Why European airfares are so cheap

CALGARY -- As you fly off to your favourite holiday spot this summer, consider the following cost comparisons on the price of airline tickets. Let's start with Europe. Imagine you book return flights between five pairs of cities: London-Edinburgh, Paris-Toulon, Milan-Rome, Dusseldorf-Munich and Barcelona-Madrid.

Book the return flights 21 days in advance and your bill is $689.68. Taxes and fees are 36 per cent of the total.

Now consider a U.S. comparison: San Diego-Sacramento, New York-Washington D.C., Buffalo-Chicago, Seattle-Spokane and Milwaukee-Des Moines. Those return tickets add up to $841.10 including taxes and fees at 16 per cent.

Compare those totals for these five return flights in Canada: Calgary-Victoria, Toronto-Ottawa, Halifax-Montreal, Vancouver-Kelowna, and Regina-Winnipeg. The cost all-in is $1,815.14, including taxes and fees at 28 per cent.

Here's the fine print for the comparisons: I used Kayak.com to track each fare and used airline websites to confirm base fares and taxes/fees. The total return kilometres flown were about 5,400 kilometres for each five-city example.

Now, consider cross-border fares using the same parameters. In Europe, book Munich-Rome, Dublin-Berlin, Vienna-Athens, Prague-Barcelona and London-Paris. Your bill is $1,277.94. Taxes and fees are 43 per cent of the total.

In North America, consider five return fares between Canadian and U.S. cities: Toronto-Chicago, Vancouver-San Francisco, Calgary-Denver, Winnipeg-Minneapolis and Montreal-New York. That will set you back $2,266.13 with taxes/fees at 22 per cent of the cost. Even though you'd fly more kilometres in Europe than in North America (almost 10,000 compared to 9,660), Europe has better fare-friendly skies.

What explains the difference in ticket prices?

Well, the standing Senate committee on transport and communications recently blamed the Canada-U.S. difference in airline ticket prices on fees and taxes, and also high airport rents the federal government charges. The Senate committee recommended abolishing the latter.

That would help, though Europe still has much better deals, despite higher taxes and fees.

Europe's pro-consumer ticket prices are explained by one word: competition.

European airlines and airports fiercely compete for passengers; it's why some European discount airlines exist that even give "loss-leader" fares.

The European Union opened its air-travel market to competition in 1992, with full liberalization as of 1997. Any carrier from any member country can pick up and drop off passengers anywhere, regardless of its home country.

That's a policy known as "cabotage." Both U.S. and Canadian governments still prohibit "foreign-owned" airlines from offering wholly domestic flights in our markets.

So, while Swissair (part of the German-based Lufthansa Group) can carry a passenger between Prague and drop her off in Barcelona (two non-German cities), a U.S. carrier cannot fly a passenger from Toronto to Vancouver. Nor may a Canadian airline pick up a New Yorker and drop him off in Los Angeles.

This anti-competitive policy by American and Canadian governments leads to North American consumers paying higher prices. (Americans are better off given their larger market already means more competing airlines.)

Europe's embrace of open airline competition has, according to the European Commission, Mobility and Transport, led to a plethora of low-cost carriers. They now constitute more than one-third of all European airlines. That has led to lower prices and has doubled passenger traffic since full competition. The open skies policy created 1.4 million direct and indirect jobs.

Some argue Canada shouldn't follow the European model because we're a small market relative to Europe or the U.S. But that's the point; Canada should drop the barriers against competition and become part of a larger North American market and do the same vis-a-vis the EU.

In Europe, even less popular routes, the ones between smaller cities, benefit from the open skies policy. Between 1992 and 2009, the number of cities served with more than two competitors increased by 310 per cent.

Europe's great deals on airline fares have resulted from two decades of open skies, a policy far preferable to the more restrictive versions in Canada and the United States. Europe's liberalized market is why Europe's consumers can find terrific deals on airline tickets this summer -- and all year round.

Mark Milke is a senior fellow

at the Fraser Institute.

Republished from the Winnipeg Free Press print edition July 9, 2012 A10