Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 19 - Evidence
OTTAWA, Tuesday, June 13, 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 9:10 a.m. to give consideration to the bill.
Senator Lise Bacon (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we are meeting again to study Bill C-26, an act 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.
This morning we have as witnesses Mr. Joseph D. Randell, who is president and CEO of Air Nova, AirBC, and Air Ontario, and Ms Nathalie Megann, manager of corporate communications.
We will hear your presentation and then the senators will ask their questions. Welcome to you both.
Mr. Joseph D. Randell, President and CEO, Air Nova, AirBC and Air Ontario: Thank you for the opportunity to appear before you today to provide an update on the Air Canada regional airlines. I am pleased to represent the 3,000 employees of Air Canada's three regional carriers: AirBC, Air Ontario and Air Nova. We play a significant role in the airline industry. Each airline was created by local entrepreneurs, and we focused on regional routes and meeting the needs of local communities. Our success continues to be based on focusing on regional markets and being close to our customers.
Today we operate over 650 flight sectors every business day -- more than either of the major airlines. We have a fleet of 10 British Aerospace 146s, 67 Dash-8s and five Beech 1900s. Although feed is an essential role of the regional airlines, we also operate extensive local services in that, for example, in Air Nova's market, approximately 60 to 70 per cent of the business is local. That number is actually consistent across the country.
There are several communities in northern remote locations where we provide the only scheduled services. We do not share the fears that have been circulating recently of high-priced monopolies. We have worked closely with the business community in developing pricing strategies and tailoring product to meet the needs of the markets and, of course, it is important that we have viable services. In the communities north of 60, CTA regulation provides an added avenue for customers concerned with pricing.
The regional carriers have seen a number of changes in the last 18 months, even prior to the restructuring of the mainline industry. On November 12, 1998, Air Nova and Air Alliance announced their intention to consolidate. By April 1999 the consolidation was completed. Based upon the early success that we achieved with that consolidation, I was asked to review the potential consolidation opportunities for the other regional carriers. Unfortunately, the review, which was in the process of being finalized, was put on hold when Onex made its bid for Air Canada last August, and we had an ensuing period of industry restructuring.
The sudden and unexpected shutdown of InterCanadian last November presented incredible challenges in Eastern Canada. Thousands of customers were potentially stranded, and Air Nova and Air Canada responded immediately to increase service to communities and to ensure that customers reached their destinations without significant disruption. On January 19 Air Canada announced that it would proceed with the consolidation of the three regional carriers, and at that time I was named president of Air Canada's regional airlines.
An announcement was also made that if Canadian Regional Airlines is not sold, that it would be integrated into the newly consolidated regional carrier. As I mentioned, that is assuming that it is not sold pursuant to the undertakings made to the Competition Bureau. If CRA continues to be owned, it does not make sense to operate it separately, it should be integrated.
Therefore, the consolidated airline, which may or may not include CRA, will focus on short-haul markets in the country, operating a modern fleet of turboprops and small jets. The airline, being regional in nature, will be decentralized and field-based to be close to customers. There will be a major presence in all regions of Canada with regional bases in Atlantic Canada, Quebec, Ontario, the Prairies, and British Columbia. There are no anticipated changes to crew bases. As you are aware, employees have been given guarantees of no involuntary lay-offs or transfers for a period of two years.
This consolidation process will take several months and at this stage we are still operating as separate airlines. We have purposefully waited to finalize our structure in anticipation of CRA's future being clearer by now. We have not wanted to exclude CRA employees should CRA not be sold. We have been developing plans. However, with the prolonged valuation period, our implementation has been delayed.
Consolidation will provide us with increased operational flexibility to better respond to the needs of communities. Although we will not see the full benefits until operational and corporate integration is complete, we see some of those benefits with the new summer schedule as we re-deploy our assets across the country to where capacity is most required.
The regional schedule is an integral part of the overall network. As I mentioned earlier, we provide significant feed and connections into Air Canada's and Canadian Airline's mainline markets. By pooling the fleet of the regional carriers, we have been able to match the right aircraft to the needs of the market. We did redeploy capacity from the west, where there were significant financial losses and duplication, and moved it to the east. We did that in response to the sudden withdrawal of InterCanadian.
We have enhanced our service in a number of markets and have launched new routes in each region of the country. These services include routes from Halifax to Stephenville, Goose Bay to Stephenville; Quebec to Charlo and Miramichi; Montreal non-stop to St. John's; Charlottetown, Windsor, London, Ottawa to Windsor; and Toronto Pearson, a number of new transporter services to Detroit, Dayton, Albany, Grand Rapids, Louisville, Akron, Fort Wayne and, in the west, from Vancouver to Spokane.
Thus, we have strengthened the Toronto hub as the northeast hub; Vancouver is the trans-Pacific hub and we are building Montreal as a new hub along with our regional hubs in Halifax and Calgary. We are bringing our gating for regional flights together at our airports across the country. We have honoured our commitment to communities.
Plans to economically serve the markets of Penticton, Fort Nelson and Sarnia with Beech aircraft were changed to ensure the continuation of Dash 8 service. Markets that are left without service as a result of InterCanadian's sudden withdrawal, will now all be served by an Air Canada regional or a code share partner. Air Creebec, a domestic partner, began service to La Grande and Kuujjuarapik, Quebec, in December; and Air Nova launched service to Stephenville in April. Our new code share partner, Air Labrador, began service to Charlo and Miramichi on May 23.
Communities and customers are increasingly wary of the changes in the airline industry. We wish to reassure the communities that we will continue to be responsive to their needs. It is our business; it makes good business sense. Addressing these needs, while respecting regulatory issues, labour contracts and our guarantees to employees and maintaining our primary focus on the safety and operational integrity of four separate airlines has been extremely challenging.
I should like to provide honourable senators with some examples of the constraints that we have faced in the short term as we continue to operate these airlines separately. First, regulatory issues prevent us from intermingling crews from different regional airlines on the same aircraft, so the crews must be kept separate. The aircraft, even though alike, must remain assigned to individual carriers.
We have guarantees of no involuntary transfer, and collective agreements prevent temporary bases. We have different union representation, collective agreements and work rules across the companies.
CRA is in the valuation sale process and must retain its value. It must remain independent until ultimate ownership is determined.
There are language issues for western-based crews that we have flying in eastern markets.
We have made use of extended charters. That means that we have moved a total of eight Dash 8s, five from Canadian Regional and three from AirBC in the west to eastern Canada with their accompanying flight crew and maintenance personnel from each of the respective airlines. Bilingual crews from Halifax have been displaced to do Quebec flying. Thus, as we have adjusted this network in the short term, we now have 1,367 flight crew members commuting from as far as Vancouver to St. John's to work. Logistically, it is a difficult situation.
These complicated short-to-medium term gyrations to meet customer demands have significantly increased costs and stress levels. Added costs have not been passed on to our customers.
We have heard concerns about pricing. The product we provide in response to our customers' needs is expensive to operate. The regionals have very successfully focused on the short-haul business market using smaller gauged aircraft to provide high frequency and convenient connections. The charter and low cost carriers, with whom our prices are often compared, offer a very different product, primarily aimed at the leisure market. It would be much cheaper for us to operate one 747 flight a week in some of our markets, but that is not what our communities want and that is not what our business customers want.
We make every effort to control costs and we have chosen consolidation as the best strategy to improve the efficiency of our operations. This will ensure our ability to continue to provide a high-quality service and product at a stable price that is important in the regions across the country. I ask for your continued support in addressing other costs that could affect regional viability, such as those arising from the commercialization of airports and services.
For example, many of the airports that we serve are facing serious financial difficulties. In trying to address their costs, many are considering substantial hikes in operating fees for the airlines. As the sole scheduled carrier at many of these airports, such increases would have a significant impact on the cost of operating in low-traffic markets. We support the lobby efforts of ATAC and the Canadian Airports Council to address the shortcomings of the national airport policy.
The integration of the three regionals and CRA, if not sold, all with their own cultures, operating procedures and with 23 separate labour contracts, is very complex.
Despite the magnitude and speed of what we have accomplished, we are plagued by media reports that are usually exaggerated and often contain inaccuracies regarding fares, services and capacity. This is very frustrating for our employees, who have been working so hard and take such pride in the service they provide. These reports, often by politicians on behalf of constituents, may also discourage people from travelling by air.
We are trying our best to respond to the needs of communities and customers. We are making improvements consistently. We are monitoring the markets on a daily basis and we have made many schedule changes where necessary.
We will not be able to meet every community's wish list, but we do listen and we are having meaningful discussions across the country. The feedback we receive has helped us to make some immediate enhancements and it will be used to build our fall schedule, which is already in the planning stages.
We are eager to realize our vision for a new regional airline operating across the country. Our employees are highly skilled professionals, committed to building the best regional airline in the world.
Our success will be based on our ability to respond to the short-haul travel needs of Canadians while maintaining the community and regional focus that has contributed to our success. We are working as quickly as we can within the current constraints to make some interim decisions, and we ask for your patience and cooperation as we move to realize our true potential.
I would be pleased to answer any questions.
The Chairman: A few small Quebec airlines have joined forces to create the new Air Quebec. It seems that this Air Quebec might be able to reach a business deal with Air Canada on the reservation system and frequent flyers' points. Would this new airline be a competitor or a complement to Air Nova in Quebec?
Mr. Randell: Air Nova now offers a very extensive service in Quebec. We expanded our service tremendously when InterCanadian actually shut down.
When I mentioned that we moved a significant amount of capacity into eastern Canada, in fact, five of the aircraft that we moved in were in the Quebec marketplace. We improved service on a number of city pairs in Quebec.
We believe that we have covered the market extensively and responded to the needs of communities as a result of the shutdown of InterCanadian. We are certainly willing to work with other carriers and we do across the country.
For instance, Air Alma provides services in a number of communities that we do not serve. We would cooperate with them with respect to those services. It is very difficult in some markets, though, if an airline like Air Alma were to schedule directly up against us and to undercut our prices to be a partner as well as a competitor. It is difficult to be both. There are obligations with regard to the legislation related to frequent flyer points and access to airfares that these carriers will have in any event, and that is part of what is in the legislation. We are certainly willing to cooperate with these carriers -- the rest is up to them.
If, for example, it means that we would have to cancel our services to accommodate those carriers, the communities would prefer that would not.
The Chairman: You mentioned bilingualism in your presentation. There will be no new obligations on Air Canada and its affiliates to provide service to the travelling public in both official languages. Your companies will have to make some adjustments, too. You mentioned some in your presentation. You have been allowed a transition period. Do you feel you will be able to carry out your new obligations?
Mr. Randell: We have a plan in place now. We have already done an extensive amount of work and we are starting into that process immediately.
For us, it will be a huge challenge. As I mentioned at the beginning of the presentation, these airlines grew from five regions of country and were originally owned by entrepreneurs. The policies that applied to those airlines at the time were quite different than they are at present. Of course, quite a number of those employees are still operating and work at those airlines. It is not a question of will but rather of the availability of people with those skills. From an inflight point of view, between Canadian Regional and the Air Canada regionals we have 88 Dash 8s, all of which have one flight attendant on board. From the point of view of Air Nova, there are certain adjustments to be made, but they are not terribly significant. However, in western Canada it is a huge challenge for us. We will do whatever we can to fulfil our obligations.
The Chairman: Do you believe that you can do it within the transition period set out by the government?
Mr. Randell: That is our plan. When I appeared before the Commons committee, I asked for more time because the time frames were extremely difficult, especially given the number of employees that we have with very limited language skills in the second language and the adjustments that we must make with our labour groups from a collective bargaining point of view. Our scheduling rules, et cetera, are very much determined by that collective bargaining process.
I felt that the time frames were very tight and I asked for an additional year. However, it is the will of the Government of Canada and we will work to comply with that.
The Chairman: You mentioned that there have been some complaints from politicians representing their constituents. Some have complained about the lack of punctuality of air services. From what we hear and read in the papers, I believe that Air Nova has had a poor record.
Will you comment on that?
Mr. Randell: We had planned for a certain size of operation for Air Nova in the fall of last year. We had the resources in place for that size of operation and until the fall of last year we were not experiencing significant delays and schedule disruption.
When InterCanadian shut down, that put considerable pressure on our resources. We had to increase the number of flights and hire and train new people. We are increasing the employment level in Quebec City. We had made some downward adjustments there, so we had to gear up, which took some time.
In January, the pressure on us was great. Previously, if there was a flight cancellation the public did not notice much because the competitor had an airplane next door and we just sent them over. When the only carrier has a problem, everyone has the problem.
Our on-time performance decreased to an unacceptable level in January and February, in particular, and we had some weather difficulties. However, in Quebec in May, 87 per cent of our flights arrived within 15 minutes of the scheduled arrival time. That was a significant improvement. We brought in additional airplanes and we lowered the utilization of the equipment. Our performance has now improved dramatically. We are dealing with a perception. Unfortunately, the travelling public does not understand what we had to do to respond to the shutdown of InterCanadian while continuing to accommodate the needs of the travelling public.
The Chairman: We heard much yesterday about Canadian regional airlines. Most people seem to believe that no one would buy a Canadian regional. You touched on that in your presentation. Did I understand you to say that you do not foresee major problems in combining your forces?
Mr. Randell: I see challenges in combining four companies with different backgrounds and different business approaches. However, these companies have the desire to come together to build a truly regional airline across the country. It will not happen overnight. Unfortunately, we have been waiting for CRA and it is taking much longer than anticipated. When you are in transition and there is uncertainty for a long period of time, you are not able to provide your employees or customers with the benefits that a full consolidation would bring. We are hopeful that that will be resolved soon.
Senator Forrestall: Welcome. I should like to touch first on the question of Francophone participation in the regionals. I know that there are many Francophones with the Canadian regional. Did Air Nova take on any of those laid-off employees?
Mr. Randell: Yes, we hired quite a number of flight attendants, pilots and maintenance personnel from InterCanadian. A number of them were previously Air Atlantic employees in the Maritimes.
Senator Forrestall: What percentage of them did you hire?
Mr. Randell: We hired a number of them, flight attendants in particular, as did Air Canada. I would guess that we hired 25 to 30 per cent of them. We hired a number of people on the airport side as well, especially in Quebec, where we hired some of the station managers of InterCanadian.
Senator Forrestall: You would have acquired a fair number of anglophone personnel at the same time, would you not?
Mr. Randell: We acquired and are looking for bilingual personnel. We will take bilingual personnel whenever we can find them.
Senator Forrestall: I am aware of that. You are required to do that. However, it goes further -- it has to do with the participation of Francophones in the industry, not just bilingual Canadians.
Last night, we asked Mr. Milton whether 25 per cent Francophone participation was a desirable goal, not only in areas where they are face to face with the public, but also on the flight deck.
Do you believe that 25 per cent is a reasonable goal?
Mr. Randell: Yes. It is sometimes difficult in certain areas of the country to attract employees from other regions. For instance, people from Quebec who move to Calgary or Vancouver are generally not interested in working in the airline business. They are involved in some other business. The mobility of employees across the country is not as great as we would like it to be. As well, 25 per cent of our operations are not in Quebec. Our operations there comprise closer to 15 or 20 per cent of our business.
All the pilots that are hired at Air Nova now fly the Beech 1900. They are based in Quebec City and it is a requirement that they be proficient in both languages because there are no flight attendants on those aircraft.
Senator Forrestall: Mr. Milton told us last night that Air Canada has not raised airfares this year. Is that true of the regionals?
Mr. Randell: Yes, it is. There has been no increase in 2000.
Senator Forrestall: Therefore, the suggestion that perhaps the government should have ordered a freeze was not necessary.
You have done this voluntarily within the constraints of good business practices?
Mr. Randell: Yes, and there have been significant seat sales launched this year. As a matter of fact, we have lowered some local fares in a number of markets, and the number of passengers that actually pay full fare is less than 10 per cent. So the actual fare paid is generally a discounted airfare off the regular airfare. Of course, we also now face significant fuel challenges. As I mentioned earlier, these charters that we are operating across the country are extremely expensive for us, so our bottom-line results are not as we had anticipated, even in our original budget pre-plan consolidation, because of the added costs we have had.
Senator Forrestall: The value of your stock is staying up, though?
Mr. Randell: From an Air Canada point of view, yes.
Senator Forrestall: Could I move to the question of pilots and, to the degree that it affects you, the mixing of the seniority lists? Is this a problem for you and, if so, to what extent is it a problem?
Mr. Randell: No, it is not as difficult an issue as it is at the mainline side. Again, it is really up to the unions to work this out among themselves. However, it is my understanding that, generally, date of hire has been established as the principle, which certainly makes things a lot easier. The biggest challenge we face across the employee groups is that, in some cases, we have different unions representing the same staff. For instance, with the flight attendants, we have the Teamsters in one airline and CUPE in another. That makes it far more difficult to bring together the bargaining units.
Senator Forrestall: But there are no insurmountable problems?
Mr. Randell: No, but we will definitely require the assistance of the CIRB in doing this.
Senator Forrestall: Do you believe that Bill C-26 will have an effect on the changes that are taking place in the restructuring of Canadian airlines?
Mr. Randell: I believe it will, because I have faith in the free market in this country. There will be a response, and we are seeing it every day. Every day that you read the newspaper, there is yet another new initiative, and some of these businesses will fail and some will succeed. I think we have to remember that this country had a very difficult time sustaining two full-network carriers. What we are moving to makes sense: instead of having two Sears stores side by side, we are going to have Sears and Wal-Mart and other specialty stores that will cater to the needs of certain market segments, and the entrepreneurs will be there to take advantage of that. That is why we cannot take any of our communities or services for granted, because it has been shown time and time again in the past that this is a very short-term approach.
Senator Forrestall: A series of definitions as to what is an addition have been proposed -- largely, I suspect, by the Competition Bureau. Have you had an opportunity to see these proposed regulations?
Mr. Randell: Yes.
Senator Forrestall: Do you feel competent to make some comments or observations about them? Generally, are they strong enough? Are they lacking? If so, where? What suggestions do you have that might make life for you fellows easier and yet continue to afford the protection that is required for the general public?
They mention different acts or conduct of persons operating domestic certificates, as defined in certain subsections of the Canadian Transportation Act, and say they are uncompetitive acts. Do you have any comment?
Mr. Randell: I do not have any specific comments. I understand the concerns that are being addressed here, in terms of unfairly using a dominant position, but I would offer the counter-argument that, in some cases, being large is a disadvantage in the marketplace, in terms of flexibility and so on. As to whether some of these things are ultimately necessary is a matter of opinion.
We have not allowed the free market to operate to a great enough extent with regard to air services within the country in the past, and it is difficult when you are somewhere in between. Now that the airports are being controlled by communities and so on, the ability of any carrier to use its position to force others out from using facilities will not be a problem.
Senator Forrestall: It did not alarm you to hear a very senior member of the Competition Bureau suggest that, if Bill C-26 were in place, together with regulations somewhat similar to this, they might have been pursuing criminal action against Air Canada with respect to its actions in Moncton, its proposed increase in seats and the little war they are having with WestJet?
Mr. Randell: That concerns me because we have to be free to compete. The response in New Brunswick was not limited to Moncton. We have situations where low-cost carriers come into certain airports, and while they do increase the market, they pose significant threats to airports that are within driving distance. The response that we took, by being responsive with regard to pricing and capacity in Saint John and Fredericton, will help preserve the competitiveness of those airports. If we did not respond, you could have a situation similar to the one that developed in British Columbia, where Kelowna drew traffic from Penticton and Cranbrook to the point where those airports became shadows of what they were previously, and now face significant challenges.
Senator Forrestall: Would that not have the effect of turning Moncton into a hub, drawing on Saint John and Fredericton?
Mr. Randell: And Prince Edward Island.
Senator Forrestall: And Prince Edward Island. I do not think I would want to try to catch a flight at seven o'clock in the morning if I lived in Fredericton and had to drive to Moncton in the middle of January. I think by doing that, you are in fact seriously disadvantaging the travelling public. With high winds, there are, not frequently but regularly, times when the bridge to the island, the Confederation Bridge, is shut down, cutting off the island. I do not think Senator Callbeck would allow you to do that in any event. I would be very disappointed if she did. I would not. I am expressing a concern about you turning Moncton into a hub.
Mr. Randell: As a regional carrier, frankly, we are dedicated to providing services to all these airports, and we will act to preserve those services and to keep them viable at these airports. We must be allowed to be responsive to ensure that that, in fact, does happen. If we are prevented from responding, other things could happen that are not necessarily positive from a community perspective.
Senator Callbeck: You mentioned that you are in the process of consolidating the three airlines. I assume that the three will be consolidated under one board of directors. When do you anticipate that will be complete?
Mr. Randell: Originally, we had anticipated that it would be complete by the end of June because we were waiting to see whether CRA would be sold or not. As a result of the prolonged process with CRA, and because of the operational issues that we need to focus on within the three Air Canada regionals, it may be necessary for us to consolidate those three before we know whether CRA is in or not. However, that will not prejudice CRA in terms of its involvement, its full integration within the group.
At present, our plan would be to consolidate the three by the end of the third quarter of this year. Operationally, it will take us longer than that because of the training, et cetera, that is required on the regulatory side. Rationalizing the unions will also take some time; we have 20 unions. However, I believe we have established the principles under which these groups would be integrated.
Senator Callbeck: The president of Air Canada said last night that there have been 200,000 more seat sales than a year ago. What is happening with Air Nova? I am particularly thinking of the route from Charlottetown to Montreal, about which I am delighted, but will there be seat sales on Air Nova flights?
Mr. Randell: Yes, exactly the same levels of discounts and sale conditions appply to them as do to the main line carriers. The seat sales are applied throughout the network. No routes are omitted.
Senator Callbeck: My understanding is that when people go to Florida from Charlottetown on Air Canada, they go over to Halifax or to Moncton to get the flights because that is where the seat sales are. They cannot get a seal-sale ticket from Charlottetown.
Mr. Randell: On the Air Canada network, we offer the seat sale prices from Charlottetown, unless they are flying over to pick up a Canada 3000 or some of the other charter operators. We do not connect into the charter operators. We feed the Air Canada services into Florida.
Senator Callbeck: I accept what you say. I always thought that there was a problem there, but maybe there is not.
Mr. Randell: Generally speaking, there is no problem getting a seat sale seat on the short flight from Charlottetown to Halifax, because as regional carriers we operate at a lower load factor, generally, than the main line carrier, which operates in the 70s. As regional carriers, we generally operate in the 50 percentages in terms of actual load factor.
Senator Kirby: I can confirm what Mr. Randell said because I had the same complaints.
Halifax to Tampa is a Canada 3000 charter. Just as you could not get an Ottawa-Toronto connecting cheap price on to the Canada 3000 charter out of Toronto to Tampa, similarly you cannot get one from Charlottetown to Halifax.
On the other hand, if you are going Halifax to Toronto to Tampa, all on Air Canada, then can you get a discount with the seat sale price starting in Charlottetown?
Mr. Randell: Generally, you will find that there will be a price differential from smaller airports to the larger airports. That has to do with the market size and the cost of providing the service. The larger airplanes on a per seat operating cost basis are actually cheaper to operate than the smaller aircraft services because the fixed costs are so high for us.
There is a differential. Some people will drive to Moncton or Halifax for this. Our primary focus is more on the business market, on the people that value frequency and flexibility with respect to their schedule. I do not think we can hope to be all things to all people in that regard, but generally we are competitive. We carry many people over that route, for instance, to Florida. There will be some differentials from time to time, but we want to do whatever we possibly can to get that customer to travel with us as much as possible because we want them on the regional services, no question about it.
We must be careful that in our pricing we do not start actually lowering our revenues to a point where the viability of the feed service really starts becoming an issue. We have seen what happens when things are not economically viable.
One of the good things about this new structure is that it generally is based on a solid economic foundation, and therefore stability will be far greater than it has been in the past. The bankruptcy of InterCanadian is a prime example of the disruptions caused for employees and communities.
Senator Callbeck: You mentioned the shortcomings of the national airport policy. In your view, what are they?
Mr. Randell: First, there is a modal issue here in that the degree of cost recovery is so great. On the air mode, we are paying our way and then some because of the rents that are taken out of airports, because of the policy whereby, aside from capital at small airports, there is little operating support.
At the same time, we see Via Rail being subsidized with hundreds of millions of dollars a year and there are many communities in this country that are not able to take advantage of Via Rail services. Yet the whole viability of the air network is in question because of these airports.
Community involvement is high in these communities in promoting their airports. Having the community active and knowledgeable with regard to air service is good.
We have gone a little too far in the air mode in terms of the degree of costs that are taken out of the system. In terms of further increases, we need to look at fairness across modes.
We have too many airports in some cases, but still we need airports to be close to communities for economic development purposes, such as tourism.
We must be very careful in how far we go. The national airport policy and its degree of cost recovery has gone too far with regard to regional airports.
Senator Callbeck: Do you mean that the airports are going to charge the carriers more or that the federal government is looking for more?
Mr. Randell: As a result of this, we are looking at some pretty significant increases at airports across the country. What existed previously, with all the duplicate networks, was not really viable. At some airports we are currently facing a 60 to 70 per cent increase in our operating costs.
Senator Callbeck: Are you speaking of further increases?
Mr. Randell: Yes. In Sydney, Nova Scotia, we are currently facing approximately a 70 per cent increase in operating costs. As another example, we have one flight a day into Yarmouth. It is very difficult for airports, being left on their own, to recover the cost when we fly only one flight a day out of them.
Senator Perrault: The matter of employee protection has arisen. I have been contacted by half a dozen airport and airline employees. What is being done to protect the pension rights of those who will be laid off? Have your employee groups raised that issue with you?
Mr. Randell: Not specifically, Senator Perrault, not with regard to pensions. As I mentioned, employees have been given employment guarantees until the spring of 2002. There will be some attrition throughout that period. We believe that the numbers that we will have to lay off, in the regional world, will be very limited. As a matter of fact, we are currently hiring more pilots, flight attendants and maintenance personnel.
Senator Perrault: Is there a net increase of jobs with this integration process?
Mr. Randell: I can confidently say that in the combined total of the four carriers there will be increased employment,
Senator Perrault: I was contacted by a chap who retired a number of years ago from Canadian and is concerned about the security of his pension.
Mr. Randell: I was not aware that that was an issue.
Senator Perrault: Perhaps I should direct that question to another witness.
Senator Finestone: I should like to ask you for some recommendations.
It is my sense that operating costs of airports is a federal responsibility and should be part of the infrastructure program under which the government has responsibilities to municipalities.
What is your reaction to that?
Mr. Randell: The municipalities, in a number of cases, are actually taxing the airports. It is unquestionably an infrastructure issue. It is not much different from roads, et cetera. Airlines pay excise tax on fuel, which goes into the general revenues of the federal government. The GST is really an input tax that should be removed for the benefit of the industry and consumers.
The airline industry is a strong, positive contributor to the economy through airport rents, excise tax on fuel, and other fees. Yet, the financial viability of some vital regional airports is in question. This needs to be taken into consideration. We have made some representations and recommendations on this through the Air Transportation Association of Canada.
Senator Finestone: Do you have a copy of those recommendations?
Mr. Randell: Yes.
Senator Finestone: Would you forward those to us?
Mr. Randell: Certainly.
The Chairman: We could include those in our observations to the minister.
Senator Finestone: What would be the impact in terms of lay-offs if no one buys Canadian Regional Airlines and it becomes part of Air Canada? They said that 2,200 people are being affected, which is nerve-racking for those people. It causes family problems and community problems. It is an economic as well as a psychological and social problem.
Mr. Randell: We want those people.
Senator Finestone: Can you absorb most of those employees?
Mr. Randell: As I mentioned earlier, Canadian Regional operates a fleet of 54 airplanes of the total of about 140 aircraft that we have. These airplanes have been deployed across the country and are part of the network already. They are operating from Halifax to Charlottetown, throughout western Canada, and out of Toronto airport. We have made these aircraft and personnel a part of the network. It would be a significant loss for us if they were not part of the network. They are critical to establishing and maintaining our service to the communities that we presently serve. However, we must abide by the wishes of the Competition Bureau, and we are now going through that process.
Senator Finestone: Therefore, we could strongly recommend that the initial directive from the Competition Bureau be reconsidered in the interests of integration into our regional structure?
Mr. Randell: It is vital to us that they become a part of the structure.
Senator Finestone: In keeping with all the uncertainty surrounding CAR, with their integration into the efficient operations that you now have in place we would have a regional service as well as a national service from coast to coast. As well, the national service provides international service. It is to be hoped that those services will fulfil the needs of Canadian travellers as well as the needs of international airlines that have tried to come into this country and are a little upset with Air Canada.
What is your reaction to the suggestion that, as we do not have enough competition, we might want to consider the modified sixth freedom? What impact would that have on adding the competitive angle to airline traffic? Would this be a disincentive at this particular moment? A needed competitive advantage is required.
How do you see that modified?
Mr. Randell: I have no difficulty competing if the competition is fair. If you were to allow carriers to enter the country and to operate on these routes, they would only operate on the most lucrative routes.
We have a number of services and obligations that we live up to which are not particularly sensible economically. The service, for instance, that we put into Charlo and Miramichi is a significant financial challenge. We operate other services into Labrador, which are also financial challenges. I do not think we will see these carriers operating on these routes. If they are allowed access, though, to our prime markets, then the only thing I ask is that we be given the same privilege on theirs, because I believe as a Canadian carrier we could actually compete very effectively in some U.S. markets. All that I ask for, though, is the same consideration in return.
Senator Forrestall: I am very confused about CAR. Hypothetically, it is a company, an amalgam of many interests, and there are 3,000 employees, and we are waiting now to see whether anybody wants to buy it. Presumably, if there is no buyer, Air Canada would become the buyer.
Mr. Randell: Yes.
Senator Forrestall: The stakeholders would be the stake-holders in the region. How many of these people are already at work for Air Nova and other regionals, Air Canada, Canadian? Of the original 3,000, how many are home on UIC and how many, in fact, are going to work every day?
Mr. Randell: I do not know of anybody who is on layoff status. They are all fully utilized. As a matter of fact, Canadian Regional continues to hire in support of the Canadian and the Air Canada network as it exists at present.
Senator Forrestall: How are you sorting out their cash flow, or are you providing a cash flow for them?
Mr. Randell: No. They are operating their own routes, obviously. The rationalization has helped Canadian Regional. Regarding the flights that they are flying in eastern Canada for and on behalf of Air Nova and Air Ontario, we are actually paying Canadian Regional to operate those services on our behalf on a charter basis.
Senator Forrestall: This is what you meant when you were talking about the charters.
Mr. Randell: That is correct.
Senator Finestone: Are 55 aircraft on charters?
Mr. Randell: No, just the eight. There were only five CRA airplanes that we moved to eastern Canada from Canadian Regional and we have chartered CRAs to provide those services on our behalf because Canadian Regional did not previously operate those services. For the benefit of consumers in the operation, it made more sense for the routes to be operated as Air Nova. If you fly from Halifax to Sydney, as an example, even though you are on a Canadian Regional airplane, it has an Air Nova flight number and it is operated for Air Nova by Canadian Regional and we actually compensate Canadian Regional to provide that service for us.
Senator Forrestall: I had a fear of 1,100 people being unemployed, but I was wrong in that.
The Chairman: I understood, Senator Forestall, that if there is no buyer, Air Canada will keep it.
Senator Forrestall: I have been fixated with this concern, just as Senator Perrault has. We have all been approached about it.
Senator Kirby: Can I clarify the confusion?
Canadian Regional Airline is doing well for exactly the reason Mr. Randell said. In the business sense it is operated separately, but in terms of its flights it is being treated as if it were part of the Air Canada family, for interline purposes, for co-chairing purposes. If CRA gets bought by a third party, then in fact there is no reason at all why Air Canada would continue to give it interlining and co-chairing privileges. In fact, it would become, in essence, an orphan. Why would people get on a Canadian Regional plane in Sudbury?
It is a bizarre situation. The risk is that it gets bought. Normally, the risk is that something does not get bought. In this case, the risk is that it gets bought and then becomes an orphan and then clearly cannot survive.
Senator Finestone: That is why, Madam Chair, I started this whole discussion by saying that I think we should strongly recommend a revision of the views expressed by the Competition Bureau and the fact that we do not agree with it. Leave it alone and let Air Canada absorb it.
Senator Spivak: That is not the most logical plan.
Senator Finestone: It may not be the most logical, but it is the one I came up with.
You talk about the fact that your whole mechanism of operation has co-chairing and interlining and functions as a provider from the regions into the central hubs. How do you work with -- or do you work with -- First Air or Pacific Coastal? Do you see their role fitting into your role?
Mr. Randell: We certainly work with First Air. First Air has a long-standing commercial arrangement with Air Canada. When the integration occurred, obviously, Air NorTerra and First Air became competitors. We are working to respect the arrangements that exist with both carriers, but certainly we are working very closely with First Air. We are working to put the AC code on their services from Ottawa to Iqaluit, for instance. We generally have a very good relationship with First Air. It has been ongoing for a number of years.
Pacific Coastal had an arrangement with Canadian Airlines. We entered into discussions when we went through the whole rationalization with regard to the role that they would play going forward. Again, it goes back to the comments and the questions that Madam Chair made at the beginning with regard to whether you are a competitor or a partner. We offered and wanted to be a full partner with Pacific Coastal and entered into discussions with regard to them providing services on a number of routes that we do not serve. However, they chose to decline that offer. An arrangement was made. The agreement was terminated, but we continue to be open to a relationship with Pacific Coastal.
Senator Finestone: First Air officials came before the committee. They had some serious concerns about the relationship and the mechanism of working with Air Canada and you. You are talking about being a good Canadian citizen, employer and service operator. I am not particularly keen for you to jeopardize First Air, which is the one I know -- or Pacific Coastal -- nor do I want you to bring in competition that could be perceived as unfair.
Were you aware of their presentation to this committee?
Mr. Randell: Yes, I was.
Senator Finestone: Are you going to address the issues they raised?
Mr. Randell: We are working to address those issues. Those issues were not of our making. Those were a result of a relationship that had existed previously between Canadian Airlines and Air NorTerra, and by virtue of the consolidation of Air Canada and Canadian Airlines, that relationship has been inherited.
Senator Finestone: Will it be an impediment to your being able to function profitably?
Mr. Randell: I do not think so. I am optimistic that we can work that through with these companies.
Senator Finestone: You should not be perceived as predators. That is important.
Mr. Randell: We have not done anything, to my knowledge, which could in any way be taken as a predatory action with regard to First Air. We do not operate on any of their routes. We have not introduced services on any of their routes. There were carriers affiliated with Canadian Airlines previously that were competitors with First Air, Calm Air and Air NorTerra. We have done nothing to encourage carriers to be in any way predatory or to unfairly present themselves in competition with First Air.
Senator Finestone: In regard to Pacific Coastal, where you had a written contract that was terminated three or six months prior to the due date, do you not think that was an unfair business practice?
Mr. Randell: I am not involved in those discussions with regard to Pacific Coastal and that particular contract. However, in a number of cases, AirBC actually operated on a number of these routes and we attempted to rationalize the entire arrangement with Pacific Coastal as best we could. A financial settlement was negotiated and talked about with Pacific Coastal. Unfortunately, it took longer than anticipated.
Senator Kirby: I happen to agree that one of the very bad side effects of the municipalization of the smaller airports across the country has been a terrific increase in the cost of landing fees, among other things.
Clearly, that works to the detriment of people living in smaller centres. In the next month or so, I would like someone to prepare a chart which tells us what the increased cost per passenger has been in a sample of the smaller airports across the country, because the committee may wish to look at it, come the fall.
It seems to me that, given the broad federal government public policy with respect to equalization and other things, it would be useful to know whether my perception is right or wrong on that. I am almost certain it is right. I know the numbers at some of the places, but if someone could produce a chart, it would be useful.
Mr. Randell: We can certainly provide that.
Senator Kirby: On page 7 of your statement, you listed a number of things that make it difficult for you to do a merger in the most efficient way possible. The last four bullet points all relate to things that public policy has nothing to do with, like labour agreements and so on.
Your first point talks about regulatory issues, which prevent you from intermingling crews and so on. It would be useful to know if there are other regulatory issues that are causing inefficiencies in the system? The bottom group we can do nothing about, but I am trying to understand if there are cases where public policy, regulatory or otherwise, is causing you to more inefficient and, therefore, to charge higher prices than you otherwise would. I assume that this is what you are alluding to in that first bullet point.
Mr. Randell: These regulatory issues relate more to training, procedures and safety, which are absolutely necessary. Thus, they are not easily addressed until you are able to get people and airplanes in the right place and to integrate your operations under one operating certificate.
Senator Kirby: To that extent, they are in a different category and they should not even be on the list because the others are things that clearly are labour management, like collective agreements and different union representation. Are you not suggesting that we change the first group? You are saying that when you can do the bottom four you will be able to solve the first ones.
Mr. Randell: I am trying to point out that they are related. I acknowledge that there is a complexity to this.
Senator Kirby: You are hearing concerns about pricing because there are a number of markets where you are the only supplier. There is no comparative price for anybody to know whether your prices are high or low.
You are absolutely correct in saying that it is not fair to take a charter price and compare it with yours. However, on the other hand, what option has the poor consumer got?
Now that you are the only supplier to a whole variety of markets, it seems to me it behoves you to think of creative ways of establishing benchmarks. I do not know whether it is by looking at what it costs to fly a similar 150-mile flight to some point in the United States, or whatever, but the danger of being a monopolist is that all consumers will always assume that your prices are too high because you have no benchmark.
To the extent that you do not solve that problem of figuring out what a benchmark is, you will inevitably invite complaints to the Competition Bureau, to the ombudsman, and to a variety of people.
My dilemma is that I do not know if your prices are too high or not, because I do not know what is reasonable. It would behove you to spend a fair bit of effort in trying to come up with a reasonable benchmark on that, otherwise the problem will become much worse before it gets better.
Mr. Randell: As a matter of fact, in certain markets right now we are actually placing some advertising with regard to the airfare practice, so we are doing that. In these markets, as well, in terms of some of these routes, we are prepared to -- and do -- sit down with these communities and share the margins. And the margins in our business are not high. There are some challenges, especially on the regional side.
The Chairman: I would refer you to the ATAC position and the rising costs of airports, on pages 14 and 15 of their presentation.
Senator Spivak: The rail roads have solved this problem through some formula of captive shippers. I do not see why the same sort of thing could not apply here.
Senator Kirby: I agree. It seems to me that it behoves them to develop that system. You are right. The railroads all across North America have developed exactly the kind of benchmark you are talking about.
Senator Spivak: On page 5 you refer to your new services. What are the planes? Are you flying different planes? Are most of them propellers, most of them jets? What are you flying in those areas? That is of concern to people when they are flying.
Mr. Randell: It is a combination in some cases.
Senator Spivak: Are they old planes, a new fleet? What do they look like, what is the profile?
Mr. Randell: It is the existing fleet of Canadian built Bombardier Dash 8 aircraft. Generally, those airplanes are about 10 to 12 years old. The British Aerospace 146s are approximately 10 years old, which in the air business is not old.
Senator Spivak: Are they primarily jet aircraft?
Mr. Randell: Turbo props and jets. From Montreal to St. John's, and Montreal to Charlottetown, those are jet flights. It is a jet flight from Toronto to Detroit, whereas it is a turbo prop flight from Quebec to Charlo and Miramichi.
Senator Spivak: Do they seat 50 passengers?
Mr. Randell: The smaller one here that is operated is actually an 18-seat Beech 1900 and then we have 37-seat Dash 8s and 50-seat Dash 8s.
Senator Callbeck: I have a question with regard to rates. Have you been involved with the complaint process of the Canadian Transportation Agency?
Mr. Randell: In my experience, one complaint was lodged against Air Nova with regard to pricing in Labrador.
Senator Callbeck: What is your opinion of the process?
Mr. Randell: We found it to be very good. They examined our pricing practices and pricing levels compared to other markets. They looked at the route's history, even when there was competition, and found that there was no case. I believe that that the same finding would be made in many situations. The process was very effective, unbiased, and well done.
Senator Callbeck: I ask that because First Air told us that there was no defined process, no rules regarding confidentiality, and no objective position criteria.
You would not agree with that?
Mr. Randell: There is no question that the criteria was loose. In our business, pricing is more of an art than a science. They compared our prices to other markets where there was competition and found that we were not gouging consumers.
Senator Finestone: Do you give frequent flyer points?
Mr. Randell: Yes.
Senator Finestone: Are you having any problems harmonizing Canadian frequent flyer points with yours?
Mr. Randell: No, we are not, and we will be integrated with the Air Canada frequent flyer program at the same time, which I believe will be toward the end of this year.
Senator Finestone: We received a complaint with regard to respecting different frequent flyer programs from Dr. Bob Chanteloup, Associate Vice-President of the University of New Brunswick. It would be a good idea for you look to look into that.
Mr. Randell: I would appreciate a copy of the complaint in order to respond to it.
The Chairman: Than you very much, Mr. Randell. We greatly appreciate your assistance this morning.
Our next witness is Mr. Randall Williams, representing the Association of Canadian Travel Agents.
Mr. Williams, welcome to the committee. Please proceed with your presentation.
Mr. Randall Williams, President, Association of Canadian Travel Agents: Madam Chairman, members of the committee, on behalf of the Association of Canadian Travel Agents I wish to thank you for giving us the opportunity to comment on the government's proposed airline legislation.
Our association has taken note of the provisions to which the government has agreed in order to protect the domestic air traveller in what is largely a monopolistic industry. By our reckoning, there are at least five provisions.
The first is that a complaints commissioner will be appointed as a member of the board of the Canadian Transportation Agency. That individual, whose duties will be similar to those of an ombudsman, will have to report semi-annually to Parliament through the minister.
The second is that the House of Commons transport committee has requested that it be provided with information on airline pricing on capacity six months after the legislation comes into effect.
The third is that an independent observer will be appointed to monitor the effects of airline restructuring on all stakeholders. This individual will be appointed for a two-year period with an optional one-year extension.
The fourth is that the Competition Bureau will be monitoring the airline for the next three years to ensure that all of its undertakings are being respected.
The fifth is that section 78 of the Competition Act has been amended to include the denial of access on reasonable commercial terms to facilities or services that are essential to providing a competitive air service. Also included is the refusal to supply such facilities or services on such terms. The Governor in Council will be able, by regulation, to specify what further acts or services should be included in this list of anti-competitive acts.
Amidst all these provisions, it is not clear to us where travel agents fit. We are concerned that we may fall between two of the outlined provisions. On the one hand, individual consumers can turn to the Complaints Commissioner and, on the other, airlines can turn to the Competition Commissioner. Who can travel agents in Canada turn to?
To be clear, our association is pleased that the legislation already incorporates a right for travel agencies to negotiate collectively with an airline on the commissions to be paid on ticket sales. Moreover, it is our opinion that this right, if undermined in any way, could be taken to the Complaints Commissioner, who will have the authority to deal with more than passenger issues. The commissioner will be able to examine systematic problems and to provide mediation.
Finally, we believe that the failure to negotiate reasonable commissions with travel agents by Air Canada could also be taken up under section 78 of the Competition Act. I have seen the draft regulations and I will comment on them later. I believe that they are deficient in subsection (k). For the sake of greater certainty, we would like to have the right of travel agencies to negotiate collectively rounded out by the addition of a few words.
We already find in Bill C-26 the recognition by government of the growing inequity in the airline industry. Travel agents have seen commissions on ticket sales cut by 35 to 45 per cent in the last while. What chance do 5,000 small to medium-sized independent travel agencies in Canada have of getting fair market value for the services we provide against one dominant national carrier?
I know that members need not be reminded that one of the four purposes of the Competition Act is to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy. As a result, in order to introduce some fairness into the process, the government has decided to exempt travel agents from the Competition Act. Section 4 of the act will be amended to exempt us from sections 45 and 61. We will, therefore, be allowed to come together for the purposes of collectively negotiating commissions with an airline that has at least 60 per cent of the domestic market.
To ensure the principle of effective collective bargaining, it is critical that this committee consider adding further words to the amendment. Essentially, we are requesting that an arbitration process be laid out in the event that we and the carrier are unable to arrive at a fair resolution.
I have appended to our brief our proposed amendment for the committee's consideration. This amendment would carry out the government's intent. In willing an end, the government should be prepared to will the means.
There are two other related points that we would like to bring to your attention today. One has to do with service fees. In the wake of the airline commission caps and cuts, agencies have begun to charge their customers a service fee for booking tickets. This is for the added value the travel agency provides the travel consumer in making their buying decision. Travel agents are comfortable and confident that these service fees represent excellent value to their clients. The fee currently ranges anywhere from $5 to $40. In order to facilitate acceptance of service fees in the marketplace, our association would like to see a box designed for that purpose on all airline tickets. Such a small measure would make seamless the process of all charges to consumer. Actually charging the fee would remain voluntary.
Attached to my brief is a sample illustrating how this box could be fitted into the present ticket, and I have highlighted a sample of where it could be located. Airlines will say that it is too difficult to add this box or that there are liability issues with this, but our research shows that that is not the case. When airport improvement fees were introduced in Canada, the airlines were quick to accommodate them on the tickets, and they are a third-party charge. Airlines will say that the AIF, or airport improvement fee, is related to the ticket purchase, but we feel that the distribution costs to consumers are just as relevant as capital costs of maintaining airports.
Our final point stems from our concern that Air Canada may link compensation to travel agents for domestic air travel to their performance of booking international travel with Air Canada. Although this helps to strengthen Air Canada's competitive position in the international arena, it also may serve to drive competition in international routes out of Canada in the near future, leaving Air Canada even more dominant than it currently is. In his October 1999 letter to the Minister of Transport, the Commissioner of Competition estimated that Canadian carriers account for 52 per cent of the scheduled capacity on routes to Europe and 55 per cent of the capacity to Asia. This is Air Canada's position today.
Foreseeing that one carrier might occupy a dominant position in the Canadian international market, and knowing that it has joined an alliance where partners fly the same international routes, the commissioner went on to recommend that airlines should consider domestic and transport or international sales separately so that no incentive is created to favour domestic bookings on the dominant carriers because of volumes incentives in transport or international markets. The dominant carrier should implement new agreements with travel agents that reflect the above conditions within six months of any restructuring. We agree with that, Madam Chairman, and we are prepared to do our part to ensure the success of the air travel industry while giving the best possible deal to the travelling consumer.
I would be pleased to answer questions that you may have at this time.
The Chairman: Mr. Williams, more people are buying tickets via the Internet. Considering the technological changes that are happening, what do you think the future holds for your industry? Are adjustments already being made?
Mr. Williams: Many adjustments are being made. We see the future for the travel agency in Canada worldwide as being very strong. The advances in technology actually allow travel agencies to get closer to their customer, to serve their customer better, to understand the needs of the customer better, and also to provide better service to their clients. Travel agencies are using technology, as are the suppliers. Many of the tickets that are booked through the Internet, even though they represent just a small portion of the tickets sold today, are being bought by travel agents for their consumers, and sometimes we forget that.
We are producing about 85 per cent of the tickets now through travel agents. This is a growing market. Travel and tourism in Canada is the fastest growing economic sector, as it is in the world. Travel and tourism is growing by 4 to 6 per cent per year worldwide. It is now the number-one industry in the world. We are distributing 80 per cent of that pie right now, and we are prepared to go to 60 or 70 per cent distribution of the pie. The pie is growing. In five years, as that pie becomes bigger, we may be distributing less of the pie, but a larger total volume.
The Chairman: Yesterday, representatives of three international airlines complained to us about what they called the cross-incentive programs offered by Air Canada to travel agents. Is this a practice that has been in place for a while, and do you know if other international airlines offer bonuses on domestic sales to travel agents based on their international sales?
Mr. Williams: You are asking about overrides or incentive payments. Right now, most airlines will offer travel agencies overrides or incentive payments based on various different means, whether it is how well they are competing in their local markets, how well they are competing in a region, or how much growth they have had over the previous year. Those kinds of incentives are used.
The Chairman: Do they offer bonuses on domestic sales to travel agents based on international sales? Are they linked?
Mr. Williams: Yes, they are linking, and part of my concern was linking international bookings with how they will provide incentives domestically.
Senator Forrestall: On the surface, I do not see anything wrong with the amendment. It is asking for an arbitrator. I am not sure how you will go about picking one. Beyond that, I would think the occasion to use the services of an arbitrator would be rare, unless you deliberately get into a confrontational mood, trusting the arbitrator to come down on your side. The provision which reads "shall not be questioned or reviewed in any court" uses a legal phrase. That is an absolute. I do not like absolutes in law, but beyond that I do not have too much problem with it.
I want to return to the chairman's question. We had quite clear expressions of concern from the three of them in front of us and a very vigorous denial by Mr. Milton, president of Air Canada, of any such practice as described in 1(f) of the regulations suggested by the Competition Bureau. Have you seen them, incidentally?
Mr. Williams: Yes, I have a copy which was given to me this morning.
Senator Forrestall: I wish I had brought the brief back with me this morning. They are claiming that they are being literally forced out of business in Canada, and one of the reasons is a variation of that theme, using commission overrides or other inducements to sell the purchase of flights of the offering carrier, having the effect of eliminating or disciplining a competitor or impeding entry into or expansion of a competitor in the market.
Can you take us through that? How does this occur? Is this a private arrangement between the carrier and one who travels, for example?
Mr. Williams: Yes, it is a private contract or agreement. We concur with the provision in 1(f), even though it will cost our travel agents some of the incentives they have received in the past. We have supported the Department of Transport and the Competition Bureau on introducing this legislation.
This proposed regulation ties travel agencies to selling only the one carrier. Our incentives are based on maximizing 60 to 80 per cent of our sales. That means that we are blocked in our ability to sell other options to consumers. The travel agency community is moving rapidly towards becoming more conscious of being agents for the consumer rather than just representing one airline.
We would like to have a marketplace that had enough competition that we could provide consumers with two or three options on every route that they wish to take. We support this bill even though travel agencies will lose revenue. However, we see this as a positive step forward because it is anti-competitive and does block new entrants.
Senator Forrestall: How do we know when there is an offending private arrangement between the dominant carrier and the travel agent, or as we have seen more and more in recent years, national and international travel agencies? How do we know that they are not pushing the Air Canada ticket or the "Air Swahili" ticket?
Mr. Williams: Like most legislation, you do not know until someone spills the beans or complains or has evidence that this has happened. Once enacted, I am sure Air Canada will not purposely contravene that law.
Senator Forrestall: Are you otherwise generally happy with Bill C-26?
Mr. Williams: We have some concerns that a monopoly can be regulated effectively to meet the needs of consumers in Canada. We would like to see more provisions to allow for a competitive environment, whether it is consideration of reciprocal cabotage, greater foreign ownership, or a number of different things in concert with each other to allow for a more competitive regional network in Canada.
Our concern is that, when Air Canada dominates 90 to 95 per cent of the market, it will be difficult to regulate that. The legislation attempts to do that. It made a good attempt, but the proof of the pudding will be in the eating a year or two from now when we see how the marketplace evolves. We do have concerns though.
One of our concerns relates to the regulation that I alluded to in my comments. That relates to the anti-competitive acts in the draft regulations. First, there is nothing in there relating specifically to CRS although that may be covered in (h) where it refers to the network. However, as far as the Central Reservation Systems are concerned, I know some changes will occur, but we see that as part of the regulations relating to anti-competitive behaviour.
It has been noted by the airlines that agents are their distribution network. Travel agencies in Canada are their agents for sale, but we would suggest that counter people who sell tickets are as much a part of the airline industry. Travel agencies are part the distribution network and should be included in the definitions or the descriptions of what is covered. Those are the shortcomings we see in the regulations.
Senator Forrestall: Are you referring to services and related infrastructure?
Mr. Williams: Number 1 is very specific and number 2 is more macro.
Senator Callbeck: I know that travel agents have lost a great deal of money over the past while. You indicate that your commissions have been cut by 35 to 45 per cent. Did the airlines decide they were going to reduce the commission? Was it through incentives they cut that out? Could you give me the particulars of this?
Mr. Williams: It started in 1995, when they started cutting and to capping the amount of commissions to be paid on certain flights, both domestic and international. Air Canada or Canadian at that time would say they were just responding to global economic competitive forces. That is fine. Some of the cuts over the last five years have been initiated by United, some by British Airways, some by various airlines and they all quickly follow suit.
Today, travel agents receive 5 per cent commission, capped at $60 domestically for the service that we provide. That used to be 10 per cent commission with no cap. That is a significant cut. The 35 to 45 per cent cut that I referred to was the latest one that happened in October of 1999.
The airlines unilaterally made that decision, which is unfortunate. Certainly, where an airline has a monopoly that exacerbates our situation here in Canada. I always refer to the Microsoft example where Microsoft could abuse its distribution because of its monopoly position. Air Canada in Canada has the same potential to abuse its distribution channels because of its monopoly situation.
We have some concerns right now because of that. Approximately 85 to 95 per cent of travel agents in the U.S. are charging a service fee. The work we do for the consumer on a consulting basis, the consumer should pay for; the work we do for the airline, the airline should pay for. We are comfortable going that route. The airline can unilaterally make a decision on what they feel we are worth without the ability to negotiate, which is what this legislation provides us. What if they do not come to the table? There is no arbitration process built into the legislation that says, "Air Canada, you have such a dominant position in this market, you must negotiate with your distribution channel fairly and openly. Why not? You have written that as part of your intent." We need a means to do it now.
Senator Callbeck: When the House of Commons held hearings on Bill C-26, did you appear before them and talk about putting in arbitration?
Mr. Williams: Yes. We appeared three times before the House of Commons Transport Committee. The last time we appeared before them, we thanked them for the right to negotiate that was captured there. We had hoped that, before it went through the House, they would add arbitration as part of the legislative changes. They have not done that.
In anecdotal conversations, there is a sense now that, with the ability for the independent observer to make reports to Parliament, there is an opportunity for them to report to Parliament whether Air Canada is negotiating in good faith. If they are not, arbitration could be built in. That is fine. It gives us a recourse. However, we would like it to be built in so that this legislation has teeth, before it becomes an issue.
Senator Callbeck: What percentage of the travel agents belong to your association?
Mr. Williams: Currently, we represent 50 per cent of the travel agencies in Canada. We have over 3,000 members. We have airlines, hotels, car rental companies, tour operators and tour wholesalers as members. However, consolidators and travel agents are the only voting members.
Senator Callbeck: Whether or not travel agents belong to your association, they will all get the same benefits once the deal is negotiated.
Mr. Williams: The act has been around since 1977 and the association is 23 years old. It is an organization that, during the past couple of years, has gone through some difficulties in its leadership. I have been on board for six months now and we are going through a restructuring and redefining of our organization as well. We anticipate and have budgeted for a representation of 70 to 80 per cent of the retail travel agencies in Canada.
Senator Callbeck: They will all get the same, though?
Mr. Williams: Yes, whether or not you are a member. We provide certain benefits directly to members, but the work we do certainly benefits all travel agents.
Senator Callbeck: Presently, do all airlines pay the same commission?
Mr. Williams: Pretty well. About 80 per cent pay the same 5 per cent commission. There are other airlines that pay different commission levels; for instance, WestJet is paying 9 per cent. However, most of the major airlines are paying the 5 per cent commission.
Senator Callbeck: Is there any cap on WestJet?
Mr. Williams: I do not believe there is, no.
Senator Kirby: I have three short questions. Let me take the three points from your brief. First, I presume that the cross-linking issue vis-à-vis domestic and international fees is solved by regulation 1(f). Once the draft regulations of the Competition Bureau are in effect, then the thing you are concerned about becomes illegal under clause 1(f). I presume that that deals with that issue. I thought that was your response to Senator Forrestall.
Mr. Williams: Yes.
Senator Kirby: Your second comment about adding a box that would indicate your fees is sensible. The reality is that it can be done; you have illustrated it. That does not require legislation. That is something that you must negotiate with them directly.
On your third point, about amending clause 78 to give you an arbitration clause, I am not convinced that it requires an amendment and I am not sure there are not other ways to achieve it.
I would like to pick up on the point you got from the House of Commons, namely, that the investigator would have the right to comment if they were not negotiating in good faith. The reality is that a variety of groups in this town will hold Air Canada under a microscope, and this will leave it -- unless it was colossally foolish -- in a situation where it would never get itself caught in a position where it was not negotiating in good faith simply because it is crystal clear to me that public policy-makers would solve the problems. I understand your motivation, but, first, I am not convinced that it requires an amendment. I think there are other ways to do it. Second, although I agree that it is something you may want to worry about, I feel public pressure would deal with that quickly.
To finish off on your ticket issue, if there is anything we can do to help you achieve that line on the ticket, we will be glad to do it because it makes sense. I am not quite sure about the process involved, though.
You said you charged between $5 and $40. The notion that you charge does not surprise me. We have full service brokers, and you pay a fee for that; and we have discount brokers, for which you do not pay a fee because you either do it yourself or there is no advice given. Is the fee charged for the advice based on a percentage of the ticket with a cap, or is it just a straight transaction fee?
Mr. Williams: It is a straight transaction fee.
Senator Kirby: If you are a $25 agent, it is $25, regardless of the ticket -- that is, whether I am buying a ticket to Montreal or to Vancouver or internationally?
Mr. Williams: Correct. That is the way the service fees have been introduced at this point.
Senator Kirby: You are one of the few businesses to do that. If you think about the brokerage business, it is a percentage of the cost of the sale. Has the U.S. model been a fixed transaction fee?
Mr. Williams: Yes, it has.
Senator Kirby: It was never done as a percentage?
Mr. Williams: No. The assumption from the consumer's point of view is that selling a ticket from Toronto to Montreal involves the same work as selling a ticket from Toronto to Vancouver.
Senator Kirby: People who are illogical in that sense are the brokers as opposed to you. Buying a $10 stock or a $1000 stock involves the same effort, but they make ten times as much money.
Senator Forrestall: I am curious about an amendment to the ticket. Was that run by anyone in the Competition Bureau?
Mr. Williams: It is not a Competition Bureau issue. At the House of Commons Transport Committee, we suggested that we do not know where this fits. It probably does not fit under legislation. It is a minuscule item, but we would encourage this committee to make a recommendation to the Department of Transport to look at it in policy and regulation.
Senator Forrestall: The regulations are not in the bill. It may have been useful in discussing Bill C-26, but if it was not run by them then why didn't the Competition Bureau include it?
Mr. Williams: We did run it by the House of Commons Transport Committee.
Senator Forrestall: They did not bother doing anything with it?
Mr. Williams: They saw it as too small a detail to deal with in legislation. We would certainly like the Senate committee to make a recommendation that it be dealt with in policy or regulations if that is within your capacity.
Senator Callbeck: I have a supplementary question. You mention here that the airlines say it is too difficult to include that box, that there are liability issues. What liability issues do they claim are involved in putting that box in there?
Mr. Williams: Liability with respect to a third party -- safety, security relating to the purchase of the ticket and the services provided therefor, the third parties that are represented by the travel agency fee, the AIF and the NAV CAN fee, and all the others. It increases the liability for the air carrier to have them acting as an agent for other suppliers of product. I am assuming that.
Senator Perrault: There seems to be an obvious attempt by Air Canada to totally eliminate the travel agents. The material I have received, for example, tells me how to purchase a ticket over the Internet and thus circumvent my travel agent. It is blatant. Does this not represent a tremendously bleak prospect for travel agents, if the premier travel company in Canadian airlines is on this kick? I have never thought that the margins in your industry were that great anyway. You have been operating under a small margin. What is your reaction to this? Do you think the long-term plan is to get rid of travel agents?
Mr. Williams: Our discussions with Air Canada, British Airways, or any of the airlines have been positive. British Airways has come out in their public objectives of getting travel agents down to 50 per cent of their distribution from the current 75 to 80 per cent. Of the four distribution processes -- the travel agency, call centres, ticket offices, and the Internet -- 50 per cent is through travel agents, the five-year objective. The other three distribution systems are splitting the remaining 50 per cent. Travel agents are still very much a key part. No company can abuse 50 per cent of its distribution for very long.
Senator Perrault: My travel agent is adding $50 a ticket. It is an interesting process.
Mr. Williams: We would argue to this committee, and we have argued to the House of Commons, that we do not wish to maintain an inefficient sector of the economy, obviously, but we believe that a strong retail distribution network, which travel abilities are, helps consumers by providing lower prices. Travel agencies are providing optional services, better services in small communities, and employment across the country. Where we have 5,000 travel agents today, if we end up with 4,500 because there is some marginalization of services, and so on, we still fully believe that the 35,000 employees that are being employed by travel agents in Canada are as important as the Canadian Airlines employees or any other employees represented by any air carrier. The 2,200 employees of Canadian Regional Airlines are no more important than 35,000 travel agent employees in this country.
It is important for Canadians to have a retail distribution system that provides for unbiased, professional counselling on travel services. It provides lower pricing options. If a consumer phones Air Canada, they will get Air Canada's pricing, and that is all.
Senator Perrault: A good travel agency is important and useful, I agree.
What percentage of Internet users are there? How many people at the present time acquire their tickets via the Internet?
Mr. Williams: The last time I saw information, only 30 per cent of Canadians have access to the Internet, and only 2 per cent of transactions are occurring for the purchase of air tickets.
Senator Perrault: It is not yet a big figure then?
Mr. Williams: No, it is not a big figure.
Senator Perrault: People may fear they will wind up in Tibet rather than Ottawa.
Senator Finestone: Thank you for being here today. I have had the opportunity to work with many of your agents, one in particular, and I can say that the advice is very sound. It is even better than going to your broker. If I am exhausted and looking for the a place to holiday, I know I can count on my agent. I would hope that most agents earn the kind of living they deserve, for the time and effort they put into their jobs.
The Chairman: Thank you, Mr. Williams. We will take good note, and observations might follow.
The committee adjourned.