UPDATE 1-Canada air policy changes could stem traffic loss to US -report

* Report says 5 mln head to U.S. annually for cheap flights

* Policy changes can reduce trend, report says

(Adds comment from Federal Finance Minister Jim Flaherty)

By Susan Taylor

TORONTO, Oct 3 (Reuters) - The Canadian government and itsairlines could make a range of policy changes to slow the tideof 5 million travelers a year that head to the United States forcheaper flights, a think tank report said on Wednesday.

Slashing the fees and taxes that account for roughly 40percent of the difference between Canadian and U.S. air fareswould have a significant impact but doing so looks unlikelygiven tight government budgets, the Conference Board of Canadareport said.

But there is a long list of more modest policy changes thatcould lead to lower prices, the report said.

Federal Finance Minister Jim Flaherty said the loss oftravelers to the United States was troubling.

"Yes, we are concerned about that, and (Transport) Minister(Denis) Lebel has been working on a consultation project withthe airlines, with the airport authorities in Canada, who arevery important on this issue, to try to see what we canaccomplish, and we'll hear more from him over time," he toldreporters in Ottawa.

Flaherty did not provide details on the consultationproject's goals or timetable.

"Cross-border air-fare shopping is being driven by aperfect storm of factors that also includes differences inwages, aircraft prices, and industry productivity as well asU.S. aviation policies," said the study's principal researchassociate, Vijay Gill, in a release.

"For air carriers flying from American airports, these addup to a 30 percent cost advantage."

The report suggested that governments could shift the waythat taxes and fees are generated. For example, the federalgovernment could change the formula for airport rents.Currently, rents rise with airport revenue, but that couldchange to flat payments.

The government could also reduce its trans-border securitycharge on passengers, so that it matches or falls below thecharge for domestic flights. Alternatively, the government couldshift the charge directly to airlines, which could then allocatethe cost according to demand.

Disparities with U.S. aviation policy, which have a majorimpact on after-tax fares, could also be reduced, the reportsaid.

On the airline side, carriers could change per-passengercharges to a pool of fees, the paper suggested, allowing thecarriers to spread the fees among flights and passengers as theysee fit.

The study was done at Canada's three busiest airports, inToronto, Vancouver, and Montreal, and at the U.S. airports withwhich they compete.

"The fact that Canada's largest airports are losing trafficto cross-border competitors matters because it undermines theirrole as national and international hubs," DavidStewart-Patterson, the Conference Board's vice president ofpublic policy, said in a statement.

"When a Canadian hub airport loses passengers, it can leadto reduced flight frequencies, higher travel costs and poorerservice for all Canadians."

(Additional reporting by David Ljunggren in Ottawa; Editing byPeter Galloway)

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Keywords: CANADA AIRPORTS/