The Push for Arrival Duty Free in Canada

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I recently came across the following post on Twitter advocating for duty free purchases upon arrival at Canadian airports.

The coalition of airports are:

  • Ottawa (YOW)
  • Calgary (YYC)
  • Edmonton (YEG)
  • Montreal (YUL)
  • Quebec City (YQB) 
  • Toronto (YYZ)
  • Winnipeg (YWG)
  • Vancouver (YVR)

These airports combine to represent close to 90% of the country's passenger traffic based on numbers published by Statistics Canada. With such a majority of the country's airports advocating for this change, I wondered what's in it for them and why Canada had yet to adopt arrival duty free.

 

WHAT IS DUTY FREE?

Duties are a kind of tax and are defined in the Customs Act of Canada as "those taxes levied or imposed on imported goods." Consequently, duty free shops are licensed places for "the sale of goods free of certain duties or taxes levied....to persons who are about to leave Canada". 

Anyone who has travelled internationally through an airport will be familiar with duty free shops. Most airports are intentionally designed so that you are forced to walk through duty free shops, the idea being that it will increase the likelihood of a purchase. The incentive for an outbound traveller is in making any last chance purchases at a cheaper price given that most duty free goods are exempt from duties and taxes. More information can be found at the Canadian Border Services Agency (CBSA) website here. Whether duty free shopping is a bargain is up for debate as there are several factors that determine how much money, if any, is saved. This doesn't seem to impede spending, however, as worldwide duty free sales are expected to hit $73.6 billion by 2019

Regarding prices at duty free shops, the Customs Act includes a note that says, "The operator of a duty free shop shall ensure that the prices of goods offered for sale at the duty free shop reflect the extent to which the goods have not been subject to duties and taxes." Indeed, the Toronto Star found that purchasing alcohol and tobacco, which are otherwise heavily taxed, can be cheaper at duty free shops and the Canadian government, it seems, would agree as it places strict limits on the amount you can bring back home upon arrival. A list of restrictions can be found here.

 

THE HISTORY OF DUTY FREE SHOPS

Coincidentally, I also came across a recent NPR Planet Money podcast on the history of duty free shops which you can listen to here. The show describes the first duty free shop as having been opened at Shannon airport in Ireland in 1951. The airport was a popular stopping point for flights originating in the Americas as limited aircraft range required planes to land on the first runway after crossing the Atlantic - which happened to be at Shannon. With flying being so expensive back then, you can imagine only celebrities, presidents, prime ministers and kings and queens could afford to fly. Shannon airport hired Brendan O'Reagan to cater to this exclusive clientele, who crafted local dishes like Kerry lamb, Dublin prawns, Limerick butter and even Irish coffee.

In addition to the restaurant, O'Reagan also ran a kiosk that sold mini bottles of whisky and trinkets. He noticed a loophole whereby sailors aboard ships on long voyages could bring aboard rum and whiskey without paying duties. On a return trip to Shannon from the States via cruise ship, O'Reagan realized the alcohol on the ship was way less expensive than what he had been serving at his own kiosk thanks to the elimination of duties. Armed with this information, O'Reagan petitioned the Irish government to adopt the same exclusions resulting in the world's first duty free shop.

 

WHAT'S IN IT FOR THE AIRPORTS?

Airports in Canada are operated by local non-profit airport authorities that receive no government support and instead pay rent to the federal government. Revenue is primarily obtained through 2 sources - aeronautical and non-aeronautical. A look at Edmonton International Airport's 2017 Annual Report shows us that EIA recorded $215 million in total revenue split across non-aeronautical (30.3%), aeronautical (25.8%) and AIF (43.9%).

AIF is the airport improvement fee which is collected by the airlines on behalf of airports for only those passengers originating at the respective airport. This does not include connecting passengers or non-revenue passengers like flight crew. The fee's purpose is to fund capital programs for airport infrastructure and related financing costs. Air Canada offers a resource for AIF charged across the major airports. I also read a CBC article that stated that not all of this fee makes its way to the airport - airlines receive between 4 and 7 per cent and chalk it up to a "processing fee". 

Aeronautical revenue comprises fees relating to airside operations - aircraft landing fees, terminal fees, US pre-clearance fees, bridge fees etc. In EIA's case, aeronautical revenue represents 25.8% of total revenue generate. 

Non-aeronautical revenue is collected from those activities that are not associated with airside operations like parking, concessions, ground transportation and real estate. Concessions are how airports make money from retail outlets including duty free shops. EIA's annual report has a note under revenue recognition that gives us an idea as to how it earns this revenue. The note states that EIA collects "the greater of agreed percentages of reported concession sales and specified minimum rentals over the terms of respective leases.

It should now be clear that expanding duty free to arriving passengers will directly benefit airports. A greater pool of passengers who shop at these stores translates into higher sales and therefore greater concessions for the airports. More importantly, however, increasing non-aeronautical revenue reduces an airport's dependence on aeronautical revenue. Indeed, ACI - the voice of airports worldwide - stated that non-aeronautical revenues are a vital component in the economics of airports that helps cushion the impact of lower passenger and freight volumes during an economic downturn. Non-aeronautical revenues may also critically determine the financial viability of an airport as they can generate higher profit margins than aeronautical revenues. Whether non-aeronautical can and should be used to reduce airport charges is hotly debated between ACI and IATA, the trade association of the world's airlines, but that's a topic for another day. 

 

THE CASE FOR ARRIVAL DUTY FREE

Canadian Airports Council (CAC), in a submission to the Department of Finance in 2009, stated that implementing arrival duty free will:

  • Repatriate $60-70 million in duty free sales that are currently going to foreign airports
  • Create 400 immediate new jobs representing $13 million in wages
  • Generate $3-7 million in direct federal taxes
  • Position Canada at the forefront of the G8 in this area

The report points to when arrival duty free was implemented in Norway in 2005, causing Copenhagen airport in Denmark to report a 3.2% drop in revenue associated with sales repatriated by Norway. A case study of arrival duty free in Australia is also included where duty free sales grew by 30% with no impact on domestic retail sales. Former Australian Tourism and Customs Minister, Hon. John Brown, is quoted as saying that "Arrival duty free has become an accepted and valued aspect of Australia's welcome to tourists.. the availability of arrival duty free has transformed the first experiences of Australia's airports from a less sterile to a more vibrant and welcoming experience."

 

THE OPPOSITION TO ARRIVAL DUTY FREE

Opposition mostly comes from domestic retail operations who fear arrival duty free will cannibalize their sales, but CAC again points to Australia that saw no decrease in domestic retail sales after implementing arrival duty free, the idea being that sales at arrival duty free are those that would otherwise be purchased at the originating international airport. To support this, the report highlights Hong Kong's Legislative Council Panel on Financial Affairs which stated that "We believe that the sale of duty-free goods on arrival would largely replace the purchase of such equivalent goods outside Hong Kong. Hence, there should not be any overall revenue implications arising from the sale of duty free goods on arrival." 

I would also imagine opposition to come from the federal government because of the loss in taxes. If I'm a tourist travelling to Canada and purchase alcohol on arrival, that is money that would otherwise have gone to a domestic retail operation and subsequently, the government. Whether the additional taxes generated by arrival duty free will be enough to offset this loss remains to be seen. 

Personally, I am a big advocate for airports and support any change that allows airports to increase their revenue generating capabilities. Whether that increased revenue is used to reduce fees for aircraft or whether it's used for future capital investments - the passenger and the local economy benefits - and I'm all for that.