Proceedings of the Standing Senate Committee on
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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"
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
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
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
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
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
Senator Spivak: Of course, but we might have the time to consider other
alternatives through the parliamentary system. Never mind that, though; I take
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
I should like your opinion of this item which was raised, I believe, in the
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
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
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
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
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
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,
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
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
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
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
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
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
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
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
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 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,
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.