Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 18 - Evidence

OTTAWA, Monday, June 12, 2000

The Standing Senate Committee on Transport and Communications, to which was referred Bill C-26, to amend the Canada Transportation Act, the Competition Act, the Competition Tribunal Act and the Air Canada Public Participation Act and to amend another act in consequence, met this day at 3:00 p.m. to give consideration to the bill.

Senator Lise Bacon (Chairman) in the Chair.


The Chairman: Honourable senators, we are again today meeting to study Bill C-26. Our witnesses today are from British Airways, Cathay Pacific and Air France.

Welcome to all of you. Please proceed.

Mr. Malcolm Freeman, Vice President and General Manager Canada, British Airways: I appreciate the opportunity to appear before this committee. Appearing with me is Robert Russell, who will address proposed amendments to the bill supported by British Airways, Cathay Pacific and Air France.

Air Canada now has an unprecedented monopoly, as illustrated by the fact that Air Canada has over 85 per cent domestic market share; $5 million or 99 per cent of all Canadian frequent flyer program members; a monopoly on key domestic routes; and over 80 per cent of Toronto slots. Air Canada now has the ability to leverage its near-monopoly position.

The presence of international carriers is vital to the competitiveness of the domestic airline industry in Canada. Any new domestic competitor to Air Canada that emerges will need relationships with competing international carriers to get the international feed traffic.

British Airways has been serving Canada since 1947 and we currently operate 28 flights per week. As a result of the merger, Air Canada now holds 72 per cent of the market; that is, 108 flights per week. Following the merger, all code share and competitive interline arrangements between Canadian Airlines and British Airways have been cancelled. British Airway's ability to continue to compete with Air Canada is anticipated to decline despite legislative relief addressing the need for competitive interline arrangements, effective legislation aimed at preventing anti-competitive behaviour, and the need to be able to purchase frequent flyer points from Air Canada. British Airways and other international carriers must be able to purchase points in Air Canada's program at a reasonable rate for redemption by Canadian consumers on domestic flights.

The second area of concern is interline arrangements. As now published in the international worldwide prorate manual, Air Canada is now charging international airlines between key Canadian cities airfares that are 200 per cent higher than what they were last month. For example, if these fares are utilized for the calculation of the domestic portion, a ticket for travel from Ottawa to London via Toronto on British Airways in business class used to cost $389 as Air Canada's portion for the Ottawa-Toronto one-way fare. These levels have been increased from $389 to $1,143, thus, effectively pricing international airlines completely out of the Ottawa market. This pretty much gives Air Canada a monopoly on the 12 cities in Canada with which we served as a result of our competitive interline agreements with Canadian airlines.

A final area of concern is the potential for other anti-competitive conduct by Air Canada, specifically the abuse of royalty programs by Air Canada to reduce competition. Air Canada's near monopoly in the domestic Canadian market has been leveraged against international competitors to permit Air Canada to secure a further share of that international market. These are significant issues that must be addressed to ensure that domestic and international markets remain competitive for the benefit of all Canadian consumers.

With that background, Mr. Russell will address the concerns with respect to Bill C-26 and the proposed regulations.

Mr. Robert S. Russell, Lawyer, Partner of Bordner Ladner Gervais, Cathay Pacific (also representing British Airways): My submissions with respect to Bill C-26 and the regulations proposed by the Commissioner of Competition are on behalf of British Airways and Cathay Pacific. Air France supports our submissions, and we theirs.

The Competition Bureau has referred to Air Canada as an unregulated monopoly. This monopoly will lead to significant economic distortion if left unchecked. For example, Calgary opened a trade office just months before it became a monopoly route for Air Canada as a result of the problems that Mr. Freeman has cited.

On third reading, Bill C-26 was amended to include an essential facilities provision, which prevents a dominant competitor from refusing access to the essential facilities or services that other competitors require to compete. This approach is consistent with the U.S., Australia, Germany, South Africa, Europe and the United Kingdom.

This provision also ensures that certain undertakings given to the Minister of Transport and the Commissioner of Competition will be effective. For example, the undertakings to enter into interline agreements with certain domestic carriers in accordance with IATA standards on "commercially reasonable terms" does nothing to provide for competitive interline agreements.

The essential facilities provision and the test adopted in the regulations tabled by the Competition Bureau will ensure that the price for interline will not prevent consumers from having competitive choices. Bill C-26 addresses the concern that the merger has given Air Canada the ability to engage in anti-competitive conduct by permitting the government to enact regulations to illustrate the type of conduct to be challenged.

The commissioner has assured us, and we are also assured by the responses of the Ministry of Transport official who appeared before this committee last week, that this clause will apply to abuse of dominance in all travel markets affecting Canadian consumers. More than 50 per cent of the dollars spent on air travel by Canadian consumers is on international and trans-border travel.

We, therefore, fully support the draft regulations tabled by the Commissioner of Competition. In particular, we support the proposed regulations concerning predatory pricing and pre-emption of airport facilities, which provides a much clearer and more enforceable test than that found in other provisions of the Competition Act.

We are particularly concerned that Air Canada is leveraging its near monopoly on domestic routes against international competitors. Again, the proposed regulations will prevent Air Canada from using travel agent commissions or other inducements to exclude competitors.

Clause 2 of the regulations establishes the general conditions to be applied in determining when such a refusal to provide access to essential facilities may be remedied. Section 3 contains a non-exclusive list of services and facilities that are considered to be essential in appropriate circumstances.

Air Canada will be required to enter into competitive interline arrangements with other carriers. The non-exclusive nature of the provision also means that in appropriate circumstances, access to frequent flyer points and other services could be properly addressed.

These provisions ensure that the competing carriers have access to the services and facilities they need to effectively compete in Canada.

This does not amount to a re-regulation of the industry. Air Canada is not required to seek approval in advance for its actions. The commissioner of competition must apply to the competition tribunal to obtain an order that prevents Air Canada from engaging in that conduct. Air Canada may vigorously contest any proceedings resulting in delay and expense.

For this reason, the cease and desist powers are necessary. Small carriers or new entrants could suffer significant losses and may fail or withdraw during the time the commissioner is seeking a remedy. The cease and desist power will allow the commissioner to act swiftly before this toll is exacted.

Therefore, the proposed regulations are vital to the legislative framework. We urge this committee not only to support Bill C-26 as it was amended, but also to recommend that the regulations as tabled by the Commissioner of Competition be enacted.

Bill C-26 and the proposed regulations will ensure a level playing field for all competitors who are needed to assure fair pricing, good service and product choice. Through this support, you may ensure that we are not hostages to Air Canada's monopoly. This will not cost Air Canada anything other than the ability to extract monopoly profits from consumers -- itself a beneficial effect of this bill and the regulations.

Thank you for the opportunity to express our views. If I may, I would now like to turn to our friends from Air France.


Mr. Pascal Briodin, Executive Vice-President and General Director of Air France in Canada: Madam Chair, honourable members of the Standing Senate Committee on Transport and Communications, thank you for giving Air France the opportunity to be heard by this Committee.

Air France has operated in Canada for 50 years. We have recently expanded and doubled the number of our employees in Canada. We currently employ 230 persons, which shows our strong commitment to this market.

First, I would like to make it clear that our company is in full agreement with the statement expressed in section 5 of the Canada Transportation Act, which states that competition and market forces constitute the elements most conducive to satisfying the needs of users of air transportation. Next, we commend the emergence of a strong Canadian competitor, which is the result of the Air Canada takeover of Canadian Airlines.

As such, this takeover has created a situation of dominance in the air transportation industry, which is unprecedented in Canada, a situation which can be compared to none other in any major industrialized country on the planet. Therefore, it is a highly unique situation, and for this reason, it is imperative that appropriate safeguarding guidelines and measures be put in place, both on the domestic market, as well as on the transborder and international markets. British Airways has provided this committee with examples of potentially negative consequences this takeover could have, based on the problems the airline is presently experiencing in its own business environment. We would now like to draw attention to our situation by shedding light on the specific problem the crossed incentive program launched by Air Canada poses for foreign carriers.

A crossed incentive is offered when Air Canada associates the payment of an incentive commission to travel agents for the sale of domestic tickets to the attainment of an objective calculated based on the sale of transborder and international tickets. This program gives Air Canada an anti-competitive advantage. In fact, this practice allows the airline to use its dominant position on the domestic market to succeed, through leverage, in imposing itself on other markets, an advantage its competitors do not have access to.

In his letter dated October 22, 1999 addressed to the Minister of Transport, the Commissioner of Competition noted that the incentive commission paid to travel agents strongly motivates the latter to conduct business with specific carriers, thereby giving rise to the threat of their having an exclusion effect in an environment where one dominant carrier prevails.

Generally speaking, Canadian travel agencies dedicate a major portion of their business to selling domestic products. As a result, revenues generated by the incentive commissions applicable to these domestic sales constitute a considerable share of their overall revenues. In Air Canada's program, the right to such an incentive commission (domestic sales) relies on the maintenance or progression of transborder or international ticket sales, which results in pressure on the agent to strongly push the sale of Air Canada products on the transborder or international markets, to the detriment of competitive offers. This pressure is even more intense when sales near the results that must be obtained in order to be entitled to the incentive commission.

For instance, the director of a large chain of travel agencies in Canada recently told us that he could no longer sell our products if he wanted to meet the objectives set by Air Canada and avoid losing his incentive commissions.

A competitor wishing to neutralize this effect must offer a much higher commission percentage than Air Canada, which is costly for the airline. Foreign companies, seeing their market share decrease as a result of this measure that has an anti-competitive effect, may be tempted to reduce the capacity offered and reposition a segment of the seat offer on the other markets.

This situation is alarming, particularly on markets such as Europe, where Air Canada already holds an important position. Our estimates on the routes to Europe more or less confirm these numbers, placing Air Canada's market share at just below 50 per cent, and the market share of Star Alliance, to which Air Canada belongs, at 58 per cent. In contrast, the market shares of its three closest competitors, specifically KLM, British Airways and Air France, fluctuate between 9 and 12 per cent. In other words, the market share held by Air Canada alone on the North Atlantic is already at least four times bigger than that of its closest competitor.

Intervention by lawmakers and the Canadian government, combined with sustained vigilance by the Commissioner of Competition, are therefore necessary if we want to avoid increased economic dependence of travel agents on Air Canada, and undue reduction of competition between airlines, to the detriment of the consumer. Basically, this means risking fewer offers, and hence less choice and higher prices.

To summarize, we are not in any way opposed to Air Canada paying an incentive commission for the sale of transborder or international tickets. Neither are we necessarily opposed to Air Canada paying an incentive commission for the sale of domestic tickets, even though such an incentive may serve as an obstacle with regard to the arrival of new competitors on the domestic market. However, we are of the view that Air Canada should be prohibited from associating payment of an incentive for the sale of domestic tickets to the attainment of an objective calculated based on the sale of transborder and international tickets, and this, owing to the anti-competitive effect of such a measure. Similarly, the association of the sales of transborder and international tickets should not be permitted.

Prohibiting such crossed incentives would not deprive Air Canada of any legitimate commercial tool allowing the company to be competitive with other international airlines. Its current market share eloquently testifies to the effectiveness of the means Air Canada already employs. This is the issue: why would Air Canada oppose the separation of commissions on the three markets I described? Certainly because it is to its advantage.

Following the amendments made in the House of Commons, clause 13 of Bill C-26 leaves room for the possibility for the Governor in Council to adopt, on recommendation by the Industry and Transport ministers, regulations aimed at defining anti-competitive actions in the application of certain clauses of the Competition Act. In our opinion, it is imperative that the current draft of clause 13 of Bill C-26 be upheld, and that it allow for the adoption of regulations allowing for action to be taken in the face of problems that have been raised by this takeover.

Thank you for your attention in this matter.


Senator Forrestall: I am a little overwhelmed by all of you, gentlemen, and what you represent in the world. We are a small nation, with a small airline. Are you upset because little old Canada has shafted you, or beat you to the punch, or that we are a little smarter? I do not understand why there is all this concern in the competitive world.

Someone stated that this program gives Air Canada an anti-competitive advantage. At the same time, incentives from Air Canada were apparently offered if an agent stopped selling the competitor's package and product. Are we talking about an "anti-competitive edge" or "competitive edge"?

I am more concerned because you apparently feel that we have not gone far enough with the Competition Bureau. We heard the Deputy Commissioner the other day, in response to a question, suggest that, were Bill C-26 in place, he would be proceeding against Air Canada with criminal charges, albeit in a domestic issue -- the question of Air Canada's attitude to WestJet and Moncton. I can think of very few stronger utterances in Canadian business parlance than to have the Competition Bureau of Canada and the government of the people of Canada make that suggestion.

On the other hand, I listen to you today, pleading for more. How can I get this straight in my mind? Do you not have any confidence at all in the capacity of the Competition Bureau to straighten out most, if not all, of the problems that you recited today and in the last month and a half? That question is addressed to all of you, generally. Perhaps Mr. Freeman could respond first, because it returns to the comment that Air Canada has an "anti-competitive edge." I would have thought it should be a "competitive edge."

Mr. Russell: I will respond, if I may. If your impression is that we are asking for more, it is incorrect. We fully support the regulations tabled by the Commissioner of the Competition Bureau to you last week. I think that the message you are getting, at least from the group here, is that we support the amendments to Bill C-26 and, with those regulations, with the meat on the bones, you will have an effective tool in the hands of the Commissioner of Competition.

However, we want to make it clear that this is an enforcement mechanism, not regulations. Therefore, you need the resources in the bureau to be able to effectively enforce the act. We have had only nine cases before the Competition Tribunal where the commissioner had to proceed. Only four or five of those have been contested. In one of those cases, a private party that opposed the commissioner reported to the press that they had spent over $10 million on legal fees on that one proceeding. Thus, we again recommend that this committee urge that there be resources to allow the policing mechanism that the commissioner would now have through these amendments and regulations. We support those amendments, and I would like to clarify any misconceptions.

Second, I would like to address the first point you made about large carriers. Each of the carriers before you occupies smaller domestic market shares than Air Canada. BA has 36 per cent in its own domestic market. I am not sure that I can speak for Air France, but I know that it is one of the lowest. The highest in Europe is Lufthansa, with 60 per cent. The discussion here is about 85 per cent. All of the competitors in Canada have to compete in the domestic markets of the others. They want those domestic markets to remain competitive.

Senator Forrestall: We are a nation of 30 million people and you are a community of several hundred million people. In each of your countries, you are so much more vast and large than we are, that we are comparing apples and oranges.

Mr. Russell: That is exactly the point. If only six people fly from Winnipeg to London, England, each month, it is still important that there is competition. We have talked about the ability of BA to compete on the flights to Winnipeg. Those six consumers are not a large group and we are a small country, but we are a country that needs competition to deliver the products and prices to consumers. It does not matter how few we may be, we deserve competition as much as any other nation. That is the point that the carriers are making to this committee.

Senator Forrestall: How effective do you think the enforcement process is under Bill C-26? Is it effective? Is it quick enough? Is it strong enough to cause people to think twice?

Mr. Russell: The laws proposed are as effective as any of the other nations that I have cited in my submission. We have put ourselves in tune with all of the other major nations that have effective competition policy with respect to this industry. However, Canada has not necessarily provided the same resources to its Competition Bureau as other nations have, and that is the point we make. Without the resources, you cannot police. Actually, we have seen it before in this country. The bureau must be able to take on more than one or two cases when it is facing a large, vigorous company such as Air Canada.

Senator Forrestall: You are a competition lawyer and you have had a chance to look at what has been produced. I wonder about your opinion. Are the regulations tough enough? Nobody disagrees that we have to have them, certainly not me. I recall that I was in the former minister's office until midnight or later to try to make sense out of economic deregulation in the transport industry. I am wondering if you think that they are strong enough to produce the type of competition that is required to assure those six people in Winnipeg, who may or may not want to fly to Europe.

Mr. Russell: We certainly believe that both the amendments to the bill and the regulations proposed by the Commissioner of Competition will give us effective competition policy and enable him to ensure that competitors are given the opportunity to compete to allow the emergence of new domestic competitors; to ensure that the international carriers are able to continue to compete, notwithstanding the merger; and to allow competition forces rather than re-regulation to ensure that we get back to a situation where we are comfortable as consumers in Canada.

Senator Forrestall: I cannot speak for others on this committee, but I am very much opposed to re-regulation of the industry. On other hand, someone has to curb Air Canada because it is getting a little out of control.

I suspect that the Competition Bureau does not have adequate resources to effectively monitor the regulations and the industry, and take difficult actions. Can you comment on that? Have you made a judgment about the Competition Bureau's capacity to enforce the regulations and oversee the competitive nature?

Mr. Russell: Concerning capacity and expertise, I think you have an enthusiastic bureau. They consider this issue to be very important. I know that from submissions they made both to this committee and to the House of Commons committee. However, they also review all the major mergers in this country, and the activity with those has been growing steadily in the 1990s. Tapping on the resources for people to do all the things that they must do in competition policy, we need to review to ensure that they have the resources. This is a policing mechanism. Abuse of dominance is something where they have to send people out, investigate, and ensure that they have the facts before they can bring an application.

Senator Forrestall: I left home at 4:15 this morning and Air Canada was not ready for me until noon. As is that was not bad enough, when I arrived here, I found out that my secretary was stuck in London, Ontario, and will not be home until Wednesday. She still has not found her bag, which was lost Sunday afternoon.

I am no friend of the people who fly airplanes in this country today at all, including all of you put together. I am not terribly happy with you, but I do want to see competition flourish. I feel strongly about the points that you made, and I welcome you all here today.

Senator Kirby: I have three questions to ask. I would be happy to have any of the witnesses answer them.

First, do I understand that both of you would be happy if the draft regulations that were tabled by the Competition Bureau were put into effect? You are not aiming to strengthen, add to or clarify those regulations, are you? I ask that because I read, for example, that a British Airways proposal on frequent flyer programs is an area of concern to you. If frequent flyer points fall under the definition of "essential services" or, to quote the draft regulations, "services essential to the operation in the marketplace," then, for example, your concern about the frequent flyer program is solved. Since neither of you are asking for amendments to the bill, and both of you are saying that you support the draft regulations as tabled by the Commissioner of Competition, are there clarifications or stronger regulations that would make you feel more at ease, such as the frequent flyer program?

Mr. Russell: The blunt answer to your first question is, yes, we fully support them and think they will address the issues.

On your second point, we will continue to encourage the Competition Bureau and the Ministry of Transport to include frequent flyer points as one of the essential services on the list. It is a non-exclusive list, so we believe it can be remedied. We would like it on the list, particularly since the Competition Tribunal ruled, in 1993-94, that it was a significant barrier to entry. This provision should address all barriers to entry. That is the purpose of the provision. We will continue to encourage them, but we believe the provision can deal with the issue.

Senator Kirby: Rather than encourage them, couldn't one simply add "frequent flyer programs" to paragraph 3 of the draft regulations, where a whole list of services is offered? I realize that it is non-exclusive, but would you not be happier if it were listed?

Mr. Russell: Yes.

Senator Kirby: I now wish to move on to the example that was raised by both of you and particularly by the representatives of Air France concerning the use of anti-competitive loyalty programs vis-à-vis travel agents.

In your case, are you content with the draft regulations as tabled by the Competition Bureau, or is some clarification of those required, such as adding frequent flyer points, which I suggested and Mr. Russell agreed with? Is there a similar modification or enlargement of the draft regulations that would deal with your concerns?

Mr. Gilbert Poliquin, Lawyer, Air France: We are looking forward to working with the Competition Bureau to fine-tune the language used in the tabled regulations. The basic idea is there, yes.

Senator Kirby: May I offer you a piece of advice? You would be far better to put on the record today or tomorrow, or by way of a letter to the chair, what that fine- tuning is. Many people have used the phrase "looking forward to negotiating" and "fine-tuning" and have then found out that they were not tuned in to the same station and had problems. If you have the exact wording, it would be helpful to the committee to give it to the chair. It does not mean that you cannot then negotiate with the Competition Bureau, but it might be helpful if we knew what it was that you were trying to get.

Mr. Poliquin: We take good note of the suggestion and we thank you for it.

Senator Kirby: Your time is limited if you wish to do that.

My third question deals with the outrageous way in which fares are now being prorated. The example you used was London to Ottawa, via Toronto. Not being a lawyer, I have to believe that going from $389 to approximately $1,143 -- which is more than a 300 per cent increase -- is abuse of power by any definition, andtherefore, would clearly fall under the provisions as drafted by the Competition Bureau. Is there any legal doubt about that? It is so outrageous that it is hard to believe. It is also pretty stupid to do it while the bill is going through Parliament, but we will set that aside for now. Is there any question that that is the ultimate in abuse of power?

Mr. Russell: I think the bureau, in response to a question last week, said that they had little doubt because foreign carriers are prevented from actually flying in Canada under the cabotage rules. It is an essential service and has been defined as such. They are incapable of supplying the service themselves, so it would clearly fall within the provision.

In prior committee hearings, Mr. Milton suggested that those numbers were falling out of the air. The changes that Air Canada made are now published in the June 1 prorate manual, the worldwide manual. There is no question that those are now part of the prorate calculations.

Senator Kirby: Have you tabled those with the committee? If not, they will be helpful.

Mr. Russell: I will table them. I have a copy.

Senator Kirby: You are telling me that no change in the regulations is needed in order to deal with that problem?

Mr. Russell: No.

Senator Kirby: The representatives of Air France will give us suggested changes on the regulations. I wish to tell the representative of BA that, other than adding the words "frequent flyer points to clause 3," any other ways of toughening the Competition Bureau regulations would be helpful to us.

Among other things, we recommended, in our report last November, modified sixth freedom and other stronger pro-competitive measures. We did not get that, but it would be helpful to us to have a tougher regulation.

Mr. Russell: BA and Cathay Pacific would like to see, in the regulations tabled by the Competition Commissioner, paragraph 1(f) clarified as to whom those inducements or commissions can be paid. I think that the bureau took "travel agents" out to broaden the application of the section, but it is now missing that vital information. That would be our suggestion.

Senator Kirby: Recognizing that some of us have the huge advantage of not being lawyers, can you give us exact wording for that change?

Mr. Russell: Certainly, senator.

Senator Finestone: I wish to ask a question about the term "cross incentive". Does it have some kind of legalistic meaning? If so, should that have been in the regulations?

Of course, my much smarter colleague has asked the question, but he did not use the term. Is that term acknowledged as an industry term that can be looked at in terms of disincentives or lack of incentives?

Senator Spivak: Where is that term?

Senator Finestone: It is in the regulations. I am talking about either paragraph 1(f) or 3, or it could even be right within Section 2. Section 2 talks about that which cannot reasonably or practically be purchased, acquired, provided or replicated by another carrier on its own behalf or 2(c).

The Chairman: You mean 2(b).

Senator Finestone: I do not know about that wording. I acknowledge that there is specific language surrounding frequent flyer points. What are your comments on crossed incentives?


Is there a legal explanation for this?

Mr. Briodin: There might be a translation problem in the English document.

Senator Finestone: But I have the document in French.

Mr. Briodin: There is a French version and an English version. In fact, the notion of "incitatifs croisés" was perhaps translated literally from the French as "crossed incentive." In fact, this is more of a commercial factor than a legal factor at this point. These incentives normally apply to separate markets, in this case the domestic, cross-border and international markets. These incentives are applied so as to control the performance of travel agencies on the three markets. This is why the incentives are crossed.

Senator Finestone: Is this expression also found in a poor translation of the regulation?

Mr. Briodin: No, the regulations at this time do not refer to the notion of crossed incentives in any way.

Senator Finestone: Should it be added, and if so, where should we do that?

Mr. Briodin: Just to give you an idea, there is a paragraph about the use of override commissions. In it, we would like a clearer approach that specifies override commissions on a given market, that must not be used to obtain advantages on another market. Our particular problem lies with using the domestic market to gain advantages on the international market.


Mr. Russell: Could we just add to that last question? I believe the provision is drafted broadly to cover more than the cross issue or leveraging issue, to cover any market share deals. In Europe, not only is leveraging from one market to another unlawful, but using market share deals per se is unlawful. Therefore, you cannot give more commissions because you have more market share.

That is not a leveraging case. However, you do want the provision to cover both types of incentives because both have powerful effects when there is significant dominance.

Senator Finestone: Is leveraging in here?

Mr. Russell: It is not in there. It is trying to be broad enough to cover not only the leveraging and cross-linking that is being discussed, but also market share deals per se.

Senator Finestone: I see. Are you still referring to paragraph 1(f)?

Mr. Russell: Yes.

Senator Finestone: Do you not think that the language should be more precise?

Mr. Russell: The language could be more precise, but it should not be exclusive. It should say "including without limiting" because you do not want to lose the effect of the paragraph, which is more generic.

Senator Spivak: Since you at least support the regulations and the bill, I have no major questions. However, I have two points of clarification.

First, you say that Air Canada has over 80 per cent of the slots at Pearson Airport compared to British Airways having 36 per cent of the slots at Heathrow. Are the number of slots not a matter for the Government of Great Britain to negotiate?

I will give you my second area for clarification, and you can answer them both.

I want to make it clear what is at stake here regarding the interline. The fares, your fare and Air Canada's fare to London, for example, are the same. This means that your profit margin is perhaps non-exist. Am I correct?

When a person is buying a ticket to London, you are not charging more than Air Canada is charging. Is that correct? I do not understand what the implications are. Does it mean that the fare is increased by 200 per cent?

Mr. Russell: On the issue of slots, the regulatory situation with respect to slots is slightly different than the U.K. It can be traded for value. The slots are like an asset of the company. It would arguably be within this country's jurisdiction, with its carrier, to determine whether or not that imbalance should be addressed because they are assets of Air Canada in essence as a result of the merger.

Second, England is focusing on how to use those slots, as well. In any route between two countries there will be joint jurisdiction, if you will. That is why you find the U.K. authorities also reviewing the merger, because it has an impact on the British consumer just as it has on the Canadian consumer.

Senator Spivak: It is up to the U.K. government to stake action on the slots business, as well.

Mr. Russell: It could be, yes. On your second issue, you are quite right. It is a cost to a carrier who is interlining. When the cost goes up from $389 one way to $1189, or whatever, one way, that is a cost. The cost of business class fare is approximately $3,500. If you triple the amount of those two one-way costs, you are effectively up to $2,400 off what would be a $3,500 one-way ticket. You cannot compete.

Remember what Air Canada has done. For the very first time they filed a J and a J1 fare at a time when it is picked up in this manual. Our friends at Air France actually capture them from the computer. They are captured to go into the manual as a pro rate calculation.

Air Canada did them in April. They did a very unusual thing; they did J and J1. Fare J is now three times as much. It went up by 193 per cent. They created a J1, which is at the old $389 price. We can only imagine that that was done to force the larger fare onto the pro rate calculation, which basically blows the other air carriers out of those markets, such as Winnipeg. There would be no other reason to do that.

The Chairman: Did you say that you would table this report in front of you?

Mr. Russell: Yes, I would.

Senator Finestone: I am glad that you asked that question, Senator Spivak. When we discussed the slot situation, Air Canada's complaints were based on the fact that you want them to negotiate the Heathrow slots, but it is not within the hands of Air Canada; it is within the hands of the Canadian and British governments. Are the slots at Heathrow on a government-to-government basis, or is it on a company-to-company one?

Mr. Russell: First, it could be a commercial issue. If you were able to negotiate, you could always agree on the issue.

Any slot constraints at airports affect the capacity of any carrier at that airport. British Airways in Toronto, for example, can only put on two flights a day, and they have around 25 per cent of that market.

They cannot compete head on. They cannot produce more widgets in such a market. When something that is otherwise a commercial issue becomes a barrier to competition, that is when the government needs to make sure the assets in some cases are properly distributed so that competition takes place.

Senator Finestone: We were told that it was not a question of Pearson Airport slots. We were told that it was a question of the slots at Heathrow that Air Canada says are theirs, and that it is your problem to negotiate. I think that that is what we heard.

Mr. Russell: To clarify the language, we are talking about slot pairs, take off and landings at both ends. If one is coming across from England, one would typically want slots to depart at around 6:00 p.m. or 8:00 p.m., the peak periods at Pearson Airport. One cannot easily get those slots at Pearson. Before, BA would have been able to get a slot at 11:00 in the morning, approach Canadian Airlines and negotiate for slot time. They eventually got the slots that they needed.

With only one major airline with whom to negotiate, there is no longer a commercial solution. That is one of the problems at this end. On the English side, slots are an asset.

For example, Air Canada bought Tokyo slots from Canadian, you may recall, at Christmastime to float them some money. Those are assets. They were provided to Canadian Airlines before Air Canada owned them because slots could be treated as assets. They can be bought and sold to some degree by the airlines.

Senator Finestone: Are you short of assets in the form of slots at Heathrow?

Mr. Russell: Yes. This is not an issue we are pursuing today, but in order to be able to put more planes onto the market here, BA does not have spare assets, if you will. They would have to take planes off another route in order to redeploy them. This is historically not a very profitable route.

U.K routes to Canada have not proven to be profitable for Canada. Fourteen airlines had an alliance with BA. That alliance lost money on these routes. A business decision was taken there as well, of course.

Senator Finestone: Is it not essentially poor faith? Is it not unfair competition?

Mr. Russell: Do you mean bad faith? As a result of the merger, Air Canada got some major assets -- 75 per cent -- that allow it to fly on this country's biggest international route. That is what they got out of the merger.

Typically, during a merger, we look at the assets and make sure that they are not a barrier to competition. Therefore, the issue of assets is sometimes addressed.

Senator Finestone: It sounds like it was a good business deal, in some sense.

You mentioned Germany and Lufthansa and yourselves with respect to domestic market control. You said that Lufthansa has 60 per cent of its domestic market, whereas Air Canada has 85 to 90 per cent of its domestic market. Do you have any idea if there were any other countries that find themselves in the same position of total dominance as Air Canada?

Mr. Russell: There have been examples. Australia was one of them. The Competition Bureau spoke to that issue. As you know, it has taken a position in a number of cases both here and before the House of Commons standing committee, that a Canada-only carrier should be permitted.

As of last week, an Australia-only carrier started up in Australia and Virgin Blue, I think, is another one that will start up. They are foreign owned and are only allowed to fly within the country -- they cannot fly international flights out of the country, but they provide that level of domestic competition.

That is how Australia dealt with it. I believe South Africa did a similar thing.

Mr. Freeman: Yes, it did. In fact, British Airways franchised an airline in South Africa called Calm Air, which has been successful. We have a fairly large stake in that carrier.

Prior to that enfranchisement, the airline in South Africa completely dominated the domestic market. The government, through its competition bureau, intervened by imposing what they called domestic add-on airfares. Any international passenger travelling out of any of the points within South Africa through the main gateways were charged the same rates, whether they were flying on the national carrier or one of the competitive airlines.

That basically levelled the playing field, and made it fair for everyone to compete. Once competition came in -- which was inevitable as competition will certainly come into the Canadian market -- those regulations fell away completely, and it was business as usual again.

Senator Finestone: You talked about how six passengers from Winnipeg should have the right to choose among competitive flights, and I am sympathetic.

Have you had overall losses that you can quantify?

Mr. Russell: We cannot give you a number, but we could tell you that approximately 18 per cent -- and that is for the U.K., I do not have the numbers for Cathay Pacific -- are going to "behind points."

If we think of the three main gateways for the U.K. being Montreal, Toronto and Vancouver, every other major city in the country depends on this interline issue. That is about 18 per cent of the traffic, based on our statistics.


Senator Finestone: And what about Air France?

Mr. Briodin: Do you mean all the airlines together or just Air France?

Senator Finestone: Only Air France. If you have the other figure, it would be acceptable.

Mr. Briodin: I do not know it by heart, unfortunately, but we could quickly obtain it for you. In fact, I am coming back to what was just said. There are three major cities as far as international transportation is concerned: Montreal, Toronto and Vancouver. Most of the other cities have less regular service with less frequent flights. Moreover, you have to transfer in one of the big airports like Montreal, Toronto or Vancouver. We only carry 10 per cent of the passengers, and even so, this may be a maximum passing through Montreal or Toronto on their way to other destinations.

On the Canadian market, when you take an Air Canada flight between Saskatoon and Toronto on your way to London, you will obviously be more inclined to choose an Air Canada flight between Toronto and London. This is more accessible for passengers with regard to baggage, airport registration and airport installations. This is already a natural advantage enjoyed by Air Canada.

Senator Finestone: Do the companies that you represent here belong to One World, Star Alliance or some other association?

Mr. Briodin: British Airways and Air France are in strong competition.

Senator Finestone: You are competitors. This is very interesting. Do you belong to Star Alliance?

Mr. Briodin: Neither of us belongs to Star Alliance. British Airways belongs to One World and Air France belongs to an alliance that will be named on June 22. It is an alliance founded with Delta Airlines.

Senator Poulin: We know that transitional periods are not easy for anyone. We, as senators, travel to Ottawa from our regions every week. We hear horror stories and we all experience horror stories. Have either of your companies lost any market share during the few months when these changes were introduced in Canada?


Mr. Russell: You could have bought a BA ticket from 12 cities in Canada; you no longer can. Those are the monopoly routes I talked about. I cited the example of Calgary and the U.K. trade-off as being open. One now can only fly via Air Canada to London, England from Calgary. That is an economic disparity issue.

If businesses are looking across Canada to determine where they will locate, international travel becomes expensive. As I cited, over 50 per cent of the dollars spent in Canada are on transborder -- U.S -- and international travel. If we allow this lack of competition, Calgary, Winnipeg and Saskatoon will be expensive cities to do business in, and that is why the interline issue needs to exist -- to make sure that the BAs and the Air Frances of the world can compete.

It is a consumer issue. It does not matter whether it is Microsoft up against Corel or any other competitor. The consumer benefits if two competitors, like those that sit here at the table, go neck and neck on the Paris and London routes. They are not giving each other a break when it comes to discussing those lucrative routes. They are at each other's throats. If you look at the fares, we can see how easy it is to hop over to Paris, if we are already in London, but we cannot easily hop up to Ottawa. If I had been in London on the weekend and had bought a London-Paris return ticket, it would have cost me 55 pounds. That is the problem. The airfares compete head-on with the railroad prices, now.


Mr. Briodin: I could add another example for you. Air Canada implemented the crossed incentive program with what we call, in our jargon, the big national chains like Amex, Carlson Wagonlit, Rider-BTI. We have witnessed the impact of this kind of program for several years. With these large chains, we have market shares well below our average market share. This means that the program is very effective in increasing Air Canada's share and, of course, decreasing the share of foreign carriers.

Senator Bacon: In Canada, there are carriers offering rates lower than Air Canada. There is competition within Canada.


Senator Furey: I have one brief question that refers to this cross-incentive issue.

I believe that it was Mr. Briodin who said that when an agent is on the verge of reaching a benchmark that allows him or her to receive an incentive commission, then funny things start to happen. I think that we can see what those funny things are. He also pointed out that, already, an operator for a major chain of Canadian travel agents has already indicated to you that the chain can no longer sell your products. Has this happened already?


Mr. Briodin: Yes, it has happened to us. This large chain works with fiscal years that are identical to calendar years. We review our figures about every three months. I met this large chain in September 1999, which was before the merger between Canadian Airlines and Air Canada. During that meeting, they explained to me that up to that date, they had sold to many Air France seats and not enough Air Canada seats, and if it wanted to meet its incentive objectives with Air Canada, it would have to stop selling Air France. In fact, with this chain, our sales dropped dramatically during the final quarter of 1999.


Senator Furey: Are you satisfied that the regulations are going to take care of that problem?


Mr. Briodin: The regulations, as they stand, are a good foundation on which we should, of course, work in order to introduce a few amendments to cover those aspects.


The Chairman: Are there other questions, senators?

Senator Forrestall: I do not understand. If you wanted to set up your own sales force in Canada, you could legally fly passengers from country A to country B. As a Canadian, I could still approach you to fly with your airline. Is that true or am I wrong? Are you legally able to fly unimpeded by the commercial problems that are in front of you?

Mr. Russell: The answer is yes, and I would like Mr. Freeman to respond because we did an analysis of the London flights to Halifax, which is a good illustration of the problem.

Senator Finestone: Do you mean London, Ontario, or London, England?

Mr. Russell: I mean London, England, to Halifax.

Senator Forrestall: Let me put the other hook in so that you can answer all at the same time. Air Canada's and Canadian's pilots are asking the company to address the issue of seniority rights, among other issues. Nothing is more hallowed among pilots than where they sit on the seniority list. If we have a protracted strike this summer, as is being threatened, would you do something about it?

Mr. Freeman: Let us deal with the hypothetical situation of London-Halifax, first, and then I will tell you what we would do in the event of a strike. First, we did an exercise to see what it might cost us to do a London-Halifax return flight at this time. Precise figures have been given to us by the various departments in Canada and the U.K. of the number of passengers that go backwards and forwards. Right now, Air Canada has that route and flies it on a daily basis. If we put an aircraft on the route, we assume that they would have one half and we would have one half. Both airlines would lose in the region of $10 million per year. Simply, the route is not big enough to sustain two carriers. The only routes in Canada that are large enough to sustain two airlines flying backwards and forwards on the same route are Montreal, Toronto and Vancouver. We would love to fly into Winnipeg and Ottawa, and as soon as they get big enough, we will. At this stage, they are too thin to take more than one carrier.

In response to your question about a strike at Air Canada, I guess we would do exactly what we did the last time Air Canada went on strike. British Airways helped in any way that it could -- it flew in six or seven charters during that week and we gave Air Canada complete free rein to book their passengers as they saw fit. It was a highly successful operation for both Air Canada and British Airways. Thus, behind the scenes we cooperate. We would not hesitate to come forward to do something with them. I am sure that Air France would do the same. Carriers assist each other behind the scenes and we have a very good working relationship.

The Chairman: Are there any other questions?

We will expect to receive your notes tomorrow, and we will make copies of your documents.

We welcome as our next witnesses, representatives of the Canadian Auto Workers and of the Air Line Pilots Association.

Mr. Robert Weeks, President, Canada Board, Air Line Pilots Association, International: Madam Chairman, honourable senators, we would like to thank the committee for inviting us to appear today. I am a pilot with Canadian Airlines.

During the restructuring, as you all the know, the industry was put together in a rather abstract way. With the important exception of the pilots at Canadian Regional Airlines, many of the issues affecting our members that have arisen out of the restructuring process have been dealt with, and in many instances have been resolved successfully through the channels of collective bargaining.

We are pleased to report that ALPA has entered into a number of agreements with the various employers involved in the restructuring. These agreements provide job security guarantees to our pilots and make provisions for the various operational changes that have arisen out of the transition. In the case of the Canadian Regional Airlines pilots, agreements have been reached on the procedure by which seniority lists and operations of the new merged air carrier will be addressed. The pilots at Canadian Airlines have negotiated a long-term agreement with Canadian Airlines and Air Canada that provides for job security during the integration of the two airlines.

While the critical issue of seniority is still to be settled, representatives of the two main pilot groups are currently involved in preliminary and confidential negotiations. We are hopeful that an agreement can be reached that will provide for a fair and equitable resolution of the seniority issue.

Much remains to be done, the most obvious of which is the integration of seniority lists at both the mainline and regional carriers. These are likely to be the most difficult issues facing us. Nevertheless, we bring to this committee's attention the fact that collective bargaining has once again proven to be an effective method for the resolution of extremely difficult labour issues.

As I indicated at the outset, the situation at Canadian Regional Airlines is an important exception to the relatively positive direction in which our collective bargaining process has proceeded. We respectfully submit that this highlights a serious weakness in the bill.

As we stated in our prior submissions before the House Standing Committee on Transport, the business case for divestiture of Canadian Regional Airlines is far from clear. We are unaware of any further studies that have been carried out in the meantime that would support the claim that a divested regional carrier could be viable.

Further, we have yet to hear any clear argument as to how the divestiture of that airline would create a more competitive environment. We do not believe there is any evidence indicating that this carrier could provide for meaningful competition with Air Canada.

The job security and employment protections accorded to the CRA employees are completely inadequate. Unlike any of the employee groups at Air Canada and the Air Canada regional airlines, the pilots at Canadian Regional Airlines do not enjoy Air Canada's job security guarantees. Air Canada's undertakings, incorporated into the bill in clause 19, are not applicable to these employees in the event of a sale. In the extreme case, if laid off the day after a sale, then it appears that the government and Air Canada would have washed their hands of their responsibilities to the employees at Canadian Regional Airlines.

As a result, and unlike any of the other employee groups directly affected by the restructuring of the industry, the employees at Canadian Regional Airlines are left with inadequate job security.

The Competition Bureau, through its legislation, is singling out the Canadian Regional Airlines employee group as a direct result of its insistence that the airline be divested. It is noteworthy that Air Canada has consistently expressed a preference not to have the airline sold to a third party, and has made clear in its agreements with us that, but for the Competition Bureau's insistence, it would be fully integrated into Air Canada's regional network.

We see no reason why these employees alone should bear all the risk of the government's experiments in competition policy. Furthermore, we do not understand the policy rationale for providing the least amount of labour protection to the most vulnerable employees.

It is absolutely necessary to thoroughly review the protections provided to CRA employees, especially since the circumstances of the CRA pilots are the immediate and direct result of the government's competition policy. We consider it essential that the government ensure that these employees are provided employment protections at least comparable to those received by employees in the Air Canada family. We therefore strongly urge the committee to make this recommendation.

As a final issue, we think it appropriate to address the recommendations for amendments made to the House standing committee by the Competition Bureau in respect of reciprocal cabotage or modified sixth freedom rights between Canada and the United States.

The Competition Bureau is suggesting that Canada attempt to negotiate with the United States what it terms "modified sixth freedom rights." These rights would allow U.S. carriers to provide air transportation between two Canadian points via a point in the U.S. One example is Vancouver to Montreal via Detroit. Presumably, in this scenario, Canadian carriers would be able to provide air transportation between two U.S. points via a Canadian point. One example is Seattle to Boston via Toronto.

The commission's proposal would completely redefine the concept of sixth freedom rights, which have always been limited to international air traffic. The commission's proposal, in our opinion, is plainly intended to prevent cabotage in Canada's domestic air service and must be rejected out of hand.

First, United States laws preclude foreign air carriers from selling air transportation in the U.S. domestic market. As the commissioner is certainly aware, there is virtually no likelihood these laws will be changed in the foreseeable future. Hence, any reciprocal aspect of this proposal is open to serious question.

Indeed, we are unaware of any initiative whatsoever on our government's part to seek changes that would be considered by U.S. lawmakers. Moreover, in ALPA's view, reciprocal modified sixth freedom rights make little sense for Canada if we wish to maintain viable air carriers of our own.

The vast majority of Canadian domestic air traffic is east-west. Much of it could be carried from one point to another via the U.S. carrier hubs, as the commissioner suggests. The size and scope of the U.S. carriers in a modified sixth freedom environment would position them to attract enough Canadian traffic to have a detrimental effect on the viability of Canadian air carriers.

The potential loss of Canadian jobs at all levels of the airline industry is real. In particular, the current strength of the Toronto hub would be considerably weakened. The proposal to use modified sixth freedom rights for domestic competition would be inconceivably bad aviation policy.

We therefore urge the Senate to reject the Competition Bureau's proposal on modified sixth freedom rights. ALPA would like to thank you for the opportunity to speak before you.

Mr. Gary Fane, Director of Transportation, Canadian Auto Workers: Madam Chair, for your information, Ms Viczko and Ms Caldwell are both employees of Canadian Regional Airlines. They are representatives of the CAW. Mr. Urquhart and Mr. Lesmesurier are also from Canadian Regional Airlines. They are not members of the CAW yet, but I am working very hard on that. Ms Lavoie is a union representative from Canadian Airlines itself.


Four of the six of us then are from Canadian Regional Airlines, and that is the major issue that we would like to discuss with you today.

I apologize that our printed presentation is the same as that we gave to the House of Commons committee, with the exception of the adjusted title page.

Our office is presently on strike, including our translators, our secretaries and our office support staff. We had to manufacture this one, which is not completely updated, because the world changes every day in the airline industry. We see some very good changes happening.

In the first introduction, CAW basically agrees with the thrust of the bill. We think we need one national airline, not two. We support the difficult work that the government and the Senate must do, but we think there are a few things that need attention.

On the labour relations front, although we let the pilots go first today, the CAW was the first to sign a new collective agreement with the new air carrier. We took it out for ratification and had it ratified on the Canadian Airlines side. It was turned down on the Air Canada side.

After that, the pilots signed a deal for the Canadian side. The flight attendants signed a deal for the Canadian side this week. The IM, the machinists, also have a deal on the Canadian side. Basically, the Canadian Airlines side of the world is becoming somewhat settled.

On the Air Canada side, we are going back to the bargaining table next week and we expect to sign a deal there. We are moving along, as we say.

We have an agreement for a seniority arbitration by the Honourable Justice George Adams, a labour practitioner who is quite famous in Ontario for his creativity in labour arbitration. As far as we are concerned, we are trying to cope with the change and take care of our members. Our members are the folks who take care of you when you fly.

We are moving along nicely. The serious problem arises from the question of selling Canadian Regional Airlines.

Canadian Regional covers about 30 bases in Western Canada. It has about 2,200 employees. We are with the pilots on this one. We keep trying to get someone to explain to us how this will increase competition. We believe if you allow Canadian Regional to be sold, it will be very much like Air Atlantic or InterCanadian. It will go bankrupt.

Now is the time for the government to say, "Hold on a minute." The idea that the Air Canada world should consist of 80 or 82 per cent of the market, and for the other 2 per cent we should put 2,200 families from Western Canada in jeopardy of the unemployment line makes absolutely no sense at all. We are quite angry about this.

The CAW is willing to have a battle with the potential buyer. We are willing to say "Buyer beware. You will have to deal with us before you buy this carrier."

We prefer not to get into that type of fight, but we talk to the flight attendants and the pilots and even they know that they are at risk. They are willing to join the debate we will have with the public or with the buyer, but we cannot find a buyer who might be interested because we cannot imagine how Canadian Regional by itself can be a viable operation. It makes absolutely no sense to us.

We watched what happened to Air Atlantic. The people who used to work for Air Atlantic are now unemployed. The people who used to work for InterCanadian are unemployed. We had members at both of those small connecting airlines. It worries us a great deal.

We have been talking about Air Canada. They will put all their regional airlines together into one airline. The 2,200 people who work at InterCanadian want to be part of that family. These people have taken wage cuts for over eight years. These people want a job. They love the industry and the airline, and they do not want to be unemployed.

If we move along and decide that we have to sell this airline, the government can still do something good. I wonder if any of you saw the new movie, Gladiator, in which there were good and bad senators.

Senator Finestone: We are the good ones; don't worry.

Mr. Fane: I knew you were the good ones.

There is an opportunity here. If someone has it in mind that selling it will increase competition, you as the government can attach strings to the sale. First, the collective agreements should stay as they are. There is no reason to gut them.

Second, you could mandate the same wages as at the other regional airlines. I want you to remember that the wages here are anywhere from 10, 15, or 20 per cent less because these people have been taking wage cuts for eight years. They should have the same wages as at AirBC, Air Nova, and Air Ontario. We will start to bargain on those three together and everyone will collect the same wage. The InterCanadian people should not be sold off as second class citizens at a cheaper wage.

Third, on the question of job security that my colleague spoke about, we have put four years of job security into collective agreements at Canadian and Air Canada, and last week for the flight attendants. It will be difficult for any union to negotiate that if Canadian Regional is left alone. The bill says two years. We have improved that to four years.

The pilots came along shortly after that and increased it by an extra year, for a total of five years, which was good business on their part.

Finally, the most important thing that we would like to see you take an active, creative role in is, if by chance someone thinks it is a good idea to sell this airline, putting an elastic on it, so that when it goes bankrupt it can revert back to Air Canada where it belongs. These people want to be part of the Air Canada family and they do not believe that by setting it out by itself that it has a hope of surviving. It will not happen.

We would like you to take an active role in this. Be the good senators that I found in the Gladiator movie. Say to the government, "Wait a minute. There is no reason why these 2,200 families have to suffer again." They have not had a wage increase in about eight years. Their salaries are the lowest in the industry. They are much lower than at the Air Canada regionals -- AirBC, Air Nova, and Air Ontario. There is an opportunity to do some things here.

Even if you do not put it in the bill, you have enough influence to put it in the terms of reference for the new buyer. We would like not to get into a battle of "buyer beware," but it is an odd scenario that if no one buys it, these people are safer because they get tied into the Air Canada family and we can take care of them that way. We can say that everyone in the four regionals will be treated equally.

It is an odd situation for the union to suggest someone not invest in it, but we will take that step if we must. All the workers want is go to work every day, continue doing a good job, and take care of the flying public.

Senator Forrestall: It is a sad situation. What is management's position? Are they sensitive to the family concerns? These go to the heart of living and getting on with life.

Is management actively concerned? Are they trying to help some of these people get through a difficult period until such time as there is a resolution? Are they doing their share?

It does not seem to me that they are, but I am glad I have you here to give a response to that broad question.

Mr. Fane: With the two major carriers, Air Canada and Canadian, the Air Canada management people are in full control and the Canadian ones are trying to find a place.

They were not sweet, pleasant, or nice during collective bargaining, but we signed collective deals with them.

The management people at Canadian Regional are playing second fiddle because no one knows what will happen to them. They are equally scared that they will lose their jobs. To be honest, there is a debate every day about who is in charge. When I talk to the senior management people, they say, "Air Canada is giving us some direction but they do not know if they are keeping us." It is as if they are in limbo. Every employee there is in limbo.

Senator Forrestall: Management is not able to reach out and help?

Mr. Fane: Certainly not in Canadian Regional.

Senator Forrestall: I am talking about the Canadian Regional.

Mr. Fane: Definitely not in the Regional. They are not in a position to help. They are not even in a position to know if they will keep their own jobs. The management people call me and say, "The bill that is coming forward will give two years' job security; is that for us too?" I tell them, "Yes, it is it for you too." The management people at Canadian Regional are in an extremely difficult position.

Senator Forrestall: What is the current work situation? What is the current morale of these employees?

Berni Viczko, President, Canadian Regional, Canadian Auto Workers: The morale at Canadian Regional is extremely low. It has gone from bad to worse over the last six months. The scenario in which we find ourselves, which we expected to be over by the end of April, continues on and on with no end in sight. Everyone is extremely frustrated. We are all in limbo. We have no idea when this will end, or if it will end, and whether that end will be good or not.

People cannot get loans or mortgages because financial institutions do not know whether or not we are viable. Everyone is in a fragile state right now. It is not good.

Senator Forrestall: It is incredible.

Pierre Orlak, Master Executive Chairman, Canadian Regional Airlines, Air Line Pilots Association, International: On behalf of the pilots of Canadian Regional, we have asked the Transportation Safety Board of Canada to step in as well. We are having a big problem with some of the stress that is involved in this. We have a large membership of about 600 pilots. We have asked them to look into it because the Canadian pilots are also experiencing some of what Mr. Fane has mentioned. That is causing some problems in their day-to-day lives. We do not want that kind of stress in the front end of an airplane. We have asked them to intercede in this process.

Senator Forrestall: Have you had a response from them as to whether or not they will?

Mr. Orlak: Not at this point.

Senator Forrestall: Do you have any idea whether or not they will respond?

Mr. Orlak: We are hoping they will investigate the process. That is what we are upset about. The sale process should have ended with that clause out of Bill C-26 and the sale should have been concluded at the end of April. Here it is June and we will probably see nothing before the end of the year.

Senator Forrestall: Many of us recall the difficulty with the EPA.

I am somewhat surprised to hear that no one has bothered to take into consideration the potential risk associated with staff disharmony. It may well be there is insufficient personnel and money

Do you know of any reason why nothing has been done? Why does the board not take a look at that situation?

Mr. Orlak: The board of the Air Line Pilots Association is reviewing that now with the different management groups. One of the problems is deciding who exactly is running Canadian Regional Airlines. There seems to be some confusion about whether it is the government or the Competition Bureau.

Our management team insists that it is basically the Competition Bureau that has the right to ensure that the undertaking by Air Canada is carried out. That creates a problem for management. Who manages the company? We are no longer able to conduct any of the day-to-day negotiations that a labour union should have with its employer.

Senator Forrestall: Are you looking for government intervention in that debate?

Mr. Weeks: Certainly not. There are processes within the labour environment to solve the situation with seniority. I am sure that we will resolve that.

Senator Forrestall: How long do you think that may take?

Mr. Weeks: I hate to put guidelines on arbitrators and attorneys.

Senator Forrestall: With respect to the bill, have you had a chance to look at some of the suggested regulations?

Mr. Weeks: Yes, I have reviewed some of the proposals, but I do not have the documents in front of me.

Senator Forrestall: Does ALPA have a position on the bill?

Mr. Weeks: ALPA is certainly in favour of the direction that the bill is taking. We point out some of the places where we feel that it is lacking, particularly in dealing with the Canadian Regional employees and also with the proposed suggestions by the Competition Bureau on modified sixth freedom, which we feel is not applicable.

Senator Callbeck: I can certainly understand why morale is very low. There is nothing worse than uncertainty. You people certainly have that, not knowing about your jobs and whether you can meet your mortgage payments and so on. I certainly sympathize with you on that.

You indicated that you feel that the divestiture of Canadian Regional Airlines would not provide meaningful competition. Is this because you believe it would go bankrupt?

Mr. Fane: Our experience with InterCanadian and Air Atlantic in particular leads us to believe that it would go bankrupt for a number of reasons -- the question of business travel, points, how Air Canada will react in the name of competition if they do not own it. We have been through so much in the name of competition. These employees have taken wage cuts for about eight years.

More importantly, we do not believe that Canadian Regional can survive. If someone in the government thinks it can, then we suggest that the appropriate thing to do is to ensure that, if it does not survive, it goes back to Air Canada and the employees have a right to "go home," if I can use that term, because the other three Air Canada regionals will be put together.

We are going to a meeting tomorrow where Air Canada management will say to us, "We are here to put together the regionals. We would really like to put Canadian Regional in this group too, but we do not know yet, and will not know for another seven to nine months, what will happen to them." In the mean time, that too is not good for the Canadian Regional business.

We are worried that is what will happen. Canadian Regional will go bankrupt. Someone will try to make some money quickly. They will come along and try to buy it. We have had a number of calls to our office asking, if they buy the company, can they renegotiate the labour contract. We are not fools. We say to those potential buyers, "You do not want to buy it; it cannot make money standing by itself. Guess what? American Airlines will not come in and make it into a full new competition partner." That will not happen here. That is our major worry.

Senator Callbeck: Have you talked to the Competition Bureau about this?

Mr. Fane: We had one or two discussions with them and it is like hitting a cement wall. We keep saying, "Tell us what you know that we do not know." We are told in a polite manner, "Well, probably no one will buy it. We do not think any one will buy it. Don't worry about it, because the world is watching and the consumer wants competition."

We get whispers like that, which do not help us at all. We tell our members, "Don't worry." Our members are worried. They say, "What will the CAW do? Will we have barbecues on the lawn of the potential buyer? Will we be reading it in the newspaper or hearing about it on the six o'clock news? What will the union do?"

We are expected to take care of our members. We are here asking senators to help take care of these people as well.

Senator Callbeck: Do you think the Competition Bureau thinks that it is a viable business?

Mr. Fane: If they do, they certainly have not shown that to us. We have pleaded with them, "Show us the game plan. Show us the five-year plan. Show us how this can work." We asked them, "Do you think that the wages should stay the way they are?" All these employees have taken wage cuts for eight years because they too were trying to make it survive.

Employees do not want to take wage cuts any more. Pilots leave there every day and join Air Canada. Our mechanics, who spend five years in training, come to work every day and find out that colleagues have quit and accepted an offer to work over there.

If the Competition Bureau has a plan, they have not shared it with this union or any other union. We have asked more than once. All we have been told is, "It is done, it is done." That is not good enough.

Senator Callbeck: Eight years of wage cuts amount to what percentage of salary?

Mr. Fane: The percentage differences range anywhere from 8 per cent to about 21 per cent. I do not know about the pilots, but I know that our folks took 8 per cent to 21 per cent difference in salary. These people took wage cuts to save Canadian Airlines. They were part of the Canadian Airlines family until the Competition Bureau changed that.

Senator Callbeck: How do wages at a regional airlines such as Air Nova compare with Air Canada?

Mr. Fane: They are probably about 20 per cent to 30 per cent less. I am not asking for Air Canada's wages. I want to make sure that people have the appropriate wages, and that the regionals get paid. They are from 20 per cent to 30 per cent less. I do not know what they are for the pilots.

Mr. Orlak: Our pilots are paid about 30 per cent less than Air Nova pilots right now on comparable equipment.

Mr. Fane: What is it compared to Air Canada?

Mr. Orlak: The difference between CRA and Air Nova is about 25 per cent to 30 per cent on the same equipment, and probably 50 per cent between us and Air Canada pilots.

I would like to speak to your question about the potential sale of CRA and the Competition Bureau. When this was conceived back in the fall, the Competition Bureau's idea at that time was to sell all the regionals. They moved away from that in their agreement with Air Canada and Canadian. The sale of CRA remained.

That is why we are concerned. There were companies at that time that wanted to buy all of Air Canada's and Canadian Regionals put them altogether and create a domestic competitor.

Mr. Fane: In addition, we met with the former owner of Air Ontario. He too stated that he was interested in buying the regionals. He wanted to buy them all. He wanted to talk to the CAW, to do business with us. After the parameters of the new airline world were worked out, we called him back and asked how he felt about buying the regionals. He said that he was absolutely not interested. He wanted them all or none. He said that one regional could not last in the business world. We thanked him, and that was the end of it.

Senator Furey: Mr. Fane, you discussed the issue of salaries and the complications that impact on the different collective agreements. Are there not a whole host of other problems with seniority, classification of employees, and things of that nature that will be a quagmire for you as well? What recommendations and what comments can you make to us here today to assist in that regard?

Mr. Fane: I will talk about the two main carriers, Air Canada and Canadian, where we have two locals. We have already agreed to an arbitration process on the issue of seniority. That will take care of itself, and we expect to have a solution in October.

On the three Air Canada regionals -- Air Ontario, AirBC, and Air Nova -- we have an agreement, if Canadian Airlines becomes one of them, on seniority. The four have an agreement on seniority just as the pilots do.

The three collective agreements that we have with the three partners look very much the same because they were established with the CAW. It will be a matter of mixing in the Canadian regionals.

To be very honest, it is not a problem at all for us. We can get over that. It will take us about three weeks' work. It is only a problem if the Regional is not included.

Senator Furey: Will the different classifications of employees into different groups be a problem?

Mr. Fane: No, we already have an agreement with the employer that there will be two classifications. One will be called "skilled trades," who are the folks who went to school and took an apprentice program to fix the airplanes on which you travel. The other group of employees will include passenger agents, people who work on the ramp, catering, and all of the others. We have a framework for that. It will take us about a week.

Senator Furey: There will be no more part-time, full-time, or temporary distinctions?

Mr. Fane: We will not have any of that nonsense. We will not have any discrimination here.

Mr. Weeks: For the pilots with the regional air carriers, our national union has imposed what we call a "policy implementation date" on our merger policy. The current Air Canada regionals are included in this to establish a seniority list. We encouraged the pilots of Canadian Regional Airlines to participate, but we cannot force them to, because under the terms of the Competition Bureau it would dilute our policy on what a merger really is. It leaves us, internally, wanting to proceed and wanting to get on with establishing a seniority list, but not being able to fully implement the procedure.

Our national president will look at the situation toward the end of the summer, and hopefully there will be more clarity as to where we can go on the integration of the pilot seniority list at the regional airlines.

Senator Furey: Would that be as a result of any variation in standards between the two companies?

Mr. Weeks: No, there is no variation in standards. Our only problem currently in implementing the procedure to establish a seniority list is the Competition Bureau's insistence that Canadian Regional Airlines be sold.

Senator Poulin: I do not have a question, but I do have a comment. As Senator Callbeck was saying, this transition period is very difficult for your members and all the employees. We have all experienced similar transitions in our professional lives and know what it means when there are more and more questions and fewer and fewer answers.

I travel regularly with Canadian Regional Airlines. Your members and the employees have risen above that insecurity, and have been able to offer continued good service, friendship, and support to the clients. I wish you would take back to your members a message from this committee saying, "Bravo!" We support them and we would like to honestly thank them.

Ms Caldwell: I should like to raise the issue of morale. We hear about all the bad things in the media, for example, the long line-ups. No one steps up to say that these employees did not ask for this. Yet they are doing the best job they possibly can.

Senator Poulin: Absolutely.

Ms Caldwell: They walk in with smiles on their faces, even though some days are horrible.

Senator Poulin: I heard some of the messages given to the employees, who unfortunately have no control over the situation. Yet there is no lack of patience. There are no inappropriate words coming out of the employees' mouths. All of them should be commended.

Ms Caldwell: I will take that message back. Our local news show interviewed four people at the airport right in front of our counters. One of our agents went home that night to watch the newscast. The only two interviews broadcast were the negative ones.

Senator Poulin: We know how that feels. We share that.

Ms Caldwell: We do not like it. Thank you for your support. I will definitely be taking your message back.

Senator Kirby: I have two questions of clarification and then a comment on your specific briefs.

I am puzzled as to what happens in a practical sense. Mr. Fane, you point out that you have reached a tentative agreement that was accepted by Canadian Airlines employees but turned down by Air Canada employees. Is the practical effect of that that one set of employees has an agreement with Air Canada and one does not, or if one group turns it down, it is effectively vetoed?

Mr. Fane: We had one collective agreement accepted one place and turned down in the other. What we did then, to be honest you, was separate it into two collective agreements.

The Canadian folks voted 90 per cent in favour, while the Air Canada folks voted 66 per cent against. When we polled our people, we found that there were a number of questions. First, a number of Air Canada people thought that if they voted no, the merger could not or would not happen.

Second, some people were angry about the seniority issue and thought, "If I just keep Canadian out there a little longer, maybe it will go bankrupt and we will not have to deal with the seniority question."

Third, a whole group of people thought that Mr. Robert Milton lied to them because he told them there would be no merger. This is my sixth airline merger. I remember having a debate with some of the ministers of government, who said, "How long will they hold it apart"? There was a suggestion of three, four, or six years. I said, "No, no, it will be three, four, five, six weeks. There is too much money to be made here." The Air Canada people turned it down for a number of reasons.

We will return to the bargaining table next week. We call it the "loyalty bonus" -- Mr. Milton will put his hand in his pocket and say, "Yes, perhaps I made a mistake in telling you that it would not be a merger; it is a merger and there will be money here." However, it is more than money. We have agreed on an arbitration process for the seniority issue. Thus we have taken that out of the question, which was probably the most emotional issue.

As a matter of fact, if you are meeting with Mr. Milton later today, you could give him a few hints about what we need to resolve this deal.

Senator Kirby: I want to make sure that I am clear about your answer. You have an agreement with Canadian Airlines?

Mr. Fane: Yes. Canadian has signed for four years' job security. The Air Canada agreement also contains four years' job security, but we feel it needs improvement before it can be ratified.

Senator Kirby: In effect, you could have improvements on the Air Canada agreement that are not offered at Canadian?

Mr. Fane: That definitely will happen and the Canadian people understand that. We have explained to them that this merger is different from previous ones. We have also explained that Canadian was facing a bankruptcy that would have resulted in business closure. We explained that the government played an active role in ensuring that that did not happen. Our members on the Canadian side know that there will be something special for the Air Canada folks.

Senator Kirby: I thought that is what you would say. Therefore we do not need further details, but I did not understand the last paragraph on page 2 of your brief -- just before the subheading on "Canadian Regional Divestment." You mention that it would be nice if the government could insist that the four-year no layoff and no involuntary relocation provisions be agreed upon. It seems to me that we do not have any role in that, nor, frankly, should we.

Mr. Fane: We have that at the major carriers. It is signed into Canadian's agreement, and I will definitely have it signed into the agreement with Air Canada. My problem is getting it signed into agreements with the regional carriers, including Canadian Regional.

Senator Kirby: Do you not have it signed into the other regional contracts?

Mr. Fane: That is correct, not yet on the regional contracts.

Senator Kirby: Let's move to the Canadian Regional situation. I could not agree more with your analysis of the market situation, Mr. Fane. Anyone who decides to buy Canadian Regional needs their head read, because it is an absolute disaster as a business proposition.

As I understand it, your proposal to us is that you will be better off if no one else buys it. This is absolutely true, because then you will be back in the Air Canada family.

Mr. Fane: That is right.

Senator Kirby: If someone is crazy enough to buy it, then we should leave you no worse off than if you had stayed in the family in the first place. That means that government action, which is the motivation for selling it in the first place, should leave you in a position that is no worse than if the government had not acted.

Mr. Fane: That is right. It should leave those 2,200 families in no worse position than the other airline employees.

Senator Kirby: Do you mean the other regional airlines?

Mr. Fane: That is right.

Senator Kirby: The logic of that proposition is different from saying that a four-year period of no layoffs and no involuntary relocation should apply at all regional airline levels. That is a different issue, from my point of view.

Mr. Fane: Yes. That is a different issue, but I will give you a scenario. I expect that by the fall -- the next time we have a chat -- I will be telling you that our regional collective agreement contains four years' job security. That is the direction we are taking and they know it. However, I cannot get the Canadian Regional people included.

Senator Kirby: Our focus ought not to be on the four years, because I understand that you are doing that, but rather on making sure that you are not left in a worse situation as a result of the government insisting on an undertaking with Air Canada.

Mr. Fane: That is right.

Senator Kirby: In that sense, I am in complete agreement with you.

Mr. Weeks -- without wanting to get into a debate, because this is the wrong time and we will cover that issue down the road -- as you know, this committee and the House of Commons committee were completely in favour of modified sixth freedom, with or without reciprocal rights with the United States. That is still very much my view. I hope that issue comes back to us sooner rather than later. However, the reality is that it is not here today, so I need not get into a debate with you.

To ensure that you are clear, I think there are many of us who look at the public interest issue from a competition standpoint and say, "The only way we will ever get meaningful competition in this country is through some form of modified sixth freedom."

Mr. Weeks: I should like to address that and say that we represent several other carriers in Canada besides Canadian Airlines, Canadian Regional, and the Air Canada connectors. We also represent airlines such as Canada 3000 and Air Transat. We would like to give them every opportunity to succeed in the Canadian domestic aviation market prior to even considering bringing foreign competition into a market that is already thin.

Senator Kirby: The debate about how long is long enough is for another day.

Senator Finestone: We seem to have similar questions. I was asking about the implications for the now-expanding regional services, such as WestJet and Canada 3000, and how that would impact on the potential for this cabotage or modified sixth freedom. I do not know that I agree with my colleague.

Could you tell me how the timeline, which was supposed to be a certain number of months, has been extended? Why can a decision not be taken?

Mr. Orlak: That is a great question.

I believe clause 19 of Bill C-26 outlined a process for the undertaking to sell CRA. That process was to take 105 days from beginning to end. That 105-day period should have ended, give or take 5 or 10 days, at the end of April. To this point, the sale process has not even started.

We understand that the different participants -- the three investment bankers, the two airlines, the government, the Competition Bureau, and so on -- have not been able to agree on some of the smaller items such as the price and the definition of "fair market value," et cetera. At this point, they continue to argue about that and have now engaged an American investment banker to handle this.

Senator Finestone: Would you not call that an unethical business practice?

Mr. Orlak: When it includes the government, we cannot use that term.

Mr. Fane: The debate was about for how much should this airline be sold. Air Canada states that it is worth $100 million because of all the traffic that they will put into their system. When they put such a price tag on it, one might think that perhaps they do not want to sell it. All of the employees said that it was a good price. However, "Mr. Competition" came by and said, "No. It is only worth one-quarter of that." If it has no connector -- main national service -- to attach to, it will probably be worth a lot less.

We have been talking about this airline restructuring for 14 months. For the Canadian Regional folks, the debate about what the price should be will go into the fall. Then the debate will be about how long it should be up for sale.

They are watching the folks at the other airlines sign new collective agreements that are giving stability and salary increases, and that are reshaping the industry, while they are left to dangle. That is why I come back to something Senator Kirby said better than I could, which was, "If you are going to sell it, you should not harm these people, so put an elastic band on it so that it goes back to Air Canada when it goes bankrupt." That is what will happen here. Believe me, senators, no one wants to put 2,200 people through this false expectation that there is a future here when it is going the opposite way.

Senator Finestone: If I were one of these people, I would call the whole deal unconscionable and ill-conceived. However, seeing as how I am not and I am not allowed to say that, I will not say it.

What action would you like to see from our committee? Would you like us to recommend that there be this large "elastic band"?

Mr. Fane: "Return to owner."

Senator Finestone: Is that what you would like us to put in? Would you like us to put in that you do not believe that there has been an effective evaluation of the whole question, and perhaps the Competition Bureau, in its enthusiasm for this undertaking, was misinformed in putting forward this recommendation?

Mr. Fane: That is exactly what we would like you to do. The employees would be very grateful for that.

Senator Finestone: Thank you very much. So noted.

Senator Spivak: I do not know whether you want to answer this question or not; however, is it your view that Air Canada did not really think that Canadian Regional would be sold? I asked whether all of the regional airlines should have been divested, and why Air Canada, which is a dominant airline in the main industry, should be allowed to become dominant in the discount market as well. The reason given was that this was the deal negotiated by the Competition Bureau. I suppose it was because Canadian only had a few days left before going bankrupt. Therefore Air Canada was able to get a better deal.

What do you think of the idea that all the regional airlines should have been divested? That leads to the larger question of whether you think it is possible -- and perhaps this is an unfair question -- to have domestic competition in Canada at the moment?

Mr. Fane: On the question of competition, quite candidly, when there were two major airlines, Canadian and Air Canada, we stated for years and years that the government had a role in terms of regulation. That role in setting prices and the number of seats would ensure that the competition was of a professional nature and not cutthroat in order to put the other guy out of business.

Senator Spivak: That is, from a carrier that had no debt.

Mr. Fane: Yes. We have been through that. It is interesting that now we will have one national carrier that will be regulated. It will be regulated in everything from official languages to how many routes it will service.

The bill seems to say, "Whoever buys Canadian Regional has to continue the services to communities for three years." However, it does not say what type of aircraft will fly, how often they will fly, how many people will be employed, and what quality of service they will provide. When I look at that, I think, "What is going on here? Someone can buy it, slice it and dice it, and do all sorts of things to it that make no sense at all."

You asked if the deal was made during the last time period. Perhaps it was. They did not invite us to that chat, although they invited us to a lot of other ones. More importantly, we have heard some people whispering, "Do not worry. No one will buy it." Guess what? We are worried that someone will buy it. I do not want to be telling my president, Mr. Hargrove, "You go out and spend a few hundred thousand dollars on yelling and screaming that this is the wrong thing to do to Western Canada." Guess what? It is a Western Canada question. You know that. We have 30 bases there. The one furthest east is Toronto. The other 29 are in the west. When we talk to the Air Canada senior management, they say to us, "Canadian Regional has a quality name in Western Canada. It is better than Air B.C. That is why we do not want to sell it."

Senator Spivak: If Canadian is not sold, and therefore I presume it would have to remain within the Air Canada family, is it your expectation that you will be able to put a contract in place including four years of no layoffs? You are sitting down to negotiate at the moment, are you not?

Mr. Fane: Yes.

Senator Spivak: Do you expect that you can do that?

Mr. Fane: I expect that. We have told the employer, "You will give us the same quality collective agreement as at Air Nova, Air BC, and Air Ontario." They are not saying no. They want stability, as do we. The only question they are not sure of is when we get into the topic of Canadian Regional, because they say, "We are not sure if we own it. We are not sure if we have to sell it."

Mr. Orlak: The pilots at CRA signed and ratified a deal with Air Canada in February that gives us that job protection. It also deals with the merger between the four Air Canada regionals and ourselves. It addresses all those issues with a new collective agreement, et cetera. The only proviso is that if we are sold, all bets are off and they start over again.

Senator Spivak: I guess we will have to put a question to Mr. Milton when we appears. His stated to the House of Commons that they would require a large number of new employees because they want to concentrate on international travel, which is where the money is. They feel that increased business will require more employees than they have now. I am wondering about this Canadian Regional Airlines situation.

Mr. Weeks: Air Canada's managers have stated clearly that they do not want to sell Canadian Regional Airlines. They want to maintain it in the family. The only reason we are here today is because the Competition Bureau is telling them that it must be put up for sale.

Senator Spivak: That was part of the deal. In other words, it is not likely that it will be sold. I only wanted to ascertain whether you were confident that you could negotiate the same sort of deal in terms of a moratorium. It strikes me that if you want to increase the value to the shareholder, the first thing you do is cut your workforce.

Mr. Weeks: As far as the pilots are concerned, as Captain Orlak stated, we already have those agreements in place. Unfortunately, we have that clause in there that refers to the Competition Bureau's position. We would be more than willing to get on with our merger and get all the pilots on one list.

Senator Spivak: Senator Kirby has said that he is anxious to see competition. He thinks the only way for that to happen is to have international foreign carriers operating in Canada. My question is, do you think we could create domestic competition by keeping Air Canada out of the discount market and arranging for the divestiture of all the regional airlines?

Mr. Weeks: I do not think that is a reasonable solution. I think this marketplace will find its own level.

Senator Spivak: Do you mean through regulation?

Mr. Weeks: No, without regulation. I do not believe that imposing regulation on the corporation would be an effective means of developing better domestic competition. We have been down that road. We have tried it a couple of times. We have people out there right now who are willing to come in and serve routes. As you pointed out, we have Canada 3000, Transat, and WestJet.

These people will do a very good job. They will do a better job if there are no regulations because they will work harder at it.

Ms Viczko: I should like to add that allowing cabotage in Canada may increase domestic service between the major centres in Canada, but it would certainly destroy the smaller community services.

Senator Spivak: I do not share the views of my honourable colleague.

Ms Viczko: It would be an expedited road to the EI office for the people who work in these small communities. Our position at Canadian Regional is that we do not have our own staff at the Calgary International Airport, or at Vancouver and Toronto. It is bases such as Peace River, Kelowna, and Saskatoon that would suffer immeasurable damage from cabotage.

Mr. Fane: Just for the record, the CAW is opposed to Air Canada entering the discount market. We think that is wrong. You are saying that Air Canada will have 80 per cent of the market, and by the way, you do not want to make it 81 per cent, so they should sell Regional. At the same time, you say to them, "Go ahead and open up in Hamilton on the discount market." That does not make any sense.

Senator Kirby: We tried to stop that.

Senator Spivak: You will now have a carrier that will be dominant on international routes, dominant on the main routes, and probably, because it has deep pockets and no debt, dominant on the discount routes. Of course, we did not agree to that at all.

I wanted to make one point to Mr. Weeks. A report came out recently showing that fares went down in Western Canada when there was competition, while they did not go down in Eastern Canada in spite of the destructive competition. It was because there was another airline that was a bit more vigorous.

We are on the horns of a dilemma. Some of us think that the only thing to do is introduce modified sixth freedoms. Although we are back to where we were before in terms of regulation, I agree with you that we are back to a regulated monopoly, and we could have had our own regulated monopoly and not a privatized one. I would like to think that with proper public policy, we could mount a somewhat competitive airline industry in Canada.

Mr. Weeks: I agree with where you are heading in that statement. However, as you can see, it would be difficult for me as a pilot to try to stick my nose into management's scenario.

Senator Spivak: I understand that.

The Chairman: I thank you all for your presence here today. I think it will help our discussion of the various recommendations and observations that we want to make to the minister.

Our next witnesses are Stephen Markey and Scott Bradley from Canadian Airlines.

Mr. Stephen Markey, Senior Vice-President, Corporate and Government Affairs, Canadian Airlines: On behalf of Canadian Airlines and its employees, particularly those who just left the table and who represented the company and its interests formidably, I thank you for this opportunity to appear.


As you know, Canadian International changed during the past six months. Our company, from a proud lineage in the commercial aviation sector in Canada, knows how to adapt.


We are an airline that has embraced change. The opportunity for Canadian Airlines and our employees in the future lies in working within this new and challenging framework to build what can be a truly national air carrier for Canadians at home and abroad. This is not an easy process, as we all know. Change of this magnitude carries with it challenges for our employees. You have just heard firsthand, personal testimony as to the level of concern at the regional level. More broadly, let me say that there is a sense of loss, of a breaking of ties to the airline that was Canadian Airlines, but there is also optimism and hope that the future of both the airline and the industry is very bright. Most importantly, despite all the change and uncertainty, the employees of Canadian Airlines continue to try to demonstrate their unparalleled pride of service. I particularly appreciate, as I know the employees did, the comments in the earlier session acknowledging those efforts.

We are also very aware that the current integration has caused concern for our customers, including many of you in this room and in communities across Canada. I should like to reassure you today that Canadian Airlines continues to be focused on safety and on customer service. We are in the midst of enormous change -- perhaps the most massive re-engineering in Canadian history. We acknowledge this is a difficult time for communities, customers, and employees across the country. There have been, and in the short term will continue to be -- although we hope fewer and fewer as time goes on -- bumps in the road, or in the air, but you have the commitment of the 16,000 employees at Canadian and the 25,000 at Air Canada that we are doing everything humanly possible to address these problems as quickly as we can.

I would also like to reiterate our commitment to the Canadian communities that we serve. I know that these subjects are of particular concern to many of you in this room. Over the past few months, we have met with airport and civic leaders in dozens of communities concerned about the future of our services in their regions and its impact on their economic development in the future. Let me be very clear: We view ourselves as a significant partner in the economic development strategies in every one of these communities across Canada. Some communities have voiced legitimate concerns. We have worked hard to ensure that ongoing refinements in our schedule reflect those concerns. This includes communities from coast to coast too numerous to mention here, whether it is Saint John's, Penticton, Saskatoon, or Regina, and the list goes on. In other communities where we have not been able to yet address the problems as they see them, we continue to monitor flights, capacity, traffic, and demand on a daily basis, so that we can ensure that we provide the flights necessary to meet the demand wherever possible. If there is a demonstrated demand, a need for additional air services, we plan to serve the market. Plainly and simply, that is good business. We do not want to leave anyone behind who wants to fly with Air Canada. If we fail to accomplish this task, frankly, our customers will find other alternatives. We have no intention of losing customers through failure to provide good service at good prices.

It is no secret that Canadian Airlines has been in a weakened condition for years, and that we could no longer afford to sustain the losses that have crippled the airline over the past decade. The merger of Canadian and Air Canada was the only possible, viable alternative.

If you will permit me, I should like to underscore some of these financial realities. I will be brief.

Canadian Airlines lost some $220 million in 1999. The cumulative loss over the past eight years is over $1.5 billion. This year, as we started the integration process, we were intent on trying to arrest this financial trend. Unfortunately, the first three months of 2000 saw the airline losing money at the rate of $2 million per day -- 30 per cent more than the disastrous 1999. This rate of loss was due in large part to market shifts, demand shifts, and increased fuel prices.

Drastic change was needed. We initiated the CCAA process, which has been widely talked about in the press. That process allows us to re-negotiate supplier contracts that are more favourable to the airline, particularly since we were paying a high premium to many suppliers based on the formerly weak financial condition.

While not yet complete, we feel confident that the process remains on track. We are optimistic that the final court proceedings will conclude in the weeks ahead.

We have also realized significant savings from joint schedule planning with Air Canada that has reduced unprofitable flying while maintaining a convenient schedule for our customers for the most part.

I am not saying that we have not made mistakes. We acknowledge that we have. The process is not perfect, and we continue to tweak the schedule when we can find the obvious exclusion. The simple reality is that Canadian Airlines, and our customers for that matter, could not afford to keep flying empty planes.

The scheduled restructuring has meant that aircraft of both airlines are now flying with fewer empty seats, as you well know as frequent travellers. We must do this to keep costs and prices down and maintain viable services in communities across Canada.

We recently postponed the launch of an international service from Vancouver to Mexico City to make better domestic utilization of the aircraft. We saw the demand domestically, and we thought that serving that demand was more important for the moment. While the Vancouver-Mexico route still fits into our long-term plans, it made more sense for us to put that aircraft into domestic service between Calgary, Vancouver and Toronto.

As new aircraft arrive, we will continue to look at ways to enhance the domestic service. Frankly, domestic service is the backbone of the airline.

The time has come to recognize the benefits of Air Canada. You have heard those sentiments expressed by Mr. Fane and others a few minutes ago. In particular, I would suggest, in the context of speculation over recent weeks about the global changes affecting airlines around the world, that the merger of Air Canada and Canadian Airlines is simply the leading wave of that change. Major U.S. carriers are announcing mega merger deals, and speculation runs rampant that the world's largest carrier, British Airways, may become even larger with the take-over of Dutch airline KLM.

While many of us may lament the airline of the past, if we are to have a thriving Canadian industry in the future, this change is necessary. We believe that the vision we are pursuing will be a sound and enduring one for Canada, domestically and internationally. We hope that, over time, we can earn your understanding, your confidence, and perhaps your support -- although that may take a little longer -- as we try to achieve these lofty objectives.

We know, senators, that we must get there soon. Our customers will demand it, and our competitors in Canada, the United States, and around the world are not standing still us waiting for us.

This is an exciting and, some would say, tumultuous time for Canada's airline industry, but we firmly believe we are moving in the right direction.


On behalf of Canadian International and its employees, I thank you.


Senator Forrestall: I wish to start with some routine concerns. Are the suggested regulations -- and I am sure you have had a chance to go through them -- sufficient in the view of an operator in the business of moving people to ensure against all the evils and sins that we have witnessed over the last few months?

I flew both airlines today, and I was not a happy camper. I do not live far away. As you know, Halifax is not very far. It is one hour and 30 minutes with a head wind.

Do you have any comments about that generally? Are there things in here with which you cannot live? Are there things that should not be there? Do you have any general comments?

Mr. Markey: First, I am disappointed to hear that your travels today were not as successful as I might have wanted them to be. Hopefully, we can improve upon that performance next time.

Regulation and the regulatory framework is a difficult issue. Frankly, we believe that it is comprehensive, and perhaps excessive. We would like to think that in the real scheme of things, returning to a heavily regulated environment is not necessarily in the interests of either the consumer or the airline. We do not think that it is in the interests of government for that matter, because turning the clock back too far is not a practical solution to some of the challenges we face now.

We think the most effective form of regulation is a strong and vibrant marketplace. We think that there is a strong and vibrant marketplace, and that it will develop over succeeding months. We have seen lots of evidence of dynamism in recent weeks, with Roots Air, CanJet, and all the other potential carriers that are emerging. Fundamentally, we think that is the safest strategy, if there is one, in terms of protecting consumer rights.

On the issue of the last couple of months, I said during my opening comments that we acknowledge that there have been hiccups and mistakes. This has never been done before.

Merging all of these unions, all of the equipment, is an enormously complex transition. We have 45,000 employees and 385 planes. This is not a simple process. It touches on people in many different ways.

This morning we did a calculation of the number of contacts the average person has with the airline before actually flying. It is as many as 10, whereas if you are travelling by another mode of transportation, it is one. The odds of our making a mistake are unfortunately enhanced by the frequency of that contact. We would like to think that we are addressing those issues and addressing them effectively, and hopefully we will succeed in reducing them over time.

Senator Forrestall: The actions of your partner, Air Canada, with respect to WestJet's move into Moncton were hardly something that fell between the cracks, an accident, or an oversight. It was quite a piece of action, if you ask me. I am sure you know what the Competition Bureau said. They said that had the act and regulations been in place, they would have been proceeding with charges.

It is not you people, it is Air Canada, but you are all the same now.

I find it hard to separate you, except I must say that service is still better on Canadian than it is on Air Canada.

Mr. Markey: We would like to think that that service ethic to which you referred will be transferred throughout the airline in due course and that you will see it everywhere.

Senator Forrestall: Let us return to the Moncton situation. Tell me about that. Why would you do it?

Mr. Markey: I cannot give you the kind of detailed explanation you want. However, Moncton, like many other communities across the country, is asking for more and more service. We try to respond to that request. We have done that in a variety of other communities as well.

Senator Forrestall: If WestJet had not gone in there, Air Canada would not have put another seat on there, I suppose.

Mr. Markey: In the case of Moncton, we responded to WestJet's initiative by matching them on price.

Senator Forrestall: You did not match them; you cut the legs out from under them.

Senator Finestone: You went lower.

Mr. Markey: If I am not mistaken, I believe we matched their price.

Senator Forrestall: Someone is in error then, because we were told that you did two things: You did not match the price; you increased the capacity. It does not matter how you cut the cake. I hate to keep using this example, and I doubt very much if Canadian would have gone into that kind of an operation, but who knows? If that is the world in which we will be living, and if Canadian and Air Canada are in the business of doing that to WestJet, what about all the rest of them? Can they anticipate the same treatment?

Mr. Markey: Your points are well taken. I would simply say that Canadians want competition. I do not think that the Moncton circumstance is any different in that respect. We had prices in the system that were competitive on the day that WestJet made their announcement. To the best of my knowledge, we have just tried to remain competitive in those markets. Frankly, that is something that we should be encouraging.

Senator Forrestall: Not that way. That was kind of hard.

Senator Finestone: You are very good at jumping through hoops.

Senator Forrestall: I am suggesting that had this bill been in place, this would not have happened. I do not know how Monctonians in that catchment area would have received increased air service except through WestJet's presence. Air Canada had no desire to do it, nor did Canadian. I am not even sure Canadian went through Moncton. Did they?

Mr. Markey: I would have to check the schedule on that, but certainly Air Canada did.

Senator Forrestall: Air Canada and Air Nova?

Mr. Markey: Absolutely. WestJet is a formidable competitor. If you listen to Steve Smith, who is a good friend and an acquaintance of mine, he welcomes competition.

Senator Forrestall: But that is not competition.

Mr. Markey: You cannot be selective about where you want to compete. You cannot pick one market and say, "We do not want competition there." Competition is competition. WestJet is very formidable. Look at their performance in Western Canada over the past four or five years. They are extremely successful.

Senator Forrestall: I do not see you taking them on out there, though. You waited until they hit the Maritimes and we are the losers.

Mr. Markey: We took them on in every market in Western Canada and it did not do us much good.

Senator Forrestall: That is, Canadian took them on?

Mr. Markey: I can only speak for Canadian.

Senator Forrestall: However, you did not go to the lengths that I suggested a moment ago. I am aware of what you did. You did not go to the lengths that Air Canada did.

Mr. Markey: Air Canada has only matched them on price.

Senator Forrestall: No, seat capacity as well, double the seat capacity.

Mr. Markey: Air Canada had additional capacity on the market prior to that. They have increased the seats on certain flights to meet demand in the marketplace.

Senator Forrestall: We have been told that, but it goes much further. There was predatory pricing. It evoked the response from the Competition Bureau that they would have been proceeding with criminal charges. That must be fairly serious.

Mr. Markey: Of course it is serious. I would never suggest for a moment that it would not be.

Senator Forrestall: I am sorry, but that is not what you are saying to me, unless I badly misunderstand you.

In any event, what I am after is whether or not these regulations, as you read them, are too strong. Do they go far enough? I am talking from the consumer's perspective.

We have had quite a lot of conversation today among a variety of witnesses about 1(f), and using commission overrides and other inducements to sell or purchase flights, the offering carrier thereby eliminating or disciplining a competitor or impending entry or expansion of a competitor in the market.

There is competition and then there is a sledgehammer.

Mr. Markey: I said at the outset that I thought that the regulations were much stronger than they needed to be. That is not necessarily true of every regulation, but certainly the overall package is serious and significant and would cause any airline to be very attentive to it. That is a formidable challenge.

On the other hand, I think Air Canada will operate successfully in the new environment by being responsive to the kinds of challenges they face, whether they are competitive or from a policy point of view.

Senator Forrestall: Are you people sufficiently separated in your day-to-day activity that you do not participate in this type of decision-making process?

Mr. Markey: To which type of process are you referring?

Senator Forrestall: To send in the level of competition that was unleashed against WestJet in Moncton. Did your company participate in that?

Mr. Markey: No. We are effectively running Canadian Airlines.

Senator Forrestall: Competitively?

Mr. Markey: Not as competitively as it has been run in the past. The functions and much of the scheduling have been integrated. We have been trying to get the financial restructuring of the airline completed to protect the employees of Canadian and to try to stabilize service to the 110 communities we serve. That was in jeopardy in the past six months, and indeed will still in jeopardy until we have finished the restructuring. An enormous amount of work has been spent on that.

Senator Forrestall: I appreciate that. I am not underscoring that.

The union problems that you are now facing give cause for some alarm. Do you have any sense of whether that can come to a reasonable, negotiated conclusion in the next one or two months, or is it likely to be protracted?

Mr. Markey: Some of the issues are very complex. You heard the previous group talk about them and how deeply these cut into the employee groups, seniority being the most difficult.

We remain optimistic that these negotiations can be brought to a conclusion. Whether it is Canadian or American at this point, in terms of management, everyone is very focused on trying to ensure that that will be the outcome. No one wants to see a protracted, difficult labour-management situation, nor do we want to see a strike.

There has been some coverage recently on the Air Canada pilots. The simple fact is that Air Canada has put an offer before the pilots that we believe to be fair. That offer has been rejected at this point, but we remain confident that if there is a reasonable debate about the merit of the offer, it will be accepted.

No strike vote has been taken. None of this will happen for some time, if at all. Hopefully, it will not.

Senator Callbeck: In regard to the load capacity, you spoke about both airlines now flying with fewer empty seats. What capacity are you now aiming for and at what capacity are people bumped and left behind?

Mr. Markey: There is no magic capacity number at this point that we are aiming for. The reality is that Canadian and Air Canada have been beating themselves up for a decade and flying empty planes. That situation has changed.

We are now trying to cope with the fact that we do have additional demand on the marketplace, and even higher demand this summer over last summer than we expected. We do not set a level and say, "At this level, we will be happy." We try to serve the markets effectively. You do not do that by setting an artificial threshold.

Senator Callbeck: I thought in the airline industry that 70 per cent was considered the load capacity, and beyond that people get bumped or left behind.

Mr. Markey: I think that is true. However, I am saying that, in this current situation, where we have made so many changes, we have watched all of the markets carefully. For example, we met recently with Saskatoon. We had their load factors by flight, by day. We said that, in our view, they were too high and we adjusted them down. The norm is probably somewhere in the 70 to 75 per cent range. However, we have been running higher than that on some routes.

As a result, we felt that we had to make some decisions and put in additional capacity. We increased capacity recently out of St. John's, Regina, Saskatoon, and Halifax on certain flights because we felt the demand and the load factors were too high and we were not serving them adequately.

Senator Callbeck: How high were the load factors?

Mr. Markey: We got up to about 85 per cent on a couple of flights, perhaps higher. On that level, the people who manage these flights on a daily basis look at these numbers almost hourly and say, "We are probably not serving this market effectively. There is more demand than we are meeting." We needed to adjust those, and we did.

Senator Callbeck: I am asking this because I am really concerned about my own province this summer. We will have roughly 13,972 fewer seats. I do not know how the tourism industry will cope with that. There will be an awful bottleneck in July and August of people trying to get to Prince Edward Island. As a result, it will do major damage to that industry.

Mr. Markey: Your point is well taken. If I may, I wish to explain that a little. I am agreeing with you, but I wish to offer a caveat.

Those numbers exclude the capacity that InterCanadian flew into Charlottetown last summer. Unfortunately, InterCanadian is no longer an active airline. Air Canada has shown a remarkable resilience in the face of the challenge of InterCanadian's bankruptcy.

Last year in Charlottetown, between Canadian and Air Canada, the total number of seats in July was 10,628. This year, the total number of seats flown by Air Canada and Canadian is 14,493. We have stepped up to the deficiencies, but we have not picked up all of the InterCanadian seats. I appreciate that fact. However, we have tried to make an enormous commitment to Charlottetown. I think we will continue to watch that market carefully.

Senator Callbeck: The fact is we are still short several thousand seats because of what happened to InterCanadian.

I want to express my concern because I am worried about what will happen to the tourist industry. It is not only this year, but if people have a bad experience trying to come to Prince Edward Island -- for example, if they get bumped -- they will not want to come back next year.

Mr. Markey: I could not agree more. We understand that Charlottetown's economy depends on tourism. We view ourselves as partners in this process. I did not make that comment in a cavalier way. We have been working with communities across this country, including Charlottetown.

The chairman of your airport authority has been extremely pleased by what we have tried to do in the community, because we recognize the importance of tourism to Charlottetown. They have encouraged us to look at additional capacity. We have put on additional flights, for example, from Montreal, into that market.

Over time, if we work together in partnership with communities like Charlottetown, we will develop an improved service. What we do not have is the capacity to put seats into those markets just because InterCanadian is not there. We are serving the entire country, plus the international market, as effectively as we can with all of our equipment.

Senator Callbeck: I agree that route from Montreal to the island is extremely important because of the Japanese markets. I understand it will connect with the Tokyo flight.

Mr. Markey: I would encourage you to work with the airline wherever possible to ensure that we understand the opportunities. As we have demonstrated in recent months, we do not necessarily have omniscience on our side. We need as much help as we can get. We are open to that.

Senator Callbeck: You were here for the discussion today about Canadian Regional. Do you think that is a viable business?

Mr. Markey: It is a viable business with us. We have made no secret of the fact that we are very proud of Canadian Regional Airlines.

Senator Callbeck: Is it viable if sold?

Mr. Markey: We have always made no pretence about our views. We have never been anything but unequivocal about that. We think it should remain in the Air Canada family.

On the other hand, we will honour the commitments to the Canadian Competition Bureau. We made a commitment to put Canadian Regional on the market. Much of the last few months, as difficult as it has been, we have been focused on trying to figure out exactly how to do that and at what price. We hope that we are close to succeeding at that. We will then find out whether or not there is a viable buyer for Canadian Regional. In fairness to the employees you heard a few minutes ago, it is obvious that they want to be part of the Air Canada family, and I cannot say that I blame them, because their future is a strong one in that family. They do not want what happened to others to be a precursor to what happens to them.

Senator Callbeck: Do you feel Canadian Regional could be viable on its own?

Mr. Markey: It is a significant carrier in its own right. It may be that in some way it could be enhanced by a partnership with other carriers. I am only familiar with the business model we have and the way it integrates into our system. We know that it is highly valuable from our point of view. We are convinced that it contributes massively to our system, so it has viability. I do not know about other business models that might or might not work. I am not equipped to analyze it.

Senator Callbeck: Senator Forrestall mentioned WestJet. I want to talk about a similar situation. Mr. Smith appeared as a witness from Pacific Coastal. He indicated that Pacific Coastal entered into agreement with Canadian Airlines and that they were flying different routes on Vancouver Island. The contract was automatically renewable, but it could be cancelled with three months' notice. Canadian cancelled it with less than three months' notice, which meant Pacific Coastal was without the CP code and any flow-through passengers. It left them in a pretty difficult situation.

Air Canada is in this and it seems to me that it was there before. However, I would have to ask, did Canadian make the decision to leave Pacific Coastal in that position, or were they instructed to by Air Canada?

I appreciate that they are very concerned about their future. The reality is that as we looked at the markets going forward, we had to try to evaluate the best way to serve those markets.

As part of our new partnership and new integrated company, AirBC, with their additional capacity in British Columbia, was a more logical partner for us at that point than Pacific Coastal Airlines.

On the other hand, there are examples that have gone the other way. Air Georgian in Ontario will fly a number of third-tier routes for Air Canada into U.S. cities as well as some Canadian cities. Air Georgian was a Canadian third-tier carrier. The opportunity for some carriers is bigger than it is for others. Unfortunately, in the case of PCA, it did not make as much sense. That does not mean that there cannot be opportunities in the long term. That was the most rational approach that we could take in the short term.

Senator Callbeck: In other words, you will do whatever you have to do to get passengers, even if it means breaking a contract?

Mr. Markey: No. I appreciate that point of view. We will do what we need to do to accommodate passengers who want to fly on Air Canada, and we have to do that responsibly and with enthusiasm and conviction. We must show people that we care and that we want their business. We do not intend to act as a monopoly or as a predatory company. That is not characteristic of a successful company in this country. It is the antithesis of the kinds of values that you would want from Air Canada, or that we would permit. I would hope that we would not do that.

Senator Callbeck: I agree, but when I look at the situation with WestJet, I see predatory action. I cannot say anything else. You were going to decrease your seats by 9 per cent, then WestJet came in, and all of a sudden your seats are back up 67 per cent, and then you come in with a lower price than that of WestJet. What are you doing but trying to drive them out of business?

Mr. Markey: To which market are you referring?

Senator Callbeck: Moncton.

Mr. Markey: Mr. Steve Smith is a very formidable businessman, as are his partners in WestJet. I am fairly recent testimony to their success. Moncton is a unique case, and I thing it is an example of where Air Canada has every right to try to compete on fair and commercial terms. I understand that is what it has done.

I do not think that Air Canada wants to gain a reputation for doing the kinds of things you are talking about, because it is not in their interest -- long term, short term, or any term -- to develop those kinds of characteristics. I for one do not believe that those are the characteristics that we will attribute to the corporation in one year's time.

Senator Callbeck: We have given you two examples, if you keep going this way.

Mr. Markey: I will not argue with your examples, although I tried to explain the Air Georgian situation, which is a nice offset. As an airline, and as part of the new airline, we will continue to work with communities across this country. Fredericton is a good example. I hope that while there may be the occasional blemish, maybe we will receive credit for some of the things that we are doing properly. That is all that I am saying.

Senator Finestone: I have a supplementary question to the excellent observations of my colleague, Senator Callbeck. In a similar situation, Canadian withdrew its service to Saint John's, Newfoundland?

Mr. Markey: No. That is not correct.

Senator Finestone: I believe that you withdrew some services to Newfoundland. What is the name of your other route?

Mr. Markey: Deer Lake.

Senator Finestone: You withdrew your service from Deer Lake.

Mr. Markey: Yes.

Senator Finestone: I have a family that wants to go to Deer Lake -- five seats. I am sure that you read about it.

Mr. Markey: Yes, I read about it many times.

Senator Finestone: What are you going to do? They made a request in May for five seats to Deer Lake, but market demand means that all seats are filled. That sounds a little ridiculous to me.

As I understand it, both you and Air Canada had seats on your airlines going to Deer Lake. Then you withdrew and there has been no replacement, except that Air Canada has added 37 seats.

Mr. Markey: That is right.

Senator Finestone: That was considered enough to fill the market demand?

Mr. Markey: We believe that it has been sufficient, but you are telling me there is a demand that we are not meeting.

Senator Finestone: Will you find some seats by the end of July?

Mr. Markey: We will take a look at it.

The Chairman: Mr. Markey and Mr. Bradley, thank you very much.

Our next witnesses are from Air Canada. Please proceed.


Mr. Robert A. Milton, President and CEO, Air Canada: Madam Chair and honourable senators, on behalf of Air Canada, I thank you for having given me the opportunity to address this committee.


I am pleased to have this opportunity to provide you with an update of the integration process currently underway at Air Canada and Canadian Airlines. At this point, I do not need to tell you how challenging this process has been and continues to be in terms of logistics, information technology, staff, facilities, operations, schedule, finances, legal processes and so on. Given the hurdles and scrutiny we have faced over the past few months, we have been extremely fortunate to count on the efforts of the women and men who work for Air Canada and Canadian Airlines across this country and around the world. They have undertaken with professionalism and determination the enormous challenge of integrating two airlines into one carrier serving Canadians and Canadian communities. It is not an easy process and it is not a perfect process, but we have reached a number of important milestones in the first six months.

On the financial front, we are close to a final court decision that will permit Air Canada to acquire the outstanding shares of Canadian Airlines. That means a large chunk of the financial restructuring of the Canadian airline industry will be complete, and it will have been done without government subsidies, without a taxpayer bailout, and without the devastating toll of 17,000 unemployed airline workers, mostly in Western Canada. That is a significant step forward. As committee members know, this restructuring is being completed without one penny of taxpayers' money.

Working with our colleagues at Canadian, we have identified synergies and we have developed an overall plan for integration that will bring the two carriers into a secure financial and operational future. We are also making good on our commitments. For example, I am pleased to tell this committee that 170 new accounting jobs are coming to Winnipeg, created mainly as a result of repatriation of accounting work currently being done by AMR Corp. in the United States.

On April 2, we began implementation of an integrated summer schedule, which offers Canadian consumers 32 new routes, 12 new designations, and over 2,000 daily non-stop flights. Our baseline was to deploy the combined capacity of Air Canada and Canadian Airlines to meet market demand plus 3 per cent. In other words, we built in substantial room for growth, but if we did not get it right we were ready to adjust and make changes based on customer and community input.

We are now in the process of finalizing our schedule. It has been a consultative process that has seen us adjust capacity where needed and even defer international services to meet the important and immediate demands of communities in Canada. It has been a process under which we have added 5,300 additional seats per week in Canada to respond to consumer needs and still have 200,000 frequent-flyer seats available between now and August.

The early signs emanating from this schedule are particularly positive for Canadian Airlines. Loads on Canadian are up. Advanced bookings are up. The summer schedule is a catalyst to improve profitability at both airlines. This augurs well for a financially viable and stable airline industry in Canada, rather than a perpetual problem for the government and a potential liability for Canadian taxpayers.

On June 3, we moved our terminal operations at Pearson International Airport -- a massive job for our people that was completed with great professionalism by our managers, frontline employees and our retirees, who stepped in to lend a hand. This milestone, which sees all international flights now departing and arriving from Terminal 1, is a great step forward in facilitating travel and reducing confusion for people travelling to and from Toronto and via Toronto.

The parameters for the process of integration continue to be guided by the firm commitments we have made and that we continue to respect as we build one strong airline to serve Canadians. All of these commitments, as well as the undertakings we have made to the commission, are being respected. They form an integral part of our integration plan as we move forward.

Now let me turn to some of the issues that have been raised, particularly by committee members, concerning levels of service to consumers and service to communities. Air Canada has also received comments and concerns from customers and communities about some of the things we are doing and some of the things we are not doing. We are actively addressing these problems.

While we set about creating one of the world's largest airlines, the interests of Canadians remain top of mind with us. We are reallocating seats and resources to meet increased demand for frequent flyer points redemption. We are still having regular seat sales. Despite the rhetoric in the press, I can tell you that 200,000 more customers have travelled on seat sales this year than in the same period last year. There has been no lack of discount prices.

In spite of significant increases in fuel prices, we have held the line on any domestic fare increase in the year 2000.

When we introduced our new schedule, some communities complained about lack of capacity or cuts in service. Some customers complained about service levels and frustrations with the frequent flyer plans. As I mentioned, we listened, and continue to listen. We are making changes. In Calgary, we responded to concerns with schedule adjustments. In St. John's we met with cargo customers and met their concerns by adding capacity. In New Brunswick, we listened to community concerns and increased capacity. I am sure that we will make more changes based on ongoing customer feedback and the input that you have collected and will provide today.

Let me add that we are devoting more time and attention to issues such as the following. We know customers are experiencing some culture shock as they try to adjust to the new world of Air Canada. We know some communities will want a return to the days when too much capacity existed and pushed the industry to the brink of financial crisis. I also know, however, that while that is not feasible, we must continue to explain more carefully and openly exactly what is happening. We need to explain what is happening with their frequent flyer points. We need to show our customers that we are working hard at building a new airline. While we do, we need their patience, understanding and support. That is why we are undertaking both national and regional communications campaigns. That is why we are adding over 1,700 more staff to help facilitate summer travel for customers.

As the integration progresses over the next months, we expect more hurdles. That is inevitable when you take on a challenge of this magnitude. We understand that we have a tough road ahead of us, but we intend to get there. As we move ahead in 2000, our focus is firmly fixed on a successful, responsible and responsive integration process. We are fully aware of the great responsibility and opportunity that has been presented to us.

Bringing the two airlines together is the catalyst to improve the long-term profitability of Air Canada and Canadian Airlines. It is a private sector solution to a public policy problem that has festered over many years and has cost taxpayers millions of dollars. With the integration of Air Canada and Canadian Airlines, we are finally getting on with the job of building a financially viable and stable airline industry in Canada, rather than a perpetual problem for the government and potential liability for taxpayers.

With this new airline come all the benefits that flow from an international franchise owned and operated by Canadians, people who have a vested interest in maintaining the airline infrastructure in this country and maximizing the economic benefits for stakeholders throughout the Canada. We intend to make it work, and we intend to make it work for Canada.

The Chairman: Unfortunately, Senator Joyal could not join us so I feel the need to ask one question. As you are probably aware, the Association des gens de l'air du Québec testified last week before this committee. Among other things, they argued that Air Canada is not hiring enough francophone pilots. I should like to have your comments on that.

Mr. Milton: Air Canada is focused on getting the highest calibre candidates that we can possibly find. That includes a great number of francophone pilots.

Through the past year, we had an issue with our collective agreements with our pilots. Until last year, we needed to draw all our pilots from our regional ranks, our wholly owned regional carriers. That composition may not have afforded the ability to expand at a rate identical to the relative proportion of francophones in the country. With that said, we stay focused on hiring the best talent. We are happy to hire any francophone pilot who meets the criteria for hiring.

The Chairman: Do they apply in large number? Is it because the francophones do not apply?

Mr. Milton: I do not know in terms of the number or the proportion of people who apply. We get a broad spectrum of talent. More recently, we have been receiving more applications from the charter carriers, commuter operators, air taxi services and the armed forces. I think it is fairly representative of a cross-section of Canada.

The Chairman: Do you have all the tools, Mr. Milton, to make a firm commitment to respect all aspects of the Official Languages Act?

Mr. Milton: Yes, and from the standpoint of commitment to that act, we will put whatever resources we can towards meeting the requirements. There is no skirting our commitment to be able to provide service to consumers at all times, anywhere in our system, in both official languages.

Senator Forrestall: Is it unreasonable to ask if Air Canada could set a goal of 25 per cent francophones in the overall mix? In this case, we are dealing with pilots specifically, but could you set a percentage not necessarily for pilots only? Is 25 per cent too high?

Mr. Milton: Again, we have to be focused on hiring available talent and the most talented people that are available in the country.

I do not know what share of the pilot population is francophone. Therefore, it is difficult to say. However, the overall hiring policies for the airline for many years have included the requirement of employees being bilingual, so we can fully deal with both official languages.

Senator Forrestall: Bilingualism is important, but that is not really the issue. The issue is the hiring of French Canadians, of francophones. To do that, I suspect that you would have to make a very special effort. You would not only have to seek them, but you probably should give consideration to programs that would tend to help young men and women from the province of Quebec.

Mr. Milton: I should have been more clear. Overall, about 24 per cent of our total population is francophone. We do make concerted efforts in all hiring programs coast to coast in terms of ensuring that we fully hire from the francophone population. However, because it is a particular level of qualifications and experience we are looking for in pilots, it is difficult for me to answer in terms of what the true availability is.

Senator Forrestall: What is the participation level, the percentage among pilots?

Mr. Milton: It is about 12.5 per cent at Air Canada.

Mr. Duncan Dee, Executive Assistant to the President and CEO, Air Canada: Senator, you were talking a couple of minutes ago about special efforts that Air Canada has undertaken to recruit francophone pilots. The one francophone flight school in Canada is in Bagotville. Our vice-president of flight operations has visited that school on several occasions over the last year or two years. He speaks to students at that school to encourage them to consider Air Canada as an option. In terms of special effort and going the extra mile to ensure representation of francophones among our pilot population, that has taken place.

Senator Forrestall: I think that it is incumbent upon you, much more so than it was a year ago with respect to Air Canada, to grow that number at a reasonable rate. It may not be possible to achieve 25 per cent; after all, you cannot make them want to fly if they do not want to.

Mr. Milton: I am comfortable with that position, senator.

Senator Forrestall: Are you?

Mr. Milton: Yes, from a best efforts standpoint, it is reasonable to expect.

Senator Forrestall: I will switch now to Canadian Regional. We are a couple of months beyond that point where we thought you would have a price or a method of sale and have gone shopping. When can we expect that you would be in that position?

Mr. Milton: In terms of establishing a price for Canadian Regional, I hope that you will understand that there are two sides to that equation. Both Air Canada and the Competition Bureau were settling on how to price that carrier. We have now come to an agreement on how that is to be conducted, and the work is underway, with outside third-party assistance, to get the price established, put it on the market and see if there are any buyers for it at that price.

Air Canada and the Competition Bureau are both moving at the fastest possible speed to get this resolved. From my standpoint, and particularly for the employees of Canadian Regional, I should like to give them clarification as to exactly where their futures lie. They have made a clear statement that they hope to remain part of Air Canada. Frankly, as I have publicly stated, I, too, hope that they remain part of Air Canada. However, we will abide by our commitments with the Competition Bureau and put it on the market for 60 days at the agreed upon price.

Senator Forrestall: Is 60 days the agreed upon time for which it will be up for sale?

Mr. Milton: Yes.

Senator Forrestall: Who is the outside help?

Mr. Milton: It is DLJ.

Senator Kirby: I think Mr. Milton and I would likely agree that it is unlikely that anybody would be crazy enough to buy Canadian Regional. However, one of the dilemmas that the committee has is, in effect, that the Canadian Regional employees would be better off if the airline does not get sold, because they would then come into the Air Canada family.

If, as a result of government pressure, the airline gets sold, and the employees are potentially worse off, and if that airline then goes bankrupt and comes back into your family, how will those employees be protected, especially given that the sale was government-generated? One would like to think that the employees would be protected. The only way one can see to do that is to have them fall back into your lap, Mr. Milton, should the airline be sold and then fail.

What is your reaction to that, assuming that that could be done at no cost to you? Clearly, you should not have to pick up the debts of a bankrupt airline. Do you have any problems with that, as a concept? I am not asking for the details.

Mr. Milton: With all due respect, it is quite hypothetical. It is hard because the no-cost component is a little bit difficult. It would still be very disruptive, in terms of selling it off and repatriating it after it failed.

One entity that has been bandied about in terms of potentially having interest is American Airlines. I do not know if that is true, but we have heard and read about it. If that company bought the airline, the employees would be secure.

Again, I hope that it is not sold, but, from my standpoint, I feel we are paying close attention to the deal that we arranged with the Competition Bureau. We are simply trying to abide by that.

Senator Kirby: This is not assigning any blame to you. We are just trying to rescue the government from its own position.

Senator Finestone: Could you tell me when the 60 days will start?

Mr. Milton: That is not precisely determined. We are working with the Competition Bureau on an agreed-upon program that will get us to that stage. We do not even have a rough idea. The dialogue is active, and we are working towards it at this stage.

Senator Finestone: Are you dialoguing with the people who are being impacted by this, such as the pilots themselves or the staff?

Mr. Milton: Absolutely. There is internal communication at Canadian Regional. However, I will be honest: it is very unsettling for the employees of Canadian Regional at this stage.

Senator Finestone: That is what we heard, sir.

Mr. Milton: We are trying to communicate, but it is difficult, because we do not know what is going to happen. We are telling them, with every ounce of conviction that we can, that we hope they will remain part of the Air Canada family. However, we cannot guarantee that, because someone might be willing to pay the agreed-upon price. We just do not know.

Senator Forrestall: Has anybody asked government to change their minds about this issue?

Mr. Milton: Not to my knowledge. I believe the employees of Canadian Regional have asked. I received a copy of a petition with over 1,000 signatures. A deal is a deal, however, and we are abiding by what we agreed to.

Senator Spivak: I asked the Canadian Transportation Agency officials whether it would not have been better to have a divestiture of all the regional airlines in order that we could have a little competition. Their answer was that, of course, this was the deal that the Competition Bureau had worked out. I understand that it was not your idea, Mr. Milton, to sell off Canadian Regional. Did they raise the idea of the divestiture of all the regional airlines?

Mr. Milton: Last year it was a hot topic of discussion. It was something that, in terms of the viability of Air Canada, we were very against. One of the arguments we made -- and I still believe -- was that it would not introduce any particular new level of competition. It would simply create a new dominant carrier at the regional level. It would decrease the effectiveness of the global capability of Air Canada in terms of eliminating this underpinning that is the regional feed network. Further, it was not our suggestion and it was against our will. Again, this was part of a very intense negotiation with the Competition Bureau at the end of last year regarding a basis upon which we could proceed with the transaction.

Senator Spivak: Was it a compromise? They would not force you to sell, that is, to divest yourself of the regional airlines; instead, they insisted that you sell Canadian Regional. Is that right?

Mr. Milton: They insisted that we attempt to sell Canadian Regional.

Senator Forrestall: I will move to the negotiations that are occurring now between the two unions, and the meshing of their seniority lists. Can you comment on that?

Mr. Milton: I am happy to comment on that. I have been working actively towards a winning outcome for all the stakeholders of Air Canada -- including the employees. Obviously, this change is enormous for the country, the employees and the customers. I want the employees to feel good about what is happening. Increasingly, with events such as the co-location of employees from the two airlines at Toronto, which occurred on June 3, 2000, there is a far greater understanding, interaction and positive attitude towards going forward together. There is also the increased realization of the opportunities that that presents for all of us.

As we work to get the employees on side and to pull forward together, we have taken it slowly. I have agreed to support the effort by paying for arbitration to determine how employee groups can be dovetailed, and so on. I have been careful to make the identical wages and work rules available to the employees of Canadian Airlines so that there is no impression of anyone being second-class citizens or of trying to lever one group over the other. All the groups of Canadian Airlines, with the exception of the IAM, the International Association of Machinists and Aerospace Workers, have agreed to do that. That is positive from the standpoint of bringing positive energy to what we are trying to do. We are working on integration, but we are trying to do it on a basis that the employees buy into it and are supportive as we move forward.

One of the key areas was getting to an integrated schedule. We are now effectively running two airlines. Clearly, there are issues remaining. I am quite upfront about the issues that we are experiencing from a customer service standpoint; however, we are running two airlines on one schedule already. I want the employees to be supportive as we go forward, and I think that is happening.

Senator Forrestall: What is the status of the so-called loyalty reward? Is that going ahead?

Mr. Milton: Yes. Both plans are fully active. All points will be valid and respected. We are working towards combining the programs in the latter half of the year.

Senator Forrestall: That is rather interesting. With the acquisition of Canadian, which I am sure is simply a matter of time as you get closer to the authorities to do that, will you press for a single union, for example, for pilots, or will you let them continue to make their own judgment calls?

Mr. Milton: With the exceptions of the pilots, by and large there are single unions at both airlines. In the case of pilots, I look at this as an evolutionary process. As I said, I am comfortable either with keeping two operating units going or with having one operating unit. Obviously, both pilot groups would have to be supportive of that. I am supportive, if they want it. I do not want to get into a situation where we are doing things against the will of the employees. That leads to upset and potential disruption. It is not necessary, because the two airlines are running one schedule today.

Senator Forrestall: As someone who went through a major meshing of seniority lists, I do not for one minute believe that it will not be with without very real problems and great difficulties. I make the plea to you to make the transition as smooth as possible. There is nothing that upsets or disturbs a flyer more than to know that the left-hand seat is not talking to the right-hand seat.

Mr. Milton: Nothing would make me happier than to have it run smoothly.

Senator Forrestall: I know it would make you happy, but what will you do to make it smooth?

Mr. Milton: We are working through this issue. It is a collaborative one between the employees and the unions and, in particular, the labour relations group at the company. The dialogue is constructive. These things need a bit of time. Again, we need to keep in perspective, please, the magnitude of the change. We need a bit of time to work through these things to get on side and it make it as positive as possible for people. Sometimes, companies deal with things by smashing them together. They let the chips fall where they may and they do not care what happens to the people. We are really trying to look after the people in this thing.

Senator Forrestall: Has management asked to participate in the development of a formula?

Mr. Milton: Yes. In all cases where we go down the arbitration track, management will participate to provide input so that we get a sensible outcome that, frankly, the company can also afford.

Senator Forrestall: "Afford" is a great word. Does the company have or contemplate a loyalty reward with respect to the meshing of the lists? Without getting into it in any great depth, I go back to Eastern Provincial and Air Atlantic, which ultimately became Canadian. Would you divide it 1:2 or 1:1?

Mr. Milton: Do you mean a formula?

Senator Forrestall: Yes, but a formula that is structured so as to reward loyalty.

Mr. Milton: Do you mean seniority?

Senator Forrestall: Yes.

Mr. Milton: My expectation is that we would evolve toward an equitable formula. This is not the first time companies in this industry have come up against this issue. It has been resolved in the past. I realize that not everyone is made happy by this type of integration, but there is some formula that will be equitable. We will strive for that.

Senator Callbeck: First, I have a short question about a sentence in your brief. You said that "In spite of significant increases in fuel prices, we have held the line on any domestic fare increases in 2000." Does that mean you have not increased fares?

Mr. Milton: That is correct. Domestic tariffs have remained unchanged this year. Transborder and international fares have increased 3 per cent in sync with competitors internationally and on transborder routes.

Senator Callbeck: There have been no increases within Canada?

Mr. Milton: That is correct.

Senator Callbeck: This afternoon we had quite a discussion about WestJet flying into Moncton. We were told that before WestJet came in, Air Canada was going to cut their capacity by 9 per cent. When WestJet announced its intention, however, you increased your capacity by 67 per cent. Before WestJet, a one-way fare was $678; after WestJet, it went down to $249. Do you feel you could have taken that action if this legislation had been effect?

Mr. Milton: Absolutely. There has been a lot of discussion about this. The Competition Bureau has been public about their intention to look into the situation, which is fine with me, because I am absolutely comfortable with what we have done.

There is no factoring in of the loss of capacity of InterCanadian, which failed. There is no factoring in of the load factors that we have been flying on the routes. There is no factoring in of the incredible demand that we are seeing. Traffic has been exploding domestically since we put these airlines together. In terms of that route, like so many routes, we have had communities clamouring for more capacity. We received requests in writing from communities in New Brunswick saying, "Please add capacity." So, we added capacity. We have communities all across the country screaming at us to add capacity. In this case, we did add capacity and people are screaming at us, "Why did you add capacity?"

I have some difficulty with that, as I do on pricing, where we had a fare of about $259 that was in the market in the first place. It was a round-trip fare, which is approximately twice the one-way fare. It was always there despite the great sound bites of $658. It was already at $259.

Senator Callbeck: Was it in your plans to cut capacity by 9 per cent?

Mr. Milton: With all due respect, none of what is happening was in our plans. We did not expect, in our 2000 plan, to be acquiring Canadian Airlines. We did not expect an incredible increase in demand. In April, the traffic on Air Canada was up 25 per cent. On a combined Air Canada-Canadian basis, travel was up 7 per cent on a 1.7 per cent capacity.

Over and above everything else we are dealing with, there is the great positive story that the Canadian economy is strong and we are seeing traffic that these two airlines have never carried in their histories. That is another reason, to be honest, that we are having problems with lines at airports. The volume is greater than these two airlines have ever carried in their histories. It is a great story. We are dealing with it and we are marching on.

Senator Callbeck: Have you put on more people to attend to these lines?

Mr. Milton: We are hiring 1,700 people. A good part of that number is placements at airports; some will be at call centres. We are having a terrible time answering the phones. We have two computer reservation systems that do not talk to each other. People ask us why we did not plan this better. We feel we planned it and executed it, removing myself from the situation, as best as 40,000 incredibly capable people could have done. Demand has been strong and we had to move as quickly as we did, otherwise we would have had the outright failure of Canadian Airlines, 17,000 lost jobs, and real chaos in the airports as the capacity evaporated.

As we went into this year, Canadian Airlines was losing $2 million per day. We could not sit and watch and not deal with these things.

As we dealt with these things, we made assumptions. As I mentioned, we took last year's traffic levels on routes through Canada and added 3 per cent. We put in place a 3 per cent margin of error. On the massive number of seats we produce every day, that is a significant margin. First, we were planning to cut 15 per cent of domestic capacity, then we went down to 11 and now we are down to 5 per cent of domestic capacity, because the demand is going through the roof. When people ask me about pricing questions, we must be reasonably close to the mark domestically in terms of appropriate pricing, because demand is going through the roof.

Senator Callbeck: Was it ever in your plans to cut capacity to Moncton?

Mr. Milton: We have had plans on all sorts of things that have been revised and updated. In terms of specifics, I am sure there are many routes on which capacity was to be cut. If I remember correctly, what we were doing on Moncton was going from two DC-9s to three F-28s in order to increase frequency. It became clear that that was not enough capacity. People are obsessed with Toronto to Moncton. Only about half of Air Canada's traffic on Moncton-Toronto is even going from Moncton to Toronto. It is a network story to points around the world.

We have changed our direction on many routes as we have seen the traffic that has actually come in and have dealt with a story. Again, the traffic really started to shift, over and above the strong economy, when Canadian Airlines was so publicly in trouble. The confidence level in booking on Canadian started to dissipate and we saw a tremendous movement of traffic to us.

Senator Callbeck: The last area I wish to talk about is my own province of Prince Edward Island. Last year, during the summer months, we had 79,756 seats coming to P.E.I. This year, in July and August, we will have 65,784. That is about a 17 per cent or 18 per cent cut. I have real concerns about those two months, because those are the months when tourists come. They bring dollars and create jobs in the province. I look at those figures and wonder how we will adequately deal with the tourist industry.

Mr. Milton: Again, we have tried to match the capacity to the market demand plus 3 per cent. We have adjusted where the demand warrants it. Often, there are expressions of the incredible constraints on capacity and then we look into it and their load factors are quite moderate and we are accommodating traffic in its entirety.

In terms of that decrease of total number of seats, you are including in there what InterCanadian provided, and InterCanadian was not owned by Air Canada or Canadian; it was affiliated with Canadian. It failed.

In terms of Prince Edward Island and our commitment, we have maintained the only non-stop service from Toronto to Charlottetown for years at a marginal level of profitability, because we have been and remain committed.

In the schedule change, we also introduced non-stop jet service from Charlottetown to Montreal. We are trying to do positive things. Believe me, as in all cases, if the market warrants it, it would be absurd for me not to add capacity to deal with the ability to be more profitable dealing with more traffic. We are doing that all over the place.

Mr. Douglas D. Port, Senior Vice-President, Corporate Affairs and Government Relations: Madam Chair, there is one perception that is universal across the country, and that is that people equate that where we have cut capacity, somehow we are throttling demand and the ability of carrying passengers to and from markets.

I re-emphasize what Mr. Milton said: We did not do this lightly. We did it with a formula. We took the actual traffic and grew it by 3 per cent, and if that is still short, we have demonstrated on many occasions now, we have even added more to the marketplace.

The great sound bite is that, because you cut capacity, somehow you are restricting tourism potential. It is not in our interests to leave people behind. It is in our interests to carry people to and from markets and to grow those markets. That is what Mr. Milton is trying to convey.

We still do not have P.E.I. right, but the airport manager at Charlottetown recently said that Air Canada is the best friend of P.E.I. because we are a loyal, long-time supporter of your province, senator, and we did add considerable capacity this year.

Mr. Milton: It is also relevant to note that, on the P.E.I. market, one area where we added more capacity and investment is Japan. That is clearly an important source of traffic for you. We have gone from a 747-400 out of Vancouver and introduced daily Toronto non-stop to Tokyo over and above Toronto-Osaka, daily Vancouver-Nagoya and Vancouver-Osaka. We are adding tremendous amounts of traffic from Japan. A key destination is yours.

As Mr. Port said, nothing would make us happier than to need to add more capacity, if it is warranted.

Senator Callbeck: What capacity rate do you look to when putting on another plane?

Mr. Milton: It depends. In many markets you are spilling traffic, which is the term we use at about an 80 per cent load factor. There are seasonal spikes and peaks. A level of 80 per cent is when we spill traffic. I do not have the load factors for Prince Edward Island, but, again, if there is legitimate spill, nothing would make me happier than for Air Canada to add capacity back in.

Senator Callbeck: That cannot be this year, though. Do you have extra planes to put on this year?

Mr. Milton: We had anticipated starting a Vancouver-Mexico City route, for example, but because the booking profile that we expected on that new route did not occur, we took that asset and put it on Intra-West routes and routes into Calgary from Toronto.

If there is a legitimate demand, I am comfortable that we could find an airplane. Again, it would have to be a legitimate demand, and we do not see that from a marketing standpoint right now.

Senator Kirby: If I had my business hat on, as opposed to my public policy hat, I would say that you have done quite a remarkable job. For instance, the way you merged the terminals in Toronto has gone far better than most rational people would have expected.

If there is a difference of view between you and me or between Air Canada and the people in Ottawa, it would be based on the fact that there are times when the business interests and the public interests do not necessarily coincide. There is a greater obligation on the dominant player in any industry, particularly a service sector industry as critical as the airline industry, to at times make decisions that reflect the public interest even though they may not reflect the short-term business interest. While I understand making decisions in the short-term business interest, it could have long-term problems for you.

In a May 31 article in The Globe and Mail, you were talking about your desire to expand internationally and about all the benefits that would bring. However, it seems to me there is an underlying assumption there that, if you are able to do that and succeed with the international traffic, you must ensure that your domestic base is solid and seen to be well enough served so that public-policy makers do not take the view that they have to put additional constraint on you in order to make you do that. The risk that you face in doing an interview where you talk about international traffic at a time when there is a lot of complaining going on about domestic things is that it is inclined to lead to an overreaction in Ottawa.

Let me make the observation that the great difficulty of governments in general is that, when they act, they always overreact. If they decide to step in, they will always go too far. That is human nature.

As an opening observation, I would say that, in considering many of your short-term business decisions, such as Moncton, which Senator Forrestall mentioned, and some of the others that have been put to us, it seems to me that you need to think carefully through the public-interest implications and not merely the short-term business ones.

Against that background, let me ask you a question. Some time ago there was a story in the Globe -- or perhaps it was in the Post -- about Jim Abbott, a Reform MP who was being dumped in Calgary, and then you added back the plane from Calgary to Cranbrook so that he and other people could get home at night.

One of the public issues that you must think through in this country is that many people will use main trunk routes and some additional routes to some point. The critical factor for almost all the people who do that is that they are able to get home at night on the last plane out of Calgary or Halifax or wherever, leave at five or six o'clock in the morning to get to the point and make a connection to get to the trunk routes. Cranbrook was one. You did not see this, but I can tell you that the same problem exists in Lethbridge. One of our colleagues now finds that the morning plane that used to go from Lethbridge to Calgary to connect to the Calgary-Toronto plane now does not exist.

It seems to me that this is a public-interest issue. You are looking at some regional flights at the beginning and the very end of the day to see that people do not get dumped at hotels, either going out or coming in, in order to make the main trunk flights. Even though I fully recognize that those things may not be in your short-term business interests as they may be unprofitable, in my view they are a key element of your public-interest responsibility. Mr. Dee got kudos in the paper for solving Jim Abbot's problem. I raise that as sort of a policy question. I do not know if you want to comment on it, but it seems to me that it is an important issue.

Mr. Milton: It might surprise you that I agree with your observation fully.

Senator Kirby: You realize a lot of people watching this will be disappointed.

Mr. Milton: Yes, they will be disappointed. Absolutely, we want to get it right for Canada. When I talk about international opportunities, this is a great story for employees and in terms of access internationally.

You are right. We have to take care of home. If we are successful in expanding internationally from Toronto and Vancouver, the way hubs work, the more traffic you can funnel into the hub, the more you have the ability to push new routes out and also to increase frequencies, even domestically.

This summer, as an example, we are starting Toronto to Kelowna non-stop, which connects to Europe both ways. That is the kind of thing that international growth can lead to domestically. Overall, the magnitude of change is massive. From a public perception standpoint, we have to keep working at making it right.

On this schedule connectivity issue, since this is a personal interest of mine, I would love to take a look at Lethbridge. Any examples like that, from the public or elsewhere, I am game to take on. We are as good as our schedule. If we do not have the airplanes going to the right places, and if the connections do not work, we will not optimize the results. I will take a look at Lethbridge or any other place.

Senator Kirby: I was not selling Lethbridge. I was making the point that Cranbrook is not the only example.

Mr. Milton: I agree with you. Your comment about last flight at night and first in the morning is valid.

Senator Kirby: It saves people a night in a hotel.

Let me move on to the comments from British Airways and Air France we had earlier today, as well as the Canada 3000 training facilities and the Air Transat ground handling facilities. I shall leave those aside and ask a broad question.

The Competition Bureau has tabled a set of draft regulations. I have no doubt your legal beagles have examined them in great detail. Can you tell us what their analysis is? I really want to know whether you like those draft regulations. If you want changes made, what changes do you want made?

Mr. Milton: From the standpoint of abiding by rules, we look to abide by rules as we go forward. Maybe Mr. Port can comment on that.

Mr. Port: Regarding the Competition Bureau itself, senator, the discussion has been underway, of course, since we made the first deal with them back in December of last year on the process.

It would be fair to say that we are not happy with the criminality aspects that are being brought into this discussion now regarding some of the clauses, particularly if we do not abide by such things as the protection of employees. We did not think that those things would be appropriate for inclusion in this discussion. We have made some observations along those lines already.

Senator Kirby: Have you made any specific comments? I ask because, as you will hear from the people who will brief you on some of the other testimony we had, several people, including British Airways and Air France, have come before us and said they do not have any problem with the bill. They want some very modest changes to the new draft regulations under proposed subsection 55(1), the draft regulations put forward by the Competition Bureau.

My instinct is that you would have found that these regulations are too intrusive, just as some people want them strengthened. Are you telling me you are happy with these the way they are, except for the criminality issue?

Mr. Port: I do not have that section in front of me.

Senator Kirby: I will move on to another question and we will come back while you take a look at that.

Madam Chairman, I will leave the issues that I raised, the specific transactions that other people have raised, but I will come back to them if my colleagues do not.

I will turn to one last area, which totally baffles me. It relates to the decision at your annual meeting to adopt a poison pill. I find that bizarre, for reasons that I will explain.

Let me go back a step. As you know, both this committee and the House committee in the fall recommended that the 10 per cent be raised to 20 per cent. You had previously described the 10 per cent provision as shareholder-unfriendly, in any event, but it is my understanding that Air Canada insisted in the negotiations with the government that 20 per cent was too high and that it should not be above 15 per cent. Why did you do that?

Mr. Milton: The consensus was that this was to remain a protective measure on Air Canada's ownership remaining domiciled in Canada. Once that direction was basically proceeded down, my understanding is that effective control occurs at 20 per cent. That is why 15 per cent was selected.

Senator Kirby: Please correct me if I am wrong, but it is my absolute understanding that the 15 per cent was driven by Air Canada's view of the world and not by the government's. That is to say, the government would have gone to 20 per cent if it were not for Air Canada.

Mr. Milton: I believe, though, that that was based on arguments we put forward in terms of what, in fact, was deemed effective control and that there was concurrence on that.

Senator Kirby: I also quote your response to a question of mine a while ago, in response to the ownership question. You said, "I operate on the basis of rules. If the law is changed through deliberation in Parliament, that is fine with me." You will just operate the company.

Why would you help the government to do something that is, in your own words, shareholder-unfriendly?

Mr. Milton: If you go back to last year, I was consistently saying that if Parliament determines that the ownership level should be changed and that effective control can go to the U.S. or wherever, that is fine. I operate the company, but, when a determination is made as to whether the airline and the industry remain in Canada, we will abide by that, too.

The direction of the government and, really, of the bulk of the population, based on the surveying we were doing, was that they wanted Air Canada to remain in Canada.

Senator Kirby: I do not disagree with that.

Mr. Milton: We can get our legal advisers to put something together for you, but my recollection was that we would have been in a control position at 20 per cent, and so that is how 15 per cent was settled on. I believe 15 per cent came about as well because it has been determined to be a relatively successful make-up for CN. Again, you can have U.S. ownership, but there is a 15 per cent limit.

Senator Kirby: You can have the majority of shares owned in the U.S., as is the case with CN, but not in your case?

Mr. Milton: Correct, but I believe that even at CN there is a limit of 15 per cent for a single entity on the control issue.

Senator Kirby: That is right. Also at Petro-Canada.

Given the fact that you are a company with a 15 per cent maximum shareholding, why in heaven's name do you need a poison pill? That must be one of the most bizarre things I have ever seen.

Mr. Milton: It is, but so is what we went through last year. There we were with a 10 per cent law and someone attempting a hostile takeover of a company with a law that was reaffirmed in November.

Senator Kirby: Therefore, why do you need it?

Mr. Milton: If the same thing happens again, we are in a position to deal with the situation under less pressure. Again, we look at it as a safeguard. I agree, it is absolutely bizarre, but it is appropriate in the context of what we went through last year.

Senator Kirby: I hear what you say and I am sure that that is what the board thought they were doing, but I must tell you that the perception it suggests is twofold. First, it looked like a deliberate attempt, largely by the board, and by management in addition, to ensure that they are entrenched entirely independent of what the government does with 15 per cent, or whether it changes it or not.

That is typically one of the rationales for a poison pill, but that then leads me to my next question: Why did you pick 10 per cent when, if you talked to Fairvest Securities Corporation or any of the experts on corporate governance -- and I know Fairvest had negotiations with your lawyers -- they tell you poison pills should not kick in until 20 per cent?

Mr. Milton: The prevailing rule is 10 per cent.

Senator Kirby: The prevailing rule deals with common shares only and you have done it in a way that takes both classes of shares and lumps them together. In other words, your 10 per cent in your poison pill is much more restrictive than the 10 per cent in the current bill. Am I right on that?

Mr. Milton: For the record, I would need to check with our lawyers.

Senator Kirby: Believe me, I am right on that.

Mr. Milton: I believe you. The bottom line is that we went through a fairly strange exercise last year, given the laws that govern Air Canada. This was something that we intended to do back in the fall; we were going to raise it at the shareholders' meeting that never occurred. We left it on the table and it was approved at this AGM.

Senator Kirby: What happens if this bill goes through in another month, or less than a month, and the 10 per cent gets raised to 15 per cent? Then you are clearly much more restricted.

Mr. Dee: It is built into the shareholders' rights plan. The limit is raised to whatever Parliament says.

Senator Kirby: Let us suppose we raise the limit.

Mr. Dee: It is up to 20 per cent.

Senator Kirby: If we go to 65 per cent, then yours kicks in.

Mr. Dee: No. The way the shareholders' rights plan is worded currently it makes provisions for the anticipated passage of Bill C-26. We could not predict what Parliament would do.

Senator Kirby: Let us suppose that the government decides that the 20 per cent could become 49 per cent. Does your shareholders' rights plan go up to 49 per cent?

Mr. Dee: The current wording of Bill C-26 is up to 15 per cent. We anticipated the passage of 15 per cent, but we would not prejudge what Parliament would do.

Senator Kirby: If Parliament goes beyond the 15 per cent, your shareholders' rights plan stays in effect at 15 per cent?

Mr. Dee: Correct.

Mr. Milton: We will deal with these issues as we come to them, based on what Parliament deems appropriate for Air Canada.

Senator Kirby: For business people, other than for self-protection, I find it one of the strangest things I have ever seen. You not only have a shareholders' rights plan that counts common shares and class As in one category, which is not normal, but you also then said that holders of preferred shares, in the event of a takeover bid, automatically got converted to class As and got counted. Then you said that anybody who was immediately kicked out, who would be over the 10 per cent or 15 per cent, specifically in this case United and Lufthansa, would automatically be exempt.

I must tell you that the whole perception of that plan is, first, that management and the board are attempting to absolutely entrench themselves, and second, to absolutely ensure that their partners in the restructuring process, specifically United and Lufthansa, are taken care of and are entirely independent of any public-policy change. I believe a detailed legal analysis would establish that point. I am wondering why you would go out of your way to create that kind of public perception, at least among the handful of people in the country who think about these arcane things, when it was completely unnecessary? It was inviting trouble.

Mr. Milton: Over the course of time it may well be unnecessary. I hope you will excuse us from the standpoint of what we went through with the prevailing law that existed in the country last fall. We have carried through with this and the shareholders have approved.

Senator Kirby: I find it hard to excuse something that appears to be oriented towards entrenching management, particularly when, as good business people, you do not need that kind of protection. I find it bizarre.

Mr. Milton: I appreciate that comment, and I must tell you that it is not from a lack of confidence or a worry about entrenchment, you are right.

Senator Kirby: Knowing you, and some of your directors, I thought it was more likely to be generated by some of the directors for their protection. I am not asking you to comment on that.

The Chairman: They are not here, Senator Kirby, to answer that.

Senator Spivak: You are very fortunate, Mr. Milton, that Senator Kirby is not on your board of directors yet.

Senator Kirby: One of your colleagues is already there.

Senator Spivak: I know exactly who you are talking about.

Mr. Milton, you received this company debt-free.

Mr. Milton: Canadian Airlines?

Senator Spivak: In the beginning. You have over 85 per cent of the domestic market. You have 72 per cent of the international market. You have 99 per cent of all Canadian frequent flyer program members. According to the brief from British Airways, you have over 80 per cent of the slots at Toronto, a disproportionately high share of slots on key international routes, and, as they say, a clear ability to leverage your near monopoly position against those domestic and international carriers.

My question is this: Is it fair for you also to become, most likely, the dominant carrier on discount routes? Was that part of the negotiation? Why do you also need to swallow that piece of business? Was that part of the negotiations with the Competition Bureau? Was that a subject of the discussion? If so, what was your position?

Mr. Milton: In terms of the discount airline, that is an area of the business that has been proliferating in North America and we have not been part of that. A main line of United Airlines has a unit called United Shuttle, which operates over 50 of the 737s; U.S. Air has one called MetroJet, which I believe operates approximately 37 of the 737s; and Delta has Delta Express, which I believe is pushing 50 of the 737s. It is a different type of product, generally low frequency and low frills. It is bringing a whole new echelon of traffic, generally off the roads and onto aircraft. It is not the type of product we generally serve.

Look at our routes like Rapidair from here to Toronto. You know that every hour you can go out to the airport and there is a flight. With the new schedules, every hour there is a flight from Toronto to Vancouver or from Toronto to Calgary. There are frequent flyers and meals. It is a very different product. Given the success that so many companies are seeing in this area of endeavour, we want to participate in it.

At the time we first articulated that, no one was even in the low care, no frills business in eastern Canada. That is why the Competition Bureau said that, if someone else started prior to, I think, September, we would have to wait a year. We will abide by those rules as well.

Senator Spivak: However, the situation in the United States is very different from what it is here. We have a monopoly here. In the United States, they have many airlines competing. The point is that, as you know, the Competition Commissioner, in the first instance, said that there is no substitute for vigorous competition. Regulation is no substitute. You may have to wait a year or two, but you have deep pockets.

From a public-policy perspective, do you think it is a good idea for you to have a monopoly position on every last bit of airline business in this country?

Mr. Milton: In terms of airlines, there are many routes where particularly the charter companies have much capacity. In many cases, on key routes in the country, they have up to 40 per cent of the capacity at peak times of the year when most traffic moves. Canada 3000, Royal and Air Transat have more seats than Canadian had in its entirety.

There is a lot of competition that really now is only raising its hand as scheduled flights. It was supposedly charter. Outfits like Royal, Air Transat, and Canada 3000 display a computer reservation systems. Royal is flying from Ottawa to Toronto six flight a day. Canada 3000, with their IPO, is now pronouncing themselves as a scheduled airline. Many of these companies have been scheduled, although they have been hiding under the guise of being charter.

There is a lot of scheduled capacity that already exists to compete. I will mention WestJet. The argument being made is that they should face no competition.

Senator Finestone: Only fair competition.

Senator Spivak: The Competition Commissioner said that the charter airlines are not competing with you for those kinds of routes. Second, you need only look at the numbers. The numbers are overwhelming. WestJet, I am sure, will have competition in the end. However, they will not have a big gorilla in there, unless you are there. I do not mean that personally. It is the airline.

Just as Senator Kirby was saying, there is a question of forbearance. I think that you face a risk of more regulations in the future if you were to become a monopoly. It would be easy for you to monopolize the discount traffic. I am just throwing that out.

Mr. Milton: I fully agree with the notion that we have to respect the interests of the country. I have no issue with that.

To a degree, I feel the same as when I am reading about Goldilocks to my three-year-old daughter. The price cannot be high, or too low; it has to be just right. You cannot have too little capacity or too much capacity; it has to be just right.

We are working through an incredible change. We would like to be able to provide Canadians with low fares on a different type of product that is much less frequent, with more seats on the aircraft, and no frequent flyer points. It is a different ball game. We would like to be part of that, just as many of the leading airlines, of which we are one, are doing in their respective countries.

Senator Spivak: I like Air Canada, but I am saying to you that we are striving for competition, and competition seems to be the way in which markets work best.

On the issue of price, did you not raise prices in 1999?

Mr. Milton: Yes, we did. I am sorry. I thought that the question was regarding year to date. We are only six months into the year.

Senator Spivak: I am sure I do not need to spell out the interline issue raised by British Airways. From my understanding, the fare from Toronto to Ottawa has been increased by 200 per cent, from $389 to $1,143. I understand that you are competitive on the total price, but, of course, this reduces their profit, I would imagine. It has been said that this is such an egregious example for the Competition Commissioner that it is quite likely that it will be acted upon. What are your view and your defence of that situation?

Mr. Milton: I would love to discuss this one. I find it remarkable and reflective of the state that British Airways was in before they got their new boss, who is a capable guy and who will stop a lot of this nonsense.

In effect, British Airways has the ability on an unlimited basis to add capacity and frequency to Canada -- absolutely unlimited. British Airways need only allocate the slots at Heathrow to put more capacity on Canada. They are the biggest holders of slots at Heathrow by a very wide margin.

I do not think that any Canadian should be supportive of this undertaking. It is an attempt to expropriate Air Canada slots at Heathrow for the benefit of British Airways. That is solely what this exercise is about. It is now before the competition people in Britain.

I question the examples that they provide. We are certainly not 72 per cent of international traffic. That is a wild overstatement. We are the biggest holders of slots at Toronto, just as they are at Heathrow. Rest assured that British Airways absolutely does not do us any favours at Heathrow as we interline passengers via Heathrow to them.

The most expensive ticket you can buy in the Toronto-Ottawa corridor, if I remember correctly, is $398. Do you not think it is absurd that British Airways would pay us $1100 for a seat? British Airways is throwing around an example of London to Ottawa, yet they do not even display going via Toronto and going on to Ottawa. They display flying British Airways flight 94 at 5:05 p.m. to Montreal, arriving there a little after 7:00 p.m., and getting on a bus, which is in the computer reservation system, to get to Ottawa. That is how British Airways gets people from London to Ottawa.

The whole thing is preposterous. It is simply an attempt to expropriate from Canada slots at Heathrow, and that is just not on.

Senator Spivak: You do not think there is any way that the Competition Bureau will look at this or do anything about it?

Mr. Milton: I cannot say what they will or will not look at. However, I do believe in what I am saying. I am very confident in our position and confident in what is going on. Again, if next week, or tomorrow, British Airways wanted to add 15 flights to Canada a day, they could do it.

Senator Spivak: They say that it would not be profitable.

Mr. Milton: I cannot help them with their profitability.

Senator Finestone: According to the documents in front of me, and you were looking at this with Senator Spivak, Air Canada has over 80 per cent of the slots at Pearson. You agreed with that. That can be compared to 36 per cent held by British Airways at Heathrow. They were asked specifically if the issue is related to Heathrow. In there opinion it is not. You say that it is.

Maybe you two should get together and have a little chat.

Mr. Milton: I would be happy to have that chat and I would be happy for them to have competitive prorates, as long as it is on a reciprocal basis -- that we have the same at Heathrow. I have no issue.

In reference to 80 per cent of the slots at Toronto, that is a large number and I do not dispute that. However, if you look at the competitive North American hubs that we, as Air Canada must compete with, 80 per cent, in many cases, is a low number.

Senator Finestone: I should like to know why 80 pre cent is low.

Mr. Milton: If you compare it to Northwest at Detroit or U.S. Air at Charlotte, you will find that at many of the key hubs, the concentration is in fact higher than 80 per cent in order to have an effective, competitive hub on the North American scene.

At Heathrow, British Airways slots are of their own making. This is an evolution over many years of flying to one of the most popular international destinations in the world. British Airways' actions have taken them to 36 per cent, and our actions have taken us to 80 per cent, which is not different from what the key hub players around the world have. It really speaks to what British Airways is doing or not doing to compete.

Senator Finestone: There was a feeling that this was more a commercial issue than a diplomatic or political issue. I would advise that you look at that. Perhaps the two of you should speak to each other.

Mr. Milton: I do not have a problem with that.

Senator Finestone: All three airlines that appeared here today felt that they should draw our attention to the situation on the international landing rights, slots and all the different aspects of the industry that they are having trouble with. The first thing they focused on was the cross-incentive program, which you have launched and which presents a serious problem for foreign carriers. They felt that incentive to extra payment to those people who are selling domestic tickets is an unfair practice. How do you react to that?

Mr. Milton: Again, this was hotly debated with the Competition Bureau at the tail-end of last year. This is the agreed-upon outcome.

Senator Finestone: Is it an agreed-upon outcome?

Mr. Milton: Yes. The Competition Bureau, through discussion with us, basically mandated that we do a bunch of different things in terms of how we calculated commissions. That being said, to the best of my knowledge -- and I am quite confident in this -- the approaches of Air France, British Airways, or Cathay Pacific -- although Cathay has no domestic market -- are not different from what we have now been mandated to do in Canada. Hence, they speak with forked tongue.

Senator Finestone: How do you approach the question of the difficulty in accessing frequent flyer points and the whole issue that surrounds that?

Mr. Milton: It is the same issue. We cannot access British Airways' Executive Club or Air France's Fréquence Plus. The concentration of domestic activity at Air France in France is not different from Air Canada's in Canada.

Senator Finestone: I can tell you that your answers, which sound so sensible, do not sound sensible to the four airlines that were here today.

Mr. Milton: I believe you, entirely.

Senator Finestone: I am sure you do. This committee is prone to considering some review of the regulations. You say that it was with the cooperation or at the incentive of the Competition Bureau?

Mr. Milton: I would not say that it was cooperation. It was through fairly heated interaction that we came to some of these outcomes.

Senator Kirby: I think that is an understatement.

Senator Finestone: There is a predisposition, if I gathered the general sense, unspoken or otherwise, to take a good look at the regulations on acts or conduct of a person operating a domestic service as defined by subsection 55(1) of the Canadian Transportation Act. In it is the question of defining the proper considerations around frequent flyer points. Air France made a point around one of the commission overrides and other inducements to sell or purchase the flights of the offering carrier having the effect of eliminating or disciplining a competitor, or impeding entry into or expansion of a competitor in a market. There was a French translation that is not in, but Air France feels that it should be in the regulations. How do you feel about amending these regulations?

Mr. Milton: It was a very laborious process with the Competition Bureau and it included the frequent flyer program.

Senator Finestone: You think there is nothing wrong with your frequent flyer program and there is nothing wrong with your incentive measures for sales to the companies that are selling your flights?

Mr. Milton: Again, these were commitments that we made to the Competition Bureau. In the example of frequent flyer programs, the commitment was in fact to open them up to smaller domestic players, which we have done.

Mr. Port: Our vice-president of sales visited the Competition Bureau last week on this very subject and had a full review of the program and its intent, because they had also heard the comments that you are referring to.

Senator Kirby: Who won?

Mr. Port: As I understand it, the program that Air Canada put into effect is entirely as was dictated by the Competition Bureau in terms of principle. I do not believe they have any concerns as to how we are applying it.

Senator Finestone: If we send your answers back to Lufthansa, British Airways and Air France and say, "Your concerns were unfounded and here is the decision that had been taken by the Competition Bureau," is that the answer?

Mr. Port: If I were in the position of those airlines, I would be lobbying as much as possible to get an edge in that marketplace. That is the nature of the competitive business. We would try to do the same thing if we had the opportunity in those countries, but those opportunities do not exist there.

Mr. Milton: The Air France program is virtually identical to what we have been mandated to do in Canada.

Senator Finestone: They indicate that there are very few countries in the world that have the percentage of market share that Air Canada has. I know that you are happy with that.

Mr. Milton: Ironically, Air France is one of the few countries.

Senator Finestone: I think they forgot to mention that. Be that as it may, you feel everything is okay and there are no worries and we should all continue without any concerns. Are you okay with issues such as Pacific Coastal Airways?

Mr. Milton: We can provide an update on Pacific Coastal, but it is through ongoing deliberation with the Competition Bureau. There is an issue in that they want a commercial relationship with us and they want to compete with us. It is a bit contradictory and hard to understand.

Mr. Port: The first point to make is that the Pacific Coastal issue is not closed, because deliberations are ongoing. That issue is not closed. The issue comes down to trying to find a reasonable agreement.

When we code share on a carrier, it is because that carrier wishes to be complimentary to the Air Canada system. In fact, we made that offer to Pacific Coastal to have a code-sharing arrangement with them as part of the settlement of the issue. They want our code, but also to remain competitive. It is still dynamic and it is not resolved at present.

Senator Finestone: What is wrong with remaining competitive? I thought that was the goal of the whole exercise.

Mr. Milton: By giving them our code, they become part of our integrated global network -- with the Air Canada code on it. It is highly contradictory that you are part of the global network and yet are competing with the main line. I do not think there is an example of that anywhere in the world.

Senator Finestone: Well, someone has to pick up their passengers, if they are coming from smaller isolated towns into the centre hub. Do they not? For example, Pacific Coastal was servicing a small town on Vancouver Island and you moved in on that territory. They had a contract with another three to six months to go. You know exactly what I am talking about, although I do not have the file with me tonight. You did not honour the date that they had with Canadian, which was on that file. You just ignored it. That was not right. I think you should go back to Mr. Smith and negotiate with him, please, and get this thing cleaned up.

The Chairman: Senator Finestone, it is not for us to tell him what to do.

Senator Finestone: Why not? That is the way I feel. You have been lobbied well tonight.

Mr. Port: Dialogue is ongoing. The senator's point is well registered.

Senator Kirby: I switched topics and went on to the corporate governance issue while the clerk took down to Mr. Port the draft regulations under the Competition Bureau. This is not a devious question. I am just trying to understand.

A number of people have said, "We like the bill, but we would like to see some modest changes in the draft regulations." What changes, if any, do you people want to see in the draft regulations, or are you happy about the way that they are drafted?

Mr. Port: Thank you for the reminder as to what changes were contemplated. They had been explained to us earlier by officials from the Transport Canada and the Competition Bureau.

Essentially, it says that you shall act responsibly. On a number of occasions, Mr. Milton has given that commitment to the Canadian public, to the Competition Bureau and to Transport Canada. The clauses reflected here basically put that mandate into effect.

Senator Kirby: But, Mr. Port, surely you understand that the interpretation of the word "responsibly" is a value judgment on which people can legitimately differ.

Mr. Port: Yes.

Senator Kirby: From a business standpoint, it seems to me that it is in your interest, as well as in the public interest, to have as narrow a range of interpretation of the word "responsibly" as possible. Otherwise, you run the risk that it will be interpreted in an excessively intrusive way. I would not take a simple view of it, frankly. I would want to be careful that those regulations contained words that you could actually live with.

Mr. Milton: I do not have any expectations at this stage that we will change the legislation.

Senator Kirby: That is why I am talking about the regulations and not the bill.

Mr. Milton: We will not change it to the degree that we might like something or not like something.

I also find it curious -- and I am not particularly comfortable from the standpoint of business -- that we have a situation where the Competition Bureau, the head of competition, is sort of judge and jury on issues. I find that very strange. The Canadian Bar Association brought forward a question about that.

There are aspects that make you scratch your head a bit. They are not conventional.

Senator Kirby: That is why I have not asked you a single question about the legislation. I was asking about the regulations because those are in draft form. It is clear that they are out for negotiation and that other people want changes in them. To take the view that they want you to behave responsibly, and knowing how people in this town can interpret that in a variety of ways, some of which are not advantageous to you, it may be in your interest, as well as in the public interest, to have that issue defined. I thought you might already have submitted suggested changes. If you do submit such suggestions, the committee would not mind seeing a copy once you have done that.

I have also a piece of gratuitous advice. There is a perception that Air Canada is determined to not leave a single crumb of the airline business for anyone else.

Senator Finestone: Absolutely.

Senator Spivak: Exactly.

Senator Kirby: That is the overwhelming perception in Ottawa. Nothing will invoke the dinosaur or the behemoth of government better to come down on your head than if that perception continues to exist. While I recognize that killing all the competition is the best short-term business strategy, believe me, it is not the best long-term strategy. A lot of us do not want to go back to the fully regulated model. It behoves you, in the public interest, to look at the long term and leave a few crumbs for someone else. Think of the flag of P.E.I., with the big tree and the three little trees underneath it. The big tree was always willing to let the little trees grow. To the extent that you do not do that, we will have a problem.

The Chairman: Thank you very much for the time you have given us tonight.

The committee adjourned.

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