Why 100% foreign ownership of the major airlines is on hold (even if it’s a good idea)

It costs a lot of money to be in the airline business. In 2015, it cost Air Canada more than $12.3 billion (or $236 per seat-trip) to keep the airline flying. The smaller WestJet cost a little over $3.4 billion to run, or approximately $213 per seat-trip. Even if half the passengers vanished overnight, most of those multi-billion-dollar costs would still need to be paid as overhead.

When fleets need to be renewed or IT systems need to be modernized, it can be helpful if the airline can turn to investors. But Canada’s major airlines are limited in who they can turn to by something that might seem rather petty in this day and age: where those investors live.

That’s because Canadian law requires that “at least 75 percent of the voting interests, meaning voting securities and the votes assigned to those securities, need to be both owned and controlled by Canadians.” In other words, foreigners are collectively limited to a 25-percent stake.

For years, this cap on foreign ownership has been seen as being of dubious value. Both Australia and New Zealand have allowed up to 49 percent foreign ownership of their international airlines, and 100 percent foreign ownership of strictly domestic airlines, since at least 2002 with no adverse effects. A working paper presented at the International Civil Aviation Organization’s 2013 Montreal conference painted the industry as being still subject to “a framework of restrictions developed in the first half of the 20th century at the end of an age of colonial empires” that are “no longer fit for purpose.” And an International Air Transport Association (IATA) report noted in 2007 that “removing ownership restrictions can also lead to increased investment in the sector . . . and a lower cost of capital as firms have access to wider and more efficient sources of finance.”

At last, momentum is building in Canada to allow foreigners a little more freedom to invest in Canadian airlines. A review of the Canada Transportation Act that concluded this past February recommended allowing up to 49 percent foreign ownership of Canada’s passenger airlines and complete foreign ownership of its cargo airlines.

The idea was met with mixed views in the industry. WestJet is said to favour raising the foreign ownership limit to 49 percent only for countries that allow Canadian investors the same privileges. Porter and Jetlines were said to be all for it, while Air Canada carefully maintained a poker face.

But why stop at 49 percent? Why not raise the passenger airline foreign ownership limit to 100 percent?

A big part of the problem can be found in those restrictions that limit international air traffic. When they fly between countries, airlines need to abide by rules set out by international treaties negotiated between Canada and foreign governments.

Most of those treaties, some of which are decades old, would bar any majority-foreign-owned Canadian airlines from serving foreign cities. For instance:

  • Canada’s agreement with Mexico says that either country has the right “to revoke, suspend or impose conditions” on an airline’s right to fly between the two countries if “they are not satisfied that substantial ownership and effective control of the airline are vested in [the country’s government] or its nationals.”
  • Canada’s agreement with the European Union says that a Canadian airline can only serve the E.U. if “effective control of the airline are vested in nationals of Canada, the airline is licensed as a Canadian airline, and the airline has its principal place of business in Canada.” Similar restrictions apply to E.U. airlines flying to Canada.
  • And Canada’s agreement with China allows China to block any seemingly Canadian airline if “they are not satisfied that substantial ownership and effective control of the airline” rests with Canadian citizens. Again, Canada can apply the same requirement to China’s airlines

It is possible that the basis for those restrictions will eventually be worked around. As the IATA’s 2007 report noted, international safety standards were already taking shape when the report was being written (including an operational safety audit that was to be mandatory for all IATA member-airlines starting in 2008) that would prevent airlines from adopting the flags-of-convenience often used in the cruise ship industry; thus, safety standards are no longer a particularly compelling reason to block foreign ownership among the countries whose airlines already have excellent safety records.

And while there were approximately 3,000 international agreements regulating air travel in 2007, only 200 of them already covered 75 percent of passenger traffic, greatly simplifying the process of revising those treaties to allow full foreign ownership between countries with similarly high standards.

There’s no longer any need to fear American or German or Australian or Japanese or British ownership of Canadian airlines. Indeed, the easier it is for Canadian carriers to get investment from abroad, the more robust the Canadian system will be. Until 100-percent foreign ownership can be allowed without running afoul of decades-old international treaties, raising the foreign ownership limit from 25 percent to 49 percent would be a fine start.

 

Demographic shift putting dream of lower taxes, balanced budgets and no cuts out of reach

By all indications, Manitoba’s provincial election on Tuesday is going to result in the election of the first Progressive Conservative government since 1999, with Brian Pallister being sworn in in late April or early May as Premier of Manitoba. As Pallister and his cabinet settle in to office, they will go through a ritual that all new governments go through: briefings by department staff who will explain the cold, hard realities that they will have to deal with as the excitement of winning an election wears off.

One of those cold, hard realities to be anticipated will be an update on how changing demographics will affect the province’s finances. The heavy influx of immigrants into Manitoba in recent years paints a picture of a young province; but the population data tells a different story.

Statistics Canada periodically updates its population projections for each Canadian province and territory, and its projections of population by age are sobering.

Over time, the balance between working-age Manitobans aged 15-64 and retirement-age Manitobans aged 65-plus has been shifting. Forty years ago, in 1976, there were 6.1 working-age Manitobans for every retirement-aged Manitoban.

Thirty years ago, in 1986, it was 5.3. Twenty years ago, in 1996, it was 4.8; rising slightly to 4.9 in 2006.

But despite the arrival of younger immigrants by the thousands, that ratio has resumed its decline over the past 10 years.

Currently, there are about 4.4 working-age Manitobans for each retirement-age Manitoban. And according to Statistics Canada’s M1 –medium-growth, 1991/1992 to 2010/2011 population trends, in just 10 years time, there will be one less person on the working-age side of the balance than there is today — or 3.4 to 1.

The change is expected to continue in this direction into the mid-2030s, when there will be three working-age Manitobans for every retirement-age Manitoban.

Number of working age Manitobans per retirement-age Manitoban by year. Based on Statistics Canada's Projected population, by projection scenario, age and sex, as of July 1 -- M1 medium-growth, 1991/1992 to 2010/2011 scenario.

Number of working age Manitobans per retirement-age Manitoban by year. Based on Statistics Canada’s Projected population, by projection scenario, age and sex, as of July 1 — M1 medium-growth, 1991/1992 to 2010/2011 scenario.

Why does this matter? As people retire, their spending changes. If you’re a working-age person, think of what you spend your money on today: transportation to and from work, food, clothing, shelter and income taxes.

Now think about how that would change if you were a retiree. You wouldn’t need to drive around so much (or buy a car or fill it up with gas as often). You would likely eat out less; you wouldn’t need neckties or dress shirts anymore except for special occasions; you may very well never be in the market to purchase a home ever again.

All of which means you’ll be paying less in sales taxes, even if the rates stays the same, and less in other government fees and taxes. That includes income tax, since you’ll be earning less. (As you can see below, the average Canadian household in which the designated “reference person” was aged 55-64 years in 2014 paid $18,220 in income tax. But when the “reference person” was aged 65 or older, average income tax payments dropped by more than half to $7,851.)

Average annual spending by Canadian households, by age of designated "reference person", Canada 2014

Average annual spending by Canadian households, by age of designated “reference person”, Canada 2014

The number of households in Manitoba (and throughout much of Canada) in which that “reference person” is one of those lower-spending 65-plus retirees is going to continue growing much faster than the number of younger, higher-spending households.

That’s going to put a bit of a squeeze on government finances, and on the businesses that sell those things on which spending drops the most in retirement: department and business-wear stores, restaurants, auto dealers, gas stations, realtors and so on.

Among the few areas where spending is higher among 65-plus households than it is among the 55-64s: direct health care costs, by $211 per year at the national level.

With that, the governments of the next 20 years will need to deal with a world where satisfying the dream of a balanced budget every year, no tax increases and no controversial cuts is an increasingly difficult task.

Palmerston, Larry and the Acoustic Kitty

A new hire started work this week at Britain’s foreign ministry — and his lunch break lasts all day long.

Palmerston, a black-and-white shorthair cat, is the new Chief Mouser at the Foreign and Commonwealth Office’s headquarters on London’s King Charles Street, kitty-corner (pardon the pun) to Parliament and just around the corner from the prime minister’s offices at 10 Downing Street.

Like his counterpart Larry, the brown and white tabby inhabiting 10 Downing Street, Palmerston’s duty will be to help the Foreign and Commonwealth Office (FCO) deal with its persistent rodent problem. To welcome Palmerston to the team, the FCO issued a tongue-in-cheek news release, quoted in The Telegraph:

Palmerston is HM Diplomatic Service’s newest arrival and in the role of FCO Chief Mouser will assist our pest controllers in keeping down the number of mice in our King Charles Street building.

Palmerston’s domestic posting will have zero cost to the public purrse as a staff kitty will be used to pay for him and all aspects of his welfur.

But has anyone thought to check Palmerston — or Larry — for any smuggled goods? To make sure he isn’t a secret agent for the Americans, the Russians, the Israelis or the Chinese?

Believe it or not, there actually was once an attempt to use a cat to commit international espionage.

In the mid-Sixties, the ever-imaginative CIA explored the possibility of enlisting a cat, with a microphone and transmitting antenna implanted in its body, to eavesdrop on conversations. It became known as the Acoustic Kitty Project.

But, as former CIA officer Victor Marchetti told The Telegraph in 2001, after the Acoustic Kitty documents were finally declassified, the idea of using a cat to perform espionage quickly ran into problems.

“They slit the cat open, put batteries in him, wired him up. The tail was used as an antenna. They made a monstrosity. They tested him and tested him. They found he would walk off the job when he got hungry, so they put another wire in to override that.”

But finally, the CIA had the Acoustic Kitty ready for his (or her?) first public test. According to Emily Anthes in her 2013 book Frankenstein’s Cat, “CIA staffers drove Acoustic Kitty to the park and tasked it with capturing the conversation of two men sitting on a bench.”

Cats tend to have a mind of their own, however. Instead of making his way to the park bench, Anthes wrote, “the cat wandered into the street, where it was promptly squashed by a taxi.”

“There they were, sitting in the van with all those dials, and the cat was dead,” Marchetti recalled decades later to The Telegraph.

Estimates of the cost of the Acoustic Kitty project range from $10 million to $20 million.

Despite the cat-astrophic flop, one of the released (but still partially censored) documents praises the researchers who worked on it.

“The work done on this problem over the years reflects a great credit on the personnel who guided it . . . [and their] energy and imagination could be models for scientific pioneers.”

But, “our final examination of trained cats for [censored] use in the [censored] convinced us that the program would not lend itself in a practical sense to our highly specialized needs.”

 

* — See also the World War II Bat Bombs experiment, which tested the possibility of releasing bats over Japan with tiny bombs strapped to their bodies, and having them fly into the country’s many wooden structures to start fires. The tests took a disastrous turn when some of the bats were accidentally released, setting both a hangar and a general’s car on fire.

April 19 election likely to end NDP’s long run in office

On April 19, Manitobans will go to the polls to elect 57 members of the provincial Legislative Assembly. That election will either turn the governing NDP into an opposition party in the Legislature for the first time since 1999, or, in the unlikely event that it is re-elected, into a statistical oddball.

Governments go through a life cycle. They start off fresh and new, even exciting sometimes. But, the longer they live, the more battle-weary they become. Sometimes a periodic shake-up and the introduction of new faces prolongs their lives, as it did for the long-running Alberta Progressive Conservatives who governed that province continuously from 1971 to 2015.

More often, however, governments find themselves running into natural limits on how long they can govern before the public tires of them.

Where are those limits? To figure that out, I looked at the life span of 41 Canadian provincial governments entering office after Jan. 1, 1960, and which left office prior to Jan. 1, 2016. By “government”, I mean a continuous period of party-rule. Thus, the current NDP government in Manitoba would count as a single government, even though it has been led by two premiers: Gary Doer (1999-2009) and Greg Selinger (2009-present).

The average lifespan of a provincial government during that time was 9.8 years, dropping to 8.9 years if one excludes Alberta’s 43.7-year Progressive Conservative government as an anomaly. This suggests that a government enters a vulnerable period as it approaches a decade in power, a time when voters might be looking around for something fresh.

This is further supported by looking at the “middle 50%” of governments, by filtering out the shortest- and longest-lasting 25 percent on either side of the continuum. Continuing to exclude the Alberta PC Anomaly, only one-in-four governments lasted less than 6.1 years, while only another one-in-four lasted longer than 11 years. This points to the difficulty (though not impossibility) of knocking off a first-term government, and the rapidly declining odds of survival after a decade in office.

Now let’s look at the extremes.

With the Alberta PC Anomaly still excluded, the bottom five percent of governments lasted up to 3.9 years before being thrown out. This includes Pauline Marois’s ill-fated 2012-14 Parti Quebecois government in Quebec, and Dave Barrett’s 1972-75 NDP government in B.C. The once-powerful Union Nationale’s 1966-70 Quebec government also finishes just above the cut.

At the opposite extreme, the longest-living five percent of governments lasted 16.1 years in office, these being the Progressive Conservative governments that ran Newfoundland and Labrador from 1972 to 1989 and New Brunswick from 1970 to 1987. The 1991-2007 Saskatchewan NDP government finishes just slightly below the cut. (I’m still excluding the Alberta PC Anomaly, as you can see.)

If making it into the top five percent of government lifespans represents “extreme old age”, the Manitoba NDP government crossed that threshold in about mid-November 2015.

It should be cautioned that elections can produce surprises, and that even improbable events — as a fifth term for the Manitoba NDP government would be — still happen once in a while. But these events are just that: improbable.

If the NDP loses the April 19 election, as they likely will, its old age and the desire to refresh things a bit will have played as much of a role in its downfall as the provincial sales tax increase, the party’s internal discord, and its weakening of internal discipline since 2011; though the public’s feelings about the latter three things will determine how deep a cut it takes in its seat count, and the party’s odds of staging a comeback in four years.

And if it wins and becomes one of the top one percent of governments in terms of longevity? Well, hopefully you will have placed and won a bet, as the government will have beaten the odds in a way that few Canadian governments ever have.

Londoners use hostage-taking to criticize restaurant’s food

For at least a few minutes on Feb. 24, the world’s eyes turned to London as news broke of a hostage-taking at a Bella Italia restaurant near Leicester Square — a landmark location in a global business and cultural capital long vulnerable to terrorism.

After a few minutes, the world’s nerves eased as it was learned that, although a serious crime, the hostage-taking was neither technically a terrorism incident nor a long-running stand-off. As The Telegraph reported:

Police said that a man with a knife held a woman against her will inside the restaurant, with two other people also inside.

A spokesman for the Metropolitan Police said the incident was not terrorist related.

All the people involved are believed to know each other and there have been suggestions on social media that the man is a disgruntled former employee.

Scotland Yard later said the incident had been been resolved and a man had been detained by police. There were no reported injuries.

Yet a strange thing happened on Twitter during and after the incident. In addition to many tweets passing the news on to others and expressing wishes for a peaceful end to the incident, Londoners used Twitter to express their frustration with the Bella Italia restaurant chain.

Bella Italia is roughly equivalent to Canada’s Olive Garden chain: family-friendly, but bland, unromantic and a bit cheesy according to reviews. As Londoners expressed their views on the chain, Twitter searches for Bella Italia quickly filled with absurdity, humour and snark:

Now you know where not to go for good Italian food in London.

The rising number of non-voters: Too much stress hormone, too little love hormone?

If you live here in Manitoba, there is a good chance that you returned home this week to find a “Sorry we missed you!” message hanging from your door knob courtesy of Elections Manitoba, whose enumerators have been out preparing the voters list for the April 19 provincial election.

As that date approaches, there will be not just plenty of discussion about the parties and the candidates, but also about the turnout. In the 2011 election, 56 percent of enumerated voters ended up casting a ballot, representing 46 percent of the province’s adult population.

Much of the discussion about the decline in voting has focused on voter apathy, busy modern lives and the possibility that more people would vote if they could do so more conveniently. But last May, this blog looked at a new angle unearthed by some accidentally obtained evidence: that making people think about politics is nearly as bad as unemployment in terms of making those people feel worse about their lives. To recap the findings of Angus Deaton from Princeton University’s Center for Health and Well-Being:

“People appear to dislike politics and politicians so much that prompting them to think about them has a very large downward effect on their assessment of their own lives . . . [T]he effect of asking the political questions on well-being is only a little less than the effect of someone becoming unemployed, so that to get the same effect on average well-being, three-quarters of the population would have to lose their jobs.”

More recently, I came across additional research that suggested that feelings of stress and of being under threat, either directly from others’ political activities or as part of life in general, could be a factor in lower voter turnout.

When people feel happy, secure and relaxed, their bodies are under the effect of a chemical called oxytocin, not to be confused with the similarly named drug oxycontin. Oxytocin is known as “the love hormone” for the role it plays in mood improvement and human bonding.

When they feel miserable, threatened and defensive, their bodies are conversely being flooded with cortisol. Cortisol is known as “the stress hormone” for its role in preparing the body for either a fight or to flee the situation.

Several years ago, five researchers from the University of Nebraska and Rice University performed an experiment to test the hypothesis that people with higher levels of cortisol in their system — the “fight or flight” chemical — were less likely to vote.

To do this, they collected saliva samples from more than 100 people before and after being put into a stressful situation, and then compared their cortisol levels to their actual (not just self-reported) involvement in political activities. Indeed, they found that people with higher levels of cortisol in their bodies were less likely to be voters:

“These analyses provide strong confirmation of our prediction that cortisol is inversely related with political participation . . . [and] that people with high levels of cortisol in non-political situations are significantly less likely to vote in elections. This effect is over and above the effects of standard demographic variables such as age, education, gender, and income, of political variables such as strength of partisanship, and of personality variables such as self-reported neuroticism.”

Thus, instead of “simply telling them that it is their civic duty to vote or browbeating them into joining civic organizations”, the authors suggest a “nuanced and targeted” approach:

“For some individuals, a lack of involvement in politics is traceable to insufficient resources (Verba, Scholzman, and Brady 1995) but for others the cause may be a physiological constitution that makes politics appear pointless and undeserving of the stress that is likely to accompany it.”

[. . .]

“To take a specific example, consider the intriguing finding that, on average, voter turnout increases if it is made likely that neighbors will find out whether an individual voted (Gerber, Green, and Larimer 2008). It may be that high cortisol individuals would be less easily shamed into going to the polls since their reason for not voting is unrelated to social shame—or a lack of resources, for that matter. The more general point is that specific strategies for enhancing turnout are likely to be differentially successful depending upon cortisol levels and other physiological data.”

But at the same time, they caution against trying to tamper with the human body:

“Politics is only one part of life and taking extreme steps to get people involved in politics may not be worth it if medical and psychological welfare is adversely affected . . . Cortisol levels are part of a complex, interrelating package of physiological variables. Altering one of these variables without considering the implications for physiology generally is likely to be a source of disruption and potential problems.”

Part of the puzzle of voter turnout might be to figure out a way to take the stress and sense of alarm out of politics; though this won’t be easy, as fear and pressure have long been vital (and shamelessly used) tools for politicians of all ideological stripes. But another possibility worth considering is the possibility that the level of voluntary voter turnout might be a partial indicator of whether a city, province, state or country is predominantly a snug-and-happy oxytocin-driven one, or a vulnerable-and-threatened cortisol-driven one.

NewLeaf offers low fares, but to the wrong places

Longing to get away from this terrible winter weather to someplace warm and sunny? Well, here is a deal for you: $410 airfare per person for a quick southern getaway, leaving Friday, Feb. 12 and returning Monday, Feb. 15.

One catch: You need to be in the U.K. to take advantage of this low round-trip easyJet fare between Bristol and Malaga, in southern Spain.

Darn! There’s always a catch, isn’t there?

Europe’s cheap flights have been the envy of Canadians for years, even as Europeans ranted bitterly about poor customer service and “gotcha” penalties that brought the total cost almost up to the prices charged by full-service airlines.

A new travel company called NewLeaf — a nominal airline selling seats on Boeing 737-400s operated by Flair Air, a B.C.-based charter operator — proposes to bring European-style low fares to Canadian skies when it launches next month. The carrier will link seven Canadian cities,  with most flights operating only once or twice a week: Abbotsford, Kelowna, Saskatoon, Regina, Winnipeg, Hamilton and Halifax.

The fares are indeed attractive. As of Sunday, Jan. 17, a Mar. 2-9 Winnipeg-Abbotsford round trip sells for just $232.75, taxes and fees included.

Like other ultra low cost carriers, NewLeaf will make its real money from all the things you can sell or charge passengers for after they’ve made that modest financial commitment to be aboard the flights: bag fees that include charges for your carry-ons, seat selection fees, food and drink sales, and so on.

But NewLeaf won’t find it easy to apply the Ryanair/easyJet methodology to the Canadian market.

The European ultra low cost carriers have succeeded by selling the lingering sex appeal of travel: dreams of long weekends in Italy, stag parties in Estonia, second homes in the south of France, and trips to watch a favourite football team play abroad.

NewLeaf’s launch destinations, by comparison, lack that sort of excitement. Hamilton Airport is about 85 kilometres from both Toronto and Niagara Falls, both of which are interesting enough. But if you’ve been to each two or three times, as many Canadians have been, it’s difficult to justify an additional visit when you can go somewhere new instead. The same applies to Vancouver, which is about 70 kilometres west of Abbotsford.

Neither Hamilton nor Abbotsford nor the other launch cities (with the possible exception of Halifax, which offers a little bit of historical charm as one of Canada’s older cities) are particularly worth visiting for those who otherwise have no connection to the place.

Where could a Canadian ultra low cost carrier go that would allow it to sell the sex appeal of travel the same way that Ryanair and easyJet do? Since these carriers try to get their crews home every night to avoid the cost of putting them up in hotels, they would need to be within a few hours’ flying time of Winnipeg, and be the kinds of places people dream of going. A few suggestions:

 

  • Florida: A favourite with families. Since Winnipeg Airport has U.S. Customs and Border Protection pre-clearance gates, NewLeaf would be able to land at whichever airport offers the airline the best terms: most likely one of Orlando’s airports for the city’s central location within the state and proximity to Disney World. Approximate flying time from Winnipeg: 4 hours.

 

  • Las Vegas: The original Sin City, still popular after all these years with Canadians looking to party. Plenty of competition on this route, but also plenty of price-sensitive demand. Approximate flying time from Winnipeg: 3.25 hours.

 

  • New Orleans: Routinely one of North America’s Top 10 urban tourism draws for its rich history, gastronomy and, of course, the annual party known as Mardi Gras. Approximate flying time from Winnipeg: 3.5 hours.

 

  • New York City: One of the great cities of the world; well worth a visit, even if accommodations are notoriously expensive. Metropolitan New York’s three main airports — JFK, La Guardia and Newark — can be challenging places for an airline to get a landing slot at, but alternatives are available at Westchester County airport (35 miles north of Midtown Manhattan, but with limited public transportation links) and at Long Island MacArthur Airport (about 55 miles east, but close to the Ronkonkoma train station, which offers direct rail service to Grand Central Terminal). Approximate flying time from Winnipeg: 3.25 hours.

 

  • Quebec City: Canada’s most European city, likely its most romantic, and yet one that many Canadians have not visited. A week might be a bit long to spend there, but a long weekend visit would be ideal. Approximate flying time from Winnipeg: 3.25 hours.

 

  • San Francisco and the Bay Area: Historic San Francisco is a major tourist draw in its own right, and only 60 miles from the Napa Valley for wine connoisseurs. An airline would be able to shop around at multiple airports for the best deal, including Oakland and San Jose. Approximate flying time from Winnipeg: 3.75 hours.

 

  • Southern California: Like Florida, southern California is popular with families and those enamoured with the region’s mild year-round climate and proximity to the sea. There are many airports that a low-cost carrier could shop around at for a deal, including Santa Ana/Orange County, Ontario, San Diego, Burbank, Palm Springs and Santa Barbara. Approximate flying time from Winnipeg: 3.75 hours.
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