Airline Industry Restructuring in Canada

Senate Committee on Transport and Communications

Second Report

The Honourable Lise Bacon, Chair

The Honourable J. Michael Forrestall, Deputy Chair

December 1999


Table of Contents

Membership

Order of Reference

Airline Industry Restructuring In Canada

1. Introduction
2. The Appropriateness of Using Section 47 at This Time
3. Domestic Competition

3.1 Predatory Pricing
3.2 Unreasonable Fare Increases
3.3 Travel Agent Commissions
3.4 Slots
3.5 Computer Reservation Systems
3.6 Frequent Flyer Programs
3.7 Interlining and Code Sharing
3.8 Surplus Aircraft

4. The 10% Limit on Air Canada Shares
5. Service to Small Communities
6. Ownership and Control
7. International Services
8. Bilingualism
9. Treatment of Employees
10. Monitoring Dominant Carrier Commitments
11. Domestic Competition from Foreign Owned Airlines
12. Conclusions and Observations
13. Recommendations

Appendix - Witnesses


Membership

The Honourable Lise Bacon, Chair
The Honourable J. Michael Forrestall, Deputy Chair

And the Honourable Senators:

Willie Adams
*Bernard Boudreau, P.C. (or Daniel Hays)
Catherine Callbeck
Sheila Finestone, P.C.
Janis G. Johnson
Michael Kirby
Marjory LeBreton
* John Lynch-Staunton (or Noël A. Kinsella)
Raymond J. Perrault, P.C.
Marie-P. (Charette) Poulin
Fernand Roberge
Mira Spivak

 

Other Senators who participated in the work of the Committee:

Raynell Andreychuk, Norman K. Atkins, Ione Christensen, Erminie J. Cohen, Joan Cook, Pierre DeBané, Mabel DeWare, Joyce Fairbairn, P.C., Isobel Finnerty, Ronald D. Ghitter, Colin Kenny, Noel A. Kinsella*, Rose-Marie Losier-Cool, Shirley Maheu, Lorna Milne, Donald H. Oliver, Marcel Prud’homme, Nick G. Sibbeston, Nicholas W. Taylor, Charlie Watt.

 

* Ex Officio Members


 Order of Reference

Extract from the Journals of the Senate, Thursday, October 14, 1999:

The Honourable Senator Hays moved, seconded by the Honourable Senator Graham, P.C.:

That, pursuant to subsection 47(5) of the Canada Transportation Act, the order laid before this Chamber on September 14, 1999, authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement, be referred for review to the Standing Senate Committee on Transport and Communications;

That the Committee hear, amongst others, the Minister of Transport;

That the Committee have the power to permit coverage by electronic media of its public proceedings; and

That the Committee submit its final report no later than December 15, 1999.

After debate,

The question being put on the motion, it was adopted.

 

Paul C. Bélisle
Clerk of the Senate


1- Introduction

On August 13th 1999, the Governor in Council signed an order under the extraordinary disruptions section (section 47) of the Canada Transportation Act, the effect of which was to suspend the application of the Competition Act as it applied to airlines in Canada, thus allowing discussions to take place concerning airline mergers, the kind of discussions which would otherwise have been illegal under the Competition Act.

On October 14th, The order was referred by the Senate to this Committee for review. On October 26th the Minister of Transport, the Hon. David Collenette, appeared before the committee and gave the background to the order in council. He asked the committee to give him advice on a number of matters related to airline policy. These included whether or not the law requiring the 10% limit on individual holdings of Air Canada voting shares should be changed, the question of the impact of any airline restructuring on competition, the adequacy of certain consumer protection sections (64 to 66) in existing transportation legislation related to pricing and service to small communities, the likely impact on the employees of the airlines involved of a merger between the two airlines or the bankruptcy of one of them and a means of monitoring the air market in which there could be a dominant carrier. He indicated the willingness of the government to take steps in all the above areas, though he said that there would not be any change in the present Canadian ownership and control requirements.

The Minister tabled with the Committee two documents on which it has drawn strongly during its deliberations. One was a Transport Canada document entitled "A Policy Framework for Airline Restructuring in Canada, October 1999". The other was a letter dated October 22nd to the Minister of Transport from the Commissioner of the Competition Bureau. The letter responded to a request from the Minister for the views of the Bureau on competition issues brought up by potential airline restructuring.

The Committee was not asked to comment on the relative merits to shareholders of the Onex and Air Canada restructuring proposals and does not propose to do so. As it happened, ten days into the hearings the Onex proposal was withdrawn after having been declared against the law by the Quebec Superior Court, since it would have broken the 10% ownership provision relating to Air Canada shares. The remarks here thus apply to the Air Canada proposal, essentially a plan to buy Canadian Airlines International and operate it as a separate company from Air Canada and to establish a low cost airline based on Hamilton, Ontario. While there may not be in future a dominant carrier, the Air Canada proposal clearly creates a dominant owner. As far as competition is concerned, the Committee sees no difference between a dominant owner of two carriers and a single dominant carrier.

In the course of its deliberations, the Committee heard from 53 witnesses including the Minister of Transport, the two major airlines involved, the Onex Corporation, the Commissioner of the Competition Bureau, several small Canadian airlines and a number of consumer and labour groups.

In making its report, the Committee is mindful of the tasks requested by the Minister and matters referred to in the following paragraphs are what are seen to be the key issues. Each is addressed briefly and in most cases a recommendation is made. As indicated above, these recommendations are based on the assumption that the Air Canada proposal will materialize. Should this not be the case, many of the recommendations in this report may no longer be appropriate.

 

2- The Appropriateness of Using Section 47 at This Time

3- Domestic Competition

4- The 10% Limit on Air Canada Shares

 

5- Service to Small Communities

6- Ownership and Control

7- International Services

8- Bilingualism

9- Treatment of Employees

    The Committee heard from a number of employee groups during its hearings. One of the main messages was that the restructuring process should be completed quickly, so that the sense of uncertainty hanging over them could be removed.

    Air Canada has given certain undertakings with regard to workforce stability and the conditions which will apply to layoffs. No doubt we have not seen the end of the negotiation process. The airline workforce is generally represented by quite strong union groups, and probably needs little help from government. Nevertheless when the commitments which government has said it will seek from any dominant carrier are discussed, commitments with regard to the rights of employees should be among the priorities.

    Many of the representations made to the Committee on this matter stressed the significance of seniority lists in airline operations, and the potential for creating very unpleasant working situations if the question of merging or transferring personnel were done without regard to the significance of seniority lists. In any overseeing role, it is thus important for the government to ensure that the fullest possible discussion take place between management and labour groups in order to minimize any adverse effects that could arise from this matter.

    Recommendation 17, Treatment of Employees

    In seeking commitments from the dominant owner/carrier, the government insists that fair treatment with regard to continuity of service or lay-off terms be accorded to employees. Special attention should be accorded to the sensitive matter of airline seniority lists.

     

10- Monitoring Dominant Carrier Commitments

    Whether the outcome of current discussions is a dominant carrier or a dominant owner, the government has indicated its intent to require certain commitments with regard to service, fares and treatment of employees. The Committee agrees with this approach.

    There should however be some formal accountability process at least on an annual basis to monitor the compliance with these commitments. The Canadian Transportation Agency, the body which issues licenses, is involved in dispute resolution and monitors compliance with air bilaterals etc. would seem to be well positioned to be involved in this work. The Committee strongly believes however that the Competition Bureau should also be involved and that the monitoring should be a joint effort. The accounting should be in public, in the form of hearings where compliance with the commitments is reported on and intervenors who may have criticisms or complaints will also be heard.

    The results of these hearings should be referred to the appropriate parliamentary Committee for review.

    Recommendation 18, Dominant Carrier Commitments

    The accountability process should be monitored in a public forum, such as through hearings held once per year by the Canadian Transportation Agency in co-operation with the Competition Bureau and open to intervenors and other critics and the report of these hearings should be referred to the House of Commons Transport Committee and the Standing Senate Committee on Transportation and Communications for Review.

     

11- Domestic Competition from Foreign Owned Airlines

    So far in this report the Committee has agreed with most of the courses proposed by the Minister of Transport in his presentation to this Committee to deal with the threat to competition posed by a dominant carrier and most of the detailed recommendations made by the Director of the Competition Bureau. These are reflected in the recommendations made in the report so far.

    The Committee is left however with a feeling of unease. There may be commitments made to holding the line on fares, but it is not at all clear where any drive for lower costs will come from or what remedies may be available if fares go up more than expected.

    This brings the Committee to some of the ideas about foreign competition. It rejects the notion of pure cabotage, under which foreign aircraft with foreign crews would operate routes entirely within Canada. This would simply be taking jobs away from Canadians. On the other hand cabotage as the extension of an international route may be more acceptable, but only if reciprocal rights were available to Canada.

    It is noted that the Competition Bureau put forward two ideas regarding foreign carriers providing competition in the Canadian domestic market. One was the modified sixth freedom service, the Montreal to Vancouver via Chicago kind of route, where unlike today, a US carrier would be able to market a through ticket from origin to destination. A second and more radical proposal was to allow what were referred to as Canada-Only Carriers. These could be entirely foreign owned, would employ Canadian crew and pay Canadian taxes, but would not have the privilege of serving international routes as a Canadian owned carrier would have. The Committee did not hear any support for the Canada-Only carrier idea. Even the one big foreign carrier who was asked for its views thought that the route structure of an all Canadian operation would not be particularly attractive. Small Canadian carriers did not offer any enthusiasm either.

    On the other hand the Committee finds appeal in the notion of allowing modified sixth freedom rights. This would seem a fairly straightforward way of introducing a significant element of competition into what is likely to be an otherwise largely uncompetitive scene. In negotiating such rights however, a reciprocal agreement to allow Canadian carriers to undertake through ticketed US to US journeys through a Canadian point should also be required.

    Recommendation 19, Modified 6th Freedom Rights

    In order to increase competition under a dominant owner/carrier regime, the government take steps to negotiate with the United States the necessary authority to allow through ticketing from one point in Canada to another through a US intermediate stop.

     

12- Conclusions and Observations

    The main conclusion of the Committee is that the structure of the airline industry in Canada under the most likely future scenario will result in one owner dominating about 90% of domestic traffic. All the recommendations made by this Committee are aimed at helping deal with this situation, through steps which will protect the customer directly and promote competition by encouraging the growth of small carriers and removing obstacles to new entrants.

    One major concern about the Air Canada proposal is the airline’s intention to set up a low cost carrier based on Hamilton. It is noted that one of the steps contemplated by the Minister in the restructuring process is submission of the whole package to the Competition Bureau for comment. In doing this we ask the Minister to ask the Bureau to pay particular attention to the Hamilton proposal.

    In the letter to the Minister from the Competition Bureau, the possibility of the ultimate requirement for divestiture of some of the affiliates of the dominant owner was raised. The committee did not hear any testimony in favour of this option, though it believes that the Bureau should take a close look at this matter also. Should it become necessary, the recommendations relating to matters such as interlining and code sharing set out in section 3.0 of this report would apply.

    The committee wishes to make a comment on airline operating costs. The restructuring of the industry will be successful in the long run only if the emerging dominant owner is successful in getting its costs under control and shifting the current system in which costs drive prices to a market oriented system in which prices drive costs. The high debt load of Canadian Airlines, with its associated high interest costs and for Air Canada the absence of a healthy competitor have allowed both airlines to develop domestic pricing policies which have been designed to cover these costs, rather than reducing costs in order to allow prices to be competitive in a competitive market place. The need to change this pricing approach becomes even more critical with the emergence of a dominant owner. Implementation of the recommendations contained in this report would help drive this change.

    While the Committee has addressed the matter of treatment of employees under section 9 of this report, those remarks were intended to apply to those who work directly for the two airlines involved and their affiliates. During the course of the Committees hearings, concern has been raised about the transfer of jobs related to such functions as computer reservation services out of the country. The Committee suggests that to the extent he is able, commitments related to retaining such jobs in Canada or repatriating any jobs already transferred also be pursued by the Minister with the dominant owner.

    Finally a comment on safety. The policy section of the Canada Transportation Act, section 5, puts safety as the first item in its declaration of national transportation policy. At a time of upheaval, there may be distractions which might unwittingly contribute to a deterioration in the safety level. We trust that all concerned will exercise exceptional vigilance in order to ensure that our Canadian system remains as safe as it is possible to be.

 

13- Recommendations

    Recommendation 1, Predatory Pricing
    The Competition Act be amended as it concerns predatory airline pricing in order to ensure that cease and desist orders are available that can stop such actions while they are in progress.

    Recommendation 2, Unreasonable Fare Increases
    It is recommended that section 66 of the Canada Transportation Act, which applies to unreasonable rate increases on monopoly routes, be revised with a view to ensuring that total revenue increases be subject to appeal and not just the basic fare.

    Recommendation 3, Travel Agent Commissions.
    The dominant carrier/owner link its travel agent commission system to sales volume alone and not tie it in any way to travel agent loyalty.

    Recommendations 4 and 5, Slots
    It is recommended that the dominant owner commit to surrendering sufficient slots in key locations including overseas to allow effective competition at key times and that access to passenger facilities generally be structured on a common use basis in order not to exclude carriers competing with the dominant owner.

    A new regulatory framework for slots be established by Transport Canada such that they be surrendered if not used, that enough be available for new entrants and that priority be given to new entrants where facilities are being expanded.

    Recommendation 6, Computer Reservation Systems.
    The government revise the computer reservation system regulations with a view to eliminating the features which work to the disadvantage of small carriers.

    Recommendation 7, Frequent Flier Programs.
    The dominant owner be required to allow new entrants to purchase frequent flyer points in his plan at reasonable cost which would be awarded to passengers on the new entrant’s routes, such points having status as if they were earned with the dominant owner.

    Recommendation 8, Interlining and Code Sharing.
    The dominant owner/carrier be required to negotiate interline and code sharing agreements on reasonable terms with all new entrants in the domestic market wanting such agreements.

    Recommendation 9, Surplus Aircraft.
    As part of the commitments required of a dominant owner/carrier, the government shall require a commitment regarding the disposal of surplus aircraft on reasonable terms first to any willing Canadian buyers before disposing offshore.

    Recommendation 10, The 10% Limit on Air Canada Share Ownership
    The Committee recommends that the provision limiting ownership by an individual of Air Canada voting shares be raised from 10% to 20% and the provision preventing like-minded shareholders from agreeing to vote together be removed. It further recommends that consistent with restraints in the Bank Act, no institutional investor should be able to own more than 10% of Air Canada voting shares.

    Recommendations 11 and 12, Service to Small Communities.
    The Committee recommends that sections 64 and 65 of the Canada Transportation Act be strengthened to guarantee that existing service from a dominant carrier to all communities now served by Air Canada and Canadian Airlines be continued.

    In the light of restructuring, the government review its pricing and rental policies at small airports bearing in mind their role as essential parts of the national transportation infrastructure.

    Recommendation 13, Ownership and Control.
    The Committee recommends that the government exercise its discretion under the Canada Transportation Act to raise the limit on maximum foreign ownership in a Canadian airline from 25% up to 49% on a selective basis in order to facilitate the access to capital of small carriers competing with the dominant owner.

    Recommendations 14 and 15, International Air Policies.
    It is recommended that the International Air Policy, including the policy for Charters, be reviewed under the dominant owner scenario with a view to increasing the participation of smaller Canadian carriers so as to promote their strength at home and that revisions to air bilateral agreements to assist this where necessary be negotiated.

    The Minister of Transport provide for the Competition Bureau to review all new or renewed international alliance agreements entered into by the dominant carrier/owner to ensure compliance with competition policy.

    Recommendation 16, Bilingualism.
    The Committee recommends that under a dominant carrier or owner scenario in Canada, all operations directly serving the public carried out by that carrier or owner and its subsidiaries be made subject to the Official Languages Act.

    Recommendation 17, Treatment of Employees..
    In seeking commitments from the dominant owner/carrier, the government should insist that fair treatment with regard to continuity of service or lay-off terms be accorded to employees. Special attention should be accorded to the sensitive matter of airline seniority lists.

    Recommendation 18, Dominant Carrier Commitments.
    The accountability process should be monitored in a public forum, such as through hearings held once per year by the Canadian Transportation Agency in co-operation with the Competition Bureau and open to intervenors and other critics and the report of these hearings should be referred to the House of Commons Transport Committee and the Standing Senate Committee on Transportation and Communications for Review.

    Recommendation 19, Modified 6th Freedom Rights
    In order to increase competition under a dominant owner/carrier regime, the government take steps to negotiate with the United States the necessary authority to allow through ticketing from one point in Canada to another through a US intermediate stop


Appendix - Witnesses

Name of Organization and/or Witness(es)

Issue Number

Date of appearance

Air Canada:
  • Robert A. Milton, President and Chief Executive Officer;
  • Douglas D. Port, Senior Vice President, Corporate Affairs and Government Relations;
  • Duncan Dee, Manager, Government Relations.

6

Nov. 9, 1999

Air Canada Pilots Association:
  • John Oakley, Captain, President.

6

Nov. 9, 1999

Air Line Pilots Association, International:
  • Michael Lynch, Captain, President, Canada Board;
  • Steve Linthwaite, Captain, Master Executive Council Chairman, Air Ontario;
  • Bruce McConchie, Captain, Master Executive Council Chairman, Canadian Airlines.

2

Oct. 27, 1999

Air Transport Association of Canada:
  • Cliff Mackay, President and Chief Executive Officer;
  • Les Aalders, Vice President, Engineering & Maintenance.

2

Oct. 27, 1999

Canada 3000 :
  • Angus J. Kinnear, President.

6

Nov. 9, 1999

Canada Airport Council:
  • Neil Raynor, Executive Director;
  • Paul Benoit, President and Chief Executive Officer, Ottawa International Airport.

6

Nov. 9, 1999

Canadian Airlines:
  • Kevin E. Benson, President and Chief Executive Officer.
  • Stephen Markey, Senior Vice President, Corporate and Government Affairs;
  • Scott Bradley, Government Relations.

4

Nov. 3, 1999

Canadian Auto Workers (CAW):
  • Buzz Hargrove, President;
  • Peggy Nash, Assistant to the President;
  • Jim Stanford, Economist, Research Department;
  • Gary Fane, Transportation Director.

5

Nov. 8, 1999

Canadian Transportation Agency:
  • Gavin Currie, Director General, Air and Accessible Transportation Branch;
  • Claude Jacques, Director, Legal Services Directorate;
  • Mary-Jane Gravelle, Senior Analyst, Licensing and Charters Directorate.

5

Nov. 8, 1999

Canadian Union of Public Employees:
  • Judy Darcy, National President;
  • Denise Hill, President, Airline Division;
  • Richard Balnis, Senior Research Officer, CUPE National;
  • Pam Betty.

6

Nov. 9, 1999

Commissioner of Official Languages (Office of the):
  • Dyane Adam, Commissioner of Official Languages;
  • Gérard Finn, Director General, Policy Branch;
  • Michel Robichaud, Director General, Investigations Branch;
  • Richard Tardif, Senior Legal Counsel and Director, Legal Services.

5

Nov. 8, 1999

Competition Bureau (Industry Canada):
  • Konrad von Finckenstein, Commissioner of Competition;
  • Raymond Pierce, Deputy Commissioner of Competition;
  • Richard Annan, Commerce Officer;
  • Richard Elliott, Commerce Officer.

2

Oct. 27, 1999

Consumer Association of Canada:
  • Gail Lacombe, President;
  • Jennifer Hillard, Vice-President, Issues & Policy.

2

Oct. 27, 1999

First Air:
  • Bob Davis, President;
  • The Honourable Jean Bazin, Member of the Board of Directors;
  • Sam Silverstone, Legal Counsel with Makivik Corporation.

7

Nov. 16, 1999

Onex Corporation:
  • Gerald Schwartz, Chairman and Chief Executive Officer;
  • Nigel Wright, Principal

3

Nov. 2, 1999

Star Alliance:
  • Rono J. Dutta, President, United Airlines;
  • Frederic F. Brace, Senior Vice President – Finance, United Airlines;
  • Shelley A. Lungmuir, Senior Vice President – International, Regulatory and Governmental Affairs.

6

Nov. 9, 1999

Transport Canada:
  • The Honourable David Collenette, P.C., M.P., Minister
  • Margaret Bloodworth, Deputy Minister;
  • Louis Ranger, Assistant Deputy Minister for Policy

1

Oct. 26, 1999

Transport 2000:
  • Harry Gow, President;
  • Michael Janigan, Executive Director, Public Interest, Advocacy Centre;
  • Andrew Reddick, Director of Research;
  • Peter Bleyer, Executive Director, The Council of Canadians;
  • David L. Jeanes, Canadian Association of Airline passengers.

2

Oct. 27, 1999

West Jet:
  • Stephen C. Smith, President and Chief Executive Officer.

7

Nov. 16, 1999


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