concerned.
For better or worse, subsidies and aviation are inextricably linked. National governments — owing to national pride or politics — have long backed the aviation sector using loan guarantees, equity infusions, tax exemptions and grants.
Lack of competition
Air Canada in particular has received considerable state support over the years, both directly and indirectly. It partners with airlines that are themselves subsidized, such as Air China and Air India. And many of Air Canada's airplanes exist largely because of manufacturing subsidies. Yet when foreign companies follow Air Canada's lead, regulatory protectionism ensues.
Canadians deserve better than such duplicity. On a per kilometre basis, Canada ranks as one of the most expensive countries to fly into. One reason for its poor showing is the lack of foreign competition. Two carriers – Air Canada and Westjet – maintain a duopoly on the market which ultimately means high fares. No wonder millions of Canadians opt to fly out of U.S. airports instead of Canadian ones.
This must change. If Ottawa wants to embrace subsidy backed ventures, it should do so wholeheartedly. No more carving out exceptions. Local politicians can start by signing expanded air service agreements with countries like the U.A.E. This would afford Canadian travellers more competitive choice.
Of course, Ottawa could disavow aviation subsidies altogether. Government handouts to some firms ultimately disadvantage others. Yet subsidies are the norm rather than the exception. From the United States to France to China, the list of countries that prop up their local aerospace sector is endless. This makes Ottawa's repudiation of state support unlikely anytime soon.
That's good news for Bombardier. But consumers will continue paying the price.