Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 7 - Evidence

OTTAWA, Tuesday, November 16, 1999

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

Senator Lise Bacon (Chairman) in the Chair.


The Chairman: Our first witnesses this morning are from First Air. We have with us today Mr. Bob Davis, the Honourable Jean Bazin, and Mr. Sam Silverstone. Welcome, gentlemen.

Please proceed.


The Honourable Jean Bazin, Member of the Board of Directors, First Air: Madam Chair, the last time I set foot in this building, I was headed for my office on the sixth floor. I find it quite interesting to be seated here today on the other side of the table. Mr. Aatami, the President of Makivik, was supposed to be traveling with us, but unfortunately he was detained in Kuujjuaq on personal business.

My firm, Byers Casgrain, has represented the interests of the Quebec Inuit since the negotiation and signing of the James Bay treaty in the mid 1970s. Therefore, we have been involved from day one in the operations of Makivik and have been with the corporation every step of the way. I have also been a member of the Board of Directors of First Air since the airline's acquisition by Makivik in 1990.

As you will recall, Makivik Corporation was established pursuant to the James Bay and Northern Quebec Agreement. Makivik's membership is made up of all Inuit beneficiaries to the James Bay Agreement, presently numbering approximately 9,000 persons. Inuit beneficiaries live in 14 Nunavik municipalities and are fully subject to all forms of income and sales tax. Makivik is responsible for administering and investing the compensation funds received for the Inuit pursuant to the James Bay Agreement.

Since its inception, Makivik has had a special interest in the aviation industry. In 1975, Makivik established Air Inuit to provide air service to the communities of the Ungava Coast of Nunavik. Since then, the company has expanded and now provides service to, from and between Nunavik using twin-otters, 748s and a Dash-8.

Air Inuit generates approximately $35 million in annual sales and, more importantly, employs approximately 300 people, one-third of whom are Inuit beneficiaries to the James Bay Agreement.

In 1990, Makivik acquired First Air. In acquiring First Air, Makivik believed it was spearheading an attempt on behalf of the Inuit of Canada to gain control over a crucial element of northern transportation. In 1995, First Air acquired Ptarmigan Airways based in Yellowknife, and in 1997 acquired NWT Air from Air Canada.

In 1998, strengthening an already established relationship with Air Canada, First Air entered into a commercial agreement with the national carrier in order to provide our northern customers with a fully integrated and seamless service with the south. Makivik has invested over $50 million in First Air which employs almost 1,100 people, 450 of whom are employed in the North.

As you can see from the map which has been provided to you, the company covers an enormous territory and it is why it is considered the third largest scheduled carrier in Canada. While the territory may be enormous, there are probably no more than 75,000 people living within its boundaries. The investment made by Makivik in First Air, as with its investment in Air Inuit, demonstrates that Makivik is prepared to put its money where Inuit live and work.

Mr. Bob Davis, the President of First Air, will now explain to you how concerned Makivik, the sole shareholder in First Air, is about the impact that the present restructuring of the airline industry in Canada could have on First Air. After, you will hear from Sam Silverstone, who will discuss the federal government's fiduciary responsibility.


Mr. Bob Davis, President, First Air: We are here this morning in response to the federal government's decision to facilitate the federal government's restructuring of our industry, a decision that appears to have been based largely on the weak financial position of Canadian Airlines. In early October, our company forwarded a brief to Ministers Collenette and Nault, outlining key issues related to an airline industry restructuring. While the issue of restructuring continues to evolve and create more uncertainty, First Air and Makivik's fundamental concerns with the federal government's quest to restructure our industry in Canada and, more specifically, its impact on the North, remain.

First Air is Canada's largest northern scheduled air carrier and the foremost remote region operator. While First Air is the North's leading airline, we face significant competition from a plethora of small operators on turbo prop routes and major competition from Canadian North on jet routes. As you are well aware, the airline industry in Canada is currently based on a two airline model: Air Canada and Canadian Airlines. Both First Air and our major competitor maintain commercial alliances with those two respective national carriers.

How did we arrive at this point? After deregulation in 1986, the airline industry in Canada evolved into two competing camps, both of whom extended their services into every region of the country. This evolution was a direct result of the federal government policy to deregulate the airline industry. First Air had to deal with this as a fact of life. The North was not insulated or protected from the national scene. Canadian Airlines integrated into the North under the Canadian North brand name as a major new player. As a northern regional airline, First Air was forced to align itself with one of the two national airline groups. The decision to align was non-discretionary, it was either align or perish.

As Canadian was our competitor, it was only natural that we align ourselves with Air Canada. Although non-discretionary at the time, this decision has surpassed our expectations and our initial marketing alliance with Air Canada has developed into a full commercial alliance with strong mutual benefits.

With the Onex proposal, First Air faced the prospect of our partner airline, Air Canada, and its primary competitor, Canadian Airlines, becoming one carrier. Although Onex was legally forced to withdraw, the dominant airline scenario outcome continues to seem likely as Air Canada follows through on its plan to acquire Canadian Airlines -- a strategy that was devised in a hostile takeover environment.

Under this scenario, it is difficult for us to foresee a structure where the dominant airline would want to compete with itself through its two northern alliance partners. First Air's commercial alliance with Air Canada remains an essential tool in a competitive environment. The dominant airline scenario raises a great deal of uncertainty regarding the future of this tool for our company.

As you can see from our route map in the kits that were distributed, First Air provides year-round scheduled air transportation to 26 communities in the North. With no alternate form of transport, all these communities are dependent on air service as there is no road or rail, and there is a very limited marine sealift season. Air service is a necessity in the North, not a mere convenience. To many of these communities, First Air continues to be the only airline willing to provide scheduled services.

First Air is proud of its accomplishments and is an integral part of the northern economy. On annual revenues of approximately $170 million, we have direct expenditures of $38 million in the North. It is a region of high unemployment. Yet, out of First Air's 1100-strong workforce, we have 450 people living and working in the North. We believe we are the North's largest private employer.

The movement of cargo, the bulk of which is food is, a critical element of air transportation in the North. There is, however, very little market demand for southbound cargo. It should be noted that, to deal with the unidirectional nature of travel of cargo to the North, it is crucial that our company, or any northern carrier for that matter, have a proper mix of passenger, cargo and charter work in order to survive. We are very susceptible to segmented competition. That is, competitors supplying part but not full service as we do.

Many and various comments have been made regarding the airline industry in a dominant airline scenario. We have yet to hear any references that specifically address the concerns of the North where air transportation is an essential service.

The industry restructuring proposal put forward to date deals solely with the two national carriers and the affiliates that they own. Can the federal government do something? We believe it can. Canada could encourage Air Canada to respect the commercial agreement that it has in place with First Air for its full 15-year term, including respect for the restrictions not to compete directly or indirectly over our northern routes. Moreover, Air Canada could be encouraged to review and modify the First Air commercial agreement in light of the fact that it will likely become the dominant Canadian airline.

Canada must ensure that a level and viable competitive playing field is established for both First Air on all our products, namely, cargo, passenger and charter. Canada must provide clear and concrete new opportunities for First Air to remain viable. The restructuring process was initiated to provide opportunity to Canadian Airlines. We do not believe that the jobs, economic contribution or essential services of First Air should be put at risk as a result of this same process.

We believe that, given the essential nature of air transportation in the North, the federal government must give the North and the role played by First Air special consideration in any restructuring. It is interesting to note that the federal government's policy framework for airline restructuring lists as a major advantage for Canada "capacity adjustments on routes".

The government's suggestion that a reduction in supply would be certainly welcome by any competitive market raises an interesting question for the North. If the federal government has concluded that the southern market in Canada cannot support two major airlines, with a population of some 30 million people, how can it believe the North, covering two-thirds of this country with a population of 75,000 people can do the same?

I now turn the floor to Mr. Sam Silverstone who will provide you with additional and important arguments as to why the federal government should protect the interests of First Air, its employees, and its sole shareholder, Makivik Corporation.

Mr. Sam Silverstone, Legal Counsel with Makivik Corporation: Honourable senators, First Air was bought with federal treaty moneys as a result of federal comprehensive aboriginal claims policy and has expanded the company in response to and in reliance upon specific federal transportation policies, as already pointed out by my colleague.

In the James Bay treaty, Makivik was compelled by Canada to use the moneys and lands received from that treaty in ways carefully specified by Canada, the fiduciary. Makivik has followed all these rules to the letter. In particular, it is important to note that Makivik was empowered in the James Bay treaty to invest in any corporations carrying on business intended to directly relate to the economic or other interests of Inuit.

As one of its main purposes, federal claims policy has always been to provide aboriginal people with the tools to promote their own economic development. Makivik's decision to invest in First Air, and Makivik's decision to expand its investment in First Air, was based directly upon federal policies with respect to competition, foreign investment controls, deregulation of the airline industry and the Crown's overall fiduciary obligations to Nunavik Inuit.

Canada is now contemplating changing the rules without any consideration of Canada's fiduciary obligations to Nunavik Inuit. Canada cannot change transport and competition policies arbitrarily if, in so doing, it violates Canada's fiduciary and treaty obligations to Nunavik Inuit.

The Crown has a fiduciary relationship with Nunavik Inuit by virtue of the historic relationship between the Crown and aboriginal peoples as reflected in section 91.24 of the British North America Act and section 35 of the Constitution Act, 1982. This fiduciary relationship has been confirmed and has evolved through the jurisprudence of the Supreme Court of Canada and has now come to mean that the Crown has a duty to act in an equitable manner towards aboriginal peoples, to generally look out for their interests and to protect them and their rights from unlawful and unfair interference. Furthermore, the Crown must place the rights and interests of aboriginal peoples first rather than second or third in any federal decision making. The Supreme Court has also said that the fiduciary duty means that governments must take into account aboriginal concerns when developing or implementing policies. Not to do so may, in itself, constitute a breach of their fiduciary duties.

In addition to the fiduciary responsibility, Canada has a special responsibility to Nunavik Inuit under the James Bay treaty and the federal implementing legislation of that treaty. For example, section 8 of the implementing legislation of the James Bay treaty states that, where there is any inconsistency or conflict between the treaty and the provisions of any other law applying to the Nunavik Inuit, the treaty prevails to the extent of the inconsistency or conflict.

Let there be no mistake: Makivik Corporation, in investing in businesses like First Air, fully accepts the risks inherent in such investments and is fully prepared to live with the vagaries of the marketplace, but Makivik Corporation cannot and will not accept financial losses brought about by federal changing of the rules in mid-stream or by the federal government favouring one sector of the airline industry directly or indirectly over another, all without any consideration of its overall fiduciary and treaty obligations to Nunavik Inuit. Because of the Crown's fiduciary and treaty obligations to Nunavik Inuit, Canada, in restructuring the airline industry, has a duty to act in a manner consistent with these special obligations and not in breach thereof. These Crown duties predate any airline restructuring and, in the case of the fiduciary duty itself, they predate the invention of the airplane itself.

Nunavik Inuit are not ordinary investors. Nunavik Inuit are people to whom Canada owes special obligations because of their historic relationship with you, because of the Constitution of Canada, and because of the James Bay treaty which you signed with them. Canada's obligations are not only part of federal law now, but they are entrenched in the Canadian Constitution itself. As such, they take precedence over any other federal policy or law, including those related to airline restructuring. These obligations are pre-existing, and they mean that Canada is not as free as it may wish to be in restructuring the airline industry, if it chooses to do so, without taking into account Nunavik Inuit. Thank you.

The Chairman: Thank you. If you have plans for future expansion, would they change as a result of restructuring of the airline industry in Canada?

Mr. Davis: It is very difficult to answer that question at this point because we are obviously not a dominant player in whatever outcome results from a restructuring. It is difficult to foresee what the outcome will be and how that may affect our business. We do have concerns as to what the future holds for us, what our relationship is with our key alliance partner, and how that will affect the long-term viability of our business. I cannot answer your question directly at this point. We are not the dominant player, so we must wait to see how this process evolves.

The Chairman: Do you have plans for future expansion?

Mr. Davis: Our current business plans do indicate some expansion in the carriage of freight areas, yes.

The Chairman: They would not be affected by any airline restructuring.

Mr. Davis: We believe anything is possible. As I tried to highlight in our presentation, cargo transportation to the North is an extremely important element of our business. All of our aircraft are combination aircraft, half passengers and half cargo, because the passenger traffic is insufficient to dictate the use of passenger-only aircraft. Our core business is our scheduled service to the North. In all of the discussions about the controls put forward by the government as they relate to service to small communities, there is nothing that protects cargo. It would be very simple and easy for a dominant player to simply divert cargo off our aircraft, and that would hurt our business overall. It would affect the viability of our company.

It is a very complex puzzle for a small company such as ours at this point.

Senator Roberge: Thank you for attending this morning. We have taken note of the fiduciary duties to which you referred.

My question pertains to your agreement with Air Canada. In that 15-year agreement, what are the terms of cancellation, if any?

Mr. Davis: Currently, the agreement has a maximum term of 15 years. It is renewable every five years. The first five-year tranche is due for renewal in two years or so. Various triggers can continue or end that relationship.

Senator Roberge: Do you have any reason to believe that Air Canada may wish, if it becomes a dominant carrier, to cancel your agreement?

Mr. Davis: We obviously do not know, given the light of this restructuring process. However, to date, we believe that there would be no reason for Air Canada to end that relationship. I believe Mr. Milton, in his presentation to you, mentioned that we were allied with them and that we were doing a good job, so there is nothing that indicates to me that that relationship would change.

I do believe that this dominant airline scenario, though, does open a new arena for alliances. Obviously it could be very detrimental to other carriers who do not have such a business relationship. Does everyone get it? Does everyone not get it? To us, there is a bit of uncertainty over the future of domestic alliances.

Senator Roberge: Has there been any discussion with Air Canada since this whole situation started?

Mr. Davis: We have kept up to date with them, but I think they are a bit like us as well in that we recognize that it is an evolving process. We have had, more or less, just an exchange of information to try to determine where things are going.


Senator Roberge: Mr. Bazin, what are you views on the possibility of air fares rising to excessive levels? Should the government step in once again to regulate the industry to prevent such a thing from possibly happening?

Mr. Bazin: That is a rather difficult question to answer, because it comes down to a matter of principle. Market forces should prevail. However, from a practical standpoint, there may be circumstances where communities and consumers need a certain regulatory framework to prevent exorbitant air fares. In the North, competition is the best equalizer. As the Chair mentioned, the North is home to many small businesses. There is a healthy measure of competition among local communities and this acts as a natural regulator. Furthermore, the movement of cargo is vital to an airline like First Air. In most instances, firm price contracts are negotiated for the movement of cargo, making regulations more or less relevant.


Senator Roberge: Mr. Davis, what is your opinion on Air Canada's plan to create a third, low-cost airline in the eastern part of Canada now, and perhaps eventually up North?

Mr. Davis: Currently, we are insisting that our relationship remain as it is, which would not allow Air Canada to fly over our market. That is the presumption we are currently maintaining. We do not believe that the dominant airline will directly enter the higher norther Arctic. We suspect some of our more high-volume routes may be subject to cargo diversion or passenger diversion.

Are you referring to the low-cost airline out of Hamilton?

Senator Roberge: Yes.

Mr. Davis: That is certainly not our market, so we do not believe it would have an effect on our company. We do not see the low-fare, low-cost airline as an area of growth for us. Currently, we are a full-service airline offering all that goes along with that -- frequent flyer programs and joint fares, schedule coordination and that sort of thing. That is the type of product we would like to continue to offer to our northern customers. I do not believe that the low-cost airline out of Hamilton should have any effect on us.

Senator Callbeck: Do you have an agreement with Air Canada respecting "throughfares" for your passengers?

Mr. Davis: Yes. That is a major part of the mutual benefits that we do share, and we do have many. Quite a large contingent of people from the East Coast work in the North, so we have many joint fares to the East Coast as well as, in the western Arctic, many joint fares into Vancouver and the prairie provinces.

Senator Callbeck: If Air Canada's proposal goes ahead and we see one dominant airline or three separate airlines under one umbrella, what changes would you like to see the government make regarding the regulatory framework?

Mr. Davis: Again, that is a very difficult question to answer because it is difficult to see where this process will end. Certain things are unusual, shall we say. Air Canada wants to acquire Canadian and operate it as a separate brand. Then I would ask the government, "What can you do to help us?" We would like to acquire our competitor and operate them as a separate brand. Is there something that the government can do for us to facilitate that?

We are in very unusual circumstances. We are not the dominant player that is driving the process. We must wait and see how it ends.

Senator Callbeck: You are no doubt familiar with the recommendations of the Competition Bureau. Do you have any comments on any of those recommendations?

Mr. Davis: It would take quite some time to go through each one. It is a fairly comprehensive list. I am in agreement with certain portions of it, and in disagreement with other portions of it.

Again, our biggest concern is how our alliances will work in the future. We currently have an alliance with Air Canada. If Air Canada becomes the dominant airline, will our current competitor be allowed to have an interline agreement with the dominant carrier? That would seem to be a level playing field, but is it? We have worked hard all along to maintain this alliance. We have backed a winner since 1986. Now, suddenly, the environment is changing. All those who can afford to have a commercial alliance with the dominant carrier will be allowed to sign one. If one signs, everyone must have it. Everyone will need a frequent flyer program to reward customer loyalty. Basically, we are all interlining with the dominant carrier, offering the same products and services. It seems a non-competitive, value-added situation.

It would take a long time to go through each one of the Competition Bureau's recommendations.

Senator Callbeck: What are your major disagreements with the Competition Bureau's recommendations? What would be your top three concerns?

Mr. Davis: I am afraid I would have to sit down with the list. It is a fairly extensive document. Again, our concern is how our airline will fair in the North.

I know the situation in Toronto causes a huge problem for WestJet and any other new airline that wants to get into that market, but for us it is not and probably never will be a problem.

Senator Spivak: I want to get a clear idea of what it is you fear; and I will be specific. This is a curious situation. Some people suggest that we need more competition, yet certain types of competition is ruinous. You say that, if competition was ruinous for the two major airlines in the south, it could have drastic results in the North. You say you are very susceptible to segmented competition. Could you elaborate on that? What you sort of competition do you wish to avoid?

You mentioned that, if all new competitors begin with commercial alliances with Air Canada, that would be very bad for you, although that would mean increased competition. Could you elaborate on those matters?

Mr. Davis: I will clarify. Perhaps I have misrepresented our position.

Senator Spivak: Perhaps I misunderstood.

Mr. Davis: We are certainly not against competition, but we want competition which is fair and level. For example, our largest competition on jet routes comes from Canadian North, a brand name which was sold by Canadian Airlines last year to another northern group. Canadian North is, effectively, a virtual airline. It is just a marketing company employing 65 people. They do supply some ground handling and certain other services. Canadian Airlines still flies the planes, provides operational control, insurance, fuel, et cetera.

If a dominant airline is created and run by Air Canada, I will have a commercial agreement with them. Canadian North will also have a commercial agreement, but their insurance rates will be 10 per cent of ours and their fuel rates will certainly be lower. That does not describe a viable, competitive, level, playing field. I am concerned about that. A small aboriginal company like ours cannot compete against Air Canada. We will get slaughtered.

Senator Spivak: Air Canada is precluded from flying on your routes through your commercial agreement. Are you suggesting that, through another method, they will, in fact, be doing that?

Mr. Davis: That is correct. Assuming that problem is set aside, we have other areas of concern. We fly to 26 communities. On some of those runs, quite frankly we do not make any money. In fact, on some of them we actually lose money.

We carry approximately 18 million kilograms of mail per year for Canada Post, consisting primarily of food. Canada Post comes to us for one-stop shopping because we go everywhere in the North, and they need not deal with five or six airlines. It has been proven in the past that if the mail goes part way by jet to, say, Iqaluit, and then it is transferred to a turboprop, the food gets damaged and many problems arise. We took a decision many years ago to go to as many places as possible so we could provide service to Canada Post, to the northern stores and to the cooperatives.

We may be attacked by segmented competition. On some routes the competition may pick at our cargo, and on others it may pick at our passengers. That will break up our system. I am not saying that we are afraid of competition.

Senator Spivak: In other words, your profit picture would be impacted if someone picked off the best routes.

Mr. Davis: If profits drop on those routes, we may need to stop service into a community where it is needed. I would like to get this point across to you. We get upset when we hear all this talk about service to small communities by groups, including the national carriers, and then they refer to places like Baie-Comeau which has access to railroads and boats and roads. Our intention is to discuss places like Resolute Bay which is 2,000 miles north of here and has three flights a week. There is no road within 1,500 hundred miles. That is what I mean when I say "small community". I think Senator Watt would agree.

We are concerned about the service to those small communities. Yes, we are a business as well, but we are aboriginally owned and there is a certain sense of social responsibility within the airline as well.

Senator Watt: Suppose that Air Canada were to become a dominant air carrier in Canada and started considering entering into agreements similar to the one you have with them, but with other airline companies. We know that in the North there is only a one-way payload; there is never a return payload. Would the fact that there is questionable profitability have any consequence on the survival of any airline companies which have interline agreements with Air Canada?

Mr. Davis: Senator Watt, this a very small and fragile market. In the South, 30 million people live in an area covering only the bottom four inches or one third of the map, and they are not sure they can support two airlines. We fly in the North where there is only so much business to go around. Splitting that up between a whole bunch of airlines makes no sense.

Senator Watt: You are saying to this committee that, when the time comes to make a decision, you will have to consider how long two airline companies operating in the North would survive, knowing that there is only one payload. Therefore, you are asking this committee to be sensitive to that aspect if the government were to introduce any regulations. Is that what you are saying?

Mr. Davis: We firmly believe that air service in the North, like nowhere else in Canada, is absolutely an essential service. If someone living in the North requires to visit a dentist, he needs an airline. If he wants a bag of groceries; he needs the plane to bring them into the community. We believe that situation merits some special attention. We am not asking for re-regulation; and we are not afraid of competition.

Senator Watt: I will try to rephrase my question. I am not trying to put words in your mouth. You are saying that you like having a monopoly, but if there is the possibility of two airlines operating in the north, there is an economic side you have to take into account. Is not that what you are saying?

The Chairman: Let Mr. Davis express his views.

Mr. Davis: I am not sure exactly where you are heading. We are obviously the leading airline of the North presently. We have lots of competition coming at us. It is certainly increasing and making the situation much more difficult. There are certain elements of "ruinous" competition, which is the term I believe Mr. Benson uses.

Our goal is not to be a monopoly. We have a fairly good position in the North now. Probably like any business, we do not make enough money, ever. However, we are not afraid of competition, and we believe that everything we have set up and the entire infrastructure we have in place should not be put at risk because the government wishes to help Canadian Airlines.

Senator Spivak: You are basically saying that market forces cannot be allowed to prevail in the North without some proper regulation. We have been asked to comment on re-regulation, certainly from the competition commissioner's standpoint.

Mr. Silverstone, could you be more specific about the sorts of actions which the government might take, based on the competition commissioner's report, which might, as you see it, come into conflict with the fiduciary duties of the government with respect to the James Bay and Northern Quebec Agreement? For example, would it be lifting the 10 per cent limit on individual ownership; would it be allowing only foreign-owned carriers to fly; or would it be limiting cabotage? Would it be any number of those things? What are the most serious threats to what you consider to be the constitutional obligations and fiduciary responsibilities of the federal government?

Mr. Silverstone: The Supreme Court and the Federal Court struggle with that question every day. What does the fiduciary duty of the Crown mean vis-à-vis aboriginal people? A few months ago we found out what it meant for the Mi'kmaqs in the Marshall case. Much of what I was saying this morning stems from the Sparrow case of 1991 and, of course, more recently, the Delgamuukw case. I quoted a statement directly out of the Sparrow case when I talked about the economic and social policies of the government having to respect aboriginal peoples and their rights. As you know, the Sparrow case arose from a simple fishing dispute in British Columbia over the size of nets.

No one knows how this fiduciary obligation will arise and manifest itself, or how it is supposed to be addressed. The court has struggled with this and tried to tell the government what it means in different situations. All we know now is that, if the government takes measures now to restructure the industry, to facilitate the purchase of Canadian or to create one dominant airline, to the extent that it affects our rights, it may be contravening those fiduciary obligations. It is very clear in both the federal and Quebec legislation that we gave up certain things in exchange for certain other obligations, one of which was the confirmation of the Crown's special duty to us. If you negatively impact us in any way, our position is that there may be recourses. More importantly, you must act in accordance with this duty to us.

You asked me specifically about increasing the 10 per cent public participation rate with respect to Air Canada, or the 25 per cent which is outlined in the Transportation Act. We must wait to see what happens. As Mr. Davis pointed out, we cannot say whether we will be impacted or not because of the uncertainty which is now being created by the prospect of restructuring. If you facilitate the creation of a dominant carrier, and one of the conditions of that dominant carrier is to do something for Canadian to allow it to survive; and if Air Canada chooses to give it some business to maintain its name and employees and maybe to give it some routes in the North, those actions may negatively impact our investment which was made directly as a result of a treaty which your government signed.

The government not only signed that treaty but also told us how to use the money. The government had federal and provincial representatives sitting on our board of directors to ensure that we spent the money on the right things. Economic development opportunities are limited in the North. Transportation is one of the main opportunities. Given all of that, if the restructuring negatively impacts us and means that we lose money, or our business altogether, we would argue that that is clearly a breach of your duty to us.

Some people do not like that argument, but those rights exist, and they have been entrenched in Canada's Constitution. They have been interpreted by the highest court in the land to mean something. In this particular case, our position is that it means that you have to tread lightly and make sure we are not damaged by whatever actions the government chooses to take.

Senator Spivak: I understand what you are saying, thank you.

Senator Kirby: Most of the questions I wanted to ask were asked by Senator Spivak but I want to pursue a few points very briefly. Not being a lawyer, I do not want to get into an argument with Mr. Silverstone on the constitutional issue, although I would say it does not matter from my point of view because I think we have a moral obligation, and whether or not we have a legal obligation is not the issue. I would have difficulty with the notion, as you say in your statement, that you cannot and will not accept financial losses brought about by the federal government changing the rules in mid-stream. The reality is that you are always going to be in mid-stream, so the only possible conclusion from that is you are making the case that the feds could never change the rules unless they compensated you. I do not think that is a sustainable proposition. We have a moral obligation in any event.

I am looking now for an easy solution to your problem. Our researchers can confirm this. As I understand the Open Skies policy, once an airline starts flying a route, say from Ottawa to Pittsburgh, another airline can get at it only if the volume of traffic on that route exceeds a threshold amount, which I think is 300,000; am I right?

Mr. J Christopher, Researcher Assistant to the Committee: There is a threshold, but it does not apply to United States routes; it applies to some international routes.

Senator Kirby: I was trying to find a precedent that would allow us solve your problem by saying no additional competition could be allowed on routes that you now serve until such time as a particular volume threshold had been passed.

You are telling us that competition would be absolutely destructive and that it cannot be allowed. I am trying to find a simple way to resolve that problem without involving some new solution if the threshold has been used to control destructive competition in other parts of the airline industry.

I leave that with you. There is no question that your basic position is absolutely correct.

Mr. Davis: The answers are very complex. It is an interesting concept and a good one to put forward.

Senator Kirby: The question is: What is the easy way to do it? The question is not: Should it be done?

Mr. Silverstone: Perhaps I could respond briefly to something Senator Kirby said.

I understand and appreciate what you say about a moral obligation. Few people talk about the moral obligation. There is both a moral and a legal obligation. However, as you can tell by what is happening with fishing rights on the East Coast today, this is not a popular concept. Our courts have taken these measures in an effort to redress the systemic discrimination that has taken place in this country against our aboriginal peoples over several hundred years.

In an effort to respect and promote treaty rights section 35 was entrenched in the Constitution Act, 1982. Clearly, treaty rights either mean something in this country or they do not. The court has said that they do, and they are sending this message to the legislature and to the executive branch: "Act in accordance with what we are saying."

That is what we are doing.The Nunavik Inuit are beneficiaries of these rights, and they gave up certain things in certain cases for these rights. They entered into solemn treaties which are now constitutionally protected. As you know, the Constitution is the highest law of the land.

We are saying to you is: Make the changes you want in the industry for the benefit of all Canadians but, remember, Nunavik Inuit are Canadians, and you have special obligations to them in addition to any ordinary obligations you have. That is the message.

Senator Roberge: If, in our report, we included a recommendation that the government should ensure that First Air will be guaranteed continuance of the contract which exists with Air Canada, would that give you some safeguard?

Mr. Davis: I do not think it is quite that simple. Canadian Airlines will still fly under the separate brand name and will still supply the aircraft and other services from the west. However, we would appreciate a recommendation in your report related to our agreement with Air Canada, but, again, the solution to our situation complex.

I note that we are the second last of the presenters, and I am sure you have many other considerations to take into account.

Senator Andreychuk: Why do you believe the Government of Canada will not or has not taken into account its fiduciary duties?

Mr. Silverstone: Our presentation is more an admonishment or a warning that whatever is planned or attempted, I know the committees are listening for ideas and they will come up with their own recommendations to government. We are putting forward these rights to ensure that they are taken into account. We are not saying, definitively, that they are not going to be considered, we are only responding to media reports, to what we have seen happen in light of the Onex proposition, to the Competition Bureau's report, and, in fact, to what may yet happen.

Mr. Davis: When we saw the Onex proposal coming forward, it was clear to us that it was an illegal offer. However, the Government of Canada never stepped up to the table to challenge the proposal. It was Air Canada, a private company, that came forward and said that they thought it was illegal and that they wanted to challenge it in court. We believe it was the federal governments responsibility to step forward and tell Onex the proposal was illegal and to suggest that they should rework it. That led us to become fairly uncertain about how this process was working or if there was, actually, a process in place.

Mr. Silverstone: We realize we have to promote our own rights because no one is going to promote them or protect them for us, even though the Government of Canada is our fiduciary.

Mr. Bazin: It is very important to remember that we do have the BNA Act, the Constitution Act, and our first modern treaty, namely, the James Bay and Northern Quebec Agreement. There is specific reference to First Air in that agreement. Put very simply, the owners have a three-level "protection", as it were. We have a very special situation regarding rights.

Senator Andreychuk: Section 35 of the Constitution indicates that there must be consultations, as I believe the courts have already stated, before the rights of aboriginals can be affected. Are you telling me that there have been no consultations by the Government of Canada with you during this entire time? To this date, has the government made statements and proffered certain positions without consulting you pursuant to section 35?

Mr. Silverstone: To this date, no one has consulted us with respect to possible amendments either to the Air Canada Public Participation Act, or the 25 per cent rule that we read about in the newspaper. No one has asked us whether the Competition Act should be suspended for 90 days in a situation that probably did not constitute an emergency.

On the issue of consultation, the Supreme Court has gone much further than that. There is a decision whereby our own Nunavik Inuit stopped the creation of a national park in Northern Labrador last year. We were negotiating a treaty for that area and the government tried to create a national park which would have precluded our rights. The Federal Court indicated it was more than a matter of consultation. The court stated that, if the government changes policy that affects our rights, they must have our consent. Consent is stronger than consultation, so in certain cases you are absolutely correct -- consent requires consultation.

The court has defined what "consultation" means. It means the government has to listen to what we say and take it into account.

Senator Andreychuk: My point is that the minimum requirement would be some sort of consultation. You are saying that minimum has not been met.

Mr. Silverstone: The first consultations we are having are our appearancec before this committee and the house committee, and we welcome these opportunities.

As Mr. Davis and I mentioned uncertainty is being created now by the government's intervention in the process. The whole thrust since 1987 has been deregulation, but now the proposal is to create a dominant carrier.

I believe Mr. von Finckenstein talked about "reregulation". What will that mean? No one really knows.

Mr. Davis pointed out that, if the creation of a dominant carrier solves the problems in the South, then there may be some logic to creating a dominant carrier in the North. We are the dominant carrier in the North now, and once intervention affects our operations, we cannot be sure of the outcome. We have been operating in the North, with Air Inuit,without government assistance or intervention. We built our own hangars and airstrips and purchased our own aircraft. Now, the intervention that is proposed may, in effect, damage us.

Senator Andreychuk: You indicated that the federal government, through its fiduciary capacity and through the James Bay agreement, sat at the table and guided you with regard to appropriate investments. It seems to me, that provision was put in place to ensure the investments were at least reasonable and that they could withstand some scrutiny and testing. If the competition rules are changed in any way, are you saying that violates the fiduciary responsibility? I ask that because surely it is one thing to say that investments should be in a reasonable venture, as opposed to providing you with a guarantee that a particular venture will never go bankrupt, never run into difficulties, and need never sustain competition. I understood you to be saying that, and I find that rather troublesome.

You obviously have a duty to your shareholders. Surely the government also has a duty to your shareholders through the James Bay agreement. However, it also has a duty to customers and to the national interest in ensuring the provision of cost-effective service. Competition is one way of doing that.

Mr. Silverstone: I agree. No one is suggesting that the Government of Canada cannot act because it signed a treaty. However, we are suggesting that, if the government does act, it must take into account its treaty and fiduciary obligations, and that whoever ends up making recommendations on the restructuring of the industry must take those obligations into account. I believe that is all that is being said.

As to the control that was exercised in the use of these monies which were put into the form of a sacred trust, there was a great deal of concern at the time that the monies be used for the collectivity in perpetuity and for future generations. The types of investments we were required to enter into had restrictions similar to those which apply to banks and insurance companies. We had to ensure that the monies would be there in 50 years, 100 years, 150 or 200 years. That was part of aboriginal claims policy as well. We are only suggesting that the government should follow through on these obligations. No one is suggesting that the government cannot act at all. We are simply suggesting that it must act in accordance with its obligations.

Senator Andreychuk: Madam Chair, I am not a full member of this committee, however, it would seem to me that there has been a trend, as Senator Watt can tell you, and that the government needs to consult with the aboriginal community much earlier in any process. I hope that concern is somehow incorporated in the committee's report as a strong recommendation.

Senator Fairbairn: It is important that these witnesses have appeared at our committee in order to underline the very special concerns and interests of those living in the North.

During our swift hearings, senators from rural areas have repeatedly emphasized the need for whatever comes out of this to fairly represent the consumer interests of smaller communities. Indeed, as we have gone through our questioning, the North has been cited as the quintessential area that is often accessed only by air, there being no roads or railroads. Your presence here underlines that.

Of course, we must also consider the special relationship between the Government of Canada and the aboriginal people.

We are in the same boat as you are, in that we do not know what the proposal will be. We do not know what the rules and regulations will be, or even what the government has in mind. We are in the same position of trying to get information, and we will not have it until we see the actual Air Canada proposal. There has been much speculation about what that proposal will be.

If out of the dust of it all came something that resembled the status quo, would that bother you? You are saying here that you are not looking for a monopoly, you are looking for fair competition, a level playing field. Can you foresee Canadian North continuing to operate without detriment to either your business or to the accessibility of northern Canadians to transportation and air cargo?

Mr. Davis: You have dispelled one great myth that Mr. Bazin shared with me. He told me that senators knew the answers to everything.

Senator Fairbairn: He is such a nice man.

Senator Kirby: That will teach you to believe your lawyer.

Mr. Davis: I should like to comment on the swiftness of your meetings. I understand that the process was started upon the disclosure of the weak financial condition of Canadian Airlines, however, they seem to use the time element as they wish. At one point they claimed to have days to survive, at another they claimed to have a year to survive. I suspect it is somewhere in the middle. Therefore, in my opinion, we should take our time to review all of the issues. If Canadian is saying they have a year, then let us take our time and make sure we do this right. Why are we rushing?

As far as the question related to the status quo being retained is concerned, our response is: yes and no. It is acceptable. We are competing. First Air has been in business since 1946. This is just another business challenge, an industry restructuring. We will figure out a way around it that, I hope, will not destroy us. If it does, we will be in a great deal of trouble because we have a large amount of real estate in very remote areas, on leased airport lands, that are basically worthless to anyone else.

The status quo is acceptable. I believe we will still be able to compete. We already have a competitor in the marketplace, Canadian Airlines which, according to the media, is on its last legs. I am not an expert on their finances. When a company is on its last legs it does foolish things in a marketplace. One of those things is destructive competition, to which they have contributed. That affects us in the North because they supply airplanes and pilots. Our aboriginal-owned, relatively small company is trying to compete against the cost structure of Canadian Airlines, against its fuel prices, insurance and all of those things. As well, they do some crazy things in their marketing. The consumer may feel that is good because they get a good deal.

We could probably live with the status quo. We will battle on and compete. We believe we will survive. Therefore, I suppose the status quo is acceptable. At the same time, Canadian is certainly making things difficult for us.

Senator Fairbairn: There will be more than a merger coming out of this now. It will be a different kind of proposal. Would you not think that, if Air Canada goes ahead -- as it has indicated here and elsewhere with different details -- and does take in Canadian Airlines but keeps its brand, nonetheless Canadian Airlines would not be operating as an independent airline, independent of the structure and the strictures of Air Canada, that there would be special recognition of the situation in the North, in however that dominant airline takes its form? It would not be just a freewheeling kind of presence of Canadian Airlines in that it would be very much a part of that airline.

Mr. Davis: Obviously, I cannot know what precisely Air Canada will do in its arrangements of its new airline. It is obvious to us that Air Canada has said it will do something to make it viable and a strong operating airline. The stronger they are, as a business, the stronger they are in their ability to compete against us.

At present, our airline can compete against the existing service in Canada's North. However, the competition would certainly become stronger. It would certainly have a far more integrated operation in regard to the airplanes utilized in the Canadian system.

Our aircraft are dedicated to the North and our own system. We do not have the ability to fly from Yellowknife to Edmonton on our own route and then use the aircraft on Air Canada's route from Edmonton to Vancouver. As I said, we are looking for a level and viable, competitive playing field.

Senator Fairbairn: You have certainly thrown up the appropriate red flags here today. Did you ever receive a response to your letter to Mr. Collenette?

Mr. Davis: No, we have not.

Senator Fairbairn: Have you received a response from Mr. Nault, the new Minister of Indian Affairs and Northern Development?

Mr. Davis: No, we have not.

Senator Fairbairn: As a result of your agreement with Air Canada and your rights guaranteed by the Constitution and through treaty, I believe you have a strong case. Perhaps one of the strongest arguments in support of your case is the reality of the situation in the North. Whatever comes out of this very confusing situation must come out in a way that is fair to northern Canadians, because there is no other acceptable way. Thank you very much for being here today.

Senator Finestone: I have used your airline extensively, having had a wonderful trip up through Nunavut before it became Nunavut, and through the Northwest Territories.

I am most interested in the discussion of section 35 and I hope that is something that you will pursue.

Is the Makivik Corporation your largest investor?

Mr. Davis: It is the sole shareholder.

Senator Finestone: What is the relationship between First Air and Air Inuit?

Mr. Davis: Makivik is also the sole shareholder of Air Inuit.

Senator Finestone: Do they own both airlines?

Mr. Bazin: They are two separate corporations.

Senator Finestone: Does the funding that has been accorded to both airlines come from the provisions of the James Bay agreement?

Mr. Davis: Yes.

Senator Finestone: As I understand the James Bay treaty and the obligations inherent in it, it was intended to ensure the social and economic well-being for all time; is that accurate?

Mr. Davis: Yes.

Senator Finestone: Therefore, the people who are managing this fund have lent money to finance First Air and are the owners of First Air and Air Inuit. Canada has a fiduciary obligation to the Inuit and to the aboriginal people of the North, but I think you have a fiduciary responsibility to the shareholders of the Makivik Corporation.

Mr. Davis: Yes.

Senator Finestone: The corporation has invested all this money over a short period of time, and I understand no dividend has ever been paid; is that an accurate statement?

Mr. Davis: Yes, it is correct.

Senator Finestone: Is there a reason why shareholders did not receive any kind of dividends that they could have invested in other areas of the development of the North?

Mr. Davis: All of the monies have been returned to the airline to allow them to expand. Effectively, we started with a clean sheet of paper back in 1979, 20 years ago.

Makivik has invested approximately $50 million in First Air. I am not sure of the exact amount invested in Air Inuit. We started with that clean sheet and we have used all those monies, as well as reinvesting retained earnings, to encourage growth in the airline.

Employment in both airlines totals approximately 1,350 people. Our revenue is just over $200 million dollars. Unfortunately, it is quite common in the airline industry that dividends are not handed over. Our shareholders wanted that.

Senator Finestone: In 20 years you have never paid a dividend.

Mr. Davis: That is correct.

Senator Finestone: Was that part of your undertaking when you borrowed those funds or when you struck the deal?

Mr. Silverstone: Some of our investments are more of a shorter term pay off. This was seen as a long-term investment in the North. We are investing in the only form of transportation for the region, and the intention was to encourage growth in the investment and, hopefully, the equity would grow over time.

However, you are absolutely correct, just as the federal government has a fiduciary obligation to us, Makivik has a fiduciary responsibility to its own members. We are trying to respect that. One of the concerns we are expressing here is that we do not wish to be precluded from being able to do that by a restructuring of the industry.

Mr. Davis: We may not have paid dividends, but we have provided many jobs in a place where there are few jobs.

Mr. Bazin: There is a management agreement between Makivik and First Air which provides for certain monies to be paid by First Air to Makivik for the services that Makivik provides to the airline. This is public knowledge. The investment is equity and debt.

Senator Finestone: We heard from representatives of the airports who expressed concerns regarding the amount of rent that they must pay to the government. Who takes responsibility for air traffic control in the North? Who does the de-icing? Who is responsible for maintaining the grounds?

We are looking at the whole area of service to the North, which is an obligation as well as an important undertaking. Should we indicate in our report that the government should contribute the rent received towards enhancing some common services?

Mr. Davis: There are many operators of airports in the north. Some airports are owned by the territorial governments, some are owned by the Province of Quebec, and some are owned by the federal government. It is a fairly broad question because there are also many types of airports.

Senator Finestone: There are some pretty fundamental services at every airport, large or small.

Mr. Davis: That is not really the case in the North. In the early days, in northern Quebec, we built the ice strips and looked after them. We built them, cleaned them, and built a terminal building. We had our own little shack on the ice. As there were never any services in the North, we became very self-reliant. We do our own de-icing.

The situation has progressed in the last 10 years or so, and now there are many reasonable runways.

The cost of using the airport facilities is a big issue for us. These costs have all sky-rocketed in the quite recent past, especially as airports have been privatized. It is certainly a cost issue for the North. As new regulations are put in place in the south for, say, fire fighting, the cost is exacerbated in the North because everything costs so much more and it is much more difficult to provide those services in these remote airports.

Senator Finestone: The suggestion was made that, rather than charging landing fees per aircraft, we could charge landing fees per passenger. That might provide some additional support for the maintenance of airports. Would that make a difference to you?

Mr. Davis: I do not think so because, as I said, cargo is crucial to the North. There are many cargo flights where half the airplane is full. There might actually be less revenue if you charged that way. The services provided by NAV CANADA used to be paid for through a passenger tax. It tax is now payable by the airline in the form of a landing tax because it more accurately represents what is done.

There are different charging methodologies. At the end of the day, the question is: Since airports cost so much to run, how can we run them efficiently and cheaply; and who should pay for that?

Senator Finestone: I do not think we are charged with examining that question, are we, Madam Chair?

The Chairman: No.

Senator Finestone: Therefore, I will only say that I hope there will be coordination in meeting the needs of the North.

I do want to point out that during the Second World War the Ferry Command of Canada started up many of our airlines, by necessity, as they ferried planes over to England.

Mr. Davis: That is right, and thank goodness they did.

Senator Watt: Senator Kirby touched on airlines which operate in the North being economically viable. If the government had more stable policies and regulations, giving you certainty that the investments you make in the northern airline industry would be more secure than they are today, would you start considering the possibility of reducing air fares? I believe that high passenger and freight rates are hampering the economy of the North. Is there anything in that sector that you would like the committee to examine? You and I both know that is a major problem.

Mr. Davis: The primary reason that costs of transportation to the North are so high is the uni-directional nature of the transportation. A lot of cargo goes North while very little goes South.

Also, the first 25 per cent of the fare goes to pay for fuel. Fuel is very expensive in the North because it is brought in once a year by ship. NAV CANADA fees comprise roughly 10 per cent of the passenger ticket. Labour is a fixed element in aviation. It takes two pilots to fly the plane, a set number of flight attendants, and a certain number of people to maintain it.

An airline can only truly affect 20 per cent of the cost, by being efficient and so on. Part of the reason for starting the business originally was to keep the cost of transportation as low as possible. It is certainly much easier to do our jobs if prices are low, so we try our best to keep them low.

As far as restructuring is concerned, if it contains something that will help us to keep prices low, we and consumers would certainly be in favour of that.

Senator Watt: As you said, some communities that you must serve have a population of only 150 or 200. The airline industry in the North is both economically and socially driven. However, is it not correct that it is not economically viable for such communities to have daily air service?

Mr. Davis: Our primary objective is, obviously, to stay profitable, to pay our bills, and to be able to replace aircraft as they wear out. However, we try to serve as many communities as possible. By supplying service to more communities, we are able to achieve some economies. Communities that should only get service three days a week can get more than that because they are on line with other larger communities. It is the collectivity of the airline that makes it possible to serve many small communities that would otherwise get either no service or much-reduced service.

Senator Roberge: Are there any routes on which you have no competition from a scheduled carrier?

Mr. Davis: Yes, there are. In the kit with which we provided to you, there is a route map which indicates where we are the only scheduled carrier. We do have a lot of competition because a charter carrier can set the price. We may be flying a 40-seat aircraft and there could be a 19-seat aircraft available for charter. If a group is travelling, it may be cheaper to use a charter. While we are the only company willing to take the business risk and supply scheduled service. Most of the routes are subject to some charter competition.


The Chairman: Thank you for your presentation. We greatly appreciated your comments and your answers to our questions.


We thank you for adding to our knowledge today.

Senators, our next witness is Mr. Stephen Smith, the president of WestJet.

Welcome to our committee, Mr. Smith. Please proceed.

Mr. Stephen C. Smith, President, WestJet: I am the president and chief executive officer of WestJet Airlines Limited, a regional low-fare carrier based in Calgary, Alberta. I am also chairman of the Air Transport Association of Canada. Mr. Cliff Mackay spoke to you about ATAC's position on the unfolding events in the aviation industry.

For those of you unfamiliar with WestJet Airlines, it was founded in February of 1996 with 220 employees and started flying three 737-200 aircraft serving five destinations. Today, WestJet operates 14 aircraft to 12 Western Canadian destinations and employs over 1,100 people. We operate only one aircraft type; namely, the Boeing 737-200, which seats 120 passengers. This year, we will carry well over 2 million passengers.

Our stock price has increased by 50 per cent since our debut on the Toronto Stock Exchange in July of this year. We are on record as saying that we plan to increase our fleet by three to four aircraft per year, and we are focusing primarily on Western Canada.

Why has WestJet been successful while other airlines have not? There are a number of factors, but primarily it comes down to our people. WestJet invests heavily in its people. As a result, our people provide us with a low-cost structure where we average approximately 65 employees per aircraft compared to the two major carriers that employ between 140 and 170 employees per aircraft. In addition, our people give us the customer service for which we are renowned. That is really the reason people continue to come back to WestJet.

WestJet fares are, on average, approximately one-half of those charged by the major carriers, and none of our fares has any Saturday night stays. We are the true low-fare carrier.

WestJet's marketing philosophy is not to garner market share but, rather, to grow the in marketplace which we serve. In 1997, when WestJet had only seven aircraft, compared to 1995, which was before we started, our markets grew, on average, 150 per cent. They are now up again by 14 per cent. I think that number has increased dramatically again. By comparison, prior to our arrival, markets grew, on average, by 3 per cent.

We believe we compete more with the car, the train, the bus or, more importantly, the couch or a night out, as WestJet tends to stimulate travel as opposed to diverting it from other carriers. We are able to do this because of our ability to charge fares which are much lower than the prevailing fares in the marketplace, and we deliver excellent value for those fares. We have tried to take people off the road and get them to travel by air, and we have been very successful in doing that. As a result, we believe we are unique in the airline industry in Canada.

Thus far, WestJet has been strictly an observer with respect to the potential consolidation in the Canadian airline industry. Our position is that we do not believe there is a problem with the industry. Rather, we believe there is a problem with one carrier, self-admitted by Canadian Airlines. From the financial results posted by Air Canada, the three publicly traded charter airlines, some regional carriers and ourselves, which all appear to be relatively healthy, we can only draw the conclusion that the airline industry in Canada is not broken.

First, we request that there not be any reregulation of the industry in Canada. We believe that this would be wrong and is definitely not necessary.

Second, assuming that one of the current offers -- and this was obviously written before Onex withdrew -- is successful, we will end up with one major carrier in Canada, or that appears to be the direction in which we are going. We are on the record as saying that WestJet is very pro competition. We were born in an era of competition; we will thrive in an era of competition. While we do not believe that we compete with major carriers, any restructure or consolidation in the airline industry would be favourable to WestJet. We become a viable alternative to the major airlines as their frequency decreases and ours increases.

We would have a problem, however, if one carrier, which would control 90 to 95 per cent of the airline industry in Canada, is free to do whatever it wants in terms of current or potential competition. You can imagine what would happen if a carrier were to control the high-fare marketplace and also decided to get into the low-fare marketplace. There would be few, if any, openings for future competition. In addition, it would allow this new large entity to cross-subsidize its low-fare operation from its profitable high-fare operation which would have no competition.

As a result, we are asking that Transport Canada, along with the Competition Bureau, ensure that a framework of competition is built into any single-carrier proposal. We have seen a letter from Konrad von Finckenstein, Commissioner of Competition, to the Honourable David Collenette, Minister of Transport, with respect to some ideas, and we are supportive of many, although not all, of the ideas contained in that letter. We also had input to that letter.

WestJet believes that we live in an efficient economy. As a result, we must allow competition and the forces in that economy to evolve. Obviously, this does not guarantee that every company that exists will always exist. In fact, I would suggest to you that we would only see a regeneration of the airline industry if there were some dramatic change to the current existing scenario.

In addition, there has been some comment about allowing foreign carriers to operate on domestic routes. While once again WestJet is pro competition, without reciprocal agreements in other countries, we do not believe this makes sense for Canada and, in particular, for WestJet. Without the ability to respond to foreign carriers who may decide to set up service on Canadian routes, it can create an unequal playing field in which we could find it very difficult to compete.

From my presentation, I should like you to take the following. First, WestJet has been and continues to do extremely well. We released our third-quarter results recently, and, on a margin basis, we are one of the best air carriers in North America.

Second, we do not believe there is a problem with the industry; we believe there is a problem with one company in that industry.

Third, while WestJet will do well with any restructuring or consolidation in the industry, if we end up with one dominant carrier, we would ask that the Competition Bureau and Transport Canada ensure that we have a competitive, fair and equitable airline industry. We believe the tools to do that are already in place and do not need further regulation. We would ask that the concept of reregulation not be considered, as we do not believe it is required.

Fourth, we do not support the ability for foreign-owned carriers to operate in Canada without reciprocal rights.

I thank you for your time. My presentation was short and sweet, like our airline. I am available to answer your questions, if you have any.

Senator Roberge: Thank you, Mr. Smith, for your short and to-the-point presentation.

Some time ago, I read in the papers that you were in negotiations with Air Canada on some sort of agreement. Have those negotiations resulted in an agreement, or are you still in negotiations?

Mr. Smith: We were in discussions with Air Canada. As a result of the Canadian Airlines situation, the discussions were terminated and put on the back burner. In addition, we had other priorities. We were doing an IPO, and that became our focal point. We do not have a huge management structure, even though we have 1100 employees. The same people doing the negotiations were doing that IPO. The waiving of rule 47 came into play and, as a result, we terminated the discussions with Air Canada. We felt that, if there were one dominant carrier, we would have to see how things came about. At the current time, there are no ongoing discussions with Air Canada, nor has a commercial agreement been reached.

Senator Roberge: You say you are presently focusing on the western part of the country. Do you have a plan to go national with your airline?

Mr. Smith: Under the current scenario in which we find ourselves, which means the situation respecting Air Canada and Canadian, we have no plans to go east. If the environment around us changes, we would reconsider that. At the present time, we have no plans to go further east than Thunder Bay, which is the furthest point east we serve.

Senator Roberge: You commented indirectly on Air Canada's low-cost carrier, or the one which they are planning to operate. If they were to operate only in the eastern part of the country, it would not affect your operation.

Mr. Smith: That is correct. I am trying to make these comments from an industry perspective. If they were to dominate the high-fare industry and then come in with a low-cost carrier, then you would have very little opportunity for competition to exist. Forget about WestJet and consider Company X trying to get into the marketplace, whether at the low end or the high end. It is difficult to come in at the high end because Air Canada and Canadian are already there. If they come in at the low end, Air Canada is there as well, and there are few openings left.

Senator Roberge: That is the answer I wanted.

Senator Callbeck: This company is a real success story, having started in 1976 and being where it is today. On page 2 of your brief, you say that you average 65 employees per aircraft versus the two major carriers who currently employ 140 to 170. How do you do it?

Senator Roberge: That is how they make money.

Mr. Smith: First, we are not uniized. Our people have the financial incentive of profit sharing. In fact, two Fridays ago, we handed out, for six months of work, $3.7 million to our people. The average employee, for six months of profit-sharing, received $4,500. Employees earn, on average, $30,000 per year, so they received an additional 30 per cent of their income over that six-month period. Our people have financial incentives in the short term and in the long term, because we also have a stock option program in which any investment of up to 20 per cent of their salary is matched by our company.

As a result, our people are productive. The wages are comparable to those in the industry, but their increased productivity shows up in our numbers when compared to the productivity of employees of the major carriers.

Senator Callbeck: What percentage of your company is owned by your employees?

Mr. Smith: They own about 3 to 4 per cent in total. Having said that, we have a number of pilots who are now millionaires. That is a nice situation.

Senator Callbeck: On page 5 of your brief you say that you do not believe there is any problem with the industry but, rather, that there is a problem with one carrier. Do you believe there is room in Canada for two major airlines?

Mr. Smith: I am not sure I can tell you that. When I look at history, I see that we have had two carriers for a long time in this country. Over that long time, no one has made any sustained profit. Based just on history only, there is not room for two carriers to financially reward their shareholders on a long-term basis.

Senator Callbeck: On page 7 of your brief, you refer to a letter which was written to the Honourable David Collenette. You say you are very supportive of the ideas contained in that letter. Which ideas do you not support?

Mr. Smith: That letter refers to allowing foreign carriers to fly between Canadian points. As I indicated in my brief, we are not supportive of that. The letter refers to giving more control to the airports. We are not supportive of that. We find the airports currently are unregulated monopolies with which we are experiencing problems. To give them further control would be wrong.

The letter also refers to the Chicago formula which is recognized industry-wide and world-wide. There are many reasons to continue with that Chicago formula.

Senator Callbeck: On page 9 of your brief you say that the Competition Bureau should ensure a competitive, fair and equitable airline industry if there is one dominant carrier, and that you believe the tools for that are already in place. Are you saying we do not need any more safeguards?

Mr. Smith: The only other safeguard needed is to give the Competition Bureau more teeth to prevent predatory pricing or practices, such as putting a lot of capacity into a marketplace which would not deserve it. They should be able to act quickly and succinctly, without any long, drawn-out investigation. I am not a lawyer but I do not believe that the safeguards that are in place can deal with those two situations without delay. The concepts are in place, but not the ability to act quickly and decisively. That is my understanding.

Senator Spivak: If Canadian Airlines fails, 16,000 jobs will be affected. If the Air Canada offer does not go through because of American Airlines or other obstacles, the result will likely be that Canadian Airlines will go out of business. I would bet that Air Canada would not mind if that happened. What do you think of that scenario? What should the position of the government be then? How many of those jobs could your company absorb?

Mr. Smith: I am a big believer in our society, and we have a capitalist society.

Senator Spivak: We have a mixed economy.

Mr. Smith: Yes, we do have a mixed economy. It is wrong for the government to insert themselves into the business of an industry. Once that is begun, it is difficult to resist going too far.

Senator Spivak: Are you saying that the government ought not to have intervened? Should they have let Canadian Airlines fail?

Mr. Smith: No, the waiving of rule 47 was fine. I am referring to the action the government should take if Canadian Airlines fails in the future. I believe that when there is a vacuum in an industry, particularly in the airline industry, a tonne of people will show up. In fact, I will guarantee that a tonne of people will show up. Two airlines made announcements today.

Senator Spivak: One of them is from Winnipeg.

Mr. Smith: Yes, and another announcement is being made literally as I speak, by Regional Airline Holdings which is owned by the family who used to own Air Ontario. They will announce, I believe, their willingness to purchase the regional airline holdings from Air Canada and Canadian Airlines.

The airline industry, more than any other industry, abhors a vacuum. If Canadian should fail -- and that is an "if" because I do not know that that will happen -- the capacity will come flooding in. Those jobs will be sopped up, although perhaps not the whole 16,000. It is possible, although I do not know this, that there were too many jobs there for what the airline was trying to do. In any event, we will end up with a better airline industry as a result.

Senator Spivak: Are you saying that the government should do nothing?

Mr. Smith: They should ensure that the Competition Bureau has teeth.

Senator Spivak: I understand that part. In respect of giving additional support to Canadian Airlines, should they do nothing?

Mr. Smith: Unfortunately, Canadian must be treated much the way Eaton's was treated, as a fatality of the industry. It is not that I am anti-Canadian-Airlines. It was propped up once; it is wrong to prop it up again because we will simply continue to have this weak airline industry. I do not believe the status quo will work.

Senator Spivak: No matter which way it goes, there would be one dominant airline. Would the configuration include regional or low-cost airlines and more charter competition, even if there is one dominant airline?

Mr. Smith: Let me paint a scenario for you. Back in the old days, some of you may remember, Air Canada was the dominant carrier across Canada. CP Air was only in the west; EPA was in the east; Nordair was only in Ontario. That was not a bad scenario at the time, but it has evolved and changed. This industry is ever-changing. We must allow the industry and our economy to work through those changes to come up with the best model for us. We may not have one dominant carrier. Some regional carriers may join up. WestJet may decide to expand across Canada. What does that mean? That is called "business", as far as I am concerned.

Senator Finestone: Could you tie in the question of Canadian Airlines and AMR to your scenario? How do you see that evolving? I do not know that the present structure is independent to the extent that it can evolve without taking into account AMR and its involvement.

Mr. Smith: From my perspective, AMR is no different from United and Lufthansa on the Air Canada side. AMR is interested in Canadian Airlines for the feed and the fees that they generate. Obviously, AMR has a role to play in the future of Canadian Airlines because they stepped up to the mark during Canadian's last financial crisis and, by so doing, obtained some rights.

The airline industry is moving towards alliances. It used to be a Canadian carrier versus a Canadian carrier. Then it was a Canadian-American carrier versus a Canadian-American carrier. Now we see world-wide alliances.

We are discussing here transportation within Canada and how that hooks up with the U.S. I believe AMR is just interested in Canadian because of the feed. If they lose, perhaps they will hook up with WestJet or Canada 3000. There are many ways to skin a cat.

Senator Finestone: You want to maintain the integrity of the Canadian airline, the Canadian flag, the maple leaf forever across this country, as far as our boundaries are concerned. The involvement of American International paints another picture.

Mr. Smith: We would be the only country in the world to go with something different from that if we did.

Senator Fairbairn: Your brief is very zippy, as is your airline.

Mr. Smith: Thank you.

Senator Fairbairn: In our hearings last week at which Mr. Milton was present, we talked about discount airlines. My colleagues can correct me if I am wrong, but the impression that he left with us was that the discount airline planned for Hamilton had the initial rationale of connecting with the traffic opportunities in that border area. Nonetheless, he did not in any way discourage the notion that it could expand into the west. Does it concern you that one dominant carrier would have, as currently proposed, retention of Canadian as a subsidiary? Also, does it bother you that a new discount airline in Hamilton may go west?

Mr. Smith: Air Canada said they would not come west of Winnipeg.

Senator Kirby: To clarify, in response to a direct question from me on exactly that issue when he was here, Mr. Milton was very clear that he was not restricting in any way, shape or form the geographic area which that airline would serve.

Mr. Smith: That is a fair comment. We have taken on Air Canada before and we have done very well. We believe our cost structure is unmatchable by anyone. I am in favour of competition. I am asking only that the Competition Bureau ensure that neither Air Canada nor their low-cost carrier engages in predatory pricing.

If the status quo continues, Air Canada could still have a low-cost carrier. I cannot stop them from doing that. I just question why, after all this time, they can come up with a low-cost carrier now. However, if they decide to give that a try, it is their decision, and good luck to them. If they decide to compete with us, we will see who wins on the battlefield.

Again, I will stress that we do not, necessarily, see ourselves competing with Air Canada and Canadian. We go into these markets, and we fill up our aircraft because with $49 fares people will visit each other. We are generating a lot of traffic. Anyone from the west will tell you that. All of a sudden we have the type of traffic I am not accustomed to, as a former president of Air Ontario, Air Toronto, and a former executive of Air Canada. I board aircraft expecting to see people in suits. Instead, we are talking about senior citizens, empty nesters, young kids, single mothers and families.

WestJet is carrying an entirely different clientele from that carried by the major carriers. We are truly taking people out of their cars, off their couches, and out of the restaurants. Instead of going to a restaurant for a night out, they are going to Vancouver for less cost. It is a unique airline in that sense.

Senator Fairbairn: You certainly set a model for others to follow.

Mr. Smith: Actually, we copied SouthWest.

Senator Fairbairn: However, I take it from your response to Senator Kirby and to me that you would not take a negative view of an expansion of a discount airline from Hamilton unless it became engaged in a predatory price war. The government has set conditions for anyone making these bids.

Mr. Smith: Yes. We are truly pro competition.

Senator Finestone: However, is the Competition Bureau strong enough right now on predatory pricing?

Mr. Smith: That is the issue, senator. I do not believe it is.

Senator Kirby: No, it is not.

Mr. Smith: That must be strengthened.

Senator Kirby: Absolutely.

Mr. Smith: Even Canadian said it would take them three weeks to spend their cash of $88 million. A week is a long time in our industry.

Senator Kirby: You need a cease and desist order.

Mr. Smith: Yes, quick action must be taken.

Senator Andreychuk: I have used your carrier. When you said good times, good schedules, and good prices I though that by "good times", you were referring to the perky staff you have, who can crack jokes at 7 a.m. before takeoff. My only complaint of WestJet is that the staff, at 7 a.m., are just too perky for me.

You have opened up a market in Western Canada which did not previously exist. You are operating between points in Western Canada that were considered not competitive by Air Canada and Canadian.

If Air Canada takes over Canadian, do you believe that they will run Canadian as it is now, or will they change the Canadian component to a discount, short-haul carrier which would compete with you? Do you believe that they will retain Canadian as a competitor to Air Canada? At the moment, Canadian is vying for Air Canada routes, Air Canada is vying for Canadian routes -- at least in Western Canada. The had comparable time slots for takeoffs and landings. If one had a seat sale, the other had a seat sale. Do you believe that will continue if Air Canada takes over Canadian, or will they force Canadian into your market?

Mr. Smith: Air Canada and Canadian were competitive, but on a different level. When one raised fares the other followed suit. It takes a WestJet to come in and disrupt the status quo.

I prefer not to guess what Air Canada will do with Canadian. I do not know what their plans are. Although Air Canada has the ability to make Canadian a low-cost air carrier, I think even Canadian indicated it would do that. Kevin Benson said he would take Canadian to low-cost, but with union contracts it is difficult. We all pay the same for the planes, fuel, landing fees and NAV CANADA fees. The big difference between most carriers tends to be the cost of labour. Our advantage is the fact that we use only one type of aircraft.

Senator Andreychuk: Press releases indicated that you would not expand. Are you now saying that you are contemplating going east?

Mr. Smith: No. I am saying that we have not seen how the airline industry will sort itself out. Under the dual-carrier scenario we had no plans to go east. If it remains a dual carrier system, we probably would not go east. However, if Canadian disappears, there is that possibility. That has not gone by our board. We still envision a two-carrier scenario. We are concentrating on what we do best, namely, running our airline and not contemplating a lot of "what ifs".

Senator Fairbairn: Do you hold a trademark for the name "EastJet" in Atlantic Canada, just in case?

Mr. Smith: We trademarked the name EastJet as a defensive move, not as an offensive move. We did not want anyone to start up with the name EastJet and have people think that they were affiliated with us. Unfortunately, going by the track record of airlines such as Greyhound, VistaJet and so on, the experience is that they do not last for more than six months. We did not want someone calling themselves EastJet and then fail and everyone would think it was affiliated with WestJet.

If we expand into the east -- and there are no plans to do that now -- we would use the name WestJet because, to us, everything is west of Saint John's?

Senator Fairbairn: That is right.

The Chairman: Thank you very much, Mr. Smith.

The committee will meet again tomorrow in camera in Room 256-S in the Centre Block when the Senate rises.

The committee adjourned.

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