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Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 35 - Evidence

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OTTAWA, Wednesday, March 20, 2002

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-23, to amend the Competition Act and the Competition Tribunal Act, met this day at 3:50 p.m. to give consideration to the bill.

Senator E. Leo Kolber (Chairman) in the Chair.

[English]

The Chairman: Honourable senators, this afternoon we will hear testimony on Bill C-23 from four witnesses. The first two are from Air Canada, Mr. John Baker and Mr. Stephen Markey.

Welcome, gentlemen. Please proceed.

Mr. John Baker, Senior Vice-President and General Counsel, Air Canada: Mr. Chairman and honourable senators, we are pleased to be with you today. We understand the tight time frames under which you are working and want to allow you to get to your questions as quickly as possible. However, given that this is the first formal opportunity we have been able to address some of the provisions before you, I hope you will bear with us as we make a statement.

In preparation for our appearance, we sent to members of the committee a detailed brief, which we believe contains some positive suggestions to improve the legislation. While I may make some references to it during our discussion today, I will not read it into the record.

Mr. Chairman, in commenting on the provisions before you, I would note the increasing and dangerous tendency that we see toward re-regulation of this sector of Canadian industry, and in particular of Air Canada, through these and other competition law provisions as enforced by the Commissioner of Competition. It would appear to us that this runs contrary to the intent to deregulate the industry, which has been the hallmark of air transport policy in the last number of years and certainly the trend internationally.

Let me turn to the draft legislation. As you are aware, Bill C-23 was first tabled in the House of Commons without substantial comment in April 2001, as part of an overall comprehensive review of competition policy and law. We appeared before the House Standing Committee on Industry, Science and Technology in November 2001; however, it was only immediately prior to that appearance that we were informed that the commissioner was planning to introduce some amendments which are before you today as proposed by our principal competitor WestJet. No details of the proposals were available to the public when we appeared. Thus, given the absence of consultation with us, and the fact that a number of the key clauses are directly aimed at us, we are doubly grateful for the opportunity to express our concerns here this afternoon.

In our estimation, the Commissioner of Competition has extensive powers now under the Competition Act, particularly as amended with the addition of section 103.3 to address anti-competitive behaviour in any sector. There is no need to treat Air Canada differently or to introduce additional provisions to deal uniquely with the airlines.

The issues of primary concern to Air Canada here today are threefold. The first is the continued existence and expansion of section 104.1. The second is the need for a more balanced approach regarding section 103.3. The third is the unprecedented administrative monetary penalties that have been proposed only in respect of airlines.

On the matter of section 104.1, we submit that the entire section should be removed. With Bill C-23's inclusion of section 103.3, the commissioner will have access to the tribunal quickly to obtain interim orders against Air Canada or any other marketplace participant without notice to the party against whom the injunction will be issued. In other words, this will be on an ex parte basis. Although in our view this raises issues of procedural fairness as to why it needs to be proceeded with on an ex parte basis, at least it requires the Competition Tribunal, an independent third party, to issue the order. This mechanism ensures that Air Canada is treated under the law as everyone else is treated.

As you can see, therefore, Air Canada is not here to question the commissioner's stated need to obtain an injunction at the outset of an investigation. We acknowledge that need.

The commissioner explains that he needs these extraordinary powers under section 104.1 due to the unique nature of our airline industry. His position ignores the fact that he would be able to access the tribunal under section 103.3 in order to obtain an interim order within two to three days of filing an application. In short, section 103.3 will add, in our view, only two to three days to the interim order process as compared with what is currently under section 104.1.

The commissioner has to commence an inquiry and proceed with an investigation. At the time that he concludes that, under section 104.1, he has the discretion to make an immediate decision. Section 103.3 would require him to go to the tribunal to have that decision made by the tribunal. In our view, and in the view of the experts we have consulted, that process can take one, two or three days. In our view, that short delay protects the principle of fairness and maintains that the roles of prosecutor, judge and jury should be kept separate. In that way, Air Canada can be accorded the same rights as everyone else under the law. We have more to say on that matter at pages 10 to 14.

Again, any discussion of section 104.1 cannot be complete without examining section 103.3. We believe that certain provisions of the proposed general power to obtain emergency interim injunctions also ought to be amended. In that regard, we note that other witnesses have come before you, the Canadian Chamber of Commerce, the Canadian Bar Association and Mr. Stanley Wong who have all expressed similar concerns about section 103.3.

In summary, our principal concerns with respect to that section relate to the harm test. In our estimation, the proposed standard required of the Commissioner of Competition is far too low. It focuses on the harm to specific competitors rather than on harm to competition, an important distinction since you have heard repeatedly in the context of this legislation that the commissioner's duty is to protect competition, not specific or individual competitors. It would also deter vigorous competition, and you have had discussion on that as well, Mr. Chairman. By definition, vigorous competition will naturally result in shifts in market share and revenues. We think that should be protected.

The standard required of the commissioner in seeking extensions of the cease-and-desist order, the original order, is also troubling to us. We think the standards are too low. We feel that indeterminate extensions beyond what will already be a long period of time, that is, a maximum of 80 days, should have a higher rather than a lower set of standards or thresholds for the commissioner to meet. We discuss that on pages 15 to 19 of our brief.

Concerning administrative penalties, we note that this proposed fine is unusual in the context of non-criminal behaviour. In fact, it is unprecedented in Canadian federal legislation. We regard it as very punitive.

Notwithstanding the commissioner's assertion in his testimony before you that a company of Air Canada's size can easily sustain penalties of that size, let me assure you that a penalty of up to $15 million would be extremely punitive, especially in the context of a company that has just reported an annual loss of $1.25 billion. On pages 20 and 21 of our brief you will see a series of examples which clearly demonstrates the current standard of administrative monetary penalties in federal legislation. You will see that they range from $5,000 to $200,000. These new penalties, uniquely set against airlines, are unnecessary and ought to be removed entirely. Other witnesses before have advocated that position to you.

Let us offer you a few more general thoughts. It should be no surprise to anyone in this room that the history of the airline industry in Canada is one of consolidation. While the integration of Canadian Airlines and Air Canada is well known to Canadians and, indeed, may be seen to be the genesis for some of these provisions that we are considering today, we believe that it is very important that there not be an over-reaction from a public policy perspective to that consolidation. We must take a realistic, long-term perspective when examining the potential impact of Bill C-23 on the state of the industry and the position of Air Canada within it.

There has been discussion before you about our market share. As a complex industry, numbers have been thrown around without clarification or proper context. One point, however, is clear regardless of the debate. The use of inflated market share figures to justify the continual criticism of Air Canada by our principal competitor is disingenuous at best.

WestJet is a highly successful, highly profitable carrier with greater capitalization than our own. With all due respect to WestJet, and we accord WestJet a great deal of respect, it does not need your protection.

Air Canada recognizes the legitimate concern that exists among Canadians about the vitality of our industry. Many events have contributed to the difficulty in which we, the government and other stakeholders, currently find ourselves. The difficult and complex merger that we have described, an unprecedented drop in business or high yield traffic and, of course, the tragic events of September 11 are all contributing factors.

Like all other stakeholders, Air Canada has worked hard to try to solve its problems. We have been fundamentally trying to reposition ourselves to respond to the shifts in consumer demand. Some of our plans have led to questions about our vision for the future of the industry. Let us be clear, there are no crystal balls available to us, or anyone for that matter, to look into the future to see how we can ride out the current move away from afull-service network travel carrier towards a no-frills service model.

In that context, we are redoubling our efforts to seek efficiencies and cost reductions in the delivery of all of our products and services, both to respond to what our consumer is telling us and to return to sustained profitability.

In the meantime, we need to look no further than our losses in 2001, which I described as $1.25 billion, to understand why we simply cannot afford to wait and see.

We believe what is needed for this industry is time. All that we can do is try to give Canadians the kind of service that they want and are prepared to support. Indeed, that is the philosophy that guided our principal competitor's growth through their accurate assessment in the mid-1990s of Canadians' appetite for low fare, no-frills air travel. It is a philosophy of finding models that our customers want and will support, which we are continually pursuing.

To conclude, senators, let me quickly summarize our main substantive points. They are three.

First, the amendment to section 104.1 would unfairly sacrifice the basic legal rights of Air Canada by placing the commissioner in the position of both prosecutor and judge. This amendment should be removed. The proposed section 103.3 is by far the more appropriate method to allow the commissioner to seek interim orders.

Second, we do not object to a general power to obtain interim orders, but section 103.3 needs to be improved in three ways. Those improvements would be: strengthening the harm test, so as to not limit vigorous competition; requiring that a higher standard be met before interim orders are extended beyond 80 days; and making a simple amendment so that a complainant not providing information against the party whose behaviour elicited the complaint cannot drag out the extension indefinitely.

Third, we believe that the administrative monetary penalties should be deleted. At the very least, the amount of $15 million should be brought into line with the quantum of such penalties in other federal legislation.

Let me repeat, our goal before you is not to diminish the role of the Commissioner of Competition, it is to ensure that we have a legislative and regulatory framework that protects competition without favouring individual competitors. With that, Mr. Chairman, we would welcome your questions.

Senator Tkachuk: I have a number of questions before I get to the bill. I note Mr. Mulder and Mr. Hunter will be appearing as individuals before us after your presentation. We have asked them to appear as individuals even though we know that they have contracts with Air Canada.

The Chairman: I have a note to read into the record that they are employed by Air Canada.

Senator Tkachuk: Susan Hutton appeared before the Chamber of Commerce as a witness. I believe that she also works for Stikeman Elliott. Does she do work for Air Canada?

Mr. Baker: She has been involved with us recently, senator. She has not traditionally done much work for Air Canada. My understanding is that she was appearing as part of a committee of the Chamber of Commerce in the absence of Mr. Paul Crampton, who was scheduled to appear.

Certainly, her work was directed, therefore, by the Chamber of Commerce. However, she is a member of Stikeman Elliott Ottawa office.

Senator Tkachuk: She does work for Air Canada?

Mr. Baker: She is part of a group that Mr. Lawson Hunter leads at Stikeman Elliott in competition law that has been fully engaged in competition law matters on our behalf.

Senator Tkachuk: It does not matter to me, but she should have told us that. I think that should be on the record. She appeared as a witness for the Canadian Chamber of Commerce. I wanted to clarify that to ensure that I was not just hearing rumours.

The Chairman: Senator Tkachuk, you are bang on, and the letter is presently being prepared to be signed by me written to her to clarify the situation and put it on the record. I thank you for the question.

Senator Tkachuk: A very strange group of circumstances led to the Air Canada merger with Canadian Airlines. Could you explain whether it was in your interest in your normal course of business to take over Canadian, and whether there were certain procedures you had to go through with the federal government? I have asked these questions before of other witnesses. Did you have to make certain commitments or undertakings to the federal government that would restrict your ability to compete? Did you need to promise certain favours to the Canadian public? Could you relate to us what happened so that we can get this picture in perspective?

Mr. Baker: Certainly, the events of the summer and fall of 1999 leading to the conclusion of the transaction in December of 1999 were extraordinary events and not the normal course of our business. It certainly was not a normal course of business that I would want to repeat every month.

The events were extraordinary. Canadian Airlines was in a failing situation. The matter of their survival was at stake. Air Canada was the subject of a hostile takeover bid starting August 24, 1999. Events unfolded in very dramatic fashion, as you recall.

Through the evolution of those events, we made an offer to acquire Canadian Airlines. In the continuation of the events unfolding, the hostile takeover was dropped. Our offer was continued, and as part of that continuance, in November and into December we engaged in discussions with the government, that is, with the bureau, the commissioner, Transport Canada and the minister as to the grounds and understanding on which a takeover by Air Canada, or a merger of Air Canada with Canadian Airlines, would be supported by the government. Those discussions were far-reaching and were reflected in a series of commitments and undertakings made both to Transport Canada and to the bureau. Those undertakings and commitments were ultimately enshrined in Bill C-26, which was introduced in February of 2000 and passed later that spring.

Further amendments, however, particularly with respect to competition law and the Canadian Transportation Agency, were introduced in the legislative discussion during the winter and spring of 2000. From our perspective, those were not contemplated or part of the discussions that we had had with government.

We had discussions with Transport and with the bureau. It is understandable, I suppose, that not all events could have been foreseen by the people involved in the discussions, and legislators properly had a voice in framing the legislation enshrined in Bill C-26, and that is what we have before us today.

Senator Tkachuk: Did the federal government make any promises to Air Canada, the corporation, in exchange for taking over Canadian Airlines?

Mr. Baker: Not promises that were otherwise not reflected in the undertakings and commitments I have just mentioned.

The Chairman: Excuse me, but I did not get the real tone of that answer. I heard the question differently. Did you feel any pressure by the Government of Canada to force you to merge with Canadian Airlines?

Mr. Baker: This is an area, senator, where one could have personal opinions, and I think my personal opinion is irrelevant to the case.

The Chairman: Can we get someone from Air Canada here whose opinion is not irrelevant?

Mr. Baker: I think there was a consistency with the government's desire to save Canadian Airlines and our own desire to proceed with the transaction. We certainly went into that series of transactions with our eyes open.

Senator Tkachuk: That was a good question.

The Chairman: It was a good question, but we still did not get an answer.

Senator Tkachuk: Follow up.

The Chairman: It sounds to me like the government's interest was in saving Canadian Airlines, and rightly so, with 20,000 jobs or whatever, and your interest was to do something with them. Are you telling me your interests were consistent with the government's and, ergo, you will not say they pressured you into it and that it is the only way you could do it? Is that your answer?

Mr. Baker: I think the option that was pursued in November and December of 1999 was the only viable option of interest to us at that time, yes.

Senator Tkachuk: Air Canada has certain restrictions as a result of the Privatization Act, such as bilingual services. What other things is Air Canada presently now regulated to do that other airlines do not have to do and that may cost you money or make you less competitive?

Mr. Baker: Senator, when we were privatized in 1988 and 1989, the Public Participation Act was entered into. Certain restrictions and requirements were placed on us. You mentioned bilingual service. There are particular requirements in that area with which we comply. Other bilingual requirements are germane to all carriers in the country. However, there are particular requirements placed on us. There are other specifications in the legislation dealing with the location of head office or the maintenance of bases in Winnipeg and Montreal, and these are not things that we bridle at or have any difficulty with at all.

Senator Tkachuk: Do they cost you money?

Mr. Baker: Compliance with all regulatory and legislative requirements generally costs the party that is subject to them money, yes.

Senator Tkachuk: Previous to the merger or takeover with Canadian, what was your market share in the country?

Mr. Baker: I am not in a position to give you the exact figures, but my memory would be that the combination of Canadian and Air Canada prior to the merger would have been, domestically, in the range of 70 to 75 per cent.

Senator Tkachuk: Would you have had 45 or 50 per cent?

Mr. Baker: Something like that, yes.

Senator Tkachuk: With that takeover, you are now at what percentage?

Mr. Baker: Let us me take this opportunity to perhaps clarify some of the uncertainty about the term ``market share,'' if I might. I believe you have heard many varying measures proposed. You have heard WestJet indicate that, in their view, Air Canada has 84 or 85 per cent of the domestic market, if not more.

Some of the measures that are used in the industry deal with what are called available seat miles. That is the number of miles flown with the number of passengers flown. That measure itself skews the statistics in favour of inflating an Air Canada figure because we fly, even domestically, much longer-haul flights and legs than many of our competitors. We have an inflated figure on that basis.

If you use a similar measure like revenue passenger miles, which compares the revenue gained on each seat with the number of miles flown, again it gives you an inflated figure because Air Canada, as a full service provider, has a business class service and a full service class that create more revenue. Again, that skews and inflates the figures.

We have suggested using, as a more accurate measure, the capacity of seats dispatched in the system domestically. We measure that through the Official Airline Guide. As we have publicly stated, in the first quarter of 2002, our domestic share based on that formula is some 67 per cent.

Senator Tkachuk: The president of WestJet mentioned, when he testified, that in regards to an offering in the States, you said that your market share in Canada was 78 per cent. What was he referring to?

Mr. Baker: I do not have that data before me, senator. I can certainly try to dig it out and provide it to you.

Senator Tkachuk: You do not know?

Mr. Baker: I do not know the context of that statement regarding 78 per cent, no.

Senator Tkachuk: In regard to sections 103.3 and 104.1, you say that you want to be treated the same as anyone else, but you are not anyone else.

Whether you use your figures or everyone else's figures, we are very confused here, because we have seen figures from 67 per cent all the way to 80-plus per cent. There must be someone out there who has a handle on this.

Air Canada is different from other businesses. You have a predominant place in the marketplace and are almost a monopoly. You are not anyone else. Would you be happier with 40 or 45 per cent of the market share, the way you were before, or having a few of these inappropriate, as you say, pieces of legislative actions and 78 per cent of the market? Which would you prefer?

Mr. Baker: Senator, I do not believe it is a crime in this country to be a company of some magnitude and size. In other sectors of industry in general, we find many companies that have a predominant share of the market or are of substance. I do not believe there are many cases in which those types of companies are singled out for particular treatment in respect of competition law provisions. I do not know of many examples where the Competition Act is used to regulate one sector of industry and one predominant participant in that industry in the way that is being proposed in Bill C-23.

You have had witnesses before you from the legal community, at least, who are very concerned that the Competition Act is being used for sectoral regulation and, in fact, being used as the de facto regulator, in this instance, of Air Canada. We believe that there is a fundamental principle of fairness and equity that says a company of our size, or a company smaller or larger, is entitled to equal treatment under the law. That is the genus for the type of amendments and provisions we are suggesting to you for your consideration.

Senator Tkachuk: You do not think that, because you are such a dominant player, you should receive special attention? We want companies in this country to grow but, as parliamentarians, our other responsibility is to ensure that there is competition in the marketplace. Every business wants to be a monopoly. Every business wants an increasing share of the market. We always hear business people say that they love competition, but they are always trying to get more market share. In the end, it is only those of us who represent the people who must find a way to ensure that competition thrives; otherwise, we might as well have a socialist state. That is our conundrum.

You do have a predominant place in the marketplace. I agree this proposed legislation is somewhat interesting, but what else can we do? Should we break you up, that is, suggest that you sell off some of your business. Perhaps we should suggest that you have 45 per cent of the market and someone else should have 30 per cent. However, it is not for us to decide what percentage is appropriate. Our job is to ensure that you do not run the whole marketplace because that is not good for you and that is not good for consumers. What else would we do?

Mr. Baker: The Competition Act, specifically, is the legislation that deals with abusive behaviour. It is complaint- driven legislation. What needs to be established are fair and equitable ground rules for all participants, big or small, because those are always evolving, changing. We need to know the ground rules of competition. Competition is, by definition, vigorous, if it is properly applied in a free marketplace. There will be winners and losers, market share shifts, revenue shifts, exogenous factors like a September 11 situation and fuel cost increases, all of which have a major impact on the viability and sustainability of this industry and the participants in it. We do not think the Competition Act is the forum, the means, or the tool to regulate the industry. If government and parliamentarians have difficulty with the structure, then there are other ways of addressing those concerns.

Part of our concern, the commissioner's concern and the concern of all stakeholders in the industry by now, is that we do not have clarity, for example, in terms of how we, WestJet or anyone else can behave in the marketplace.

You are well aware of the matter before the Competition Tribunal, the first part of which is to have a determination of what the definition of ``avoidable cost'' should be. This was an initiative that we at Air Canada worked out with the bureau to try to establish a clear definition of that before we got to the substance of the tribunal case. We suggested that because we and everyone else needs clarity. We need to know what the ground rules are. Right now, Air Canada, being ``the dominant carrier'' under the definition, is hard pressed to know how to react in any given situation. We walk on eggshells in terms of our marketplace behaviour. Until we have some clarity, it will be very difficult for us, and very difficult for the bureau and other participants to know how to act.

Part of our difficulty in reacting to the provisions of Bill C-23, is that we are dealing with ostensible behavioural threats that a dominant carrier can bring to the marketplace at a premature time, that is, before we know what the market will look like, and before we have clarity on the ground rules for market behaviour.

Those are some of the issues that Air Canada is struggling with right now. I know the bureau shares in this struggle.

Senator Fitzpatrick: Do you believe that deregulation or the open skies policy is working? A large body of people believes that the airline system is broken and those people are expressing real concern. As events have unfolded, that has led to the dominant position of Air Canada.

I should also your comments on the process of deregulation that we went through and whether you believe that has been a healthy exercise.

Mr. Baker: The conundrum we face is understanding what phase we are in currently. We proceeded through a period of deregulation and our privatization was involved in that. There was a loosening of restrictions, and that is and was the ostensible public policy that was espoused and pursued.

Since the events of 1999, we have found that there has been — and I will fully acknowledge that it is probably an understandable reaction — a desire to reign us in to ensure that excesses that resulted from this merger of the two airlines did not create abuses in the system and allow new entrants to enter the market and existing entrants to flourish and survive. It is in our interest that that model work. We are in favour of a vital, competitive marketplace.

In terms of deregulation, you will note that late last year our president was strongly promoting the idea of an open skies plus model in the U.S. for what we called modified six freedoms to allow carriage from here to the states and back into Canada and conversely. We think that would have reciprocal benefits to U.S. and Canadian carriers. We still promote that suggestion and we would urge the government to continue to work on that. We understand that Minister Collenette is spending time on that portfolio.

That is one way in which the competitive landscape can be improved in Canada for the benefit of all stakeholders.

Senator Fitzpatrick: You said earlier that you believe that some ground rules must be set. I think you said that means regulations. To me, that means that you are looking at some form of regulation under which to operate. I know it is a conundrum about what to do with the airline industry in Canada, but that seems to be a contradiction somewhat of the rationale you have just gone through. You have stated that you do not think that the Competition Act is the proper place for regulation, but do you believe that there should be some degree of regulation in the Canadian airline industry at the present time? Do you confirm that you believe that some ground rules should be established?

Mr. Baker: The ground rules that I was referring to are ones to describe and define the competition law provisions that were captured in Bill C-26. It was not our suggestion or motivation that those provisions be included in that legislation, but that being the case, then we must make sense of what was enshrined in that legislation. Those are the ground rules that I am talking about.

In a free and open market, we would like those market forces to work properly. That cannot be in a completely unrestrained situation. Market forces need to be regulated against abuses. We understand that, but we want that to be equally applied, and we want there to be great clarity in the enforcement of those provisions and not use those provisions as a way of de facto reregulating solely the ``dominant carrier in the industry.''

Senator Fitzpatrick: Dominance is the problem here. Whether it is good news to you or bad new to you, you are there and that is what we are dealing with. That brings me to the proposed amendments to sections 104.1 and 103.3.

I take it from what you said that you feel that section 104.1 is unfair. The commissioner acts as prosecutor and judge and the time it would take to use section 103.3 as an alternative would not be a real problem or detriment to the commissioner.

How much harm does it do you as the dominant carrier to have the commissioner have the right under section 104.1, and how much harm does the difference of two to three days make if it were under section 103.3? How much harm does it cause to you as an airline?

Mr. Baker: There is substantial harm, as well as potential substantial harm. Understand that under section 104.1, the commissioner and his staff, on reacting to a complaint and investigation, come to their own determination on that inquiry as to whether they have grounds to issue the order. We have no opportunity to be heard. There is no opportunity to present countervailing evidence. We are met with the results of the order for, initially, 20 days and up to 80 days. Under this legislation, that provision is basically extendable indefinitely. It puts an absolute chill on our behaviour on the number of routes that are the subject of that order. Again, it precludes us from knowing how to react further.

One must understand that the ambit of the cease and desist order based on complaints goes to a multitude of potential routes when pricing actions are initiated. If we are trying to match competition and do it across the board, the bureau may receive complaints that Air Canada has acted in an improper fashion over 10 routes, 10 city pairs or 20 city pairs. On his own volition, investigation and determination he can shut us down on those routes for up to 80 days and more. The damage is substantial.

Senator Fitzpatrick: That cease and desist order triggers an investigation. That is the first step in the process. It may involve one or more routes, as you have said.

I do not know that a case has been made that having a cease and desist on fare or overcapacity action taken by Air Canada would cause economic harm or harm to Air Canada for that period of investigation.

In terms of dollars, let us consider, for example, a flight from Vancouver to Terrace. Let us say a competitor has started up business on that route and Air Canada decides that it will throw in extra capacity and that you will match the fares. If you are asked to stop doing that, how much will that hurt Air Canada?

Mr. Baker: As you know, senator, we are a network carrier. We are a carrier that is premised on a business model in which the feed, that is, the feed from all routes into the trunk lines and hubs, is fundamental to our business model. Thus, the passengers on the Terrace to Vancouver route matter a great deal because they may go to Toronto or Hong Kong.

If you want, we can come back to the committee through the clerk and try to provide some data with respect to potential damage on an example like that. It requires a quantifiable answer, and I am not in a position to give one. However, we can try to respond to a framed question in that regard if you would like.

Senator Fitzpatrick: The alternative is that if there is a Terrace Airlines, for example, flying from Terrace to Vancouver, the passenger could climb onboard Terrace Airlines, fly to Vancouver and then he or she would have the choice of flying with you or one or two other airlines if he wants to go to Hong Kong, for example. You are saying that you want to grab that passenger and have him stay on your system and not give him a choice. You can make a case that passengers should be given the opportunity to have that choice.

Mr. Baker: I am not following your phraseology. Absolutely, we would like to provide that passenger with the choice to fly with us or to fly with competitors. Let us remember that the consumer speaks on this. If we are not providing a service that is attractive at a price that is attractive, that customer will not stay with us. We always have to keep the customer in mind in this equation.

We are trying to provide service and to compete for that customer, absolutely.

Senator Fitzpatrick: At which stage are you talking about, out of Terrace or Vancouver, if he is going to Hong Kong?

Mr. Baker: At all stages.

Senator Kelleher: I will try to have another go at you with respect to the questions put to you by Senators Tkachuk and Kolber. The nicest way to put it is we do not feel the questions were answered.

I am not a financial genius. I know very little about financial matters, so perhaps you can enlighten me by answering my question. Why would Air Canada willingly take on and assume all of Canadian Airlines' debt, which added to your own debt and created quite a load for you to carry? Would it not have been better for you to have sat on the sidelines, let Canadian go bankrupt, and then pick up the pieces or do nothing? Why would you not have done that?

Mr. Baker: Senator, I do not want to speculate on that topic. Canadian Airlines was a worthy competitor of ours for many years. They had wonderful staff. They had a route network, assets and international routes of interest to us. There were many reasons why Canadian Airlines was an attractive partner to merge with at that time.

I am not in a position, nor do I think it is fruitful, to speculate on what might have happened had we chosen a different course of action. We were happy, and are happy, with the course of action we chose. We are working hard to make that merger work for the benefit of our shareholders, our customers and ourselves.

Senator Kelleher: Mr. Chairman, I am not getting any further than you two did.

The Chairman: That is true.

Senator Kelleher: I still have trouble understanding why you would want to load yourself up with Canadian's debt. I guess what you are saying is that there were other benefits to offset the taking on of all that debt. Is that what you are saying?

Mr. Baker: Yes, there were other benefits. Also remember that, upon that transaction being completed, we did enter into a Companies' Creditors Arrangement Act process that took a number of months through the spring of 2000. The debt load was compromised substantially. Other concessions were made with creditors. The result of that put the ultimate merger with Air Canada in a much more viable situation.

Clearly, it was a period of growth and prospective growth at the end of 1999 and into 2000. Events have worked somewhat against us in the intervening two years, for reasons that are well understood by all of you.

However, the base reasoning for proceeding with the merger is not something we are questioning or in any sense regretting.

Senator Kelleher: I will change the subject.

Let us take a look at amendments that are proposed to sections 103 and 104. You and others have said that the bill really does not need section 104.

A witness told us that, when he made his presentation before the House committee, this amendment section 104 was not included in the bill. It was something that arose part way through the process. This has been a mystery to us.

What is the history behind the sudden appearance of this proposed amendment to section 104? If reasonable people, knowledgeable in the industry, are saying that we do not need section 104 and that 103 can handle it, what was the raison d'etre behind introducing this amendment at the last moment?

Mr. Baker: I would love to know the answer to that question.

Senator Kelleher: Can you try to answer the question?

Mr. Baker: Fortunately, we are not the right parties to be asking about that. As you mentioned, and as I indicated in my opening comments, the introduction of that cease and desist power into the legislative process in the spring of 2000 was a surprise to us as well.

The Chairman: Senator Kelleher, are you asking about the proposed amendment to section 104 in the bill before us or as it appears in the Competition Act?

Senator Kelleher: In the bill before us.

The Chairman: I believe that was included from the beginning. That is what I am told by the researcher from the Library of Parliament in reference to what was created by Bill C-26 two years ago.

Senator Kelleher: What about the evidence we were given?

The Chairman: Could you clarify that for us, please?

Mr. Baker: In section 104, the .1 was introduced in Bill C-26 in the spring of 2000. My comments were related to the time frame as it relates to that provision. What is before you now is a proposed extension of 104.1 which will allow the extension of the cease and desist orders; plus the introduction of section 103.3, creating an interim order power of general application across the spectrum of industry.

We are saying that we think you should support the introduction of 103.3, which is of general application, which requires the commissioner to go to the tribunal for that order.

The Chairman: We apologize. Apparently, we are right and he is wrong.

Senator Kelleher: That does not happen very often. Thank you very much.

In response to my question you said that you did not know the answer because you did not draft the legislation. As a fellow lawyer, when I am handling a case for someone, I have a pretty good idea, and I am sure you have too, of what went on and what caused something to occur. Can you not give me some personal or professional opinion as to why this suddenly came upon us?

Mr. Baker: I cannot do that. I can say that it was always our position that the introduction of that provision was above and beyond anything that was appropriate or required. There was commentary before various committees in the spring of 2000 by the bar association, among others, about the inappropriateness of the commissioner being given the power to investigate, inquire and be judge and jury. It is entirely inappropriate. We made our submissions in that regard at the time.

Frankly, in the spring of 2000, arguments of equity and procedural fairness were not resonating very much with the audiences to whom we were talking, because suddenly we were this behemoth that had been created some months prior.

In terms of anticipating the other side's arguments, certainly, the commissioner's view was that he needed this power and he needed to act peremptorily, and so peremptorily that he did not have the time to even go to the tribunal and delay his decision by two or three days.

Senator Kelleher: Is that all you know about why it was introduced?

Mr. Baker: That is all we were ever told about it, yes. I would suspect that, if the commissioner has some concern, if he has to proceed with his investigation and inquiry and come to a conclusion, and if he has to convince an impartial arbiter of the need to impose this order, with the consequences that I have talked about, then he would rather be able to decide it himself, thank you very much. I can understand that motivation very well.

Senator Kelleher: I can understand that answer. It is helpful. Mr. Chairman, I now want to move to another section of the act.

What is your opinion — and we have heard some evidence to the contrary — about the mutual legal assistance provisions of this act? Are you happy with them? We have heard criticism of them to the effect that, in some cases, the evidence could be passed on to a competitor of yours in the country from which it emanated, for example. You do not want this evidence to be available to your competitor. Could you tell me what your opinion is of those provisions? Do you have suggestions about this particular part of the act?

Mr. Baker: As a lawyer, I remain concerned about those provisions. I did not come here prepared with an analytical understanding of those provisions. Air Canada is part of a group called the Competition Policy Group which has made comments on all the provisions of Bill C-23. The concerns expressed by that community of companies were about the retention of confidential information and the dangers of its improper dissemination. As a lawyer, I have concerns with it, but I am not in a position to give detailed commentary on the provisions of this bill.

Senator Kelleher: Mr. Chairman, unfortunately for us, we have the whole bill in front of us. We have heard some evidence on this particular section of the act, about it being poorly drawn and open to these criticisms and concerns. Surely, it is in Air Canada's interest to provide us with a witness who can give us more particulars about the deficiencies of that decision.

Mr. Baker: If I may, I will happily provide you with a witness, in about 10 minutes. Mr. Lawson Hunter will be happy to give you his views on that matter.

Senator Kelleher: That is fine. You will be happy to know I have no further questions.

Senator Furey: My first question concerns your reply to Senator Tkachuk regarding market share. I presume there is no industry standard for measuring this. I understood you to say that you prefer to use capacity of seats domestically, which is how you arrived at your 67 per cent. What exactly does that mean? Does that remove all the international flights from your consideration? Does it include your regionals? Does it include Tango? How did you arrive at the 67 per cent when you use the term ``domestically''?

Mr. Baker: The 67 per cent is based on the domestic scene, seats dispatched within Canada. It would include, I believe, Tango results, because Tango is a brand within the Air Canada main line. It includes the entire regional network of Air Canada Regional.

Senator Furey: Does it include Tango and the entire regional network of airlines?

Mr. Baker: Yes.

Senator Furey: My other question pertains to comments of the commissioner regarding his views on the need for these extraordinary powers in 104.1 because of the unique nature of the airline industry. I know that you have addressed the processes available to the commissioner with respect to that. I would like to hear your comments on his assertion that the airline industry is, indeed, unique. He noted the ability to move assets quickly, the share of the market and various other things. Could you comment on that?

Mr. Baker: That has been part of his rationale in asserting the need for these provisions. I do not believe that the mobility of assets is as germane as he indicates. This is a highly capital-intensive industry with many fixed assets that are unavoidable in allocating elsewhere. The activities that he wants to have ceased while investigations are going on should be based on competitional provisions and not on the mobility of assets.

Mr. Hunter, when he appears before you, could give you a broader spectrum of experience of that argument in light of other sectors of Canadian industry.

Senator Furey: Let me ask another question as a devil's advocate. If you are satisfied that section 103.3 can give quick access to the commissioner, what difference would it make if we left 104.1 in there as it is and gave him the same speed of access?

Mr. Baker: There is a fundamental difference.

Senator Furey: One allows him to do it on his own, without going to the tribunal. I am thinking in terms of quick access. What harm would it do to you if he got there a few hours earlier or a day earlier under section 104.1 as opposed to section 103.3?

Mr. Baker: The harm is in the process of arriving at that decision. The essential unfairness of having the commissioner make that determination is what we are talking about here.

We are arguing that the tribunal has to be the arbitrator that makes that decision. We are saying that the commissioner and the complainant are in no way prejudiced by changing the procedure so that the tribunal is the decision maker. It is adding a day or two or three, maximum, to that process. Having both 103.3 and 104.1 in the legislation, if that is what you are suggesting, and I am not sure that you are, is a redundancy and conflicting.

As Air Canada, do I now worry as to whether the commissioner is going to issue an order under 103.3, through the tribunal, and if, failing that, he will make his own determination under 104.1 because he could not convinced a tribunal panel?

If you understand and agree with our concerns that the tribunal should make the decision, then 103.3 is there, as drafted, to provide that, with the amendments we are suggesting. You do not need 104.1. If the commissioner were convinced that 104.1 was the mechanism that met all legal tests, including procedural, equity and fairness, he would suggest expanding 104.1 to all industry sectors. He did not do that. He said that he thinks we should go to the tribunal.

Senator Furey: How quickly could a commissioner obtain a 103.3 order?

Mr. Baker: It is our view that it could be done in a day, two day or three days. The work necessary for the commissioner to come to a determination is done in his investigative period. It is up to him to determine how long that takes.

During that period, he can be preparing, as part of his case, the application to the tribunal. When he has come to the determination, he switches the trigger and will tell us that we will be before the tribunal tomorrow. The timing is an absolute red herring. The issue is who makes the decision.

Senator Kroft: I have heard a great deal about sections 104.1 and 103.3, than I heard a couple of weeks ago. In trying to make sense of it, I take myself back to basic principles. One of the principles that we all learned in law school is that whatever the remedy, and in whatever field of law, you have to balance the threat or danger. You balance what is reasonable. What you put up as the defence or response has to be reasonable in terms of the threat.

When I look at sections 103.3 and 104.1 and consider ex parte action and the ability to act with or without the tribunal, I first try to get sense of the degree of the threat. How serious is the threat? If the threat is terribly serious in terms of time and damage, then that would seem to legitimize a more drastic response, and perhaps, a response that, in ordinary situations, we might not feel is appropriate or that does not represent due process. Instinctively, I start off by looking at ex parte actions as being extraordinary. Things being done without notice are extraordinary. I consider the judge and jury being the investigator as extraordinary. These extraordinary remedies are only justifiable when there is a reason, so I ask myself: ``Is there a reason?''

When Mr. Beddoe was here he gave us a series of examples. I am drawing from the evidence. He cited a case in Moncton and another one in Abbotsford. He cited CanJet and Royal in Eastern Canada. These are horrendous stories which would move someone to suggest that we must do something extraordinary to stop this. I could read the numbers, but I am sure you have read all this evidence, and you have followed it closely.

Why would we not be sympathetic to an extraordinary type of remedy given what appears to be the ability of your company to double and triple the number of seats and drop the number of days and so on? Why should not we be sympathetic?

These stories are serious enough that they capture my attention. Is there something in all this that we are missing? Is there a balancing factor somewhere?

Mr. Baker: You should be mindful, as I know you are, that you are hearing a story propounded by one party who is a complainant. Most of the matters that you described there dealing with WestJet are before the tribunal. That matter will be the subject of very vigorous debate and evidence.

The first part of that deals with the avoidable cost determination, which I mentioned earlier. I would suggest that it is premature and inappropriate to react legislatively to the assertion of claims before the matter has actually been determined in court. All you have heard is one side of the story in a complex scenario.

Senator Kroft: I understand that, but would the commissioner not say that, by the time we hear the other side of the story, the damage will have been done — an airline could not get started or a service was dropped or whatever? Is that not the very point that gives rise to the right for quick and extraordinary orders?

Mr. Baker: Correct, and we have said and do say that we do not have an objection to an interim order power. We are at odds with the procedure that is followed for that power. We think the tribunal should make the determination regarding a cease and desist order. Again, we think nothing would be lost to the complainant and there would be no danger of the complainant failing over the period of one, two or three days, the time that would be required to go before the tribunal.

We are talking about the procedure. Senator, where is the balancing act between potential threat and damage to a complainant, and the removal of all legal safeguards which are enshrined in our system by having the commissioner be judge and jury?

Senator Kroft: I am preoccupied with that, and I look forward to hearing from Mr. Hunter. I have to find a comfort level in my own mind with this two or three day business, because that is a pretty specific item. If you think we are out in a variety of scenarios as far as market share is concerned, we are even further out in terms of the time it takes to bring an action and before a tribunal. I will go back to that topic with Mr. Hunter.

You talk about being a full-service airline with a branch structure feeding a national trunk system and an international system. I live in Winnipeg. There was a day when I could go to London from Winnipeg. I can no longer do that. I have to go through Toronto or Montreal. If I fly to Toronto with Air Canada, I would then go on to your Toronto-London flight. However, if another airline flies me to Toronto they could offer, as a plus, a choice of, say, seven other airlines to go on to London. However, to me, that is not a choice I want. I want to board one plane and go all the way to London.

How does the competition work? You have a stake in getting me to Toronto so that you can sell me an expensive Toronto-London ticket, and that is fair game. How does the competition work as far as the Winnipeg-Toronto leg of the journey is concerned? Is there competitive pricing? Can you offer me a cheaper ticket on the Winnipeg-Toronto leg because, in our overall financial transaction, you can carry me for less on that part of the journey because of the expensive ticket I will buy between Toronto and London? How does that play out in a competitive sense?

Mr. Baker: We will quote you a fare from Winnipeg through to London, whether you are connecting or not, and we build up that fare structure on a leg-by-leg basis. The exact fare between Winnipeg and Toronto may not be the same value that it would be if you were going Winnipeg-Toronto alone. The pricing of these through-fares involves a dense, complex set of factors that yield managers of all companies are involved with. Clearly, we want to provide you the convenience and seamlessness of getting on in Winnipeg, switching in Toronto and having your bags checked, and all of that. We would equally fly you, if you flew with a competitor from Winnipeg to Toronto and switched terminals.

Senator Kroft: Would you say that, generally, you would be more competitive against that other competitor because you have the reward of getting me on the overseas flight; or would you be more expensive because you have me hooked because I am a guy who wants to be part of the system? Should the Competition Bureau have any concern about that?

Mr. Baker: We are looking at what your alternatives will be from Winnipeg to London. In building up our fare structure, we will look at exactly how you build up the legs of your trip if you were to go otherwise than through us. We have to look at your total cost and assess how we can be attractive to you.

Senator Kroft: What if I decide that I like British Air and want to fly from Toronto to London on British Air, but I have to get from Winnipeg to Toronto. I already have my British Air booking, and then I ask you for a flight to Toronto. How does the cost of getting me from Toronto to connect with British Air compare with the cost of getting me from Winnipeg to Toronto if I am going to connect with Air Canada?

Mr. Baker: I cannot give you the details of that, senator. I can certainly undertake to provide them to you and the committee.

Senator Kroft: I am trying to understand, from a consumer's point of view, where the advantages lie in Canada having an integrated, full-service, international network. Does this advantage play out only in nationalistic terms because we have a flag carrier, or does it play out because we have choices? Does it, in fact, encourage competitiveness in the system?

These questions were not to try to test you on whether you had checked your screen before you left for the latest hourly pricing. This a confusing business for us all to have to learn on the run here. Knowing how this competition works will help me to understand whether it is appropriate to give someone a relatively arbitrary power to act immediately. That is what we have to figure out here. Is it more or less reasonable than the circumstances demand?

Mr. Baker: Again, we are not arguing with the commissioner's ability to seek an order and obtain that interim order quickly. It is how he does it and who decides where we have the difficulty.

Senator Kroft: We will ask Mr. Hunter about that.

Senator Gustafson: This legislation and certainly your objective would be to give good service to the customer.

Mr. Baker: Always.

Senator Gustafson: Canadian Airlines and Air Canada used to fly from Regina to Toronto, and at that time you could not have received better service anywhere in the world. We are now down to only Air Canada. I have flown that flight for 23 years, and it seems that there is always something wrong. We are sometimes late, and I can understand that there are occasional weather problems. I would not want an airplane to fly in bad weather. However, it sometimes seems that Regina is treated as if it is at the end of the world. What consumer protection is there in this legislation? I hope that just mentioning Regina here will improve that service. It has been quite unsatisfactory.

For example, the last time I got on the plane, there was no crew available to fly it. When a crew did finally arrive, they realized the flight would cause them to go over the limit of flying hours, so they had to find another crew. We sat on the plane for about an hour and 45 minutes before we left. These kinds of things happen quite often.

There is no point in introducing legislation that will not serve all Canadians. I have no problem with the Toronto- Ottawa leg of the flight. The plane and crew are always ready. Lunch is served, though most passengers do not need it on the 45- minute flight. However, when I leave Toronto at 7:40 to arrive in Regina at midnight, no food is served. It might be in the best interests of Air Canada to look into that.

Mr. Stephen Markey, Vice-President, Government Relations and Regulatory Affairs, Air Canada: Regina is an important market, notwithstanding your perception that, perhaps, we are not treating it as well as we should be. Your point in respect of the pre-merger period was that Canadian and Air Canada were both serving the market. You are quite right. We had lots of capacity, lots of seats and lots of frequency. To some extent, that is why we ended up in the merger situation. Since then, we acknowledge your point. The merger has been extremely complicated and difficult. We have made mistakes along the way, but we are focused on trying to improve all these issues. Meals, in particular, are one of the largest irritants for frequent flyers because they tend to build them into their schedules. We have made changes in recent months. We heard from our consumers, particularly our frequent flyers, and we are trying to address their concerns.

Senator Gustafson: That plane is jammed full of passengers. There are times when people will offer passengers money to give up their seats. It must be a money-maker for you. I would appreciate it if you would look into this.

Mr. Markey: I will be flying to Regina in a few weeks and will do a personal check on service levels. If they are not right — and we know they are not, and not just on that run because other parts of system are not working well — we must get them right.

Senator Di Nino: During the discussions on competition and how there can be improved service to Canadians, I am sure you touched on this subject, but could you tell us again Air Canada's position on cabotage?

Mr. Baker: Our position has often been stated. We are in favour of it if it is done on a reciprocal basis. If a bilateral agreement could be negotiated with the U.S. to achieve that, then we would be fully supportive of it. The modified six freedom program that we discussed earlier on the open skies plus is an entry into that type of model. Again, it is a reciprocally based program, and we are very much in favour of it. We do not favour unilateral cabotage that allows foreign carriers in here without any ability for Air Canada, WestJet, or anyone else, to participate equally in their home markets.

Senator Tkachuk: You might want to have a look on your own Web site. I am not positive how to interpret the numbers but I am positive on this: You state that your domestic market share is either 73 per cent or 78 per cent. It is one of the two, which is a significant piece of the marketplace.

Mr. Baker: We will investigate that for you and report back, but that might include co-chair arrangements with others. I am not sure what has gone into building that number, but I will try to determine that.

Senator Tkachuk: It says that ``Air Canada maintains and strengthens positions in all markets: Domestic 73 per cent, 78 per cent.'' That is on your own Web site. If these numbers are wrong, perhaps they could be changed.

Your concern regarding this bill relates to the proposed amendments to sections 103.3 and 104.1, and your main concern is the fact that the commissioner can go to the marketplace and take action and stop a flight or a particular action by a carrier if he believes that it is practising anti-competitive behaviour. You stated earlier that he can extend this for as long as he wants. However, am I correct in saying that, to extend it past 80 days he must approach the regulatory board for permission to do so?

Mr. Baker: Yes.

Senator Tkachuk: He will be asked questions such as: ``What have you done so far?'' and, ``What is happening now?'' Surely they will not give him that extension simply because he asked for it

Mr. Baker: We hope not.

Senator Tkachuk: He would only ask for 80 days if he could prove that he needed an extension of 80 days, correct?

Mr. Baker: One of the areas of concern with respect to that extension of the cease and desist orders is that, as currently drafted, if the commissioner needed more time because he was failing to get the information he needed to conclude his investigation and the failure to obtain that information was not — and let us say Air Canada is the party being complained about — because Air Canada was not fully cooperating in providing the information but because others were not, then Air Canada would be left in a situation where the order would remain alive against us, with all the harm that would cause, for reasons completely beyond our control and for reasons that could be manipulated by complainants to their own advantage by refusing to cooperate or not cooperate fully with the bureau. That is why one of the amendments we are suggesting is that the order be extended only if the commissioner's failure to obtain information arises from the failure and inability or refusal of Air Canada to provide that information and not other causes.

The Chairman: I am not sure, because it is a little vague, but I think the act bears out what he says. It does not specify that it is failure to get the information from the person who is accused. It seems to apply to both parties. That is what you are getting at, is it not?

Senator Tkachuk: He still must go to the regulatory board to get it.

The Chairman: I am just clarifying it.

Senator Tkachuk: They will ensure that the marketplace is not hurt. I understand your fear because you think, being the dominant carrier, you will be the object of a many of these complaints.

Mr. Baker: Yes. The other issues we have to deal with is, as an order is extended 20 days, 30 days, another 30 days and to the 80 days and beyond, the threshold test that the commissioner should be passing to satisfy the tribunal that the order should be extended should be higher. There should be an absolute likelihood of harm test required of him, and the harm potentially to the complainant as against the harm and consequences being suffered, by Air Canada in that case, needs to be balanced. We do not think the drafting has that right.

Senator Tkachuk: He can order a cease and desist order now, but he must go to the regulatory board. Is that correct?

Mr. Baker: No, he does not. Currently, he can order a cease and desist without going to anyone.

Senator Tkachuk: Has he done it?

Mr. Baker: Yes, once, on a CanJet complaint.

Senator Tkachuk: To what flight did that relate?

Mr. Baker: That was a series of routes in Eastern Canada: Halifax-Ottawa, Halifax-Toronto and, I believe, Ottawa- Windsor.

Senator Tkachuk: What problems did you have with that cease and desist order?

Mr. Baker: We were precluded from putting in the pricing that we were suggesting on those routes. Interestingly enough, the commissioner did not, in that case, extend the order for a full 80 days. He withdrew it before the expiry of that time. After discussions with the commissioner, we did not reinstate the pricing that was the subject of the matter. There was a substantial chilling effect.

Senator Tkachuk: If you have either the 67 per cent, as you say, or 78 per cent, as the document says, of the marketplace, is the purpose of Tango to maintain the market share you already have or to increase the market share you already have?

Mr. Baker: It is to address what customers are telling us they want. What was happening in the market well before September 11 was a flight of business traffic from the system. That was not only our experience, it was worldwide.

We have recognized that, and we have reconfigured a number our aircraft to provide the lower fare variant of the industry. That is, as I was saying earlier, the direction that the industry is following, and we wanted to follow with it and capture part of that market.

Tango was introduced in the context of Air Canada having dramatically reduced its capacity. We announced the reduction originally as up to 20 per cent domestically. Within that reduced envelope of, say, 80 or 85 per cent, we introduced Tango within that remaining configuration. In other words, we took out some main line flying on certain routes and put in Tango on those routes.

Senator Tkachuk: I know that you are very concerned about the ability of the commissioner to do what you say he is going to do. I know you worry about it, but I find that in a marketplace where you hold say 78 per cent or 67 per cent, or whatever the number is, if you are stopped from having a Saskatoon to Edmonton or Saskatoon to Calgary to Vancouver flight, it is not that big a deal, is it?

Mr. Baker: I would suggest it is a very big deal. Again, if you want us to quantify what a big deal it is, we would be happy to put that together for you. Do not leap to a conclusion that, because there are some short haul routes of not the largest urban centres in the country, the impact of those cease and desist orders would not be significant. It absolutely would be.

Senator Tkachuk: It would also be a big deal if you were demonstrating anti-competitive behaviour, would it not?

Mr. Baker: The big deal about that is what the process is intended to flush out. It is before the tribunal, ultimately, that the determination is made whether we are dominant, whether we have engaged in a practice of anti-competitive behaviour and whether that behaviour has resulted in substantial lessening of competition.

The Chairman: Thank you, gentlemen.

We have with us Mr. Nick Mulder and Mr. Lawson Hunter.

Gentlemen, for the record, I believe that you do have some connection with Air Canada. Would you just say what it is? Will both of you make a statement?

Mr. Nick Mulder, Principal, Global Public Affairs: We will explain why we are here. We both want to deal with one or two issues that have been raised. We realize that you may be short of time.

The Chairman: Do not worry about the time.

Mr. Mulder: In terms of my connection, for the last three I have had my own consulting firm. One of my clients is Global Public Affairs, which is a policy, advisory and government relations firm in Canada. Among their clients is Air Canada. I provide advice to Global Public Affairs and Air Canada on various policy and government relations' issues.

The Chairman: Do you have a contract with Air Canada?

Mr. Mulder: Not directly. I have a contract with Global Public Affairs which is one of my clients.

The Chairman: Directly or indirectly, you have something to do with Air Canada.

Mr. Mulder: I benefit financially through Air Canada being a client of Global Public Affairs, yes.

Mr. Lawson Hunter, Q.C., Partner, Stikeman Elliott: I have been involved with Air Canada on competition and regulatory issues since 1999 when the restructuring started. I have continued as their competition counsel since that time. I appeared as a witness for them before the House of Commons committee.

The Chairman: Thank you.

Mr. Mulder: Both Lawson and I come from small towns in New Brunswick so we enjoy the opportunity to appear before the Senate. It is an important forum.

I want to deal briefly with three issues that have been raised in case we run out of time. First is the question of why a number of airlines in this country have not done well. From my experience dating from the early 1970s in transportation, on and off, I believe the fact that most airlines have not done well has nothing to do with their competitors; it has to do with their management model, whether they stick with it or whether they divert from it.

For example, Greyhound had a business model that everyone questioned, and it did not work out. Routes Air had a model that did not work out. Nation Air had a business model from which they diverted and got into difficulties. There are a number of companies like that.

I have a lot of admiration for WestJet. It started in 1996 at a very low level. They had a basic business model and they stuck with it. They are doing very well despite all the competition, and despite the shocks in interest rates, energy prices, September 11 and so on. They are doing well because it is well managed. They have stuck with their business model.

Second is the issue of dominance. In the airline industry internationally, you should never aggregate broad numbers. Very few small and medium-sized cities or communities in North America or in Europe have more than one airline. Looking at system-wide dominance figures does not help very much because even in some countries, such as the U.S., where one airline may have only 25 per cent of the national market, but in certain city pairs, that airline may have 80 or 100 per cent of the market. Always look at city pairs.

When you are assessing competition in the short haul, do not look only at airlines, look at roads, rail and bus because people have a choice. CanJet or WestJet do not operate as much in Eastern Canada because distances are shorter. I have relatives in New Brunswick, and if they want to go to Montreal, they hop in a car and drive there as opposed to taking an airplane.

When assessing dominance, look at the city-to-city picture, and consider all other competitors. In most cases, there is not more than one airline in most communities neither anywhere in North America nor in places to which I travel, such as Indonesia and Malaysia.

Third, we have to focus on the passenger. I recognize that we have to be sensitive to the roles of the airlines, to their viability, and to the degree of competition, but the bottom line of transport policy should always be consideration for passengers and shippers. If it is good for them, it must be good for the country at large. With deregulation, that has been lots of competition, off and on. It goes up and down. However, overall, passengers benefit.

The notion of regulating, using a competition bureau or a bunch of civil servants in Transport Canada — I was one - does not turn me on because, despite the fact that many are smart and capable, you cannot regulate this industry. It moves too fast.

The Chairman: For the record for the senators, could you say exactly what you were in your previous incarnation?

Mr. Mulder: I spent from 1975 to 1987 as an assistant deputy minister in Transport Canada including working with Mr. Mazankowski and Mr. Axworthy in deregulating the industry, then I came back in 1993 as deputy minister for about three and a half years working with Doug Young and David Anderson. I left in the spring of 1997.

Mr. Hunter: For those who do not know, I was the director, as it was then called, or the equivalent of the commissioner of competition, in the 1980s. I like to say, probably correctly, that I was the principal architect of the amendments to the act that were passed in 1985 and 1986, which are really the fundamental parts of the bill about which we are now talking.

As was the case with Mr. Mulder, in my capacity as director at that time, I had significant involvement in the deregulation of the airline industry and other industries because the bureau has always encouraged less regulation as opposed to more. We could get into a discussion about regulation as you did with Mr. Baker. As you know there are different types of regulation.

I would like to make a few general points about competition policy, mainly about airlines, but I am also willing to answer any questions you have about any part of Bill C-23.

My first point is that process is substance in competition policy. There are very few contested cases under the Competition Act. Not only in Canada but also in the anti-trust regimes around the world, the investigator has enormous discretion because the business community does not want to go to court for protracted, lengthy and costly legal proceedings. It is extremely important that we get the due process right, and that we have the appropriate level of accountability in the system because, in many instances, the process ends up being the final result.

In my view, the amendments proposed in the bill to sections 104.1 and 103.3 are some of the most significant amendments to competition policy that have ever been proposed in this county. They provide interim powers in a situation where very often the law is unclear. They can easily become final results, because the business community, when it is faced with interim powers that can go on for some period of time, may say, ``I am not going to fight this. I better just give in.''

When considering harm, you must look not only at harm to the parties that are trying to compete against an incumbent or a dominant player, but also the harm to the consumer if the consumer is denied the benefits of competition, even for a short period of time.

In my view, as well, the tests that are used in 104.1 and 103.3 to allow for interim orders are not well thought out, they are not balanced, and they are not good competition policy. I do not disagree with the notion that there needs to be some interim power, but you must be extremely careful in the balance that you strike between the substantive test and the process that is being used here, because as Mr. Mulder said, the consumer is the primary concern of competition policy. Raising prices to consumers by denying incumbents or anyone from offering low prices is almost never in the public interest.

My second point is that competition in the airline industry is inherently competitive. Around the world, we see frequent entry and frequent exit. We see frequent entry by little guys, obviously, and we see frequent exit by large players. In the United States, we have had Continental restructure twice. Since September 11, throughout the world, very large carriers have gone out of business.

There was a question about movable assets. The fact that assets are movable in the airline business makes it competitive. Suppose I have an airplane on Route A-to-B and I am not making much money. If I have a fixed plant where I am making steel, I cannot pick that plant up and put it somewhere else where it might make a better return, but in the airline industry you can do that, and that is what makes it so competitive.

You need to be careful about very simplistic notions of market share, or dominance for that matter. To be honest, Mr. Beddoe should know better. Mr. Mulder raised the issue of market share from a competition point of view. You have to add a geographic dimension. Talking about Air Canada's overall size tells you nothing about the nature of competition between Regina and Toronto. The fact that Air Canada is large in Eastern Canada does not help someone in Regina. You have to look at market share city by city. As we know, if you look at market share on that basis, you will find that WestJet is the dominant carrier on most routes in Western Canada.

You also have to be careful about what measurement you use. Revenue obviously can inflate market share. I think Air Canada itself sometimes get carried away, as most businesses do, wanting to say it is big and powerful. You must look much more narrowly geographically and come up with the appropriate notion of market share.

With respect to harm to Air Canada, I want to make reference to the order that was issued in the CanJet case. The harm to Air Canada by the issuance of an inappropriate order is immediate. If an order is issued preventing them from charging a low price, they will lose passengers. They will lose revenue. That is precisely what happened when the order was issued in the CanJet case. The financial harm to Air Canada would be significant, and it would lead to a self- fulfilling prophesy on the abuse of dominance rules.

Air Canada has a certain amount of capacity on a route. If a new entrant charges low prices, Air Canada cannot do that. Passengers then migrate to the new competitor and Air Canada is left with empty seats. All of a sudden they are caught in a situation where their revenues are not covering their costs, and then the commissioner could say, ``You have to take that capacity off as well.'' It is a one-way supply management scheme, and it is always against Air Canada. The harm is immediate to Air Canada financially, but the harm to consumers should be the most important issue. Consumers will no longer have a choice or low prices.

Senator Tkachuk: The question of market share bothers me. Both of you were senior officials in the bureaucracy, working on transport policy and competition policy. If you were advising Minister Collenette at the time he changed competition policy to allow Onex to purchase both Air Canada and Canadian, which I think at that time would have delivered one company at least 80 per cent but probably 90 per cent of the market, what would you have told him to do?

Mr. Mulder: This is partly because of hindsight, but certainly at that time a number of us were keeping track of it from the outside and wondering whether the better model would not have been to let Canadian Airlines just suffer the consequences of lack of profitability as opposed to encouraging a merger. The process got started, and there was a competition between Onex and Air Canada. They outbid one another. While Air Canada was overall a good airline, they have built-in burdens that make it hard to become viable in the long run, although I think they will be.

I commented at that stage that Eaton's was not doing well either, and it closed its doors. Over 25,000 employees lost their jobs. I realize it is difficult and disruptive to have an airline disappear or go bankrupt and so on, but an airline can go through bankruptcy proceedings and revive.

That is from a broader perspective. I realize that the community impacts, the employee impact and the political dimensions of that decision were complex and, ultimately, that is why the government decided to support a merger of one kind or another.

Mr. Hunter: From a competition law point of view, the commissioner was in a difficult position in terms of the acquisition of Canadian. If the Department of Transport had not intervened in this transaction and it had only been reviewed under the Competition Act, I think that the commissioner would have had to let it proceed because Canadian was failing. As you may know, under the merger law, there is a failing firm defence, in essence. If a company is going to go out of business anyway, then you might as well allow a competitor to buy it because at least you will preserve jobs. The commissioner was in a difficult position. If it had just been the commissioner, chances are Air Canada would have ended up with less onerous restrictions on them than they ended up negotiating with the Minister of Transport.

Senator Tkachuk: It was the position of the government that they wanted the carrier to have a certain percentage of the market.

Mr. Mulder: They wanted a merger, and they wanted to protect the services and the employees as much as possible. I doubt whether the objective was to have the 90 per cent market share. We can get into numbers, but if you look at available seat miles, it was about 80 per cent.

Mr. Hunter: The undertakings negotiated with the commissioner were designed to encourage entry. Air Canada, for example, had to make Aeroplan miles available to small new carriers. It had to interline with small carriers. It had to make facilities available to them at airports. The government's and certainly the bureau's view was to encourage entry and to impose restrictions on Air Canada so that could happen.

Senator Tkachuk: If Air Canada continues to increase its market share from, say, 67, 73, 78 or 80 per cent, so that it is a dominating carrier, which is possible with about 85 per cent of the market, as policy people, what actions could the government take before this proposed legislation to change that around?

Mr. Mulder: To go back to city pairs, I do not think it is likely that Air Canada could increase its market share. If anything, it will go back down again as other people get into the business.

I would like to touch on two areas. In terms of increasing market share, if it means that there is a build up in traffic and at the same time fares are low and services are good, why should anybody worry about that? If, in Atlantic Canada, fares are lower, more seats are made available, the service is improved and the operators still make money, why would anybody object?

In the last six years, I have been associated with the Atlantic telephone companies. They still have 92 per cent of the long distance telephone market, despite the fact that the long distance telephone market has been deregulated. That is because they provide good service. They are innovative and have a low cost. AT&T and Sprint go in there, but they do not do very well.

Senator Tkachuk: It is the fear of them going there that is important.

Mr. Mulder: I know. In Atlantic Canada, anybody can start an airline at any time. If one sticks with a WestJet model, one may do well. Once one is in there and goes after the image of Air Canada, one is bound to deal with competitive issues.

The other area concerns policy. The policy should not be based on having a lot of smart civil servants in the Competition Bureau and the Canadian Transportation Agency who regulate the industry. That does not work. Pope Alexander could not split the world and make it stick. The Competition Bureau and the Canadian Transportation Agency cannot decide where competition should start or stop.

We should continue to develop a long-term policy, as we have seen happen around the world, in North America and Canada, and open the industry up further. Allow people to fly from Toronto to Chicago to Vancouver. Allow airlines such as Cathay Pacific, when they arrive in Vancouver and are continuing on to Toronto, to pick up people in Vancouver. Allow more liberalization of transborder traffic. Have a North American free area. Deal with the problem of gates at major airports. That is a bigger problem at times in terms of generating competition than the fare structures.

Pursue those policies. That is what we should work at over the next three or four years, not giving more powers to a group of professional regulators. To measure avoidable short-term costs is an accountant's nightmare and a lawyer's delight. I have been through it. It is impossible. I spent three years in universal classification of accounts in the railway industry. That is why my hair turned grey sooner than it should have. It led to nothing. It was done to control railway freight rates. Senator Gustafson knows about that. It does not work.

It will not work to give more powers to the Competition Bureau and the Canadian Transportation Agency to regulate market share. By getting Air Canada out of small communities and replacing it with another airline is just to replace one monopoly with another. How does that benefit passengers?

Senator Tkachuk: WestJet has benefited the passengers in Western Canada, and they fly to the same cities as Air Canada. They are very good.

Mr. Mulder: They started off well in 1996. They have done it step-by-step. They stuck with the business model. They have very good service and good management. They have a dedicated product. The model works, as long as one sticks to it.

WestJet is the perfect example that transportation policy works and that competition is alive and well in the airline industry if one has good management, a good business model, and provides good, steady service.

Senator Tkachuk: What is Air Canada's business model? It has been losing money.

Mr. Mulder: It is changing its business model.

Senator Tkachuk: What is it trying to be?

Mr. Mulder: Everyone realizes, internationally, that the high end of the market — the business class and the full-fare economy — is no longer the way to go. People do not want it. Something like 70 to 75 per cent of passengers are now on discount tickets in one fashion or another. People are taking advantage of discount fares. They want a lower-cost model.

Travelling on an airplane used to be considered a luxury, a one-time event. Now it has become a basic commodity. I want to get on a plane and go from point A to point B. I do not want fancy services.

Everyone is moving towards the low end. Over the last two years, Air Canada has been moving toward the lower end of the market. That is why it is getting into areas where the WestJets of the world are.

What is wrong with that from the passenger's perspective? Focus on the passenger.

Senator Tkachuk: There is nothing wrong with it, providing that it is fair and not predatory.

Mr. Mulder: WestJet is a perfect example. Even though Canadian Airlines and Air Canada were around, and despite the fact that interest rates and oil prices have been up and down, and September 11 came along, WestJet has stuck to its model and has done well. I give Mr. Beddoe and his team full credit. He is proof positive that when one knows what one is doing, one can do well in the airline industry.

Senator Poulin: Why then would Mr. Beddoe come here and be in such strong support of the amendments to the Competition Act that are proposed through this legislation?

Mr. Mulder: I do not know.

Mr. Hunter: I have speculated about that as well. He and WestJet have been very successful. WestJet has a bigger market capitalization than Air Canada. As you may know, Southwest, on which WestJet is modelled, has a larger market capitalization than all five of the next largest carriers in the United States. This model works.

Why does he come here, when he has, as Mr. Mulder said, stuck to his knitting, as it were, and done it the right way and is gradually but inexorably extending the service throughout the country? He sees the strategic advantage in it. If he can use the government and regulatory policy to his commercial advantage, why would he not? It is a free country.

Senator Tkachuk: Both airlines are becoming Southwest-type airlines.

Mr. Hunter: I do not think that will happen. They are moving in that direction. I think Air Canada deserves credit for recognizing this shift in the market to the no-frills, low-priced segment earlier than some of their major international competitors.

As you may know, two or three years ago British Airways announced it was abandoning the low-priced part of the market. Since September 11, it has done an 180-degree about-face. It has to compete.

I find it troubling to hear, when somebody enters a new market and lowers the price, that Air Canada should not be matching the price. What is it supposed to do? It is a high-cost network carrier. We all know that. We know its costs are higher than WestJet's. We know it has unions that have rights. We know the country expects it to offer multiple levels of service and be the flag carrier internationally. Is Air Canada supposed to sit there and say, ``We cannot lower the price, so we will lose that share of the market''?

If you want a model to drive Air Canada into bankruptcy, then that is the model.

Senator Tkachuk: Should Air Canada, because it has these higher costs, operate at below cost?

Mr. Hunter: Air Canada must figure out how to lower its costs so it can make money. That is part of what Tango is about, of course.

Senator Kroft: The business of mobility of assets is interesting. I was involved in an indirect way with another client when mobility of assets was the market advantage that everybody had, whether it was railways or supermarkets or whatever. We had this conversation with the commissioner.

I promised an earlier witness that I would come back to you on the question of how quickly the commissioner can get to the tribunal. We have been all over the park and we keep hearing that it takes too long, and that there has to be an expedited process. Can you give us some comfort on this matter?

Mr. Hunter: You have to remember that even under the proposed sections 104.1 and 103.3 there is a possibility of an ex parte application to the tribunal in extraordinary circumstances. The other side is not being heard. However, the tribunal has demonstrated a desire to move quickly on these matters generally. The commissioner in merger cases is able to get interim orders, typically of a hold-separate-type nature. I do not know whether you are familiar with that notion. They are usually given over the phone, after an application, and often on consent. I do not think it takes very long. You must couple the test that the tribunal has to look at with how long it will take them to make a determination as to whether to issue the order or not. I feel that the test, as it is currently structured, is too low and is inappropriate; however, it is not a difficult test.

Senator Kroft: Could you describe the test to get to the tribunal, as you understand it?

Mr. Hunter: The test in section 104.1 today states that the commissioner must commence an inquiry. That is within his power. He must consider that, in the absence of the order, injury to competition that cannot adequately be remedied by the tribunal is likely to occur. That is a good test, because it talks about the effect on competition.

However, paragraph (ii) troubles me. It states:

a person is likely to be eliminated as a competitor, suffer a significant loss of market share...

What is competition about? Some competitor gains market share and some competitor loses it. The next phrase is worse. It is:

...suffer a significant loss of revenue...

What is competition about? It is about who will get the revenue. If Air Canada matches a new entrant's fare and they say, ``If you hadn't lowered your fare I would have had more revenue. I have now lost revenue.'' The next test is an easy test to meet, namely:

...suffer other harm that cannot adequately be remedied by the Tribunal.

Financial harm cannot be remedied by the tribunal. The test is too low.

The first time the commissioner issued an order, in a case involving CanJet — and Air Canada appealed it to the tribunal — the court found that he had issued it improperly. The fundamental concern is that there is no check on this official. The one time the commissioner used this power, the tribunal found he issued the order improperly.

Senator Kroft: If there is a good, quick alternative and established jurisprudence in both the procedure and the broad principle, why do you believe the government is finding it so necessary to take this extraordinary measure?

Mr. Hunter: That is a good question. From a regulatory or a competition policy point of view, I cannot see why it is necessary in the airline business. As Mr. Mulder has said and we have said, this industry is probably one of the most inherently competitive businesses that exist. Why would one need extraordinary measures to single out the airline industry when you have telephone companies and daily newspapers in cities that are monopolies? We know they are. You also have Microsoft, which has over 90 per cent of the market and the government is not taking special measures against them. They are far more difficult to enter. I do not understand it. If you are asking my personal opinion, it is politics. It is not good policy. It is just that it is nice to beat up on Air Canada. That is only the thing I can see.

Senator Kroft: I wish to shift you to another ground that worries me even more as a matter of legal process, namely, the mutual legal assistance provision.

A former colleague of yours, Mr. Addey — and others were too — was graphic in his presentation. The absence of notice was a portion that struck him as was the general ex parte nature of this. He took us through examples of things that could happen. In his evidence, he envisaged foreign officials arriving in a Bombardier office and having access to third party supplier documents. It was a horrendous story. We were cautioned not to listen to Mr. Beddoes because he is arguing only one side.

Why are we taking these mutual legal assistance measures? Is it necessary to conform to the practice of trade partners on the other side?

Mr. Hunter: The global anti-trust world is converging. With globalization, or whatever you want to call it, we are seeing more and more transactions and mergers. We are seeing more global behaviour such as that of Microsoft. Yet, our competition and anti-trust laws are national. It is in the interest of the business community — and certainly they would say that in the merger side — that we have more harmonization with the application of these laws. A degree of cooperation between enforcement agencies is a good idea. As we get into more conversions, we will have more of that.

In my view, Canada must be careful that we do not become the white knight in shining armour and do our own business a disadvantage in other jurisdictions. Some points worry me about these provisions.

First, there is the extent to which information is made available from Canada. I am worried about the United States, to be honest, because they are our major trading partner. As many of you know, they have accessible, damage actions in the anti-trust area, which are much more vigorously used in the United States than in Canada. Their lawyers are more rapacious than Canadian lawyers. There is a whole host of private plaintiff's lawyers in the U.S. who bring class actions at the drop of a pin.

I had a client in Canada who suffered as a result of this. Information that goes to the United States and leads to grand jury investigations becomes public knowledge quickly. Almost immediately, class actions are started in the United States. Grand juries may never go anywhere, but once these things start, it takes years and millions of dollars to do away with them.

There is no real reciprocal notion of that in Canada. You are potentially exposing Canadian business to a legal regime that is more costly to them than would be the case of the clients came to Canada. That troubles me. We need to be careful that these provisions do not allow the Canadian government to start whistle-blowing on Canadian companies where there is no enforcement issue in Canada. If Canada were investigating the same behaviour, then there would be a real interest in cooperating. You are facing it on both sides of the border anyway and we might as well get the facts out and get on with it. However, if you are not, you need to be more careful.

One problem in the provisions of the bill, in the proposed section 30.01, is that the substance is not in front of you. The process is there but what will happen is not there. For example, the proposed section 30.01(c)(i) states:

the circumstances in which Canada may refuse, in whole or in part, to approve a request...

That is the key. However, we do not know what that is. Presumable, if there is an agreement, there must be consultation about the agreement. That is the core, in my view. When can we refuse to cooperate?

Mr. Addy made the point that you might be subject civilly here and criminally somewhere else and that that seems inappropriate. I share that view. We must be careful about that.

Senator Kroft: The absence of notice was also an issue.

Mr. Hunter: I am not quite as strong as Mr. Addy is about that because you do have to be careful about giving notice for fear that, as we have seen in Enron, all of the sudden, the documents are not there any more. There is another side to that coin. However, I think you could put in some test that said you would have to be on notice unless there was a fear of destruction of documents or evidence.

Senator Kelleher: If we eliminate section 104.1, in your opinion, can this bill function reasonably well?

Mr. Hunter: I have absolutely no doubt about that. I would like to give you a little of the legislative history of section 103.3.

Senator Kelleher: I tried to dig that out but I met with no success, so go ahead.

Mr. Hunter: Section 104.1 passed, and Mr. Baker gave you the story about that. Air Canada objected to it at the time for the reason, it is saying now, that it seemed inappropriate to give the investigator the judge role too. The bar opposed it at that time, as did some others. However, it passed and we were in the heat of the aftermath of the merger and there was the concern about Air Canada's size.

The commissioner then started a new round of consultation on amendments to the act. He used the public policy forum to go across the country and find out what was in need of amendment, et cetera, and in that package they proposed that this power in 104.1 be available to the commissioner all the time for all industries, as it is now. The reaction of the public policy forum on that consultation was almost universal. It was that that was a bad idea and that it was inappropriate to give the commissioner the power to be judge. That is why we see it as it is in clause 103.3. Everyone recognized that this was not appropriate.

Here we were, with a bill that had already been passed and it was left there. In my view that is what happened.

[Translation]

Senator Poulin: We have heard from a number of witnesses and I was struck by the fact that many of them support the bill, while many more oppose it. I was surprised to learn that the House of Commons unanimously voted in favour of these amendments to the Competition Act. Earlier, you spoke of policy issues. However, no such issues arose in the House of Commons because all parties supported the bill. How do you explain that fact?

[English]

Mr. Mulder: I was not around when it was introduced. I understand it was introduced on December 4 when they were at the clause-by-clause stage. There was no substantive debate and no witnesses were called. I believe it was passed within a few days as part of the overall bill and then went back to the House of Commons.

Certainly one wonders — and I have been involved with a lot of legislation — whether there was due process. I do not know whether there was sufficient debate, or what the commissioner might have said before the committee convinced him that this was the best thing to do, but one would think, if he introduced amendments at the last minute, at least the onus would be on parliamentarians to hear evidence from different groups as to the pros and cons. One would think due process ought to be followed. I do not know what swayed the parliamentarians.

Senator Poulin: My question relates to an issue that was raised by several witnesses, and I ask it of you as you wear your hat of a former deputy minister, with your knowledge of the industry and of the evolution of the industry.

Many people have asked whether the Competition Act is the appropriate venue to ensure that the transportation industry operates successfully in a good, competitive environment. Could you tell us what, over the years, has happened to the enabling legislation of the CTA that you referred to earlier?

Mr. Mulder: Mr. Hunter is the expert on competition policy and competition law, but as I understand it, it is supposed to be broad-based, generic, applied to all sectors and not focused on a particular sector or a particular firm. I would fully agree with that. They should not be in the regulatory business. They should be ensuring competition.

During the late 1970s and early 1980s we regulated everything under the Canada Transportation Act. We still regulate many international bilateral agreements. Anything that is not agreed to by the parties is automatically excluded. That is another area that should be dealt with. The Canadian Transportation Agency, for all intents and purposes, no longer has a role in airline regulation. I agreed in part with Mr. Axworthy and Mr. Mazankowski, and later with Doug Young. I was one of the main people who was saying that they should get out of regulation. I have made a career of being a civil servant. In the first 15 years of my career as a civil I used to believe that the government could do no wrong. I concluded after about 15 years that the government quite often could do a lot of harm.

One area that we are not good at, and not because of lack of talent or expertise, is the regulation of any sector. If the government tries to regulate or micro-manage the energy sector, the telecommunications sector or the transportation sector, it cannot win. The government does not have that kind of capacity. It is much better to rely on good market forces to do it well. Earlier I suggested that we proceed with the whole notion of dealing with open skies by liberalizing, that is, having five freedoms and six freedoms and whatever else. That is the way to go. As long as you have good entrepreneurs who know their business, like WestJet, they will do quite well.

Mr. Hunter: I will supplement that answer on the transport agency side. There are still provisions in the CTA that allow them to review prices on monopoly routes, and that was amplified at the time of the merger because it gave the agency that ability on their own initiative, not just by complaint.

Typically, if you deregulate an industry, your concern is whether you will end up with a monopoly, That is why when the telephone business was a monopoly there was rate regulation. When it moved to competition then it changed, but there is still some power to deal with the quantity and quality of services provided on routes where there is only one carrier.

Senator Poulin: When you arrived you said you were both from the East. Being from Sudbury, I know that, by your definition, Bearskin will be happy to know that it is the dominant airline in Northern Ontario. Since many regions of our country are not as accessible as others, do you not agree that certain necessary services may have to be offered by publicly funded companies?

You are saying that, in the air transportation business in our country, total deregulation and free competition — no matter where the dominant carriers exist — will ensure appropriate service to passenger. You were saying that the bottom line is the quality of service to the passenger at a reasonable cost. Do you think that we can survive as a country with those terms?

Mr. Mulder: Your question is excellent because it is fundamental. I cannot think of any small community in this country of 5,000 to 10,000 people — although I suppose there might be some communities of 100 people — that does not have access to an airline within a radius of about 50 kilometres. I was even thinking of the place where I spend a lot of time now, Perth. I can go to Kingston and board an airplane there. There may be some remote areas in the Far North. However, even if you go to Pangirtung — I have been there several times over the last 15 years — there is always an airline.

How high the fares should be is another matter. There are other considerations as well. The property taxes are a lot lower. If it came to a choice, would people rather have lower fares or better schools and medical services? I used to be involved in the hospitals and I know that many people in these remote areas want to have a surgeon in every community. Why are low fares for air transportation for many small communities more important than a lot of other basic services they want? If the government is going to subsidize it, maybe people would rather have improved medical services as opposed to reducing airfares when only 10 per cent of people would ever fly on a regular basis.

Senator Poulin: I am not suggesting low fares, I am suggesting reasonable fares because, for people in Northern Ontario, air transportation is essential. You told us that people living in the East will choose to use their cars, or to take the train or the public bus. In Northern Ontario, there are almost no passenger trains, so choices are limited.

Mr. Mulder: I would not call Sudbury isolated by any means but, for people who live in Moosonee, the only way to go is by air. An airline operates there.

In terms of business models, one airline that I admire a great deal is First Air. They have been in business for over 20 years and they always make money because they stuck to their basic model.

Senator Poulin: I am not referring to isolated communities but rather to regions that absolutely must deal with Toronto, Montreal or Vancouver to do business, and therefore must have access by air at a reasonable cost. There is also the practicality of doing that business. They need to be able to fly in and out in one day. I find it interesting that, in your definition of stability in competition, you favour and support totally opening up the skies.

Mr. Mulder: Yes, to some extent because Air Canada has been obligated to serve many small. Perhaps if Air Canada were not involved so much, then it would encourage more low cost operator to take on those routes. This might actually increase the frequency of service and at the same time reduce the burden on Air Canada. Every community is not necessarily well served by having a dominant carrier operate in that marketplace.

Senator Poulin: Could you tell us, Mr. Mulder, based again on your past experience, how this proposed section 104.1 would work in practice?

Mr. Mulder: I am not the expert on that.

Senator Poulin: Could you walk us through it, Mr. Hunter?

Mr. Hunter: Are you referring to section 104.1 or section 103.3?

Senator Poulin: The proposed section 104.1.

Mr. Hunter: Except for who makes the decision, they are very similar. There is one other difference that I will point out. I am sure this has happened a number of times in the bureau, but let us take the CanJet case. CanJet starts up; they enter certain markets; Air Canada responds by lowering prices; and CanJet complains to the bureau and says that they think this is something that the bureau should be investigating because they think it is improper under the general dominance section. The commissioner then engages in a fact-gathering exercise to find out what is going on and how they are being hurt, what Air Canada has done, and what the impact on Air Canada would be. The commissioner, as you know, has stated that one of his concerns and the need for the section is the difficulty of gathering information. As Mr. Baker said, Air Canada has some difficulties with people being able to use that strategically to delay and prevent Air Canada from responding.

The commissioner gathers this information and at some point he must decide, as quickly as he can, whether he has sufficient evidence to meet the test that I just went through. Today, if he thinks he can meet that test, he can just issue an order, as he did in the CanJet case.

Then the question is: What is the nature of the order? In that case, Air Canada had something called a L14 east fare and the commissioner decided that they could no longer issue that fare. That left Air Canada wondering what to charge. That is part of the problem. However, that was the nature of the order.

If it were done under 103.3, the commissioner would again gather the evidence and then go to a judicial member of the tribunal, who is a member of Federal Court assigned to the tribunal, and make an application to get this order, using the same test, unless you amend it. At that point the person against whom the order is sought has a right to be heard. The law also says that anyone else can be heard too.

It is interesting that under the proposed section 104.1 the commissioner has no obligation to give Air Canada or anyone else — Bearskin — who could be the subject of this order, a right to be heard. It seems extraordinary that, without even asking what your view is, an order could be issued. That is basically the process of the fact-gathering exercise.

By the way, you must remember that it does not happen overnight. This is why this notion of two to three days is really a red herring, as Mr. Baker said, because to bring a case together the commissioner must gather some facts, and you do not do that overnight. I do not know how many days it took in that case. It could take a few weeks.

Mr. Mulder: Four to five weeks.

Mr. Hunter: It does not have to take that long. In that case that is what it took, but it does not necessarily take that long.

Senator Tkachuk: When I stepped out for a minute you talked about the fact that this bill was political and you gave the example of Microsoft. Could you clarify that for me?

Mr. Hunter: I want to clarify both. I am not saying it is political in any big ``P'' political sense; I am just saying it is a question of what the public will tolerate. Microsoft was really a reference to the question of: Since Air Canada is so big should we not have special rules for it? Mr. Mulder and I made the points that there are lots of businesses and industries in this country that have a larger market share than Air Canada in a properly defined market. There are no special rules for them, and I said that I suspect Microsoft is one of them. Most major cities only have one daily newspaper. There are no special rules for them under the Competition Act. They apply the general rules. My additional point was that entry to those industries is far more difficult than it is for airlines.

Senator Tkachuk: The problem the government had with trying to show that Microsoft was behaving in a monopolistic way was that their prices always decreased. They have made office products software available to everyone. On that same basis, I would like you, if you can, to name one time when Air Canada lowered its prices when it did not have to do so.

Mr. Mulder: The recent rate of special fares for May to June is, perhaps, an example. Air Canada has seat sales all the time. Perhaps international competitors also do this, but whenever Air Canada makes projections, taking into consideration the seasonality of the business, the fixed costs and the number of planes available, it will often offer seat sales. If you do not have the prospect of making more money, why would you reduce your prices?

I have three brothers who are in the meat business, and I do not think that any of them would reduce their meat prices if they did not have to, as long as the customers still showed up.

Senator Tkachuk: That is exactly the point. They did not have to.

Mr. Mulder: That is why people are in business.

Senator Tkachuk: That is why we are in the business of preventing monopolies — so that they do not do that.

Mr. Mulder: With all due respect, senator, Air Canada is not a monopoly. I told you already. Look at market share. In Western Canada, WestJet has more market share than Air Canada. People can travel between Toronto and Montreal and other cities by train or car. If you are not in a hurry, you can take a charter flight or use other airlines. Air Canada is not a monopoly.

Senator Tkachuk: You could walk.

Mr. Mulder: I am just saying that it is not a monopoly.

Mr. Hunter: The introduction of Tango on routes where there was no low-cost competition is certainly, in my view, an example where Air Canada was responding to changing public demand to provide a low-cost service. It was not done in response to the entry of a new competitor.

I do not want to bore you with the economics of the airline business, but it is true that there is differential pricing in the airline industry between routes where there are monopolies and where there are not.

I will give you an example of how that is the nature of competition. When I was the director of the competition bureau, Loblaws expanded their superstores to Western Canada. Safeway, as you probably know, was the dominant supermarket in Western Canada. They were everywhere. They had been attacked under the provisions of the Competition Act. Loblaws decided to move into Saskatoon so they built one of their big stores in Saskatoon. However, unfortunately, they did not build one in Regina. What happened was that Loblaws lowered their prices, that is their model, and Safeway in Saskatoon responded. I was inundated with complaints from Regina demanding that Safeway lower their prices in Regina. They were responding to competition, and that is what the market is all about.

Senator Tkachuk: I understand what the market is all about. You do not have to explain that to me.

Mr. Hunter: I am saying that you respond to the level of competition.

Senator Kroft: Earlier someone said that they were uncertain why Mr. Beddoe had been here because he is doing so well. He has added 20 per cent to the bottom line. That raises another line of questioning that will be important for us to think about. He told us that he is not here for himself but for all the people who want to start up but cannot get the capital to do that because of the circumstances of the industry.

Mr. Hunter: I would respond to that in this way. There was a newspaper report about a month ago that there are currently nine new airlines on the drawing boards in Canada. You might ask yourself who is putting the money into this business if you look at the rate of return in the airline business in Canada, and anywhere around the world, and compare it to the rate of return on the TSE 500. You will find that the airline rate of return is much below the average.

People are still putting capital into these businesses. We are seeing all kinds of new entrants. I do not see any evidence that the capital market is not providing the necessary capital to provide new airlines in this country.

Mr. Mulder: WestJet is in the process of acquiring new planes and expanding service. Air Transat is also expanding, and some of the existing charter carriers are thinking of expanding. There are ups and downs, and the margins in the airline industry are not very big.

If you look in the longer-term perspective, which is what this legislation should be all about, people do come and go. There is competition. There is a report coming out in two weeks from Transport Canada showing that, relative to the Consumer Price Index, fares in Canada in the last 20 years have been dropping.

Senator Tkachuk: Is that due to deregulation?

Mr. Mulder: There are a variety of reasons for that, including lower operating costs and deregulation.

The Chairman: Thank you gentlemen. You have been most helpful.

The committee adjourned.

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