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Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 6 - Evidence - afternoon sitting

OTTAWA, Tuesday, 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 1:30 p.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, we are meeting again this afternoon to continue our study of the air carrier issues. Our first witnesses this afternoon are from the Canadian Airports Council.

Welcome to our committee, and please proceed.

Mr. Neil Raynor, Executive Director, Canadian Airports Council: Thank you, Madam Chairman and honourable senators, for giving us the opportunity today to present a different perspective on these issues, one from the airports of Canada. We appreciate the opportunity to appear before you today. This is the first time that the Canadian Airports Council has appeared before any parliamentary committee, so it is a double honour for us to be here.

I believe you will find that we provide a distinct and different perspective from those of the witnesses you have heard to date.

First, I will talk about the Canadian Airports Council itself so that you will be able to understand the organization. We represent local, regional and national airport system airports stretching across the country from St. John's, Newfoundland to Victoria, British Columbia, and from airports the size of that in Grande Prairie in Alberta to the very largest, Lester B. Pearson International Airport in Toronto. We are welcoming many more airports across the country each and every day, and of all sizes. We have captured most of the large ones. Over 95 per cent of all domestic travellers use Canadian Airports Council member airports to start or complete their journeys safely and securely.

The Canadian Airports Council is the voice of airports in Canada. In 1992, the Government of Canada had the good sense to start devolving those airports to local bodies to encourage appropriate development based on local markets, realities and priorities. With CAC representing airports of very different sizes, in different stages of development, and with different growth opportunities, no one solution is going to fit every need. The Canadian Airports Council encourages the committee to take account of these local differences in crafting solutions to the issues we are here to discuss. We also encourage you to seek the views of those individual airports, to get their local and important perspectives.

However, at the outset, before I turn to Mr. Benoit, we can state categorically that the Canadian Airports Council member airports are all in favour of competition because of the benefits that competition brings to the communities and to the travellers they serve.

I will now ask Mr. Benoit to continue.


Mr. Paul Benoit, President and Chief Executive Officer, Canadian Airports Council: Madam Chairman, honourable senators, our presentation will be English, but we will gladly answer your questions in either French or English.


The question before your committee today is one that has been debated within the airport community, not only in Canada but also in the United States and in Europe. We recognize that airports have a role to play in promoting competition, in terms of both the airlines that serve our communities and the non-airline services that we provide to our travellers. Airport executives and their teams have taken this responsibility very seriously. Airport planning horizons stretch 10 to 15 years because of the size and the impacts of our investment. Airport management is constantly seeking to increase the number of domestic, transborder and international routes served by airlines in their communities. They are looking to provide choice of routings and enhanced frequency because they know that that confers benefits in terms of opportunity for affordable travel, and they are looking to achieve the very best possible fares by encouraging competition.

Airport management has focussed on providing quality service and choice together with the lowest feasible prices. On the commercial side of airports, there is tangible evidence of that in the adoption of "street-level" pricing policies in our airports that are of direct benefit to the consumer.

While we are all concerned about the outcome of the current round of airline restructuring and the creation of an effective monopoly, we believe that regulation, or re-regulation, is not an answer to the airlines' current problems and should be studiously avoided.

To help you understand the Canadian Airports Council's position on the question of airline restructuring, it might be useful for the committee to have a background on the airport devolution experience. When the federal government first commercialized some of the largest airports in 1992, it was breaking new ground. It was, in effect, an act of faith, and the government of the day decided it appropriate to review the process of the policy after five years of local airport authority control. That review has now taken place.

The overwhelming conclusion of the review is that the policy has been successful and that there is no basis for greater federal intrusion in local airport management and business practices. The locally focused and accountable airport authorities better serve their communities. The same communities enthusiastically endorse the airports as economic engines of their regions. The principal aim of the airport authorities, which is to maintain a safe and secure operation while enhancing efficiency and delivering cost-effective services, has been achieved to a remarkable degree in a very short time, according to the report.

Today, the airlines, by their own admission, have greater influence over capital investments, and acknowledge that airport management is focused on their needs as never before. All this has been achieved through the efforts of people dedicated to making it happen. Moving from federal stewardship to a business oriented approach was neither straightforward nor easy, but the people -- and most of them are former Transport Canada employees -- have risen to the challenge.

For its part, the federal government got out of the business of running airports, and as a consequence it is saving over $100 million in costs annually. Moreover, it now receives over $200 million in rent each and every year from the commercialized airports. While that is a success from the federal government's fiscal perspective, that same rent represents a dramatic increase in cost to airport users, and that figure is set to increase again when participation rent kicks in at various airports, which will further compound the problems of this industry.

Senator Kirby: Madam Chairman, I am concerned that, if the witnesses read all 13 pages, we will not have any time for questions. Perhaps they could just read the highlights.

Mr. Benoit: As I understand it, the committee has reviewed the document. We would then be prepared to answer the questions. I can go over our report very quickly, Madam Chairman, if that is what you prefer.

The Chairman: Yes, please.

Mr. Benoit: We will address certain areas such as slot control. Lester B. Pearson International Airport is currently the only slot-controlled airport in this country. It is important to realize that eventually slot controls may become necessary at Dorval, Calgary and Vancouver.

Today at Pearson, Air Canada, Canadian and their regional affiliates hold the majority of slots. They overwhelmingly control the morning and afternoon peaks at these airports. It is the position of the Canadian Airports Council that slots are a public and not a private good. These slots are not owned by the airlines, and the same thing should be said of international routes.

In view of their signal importance for the smooth operation and development of community-based airports, we believe that slots would be better managed by others than the airlines. Allocation of the slots should be based on three clear principles: fostering competition; use-it-directly-or-lose-it policies; and the reflection of international obligations.

I shall now turn to the subject of the impact on smaller airports. They often tend to be forgotten as we go through this process. On page 10 of our presentation you will see highlighted three key issues that involve smaller airports.

First, essential service must be guaranteed to communities served by smaller airports by whatever carrier structure emerges from the restructuring process. Second, regulation must not establish a monopoly. Third, the federal government must increase the size of the Airport Capital Assistance Program to smaller airports to a minimum of $105 million per year, bearing in mind that as airports we are paying over $200 million in rent to the federal government today.

We will now go directly to our conclusions.

Mr. Raynor: The text really boils down to the following conclusions and recommendations that the Canadian Airports Council has for the restructuring process.

We believe that the federal government is right to be concerned about the potential for a dominant domestic carrier emerging. Since I wrote this on Friday, of course, things have moved ahead. We do not necessarily believe that regulation or re-regulation is the answer to the current problems.

We are willing and able to participate in helping solve the industry's problems. The devolution of airports has created the right conditions, in my opinion, for airports to respond proactively to support competition for the future.

Therefore, we would make the following recommendations. Of particular importance to the airports and to our users, clients and customers is that we reduce the rent burden. There are three elements to this. First, Transport Canada must acknowledge that they can enhance our ability to respond in a pro-competitive environment by reducing our rent. Second, as an indication of good faith, the rents should be capped at the current rate, and, as Mr. Benoit has indicated, that is at about $200 million to $250 million at present. Third, Transport Canada should involve the industry and the airports in developing a set of key principles that will define the rent for the future.

At the smaller airports, there are three points: essential service must be guaranteed, regulation must not establish a monopoly by right, and the federal government must increase the size and scope of the all-important ACAP program, which assists the small airports in their capital needs.

If -- and it is a big "if" in my opinion -- if slots are needed at Canadian airports, they should remain in public ownership and be managed by the airport authority. We do not need to put a regulatory body in place if we have clear rules and principles.

Common-use facilities can result in lowering the overall costs to our customers and clients. That is most important. We believe that with appropriate incentives, such as reductions in the Crown rent, more airports will be able to adopt policies to provide shared-use facilities, which is very much, as we make the point in the paper, pro-competitive.

The Chicago formula -- and we can go through these technical issues, if you wish, during questioning -- which is a formula that is used to share costs currently, we believe works against the smaller airlines and the start-up airlines and should be changed.

Finally, as part of the federal government's agreement to any scenario that creates a dominant domestic carrier, that airline should be required to forego its majority and interest rights under current agreements and to surrender back to the airport authorities its rights to facilities that could be converted to common use. I am thinking of things such as the gates, bridges and ticket counters that one sees as a passenger while travelling through the airport.

Senator Forrestall: Two or three years ago we privatized Canadian ports. There was a very interesting debate, and people looked askance at me and wondered if I had taken leave of my senses because of the position I took. My concern was, of course, for the ports and the management of them and where they would find the capital to expand and do maintenance work and so on. My ultimate concern was about the impact the privatization would have on the municipalities in which the ports were located.

On day one, they got a grant in lieu of taxes, because they were non-taxable. The airports pay a grant in lieu of taxes. What happens if there is no business at the airports and the airports are not able to pay grants in lieu of taxes or pay taxes to the municipalities in which they are located?

In terms of ports, I could list the areas on which that has an impact. I think that, for airports, you will find it likely that cuts could extend all the way to impact upon fire fighting services and the delivery of that service.

Could you comment on that, because I am wondering if it is a problem with airports as it was and continues to be with ports.

Mr. Benoit: Taxes are a problem for all of us, but that might be a matter of consideration for another committee. We at the Ottawa Airport have seen, for example, our tax bill go from $2.9 million to $7.3 million. That is a major concern to us. The major airports are currently maintaining fire fighting services -- and they are all exceeding Transport Canada's norms -- and that is, first and foremost, something we continue.

The airports by being privatized have been allowed to operate on a business-oriented basis, rather than necessarily as a system managed by one entity. Our boards, as you know, are made up from the communities. The communities have full input. We are currently, at several airports, looking at major restructuring, major building projects.

The acid test comes for us when we go out and borrow money, because, as you also know, no airport of size today receives federal money. In fact, we are paying at our airport approximately $5 million to the Crown in rent each and every year, and the amount goes up each and every year. We have some very high expenses, but our airports are sustainable and profitable and the money is being reinvested in our facilities.

Senator Forrestall: Are you able to meet the additional tax burden?

Mr. Benoit: We are currently on appeal on that. It varies from community to community. As you get to the smaller airports, it becomes a more critical issue. It is possible that new regulations being introduced by the federal Government will have an impact on these communities. Some of these questions were not there when these communities took over the airports, but the larger airports are in a much more enviable position than the smaller ones. Perhaps it all revolves around the fact that previously the legislator was both the regulator and the operator, whereas now the legislator is no longer the operator but is only the regulator, and the regulator is getting very strict.

Mr. Raynor: Perhaps I could pick up on the point about smaller airports. You asked a specific question about the fire fighting service, or the emergency response service, ERS in the shorthand of the aviation community. This morning I was at a meeting of CARAC, the Canadian Aviation Regulation Advisory Council, which is in the process of considering what the future of ERS is at smaller airports.

When the federal government transferred operation and ownership of those smaller airports to municipalities and local groups, it did so on the basis that it had removed the need for dedicated fire fighting services at the airport, the proposal that we are discussing right now. The federal government has reversed that proposal and intends to regulate those fire fighting services back into the airports. The net effect of that is that a number of community airports will close because the costs of that will be unsustainable.

Quite often, the cost of implementing the regulation that is being proposed is fully one-third of the operating budget of a smaller airport. It is just not feasible, unless the federal government comes up with the money, and at the moment there is no indication that it is prepared to do that.

Senator Forrestall: The management of airports -- tower services, ground services and weather services -- are not caught up in this, are they?

Mr. Benoit: NAVCAN, which is a private corporation, manages the air traffic control system. The federal government has divested that. With regard to weather services, the federal government, I think correctly in terms of principles, is getting into the realm of regulator-legislator overseeing the safety of airports.

The 24-hour fire fighting service that we have at our Ottawa airport costs us over $2 million per year. The vehicles alone cost over $700,000. To sustain a service like that, small communities would have to raise their rates. What is even more critical is that small carriers, which normally do very short hauls, would not be able to get a return on their investments and would therefore pull out. That is why we say that economic impacts on airports also have impacts on communities being able to maintain their services.

Senator Finestone: We are going to be writing a report. Are you suggesting that there should be consideration given in our report to the maintenance of essential services in small communities by the Government of Canada?

Mr. Benoit: The federal government is currently drawing close to one-quarter of a billion dollars a year in rent from the airports that are privatized. Under some of the proposed regulation changes, communities will lose their air service because they will not be able to afford it, unless some of that money goes back into the system. That is a question for honourable senators to ponder.

Senator Fairbairn: You may notice that I continue to ask questions about small airports and the effect of this particular airline situation on small airports. In many parts of the country, these additional costs were removed at the instruction of the government. Now, after the agreements are signed and people have put the money together to operate the airports under a certain degree of regulation, the regulations are being changed.

In addition, there is anxiety about the possible reduction of flights. We may have far fewer airports in Canada. Airlines should be cognizant of that, because, if we do not have the airports, they will not be flying the planes in.

Senator Spivak: On the same line of questioning, what is the relationship between the rent charged and the market value, and what is the rationale for the federal government to continue to collect this rent, other than deficit reduction?

Mr. Benoit: Initially, the federal government's policy was that the Crown should be no worse off after airport devolution than before. Some of us think that the philosophy has changed to "must be better off" as opposed to "no worse off". There is very little economic reason to any airport lease.

The federal government has managed to shed about $100 million in costs and a few thousand employees. It has turned it over to the private sector. We pay one-quarter of a billion dollars in rent. We are building $5 billion to $6 billion of new infrastructure over the next several years. At the end of the lease, the Crown owns it. If I were in Treasury Board, I would say that that is a tremendous idea.

Senator Kirby: On a point of clarification, are you leasing the land? Are you leasing the building? What are you leasing? Why is it that, if you do capital improvements, they are not yours?

Mr. Benoit: Generally, in the larger airports we have a 60-year lease for the facility.

Senator Kirby: Is that on the buildings or land?

Mr. Benoit: Land and buildings -- the whole facility. That is, for 60 years plus an additional 20 years we have quiet enjoyment of the facility. However, at the end of our lease, because the buildings are on Crown land, they revert back to the Crown, whether we built them or not. For example, if we replace a terminal in Ottawa with a brand new terminal, at the end of the lease it is not ours.

Perhaps Mr. Raynor can address the situation at the smaller airports, because their situation is different from that of the larger ones.

Senator Spivak: Would you characterize this as a tax? We talk about tax reduction, yet there are hidden fees everywhere.

Mr. Raynor: Some would characterize it that way. Some of the international organizations that oversee airlines and aviation, ICAO, for instance, see this directly as a hidden tax and have commented on that.

To go back to the point about the rent, it is very interesting to note that the rent was based on the net book value of the facility, what the federal government said the property was worth on the day of transfer, although each lease deal is different.

This was not done according to generally accepted accounting principles; this was government accounting, which those of us from the private sector found to be somewhat at variance with the norm.

It is interesting to note that the value of the original investment that the Government of Canada transferred is decreasing as the capital investments are being put in place, but the rent is going up. There is this divergence. The rent increases over the 60 years while the underlying value of what was transferred actually decreases.

Senator Spivak: How about depreciation costs?

Mr. Raynor: That is pretty much taken out.

With regard to the smaller airports, the national airport system is made up of the 26 largest airports in Canada. In 1984, when the current National Airports Policy was introduced, Transport Canada operated about 150 airports. The remaining 125 are being transferred in their entirety, ownership and operation. The so-called 26 top airports, including Ottawa, Toronto and Moncton, which are part of the national airport system, are on 60-year leases.

There are two distinct groups of airports that were previously operated by Transport Canada. Some have been transferred free and clear while others are on a lease basis. Underlying that there are a number of municipally and provincially operated airports that were not part of that system.

Mr. Benoit: The leases required the agreement of both parties. The airports and the communities agreed to the terms. I want to make that perfectly clear. Perhaps these were not commercially viable or understandable deals, but the communities and the airports signed off together on these documents.

Senator Forrestall: I have a related question concerning monitoring this situation. Do you see it as your responsibility to keep an eye on marginal situations? I am talking now about airports. Were you to close them down, there would be a significant impact on the municipal tax structure. Who is monitoring that and keeping an eye on it from the other point of view? Vancouver is getting to be a place you want to look at from a distance. Pearson is almost the same. We build these new glorious airports and then we have to pay $15 or $20 for the privilege of going through them.

Mr. Benoit: In many cases, for a variety of reasons including the national deficit, the federal facilities that were turned over to us have not had any investment for several years.

Senator Forrestall: I am asking who is monitoring it.

Mr. Benoit: In terms of monitoring, our communities do reviews. We also have boards. We are private corporations managing a public trust. In my opinion, we are held to a higher degree of accountability than if I were running Nortel, for example. We have boards that are made up of members the community. The new Canadian airport authorities have 15-member boards on which the federal government has representation, as do the provinces and our municipalities.

In terms of the improvements made at Vancouver, had that not been done, tourism would have suffered and the country would have suffered. You would have had a bottleneck. That airport is now servicing approximately 14 to 16 million passengers, which it could never have handled in the old facility. However, there is no federal money going into these facilities, and someone has to pay the price.

In terms of whether or not we are building Taj Mahals, at the end of the day there is one consumer. You could say that you are getting the money by way of rent relief. However, if you are charging on a user-pay concept, then perhaps the people using the facilities should pay as opposed to someone who never flies, although there is an economic benefit for all of us. The economic oversight is basically the market today. The agreement we have with the airlines for the collection of the AIFs, airport improvement fees, gives them a strong right of consultation in our documents.

Senator Forrestall: This is fine; however, you are getting into Political Science 101, or something. I am interested in the impact of the merger of Canadian and Air Canada and group rationalization, for example, where there are 20 planes landing. We have 100 planes landing today, and that produces X dollars in revenue. If that number is suddenly decreased to 40 landings a day, or 20 landing cycles a day, your revenue is reduced correspondingly.

Mr. Benoit: That is correct.

Senator Forrestall: Who is monitoring the impact that that might have on the airports and the airports' capacity to help the municipalities in which they are located?

Mr. Benoit: I understand the question much better now. The aviation policy of 1988 was: Let market forces decide, to a point. If there is a restructuring of the industry, there will be new entrants, depending on the markets. There will also be a reduction in certain areas.

We have done a fairly exhaustive study about our own community in Ottawa, which shows that for the first two to three years we would suffer a decline in our community, after which time the market would return. If there is a market to be served, someone will serve it. If there is not a market to be served, however, should we constantly be propping up people? That is a question for this committee to address.

At the end of the day, there will be a rationalization. Already in certain markets there are carriers coming forward to say, "If something happens, we might be interested in additional counters. We might be interested in gates. Can we serve your airport?" If there is not a market to be served, I would ask you, sir, should the market then be served?

Senator Forrestall: You tell that to the people living in Sydney, Nova Scotia, then.

Mr. Benoit: There may well be a market there strong enough to be served.

Senator Forrestall: What if there is not? Do you abandon industrial Cape Breton?

Mr. Raynor: From a Canadian Airports Council perspective, we made the point to the federal government on numerous occasions, well before we got into the current restructuring discussions, that we must be aware of the financial viability issue with regard to the smaller airports. In terms of the market, the airlines and the municipalities, I can assure you that the Federation of Canadian Municipalities are very keen and are watching this issue with great interest.

Senator Forrestall: They will be the watchers, not your council.

Mr. Raynor: We are working with our smaller airports. In fact, the smaller airports receive more attention than the larger ones, because the larger airports can look after themselves.

Senator Forrestall: They do not want you sticking your nose in their private business?

Mr. Raynor: I would not say that, but they might. We work very hard and diligently with the smaller airports. The meeting that I just left to come to this committee is evidence of that.

In terms of the impact on the municipality, it is really for the municipality to watch. We will do what we can to ensure that there is competition and to ensure that new entrants can get into the airports. That is one of the statements that we make in our document. It is very important in any dominant carrier scenario that there are facilities both on the air side -- for example, the bridges and the gates -- and on the ground side -- the ticket counters, et cetera -- so that new entrants can come into those markets and that one carrier does not lease all the space. They may have to give some of that back. That is the position we have taken.


Senator Poulin: Getting back to what Senator Fairbairn was saying earlier about the close ties between the airlines and the Airports Council, on listening to your testimony, I would have to say that this relationship is more than just a partnership. It is almost like a marriage.

Mr. Benoit: We are not always on the best of terms, but both parties recognize that they need each other. Without airplanes, airports would not make a great deal of money and without airports, there would be few places where airplanes could land. For the past two years, we have been working closely with the industry. However, we do not agree on everything, not by a long shot.

Senator Poulin: Which association is your counterpart when you engage in discussions with the airlines?

Mr. Benoit: The Air Transport Association of Canada, or ATAC.

Senator Poulin: When you make representations to the Department of Transport, given that you have both short-term and long-term ties to the department, with whom do you deal?

Mr. Benoit: In our case, we deal primarily with Transport Canada's airports group and with Assistant Deputy Minister Ron Sully.

Senator Poulin: As I understand your overview of the situation today, there are 26 large and 125 smaller airports in the country. Is that correct?

Mr. Benoit: That is more or less correct.

Senator Poulin: You stated that problems occur primarily in the smaller airports because of the costs involved.

Mr. Benoit: The problems are not confined exclusively to the smaller airports, although that is where bigger problems occur. However, larger airports are required either to pay $250 million in taxes annually or invest a comparable amount of money in airport infrastructures or invest in our communities. Since accounting is done on a cash basis, it is very difficult, from a financial standpoint, to do both.

Small airports are indeed threatened, but the larger ones would also benefit from a relationship of a different nature with Transport Canada.


Senator Poulin: Is that where your recommendation to us to cap the rent occurs?

Mr. Benoit: That is one of our recommendations. That would be a first step, namely, to stop now while we look at a formula that ensures that the Crown is no worse off and, at the same time, allows us to be what our communities want us to be, which is economic developers of our region.

Senator Poulin: You stated something in your brief that I think is contradictory. In your paper you state that it is important to cap the rent and to bring extra help to the smaller airports, but you do not want the industry to be regulated.

Mr. Benoit: That is correct, but I do not think that is opposing or contradictory: one is regulation and the other is an economic agreement between two parties. When we are looking at our commercial dealings with the Crown, we need to ask, "How can we discuss and negotiate? What can we do?"

There has been a five-year review of the first four airports -- Vancouver, Montreal, Calgary and Edmonton. That is part of the review process. I will tell you what ATAC, the Air Transport Association of Canada -- the airlines -- has said in terms of re-regulation, with which we fully agree. Let me quote them. They say that it would:

... dull competition, discourage initiative and foster a "cost plus" or utilities approach to the regulatory approval of ticket prices, routes and even capacity ...

You cannot go back to the good old days. They were not good old days. They were artificial days. The policy of the government, which was to allow market forces to play, as much as is possible in this type of environment, recognizing the impacts on small communities, must be brought into place. To have to go before an agency to justify your fares -- that is the old utilities.

Senator Poulin: In order that we may better understand how airports work, could you describe for us the basis on which the airports earn revenue? How much of the revenue is landing fees, and how much is franchises in the case of these airports that have direct passenger charges? It would give us a more complete picture.

Mr. Benoit: Airports generate revenues from landing fees, which we receive from our carriers.

Senator Poulin: If a flight comes in from Montreal by whatever airline from a domestic city, what would be the cost of one landing?

Mr. Benoit: It varies. It is a very complicated formula. I am not trying to be evasive. It varies based on the number of seats and weight of that aircraft. The larger the airplane, the more it costs. For an international flight of a 747, the landing fees could be in the order of $1,500 to $2,000, depending on the airport because it also varies by airport. Landing fees for a small aircraft could be $47.

We receive revenues from our concessions, the restaurants that you see. Parking at airports is an issue that has a revenue cost. We also rent land. We re-rent the Crown lands that are ours. Airlines are covering between approximately 50 and 75 per cent of their costs. This varies from airport to airport. Revenue dollars go into that, so it becomes a large pool.

Senator Poulin: I notice that there is a lot more space dedicated to promotion and publicity since the changes in the status of the airports. What percentage of the revenues does publicity account for at the Ottawa airport, for example.

Mr. Benoit: It would vary. Unfortunately, I do not have the exact number. For the Ottawa airport, our revenues are approximately $35 million per year. Our expenses are approximately $32 million per year. The balance is money that has to be reinvested in the facility. We have an obligation by lease to put that money back in.

Our advertising in the airport probably represents a little over half a million dollars a year. It is not the major revenue. What you are seeing more frequently in airports is a lot more commercial aspects, where you, the customer, have the right to spend or not to spend. We are ensuring downtown prices at all our airports as opposed to raising fees. Most airports have tried for the last several years not to raise fees to airlines.

Mr. Raynor: You will find that the percentage of what we call aeronautical fees, those fees which we get from the airlines, versus non-aeronautical fees, has moved to the revenue streams from the non-aeronautical sources. The airlines are actually paying less in percentage terms of the total cost than they were prior to commercialization and privatization.

I make one other point, though, particularly to the one that concerns many people. The small airports do not have the same ability to develop their non-aeronautical revenues; so this is a double hit. When their costs go up, some of them imposed by government regulation that were not there when they transferred, that absolutely has to pass through to the airline, because the municipality probably can not pick that up.

Senator Poulin: This is an interesting detail, but you were mentioning that the circulation at the Vancouver airport is approximately 16 million people per year. We know now that the biggest airport in the world is Kuala Lumpur. I was just visiting it. They have 16 million people a year also. They were expecting 25 million and they only had 16 million last year.

Mr. Raynor: Returning to capital projects, if the Vancouver Airport Authority had not taken over that airport in 1992, I do not think you would have seen the development that you have seen there to date. Without that development, you would not have had the job growth associated in that community, both directly on the airport and also in the surrounding communities.

Airports are economic engines for their region. There is a direct linkage between those developments and the improvements to those airports and the growth in jobs both in aviation related industries and in tourism. Tourism is just vital to a lot of our smaller communities.

I have in fact just moved from Halifax, so I know Sydney and Cape Breton very well. Cape Breton benefits significantly from having an international airport in Halifax and an airport in Sydney. Tourism would be much worse if those airports were not run effectively and they did not have the service from competing airlines.

Senator Poulin: I appreciate your input today. I think it is very important for our report. Thank you.

Senator Finestone: I want to deal with the question of slots. But I would first finish some questions that arise from my colleague's questions.

I presume that one of the guiding principles would be that your passengers should be comfortable and be able to facilitate their plans in a more expeditious way?

Mr. Benoit: Yes.

Senator Finestone: If that is the goal, what can you do to ensure that the long line-ups and the waiting to check in baggage is done a little more quickly? How do you avoid having people miss their flights because of the long waiting lists? Could there not be someone there to help with heavy luggage, particularly as the flying population is a little older than 25 to 35 years of age. We need some baggage handlers out there. We need some desks that are staffed with more than one or two people with line-ups of about 100 people.

Last but not least, I believe there was an answer to Senator Fairbairn on the question about small airports that, if you were cut back on the number of landings, perhaps you could count it by head instead of by number of plane landings. Is that something you might consider in terms of improving the rental and the income sides of the issue?

I am concerned because the comfort of the passenger is being compromised: there is less space for the customer because of commercial activity; there is a restraint in the number of desks operating, and in the number of people available to operate everything, and in the number of staff available to pick up your luggage and help. It is very uncomfortable to travel. You have to come hours ahead of time just to ensure that you catch your plane.

After you respond to those comments, I would like to ask you about slots.

Mr. Benoit: I am not trying to deflect the question or to throw it aside, but it is the airlines that staff the check-in counters.

Senator Poulin: Can you not have something in your contract that makes it more humane?

Mr. Benoit: In terms of our contract, the airlines lease space from the airports. In certain airports, you have congestion, and you may not have enough facilities because you have exceeded the capacity of the building. That is where you end up in building projects.

You may want to ask the question regarding check-in and waiting lines directly to the airlines as opposed to having an outside party address it.

With regard to charging by head, by seat, by pound, by weight, in terms of the aircraft, at the end of the day it will all translate into dollars. If I have to have five heads to equal one aircraft landing weight, it is the amount of dollars. We have worked over the last year with the Air Transport Association to try to devise a more equitable formula. We are working in that regard but we are not there yet. The bottom line still rests on how things are counted.

Senator Finestone: That issue was raised particularly in light of small airports, although I keep hearing that Lethbridge is not small.

In respect of passenger concern and consideration, we can recall a very unfortunate accident which occurred at night at a small airport in Quebec because of inadequate lighting conditions; the ground had not been cleared of snow; there was no ambulance service; and no one was there to call for help. I hope such incidents do not recur after your work has been completed.

On the issue of the availability of slots, I believe your comment to be a very sound one, that is, that slots are a public and not a private commodity. This morning, we heard from a very interesting gentleman who represents Canada 3000. He asked how we could expect his company to prepare for a competitive environment involving this major carrier which will handle national routes, international routes, inter-regional routes, which, in so doing, will take up all the slots. According to his testimony, over two-thirds of the slots at Pearson airport are controlled by Air Canada and Canadian. I believe he said that 82 slots are available every hour and that two-thirds of those slots go to the major airlines.

Senator LeBreton: He also said that between four o'clock and eight o'clock, there are no slots available to smaller carriers.

Senator Finestone: How can we convince the airlines that those slots should be made available? You do not believe there should be regulation, but how will we have any control over this one airline which will service every kind of route without any credible competition?

Mr. Benoit: We share your concern. Instead of a hypothetical situation, I will give you a concrete example. Several years ago, a small airline in Quebec wanted to start a service from St. Hubert to Toronto/Pearson but they were unable to get return slots between 4 p.m. and 6 p.m. I was with the Montreal airport service at the time. If a passenger flew with this carrier in the morning from St. Hubert to Pearson, he had to return via Dorval in the afternoon and somehow get across the bridge to pick up his car.

It is our position that slots are a public and not a private-owned facility. Airlines operate or use the slots, but we do not believe they should be able to transfer the slots amongst themselves. If slots are not used, they should be returned to the airports for re-distribution. In the event of a rationalization involving the downsizing of flights throughout the market, those slots should be returned to the airport.

Airports are in favour of competition; but are monopolies? I would leave that question out there. It is to our benefit to accommodate as many carriers and as many flights as our markets can sustain.

We see slots or reserved ticket counters not being used. This may well be a recommendation for some committee to make down the road. Airlines should be told to "use it or lose it." Spaces should not be transferred to alliance carriers by the airlines. A slot which is not used should be returned to the airport to be re-assigned.

The same situation should apply to international routes. Numerous international routes on the market are not being used. I have heard representatives of airlines say they could get $90 million if they sold their routes. I question whether those routes are the property of the airlines or the property of the Canadian people. Should they be owned by the government and then re-assigned by the government when they are not used? That debate has gone on for years in this industry.

Senator Finestone: Does that not then beg the question of the need for some form of regulation to determine and enforce the rules? Then airport managers could be told to take an unused slot or ticket counter and give it to those who are on the waiting list. The present system is counterproductive and anti-competition.

Mr. Benoit: I believe that enforcement can be done without regulation. It could be done by an order from Transport Canada saying "use it or lose it."

We laid out three conditions in our brief for effective airport management without having to go through the long process of regulating and applying to the Canadian Transportation Agency. ICAO and IATA have standards in place which could be developed and used as a three-pronged solution, as suggested in our brief, without going to regulation.

Senator Finestone: That, in a sense, could partially answer our questions about competition and encouraging competition.

Mr. Raynor: I believe that is so. We do need that regulatory framework if clear rules and clear principles are applied by the airport authorities. The airport authorities are established to work on behalf of their communities with local oversight and sound business management. They are in the best position to ensure the very best service to the consumer in their markets by the proper application of those slots.

Senator Fairbairn: In discussing small airports, you indicated that the Ottawa airport, which is a major airport, would probably survive even if it suffered a decline over a two-year period. However, if that happened at a new community-owned airport, that airport might well have to close. With our country being so large, east, west, north and south, at some point do airport closures not become a matter of public policy because they provide an essential service to Canadians?

Mr. Raynor: That is a very good question and we may get to that point if the level of service and the revenues do decrease significantly at the smaller airports. We are concerned, and we have been for the past two to three years, about the financial viability of Canada's smaller airports. Those airports are essential. You used the example earlier of Fort McMurray which cannot be easily reached by any other mode of transportation.

We are concerned about the long-term financial viability of airports. As an act of public policy, we must be cognizant of how things may develop in the future and take steps to deal with what could happen. We have already expressed that concern to the federal government.

Mr. Benoit: The federal government has a policy regarding Arctic airports and northern airports. That is not a deregulated environment. That policy or a variant of that policy may well be what is needed for certain smaller communities. Certain Arctic airports operate virtually in a regulated environment in terms of who serves what and where. That existing policy may be expanded.

Our message is that we are afraid of re-regulation. We do not want to go back 30 years. Some present systems may be adapted to provide solutions, for example, the system related slots.

In some areas, three or four airports exist within a half-hour drive of each other. Are they all needed? Perhaps not. However, all the regions must be served. Perhaps the same approach which we apply to the high Arctic airports may need to be applied to areas like Fort McMurray. That policy is already in place.

Mr. Raynor: There are other examples in other jurisdictions. Our friends to the south have a policy of making available operating subsidies to any carrier that will serve certain smaller communities. Rather than regulating or setting prices, the government may provide some incentive to carriers to serve the smaller communities. Perhaps that is something which should be developed.

Senator Fairbairn: The smaller communities are not necessarily remote.

Mr. Raynor: That is exactly right.

The Chairman: Thank you.

Senator Finestone: I do not believe I got an answer to my question. Perhaps it was unclear. I did wish to continue on the user friendly question. I talked about the elderly, the halls and the lanes, and what you could do to alleviate the problems in those areas. Never mind the long waiting lines and the fact there is no place to sit, which is a serious issue. Whose responsibility is it if the moving sidewalk is not working along those long halls? Can there not be a cart that will take people, who need that service, to the loading dock? Why are there not baggage handers outside the door? Why is there not, in some instances, a seating arrangement for people who cannot stand and wait 20 or 30 minutes in line? How do you answer these questions and who is responsible?

Mr. Benoit: A moving sidewalk is an airport responsibility. It is up to each airport to either ensure that it is working or that they have an alternate system available.

Regarding areas in front of ticket counters where passengers are checking in, if there is a long line, one must ask why. Is it because we have 20 ticket counters and only four agents working? In that case I believe the responsibility lies somewhere else. Certain airports cannot physically accommodate more ticket counters and that is why construction times are important. We are all attempting to make this a more user friendly system. Apart from the first four airports that were transferred in 1992, all other airports were transferred beginning in December 1996 and January 1997 on. We have, in fact, inherited these facilities from someone and we are trying to make them better.

Senator Kirby: Your brief is excellent. As a committee, we may want to come back to the issue of essential service. Senator Forrestall and I have been through this in an entirely different context, called "small craft harbours," where we both have been on the same side for at least 20 years, and the small airport essential service element is exactly the same.

The Chairman: The next witnesses are from the Canadian Union of Public Employees, Airline Division.

Welcome to our committee.

Ms Judy Darcy, National President, Canadian Union of Public Employees: With me today are Denise Hill, president of our Airline Division of CUPE; Richard Balnis, senior research officer specializing in airline issues; and Pam Beattie, executive assistant to the president.

I should like to thank you for the opportunity to appear before you today. We have a verbal presentation only because we were asked to appear on very short notice. I apologize for not having a written text of our comments today. We do have a document that goes back two years. This document is the position of the Canadian Labour Congress, a joint position that was developed in response to the last crisis in the case of Canadian Airlines three years ago. A committee was set up by the Minister of Transport and we presented a joint paper of the air transport unions which the Canadian Labour Congress called "Heads in the Sand."

We are Canada's largest union, representing 470,000 working men and women in the public and the private sector. In particular, for the purposes of our discussion today, although many of our members are part of the travelling public, as you are as well, we are here specifically to speak about the concerns of our members of the airline division of CUPE. We represent approximately 9,500 flight attendants and 11 carriers; Air Canada, Air Nova, Air Ontario, Air Transat, Canadian Airlines, Canadian Regional, Calm Air, First Air, Inter-Canadian, Royal Air and Cathay Pacific in Vancouver, and even more groups as we continue to organize them.

Why are we all here today? If we go back to August 13, when the government invoked section 47 to facilitate the restructuring of the airline industry, in our opinion, in our experience, in the experience of our members and of Canadians as well, chaos has reigned in the industry since that time. Frankly, our members and their families have lived through 12 weeks of hell. At this point, there is no indication of when it will all end. I believe we all think that. We are in for a pretty rough ride over the coming months as well.

It is no secret to your committee, it is no secret to Canadians these days, that this restructuring has also resulted in considerable hostility amongst airline workers. Unfortunately so, because at one point or another many of these employees will no doubt be working side by side. We have a very difficult situation on our hands with the serious moral problems which have been created, as well as the uncertainty about the future of these employees.

Flight attendants and other airline workers have experienced being treated like pawns in another round of corporate restructuring that we believe was brought about as a result of the inherent instability that exists in the industry today as a direct result of deregulation. Your have heard different opinions from your previous presenters on that issue. The "R" word is not one that we are afraid of and, surprise, here we are back again as a country, as a government, talking about that issue again.

The future of our industry, of our members' jobs, of service to communities, of access for communities to our national transportation system, is the subject of daily headlines. We wish to start by talking about how we think we got here. We do not say that because we take any pleasure in saying, "I told you so," however, we feel it is important to understand how it is that we got here. We really do believe that we are facing this crisis in the industry today as a direct result of the federal government's refusal to play a leadership role in creating a policy framework that would assure a viable Canadian airline industry today and into the future.

This is an omission that we believe this committee can play an important role in correcting. We understand that you have a specific task that was defined for you, and that is to review the section 47 order announced by government. However, from the previous discussions it is clear your mandate goes far beyond that, and we would suggest that it should be broader even still if it is to be useful to the Canadian government and to the Canadian public.

We believe that it is essential that government be pressed to take action immediately in order to restore consumer confidence in the future of Canadian airlines, and we will be speaking more about that. We believe it is critical that this committee make recommendations on the enforceable criteria that will form part of the minister's proposed legislation on the approval of restructuring in the airline industry. Finally, we believe it is critical that you also press the government for long-term solutions to establish the kind of long-term policy framework for a viable Canadian airline industry. We wish to touch on all three of those issues today.

First of all, on the negative consequences of airline deregulation, as Canadians, we have lived through periodic crises in this industry since the airline industry was deregulated. We have not just lived through them, the country has been engulfed in these crises on a periodic basis -- for example, in 1992 and '93 and again in 1999.

In our view, these periodic crises will continue unless smart regulation is introduced that makes sense in the present context and into the future. We think these crises can be related directly to corporate behaviour that is being allowed and fostered by airline deregulation. As a direct result of airline deregulation, government has been powerless to intervene and to achieve a fair balance between the forces of competition on the one hand and the protection of public interests on the other.

We have seen the relaxation of market entry and exit requirements under airline deregulation, which has allowed corporations to restructure the airline industry in their own interests without reference to the public interest. However, we believe our experience as a country shows us that the corporations left to their own devices have produced periodic chaos in our industry, and that that will continue to be the case.

Unfortunately, during the last three months of this current crisis, the root causes of the crisis, by which we mean both deregulation and federal government inaction, have been overlooked in the debate. It is critical that they be put on the table now.

The real issue is the role the government must play to ensure that, no matter what corporate solution comes about at the end of the current crisis, we have a viable airline industry and that we preserve as many airline jobs in this country as we possibly can. That means there are short-term and long-term solutions that the federal government must take.

I should now like to address the immediate crisis facing Canadian Airlines, which has to do with its future. As of today, there is no private-sector solution on the table for the orderly restructuring of the airline industry. Onex withdrew its offer. Air Canada has yet to make its offer official. I understand Mr. Milton says that he will be doing so within a week or so. It is still unknown what role American Airlines can or will play at Canadian Airlines as a result of the withdrawal of the Onex bid.

As a result of this uncertainty, Canadian Airlines, as we all know, is extremely vulnerable. Some weeks ago, Mr. Benson was quoted as saying that they would have money for only a number of months. Frankly, if consumer confidence continues to dive, we will have an even more serious crisis in a shorter term than that. We could see a major crisis of consumer confidence within days that would have major consequences for their balance sheet.

Given the federal government's responsibility for the future of the industry, we believe that the government must take steps to reassure consumers about the future of Canadian Airlines until there is a viable industry restructuring option back on the table and until there are longer-term legislative and regulatory solutions developed. We know that there will be bids and counterbids. We do not know for how long the process will go on. We are saying, and we will continue to press, that there be longer-term regulatory solutions. However, there is no doubt that action will need to be taken in the short term in order to assist Canadian Airlines. The restructuring in the industry is taking longer than was initially expected because of government inaction and ineptness. If Canadian Airlines requests federal loan guarantees from the federal government to weather this crisis, we believe that the federal government will need to be there.

That was certainly something we pressed for in 1992, when a merger was proposed between Air Canada and Canadian. That proposal collapsed. That was a proposal that had the support of the Liberals, who were in opposition at the time, when Jean Chrétien was Leader of the Opposition. We also pressed the issue on Prime Minister Mulroney, as did many other people, including, I am sure, people around this table. Such financial assistance was offered. We believe that it may be required again.

The second subject I wish to address has to do with government approval of any shareholder agreement. On October 26, the Minister of Transport, Mr. Collenette, indicated that he would be tabling legislation shortly to give him and cabinet the authority to approve any airline restructuring initiative retroactively. I gather the timelines have been put off a bit and that we are now talking about early December.

The criteria for approval under a section 47 order, or this proposed legislation, has been a matter of considerable debate over the last weeks and months. We believe that the criteria to be established in that legislation should be established only after full parliamentary debate and after full consultation with Canadians. We believe that this committee can play an influential role in fostering that debate. It is critical that this committee offer its views to the government about what those criteria should be so that the government will have something on which to base its ultimate decision, when it approves or disapproves a shareholder proposal.

A multitude of promises have been made to airline workers and to Canadians over the past few weeks and months. Some of them have been in the form of commitments without a lot of meat on their bones. There have been five commitments put forward by the federal Minister of Transport. There have been other commitments and promises made in various forms by corporations. Some have been better than others. The commitments that have been made to employees by corporations and by the Minister of Transport need to be pinned down and made specific before they form part of whatever legislation comes forward.

I now wish to talk about what we believe those criteria should be. The first criterion has to do with current labour force protections and includes the following: no involuntary layoffs; no involuntary relocations; and enhanced early retirement incentives and involuntary severance packages to mitigate any job losses. The second has to do with wage equity and wage protection. The third involves the protection of pension surpluses and their use for the benefit of airline employees. The fourth criterion is that the future jobs of Canadians should be protected by preventing the export of job opportunities to foreign nationals, which is a very real danger under certain scenarios. The fifth is that the existing rights of flight attendants and other airline employees must be protected, and they must assured of their right to respect and dignity in the workplace. The sixth is that regional and charter carriers and airlines operating in and to the North must be protected. the seventh criterion is that the service to all Canadian communities, particularly in the North and smaller communities, must be maintained. The eighth is that affordable air fares and service in both official languages must also be maintained.

The requirement to meet these criteria must be enshrined in a binding fashion as part of the corporate approval process that cabinet says it will be undertaking. Adherence to these commitments must also be monitored and enforced with penalties for non-compliance.

We reiterate what we said to Transport Minister Collenette when we met with him several weeks ago: Broad policy outlines will not cut it. We need meat on the bones. We need concrete criteria, and they need to be enforceable. In addition, we believe the federal government must provide money to assist workers who will be affected by industry restructuring, including financial assistance and retraining. Certainly, considerable financial resources were provided for retraining and readjustment programs when we faced the restructuring in the rail industry. We believe the same kind of thing needs to be available here.

In the longer term, we believe that a government approved shareholder deal will be meaningless if there are not steps taken to ensure a viable industry in the long term in this country. This means that we were seeking commitments from the Minister of Transport and the Government of Canada to begin the development of a new regulatory fiscal and policy regime to foster a viable Canadian airline industry.

The first step -- and again this is outlined in a document that was presented a few years ago -- is the end of government policies that make Canadian air carriers uncompetitive in areas such as fuel taxes, user charges, leasing, and taxation. That is outlined in our paper that is entitled "Heads in the Sand."

The second step is for the federal government to begin developing effective strategies to promote a viable and well managed airline industry, strategies that foster safe and reliable air transportation through managed and not destructive competition. I underline "managed competition" because the form of competition we have had, essentially, is two big carriers who had the market divided, and what we have seen in the last few years is destructive competition, which has not helped consumers, the travelling public, airline employees, or anyone.

We believe that these strategies also have to include maintaining effective Canadian control over any restructured air transportation system. We believe they need to maximize decent-paid unionized jobs in the airline industry. That is not just good for employees but good for communities. We have to prevent the transfer of airline jobs and work out of Canada, and we have to protect the rights of airline employees -- we are particularly speaking of flight attendants today.

As I mentioned at the outset, these steps are outlined in the recommendations in the November 1997 CLC paper entitled "Heads in the Sand," which you have copies of today.

These recommendations call for domestic regulation of capacity, of routes, of fares, of air carrier financial fitness and commercial viability, as well as workers' rights. We strongly believe that government action must focus on long-lasting changes to these basic regulatory rules if it is to be effective. Otherwise, we will be lurching from one airline crisis to another. Our members have experienced, firsthand, that any voluntary corporate solutions cannot address these basic rules and will, by definition, be unable to promote the public interest in air transportation. Clearly, the corporations have shown, under airline deregulation, that they are unable to manage air transportation in the interests of Canadians.

Let me just conclude by saying, as we said very clearly in an ad that we ran today in The Globe and Mail and in La Presse, that we believe that the time for excuses is gone. We need short-term assistance for Canadian Airlines, if it is called upon. We need publicly debated criteria that will be enforceable as part of any government-approved shareholder agreement, and we also need longer-term legislative and regulatory solutions.

We call on the Government of Canada, and we ask you to call on the Government of Canada, to stop ducking its responsibilities and to develop an airline policy with teeth, and by that we mean managed competition, protection for airline workers, maintaining service to communities, and regulating the industry in the interests of Canadians.

Senator Forrestall: What is your advertising budget?

Ms Darcy: The ad I referred to is actually the first one we have run, senator, but I can tell you they are expensive. However, it is the only one we have run.

Senator Forrestall: There has been a lot of speculation about the status, on the airline side, of CUPE in different scenarios. Can I walk you through the present scenario? How many people who fall under your control are engaged in the airline business today?

Ms Darcy: We represent 9,500 members. Are you talking about flight attendants?

Senator Forrestall: Can you narrow it into Air Canada and Canadian?

Ms Darcy: Employees in the airline industry in general?

Senator Forrestall: Not in general. Air Canada and Canadian.

Ms Denise Hill, President, Airline Division: There are approximately 8,000 flight attendants between Air Canada and Canadian, and approximately 800 more with the regional carriers, who would belong to the families of Air Canada and Canadian Airlines.

Ms Darcy: You have to include them because they are part of this.

Senator Forrestall: So, roughly 9,000?

Ms Darcy: Yes.

Senator Forrestall: One year from today, should Air Canada's bid be accepted by the shareholders of Canadian, can you speculate for us how many employees you would have? I am looking for the shrinkage.

Ms Hill: Unfortunately, Air Canada has not provided us with any details. Because they have not made an official offer to Canadian, we have not been able to look at a circular to see what the plan looks like for the future. We do not have the numbers, so we do not know what it will look like in a year.

Senator Forrestall: Do not feel badly; they will not give them to us either.

That is a shame. You are going to wake up one morning wondering what the consequences to your members will be.

Ms Darcy: That is one of the questions the committee should put to them, and which should be part of the government criteria.

Senator Forrestall: I am sure you have considered this. What if they do not take your ad seriously, do not get down to business very quickly, and Canadian goes bankrupt and has to lay off all of its employees?

Ms Darcy: If Canadian goes bankrupt, about 16,000 jobs will be lost, and I do not believe anyone in this country can allow that to happen.

Senator Forrestall: How many of your membership would that include?

Ms Hill: About 3,000.

Senator Forrestall: A significant number of families would be affected. There is no comfort for them either, is there?

Ms Hill: Not as of today. As we said, we have not seen an official offer from Air Canada so that we would know what the future of Canadian looks like. When I left this morning to fly here, I saw a lot of Canadian workers, and they are feeling pretty down.

Senator Forrestall: I am sure. With respect to the line between reregulation and management of certain aspects of the industry, do you draw a line, in your thinking, with respect to new entrants, should there be a vacuum? What is your attitude with respect to job protection and those other areas for which you are responsible? Will you have a different approach the next time around?

Ms Hill: With respect to new entrants, we have always maintained that the government cannot continue to license new carriers if the population of a city or of the country does not justify adding more seats into the mix. We have said that they must do a better study of whether it makes sense to allow new entrants. We have seen that happen. Intair and Greyhound were mentioned this morning. They went out of business because there were not enough people flying. Unfortunately, in those cases, most of the jobs were non-unionized. Their employees had no protection, so they people were put out of work and not protected by anyone.

We believe that the government must look at how much of a population is being served before they start approving new entrants into the market. They have not done that in the past. They have allowed a free-for-all. Hence, we have seen overcapacity in the marketplace, and overcapacity is one of the problems we are seeing today.

Senator Forrestall: You want more than simply fit, willing, and able.

Ms Hill: Yes.

Senator Kirby: Up until your last comment, I was in agreement with much of what you said. I have great difficulty with your last comment, which was essentially that the government should prevent people from coming into a business that might lose its shirt and go out of business. The entire market system is based on the notion that companies can fail. You can take the view that, because the business failed, many people lost their jobs, but you could also take the view that, if those jobs had not been created, people would not have had them in the first place. It is not clear to me which of those is a worse alternative.

It seems to me, from a realistic standpoint, that re-regulation, in the old-fashioned sense of re-regulation, is absolutely not in the cards. It also seems to me that your call for a longer legislative policy is in the cards. The government said that it will do that.

With regard to your comment that you want government agreement to any shareholders' agreement, it seems to me that that will be conditional on the shareholders' agreement being consistent with the policy. I cannot see that the government would agree with the details of a specific shareholders' agreement.

Ms Darcy: It was Transport Minister Collenette who said that.

Senator Kirby: I think his point is that the shareholders' agreement must be consistent with the policy, and I have no difficulty with that. However, I do have difficulty with the notion that, by public policy, we should stop new entrants into a business, because the competitive marketplace works by having new people coming in. Some succeed and some do not.

Ms Hill: We are not arguing that there should never be new entrants into the market, but there must be a test level to ensure that the population is there to sustain it.

Senator Kirby: We do not do that in any other business. Why would we do it in yours?

Ms Hill: Otherwise, we will continue to have an industry that is not financially sound. When a new entrant comes in as a low-cost carrier, that has an effect on all the other carriers surrounding it.

Senator Kirby: That is basic economics.

Ms Hill: But it is not working.

Senator Finestone: I wish to thank you for your well-articulated presentation. I found your conversation with Senator Kirby very interesting. That is one of the important things we must learn. We are interested in protecting the interests of the public sector workers with regard to equal pay for work of equal value.

Ms Darcy: We have a case pending on that as well.

Senator Finestone: Our concern is the well-being of the worker, because the workers are an integral part of a successful airline policy. However, it is very important to remember that this is a private-sector undertaking. In a private-sector undertaking, good public policy is in their best interest, but stopping competition is not. That is neither the goal nor the role of the private sector.

You have enunciated the role very clearly, except that you have tagged it as government responsibility all the way down the line. Everything is related to regulation, re-regulation, and regulatory regime, whether you are talking about safety and reliability, jobs, layoffs, wage equity, service to the North, or competition. That is the responsibility of the private-sector initiatives that exist and regulatory oversight by the Competition Bureau and Transport Canada.

I should like to understand why you believe that your goals can be achieved much more easily with a regulatory system than with proper contracts between contracting parties in each of these instances.

Ms Darcy: In the crisis we have been through in the last three months, the government has been flying without an airline policy. The corporations have been battling it out and there have been no clear rules. There is virtually no policy that guides it at this time. In the end, the courts decided that Onex could not do what it was trying to do with the 10 per cent rule.

For the sake of everyone, there ought to be clear rules in advance so that everyone knows what kind of playing field they are working on. We did our best and we will continue to do our best to negotiate whatever we can. We had commitments from Onex and from Air Canada. However, there is the issue of the enforceability of those commitments, and there is the issue of what criteria the government will use when it decides in the end that a certain shareholder proposal is acceptable.

Senator Finestone: It is true that there has been chaos. There has been a great deal of disruption, difficulty, emotionality, and hostility between parties. However, if the Minister of Transport had not opened the Onex and Air Canada deal up to public debate, the population would not have been aware of the issues to the extent that they are today, and they would not have been as sensitive to the interrelationship between slots, American-Canadian issues, international flights, the issues surrounding national, regional and international carriers, and the potential for corporate competition.

This debate has been an important exercise in public policy. You said that there was no leadership, or there were no guidelines. The guidelines will flow from the chaotic and unfortunate circumstances that we have had to live with. That is not a happy case for the workers, especially those at Canadian. Everyone in this room is well aware of that issue.

However, I wanted to suggest to you that regulation is not the only way to go.

Ms Hill: Much of what you said is very true. We always enjoy the debate. However, the problem was a lack of clear rules on where the debate was going. I will take you back to the 1996 airline crisis with Canadian Airlines. Coming out of that, the then Minister of Transport, David Anderson, agreed to set up a minister's advisory committee on the transportation industry. We warned at that time that we would once again run into a crisis in this industry because we were ignoring what the problem was. We were ignored.

Senator Finestone: What was the problem that you thought we were ignoring?

Ms Hill: We talked about capacity and routes, for example. We had a year of hearings with representatives from Air Canada, Canadian Airlines, the charter carriers and from the airports that you saw here before you, and their response to it was, "We don't really care if Canadian survives or if Air Canada survives or if any airline survives, because someone else will come along and pick it up and we will get paid."

Senator Finestone: I think that is a very rough and unfair comment.

Ms Hill: It is true. He said that. Here at the committee we were trying to determine what the problems were and trying to find solutions. We put forward solutions to the minister, who, unfortunately, would not even meet with us to talk about what we could do to ensure that we did not run into another crisis. Of course, here we are again in 1999 in another crisis.

You are right that debate is always good. We have heard many things about slot times and other issues. Unfortunately, there were no clear rules by which we should be abiding. Mr. Collenette spoke about criteria, but how would he enforce the criteria?

Senator Finestone: As things unfold we will see how guided or misguided we are in our observations. I am pleased that you appeared before us today.

Senator Fairbairn: You are appearing here to place as much pressure as you can on the confused situation of your employees and your concern for them. For most of us who travel often, there are broad concerns for the airline industry. However, I do not think they are as fundamental at this stage of the debate as the concern for the employees and the way this situation progressed. We have heard from the heads of both the airlines and from Mr. Hargrove, and we have read the media. I do not seek reassurance from you but, rather, your view. Is the reported rift between the employees of the two airlines as a result of the competing bids and the discussions with union representatives as great as the media would have us believe? Is that real? Is there a way of easily bringing this together, or will this be a very complicated process?

Ms Darcy: It is every bit as deep as you have seen. This is not the first time it has happened; it also happened in 1992-93. At that time, the signs read "Better dead than red." That phrase, which has been commonly used, has a whole new meaning when it is used in the airline context. However, the rift is very serious and deep. It is of grave concern to us because we are trying to speak on behalf of, and do what is best for, all airline employees and the industry. We do not think those two ideals are incompatible; that is why we place considerable attention on what is in the public's interest as far as the industry is concerned. This is something that we should all be concerned about. This is about people who will work either side by side at counters in the airport, side by side in slots, or potentially side by side as crews in the same aircraft in the future.

To return to the reference that Senator Finestone made earlier, namely, that we needed to go through this debate, I cannot emphasize that for you enough. The public debate is an excellent thing. I wish the process had started by the Government of Canada saying: "We propose that there be these new rules, policies, or criteria, or whatever you want to call it, that govern the airline industry. As a country, let us speak about that. Let us involve all of the stakeholders." We would have welcomed that debate. That is the debate we tried to take part in and that is the debate that occurred in the middle of the night in that Canadian Airlines crisis in Vancouver three years ago. It always comes at this time of year, and the reason for that is obvious, in terms of the travelling public and so on. In the middle of the night, we said, "You must get on top of long-term issues about policy. We want to be part of that process. We think it is about deregulation, but let us engage the stakeholders and the country in that debate." We did not have to go through it in the way that we did in the last few months. It put everyone through torment and will have long-term consequences for morale in the airline industry. There is no question about that. People are torn apart; families are torn apart.

Senator Fairbairn: We have a chance to make recommendations to do things differently in upcoming legislation. I understand what you are saying. I have an intense admiration for the employees and, in particular, those in the category of the flight attendants.

Ms Darcy: Yes. They must smile every day.

Senator Fairbairn: That is right. They must camouflage their true feelings every hour of every day in their dealings with the public.

Do you have any confidence in the assurances that you have heard? We have heard from both airlines and from one of your activist leaders, who was here last night. Do you have assurance from both airlines at this point that your concerns are not only being seriously considered but also guaranteed in the process of developing this new entity, whatever it may be?

Ms Darcy: We do not. That is why we believe that government has a major role to play in ensuring that whatever commitments are made will be enforced. That should be part of the criteria for approval by cabinet or government.

The Chairman: Ms Darcy, will you send us a copy of the text of your presentation? I think senators would appreciate reading it again. Thank you for your presentation today.

The next witnesses are from Star Alliance.

Mr. Rono J. Dutta, President, United Airlines, on behalf of the Star Alliance: I have a written text, which I would like placed in the record. However, events have overtaken us since we wrote it. Therefore, some of our events will relate to the Onex deal, which, at this point, is somewhat redundant.

I should like to say a few words in French before I start. I would ask for your indulgence because my French is not very good.


Fortunately, the takeover bid has been unsuccessful, in light of the developments late last week and the decision by Quebec's Superior Court.


I will focus most of my testimony on the international side of the issue. Ten years ago, most of the traffic was between major economic centres, such as New York to Los Angeles or Los Angeles to London. The traffic that is showing the highest growth rate, however, is from medium-sized cities -- for example, the traffic from Edmonton to Milan, from Calgary to Sao Paulo.

While we are focusing on domestic competition, it is also important to ensure that Canadian aviation can compete internationally. At the end of the day, if all the international traffic is carried by United, Lufthansa, American, or British Airways, that does not serve the Canadian economy well. I shall focus most of my comments in that regard.

The first slide shows that the underlying, global trends are positioning aviation as a key engine of economic competitiveness. Clearly, there is an explosion of global trade. That is driven by many barriers. Whether it is information, trade, or currency, all of those barriers are coming down. Aviation is at the forefront of these trends. In some ways, it is useful to liken it to the building of major highways. Towns and communities that were positioned on these highways developed economically, and communities that were not well positioned as these highways were being developed saw their economic activity actually diminish. Similarly, it is very important for Canadian communities to be well structured along these highways, and it is important for Canada to have a strong global arm in its aviation decisions.

In my remarks, I will speak about hubs and networks, so if you will indulge me for a few minutes, I would like to ensure that everyone knows what I mean. A point-to-point schedule has no hub structure behind it. Let us say there are eight cities, each of which has an underlying traffic flow of 50 passengers. Therefore, from A to C or from G to B, there is an underlying traffic demand of 50 passengers per day. Let us assume, again hypothetically, that the break-even load factor for a given aircraft type, such as a 737, is about 80 passengers. Under these circumstances, although you have this potential demand, it cannot be economically served because there is no load factor that justifies airline service.

Let us now look at what happens if you take the same demand and funnel it through a hub. Now, instead of flying point to point, all of the cities are connected to a hub. The 50 passengers that were going from A to B, A to C, et cetera, are collected into a total demand of 400 passengers. Taking again a hypothetical 80-passenger load factor, now suddenly you can justify five flights between the cities. That increases convenience. You have five flights instead of none. More important, the cost structure of serving those passengers goes down because, as we know, larger aircraft have lower unit costs.

Therefore, in looking at the health of any airline, it is critical to look at the strength of its hubs. An airline with all the motivation and goodwill in the world that does not have a good hub structure cannot compete well, either domestically or internationally. That is one of the problems that I think faces Canadian today. However, it is also one of the opportunities that is presented by the Star Alliance.

The Star Alliance takes this hub network, the hubs of individual carriers, and puts them together into a string of networks. As a result, a person can now travel from Calgary to Istanbul over the network provided between Toronto and Frankfurt through the Star Alliance. As I said before, it is that growth in traffic that is fuelled by global trade. That is what Star makes available. Similarly, between Calgary and Denver, connecting the hubs essentially means connecting Winnipeg to all the cities south of Denver. Again, that is where the growth is in transport or traffic.

Star Alliance, over the years, has taken the major economic centres across the globe, whether it be Tokyo, Sidney, Sao Paulo, Toronto, London, or Frankfurt, and has put them together into this global highway. That is what fuels the flow of passengers across the globe.

To the extent that airlines are positioned with weak hubs or with weak networks, they are not able to compete effectively. Air Canada has done relatively well over the past few years because it has become a member of this network, a member of this hub structure, which then allows it to compete effectively. Canadian, unfortunately, has not been able to do that, to a large extent. It is not enough to have just a hub structure, clearly. You need to have good safety, good product, and good services. Our collection of brands is testimony to what a strong product offering we have. As you can see, we have Singapore Airlines, United, Lufthansa, Thai -- all well-known global brands. We are proud to include the maple leaf in our global spectrum.

This is not just an internal look at alliances. Outsiders, too, are looking at that. There have been numerous studies trying to define how these alliances measure up against one another. There are four global airways being built: Star; Wings, which is the KLM/Northwest alliance; oneworld, which is the American/British alliance; and there is the Delta/Air France alliance. Of all of those, Star is the clear, acknowledged leader. Again, that is one of the strengths that Air Canada brings to the table in building these alliances.

One of the problems that oneworld is running into is that their routes overlap rather than being complementary. When British and American proposed putting them together, both governments on either side of the Atlantic, the EU and the United States, had a major problem with that because it was overlapping rather than complementary. Their structures fell on top of each other instead of connecting, the way we showed for Toronto to Frankfurt. If oneworld did absorb Air Canada, you would find a similar issue, because your two biggest destinations are London and Hong Kong. With Air Canada and oneworld rolled into one, it would have eliminated all competition. In London to Toronto, for example, it would be British Airways and Air Canada both in terms of one alliance, if Air Canada had joined oneworld. Similarly, Hong Kong, Singapore, and Cathay would have eliminated all competition. Fortunately, this is not a dilemma that is facing you any more because Air Canada is firmly with Star.

Senator Finestone: I do not understand that particular graph. Would you go back to that oneworld overlapping with Star?

Mr. Dutta:Let us take United and Lufthansa. United is strong, Chicago to the west, and Lufthansa is strong, Frankfurt to the east. When you put the two hubs together, essentially you are taking all the cities to the west of Chicago -- San Diego San Francisco, Denver, et cetera -- and connecting them to all the cities east of Frankfurt -- Istanbul, Bombay, et cetera -- and that is what we call a complementary hub structure.

However, if, between New York and London, British and American are the only two hub carriers and they go into an alliance of some nature, then you do not have a complementary alliance. You have eliminated competition on key routes. When British and American were proposing the alliance, the government identified the fact that what American brought to the table was 12 or 13 more cities that British did not already serve either directly or through the alliance members. Therefore, you are not opening up new cities. You are just overlapping existing routes. You would have a similar problem if Air Canada had joined British and Cathay, who are members of oneworld, because in your key international routes all the competitors would have belonged to one alliance. Is that point clear?

Senator Finestone: Thank you.

Mr. Dutta: It is important to keep in mind that it is critical for the Canadian economy, for Canadian competitiveness, to have a strong airline that can compete effectively against the British, American, United, Continental, and the Northwests of the world.

The question is, which airline structure makes Canadian aviation the strongest? Clearly, you need an airline that can provide you with the greatest support in markets that are important to you.

The reason Canadian has not been successful in doing an alliance with American is that American brings very little strength in markets that Canadian should be flying. Canadian should be flying cross-border along the West Coast to cities like San Francisco, Los Angeles, Portland, and Seattle because those are very profitable routes. American, being as weak as they are in those cities, cannot provide Canadian with any support. As a result, while every airline has seen its transborder traffic between the U.S. and Canada growing -- and that is one of the highest profitable markets right now -- Canadian has been unable to participate in those key markets.

Air Canada, on the other hand, with the strength that United brings along the border, has done very well in transborder markets.

American's strength, by and large, tends to be along the southern-tier cities, the Austins and San Antonios, which are not particularly important to Canadian aviation. United, in particular, brings strength close to the border, followed by Northwest, then by Alaskan. American is not a strong player in those markets. That is one of the key reasons that Canadian is finding it hard to develop an alliance with American and make it meaningful. Star, on the other hand, does bring a lot of strength and opportunities for Canadian.

It is also important to understand the underlying philosophies and founding principles of Star versus other alliances. United really prides itself on its core competence of building long-term relationships, which are based on maximizing mutual, long-term benefits to each party. There is a principle of equality and collaboration.

We have nine or ten members in Star, some of whom are relatively small. I point to Ansett. I point to British Midland. I point to Austrian Airlines. These are very small airlines. Most of them had previous relationships with other alliances. The reason they are all flocking to Star, voluntarily, is the realization that they have an equal voice at the table. Second, they are driven by marketplace benefits rather than carrier control. Ansett, Austrian, British Midland, Singapore, Thai have come to us voluntarily. We do not force them to come to us by buying into their equity structure.

Air Canada, in particular, has consistently done numerous analyses to say who is the best alliance for Air Canada to join. They repeatedly come to the same conclusion: Star provides the greatest benefit for Air Canada. They come voluntarily after reasoned debate and internal review as to the best conclusion.

I wish that it were true for Canadian, as well, that it would be free to choose the alliance that best suits its needs. There are no service contracts with hidden transfer of benefits in Star. Each party runs its independent reservation system and its independent frequent flier system. There is no hidden transfer of wealth between airlines based on service contracts at less than market rates.

All recent new entrants, as I have said -- Austrian, for example -- have come to us defecting from other existing relationships because they see the benefits of Star, particularly in its democratic principles of equality. We do develop all of our relationships based on the win-win principle and based on the long-long term. We are not here to win one transaction at a time. We might lose a given transaction, but we want it to work for both parties long term.

Finally, we are further ahead than oneworld in development and integration worldwide. In other words, with its code sharing, its antitrust immunity, and its frequent flier program, Star is further ahead than oneworld, in particular.

Canada a one-time opportunity to determine its long-term aviation policies. It has an opportunity to find a long-term solution to its problem with Canadian. It would be a shame if the focus were on the near term, trying to do one more transaction, and Canadian does not become integrated with Air Canada. In the long term, the problem would not be solved. The long-term problem is that Canadian has a weak network, a weak hub structure. It is not part of a strong alliance. Therefore, it is difficult for Canadian to survive economically.

The long-term solution is the integration of Canadian with Air Canada and to build that into the Star Alliance. Canadian aviation would then have a competitor that could compete internationally.

I would be happy to answer any questions you may have.

Senator Roberge: I believe that, on October 19, 1999, you signed a 10-year agreement with Air Canada on behalf of Star Alliance. Are there any special covenants within that contract that would be specific to the frequency, and possibly the slots, at the Chicago and Frankfurt airports?

Mr. Dutta: None whatsoever. Our contract essentially protects us for the long-term. It specifies that for 10 years Air Canada would continue to code share with us. As to where Air Canada flies, with what frequency, and with what equipment, we have no say in those issues at all.

Senator Kirby: Just a simple clarification, since you are wearing both hats -- United and Star. You used the word "we" a couple of times. Is "we" United Airlines or Star?

Mr. Dutta: In this particular case it is Star.

Senator Roberge: Where do you see the issue of cabotage going in North America in the next few years?

Mr. Dutta: I should like Ms Longmuir to answer that question.

Ms Shelley A. Longmuir, Senior Vice-President, International, Regulatory and Governmental Affairs: With respect to cabotage within Canada.

Senator Roberge: I am talking about North America.

Ms Longmuir: Meaning within the United States.

Senator Roberge: And Canada.

Ms Longmuir: For cabotage within the country of Canada we would defer to the Canadian government as to how best they would resolve that. We would not have a say in that matter. With respect to cabotage within the United States, as you may know, United Airlines is an employee-owned company, and that is an issue currently under discussion and debate within our company. Currently, we feel strongly about getting the "sign on" of all of our interested constituent parties, which would include the pilots, in particular, with respect to whether or not we would support cabotage in the United States.

Senator Roberge: Internationally, there is much focus on the subject of cabotage. Perhaps airlines in the United States are also involved in a discussion about cabotage.

Mr. Dutta: We do not have an official position at this point. Clearly, it is an issue of discussion. With so many issues involved, we do not have a clear consensus as to what our position is.


Senator Poulin: With increased globalization, partnerships are increasingly important if companies are to evolve. Could you explain to us what exactly an alliance between companies like Star Alliance, United Airlines and other Canadian companies means in terms of the day-to-day operations of a company like yours?


Mr. Dutta: Let me be specific. The Star Alliance between United and Air Canada means that we fly from various hubs, which are Chicago, Denver, Washington, San Francisco and Los Angeles, into various Canadian cities.

Air Canada flies from its hubs into various U.S. cities. We have a practice called "code share," which means that when Air Canada flies from Toronto to Washington it shows up both as an Air Canada flight and as a United flight. The practice enables airlines to coordinate their schedules. If someone is flying from Toronto to Winnipeg, going on to Washington and then connecting on a United flight to another city, we try to make the whole experience as customer friendly as possible. We try to put our terminals close to each other. We allow one-stop check-in. We recognize frequent-flier miles. More important, we try to make the schedule as customer friendly as possible. When a customer books a flight, it is apparent to that customer that that this is one alliance under which their bags, itinerary, and travel can be planned in a customer-friendly fashion.

Senator Poulin: In trying to make these alliances workable, what are the main difficulties that have been met?

Mr. Dutta: The major difficulties really are found in the information systems. Airline information systems are fairly complex. Ensuring that the two systems are talking to each other is a major challenge. Structurally, that was one of the most important challenges.

Equally, when you have nine or ten airlines with their own strategies and cultures, it can be difficult to develop a consensus on issues like branding, marketing dollars, and advertising budgets. Again, we have consciously tried to give every player, regardless of size, at the table an equal vote.

Senator Spivak: You talk about a win-win situation for everyone. In terms of the arrangement between American Airlines and Canadian Airlines, obviously to American Airlines the arrangement is worth hundreds of millions of dollars, in terms of routes and code sharing.

You have explained the advantages for Air Canada. What is in it for United? What is in it for Star Alliance? What is their "win" side?

Mr. Dutta: The benefits are mutual. Air Canada has a stronger presence in U.S. and in Australian cities because of Star Alliance. It has a stronger presence in Japan because of ANA. As well, each of the Star partners, be it ANA or Ansett, has a stronger presence in Canada.

Global trade is fuelling these alliances. The total incremental revenue that we receive from Star Alliance exceeds $200 million. Of that, the portion from Air Canada is worth about $30 million annually. There are benefits for all parties, but the benefits really come from offering to the customer the ability to travel worldwide on these combined infrastructures.

Senator Spivak: You are not doing that for the good of your health, though. Customer service results in profits.

Mr. Dutta: Sure.

Senator Spivak: You mentioned that development and integration in Star Alliance is far more advanced than in oneworld. Globally, we are seeing huge mergers in many sectors of industry. As I understand it, this alliance is a different form of merger.

Do you see further integration in the future? What does that mean for competition, for international travel, and for independent carriers? We just heard from Canada 3000 about some of the inequities they face. There is a demand to change some of the rules that seem to fly in the face of fair competition. What impacts do you foresee?

Mr. Dutta: I will take the last question first. What are the impacts of alliances upon competition? There are four major growing alliances. They compete with each other. Each of these four developing systems will try to take passengers from A to B. The question is this: Who can do it better, with more frequency, and with the quickest network. Those are some of the measures to be considered.

Senator Spivak: Does size matter?

Mr. Dutta: Does size matter in the major cities? Absolutely. Size is important for any business, particularly in terms of which cities are served and with what frequency.

Will there be competition? Yes, there will be competition between the four alliances. In their study to determine whether alliances are anti-competitive or pro-competitive, the U.S. Department of Justice concluded that alliances are pro-competitive. In countries where strong alliances emerge, fares go down. I am sure the American justice department did a thorough analysis to come to that conclusion.

You also asked about the future of these alliances -- a question to which I am sure each alliance would give a different answer. Star Alliance's answer is that the future is unknown. We will take baby steps into the future. We will do it voluntarily. We will do it in a consensus-building mode. No alliance will own other members of the alliance; each member will have equality at the table. We will experiment with slow steps. Most of all, we will focus on the customer. We will let the customer guide us as to what is important.

Senator Spivak: It appears that American Airlines has a virtual veto on every important management and business decision of Canadian Airlines. They have demanded rather high annual fees from Canadian Airlines. Even Mr. Schwartz admitted that their fees might have been excessive at one time.

Mr. Milton was asked about the kind of control that Lufthansa and United might have over the business management of Air Canada. He said they have none at all.

I ask you the same question. Will these agreements be transparent? Will they be tabled publicly? Will we be able to see the exact elements of the agreements or contracts between Air Canada and Star Alliance and the alliance members? Will we be able to examine them?

Mr. Dutta: It would be useful at this point to highlight the key terms of our agreement. Mr. Brace will do that.

Mr. Frederic F. Brace, Senior Vice-President, Finance, United Airlines: Air Canada has been a long-time partner of ours. They came to us and asked for help. As Mr. Milton testified, the Star Alliance, along with CIBC, gave them $500 million worth of value. In return for that value, we helped them to deal with the Onex situation.

We also entered into a 10-year, code-sharing alliance agreement with them, as did Lufthansa. As part of that agreement, a separation from the Star Alliance would cost Air Canada $250 million in liquidated damages. As you said, we are not in this for the good of our health. We, in conjunction with CIBC, paid them $500 million.

As part of that, we have made some investments. We bought some preferred stock; we entered into some sale lease-back transactions with them; and we provided them a bank facility. As part of those transactions, we have no special governance rights, we have no members on the board of directors, and we have no special voting rights. The preferred stock that we have converts into approximately 7 per cent of the non-voting stock of Air Canada. Therefore, we have no special influence or control in Air Canada. They are part of our alliance; they are one of the partners in our alliance, as Mr. Dutta said.

Senator Spivak: Does the 10-year code-sharing agreement have an equivalent value to the $500 million, or has it got greater value in financial terms? Second, if the ownership limit were lifted and someone else wished to purchase Air Canada, would you have any part in that decision?

Mr. Brace: We had no part in the decision. Air Canada's board of directors decided how to respond to Onex. We provided them some financial help. They asked for that help, we provided that help. They are our partner, and we did that.

The value from the code-sharing agreement is substantial. Our share was $300 million; CIBC's share was $200 million. We made that investment because we think we will get value to that extent.

Senator Roberge: Over and above the $500 million, it is my understanding that United and Lufthansa entered into a partnership and also loaned some money for convertible, preferred shares.

Mr. Brace: Let me go through that again slowly. I believe I might have confused you.

Senator Kirby: May I ask you to be very clear on the word "we". I was with you until you used the word "we". The first time you used it I believe you meant only United, and the second time you used it I believe you meant United and Lufthansa combined.

Mr. Brace: We, United and Lufthansa, entered into an agreement where we both put money into a joint venture. That joint venture is buying preferred securities of Air Canada that are convertible into non-voting Air Canada shares, which amount to approximately 7 per cent on a fully diluted basis. We, United, also invested in a sale lease-back arrangement for three A-330 aircraft, one of which I believe has been delivered already, two of which are soon to be delivered. We did that on very favourable terms to Air Canada. That also provided them some value. We, United and Lufthansa, agreed to guarantee an amount of $310 million at a bank facility. If I did the numbers right, it should add up to approximately $730 million.

Senator Finestone: One of the things that concerns us is customer satisfaction. I believe that Star Alliance is also concerned about customer satisfaction, is it not?

Mr. Dutta: Absolutely.

Senator Finestone: Would you suggest that when customers are disgruntled they will say, "I am never flying with that airline again"? It may be because of dissatisfaction with the food, poor service at the gate, distances they have to walk, baggage-handling issues, et cetera; correct?

Mr. Dutta: Yes.

Senator Finestone: The older generation, who are major travellers, are not being well served by the present structure, whether it is Air Canada, Star Alliance, oneworld, or whatever. Do you have an arrangement in place whereby you look at these issues and discuss them when you sit down with your alliance partners?

Mr. Dutta: It is very important for us to have partners that are on par in terms of all aspects of customer service. The most critical aspect clearly is safety. As you know, in view of events such as the Korean Air crash, government worldwide, the U.S. government, in particular, have become quite sensitive to this issue.

In particular, we do a thorough internal review of safety standards. In addition to that, although not as in-depth, I would acknowledge, we also assess quality standards -- issues related to customer service, to which you referred. Star Alliance is adamant that it will not include as its partners any airline that will drag the level of service, perceived or actual, down.

Senator Finestone: You would be amazed at what is discussed at bridge tables or at the 19th hole on the golf course. You might hear someone complain about the drinks that were offered or the flavour of mints that were distributed to the passengers. You might also hear complaints about having to walk a long distance between gates in order to get to a connecting flight. These issues are important to travellers.

I would now turn to the issue of slots. Do any of the partners of Star Alliance come into our Canadian airports?

Mr. Dutta: We fly into a number of Canadian airports.

Senator Finestone: Do you ever have a problem with landing rights, in terms of getting a slot, et cetera?

Mr. Dutta: Since we went to Open Skies between our two countries, specifically Air Canada to U.S., the environment is much more favourable to more growth by both countries. In fact, cross-border traffic has grown in double digits, as I recall, over the past few years.

I am not aware of a situation where we have not received a slot at a given point. There may have been an occasion in Toronto where we did not receive a particular slot at a particular time, but it has not come to my attention.

We have added flights to Calgary and Vancouver. These routes are quite profitable and we plan to continue to grow in Canada.

Senator Kirby: Mr. Dutta, your overview of the Alliance was very helpful. Having been through the two and-a-half hours we went through this morning, it is nice to have a witness who answers questions.

I wish to ensure that I understand the numbers. First, was the $250-million penalty for breaking the 10-year agreement calculated as the present value of the stream to you and Lufthansa of what you would lose if Air Canada backed out of the deal by present day calculation, roughly?

Mr. Brace: It was a negotiated number.

Senator Kirby: There are three aspects to your financial support. The first is the lease-back. The second is the guarantee of the bank facility, which I believe your press release said was $160 million of the $310 million?

Mr. Brace: Three hundred and ten million for Lufthansa and ourselves.

Senator Kirby: Each?

Mr. Brace: No, $310 million combined.

Senator Kirby: Your portion is $160 million?

Mr. Brace: Yes.

Senator Kirby: What did you get in return for that? You are not in a charitable business; hence, you would not do that unless there was something in it for you. What is in it for you?

Mr. Brace: We get some market base fees on providing the guarantee. If they draw on the guarantee, we get some fees based on the differential between our credit standing and that of Air Canada.

Senator Kirby: You were essentially a banker?

Mr. Brace: Somewhat. Let me be clear. They are borrowing directly from the banks. We are providing a guarantee; therefore, the banks give them our credit rather than theirs.

Senator Kirby: That strikes me as a relatively unusual thing for a major corporation to do for another corporation. This is not the standard way by which guarantees are lined up. I am somewhat curious. There must be some underlying reason for doing it -- and I do not mean surreptitiously. I am just trying to understand what it was.

Mr. Dutta: What is in it for United from a strategic standpoint?

Senator Kirby: Yes, exactly.

Mr. Dutta: I must speak on behalf of the alliances. Let us assume that someone from Nagoya wishes to come to Canada on business. If there is no Star Alliance member in Canada, that person will be on JAL. On the other hand, if a major Canadian airline is a member of Star Alliance, then the person who is landing in Toronto and is travelling to Winnipeg or Calgary, the passenger who originated his travel in Japan, is likely to be on ANA, which is a member of Star Alliance. That is the fundamental issue Star Alliance is trying to protect. That is what is in it for us.

Today, the number is $30 million. It may or may not grow, although we think it will grow with global trade. However, we want to ensure that Canada's major airline is a member of Star Alliance. It is important to all the members of Star. It is also important for the originating traffic in each of those countries.

Senator Kirby: You mentioned earlier that Star Alliance is worth roughly $200 million to United and $30 million to Air Canada. How do you calculate that value? I am curious as to how you decide who you got because they came in on Air Canada and who you would have had in any event.

Mr. Dutta: Clearly, it is with a great deal of difficulty.

Senator Kirby: You must make a number of assumptions.

Mr. Dutta: Yes. We look at the traffic we used to carry. We look at the traffic we now carry. We look at our position on the travel agent's screen. As I explained before, the alliance means that an Air Canada flight now shows up as a United flight. That has a certain amount of sales draw in the travel agency community. I would say we might be off by 10 per cent. We are not off by 100 per cent.

Senator Kirby: Presumably, you use that same methodology with all of your partners.

Mr. Dutta: Yes.

Senator Kirby: Do the convertible preferred shares have a guaranteed dividend rate?

Mr. Brace: No. There is no dividend on those shares.

Senator Kirby: They carry just the conversion privilege and nothing else.

Mr. Brace: Yes, that is right.

Senator Kirby: Are they marketable? Can you sell them?

Mr. Brace: We could sell them or convert them and sell the underlying shares. The conversion price will be somewhere between $24 and $28 per share. When I say that we and Lufthansa had 7 per cent, that is assuming that they were converted somewhere in that $24 to $28 range.

Senator Kirby: I have two other questions related to some of the proposals that our Competition Bureau has put on the table. Our Competition Bureau is the equivalent of your justice department's antitrust branch. I am interested in your views of these proposals from the perspective of the president of United.

Two specific proposals have been put on the table. When I say "put on the table," I mean that they have been suggested by the Competition Bureau as a way to deal with the issue of one dominant airline in Canada, regardless of whether one got there through the bankruptcy of Canadian or the ultimate merger of the two.

The first proposal I have taken to calling the "quasi-cabotage" proposal. For example, let us consider a flight from here to Calgary via Chicago, which is doable. What is your reaction to that? From your point of view, the flights already exist. The only impact that would have on you is that it would enable you to offer the fare as a through fare rather than what you have to do now, which is to offer it as two separate segments.

Am I right in assuming that, from a business standpoint, if you had that opportunity you would obviously do it?

Mr. Dutta: It is slightly more complex than that because there is a reciprocal image of that. For example, someone going to San Francisco from Boston could just as easily connect through Toronto.

Senator Kirby: That assumes that there is a reciprocal agreement between Canada and the United States, which I think would be extremely difficult to achieve. Forget for the moment that the reciprocity is there. Let us assume it is not there. It seems to me hat there is no reason in the world why you would not take advantage of that.

Mr. Dutta: In the one-sided deal that you describe, that is right.

Senator Kirby: I understand that it sounds like a one-sided deal. However, if the public policy issue, not the international issue that we have been talking about, is concern about adequate competition domestically, then you may want to find a way of providing additional competition from point A in Canada to point B without going to cabotage. The danger of cabotage is that large American players like yourselves could do it at marginal costs, not average costs. It seems to me that you ought to be able to do that in a manner that is pro-competitive in Canada without being totally predatory.

Mr. Dutta: That is absolutely right.

Senator Kirby: Therefore, I think the answer to my question is that, yes, you would be interested in doing that if it were available.

Mr. Dutta: That is absolutely right.

Senator Kirby: That is to say, without committing yourself to the notion that it is reciprocal.

Mr. Dutta: That is right.

Senator Kirby: The second issue put on the table was the notion of allowing a domestic airline in Canada that is 100 per cent foreign owned to serve only domestic cities. It would not carry any transborder traffic. For example, you could have "United Canada," which, from your point of view, would mean a Canadian regional airline, except the region would be the country and you could not fly internationally. The argument in favour of that made by the Competition Bureau is that, if it can only be an airline operating in Canada, why do we care who owns it? Why would we worry about that? It only gets complicated if you cross the border. Would you have any interest in owning such a regional airline? Please keep in mind that I am defining the region to be Canada.

Mr. Dutta: Off the top of my head, no. I return once again to the hub structure. What is important to us is traffic that feeds into the network. Therefore, traffic that somehow does not feed into the network is of very little value. The Canadian traffic is important to Star Alliance to the extent that it feeds into Toronto and Vancouver and connects globally.

Let us take an airline that operates just in the Caribbean and stays within the confines of the Caribbean. We might as well be in the hotel or car business. It has no synergy with our existing business.

Senator Kirby: That is why I say that the "quasi-cabotage" option over a U.S. hub is of genuine business interest to you while the other is of much less interest to you.

Mr. Dutta: That is right.

Senator Finestone: In answer to Senator Kirby's question concerning the worth, et cetera, you said that you would take a look at what the travelling public did on United, for example, and that you would examine the increase or decrease as the case may be to make your business case. I should like to make my privacy case. What do you do with my name? Who gave you permission to use that information to make your measurement so as to understand what is going on? Do you give me a number? Do you remove my name, address, and phone number? Do you remove where I went on my trip? What do you do with that information? How private is it?

Mr. Dutta: The analysis we were referring to is strictly internal.

Senator Finestone: Are you saying that no one sees that but United?

Mr. Dutta: That is correct.

Senator Finestone: Are you saying that no one but United would see that if I were travelling on Air Canada and then on United?

Mr. Dutta: If you were travelling on a number of airlines, clearly, every one of them would see it.

Senator Finestone: Did you ever ask me if I wanted my name added to your spread sheets?

Mr. Dutta: That is a government regulation issue. I cannot comment on it. It is something over which the government has jurisdiction.

Senator Finestone: At this moment you feel free and at liberty to do that.

Mr. Dutta: Based on government regulations, yes.

Senator Finestone: What government regulations give you the right to do that?

Mr. Brace: Mr. Dutta may be answering a different question from the one you asked. We try to determine how much extra revenue we get. That does not involve anyone's name. That involves calculations strictly from a ticket basis. My department does some of those calculations and they do not have big spread sheets full of people's names. Obviously, people's names are in the records, given that their names appear on the tickets, but that does not go into any of the calculations that you were referring to, senator.

Senator Finestone: If I am a frequent flier from Montreal to Palm Beach, my name does not appear very often on the Delta list or on the list of any of the other airlines that might fly into Miami or Arizona or California. I am trying to find out why you are always sending me stuff based on where I have gone or want to go. Where did you get my name, address, and phone number?

Mr. Dutta: I do not think any of us are experts on that issue.

Senator Finestone: I suggest you look that up because I would like an answer, if you would not mind.

Ms Longmuir: I would be happy to follow up.

Senator Fairbairn: This whole adventure over the last several months has drawn a new element into the consciousness of Canadians. I am not sure that there was much of a grip on the questions of alliances until, all of a sudden, they loomed large in this new equation, to the extent, perhaps, that they seem to be more important, in terms of power and influence, than the individual airlines that make them up.

From the perspective of Canadian, it would have appeared, for the purpose of the struggle that was going on here, that your 10-year agreement was extremely important for Air Canada to obtain. Having listened to you today, it would appear that this was not simply a one-sided gift of goodwill. You evidently felt that, for this country, that 10-year agreement was very important for the alliance to nail down as well. Am I correct?

Mr. Dutta: We were clearly offering assistance to Air Canada. We did not want to offer the assistance and then find that Air Canada had gone to oneworld along with all the goodies we had given them. Therefore, it was a quid pro quo for us. We made a contribution in return for which we desire a long-term relationship.

Senator Fairbairn: We did hear testimony this morning from Mr. Milton, who said that, in discussions some months ago with American Airlines, or with AMR and Canadian, the question of oneworld came up. He indicated to us that, pragmatically, had it been in the best interest of his shareholders then that is the way it might have gone.

Mr. Dutta: That is one of the key points that I would like to make about Star. All of us continuously do analysis as to who is our best partner. We did not just do a deal with Lufthansa because of some external pressure. We sat down and we looked carefully at opportunities with British Airways and with Air France, and we concluded, both from a network standpoint and from a culture standpoint, that our best alliance was with Lufthansa. Air Canada, again, freely and voluntarily, does this analysis over and over again. I have seen some reports in the press saying that Air Canada considered oneworld. Of course, they did; of course, they should. They must do that analysis over and over again.

The important thing, however, is that they freely and voluntarily concluded that it was in their interests, and in the interests of Canadian aviation, to be with Star.

Senator Kirby: Just to pick up on something Mr. Dutta said, I think you said that you did not want to end up in a situation in which you had provided all this assistance and then Air Canada had gone to another alliance. Does that mean that, had the Onex proposal gone through and had Air Canada, in fact, gone to oneworld, the cost would have been the $250-million penalty that we talked about earlier, but also you and Lufthansa would have asked for all of your money back immediately? Is that a reasonable interpretation of what you said?

Mr. Brace: The short answer is yes.

Senator Kirby: Which means, in effect -- this is theoretical because the Onex proposal is not on the table -- that, had the Onex proposal in fact been successful, the cost to Air Canada's new owners would have been not just the $250-million but the rest of the $700, so it would have been closer to $1 billion. I am just using numbers approximately.

Senator Spivak: I thought that was just a guarantee.

Mr. Brace: That is correct. The $730 million would have to be repaid. However, a significant part of that was just market-based financing, so we would have, of course, asked for our financing assistance back because we would not want to have financed the other guy's purchase of Air Canada. That would come back to us, and they would have to replace it with their own funds. I would not characterize it in the same way you did, but the money would have come back to us.

Senator Spivak: May I just clarify that? That was not actual money. It was just a guarantee at the bank. Air Canada as part of Onex would have had to get other financing.

Mr. Brace: Yes.

Senator Spivak: But there would not be a penalty to that.

Mr. Brace: No. They would just have to undo the financing that we provided.

Senator Fairbairn: Let us say this whole thing goes through and you have your founding partners still intact, with perhaps another airline submerged within it, which opens up competitive possibilities for others in Canada. In dealing with nationals, would you only have one companion in a country? Is there any possibility that you would pick up another airline for your alliance in any given country?

Mr. Dutta: That brings us back to the notion of complementary versus overlapping issue. We are careful to build complementary, not overlapping, networks. Therefore, that would push us in the direction of not doing that. Offhand, I cannot think of a country where we have two partners.

Senator Finestone: With respect to the Air Canada proposal, there is talk of a duopoly. They are going to run a national line and two international lines, Canadian and Air Canada. What do you do in that instance? It is to be fully owned by Air Canada, but they will leave the name -- or are they going to change the name? What would happen if they leave the name, and the western end of Canada is Canadian and the eastern end and the North is Air Canada?

The Chairman: That is not what Mr. Milton said this morning.

Senator Finestone: Whether he said it or not, let me ask if that is a possibility.

Mr. Dutta: It would be for Air Canada to determine what the structure would look like.

Senator Finestone: It would be Air Canada's call?

Mr. Dutta: Star would have no call on that.

The Chairman: Thank you for your presentation.

Our next witnesses are from the Air Canada Pilots Association. Welcome, Mr. Oakley. Please proceed.


Mr. John Oakley, President, Air Canada Pilots Association: Madam Chairman, I am speaking today on behalf of the Air Canada Pilots Association. ACPA represents approximately 2,200 pilots flying for Air Canada. Founded in 1995, ACPA is the largest Canadian-based association of airline pilots.


As pilots of the largest Canadian-based airline, we view the goings-on in the industry from the cockpit. That is to say, we play an active role on the business side of the equation, and we also have a direct window on the day-to-day operations of an airline.

Many of us, like myself, have flown for the military and for different carriers, which also adds to our perspective on the industry. However, the most important job we have is to ensure that our passenger safety remains the highest priority. In sum we believe we have a unique perspective on the industry.

There is an ancient Chinese proverb that is also a curse: "May you live in interesting times." Certainly, that is the case now for airline employees, where events are passing so quickly that you need your seat belts firmly fastened.


ACPA members believe in a healthy, growing, competitive Canadian airline industry. We believe the government made the right decision when, several years ago, it privatized the industry and decided to let free market forces prevail.


Since mid-August, the state of the airline industry in Canada has been hotly debated. In this period of time, the debate has been shaped primarily by the views held by the Onex Corporation, as articulated by its chairman and CEO, Mr. Gerald Schwartz, through a sophisticated and expensive public and government relations campaign. At the heart of the Onex argument was the claim that there was a crisis in the industry. It was presumed that the only solution would be the inevitable emergence of one dominant or monopoly air carrier.

The Air Canada pilots do not see the current and future state of our industry through such a dark and pessimistic prism. Canada's airline industry is not in a state of crisis, nor do we share the view that one single dominant monopoly air carrier must necessarily emerge from our current situation.

The industry as a whole is not in trouble. There are approximately eight significant carriers in Canada, plus four mature second-tier feeder networks. Of these, only one company is facing a crisis, and that is Canadian Airlines International Ltd. The problems at Canadian are not new. Fundamental problems have repeatedly come to a boiling point over the last decade -- a situation initially caused by ambitious mergers and an expansion funded by an unsustainable debt load.

Other than CAIL, Canada's airlines are healthy. Our company, Air Canada, and other airlines in Canada are growing and prospering. As such, the federal government should not be pressured into hasty and potentially disastrous policy decisions based on a false sense of crisis -- a false sense that had been deliberately nurtured by Onex to rally public and regulatory support behind their failed takeover bid.

It is our view that a solution to Canadian Airlines' problems lies within Canadian Airlines itself. First, we must look at how they got into financial trouble in the first place.

Canadian's problems began in the 1980s, when Pacific Western Airlines entered into merger agreements with Canadian Pacific, Wardair, Eastern Provincial Airlines and Nordair. In order to facilitate the formation of a new entity, company officials "feather bedded" agreements with the various employee unions so that the streamlining and harmonization normally occurring through corporate consolidation did not occur.

To illustrate this point, by North American standards, the average airline has approximately 110 employees per aircraft. Air Canada employs about 120. In contrast, at Canadian Airlines there are approximately 187 employees per airplane -- nearly 70 employees more per aircraft as Air Canada and nearly 80 more than the industry standard.

The second factor lies in the fact that Canadian Airlines has never been able to earn significant profitability on its international routes when compared to Air Canada. Quite simply, it is not funnelling enough passenger traffic from its domestic services nor from its alliance partners on to these important routes. We argue that, in the case of one alliance partner of Canadian, namely, American Airlines Corporation, a systematic plan has been put into place to starve Canadian from carrying more passengers.

The third and most significant negative factor affecting Canadian's earning potential is the fact that American Airlines has been draining hundreds of millions of dollars a year and sending this money to Dallas. In Canadian, AMR corporation saw a company in crisis and moved quickly to permanently lock them into their orbit by agreeing to keep them afloat in exchange for what we now know to be suffocating concessions.

Under duress, Canadian agreed to high price contracts, payable in U.S. currencies, for services and maintenance; they moved to the AMR controlled Saber reservations system; and they moved Canadian jobs south of the border. This ceded a significant degree of financial and management control to American. They subjected themselves to American's prerogative in the immensely profitable transborder routes, the key to any future Canadian profitability.

On this last point it has recently been revealed that, in the current collective agreement signed between AMR and its pilots, American has agreed to seek the route authority on Canadian transborder routes with its alliance partners when revenues reach a certain threshold, namely, a level of profitability.

If it pleases the committee, I will table copies of the key provisions of the AMR/Allied Pilots agreement with the clerk at the end of our presentation.

Over the last three years, Canadian Airlines has lost nearly $1 billion. During that time, it is estimated that Canadian has paid out nearly $1.05 billion or nearly $350 million per year to American Airlines. One does not require a degree in finance to see that, if American Airlines were removed from the equation, Canadian's problems would be diminished significantly.

The Air Canada Pilots Association believes that Canadian Airlines can be operated profitably. We believe that allowing Canadian to restructure by seeking protection from its creditors under either the Bankruptcy and Insolvency Act or the Company's Creditor Arrangement Act, the CCAA, is one solution to resolving Canadian's problems. This is a market-based solution to a market-based problem, and it is in keeping with government policy. It is our view that this would allow Canadian to restructure debt in a manageable manner and address fundamental problems with its relationship with American Airlines.


Your committee has been mandated to examine the serious implications of government policy and in making its recommendations, it will greatly influence the future of this country's airline industry.

The Air Canada Pilots Association respectfully asks that in making its findings, your committee be guided by the following considerations.


It is our view that, given the advantages it provides to AMR Corporation, Canadian Airlines is unlikely to be allowed to go into bankruptcy. The onus is on Canadian Airlines to restructure itself into a leaner and more efficient airline. The Air Canada Pilots Association supports the need for effective competition on domestic and transborder routes. Competition best serves the public interest by spurring operators to provide the service consumers want and deserve at a fair price.

This country, we believe, can only sustain one strong Canadian flag carrier to compete with foreign airlines on international routes. Having only one international flag carrier is also the norm in most other countries. Canada has an abiding national interest in ensuring we maintain an industry that meets our unique needs and national policies. The direction and operational control of the airline industry's major component should remain in Canadian hands. Accordingly, ACPA supports the Minister of Transport in the retention of the essential rule of limiting foreign ownership in our airlines to 25 per cent.

We encourage the government to take the time necessary to thoroughly study, evaluate and consult on all policy options available. The issues now being debated have a potentially far-reaching impact on the future health and direction of Canada's airline industry. This is not a time to rush through any new policy or decision.

Air Canada pilots would strongly caution against a government reaction that leads to re-regulation of the airline industry. We have seen at Air Canada what can be achieved by taking advantage of the opportunities presented by deregulation and the open skies agreement that we have with the United States. Recalling the moribund and costly airline systems of the past, we are concerned that increased controls could stifle the vitality and sense of initiative we are seeing demonstrated today in our industry.

Transport Minister Collenette has asked the House and Senate committees of transport to respond to six issues raised in the policy framework. We would like to comment on two of those issues.

This association stands against the relaxation of the 10 per cent ownership limit in Air Canada. Air transport is vital to the economic wellbeing of this country, and this regulation was put in place to ensure that Air Canada remains widely held. This rationale, we believe, is still valid. Any change to the regulation would be a considerable change in public policy and should be first subjected to a thorough and reasoned debate in Parliament.

Should one dominant airline come to pass, the Air Canada Pilots Association is anxious that the committee fully understand the complexities of merging workforces. For instance, this association has faced a protracted battle with another pilot group which has tried to insert itself into the Air Canada seniority list, a struggle which after nearly four years is still before the labour courts. If one carrier were to dominate, the pilots of not only my association but from both the former main line carriers may find themselves having to defend their career prospects against spurious single-employer applications by pilots from the second-tier carriers.

In conclusion, the Air Canada pilots do not agree that there is a crisis in the airline industry in Canada. There is a significant problem at Canadian Airlines that must be resolved in the marketplace through restructuring and by resolving Canadians' fundamentally flawed relationship with American Airlines. We believe that Canadian can reshape itself to become a healthy, profitable and competitive domestic and transborder airline in Canada. This solution best serves consumers by fostering competition in the Canadian market. We do not agree that the favoured solution of the moment, the emergence of a single dominant carrier, achieves these goals.

I would be happy to take any questions, although I must say that I much more comfortable at 39,000 feet.


Senator Poulin: As you see, even though Parliament is not in session this week, the Senate Committee on Transport and Communications is hard at work. The future of the airline industry is an important priority for Canadians. When one hails from Northern Ontario, for example, one realizes just how important the industry is when it comes to forging ties with people and with the business community.


Mr. Oakley, you are one of the very few who feels that we do not need to review the organization of the airline industry, and I am quite surprised. Could you try to explain to me again why you feel that it is not in need of a review? I hate to use the word "crisis". Please notice that I avoided using it.

Mr. Oakley: Perhaps the government should look at airline policy. That has not been done since 1988. I am not saying that the overall policy surrounding the airline industry need not be reviewed. If you were not sitting here, perhaps you would consider that a waste of your time. However, our solution to the problem, and not the crisis, probably goes against what you have heard for the last several days in that we do not believe in the dominant carrier theory. There are the foundations of keeping competitors alive and providing the competition that the consumers are demanding -- of the government, in fact. We believe that solution is still viable.

Senator Poulin: When the CEO of Canadian Airlines appeared before us as a witness, he stated the opposite. How would you feel if you were in his shoes?

Mr. Oakley: About the crisis?

Senator Poulin: Yes.

Mr. Oakley: I suspect he is facing a very sad end to a long-standing and glorious airline in this country. He seems to have accepted the premise put forward by Mr. Schwartz. Perhaps he is handcuffed into doing certain things in his relationships with his creditors. We do not think they have taken a very serious look at the situation by grouping all their creditors together. In the last three years, they have refinanced three times, but who have they refinanced with? We submit that they just talked to their more important creditors, perhaps American Airlines or Royal Trust, and that they did not group all the creditors together and present to all the creditors a viable option. I think he feels handcuffed by his options. When a white knight came along, with a leap of faith he took this to be the only solution.

Senator Poulin: As a representative of your colleagues, what is your objective in saying that the structure of the airline industry is not in need of review?

Mr. Oakley: That is a difficult question. The role of any union is to protect its members, specifically, their standard of living and their jobs.

Senator Poulin: Do you feel that the jobs of yourself and your colleagues are in jeopardy?

Mr. Oakley: At the moment, no. There were some real concerns about the Onex proposal, of course, and a direct merger would obviously have created some surpluses. That is exactly the opposite of the stance we are taking. There need not be a merger in this country. We do not have to go through that painful exercise. If you accept my premise that one international carrier is the norm, then I think Mr. Milton explained this morning, quite eloquently, the potential for growth in the industry and the pent-up demand for international travel that would see an industry growing rather than retrenching. We are very positive about the outcome of this, but we are not overly confident. We are terribly concerned with our brothers and sisters at Canadian Airlines. They have been through a lot in the last 10 years. We would get on side with any solution that would guarantee the 16,000 jobs at Canadian.

Senator Poulin: We need you to be confident when you are sitting in that cockpit, because we rely on you. Thank you, Mr. Oakley.

Senator Kirby: I have two questions. You are the only witness who has come before us, on all sides of this issue, who does not think that Canadian Airlines is in serious trouble and that, however you work it out, you will wind up with one dominant airline. What do you know that no one else knows?

Mr. Oakley: That is a difficult question. The debate has been terribly focused for the last two months by two opposing, interested parties.

Senator Kirby: Both parties and the government, and some of the neutral third parties that have been before us, all agree on what will be the financial future of Canadian Airlines if nothing is done, and all agree on the consequences of that, whether it is a bankruptcy, a merger or whatever, and that the outcome will be one dominant airline. Yet you said three or four times in both your statement and in response to Senator Poulin, that will not happen. Is that just a hope or do you know something that we do not know?

Mr. Oakley: It is a hope, but I think it is only the minister who has taken the position that the outcome will be one dominant airline.

Senator Kirby: Literally all the other witnesses have taken that position, as did Mr. Milton morning.

Mr. Oakley: A monopoly is a licence to print money. The big players in this would support a dominant carrier approach. Air Canada pilots are not big players in this. Maybe we are just rattling the cage a little bit in saying that it does not have to be a dominant carrier. There are other options available. Maybe we are a voice in the wilderness senator, but no one else has come forward with our point of view. I have no inside information.

Senator Kirby: Why are you opposed to changing the 10 per cent rule? Why do you want to keep the 10 per cent rule when no other industrialized country has that rule?

Mr. Oakley: We are listening to the debate with an open mind on this. From our perspective, the government of the day debated for a long time before putting that policy or that law, into effect. We think that widely held shares of Air Canada are in the best interests of this country. Until someone proves us wrong, we cannot take the position of the shareholders. I do not know what that means to the shareholders.

Senator Kirby: I should not say this, but I will given your comment on the best interests of the country and the public. I understand that concern. Your position of wanting included in your contract with Air Canada a provision that regional jets shall not flown by the regional airline is completely inconsistent with my view of what is in the public interest. Anyone who flies, as many people around this table do, to much smaller communities in this country, is obviously suffering a disservice by virtue of the nature of your union's agreement with Air Canada on limiting the use of jets by the Air Canada regional players. Frankly many of us go out of our way to fly on the Canadian regionals because they are much nicer planes than the small Air Canada ones. We only found out a while ago that that was part of the agreement you had negotiated with Air Canada.

Mr. Oakley: We are not isolated in our big cockpits from the movements in the industry. We understand that, as the lowest level, consumers are demanding jets and that they will get them. Air Canada wants them down there as soon as possible. Our position is not cast in concrete, senator.

We have said to Mr. Milton, on a number of occasions, that we know what he wants and he should make us an offer. He has said publicly that he will give the Air Canada pilots one big jet for one small one, if it goes on the feeders. He has not said that to us in negotiations. He has not put that offer in writing to us and we are more than willing to address that issue. We know that it has to be addressed.

Senator Kirby: I only raised it in the context of all of your comments about concern for the travelling public being inconsistent with that clause in your current contract.

Mr. Oakley: It is a fairly short clause, and it was put in a number of years ago. It is a living document like all collective agreements. We can work on it. We will go into negotiations this fall, and we know that is probably number three on the negotiating table from the company. We have expressed our desire to negotiate a position on it.

Senator Fairbairn: I remain puzzled as to how you see Canadian Airlines surviving as a separate entity. You have made it clear that, in your view, one of its major problems is American Airlines, and that Canadian should be pulling away from or severing that relationship. I am having trouble in seeing how seeking protection under either the Bankruptcy and Insolvency Act or the Companies' Creditors Arrangement Act would not finish it right off, particularly when creditors might at that point see no alternative to pulling their aircraft off the tarmac, which would basically be the end of Canadian Airlines.

Do you believe that that clearly market-driven solution would be preferable to trying to retain that airline, in some form, within a larger entity, thus keeping some of its very positive advantages. It would also prevent the cutting loose of 16,000 people, which bankruptcy would surely cause.

Mr. Oakley: We think that Canadian Airlines has the infrastructure, the resources, and the personnel to have a viable operation. To hark back to the subject of Canadian's international operations, the Air Canada offer for those international lines included the employees and the airplanes that went with those international routes. In that case we would no longer be talking about 16,000 employees. We would be talking about a domestic and a transborder carrier.

According to the balance sheet of Air Canada, their internal, "infra-Canada" if you like, and transborder routes are extremely profitable. Therefore, we do not see why the public has to accept the theory of a dominant carrier.

I think the Prime Minister said that the regionals or the charters would grow to fill the gap. We think there is no gap to be filled. The basics of a very viable transborder domestic operation are already in place.

We have not heard Canadian come to the people of Canada and say that there are other options that should be studied. They have said that it is a matter of losing 16,000 jobs or accepting Mr. Schwartz offer or, failing that, relying on Air Canada. Other options must be explored. I hope that one of the reasons we are in this debate is to demonstrate that there are other possibilities out there.

Senator Fairbairn: You have certainly put one on the table and I thank you for it.

The Chairman: Thank you very much for your presentation, Mr. Oakley.

The committee adjourned.

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