Transborder demand leakage and the US–Canadian air passenger market

The US–Canadian air traffic market is one of the largest international markets in the world – estimated at 23 million passengers in 2008. The market is currently regulated by an “Open Skies” agreement, which eliminated all restrictions on the frequency of flights, the aircraft flown, and the fares charged on transborder routes. Although there is evidence that consumers have benefited from the Open Skies agreement, there is also evidence that many passengers have chosen to avoid transborder services, and instead fly from airports in US border cities and cross the border by surface transportation. This paper uses a passenger demand model to determine the scope of this “leakage” from transborder routes. In addition, transborder airfares are compared to US domestic airfares to determine whether transborder fares are “excessive”, a potential cause of the leakage. Results show a substantial amount of leakage estimated at over 4.7 million passengers for 2008. Furthermore, after controlling for the impact of route-specific variables, such as market concentration, average fares are 28.2% higher in the transborder market. Finally, policy implications and the future of the transborder air passenger market are discussed.

► We estimate annual leakage from Canadian to US airports in 2008 at over 4.7 million passengers. ► Controlling for route-specific variables, fares are 28.2% higher in the transborder market. ► The gross revenue loss to airlines operating on transborder routes is over $1.3 billion in 2008. ► The savings to passengers choosing alternative US routes in 2008 is approximately $480 million. ► The Open-Skies policy regulating the US–Canadian transborder market may be sub-optimal.