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 its airlines could make a range of policy changes to slow the tide of 5 million travelers a year that head to the United States for cheaper flights, a think tank report said on Wednesday.

Slashing the fees and taxes that account for roughly 40 percent of the difference between Canadian and U.S. air fares would have a significant impact but doing so looks unlikely given tight government budgets, the Conference Board of Canada report said.

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

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

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

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

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

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

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

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

Disparities with U.S. aviation policy, which have a major impact on after-tax fares, could also be reduced, the report said.

On the airline side, carriers could change per-passenger charges to a pool of fees, the paper suggested, allowing the carriers to spread the fees among flights and passengers as they see fit.

The study was done at Canada's three busiest airports, in Toronto, Vancouver, and Montreal, and at the U.S. airports with which they compete.

"The fact that Canada's largest airports are losing traffic to cross-border competitors matters because it undermines their role as national and international hubs," David Stewart-Patterson, the Conference Board's vice president of public policy, said in a statement.

"When a Canadian hub airport loses passengers, it can lead to reduced flight frequencies, higher travel costs and poorer service for all Canadians."

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

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