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One Passenger - One Fare
Published in the February 2008 issue of Transportation Notes - View Article
On January 10, 2008, the Canadian Transportation Agency released a decision which, if not overturned on appeal, will require certain air carriers operating a domestic air service in Canada to provide additional seats without additional charge to various persons with disabilities. Included in the population targeted for this benefit will be all persons who require attendants in accordance with the criteria specified in the carriers’ tariffs as well as all persons who require extra seating to accommodate themselves. This last category will mostly be composed of the obese. It has previously been decided in Canada (Transportation Notes, February 2006) that the obese are disabled if they cannot “fit” into an airline seat.
The Agency heard evidence from economists and accountants respecting the probable costs of the remedy sought. The range of possibilities suggested by the parties was quite wide and the Agency settled on a figure not quite at the very low end of the range suggested, but close to it. The Agency estimated that the three carriers involved in the litigation (Air Canada, Jazz and WestJet) would suffer a loss of more than $9 million a year, on a pre-tax basis, if required to implement the measures and if unable to pass the costs on to passengers in the form of increased fares. The Agency concluded that the carriers did not offer sufficient evidence that a loss of this magnitude would constitute “undue hardship” and accordingly imposed the remedy sought. The Agency acknowledged that implementation of the remedy would require some time. The carriers would be required to develop procedures to properly identify the persons entitled to the remedy and to eliminate those who might apply although they do not fall within the intended target population. In order to develop these and other necessary procedures, the carriers were given one year. Accordingly, subject to possible appeal, the remedy would take effect in Canada in mid-January 2009.
The order of the Agency is limited to domestic flights. It would not apply to any foreign carriers. Furthermore, it would not apply to domestic segments of a flight sold in conjunction with transborder or international segments.
This case follows some 30 years of debate on the issue in Canada. Unlike previous instances in which the issue had been considered, the present litigation involved a detailed analysis of the financial and economic consequences of the proposed remedy. As noted above, the Agency arrived at an estimate of costs which is near the low end of the range proposed. Some of the factors which will determine the ultimate costs are uncontroversial, others not. The main determinants are reviewed briefly below.
The first figure in the equation is the number of persons with disabilities, in Canada, who travel by air. There was not much controversy over this figure and the number accepted by the Agency (for 2005) was 872,000.
The next variable element is the centre of the greatest and most significant controversy: how many of these 872,000 individuals will qualify for the proposed remedy? There is good data to suggest that between 18.5% and 22% of all disabled passengers who travel by any mode (air, rail, ship, bus or private automobile) are in the habit of traveling with a companion. However, the Agency did not accept that figures in this range were good approximations of the percentage which would qualify. The Agency, basing itself on the evidence given by an economist called by the applicants, chose the figure of 3.6%. The Agency conceded that, in order to keep the number of persons who qualify consistent with this estimate, carriers will have to develop criteria and policies to eliminate persons who would wish to obtain a free seat but who are not in the population targeted by the order. As noted above, carriers were given one year to devise those policies.
The next controversial number is “flight frequency”. The Agency, having concluded that some 31,000 people would qualify for a free attendant seat each year, then needed to determine how often these people would fly. Economists retained by the Agency and applicants testified that the best number they could suggest was approximately 5 one-way trips per year. Each expressed some reserves about this figure and suggested it might be “highish”. A third economist, retained by one of the carriers, gave evidence which was interpreted by the Agency to mean that the correct number is 2.5 one-way trips. The Agency accepted 2.5 as the best estimate. The Agency’s interpretation of this evidence is contentious.
Thus, on the basis of one uncontroversial number (number of disabled who fly) and two highly controversial numbers (how many “need” attendants and how often these fly) the Agency settled on a figure of approximately 78,000 flights. This represents all flights (defined as one way voyages) taken by qualifying Canadians with disabilities in a year. This figure was then reduced (in non-controversial calculations) to domestic flights and allocated to the carriers in accordance with their share of domestic traffic.
That, then, gave the first part of the costs equation: the number of qualifying flights on each carrier, considering only those persons who qualify because they “need” attendants. We say “need” in quotes, because this number does not include the disabled who admittedly will want attendants but who are supposed to be winnowed out by some yet-to-be-developed selection criteria and elimination process.
What is needed next is an estimation of the number of obese people who will not “fit” into an aircraft seat. A good deal of evidence was led respecting the concept of “fit”. All are agreed that this is a subjective concept. Some believe it is virtually impossible to operationalize. Again, the Agency expressed the view that air carriers would be able to devise a procedure to reduce the subjective concept to a workable selection criterion. After hearing non-controversial evidence to the effect that more than 20% of the adult Canadian population is obese and that about 2% of the population is “morbidly” obese, the Agency selected the latter number as the best estimate of the percentage of Canadians who would not “fit” in a seat because of their obesity. As noted above, the Courts in Canada have already accepted the proposition that an obese person who cannot fit in a seat is a disabled person in Canadian law. It has also been determined that the cause of obesity is irrelevant.
The Agency’s 2% figure gives us about 48,500 obese individuals who would not “fit” in a seat. The next step in the Agency’s analysis is controversial. In order to proceed with a calculation of the costs of the proposed remedy it is necessary to estimate how many of these individuals travel. The evidence was that more than 18% of all persons with disabilities travel by air and that the travel propensity of the obese is slightly higher than this. The only witness called by the intervenor (an obese person who does not fit in a seat) agreed with this proposition. The economist called by the applicants suggested an even higher figure for propensity to travel. The Agency however found all of these figures too high and selected 10% as the most reasonable figure. This of course reduces the target group to just under 5,000 whereas the 20% propensity rate would have doubled the number and resulted in greater costs.
On the basis of the figures accepted by the Agency, the annual costs, before tax considerations, of the proposed remedy were calculated as $7.1 million for Air Canada and $2.3 million for WestJet. It goes without saying that if any of the assumptions made by the Agency respecting size of the qualifying population, propensity to travel and number of trips per year should prove to be wrong, the loss figures will increase accordingly. The Agency recognized the significance of the costs, even calculated on the basis of their contentious assumptions, but was not persuaded to withhold the remedy.
An important issue concerns the ability of the carriers to pass on these increased costs in the form of increases in the ticket price. The Agency did the arithmetic and concluded that the losses could be recouped by increasing all ticket prices by less than a dollar each. Although it did acknowledge that the economist retained by the applicants agreed that it was not reasonable to believe that carriers could impose fare increases which would “stick” and although this was the evidence tendered by the carriers themselves, the Agency apparently decided to reject this view although the basis of the decision is perhaps not entirely clear in this respect.
In any event, the Agency did also consider the impact of these annual losses on the enterprise value of the carriers. A methodology proposed by a witness called on behalf of the carriers, and explicitly accepted by the economist who testified for the applicants, suggested that the impact on enterprise value could be estimated by multiplying each dollar of annual loss by a factor of between 9 and 13. The economist retained by the applicants accepted 12 as a reasonable factor and then proceeded to demonstrate, in his estimation, that the impact of the losses would not be discerned by a market observer as it would fall within a range of expected random variation in value. This range he referred to as “market noise”. When it was pointed out to this witness that his calculations were based on an erroneous assumption respecting the market capitalization of Air Canada he admitted that his conclusion was incorrect and that the change in value would be greater than “market noise”. He declined to opine on whether it would be material and suggested that was the domain of the Agency.
The Agency responded by changing the definition of “market noise” in a fashion which was not discussed or suggested in the proceedings. By doing so, it was able to return to the proposition that the changes in enterprise value would be lost in “market noise”. Thus, the Agency is able to conclude that overall enterprise value impacts of approximately $110 million are not demonstrably material and constitute no reason to prevent adoption of the proposed remedy.
While both the EU and the USA have implemented requirements for the accommodation of persons with disabilities and are considering further requirements, it is clear that Canada has taken a large step beyond what any other jurisdiction in the world is proposing today.
Under the applicable legislation, this decision can be appealed to the Federal Court of Appeal on a question of law or jurisdiction, but only with leave. An application for leave to appeal was launched on February 11, 2008. In the normal course, a decision on that application may be expected in approximately two months.
CTA Decision 6-AT-A-2008