Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
Submission to
the Canada Transportation Act Review Panel
Submission by:
British Columbia Air Merger Consortium
chaired by
Mr. Kevin Walker
Immediate Past President
Council of Tourism Associations of British Columbia
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Table Of Contents
Table Of Contents i
1.0 Introduction 1
1.1 BC Air Merger Consortium 1
1.2 Initial Impacts on BC Tourism 1
1.3 Continuing Monitoring 2
1.4 Conclusion: Current Domestic Air Policy Does not Serve the Tourism Industry 2
2.0 Importance of Tourism 4
2.1 Importance of Tourism to B.C. 4
2.2 Importance of Air Transport to Tourism 4
3.0 Recommendations 5
3.1 Right of Establishment 5
3.2 Modified Sixth Freedom Rights. 6
3.3 Regulation of Average Air Fares 7
3.4 Price Competitive Foreign Carrier Access to Beyond the Gateway Markets 9
3.5 Improve Collection and Access to Data on the Airline Industry 10
Appendix A: Executive Summary 12
Airline Industry Restructuring Implications for B.C. Tourism 12
Appendix B: Recommendation of the National Transportation Act Review Commission 24
Competition in Transportation Policy and Legislation in Review Volume 1, National Transportation Act
Review Commission (1993) 25
Appendix C: Recommendation of the Royal Commission on National Passenger Transportation 26
Directions: The Final Report of the Royal Commission on National Passenger Transportation (1992) 27.Submission of BC Air Merger Consortium to CTA Review Panel
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Submission of the
British Columbia Air Merger Consortium
Introduction 1.0
BC Air Merger Consortium 1.1
On August 9, 2000, the Council of Tourism Associations of BC (COTA) and Tourism
British Columbia co-hosted an industry meeting at which a study on the effects of airline
restructuring, commissioned by Tourism BC, was unveiled, and a consortium of industry
stakeholders was assembled. The consortium consists of BC tourism organisations
(including COTA, Tourism BC, Tourism Vancouver, Tourism Victoria, Tourism Whistler,
Regional Destination Marketing Organizations, BC Yukon Hotels Association, BC Food
Services and Restaurant Association) and the BC Chamber of Commerce who are
concerned with the impacts that airline industry restructuring was having on tourism and
businesses in British Columbia.
Initial Impacts on BC Tourism 1.2
COTA and Tourism BC had been hearing anecdotal evidence from the industry that
serious negative impacts were being experienced. Accordingly, they commissioned a
study by InterVISTAS Consulting with the intent of determining whether the anecdotal
evidence was reflecting a true problem or not. A copy of that study is being provided to
the Review Panel. Its executive summary is provided as Appendix A.
The study disclosed the following situation:
There had been a 13% reduction of flights to BC from the rest of Canada. (net •
reduction after offsetting a 17% decrease in Air Canada flights by increases in flights
by other carriers)
Seat capacity on flights from elsewhere in Canada had been reduced by 7% (net). •
The number of flights from the Vancouver gateway to destinations within BC, had •
been reduced by 20% (net) and the number of seats by 8% (net).
Overall, trans-border and international capacity had increased at Vancouver Airport •
during August 2000, while domestic capacity has declined.
While nominal air fares increased only by the rate of inflation, average air fares in B.C. •
had increased by 11% for domestic leisure travel and 9% for US leisure travel.
The study observed that despite the passing of Bill C-26 into law, Canada has an
inadequate regulatory framework for addressing the dominance of Air Canada..Submission of BC Air Merger Consortium to CTA Review Panel
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Specifically, the bill does not address:
increases in the average cost of air travel (caused by the lower number of discount •
seats available);
There is lack of a mechanism for timely disclosure of data to track the airfare, sales
and seat capacity impacts of restructure. Such information is vital to assist the tourism
industry in its own planning. This issue of lack of sufficient data for monitoring
the effects of industry restructuring is highlighted. It is a major concern when the
government undertakes a fundamental restructuring of an industry (air transport) upon
which other, larger sectors of the economy (e.g., tourism) depend, without either a
legislative capability to properly monitor effects or without committing departmental
resources to undertake an adequate level of monitoring.
Foreign carrier access to British Columbia markets is severely limited. Only 37% of •
Canada’s bilateral air services agreements allow access for the foreign carrier(s) to
British Columbia. There are carriers who have indicated an interest in serving BC, but
the lack of route rights has been an impediment. As well, foreign carriers complain of
being priced out of beyond-the-Vancouver-gateway markets, now that there is only
one regional network carrier.
The study also noted that there is potential for further negative impacts. Air Canada will
continue to dominate the Canadian market for years to come. Despite ambitious fleet
plans, WestJet and charter carriers will not be sufficient to eliminate Air Canada's
dominance. Fleet additions between 2000 and 2005 will still leave Air Canada with an
overwhelmingly large share of the domestic market. As well, Air Canada has made clear
its intention to reduce its workforce and further rationalise domestic services.
Continuing Monitoring 1.3
The Consortium has continued to monitor developments in the industry, tracking the
limited data that is available. Each update shows some change in the market, but overall,
the reductions in service (flight frequency) and capacity (seats available) continue to be
experienced, along with increased average air fares.
Conclusion: Current Domestic Air Policy Does not Serve the Tourism 1.4
Industry
After almost nine months of monitoring, the consortium has determined that the current
legislative framework for Canada’s airline industry is inadequate to meet the needs of BC’s
tourism industry. The consortium recognised the importance of this inadequacy to the
growth of the tourism industry and the viability of many of its members. The importance is
such that the BC tourism industry has found it necessary to commit considerable
resources to a multi-year effort to monitor the effects of industry restructuring and to
advocating policies which will protect the interest of tourism industry. In discussion with
other industry groups across Canada, the issues are not impacting tourism in British.Submission of BC Air Merger Consortium to CTA Review Panel
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Columbia but all tourism in the country.
The current review of the National Transportation Act provides a timely opportunity to put
forth some recommendations for changes to the legislation governing aviation policy. Our
recommendations are provided in Section 3 of this submission, after commenting on the
importance of tourism in Section 2. Recognising that public policy must reflect the values
and concerns of Canadians, we supplement our submission with a separate confidential
document with polling results on questions related to our recommendations..B.C. tourism:
113,000 direct jobs. ! !! !
31% job growth in 10 years. ! !! !
5 th largest in job growth. ! !! !
larger employment base ! !! !
than any resource industry.
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Importance of Tourism 2.0
Importance of Tourism to B.C. 2.1
Tourism is perhaps the largest and most important sector of the economy that depends on
air transport. In British Columbia, Tourism is
one of the largest sectors of the economy, with
113,000 B.C. jobs in 1998 directly employed in
tourism. B.C. tourism alone supports a far
larger job base than the entire airline industry
in Canada.
Tourism ranked fifth of all B.C. sectors in job
growth, outranking all goods production
sectors, including the resource industries.
Over the previous ten years, tourism employment grew by 31%, almost double the
provincial average rate of job growth.
In 1997, tourism accounted for $4.1 billion of B.C.’s gross domestic product. Industry
revenue was roughly $9 billion per year on visitor volumes of approximately 22 million.
Over half of these were visitors from outside the province.
Importance of Air Transport to Tourism 2.2
With just over half of the customers served by B.C.’s tourism industry arriving from outside
the province, air transport is critical to the industry. Convenient air service increases the
size of the accessible market. Air tourists also tend to be the highest tourism spenders.
Air access is also critical in moving U.S. and overseas tourists out of the gateways and
into other B.C. tourism markets and experiences..Submission of BC Air Merger Consortium to CTA Review Panel
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Recommendations 3.0
Right of Establishment 3.1
Reason for Change: Two previous commissions examined the issue of whether to allow
increased competition from foreign carriers in Canada’s domestic airline markets. Both
the National Transportation Act Review Commission and the Royal Commission on
National Passenger Transportation Policy were reluctant to recommend increased access
while Canada had two competing national network carriers. However each anticipated
that Canada’s airline markets may evolve such that only a single national network would
be serving the market. Both recommended that in such an eventuality, foreign carriers
should be allowed to offer service in domestic Canadian markets. (The full text of the
recommendations of these two commissions are provided in Appendix B and Appendix
C.)
The market structure anticipated by both commissions has come to pass and their
recommendations should now be implemented. Both were near identical in
recommending that foreign carriers be granted the right to establish Canadian airlines.
Recommendation: We recommend that Section 55(1) of the Act be revised to change
the definition of what constitutes a “Canadian” air carrier. Existing provisions regarding
ownership and control should be replaced by a provision which defines a carrier as being
Canadian if its place of incorporation and principle place of business are in Canada.
Discussion: This new definition of what constitutes a Canadian air carrier would then
result in the carrier employing Canadian labour, abiding by Canadian labour law, using
Canadian licensed aircraft, adhering to all Canadian safety standards, paying Canadian
taxes, etc.
We are not recommending at this time that foreign carriers be granted cabotage rights.
We do not anticipate that such rights would result in significant service offerings. More
importantly, cabotage would not be as strong a generator of jobs as would the
establishment of Canadian domiciled carriers.
This new definition of what constitutes a Canadian carrier should be applied in the Act to
both domestic and international air services. In practice, it will not result in the designation
of a foreign owned Canadian domiciled air carrier to an international service, as virtually all
of Canada’s existing bilateral air services agreements require that any carrier designated
by Canada be substantially owned and controlled by residents of Canada. The issue of
whether the Minister negotiates new air service agreements (bilateral or otherwise) which
would allow the Minister to designate a foreign owned Canadian carrier is a matter for
international air policy, which is the subject of another review. The Act, however, should
not be a barrier to policy options and negotiating positions by the Minister.
Some may argue that Canada should move to our proposed right of establishment policy
only if reciprocal rights are negotiated. We recommend that Canada should change the.Submission of BC Air Merger Consortium to CTA Review Panel
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Act immediately and unilaterally. Many commentators, including, we understand, some of
the Review Panel’s own researchers and commentators, have indicated that it is very
unlikely that the U.S. will grant the right of establishment to non-US carriers or other
investors. The question then becomes one of whether to wait for a remote chance of
reciprocal rights which would produce a benefit to Canadian air carriers but deny
Canadian citizens and our economy the much larger benefits of a competitive domestic
airline market.
The B.C. tourism industry alone employs more Canadians than the entire Canadian airline
industry. We urge that the much larger economic and social value of a competitive airline
market be given the weight it deserves in your recommendations.
We also note that other progressive nations have adopted a view that the benefits to
consumers and industry should outweigh the benefits to carriers in the development of
transportation policy. Australia and New Zealand are two examples, each of which now
have foreign owned domestic air carriers (and arguably a foreign controlled international
carrier – Ansett International). Some may argue that British owned Virgin Blue in Australia
may not survive its recent start of service. Such arguments are irrelevant. The Canada
Transportation Act is based on using competition as the primary means to achieve the
objectives declared in Section 5: “ … those objectives are most likely to be achieved when
all carriers are able to compete, both within and the various modes of transportation …”
This is at variance with the need to determine in advance whether in fact there will be new
foreign owned domestic air carriers established, or whether such carriers will be long lived.
The Act should enable the best conditions for the emergence of competition and not
require a predetermination as to whether actual entry will take place. Such
predetermination would be speculative at best.
Finally, we note that air transportation is the only mode of transportation in Canada which
excludes foreign ownership and control of a carrier. In our opinion, this contradicts the
objective of Section 5 that national transportation policy rely, in part, on competition
between the modes of transport.
Modified Sixth Freedom Rights. 3.2
Reason for Change: In his testimony to the House of Commons Standing Committee on
Transport, the Commissioner of Competition advocated that foreign air carriers be granted
what he termed modified sixth freedom rights. Sixth freedom traffic is that which moves
from a city in Country A to a city in country B via a hub in Country C. (E.g., Boston to
Taipei via Vancouver.) Modified sixth freedom traffic rights would allow movement of
traffic between two cities in Canada via a foreign hub. (E.g., Regina to Montreal via
Minneapolis.)
Currently such service is prohibited by the Canada-US bilateral air services agreement.
As well, there is some ambiguity in Section 55(1) of the act as to whether a modified sixth
freedom service would constitute a domestic service, and thus could not be served by a
foreign air carrier..Submission of BC Air Merger Consortium to CTA Review Panel
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Allowing modified sixth freedom services would create the opportunity for passengers and
shippers between two Canadian points to have a choice of service, injecting competition
as is preferred by Section 5 of the Act.
Recommendation. It is recommended that Section 55(1) of the Act be modified to make
clear that service between two points in Canada via a foreign airport does not require
holding a domestic license. As well, it is recommended that the Review Panel recommend
to the Minister that he negotiate a change to the Canada-US bilateral air services
agreement which would remove the prohibition on modified sixth freedom services.
Discussion. In making this recommendation, we recognise that modified sixth freedom
service, while potentially offering a low price, have lower service quality attributes. They
are indirect and would involve two customs and immigration inspections in each direction.
These services will appeal largely to the most price sensitive passengers. Tourists are
such passengers. They generally are very price sensitive. Modified sixth freedom
services would enhance the development and maintenance of domestic tourism – a
market segment which could choose US, Mexican or other foreign destinations if domestic
air travel is too expensive.
We also note that ability of US carriers to carry some modified sixth freedom traffic may be
an enabler of new transborder air services. There are a number of unserved routes which
are only marginally unprofitable. A small amount of incremental traffic could make the
difference in terms of new transborder services to communities currently unserved.
A question is whether the US would be willing to negotiate for reciprocal modified sixth
freedom traffic rights. We believe that the prospects for this may be good. US carriers
would serve to benefit from such rights and thus might see it in their vested interests to
support such a granting of rights.
Regulation of Average Air Fares 3.3
Reasons for changes: The tourism industry is very price sensitive. There is significant
competition between different tourism destinations, both regionally as well as
intercontinentally. A major pricing concern is in markets beyond the major gateways.
While gateways will have some degree of competition, either from foreign carriers or from
charter carriers, beyond the gateway markets are vulnerable to unreasonable fares due to
lack of competition.
Section 66 of the Act provides powers to the Agency to provide orders to an air carrier
regarding unreasonable air fares. This provision is of great importance to Canada’s
tourism industry in the vulnerable beyond-the-gateway markets. The provision is intended
to deal with cases of abuse of market power without introducing onerous regulation. We
support both of these goals: market power must not be abused and the Canadian airline
industry must not be subject to onerous regulation.
However, we do not believe that the specifics of Section 66 are as effective as they should.Submission of BC Air Merger Consortium to CTA Review Panel
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be. Our concerns lie in four areas.
First, except for a transitional period, the agency cannot act on its own initiative. Given the
complexity of air fares, we believe that it is highly desirable for a professional group (the
Agency) to develop skills and be provided with the resources to understand and monitor
air fares and yields. We thus recommend that the transitional provisions contained in Bill
C-26 empowering the Agency to act on its own initiative be made permanent.
Second, the provisions of Section 66 only empower the Agency to review specific air
fares. As we indicated in the previous paragraph, air fares are complex. A carrier may
“offer” a low fare but make little capacity available at that fare, resulting in a subtle but
powerful means of exploiting market power. It is our recommendation that Section 66 be
modified to make clear that the Agency may and should examine the average air fare paid
in the market in question.
Third, and related to our previous point, Section 66 does not make clear that the Agency
may examine and make orders regarding the capacity offered at various air fares. A low
air fare may be offered, but if few seats are available for sale, the carrier can achieve a
significant increase in revenues, exploiting its market power. It is our recommendation
that Section 66 be revised such that in examining and making orders regarding the
average air fare in a market, the Agency may make orders regarding capacity to be made
available during a scheduling season. Note that we do not believe that a carrier should be
ordered to offer specific levels of capacity at any specific air fare on any specific flight. It
should have the flexibility to manage its capacity to deal with peak demands -- but within a
season, it must make adequate capacity available at lower fares so as not to exploit
market power.
Fourth, Section 66 applies to monopoly routes operated by a carrier or affiliated carriers.
The act is unclear as to whether it would apply to routes which are not strictly a pure
monopoly but which are dominated by a carrier and its affiliates. We envision routes
developing in the next few years where small regional carriers will operate point to point
services with very small capacity. On such routes, there will be a concern that although
not strictly a monopoly, the dominant carrier may exercise significant market power,
especially with regard to network traffic, that is traffic originating outside the immediate
region. The latter type of traffic is especially important for the tourism industry at locations
beyond the major gateways which receive competing service by foreign carriers.
Recommendation: We recommend that Section 66 of the Act be revised to a) continue
the ability of the Agency to examine air fares on its own initiative, b) examine average air
fares in markets, c) be empowered to make orders regarding either average air fares or
capacity offered at the lowest air fare, and d) conduct examinations and make orders in
markets which are dominated by a major air carrier and its affiliates, even if not strictly a
monopoly.
Discussion: Some may consider it paradoxical to advocate both increased competition
from foreign carriers, as well as fine tuning regulations regarding unreasonable fares. In.Submission of BC Air Merger Consortium to CTA Review Panel
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our view both of these are consistent. Section 5 of the Act embraces competition within
markets as the most likely means to achieve the national goals for transportation policy.
Our recommendation for foreign air carrier right of establishment is fully consistent with
this. However, actual competition cannot be insured and the Act needs powers to prevent
abuse of monopoly or dominance powers in such cases.
Price Competitive Foreign Carrier Access to Beyond the Gateway Markets 3.4
Reasons for Changes: Historically, the interline fare setting process reserved beyond-the-
gateway access to a national market for its national air carrier. This was accomplished
by means of the interline proviso which provided a disproportionate share of an interline
fare for the carrier on the domestic route segment. These provisos are not set by an
international agreement, but rather have been specified by national carriers. For example,
on a Tokyo-Paris-Marseilles ticket, the French carrier would specify the fare sharing
proviso for the Paris-Marseilles segment which a Japanese carrier could access. A
consequence was that national carriers had a significant advantage in carrying traffic from
behind their gateways to foreign markets. While national and foreign carrier may compete
equally in gateway-to-gateway markets, beyond the gateway markets were dominated by
the domestic carrier through provisos which were unfavourable to the foreign carrier.
Over the past two decades while the unfavourable domestic proviso continued, carriers
formed alliances which provided alliance partners with more favourable provisos. In
Canada, where we had competing domestic network carriers, this afforded many beyond
the gateway communities with competitive access to the services of foreign carriers. This
had a favourable pricing effect for the development of tourism and other travel to beyond
the gateway communities, and it also tended to raise the visibility in foreign markets of
opportunities in Canada’s beyond the gateway regions.
Since the merger of Air Canada and Canadian Airlines, the new Air Canada has cancelled
the favourable provisos which Canadian Airlines had provided to its foreign alliance
partners (oneWorld and other bilateral alliances). These foreign carriers, unless they are
part of an Air Canada alliance, are now only able to obtain access to beyond the gateway
markets in Canada by the historical (unfavourable) interline provisos which are
unfavourable to foreign carriers. In one well publicised case, British Airways witnessed its
proviso for access for Toronto-Ottawa increase from the range of $300 to over $1000.
Recommendation. Bill C-26 modified the Canada Transportation Act to allow the
Governor in Council to define predatory acts, which the Competition Bureau and the
Competition Tribunal would then enforce under section 78(2) of the Competition Act. We
recommend that the Governor-in-Council add to the list of predatory actions which are
enforceable under 78(2) of the Competition Act. The addition should define as predatory
the act of charging foreign carriers domestic provisos which are in excess of those
charged to foreign carriers with which a dominant Canadian carrier has a code sharing
alliance or an alliance which involves the joint establishment of prices and/or capacity..Submission of BC Air Merger Consortium to CTA Review Panel
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Improve Collection and Access to Data on the Airline Industry 3.5
Reason for Changes: While Canada has never had the level of data collection on the
airline industry enjoyed by the United States, the National Transportation Act of 1987
eliminated significant elements of data collection on Canadian air services. The result is
that as we enter the era of a domestic airline market dominated by a single carrier and its
affiliates, consumers, public interest researchers and dependent industries such as
tourism have limited ability to monitor developments. This is a serious gap in public policy
toward this industry. As well, the lack of timely and meaningful data makes it more difficult
for potential carriers to evaluate opportunities.
Even simple data, such as average fares or load factors on routes are not available. The
lack of data in Canada is a serious problem, made more so by restructuring into a
dominant air carrier.
The are several sources of the problem. First, not all carriers are required to report data.
This results in an incomplete picture of what is happening. As well, it makes it difficult to
publicly report data, as the Statistics Canada Act prohibits reporting of data when there
are fewer than three participants in a market (unless directed to by legislation). It also
disadvantages Air Canada, as its competitors do not incur the costs of reporting data,
while potentially benefiting commercially from data reported by Air Canada.
Second, because the Canada Transportation Act does not require the reporting of data,
the Statistics Canada Act makes it difficult to access data. Legislation which requires data
dissemination enables Statistics Canada to make data available to the public.
Third, there are no effective penalties for timely reporting of data by carriers. Discussions
with Statistics Canada personnel indicate that their serious delays in reporting the limited
airline data made available in Canada is due to laggard reporting by carriers.
Recommendation: The Canada Transportation Act should introduce a new provision to
require the collection and reporting of an adequate set of data by carriers so as to allow
users to monitor the airline industry and to enable commercial assessment of potential air
services. This data must include:
Capacity, passenger traffic, load factors (computed from the previous two), and •
average fares (or alternatively total revenue) by carrier by route.
A ticket sample of all routes in Canada must be collected and made available. The •
data collection should include carrier, origin and destination, specific flight segments,
and fare paid. Because of the commercially sensitive nature of this information, this
data can be made available with a lag, such as two years.
The requirement to provide data needs to be extended to a much more •
comprehensive set of air carriers than at present. There should be no exceptions for
carriers providing charter services. We recommend that it apply to any air carrier.Submission of BC Air Merger Consortium to CTA Review Panel
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providing commercial air service with annual revenues greater than $20 million. This level will
allow capturing most important data while freeing the small specialist carriers in Northern and
other services from what to them would be a burdensome requirement.
Discussion: The United States considered significantly reducing its data reporting and
dissemination requirements in the early 1980s when it was sunsetting its Civil Aeronautics
Board. It is interesting to note that it was Bob Crandall, President of American Airlines,
who was the strongest advocate of retaining data reporting requirements. His support was
based on the simple fact that American would benefit more from access to market data
than it would give up in terms of competitors having access to American Airlines traffic and
other data by route. In this spirit, we strongly support the requirement that a broader set of
carriers must report data than at present, so that Air Canada will also gain from the
increased data reporting requirement.
We also note that in 2003, Air Canada will be allowed to drop service to some
communities in Canada, subject to the consultation provisions in the Act. Some service
rationalisation by Air Canada must be anticipated as it integrates its network and pursues
its best commercial opportunities. Thus a number of communities will need to rely on
replacement service from other carriers. Commercial evaluation of service is hindered by
the current lack of data. An improved data reporting and dissemination policy will facilitate
development of replacement service..Submission of BC Air Merger Consortium to CTA Review Panel
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Appendix A: Executive Summary
Airline Industry Restructuring Implications for B.C. Tourism
On 21 December 1999, the Federal Minister of Transport announced that the Federal
Government would allow Air Canada (AC) to acquire Canadian Airlines International (CAI).
This ended several months of industry restructuring battles that were fought in the
financial markets, the policy environment and the courts. However, for users of air
transport and the tourism industry, this is only the beginning of a multi-year process of
industry restructuring. A dominant airline with control of roughly 80% of domestic seat
capacity and 90% of revenues at the time of merger has the potential to exercise market
power. There are some benefits that could accrue from a large Canadian carrier emerging
as a major force in the world airline industry, but a dominant carrier in domestic markets
could potentially act to the detriment of the consumers and industries, such as tourism,
that depend on air transportation.
Considering the critical role air transport plays in B.C. tourism, it is important to understand
what is happening as a result of airline industry restructuring and what the implications will
be for the tourism industry. There is much anecdotal evidence of the impacts, but the
tourism industry must weigh factual evidence. In addition, it must look beyond the initial
effects, both positive and negative, and anticipate further impacts. Some policy decisions
governing Canada’s airline industry are yet to be made (such as a new international air
access policy); therefore, an opportunity exists for the tourism industry to influence some
dimensions of the outcome.
The purpose of the report is to address these issues and to provide information to the B.C.
tourism industry and government policy makers to assist them in responding to the effects
of airline industry restructuring.
The Merger and Market Structure
As the merger begins, Air Canada has a dominant position in the Canadian airline
industry. It has a fleet of 436 aircraft (283 of which are jets) versus 75 aircraft (70 of which
are jets in service) operated by WestJet (WJ) and the charter carriers. Even with the
ambitious fleet expansion plans by WJ and the charter carriers, AC will remain dominant
for some time. The current fleet plans of the independent carriers for 2005, for example,
will see a doubling to almost 150 aircraft, but this will still be a fraction of AC’s size.
Air Canada’s offer to purchase CAI was contingent upon a number of requirements. These
included: no interference from AMR Corp. (the parent company of American Airlines),
approval from government and regulatory agencies, no opposition from the Commissioner
of Competition, access to non-public CAI financial information, and consented
arrangements that provide for the resignation and appointment of directors of CAI. All of
these requirements were eventually met, in part because AC agreed to a number of formal.Submission of BC Air Merger Consortium to CTA Review Panel
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1 Cabotage is the right granted to a foreign carrier to operate within another nation’s domestic market.
undertakings with the Commissioner of Competition to facilitate market entry and foster
competition.
One significant undertaking was the divestiture of Canadian Regional Airlines (CRAL).
CRAL’s fleet of roughly 50 aircraft, many of which are regional jets, could offer both (a)
significant competition in domestic markets, and (b) foreign carrier price competitive
access beyond the gateways. While an independent CRAL would not replicate the Air
Canada network in terms of scope and frequency, it might be able to provide a competitive
choice for a number of Canadian communities.
The Federal Government introduced legislation (Bill C-26) to deal with some of the
concerns associated with a dominant air carrier. It gives the Canada Transportation
Agency (CTA) powers to regulate individual airfares (but only on complaint after 2002),
and gives the Competition Bureau new temporary cease and desist powers to prevent
anti-competitive actions by a dominant air carrier.
However, there are still some important gaps in terms of dealing with the effects of a
dominant air carrier. These gaps include:
The CTA has no powers to control the number of seats offered at various fare levels. !
Hence, even if the CTA prevents increases in discount airfares, a dominant carrier
could reduce availability of discounted seats. Average prices would rise and the price
sensitive tourism markets could be severely impacted.
Foreign air carriers and other investors continue to be severely limited in their ability to !
invest in Canadian air carriers, thus constraining the potential for competition in
domestic markets. As well, U.S. and other foreign air carriers continue to be excluded
from Canadian domestic routes by the so-called cabotage prohibition.1
Foreign air carriers competing with Air Canada have no mechanism by which they can !
ensure that they can access to beyond-the-gateway markets in Canada at charges
reasonably similar to what they could obtain in 1998 and earlier.
Canada’s bilateral air services agreements continue to be generally restrictive. For !
example, the Vancouver International Airport Authority reports that only one-third of
Canada’s agreements allows foreign air carriers access to Vancouver. The federal
Minister of Transport has indicated that he is unwilling to revise Canada’s International
Air Policy before 2002.
Initial Impact of the Merger on Air Capacity
Capacity inbound to B.C. This study used data from the June 1 schedule of the Official
Airline Guide (OAG) to measure the impact of the merger on airline capacity in individual
airline markets in B.C. While the OAG database is not without its limitations, it is the most
up to date, comprehensive and consistent source of data on airline services. Table 0-1
summarises capacity impacts on routes to B.C. Major findings from this analysis include:.Submission of BC Air Merger Consortium to CTA Review Panel
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The AC family has reduced the number of inbound domestic flights to the province by !
17%. Seat capacity has been reduced by 10%.
This has been offset by 9% growth in flights (6% in seats) by other domestic carriers, !
resulting in an overall 13% reduction in domestic flights to B.C. (7% in seats).
AC has expanded transborder service to the U.S. for an overall increase of 5% in !
flights and 3% in seats.
Asian seat capacity has increased by 9% for AC but has declined by 2% for foreign air !
carriers for an overall increase of 4%.
European seat capacity increased by 10% for AC, 6% by the Canadian charter !
carriers but declined by 1% for foreign carriers for an overall increase of 4%.
Table 0-1: Air Capacity Inbound to B.C. (Excluding Intra-B.C.) August 1999 vs. 2000
By Sector:
British Columbia
Frequency Seat Capacity
Aug-99 Aug-00 % change Aug-99 Aug-00 % change
Domestic AC family 3,451 2,856 -17.2% 338,414 303,320 -10.4%
Other Domestic 679 752 8.5% 98,969 105,756 6.1%
TOTAL 4,130 3,608 -12.6% 440,470 409,076 -6.5%
Transborder AC family 960 1,007 4.9% 86,584 88,937 2.7%
Other Domestic 88 100 13.6% 12,016 11,360 -5.5%
U.S. Carriers 2,334 2,496 6.9% 205,281 217,986 6.2%
Overseas Carriers 31 49 58.1% 11,997 16,101 34.2%
TOTAL 3,413 3,652 7.0% 315,878 334,384 5.9%
Other International
Asia-Pacific
Europe
Misc. International
AC family 317 341 7.6% 87,125 95,379 9.5%
Other Domestic 140 147 5.0% 40,332 46,241 14.7%
Overseas Carriers 317 303 -4.4% 115,715 113,336 -2.1%.Submission of BC Air Merger Consortium to CTA Review Panel
17
10 April 2001
TOTAL 774 791 2.2% 243,172 254,956 4.8%
AC family 240 248 3.3% 68,378 74,772 9.4%
Other Domestic 0 0 - 0 0 -Overseas
Carriers 199 188 -5.5% 74,227 72,836 -1.9%
TOTAL 439 436 -0.7% 142,605 147,608 3.5%
AC family 77 93 20.8% 18,747 20,607 9.9%
Other Domestic 122 118 -3.3% 36,722 39,017 6.2%
Overseas Carriers 106 106 0.0% 37,288 36,900 -1.0%
TOTAL 305 317 3.9% 92,757 96,524 4.1%
AC family 0 0 - 0 0 -Other
Domestic 18 29 61.1% 3,610 7,224 100.1%
Overseas Carriers 12 9 -25.0% 4,200 3,600 -14.3%
TOTAL 30 38 26.7% 7,810 10,824 38.6%
TOTAL 3 8,317 8,051 -3.2% 996,433 998,416 0.2%
Source: Official Airline Guide OAG-MAX February and August 1999 and January-June 2000 data disks, YVR Flight Information
Display System (FIDS), Canada 3000 Flight Schedule. 1) "Other Domestic" denotes other Canadian airlines. 2) Caution:
Frequency and capacity data totals may not include all charter operations by Royal Airlines, Air Transat and foreign
charter carriers. 3) See notes to Air Capacity Tables in Appendix G for additional discussion on methodology,
limitations and interpretation of data..Submission of BC Air Merger Consortium to CTA Review Panel
18
10 April 2001
Capacity within B.C. Table 0-2 summarises the impact on capacity for service within B.C.
As can be seen, there has been a major reduction in beyond-the-gateway capacity by AC.
Impact on air capacity from YVR to B.C. Tourism Regions. Table 0-3 summarises air
capacity changes from YVR to the B.C. tourism regions.
Table 0-2: Air Capacity for YVR Routes Intra-British Columbia (August 2000)
By Carrier Group:
British Columbia
Frequency Seat Capacity
Aug-99 Aug-00 % change Aug-99 Aug-00 % change
AC family Carriers 4,369 2,820 -35.5% 159,350 127,033 -20.3%
Other Domestic Carriers 1 854 1,387 62.4% 29,272 46,885 60.2%
TOTAL 5,223 4,207 -19.5% 188,622 173,918 -7.8%
Source: OAG MAX August 1999 and August 2000 data disk.
Figure 0--1 provides a summary of the capacity changes inbound to B.C. and for intra
B.C. routes from YVR.
Figure 0-1 Summary of Capacity Changes Inbound to B.C. and YVR Intra B.C.
Routes
(August 1999 vs. August 2000)
from Asi a
Flights Seats
AC 3% 9%
Total -1% 4%
f rom Europe
Flights Seats
AC 21% 10%
Total 4% 4%
from Domestic Canada
Flights Seats
AC -17% -10%
Total -13% -7%
from US
Flights Seats
AC 5% 3%
Total 7% 6%
BRITI SH
COLUMBI A
YVR
intra
B.
C.
Flights Seats
AC -36% -20%
Total -20% -8%.Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
Table 0-3: Air Capacity Changes From YVR to the B.C. Tourism Regions (1999 vs. 2000)
Frequency Seat Capacity
1999 2000 % Change 1999 2000 % Change
Region A
The Islands
AC family 25,495 17,132 -32.80% 827,769 713,414 -13.81%
Other Domestic 4,165 8,550 105.28% 63,094 184,386 192.24%
Total 29,660 25,682 -13.41% 890,863 897,800 0.78%
Region B
Vancouver,
Coast
& Mountains
AC family 0 0 - 0 0 -Other
Domestic 1,801 1,774 -1.50% 32,418 26,610 -17.92%
Total 1,801 1,774 -1.50% 32,418 26,610 -17.92%
Region C
Thompson
Okanagan
AC family 10,232 7,350 -28.17% 373,120 293,442 -21.35%
Other Domestic 1,532 1,370 -10.57% 123,511 163,964 32.75%
Total 11,764 8,720 -25.88% 496,631 457,406 -7.90%
Region D
B.C. Rockies
AC family 2,775 1,978 -28.72% 103,353 80,296 -22.31%
Other Domestic 80 0 -100.00% 846 0 -100.00%
Total 2,855 1,978 -30.72% 104,199 80,296 -22.94%
Region E:
Cariboo
Country
AC family 1,275 1,102 -13.57% 43,442 39,035 -10.14%
Other Domestic 544 604 11.03% 10,050 11,476 14.19%
Total 1,819 1,706 -6.21% 53,492 50,511 -5.57%
Region F:
Northern B.C.
AC family 11,111 7,261 -34.65% 535,879 379,726 -29.14%
Other Domestic 285 679 138.25% 34,770 81,928 135.63%
Total 11,396 7,940 -30.33% 570,649 461,654 -19.10%
TOTAL 59,295 47,800 -19.4% 2,148,252 1,974,277 -8.1%
Notes: Source: Official Airline Guide OAG-MAX February and August 1999 and January-June 2000 data disks, YVR Flight
Information Display System (FIDS), Canada 3000 Flight Schedule. 1) "Other Domestic" denotes other Canadian airlines. 2) See
notes to Air Capacity Tables in Appendix G for additional discussion on methodology, limitations and interpretation of data..Submission of BC Air Merger Consortium to CTA Review Panel
20
10 April 2001
2 There are some differences in how capacity to/from/within provinces is treated in the figure that shows impacts on all
provinces, versus how capacity was measured in the previous tables, hence they cannot be directly compared.
Comparison of Impacts on B.C. to Impacts in Rest of Canada
An analysis of August 2000 vs. August 1999 air capacity changes in each of the Canadian
provinces/territories and among the other major gateways was conducted to provide a
broader perspective on impacts to the B.C. tourism sector. Figure 0-2 shows the relative
impacts.2 As can be seen, Ontario has fared quite well relative to the other provinces.
B.C. has experienced a large drop in capacity offered by AC, but due to WestJet, Pacific
Coastal and others, B.C. has had a lower total (AC and others combined) impact.
Figure 0-2: Change in AC and Total Domestic Seats Among the Canadian Provinces
(August 1999 vs. August 2000)
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
AC Seats Total Seats
BC AB SK MB ON PQ NB PEI NS NF YK NWT NUN
Source: The Impact of Airline Restructuring in Canada upon Tourism in the Provinces and Territories, June 2000.
Initial Impact of the Merger on Airfares
Airfares. The study also looked at preliminary information on airline fares in B.C. Sources
include databases from Air Tariff Publishing Corporation and Sabre computer reservation
system, and average fare data from the Bank Settlement Plan of the International Air
Transport Association. Major findings include:
There are no significant increases in published airfares taking place. Preliminary !
evidence gathered in the review of select city pair markets is consistent with this
conclusion. On average, full/discounted economy airfares increased 3% over the
previous year. Other fare levels increased at various rates, remained the same or.Key strategies to deal with fare
concerns will be:
continued monitoring of ! !! !
average fares.
active pursuit of alternate, ! !! !
sources of detailed average
airfare data.
obtain quantitative feedback ! !! !
from inbound tour operator
community.
Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
declined.
A new discount program has been introduced. In a recent development, the AC family !
announced the introduction of new lower fare levels to and from 75 small communities
in Canada. The average discount is 38% off the current lowest year round published
fare. The new discounts will apply
to more than 700 routes,
representing 30% of the carriers’
markets in Canada. While it is early
to assess the impact of the fare
reductions, it is known that this is a
previously existing fare program, but
which is now being expanded to
include a range of smaller
communities that were previously
excluded. Although only 30% of the
AC market is included in the
program, fare reductions are
applicable to routes involving a
number of B.C. destinations. In
comparison to the previously available fare levels between these city pairs, the
discounts are significant. What is required to provide an assessment but is unknown
at this time, is whether meaningful numbers of seats will be available at these fares.
This is of particular concern given the reduction in capacity on a number of intra-B.C.
routes.
The average airfare paid has increased. The preliminary information indicates that average !
airfares from B.C. to Canadian destinations have increased by 5% for the business traveller
and 11% for the leisure traveller between 1999 and 2000. Not only is this higher than the
nominal increases in fares, B.C. average fares have increased more than the Canada-wide
average airfares.
The number of discount airfares may have been reduced. January-May 2000 data on average !
fares purchased in Canada provide an indication of the direction that ticket sales have taken
for travel in Canada. Average fares for pleasure travel have risen at roughly three times the
rate that full fares have risen. While there are a number of reasons why average air fares
may have increased significantly greater than nominal airfares, the report indicates that the
evidence is suggestive that the driver of increased average airfare levels is decreased
availability of tickets at discounted fares. Nevertheless, it is not possible to definitively assert
that the availability of discount fares has been reduced. Given the importance of this topic to
the tourism industry, it will be essential to establish an effective tracking mechanism to monitor
changes.
Competition brings average fares down. In markets with significant competition, such as !
Vancouver-Kelowna, there are substantial fare savings taking place..Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
InterVISTAS cautions against relying solely on preliminary and anecdotal information. At
this early stage, the best approach for gathering solid evidence for trends in yields would
be (a) to continue the monitoring of average airfares sales in Canada; (b) active pursuit of
alternate data sources for inbound average airfare data; and (c) gather qualitative and
quantitative information from the travel agents and tour operators community to combine
with data available from other sources, and (d) to urge the Federal Government to collect
and report on changes to fares, average fares and capacity at various discounted fare
levels.
Future Changes
Airline industry restructuring is an ongoing process whose effects will continue to take
place for the next few years. Some observations that can be made include:
The Canadian market is, and will likely continue to be, dominated by the AC
family in terms of fleet and capacity for the next several years.
In spite of the presence of other carriers, the Canadian market is, and will be, !
dominated by the AC family in terms of fleet and capacity for the next several years.
Competitive offsets from charter carriers and WestJet will not be sufficient to eliminate
Air Canada’s dominance.
As AC completes alliances with Delta and potentially with US Airways, and as it !
pursues a strategy of seeking growth in transborder and other international markets,
tourism access to the Vancouver gateway may continue to improve.
Competition from airlines outside of Canada to beyond-the-gateway markets in B.C. !
may be insufficient due to limited price competitive access, and due to Air Canada’s
strategic alliances dominating some key international markets (e.g. Vancouver –
Germany).
A sale of Canadian Regional Airlines (CRAL) may provide important medium term !
benefits in providing competitive beyond-the-gateway access to U.S. and international
carriers. A sale, however, would result in a period of adjustment as AC scrambles to
deal with the loss of CRAL’s capacity (roughly 50 aircraft), and as an independent
CRAL establishes itself in the market.
Preliminary Assessment of Impacts on B.C. Tourism
VFR (28% of B.C. non-resident visitors). The visiting friends and relatives market is !
generally very sensitive to prices. VFR travel to Vancouver is likely to remain
competitive. For beyond-the-Vancouver-gateway markets, the news is not good.
There are significant reductions in capacity and there may be reduced access to the
lowest fares. A few communities will benefit from offsetting service by WJ and Pacific
Coastal..Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
Leisure (56% of B.C. non-resident visitors). Leisure visitors to B.C. are generally !
somewhat less price sensitive than VFR but much more price sensitive than various
forms of business travel. Impacts are similar to those for VFR travel: competitive for
the Vancouver gateway but potentially negative for beyond-the-gateway markets,
except where WJ and others can provide significant offsetting capacity.
Conference/Business Meetings (16% of B.C. non-resident visitors). These travellers !
are much less sensitive to price and much more sensitive to service quality and
convenience. The Vancouver gateway will have increased connectivity to U.S.,
overseas and domestic markets, offset somewhat by higher average fares in domestic
markets.
Beyond-the-gateway markets will have mixed effects, but likely negative overall. On the
positive side, Victoria and Kelowna have benefited from seasonal non-stop service to
Toronto and there may be additional U.S. market penetration from new AC alliances with
Delta and possibly US Airways. On the negative side, most communities will experience
reduced capacity, higher average fares, and loss of code sharing connectivity with U.S.
and overseas carriers.
Policy and Action
A number of actions to mitigate negative impacts on B.C. tourism and to maximise positive
impacts from new opportunities were considered. These initiatives can include strategies
to:
Monitor industry developments so negative impacts can be pinpointed in a timely
manner.
Encourage AC to maintain or expand service, especially in beyond-the-gateway !
markets.
Ensure that government agencies have powers which can prevent dominant air carrier !
abuses in a timely manner.
Create the best conditions for continued expansion of airlines that provide competing !
services in domestic markets.
Create an airline network alternative that will provide a competitive choice for tourists !
and for air carriers (Canadian and foreign) desiring access to beyond-the-gateway
markets.
Increase foreign carrier access to beyond-the-gateway markets at competitive prices. !
Below, some details on potential initiatives are provided.
Monitor Industry Developments.Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
Data on key measures of airline industry performance should be collected and 1.
reported on a timely basis. This should include information on average fares in major
market segments (intra-province, domestic transcontinental service, gateway to
regional community services, transborder services, overseas services by national
market); capacity and frequency in individual markets; market shares of individual
carriers (measured in revenues, capacity offered, passengers carried); and load
factors.
The tourism industry should be provided with regular reports on developments in the 2.
airline industry.
Encourage AC Maintenance or Expansion of Service
Because of Air Canada’s current and future dominance of the Canadian aviation
marketplace, B.C. tourism will depend on this carrier for the majority of inbound air
tourism. Accordingly, AC should be supported in its efforts to expand air services to B.C.
This leads to the following initiatives that could be considered:
AC’s efforts to seek additional open skies agreements should be supported by the 3.
industry and enabled by government.
The B.C. tourism industry should meet regularly with AC staff to exchange marketing 4.
concepts and develop methods to support each other’s marketing and sales efforts.
AC should be encouraged to maintain a senior executive in B.C. Currently AC has no 5.
Vice President level manager located in B.C. Although there are indications that Air
Canada may establish the headquarters of its proposed discount carrier in Vancouver,
it is important that the mainline carrier has senior representation in B.C. and an
internal voice for the opportunity of the Vancouver gateway and the B.C. market
opportunity.
The B.C. tourism industry must ensure that AC recognises the B.C. gateway and tourism
opportunities. AC is cultivating Toronto as a mega-hub, and, with its corporate
headquarters in Montreal, has a strong eastern focus in general. As well, much of the
senior staff of Canadian Airlines, which had developed a deep understanding of the B.C.
market potential, have left the air carrier.
Prevent Abuse by Dominant Carrier
Even with passage of Bill C-26, some believe that the Canadian Transportation Agency
will have only weak regulatory oversight powers. A specific concern is its inability to
regulate average prices. As well, after a two year initial period, the agency will only be
able to investigate prices upon complaint, and the new ombudsperson-commissioner of
the Canadian Transportation Agency will have no enforcement powers. Some specific
actions, which might be considered, are:
Make competitively priced beyond-the-gateway seats on regional AC family flights 6.
available to foreign air carriers..Submission of BC Air Merger Consortium to CTA Review Panel
25
10 April 2001
Provide the CTA ombudsperson with real powers. 7.
Increase the powers of the CTA to monitor and limit increases in average fares. 8.
The Minister of Transport has commenced the required four year review of the Canada
Transportation Act. The panel has a reporting date of 1 July 2001. This review process
will be an excellent opportunity to put forth revisions to the CTA which will mitigate any
negative impacts of airline industry consolidation. As well, there may be opportunity for (or
opportunity should be created by) the tourism industry to put forth its views to the
Parliamentary Standing Committees on transport. Of special importance is the need to
ensure that in the future, the interests of the tourism industry are explicitly taken into
consideration by the Government and its Agencies when dealing with airline industry
issues. Australia, for example, explicitly considers tourism interests in its regulatory
proceedings.
Best Conditions for Continued Expansion of Air Canada and Independent Carriers
In the long term, B.C. tourism growth will depend on the success of all of Canada’s air
carriers (AC and independent carriers) in providing competitive access to B.C.
communities. This leads to actions that focus, in part, on lowering the costs for these
carriers and potentially lower prices for inbound tourists.
Reduce or eliminate fuel taxes (provincial and federal domestic) on air carriers. 9.
Revise the Federal Airports Policy to limit present and future ground rent payments by 10.
airports to the Federal Government.
Expand the Federal Airport Capital Assistance Program to increase support for the 11.
capital programs at regional airports.
Network airline alternative
An independent CRAL could provide important competitive access to beyond-the- 12.
gateway tourism markets.
If Canadian Regional Airlines (CRAL) is successfully sold, then many Canadian
communities would have competitive service from an independent network carrier. It
would not replicate the extent or frequency of the Air Canada network, and there
would be challenges faced by an independent CRAL. If successful, it would be likely
to form code sharing alliances with important U.S. and foreign airlines, creating
conditions for competitive price access to a number of B.C. tourism destinations.
Cabotage access for U.S. and/or other foreign carriers would grant U.S. carriers the 13.
privilege of marketing purely domestic air services in Canada.
Cabotage is considered by some to be a controversial policy action to take. In part,
this is because the stereotypical view is that there could be implications for
transferring some Canadian jobs to locations in the U.S. However, there are several
forms that cabotage could take, and some would generate new jobs in Canada. The.Submission of BC Air Merger Consortium to CTA Review Panel
26
10 April 2001
3 The latter initiative requires some comment. The 1995 Canada-U.S. open skies agreement gives U.S. carriers the right
to fly to/from Canada, but not beyond Canada. 5 th freedom rights, the ability of U.S. carriers to fly beyond Canada to
overseas destinations, could result in new services by U.S. carriers, or increased service by overseas carriers due to
increased gateway traffic to their flights via third-country-code-sharing by U.S. carriers. Just as importantly, AC could
benefit from 5 th freedom rights. If it exercised these rights and flew from Canada to a U.S. and then beyond, new
overseas destinations (perhaps in Latin America or deeper into Asia) could be connected to Vancouver.
text describes several cabotage variants which might be considered:
Modified Sixth Freedom Cabotage. !
Right of Establishment Cabotage. !
Domestic Code Share Cabotage.
Pure Cabotage.
Air Canada itself has indicated it would support cabotage rights provided that 14.
privileges are reciprocal. Until recently, reciprocal cabotage rights with the U.S.
seemed a remote possibility due in part to the way in which the cabotage prohibition is
enshrined in U.S. legislation. The recent proposal to merge United and US Airways,
however, could prompt the U.S. Congress to authorise cabotage rights for non-U.S.
carriers, something which already has found some support within Congress. As well,
U.K. carriers, such as Virgin, could be interested in establishing Canadian domestic
operations, providing an alternative avenue for reciprocal cabotage rights. Virgin is
launching domestic service in Australia this summer with the brand name of Virgin
Blue. Australia has a significantly smaller domestic market than Canada, and is
already served by two financially healthy domestic carriers.
Foreign carrier access
There should be an immediate start of a federal international air policy review, rather 15.
than a delay of the review to 2001, and an acceleration of implementing changes in
this policy from 2002 to 2001.
Ensure that the needs of the B.C. tourism industry for increased access for air carriers 16.
(Canadian and foreign) to B.C. are made known in that policy review.
Obtain open skies regimes with as many countries as possible. 17.
Support an early move away from the cumbersome, expensive and time consuming 18.
bilateral air services agreement negotiating process. This would be replaced with
multilateral agreements. A significant medium term opportunity is to expand the
coverage of the GATS agreement to include air traffic rights.
Complete the Canada-U.S. open skies agreement to include 5 th freedom rights.3.Submission of BC Air Merger Consortium to CTA Review Panel
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10 April 2001
Appendix B: Recommendation of the National Transportation Act
Review Commission.Submission of BC Air Merger Consortium to CTA Review Panel
28
10 April 2001
Competition in Transportation Policy and Legislation in Review
Volume 1, National Transportation Act Review Commission (1993)
RECOMMENDATION NO. 17
We recommend that, should restructuring in the domestic airline market result in a
primary carrier monopoly, the federal Cabinet give policy directions to the Agency
under section 23 of the NTA, 1987 to license the granting of traffic rights within
Canada to foreign carriers, or to permit foreign carriers to establish operations
within Canada.
International Protectionism
Despite deregulation in the U.S., airlines worldwide remain highly regulated. International
air travel is governed by bilateral agreements between countries, foreign ownership is
strictly limited, many airlines are either state-owned or subsidised and fares and routes are
often set by governments. Airlines for their part are seeking to expand their foreign
markets through networks, alliances and mergers with other airlines.
The airline industry is changing. As carriers form international alliances and global
networks, the central importance of a national airline is passing away. The government
has indicated that it is willing to liberalise its bilateral arrangements with the U.S. The
future of competitive domestic air travel in Canada may well lie in policies that help
Canadian carriers competed in the new international markets, but such policies should
never by adopted at the expense of the Canadian traveller.
Certain restrictions in the Air Transportation Regulations delay possible use by air carriers
of other carriers' seating space or aircraft in servicing proposed alliance routes
economically..Submission of BC Air Merger Consortium to CTA Review Panel
29
10 April 2001
Appendix C: Recommendation of the Royal Commission on National
Passenger Transportation.Submission of BC Air Merger Consortium to CTA Review Panel
30
10 April 2001
Directions: The Final Report of the Royal Commission
on National Passenger Transportation (1992)
Excerpt from Chapter 11: Applying the Principles to Air Carriers
Recommendations: OWNERSHIP AND CONTROL (p. 248)
Although there are no national restrictions on ownership for the other transportation
modes, air carriers are protected from foreign ownership and control under the National
Transportation Act, 1987. This protection is consistent with the Chicago Convention,
which sets the requirements of the world’s bilateral air agreements. Under the Chicago
Convention, there must be substantial national ownership and effective control of an
airline designated as national. For an airline to be a national Canadian air carrier,
substantial ownership and effective control must be held by Canadians—citizens,
permanent residents, a government or government agent, and entities in which Canadians
own and control at least 75 percent of the voting interests or “such lesser percentage as
the Governor in Council may by regulation specify.”
If a Canadian air carrier that flies international routes were, by virtue of foreign investment,
no longer owned and under effective control by Canadians, its designation as a national
airline under the relevant bilateral agreements could be challenged. This challenge could
come from the remaining Canadian air carriers, the other country party to the bilateral
agreement, or from carriers in competition with the newly controlled airline. Under the
existing international rules, this challenge would probably succeed.
Foreign control may also affect the ability of the government to ensure the availability of
domestic service in emergency situations. The Emergencies Act provides the Canadian
government with the power to requisition the use of any equipment, which includes aircraft
on Canadian territory, in times of a declared emergency. Other governments have similar
laws. A foreign government might act on prior knowledge, however, and order aircraft
owned, or even operated, by its nationals, to be returned to its territory (in a manner
similar to the control over shipping demonstrated in the days preceding World War II).
Restricting foreign ownership and control may reduce choices to the consumer. This
would be of particular concern if a situation arises where only one domestic carrier
remains viable. We recognize that there are instances when a relaxation in foreign
ownership controls may be necessary to preserve domestic competition (we return to this
later). For the most part, though, we believe existing restrictions on foreign ownership and
control of Canadian air carriers are appropriate, given the current bilateral air agreement
regime.
(….)
(from p. 252).Submission of BC Air Merger Consortium to CTA Review Panel
31
10 April 2001
The federal government should be prepared, however, to prevent a situation that would
require a return to economic regulation, which would be the likely outcome if only one
major Canadian air carrier emerges. At the time of writing, discussions were under way
regarding a potential merger between Air Canada and Canadian Airlines International.
The presence of only one major airline in the domestic market is inadvisable. While we
are concerned with the survival of the airline companies, our overriding policy
consideration is to maintain competition between at least two air carriers. We believe that
Canadian travellers will be best served if there are two or more competing carriers in
Canadian skies. Maintaining competition should be the overriding policy consideration.
Therefore, we recommend that:
11.6 If faced with a potential reduction to only one major Canadian air carrier,
the federal government exercise its authority under sections 67, 72 and
73 of the National Transport Act, 1987 to override limitations on foreign
ownership and control for the explicit purpose of, and to the extent
required for, ensuring competition in the domestic market.