Submission to the CTA Review Panel
November 24, 2000
AIR CANADA.- 2 -Contents
I. Introduction II .Background
III. New Competition Emerging
IV Cabotage, or Foreign Owned Airlines: The Dangers
V. Public Concerns and Public Information -Air Canada Responds
VI. Canada's Airline Merger:
Domestic Strength -Global Reach
VII. Specific Legislative Issues:
i) Foreign Investment
ii) E-business Environment
iii) Emerging Industry Structure
iv) Inconsistency: The CTA and the Competition Bureau
v) Net Fares
vi) CTA Licensing
vii) Code Shares/Wet Leases viii) National Airports Policy
VIII. Conclusions.- 3 -I
Introduction
Air Canada is pleased to offer the following thoughts and observations pertaining to the
effectiveness of the Canada Transportation Act ("CTA") and related legislation in providing the
foundation for a safe, economic, efficient and adequate transportation system for Canadian
travellers and shippers.
Air Canada believes that Canada's national transportation policy objective, of fostering such a
system, will be achieved only when all carriers are able to compete freely, both within and among
the various modes of transportation.
Fundamentally, Air Canada believes Canadians now have a uniquely Canadian solution in place as
a result of industry and government leadership in the last year .
The airline industry must be given time to find its new equilibrium before any new or radical
changes to the industry's legislative and policy framework are considered.
This submission parallels our presentation to the Review Panel and will deal with a number of
specific points, which we hope will be of interest to the Review Panel.
II. Background:
To start, we would like to set the stage, which forms the backdrop for the work of the Panel. 1999
and 2000 have been years characterized by massive change.
This change was precipated by a looming financial crisis within Canadian Airlines. It led the
Minister of Transport to intervene in August 1999 and create an opportunity for rationalization
that many had been saying was inevitable for much of the last decade. This led to a decision by
Air Canada to acitvely pursue the integration of the two airlines thereby protecting thousands of
jobs from coast to coast, and saving Canadian communities from the chaos and disruption
associated with the collapse of Canadian Airlines and its associated route structure.
While the merger may have -been inevitable, given the demographic and geographic features of
Canada - a long thin band of population on a huge land mass with far flung regional communities,
change of this magnitude always entails some costs. In this case, change has required the
integration of two great airlines, two service cultures, and two networks. This has been a complex
process -not without problems.
Air Canada is however confident a successful and satisfactory end is in sight.
Many of the integration-related issues, which have affected employees and customers over the last
nine months are moderating. We have made enormous progress. Air Canada has been completely
focussed on alleviating the stress and strain on its customers and staff and implemented a company
wide 180 day campaign focussed on resolving any problems..- 4 -Recent
public opinion polls indicate airline customers now believe Air Canada service levels
are returning to historic norms and that service characteristics important to customers -such as
knowing the company cares -are once again being felt.
III. New Competition Emerging
While all of this has been occurring, other companies in the industry have been growing -some
very quickly -into realistic, competitive alternatives. We are not going to suggest that we
should want the same hyper competitive -if not destructive -environment as in the pre-1999 era.
But, competition and change are definitely the hallmark of the industry as we enter the
millennium.
Charter companies have expanded to include scheduled service; new and 'existing airlines have
expanded scheduled services in central Canada, and the east. Other niche operators are
spreading their wings.
In fact, the competitive relationship between Air Canada and Canadian in many ways stifled
the market from producing other, real, competitive alternatives. The merger has in fact created
openings and opportunity for real competitive alternatives.
This is a positive and dynamic marketplace, which will continue to grow and prosper.
Canadians will have a wide variety of reasonably priced domestic air transportation
alternatives. And, Canadians will have, underpinned by a reliable and efficient domestic air
transportation system, a company of global proportions, which can serve Canadians better at
home -and on the world stage.
Air Canada is well aware of -the need for Canadians to have competitive options. Air Canada
believes competition will be good for Air Canada. The situation we are now in., is a uniquely
Canadian solution to uniquely Canadian needs. Air Canada has made transportation
commitments and competition undertakings for a period of up to seven years so as to satisfy
concerns of the Federal Government.
As part of this process, Air Canada had to respond to issues relating to ease of access for new
entrants to the industry. Air Canada agreed to allow other airlines to participate in Aeroplan on
commercially fair terms. One airline has already done so and another is currently in
negotiations. Air Canada also committed to make facilities, including counters and gates,
available at certain airports to ensure other carriers had a reasonable and fair basis upon which
to compete. Air Canada has lived up to these commitments, consistently. With regards to slots,
access is not really an issue in any airport in Canada, with the possible exception of Toronto,
and even there, only in the peak evening period daily. Here again, the problem has not been
very pronounced, and slots have been found in this'time period, even during this past summer..Air Canada has also been forging viable commercial agreements with new and existing airlines
in the industry and will continue to do so. During our meeting with the Review Panel, we
explained that we had been involved in extensive negotiations with a limited number of carriers
where an agreement was not reached. Air Alma elected not to conclude a commercial
- 5 -agreement
with Air Canada, while an ongoing competitive situation prevented any agreement
with Pacific Coastal Airways.
The Government has also adopted legislative amendments reflecting elements of its "Policy
Framework for Airline Restructuring in Canada" which should be allowed to evolve before
further changes are made.
What is not needed are new and dramatic public policy initiatives which could jeopardize the
stability of the airline industry in Canada.
What is needed is an appropriate period of maturation to permit the further development of a
sustainable, competitive airline industry.
IV. Cabotage, or Foreign Owned Airlines: The Risk
Some critics of the new and evolving order are demanding extreme measures such as allowing
foreign -owned airlines to operate within Canada.
Scenarios presented have included unilateral cabotage, or the introduction of new domestic-only
airlines that would be foreign controlled and owned.
While it is true that an experiment of the latter is currently being watched in Australia, it would
be a serious mistake to assume such an experiment should be allowed in Canada.
The Australian experiment is far from conclusive but several things are clear .Australia is
isolated. Canada on the other hand is not. Canada sits next door to one of the most aggressive
aviation industries in the world. Any carrier, that was operating in Canada, and owned by US
interests, would be closely linked with a US carrier, or fully integrated.
The consequences of such a scenario, in Air Canada's view, have enormous implications.
Canada essentially would have given away the right of cabotage -without reciprocal benefits
for Canadian carriers. The cost structure of a US owned carrier is much lower than that of
similar Canadian carriers and it is likely this would be perpetuated. Aircraft servicing would
take place, not in Canada, but in the us. As a consequence, it is also fair to assume investment
would take place in the us - not Canada.
Unilateral cabotage, or permitting foreign owned carriers, particularly us carriers, to operate in
Canada's domestic market, without fair and reasonable reciprocal terms for Canada's aviation
industry , has the potential to devastate Canada's aviation community. The routes flown would
be limited to Canada's prime markets; secondary markets would not benefit..While concepts such as this may be tempting, they have the potential for long reaching
negative consequences, particularly for smaller airlines and smaller Canadian communities.
Air Canada would be impacted but the greater strain would be on other Canadian airlines
currently establishing themselves on the very routes that would be targeted by foreign carriers.
- 6 -As
Robert Milton, Air Canada's President and CEO has said, unilateral cabotage is sabotage to
the Canadian Airline industry .
Air Canada is more than prepared to compete on the world stage. But, Air Canada believes the
unique needs of the Canadian market need to be kept squarely in mind - particularly if there is
little advantage to the introduction of cabotage or related schemes and significant, if not
unreasonable risk to the stability of the air transportation system in Canada. Cabotage,
particularly in North America, only makes sense if it is reciprocal, and we would support such
an arrangement. With respect to carriers from countries outside of North America, separate
bilateral reciprocal cabotage would not contribute to domestic competition and would
destabilize the domestic market.
V. Public Concerns and Public Information: Air Canada Responds
Air Canada recognizes it has a responsibility to meet public concerns and address issues. A
massive communication program, entitled our 180-Day Commitment, outlining a
comprehensive list of improvements to customer service, has been in place since August to
address public concerns.
Air Canada is working closely with the newly appointed federal Ombudsman, Bruce Hood. Air
Canada's own Ombudsman, Michelle Perreault-Ieraci, with parallel responsibilities, has also
been announced. She is working very determinedly to meet the new level of public
expectations for consumer sensitivities.
Air Canada will shortly be introducing a Customer Service Commitment, which will clearly
outline the service standards our customers can expect. Some observers of the industry in
Canada have recently been promoting an FAA style compulsory industry reporting system. The
fact is that in the US, this mandatory reporting system is far from effective. There is widespread
skepticism that the data reported by the industry is of any real use. On the other hand, the
requirement represents yet another enormous administrative burden to the airline, and cost to
the consumer. The industry . in Canada generally recommends that extreme care be taken
before such an ' approach is investigated for possible introduction here.
Further, aggressive public policy intervention to address perceived service needs would be well
intentioned but unnecessary at this point in time. Under the leadership of the Air Transport
Association of Canada, a number of Canadian air carriers are actively developing a service
standard document that will parallel Air Canada's initiative..In the near term, monitoring the market should be the priority so that, in a few years, enough
accurate information exists to consider policy options -not now.
VI. Canada's Airline Meraer: Domestic Strenath Reach
In the domestic market, new non-stop jet service is now available on the Halifax-Vancouver,
Montreal-Edmonton, Toronto-Kelowna and Toronto-Victoria routes. Further initiatives to link
- 7 -Canadian
cities directly, bypassing hubs such as Toronto, should be expected. Our focus is to
take care of Canada and build on that bedrock to expand.
On the Global stage, the integration of Air Canada and Canadian Airlines has created an airline
which can compete - effectively -with other national airlines, even those with state ownership
and support. Air Canada has expanded its international and transborder network -and this
expansion continues. New services to international markets are now available which are
economic and viable after the integration - which separately neither airline could have
sustained. Air Canada will continue to grow its international network. Since the integration of
schedules, Air Canada, Canadian Airlines and our regional carriers have launched more than 30
new routes with service to 11 new destinations.
VII. Specific Legislative Issues
We would like to turn, at this point, to some of the issues requiring special attention as
identified in the Review Panel's Terms of Reference, together with a few other issues of
concern:
i) Foreign Investment
Item (a) of the Terms of Reference raises the issue of the overall effectiveness of the current
legislative and regulatory framework in sustaining high levels of capital expenditures
required to enhance productivity and promote innovation. Foreign investment in the
Canadian aviation industry is relevant to this issue. The CTA contains rules on foreign
ownership. Canadian carriers must be owned and controlled by Canadian citizens or by a
Canadian corporation that is controlled in fact by Canadians and of which at least 75% of
voting interests are owned and controlled by Canadians. The Governor in Council may by
regulation specify a lesser percentage. Also, there are restrictions on foreign ownership of
the voting shares of Air Canada just as there are for the national carriers of many other
countries. The rule in Canada is that no more than 25 % of Air Canada's voting shares may
be held by non-residents and that no more than 15 % of voting shares may be owned by
anyone shareholder. It is to be noted that, internationally, only Canadian carriers owned by
Canadian citizens can operate to other countries on a scheduled basis in view of the clause
in bilateral agreements between countries which states that substantial ownership and
effective control of a designated carrier must be vested in the nationals of the country of
designation..In view of this background, we support changes, which would permit increased foreign
investment up to 49% of the voting interest in Canadian carriers, so long as effective control
remains firmly in Canadian hands.
ii) E-business Environment
Item (b) of the Terms of Reference questions the extent to which the current iramework
supports the efforts of Canadian transportation players to adapt to the new e- business
environment and to meet global logistics requirements. In this regard, there is an aspect of
- 8 -the
tariff system that needs review and that is the requirement that tariffs be displayed at the
business offices of the air carrier. This is impractical since a large carrier like Air Canada
has many business offices and tariffs change on a daily basis and are extensive in number.
In 1992, the Agency issued an interpretation that its regulation on displaying tariffs did not
preclude the use of electronic display for international tariffs. This interpretation should also
apply to domestic tariffs. Nevertheless, all business offices do not have electronic access to
tariffs, a costly exercise. The question arises whether the law and regulations go further than
necessary to inform a public that rarely inquires anyway, of the contents of tariffs.
Availability at headquarters should be sufficient and since fares change on a daily basis,
only terms and conditions of carriage should be covered by the rule. In conclusion, the new
e-business environment provides one reason why the tariff system needs a fresh look as to
which more will be said later.
iii) Emerging Industry Structures
Item (c) of the Terms of Reference raises the issue of the extent to which the current
legislative framework is appropriate for dealing with the public policy issues that may arise
from newly emerging industry structures. In the airline context, global alliances have
emerged relatively recently. Presumably, the Canadian Transportation Agency ("Agency")
would want to ensure that the legislative framework does not hamper the industry's ability
to participate in such industry structures, if they would help promote an efficient
transportation system to the benefit of customers, the industry itself, and shareholders.
However, while this may be an issue which interests the Agency, at the same time, the
Competition Bureau is proposing a new set of amendments to the Competition Act, which
would make per se offences of agreements that have the effect of fixing, establishing,
controlling or maintaining the minimum price of a product or have the effect of allocating
markets. In the airline industry , code-sharing agreements and related airline alliance
agreements could therefore be made unlawful.
iv) Inconsistency: The CTA and the Competition Bureau
Based on the latest amendments to the CT A, there is an inconsistency between the powers
of the Agency and what the Competition Bureau is doing. This is likely to create
confusion for carriers and the public. For example, under new Section 66 of the CT A, the.Agency may disallow a fare, rate or increase , and even direct a licensee to amend its tariff
by reducing a fare, rate or increase and to refund amounts to consumers. Concrete
evidence of the Agency's assertion of jurisdiction in this regard can be seen in its current
review of passenger fares presently being offered by Air Canada in respect of its domestic
service provided between Quebec and Toronto, and the comparison being drawn to the
Halifax-Ottawa route. At the same time, the Competition Bureau is conducting
investigations into the pricing actions taken by Air Canada in the Maritimes, in response
to entry by both Westjet and CanJet, which pricing actions have had the effect of lowering
prices. On the one hand, one regulator raises questions of abuse of dominance and
predatory pricing when prices are lowered and/or capacity is increased on specific routes
and on the other
- 9 -hand,
another regulator suggests that these prices should be applied on other routes. This
inconsistency may not lend itself to a stable regulatory environment and could have
negative consequences on the industry as a whole.
v) Net Fares
Another issue alluded to earlier in the context of e-business, concems the tariff system
which requires carriers to have tariffs, make them available for public inspection at
their business offices, not depart from them and in the case of intemational tariffs, file
them with the Agency. A fact well known to the Agency is that a worldwide practice
exists whereby fares are 'available that are below tariff. This practice has been brought
about because of competition in a market forces system, which is clearly inconsistent
with the tariff system. A presentation was made in early 1999 to the Agency which is
considering how to make lawful "net fares" which are fares below tariff. The point here
is that the tariff system needs to be reviewed and amended to make it consistent with
what is going on in the market place. We think the Agency is well aware of the
situation and we are prepared to work with the Agency to arrive at appropriate
solutions.
vi) CTA Licencing
Section 59 of the CTA provides that no person shall sell, cease to be sold or publicly
offer for sale in Canada an air service unless the person holds a licence. Air Canada
when filing licence applications usually requests an exemption from this section since
it needs to be in the marketplace as soon as possible in advance of licence issuance to
fill the seats of the first aircraft to operate. This comment only applies to international
scheduled services and the exemption should be made permanent since there is little
risk that an international licence will not be issued, the applicant carrier having been
designated by its government to operate.
vii) Code Shares/Wet Leases.Section 60 of the CTA provides that a licensee may not use aircraft with a flight crew
provided by another person except, amongst other things with the approval of the
Agency where prescribed. The Agency has prescribed approval in its regulations, the
result being that in code share and wet lease situations, an application for approval
must be made. Air Canada considers that the application process is unnecessary where
the Agency has on file certificates of insurance from both carriers involved and both
carriers have licenses to operate air services in, to or from Canada. An exception to the
approval process should thus be considered.
viii) National Airports Policy
Finally, we would like to note our support for the Government's review of its National
Airport Policy. It can be safely said that the air carrier community is anxious to achieve
-10 -a
much greater level of open cooperation with local airport authorities. Such authorities
comprise in a real sense monopolies in their own right and are exercising extensive
authority and control over the activities of airlines in their domain. Such authority has
in large measure been exercised without a clear regulatory framework to achieve
greater transparency and accountability .For example, it is interesting to note that the
air carrier community which itself, through rates and charges, provides the vast
preponderance of revenue to local airport authorities has no statutory or contractual
oversight in the application of such revenues in either the operating or capital budgets
of the authorities. In addition, carriers are generally not represented in any way in the
governance of airports. We would further note the troubling imposition of ground rent
payable by the airport authorities through their lease arrangements with the
Government, which payments are effectively passed through to the carriers as a further
component of rates and charges assessed against them. It is not apparent that the scope
and quantum of such payments are reflected in the provision of services either to the
airports or to the carriers and their customers. Indeed, some services previously
provided by the Government are now supplied by local airport authorities and charged
directly to the carriers. Linked to this development has been the increasingly fragile
financial state of airports in smaller communities where traffic volume and frequency is
low and accordingly, where carrier generated revenue is not sufficient to sustain local
airport activity .The Air Transport Association of Canada has been leading the dialogue
on behalf of the carrier community with Transport Canada, and we encourage the CTA
Review Panel to provide support to the extent possible in this area.
V1I1. Conclusion ,
Air Canada wishes to emphasize to the Review Panel that, in our opinion, a uniquely Canadian
solution to uniquely Canadian needs has now been put in place as a result of events of the last
year ..We would recommend the airline industry in Canada be given the necessary time to find its
new equilibrium before any new or radical changes to the CTA and related legislation are
considered.
Air Canada continues to believe strongly that its conduct and behavior is consistent with our
recognition of our responsibility to the travelling public across Canada. While the merger of
two great Canadian airlines has not been trouble free, we are well on track to realizing the
vision and promise of this opportunity .Air Canada recognizes that its position in the Canadian
market entails responsibilities. We shall meet these responsibilities.