Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 1 - Evidence (evening meeting)

OTTAWA, Tuesday, October 26, 1999

The Standing Senate Committee on Transport and Communications, pursuant to subsection 47(5) of the Canada Transportation Act, met this day at 6:00 p.m. to consider the order authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement.

Senator Lise Bacon (Chairman) in the Chair.


The Chairman: This is the first meeting to study the order in council authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement.

We are quite pleased to have the minister here tonight. I know that you worked hard in the House of Commons, but you will work hard here, too. The members have many questions to ask you. We are pleased to have you to start this committee's work. Welcome, and please proceed.

The Honourable David Collenette, Minister of Transport: One of the great advantages -- there are many to being in the Senate -- is that you can watch a minister go through two hours in the House of Commons on TV and then prepare your questions accordingly. Certainly this afternoon was interesting, and I hope to be equally forthcoming with you. It is with great enthusiasm that I am here at this Senate committee meeting.

Much has happened since August 13 when I announced, with Mr. Manley, that the Governor in Council had issued an order, pursuant to section 47 of the Canada Transportation Act, which established a special 90-day process designed to facilitate an orderly restructuring of the Canadian airline industry. In early August we were faced with the prospect of a major disruption in a key industry -- an industry that is essential to this country. The government took steps to ensure that all options could be considered and that the public interest would be protected. We took action quickly and decisively, but it was only a temporary first step. Today I have come to speak to you about how we have prepared the groundwork for the next step, which will be permanent. I am therefore tabling today a document entitled "A Policy Framework for Airline Restructuring in Canada."


It is very clear that Canada's airline industry is not just another service sector and that it is, inevitably, on the verge of major change. In a country with the width and breadth of ours, air services are a vital feature of our ability to meet our personal, commercial and national objectives. For these reasons alone, it is appropriate for the government to have a say in a restructuring, even if the solution is developed in the private sector.


The government is well aware that there are implications for competition in any major restructuring. Consequently, on August 30, I wrote to the Commissioner of Competition, Mr. Konrad von Finckenstein, seeking his advice on how to achieve an outcome as pro-competitive at possible in the face of consolidation, regardless of how it would be achieved. Last Friday, I received the reply from the commissioner, and I thank him publicly for his thorough airing of concerns and for his recommendations. His reply is in the form of a letter, which I am also making public today.

In examining his letter, it is important to recognize that while the advice of the commissioner covers four broad areas of concern, only one of those can be addressed by the Competition Bureau within its mandate. Using its normal merger review process, the bureau could seek remedies to address competition concerns, but it could not deal with the regulatory, legislative and policy issues identified in the commissioner's letter. For these, action by the government is required.

As we enter the final days of the 90-day period, I am pleased to note that a total of three proposals have come forward, and two of them are still on the table: on from Onex Corporation and one from Air Canada.


In announcing the issuance of the order on August 13, I said that I would be reviewing with my cabinet colleagues what further action might be required, including the possibility of introducing legislation to facilitate the implementation of an acceptable proposal and to make the necessary changes to the regulatory framework governing airlines.

In releasing this policy framework, the government is requesting input from parliamentarians on the important public policy issues identified and on the options for addressing them.

Both I and my officials have met or spoken to many of those directly affected including carriers of all sizes, consumer groups, travel agents, and airports. I personally have met with representatives of most of the unions whose members would be affected.

Many will welcome the opportunity to share their views with you. Over the past two and a half months I have indicated publicly, on a number of occasions, the areas of most concern to the government. Today, I am tabling the government framework to address them and requesting your assistance in finalizing this policy.

Our vision, as we enter the 21st century, is a safe and healthy Canadian airline industry. One that is owned and controlled by Canadians, that serves all parts of Canada at fair prices and that is capable of competing with the biggest and best airlines in the world.


A key, fundamental, underlying current and future airline policy is that there will be no compromise of Canada's existing high safety standards. Canadians can be proud of the safety standards of our airline industry. The government will remain vigilant to ensure that our standards remain among the most rigorous in the world.


Fundamental to the identity of Canada is its linguistic duality. It is a reflection of Canada's unique culture and values that Canadians be able to rely on the national air carrier for service in either official language.

The government will ensure that the Official Languages Act continues to apply in the case of Air Canada or any newer dominant carrier, and that the act is effectively implemented.


Let me now turn to some specific elements in the framework. The government will ensure that Canada's airline industry remains owned and controlled by Canadians. The Canadian Transportation Agency will carry out its legislated mandate to ensure compliance.

There will be no reduction in Canadian ownership and control requirements. The 25 per cent limit on foreign voting shares will not be changed. The requirement to be controlled in fact by Canadians will not be changed. The 25 per cent limit on voting shares held by foreigners applies to all carriers, including Air Canada.

In addition to this limit on foreign investors, the Air Canada Public Participation Act prohibits any person from owning or controlling more than 10 per cent of Air Canada's voting shares. This affects all shareholders -- both Canadian and non-Canadian. Although this provision has ensured that this former Crown corporation has been widely held, some have argued that this reduces shareholder influence. The government is prepared to consider increasing the limit to a new level, to be decided following input from parliamentarians, if such a measure contributes to achieving a healthy, Canadian-controlled airline industry.


Another key element of the policy framework relates to fostering competition. Both the government and the Competition Bureau have identified a number of areas where action will need to be taken to ensure as pro-competitive an environment as possible -- one that will assure other carriers that they could successfully mount and sustain a competitive service.


Two particularly important issues in this regard are predatory behaviour and airport access. While energetic competition is to be encouraged, predatory behaviour cannot be tolerated. Small and new entrant carriers are potentially vulnerable to excessively aggressive, competitive attacks from a larger, established carrier. The government will ensure that effective measures are put in place for dealing with predatory behaviour in the airline industry.

The government will also ensure that access to airport facilities will be allocated to permit competitive domestic services to be introduced. This will include actions to ensure a fair and competitive allocation of runway slots. It may also require the dominant carrier to give up some access to terminal facilities to ensure that airport access is not a barrier to entry.

The Commissioner of Competition has developed concrete proposals in these two areas, as set out in his letter. I am seeking your advice as to the most effective way to address these two concerns.

The policy framework also covers a number of areas in which measures might be considered to mitigate any anti-competitive effects identified by consumers, travel agents and potential competitors. These include frequent-flier programs, computer reservation systems and travel agent commission overrides, as well as the needs of independent charter carriers and regional carriers that were previously affiliated with one of the major airlines. The commissioner's letter also describes possible actions that might be taken in these areas. Your advice, based on the input you will hear, will be valuable in assessing which are the most practical and effective measures to be prescribed.


The airline industry is changing and Canada's international air policy must change as well. The government will revise its policies for international schedules and charter services with a view to removing unnecessary restrictions on air services. It will also reconsider its approach to the 60-plus bilateral air agreements the federal level has negotiated with other countries, to determine the extent to which Canadian and foreign carriers should have more international route opportunities.


Canadians are concerned about the future price of air travel; so is the government. Although the best way to address pricing is to have an air services market that remains competitive as a means of disciplining prices, it is recognized that competition may not exert sufficient control on prices in all circumstances.

Section 66 of the Canada Transportation Act, 1996, allows for complaints on unreasonable basic fares on monopoly routes. It is for consideration whether this section should be broadened to address dominance as well as monopoly on any given route and some other prices as well as the basic fair. In addition to reviewing this section, the government will require commitments on pricing from a dominant carrier during the restructuring process and will consider adding conditions to its restructuring approval.


The government is sensitive to the concern that services to smaller communities may decrease or even disappear. However, we are also confident that with the appropriate competitive environment, other companies will choose to serve, if the major carrier or its affiliate gives proper notice and withdraws. For this reason, the government will review the sections of the Canada Transportation Act dealing with the requirement to give notice to exit a market.

In addition to reviewing the sections, the government will require commitments on service to small communities from the dominant carrier during the restructuring process and will consider adding conditions to its restructuring approval.


The unions have shared their concerns with me regarding the impacts of airline consolidation on employees. They fear substantial job losses and relocation and that layoffs will be made without the choice of staying or without an attractive separation package. The government will encourage labour and management discussions on these matters. The government will insist that during any major restructuring of the airline industry employees are treated fairly, and the government will require commitments from the dominant carrier to this effect.

The government intends to introduce legislation soon that will give it permanent authority over the review of any merger or acquisition affecting Air Canada or Canadian Airlines that is concluded from now on. This formal review process, which is being put in place because of the importance of the airline industry to Canadians and to our economy, will involve the three elements of our government oversight which are needed to fully capture the public interest. These include the Competition Bureau, which will review specific proposals with regard to the competition issues, the Canadian Transportation Agency, which will review proposals to ensure that air carriers remain controlled in fact and in law by Canadians, and the government itself, which will ensure that transportation public policy concerns are addressed.

This process puts the final decision to approve a merger or acquisition with the Governor in Council on the recommendation of the Minister of Transport. If a merger or acquisition was found to comply with the requirements to be owned and controlled by Canadians, as determined by the agency, the minister would formulate the recommendation for approval, taking into account the extent to which the carrier has made undertakings to address the remedies negotiated with the Competition Bureau and the conditions necessary to meet public policy objectives.


These are the cornerstones of the framework, but some work remains before this framework can be put into effect.

I am seeking the input of parliamentarians on key issues that may ultimately require commitments from a dominant carrier, government conditions to an approval, regulation and legislation.


Specifically, I am asking the House of Commons Standing Committee on Transport and the Standing Senate Committee on Transport and Communications to examine the policy framework and the specific issues identified for parliamentary input. These include the following: the issue of whether to increase the 10 per cent limit on the individual holding of voting shares in Air Canada; the most effective means to foster competition; how to address pricing; maintaining service to small communities; carrier commitments, including those related to the treatment of employees; and how to monitor the air market in which there could be a dominant carrier. I would hope to have reports on their findings by November 26. Members will find the commissioner's letter helpful in dealing with some of these questions.


Let me conclude by emphasizing that a number of actions still have to play out with respect to airline restructuring. The private sector has not yet produced a conditional agreement which can be reviewed.

However, it has become very clear that government action is needed to ensure that the public interest remains paramount and is protected, under whatever scenario emerges.


Canadians know the benefits of market-driven solutions, but in such a pivotal industry as air travel, they demand that their government protect their core interests. In so doing, it will be important to find a balance between imposing a policy and regulatory framework that meets Canadian needs and avoids hampering the ability of any Canadian carrier to be effective and viable at home and in the global market.

I have been assured by Canadian air carriers that with a proper legislative and regulatory framework, competitive services will develop and provide real options for travellers. I should also like to assure not only parliamentarians but also all Canadians that whatever proposals are brought forward by the private sector, and whatever shape federal legislation and action takes, reductions to the safety of our aviation system will not be tolerated. Safety remains Transport Canada's top priority and we will not allow Canada's enviable safety record to be compromised.

I look forward to receiving your report and I am ready to answer any questions you may have.

The Chairman: A merger of the sort proposed by Onex, for example, raises several questions concerning competition policy in Canada. For example, what is the government's view of the domestic airline scene and what is the preferred structure?

Mr. Collenette: That is a bit of a loaded question. In terms of the present scene, as I outlined on August 13 when Mr. Manley and I put in place section 47, we saw an industry needing restructuring. We pointed out the financial problems of Canadian Airlines, which drove us to put section 47 in place, but we also outlined at the time that Air Canada has had a disappointing record financially over the last 10 or 11 years since privatization and that the two principle Canadian carriers obviously were not performing as well as comparable carriers in markets within our allies, within other jurisdictions. Therefore, we brought forward section 47 to allow the companies to talk to each other not only because at the time there was that proposal for the acquisition of Canadian's international routes by Air Canada, but also to bring other solutions forward. This was the most ready instrument that we had available to put in motion a process that would bring focus to the debate and try to bring forward proposals.

I must say, perhaps somewhat in modesty, that the government believes that the section 47 process has worked. We are now currently into the seventy-fourth day of the process and two of the three proposals are still with us and will be presented to shareholders of Air Canada on November 8. One has already been presented to the board of Canadian Airlines. I am not certain about the shareholders of Canadian Airlines, but at least it has been presented to the board. We have two proposals that are current. Therefore, the process has worked.

We do have a healthy charter environment. We have other carriers, such as WestJet and First Air, which are doing well, and we believe that they will continue to do well and to thrive in any new environment. However, the two dominant carriers, which, I believe, carry 80 per cent of all passengers in Canada, have experienced difficulties. That is the section of the industry that we have been focusing on and that is the majority part of the industry.

The Chairman: What is likely to happen to international markets? Air Canada and Canadian now belong to different international alliances, but if only one alliance served Canada, what would that likely mean for international fares and services?

Mr. Collenette: We are examining that issue in the present context. There are a number of ramifications, not just in Canada but in the United States and in Europe. We do know that the possibility is being looked at by the European Commission, the U.S. Department of Justice and the U.S. Department of Transportation. We would hope that the provisions outlined in this policy framework would give safeguards as well in terms of competition, in terms of pricing and in terms of service to communities.

There is no question that right now there are competing alliances serving Canada. Under either scenario going forward to shareholders at Air Canada, one alliance would prevail. It is important in the context of our discussions, with your input, that we ensure that this state of affairs does not unduly influence air travel options for Canadians in a negative way.

The Chairman: How important are the ownership rules that apply to Canadian carriers? Are they very important to you?

Mr. Collenette: The 25 per cent foreign-ownership rule is very important. At no time in the discussions that we have held with the industry have there been any suggestions that we raise the 25 per cent limit. We think that there is enough interest in Canada to satisfy capital needs and we are concerned about the whole issue of foreign control. Obviously, he who pays the piper calls the tune. Although we have statutory authority to go to 49 per cent, we do not feel that that is warranted.

Senator Callbeck: On the 25 per cent issue, why is that applicable only to the airline industry and not to the trucking, railway and shipping industries, and so on?

Mr. Collenette: That is a good question. There was a debate on that when we privatized CN. Of great concern not only to me as minister but also to the executives of Canadian National is that 65 per cent of CN is now owned by non-Canadians. Perhaps my officials should answer that. With me today are the deputy minister and the assistant deputy minister. Either one of them can help me on this.

Ms Margaret Bloodworth, Deputy Minister, Transport Canada: Honourable senators, part of what we are seeing is historic, not just here, but around the world. We are not the only country that has foreign restrictions on airlines; the Americans do, for example. It goes back to the origins of air.

We are not the only country that applies these rules to air transportation and not other industries. With trucking it is much different: it is quite easy to enter trucking and there are fewer barriers to entry. However, with the rail industry, it is harder to rationalize on a purely logical basis why you would have a difference. We are not alone, however. Most countries have had that difference and it might reflect the historic origins of air.

Mr. Louis Ranger, Assistant Deputy Minister, Policy Group, Transport Canada: What is unique about the airline industry is that all international services are governed by bilateral agreements. Canada has over 60 bilateral agreements with other countries. One basic requirement is that Canada is entitled to designate only Canadian carriers to serve routes between Canada and other countries. That is a basic requirement, so it is important that we have a clear test so that the rest of the world can see that, indeed, the carriers we designate are truly Canadian.

Senator Kirby: I have a supplementary question on the foreign ownership question. In the long letter from the Competition Bureau two recommendations are raised as to ways in which foreign-owned airlines could provide added competition in Canada. One you have dealt with, which is the question of whether the 25 per cent limit should go to 49 per cent as proposed by the Competition Bureau, and you said that you are not considering that policy option.

The other option, which is unique to the Competition Bureau's proposal, is that there could be a 100 per cent foreign-owned airline operating only in Canada; in other words, it would not be allowed to operate even transborder. That is the other aspect of foreign ownership that is in the Competition Bureau letter. Do you have a response to that? This subject is not covered in your statement, so I assume that you are not covering it, but do you now want to clarify that point?

Mr. Collenette: Frankly, we have not clarified it internally. The bureau's report came to me on the weekend. I met with the commissioner on Sunday night and we went over this. I was quite intrigued with his explanation that you could establish a TWA Canada or a Delta Canada as a franchise kind of operation.

I asked him if this would not have the same effect as cabotage, and his answer was no, because that carrier would have to operate according to Canadian law; crews would have to be Canadian; labour agreements would have to respect our environment. It would not have the same cost structure that you would have if a U.S. carrier came in here under cabotage.

I found it intriguing. We have been so busy the last few days that I have not had a chance to bounce this off my colleagues. Although we have said that the 25 per cent rule is not to be raised in dealing with the ownership rules, it is intriguing, and I should like to hear the views of the Senate on it.

Senator Kirby: I would point out that there is an exact analogy in the banking industry where we do not allow foreign banks to come in with branches but we do allow foreign banks to come in with subsidiaries which must operate entirely under Canadian law, a Canadian board of directors, et cetera.

Are you saying, with respect to that proposal in the Competition Bureau letter, that the government still has an open mind on the subject?

Mr. Collenette: If I am considered to be the government, given the pace of events, I have an open mind because I have not closed it after discussion with my colleagues, although this may appear to be in contradiction with what I said on the 25 per cent rule.

Senator Kirby: That is a different issue. Clearly, the analogy for the 25 per cent rule is the foreign bank coming in and operating a branch system. That is different. I just wanted to understand whether that option was still on the table.

Ms Bloodworth: I will add one factor that we must look at, and, as the minister has said, we have not concluded on that. We do have two carriers that have not performed well financially over the last few years. They may have concerns about competition from a very large and successful American carrier coming in and establishing itself domestically. I think we would have to look at that given the current state of the industry.

Senator Forrestall: With due respect, Madam Chairman, we are getting far away from where you started. If you could be relevant, Senator De Bané, it would be appreciated.

Senator De Bané: What about that 25 per cent limit on foreign ownership? To what extent does that limit become theoretical if the majority shareholder gives a veto power to the minority shareholder? If someone has only 10 per cent or 15 per cent but he manages to negotiate with a majority shareholder that no substantial decision can be taken without his concurrence, are we not then circumventing the 25 per cent limit?

Mr. Collenette: As you described it, it may seem that way, but the Canadian Transportation Agency has statutory responsibility to ensure that control rests in the hands of Canadians. If an agreement is arrived at in the next little while, the agency will study it and the agency will have the legal right to demand access to every document, side agreement, union contract or anything else that it requires to ensure that the situation you have described does not occur.

Senator Kinsella: Going back to the order itself, in August you were apprehending extraordinary disruption. It is now October. Do the same concerns that you had that caused you to recommend the issuance of the order prevail today?

Mr. Collenette: Yes.

Senator Kinsella: And did the issuance of this order, in your view, facilitate putting into play the proposals that have been generated in the private sector?

Mr. Collenette: It was designed, among other things, to give the government final say on any proposals that came forward. As you know, the Competition Bureau is limited to certain areas of competence, but the order was also designed to enable the parties to talk to each other, which does not appear to have happened, although it could have happened. You should ask the airlines this when their representatives appear before you. It also provided for private-sector solutions to come forward, which has happened.

Senator Kinsella: I have had the opportunity to share with you in private my concerns, but if it works, it will be quite brilliant.

If the shareholders decide not to accept either of the two private-sector proposals that currently exist, are you not left with a situation of still apprehending the potential for extraordinary disruption? If that were the case, would you give consideration to issuing a second order?

Mr. Collenette: No. We used section 47 because it was the most readily available statutory instrument that allowed us to deal with a situation that we believed was becoming extremely serious, and which is as serious today as it was in July and August when it was considered.

In politics we do not like to answer "what if" questions, but if there is no private-sector solution, then we are still looking at having a dominant carrier. However, the failure of Canadian Airlines would require a certain statutory framework and nothing in this document precludes dealing with a situation other than a merger. In other words, if there were a failure, the guarantees for the public interest outlined in this document would apply. If we are going to a dominant carrier regime, as we believe we are, then this is valid in whatever happens in the next little while.

Senator Kinsella: The question I had on the recommendation of Mr. von Finckenstein has been answered. He was recommending 49 per cent and you have made your position clear on that.

With regard to the provision in the Air Canada Privatization Act, which limits ownership to 10 per cent, what did you understand to be the public policy principles considered by Parliament when placing that limit? To change that, what change in policy principles would we have to consider?

Mr. Collenette: I was not in Parliament in 1988 when that act was passed, but I gather that the reasoning was not unlike that for placing limits on individual shareholdings in other former Crown corporations, and that is to disseminate the shares widely across the country in the public interest. There are two schools of thought as to whether that is the right thing to do. When that happens, invariably there is no dominant shareholder or shareholders. In that act there was also an anticollusion provision which prevented shareholders from getting together to exercise influence over the shares of the company. In other words, it was simply an investment vehicle for individuals.

The supporters of this say that this is good public policy, that it allows the industry to be widely held by Canadians and prevents foreign control. Certainly the latter is not true because there are other ways to prevent foreign control. One is the 25 per cent investment limit.

Some people believe that this kind of corporate governance structure favours management over shareholders and means that management is not as sensitive to shareholders as they should be. It will be up to you and the House of Commons committee to consider these various points of view because that will help determine your views on whether we should raise the 10 per cent limit.

Senator Forrestall: Minister Collenette, it might have been much more helpful had you been able to foresee the advent of the difficulties facing the industry two or three years ago. I suspect that some of your staff people did start to do some work, but it would have been nice if we had done what we are doing now before the horse was out of the barn.

There is an old adage that one of the worst forms of pollution is the pollution created by the failure to use good ideas and good concepts until they are no longer needed. I am suggesting that deregulation in the air industry is only about half way through its growing pains, yet here we are about to re-introduce regulation. It will be a regulated industry all over again.

Most of us on this side have open minds. We hope that the leader of one group will not criticize comments or observations made by the leader of another group in another place. The time that we have been allotted to study these serious matters is short and it may be difficult to avoid that. I hope that we do not give you unnecessary headaches in that regard. Had you given us this a couple of years ago, we might have a better understanding. It seems to me that the ideas we had when the former minister of transport was trying to deal with this were not bad ideas.

Returning to section 47 and its use, did the department undertake any studies with respect to this move? In other words, had you done preparatory work?

Ms Bloodworth: No. It was just put into the legislation in 1996, which was before my time in the department. Prior to the last six months, no work was done to look into whether or not we would use it.

Senator Forrestall: I take it you cannot say, then, whether or not you examined any other alternatives before you settled on section 47.

Ms Bloodworth: Yes, other alternatives were considered. In the last six months we certainly looked at the various options.

Senator Forrestall: Would you outline briefly some of those options for us?

Ms Bloodworth: The first option was to do nothing.

Senator Forrestall: I do not mean that.

Ms Bloodworth: That was clearly an option.

Senator Forrestall: Yes. It was not an option because you decided to do something.

Ms Bloodworth: No. That was very much an option this summer.

Mr. Collenette: Senator Forrestall, the fact is that back in the summer we had three options. They were to bail out Canadian Airlines, let it go bankrupt or find some other way to restructure the industry. The only instrument that we found to allow the restructuring was section 47.

In case people think that section 47 was dreamed up by the deputy minister and others in the department, the fact is that the use of section 47 was first raised by Air Canada with my officials back in March. We now know that they raised it in connection with the failed merger discussions with Canadian Airlines. Section 47 was not used back in March because the negotiations collapsed. Therefore, obviously, the parties did not need the protection to talk to each other under the auspices of section 47.

In June, the president, the past president and the current president of Air Canada came to see me about the acquisition of the international routes of Canadian Airlines. A few days later, the president of Canadian Airlines came to tell me that they had secured a third-party investor who wanted to merge both airlines.

Subsequently, in the context of discussions with the department, Canadian Airlines raised section 47 and made a formal request in writing to use that section. Air Canada certainly was aware that we were considering this. We discussed it with officials in a conference call some time in July with them. Certainly, there appeared to be agreement on the part of the former president. They were aware that we were looking at using that instrument.

I think that builds on the deputy's question, senator. However, may I return to your first point? You asked whether we should not have done this three years ago. I would not want to be unduly partisan. I would ask you this: Why stop at three years? Why not go back 15 years to the de-regulated environment that was created in the mid-1980s and the subsequent public policy decision to sell off a Crown corporation, along with all the other issues that arose at that time?

As you know, senator, the former government agreed to assist Canadian Airlines. The current government assisted Canadian Airlines. The environment has become a bit more difficult over the last year or two. I believe we should leave it to historians to decide why we are where we are today. Only three or four years ago there was a four-year restructuring plan on the part of Canadian Airlines which seemed to be quite promising.

The deputy minister is a lawyer and she does not want me to get into trouble. Air Canada was aware that we were considering its use as a result of those conversations in the summer. It was fully advised that we were considering its use and it mounted no objections at that time.

Senator Forrestall: It is understandable that it is somewhat confusing. It is confusing to many of us. We now know that Canadian Airlines International was not in the dire straits in which it was portrayed to be.

Mr. Collenette: How do you know that, senator?

Senator Spivak: June 30.

Senator Forrestall: Do you want me to get into that? Sooner or later we will have to do so. I wish someone would do the research work, give us the documentation and tell us what we are really talking about. It is my understanding that Canadian Airlines International owned most of its equipment. Air Canada owns nothing except those 10 or 15 DC-9s that they could not get rid of anywhere. They now want to be based in Hamilton and fly them across the country -- for what, I do not know. Perhaps it is to promote competition among the regional and secondary levels of carriers.

Those questions were in the back of my mind when Canadian Airlines was suggesting that it was in trouble. We now have knowledge that American Airlines was prepared to step in, and did step in.

It is terribly confusing not knowing what is going on. My criticism has to do with us not having very much background information to look at in any reasonable manner.

Mr. Collenette: It is our view that the situation that led us to implement section 47 in August has not changed. I know that certain statements made by certain individuals have, perhaps, lead you to believe that this is not the case. I would ask that you pose your questions to the president of Canadian Airlines when he comes before this committee. Hopefully, he will be able to enlighten you to some degree. I do not think it is up to me, nor is it proper for me, given the fact that we have proprietary information in the department as the regulator, to go into further detail as to why we believe the situation existed as it did at mid-August and which still exists today.

Concerning your last point, and not to quibble, you implied that we are back to re-regulating the industry. We are not. The fact that there will be more regulations and statutory change does not mean that we are back to the days of re-regulation.

Senator Spivak: I should like to clarify one point. I wish to get the dates clear. Onex was in talks with Canadian in about February. You are saying that it was not until the summer that you contemplated the use of section 47. I want to know if that is accurate and that no one on the board of Canadian Airlines was speaking to you about section 47 back in February.

I ask this because it is quite clear that Onex has said that they could not have this deal had they not had the assurance that section 47 would be suspended. That is a series of circumstances that I cannot quite put together in my mind.

Mr. Collenette: I know that this has been speculated about in the press. I can tell you categorically that Onex received no assurances from us because we did not know of Onex's interest until June 25. Even then, we knew simply that there was interest, and a few more details dribbled out in the next week. We had conversations with the deputy minister, but the Onex proposal itself was made known to us only the day before it was made public.

I think you should ask Onex these questions because we certainly did not know that they were involved in these discussions before Mr. Benson informed me of their interest.

Senator Spivak: I am not asking you about Onex. I am asking you if anyone from Canadian Airlines's board spoke to you early on, as far back as February, about the possibility of a section 47 waiver.

Mr. Collenette: Absolutely not. In fact, the deputy minister insulted me the other night in a private conversation. She said, "You did not even know what section 47 was until we raised it in mid-July." I will accept the insult because it is accurate. I had not focused on it because I did not know it existed. Ministers should know everything that exists in statutes but I will admit to not even focusing on this until it was raised with me by the deputy minister and Mr. Ranger in discussions sometime in July.

Senator Forrestall: Again, regarding section 47, may I ask you whether it might have occurred to you -- I have no way of knowing, of course -- that, perhaps inadvertently, you were going to make in this particular case a bad situation even worse? Once section 47 was in motion, that put Canadian Airlines in a fairly difficult position.

My only other question concerns the five basic conditions for merging. I am not sure that I followed what you said before. Is the Official Languages Act part of those five conditions or is it a sixth point?

Mr. Collenette: On the Official Languages Act, we feel that the country's commitment to the Official Languages Act and bilingualism is such that we would not want to denigrate it, if I may put it that way, by putting it in with the other conditions, which are commercially oriented conditions. This is something that defines us as a country. I know there was some discussion about whether it is a sixth point. Quite frankly, I told my colleagues that I thought it would sully the concept of bilingualism under the Official Languages Act to add it as a sixth point. That pre-eminence is why, in the document, it has a position of its own.

Let me return to your earlier point about Canadian Airlines being put at risk by our doing what we are doing. Canadian Airlines asked us to do it. They wrote us a letter. I assume that, being mature adults, they understood the ramifications of what they were asking.

Senator Forrestall: That is a good answer. It is not acceptable but it is a good answer.

Senator Spivak: They had an offer from Onex.

Senator Forrestall: One of your five conditions is effective control. I do not expect you to comment on the situation that is before us, but, as you have said, this is forever, this is permanent, this will not be kicked around by mean old bullies in the House or in the Senate. It is with us for the foreseeable future.

Just what do you mean by "effective control"? Does it have a 100-word explanation or does it involve volumes?

Mr. Collenette: Perhaps I could let the deputy minister deal with that, because she was with the Canadian Transportation Agency at another time in her career.

Ms Bloodworth: If you are talking about effective Canadian control, that is a factual question for the agency to determine. They have to address themselves to whatever documents they consider pertinent in order to determine that, and they have to make a factual determination that they are satisfied that this corporation is controlled in Canada. They have to make that determination about every airline in Canada.

I should say that if the government raised the 25 per cent limit to 45 per cent, for example, and if the agency concluded that someone who owns 38 per cent did, in fact, control it, it would not be legal. The agency would look at all agreements, including the shareholdings but not limited to those. They have had some experience in doing that. They have done it now for quite some time.

Senator Forrestall: I was asking more in the sense that, while Canadian Airlines International is Canadian-held, so American Airlines does not control it in that sense, there is no question that, through a series of agreements, American Airlines does, in fact, control Canadian. It was in that sense that I wanted a 100- or a 50- or even a 27- word explanation as to what "effective control" meant.

Ms Bloodworth: All I can say in that regard is that the agency has determined that Canadian Airlines is, in fact, controlled by Canadians. They have done that twice.

Mr. Collenette: I should add that the Air Canada pilots have challenged this in court, so I do not think we can go any further.

Ms Bloodworth: I think they have gone back to the agency, but that is a continuing test. It is not a test that is met once and for all time, but is one that can be raised again if things change.

Mr. Ranger: Having watched the agency over many years and having seen how they actually administer that test, I can say that basically they want to know how decisions are made by the board. If a board member happens to have veto on the acquisition or disposal of assets above $50,000, or if one member has a veto on who is the chief financial officer, the agency wants to know that in making their determination. It is a qualitative test that looks at all aspects, not just at all the documents but also at how decisions are actually made.

Senator Fairbairn: Mr. Collenette, going back to the options before you in the summer which caused you to choose to deal with section 47, we were told at that time -- although there have been other suggestions in the intervening weeks -- that there was a possibility that Canadian Airlines would not survive beyond Christmas. That being the case, if both bids should in some way fail as they progress over the next few weeks, does the government have a strategy to deal with Canadian Airlines if it is confronted with bankruptcy?

Mr. Collenette: Again, those are hypothetical questions, but we are planning for any eventuality. You will note that the document can be applied in any dominant carrier situation, whatever the circumstance, whether through merger or through something else.

Senator Fairbairn: Going back to an earlier question regarding international routes or services, if Canada ends up having one major airline -- and I have no doubt that that is what will emerge from this -- is it fair to assume that that major airline will take over all of the international routes that are now held by both Canadian Airlines and Air Canada, or will the situation fall into a battle of alliances?

Mr. Collenette: We cannot assume entitlement. The government would have to decide that. As you know, we do not have a deregulated environment on international routes. We allocate the routes. We have said here that we will look at our international air carrier policy. Right now, we have a policy whereby if, on a particular route, more than 300,000 one-way, full-fare trips occur within a year, then we can designate a second carrier. That is the case with respect to Paris, London, Hong Kong and Japan. We can then designate another carrier. In Paris right now, Air Transat is the second carrier, not Canadian Airlines. If we went to one dominant carrier, that would beg the question as to what you would do with the Canadian Airlines slots in, say, Heathrow. The EEC may have other ideas, so the issue gets quite complicated.

The short answer to your question is that one cannot assume entitlement automatically. We would have to see what was fair and just.

Part of this whole exercise is to foster competition. Carriers like Canada 3000 and WestJet do a good job right now. WestJet is a scheduled carrier. Canada 3000 is a charter carrier that operates scheduled trips in the Toronto-Vancouver market, and I am told they have 20 per cent of the market.

We would need to see what came forward from the industry. It is likely that the dominant carrier would do well out of the exercise.

Senator Fairbairn: In response to other questions, you have repeatedly mentioned your five conditions and have said that the government will be careful to receive assurances guaranteeing that certain areas of the country will not receive less service than they have been accustomed to should one major carrier emerge from the situation.

I have an interest in Western Canada. I am not a pessimist, but there is a concern, certainly in the farther reaches of Canada, the West and the North, that this tumultuous change in our air transportation system will leave large parts of our country with less service than they have had in the past.

Mr. Collenette: The experience in the North, senator, is that there must be a transition between the exit of one carrier and the entrance of someone else, a bridging, so that the other carrier can fill the void. This is why we talk about service to the small communities; we need to see whether the exit provisions in sections 64 and 65 of the Canada Transportation Act are indeed adequate to deal with this kind of dominant carrier environment or whether there should be changes so that there could be the kind of protection that you seek.

Senator Fairbairn: That could involve not just the current section but also further action on the part of the government.

Mr. Collenette: We may have to change that. The policy framework, at the bottom of page 10, says:

In addition to reviewing these sections, the government will require commitments on service to small communities from the dominant carrier during the restructuring process and will consider adding conditions to its restructuring approval.

We could build that into the legislation. Whatever happens here will be legislated. That is the law, and the law must be discharged. That is a good way of keeping the commitments focused and discharged.

Ms Bloodworth: Perhaps history could be a little comforting. Look at our experience in the North when there was deregulation in the 1980s. There was considerable concern about loss of service. In fact, there was no loss of service. As the minister said, we ensured that there were exit provisions. In other words, the last carrier could not just walk out one day. They had to give notice. Wherever there was a market, carriers did come up to serve them. It is important to look at it in the context of the dominant carrier to see if those are sufficient exit provisions for the new scenario.

Senator Fairbairn: There are examples farther back in the history of Western Canada when the service was not as quick and fulfilling as it might have been.

Senator De Bané: On that question, you referred to what happened when deregulation was established early in the 1980s. Suppose that we end with one dominant air carrier in Canada. As you said, there will be some gradual phasing out in some areas.

How many years do you think it would take to organize an orderly merger of both airlines, especially considering all the collective unions and two large organizations? How many years will it take to merge them together? Can you give me an approximate idea?

Mr. Collenette: We do not want to get into any specifics of the mergers that are being proposed, but certainly the most optimistic guess is 18 months and the most pessimistic is four years. There are certainly issues, especially seniority issues, that must be considered at the two airlines. Any new owner or owners would need to be very careful. On the one hand, you would want the restructuring to go ahead as quickly as possible to realize the economies from the reduced capacity. On the other hand, you do not want to have walkouts and a disgruntled labour force and all kinds of cultural battles.

Senator Spivak: Minister, I am afraid I do not really think this is the best of all possible worlds. You stated you are very pleased with the results. We have here a war of poison pills with two huge global alliances battling.

You have actually changed a policy in Canada. We had two airlines, and now we have basically a government-sponsored monopoly, which is how it will wind up in the end by removing the Competition Bureau through section 47. You did that in advance of a parliamentary review and public consultation. You are now asking us to give that advice and that consultation, but the broad policy structure has been cast or set.

Canadian Airlines was due to last for a year, and it had been a basket case for a while. AMR had been supporting Canadian Airlines. Obviously there must be a reason for AMR to be interested in putting up all that money. It is the code sharing and the routes. Why was that so imminent?

Again, you must ask yourself why the Onex proposal was so dependent on section 47 if not for the purpose of having a monopoly.

Since I just received the material, perhaps the answer is contained somewhere in these papers, but will the Competition Bureau review the specifics of this merger? I know they have given you a broad brush, but what about the specifics of the situation now?

I remind you, and I am sure you know this, that in 1993, although things have changed a bit since then, the Competition Tribunal said that if Canadian fails or is forced to merge with Air Canada, the tribunal would find that competition in existing airline markets would be substantially lessened. They found that existing charter carriers, even if they expanded, could not compensate for Canadian's removal, and the possibility of new entry is remote and will not provide adequate competitive discipline in Air Canada, which will have an overwhelming market share on most routes. In hearings with the Onex officials, it is quite clear that while they welcome competition, it is competition of a certain kind where they have a monopoly over most of it and little competition is allowed. Obviously, it is very beneficial for them to have that.

Will the Competition Bureau be given free rein, no matter what your legislation says, to examine these specifics? There are many different issues involved here, as I am sure you are even more aware than am I.

Mr. Collenette: I appreciate, Senator Spivak, that you have only just received the documents, but towards the end we talk about the process. The Competition Bureau will look at each merger in detail, as it does now under law. This will, along with the Canadian Transportation Agency's analysis of the Canadian-content rules and the government's own examination of the other transportation policy issues, then ultimately be subject to enshrining any agreement, or any deal, in legislation so that we can be sure that this new dominant carrier does act in the public interest.

Senator Spivak: When you say "dominant carrier", is what you really mean a monopoly? Give me the definition.

Mr. Collenette: A dominant carrier is a carrier that has an overwhelming segment of the market. However, we hope, by the measures contained in Mr. von Finckenstein's report and in this document, to encourage competition so that the WestJets and charter operators and the First Airs and all these other companies will indeed fill the vacuum and give us vibrant second-tier carriers to provide competition.

Let me take issue, however. You seem to say that we have created a monopoly. We did not wake up one day and say that we must have a monopoly and we will make all these changes. The fact is that this entire exercise was driven by the pending weakening of Canadian Airlines, the number two carrier, servicing 70 per cent of all passengers in Western Canada, with 16,000 employees coast to coast, a major international presence for us in the Far East and in Europe. That is what has driven this entire exercise. I did not get up one day with a bright idea that we must have a monopoly. I can think of better ways to spend the summer and the fall. I have lived many lives in my previous portfolio -- I do not need to live more. The fact is that the situation needed to be addressed. That is the reason it is being addressed.

You talk about the best of all worlds. The fact is we are trying to find some ways to effect a solution, but what is the alternative? We are dealing with the question of what are the alternatives here and that is why we embarked on this course.

Senator Spivak: Of course, but we might have the time to consider other alternatives through the parliamentary system. Never mind that, though; I take your answer.

Mr. Collenette: You are somewhat right, in the sense that after I became minister I figured that something like this would happen on my watch and it would be better to start planning for it and that is why the House committee started to examine this issue last spring. I thought that we could have a reasonably paced, detailed examination of these issues from a policy point of view before whatever erupted. The eruption occurred earlier than I expected and forced us to act in this way. I realize it is disconcerting for parliamentarians to be faced with a contracted policy debate, but that was not our choice as a government. We would have preferred this to have been done in an even more orderly way than the way we are doing it now.

Senator Spivak: My second question has to do with the 10 per cent individual ownership limit. I am sure you and I have read the same arguments in the press that talk about what is in the NAFTA annex and about the fact that this is an official Canadian exemption from the agreement's common treatment requirements. Also, according to the newspapers, Article 1108 says that any violation of Canada's itemized exemptions that increases discrimination against foreign investors -- and it is possible that Canadian individual investors might be treated differently than foreign investors -- would be a violation of the trade treaty and could nullify the exemption; thus modifying the 10 per cent share restriction could automatically trigger an invalidation of the foreign-ownership restriction. That could lead to a consequence that we might not like: complete foreign ownership of what is a very vital public utility, in a sense, in a country that is utterly dependent on air travel. It seems to me we need to ensure that that does not happen and that we have control of this part of the industrial strategy.

I should like your opinion of this item which was raised, I believe, in the National Post.

Mr. Collenette: The government's trade policy legal advisers believe that there will be no problem if we choose to raise the 10 per cent with respect to our NAFTA obligations. I might remind you that PWA Corporation, the parent corporation of Canadian Airlines, was created under statute in the Albert legislature with a 10 per cent rule and that 10 per cent rule was removed last year. I believe there was no impact at all; there was no challenge, no mention of violation of NAFTA obligations.

We are fully of the view that should we choose to raise the 10 per cent limit, it will have no impact on NAFTA obligations.

Senator Spivak: The National Post, which of course is never wrong, was wrong in suggesting that government lawyers had advised that this was indeed a problem.

Mr. Collenette: I never speculate on newspaper articles, especially from some sources.

Senator Spivak: It is not my agenda either, the National Post agenda.

Senator Johnson: That is on the record.

Senator Spivak: Absolutely. Let me satisfy my curiosity as to whether anyone from Canadian Airlines spoke -- you said they did not speak to you -- to your officials any time earlier, let us say before March or in March or February? Did anyone from Canadian Airlines' board or any representatives speak to any of your officials within the department?

Mr. Collenette: I will let the deputy speak for the officials.

Ms Bloodworth: About section 47, I assume?

Senator Spivak: Yes, about section 47.

Ms Bloodworth: No, I do not believe I have ever spoken to anyone on the board of Canadian Airlines, but I qualify that, because I may have unknowingly. We certainly speak to Canadian Airlines often. They did not raise section 47 with me until I believe July 6. Air Canada did raise it, and it was with myself and Mr. Ranger, I believe, back in March, but Canadian Airlines did not raise it before that.

Senator Johnson: What is the significance of November 26 in terms of our timetable here with our hearings?

Mr. Collenette: Senator Johnson, we believe the situation is such that we need to take reasonably quick action. I know it is a tall order to throw a lot of this kind of detailed work at parliamentary committees, but we need to get the work done as quickly as possible. That is why we put the November 26 date in there. We feel strongly about it, although I recognize that the committees are masters of their own destiny. However, we certainly must table a bill before the Christmas recess in order to show our intent as a government in this restructuring.

Senator Johnson: How do you respond to critics who say that this is a timetable very similar to that outlined by Onex?

Mr. Collenette: This has not been driven by Onex. This has been driven by the financial problems, the crisis, at Canadian Airlines. Whether it is Onex or anyone else or any other proposal, such as the Air Canada proposal that is on the table, the matter must be dealt with expeditiously. Whatever the shareholders choose, whether it is Onex or Air Canada's proposal, we must do this quickly.

Senator Johnson: I understand and I respect that. I am just saying that what we are reading in the paper makes it hard for us to deal with this in three weeks. It will be a difficult task, I believe, but I thank you for your answer.

Mr. Collenette: Onex's timetable was even earlier; it was November 8.

Senator Johnson: This information is out there and we as parliamentarians must respond to that. I wanted to ask you that question because I wanted to make it clear on the record that we are doing our job as parliamentarians and we are part of this process. A renowned columnist called us "chopped liver" the other day with respect to a number of issues that the government has dealt with in the last month for which Parliament has hardly been relevant to the whole process. That is why I feel it is important that we show Canadians that Parliament is important to this whole process and to this whole discussion.

Mr. Collenette: I am trying to point out that there are basic questions, such as the 10 per cent question, where we hope you will spend your time. Many of the other issues will be dealt with by the Competition Bureau and the CTA. They are all important, but we have outlined some specific areas that we hope you will focus on because of the time frame.

Senator Maheu: My first question touches on membership of AMR on boards. I continue to be apprehensive, even after all the consultations with which I have assisted.

AMR had two members on Canadian's board but they had a veto on many things, which makes this two-member of a 16-member board limit, or whatever it is, totally unimportant.


Until now, a great deal of effort has been expended to remind us that ONEX is a Canadian corporation. What they neglect to say however is that American Airlines is behind ONEX, and that the giant corporation would invest considerable amounts into a merger agreement between Air Canada and Canadian International. They are also silent on the role AMR would play in the new Air Canada airline and the control it would have over it.

In light of these circumstances, are you not concerned that effective control of air transportation in Canada could be transferred to an American corporation? What do you intend to do to avoid such a situation, with the vetoes, et cetera?

Mr. Collenette: It is not my role to comment on the proposals made by ONEX or Air Canada. The Canadian Transportation Agency is responsible for reviewing the proposals, the existing agreements and the current situation with Canadian International and American Airlines and to decide if there actually is effective Canadian control.

Air Canada's pilots are the ones who decided to meet the challenge by stressing the links between American Airlines and Canadian International. It is the Canadian Transportation Agency's role to decide. The Agency has the regulations and it is its duty to review all contracts, such as agreements with the unions, for instance, to decide if there actually is Canadian control.


Senator Maheu: Are you not removing many of their powers if you pass a bill soon?

Mr. Collenette: No. It is not our intention to deal with any of the powers of the agency. The agency has its statutory powers now to determine whether or not there is effective control.

Senator Maheu: I should also like to ask you a question about the 10 per cent issue again.


Senator Maheu: Let me read part of an article from today's Le Devoir:

As to the substance, the 10 per cent rule has been put in place to avoid situations in which an individual or a company might acquire a controlling interest in Air Canada and profit from its control over the country is dominant carrier. I believe that this rule should be maintained in the public interest and that it would be wrong for Parliament to change it.

The ONEX proposal to merge Air Canada and Canadian Airlines illustrates the need to keep this 10% rule even more clearly, since the merger would result in the creation of a closely held corporation which would control approximately 80% of inland air transportation in Canada.


Are you not afraid that a very few interested investors might be able to control the industry at the expense of the investors?


Mr. Collenette: The article you quoted from, from today's Le Devoir, was written by my former colleague Mr. Lalonde. I have tremendous esteem for that man. He is a lawyer with the firm Stikeman, Elliott, which represents Air Canada. I honestly believe that what he wrote was his personal opinion.


Do we think that by changing this we will weaken foreign control? If Parliament chooses to change the 10 per cent rule -- but no decision has yet been made; we want your guidance -- it will have no bearing, as far as we are concerned, on the control issues. It has a bearing on the number of shareholders and the way the company is operated.

Senator Callbeck: My first question is on the Competition Bureau. They have said that, if a merger should take place, the government currently does not have the mechanism to prevent price gouging. What does the government plan to do about that?

Mr. Collenette: The Competition Bureau does not look at price gouging, they look at predatory pricing. They have told us that they would like the legislation strengthened on that part.

Ms Bloodworth: There are two issues on the pricing with a dominant carrier and less competition. There is the question of price gouging -- that is, if you are the only game in town, will you charge more than you otherwise would? The Competition Bureau does not have a mandate to deal with that. That is why, on page 10 of the document, we referred to the existing term in the Canada Transportation Act, which refers only to basic fares and monopoly groups. We asked whether you consider that sufficient or if you feel that it must be strengthened. That is on the high side.

There is also a concern where you have a dominant carrier on the low side -- namely, predatory pricing. They could decide to have low fares with a view to driving a new competitor out of the business. On that, the Competition Bureau has given new advice. They have proposed a particular way of addressing that situation. They have said they do not feel that existing legislative mechanisms are sufficient to deal with that, and that is certainly one way of dealing with it.

The document here says that the government is committed to further measures on predatory pricing, although they have not decided what those measures would be. They have before them the recommendations of the Competition Bureau and are interested in the views of parliamentarians as to whether those are the best ways or whether there are other ways to deal with predatory pricing. You must deal with both sides with a dominant carrier.

Senator Callbeck: I have another question on the small airline carriers. The minister has referred several times tonight to WestJet. You said that 20 per cent of their passengers are from Western Canada.

Mr. Collenette: No; that was a reference to Canada 3000, which is running schedules from Toronto to Vancouver.

Senator Callbeck: You mentioned WestJet two or three times. Will these smaller airlines not have a difficult time if we have a dominant carrier in Canada? Would that not be especially true for one that is a low cost carrier owned by the dominant carrier?

Mr. Collenette: That is why the Competition Bureau has given us some helpful insights. We have accepted many of their representations, such as access to slots and slots at peak times in places such as Pearson, Dorval and Vancouver. We have also accepted their representation dealing with access to frequent flyer programs and the concept of interlining, whereby if you are flying First Air from the Northwest Territories you can make a reservation from Iqaluit and you are then able to go to Chicago through the dominant carrier.

The reservation is accepted on a first-come, first-serve basis, even though someone else is travelling on a regional carrier from some other point in Quebec or elsewhere into Montreal en route to Chicago and they have the access as a subsidiary. The fact is that it is first come, first serve. First Air, for example, might want to make an arrangement to sign up with, say, Aeroplan, if that is what remains, and we will stipulate that the dominant carrier must allow the smaller carrier to make a deal so that they can give frequent flyer points so that you would fly First Air but not be put at a disadvantage.

If we are looking at surplus aircraft from Canadian Airlines being available, the right of first refusal on those aircraft must belong to Canadian operators within a specified period of time at a commercially viable rate. In other words, WestJet or Royal could access 737s from Canadian Airlines' fleet without those being sold offshore and not available to the Canadian market.

There are many things we can do. Between the Competition Bureau's letter that you have now and that I have made public and this framework, we address that regime to encourage smaller operators.

Senator Callbeck: Yes, I will have to read this. I just received this document this evening.


Senator Poulin: Mr. Minister, when you accepted your appointment as Minister responsible for Transport, you probably never thought you would be as popular and as visible as you have been in the last few weeks.

As members of the Senate Standing Committee on Transport and Communications, our questions are all linked to the fact that the majority of senators come from outlying regions: Toronto, Vancouver or Montreal. The people in our regions asked us these questions over the summer.


When you first started speaking to us, Minister, and when you spoke about the vision, you answered in theory the main concerns of Canadians that we have been hearing over the summer. You spoke about a safe and healthy airline industry, one that is owned and controlled by Canadians and that serves all parts of Canada at fair prices and that is capable of competing with the biggest and best airlines in the world.

Senator Adams: You spoke about process with respect to meeting those objectives. Could you just walk us down the key steps of the process so that at the end of the day all Canadians feel that the Canadian government has met those objectives?

Mr. Collenette: In the summary in the annex, we outline the procedure that we will use. It is a three-pronged approach. The question of gaining control is to be examined by the Canadian Transportation Agency. As I said before, any document, any information the agency wants must be provided in order for it to make its decision on Canadian control.

Senator Poulin: Is that going on currently?

Mr. Collenette: My understanding is that offers are currently being proposed. Onex is probably there and Air Canada's offer will certainly be en route. In any event, whatever the shareholders decide, if they decide to take one of these offers, the agency will then tell the successful bidder that it wants the agreements, which the agency will then go over with a microscope regarding the issue of effective Canadian control.

Senator Poulin: Is this agency at arm's length?

Mr. Collenette: Yes, this is a quasi-judicial agency of government and it has a statutory board.

Then we have the Bureau of Competition, which will, as I said in answer to an earlier question, have full rights to examine the merger as it always does under statute.

Finally, I talk about other areas requiring legislative amendments, whether the Canadian Transportation Act or other regulatory changes, other conditions that we will impose on the carrier and will put in legislation.

Senator Kirby: Minister, since we will have the Competition Bureau before us tomorrow, I have just three short questions.

One of the alternatives outlined in the letter from the Competition Bureau is not covered in your statement or in the document you released today, and that is what they have called "modified sixth freedom" and what I think the rest of us would call quasi-cabotage. I mean going from one point in Canada to another by passing over a U.S. hub; in other words, using flights that already exist, you could, for example, take a United flight from Ottawa to Chicago and then a United flight from Chicago to Calgary and do it on a through-fair ticket. You did not comment on that in your document. Does that silence mean that that is an option that the committee should consider in the same way that we left on the table for consideration by the committee the domestic-only foreign-owned airline?

Mr. Collenette: We are not in favour of cabotage or quasi-cabotage until we get our industry in shape. Even then that would be a very tough public debate. While many theorists out there think that cabotage is the be all and end all to deal with this, the fact is that where it is practised in the Europe, Australia and other places, they do not have next door the huge elephant the United States, where United Airlines has 1,100 planes, American has 850 planes and then Delta and all the others underneath. The U.S. is much larger Canada. The cabotage question is a debate for another time. I do not think I will be minister at that point.

Senator Kirby: The recommendations in the Competition Bureau letter talk about ensuring that the non-dominant airlines are given access to adequate gates and adequate time slots and so on. Am I right in assuming that in order for the government or the CTA to have sufficient authority to be able to do that, it would require some form of legislative change? Now that the government no longer owns the airlines and does not control the airports, now that the airlines are owned by local air authorities, does the government have the authority to require those adequate gates and so on?

Mr. Collenette: We can do it on time slots, but on airport facilities it will have to be addressed.

Senator Kirby: You do it on time slots, but you cannot do it on gates, can you?

Mr. Collenette: Gates and other services must be negotiated. The deputy has been in touch with some of these authorities.

Senator Kirby: My real question is this: Is that a legislative change, or can you do it through some other mechanism?

Ms Bloodworth: At the moment, the minister does have the authority to regulate airport slots, although we have never chosen to do that.

On the facilities, there are two ways of achieving that end. The Competition Bureau will review any specific proposal and they could make it a condition of their approval that certain airport facilities be given up. That is a one-time thing, though. It may also be necessary to have some legislative backstop for the future.

The bureau can do very effective things at the moment of the transfer, but as the world changes it may be necessary to have legislation. In the document, we picked out predatory pricing and access to airports as key issues that would have to be addressed on a competitive basis and there may be a need for legislation in both of those.

Senator Kirby: You certainly need legislation on predatory pricing. There is no way you could deal with that issue under the current law.

Ms Bloodworth: Yes, and the Competition Bureau agrees.

Senator Kirby: Therefore, if you are going to change the act for one thing, you may as well change it for others.

Ms Bloodworth: There are a number of suggestions on the other issues, some of which it may be possible to do as conditions. In fairness, for some they have not said definitively, "Yes, do this." Therefore, you might want to consider which are most effective.

Senator Kirby: Minister, I have a last question on timing. You have said that you want this committee and the House committee to report by November 26 so that you can table a bill in the House of Commons before Christmas. I understand that. However, in the section of your report on the restructuring process, you have two other steps, one being a CTA step and the other a Competition Bureau step. Accepting that time frames cannot be guaranteed, are you reasonably confident that those two steps can be completed on time? In fact, is that confidence reflected on page 12 of your report where you say that all three tracks will be conducted as expeditiously as possible with due regard to the financial health of the companies involved?

I assume that means that your hope is that Canadian Airlines will not fail because of the slowness of any one of the governmental processes. It may fail for other reasons, but is it correct that you do not want governmental slowness to be the cause of the failure?

Mr. Collenette: That is exactly correct. I believe that the CTA will have no problem dealing with their issue speedily, and I believe that the Competition Bureau knows that there is some degree of urgency in this and would probably be able to meet any time frame. I am sure you will ask the Competition Bureau that tomorrow and I will be interested to hear the answer.

Senator Kinsella: There are two weeks remaining in the duration of the current order. There are two private-sector proposals before the respective groups of shareholders, and the shareholders could well receive a second proposal from each of the principals associated with the two proposals before them. If that happens over the next 14 days, it will be quite a challenge for the shareholders to make their final judgment.

My fear is that the shareholders, pressured in this way, might conclude that that is not enough time for them to make that determination. If the order expires, the negotiations between certain major air carriers could not continue outside of the normal regulations.

If the shareholders reject the two present proposals, are you not in the same position that you were in on August 13 as far as apprehending an extraordinary disruption, which the Order in Council describes as "imminent"? Is that disruption that was apprehended on August 13 less or more imminent today? What will happen if there is no take-up by the shareholders of the current proposals or of enriched proposals?

Mr. Collenette: I do not want to speculate too much but, as I said to Senator Forrestall, in terms of the imminent disruption, the conditions under which we issued section 47 are, in our view, at least as applicable today, and obviously steps would have to be taken to deal with that situation.

Senator Kinsella: Would you not therefore keep in your arsenal of options the option of looking at issuing a second order?

Mr. Collenette: For what purpose, senator?

Senator Kinsella: For the same purpose that the order was issued on August 13.

Mr. Collenette: We have received proposals.

Senator Kinsella: And you might receive more proposals.

Mr. Collenette: Events may overtake us.

Senator Kinsella: Going back to the legislative timeline, minister, you said that you would like to introduce the legislation before Christmas. When could you reasonably expect the envisaged legislation to be adopted by both houses of Parliament?

Mr. Collenette: It is very important that we show our intent in this restructuring process; that is why we would introduce a bill before the recess. Obviously, we like Parliament to deal with matters expeditiously, but when changing laws we must be sure that we are comfortable and that amendments are thoroughly considered. There would be some latitude when the House of Commons and the Senate reconvened after the Christmas break to deal with this in an acceptable way. From a legal and a policy point of view, we must show our intent.

Senator Kinsella: Our colleague Senator Poulin raised the point that in the communities in our regions there is great concern among all the sectors -- the employees, the local airport authorities, and the travelling public. Given that concern is so deep and worry so real across the country, do you think that between now and November 26 this committee and the committee of the other place ought to travel to hear directly from the people? Considering the pressing time, if a division of labour could be worked out between the two houses, do you think it would be worthwhile?

Senator Kirby: The next question, of course, will deal with whether you will support an application for Supplementary Estimates for the Senate committee to travel.

Mr. Collenette: I have been assailed for many things in this process and I do not intend to be assailed for telling the Senate committee what it can and cannot do. You must sort that out yourselves.

Senator Forrestall: As you are aware, minister, safety is very important to members of this committee. We are about to issue a report of 70 pages or 80 pages on safety in air transportation.

I am bolstered by the revelations of very prominent experts that Kapton wiring does indeed fray, causing arcing, which creates heat, which creates fire, which takes lives in the air. We have reason to believe that the harnesses in the 15 or 20 DC9s that Air Canada has and is proposing to use in light air operations out of Hamilton are wrapped in this material. The United States military had banned this material from all aircraft built in the last two or three years. Both our military aircraft and a large segment of our commercial aircraft contain this danger.

Will safety be considered in this merger? If, as you have said, safety will not be compromised, how do you propose to deal with this, which will be a direct outcome of a merger?

Mr. Collenette: Sorry, by "this" are you referring to safety or to Kapton wiring?

Senator Forrestall: Well, both really. I think the two are synonymous now.

Mr. Collenette: The safety regime that we have now, with the oversight, is second to none. We really do a bang-up job and we are recognized for it worldwide. We will not compromise an inch on safety, whatever the airline structure is, whatever the dominant carrier is and whatever the regime is for regional service.

On the issue of Kapton wiring, we are following this closely since it came to prominence as a result of the Swissair crash. It is true that there are aircraft in Canada with Kapton wiring. The view of our officials is that Kapton wiring itself does not mean that there is a safety hazard. It depends on the maintenance schedules and the kinds of maintenance techniques that are used when it is in place. We are monitoring this closely to ensure that the advice that we now give and the procedures that we now follow specifically with any aircraft with Kapton wiring are not in any way impacted by further revelations coming from the Swissair investigation. As you know, we have a very close relationship with the Transportation Safety Board, which is leading this investigation. We are fortunate to have the TSB as our Canadian agency. We are working closely with it and we are looking at that particular issue as it unfolds.

Senator Forrestall: I am tempted to put the question to you directly. Does the government consider it to be a hazard? And if it does consider it to be a hazard, will it allow the use of these aircraft, some 19 or 20 of them, in the establishment of the new airline?

Mr. Collenette: My previous answer really covers it as comprehensively as I should like at this point in time. We will certainly monitor the findings of the ongoing Swissair investigation, but we have no problem in saying that the Canadian safety regime applying to aviation is extremely good and that Canadians should not worry.

Senator Forrestall: I have one final question, because I am one of those with a conflict of interest. Is there any way you can do better than $2 a share for my interest in Canadian Airlines?

Mr. Collenette: Next question.


Senator Poulin: My question deals with our raison d'être and our interest as members of the committee. I am happy to see that you want the committee on transport and communications to go to Sudbury.


But when we look at the cost of travelling to certain regions of the country, we can see how expensive it is. It costs close to $1,000 for me to travel between my dedicated region and Ottawa.

Senator Spivak: And you are close.

Senator Poulin: And I am close. Senator Fairbairn, for instance, would pay what, on average, to travel to Lethbridge -- about $3,000?

Senator Fairbairn: Yes.

Senator Poulin: With the review of the whole industry that you are doing now, do you think that you will be able to make regional travel more accessible? I am thinking of all the business people in Northern Ontario and in other parts of the country.

Mr. Collenette: There are specifics on price in the document that will try to address those issues, because I think it is a valid point.

The situation you describe is similar to the one I face as a member of the House of Commons. We generally travel full fare, economy or business class, and you pay the premium. However, 90 per cent of all trips in Canada are on what are called, I think, excursion fares, the cheaper fares. I know in the House of Commons there is a program to encourage members to do advance bookings, and you can often get those fares down but it does not always work; it depends, obviously, on the schedule of commitments that you have. It is the same for business people. We will be attentive to this as the process unfolds but we would like to ensure that we keep the existing regimes for excursion fares with advance booking, because many people do not mind travelling in the middle of the night or staying over on certain days. We will also try to keep seat sales as well. It is six of one and half a dozen of the other. The airline companies would argue that they need to get the full fare out of business travellers to give them the ability to subsidize seat sales and excursion fares. However, the whole issue of price must be very closely regarded by this proposal.

Senator Spivak: I have a short question. As you know, minister, both the European Union Commission in Brussels and the Americans are doing a merger review of what is happening here. What impact will that have? Will you be able to come out with contrary positions? How are you looking forward to resolving or dealing with those issues? They, of course, have control of time slots and landing positions in the major cities that both Canadian Airlines and Air Canada travel to.

Ms Bloodworth: It is true, senator, that both are looking at the merger. They are looking at it for specific reasons, not the bigger picture, if I can put it that way. As we understand it, the EU is interested particularly in slots at Heathrow, and I think that to date they have looked only at the Onex deal because Onex went to them. Their concern was that under that proposal, much of the access between Canada and Heathrow would be controlled by one alliance. Their concern is solely related to slots at Heathrow. Should that proposal come forward, it may be that some of those slots should be given up, but our concern as the Canadian government would be to ensure that those slots remain with Canadian carriers and not go to other EU carriers who might well want those slots.

The Americans are looking specifically with respect to the anti-trust immunity that is on transborder alliances. In the end, the Americans will decide whether they are prepared to grant anti-trust immunity in whatever the new regime is.

Senator Spivak: Am I correct that the merger between British Airways and American Airlines was disallowed because they would have had to give up too many landing time slots?

Ms Bloodworth: It was not a merger. It had to do with the alliance. You are correct that as we have looked at slots, the EU is also looking at the slots at Heathrow.

Senator Spivak: I am suggesting that that deal did not go ahead then because of the tremendous cost. Is that being factored in here?

Ms Bloodworth: Certain elements did, but not the whole deal. Because the EU has some concerns with Heathrow, it may well be that any proposal that comes together would contain conditions that would resolve those concerns. What we would be concerned with is to ensure that the Canadian carriers as a whole retain as much access to Heathrow as they have now.

Mr. Collenette: There is a little bit of European politics in here, senator. The EU, I think, would love to use this as a pretext to grab Canadian slots for other carriers, and we will fight hard to maintain Canada's share of the slots at Heathrow.

Senator Spivak: We may fight hard, but we may not be successful. Then what?

Mr. Collenette: Canadian law does not cover slot positions.

Senator Callbeck: I have a supplementary question with regard to the slots. I am thinking of Charlottetown and Prince Edward Island.

Mr. Collenette: Is there a slot problem at Charlottetown?

Senator Callbeck: The airport authorities there get most of their income from the airlines that come in there. If we have a merger, those airport authorities will have their income reduced significantly. From where will they pick up that money?

Mr. Collenette: Officials from the airport authorities and NAV CANADA acknowledge that there will be a short-term dip in revenues because of the reduced capacity, but they believe that the rationalization will quickly produce more flights and that their revenues will rise.

Ms Bloodworth: It is important to remember that there will not be fewer people travelling. The same number of people will travel. Some airport authorities are concerned about a reduced income, as the minister said, but that is in the short term. We have not heard an overwhelming concern that it is a longer-term problem. They seem to see it as short-term dip, and then it will go up again.

Senator Callbeck: What if it does not?

Ms Bloodworth: The Government of Canada continues to own the 28 airport authorities, including Charlottetown, and, as part of the national airport policy, has said that those airports will continue to exist. No change in that regard is being contemplated.

Senator De Bané: Mr. Minister, you have published a document entitled "A Policy Framework for Airline Restructuring in Canada." In that document, you outline the major consequences of having one dominant carrier in our country. You say that it is in our interest to have one strong economic company that would fulfil all those needs, with the government establishing the framework.

That being said, do you have any views on the relative merits of the two proposals currently in play?

Mr. Collenette: I have no comment on those proposals at all. That is for the shareholders to decide. These are business propositions that affect two publicly traded companies. It is up to them to decide what arrangement makes financial and organizational sense. If one of them does and it comes to us, then we must ensure that it makes political sense and that the public interest is protected.

Senator De Bané: You say the first step should be totally in the hands of the private sector, the shareholders, and that after that the government will come in to assess if the big public interest is looked after. Is that really the most effective way of approaching the issue?

Senator Spivak: Is that the Liberal way?

Mr. Collenette: Senator, many people use your line of reasoning because they feel that there is a relationship between what is going on now and the way the government looked at the banks. There is no relationship. The six banks were doing well, and they wanted to merge in order to have greater efficiencies and to compete on a world scale. We are looking at two national carriers where one is failing very fast and the other has underperformed financially in the industry worldwide. The circumstances are different.

We do not have the luxury of the time that we had to deal with the bank merger reviews, and that is why we followed this process. However, that is the whole point of coming today and outlining a framework that will help the airline companies understand what the environment will be and help the shareholders understand what the environment will be should they take a certain course of action.

Senator De Bané: The point with which I respectfully beg to differ, Mr. Minister, is that in your document about the policy framework you explain very clearly that we cannot overestimate all the implications of having one dominant player. Many problems will need to be resolved, and government will not remain passive. It will deal with them, and you give here the broad principles. On that, I fully agree with you. However, I respectfully beg to differ when you say, "Let us have these private shareholders first express their preferences, and then we will be governed by their preferred options and will have to deal with those."

I will give you a comparison. Mr. Firestone decided that he would like to have a stadium for the Senators in the west end because he happened to have a piece of land there. The different public authorities had to deal with that. They asked, "Will we allow rezoning of that piece of property?" However, we were stuck with his preferred option. Now, we are stuck for another 100 years to 200 years with a stadium that does not serve the people of the other side of the river. We were stuck with his option. He decided the rules of the game, and now we have a stadium that does not make sense from an urban planning point of view. That sports centre is not where it should be.

Here you say, "Let us have them decide which of the two options. I as minister have no preference with regard to the two very different options. Then we will come with our own policy framework to ensure that the one preferred by the shareholders is congruent with government public interest."

I am not sure, Mr. Minister, that that is the best way to approach a sector that is fundamental for a country that has six time zones and that is larger than the 33 countries of Europe.

The Chairman: Is that a question or a comment?

Senator De Bané: I am putting to the minister, whom I respect very much, my views.

Mr. Collenette: Senator De Bané, give us the alternatives if you do not like the present process. We have looked at them, and they are not pleasant.

The Chairman: Thank you, Mr. Minister, and members of the committee.

The committee adjourned.

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