Final Report - The Airline Industry

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Chapter 7

The Airline Industry
Following Air Canada's acquisition of Canadian Airlines International, the ability of the domestic airline industry to give Canadian consumers high-quality service at a reasonable price became a major focus of attention and concern. Legislation that took effect on July 5, 2000, sought to address some of these concerns:

Revisions to the Canada Transportation Act gave the Canadian Transportation Agency stronger powers to monitor prices on monopoly routes and to oversee the terms and condition of carriage.
Amendments to the Competition Act gave the Competition Bureau additional powers to address airline-specific anti-competitive acts and to ensure potential entrants have access to essential facilities.

Airlines must now provide longer notice if they intend to terminate service to small communities. In addition, the government created an Independent Transition Observer on Airline Restructuring and an Air Travel Complaints Commissioner at the Agency. Both have released their initial report.¹
With recent legislation aimed at controlling Air Canada's market power, Canadian policy has turned 180 degrees from earlier years, when Air Canada was an instrument of government policy and the focus was on protecting the country's national airline from undue competition. Throughout the 1980s, government dismantled most of the restrictions limiting the ability of Canadian carriers to respond to market forces, paving the way for development of a competitive industry offering more frequent flights, fares that better reflected airlines' costs, and a significant range of price and service offerings.
Many countries' airline sectors have weathered a period of consolidation and restructuring in recent years, including the disappearance of major carriers through mergers or bankruptcy. In the United States, consolidation is continuing as major airlines strive to increase the scope and scale of their route networks, strengthen their hubs and expand service on international routes.² Airline restructuring has different implications in the U.S. than in Canada, however, where the result leaves one major carrier. Recent developments underscore the challenges of attempting to create conditions to sustain a competitive airline industry in the relatively small Canadian market.
On transborder and international routes, U.S. and other foreign carriers give Canadian travellers additional options. Submissions to the Panel focused almost exclusively on domestic markets, yet transborder and international traffic accounts for more than half the industry's revenues and recently has been the area of strongest passenger growth.

Market Developments

Traffic Trends
Dramatic changes in industry structure have occurred against the backdrop of strongly growing airline activity. Growth in air passenger traffic has outstripped growth in the overall economy. The increase in passenger output from 1987 to 1999 (measured by an index based on passenger-kilometres travelled3) was almost double the growth in constant dollar gross domestic product. Air cargo output growth over that period matched GDP growth (Figure 7.1).

High growth in passenger travel results from strong activity in international and transborder markets, where traffic increased at average annual rates of 5.6% and 4.7% respectively over the 1987-1999 period. Meanwhile, average annual growth in domestic passenger travel, at 2%, was below GDP growth of 2.5%. The influence of the economic cycle on domestic traffic is apparent in Figure 7.2. International and transborder travel experienced more sustained growth, which continued into 2000 according to preliminary estimates.
Moderate increases in fares and declines in freight rates contributed to air traffic growth. The nominal price of air passenger service increased by 2.2% a year on average between 1987 and 1999 (Figure 7.3), which translates into an annual decline in real terms of 0.4% (deflated by the Consumer Price Index). The price of freight services in nominal terms declined by 1.1% a year on average.
These growth patterns are expected to continue. Between 1999 and 2004, growth in aviation demand is projected to continue to outpace real economic growth in international and transborder passenger and air cargo markets and to lag behind overall economic growth in the domestic market (Figure 7.4).⁴

Over the next 20 years, passenger traffic will grow at an estimated rate of 3.1% annually and freight traffic at a rate of 4.8%. Total arriving and departing flights (itinerant aircraft movements) of 5 million in 1999 are projected to grow by 1.7% per year. Slower growth in the number of flights compared to air traffic reflects expectations of a trend toward using larger aircraft and higher load factors.

The Domestic Market
Air Canada has always been the largest carrier, initially as the publicly owned carrier, with exclusive rights to serve domestic markets, and latterly, since relaxation of entry and pricing restrictions, by success over domestic competitors. With the acquisition of Canadian Airlines International, Air Canada moved from the 18th to the 12th largest passenger airline in the world and the 7th largest in North America. While restructuring will take some time to complete, since the beginning of 2000, Air Canada has made progress in integrating CAI's operations, including those of its regional carriers:

Route schedules have been redesigned and airline capacity redeployed to eliminate duplication and improve aircraft utilization.
CAI's regional airlines and cargo operations have been merged with Air Canada's.
Operating, maintenance and administrative functions have been amalgamated.
Airport operations, including those at Air Canada's Toronto hub, have been integrated.

The other major development in the domestic market has been expanded service by medium-sized carriers. WestJet, Western Canada's discount carrier, which began operations in February 1996 and has recently extended its services into Eastern Canada, has been Canada's fastest growing and most financially successful independent carrier. The largest independent is Canada 3000, a 12-year-old airline that has gone from being a charter carrier to a significant provider of low-cost scheduled service. With its recent acquisition of Royal Airlines and CanJet Airlines, Canada 3000 has become a more important player in the domestic industry. Air Transat, Canada's largest charter-type carrier, has been expanding its domestic service as well.⁵
Most recently, new entrants have begun service, including Capital City Air, an Edmonton-based carrier, while small regional carriers like Hawkair and Peace Air have expanded their service.
This expansion has created new options for travellers, but it has not significantly affected Air Canada's position as the dominant carrier. Early in 2001, Air Canada estimated that it had a 90% share of Canadian travel agency sales and a 75% share of seat capacity in the domestic market.⁶ After Air Canada gained control of CAI, it became the sole carrier on the majority of the top 200 domestic routes.⁷ As of August 2000, Air Canada accounted for 80% or more of the capacity on 11 of the top 25 domestic routes and at least 50% of the capacity on 22 of the routes.⁸
Niche and fringe carriers serve mainly leisure travellers and some less time-sensitive business travellers in major markets. Air Canada has important competitive advantages in the general business market, where travellers value the airline's flight frequency, seamless service, frequent flyer points and other amenities. Canada 3000 is targeting business travellers on selected city routes, but it does not pose a major threat to Air Canada's dominance of this segment.
Competition is also limited in the markets served by Air Canada's regional airlines. After trying unsuccessfully to find a buyer, Air Canada absorbed CAI's regional affiliate in August 2000, then subsequently incorporated it — along with Air Ontario, Air Nova and Air BC — as Air Canada Regional Inc. early in 2001. Although the regionals play an important role as feeders to Air Canada, more than 65% of their customers use the airlines for local travel. In most local and regional markets, there is no alternative scheduled or charter service. These markets appear 'contestable', but prices are generally not subject to competition from other market participants.

Transborder and International Markets
Since the signing of the 1995 Open Skies agreement — allowing Canadian and U.S. carriers virtually unrestricted access on transborder routes — air traffic between Canada and the U.S. increased substantially, from 13.6 million passengers in 1994 to almost 20 million in 1999. Canadian carriers, which have strengthened their competitive position in this market since the agreement, now account for about half the transborder traffic. Air travel in this segment will be facilitated further by the Canada-U.S. Air Travel Agreement, signed at the beginning of 2001, which will expand pre-clearance services at Canadian and U.S. airports, as well as in-transit pre-clearance for third-country passengers travelling to the U.S. by way of a Canadian airport.⁹
Most travellers have choices on transborder routes. As of December 31, 2000, Canadians flying to the U.S. had access to two or more U.S. carriers, along with at least one Canadian carrier, at eight airports. Transborder routes from Toronto, Vancouver and Calgary were served by nine, eight and six U.S. carriers respectively. While only one or two carriers offer direct flights from Canadian airports to many specific U.S. destinations, the availability of connecting services through U.S. hubs limits the prices that can be charged for non-stop services between Canada and the U.S.
International air passenger services are governed by some 70 bilateral agreements between Canada and other countries. The agreements specify the rights of carriers on international routes, including cities to be served, aircraft to be used, and frequency of service to be provided. Canadian policy has been to designate one Canadian carrier to serve a destination until an international route generates more than 300,000 one-way origin-destination passengers annually, and to subject all route rights to a 'use it or lose it' requirement. Following Air Canada's acquisition of CAI, the Minister of Transport suspended the use it or lose it provision temporarily. The government also negotiated the transfer to Air Canada of virtually all of CAI's international route rights and slots at New York's La Guardia and Chicago's O'Hare airports.
Bilateral agreements ensure that international traffic is shared among designated carriers. Most of Canada's international traffic originates and terminates in Toronto, Montreal and Vancouver, and each of these cities is served by a large number of international carriers: Toronto by 22 international airlines, Montreal (Dorval) by 15, and Vancouver by 12 (as of December 31, 2000). Canadian carriers are estimated to account for 50% of the scheduled traffic on routes between Canada and Europe, 55% of the traffic on Asian routes, and 70% of the traffic on routes to the Caribbean and South America.
Air Canada's acquisition of CAI has not affected transborder and international markets in the same way as domestic markets, but it has affected competition among the global airline alliances vying for international traffic. Air Canada belongs to the Star Alliance, the largest group, whose senior North American member is United Airlines. The world's five major alliances account for an estimated 57% of all passenger traffic (measured by revenue-passenger-kilometres); the Star Alliance alone accounts for 21% of global industry output.¹⁰ CAI belonged to OneWorld, the second largest group, which includes American Airlines and British Airways.
Through alliances, airlines gain access to larger international networks, and membership in an alliance tends to enhance an airline's productivity and profitability.¹¹ Competition may be weaker, however, in markets served by partner airlines. In the current Canadian circumstances, transborder and international competition has been somewhat reduced because of the significant advantage Air Canada's well developed domestic feeder network gives members of the Star Alliance.
Evidence suggesting that Air Canada may be charging higher interline fares to non-Star Alliance foreign carriers lends support to the concern that its dominance in domestic markets is affecting competition in transborder and international markets. The UK Civil Aviation Authority, for instance, reports that Air Canada increased the interline fare offered British Airways on the Toronto-Ottawa route segment from the $389 charged by CAI to $1,189.12 Such practices can reduce travel options and inhibit effective competition.
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Impediments to Competition
Competition from independent carriers can potentially have a major influence on airline fares. In the United States, for example, Southwest Airlines has exerted strong downward pressure on prices since deregulation: "actual, potential and adjacent competition" from Southwest Airlines has accounted for an estimated 40% (amounting to US$9.7 billion) of the annual savings from lower real fares from deregulation.¹³ The evidence is less dramatic in Canada, but here too, research shows that competition from a low-cost carrier tends to reduce air fares.¹⁴ The benefits of competition cannot be enjoyed by all Canadian passengers; many markets are simply too small to support more than one carrier. On routes where it is feasible, however, competition may not be realized because of the formidable impediments confronting existing independent carriers and new entrants.
The high-risk nature of the airline industry tends to discourage entry. Because airlines have high fixed costs relative to revenues, a small change in load factors or fare levels can have a large impact on profits. The industry is therefore highly vulnerable to an economic slowdown. Among the independent carriers, WestJet stands out for its success in controlling costs and sustaining profitability.
The greater risk for independents and new entrants arises from the difficulties of competing with a large carrier with strong market advantages. Among Air Canada's strengths are its extensive domestic network, its ability to offer frequent flights, its control over the main available frequent flyer program, its well developed marketing and distribution system, and its favourable position at Pearson, Canada's major airport and the hub for domestic air traffic. Air Canada has been very successful in combining a marketing strategy aimed at attracting business travellers with a sophisticated yield management system that allows it to adjust fares to appeal to more price-sensitive travellers.¹⁵ With the takeover of CAI, Air Canada has a denser network that should produce cost savings from better aircraft utilization (including larger planes, higher load factors, and increased aircraft use) and more efficient use of ground personnel and equipment.
Legislative change in the summer of 2000 aimed to reduce industry entry barriers. Under the law — and consistent with undertakings Air Canada made to gain approval of its CAI acquisition — Air Canada has given up a number of peak-hour slots at Pearson and made available facilities at selected airports where it had preferred or exclusive use of more than 60% of facilities. Air Canada must also offer interlining and joint fares to other Canadian carriers belonging to the International Air Transport Association and, for a five-year period, sell access to its Aeroplan to Canadian carriers below a size threshold ($250 million in domestic passenger revenues). In addition, amendments to the Competition Act give the government greater authority to address airline-specific anti-competitive acts and ensure access to essential facilities, including take-off and landing slots, interline arrangements, airport gates, loading bridges, counters and related airport facilities, maintenance services, and baggage handling infrastructure, equipment and services.
These reforms are important, although the Panel believes there is scope for additional measures in some areas (discussed later in the chapter). Over the longer term, vigilance by the Competition Bureau may well provide the most important check against practices that limit entry to airline markets. Experience in Canada and elsewhere suggests, however, that the best hope for developing competitive markets rests ultimately with talented airline managers who can design and implement a business model that makes sense in the context of market realities.¹⁶ Southwest Airlines in the U.S. and, on a smaller scale, WestJet in Canada offer examples of successful strategies for pursuing market opportunities. Both have been a significant constraining influence on major carriers' activities in their markets.
The government must ensure that, where Air Canada is in a position of dominance, it does not abuse its market power. Beyond that, the role of government is to establish an environment that fosters the entrepreneurship needed to build a more competitive airline sector.

Considerations and Recommendations
Several submissions to the Panel offered suggestions for enhancing competition in the airline industry. Some groups recommended action to address specific competitive impediments; others proposed broader reforms, including removal of restrictions that prevent foreign airlines from competing in the domestic market. Several observers recommend removing legislative restrictions on foreign ownership of airlines operating within Canada.
The Panel is sympathetic to the view that the airline industry, like other sectors of the economy, should be subject to the stimulus and discipline of foreign competition. Greater competition in domestic and international aviation would make airlines more efficient and bring lasting benefits for users. Recognizing the growing integration of the North American and the world economies, a desirable objective would be a world — or at least a continental — market in air transport services. There is no guarantee of the type and amount of services Canadians would supply in this larger market, but the Panel is confident that Canadian providers have the ability to find their place in a broader North American and world marketplace.
It is also readily apparent, however, that airline markets do not conform to this vision of a free and competitive system. International markets are still dominated by the Convention on International Civil Aviation (the Chicago Convention) and its government-directed bilateral agreements. Despite the Open Skies agreement, the U.S. domestic airline market remains closed to non-nationals. Against this background, the Panel recommends a medium-term policy approach for the airline sector that can be pursued through negotiations with the United States and other countries, along with more immediate actions to enhance competition in the domestic market.

Pursuing the Benefits of Foreign Competition
The Panel considered two proposals for unilateral action to introduce foreign competition in the domestic market without violating Canada's bilateral agreements or the Chicago Convention. The first proposal — termed 'modified sixth freedom rights' — would allow a U.S. carrier to fly passengers from one point in Canada to another point through a U.S. interchange. For example, a U.S. carrier could offer a service from Toronto to Vancouver via Minneapolis. A U.S. airline can currently sell a trip from Toronto to Minneapolis and a second trip from there to Vancouver, but the two cannot be marketed and sold as a single ticket.
The second proposal would create a new class of domestic carrier that could be 100% foreign-owned. Australia took this step in June 1999. Since the new class of carrier would be allowed to fly only in Canada, the argument that ownership restrictions are needed to designate national carriers under bilateral and international agreements does not apply.
These reforms, recommended by the Commissioner of Competition and others, might attract some foreign entrants to the domestic market. By opening the domestic market to foreign carriers, Canada would gain access to a broader pool of airline entrepreneurial and management talent. Participation by foreign carriers is, however, likely to reduce opportunities for independent Canadian airlines. While Air Canada has competed successfully against U.S. carriers in the transborder market, it is still in a transition period, absorbing the adjustment costs associated with its acquisition. Air Canada would also be handicapped temporarily by its legally enforceable undertaking not to lay off or relocate unionized workers for two years after the takeover and to serve all domestic points previously served by the two airlines for three years.
Modified sixth freedom rights could also seriously affect the Canadian air cargo industry. Under the 'scope clause' in their contracts with pilots, Federal Express, UPS and other U.S. companies are bound to use their own aircraft and pilots on all jet category routes into their hubs and all routes where they have a right to fly. With modified sixth freedom rights, there would be less demand for Canadian carriers to provide trans-Canada flights for U.S. cargo/courier companies.¹⁷
Balancing these considerations — and taking account of the rigidities of the international regime in air transport (especially U.S. reluctance to give any foreign carrier access to its lucrative domestic market without major offsetting concessions) — the Panel opposes unilateral action to allow foreign entry at present. The Panel believes that the government should instead pursue foreign competition by negotiating for liberalization of air services. A priority should be to expose air services to the benefits of North American free trade.

Recommendation 7.1
The Panel recommends that the government enter into negotiations with the United States and Mexico to create a North American Common Aviation Area in which carriers from Canada, the U.S. and Mexico would compete freely.

As a back-up option if negotiations do not succeed, the Panel recommends that the government negotiate with other countries for the reciprocal granting of modified sixth freedom rights and of rights of establishment for foreign-owned domestic carriers.
Under the first proposal, Canadian, Mexican and U.S. carriers could compete in each other's domestic market. The rights of establishment proposed as a back-up option would be extended to any country prepared to offer equivalent rights to Canada. Foreign carriers that took advantage of the right would have to establish separate Canadian subsidiaries that employ Canadian workers, pay taxes, and operate generally under the same conditions as Canadian-owned airlines.
Bilateral negotiations have been successful in expanding choices for Canadian passengers on transborder and international routes, and the Panel believes they can be effective in strengthening competition in the domestic market. If negotiations fail, however, the government must be prepared to adopt another course of action. By 2005, it should be apparent whether negotiations with the U.S. and/or other countries are likely to result in stronger competition in the domestic market and increased opportunities for Canadian carriers, or whether a different approach is required.

Promoting Multilateral Reforms
Along with pursuing bilateral negotiations, the government should support multilateral initiatives to liberalize trade in air services. The World Trade Organization is reviewing the air services annex to the General Agreement on Trade in Services, a process that could lead to an easing of restrictions in some areas. The Organisation for Economic Co-operation and Development is exploring options for liberalizing international cargo services. Discussions on air services are also under way in APEC (Asia Pacific Economic Cooperation), which provided the vehicle for a recent multilateral open skies agreement between the U.S., Brunei, Chile, New Zealand and Singapore. Although the latter has run into implementation problems, it does mark a slight shift in stance for the United States, which has traditionally favoured bilateral over multilateral agreements.

Recommendation 7.2
The Panel encourages the government to pursue actively Canada's interest in a more liberal international environment for air services.

In addition to other initiatives, the government should ensure that Canada participates in any negotiations to establish a Transatlantic Common Aviation Area (TCAA). The Association of European Airlines is advocating such an agreement to give airlines in the U.S. and the European Union full commercial opportunities on an equal basis and to substitute a common body of rules for the current fragmented regulatory regime. There has been little progress in gaining support for a TCAA, but Canada cannot afford to be left out of a future accord, given its strong links to the U.S. and some EU members.¹⁸

Relaxing Airline Ownership Restrictions
Several submissions to the Panel proposed relaxing the current rules restricting the percentage of voting shares in a Canadian airline that foreigners can hold. The Panel agrees that the 25% limit should be raised. This would not guarantee availability of foreign capital, but it would facilitate access to foreign funds.

Recommendation 7.3
The Panel recommends that the limit on the voting shares of Canadian airlines that can be held by foreigners be raised to 49%.

This proposal can be implemented under existing legislation and would not affect Canada's bilateral agreements. Airlines requiring a domestic licence would still need to demonstrate that effective control resides in Canada.

Eliminating Potential Barriers to Entry
Recent legislation addressed several specific barriers to entry, but the Panel sees a need for three additional measures to promote a more level playing field.
First, policy must recognize the importance of assuring new entrants reasonable access to airport facilities. The concern goes beyond limitations in available slots, gates and other facilities that may arise at certain airports at specific times (dealt with in amendments to the Canada Transportation Act in 2000). The more general concern is that Air Canada may be in a position to exercise inordinate influence over key airport decisions. Dependent as they are on establishing favourable relations with the dominant carrier, airport authorities may place greater importance on accommodating Air Canada than on giving independent airlines high-quality access at a reasonable price.
The Panel is sympathetic to the view that airports should treat gates and other airside facilities as common use facilities, available for rental by all carriers (as discussed in Chapter 9). In the meantime, to ensure that airport access does not impede market entry, airlines should have recourse for treatment they believe is unfair in terms of price or quality of service.

Recommendation 7.4
The Panel recommends that carriers be given recourse to the Canadian Transportation Agency for disputes over access to airport facilities and that the Agency be given power to provide an appropriate remedy in situations where airlines are found to be subject to unfair treatment in terms of prices charged or type and quality of services provided.

The Agency would likely become involved only in disputes the parties cannot resolve on their own, and its powers would be directed only to resolving situations where airlines had been clearly and significantly disadvantaged. In these circumstances the Agency could issue an order requiring specified improvements in facilities and related services and/or that charges be reduced.
Second, further attention is needed to the competitive advantages Air Canada derives from its frequent flyer plan. Under the legislative provisions requiring Air Canada to sell access to Aeroplan, eligible carriers must have annual domestic revenues of less than $250 million. This is a relatively low revenue ceiling that excludes some independent carriers. Moreover, Air Canada's obligation extends only to 2005. The Panel sees a need to expand coverage and to make access to Aeroplan available as long as Air Canada continues to occupy a dominant position in the domestic market.

Recommendation 7.5
The Panel recommends that the maximum annual domestic passenger revenues used to determine eligibility for access to Air Canada's frequent flyer program be raised to $500 million. The Panel recommends further that the requirement to provide access to Aeroplan be extended until the Minister of Transport determines that competition in the domestic market has strengthened to the point where it is no longer necessary.

Finally, the Panel is concerned about a possible impediment to transborder and international competition if Air Canada charges excessive rates for interlining and other services to foreign airlines outside the Star Alliance. Airlines belonging to OneWorld and other alliances can establish interlining and joint fare agreements with independent Canadian carriers as an alternative to relying on Air Canada. The latter would be a positive development; along with facilitating transborder and international competition, it could help strengthen the position of the independent airlines as competitors in the domestic market. The Panel considered the desirability of regulating interline charges but wanted to avoid recommending any action that might discourage a market-based solution. In addition, regulations limiting interline charges would be difficult to enforce.
These charges will not be an issue if a North American Common Aviation Area is established, and they are likely to be of less concern if rights of establishment are granted to foreign carriers. The Panel's recommendation for a more transparent system, where passengers can readily compare prices on flight options, should also help respond to this issue. The possibility of higher interline charges to non-Star Alliance airlines is of significant concern, however, and specific controls could be required at some point.

Removing Fare Regulation
With recent amendments to section 66 of the Canada Transportation Act, the Canadian Transportation Agency has significantly more responsibility for monitoring air fares. The new rules authorize the Agency

upon complaint, to review all passenger and cargo fares (instead of just passenger economy fares) on monopoly routes and order corrective action;
to order additional fare classes on monopoly routes if these are available on similar competitive routes operated by the carrier; and
to audit carriers proactively on its own until July 5, 2002 (and, with Cabinet approval, for another two years after that) and take appropriate action against unreasonable fares on monopoly routes.

The Panel is concerned that the Agency has been saddled with exceedingly complex responsibilities that are difficult to fulfil in a timely and effective manner and that may give rise to conflict with the Competition Bureau's enhanced authority to prevent anti-competitive conduct in the airline industry. Air Canada has a large number of fare classes, and average fares on any given route are determined both by fare levels and by the proportion of seats allocated to different fare classes. It is very difficult to determine whether differences in fares and yields between one route and another reflect the exercise of market power or basic differences in the characteristics of the two markets. Price regulation is a costly and slow process and one that is especially ill-suited to an industry characterized by frequent and rapid price changes. The Agency's efforts to monitor fares and fare classes will impede Air Canada's efforts to implement an efficient yield management system, yet they cannot give consumers effective protection.
The focus must be to create opportunities for competition to develop and grow. In addition, there would be benefits from greater transparency. Passengers should have access to detailed information indicating, for example, the percentage of seats airlines have sold in various markets by major fare classes. Information disclosure can be a significant mechanism for protecting consumer interests. The Panel makes specific recommendations to enhance transparency in Chapter 18.

Recommendation 7.6
The Panel recommends that the Canada Transportation Act be amended to remove the Canadian Transportation Agency's powers to review passenger and cargo fares on monopoly routes upon complaint; to order additional fare classes on monopoly routes if these are available on similar competitive routes; and to audit carriers proactively and take appropriate action.

Revising the Merger Review Process
In Chapter 6, the Panel recommended a new process for reviewing major transportation mergers, including airline mergers. Like the current process, the Panel's proposal allows for consideration and weighing of both competition and public interest concerns. The Panel's proposal, however, involves an open process for considering public interest concerns while maintaining independent consideration of competition issues by the Competition Bureau and the Competition Tribunal.

Preparing for Service Termination
Air Canada's legal obligation to continue providing service to communities served by it, CAI and their wholly owned subsidiaries expires on January 4, 2003. Some observers believe that Air Canada will terminate service to a substantial number of destinations at that time, with a significant impact on passengers, communities and small airports.
The Panel recognizes the anxiety created for passengers and communities by service disruptions. At the same time, Air Canada is no longer an instrument of government policy, and it would be inappropriate to impose obligations that reduce its ability to cut costs and compete effectively. Air Canada is feeling the effects of economic slowdown, and its financial performance would be affected adversely by policies that keep it from responding effectively to market pressures.
Canadians have experience adjusting to shutdowns and service termination in other sectors of the economy. Termination of services by Air Canada will prompt governments, other airlines, and providers of alternative forms of transportation to look for ways to respond to the needs of affected communities. The market itself is likely to give rise to lower-cost options for providing service to small communities and less sparsely populated areas. In particular, service termination is likely to create new opportunities for small carriers with equipment and services tailored to meet the needs of small markets.
The Panel is concerned, however, that the Act's notice provisions (120 days) do not allow enough time before January 2003 for needed consultations among governments and other interested parties. With inadequate time for planning, adjusting to service termination will be more difficult.

Recommendation 7.7
The Panel recommends that the government require Air Canada to provide 180 days' notice of services it plans to terminate in the first six months of 2003.

The Panel believes that Air Canada's own interest in softening the impact of route restructuring will encourage it to support the needed preparation and planning.

Meeting Data Requirements
Like other industry observers, notably the Independent Transition Observer on Airline Restructuring, the Panel was struck by the inadequacy of data on the airline industry. Better data would facilitate more in-depth research, would give observers a better basis for assessing the performance of Canadian carriers, and would help participants and potential entrants identify new opportunities. Air sector data problems are part of the broader issue of inadequate data disclosure in the transportation sector, an issue examined in Chapter 18.

Notes
¹ Debra Ward, The Impact of Airline Restructuring in Canada: First Interim Report, February 5, 2001; Bruce Hood, The Report of the Air Travel Complaints Commissioner, Canadian Transportation Agency, March 2001.
² Fred Lazar, "Potential Market Impacts of Liberalization Options on the Commercial Canadian Aviation Industry", paper prepared for CTAR, March 2001.
³ Transport Canada output indices are described in Transportation in Canada 1996, Annual Report, pp. 153-167.
⁴ Transport Canada preliminary forecast, presented at Aviation 2000 Workshop.
⁵ In the domestic market, there is no legal distinction between scheduled and charter carriers. The charter label reflects a marketing approach and business strategy.
⁶ Robert Milton, President and CEO, Air Canada, "Air Canada integration on fast track to gain synergy and benefits despite slow economy in 2001", speech to a Quebec investment seminar, Montreal, February 9, 2001.
⁷ Commissioner of Competition, submission to the CTAR, November 17, 2000.
⁸ Transport Canada, Transportation in Canada 2000, Annual Report, p. 164.
⁹ Canadian passengers can be pre-cleared for entry into the U.S. at Dorval, Ottawa, Toronto, Winnipeg, Edmonton, Calgary and Vancouver.
¹⁰ The five include three other global groups: OneWorld, Air France/Delta and Wing, and one intra-Europe alliance, Qualifyer.
¹¹ Tae Hoon Oum, "Key Aspects of Global Strategic Alliances and the Impacts on the Future of Air Canada and Other Canadian Air Carriers", paper prepared for CTAR, March 2001.
¹² Tae Hoon Oum, "Key Aspects of Global Strategic Alliances".
¹³ Steven A. Morrison and Clifford Winston, "The Remaining Role for Government Policy in the Deregulated Airline Industry", in Deregulation of Network Industries: What's Next, edited by S. Peltzman and C. Winston, Washington, D.C., AEI-Brookings Joint Center for Regulatory Studies, 2000.
¹⁴ This is discussed in Thomas W. Ross and W.T. Stanbury, "Policy Proposals for Enhancing Competition in Canadian Airline Markets", paper prepared for CTAR, March 2001.
¹⁵ According to one study, the high average yields Air Canada achieved over the 1990s and the low yields CAI achieved was a main factor underlying the success of the former airline and the failure of the latter. Tae Hoon Oum and Chunyan Yu, "Assessment of Recent Performance of Canadian Carriers," paper prepared for CTAR, February 2001.
¹⁶ This is discussed in Fred Lazar, " Potential Market Impacts of Liberalization Options".
¹⁷ Lazar, "Potential Market Impacts of Liberalization Options".
¹⁸ The TCAA is discussed in P.P.C. Haanappel, "International Aviation Framework and Implications for Canadian Policy", paper prepared for CTAR, March 2001.
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