Canada Gazette, Part I, Volume 155, Number 27: Regulations Amending the Air Passenger Protection Regulations

July 3, 2021

Statutory authority
Canada Transportation Act

Sponsoring agency
Canadian Transportation Agency

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Executive summary

Issues: Canada's Air Passenger Protection Regulations (APPR), which set out air carriers' (carriers) minimum obligations toward passengers, are designed to ensure the clear, consistent, and transparent treatment of air passengers. The COVID-19 pandemic and the subsequent collapse of global air travel have revealed a gap in the protections offered by the APPR: passengers whose flights are delayed for long periods of time or cancelled due to situations outside the carrier's control, such as the government no-travel orders related to this pandemic, are not protected by being entitled to refunds. New refund requirements are needed to close this gap and protect passengers.

Description: The proposed amendments to the APPR (proposed Regulations) would require carriers to provide a refund to passengers affected by flight cancellations or lengthy delays due to situations outside the carrier's control that prevent it from ensuring that passengers complete their itinerary within a reasonable time, or rebook those who do not wish to be refunded. In addition to establishing the point in time at which the refund requirement would apply (refund timing), the proposed amendments would specify the costs to be included in a refund (refund coverage), the means by which carriers would issue refunds (refund method), and the time frame within which carriers would have to provide the refund to the affected passenger (refund deadline).

Rationale: On December 18, 2020, in accordance with powers provided under the Canada Transportation Act (Act), the Minister of Transport (Minister) directed the Canadian Transportation Agency (CTA) to make a regulation setting carrier obligations to passengers — including a requirement to provide refunds — in certain situations outside their control. To ensure the resulting regulation is robust yet balanced (fair and reasonable to passengers, while considering the financial health of carriers), the CTA considered feedback from stakeholders, as well as refund requirements from other jurisdictions.

Issues

The APPR protect passenger rights and ensure that those rights are clear, consistent, and transparent. The APPR's current provisions on flight disruptions that are outside a carrier's control (including cancellations and delays) prescribe the carrier's minimum obligations to communicate key information to passengers, and make sure they complete their itinerary, for example by rebooking them on another flight.

The COVID-19 pandemic has revealed that these minimum obligations are insufficient. Amid the subsequent collapse of global air travel, most passengers could not be rebooked and thousands were left out of pocket for the cost of tickets they could not use. Without regulations requiring carriers to provide refunds when there are flight cancellations and lengthy delays due to situations outside their control that prevent them from ensuring passengers complete their itineraries within a reasonable time, there is a risk that future passengers will also be left out of pocket for the cost of some disrupted flights.

The Minister has the authority under subsection 86.11(2) of the Act to direct the CTA to make regulations respecting additional carrier obligations towards passengers. On December 18, 2020, the Minister issued Ministerial Direction No. SOR/2020-283 (“Direction Respecting Flight Cancellations in Situations Outside of a Carrier's Control”), providing the CTA with the authority to develop a regulation on the issue of refunds to passengers. This Direction requires the CTA to make a regulation respecting a carrier's obligations to passengers in the case of flight cancellations due to situations outside their control that prevent them from completing the passenger's itinerary within a reasonable time. It specifies that this regulation must require carriers to provide refunds in these situations. The Ministerial Direction also provides the CTA with the authority to apply the refund requirement to lengthy delays.

In addition, some minor “housekeeping” amendments to the APPR are needed to provide greater clarity.

In keeping with the Minister's letter accompanying the Direction (letter of intention), the CTA has designed the regulation in a manner that is “fair and reasonable to passengers and, to the extent possible [does] not impose an undue financial burden on air carriers that could lead to their insolvency.” The CTA has also taken the air passenger protection refund regimes of the European Union (EU) and the United States (U.S.) into consideration, which are described under the “Regulatory cooperation and alignment” section below.

Background

In 2018, amendments to the Act required the CTA to make regulations establishing a new air passenger rights regime. The Act specified the types of obligations that the regulations must set out for flight disruptions, including

In accordance with this requirement in the Act, the CTA made the APPR, which set out minimum passenger entitlements that carriers must include in their tariff (the contract between a carrier and its passengers). The APPR came fully into effect on December 15, 2019, and apply to all flights to, from and within Canada, including connecting flights.

The APPR reflect the legislative framework. For all disruptions, they require the carrier to rebook passengers so they complete their itinerary. For disruptions within carrier control (including for safety purposes), the APPR require the carrier to provide a refund if rebooking does not meet the passenger's needs. However, consistent with the enabling legislation, the flight disruption provisions of the APPR limit carriers' minimum obligations for disruptions outside their control to communicating key information and making sure passengers complete their itinerary.

When COVID-19 was declared a pandemic in March of 2020 and countries began restricting travel and closing their borders, the resulting global collapse of air travel was unprecedented in the history of commercial aviation. Carriers curtailed their operations, cancelled thousands of flights and laid off tens of thousands of employees. Passengers were frustrated about not getting refunds for flights that were not only cancelled, but could not be rebooked in the foreseeable future.

The situation these passengers found themselves in has highlighted a gap in the passenger protection framework. When it comes to flight cancellations and lengthy delays outside a carrier's control, simply ensuring that the passenger completes their itinerary is insufficient if there is no way to do so within a reasonable time. While the APPR currently require rebooking within certain time frames for flight disruptions outside the carrier's control — large carriers, for example, must rebook passengers on a flight leaving within 48 hours of the end of the event that caused the cancellation — the APPR do not stipulate any minimum requirements if it is impossible to rebook a passenger on a flight within the set time frame, or if it is not clear when the disruptive event will end.

In the absence of clear refund requirements for these situations, refund policies vary from carrier to carrier. Some carriers' tariffs require refunds for flights cancelled for any reason; others do not. Some carriers offer fully refundable tickets, which are usually more expensive, but do not refund the non-refundable tickets, even in such extreme circumstances as the current pandemic. Some carriers may make goodwill gestures above and beyond their tariff requirements, which typically involve vouchers or other benefits rather than refunds, but these are not necessarily extended to all affected passengers.

This inconsistent treatment of passengers, and the possibility that some could end up entirely out of pocket for disrupted flights, has generated considerable public and parliamentary concern, resulting in the Ministerial Direction giving the CTA the necessary authority to make a refund regulation to address the issue.

The parameters for the proposed requirements are as follows:

As recommended in the Minister's letter of intention, the CTA considered carrier refund requirements in the EU and United States, including the circumstances and timelines within which carriers must provide refunds.

The CTA also consulted the public, consumer advocates, and the air industry on the proposed refund requirements. The consultations began on December 21, 2020, and ended on March 1, 2021. The results have informed this proposal, as noted in the “Regulatory development” section further below. In addition, the CTA surveyed a number of carriers and carrier associations about the possible cost implications of the proposed amendments. The survey was distributed on January 6, 2021, and had a deadline for responses of February 4, 2021. The survey results have informed the cost-benefit analysis further below.

In addition to establishing refund obligations consistent with the Ministerial Direction, amending the APPR provides an opportunity for the CTA to correct minor administrative errors in the existing provisions.

Objective

The objective of this proposal is to close a gap in Canada's air passenger protection framework and establish a clear, consistent, and fair policy with respect to refunds in situations outside a carrier's control. This means that, after the proposed Regulations are in force, passengers who experience a cancelled flight or lengthy delay in those situations would have the right to a refund — regardless of the type of ticket they purchased — if the carrier cannot complete their itinerary in a reasonable time. In other words, no one in such a situation would be left out of pocket for tickets they cannot use.

The proposed Regulations would not apply retroactively to flight cancellations or lengthy delays caused by the COVID-19 pandemic. Although the current pandemic has revealed the need for this proposal, the proposal's objective is not pandemic specific. The proposed Regulations would protect future air passengers affected by similar events, but also by a broad range of travel disruptions outside a carrier's control, such as bad weather or a security incident, that cause cancellations or lengthy delays that prevent a passenger from completing their itinerary in a reasonable amount of time.

Consistent with the Minister's letter of intention, a further objective is to balance the passenger protection the refund would afford against the air industry's operational and fiscal requirements. This is an important aspect of a fair policy.

By establishing a clear and consistent refund right for passengers, the proposal also aims to

Description

Scope

As new provisions of the APPR, the refund requirements would apply to all flights to, from and within Canada, including connecting flights. This includes certain charter flights on which one or more seats are for resale to the public, namely charter flights within Canada and flights to and from Canada that are a part of a charter that originated in Canada.

The provisions would become part of a regime designed to ensure as much consistency as possible, and to limit passenger confusion about redress in situations where flights are operated through commercial agreements between carriers (like code sharing, wet leasing or interlining). Like all other APPR provisions related to flight disruptions, the refund requirement would be the responsibility of the carrier operating the affected flight.

In keeping with standard regulatory practices and the Minister's letter of intention, the regulations would only apply to future flight cancellations and lengthy delays (those that occur after the proposed Regulations come into force). The proposed Regulations would not apply retroactively. However, the Government of Canada, as promised in its Fall Economic Statement 2020, is continuing its negotiation process with Canadian carriers regarding financial support. The Government has indicated that, as part of this process, it will “ensure Canadians are refunded for cancelled flights.” The CTA's forward-looking regulations that would guarantee a right to refunds in the future is an important complement to the Government's retroactive initiative.

Application of the new refund requirement, including timing

The proposed Regulations would require carriers to provide a refund to passengers when there is a flight cancellation or lengthy delay caused by situations outside the carrier's control that prevents it from ensuring that passengers complete their itinerary within a reasonable time.

Currently, the APPR require that, for delays of 3 hours or more and cancellations outside a carrier's control, all carriers must rebook affected passengers on the next available flight operated by them or a partner carrier. In addition, for large carriers (those that have transported at least two million passengers during each of the past two years), the flight in question must depart no later than 48 hours after the event that caused the delay. If that is not possible, a large carrier must rebook them on the next available flight of any carrier, including competitors.

Under the new requirements, if there is a flight delay of 3 hours or more or a cancellation, large and small carriers would continue to have to rebook passengers on the next available flight operated by them or a partner carrier. However, if they cannot provide the passenger with a confirmed reservation on a flight leaving within 48 hours of the departure time on the passenger's original ticket, the carrier would have to, at the passenger's choice,

At any time prior to being provided a confirmed reservation on an alternate flight, passengers would be free to change their decision and choose a refund.

Currently, the APPR require large carriers to rebook the passenger within 48 hours from the end of the event that caused the disruption. The proposed amendments would adjust that requirement to 48 hours from the original departure time because — as observed in the current pandemic — some disruptive events have no clear end.

Refund coverage

The proposed Regulations would specify that, when an affected passenger chooses a refund, the carrier would have to refund the unused portion of their ticket. This would include any unused add-on services the passenger paid for (such as preferred seat selection or additional checked luggage).

If the passenger is no longer at their point of origin, and their travel no longer serves a purpose, the carrier would have to refund the ticket, including any unused additional services, and book the passenger on a flight back to their point of origin. This aligns with the current APPR requirements for refunds in situations within carrier control.

Refund method

The proposed Regulations would specify that, for all refunds required in the APPR, the carrier must issue the refund to the person who originally purchased the ticket, using that person's original payment method, unless the passenger accepts to receive the refund in an alternative form also offered by the carrier (for example a travel voucher). The carrier would only be allowed to provide a refund in an alternative form if

Requiring that refunds be provided to the person who purchased the ticket, using the original payment method, aligns with the current APPR requirement for refunds in situations within carrier control. The new provision allowing carriers to also offer alternate refund methods would be applied to all refunds under the APPR.

Refund deadline

New provisions would specify that, for all refunds required under the APPR, the carrier would have to provide the refund:

These timelines begin as soon as the carrier's obligation to provide a refund is triggered.

Rebooking requirements

When a carrier rebooks a passenger under the APPR, they must, to the extent possible, provide arrangements that are comparable to those of the original ticket (for example same class of service). For situations within carrier control, the APPR stipulate that, if these alternate arrangements provide a lower class of service, the carrier must refund the difference in cost. They also state that the carrier must refund any additional services that the passenger paid for but did not receive on their alternate flight (or if the passenger was charged twice for those services).

As part of this proposal, the CTA would ensure that passengers are entitled to these refunds when they are rebooked for reasons outside carrier control as well. This would provide consistency and equal treatment of passengers.

Administrative monetary penalties

The CTA would make the new requirements under the proposed Regulations subject to administrative monetary penalties (AMPs) for non-compliance (described in the “Compliance and enforcement” section below) by including them in the Schedule of the APPR.

Housekeeping amendments

The CTA also intends to make minor amendments to correct minor errors in existing provisions of the APPR.

Regulatory development

The CTA consulted the public, consumer advocates, and the air industry about its regulatory proposal, and also conducted a survey of carriers and carrier associations concerning the possible costs of the proposal. The consultation highlights are below. Feedback from the survey is discussed in the “Benefits and costs” section.

Consultation

On December 21, 2020, the CTA launched a consultation with the public and key stakeholders. It provided a consultation paper that invited answers to questions about

The deadline for responses was March 1, 2021. The CTA received a total of 119 submissions, with 100 from members of the public, 11 from carriers and other industry representatives, 4 from consumer organizations and 4 from travel and insurance industry representatives. Key comments are summarized below.

Application of the new refund requirement

The current APPR provisions require carriers to ensure that passengers complete their itinerary by rebooking them when flights are cancelled or delayed for reasons outside a carrier's control. Consultation participants were asked what a reasonable rebooking period would be before carriers should be required to provide passengers with a refund. Responses varied significantly.

Suggestions from the public ranged from five hours to one year. Some consumer organizations argued that the new refund requirement should apply for all cancellations and delays of three or more hours, in alignment with the current requirement for situations within the carrier's control. Others argued that up to 48 hours would be a reasonable window to allow carriers to recover their schedules and rebook passengers in the event of a disruption outside their control. One organization emphasized that measuring from original departure time is important, because measuring from the end of the event that caused the delay (as the APPR currently does) is problematic when a delay does not have a foreseeable end. This was the case in many cancellations related to the COVID-19 pandemic.

Generally, carriers felt that a minimum of 72 hours from the end of the event that caused the delay would be appropriate, though some suggested that the time available for rebooking (before providing a refund) should be flexible, especially in situations where completing the passenger's itinerary might take longer, for example, in the event of a large-scale disruption or on routes with relatively few flights.

All consumer organizations and most of the public agreed that passengers should be entitled to a refund for lengthy delays, not just cancellations. The majority of industry respondents did not comment specifically on whether there should be refunds for such delays.

The refund requirement being proposed reflects the general agreement among public stakeholders that refunds should apply to lengthy delays as well as cancellations. It reflects the general agreement that, when a flight is cancelled or delayed, there is a point when the reasonable time for rebooking passengers has passed. Despite stakeholders' varying views on the exact time this occurs, they all indicated time periods beyond which passengers should be entitled to a refund.

Entitling passengers to refunds if a carrier cannot put them on a flight leaving within 48 hours of the original departure time recognizes that in many cases, this length of delay could result in passengers no longer needing to travel, regardless of whether it was due to a flight delay or a flight cancellation. It also allows carriers sufficient time to recover their schedules after an unanticipated disruption. This rebooking window is longer than the one in some jurisdictions, such as the EU, where passengers have the right to a refund for all cancellations and delays lasting more than five hours. However, the Canadian rebooking window needs to take into account the realities and concerns of carriers in Canada, including small carriers serving northern and remote communities, where flights are often infrequent, and weather-related disruptions that can be lengthy. There are limited flights to northern and remote areas, and in some cases there is only one carrier per route with a limited fleet. Therefore, northern and remote carriers may require more time to rebook their passengers.

Requiring rebooking or a refund after a 48-hour window from the original departure time instead of the end of the disruptive event (which is the current rebooking window in the APPR) addresses the issue raised in the consultation, as described above.

Refund coverage

Both consumer organizations and industry generally agreed that a refund should cover the unused portion of the ticket and any unused services, such as seat selection and extra baggage allowance. A consumer organization and most of the public responded that passengers should be entitled to a full refund if their trip no longer serves a purpose due to the flight disruption.

The proposed refund coverage requirements reflect the general agreement that the unused portion of a ticket should be refunded. This would cover any unused add-on services the passenger purchased. If the passenger is no longer at their point of origin, and their travel no longer serves a purpose, the carrier would have to refund the entire ticket (and the unused add-on services) and book the passenger on a flight back to their point of origin. This approach matches the existing APPR policy for refunds in situations within carrier control, and generally aligns with the approach in the EU and in the United States.

Refund format

Consumer organizations, the air industry and the public generally agreed that refunds should be issued using the method of payment that was used to buy the ticket. Industry respondents suggested that this would be the easiest way to return the payment to the passenger, as well as a way to prevent problems such as fraud.

Air industry respondents also generally agreed that the proposed Regulations should remain flexible enough to allow carriers to issue refunds in alternative forms, such as vouchers, to those passengers who may wish it. The majority of industry stakeholders argued that allowing passengers to choose vouchers would spare carriers from cash flow problems if they are required to refund a large number of passengers in a short amount of time. Some consumer organizations raised concerns regarding allowing alternate forms of refunds, and most of the consumer organizations and public suggested establishing parameters for vouchers if they are going to be permitted. These include requiring that the monetary refund be offered first; that passengers should state their choice of a voucher over a monetary refund in writing; that the voucher never expire; and that the voucher be worth more than the ticket value.

The proposed refund method reflects the majority view that refunds should be made in the same form as the original payment. This also aligns with the APPR provisions on refund methods in situations within the carrier's control and the approach in the United States. Allowing carriers to offer passengers any refund under the APPR in an alternative form (like a voucher), with written consent from the passenger, aligns with the approach in the EU. Requiring that the voucher not expire and that the value of the voucher exceed the value of the ticket matches the existing APPR requirement for the payment of compensation for inconvenience when there is a flight disruption within a carrier's control not required for safety.

Refund deadline

Consumer organizations generally agreed that refunds should be provided within seven days (as in the EU), but some suggested there could be flexibility if the refund is being provided via cheque, gift certificate, voucher or a frequent flyer program.

The feedback from industry varied. Suggestions for the deadline generally ranged from 30 to 90 days, or even up to a year, depending on the scale of the event causing the disruption. Many carriers emphasized that the time frame should be flexible, as in some situations it might be impossible to refund passengers for many months after the event has ended.

That said, one representative of EU carriers submitted that carriers should have to provide the refund within seven business days, with greater flexibility in the event of a large-scale disruption. The proposed refund deadline of seven days for credit card refunds aligns with consumer feedback and EU and U.S. requirements. The proposed deadline of 20 days for refunds by other methods (e.g. cash or cheque) aligns with consumer feedback and U.S. requirements and provides some flexibility to industry.

Flexibility for certain carriers or situations

In addition to the issues above, the CTA's consultation paper invited feedback as to whether any refund requirement should include flexibility for certain carriers or situations.

Smaller regional carriers and their industry representatives felt that any new refund requirements should be flexible and take into account both the size of the carrier and the type of operation (such as essential air service in the North). Smaller carriers noted that they typically have fewer aircraft at their disposal to rebook passengers in the event of a flight disruption. They indicated that restrictive refund policies may lead to insolvency for carriers who provide communities with an essential service.

Many of the large carriers consulted felt that any requirements should apply to all carriers equally, with no flexibility based on carrier size. They suggested that allowing flexibility based on carrier size could hamper competition.

While one consumer advocate and some members of the public suggested that there could be some flexibility for small or remote carriers, most argued that, to avoid confusion, the proposed Regulations should be applied equally to all carriers. It was also argued that different refund standards based on carrier size or financial situation were not warranted, as lesser requirements for some carriers would simply place the financial burden on passengers.

Generally, all industry respondents believe that refund requirements should be flexible enough to take into account the type of situation causing the flight disruption and allow for a longer refund deadline to ensure financial viability.

The proposal does not provide stratified requirements depending on the severity of a disruption outside the carrier's control. This is to ensure clarity and also reflects the objective of ensuring that passengers are not left out of pocket in the event a carrier cannot complete their itinerary in a reasonable time, regardless of the reason. However, other concerns about flexibility raised are being addressed by providing a 48-hour window before refunds are required and allowing carriers to offer refunds in non-monetary form, such as vouchers.

Modern treaty obligations and Indigenous engagement and consultation

The proposed Regulations do not affect modern treaty obligations or engagement. They do not have the potential to adversely impact potential or established Aboriginal or treaty rights, and therefore, do not trigger the Crown's duty to consult.

Indigenous peoples were welcome to participate in the CTA's consultation process for this regulatory proposal. Air North and the Air Transport Association of Canada (ATAC), which represents carriers owned in whole or in part by Indigenous groups such as Air North, Canadian North, Air Inuit and Air Creebec, provided comments to the CTA. Their submissions specifically addressed the unique operating realities in northern and remote areas.

Instrument choice

The Act provides a framework for the APPR and requires the CTA to make regulations on the air passenger protection topics that Parliament set out in the legislation and on any other topics (additional carrier obligations towards passengers) that the Minister of Transport may set out in a direction. As the Minister has issued such a direction, which requires the CTA to make a new regulation respecting refunds, no other instruments were considered.

Regulatory analysis

Benefits and costs

Summary

The proposed Regulations would result in a cost to Canadian carriers of $46.15 million present value (PV), and benefits to Canadian passengers and the CTA of $46.67 million PV for a net present benefit of $0.52 million expressed in 2021 Canadian dollars, over the 10-year study period (2021–2031). The benefits of the proposed Regulations to Canadians outweigh the cost to Canadian carriers. Canadian passengers would experience the benefit of recovering their money for cancelled flights or lengthy delays if they decide that they no longer want to travel. In addition, passengers are expected to experience reduced stress and anxiety that comes from dealing with the carrier in trying to obtain refunds.

Analytical framework

The cost-benefit analysis (CBA) measures the incremental impacts on the affected Canadian stakeholders (governments, consumers, businesses and other organizations) from the proposed Regulations in accordance with the Policy on Cost-Benefit Analysis.

Incremental impacts reflect the difference between two scenarios: what would happen in the absence of these proposed Regulations (baseline scenario); and what is expected to happen when these Regulations are implemented (regulatory scenario). These scenarios are described in the next two sections.

Baseline scenario

The baseline scenario refers to the current legal situation with respect to refunds for flight cancellations or lengthy delays due to forces outside the control of the carrier. The baseline represents the absence of the proposed amendments to the APPR.

Canadian carriers' obligations towards passengers flying to, from, or within Canada are established through

Beyond communication requirements, the only current obligation when disruptions happen for reasons outside the carrier's control (such as government advisories against travel or border closures due to a pandemic, or a hurricane, volcanic eruption or security incident) is to ensure the completion of a passenger's itinerary — that is, making sure the passenger gets to the destination on their ticket.

For international flights, the rules and regulations of the other country could be applicable to Canadian carriers who fly to or from there. This analysis focuses on the regulations of the EU and the United States as they are the biggest international markets for Canadian carriers, and their regulations are clear, making the comparisons to the proposed Regulations straightforward. The EU regulations apply to Canadian carriers if a flight departs from the EU to a non-EU country, but do not apply to flights that arrive in the EU from outside the EU. The United States, in a notice published on April 3, 2020 (PDF), reminded U.S. and foreign carriers operating at least one aircraft having a seating capacity of 30 or more seats, of the obligation that passengers should be refunded promptly when their scheduled flights are cancelled or significantly delayed. This obligation applies to all carriers operating flights to, within, or from the United States (Note: given the impacts of the COVID-19 pandemic on carriers, the notice also stated that the U.S. Aviation Office would provide carriers an opportunity to become compliant before taking enforcement action).

Regulatory scenario

Under the regulatory scenario, carriers subject to the APPR would be required to provide a refund to passengers following a cancellation or lengthy delay due to reasons outside of the carrier's control if they cannot rebook the passenger within 48 hours of the original departure time, or rebook passengers who do not wish to be refunded.

Stakeholders

Canadian carriers

Canadian carriers are split into two categories:

  1. Carriers that offer, as per their tariff, a voucher or refund for cancellations or lengthy delays outside of their control when it is not possible to complete the passenger's itinerary in a reasonable time; and
  2. Carriers that do not offer vouchers or refunds in these scenarios.

Vouchers are considered a liability against the carrier in the amount of the fare price and are, therefore, considered to be of equal monetary value to cash refunds. However, since the onset of the COVID-19 pandemic, many passengers have expressed a strong preference for receiving a cash refund over vouchers. This is discussed in more detail in the “Benefits” section below (Higher utility/satisfaction).

The consideration of vouchers in this analysis is not as straightforward as it is for refunds, as the usage rate (of the voucher) would play a role in the potential cost to carriers. See the section below on Canadian passengers for more details on how this is accounted for in this analysis.

Carriers in category 1 would not be impacted by the proposed Regulations as they already provide a resolution equal to the value of a cash refund.

Foreign carriers would also be impacted by the proposed Regulations for their flights to or from Canada, however, as per the Cabinet Direction on Regulation, impacts on foreign entities are out of scope in this analysis.

Canadian passengers

Passengers are split into two categories:

  1. Passengers with refundable tickets, travel insurance, or flying with carriers that offer vouchers or refunds as per their tariffs.

These passengers, in the baseline scenario, would receive a refund from the carrier when a refundable ticket is purchased, or from their insurance company when travel insurance is purchased. Therefore, there is no incremental benefit to these passengers of the proposed Regulations.

  1. Passengers with non-refundable tickets, no travel insurance, and flying with carriers that do not offer vouchers or refunds as per their tariffs.

Passengers with no alternative avenues to a refund have a different baseline scenario than those passengers who do. In this case, an incremental benefit is experienced from receiving the refund from the carrier.

Passengers in category 1 who receive vouchers in the baseline scenario, but do not use them prior to their expiration, are grouped in category 2.

Similar to foreign carriers, impacts on foreign passengers are also out of scope in this analysis. In this context, Canadian passengers are considered to be Canadian citizens, or residents of Canada.

Travel insurance companies

With respect to the passengers purchasing travel insurance, this analysis assumes that the proposed Regulations would not lead to a reduction in the demand for travel insurance for two reasons. First, the main reason passengers purchase travel insurance is to be covered for potential health issues while abroad. Secondly, travel insurance covers more costs than just airfare; it can include costs associated with accommodations, car rental, and other out of pocket expenses. The proposed Regulations would only require the carrier to refund the unused portion of the original ticket, leaving potential accommodations, car rental, and other out of pocket expenses unrecovered. It is assumed that passengers would continue to purchase travel insurance for these reasons.

Data sources, forecasts, and assumptions

Study period

This analysis examines costs and benefits over a 10-year period (from October 2021 to September 2031). A real discount rate of 7% is used to establish the net present value of the regulations for non-compensation provisions. Values are expressed in 2021 constant dollars.

Overarching assumptions

Forecast of Canadian passengers receiving refunds by flight cancellations outside the carrier's control

Under the proposed Regulations, carriers would have to refund the unused portions of a ticket impacted by a cancellation outside the control of the carrier that prevents it from rebooking passengers within 48 hours of the departure time indicated on the original ticket. For many one-way flights, passengers may have multiple legs in their journey before reaching their destination. Any part of that journey could be impacted by a cancellation. Therefore, it is more appropriate to forecast passenger legs, rather than the number of passengers, to determine the true impact of the proposed Regulations. All forecasts below are of passenger legs impacted.

The number of passenger legs impacted by the proposed Regulations, throughout the study period, is forecasted based on historical data, and the overarching assumptions described above. The following forecast was made based on data obtained from an industry questionnaire conducted by the CTA, and third-party confidential data purchased by the CTA. The CTA received 11 responses to the industry questionnaire, all from Canadian carriers. Averages of all responses were used in this forecast estimation, and throughout the analysis where these data are applicable.

This analysis equates the number of adjusted cancelled available seats to the number of passengers impacted by a flight cancellation in a given year. The number of cancelled available seats is calculated by multiplying the average rate of flight cancellation, per carrier,footnote 1 by the average number of available seats per flight.footnote 2

Passenger Traffic is assumed to recover to 2019 levels in 2023, as predicted by the International Air Transport Association (IATA) [PowerPoint presentation]. This analysis assumes that available seats would increase proportionally to passenger traffic. Furthermore, this analysis uses the growth forecast in U.S. available seat miles of 1.80% per year, made by the Federal Aviation Administration (FAA) [PDF] (PDF) as a proxy for the growth in Canadian available seats beyond 2023. The average flight cancellation rate between 2018 and 2019 is applied to the available seats in these years to calculate the cancelled available seats.

Due to the COVID-19 pandemic, air passenger traffic diminished in 2020. In 2019, Canadian carriers carried more than 90.7 million passengers in their scheduled services. This dropped to 26.2 million passengers in 2020.footnote 3This analysis assumes that the air industry will continue to experience residual effects of the COVID-19 pandemic in 2021. A recovery of 32% in the available seats in 2021 (over the 2020 number) is estimated based on the average of two IATA forecasts (PDF); however, the cancellation rate is still expected to be higher than the pre-pandemic years. Assuming that the cancellation rate will fall somewhere within the range experienced in 2018, 2019 and 2020, this analysis uses the average rate from these years to calculate the cancelled available seats in 2021. In 2022, the recovery in available seats is expected to continue, but it is assumed that cancellations would fall back to the rates experienced in 2018 and 2019, as residual effects of the pandemic would be accounted for in carriers' schedules.

Several adjustments are applied to the amount of cancelled available seats to arrive at the number of passenger legs impacted by the proposed Regulations. First, not all cancelled available seats would have been occupied. Therefore, cancelled available seats are adjusted downwards by the average load factor, which measures the occupancy level of flights, to account for the number of cancelled seats that would have been filled. Secondly, overall seats are adjusted upwards by 23.4% to account for available seats from foreign carriers (to or from Canada) which are not accounted for in the projections. Since the proposed Regulations deal with cancellations outside the carrier's control, an average adjustment of 66.6% was made to reduce cancelled available seats by the percentage of total cancellations due to circumstances within the carrier's control.

Additional adjustments are then made with respect to baseline and scope considerations. Passengers who purchased refundable tickets or travel insurance (40%), who are rebooked by the carrier within 48 hours (98%), and non-Canadian passengers (35.09% for international flights, 17.55% for domestic flights) are further removed from the number of forecasted passenger legs impacted by the proposed Regulations. Finally, 21% is removed from the international forecast to account for the Canadian passengers on flights to or from the United States on either Canadian or foreign carriers, to or from the EU on EU carriers, and from the EU on Canadian carriers, as they would receive refunds under the baseline scenario from the respective regulations in the United States or the EU. The following table shows the forecasted number of impacted passenger legs throughout the study period after all adjustments are made. Tables 1 to 4 show the incremental number of passenger legs for which refunds are paid or received in comparison to the baseline scenario.

Table 1: Number of legs for which Canadian passengers receive refunds for cancellations
Year Domestic flights International Flights
2021–2022 12 803 1 307
2022–2023 14 523 1 375
2023–2024 15 704 1 486
2024–2025 16 003 1 514
2025–2026 16 307 1 543
2026–2027 16 616 1 572
2027–2028 16 932 1 602
2028–2029 17 254 1 632
2029–2030 17 582 1 663
2030–2031 17 916 1 695

The split between domestic and international passengers is based on the responses to the industry questionnaire.

Forecast of passengers paid refunds by Canadian carriers due to flight cancellations outside the carrier's control

The table above is the forecasted number of legs for which Canadian passengers would receive refunds. The number of passengers paid refunds by Canadian carriers is different because it includes foreign passengers. Although the impact on foreign passengers is out of scope for this analysis, the refunds paid to them by Canadian carriers would account for some of the cost to the carrier, and thus need to be considered in this context. The forecast for passenger legs for which Canadian carriers would pay refunds is calculated in the same way as the number of legs for which Canadian passengers would receive refunds, except, the percentage of non-Canadian passengers is not removed, and the foreign carrier premium is not applied to the projections. The following table shows the forecasted number of passenger legs for which Canadian carriers would pay refunds throughout the study period after all adjustments are made.

Table 2: Number of passenger legs paid refunds by Canadian carriers for cancellations
Year Domestic flights International Flights
2021–2022 15 528 1 325
2022–2023 17 614 1 354
2023–2024 19 046 1 469
2024–2025 19 408 1 497
2025–2026 19 776 1 526
2026–2027 20 152 1 555
2027–2028 20 535 1 584
2028–2029 20 925 1 614
2029–2030 21 323 1 645
2030–2031 21 728 1 676

Forecast of passengers impacted by long flight delays outside the carrier's control

The forecast of passenger legs impacted by flight delays outside the carrier's control was estimated by first forecasting the number of available seats of flights experiencing any delay between scheduled departure and actual arrival time, per carrier. This was estimated using third party confidential data. The available seats were forecasted to 2030 using the same growth forecast made by IATA and the FAA to estimate available seats for cancelled flights.

The forecasted number of seats available on flights that were delayed were then reduced using several factors. First, to estimate the number of passengers impacted by any delays, the average annual load factors were applied to the number of available seats per carrier. Second, the estimated number of delayed passengers were reduced by applying the rate of delays outside the carrier's control, based on carriers' responses to the industry questionnaire.

Similar to the cancellation methodology, the following adjustments were also made to reduce the forecasted number of passenger legs impacted: passengers who purchased refundable tickets or travel insurance (40%); passengers who are rebooked by the carrier within 48 hours (98%); and flight legs covered by EU or U.S. regulations (21%) are all removed.

Table 3: Number of passenger legs paid refunds by Canadian carriers for long delays
Year Domestic flights International flights
2021–2022 4 271 1 036
2022–2023 5 022 1 217
2023–2024 5 252 1 276
2024–2025 5 352 1 300
2025–2026 5 454 1 325
2026–2027 5 557 1 350
2027–2028 5 663 1 376
2028–2029 5 771 1 402
2029–2030 5 880 1 428
2030–2031 5 992 1 456

Further adjustments to forecast how many Canadian passenger legs would receive refunds by all carriers were made. Similar to the cancellation forecast, the percentage of non-Canadian passengers are removed and a premium was added to account for foreign carriers.

Table 4: Number of legs for which Canadian passengers receive refunds for long delays
Year Domestic flights International flights
2021–2022 3 522 2 725
2022–2023 4 141 3 621
2023–2024 4 331 3 887
2024–2025 4 413 3 961
2025–2026 4 497 4 036
2026–2027 4 582 4 113
2027–2028 4 669 4 191
2028–2029 4 758 4 271
2029–2030 4 848 4 352
2030–2031 4 941 4 435

Benefits

Passenger refunds for flight cancellations outside a carrier's control

Passengers in category 2, described earlier, would experience a benefit from the proposed Regulations. In the baseline scenario, passengers in category 2 would have paid for their flight and received nothing in return for the cancellation or long delay outside of the carrier's control, except the promise to be rebooked/flown at the earliest possible time. Passengers who no longer wish to travel as a result of the flight disruption would be left with no option in the baseline other than to take the loss of the fare paid for the ticket or file a complaint with the CTA, where they may or may not be successful based on the merits of the case.

In the regulatory scenario, for cancellations outside the carrier's control for which passengers are not able to be rebooked within 48 hours, a refund would have to be provided. These passengers experience a net benefit from the proposed Regulations.

To estimate the benefit of refunds to Canadian passengers, the forecasted incremental number of legs for which Canadian passengers (incremental to the baseline scenario) would receive refunds throughout the study period (Table 1) is multiplied by the respective average airfare (of one leg of the flight) for domestic and international flights. Average fares from 2019 Q2 are taken from Statistics Canada and the average ancillary fee per passenger for 2020 ($25.90footnote 4) is added to determine the total fare ($200.32 for domestic flights and $336.87 for international flights). It is assumed that the average air fare remains constant throughout the study period. The proposed Regulations are expected to result in an estimated benefit of $27.77 million (or $3.95 million annualized) to Canadian passengers impacted by flight cancellations outside the carrier's control.

Passenger refunds for long flight delays outside a carrier's control

Similar to the refund benefit for cancellations outside a carrier's control, passengers in category 2 would also benefit from the opportunity to be refunded when a lengthy delay occurs due to a situation outside the carrier's control that prevents it from rebooking passengers within 48 hours of the departure time indicated on the original ticket. The baseline and regulatory scenarios for passengers in category 2 would be the same for lengthy delays and flight cancellations outside a carrier's control.

To estimate the benefit of refunds to these passengers, the forecasted incremental number of Canadian passengers who would receive refunds throughout the study period (Table 4) is multiplied by the respective average air fare for domestic and international flights. The proposed Regulations are expected to result in an estimated net benefit of $16.44 million (or $2.34 million annualized) to Canadian passengers in category 2, impacted by long flight delays outside a carrier's control.

Passenger time savings from reduced complaints to the CTA

In 2019, before the COVID-19 pandemic, the CTA received roughly 9 complaints per month related to refunds for flight disruptions outside the control of carriers. When the COVID-19 pandemic hit, however, the issue of passenger refunds became more prominent. The CTA received 17 130 complaints between March 2020 and March 2021, of which 8 565 are estimated to relate to refunds.

The analysis assumes that there would not be any refund complaints for flight disruptions outside the control of carriers following the coming into force of the proposed Regulations. Therefore, there is a time savings for passengers related to the nine complaints per month received by the CTA (pre-pandemic) with respect to refunds. It is possible that the CTA could experience an increase in other types of complaints following the coming into force of the proposed Regulations; however, such complaints are not considered in this analysis.

The process of filing a complaint involves searching the Internet to find where to make a complaint, filling out the complaint form on the CTA website, uploading all necessary documents and evidence, and doing any necessary follow-ups. In total, it is assumed that this process takes 0.75 hours to complete. An average wage rate of $36.28 per hour is used to estimate the value of a passenger's time.

It is estimated that the time savings experienced by passengers related to complaints to the CTA would result in a benefit of $18,209 PV ($2,593 annualized).

Passengers also initially save time not having to deal directly with the carrier for a refund when a flight disruption outside the control of the carrier occurs. It is assumed that a passenger in category 2 would spend 15 minutes talking to the carrier when a disruption occurs. An average wage rate of $36.28 per hour is used to estimate the value of a passenger's time.

It is estimated that the time savings experienced by passengers related to refunds for flight disruptions outside the control of carriers would result in a benefit of $1.75 million PV ($0.25 million annualized).

CTA savings from reduced refund complaints

For the same number of complaints reduced in the time savings benefit mentioned above as a result of the proposed Regulations, the CTA saves processing costs. From start to finish, the average complaint takes several months to complete. The average cost of a case, which may include facilitation, mediation or adjudication, and potentially involve the input of legal services and the CTA's decision makers (Members), is multiplied by the number of complaints to estimate the benefit to the CTA. The average cost of a case is $768 (based on internal CTA estimates).

It is estimated that the CTA would save $623,525 PV ($88,776 annualized) from a lower number of complaints as a result of the proposed Regulations.

Reduced passenger stress and anxiety

Passengers who do not have a refundable ticket, or travel insurance, have the added stress and anxiety of the potential loss of their money.

Similar to the methodology employed in the APPR RIAS,footnote 5 a premium for reduced anxiety of 1% is applied to the average wage rate of a Canadian passenger ($36.28 per hour) and multiplied by the total time saved by Canadian passengers attempting to get a refund. It is assumed that a Canadian passenger from category 2 would spend a total of one hour attempting to obtain, and worrying, about a refund from the carrier in the baseline.

It is estimated that Canadian passengers in category 2 would experience a benefit of $70,034 PV ($9,971 annualized) from reduced stress and anxiety.

Passengers who, in the baseline, would have filed a complaint with the CTA would also experience a reduction in stress and anxiety related to the status of their refund. It is assumed that a Canadian passenger would spend a total of 12 hours thinking, and worrying, about the status of their case with the CTA.

It is estimated that Canadian passengers would experience a benefit of $2,913 PV ($415 annualized) from reduced stress and anxiety from not having to deal with filing a complaint with the CTA.

Higher utility and satisfaction

Within category 1, in the baseline scenario, it is assumed that there are some passengers who would accept a voucher, and subsequently use the voucher, who would have preferred a cash refund if it had been offered. These passengers do not receive an incremental monetary benefit from the cash refund itself since they receive a voucher of equal value to the cash refund.

A voucher results in a lower utility level for many passengers as it only allows for one specific use, often with an expiration date. Passengers who go on to use the voucher for travel, in many cases, do so not necessarily because they wanted to travel, but because the alternative is allowing the voucher to expire, and getting nothing from the original flight disruption. In the regulatory scenario, with the cash refund, the passenger would experience a higher utility than they would have with the voucher.

At any given time, only 10% to 19% of gift card balances remain unredeemed, and roughly 94%footnote 6 of all gift cards are eventually used. If vouchers are used at the same rate as gift cards, a large proportion of passengers who receive vouchers go on to use them. Depending on how many would have rather received a cash refund, this benefit could be significant.

Costs

Refund payout by Canadian carriers for cancellations outside their control

Carriers that do not offer vouchers or refunds as a part of their tariffs (category 2 described earlier) in the baseline would now be required to provide refunds when they are unable to rebook the passenger within 48 hours, if the passenger wishes to be refunded.

This is an inverse of the benefit situation to passengers in that, in the baseline scenario, Canadian carriers, in category 2, retain the funds from the passengers for services not rendered. In the regulatory scenario, they would experience the cost of having to return that money to the passengers. Table 2 displays the incremental number of passenger legs forecasted to receive refunds from Canadian carriers as a result of cancellations outside their control over the study period. The same fares used to estimate the benefits to Canadian passengers are used to estimate the cost to Canadian carriers.

It is estimated that Canadian carriers would assume a cost of $32.83 million PV ($4.7 million annualized) paying refunds for flight cancellations outside of their control.

Refund payout by Canadian carriers for long flight delays outside their control

Canadian carriers would also have to provide refunds to passengers when a lengthy delay occurs due to a situation outside the carrier's control that prevents it from rebooking passengers within 48 hours of the departure time indicated on the original ticket. Table 3 displays the incremental number of passenger legs that are forecasted to receive refunds for lengthy flight delays by Canadian carriers.

It is estimated that Canadian carriers would assume a cost of $11.3 million PV ($1.60 million annualized) paying refunds for lengthy flight delays outside of their control.

Alternative forms of refund

The proposed Regulations would allow carriers to offer alternatives to cash refunds. These could include travel vouchers, travel credits and points towards loyalty programs. There would be conditions on these alternate forms of refunds, including that the value of the alternative form would have to be greater than the value of the ticket, and the passenger would have to be informed that they have the option to receive a refund in monetary form. Passengers would need to confirm in writing if they choose an alternative to a monetary refund.

Although this analysis assumes that carriers would pay refunds in cash, and that the alternatives are assumed to be of equal value to cash, the flexibility would help carriers adjust their practices to meet their individual needs. For example, this flexibility would allow carriers to provide more diverse competitive offerings and help mitigate the risk of carrier insolvency given that there are passengers who may be more interested in credits/vouchers than cash refunds. In addition, this could be used to foster and maintain customer loyalty and goodwill and ensure that the passenger would remain a customer following the event.

Under the proposed Regulations, this flexibility would be extended to all refunds under the APPR, thus providing the same benefits to airlines for cancellations or delays within the carrier's control as for disruptions outside their control.

Cost to process the refund

Similar to the costs of refunding passengers, only Canadian carriers from category 2 would experience this incremental cost. In the baseline scenario, Canadian carriers in category 1 would assume a similar cost of processing refunds or vouchers.

The cost is estimated by multiplying the time it would take to process a refund by the number of refunds that would be issued (for both cancellations and long flight delays outside the carriers' control) and by the average wage rate of the carrier staff member responsible for the task of issuing the refunds ($22 per hour for a carrier employee and $36 per hour for a third-party vendor).footnote 7 The average time reported by all respondents in the questionnaire is used to estimate the time to process the refunds (25 minutes).

It is estimated that Canadian carriers would assume a cost of $2.0 million PV ($0.29 million annualized) to process refunds for flight cancellations or long delays outside the carrier's control.

Cost to update the tariffs

Carriers would assume a cost to update their tariffs to reflect the requirements of the proposed Regulations. This cost would only be assumed by carriers in the first year following the coming into force of the proposed Regulations. It is assumed that lawyers, either internal or external, would make the changes to the tariffs. The cost is estimated by multiplying the time needed to make the changes and the average hourly rate of legal counsel responsible for making the change for each carrier. It is estimated it would take one day's worth of work (eight hours) at a wage rate of $42 per hour.

It is estimated that Canadian carriers would assume a cost of $11,394 PV ($1,622 annually) to update the tariff to reflect the new requirements of the proposed Regulations.

Cost of refunding unused ancillary services

Under the proposed Regulations, when a passenger is rebooked on an alternate flight following the cancellation or delay of their original flight, any ancillary service purchased by the passenger must be refunded if the service is not available to them on the alternate flight. This aligns with the existing APPR requirement for situations within a carrier's control (including those required for safety).

It is assumed that all passengers eligible for a refund under the proposed Regulations would accept one. This section applies the cost of refunding unused add-on services to those passengers who are rebooked within 48 hours of their original departure time in situations outside the carrier's control. According to the industry survey, more than 95% of passengers are rebooked within 48 hours.

Ancillary revenue is estimatedfootnote 4 to be $25.90 per passenger in 2020. It is likely that most passengers rebooked within the 48-hour period would be rebooked on the same plane as the one delayed or cancelled, with the same passengers from the original flight, and would be provided the same ancillary services. However, it is possible in some cases that a passenger would not receive all or some of the add-on services they paid for on the original flight (seat selection, checked baggage, etc.) requiring a refund of some or all of the $25.90 per passenger.

Given the low rate of cancellation and delay outside a carrier's control and high likelihood that the services would be provided, it is likely that the cost to carriers (and similarly small benefit for passengers) of refunding ancillary services would be low.

Downgrading of passengers on alternate flights

The proposed Regulations require that an air carrier refund the difference in price between the fare class paid for by the passenger and the lower class received on the alternate flight.

While, in these circumstances, an air carrier would have to refund the passenger a portion of the fare paid, they would not have to provide the services generally offered with those higher classes of fare. Those services (for example food, alcohol, free checked bags, lounge access) are assumed to be valued at the price difference between the fare classes.

In addition, as air carriers are in the business of customer service, it is assumed that they would strive to provide excellent service to all their passengers. They may especially wish to ensure a positive experience for preferred customers or those in higher fare classes to maintain their loyalty. Therefore, in the baseline scenario, it is fair to assume that air carriers would do everything they can to rebook these passengers at the same fare class, and would refund the price difference (and possibly more) in situations in which this is not possible.

It is expected that downgrading passengers will be a rare scenario due to the carriers’ focus on customer service, as well as the fact that higher fare classes generally are refundable. Therefore, those who do not want to accept alternate travel arrangements in a lower class could elect to receive a refund. Costs to carriers of downgrading passengers, if any, are expected to be low.

Refund deadline

The proposed Regulations would set a deadline for carriers to issue any refund required under the APPR (7 days for credit card refunds, 20 days for other methods). The Regulations currently do not set a deadline for refunds. Therefore, the time taken to provide refunds varies depending on the circumstances of the event prompting the refund. The proposed deadlines align with those already in place in the European Union and the United States. If, in the baseline scenario, carriers take longer to issue refunds than the deadlines set out in the proposed Regulations, they could experience a small cost.

There is a “time value of money” principle that money now is worth more than the same amount of money in the future, as it can be saved or invested and earn a rate of return. As the proposed Regulations would require a carrier to refund passengers earlier than they otherwise would have, this would represent a cost to the carrier and an equal benefit to the passengers. Carriers would not earn a rate of return on the refund amount for as long a period, but the converse would be true for passengers.

The cost experienced by the carriers and the benefit experienced by passengers should cancel each other out.

Consolidated cost-benefit summary

Table 5: Monetized costs
Impacted stakeholder Description of cost Base year: 2021–2022 Year 4: 2025–2026 Year 7: 2028–2029 Final year: 2030–2031 Total (present value) Annualized value
Canadian carriers Refunds paid for flight cancellations $3,556,877 $3,984,576 $4,310,137 $4,392,029 $32,825,162 $4,673,565
Refunds paid for long flight delays $1,204,567 $1,415,976 $1,481,933 $1,510,090 $11,310,709 $1,610,390.51
Cost to process refunds $215,620 $245,267 $263,133 $268,133 $2,004,323 $285,370
Cost to update tariff $11,394 $0 $0 $0 $11,394 $1,622
Total costs $4,988,459 $5,645,819 $6,055,203 $6,170,252 $46,151,587 $6,570,948
Table 6: Monetized benefits
Impacted stakeholder Description of benefit Base year: 2021–2022 Year 4: 2025–2026 Year 7: 2028–2029 Final year: 2030–2031 Total (present value) Annualized value
Canadian passengers Refunds received from flight cancellations $3,004,949 $3,786,164 $4,006,102 $4,159,780 $27,766,726 $3,953,357
Refunds received from long flight delays $1,623,556 $2,260,510 $2,391,823 $2,483,576 $16,440,999 $2,340,828
Time savings from refunds $184,628 $239,272 $253,171 $262,883 $1,750,848 $249,281
Time savings from reduced complaints $2,423 $2,423 $2,423 $2,423 $18,209 $2,593
Reduced stress/anxiety refunds $7,385 $9,571 $10,127 $10,515 $70,034 $9,971
Reduced stress/anxiety complaints $388 $388 $388 $388 $2,913 $415
CTA Time savings from reduced complaints $82,968 $82,968 $82,968 $82,968 $623,525 $88,776
All stakeholders Total benefits $4,906,297 $6,381,296 $6,747,001 $7,002,532 $46,673,254 $6,645,221
Table 7: Summary of monetized costs and benefits
Impacts Base year: 2021–2022 Year 4: 2025–2026 Year 7: 2028–2029 Final year: 2030–2031 Total (present value) Annualized value
Total costs $4,988,459 $5,645,819 $6,055,203 $6,170,252 $46,151,587 $6,570,948
Total benefits $4,906,297 $6,381,296 $6,747,001 $7,002,532 $46,673,254 $6,645,221
NET BENEFIT ($82,162) $735,477 $691,798 $832,280 $521,667 $74,273

Sensitivity analysis

A sensitivity analysis was conducted by altering the discount rate used to calculate the present value costs and benefits in this analysis. A 7% discount rate is used in the central analysis. Since the benefits of the refund paid to passengers are equal to the costs of the refund paid by carriers, and occur in the same period, the direction of the result of the CBA does not change when different discount rates are applied. As shown in Table 8, the net present value of the proposed Regulations is estimated to be $0.45 million when a discount rate of 10% is applied, $0.64 million with a 3% discount rate, and $0.76 million when undiscounted.

Table 8: Present value total benefits and costs using various discount rates
Discount rate Undiscounted 3% 7% (central analysis) 10%
Total benefit $63.18 million $55.10 million $46.67 million $41.68 million
Total cost $62.42 million $54.46 million $46.15 million $41.23 million
Net impact $0.76 million $0.64 million $0.52 million $0.45 million

Distributional impact analysis

The costs from the proposed Regulations may affect carriers differently. In absolute terms, the costs are mostly borne by the larger carriers, as they carry the most passengers and costs are driven by the number of refunds. For example, the two largest carriers are estimated to account for 72% of the costs to all carriers.

In terms of cost per passenger, smaller and northern carriers may incur higher costs than larger carriers. According to the industry questionnaire, for a variety of reasons, smaller and northern, carriers are able to rebook passengers within 48 hours after a cancellation or delay at a lower rate than the larger carriers. In addition, the percentage of cancellations due to situations outside a carrier’s control is slightly higher with the smaller carriers (mostly due to weather issues). Therefore, the number of cancellations and delays forecasted earlier in the analysis for these carriers is not reduced by as much to account for the number of passengers rebooked within 48 hours and the percentage of disruptions outside the carrier’s control.

In response to the proposed Regulations, carriers may increase fare prices, thus passing some or all of their costs to the passengers. This potential increase is not calculated in this analysis because it would be a business decision made by carriers and not a direct impact of the proposed Regulations. That said, price increases would be spread across all passengers, resulting in an increase of less than one dollar per ticket to recover the full cost estimated in this analysis.

Insolvency

Many industry stakeholders expressed concern that a requirement to refund passengers for cancellations or long delays outside their control could lead to higher rates of insolvency. Given the specific conditions under which a refund would be required, and the assumption that another world event, such as the COVID-19 pandemic, is unlikely to occur during the study period, it is not expected that the proposed Regulations would result in insolvency for carriers. Given the relatively small number of passenger legs forecasted that would receive refunds in comparison to the overall number of available seats in a non-pandemic period (less than half of a percent), the impact on industry operations is not expected to be significant.

Small business lens

There are three carriers covered by the proposal that meet the definition of a small business for the purposes of the small business lens analysis (having fewer than 100 employees). This is distinct from the concept of “small carrier” under the APPR (those that have transported fewer than two million passengers during each of the past two years).

Costs to small businesses associated directly with compliance with the proposed Regulations include the cost to refund passengers; the cost of processing refunds; and the cost to update the air tariffs.

The estimated annualized increase in total cost is $0.26 million (in 2021 dollars) for all affected small businesses and the average cost per small business is $85,408 (in 2021 dollars). The estimated present value of total costs and cost per small business over the 10-year period is valued at $1.80 million (in 2021 dollars) and $0.60 million (in 2021) respectively.

This proposal does not include any flexibilities solely targeted at small businesses. This approach ensures that passengers are equally entitled to a refund, regardless of the carrier from which they purchased their ticket. It also aligns with the refund provisions currently in place for flight disruptions within carrier control.

However, bearing in mind the objective of minimizing, to the extent possible, the risk of insolvency to carriers, the proposal does address a number of concerns raised by small carriers during the consultations. In particular, compared with the EU regime, this proposal provides more time for carriers to recover their schedules and rebook passengers before being required to refund passengers. This recognizes the realities faced by small carriers, particularly those in northern and remote areas, which tend to operate with lower frequency and smaller fleets, resulting in fewer rebooking opportunities than for large carriers.

In general, the APPR address concerns regarding small carrier viability through a two-tier approach to both compensation for inconvenience and rebooking requirements, with less stringent requirements for small carriers in those areas. The current proposal does not change the two-tier approach to rebooking requirements for flight disruptions outside a carrier’s control. As is currently the case, small carriers would not be required to rebook passengers on the flight of a competing carrier (one with which they do not have a commercial agreement).

Small business lens summary

Table 9: Compliance costs
Activity Annualized value Present value
Cost 1: Cost to refund passengers $244,468 $1,717,043
Cost 2: Cost to process refunds to passengers $11,618 $81,603
Cost 3: Cost to update tariff $136 $956
Total compliance cost $256,223 $1,799,602
Table 10: Total compliance and administrative costs
Totals Annualized value Present value
Total cost (all impacted small businesses) $256,223 $1,799,602
Cost per impacted small business $85,408 $599,867

One-for-one rule

The proposed Regulations would not require carriers to take on any incremental administrative costs, for example to keep additional records or report additional information, in order to meet the new refund requirements. The one-for-one rule therefore does not apply.

While carriers may provide information or documentation to the CTA in the context of dispute resolution or enforcement, those processes are not affected by the current proposal. They are the same processes the CTA uses currently to ensure carriers follow all policies in their tariffs, including refund policies.

Regulatory cooperation and alignment

This regulatory proposal is not being introduced to comply with an international agreement or obligation, nor does it relate to a work plan or commitment under a formal regulatory cooperation forum.

The CTA reviewed the refund regimes in place in the EU and the United States. Both jurisdictions require carriers to provide refunds for flights cancelled for any reason if the passenger prefers a refund to continuing their travel. However, in other respects, the EU and United States have somewhat different regimes:

As shown above, the EU and U.S. regimes do not always align. This limits the extent to which the proposed Regulations could align with them both. Instead, many key provisions generally align with either the EU or the U.S. model, as outlined in the “Consultation” section.

That said, some aspects of the proposed Regulations must be tailored to Canadian realities that may not exist, or not to the same extent, in either the EU or the United States. For example, those jurisdictions, in part because they have much larger populations in a smaller territory than Canada’s, have a significantly more varied air sector, with many more small- and medium-sized carriers active in their respective markets. They also do not have the same number and wide geographical distribution of hard-to-access communities in remote areas, including the Far North. This means they have less cause than Canada to consider the impact of regulations on small carriers offering lone, infrequent, critical service to remote locales, some of which often have extreme weather events during part of the year.

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

The proposed amendments would benefit the travelling public generally, by ensuring that Canada’s air passenger protection regime works as intended to support passenger rights. That said, there may be differential benefits for those of middle and lower incomes — people less able to absorb the out-of-pocket costs when a flight cancellation or serious delay does not result in a ticket refund.

These middle- and lower-income Canadians could face particular financial constraints in a widespread, sustained disruptive event of the type in which the proposed refund requirements would apply, such that the refund amount would be of financial importance to them. In the case of a pandemic, for example, they might suffer economic impacts similar to those created by COVID-19, which the Fall Economic Statement 2020 found to have included

The Economic Statement further found that in the COVID-19 context, job and wage losses have been higher among young people, low-income workers, people living with disabilities, and women.

Statistics Canada’s Survey of Household Spending shows that in recent years, most Canadians (except for the highest earners) have spent proportionally similar amounts on air travel: slightly less than 1% of their overall annual expenditures. However, in 2019, the most recent year for which data is available, those in the lowest bracket (with household expenditures of just over $37,000) spent 1.17% of their expenditures on air travel, meaning an average of $441. This was proportionally much more than most others, who remained under the 1% threshold. At the same time, those in the lowest bracket also spent proportionally much more on essential items such as food, shelter, and health care: 51%, compared to 44% or less for those in higher expenditures brackets. This helps demonstrate that not a receiving a refund for cancelled flights or lengthy delays is likely to be proportionally more painful for lower income households.

In sum, it is expected that various economically vulnerable populations would benefit from the financial protections established in the proposed Regulations when events outside a carrier’s control cause flight cancellations or lengthy delays.

Implementation, compliance and enforcement, and service standards

Implementation

The proposed amendments would come into force on the day on which they are registered. Once they are in force, passengers would be entitled to refunds for delays and cancellations outside of a carrier’s control, as described in this proposal.

Compliance and enforcement

The CTA’s ongoing monitoring of the air industry, and existing complaint processes and dispute resolution services, would apply to the new refund provisions.

The CTA monitors and enforces compliance by the entities it regulates, including carriers, using a variety of tools and activities. These include compliance self-assessment questionnaires, website and routine documentation reviews, desk inspections, and on-site inspections. The CTA’s approach is guided by its modern Compliance Monitoring and Enforcement Policy and enforcement process that were developed and published in 2019.

The CTA is responsible for ensuring that carriers follow the terms and conditions set out in their tariffs, which would include the new refund requirements. This is done through monitoring and enforcement and by addressing air travel complaints. The contravention of any APPR requirement is subject to administrative monetary penalties (AMPs) of up to $5,000 per offence for individuals and $25,000 for corporations, depending on the type of penalty and contravention. This would include the new requirements in the proposed Regulations.

Passengers can complain to the CTA if they believe a carrier has not followed the provisions set out in its tariff (which include all APPR requirements). Most passenger complaints are addressed through informal dispute resolution, namely facilitation and mediation (processes in which CTA staff help the passenger and carrier work through their dispute).

If the carrier involved refuses to participate in an informal dispute resolution, or those methods are not successful, the issue is resolved through formal adjudication. If it was found that the carrier in fact owed a refund, the CTA could order it to be paid. The refusal to obey the order could result in an AMP. The CTA has powers under the Act to apply an APPR-related adjudication decision made in response to a written complaint about a domestic or international flight, to all passengers on that flight.

Once the proposed Regulations are in force, the CTA will update its guidance and tools for the public and carriers to help ensure that carriers know their obligations, passengers know their rights, and the amended regime is implemented smoothly.

CTA costs associated with the proposed Regulations would be managed within existing reference levels.

Contact

Caitlin Hurcomb
Senior Policy Advisor and Team Lead
Regulatory Affairs Division
Analysis and Outreach Branch
Canadian Transportation Agency
15 Eddy Street, 19th Floor
Gatineau, Quebec
K1A 0N9
Telephone: 613‑853‑3381
Email: Caitlin.Hurcomb@otc-cta.gc.ca

PROPOSED REGULATORY TEXT

Notice is given that the Canadian Transportation Agency, pursuant to subsections 86.11(1)footnote a and 177(1)footnote b of the Canada Transportation Actfootnote c and subject to the approval of the Administrator in Council, proposes to make the annexed Regulations Amending the Air Passenger Protection Regulations.

Interested persons may make representations concerning the proposed Regulations within 60 days after the date of publication of this notice. All representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Caitlin Hurcomb, Team Lead and Senior Policy Advisor, Regulatory Affairs, Canadian Transportation Agency, 15 Eddy Street, Gatineau, Quebec K1A 0N9 (tel: 613‑853‑3381; email: Caitlin.Hurcomb@otc-cta.gc.ca).

Ottawa, June 23, 2021

Julie Adair
Assistant Clerk of the Privy Council

Regulations Amending the Air Passenger Protection Regulations

Amendments

1 Subsection 2(3) of the French version of the Air Passenger Protection Regulationsfootnote 8 is replaced by the following:

(3) Le transporteur émetteur d’un titre de voyage à un passager est responsable envers ce dernier des obligations prévues aux articles 5 et 6 ou, de celles figurants dans les tarifs applicables et concernant les mêmes sujets si elles prévoient des conditions plus avantageuses pour les passagers.

2 Paragraphs 10(3)(b) and (c) of the Regulations are replaced by the following:

3 Paragraph 12(3)(d) of the Regulations is replaced by the following:

4 (1) The portion of subsection 17(1) of the Regulations before paragraph (a) is replaced by the following:

17 (1) If paragraph 11(3)(c), (4)(c) or (5)(c) or 12(2)(c), (3)(c) or (4)(c) applies to a carrier, it must provide to each passenger, free of charge, the following alternate travel arrangements to ensure that the passenger completes their itinerary as soon as feasible:

(2) The portion of paragraph 17(2)(a) of the Regulations before subparagraph (i) is replaced by the following:

(3) Subsection 17(4) of the Regulations is repealed.

(4) Subsections 17(6) and (7) of the Regulations are repealed.

5 Subsection 18(1) of the Regulations is replaced by the following:

Delay or cancellation — outside carrier’s control

18 (1) If paragraph 10(3)(b) or (c) applies to a carrier, it must provide to each passenger, free of charge, a confirmed reservation for the next available flight that is operated by the original carrier, or a carrier with which the original carrier has a commercial agreement, is travelling on any reasonable air route from the airport at which the passenger is located to the destination that is indicated on the passenger’s original ticket and departs within 48 hours of the departure time that is indicated on that ticket.

Passenger’s choice

(1.1) If a carrier cannot provide a confirmed reservation in accordance with subsection (1), it must refund the passenger for any unused portion of the ticket or provide the following alternate travel arrangements, free of charge, if the passenger does not wish to be refunded:

Return to point of origin

(1.2) However, if the passenger is no longer at the point of origin that is indicated on the original ticket and the travel no longer serves a purpose because of the delay or cancellation, the carrier must refund the ticket and provide to the passenger a confirmed reservation for a flight to that point of origin that accommodates the passenger’s travel needs.

Refund

(1.3) A passenger who is eligible to be refunded under subsection (1.1) may choose a refund at any time prior to being provided with a confirmed reservation.

Denial of boarding — outside carrier’s control

(1.4) If paragraph 10(3)(d) applies to a carrier, it must provide to each passenger, free of charge, the following alternate travel arrangements to ensure that the passenger completes their itinerary as soon as feasible:

6 The Regulations are amended by adding the following after section 18:

Refund of additional services

18.1 (1) A carrier must refund to a passenger who has been provided with alternate travel arrangements under section 17 or 18 the cost of any additional services purchased by the passenger in connection with their original ticket if

Refund for lower class of service

(2) If the alternate travel arrangements provide for a lower class of service than the original ticket, the carrier must refund the difference in the cost of the applicable portion of the ticket.

Method used for refund

18.2 (1) All refunds provided under these Regulations must be paid to the person who purchased the ticket or additional service and must be paid using the method used for the original payment, unless

Refund deadline

(2) Refunds must be provided by a carrier

7 The portion of subsection 19(2) of the Regulations before paragraph (a) is replaced by the following:

Compensation in case of refund

(2) If paragraph 12(2)(d) or (3)(d) applies to a carrier and the passenger’s ticket is refunded in accordance with subsection 17(2), the carrier must provide a minimum compensation of

8 Item 45 of the schedule to the Regulations is repealed.

9 The portion of items 47 to 51 of the schedule to the Regulations in column 1 is replaced by the following:
Item

Column 1

Provision, Requirement or Condition
47 Subsection 18(1)
48 Subsection 18(1.1)
49 Subsection 18(1.2)
50 Paragraph 18(1.4)(a)
51 Paragraph 18(1.4)(b)
10 The schedule to the Regulations is amended by adding the following after item 53:
Item

Column 1

Provision, Requirement or Condition

Column 2

Maximum Amount Payable — Corporation ($)

Column 3

Maximum Amount Payable — Individual ($)
53.1 Paragraph 18.1(1)(a) 25,000 5,000
53.2 Paragraph 18.1(1)(b) 25,000 5,000
53.3 Subsection 18.1(2) 25,000 5,000
53.4 Subsection 18.2(1) 25,000 5,000
53.5 Paragraph 18.2(2)(a) 25,000 5,000
53.6 Paragraph 18.2(2)(b) 25,000 5,000

Coming into Force

11 These Regulations come into force on the day on which they are registered.