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Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 6 - Evidence - morning sitting

OTTAWA, Wednesday, November 9, 1999

The Standing Senate Committee on Transport and Communications, pursuant to subsection 47(5) of the Canada Transportation Act, met this day at 9:30 a.m. to consider the order in council authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement.

Senator Lise Bacon (Chairman) in the Chair.


The Chairman: Honourable senators, our witnesses this morning are from Air Canada.

Welcome, gentlemen. I am sure our members are ready to ask questions but they will treat you with courtesy and fairness. Please proceed.

Mr. Robert A. Milton, President and Chief Executive Officer, Air Canada: With me today are Doug Port and Duncan Dee. We appreciate the opportunity to be here this morning to talk to you about Air Canada's plan for the future. First, I should like to apologize to honourable senators for any misunderstanding that arose from our request to postpone last Wednesday's appearance before this committee. Honourable senators will recall that the day before our scheduled appearance we announced a major improvement to our share buy-back program, an announcement with significant implications for our shareholders, partners and employees.

With only three business days left until the shareholders' meeting that was to be held yesterday in Montreal, and with the very future of our company on the line, I took the decision to request that our appearance be postponed a few days, until early this week. That request was granted. The truth is that we needed to continue intensive discussions with shareholders in order to communicate the benefits of our latest proposal. And, yes, I did talk to the media the very next day as part of our ongoing attempt to communicate the benefits of our improved offer only days before shareholders were to decide our fate. In requesting a short delay, I wanted to ensure that I personally would be available to meet with honourable senators to talk about our plan and to answer questions. That is consistent with my sincere belief, expressed on numerous occasions since this debate began in mid-August, that Parliament has a crucial role to play in any restructuring of the airline industry. My opinion in this regard remains unchanged. That being said, I should now like to move on to discuss Air Canada's plan for the future of the airline industry in Canada.

The details of our plan originally announced on October 19 are now well known. Copies of our plan have been sent to all senators, members of the House of Commons, and provincial and municipal officials across Canada. For this reason, and in the interests of time, I do not propose to review all the details of our plan. That is, perhaps, best left to the question and answer period to follow. However, in the wake of Friday's important developments, I should now like to address a few key issues.

First, Air Canada remains absolutely committed to proceeding with all aspects of the plan that we have announced, including acquiring Canadian Airlines and establishing a low-fare airline to be based in Hamilton, Ontario. Clearly, we will need to negotiate a mutually acceptable business arrangement with AMR Corporation if we are to successfully acquire Canadian Airlines. They are aware of our willingness to cooperate and to negotiate. We have also initiated discussions with Canadian's management. We will need their support and the support of Canadian's 16,000 employees if we are to make this work. Let there be no uncertainty. As I have said on numerous occasions, both Air Canada and Canadian must be part of any solution to the challenges facing Canada's airline industry. While we believe that Air Canada is the airline best suited to lead any restructuring of the industry, Canadian Airlines is a key part of the equation. Therefore, we intend to move quickly to formalize our offer to acquire Canadian Airlines. To that end, yesterday I wrote a letter to Canadian Airlines' CEO, Kevin Benson, reiterating our desire to proceed with an acquisition of Canadian Airlines as soon as possible.

As for a new, low-fare carrier, we have been working on that concept for some time now. We did not, as some have suggested, develop this idea as a response to recent developments. We intend to move quickly to establish this carrier, which will provide consumers with improved choice in a market segment not currently served by a full-fledged discount airline. We look forward to announcing further details of our plan shortly.

Second, I want to make a clear statement to members of this committee and to Canadians in general that, in addition to acquiring Canadian Airlines, we are firmly committed to reviving and rebuilding that airline and to operating the company as a distinct brand. The fact is that Canadian Airlines is a strong brand. Its employees are professionals who are among the best at what they do. I encourage them to join us as we begin the task of rebuilding for the future so that we can, together, move that distinguished airline to financial health and prosperity.

Third, the Air Canada plan meets and in many cases exceeds the five principles outlined by the Minister of Transport. In developing our proposed solution to the challenges facing the future of Canada's airline industry, this was a very important consideration for us. Therefore, our plan protects consumers, guarantees regional service, fosters industry competition, ensures that effective control remains in Canadian hands and, most important from my perspective, addresses employee concerns. No one has suffered more over the last few months than the employees of both airlines and their families. They have experienced emotional upheaval and uncertainty. They have watched helplessly on the sidelines as their future has been debated publicly in Parliament and in the media by union leaders and political pundits. They have worried about what will become of them and their jobs once the restructuring process unfolds. They now deserve a clear statement of reassurance.

From the outset of this process we have said that no one will be forced out of a job as a result of our proposed transaction. Last week I went further in a written seven-point commitment to the union leaders of both airlines, including the regional subsidiaries. Copies of this letter have been tabled with the clerk of the committee. Today I want to reiterate our commitment to that seven-point plan. Simply put, we cannot run a profitable airline, nor successfully restructure the industry, without the support and active participation of airline employees.

The fourth and final issue that I want to touch upon involves the future regulatory framework for Canada's airline industry.

Over the past three months there has been a great deal of debate surrounding the current 10 per cent restriction on individual share ownership contained in the Air Canada Public Participation Act. I want to remind honourable senators that the Air Canada plan complies with all existing laws governing Air Canada and that it will not require legislative change. The 10 per cent rule may be shareholder unfriendly. However, all of our shareholders have invested in the company with the knowledge that this rule exists. It continues to serve valuable public policy objectives.

The point is that the 10 per cent rule was not introduced by Parliament to protect Air Canada's shareholders or to entrench management. It was introduced to protect the interests of the country. Our research indicates that the vast majority of Canadians support it. If this rule is to be changed, and I recognize that the minister has asked for the advice of this committee, such change should only occur after thorough debate and analysis in Parliament.

In the meantime, I want to say to the federal government and to the members of the Senate and the House of Commons that we at Air Canada look forward to working with you to develop a regulatory framework that works. It should be one that works to facilitate a smooth and efficient restructuring of the nation's airline industry, one that works to preserve consumer choice and affordable air travel, and one that protects the interests of employees and service to small communities. In short, the regulatory framework should be one that creates a foundation upon which the entire airline industry can grow and prosper.

In conclusion, Madam Chairman, we at Air Canada are proud of the plan that we have developed. It is a bold and practical plan. It is a plan based on realistic and realizable opportunities.

The last few months have been difficult for all of us, for all of those involved in this historic debate. I for one do not wish to relive them. It is now time to look forward to the future. The wounds of this debate will heal with time and with a sincere commitment on the part of those involved to listen, to learn and to work together. That is a commitment I am proud to make on behalf of everyone at Air Canada.

Senator Forrestall: You fellows have subjected us to quite a show for the last several weeks. I hope there are not going to be any reruns. I do not want to see this on the long weekends during the winter.

We have a number of concerns, including competition, the protection of consumers and safeguards against gouging of consumers under a monopoly or duopoly or however it may be coloured when it is all over. We have real concerns about the employees - and not just of Canadian Airlines but of Air Canada as well. We have concerns about your failure to address some of the propositions put to you by the unions.

The fundamental question or concern is what will come out of this. What form would Canadian Airlines take if you owned it? How would you operate it as an arm of Air Canada?

You have proposed that Canadian Airlines become an operating subsidiary of Air Canada. Would you take us through the steps as to how that would work? How would the seniority lists work? How would the workforce breakdown eventually? Would there be a process to look at how it was working after six months to see if adjustments had to be made? In other words, would there be an ad hoc start or would there be some kind of stability?

I have always understood that mergers were to avoid duplicated costs, but that is not the case here because you are going to operate them as separate structures. Would you lead us through what you have in the back of your mind in that regard? Tell us how you intend generally to deal with the coordination of flights and the avoidance of parallel routing at parallel times and all of the things that seem to be causing major headaches.

Mr. Milton: I have been very clear from the outset that the interests of the employees have to be looked after. I have made very strong statements regarding the protection of Air Canada employees; they are the employees currently reporting to me. Obviously, if we are successful in acquiring Canadian Airlines, I will consider those employees on the same basis and look to protect them.

I have been very clear in writing to the union leaders of both companies that the employees will be protected, that anyone who decides to leave will be given an appropriate and attractive severance package and that with our option, growth occurs. In our proposition, we are talking about a plan under Star Alliance that offers the prospect of significant growth. Currently, Canadian Airlines is within an alliance called oneworld. To a large degree, the airlines of oneworld do the predominance of flying to Canada. That is not the case within Star Alliance, which is the alliance that we are in. There is significant growth upside within Star. Additionally, we have introduced Delta Airlines, one of the largest airlines in the world, into the mix in our picture. The combination of Star and Delta will produce great growth, thereby achieving an outcome that will produce the ability to have better and more stable jobs at both companies.

Regarding seniority issues, I clearly look to the employees and the unions to dialogue to determine precisely how we best go about it. The airline industry is littered with examples of poor merger integration. There are very few good examples, notable exceptions being Western and Delta or British Airways and British Caledonian. I intend to have any outcome that involves the acquisition of Canadian Airlines land in the positive category. The only way that that will be achieved is through dialogue with the employees. That is a key cornerstone of how I see us proceeding, and that is one of the key reasons I think keeping these airlines as independent units is very sensible.

You talked about merger cost benefits and the benefits of duplication. In the airline industry, historically, the areas of benefit have principally been in revenue generation and in purchasing synergies, not in overall cost exercises nor in any way in acting detrimentally to employees. My focus will be on revenue enhancement and purchasing in the first stage. Then, based on dialogue with employees, there would be a transition over time to evolve into whatever the collective view dictates.

Opportunities exist at Air Canada and Canadian Airlines. For Canada, this is a terribly under-leveraged franchise in that Canadian cannot or does not or will not fly many of the routes for which they have authority. Air Canada is precluded by government constraint from flying to many of the places we would like to fly. I see this as an opportunity, once and for all, to get on with creating much of the growth that is possible. Again, this will be positive from a job-creation standpoint, from a revenue-generation standpoint and, ultimately, from a profitability standpoint. That is where I see the most significant benefits.

You commented on parallel times. Much has been said about this subject but it is quite straightforward if one stops to think about the recent situation in Canada. We are talking about competition. Generally speaking, flights leave at the same time in competitive markets the world over. The evolution of the New Air Canada-Canadian model will involve a further separation of flight times. The net result will be more flight departure opportunities and better coverage over the course of the day.

Senator Forrestall: Have you done a pro-forma balance sheet on paper? If you have, could the committee have access to that?

Mr. Milton: We have done detailed projections of how the combined airline would look.

Senator Forrestall: Could you let us have a copy of that work?

Mr. Milton: I do not know that that would be reasonable. As we progress and if a deal is consummated, it will be quite clear for the world to see.

Senator Forrestall: I want to touch briefly on Canadian Airline's international routes, which are of enormous value in dollars. I am a shareholder who is not very happy with your $2 offer. Perhaps I should have bought Air Canada shares; who knows? In any event, how do you see a rationalization of the international routes? Would Canadian continue to operate those routes or would you interchange?

Mr. Milton: American Airlines has worked with Canadian Airlines on their international route franchise for the past five years. This is an area of serious underachievement for the industry in Canada. Canadian Airlines has route rights on which it is not operating, such as Australia, Toronto to Hong Kong, Toronto to Tokyo and Asian markets. Italy is under-serviced because, for half the year, Canadian Airlines does not operate their own aircraft there. The route rights to Canada are seriously under-leveraged. That problem exists all over the place. One million passengers per year travel between Canada and Mexico, but Canadian Airlines operates one flight a day with an A320 from Toronto. Yet Air Canada is not allowed to fly that route.

As I see it, this is an opportunity for Air Canada, for Canadian Airlines and for the industry to stop splitting the pie and to get on with true growth and full achievement of the franchise potential.

Yes, those routes are valuable. We tried to put a value on them several months ago and we made an offer to buy the international routes for some $400 million dollars. To the best of my recollection, that is about twice what was offered four years ago. Canadian rejected the offer. That is fine, but this is another opportunity to get on with full leverage of those routes.

Senator Kirby: I have read a number of Mr. Milton's comments in the paper recently, so I was tempted to thank him for taking time to appear before a parliamentary committee from a third-world country, as he has taken to calling Canada. However, in light of the suggestion that we be nice, I will not say that.

I am trying to understand precisely the commitment of Air Canada vis-à-vis Canadian Airlines. As I understand it, you have offered to buy all the shares in the holding company; is that correct?

Mr. Milton: Yes.

Senator Kirby: Are there any conditions on that offer? For example, does that offer exist even if AMR keeps its position in the operating company?

Mr. Milton: I have no qualms about American Airlines maintaining a position. However, they contend that they have very significant dilutive rights. I see that as being problematic if we attempt to go in there and then they exercise their rights which we think may give them an ownership stake of up to 80 per cent. Clearly, that would not have been the intent under Canadian law, which imposes a 25 per cent maximum ownership for foreign enterprises.

There are many questions about what American says are their rights versus what they have disclosed to regulators as being their rights. We will need more clarity as to precisely what they can and cannot do.

Senator Kirby: I am trying to clear a way through the verbiage to ensure that I understand the answer; I think it was no. My question was this: If AMR keeps its position in the operating company, is that a condition? You answered that yes, it is a condition in the sense that if Air Canada is not happy with American's role, they may not buy Canadian Airlines.

Mr. Milton: I will not buy Canadian Airlines if the proposition is not acceptable to the shareholders of Air Canada. I believe that that outcome is possible but I have no clear idea yet as to precisely what American can or cannot do. Until such time as I do have such clarity, I cannot respond.

Senator Kirby: That clarifies the answer. This may not be in your offer but in many of your public statements and in the material you have circulated to the committee members, you talk about the necessity of Canadian Airlines' creditors taking a haircut, to use the business terminology, meaning that they will not necessarily get 100 cents on the dollar. If you were unable to negotiate such an arrangement with the creditors, could that condition prevent you from buying Canadian Airlines?

Mr. Milton: It could. However, I am confident, given our many common creditors and given the statements made before this committee about the intensity of the crisis at Canadian Airlines, that we are in a position, with our stability, to do sensible things of mutual benefit to the creditors of Canadian Airlines and to Air Canada and its stakeholders.

Senator Kirby: Nevertheless, is it possible for me to conclude that there is at least a potential condition there on the purchase?

Mr. Milton: Absolutely. I will not proceed on a basis that does not make sense for Air Canada, but there is a lot of room to proceed on a sensible basis.

Senator Kirby: Is the Competition Bureau saying yes to your proposal for the low-cost airline based in Hamilton another condition on buying Canadian or is that an entirely separate issue?

Mr. Milton: That is an entirely separate issue.

Senator Kirby: I presume your purchase of Canadian Airlines is conditional on the government's agreement that all of Canadian Airline's international routes would remain with Canadian or, alternatively, be transferred to you? In other words, are the international routes among the assets that you think you are buying?

Mr. Milton: Absolutely. However, as I said, my full expectation is that this transaction would undergo the scrutiny of the Competition Bureau.

Senator Kirby: The purchase of the international routes is not necessarily a Competition Bureau issue.

Mr. Milton: It may or may not be. In terms of concentration of activity at foreign airports, it may be an issue, but we will proceed with the expectation that we will go through appropriate competition review.

Senator Kirby: Let me move on. I have never understood your use of the word "competition". I will use your own words to try to explain it. In various and sundry statements, even today, you have talked about your plan fostering industry competition. You used that term in a variety of documents that you sent out as public relations material. You have said that consumers will continue to benefit from competition because Air Canada and Canadian will not be merged.

It may interest you to know that we have not had a single witness appear before this committee who thinks that there will be any element of competition between Air Canada, a Canadian Airlines owned by Air Canada, and the discount airline.

I will give you some illustrative examples. The Canadian Association of Airline Passengers says that your definition of competition "breaks new ground in the field of economic confabulation." An article in The Financial Post of Saturday, October 23, states that:

The parent company will dictate all major decisions, with the profitability of each subsidiary holding less importance than the parent's overall profitability. If the parent company's best interest requires that one subsidiary forego certain strategic opportunities for another to benefit, it will no doubt mandate this trade-off.

The Consumers' Association of Canada says that your proposition

will continue to be a "smoke and mirrors" proposition that will still leave Canadian consumers dealing with an effective domestic airline monopoly.

Finally, we asked the Competition Bureau, which testified before this committee a week or 10 days ago, whether they felt that the notion of competition between more than one company made sense in your case, whether you are two subsidiaries of a holding company or three subsidiaries or a parent with two subsidiaries. We asked them whether or not, in their definition of competition, that consisted of competition, and they made it very clear that it does not.

I am at an absolute loss, on the basis of everything we have heard from everyone, as to how you can conceivably describe your proposal as fostering competition. Perhaps you have a different notion of competition than we do.

Mr. Milton: Perhaps I also look at a global perspective. When you look at Air Canada over the last few years, you can see that we are clearly not concerned about competition. We have taken on the biggest airlines in the world under Open Skies, which was introduced four years ago on routes to the United States. Air Canada versus the entire airline industry in the United States has picked up 10 market share points, moving from just over 30 per cent to just over 40 per cent of the market, and that is against the biggest and strongest carriers in the world. Air Canada is able to compete. We are competing transborder. We are competing to Europe and to Asia. Everywhere we go, we achieve record levels of profitability. We are winning customer service awards. We have absolutely no qualms about competition. Air Canada is the notable exception amongst the airlines of Canada in that we did not object to the start up of Greyhound or WestJet. We are a totally pro-competition airline.

It should be pointed out that we did not make the problem at Canadian Airlines. We did not start this process. We are trying to come up with a solution to their inability to progress. There are issues of international competition. There are also issues of alliances. In our picture, we have Star Alliance. Star Alliance provides considerably more competition than oneworld has provided, given the fact that oneworld would have resulted in 100 per cent concentration on routes to Hong Kong, Tokyo and the U.K. We have also attempted to introduce Delta Airlines to the mix, which would increase the competitive alternatives available to points around the world. As I mentioned earlier, by fully accessing all the route rights that Canadian Airlines does not currently use, we will be able to introduce competition in markets around the world that do not currently have any Canadian carrier operating in them.

Anything we propose to do will undergo the scrutiny of the Competition Bureau. If in the end it is deemed that what we are advocating is not acceptable, who am I to say it happens? Ultimately, if we are told it cannot go forward, it cannot go forward. However, remember, we did not cause this problem. We are competitors. We are profitable competitors. We are seeking to benefit our stakeholders and to create a good, vital, competitive company for Canada. What we are advocating is completely consistent with international airline models seen around the world. British Airways, which is one of the key leading airlines of the world, has created a low-fare airline based north of London that is identical in composition to what we are advocating for Hamilton.

In terms of the low-fare airline in Hamilton, if what we are doing is so uncompetitive, why has no one done it? We are the first to do it. We are ready to go, and we want to start this airline. If we are told we cannot do it, fine; but no one else has done it, no one else is doing it and no one else has said they want to do it.

I think what we are advocating is entirely pro-competitive, and our behaviour over many years has been open to added competition. We have no qualms about anyone competing on any route we operate.

Senator Kirby: It is hard to go back to the beginning of the question. The vast majority of your comments in response to my question, Mr. Milton, dealt with international situations and alliances and so on. I would not disagree with a word you said on that part of it, by the way. It does remind me a little bit of the bank CEOs last year when they were seeking to do the Canadian merger. They kept talking about the value of the merger in international terms, whereas the average Canadian citizen is worried about getting shafted in Canada.

I should like to get you to come back specifically to the purely in-Canada, domestic flight context. You seem to be trying to argue as a credible proposition that Canadian Airlines and Air Canada continue to compete with each other on domestic flights only - I am talking only about domestic flights - even though they would both be owned by you. Am I right or wrong?

Mr. Milton: There is a choice of brand, with two operating units providing good, safe, reliable, high-quality service to points throughout Canada. As I said, we did not create this problem.

Senator Kirby: I am not accusing you of that. I never accused you of that.

Mr. Milton: Let me finish. We did not start the process. If other people want to start other airlines, or if it is determined that we should not buy Canadian Airlines, fine. We are trying to provide a solution to a problem that is not of our making. If you, Senator Kirby, want to start an airline or buy Canadian Airlines, go ahead and do it. Let Canadian compete with us. That is okay. However, there is a problem, and we are trying to provide a solution. I will not sit here and tell you that I intend to go out and start up an incredibly nimble, low-cost airline to keep Air Canada alive. It does not make much sense. I will not say that.

Senator Kirby: I wish you were not so defensive. No one ever accused you of starting the problem. We are just trying to understand your proposed solution to it. In effect, Canadian and Air Canada, under your restructuring proposals, are not in the normal sense of the word "competitors" to each other.

Let me ask you about the low-cost airline. It seems to a number of people, including witnesses before this committee, that the low-cost airline based in Hamilton was designed to simply extend the market dominance of Air Canada by putting them into direct competition with WestJet, Canada 3000 and other smaller airlines which have been attempting to provide low-cost service to various parts of the country. If you own both the major airlines in the country, surely to goodness it is not in the public interest, and to use your words, it does not foster competition, to put you in a position where, in effect, you could proceed to drive all the little guys out of business. What am I missing?

Mr. Milton: You are missing that there is an industry to the south of here that is big and strong.

Senator Kirby: You were never in the banking business. That sounds exactly like what they said.

Mr. Milton: U.S. competitors will come across the border, and I intend for us to be well prepared to compete with them. We are talking about introducing a low-fare piece of activity that is completely consistent with other major international airlines. Delta has Delta Express, U.S. Air has MetroJet and United has United Shuttle. We are doing what is completely consistent with the world's leading airlines.

Air Canada is the twentieth largest airline in the world, and we intend to do something that we think is attractive to consumers and is not currently being offered. It is priced at a level that attracts traffic from the roads and the rails. We believe it is an attractive proposition, completely consistent with what the world's leading airlines are doing.

Senator Kirby: I am glad you raised that; I will come back to that point.

Since, in response to my question, you once again raised U.S. issues, I could draw one of two conclusions. I wish to understand if either or both are correct. One conclusion is that your intention would be that the low-cost airline would not fly between points in Canada but would fly only transborder flights.

Mr. Milton: Incorrect.

Senator Kirby: Then let me try my other conclusion: Since you are so keen on beating the U.S. competition, is it fair for me to conclude that you would have no difficulty with a number of the Competition Bureau's proposals, including talk about a 100 per cent foreign-owned purely domestic airline, or allowing U.S. airlines to fly Canadians from one point in Canada to another across a U.S. hub, and so on? Would you have difficulty with any of those?

Mr. Milton: If it were on a fully reciprocal basis I would have no problem at all.

Senator Kirby: We know we will not get full reciprocity.

I must tell you that it is really frustrating that you keep putting forward ideas and then putting on the table conditions that make it pretty clear that you know the good thing you are saying will not be achieved. It seems to me that this is not getting us anywhere. On the one hand you say this is a great idea and on the other hand you impose a condition that you could be quite confident will not be achieved, such as the reciprocal basis. These are shades of the bank issue all over again.

Mr. Milton: Why is it not achievable given what has been accomplished in Europe under the EU?

Senator Kirby: As you know, a great deal has been accomplished under the EU that has not been accomplished in the United States.

Mr. Milton: If you wish to take a defeatist attitude that it cannot be accomplished, fine; however, I believe it is perfectly appropriate for Canada to expect reciprocal treatment.

Senator Kirby: I must deal with your shareholder-unfriendly line. Since you have constantly referred to things that are happening elsewhere in the world, I should like to ask two questions in one: First, why do you think it is shareholder-unfriendly? Since it is shareholder-unfriendly, am I correct in assuming that you are prepared to recommend to the government that the 10 per cent be changed? I do not know why you would recommend that they keep something that is shareholder-unfriendly.

Second, since you wish to keep drawing all these international comparisons, it is my understanding that in no ICAO country, certainly in none of the industrialized countries, is there a limit other than the foreign ownership limits, which are always at 49 per cent, more or less, on the amount of shares that a single domestic shareholder can own. Since you are such a fan of everything that is happening elsewhere in the world, I presume that that alone would make you willing to see the 10 per cent rule completely dropped. In addition, since it is shareholder-unfriendly, I suppose you would be even more willing to see it dropped. Am I right? In that case, I presume you are prepared to recommend that to the government.

Mr. Milton: As I have said throughout this process, there are a couple of issues here: One is a shareholder issue and one is the issue for the country. I operate the company, full stop. I operate it on the basis of the rules. Last Friday we received clarification on the law from a judge, which was terrific. If the law is changed through deliberation in Parliament, that is fine with me. I operate the company.

As far as the 10 per cent rule goes, it was clear in the process that was begun some 80 days ago that if we allow big, well-funded institutions to compete vigorously to buy one of the great airline franchises in the world, the value that will be achieved will be tremendous. The value will also be tremendously higher than was achieved over the last 80 days, during a process where one institution had the ability to make an offer that was in the 30 per cent range, contrary to the law, while another one tried to deal within the law. What is in the interests of the shareholder is a very different proposition from what is in the interests of the country.

In the polling that we have been doing throughout this entire process, the country has been saying clearly that they believe in the 10 per cent rule and that this industry should continue to remain domiciled in Canada and controlled by Canadians. It is not up to me to say. If the law changes, I will run the company on whatever basis is determined by the law.

Senator Roberge: Can you give us the details of the $800 million infusion by your Star Alliance partner into Air Canada? What are the payments? When are they due?What are the covenants?

Mr. Milton: I am happy to get you a detailed breakdown on that. We have $500 million of value - in essence, a gift given to us for the ability to continue an association with Air Canada over 10 years.

Senator Roberge: Does that mean a non-payment, a gift?

Mr. Milton: You can assume just cash. We are taking that and passing it through to our shareholders. Many people are talking about the way we have encumbered Air Canada with debt at $1.1 billion. That is, in fact, not true. We have received a total of $500 million in gift, or actually $490 million, which we are passing through to the shareholders.

At the end of September we had $900 million in cash. We are using some of our cash, but given the financial performance that we are currently achieving and given our overall strength, we will be in a position to raise further capital if we wish, although we have no current plans to do so to deal with this. I feel it was a very attractive proposition structured with our partners.

Senator Roberge: What about the $300 million? You are talking about $500 million and what we are hearing is $800 million.

Mr. Milton: We also arranged for loan guarantees of $310 million from our partners, which will be financed through banks and on very attractive terms.

Senator Roberge: What are the covenants attached to that?

Mr. Milton: In terms of what?

Senator Roberge: In terms of voting rights or any other terms.

Mr. Milton: The covenants are completely consistent with the financing we have done in the past. At Star, which is clearly emerging as the leading alliance in the world amongst airlines, we have been talking for a good couple of years now about a Star governance package which would include the rules by which you will enter Star, participate in Star and exit Star. In the near term, Air Canada and the other members will be entering a Star governance package, which will mean that related to the value we have achieved from our Star partners we will be bound by only the same restrictions as all of the rest of them. Therefore, there will be no restrictions related to the money we have received once that governance package is achieved, which should be in the near term.

Senator Roberge: Will it be possible for us to get a copy of that eventual agreement?

Mr. Milton: I am happy, in due course, to provide those details.

Senator Roberge: You have been referring to Delta Airlines, and in the beginning of your proposals you were talking about Delta and the connection with Canadian. Do you have an agreement with Delta?

Mr. Milton: Correct.

Senator Roberge: What happens if you make a deal with American Airlines? Where will they fit?

Mr. Milton: Both Delta and United agreed, prior to our entering into this, that we would look to the possibility of needing to make an accommodation with American Airlines. If that happens, the role of Delta could be eliminated. That was part of the agreement.

Obviously, we have moved beyond the world we were in even as recently as last Friday, but in that scenario of oneworld versus Star and American versus United, American was advocating that United, the biggest airline in the world, be kicked out of the picture, leaving only American to deal with Air Canada and Canadian. The resulting network flows would cause such a big contraction in activity that in our picture we decided that if American were removed from the picture and we were left with United, we would introduce a new player, Delta, to create tremendous growth and keep all the jobs going and to produce revenue growth and profitability growth.

We have maintained the American hub at Chicago with the relationship with United, maintained the American activity at Dallas with Delta, and added to the United hubs at Dulles and Denver and to the Delta hubs at Atlanta, Cincinnati and Salt Lake City. We tried to develop something that was really pro-growth so that we had a good outcome. That is why Delta is there. My preference is a Delta-Star outcome, but we are willing and happy to dialogue with American on a reasonable basis.

Senator Roberge: As my last question, I should like to hear further details about your seven commitments.

Mr. Milton: I can provide a copy of the seven commitments to the employees. It should be in your package.

The Chairman: It is in the folder.


Senator Poulin: Mr. Milton, is this your first time testifying before a Senate committee?

Mr. Milton: Yes.

Senator Poulin: Are you surprised at the difference between perception and reality? Obviously, you seem to think that all senators are asleep at the wheel. Even though both Houses of Parliament are not sitting this week, we the members of the Senate Committee on Transport and Communications are hard at work hearing testimony from witnesses because we recognize the importance of Canada's airline industry.


I am from Sudbury and I know that the regional airlines are essential to the continued growth of our regions. Could you elaborate more on Air Canada's plan for the regional airlines?

Mr. Milton: Those are critical components to any major airline network. Obviously, as in much of the overall picture for the domestic capacity plan that we would see going forward, you could take a regional carrier market where there might be eight flights a day, and I could see an outcome where there would be six flights a day. However, we have committed that no market will lose service. In many cases, when going from those eight flights to six, you will probably see an increase in the size of the aircraft, but there will be a continuation of good, healthy service.

Senator Poulin: We are hearing that the three key concerns of Canadians as consumers are safety, service and affordability. Could you comment on your plan in relation to those three key concerns of Canadian consumers?

Mr. Milton: Clearly there is a keen focus on safety in Air Canada and Canadian Airlines and in the overall industry in Canada. I should like to think our records stand for that.

In regard to service, both international and domestic, although we do not always make everyone happy, I realize that our reputation for service is strong. Last year Air Canada won the Air Transport World Magazine Airline of the Year award for passenger service, which is as highly regarded a recognition as you can receive in our industry. Everyone hopes to receive that award. We received it, as well as numerous other awards of which we are very proud. On a customer service basis we are extremely strong.

I shall now turn to the subject of fares. I understand the concerns that are always present regarding fares. It is expensive to operate aircraft in an airline and I am confident in saying that we are always competitive. In terms of the competition, we are always in the range of appropriate pricing. In Canada, we operate in a higher cost environment, with more difficult weather, higher taxation and other hindrances that we face, as compared to similar markets such as the U.S. On a comparable stage length, the fares are actually lower in Canada than in the United States, which is a market nearby where the airlines operate on a much more advantageous cost basis.

The commitment is to continued competitive fares. In our business, the norm is that the one who sets the lowest fares dictates the prices in the market.

Senator Poulin: Mr. Milton, we all recognize that employees have a huge responsibility in the areas of safety, service and affordability. In the last year, mainly in the last six months, many honourable senators have noticed how worried employees of Air Canada and Canadian Airlines are. I am sure that this morning, employees at Canadian are even more worried than employees at Air Canada. As CEO of Air Canada, how will you succeed in remotivating these employees across the country, from coast to coast to coast, to ensure that they, as your partners, will continue to embrace safety, service and affordability?

Mr. Milton: That is a great question. There is a significant amount of history between the companies. When I was growing up, I was told never to look down on people unless you are lifting them up. We have the ability to help Canadian Airlines produce in a manner consistent with the ability of the people at Canadian and we can protect them.

I have had a lifelong interest in the airlines, and one of the reasons I believe it is appropriate to maintain these airlines initially as independent units is, given that history, the need to let this transition occur, however it occurs, over time with the full involvement of the employees. In other words, let the employees lead the change of the two companies, as opposed to forcing whatever change occurs. That is consistent with the best demonstrated practice in our business. We are very focused on safety at Air Canada; so is Canadian. As you meld the two companies, you must be extremely vigilant. I believe we have the people who can and will do that.

Senator Poulin: It is fantastic to hear the faith you have in the employees. I am sure they will be happy and appreciate it when they hear you. However, when you say, "Let the employees lead the change," how exactly would you do that in practice?

Mr. Milton: There must be active dialogue with the employees and the unions. The first piece of the puzzle is untapping and unleashing the unrealized, inherent value that Canada, the franchise in the airline business, possesses. It has been an underachiever. Air Canada is doing great, but not anywhere near as great financially as we could if we were totally unleashed.

You could just cram these companies together, but it would lead to problems. Canadian knows how to run an operational business. Let them run the operational business. Air Canada runs the operational business. Let us get the benefits of the network. Run the airplanes to the right places at the right times, make the money and, with that success, proceed with the change over time.

Senator Poulin: Yesterday we heard from Buzz Hargrove. He stated to us as a witness that he had received a range of commitments from Onex. He also stated to us that he had serious worries now with the new picture that was developing. He was worried about layoffs and transfers of jobs outside the country. He claimed that Air Canada was not prepared at this time to make such commitments. I have read the letter in the file, but could you comment on Mr. Hargrove's worries?

Mr. Milton: I would love to. I have made commitments here that went out before this whole thing started. If there is any company in Canada, certainly in the airline business, that has demonstrated a willingness and an ability to create jobs in Canada for Canadians over the last number of years, it is Air Canada. Five years ago we had 99 aircraft and today we have 155. This is a tremendously strong success story for Canada and for Canadians in terms of growth and the ability to compete globally. We have brought jobs to Canada.

Earlier in the year, we had a dialogue with Sabre, the IT division of American Airlines, about Air Canada transitioning to Sabre. Our discussion was entirely predicated on the point that all the jobs related to that work had to come to Canada; they could not go to the U.S.

On the other hand, when Canadian Airlines first entered into their agreement with American Airlines five years ago, 1,400 jobs went south. This has been a consistent trend. We have brought jobs north. I am committed to continuing to do that.

This is about growth for Canada. All those Sabre jobs that would have gone south in the Onex proposal come north in our proposal, and that will continue to be the case.

Senator Poulin: As you probably know, last week the CEO of Canadian Airlines, Kevin Benson, appeared before us. He was extremely respectful of Air Canada. He had only good things to say about it.

He informed us that no formal offer had been made by Air Canada. In your presentation today you said that you are now ready to formalize the offer. I do not understand the time lapse. It seems to me that the time lapse contributed to more worry by employees and the public.

Mr. Milton: I would not want to cause the employees any concern, but please think back to what we at Air Canada were dealing with a week or two weeks ago. We had an illegal offer and we were fighting to clarify the rules in order to produce an outcome for our shareholders superior to the one that had been laid on us. The documentation that we had to produce in coming up with proposals and revised proposals was probably equal in size to a phone book. Yes, we had an offer on the table for Canadian Airlines, but it was not the pressing issue. Yes, we would buy it, but we had so many other things to deal with.

First thing yesterday morning I phoned Kevin Benson and told him that we were sincere, we were ready to buy Canadian Airlines, protect every employee at that company, and get on with it, but that we should move quickly. I followed up with a letter to him, which he has received. I told him that by the beginning of next week he would receive the bid. It is not simply a one-page letter. It is a very large and complicated document that is in the process of being developed. I am hoping that he will have it by the beginning of next week.

Senator Spivak: Mr. Milton, the key issue here, as has been outlined mostly by the Commissioner of Competition, is whether in these changed circumstances there will indeed be competition. Only proper competition will guarantee affordability, quality of service and all the things that Senator Poulin spoke of.

In spite of all the talk about an independent operation, we are basically talking about a dominant carrier emerging, because you will have control of Canadian if you succeed. Competition is not going to come from the regional carriers or the charter carriers. Canadian Airlines and Air Canada have 90 per cent of the traffic, including transborder traffic.

The Commissioner of Competition talked about a number of things. I understand that there will be a full examination later, depending on whether you are successful. He said that quite a number of things would have to be done in order for real competition to occur. I am sure that you are familiar with all of the things he spoke about. He also raised the idea of Canada-only carriers and other disguised forms of cabotage, which means that you could fly from Toronto to Vancouver through Minneapolis.

I am sure you have looked at all the proposals the Commissioner of Competition has outlined. First, how do you defend the contention that Canadian Airlines will be an independent operation when in fact you will own all of this? Second, which of the recommendations are you willing to accept in order that real competition could happen in Canada?

Mr. Milton: With regard to the Canadian independence question, I am totally comfortable with our ability to compete. If American wants to put the money in to fix Canadian Airlines and make it a viable competitor, that is fine with me. I will put before the Competition Bureau any outcome, but I reiterate that we did not cause the problem and we are trying to provide a solution. I can go no further than to say that it is okay with me if American fixes Canadian too. I do not mind the competition.

Senator Spivak: We are not accusing you of causing the problem. We are into a situation from which there could be several outcomes. AMR might keep the airline, Canadian might fail or you might succeed in your merger. We are here to protect the public interest and we are being asked to comment.

Mr. Milton: It is difficult to comment on. If I do not fix Canadian, we may lose 16,000 jobs. I am willing to fix Canadian. If the country does not want me to fix Canadian, I will not fix Canadian. If we fix Canadian, obviously I want to do it on a basis that is beneficial to our stakeholders; otherwise, there is no point in doing it.

I am open to the outcome through deliberations with the regulators. I do not see how I can be any more open than that.

Senator Spivak: Are you saying that you are willing to accept any and all recommendations of the Competition Bureau that would foster true competition?

Mr. Milton: No. I am willing to engage in dialogue with them to determine the outcome. I think it would be inappropriate and unreasonable for you to suggest that I should be willing to accept anything that they say.

With regard to your question on cabotage, my answer remains the same. If U.S. carriers get to flow traffic over U.S. hubs, Air Canada ought to be able to flow U.S. traffic over Canadian hubs on a reciprocal basis. If they want to do that, that is great. Air Canada is ready, willing and able to compete with anyone.

Senator Spivak: Yes, but when there is a dominant carrier - "a monopoly" - it is easy to compete.

Mr. Milton: American Airlines is bigger than the industry in Canada, so I am competing with them. In your Minneapolis example, I am competing with Northwest. We are comfortable competing with anyone. If new carriers start up, we will compete, but it is difficult for me to go beyond that.

Senator Spivak: I understand you to be saying that we will have to see what happens and then we can analyze each recommendation to ensure that there is competition. This has been looked at many times in terms of a possible merger or a possible failure, and each time it has been concluded that competition would be severely reduced and that the regional carriers and the charter carriers are not able to provide that competition within Canada.

With regard to the possibilities for the purchase of Canadian, my understanding is that Air Canada has had discussions with Canadian at various times since 1992, sometimes at the initiative of the government, and those talks have always failed. Could you shed more light on what the barriers and the penalties might be that would prevent you from buying Canadian? I understand there are severe financial considerations because of the control that American Airlines has.

Mr. Milton: As you say, over the five years there have been discussions on a variety of things. However, in business it is not uncommon that two parties do not come to a meeting of the minds over price. We have never been able to get to anything that both sides felt made sense, which is fine. Now there is a new element in the mix: American Airlines has a role and an opinion of what is acceptable to them. Again, this is what is before us in the coming days and weeks.

From my standpoint, I cannot be any more categorical than this: I am willing to buy Canadian and protect 16,000 people. However, I recognize that we might not get there. A key factor would likely be American Airlines, but we will know only by proceeding with dialogue.

Senator Spivak: It is puzzling to me that American Airlines has put all of this money into Canadian, yet Canadian is a money-losing proposition. What will change here? Why will you make it work?

Mr. Milton: Air Canada is the leading carrier in this country in any direction you look. From a marketing standpoint, it is tough to be number two. That number two is trying to fly and compete with number one all over the place, which is causing them to lose a great deal of money virtually everywhere they fly.

If you look at American Airlines' relationship with Canadian, you will see that Canadian has not been rejuvenated. Their fleet is tired and old. Their employees have been through a lot, including pay cuts, downsizing and so on. American Airlines, on the other hand, has through this five-year process consistently benefited by deriving high fee revenue and feed, that is, traffic flowing through American's network. We need to recognize, although not everyone accepts this, the level of control that American has over both Canadian Airlines and the airline industry in this country, even though from a regulatory standpoint they are not supposed to have that kind of control.

Senator Spivak: Can you give us any broad guidelines as to how you would rationalize Canadian in this new arrangement and make it viable?

Mr. Milton: I have tried to describe that with the growth of Star Alliance, with the growth into the Delta network and the international growth. Unlike a contraction exercise, we are talking about a significant growth exercise to points the world over to which Air Canada is not allowed to fly and to which Canadian does not fly but is allowed to.

Senator Spivak: You mentioned revenue growth, but what about price? How will all this affect the price that Canadians pay for air travel? That is a key issue, too. Will prices go down?

Mr. Milton: The market will dictate that. The lowest fare provider is the one that leads the market. In Western Canada, it is WestJet. On transcontinental routes, it is the charter carriers. They lead the market in terms of pricing. I do not see that that will change. Introducing cabotage via the U.S. is a pricing protection mechanism.

Let us face it, the majority of Canada's population is spread along a thin band of geography along the U.S. border. Thus, if you want to protect consumer pricing, perhaps the way to do it is to offer the ability for traffic to flow over the U.S., but on a reciprocal basis so that Air Canada can sell a ticket to someone to go from New York to Los Angeles. Then it will be fair ball and I am game to go.

Senator Finestone: Listening to what you have been saying gives me the sense that things are rather conditional. On the one hand, it is sort of like there is a big smokescreen through which we cannot see. On the other hand, we have a "David and Goliath" issue that will allow and determine the conditionality of your purchase of Canadian. You are talking about the need to negotiate with American. At the same time, we own the routes. I understand that Canada owns slots and routes all over the world. Canadian and Air Canada have divided up those slots. Canadian did not use all of them. You are presuming, hopefully in the best interest of Canadians and of business, that you will be able to reorganize so that we will have a profitable Canadian industry. How will you do that?

First, could you explain the routes and the slots to us and how you can take them over? How could American prevent you from doing that?

Mr. Milton: It is fascinating question. If you go back some five years when American was considering their investment, you will see in the transcripts some great comments made by Hollis Harris, the then CEO of Air Canada, who talked about the behaviour of American Airlines and the inevitability of them claiming ownership of Canada's route rights. What we have here is of real concern.

Clearly, it is the government's authority to grant route rights. Slots can be leased or purchased by airlines at airports around the world. In those cases, the slots can be owned by the airline. Ultimately, route rights are granted in this case by the Government of Canada. Under the bilateral agreements with other countries, those route rights specify that the airline of Canada must be a Canadian-owned airline. That is a requirement in the bilateral agreements.

By acquiring, in this case, Canadian Airlines, you would expect to be able to acquire the routes and slots that come with it. However, that is subject to government approval, and it would be subject to approval by the foreign government in any given case. What we have here, seemingly, is the ability of American to gum up that process. Even though Canadian's market capitalization at this stage is, perhaps, $80 million to $100 million, they are saying that they have the right to invoke a billion dollars' worth of penalties on breaking up the relationship between American and Canadian.

It is quite a remarkable situation in which we find ourselves. Over and above the route right implications and achieving full benefit for Canada, there are significant implications for employees at Canadian Airlines. I am increasingly concerned that American and Canadian are continuing to look at this from their own standpoint as opposed to from the standpoint of the employees of Canadian.

Regarding the comment you made about conditionality, I would say categorically that if American were not to be abusive - and I do not know how abusive they might be with regard to the dilutive rights or this $1 billion - we would buy Canadian Airlines. Thus, we would protect 16,000 people and we would make the airlines grow.

It is in this cloudy, difficult-to-see-through picture because of those arrangements and the fact that we do not know precisely what is there. I hope to gain clarity as we go forward. I hope that Canadian Airlines will take a leadership role in this matter in dealing with American Airlines so that we can obtain the best possible outcome for their employees.

Senator Finestone: If those rights belong to the Government of Canada, do we need the World Trade Organization to make some decisions for us? You are a private-sector company. We say the private sector should resolve private-sector problems. On the other hand, this matter involves a government-to-government undertaking. Where is the responsibility of the federal government, the Minister of Transport and the people who appeared before us from the transportation agency and the Competition Bureau? Whose job is it to start negotiating?

Mr. Milton: If we do not get a straightforward outcome with American Airlines, I will look for the support of the Minister of Transport in arguing the benefits to Canada of an Air Canada and Canadian outcome so that these route rights of Canada can be fully employed, which they are not currently.

Senator Finestone: This committee, along with the House of Commons committee, is mandated to give a response and some direction to the Government of Canada. Do I understand from what you have just said that we must await what happens with the negotiations among Canadian, American and yourselves before we can give some direction to the government, or do we suggest to the Government of Canada and the minister that they step in and act?

Mr. Milton: I think that what is in the interests of the employees of both companies and ultimately the country is quite straightforward. I would encourage you to do anything possible to encourage an outcome that is beneficial to Canada as opposed to beneficial to American Airlines of Dallas, Texas.

Senator Finestone: Let us move on to another issue, because I am sure that my colleagues can ask even more enlightened questions. I find that the whole issue leaves everything hanging in the air. We have gone from two buyers, two propositions to one proposition, a big stick, with all the positives in the negotiations on their side and a lack of clarity. It would seem that that is not your fault. I heard what you said.

Mr. Milton: Thank you for noticing.

Senator Finestone: You said that.

Senator Kirby: Many times.

Senator Finestone: There are two areas I want to go into. With respect to determining what is fair and what is not fair on that American-Canadian topic, what is the role of the Canadian Transportation Agency? We were really delighted to learn what they did yesterday. There is lack of clarity there, too.

Mr. Milton: From my standpoint, clearly there is.

The Chairman: It is not for the witness to answer the question.

Senator Finestone: I will leave that for the moment.

The Chairman: You do not have to answer the question.

Senator Finestone: I will move to something you should be able to answer. Fundamental to the quality, value and character of Canada is its bilingual nature. I was co-chair of the official languages committee. I must say I was distressed to note that there was not a great enthusiasm on the part of Air Canada to ensure, whether by law or not by law, the application of a fundamental quality of Canada. It is before the Federal Court. There is a decision to be rendered.

There are certain moral and cultural values at stake. Why is there even a question on the part of Air Canada or its subsidiaries about using both languages? The Cree air service, First Air and Canadian North fly using three languages. This country is very proud to have two languages, and having two languages is good for competition, yet, even in light of the absolute incredibility of the country, you do not honour that bilingualism, even in the breach. Why not?

Mr. Milton: We do, and we work very hard at it.

Senator Finestone: No, you do not.

Mr. Milton: I would welcome you or anyone else on this committee to come see how we work to ensure our ability to provide service in both languages to the greatest extent possible, which is an attempt at always being able to provide service in both languages. I would welcome you to come see what we do to try to make it happen.

Senator Finestone: Mr. Milton, I would ask you to obtain please a copy of Dr. Dyane Adam's presentation to us yesterday. Fifteen per cent of all complaints that come into the Office of the Commissioner of Official Languages are about airlines. Fifty per cent of complaints regarding airlines concern Air Canada. That is many complaints. I do not think that it is frivolous.

I can give you a complaint from your Maple Leaf Lounge in London a couple of weeks ago. I can give you a complaint about flying up North and into the Maritimes on Air Nova.

There has to be an obligation. You have had the matter referred to the Federal Court because you maintain that your regional carriers are not subject to the act although they are wholly owned subsidiaries. Whether they are subject or not, I should like to ask you, morally and consciously as a Canadian or as a person working in a Canadian company, do you not think it is about time that you really tried to apply it right across the board?

Mr. Milton: We do try to apply it across the board. I should like to give you greater visibility on how we do it. I realize that we are going to have service failures or language failures. Based on five interactions per passenger, we interact almost 75 million times a year with customers. We are going to have failures with that number of interactions, particularly since some of our work is subcontracted to other airlines or agencies. I recognize that there is not 100 per cent success, but you will not find another airline, and probably not another company, in this country that works harder at providing service in both languages. I am willing to put forward for your scrutiny exactly how we go about it.

Senator Finestone: I do not see that among the commitments you have undertaken. Therefore, I should like you to tell me whether you will, in the instance of your subcarriers and within the context of your obligations to the Canadian constitutional undertaking of bilingualism, take a really good look at what you have done, what you are doing and where you are going and include that as one of your goals.

Mr. Milton: I will definitely take a look at it and look at where we are going.

Senator Finestone: Will you commit to that?

Mr. Milton: I also commit to offer you the invitation to come visit. We work very hard at this. We take this very seriously, and I think the results are strong. Reports like that are not particularly reasonable nor entirely accurate. Again, I would be happy to discuss that in another venue in far greater detail.

Senator Finestone: I will leave with you the hope that you will read Dr. Adam's report and that you will pay attention to what she has said. Would you please get back to this committee with comment regarding page 6? Recommendation is made to the Government of Canada that they:

ensure, in the context of the restructuring of the airline industry, that the law stipulates that:

a) the Official Languages Act will continue to apply in its entirety to Air Canada regardless of its structure or to a future "dominant carrier" and

b) that the regional affiliates and other subsidiaries be subjected to Part IV (Communications with and services to the public), Part IX (Commissioner of the Official Languages) and Part X (Court Remedy) of this same Act.

It goes on to say that the Official Languages Act applies to the new corporation:

Without restricting the generality of the preceding, with regard to communications with and services to the public, where there is a significant demand, the provisions of Parts IV, IX and X of the Official Languages Act apply to the Corporation's regional carriers and other subsidiaries (such as Air Canada Vacations) as well as to carriers under contract to this corporation, both in their offices and in transit.

I remind you that section 25 of the Official Languages Act includes acting and performing in those subsidiaries.

Mr. Milton: I will be happy to look at it and we will get back to this committee.

Senator Finestone: That will help us.

Senator Forrestall: I have a supplementary relating back to the first part of the question. The government has indicated a willingness to take a look at changing the 10 per cent rule to, say, 49 per cent and take the $800 million in debt and convert it to equity in Canadian and immediately put it back on the block for sale. Would you be a bidder if that were to occur?

Mr. Milton: That is a hypothetical question, but I am focused on doing the right thing for our stakeholders. I will be unwavering in that approach.

Senator Forrestall: That is an answer. However, like most of your answers, it is conditional. I do not enjoy asking questions with a number of hypothetical conditions. On the other hand, I was prompted by you completely abandoning the use of hypotheticals in the last ninety minutes. Thank you, that is an answer.

Senator LeBreton: I am going to ask a question that you have answered many ways already this morning. It goes back again to the workers. It may not be fair, but there is a perception out there that a merger would result in Canadian Airlines employees being the big losers and Air Canada being the wig winner. That term was used in the media over the weekend. We all saw the television coverage of Air Canada employees celebrating and Canadian Airlines employees looking quite concerned and troubled by it all.

Mr. Milton, how does Air Canada plan to dispel this unfortunate view of winners versus losers? That is a big concern to ordinary Canadians who are watching this whole debate.

Mr. Milton: The operational competence of Canadian Airlines and the customer service capabilities of Canadian Airlines are as strong as any that exist. I want to latch on to that. I want to turn those aircraft to points where they can make money and quickly give them the strength and the winning results that we have been able to achieve at Air Canada. I know the potential is inherent in the Canadian Airlines franchise.

It is a fact that Canadian Airlines is losing a tremendous amount of money. When I joined Air Canada in 1992, we were losing $1 million dollars per day and I knew that we could make that franchise work and we did. In the same way, I know we can reorient Canadian Airlines and make it work in a big way. Let us get on with that quick transition to make Canadian Airlines work well. Let those employees win, because they have demonstrated that they have all the ability in the world.

Senator LeBreton: Are you trying to get Air Canada employees to tone down the rhetoric a bit in terms of dealing with their counterparts in Canadian?

Mr. Milton: In my view, and I must be truthful, I am extremely proud of Air Canada's people. Throughout this entire process, I repeatedly left voice mail messages for employees asking them to please hold back, to let the process run and let us deal with it. They listened and they did marvellously. Last week when that activity erupted, it was not me who asked them to state their thoughts. They just felt that it was time for them to speak out. I am proud of them for the way they handled themselves, for what they said and for the way they behaved.

Last Friday evening, the anti-Onex pins started coming off their uniforms. That is because Air Canada people are professionals. War was waged on Air Canada. It was a hostile attempt, contrary to the law of this country, to steal that company for $8.25 per share. Five thousand people were to be laid off, the bulk of them from Air Canada. They had every reason to be concerned. They behaved admirably.

We are extending our hand to Canadian Airlines to get them on a winning track very quickly. We can do that and we will do that together.

Senator LeBreton: Referring to the proposed new low-cost air carrier, why was Hamilton chosen as its base?

Mr. Milton: Hamilton has a very large catchment area around Toronto. There is significant congestion in Toronto. I am sure many of you have flown in and out of Toronto on flights that have been delayed for all sorts of reasons, often related to congestion. There is less congestion at Hamilton. It is a low-cost environment, which is obviously conducive to low-fare operations. It benefits from the significant market size of Toronto. It fits all the parameters of precisely the type of airport and catchment area needed for this kind of airline.

Senator LeBreton: What does the start-up of a new airline do to your other regional airlines within the Air Canada or Canadian family or even WestJet? I am not an economist or a lawyer. We have been shown how airfares have risen. I do not understand how Air Canada can compete with itself through this new airline. Do you see this new company as a WestJet for the East?

I just do not understand. Yesterday, the Canadian Auto Workers gave a statistic that domestic airfares, including discounts, are up 22 per cent since 1990 versus an increase of 16 per cent in the CPI. The total cost has increased 76 per cent since 1992. I do not understand how Air Canada and a new, low-cost carrier will affect the other regional airlines. How can the consumer benefit when you are basically competing with yourself?

Mr. Milton: The consumer benefits from extremely low fares. These fares are so low that people who would have driven cars or taken the bus will now take the airplane. Airlines like WestJet are the examples. Such airlines have been started up in a lot of markets in Europe and in the United States. United Airlines has United Shuttle. Delta has Delta Express. U.S. Air has MetroJet. All those are unionized operations that operate on a different basis - high productivity in terms of aircraft utilization and aircraft seating density.

It is a different product. You do not look for food service. The seats are tighter and there is probably no first class. It is a different market segment. It is a market segment that provides very low fares. There will not be 28 flights per day from Toronto to Montreal. There may be one or two flights per day from Hamilton to somewhere in the Montreal vicinity. A very different type of consumer will be using it and the price will be very low.

This does not mean Air Canada is competing with itself. All the airlines I mentioned - United, Delta and U.S. Air - also have thriving regional carrier networks. This is a whole new segment that has been introduced and developed very successfully by many key airlines. The biggest and most successful of them all, Southwest Airlines, is also a highly unionized operation.

This idea is about making things happen. There is less constriction and fewer cost constraints at the airport. There are more seats in the airplane and the service is low frequency. It does all fit together. What we are talking about doing is not unique. It is being done by leading world airlines all over the place.

Senator LeBreton: Are you talking about a different customer base then? You are not talking about taking customers away from Air Canada.

Mr. Milton: These are customers who come out of their cars or buses. If you ask people in Western Canada about WestJet or if you look at examples in the U.S. or Europe, where there has been a proliferation of these carriers, guys like Easy Jet and Ryan Air, you will find a whole new level of travel by people who were not previously travelling on aircraft. We are creating this element of competition in Eastern Canada. That is the way we see it.

Senator LeBreton: You see it as operating just in Eastern Canada? You do not see this new airline crossing over to compete with WestJet?

Mr. Milton: I am open to where it goes, but currently there are so many opportunities east of Thunder Bay that expansion will take quite a while. We have been talking about doing this for a couple of years. We have been successful at growing Air Canada with our existing fleet but we have not been in a position to do this.

Last year we had a pilot's strike which set us way back. We took a bunch of aircraft and parked them in the desert. We had the potential, if we worked things out with our pilots, to create a low-cost airline. Our dialogue with our pilots is improving dramatically. There are many opportunities there. With the potential acquisition of Canadian Airlines, instead of parking the surplus equipment and laying people off, we will put them to work at the new airline. As we have said here, though, no one will be forced to go to the new airline. However, I predict that with the formulas that will come up on compensation and the new carrier - and those formulas often involve profit sharing - many people will want to go to work for this new airline.

Senator Fairbairn: I wish to make a comment before I ask my questions. You commented about your workers, your employees, at Air Canada. I certainly commend your support for them, your appreciation of them and your commitment to fight for them in what has been a very unsettling and difficult-to-understand series of events in the last several weeks. I do not believe you would wish to leave the impression that Canadian Airlines and your counterpart Mr. Benson have any less commitment to the worth of their employees than you have to the worth of yours. I think that inference could have been taken from some of your earlier comments, leaving American Airlines aside. One reason for being where we are at the moment is that, over the many months of concern about the viability of Canadian Airlines, there has been an effort on the part of Canadian Airlines' management to get a different situation here in Canada, with the interests and concerns of those employees in mind.

Mr. Milton: I would not want that impression left about Mr. Benson and his relationship with his employees. I have tried to offer the willingness on our part to take the hand-off and protect the interests of those employees.

Senator Fairbairn: I understand that. I just drew an inference from remarks made earlier. I was sure that you were not implying something that you would want to have on the record.

Mr. Milton: Thank you.

Senator Fairbairn: Going back to questions that Senator Poulin was asking, much of the discussion in this debate has been on national routes, on international routes and on the areas of high passenger density, et cetera. I come from Lethbridge, Alberta, which is a small city in Canadian terms, although not so small in Albertan terms. We are dependent on the ability to transport ourselves, either within the province or across the country, through regional airlines. Both Air Canada and Canadian Airlines fly into that centre. There is enormous anxiety in this region of Canada that has so many miles to travel, so few people and so many small communities and small centres. There is anxiety about this whole debate and where they end up.

I took from the answer to Senator Poulin's questions that although service might be somewhat reduced in smaller communities, it would nonetheless continue. I do not believe you have put a guarantee on anything, but that would be your intention.

It is not just passengers that are important in the regional considerations; it is the airports themselves. These small communities own their airports, with small tax bases in the case of my area. Certainly a small city is involved, but it has largely been an amalgamation of small towns that have come together to save this airport. I am sure it is the same in many parts of the country. They are hanging in there by their fingernails in order to maintain those airports. Disruption in service and loss of flights concerns not only passengers but the very future of those airports.

The earlier offer that is no longer on the table did contain a commitment to work with those airports directly and with communities and the government to ensure that in all of the shifting that goes on and in the solution to this situation we will not find parts of our country disenfranchised from transportation where no other transportation is available. Consider Fort McMurray, for example, where there are no roads. It is critical in the development of your plan.

These are not just names on a map; they are people. For their economic and personal lives they need these links, and we are anxious. We talked with the Competition Bureau and Mr. von Finckenstein about this. In the beginning, as you wait for competition to come in, any gap could be absolutely devastating for the airports themselves and the communities that they have served.

Mr. Milton: From the standpoint of commitment to communities, I will commit before you that there will be no cessation of service to any community currently served. In terms of your question on our willingness to participate with the local communities, we should and will do that. As I said earlier, there could be some modification of how the markets are served. Markets that have eight flights a day might end up with six, but those six will be spread out during the course of the day more evenly than they probably are currently with the two airlines operating the way they are. I am committing before you that every community that has service today will continue to have service without interruption under the plan that we have.

Senator Fairbairn: You welcome competition from airlines like WestJet.

Mr. Milton: Absolutely. They keep us on our toes.

Senator Fairbairn: I was watching you on television last night. Some have talked about a smoke screen or whatever, but I think it is downright difficult for ordinary Canadians to understand what is going on here. I really do. You have been forthcoming in what you have said today about your desire to take over Canadian and your desire to have it in a rejuvenated position and to be a valued part of a larger solution. With American Airlines last night, you indicated quite categorically that if you are looking at $1 billion of penalties, you are not going there. Am I correct that that is not on, as far as you are concerned?

Mr. Milton: We cannot afford that. I do not think we could justify it. Given where Canadian Airlines is at present, and given where their market capitalization is, it does not make any sense. It is not reasonable. We are willing to be reasonable in negotiations with American and Canadian. I would be happy if Canadian said, "We will get on with what is right for Canadian Airlines and its employees, and who cares about American Airlines. We are ready to go."

I should like to think that if you checked with people who have been at Air Canada over seven years, they would confirm that I mean what I say. I am being sincere. I will do my best to get on with this and to protect the interests of those people, but if I cannot get there I cannot be successful. That is really where I am right now, and I do not have clarity as to precisely how this will unfold.

I agree this must be confusing for Canadians watching, because it is not clear to us. We intend to challenge, among other things, what precisely is the relationship between American Airlines and Canadian Airlines. Many of the things they claim they can do have not, to our knowledge, been filed with the regulators.

I must admit that on Friday evening I was fascinated by American's reaction to the announcement of Onex pulling their bid. American's reaction to my saying that we now intend to proceed with purchasing Canadian Airlines was, "Canadian Airlines is not for sale." How can they say that if they do not own it? They own part of it, but they say they do not control it; however, now they are saying that Canadian is not for sale. This is problematic; this is what we are trying to sort out.

It will take a bit of time but, given what is happening at Canadian, I hope not much time. I wish to be crystal clear: If American were out of the picture, without their penalties, I would buy Canadian Airlines today if their shareholders agreed. We would write the cheque and we would protect those people today.

Senator Forrestall: For how much? Give us a figure.

Mr. Milton: More than what it is trading at today, and I do not know what it is trading at today.

Senator Fairbairn: If that is the case, is it logical to assume that under those circumstances you would assume the debt?

Mr. Milton: No. We will need to work with creditors. The piece to me is protect the employees and make the franchise happen. Many of those creditors, as I said earlier, are our creditors. I believe we have the basis upon which to deal with them reasonably in a way that is acceptable and beneficial to both. However, the creditors have been charging Canadian very high interest rates, often twice what Air Canada has been paying in interest rates in the last couple of years. They charge those rates because they feel that there are additional risks. If they want that additional reward they know there is risk, and now the risk has come home to roost. We believe it is only fair that we deal with the creditors; however, we will take care of the employees and make that franchise work if we get the chance.

Senator Fairbairn: I asked the question about the creditors because if it turns out that that is a real negative then that is when you start seeing the physical effects - that is, the aircraft itself disappearing from the tarmac.

Finally, there is a fear - and I will use that word today because you are here and this is part of the hearings - that the end result will be that with all of these conditions what we will see is the bankruptcy of Canadian Airlines. Probably for everyone concerned, that is the most undesirable conclusion of all in this whole business because then no one wins, certainly not the employees. You know that fear, that possibility is out there. May I take from your statements today about making Canadian win that you are in no way even considering that option?

Mr. Milton: That is not where we are heading. I have tried to be as clear as I can. I know there is tremendous history here, but as I see it, the obstacle is American Airlines. The bankruptcy of Canadian Airlines is absolutely not a necessary outcome. As convincingly as I can look you in the eye, I tell you that we wish to make it work and we wish to protect those people as quickly as we can.

Senator Adams: The only way I can travel to Ottawa from the North is by aircraft. We do not have a highway, but even if we did it would take perhaps six weeks to get here by car.

Canadian Airlines appeared last week before this committee. We are concerned in the North, where Canadian operates, that there may be a different structure and different shareholders. I know that people have bought shares in Canadian Airlines and they are in direct competition with First Air through Air Canada.

If Canadian Airlines goes bankrupt, that is, if the deal does not go through with Air Canada and American Airlines, what will happen to Canadian North Airlines?

Mr. Milton: To be honest, I am not 100 per cent up to speed on the ownership structure of Canadian North. I believe they spun it off approximately a year ago. However, we are aligned with First Air, which does tremendously in association with us. Between First Air and Canadian North, in an Air Canada outcome, I commit that you will have every bit of service that you have today in terms of access to communities, and it will be the good, attractive, competitive service as you know it today.

Not knowing the exact ownership composition of Canadian North or what that relationship is right now, it is difficult for me to comment on that but I will commit to the levels of service.

Senator Adams: In the meantime, if Canadian Airlines goes bankrupt and if Canadian North continues, would there be competition with First Air and Air Canada? How would the system work?

Mr. Milton: If it is, in fact, independently owned - and, again, I am not positive of that - it would be an independent carrier at that stage and First Air would be aligned with us. In that kind of situation I am willing to look at precisely what is involved, what the ownership structures are and how they are aligned, and how we make a sensible outcome going forward to ensure the service is there.

Senator Adams: My concern is that if something happens that way with First Air and if Canadian North is merged with Air Canada, there will be no competition in the North. The fares are high enough now, but at least they could have competition with rates and there could be other small airlines, such as Calm Air and Skyward and Keewatin Air. People have a connection to Canadian Airlines and some of them have a connection to Air Canada. It is difficult for us if you do not make up your mind about that.

Mr. Milton: In any circumstance, I should look for carriers that are not under the Air Canada umbrella to have full interline access - that is, the ability to issue tickets on each other, check bags on each other and flow passengers on each other. In any circumstance, we would be looking to have full interline rights with these other carriers.

Senator Atkins: I gather we are now operating under a hub and spoke system in this country. I assume that Air Canada likes that system and that it is the one most profitable to them.

Is there any possibility that under your new proposal you would make some changes in the way you would operate under that system? I am thinking that a number of cities are serviced indirectly rather than directly. You can correct me on this, but I understand you cannot fly from central Canada, say, to St. John's, Newfoundland, without going through Halifax. Is there not a possibility that some direct flights to these destinations would be profitable? Can the system be changed in a way that would make it more consumer-friendly? Many people are frustrated by the fact that they cannot get to their destination without going through a hub.

Mr. Milton: That is a good question. Because of the population configuration in Canada, we have less of a hub-and-spoke airline market than you would find in many other countries. Toronto is clearly the principal hub but there are not many big cities to the north of Toronto to build the hub. There are obviously several to the south. We have built up Toronto significantly, and that has made other things possible. As you build the hub and increase the mass and more and more flights come in, you can support more and more flights going out. In the last few years, we have worked on some new hub bypass routes. We have introduced routes such as Toronto-St. John's, and Halifax-Calgary non-stop. As a result, you will definitely see passenger flows that bypass a city like Toronto. I am absolutely confident, without giving you examples, that there will be new routes that can be made to make sense. Montreal to Winnipeg is once a day; otherwise, it flows over Toronto. Ottawa to Winnipeg is twice a day; otherwise, it flows to Toronto. You will see more service on those routes. On routes like Ottawa to Calgary, you will see better distribution of flight times.

Yes, in my estimation, as a result of this you will indeed see reflowing of traffic onto routes that are not currently served non-stop.

Senator Atkins: Is there a policy about having direct routes from capital to capital?

Mr. Milton: There is no such policy. Our network decisions are based on market size or market potential.

Senator Christensen: I have one question for you. First, though, I wish to reiterate what some of my colleagues have said about the importance of the smaller communities, particularly in the North and other parts of Canada, and the assurance that is needed for the public that those small communities will continue to enjoy the services that they have enjoyed to the present time.

In the area I come from, the Yukon, Canadian Airlines has been the major carrier since the beginning, because it started in the North. Although there have been attempts at competition, they have not been successful because the region cannot support more than one carrier on a 12-month basis. We have high passenger loads in the summer, and very often other airlines will come in and cream off that business and leave Canadian to take the lower-passenger winter months.

What is Air Canada's position on the entitlement of air mile points if there is a merger?

Mr. Milton: Clearly, in an acquisition of Canadian Airlines, all the points that are in Canadian Plus will remain valid and alive, and we will absolutely continue frequent flyer mileage programs because, on a global basis, it is a competitive necessity.

Senator Christensen: Thank you. That is an area of great public concern.

Senator Forrestall: I have a question by way of supplementary to Senator Atkins' questions. Incidentally, when you speak of Eastern Canada, do not speak loosely. This is Central Canada. Eastern Canada is way out there in Nova Scotia, Prince Edward Island, Newfoundland and New Brunswick. We do not like this confusion about how you describe Eastern Canada.

Is there any danger that flights emanating from Halifax will terminate in Hamilton as opposed to at Pearson?

Mr. Milton: That is a completely distinct proposition. Again, based on the previous question, you will see enhancements in service in many markets not currently served. A possible example out of Halifax, with a combination of activity, would be Chicago or Winnipeg, bypassing the hub in Toronto. Those markets are not currently served non-stop.

Senator Forrestall: I agree. You did not say so but I gather that you are saying no, it will not happen.

Mr. Milton: Absolutely. It is distinct. You might get a low-fare airline flying from Hamilton to Halifax, but that will augment what is already there.

Senator Forrestall: I see. That is a different story, is it not? Once again, we are relegated, and without competition. We would be flying Dash 7s, I suppose. Is there any chance of you putting any jets back on?

Mr. Milton: On what?

Senator Forrestall: On our local routes. It is a long way from Halifax to St. John's.

Mr. Milton: Halifax to St. John's is all jets.

Senator Forrestall: Is it? It was not the last time I went, so that tells you how long ago it was, but I appreciate that.

I am very concerned because I have had reports about captains on the flight deck issuing a very direct order not to discuss this merger while on the flight deck. Do you know anything about that? Can you comment on it?

Mr. Milton: I have no knowledge of that, but on the flight deck it is the captain's discretion to determine what will or will not be conducted on the flight deck. However, I have no awareness of it.

Senator Forrestall: I can understand the elation of your pilots, but you will have to understand that this comes from a Canadian flight deck on which the captain was terrified of what was happening, and there was anger and frustration. There was a loss of attention, and that is a dangerous situation.

Senator Kirby: I have three extremely precise questions. They are all supplementaries to other inquiries.

My first question is in response to your comment to Senator LeBreton, Mr. Milton, about your low-cost airline serving a different market segment than that which is served by Air Canada, what would typically be called the value-brand or the price-brand segment. I am totally puzzled as to how you can think it would be in the national or the public interest to allow an airline with your muscle to come in and control that market segment as well as controlling the basic typical market segments now served by Canadian and Air Canada. How can you possibly justify that, using words like "pro-competitive", as you have done in a variety of places?

Mr. Milton: No one is doing it.

Senator Kirby: It is not clear that no one is doing that. One can make a compelling argument, using some of your own responses to other senators, that companies like Canada 3000 and WestJet and so on are capable of doing that and are in that price segment now.

Mr. Milton: They do not fly to Hamilton now. If they want to get into that segment now, that is fine, but they do not do it.

Senator Kirby: Under the deal that you have struck with Hamilton, they could not fly to Hamilton because, as Pem-Air discovered, your proposal with the Hamilton airport is to shut everyone else out of that airport, which is exactly what the president of Pem-Air has said.

Let me get to my second question. In response to Senator Spivak, you were positive about the benefits of Star Alliance. If Star Alliance is that good, why is it, as other witnesses told us last spring, you were prepared to leave Star Alliance and join oneworld?

Mr. Milton: We have a fiduciary responsibility to look at any opportunity to enhance the interests of our shareholders and overall stakeholders. Canadian Airlines and American Airlines approached us due to the impending crisis at Canadian to discuss an acquisition or merger between Air Canada and Canadian at the time.

With American at the table, it was very clear that oneworld would have to be part of that outcome. They made that clear up front. Air Canada and American were not able to come to a meeting of the minds about the transaction value. We were about $1.7 billion off, and a key component of that was the relative merits of Star versus oneworld, which was made clear to American.

We could not agree on the price. However, from a fiduciary responsibility standpoint, if it had been very clear that it would be beneficial for us to switch to oneworld, we could have and should have, but we did not because it was not.

Senator Kirby: I understand the second comment. However, had it been in the interests of your shareholders, you were prepared to switch to oneworld as opposed to staying with Star Alliance.

Mr. Milton: If it was the right thing for our shareholders.

Senator Kirby: You have made it very clear that you want to buy Canadian, provided the conditions are right. You then go on to speak about the conditions being such that the potential villain in the piece is American Airlines, but above all else the villain is clearly not you.

When I asked you questions earlier about competition policy, you responded repeatedly with comments on the transborder issues but not on the domestic competition questions and you ducked the 10 per cent issue.

My general view is that you ducked the important domestic issues. Your basic position has been that if Canadian goes under, it is not your fault: it is American's fault. Pardon me for saying this, sir, but I am not sure that Air Canada is not still following the strategy it has followed for a decade, which is fundamentally - and I understand it from a business standpoint though it is not in the public interest - that the bankruptcy of Canadian is the preferred alternative, because then you can buy from the receiver the assets that you want at a much cheaper cost. You said absolutely nothing today that would convince me that that is not the strategy you are following. That is a comment.

Senator Spivak: It is amazing to me that despite the 25 per cent ownership rule and the Canadian Transportation Agency's review of American's deal with Canadian, we are left with AMR Corporation controlling basically every key decision that that airline has, including sale, management, et cetera.

Is there anything hidden in the agreements that you have made with Lufthansa, United or any one else that we should know about in terms of control?

Mr. Milton: There is absolutely nothing hidden. As I mentioned earlier, it will transition in short order to an overall governance package for Star.

If the law is changed, any enterprise in the world, if it is legal, including Onex, will be able to buy Air Canada. They will be buying into an airline that is in a Star relationship for 10 years, which we have computed to be by far the superior alliance. However, there is no restriction or control.

Senator Spivak: Is it all perfectly transparent? Can all of those documents be tabled?

Mr. Milton: Yes.

Senator Roberge: In looking through my papers, I see that there is a joint venture created with Lufthansa and United with $230 million of non-voting preferred shares, but convertible.

Mr. Milton: Right.

Senator Roberge: Can you explain to me how they are convertible? Is it in common shares, votable shares or some other way?

Mr. Milton: They are convertible in non-voting shares and on very attractive terms to the Air Canada shareholder with a strike price of $24 to $26. We have negotiated at arm's length a transaction without control, with liquidated damage numbers of $250 million in contrast to the $750 million that was negotiated with American Airlines and oneworld. If you look at what we negotiated under pressure, it looks terrific relative to what was negotiated for zero value by American Airlines, Canadian and oneworld without the pressure.

I should like to return to the previous question. It is interesting that if you look back in history, one of the deciding issues in American's initial involvement with Canadian was the dissolution of Gemini, another Canadian company that was demolished by American Airlines.

How many times do you have to get hit by a brick before you wake up and say, "There is an issue here that is not Air Canada"? We picked up Gemini, we made that company work, and it is very profitable and employing Canadians. Here we are again, saying that we are willing to fix the problem that we did not cause.

Senator Spivak: You have often made the case about being pro-Canadian. Although the government has not asked us, do you think we should make some recommendations with regard to the role of the Canadian Transportation Agency in order that we might see real control rather than just paper control?

What difference does it make how much of the voting shares an American company owns if it controls every single major decision? Should we recommend something to the government?

Mr. Milton: I think that is an excellent issue. I said earlier that it is not up to me, it is up to the country. It is up to Parliament to determine what rules will bind the industry.

Senator Spivak: However, you are a key player.

Mr. Milton: It seems to me that whatever is put in place should be enforced. You should not get into these levels of manipulation and control that we are currently seeing with American at Canadian.

Senator Spivak: It is within the law, but de facto it is control.

Mr. Milton: I agree.

Senator Spivak: As a key player, you are saying that we should look at that; is that correct?

Mr. Milton: Absolutely; you should address how it is enforced.

Senator Finestone: Senator Kirby asked you if your strategy was to let Canadian go bankrupt. What is your answer?

Mr. Milton: My response would be a definite "no".

Senator Kirby: In fairness, I do not think I asked him that; that was my conclusion.

Senator Finnerty: Therefore, you would not agree with Senator Kirby's comment.

Mr. Milton: That is correct.

Senator Finestone: Are you of the view that you will be able to negotiate with American? We have had failures all along the way.

Mr. Milton: I do not know. I must believe that we have the ability to produce an outcome that will be attractive to American Airlines in terms of their ongoing relationship with Canadian, where Canadian is owned by Air Canada. I should like to think so, but I do not know.

Senator Finestone: You spoke about the importance of coming to a decision on how to handle the employees. You said that you were extremely empathetic, and I believe you are, to the place and the role of the employees in the success of the company, be it Canadian or Air Canada. You would also like to go into a dialogue with your employees.

Mr. Hargrove was here. He will be an important person for you to dialogue with; would you agree?

Mr. Milton: Absolutely.

Senator Finestone: Do you think you will be able to do that?

Mr. Milton: Mr. Hargrove is unique among of the union leadership with which I deal. We have a bit of a problem with dialogue because as the last time we met, which we agreed was to be entirely confidential, there was within hours a live news broadcast of his discussion with me. I have difficulty operating on that basis.

I have an excellent rapport with our employees within the CAW. I am confident that I will be able to move forward with a basis of an excellent relationship with the employees of the CAW of both airlines, with Buzz Hargrove and with all the union leadership involved.

Senator Finestone: Well, Mr. Milton, you must recognize the fact that they are the major union in 14 sectors of the economy with which you deal. You must both find a way to dialogue with each other.

Mr. Milton: I agree. However, I listen to my employees and our employees were very unhappy with Mr. Hargrove last week.

Senator Finestone: Canadian employees were very unhappy with Mr. Hargrove a few months before that. I do not think that that is the issue.

Mr. Milton: My issue right now is Air Canada's employees. If it develops that the issue is protecting Canadian employees, I will protect them with every ounce of my existence. However, at present it is Air Canada's employees who are upset and I protect the issues of Air Canada's employees.

Senator Finestone: That is as it should be, and the issue will broaden if and when you acquire Canadian Airlines.

Mr. Milton: I agree.

Senator Finestone: However, yesterday Mr. Hargrove and Mr. Fane said that they had discussed, with over 100 of the Air Canada leadership and over 70 of the Canadian Airlines leadership, the issue of one company with two business units, and that they had received approval.

Do you envision one company with two business units? Do you envision one company with two separate seniority lists?

Mr. Milton: The seniority list issue is an evolutionary one involving dialogue with the employees. Initially, I envision two operating units, which is consistent with the position of the CAW as indicated in its ads. I think that is the right place to start.

Senator Finestone: From listening to Mr. Hargrove and others I have discerned a common line. First, the industry has excess in some areas, is over-programmed in some areas, is underused in others, has excessive equipment in some places, and not enough in others. Essentially it is a redistribution matter.

Second, the fact that all employees are competent and capable begs a question related to pay equity. The Federal Court has said something significant about that. Do you believe that pay equity applies to your employees? You will have two or three levels of workers within the industry; those who work on the low-cost, low-fly Hamilton initiative; those who work on your regional airlines; and those who work on your two major international airlines. However, you will have overall responsibility. Will you have equal pay for work of equal value?

Mr. Milton: There are existing contracts at Canadian and Air Canada with identical pay. I have no doubt that that will be the outcome.

With regional carriers or low-fare airlines there are different ways to compensate. As I mentioned earlier, profit sharing is one possibility. There are many more current ways to compensate people, often on a much superior basis. These matters should be open for discussion between the employees and unions in order to allow for the creation of winning compensation packages and work schedules for people.

Senator Finestone: Will that leave space for growth and development of personnel?

Mr. Milton: Absolutely.

The Chairman: Thank you, Mr. Milton, Mr. Port and Mr. Dee. Our next witness is Mr. Kinnear from Canada 3000.

Welcome, Mr. Kinnear. Please proceed.

Mr. Angus J. Kinnear, President, Canada 3000: I appreciate the opportunity to spend some time with the committee to explain the position of Canada 3000 on the Canadian aviation industry.

I should like to first spend a few minutes introducing you to Canada 3000. I have distributed a route map that shows the destinations to which Canada 3000 flies. Canada 3000 has been in business for 11 years. We have a turnover of Can. $740 million. We are the third largest passenger air carrier in Canada. We carry just short of 3 million passengers annually. We are often referred to as a "charter" carrier, but 50 per cent of our passengers fly on scheduled service. We are a charter carrier outside of North America, but a scheduled service carrier within North America. We fly both domestic and international flights, and we serve 94 cities around the world. Eighty per cent of our passengers buy an air-only ticket, while 20 per cent buy a package holiday. In the last fiscal year, we carried 852,000 domestic scheduled passengers. That was a 24 per cent increase over the last two years.

We operate modern airplanes. We have three types of airplanes. The A330-200 has a global reach. The Boeing 757 serves a great deal of our markets, both in North America and in Europe. Our six A320 aircraft, which are also flown by the major airlines, are ideally suited to domestic and North American routes. We operate the highest annual utilization in the world of all three types of aircraft, which allows us to provide reliable and affordable air travel to Canadians.

In the last three or four weeks we have head a lot of discussion of all the problems the changes in the Canadian aviation industry are likely to cause. I shall suggest to the committee four solutions to some of the problems discussed this morning.

The first is runway slots. It is vital that the committee understand that competition can only occur if people are given access to the major airports in Canada. At the present time, between 4 o'clock in the afternoon and 8 o'clock in the evening there are very few, if any, available slots at Pearson airport. Air Canada, Canadian Airlines and their associates control 81 per cent of those slots, making it virtually impossible for any other carrier to compete.

Some of you have asked: "Why Hamilton?" The answer is that you cannot run an additional service out of Pearson during peak hours because there are no slots available. You must go to Hamilton. Of course, Air Canada has now bought all the slots at Hamilton, so that is a futile exercise for anyone wanting to mount competition. They have closed the door on competition and, unless the government seizes the opportunity to control that, we will have a monopoly situation in Canada.

We propose that no airline, affiliate, group of airlines or commercial airline alliance, should be permitted to control or have control over more than 65 per cent of the available runway slots at any airport in Canada during any 15-minute period.

There are 82 slots available at Pearson in an hour - 21 slots every 15 minutes. Our proposal is that the monopoly carrier and its associates be able to use 14 of those slots. The other seven in that 15-minute period would be spread over the other carriers that serve Pearson, whether they be international carriers, American carriers operating transborder, or the Canadian carriers that presently do not have access to those slots. If we fail to take some control over the slot positions at our runways, including Hamilton, then there will be no competition in Canada, and there can be no competition in Canada because there will be no access.

Obviously, there is great concern about access to smaller communities. It would be wrong of me to say that Canada 3000 is about to start a whole series of routes serving smaller communities. That is not our main business. I am sure that there will, however, be airlines that wish to operate out of smaller communities, if they have the ability to gain slots at the main airport terminals where the people from smaller communities wish to go. However, there is a way that we can serve smaller communities.

Our proposal is that an air carrier which holds a monopoly position on any domestic route in Canada must be required to offer add-on fares to all other carriers, pro rata, as if it were constructing add-on fares for connections to its own services. For example, if you live in Timmins and you want to go to Japan, you fly from Timmins to Toronto and connect with a service to Japan. Presently, the major carrier is able to direct the traffic originating in Timmins all the way to Japan because they control the add-on fare access between Timmins and Toronto. We are saying that, if you are a monopoly carrier operating between Timmins and Toronto, then whatever add-on fare you allow your own carrier, you must offer to other carriers. In this way, the people of Timmins are not forced to fly on only one airline because they cannot get off the system once they have joined it because of the value of the add-on fare.

Senator Poulin: Mr. Kinnear, could you explain to us what you mean by add-on fare?

Mr. Kinnear: It is a fare where a series of routes is constructed by making a number of different fare additions to arrive at the total route structure. It is where a passenger is not going from point A to point B directly, but, rather, through another hub point.

Senator Poulin: Does it have anything to do with the cost?

Mr. Kinnear: Yes, it has very much to do with the cost. If you were flying only from Timmins to Toronto, you would pay a higher fare than if you were travelling a much longer route where the fare would be proportionately lower for the Timmins-Toronto sector. The bigger carrier will not make that add-on fare available to other carriers. Thus, you cannot afford to change your carrier when you get to the hub.

The current air charter rules in Canada are cumbersome and outdated. They need to be revised and modernized to reflect current realities, allowing international charter services to compete on equal terms with scheduled service providers. For example, this summer, we operated a daily A330 service between Toronto and London Gatwick. Air Canada and Canadian serve Heathrow. The difference between our service and their service boils down to the rules. We are not permitted to sell one-way tickets on our service. Our passengers are supposed to spend six nights in their destination. We have not come very far from the days when you had to be a member of the budgerigar society in Max Ward's time before you had access to economical air travel. Many of those silly rules have never been changed.

Similarly, Canada's existing international scheduled air policy is anticompetitive in current circumstances, as it was designed to serve the specific needs of Air Canada and Canadian Airlines. Present circumstances dictate a thorough review be undertaken of Canada's scheduled air policy, and that an open skies policy be adopted to further competition. For example, this morning, a Canada 3000 A330 left Sydney, Australia, on its way back to Canada. No other airline that serves Australia carries a Canadian flag. However, we are not recognized as a Canadian carrier by the Canadian government. We operate a charter service. The official Canadian carrier to Australia is Canadian, but they do not go past Honolulu. They change their passengers on to their code-share partner and they fly on via Qantas.

You must be careful. The code-share business is the business of trying to co-opt all of the airlines into two major airline forces in the world. What we are watching today is the two major airline alliances fighting over the bones of the Canadian aviation industry. It is not a Canadian matter; it is global airline competition that we are witnessing happening here.

Senator Finestone: Is this an issue that is being addressed? You say you are the only carrier sporting the maple leaf, which is obviously a problem for many other airlines. Is that matter before the World Trade Organization?

Mr. Kinnear: No, it is not. It is a matter of Canadian government policy which dictates that only two carriers thus far have been given access to international routes. There is also another requirement that you can only have competition on the route that has more than 300,000 passengers a year.

Again, we are locked out by our own legislation in the way in which we can compete. The legislation was provided to protect Air Canada and Canadian.

Senator Finestone: Are you saying it is anticompetitive?

Mr. Kinnear: That is correct.

The association of European airlines is proposing, in Europe, a complete overhaul of all legislation affecting airlines in Europe and the U.S.A. The ultimate aim is to establish a free market zone with no airline ownership or cabotage restrictions. The Canadian government should seize the initiative to create a completely open skies environment within NAFTA, the area of North America, which would then be expanded to incorporate both NAFTA and the European Union member countries. This would lead to deregulation of air travel in Europe and North America, and would permit free competition among all carriers within this enlarged market area.

The United States government has now completed 36 open skies agreements with other nations around the world. Canada has one between Canada and the U.S.A. All of the airlines within Europe may now fly between each other's countries and within each other's countries. It is expected that the Americans and the Europeans will come to a deal within the next two to three years whereby any of the American carriers can fly anywhere in Europe, and any of the European carriers can fly anywhere in America. Canada is most likely to be left behind.

If we are concerned about competition, and we want to have competition, and we believe that our air carriers are capable of global competition, then we should not be frightened of open skies. We should be able to serve the markets both in Canada and elsewhere. That does not mean that we should allow other carriers to operate within Canada without reciprocal rights in their countries.

Senator Forrestall: Mr. Kinnear, you are a welcome breath of fresh air. Your proposals took me back a few years.

I would like to deal directly with what is happening and ask you to respond to how it may impact upon your company. Your suggestions regarding slots are absolutely bang on. How will it affect you if Air Canada is successful in this process? How will that impact upon you in the absence of a strong, major competitor in the marketplace for Air Canada? How will it affect Canada?

Mr. Kinnear: We have competed with Air Canada and Canadian for 11 years, and we compete with their alliance partners as well. The market is changing, and we will have to learn to adapt to it, as must everyone else.

The concern for the moment, and it was mentioned in other testimony, is that we are not quite sure what the rules are yet. The big debate is over the definition the rules and the game we are playing. Are we supposed to turn up with ice hockey gear or are we bringing along baseball bats? Week after week when you read the newspaper, another set of rules is proposed.

All of us can compete, all of us can provide air service to Canadians, and all of us can make our corporate decisions if we have a clear set of rules under which we are operating. Clearly, part of my submission is that those rules that we have are either out of date, unenforceable, or do not apply to what is actually happening in the marketplace.

We must first set up a set of rules that we must all play by, and then we will be able to provide a service that meets the requirement to abide by the rules and provide service in the marketplace.

Senator Forrestall: You confuse me a bit. You were talking about the benefits to Canada 3000 from an open skies policy. Now you are talking about selective regulation. You used the words "rules" and "regulations" as interchangeable. Which is it? Is your protection in a deregulated industry, or do you need some selective areas of regulation?

With regard to the availability of slots, I would point out that we cannot continue to expand Pearson Airport. Planes will get bigger, and more and more people will also be flying. It is almost impossible for us to imagine what the airline industry in Canada will be like 50 years from now..

Mr. Kinnear: Over the years, the number of slots at Pearson has supported a certain number of passengers. However, in the last five years we have seen the number of passengers being landed at Pearson diminish with the introduction of the smaller regional jets.

You heard Mr. Milton say that he expects to see a reduction in the number of flights that he will operate from smaller communities, possibly with larger airplanes. That will help the Pearson situation.

If you want competition, you must restrict the use of the monopoly carrier to roughly two-thirds of the available slots; otherwise, there can be no competition. This will not prevent Mr. Milton from increasing the business of Air Canada. As he said himself, he can use larger airplanes. However, you must create that opportunity in the first place. Other than that, I am not asking for regulation, and I am not asking for protection. What I am asking for is deregulation and a level playing field.

Senator Poulin: Thank you for appearing before us today.

My question relates to your perception of the current situation. As an airline carrier, you have access to complete information, and I am sure, with your experience in the management of an airline, you have specific opinions. How do you envision the restructuring of the airline industry in this country?

Mr. Kinnear: Quite frankly, in the normal course of events, Canadian should be allowed to go bust. The rest of the world will go on, and the airline will restructure itself automatically. However, the government has decided that, politically, that is not an option. We are all here trying to find what I would call a "cozy" Canadian solution to a problem.

The big question is: Why is it that the 16,000 staff who work for Canadian are so much more important than the 16,000 staff who work for Eaton's? No one can explain that to me, but it is a fact.

I have nothing against the very competent and loyal staff who work for Canadian, but in any other industry the business would fail and the competition - in this case Air Canada - would expand its services. Any industry would recreate what it must to accommodate the volume. It would do it at an economical price and get on with its business.

The debate we are having at the present time relates to the question of who provides for the billion dollars worth of debt. Will American Airlines pay it? Will it be Air Canada's shareholders? Will it be the Government of Canada - that is, you and I, the taxpayer - that pays the billion dollars? Who will pay? The conclusion that we reached on Friday is that it will not be Mr. Schwartz and Onex. The debate is over who will pay the $1.1 billion loss.

Senator Poulin: Mr. Kinnear, with all due respect, I felt very sad when the Eaton's Corporation found that they had to close down and many Canadians lost their jobs. However, the airline transportation industry - and I come from Sudbury in Northern Ontario - is extremely important to the progress of this country and to our economic survival. Business people, public servants, professionals, miners, in fact at some point everyone requires to travel from point A to point B to survive, be it on personal business or in a professional capacity.

This government has recognized its responsibility to facilitate the restructuring of the industry so that our country can continue to progress. Historically, as a country, we have tried to balance public and private interests, and decisions are made to benefit Canadians as a whole and not one region more than another. Coming from Northern Ontario, I feel comfortable asking you: If you were Minister of Transportation, would you not feel concerned about 16,000 people in Western Canada losing their jobs?

Mr. Kinnear: The not only come from Western Canada. Employees of Canadian are spread across the whole of the country. It is certainly not a Western Canadian issue.

I have no testimony here to the effect that there will be a cessation of service to any city, town or place in Canada that presently has service. The only difference will be that we will have two carriers owned by one umbrella company providing service instead of two carriers owned separately providing service. I find it difficult to see the difference.

However, I do not know how you can preserve the 16,000 jobs. I believe one of the reasons why Onex gave up on Friday, aside from the 10 per cent rule, was related to the number of commitments they had made to so many people. I do not know how they could then resolve the problem of how to turn Canadian around, to make it economically viable. If the costs, the staff, the aircraft and the route structure were all to stay the same, then what would be different? What would be different from the situation we had in 1992 when we went through this before?

There are choices to be made here, but things cannot and must not go on as they are. We must not lose this opportunity to solve the existing difficulties. It is time that we faced these difficulties head on and dealt with the issues. Presently, no one can say how we can go forward and under what rules we will operate. Therefore, we cannot give you any definitive answers as yet.

Senator Poulin: The minister appeared before us as a witness and provided a very clear vision of the objectives of the restructuring. He described the five principles with which you are familiar. I expect that, within the next few weeks, as the different airlines and their shareholders work together and make their decisions, that we, as a country, can live up to those principles and that we can have a continued, good, safe, secure service everywhere in our country. Do you not agree?

Mr. Kinnear: Absolutely. The system will be better than it was before.

Senator Poulin: Do you not find that cooperation between the private sector and the public sector is important in order to identify the best solutions?

Mr. Kinnear: I most certainly agree; otherwise, I would not be sitting here today.

Senator Roberge: Mr. Milton commented earlier that there is no low-cost, scheduled carrier serving potential passengers in the eastern part of the country.

Mr. Kinnear: I think he actually said there is no low-cost operator out of Hamilton. I would agree with him. He is clearly wrong that there is no low-cost operator operating in the eastern part of the country because Canada 3000 is such an example.

Senator Roberge: I understood him to say otherwise. I know that your company is a low-cost, international, scheduled carrier. What scheduled flights do you fly in Canada?

Mr. Kinnear: In Canada, we serve St. John's, Halifax, Moncton, both airports in Montreal, Ottawa, Toronto, Winnipeg, Calgary, Edmonton, Vancouver, Victoria, and Whitehorse during the summer.

Senator Poulin: Do you also fly to Anchorage?

Mr. Kinnear: Yes, that is in the U.S.A.

Senator Roberge: Do you serve those routes as a scheduled carrier?

Mr. Kinnear: We fly as a scheduled carrier with exactly the same rights and abilities as Air Canada and Canadian Airlines.

Senator Roberge: Would the new airline that Air Canada is proposing, this third-tier airline, compete directly with you?

Mr. Kinnear: Yes, it would.

Senator Roberge: If all the conditions were proper, would you have any interest in increasing your schedule in the eastern part of the country?

Mr. Kinnear: In the last two years we have grown in that area by 24 per cent. In that time, our domestic scheduled service business has grown from 685,000 passengers to 852,000 passengers, despite all the competition from both major carriers, WestJet, and everyone else in the game. The response is, yes, sir; we will continue to grow our business in Canada and to provide Canadians with reliable, affordable air travel.

Senator Roberge: Are there any other operators like you in Canada?

Mr. Kinnear: Yes, there are. Royal Airlines and Air Transat operate as we do. Sky Service does not participate in domestic, scheduled services.

Senator Atkins: You should be congratulated for your growth which has been significant. To what do you attribute that growth? Is the bottom line the cost of the fare?

Mr. Kinnear: Most certainly. As was explained earlier, Canada was built along a railway line from coast to coast. Most of the major centres in Canada are found along those two railway routes. The only practical way to get from one major Canadian centre to another is by air because of the distances and the time involved. There is an enormous, latent market there. Canadians will use air travel more frequently if the price is right. That principle is a part of our business.

Senator Atkins: Do you manage your schedules in order to get a payload almost every time you take off?

Mr. Kinnear: Yes.

Senator Roberge: What is your reaction to the potential creation of a third airline under the umbrella of Air Canada, the dominant carrier? Are you in favour of it or against it?

Mr. Kinnear: As a free marketeer, I cannot sit here and espouse free markets and open competition and then say that I do not like the competition of my major competitor. I find it a little bizarre, though, that we will end up with one airline company which owns three airlines operating domestically and globally. I must ask whether they will take over the banks next month.

Senator Fairbairn: Mr. Kinnear, early today you talked about a situation which I do not think is well known in this country, and that is the degree to which all of the carriers in Europe are able to fly between and within the various countries. You said that the United States would soon be opting into an agreement of this nature in Europe. Can you tell me more about that?

About a week ago, we heard from the head of the Competition Bureau, Mr. von Finckenstein. He recommended to the government that Canada get into the business of moving back and forth across borders. He went on to suggest that there could be a carrier which could be foreign-owned and operating solely within Canada.

Mr. Kinnear: This is obviously the real argument. First, there is a law which prevents more than 25 per cent foreign ownership of a Canadian airline. Yet, we hear that American Airlines is capable of vetoing any decision made by Canadian Airlines. We also hear that Lufthansa and United, the largest airline in the world, are actually providing low-cost loans to Mr. Milton so that Air Canada is not overtaken by someone else.

No one believes the foreign ownership restrictions any more. They are a part of history. Now we see alliances which allow all the major air carriers to obviate the foreign ownership rules. They form alliances, so that they need not bother about foreign ownership rules in Europe or anywhere else in the world. This idea that one airline is owned by one nationality and another airline is owned by another nationality is not really valid. Airlines are owned by combinations of international alliances.

The European Union has created an open-skies environment where, for example, British Airways can now fly anywhere between any two cities in Europe. Formerly, British Airways could only fly from Britain to a European destination, say, from London to Frankfurt. British Airways could not fly between, for example, Frankfurt and Munich. Similarly, Lufthansa could operate from Frankfurt to London but could not fly between London and Glasgow. Now Lufthansa can fly between any two cities in the European Union as can British Airways. Therefore, it is a totally open environment. Anyone who is part of the EU can fly anywhere in the EU.

We should be developing the same type of situation in the NAFTA. However, air travel is excluded from the NAFTA. We have an open border with the Americans on virtually everything except air travel. We can only fly from here into the United States as a Canadian carrier, and an American carrier can only fly between the United States and Canada. We cannot fly between New York and Chicago, and American airlines cannot fly between Winnipeg and Toronto. Of course, they can as Canadian Airlines and, as they own them and control them, they already have 50 per cent of the domestic Canadian market. Why would they wish to change the present arrangements? They have slipped under border, under the barbed wire, and they do not need to worry about changing the rules because they are already here.

Senator Fairbairn: Did you indicate when the United States would be reaching this agreement in Europe?

Mr. Kinnear: It is a proposal from the European airlines. The Association of European Airlines is anxious to break the hold of Heathrow as a hub and Frankfurt as a hub. Therefore, they are suggesting that, if all the air carriers could fly to any destination within or through the United States, it would be a way of breaking the lock hold that the two large alliances have on the whole of the airline industry.

Senator Spivak: Mr. Kinnear, some of what you are suggesting regarding domestic competition has been touched upon by the competition commissioner. He told us that, if Canadian goes bankrupt, these recommendations should be in place or there will be no airline to compete with the dominant carrier. Competition concerns will arise.

My question has to do with international schedule air policy being anti-competitive. You mentioned the open skies policy, but at the same time, there is code sharing and two major alliances, which, it strikes me, are interested in restricting competition between two large blocks. We are not headed towards more competition, we are headed towards huge monopolies which will not accommodate an independent carrier.

The competition commissioner told us that, if a dominant carrier emerges it would provide most of the international services out of Canada, and concerns about competition may arise in certain international and transborder markets, and these concerns would be magnified when the dominant carrier joins an alliance whose partners fly the same international routes. Of course, we are supposed to provide advice to the government. We take that on its face value. We hope the government will take this into consideration.

What are your specific recommendations? You described the situation in New Zealand and Australia. What would it take to compete with those huge alliances and make the transborder and international routes competitive?

Mr. Kinnear: Let us start with last week's Onex proposal. Had the Onex proposal run, everyone would be part of oneworld, so you could not go from here to Britain on a scheduled carrier unless you flew on oneworld because British Airways would be oneworld, Canadian would be oneworld, and Air Canada would be oneworld. You could not go to Hong Kong without flying on oneworld, that is, Cathay Pacific. You could not go to Australia unless you flew on oneworld, that is, Quantas.

We are saying that we can compete with that. We do not have a problem with that. However, surely we should be able to fly to London and sell a passenger a one-way ticket, and take a stand against this woolly mammoth, with the tusks, that is out there. Why must you protect the woolly mammoth from the competition that we could offer and the better service we can provide the Canadian public? Why is it that we are still living with rules that were designed to protect Air Canada as a Crown corporation, and Canadian as an airline that was being coaxed along to try to provide some competition in certain designated routes? Those days have gone.

You are quite right. The whole point of this exercise is that this is a tussle between two major alliance groups. It has nothing to do with foreign ownership and it has nothing to do with anything else other than trying to dominate certain segments of the airline sector.

We are saying that we can provide additional competition, provided we have access to runway slots so we can land our airplanes at times people wish to fly. As well, you must deregulate and take the handcuffs off us which we have lived with for the last 11 years. The regulations do not allow us to compete on a level playing field. Those are the charter rules and other regulations which are left over from another era, but which have yet to be removed from the statute book.

Senator Spivak: What is the provision related to 300,000 passengers?

Mr. Kinnear: In order for there to be two Canadian scheduled carriers on a route, the route must service more than 300,000 people. However, that is crazy because you build up a route, you spend years creating this traffic, and the moment you trip the bell at 300,000 passengers you allow your competitor to come in and take advantage of all the hard work which you have put into building that structure. When you get to 295,000 passengers, it is better, to restrict competition, to not transport more passengers because it will keep the competition off the route.

Senator Spivak: Do you think that these measures will enable you to compete with these huge monopolistic tendencies in this world market?

My other question has to do with price. Canadian and Air Canada have 80 per cent of the domestic traffic and you have, I believe, 5 per cent. That is not competition because it has not, as far as I can see, encouraged lower prices. In fact, prices have increased. We were told that when deregulation comes about prices will come down. However, the prices have increased tremendously. Even though you are a low-cost airline, you are not providing enough competition for those prices to come down.

Mr. Kinnear: I would argue with that premise. I am flying to Florida right now cheaper than Wardair flew to Florida in 1970. You can fly with us to the U.K. or Europe cheaper than Wardair flew in 1970. Therefore, it is incorrect to say that airfares in Canada have increased dramatically. They have not. They are probably some of the lowest anywhere in the world. We sometimes forget that when we buy something with a Canadian dollar, it is worth about 67 cents, and we look at airfares in the U.S.A. and think that U.S. $99 is Can. $99, not Can. $150. You must be very careful in drawing comparisons because air travel provided by the Canadian carriers is, in fact, some of the lowest-cost travel available.

One other issue is very important. Air Canada and Canadian have built a route structure to serve business travel which is on-demand aviation. If you finish your meeting in Vancouver at four o'clock in the afternoon and you wish to catch the five o'clock flight, there is one available. That is a very expensive way of providing air travel. Those who use it must pay for the privilege. That is very simple.

There are other ways to provide travel. I always use the analogy in our business of Air Canada providing the limousine service; and Canada 3000 providing the bus service. Passengers travel with us at a lower fare, but they must go when we are ready to go, not when they wish to go. That is how we create our larger load factors.

There are two markets and two demands are placed here. Please remember, though, that up until today there are still two carriers flying all of those routes and there are still two carriers providing a large amount of capacity, in fact, too much capacity. In that way, Gerald Schwartz was right. If you took out some of the capacity perhaps you could actually reduce the fares because you would have a higher load factor on the remaining flights.

We have this dichotomy. What we must try to achieve is a balance between capacity and fares. How much schedule integrity do you want? How many times a day do you wish to serve a small community; once a day with a big airplane, or six times a day with a small airplane? All these are decisions to be made in the marketplace, and each carries a cost implication.

I can provide you with low-cost air travel into and out of any of your smaller cities in Canada, by flying one A320 in there a day and by everyone getting on that plane. However, if you want a flight out in the morning and a flight back in the evening, and one at lunch time in case you slept in, then you must pay for that service.

The level of air service is dictated by the type of service passengers want. Each community must decide what level they want. We provide service to the Yukon in the summer because that is when the demand is there. That is when the German tourists want to go to the Yukon. It would be futile to provide that amount of service in the winter because it could not possibly be supported. Not the same number of people go to Whitehorse in December, January and February that does in the summer. Why put on four or five more flights a week when there are not sufficient passengers?

Senator Atkins: Do you sell your seats by blocks to brokers?

Mr. Kinnear: We do if we are selling certain charter services, however, we do not on the scheduled service business. On the scheduled service business within North America, we distribute through tour operators, through the CRS, and through the normal travel agency networks. Canada 3000 takes responsibility for the risk of flying those programs.

Senator Atkins: However, you rely heavily on the travel agent.

Mr. Kinnear: Yes, all our product is distributed through travel agents.

Senator Atkins: Do you offer the same commissions as the two major airlines?

Mr. Kinnear: We offer more commission. At present, the two major airlines are offering 5 per cent. We are offering 12 per cent.

Senator Atkins: That is interesting.

The Chairman: If there are no further questions, I thank you, Mr. Kinnear, very much for your presentation.

The committee adjourned.

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