Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 36 - Evidence
OTTAWA, Thursday, March 21, 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 11:05 a.m. to give consideration to the bill.
Senator David Tkachuk (Deputy Chairman) in the Chair.
[English]
The Deputy Chairman: Our first set of witnesses today is from the Canadian Auto Workers.
Please proceed.
Mr. Gary Fane, Director of Transportation, Canadian Auto Workers: Mr. Chairman, we would like to thank you for allowing us to meet with you today.
Our union has about 250,000 members. In the field of transportation, there are approximately 49,000. In the airline industry itself, we have 15,000 members. We also have another 3,000 employee at NAV CANADA. The folks at NAV CANADA are air traffic controllers and flight specialists who ensure flight safety.
Of the 15,000 who work in the airline industry, the majority work at Air Canada, as well as Air Canada's regional airlines. At least 40 or 50 per cent of them worked for Canadian Airlines.
We have a long history with both Canadian Airlines and Air Canada. In particular, at Canadian Airlines we had employees and members who used to work for Transair, Eastern Provincial Airlines, Nordair, Canadian Pacific Airlines, Wardair and Pacific Western. I list those because my colleague, Jim Stanford, will talk about the history of our union and the airline industry. You will note that many of the airlines I listed are no longer in business or have been gobbled up by one airline or another.
Most recently, we went through a difficult process merging Canadian Airlines and Air Canada. The people we represent are the folks who serve you at the airports. They are the people who take your telephone reservations. They consist of customer service employees.
The employees we have in the airline industry as a whole enjoy working in the industry. We represent many other small airlines, First Air as an example. We also used to represent folks at Canada 3000. If I can use the term, we corner the market on customer service people in the airline industry in Canada.
At Air Canada, we have between 8,500 and 9,000 members. In the regional airlines, we have 2,000 members. Our members in the regional airlines consist of the mechanics, the people who fix the airplanes, as well as those who sell tickets and provide customer service.
Most of our members enjoy working with Air Canada, although it has difficult for the 12 or 15 years that we have been involved to ensure that whatever company they were working for would continue in business.
We have a longstanding interest in the evolution of Canada's air transportation policy. Over the years, our members have suffered uncertainty, fear, and dislocation as a result of the particular nature of competition in the airline industry.
I realize that today you are not charged with the state of Canada's air transportation policy; I know there are other committees and ministers in charge of that. However, we have some serious concerns about Bill C-23. We feel the bill was handled in a hasty and poorly considered manner to address major structural problems in the Canadian airline industry.
We believe it would have been more proper, instead of using competition law, to handle policy making through normal transportation policy, in terms of the industry and what is good for Canadians, keeping in mind this is not America. We have 30 million people in our country and a vast geography that has to be covered.
At this time, for example, we are waiting for notice of what air carrier will go into small communities, as we have been advised that Air Canada Regional will soon be pulling out. When the airlines merged, the government and the airline had an agreement that the service would continue to small communities across the country. That two years is nearly up. We are in the process of bargaining for a collective agreement, and we were given notice that there are at least 20 or 30 communities that the employer will not be flying into soon. Of course, that puts a halt to collective bargaining.
Back to Bill C-23. We think the bill, as amended in the House of Commons, contains unique, arbitrary and far- reaching measures intended explicitly to limit the actions of Air Canada. It would be better to have a national debate on airline policy than to attempt what we consider a backdoor approach on this matter.
The measures that have been taken have been justified by the assumptions that the recent structural, operational and financial problems of Canada's airline industry are somehow the result of inadequate competition in the industry. This is wrong. Furthermore, this approach assumes that the problems can be addressed with policy measures that would facilitate or protect more competition in the future. At CAW, we take a different view. The economic evidence suggests increasingly that the free competition in air travel since 1987 has had destructive consequences for airline consumers, employees and investors alike. This evidence will be given by my colleague, Mr. Stanford, in his presentation.
As Mr. Stanford will explain, the 15 years since deregulation have been marked by repeated cycles of airline expansion, prolonged financial crisis and eventual re-entrenchment. Air fares have not declined on a substantive basis, the quality of airline service has clearly deteriorated, investor losses under deregulation have totalled over $3 billion and the industry as a whole has earned positive profits in just 2 of the last 14 years, since deregulation was implemented.
It is difficult for us to continue to negotiate quality collective agreements for our members if the airline is always retrenching. It is difficult for our members to provide quality service to the public if the airline is always taking two or three steps back because of the financial crisis the industry is in.
These negative outcomes cannot be ascribed to the anti-competitive behaviour on the part of Air Canada or any other market player. Instead, they reflect the inherent economy of air travel in Canada with its small population and diverse geography. Repeated efforts by government to artificially sustain more competition in the industry against the natural pressure to concentrate what the deregulated industry produces have not been successful. I started off earlier by listing all those airlines because they are no longer here. That was in the policy of the government's deregulation.
The efforts have included bailouts, special tax holidays and incentives for new entrants. However, they succeeded only in prolonging the agony of over-capacity, financial distress and uncertainty for passengers, workers and investors.
The measures contained in Bill C-23, which would protect new entrants from competition from existing players and from Air Canada in particular, fall into the same category: an attempt by government to artificially sustain a level of competition in the industry that would not exist without the active government intervention.
From the people we represent, we think there is something wrong, in particular if you are contemplating telling Air Canada that they cannot match fares. Many years ago, when we had two national carriers, Canadian and Air Canada, our union argued that you had to regulate capacity and that one company could not or should not be able to use predatory pricing to put the other out of business. In particular, Air Canada should not have been able to do that and should still not be able to do that. We do not think that is proper competition.
Finally, we find that Bill C-23 represents an arbitrary ad hoc approach to addressing the longstanding structural difficulties in Canada's airline industry. It is unlikely, given the experience of the past 15 years, that they will succeed in constructing an environment within which several competing airlines can substantially and productively coexist. It is more likely that they will inflict continuing economic damage on Air Canada while encouraging the entry of still more underfunded and unsubstantiated new entrants that offer temporary low fares but eventually go the way of dozens of other failed start-ups that preceded them.
The bill's explicit goal of reducing Air Canada's share of the domestic air traffic to 60 per cent or lower is arbitrary and will be economically destructive. We cannot figure out why you would want to do this to the national carrier. It makes absolutely no sense to us. It is the national carrier. We should concentrate on providing quality service at reasonable prices for the consumer.
We recommend the deletion from Bill C-23 of the special measures allowing for the administrative monetary penalties to be imposed on Air Canada by the Competition Tribunal. We also recommend that the injunction relief measures outlined in proposed section 103.3 of the bill be clarified to exclude from those procedures normal competitive pricing practices such as the matching of one firm's price by a competing firm, regardless of market share of the alleged offending firm.
We think that if you have two airlines — say, Air Canada and WestJet — where WestJet has a fare that is $300 from point A to point B, Air Canada should be able to match it. The consumer should then decide which airline gives them better service. Shame on Air Canada if they cannot provide better service, for if that is the case they will lose market share. However, we should not be saying to Air Canada that they cannot match a competitor's price. That makes absolutely no sense at all from a competition point of view.
Finally, we urge the committee to reject this hasty effort to design airline policy through the backdoor of competition law. If the government believes that new measures are needed to ensure a certain type of behaviour by Canadian airlines, it should design and implement those policies directly and honestly, with full consultation and consideration, rather than by sliding them through the backdoor by extraordinary amendments to a broader package of competition law.
I shall now ask my colleague, Mr. Stanford, to summarize some of the facts and figures in the airline industry with respect to competitive performance over the past 15 years.
Mr. Jim Stanford, Economist, Canadian Auto Workers: I should like to flesh out some of Mr. Fane's comments about the bill and our concerns about the arbitrary, hasty amendments proposed in the Commons before Christmas. I will highlight a few of the facts and figures contained in our longer brief, especially some of the airline industry's economic results as it operated under deregulation during the past 15 years.
The promise of deregulation is lower fares, greater efficiency, more air travel in response to lower fares and better, indeed, more productive, jobs for workers in the industry. That was the promise in 1987 when the industry was deregulated, and in some industries that is what deregulation has brought about.
However, in practice, in the Canadian airlines industry, the results have been quite different. The overall trend has been an irrational, inefficient and chaotic airline industry during those 15 years.
Under deregulation, the cost of air travel has increased in Canada. The financial losses to investors in the airline sector have been huge, and are getting larger. What competition has produced is not greater efficiency and lower fares, but rather a fruitless cycle of new entrants, rapid growth of capacity and a short-lived, financially unsustainable period during which competition drives fares down. This leads to financial distress, big losses and crises of retrenchment.
The research department at CAW has files on the crises of 1989, 1992, 1996 and 1999. Of course, we opened a new one last year after September 11 for the crisis of 2001.
Competition is part of the problem, not part of the solution. That is why we are here to ask provocative questions about those amendments to Bill C-23 that were intended to produce a heightened intensity of competition in airlines. We are asking if more competition in airlines is wanted. We think the answer may be no.
Competition is supposed to be good for consumers by reducing airfares. It is clear that the cost of the airline travel in Canada has grown since 1987. As measured by the airline transportation component of the consumer price index, the cost of air transport has more than doubled. There was a 110 per cent increase in the cost of flying, as compared to a 43 per cent increase of the overall level of consumer prices. In other words, the cost of air travel has risen more than twice as fast as other items in the consumer's bundle.
The cost of air travel includes various taxes and surcharges, some of which are levied by airports and government, not solely by airlines. While the direct cost of airfares from the airlines has not risen as quickly as the cost of the overall air travel, considering those other surcharges and taxes, neither has it decreased on a sustained basis. There is no evidence that airfares have decreased on a sustained basis in Canada under deregulation. Several studies have borne that out, most recently one from the Federal Reserve Bank of San Francisco, which compared airfares in Canada compared to the U.S. In fact, in the late 1990s, airfares, even after deducting those various taxes and surcharges, increased significantly faster than overall consumer prices.
Contrary to the assumption that competition is good for consumers, 15 years of deregulated competition has not benefited consumers. Actually, they have enhanced the uncertainty of consumers regarding the reliability and quality of their air service. A public opinion poll in the wake of September 11 asked air travellers about their greatest fear. The greatest fear expressed by the majority of respondents was that their airline would go bankrupt while they were on a trip somewhere and they would not be able to return home. That was a greater concern to them than being involved in a terrorist event.
As to the issue of productive efficiency under a deregulated competitive environment, there is much evidence that deregulation has not enhanced productivity. Individual airlines are working their people harder, leaner than ever, and if you measure efficiency in terms of the number of seat miles per employee there have been significant increases.
The problem is that we are not interested in flying seats around for their own sake; we want seats filled by paying passengers. If you measure productivity by the number of flown passenger kilometres per employee — and our written brief enlarges upon this — there has been no improvement in productivity over the last 15 years. If you measure productivity by the value of delivered services per worker in the industry, productivity has actually declined, because the quality of air service, the value of it, according to the survey, has diminished. In terms of physical flown passengers per airline employee, there has been no improvement in productivity. In terms of the value of those filled passenger kilometres, it has actually deteriorated. This reflects the excess capacity and overhead waste of the fruitless cycles of entrants and exit that have marked the industry over that time.
Our brief also raises major questions about the financial sustainability of deregulated competition in the Canadian sector. The operating ratios of Canadian airlines have tended to stay at unsustainably high levels. Since deregulation, more often than not, airlines have spent more on their day-to-day operating expenses than they take in revenues. Operating ratios have been at 100 per cent or above, leaving nothing to pay interest charges and other overhead costs, let alone a bottom-line profit. For the industry as a whole, it has earned positive profits in just 2 of the last 12 years, and last year was the worst yet.
Any measure that will enhance the intensity of competition in an industry will have the natural effect of driving down profit margins. We have to ask ourselves, in light of that record of 2 positive years in the last 12, how much lower do we want profit margins to go? We have deep concerns about the financial sustainability of the industry.
Air Canada is often portrayed as the bad boy in this unfortunate scenario, which may have motivated some of the amendments that came forward in the House of Commons. It may be politically convenient to target Air Canada with some of the anger and frustration people feel as a result of the mess of airline travel in Canada. Our members have no particular sympathy for Air Canada's management, no more so than the rest of the Canadian public, but we must be very careful about measures so specifically and arbitrarily aimed at a particular company, especially given its important role in the overall industry.
Air Canada does not look like a greedy monopoly from any perspective of its revenue, income statement, or balance sheet. The equity base at Air Canada has grown slowly during the 1990s, but it collapsed in the last couple of years, such that it is in a position of negative shareholder equity. This is a company that is financially struggling, as is the entire industry. We must think carefully about measures that will intensify financial pressures on the company.
The outlook for start-up airlines in Canada is highly questionable. Dozens of airlines have come and gone under deregulation. Each one had its own problems and management mistakes. However, the repeated pattern of optimistic entry, initial expansion, ultimate distress and collapse has to lead to some questions. For example, if there is a curve on a highway and one person accidentally drives off, the police may investigate and say he was talking on his cell phone and not paying attention. If another person drives off the highway, it may have been due to bad visibility. However, if 40 people drive off the same curve on the highway, you ask yourself what is wrong with the curve on the highway?
We must do the same with the airline industry. Dozens of companies have come and gone. The only financially sustainable one has been WestJet, and it has its own reasons for its success. If anything, that is the exception that proves the rule.
That reflects the underlying economics of airline transportation in Canada. It is not the result of an accident or predatory behaviour by Air Canada. There is a powerful tendency towards concentration, towards bigger is better, in the industry because of the economies of scale that the airlines enjoy, because of economies of scope, what economists call network economies, whereby your ability to run a full service is enhanced if you are operating in a number of different regions.
Those economic factors push towards concentration. Attempts to stop that tendency towards concentration require government aid or active regulation and have not, in general, in our view, been successful.
Hence, we have a situation where a government that is wedded, in a way, to a vision or an ideology of free competition has to intervene in order to artificially sustain a level of competition that a truly deregulated market does not produce. A truly deregulated market tends towards that dominant carrier situation that we have.
We have had various attempts — ranging from outright subsidies of competing firms, to bail-outs, to measures that would, in our view, artificially and arbitrarily protect new entrants — all in order to subsidize competition for its own sake. From the point of view of consumers or the industry as a whole, this is very questionable.
We should face the facts. After 15 years, crisis after crisis, we should have figured out that the Canadian domestic market can only support one full-service carrier. That is different from the U.S. The U.S. has a population 10 times ours, a more concentrated geographical context, yet it supports less than 10 full-service carriers. If you put that in Canadian terms — divide by 10 — you have less than one. Why spend all this money and direct legislative attention at trying to support more than one full-service carrier?
There will obviously continue to be competition, and in some places it is sustainable, particularly in niche markets like the charter business and certain regional services and so on. However, instead of trying to artificially protect and promote a level of competition that the market itself cannot sustain, policy should accept that and then behave accordingly, which is to oversee the dominant carrier, which the industry naturally produces, with regulations oversight on its pricing and profit behaviour — not to artificially keep its prices high, as the current regulations envision, but to ensure that their prices are not too high.
The likely effects of the amendments to this bill, in our view, are many. This proposed legislation will encourage new start-up airlines, which are not economically sustainable. Air Canada is prevented from responding to the entrants. The proposed legislation will impose further financial damage on the airline, which represents, like it or not, three quarters of our domestic industry. Do we really want to take this company, which is in the red, and make its financial problems worse, given the dominant role that it plays in the industry? This will encourage Air Canada to exit from regional services in order to try to reach that 60-per-cent market-share target. With does this do for competition? Where you take regional services currently served by one airline, Air Canada exits and another airline comes in. It is still served by one airline, but probably in a less reliable and lower-quality manner. If this bill becomes law, it will repeat that cycle of new entrants, overcapacity, financial distress and retrenchment that we have seen over the last 15 years.
Our recommendations would be to eliminate those special and, in our view, arbitrary administrative penalties that are targeted at Air Canada in this bill. We should have a debate on airline policy in Canada that is a debate about airline policy, not a debate about some hasty amendments to an omnibus competition bill. We should clarify the injunctive relief provisions in Bill C-23 to ensure that the provisions in proposed section 103.3 do not exclude what we would view as a normal competitive response by an existing firm to the entry of another firm, which would be to match its prices. Why do we want a competition bill that forces a dominant carrier to keep its prices high? That benefits neither consumers nor the industry as a whole.
I look forward to discussion and questions.
Senator Kelleher: Are you suggesting that we toss out the bill entirely or attempt to make amendments to certain parts of the bill?
Mr. Stanford: We have suggested amendments to segments of the bill that are, in our view, targeted arbitrarily at the airline industry. We believe proposed section 104.1, which relates to the Competition Commissioner making summary judgments, should be eliminated. We would like you to eliminate the proposed section that allows the imposition of administrative penalties on the dominant airline of up to $15 million. We would like you to clarify the injunctive relief provisions in proposed section 103.3 so that that would exclude penalizing a company that simply matched its competitors' fares. Those are the specific regulations.
If this bill had come forward as it was more or less introduced last April in the House of Commons, we would not be here. It is those, in our view, arbitrary things that were tacked on in December in response to the concern about the collapse of Canada 3000 and so on that are the ill-advised aspect here.
Senator Kelleher: Do you have any comment to make with respect to the mutual assistance provisions of this bill?
Mr. Stanford: As I said, those were all contained in the initial legislation. I do not see any particular impact on the airline industry. We would not be here in regards to those aspects of the bill.
Senator Kelleher: Are you, in effect, suggesting a return to the situation prior to 1987?
Mr. Stanford: In terms of our view of broader airline policy?
Senator Kelleher: Yes.
Mr. Stanford: No. Given some of the regulatory structures that were in place before 1987, where every route and every fare had to be approved by federal regulators, it does not make sense to go back to that type of environment. In the various debates and discussions about airline policy that we have experienced in the last 15 years, involving one crisis after another, and often an inquiry or commission, our proposal has been to reinstate some broad regulatory function for the federal government. This has happened particularly in terms of trying to manage the level of overall capacity in the industry to prevent that overexpansion that has proved so destructive economically, and also a broad capacity to oversee, to monitor, and in some cases to roll back the pricing behaviour of a dominant firm.
Given the fundamental economics of the industry, instead of swimming against the tide and perpetually trying to protect and subsidize competitors to that dominant firm, we think the federal government should simply keep an eye on that dominant firm to ensure that it does not act in a manner that is not conducive to the public interest. We would like to see the reconstruction of a broad regulatory capacity but not a return to the micromanagement that was in place before 1987.
Senator Kelleher: Are you suggesting that the Competition Bureau has no business in the cockpits of the nation?
Mr. Stanford: ``Flight decks of the nation'' is the politically correct way to phrase that question these days.
Senator Kelleher: I was following in the footsteps of your former Prime Minister. I thought the analogy would find favour with my friends on the other side. I have a very good assistant who attunes me.
Mr. Stanford: We are not arguing that the airline industry be excluded from the normal provisions of competition law. We are concerned about these arbitrary, unique and, in some cases, frankly bizarre extensions of competition law specifically to apply to the airline industry. That represents an attempt, in our view, to manage in an ad hoc manner a problem that should be addressed directly through a review of air transport policy.
We are not suggesting airlines be excluded from normal competition law. There is plenty of power and there are plenty of mechanisms for redress through existing competition law and the existing powers of the Competition Commissioner and the Competition Tribunal to deal with the situation in the airline industry. We do not understand why we need these unique and in our view arbitrary measures aimed explicitly at airlines.
[Translation]
Senator Poulin: You stated that the Canadian Automobile Workers' union has 250,000 members, of whom 49,000 work for the transportation industry and 15,000 in the air transportation sector proper. It is obvious that, like the members of other Canadian industries, they have had to make major adjustments over the last 10 years because of all of the changes we have seen in the area of communications and in the economy. These adjustments have not been easy for the members. Your members, and I am quoting you here, are customer service employees.
What strikes me when I travel in the regions is that I often hear your members talk about their union problems instead of serving me and asking me, as their customer, what my reservation is and at what time I must leave. Instead of that, I hear the employees continue to talk amongst themselves. I often hear similar complaints not only from my colleagues in the Senate but also from family members in Northern Ontario who do a lot of travelling. What does your union do to ensure that its members devote themselves to customer service, setting aside their adjustment problems for in-house discussions?
[English]
Mr. Fane: Honourable senator, this is the type of question for which I need to take you to lunch; we would need to spend some time talking. It has been a difficult process.
I will assume that you are talking about Air Canada and particularly the merger with Canadian Airlines. For our members at Canadian Airlines, this was their fifth or sixth merger. They were comfortable that the union would do its job and take care of them. Our members at Air Canada, who listened carefully to the Onex argument and who were dedicated to their company, expected that in the fine field of competition when Air Canada won the battle between the two major carriers they would end up on top and the Canadian employees, particularly with their seniority, would end up on the bottom. This is not what happens in labour law and it is not what happens in our union particularly. We treat all members equally, regardless of which company they come from and which company won the competition battle.
I am pleased that our union was the first to negotiate an arrangement with Air Canada to put the two groups together to serve the customers better. We were the first to negotiate a new collective agreement. We were also the first to negotiate job security, where the company could not lay us off. When the company had some problems after September 11, at least 1,000 employees voluntarily left the workplace, to reduce the costs of Air Canada in that difficult time.
On the other hand, I travel at least three times a week. We push Air Canada to ensure that there is enough staff to serve the customer. We argue all the time with them. They have to watch the bottom line, the profits and losses. On the other hand, we have to watch the quality of customer service. That is what our people do for a living. I know there is much opportunity to improve customer service there.
Air Canada has just made some management changes. We are looking forward to working with their new management group. However, we know how important it is to take care of the customer. We have some problems. For example, when the government has a fight in the press with Mr. Milton and the management of Air Canada, we know that it will be difficult for our members to make a customer happy, if that customer shows up in a not-so-happy mood.
For our members, the merger was a shocking cultural change. They honestly believed that many would be out of work.
Things have not happened that way, and do not happen that way with our union. It has been difficult. We have new processes in place with the company. We want to ensure that the customer receives good service. We know there are serious problems, but we will continue to work with the company to serve the public better.
Senator Furey: Mr. Stanford touched on my question in his comments, but I want to refer to Mr. Fane's presentation. You indicated that investor losses under deregulation totalled in excess of $3 billion and that in only two years since deregulation have there been positive profit years.
You further indicated that negative outcomes could not be ascribed to anti-competitive behaviour on the part of Air Canada, or any other market player. They reflect, instead, the inherent economics of airline travel in Canada with its small population and diverse geography.
How can you make those comments and account for the rather impressive success of WestJet in this environment?
Mr. Fane: The first comment particularly is focussed at a time when we had two major airlines and a problem of overcapacity. We could not at that time get anybody in government, Conservative or Liberal, to focus in on the capacity problem. They kept selling fares for cheaper than it cost to produce them.
I am talking about two international carriers, particularly Canadian and Air Canada, who were not only competing domestically but in some places were even competing internationally. Canadian Airlines was buying up EPA, Nordair, and Pacific Western coming by and buying them up, then buying Wardair and increasing the debt loads by $500 million. We all this capacity, and we kept begging the government to regulate capacity. We got to the point where everyone was selling cheaper and cheaper. We even argued about Air Canada, who used to do predatory pricing. Everyone was driving the market down. The billion dollar losses belonged to everyone, including Air Canada.
With respect to WestJet, they are doing a fabulous job. First off, they were able to limit themselves to the domestic market, which was a smart thing to do. Second, they do not have a large infrastructure, unlike an Air Canada or a Canadian. Third, they were able to buy Air Canada's 737s at a relatively cheap price. They have no unions; hence, people get paid less and their working conditions are not as good. However, I think they are doing an excellent job. I have no problem with them being in the market. I am looking forward to my next appearance here, when I tell you that we have unionized half of their workers. That is what we do.
Nevertheless, they have a niche in the market, and they should be here for a long time.
We are opposed to you telling a national carrier it cannot match WestJet's cheaper fares. If we want competition, we have to let the customer decide. The national carrier should be able to match fares.
On the other hand, I do not think Air Canada should do predatory pricing and put them out of business. I think that is wrong. We are fine with the competitive market, if I can use that term, in the fashion of a WestJet or Air Canada flying on the same routes.
Finally, we have a problem in smaller communities. If these proposed amendments are directed at ensuring that Air Canada has 60 per cent of the capacity of the domestic market, it literally means they will pull out of small communities that the regional airlines are in now. There will be less service to those communities. Some of them might get a WestJet or an ABC company flying in there, but we think that is not good for the country.
Senator Furey: Mr. Stanford, what is your understanding of Air Canada's percentage of market share today, and how is it arrived at?
Mr. Stanford: We have no capacity to make our own independent measurements of that. Statistics Canada measures how many passenger kilometres are flown in Canada. They will make an assessment of Air Canada's share of that. Their numbers come out quite delayed.
The companies individually produce numbers on how many passenger kilometres they have flown.
Senator Furey: As a representative of the workforce, you have not done work on looking at what size market you are dealing with or what percentage your company has captured or how they arrive at that figure?
Mr. Stanford: We have nothing other than the publicly reported statistics, which suggest that Air Canada's market share is 80 per cent or more. We have no capacity to generate independent data on that subject.
Senator Di Nino: Obviously, you are aware that our mandate is to provide for the consumers and the citizens of this country a transportation system that is fair, comfortable and at a price they can afford.
At least one, if not more, of the witnesses who we have heard so far have suggested that competition could come from the outside and not just from the inside. That is the Open Skies concept that has been talked about and which would include things like cabotage. I am wondering if you could deal with that.
Second, at least one witness that I heard has said that part of the problem with Air Canada is its labour contracts, that it is stuck with some very difficult labour contracts. I wonder if you could put on the record some thoughts on that issue as well.
Mr. Stanford: According to my understanding of the economics of the industry in Canada and its geography, I tend to agree that the only way you could generate a system of sustainable competition between full-service carriers would be to fully integrate the Canadian domestic market with the U.S. market. The U.S. market is 10 times our size.
After 20 some years of deregulation, there has been the consolidation of the industry into six, seven or eight different major full-service carriers that operate overlapping hub-and-spoke systems across that market. The nature of the market, namely, that there is a more concentrated geography, compared with our long strung out geography in Canada, allows the companies to operate overlapping hub-and-spoke systems where different companies have different hub airports. Each is able to offer different routes and combinations of routes to their customers. However, that is less than 10 operating in a more geographically concentrated and definable region.
I do not think that can be replicated within Canada. However, if the Canadian system were integrated with that, then, obviously, we could become part of a sustainably competitive system.
For us, the problems outweigh the benefits. The problems that will entail will be that most Canadian destinations will become spokes around U.S.-based hubs. We would probably lose, eventually, a major Canadian carrier. I do not think Air Canada is in the position — certainly not now — to financially sustain itself in competition with the larger U.S. carriers, who, despite their problems, still have deeper pockets. It would involve many Canada-to-Canada travel combinations to require routing through the U.S.
If you do believe in unregulated competition, the only way to sustain more than one full-service carrier operating in Canada is by integrating the system with the U.S. The costs of that to Canada would outweigh the benefits. As such, we are not in favour of that. We would prefer to see some regulatory oversight on a single dominant carrier operating in the Canadian market.
Mr. Fane: On the question of flexibility in collective agreements, although we were involved in the Onex attempt to buy Air Canada and Canadian, for which we took a bit of a black eye, we were the first union to get up and sign new collective agreements with Air Canada. We also did the same with the regionals. We now have but one outstanding. Everything on a bargaining table is negotiable. The union has absolutely no value in having rules that are old, archaic and do not fit in.
On the other hand, I cannot have employers saying to me, ``We can make Johnny more productive if he could give up a week of his holidays, or if he could take a cut in pay.'' A rule in collective agreements pertains to whether you are buying or selling. We have no problem managing change in the collective agreements.
On the Air Canada-Canadian merger, all the rules that were kept were the Air Canada ones. The Canadian ones were tossed out. The company and the union now keep saying, ``Maybe you want to take a look at this rule; it is more productive.'' Our job is to ensure that the company is productive. It is easier to bargain our wage increases and benefits when a company is productive. It is difficult when it is not. We are flexible on rules, but it is not Christmas. We do not give anything away. It is a negotiation.
Air Canada has just changed its top labour relations people. It has been suggested that they did that to foster a better relationship with the unions. We already have an acceptable relationship with Air Canada.
Senator Kroft: I would like to get a better idea of your vision of the airline industry and the way in which it is governed. I want to go back to a comment that you made, Mr. Stanford, that if we do not do such and such we will not have more than one fully integrated national carrier.
Is it your view that, in the interest of Canadians, there should be and could be more than one fully integrated carrier, using your term, full-service national carrier?
Mr. Stanford: The conclusion we have come to after 15 painful years is that there is not economic room for more than one full-service national carrier in Canada. Previous attempts to build them commercially have failed. Previous attempts by government to assist, to subsidize, to protect and to sustain competitors to Air Canada have failed. Policy might as well reflect that truth, not try to swim against the tide.
Senator Kroft: I misunderstood you. I thought you were still looking for a way to more than one.
Mr. Stanford: Accept the tendency toward one dominant carrier and then put in place some broad regulatory oversight to ensure that that carrier behaves in a manner compatible with the public interest.
Senator Kroft: In your presentations, you have talked about the need to manage capacity, number of seats. Basically, I hear from you that what we need is a return to a regulated system.
Mr. Stanford: We have argued for the re-creation of broad regulatory power at the federal level, not micromanagement, not where you have to get approval for every route and every fare. Again, this gets into the broader air policy issue rather than Bill C-23 per se.
For example, we have proposed a system of auctionable quotas where the federal transport department would issue quotas for a certain expansion in capacity on certain major routes. New entrants could enter the industry by bidding on those quotas, but you would not get the unsustained overexpansion in total capacity that we have seen.
There are various ways to manage the overall level of capacity and to monitor the behaviour of the dominant carrier, without going back to the micromanagement of the pre-1987 era.
Senator Kroft: We were told yesterday by Mr. Mulder, who had years of experience in this with the government on the regulatory side, to accept his advice that, if we had any thought that government could manage capacity, we should forget it. If experience has proven anything, it is that government is incapable of effectively making the calculations that make regulation in the form of capacity management possible.
The second thing we were told is that the studies, including the new one to come out in the next week or two, will demonstrate that over the period since deregulation, as against CPI the cost of air travel in Canada has steadily and substantially decreased. I believe you said it is exactly the contrary. I think you admitted there were periods of abhorrent pricing but that the cost of air travel in Canada has not decreased. This is a fundamental issue for us in making any assessment of this. Anything you could do to help us — and it does not need to be now — to sustain the point of view that the cost of travel in Canada has not decreased would be helpful.
Senator Poulin: You made a few comments on the process of review of this bill. You used terms like backdoor approach, arbitrary and hasty. I should like to better understand what you would have preferred, because this bill was tabled at first reading in the Senate in December. It was then referred to this committee at the beginning of February. We have been sitting as a committee now twice a week and we have heard from nearly 20 witnesses. We have quite a few others to hear because of the importance that we are ascribing to the bill. We also know how important both competition and the transport industry are, since we all come from different regions in this country.
We feel strongly that Canadians must be well served, both in large and small communities, with reasonable prices. I am a bit surprised at your questioning of the process when these are public hearings and we have ensured that they were broadcast.
Mr. Stanford: In no way do I mean to criticize the process of this committee. Once again, I thank you for the opportunity to appear here. I think I criticized the way the policy is being made. If we are to have a debate over a fundamental structural service affecting an important industry, we should have that debate full out. It should not take place through some hard-to-understand paragraphs attached at the last minute to a bill that initially looked like it was dealing with something very different. It is not a reflection on this committee. We do appreciate the time that you have taken.
I believe you have heard a number of similar concerns, that these amendments to the bill from December raise many issues about due process and long-run economic impact, and so on. I would prefer to have seen the federal transportation policy-makers take a different approach in how they designed, conceived and carried forward the debate on this. I do not believe most Canadians are even aware that we are having a debate over the fundamental structure of the airline industry, and I think that they should be, given the importance of the questions that are addressed in those amendments.
Mr. Fane: I come from the airline industry. I was around, for example, while all those carriers were going out of business. We kept asking: ``Why?'' Why, in particular, is Eastern Provincial going out of business? Why do they have to be gobbled up? Why is Quebecair not here any more? How did it come to be the debate over who was going buy Wardair and take on $500 million in debt? Canadian Airlines and Air Canada fought over Wardair in the back rooms.
I was around when the Conservative government decided that it would help CP-Air continue, provided all the workers took wage concessions. It was our union that was saying, ``The wage concessions were not the problem; the problem was capacity and predatory pricing.''
We do not intend to sound negative. We are delighted to be here.
When we read this bill — and in particular the parts Mr. Stanford has said have been added on — it seems as though the Government of Canada wants to punish Air Canada. If Air Canada acts in a predatory pricing way, we think the government should stop that from happening.
However, we do believe that we will now have one national carrier, and there will still be competition like the WestJets.
Senator Poulin: There are definitely two sides to every coin, because we see a clear effort to ensure that the airline industry does remain competitive and in the best interests of all Canadians. We do not see it as airline bashing at this time.
Mr. Fane: That is good.
The Deputy Chairman: Thank you for your attendance here today. From the interest expressed by my colleagues, it was a well-spent hour.
Our next witnesses are Ms Margaret Sanderson and Mr. McTeague.
Mr. McTeague, we are honoured to have a member from the other place here.
Please proceed.
Ms Margaret F. Sanderson, Vice-President, Charles River Associates: I want to thank the committee for the opportunity to appear before you today. I have worked for Charles River Associates as an economist since August 1998. In that company, I advise both government and private parties on competition issues as an economist, not as a lawyer. Prior to joining CRA, I worked at the Competition Bureau for 10 years, where I held various positions in the economics and international affairs branch, as well as the mergers branch. I have had many years of experience both in the guts of the organization so to speak and as well as advising people who are dealing with the government outside of the bureau.
When I was invited to appear before you, it was suggested that I address my remarks to three areas. He suggested I speak to you about private access to the tribunal, U.S. experience with private access and the interim order provisions in Bill C-23. I shall take each in turn.
I strongly support the proposed right of private action and I commend the committee on industry for bringing this issue back into the bill. As the professors from the law school at the University of Toronto have succinctly stated, it is difficult if not impossible to defend a public monopoly on the enforcement of laws whose central raison d'être is redressing the evils of private monopoly.
Effective right of private action produces several immediate benefits. First, it augments what many would agree are relatively limited public resources, both with private resources as well as private information and initiative. In some cases, private parties are in a better position and more informed position to detect and prosecute anti-competitive practices than the government may be.
Second, private enforcement can be an effective and efficient means of introducing additional accountability on the commissioner and the Competition Bureau for those cases that he chooses not to take. As well, a well-designed private party access system allows plaintiffs to seek remedies for both past and future harms. Ultimately, this will help improve deterrence.
In light of this, I believe that the provisions contained in Bill C-23 for private access to the tribunal, while laudatory, do not go far enough. As currently structured, Bill C-23 provides for a very limited right of private action. In particular, the rights of private action are only available under proposed sections 75 and 77. Hence, they are only in respect of refusal to deal, exclusive dealing, tied selling and market restriction. As well, the only relief available to private parties is injunctive relief and possibly costs.
I think this is too narrow. I would urge you to recommend that Bill C-23 should also allow private party access for proposed section 79, the abuse provisions. It should also allow private parties to seek compensatory single damages as part of the relief.
From my perspective, I fail to see why the abuse provisions are excluded. I have three issues I should like to raise with the committee in this respect.
The first is that sections 75 and 77 are what economists talk about as vertical restraints. These are contractual restrictions between suppliers and their customers. Economists have long argued, and it has been well accepted, that many of these practices are efficiency-enhancing, pro-competitive, not necessarily anti-competitive. As a result, you see in the legislation, with the exception of the refusal to deal provisions, that these practices have to substantially lessen competition before they will be attacked.
There are very few cases taken by the commissioner under sections 75 and section 77. Instead, the commissioner has been more active in respect of the abuse of dominance provisions. Why is that? From an economist's perspective, exclusionary actions that would be attacked under the abuse provisions are things that are engaged, and exclusion that is engaged in horizontally rather than vertically. All else being equal, that practice is more likely to be anti-competitive when it is engaged in horizontally as opposed to vertically. Hence, that is the type of conduct we want to stop.
The question I raise is this: Why do we want to restrict private actions to the conduct that is less likely to be competitively harmful?
The second issue is whether we are introducing unnecessary distortions between sections of the act that ultimately may go to the same behaviour. For example, in the abuse case Nutrasweet, the commissioner attacked the same contractual provisions in inducements under both section 79 and section 77. Why would the same conduct that is attacked under one provision of the act allow for additional rights of private action while the exact same conduct if attacked under another provision of the act excludes this right?
Third, by failing to include section 79, we are not allowing private parties who are subject to predatory conduct the right of private action before the tribunal. If it is a predatory pricing case on the criminal side, they have the right of private action on the criminal side of the law, but not before the tribunal if we do not include section 79 in Bill C-23.
Yet I imagine a large percentage of the time you have spent in the hearings has been all about strengthening the law in respect of airlines and with particular focus on the nature of predatory conduct by airlines. I am certainly not going to advocate a special private right of action for airline-only predatory conduct, but I do not understand why this important concern for small- and medium-sized business is not just in the context of airlines but things like vertical squeezing that you would have heard about from CIPMA.
Vertical squeezing is an anti-competitive act that is outlined in section 78 of the Competition Act. It is part of the abuse provisions. It again is something that you often hear independent retail gasoline marketers being very concerned about. They would not have the right of private action to deal with concerns of that nature under the current Bill C-23, because section 79 is excluded from the private access rights.
At the end of the day, I do not understand why these have been left off the table. I think a private right of action for all industries under section 79 would provide important additional powers to small- and medium-sized companies, as well as other companies.
As I noted earlier, I also believe Bill C-23 should include the right for private parties to seek compensatory single damages from the tribunal. Injunctive relief is not enough. To understand why, I should like to briefly tell you how as an economist I look at crime and deterrence.
Economists, perhaps foolishly, always assume that firms are rational profit maximizers. As a result, the penalty that a firm will face from engaging in anti-competitive conduct must be large enough that it offsets the gains to be had from this activity; otherwise, one does not get any deterrence.
Therefore, if the only cost to me at the end of the day is that I am told to stop the bad behaviour, and possibly I will have some legal bills to pay, perhaps for myself as well as the plaintiff, I have little incentive not to engage in the bad behaviour in the first instance if that bad behaviour is quite profitable to me.
Contrast that with a situation where, instead, I know that, if I get caught, I have to stop the bad behaviour and I have to potentially make the victims whole but for the bad behaviour; alternatively, I can think of this as returning the ill-gotten gains that I received from the bad behaviour. That will make a very different set of calculations when trying to decide whether it is profit-maximizing for me to engage in exclusionary conduct against a competitor.
As a result, I think there must be the right to recover damages; otherwise, there is no incentive for plaintiffs to take actions to the tribunal in the first instance. As well, we fail to provide firms with the right incentives not to offend the act in the first instance.
My last point before turning to the U.S. issues is that there is also a technical glitch in the current wording of Bill C- 23. As the bill is currently drafted, proposed section 103.1(8) provides a time limit. It reads, in part, as follows:
The application must be made no more than one year after the practice that is the subject of the application has ceased.
However, if the only relief available to you is injunctive relief, there is no reason any private action would ever be brought after the conduct has ceased, except possibly that it has stopped and you really want to ensure that it never comes back.
This provision is a much more sensible one if we are talking about single damages being available as well as part of the relief provisions.
Turning to the second area that I will discuss briefly, there is frequently much concern expressed in Canada that if we expand the rights of private action we will be in the quagmire that exists in the United States, where it is alleged that there is a tremendous amount of strategic litigation.
Canada is very different from the United States. There are some fundamental differences that I think will make that possibility very remote. The first is that the U.S. has designed their system to encourage the bringing of suits. One of the things that they have is treble damages. Their cost rules are also different. Class actions and contingency fees have been part of their litigation landscape for decades. Jury-determined damages, which tend to be the norm in the United States, tend to produce higher damage awards. All those things combined mean that there is generally an environment where there is a greater incentive to bring litigation.
Those things are not in existence in Canada. Combined with the safeguards that have been brought forward in Bill C-23, I think there is little reason for Canadian companies to grossly misuse any right of private action, even one that extends to section 79 and even one that allows for the recovery of damages.
There is actually very little empirical evidence as to whether this is truly a phenomenon in the United States. On that, unfortunately, we cannot be guided by any studies that have been done to determine what may have been spurious litigation versus what was not.
I would note anecdotally that many of the U.S. Supreme Courts' anti-trust decisions have been the result of private actions. The established norms for U.S. courts right now in dealing with predation, exclusionary conduct and tying have all started from private actions. The guidance that those decisions bring, of course, is valuable for all players including the government.
The other thing that you see in the United States that you do not see in Canada is that when you go to a conference in the United States or have a general debate about anti-trust law there is an active plaintiff's bar. There is a group beyond government-enforcement agencies that is actually interested in having strong anti-trust laws. The situation is not the same here in Canada. In Canada, the bar is primarily a defence bar, although there are some plaintiff lawyers now.
Typically, the government in proposing any amendment faces a wall of opposition. Even when Canadian practitioners are supportive of strengthening competition laws, they risk the wrath of very important corporate clients. Hence, their support is not as public or vocal as perhaps it might be otherwise. There is a more balanced public debate in the U.S.
I was asked to speak about proposed section 103.3. I know from reading the transcripts that the committee has heard from many commentators that various people believe that this proposed section as currently worded is flawed, and I would support that view. I am not in favour of the way the proposed section is currently drafted.
That being said, I do think there is a need for interim relief provisions. I would suggest, as others have suggested to the committee, that the interim relief provisions should be restructured along the lines of section 100, which is available currently to the commissioner in the context of the merger provisions. I wrote about this view with a professor from the University of Toronto when the provisions were initially proposed. I will not speak to it further in the interests of time.
Mr. Robert was kind enough to send to me the proposal that Stanley Wong brought forward to the committee in terms of his approach to this issue. I would be in complete agreement with what he has proposed. I am available to take questions.
Mr. Dan McTeague, Member of Parliament: As a member from the other place I wish to declare an interest off the bat. I represent Canadian consumers and constituents. They pay me as taxpayers and otherwise individuals who have been very involved in the competitive process for many years.
I must also note that it warms the heart to know that many members in the upper house are now looking at the question of the Competition Act. I must blame a great deal of this on myself. I hope that you will bear with us in this very exhaustive process. Much of which we see here before you is really the result of the efforts of some members, myself included, who have been quite willing to recognize the substantial need for change in terms of how we perceive the Competition Act and how we appreciate the changes that have occurred in the Canadian economy since the last substantial rounds in 1986.
The Canadian economy is different than it was when we amended the Competition Act this Parliament. We have an economy that is primarily characterized by much more vigorous small and medium-sized enterprises. We have a number of changes in the scale and the strength of players within the Canadian economy. There has been a wide recognition of greater concentration. Much of this is inevitable. Other parts may be the result of a law that may be well written but practically impossible to enforce.
Through a series of bills, presented by me and other colleagues, we were able to convince the government, as well as Parliament, certainly the House of Commons and the standing committee, of the need for some modest change that would bring us in line with our partners not only to the South but also around the world. There is also wide perception — and this has been addressed adequately by Ms Sanderson — of those who had the final word or the only word when it came to discussions about public policy and arguably one of the most important economic instruments at our disposal, the Competition Act.
The bar in Canada is very much defined as being pro-defence. Of course, there was some tension throughout all this as to who should have final word in the end to any changes — substantive, modest or otherwise.
I am primarily interested in my pet project, but one that I think the House of Commons has widely endorsed. It is significant that the House of Commons, not only the standing committee but also the House itself, referred this matter to the Senate on division for various reasons. It is significant that there is a general consensus that has developed in the House of Commons with respect to these amendments.
I understand that there have been some concerns raised with some aspects of refusal to deal. I am pleased to hear that concerns have not been raised in the area of private access.
Some have suggested the need for a competitive effects test. I would argue that, in 1975, when the refusal to deal provisions were made, they were done in the context of the 1986 interpretation, which is the interpretation and purpose of the act in section 1. Section 1, which is not to be dismissed or ruled out of hand, was to increase the participation of all players including small and medium-sized business as well as to give some deference to those who, consumers and otherwise, would have an opportunity to ensure that there are the fruits of the competitive process that allow Canadians to enjoy innovation and the products and services that are derived from a vigorous and effective competitive model.
I would suggest to you that the few cases the tribunal receives are alarming and do not provide any comfort to the notion that there is a wide body of jurisprudence. Why are parliamentarians involved in this?
There is a wide recognition that industries should not fail because the deck is stacked against them or because a law says a great deal but cannot be used in a practical way or in a timely way. This effectively stalls competition and the positive effects that competition brings in the Canadian economy.
Having studied this matter for some time, none of us as parliamentarians, would go so far as to suggest that we should create specific laws for specific industries. I have read the deliberation and comments regarding proposed sections 103 and 104. I am not sure that if someone is subject to an anti-competitive activity they can wait to call a judge as opposed to calling a cop to have the problem resolved or at least the matter settled as quickly as possible. You have a situation where, in the case of the airlines industry, there are examples of a number of exits of this market and very few entrants.
I will talk about it a little further upon your questions, but if it takes a year and one-half or two years for the tribunal to address the WestJet-Air Canada issue, then we have a certain problem in terms of timing. I do not know if many people in the private sector have the kind of margins or deep pockets that can sustain protracted long-winded trials or discoveries that may work to the advantage of those who may have committed an anti-competitive act. The burden of proving that may take much longer than expected.
One of the concerns that we have raised is the need for an effective and vigorous umpire to be able to make a quick determination. Proposed sections 103 and 104 in which you are interested in terms of cease and desist do not give judgment. They do, however, arrest situations in cases of industries.
Air Canada's presentation to the air carrier conference in 2002 readily admitted that its dominance in the Canadian market is maintained and strengthened in all markets at nearly 80 per cent. It says here 78 per cent.
Airlines are a unique industry, with unique circumstances, with a tremendous history behind it. However, it should not be suggested that the Commissioner of Competition is not capable of identifying a problem and not able to provide an effective tool. Some who have made presentations to you that could lead you to believe that the commissioner could bring forth an order within 24 hours. That would need to be proven with cases.
You have, with misleading advertising, the civil track that was introduced in Bill C-20, the last time I believe the committee dealt with this, examples of where misleading advertising was seen as an opportunity to be able to take the matter and bring it to the tribunal and have the tribunal adjudicate. We are seeing instances now that take up to seven months before the tribunal is able to provide an effective order that would prevent or stop the alleged anti-competitive activity.
The suggestion that it could be done in a day versus seven months left many of us on the Industry Committee in the House of Commons believing that that might be optimistic and wishful thinking. Otherwise, it may lead to certain circumstances where these industries, as a result of the delay, which you are concerned about for constitutional reasons, may be at great variance with what occurs in the private sector.
I want to leave my comments at that for now. I hope that some of the comments and questions you have will provide us an opportunity to elaborate. I have put this forward because I am concerned, after five years of working with this, that amendments this committee may consider may have the effect of delaying beyond a certain period of time and may ultimately take down the good clauses of the bill that this committee is interested in supporting.
In areas where senators have concerns, I would recommend that, rather than making an amendment in an area that you feel strongly about with cease and desist, perhaps you have the commissioner report to Parliament on an annual basis. I believe that would provide some comfort to the committee, as well as address whether this amendment in cease and desist, in proposed sections 103 and 104, is in fact effective or is perhaps unduly cumbersome and creates problems for those legal purists who are concerned about competition and due process.
The Deputy Chairman: I would like to add that Mr. McTeague is also the vice-chairman of the House of Commons Committee on Industry, Science, and Technology.
Senator Kelleher: Mr. McTeague, as you correctly made reference, there have been many discussions about proposed sections 103 and 104. A number of witnesses have stated that in their opinion that 104 is basically redundant, that it is not necessary, and the act could very well survive nicely if it were removed. You have a great deal of experience with this proposed legislation. I would like your comments on that.
Mr. McTeague: I, too, have an interest in ensuring that we have a swift and effective means in which to perceive what is otherwise for some very subtle changes that may occur in the industry. Business is moving at a rapid pace. Most would recognize that there are times and places where we do not have the wherewithal and the time it takes to provide a long and protracted process of demonstrating before the tribunal the need without prima facie evidence of ordering a cease and desist or interim order.
We may see a situation where a vigorous and effective competitor that has entered an industry, has maintained and sustained itself in an industry, suddenly finds itself removed notwithstanding the fact that it may have been subjected to an anti-competitive act. The remedy is too far off. We wind up, as parliamentarians, with having to deal with tombstones of many effective companies in this country. The effect, of course, is broader than that. It is not just the shame of whether or not we have a vigorous umpire; it is also the effect on consumers.
Examples in the airline industry are probably just good examples. There are many cases where Air Canada had to admit more or less before our committee that where there was no competition, for instance, where it was not competing against say another competitor, particularly WestJet, the prices on a mile-for-mile basis were substantially higher than where it had a competitor. Is that a question of meeting one's competitor or is that simply an opportunity to take advantage of where there is, in the absence of any competition, an opportunity to make money?
I suspect that what you needed, and one of the reasons the committee did not see the redundancy of proposed section 104, was to actually ensure that the equipment was there for the commissioner in certain circumstances, which has been proven, by the way, in case law. There are some lawyers who have taken the time to look at this, in both American Cyanamid and Ethicon, as Hoffman-LaRoche, where the commissioner rarely undertakes something in a circumstance where it is based on frivolous or vexatious behaviour. We have to exercise trust in the industry, which understands more subtly than the rest of us the nuances, and arrest them before the damage is beyond repair.
Senator Kelleher: Some of us, myself included, are perhaps curious. This bill had a strange birth and gestation period in the House before it landed here. Some of the people complained to us that these amendments came forward after they had made their brief to the various committees. Could you explain to us the rather convoluted history of this bill?
Mr. McTeague: Bill C-23 probably had its origins with my votable Bill C-235. You recalled an inquiry that I conducted — certainly members on the government side will know the history of our concerns about independent gas retailers going out of business as a result of what was occurring in the downstream of the industry. There was a feeling at the time that recommendations made in the past by the former Restricted Trade Practices Commission, the Bertrand commission, had been largely ignored. The effect was a cost push on the bottom line for consumers, or unusual circumstances whereby a wholesaler of gasoline who was also competing at retail against its largest customer, who happened to be independent and not integrated, was selling gasoline at prices that were below wholesale. One would think that that could be the result of a number of circumstances, but for us, if it looked like a duck, quacked like a duck and flew like a duck, obviously it was a duck. We saw it as predatory pricing and we attempted to try to address that.
We did not know at the time that there were a number of other industries that came forth, such as the cement industry, the grocery industry, cable industries, telecom and telephony industries. The numbers went on and on. What we had stumbled on, as a very small group, was that what was true in the oil and gas industry, particularly in the downstream, was also true in any other industries. It led us to conclusion that while large companies were shedding jobs people were finding fertile soil in starting up their own companies.
We thought it was important to recognize that at a time when the country was relying on small business to carry the burden of a successful economy and be the engines of growth they were being stymied and often knocked out by the very people who were supplying them.
We also thought it was bizarre that you would have a situation where conduct that was perfectly illegal in other jurisdictions, particularly in the United States, was perfectly legal in Canada and those who did not like the changes were suggesting that somehow Canada should have a subordinate law or laws that are readily inapplicable. As a result, the burden fell unevenly on those who were not looking necessarily for a level playing field but not an opportunity to participate on the field. That led to some negotiation, I suppose, between members of our caucus and the government over the need for many changes in the Competition Act. Many players came to us and said, as the senator has alluded, that they could go to Australia and bring a case and apply for damages. We had known the history of that in Canada and most times it had failed, but we also recognized that many businesses thought it would be a good idea if they could bring matters that were not necessarily of a public nature, did not have a strong public overtone but were more contractual in essence to the attention of the tribunal, to give them an idea of what was occurring in the real world.
That is not to disparage the tribunal but to suggest that, in certain areas such as predatory pricing where they may have had only nine cases since inception, there was obviously a problem. The changes made were the product of many years of members of Parliament bringing forth concerns that were ostensibly reflected by the people we represented.
Senator Kelleher: What about the so-called accusation that many of these amendments were made partway through the hearings? People who were appearing never had the opportunity to address the matters brought forward with the later amendments. I do not know whether that is accurate.
Mr. McTeague: I do not think it is accurate. I know that many of the witnesses that appeared were recycled. There was a strong group of 20 — the same individuals who were heavily involved in creating the first round of amendments in 1986 — who somehow suggested that all we were doing would bring industry in Canada to a screeching halt. There were some who suggested that if these amendments went through, as harmless as most critics now say they are, particularly in the area of private access, the economic recession that Canada may have touched upon could have been easily blamed on these changes. We were dealing with individuals who had a vested interest in protecting the interests of their clients and a handful of individuals, as opposed to reaching out to the broad impacts of that on the economy. We found that disingenuous and unfair to what we were presenting.
Bill C-23 began with most of what was there, although there were some changes on the question of interim order and cease and desist, which were provided for in Bill C-472 a year and a half earlier. This was not new to the committee. Some suggested that they did not like certain inclusions and would fight against them, but they did not make a strong case, when one considers the safeguards that were put into place.
There are those who make those acquisitions, and that is fine. However, one has to look at those who proffered the opinion. If they really believed that these things would bring industry to a halt, perhaps we should also examine the standing of the opinionists and where they are coming from.
Senator Furey: Ms Sanderson, we heard a fair number of questions about market share. Can you tell us about the idea of contestability of the market in the Canadian airline industry. Should we be concerned about Air Canada's market share? Will it make a difference if it is 60 or 70 or 80 per cent?
Ms Sanderson: On the notion of contestability, the entire economic concept of it could be simplified by saying that some identify it as a hit-and-run entry. There can be a market where the investments made in that market might be large but reversible should the investor decide to withdraw. Economists will say that those investments are not ``sunk.'' That terminology would be used in such a case.
Airlines came forward because people asked what the required investments are: leasing the aircraft; pilots to fly them; leasing the gates; leasing slots at airports; and hiring the labour. I suppose I should not say this right after the CAW presentation, but you can move labour around, and sometimes it is easier than in other circumstances.
The basic notion was that there was not much in terms of an investment that was sunk. Therefore, the market was ``contestable.'' That meant I could be a large player in that marketplace. This is just the theory: The notion was that a large player could sit in the market with, perhaps, a 100 per cent share of that market. However, the market is fully contestable, such that if the prices are raised and a competitor comes into market, even for a short time, it forces the large player to lower those prices in reaction. That person may stay or leave. Thus, there is an ebb and flow of entry- exit activity.
There is no ``sunkness'' to the investment, so there can be a stream of these players, creating a continual stream of entry-exit activity. The bottom line is that prices do not rise to anti-competitive levels even though the large player has the high share. That was the original theory, and it was postulated in the context of airlines.
There have since been a number of empirical studies done to test whether in reality that is true. I would say that the vast majority of the published empirical studies in the economics literature in the context of airline markets all agree that airline markets are not contestable — they are not fully contestable. We need to worry about high market share in airline markets.
The reason for that was spoken to earlier by the witness from the CAW in respect of the network effects in an airline market. There are two ways to think about the network effect: the cost as the supplier goes down and as the number of origin-destination points increases; and the value from the demand point of view for the customer — the value the customer is willing to pay. The system becomes more valuable as there are points available. Telephony — a telephone network — is an example of this. It is much less valuable to me either providing the service or as the customer paying for service if I am on a telephone network that has four customers versus the network that has the rest of the country.
The question is this: Should we worry about market share in the context of airlines? I think we should worry a great deal about market share in the context of airlines. Somebody may ask: What is the difference between a 75 per cent share and a 90 per cent share? There is a difference, and that can occur on many different levels. It will make entry that much more difficult for a potential competitor to try to enter the market and compete against the behemoth that has all these other advantages.
One thing that people forget is the notion that comes up about just meeting their prices in the context of airline markets. My flight was cancelled this morning, for example, so everyone has had that happen. The airline was very good about it, and they put me on Tango so that I could arrive on time. If you mention the Senate, all kinds of good things happen for you, or so it seems.
The Deputy Chairman: That is news to us.
Ms Sanderson: You can see that there is a difference in the service — are we talking about the same product? When there is a product available and its service is declining, the lines are not as long, there is a business lounge, there are frequent-flyer points, and there is a more frequent schedule. Is that package the same as the package that is offered by Tango or by an upstart that is trying to compete against that? We need to be concerned about the market share of Air Canada. There are numerous ways to deal with it.
Senator Furey: This is a question that you may or may not be able to answer. I understand there is no industry norm for measuring market share, but we have heard different things about that. Does this make it difficult to determine the market share of a particular company? What are the factors used to make that determination?
Ms Sanderson: There are well-accepted ways of measuring capacity in the industry. For instance, people will consider available seat miles, capacity in that context, and then measure the shares that are held by the different players. People also consider the revenue per mile.
It is not any different from any other industry where there are accepted norms as to how you measure capacity. What typically happens is the competition authority looks at what is industry practice. How I run my business on the basis of available seat miles and how I internally allocate and make investment decisions is a valid way to think about measuring market share.
Senator Maheu: I have a very specific concern about how this bill deals exclusively with Air Canada. It is a national airline, serving our country from coast to coast, with government insisting they offer service in both official languages, which in some instances gives them problems that other airlines do not have.
My fear is that proposed section 104 is arbitrarily giving special measures to one person to impose administrative and monetary penalties. How far will this go? Are we not putting our national airline in jeopardy? Is there any risk to the Canadian population by us allowing the possibility of imposing penalties up to $15 million? How many of these types of penalties could be imposed before Air Canada really starts to feel it? Could it make them rethink their position as the national Canadian airline? If it does, we can forget about bilingualism in our air space and serving a quarter of our population.
Could you comment on that, or am I in left field in my thinking that there is a serious possibility of harm to the Canadian population if we penalize Air Canada?
My main point is one person having that power without the involvement of a tribunal or court. It depends on who names that person, who he is, what government is in power and how much concern we have for a certain group of our population.
[Translation]
Mr. McTeague: Senator Maheu, I appreciate your question. I will read you the situation as it is described in clause 11.4 of Bill C-23:
Where the Tribunal makes an order under subsection (1) or (2) against an entity who operates a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, it may also order the entity to pay, in such manner as the Tribunal may specify, an administrative monetary penalty in an amount not greater than $15 million.
[English]
A company like Air Canada would have nothing to fear if, upon a review by a tribunal, they have engaged in an anti-competitive act. While we are concerned about competition, our concern is not simply that the commissioner would simply be able to levy a $15 million penalty; that is not what this bill envisages. It suggests that should they be found guilty of having engaged in anti-competitive acts, only then would there be an administrative penalty. I do not see how that would detract or derogate from their excellent policy.
[Translation]
I obviously accept the bilingualism policy in air transportation. In other circumstances, we could certainly talk at greater length about the other airlines that compete against us in this area and that are also obligated to reflect this reality in our country.
Senator Maheu: They are not subject to our Official Languages Act. I thank you, because we will probably be inviting you to appear before another committee.
[English]
Ms Sanderson, would you agree that the possibility is not there, in any way?
Ms Sanderson: We have had a history in this country of separating prosecution and adjudication. We should maintain that, as it works. There were features in earlier versions of the bill where the commissioner had a number of powers. Now there will be application to the tribunal for some of these interim relief provisions. If the tribunal is in the position where they are determining if there has been an infraction, and there is full due process where the commissioner and Air Canada present their cases, there is no need to be concerned about the commissioner. One person chooses to do the prosecution and the defence has to be brought forward.
In the context of the administrative fines, if we care about deterrence, we do not want predatory actions or abuses of practice to occur by any company. Why is it only Air Canada? Frankly, the $15 million administrative penalty should apply across the board. In Europe, there are very large administrative fines that competition authorities issue. Presumably, when a company there is thinking about making the decision to predate, it is deterred by the risk of incurring these fines.
Senator Kroft: Mr. McTeague, in terms of parliamentary process, you will recall the role we played and the action we took in this committee in terms of amendments to the money-laundering bill. With that bill, there were four amendments, and most of them had to do with various aspects of due process and professional practice. That experience has heightened my concern here, as that bill had come from the other place and was presented as being the result of a review. As we examined it, there was a general consensus that there were flaws in terms of process and the constitutionality of some of the provisions should have been reviewed. After sober second thought, there were some amendments.
I am concerned about — and I do not think, in your words, I am being a legal purist — the provisions that give some dramatic arbitrary powers. What comfort can you give this committee in terms of how thoroughly your committee processed, and the debate in the House of Commons pursued, the concerns that might have been inherent in the powers given under proposed section 104?
Mr. McTeague: Senator Kroft, I certainly would not want to get into the purity battle. We would both have a bit of fun with that. It has been a long time since I have seen a bill go through the House of Commons at the end of such a very long and exhaustive process, and I allude, of course, to what I perhaps failed to mention to Senator Kelleher: the public policy forum, the Van Dusen report and five years of deliberation by an Industry Committee, which of course had the confidence of the House sufficient to not need or to see the necessity for a vote.
As it relates to 104, I think it has become very apparent to most members of Parliament, certainly those I have discussed it with and certainly those who have had no objections to the idea, that you need a vigorous and effective umpire, and someone who has and can respond instantaneously, given the very narrow margins that exist in many industries but specifically uniquely to this industry as it relates to airlines. I do not think we should be in a position of second guessing the commissioner. Let us give the man some credit. He has done a good job where he has been given the tools.
The difficulty is that those who tenaciously hold to the idea of due process and concerns about constitutionality are at the same time apparently oblivious to the argument of what is occurring in our economy. We are not suggesting that someone who has been accused will be convicted of a particular anti-competitive act. We are simply saying that there is a strong sense that something is wrong here, so we want to arrest that particular situation until such time as the tribunal looks at it. The tribunal has an experience of taking a rather long time even before it hears cases, specifically in this industry, in airlines.
I point out to you what has happened in the case of WestJet and Air Canada. A complaint that came in August of 2000 has not yet been heard let alone decided upon.
Senator Kroft: Ultimately, there will be an action and a defence to that action, and there would be a resort to the tribunal. A case could nevertheless still be in the legal process for a long time no matter how it was initiated. You must separate these two things.
Mr. McTeague: Senator, CanJet no longer exists as a company. Its case is, by all accounts, still before the tribunal with respect to the temporary order that we are talking about under proposed section 104. That case has yet to be resolved.
The important question is this: What guarantees are there to ensure that when the Commissioner of Competition believes there is a problem the tribunal will give quick and effective remedy to halt a situation that may have irreparable consequences? More important, we all believe in certain democratic and fundamental principles in law, but one that I know that operates in my streets, in my riding and right across the country is ``justice delayed is justice denied.''
I am concerned that we are second guessing something that does not have the effect of harming a particular party, which may very well find itself questioning why this has happened, but nevertheless may prevent an otherwise cataclysmic occurrence in an industry for which the consequences may be impossible to recover. That is the concern. We have basically said that in cases of ``force majeure,'' and we believe this is one industry that exemplifies it, not just in terms of our own imaginations but in the broad public interest, the commissioner perhaps has the opportunity and be empowered with the opportunity to respond to this.
Perhaps the model of separation of administration and those who enforce and those who adjudicate is not the perfect model that fits the Canadian or for that matter the international concerns. I understand that the OSC has certain powers to stop an activity before harm is made. You do not have to spend five days or five years before a court or before a tribunal explaining why we should stop a situation that may have irreparable harm. I suspect the same kind of wisdom that exists in another country where the commissioner has those powers, or his or her equivalent, should also be here in Canada. We should not be allowing anti-competitive activity to occur simply because there are those who believe it is somehow an infringement, unspecified as it might be, to their rights.
Senator Gustafson: I am questioning whether I should ask a colleague this question, having served with him for some time. Is the deeper problem that we face here the one of competition? The unions indicated that we cannot compete with the Americans. All kinds of people are flying out of Minot, North Dakota, because of the rates. All kinds of people are flying out of Vancouver. I do not know the eastern situation, but I am sure the same type of thing is happening. Also, you can fly from Toronto to some island in the south, accommodation included, for $670, but a flight from Regina to Ottawa costs $2,200 return.
Is this not really the crux of the problem that we are facing as Canadians? We are not only facing it in Air Canada, we are facing it in numbers and numbers of areas that I could mention to you that I will not.
It really comes down to one thing: We are being squeezed. We have a 60-cent dollar, and I understand very well the advantages of that, but we are also facing some very difficult disadvantages when it comes to competition.
Mr. McTeague: Senator, I suggested that there are some inevitabilities about our economy, and that is probably a pretty accurate portrayal of what I was referring to. I am not saying that Canada should have exactly the same prices and the same regime as the United States. We have a very solid system, our Competition Act notwithstanding. We have been the model for other countries, South Africa being the example.
On the question of scale, are we able to do in Canada what they do in the United States? Clearly not. The economy of scale is not there. Does it cost more to fly from Toronto to Ottawa than from Toronto to London, England? Probably.
My interest here is simply that in instances where there is competition it is not sufficient to say that we are simply going to meet competition. My concern respecting Air Canada is that, in the absence of any type of regulatory oversight and someone saying there is a fine line between competition and predatory pricing, the ultimate consequences may be higher prices for consumers, if there is not the kind of supervision and the ability to say that this may very well constitute a harm from which we can never recover.
The Deputy Chairman: Our next witness is Mr. Peter Greensmith. Please proceed.
Mr. Peter Greensmith, President, Canadian Survey Research Council: I am here on behalf of the market and survey research industry. We appreciate the opportunity to give our comments.
Our focus on Bill C-23 is strictly on the deceptive contest part of it. I am only directing my comments to that. We basically support and do not take issue with what is already there; we simply would like to see it taken a little further.
For the benefit of those people who are not too familiar with our organization, the Canadian Survey Research Council, CSRC, is the umbrella organization for the market and survey research community in Canada. We represent the better interests of the majority of large marketing research companies and the major corporations that use market research and survey research.
One of our primary mandates is to protect the good relationship that exists between market and survey researchers and the public. In fact, our dependence on voluntary cooperation from the general public, or other publics, to perform our work properly puts our interest and the public interest in fairly close alliance.
As I mentioned, we support the legislation referring to deceptive contest but we feel that it could go further to protect Canadians from all forms of deceptive solicitations, not just deceptive contests. When the rights of Canadians are infringed upon, as they are with deceptive contests, mistrust among the public is generalized and tarnishes legitimate industries such as our own that rely on unsolicited communications to conduct their affairs.
I will not go into the self-regulatory things that we do, but the basic tenets of our professional standards are in honest representation and public privacy rights. These are cornerstones of our professional standards. An atmosphere of public trust, which means higher cooperation, is critical to the quality of our work; it is also critical to the users of research both in the private and in the public sector who rely upon our information to make product or policy decisions based on people's true and accurate opinions.
A recent survey that we conducted last fall — a survey on surveys, if you like — indicated that Canadians did hold a favourable attitude towards market and survey research. They understood how it had a useful role to play and, in fact, even appreciated the opportunity to make comments. In this sense, it can be regarded as a form of democratic input that is appreciated by the public.
However, the same survey was somewhat alarming in that it indicated that a high level of respondents, over 52 per cent, had reported having been ostensibly contacted for a survey that turned out, in reality, to be a direct sales pitch. In other words, they were victims of dishonest representation, something that we in the industry call mugging — marketing under the guise of research. Such unscrupulous solicitations clearly hurt our industry and all other legitimate industries that rely on public trust to conduct their affairs.
This aspect was addressed in 1999. Strict provisions were added to the Competition Act that went a long way towards deterring these kinds of deceptive telemarketing practices. Specifically, the 1999 amendments required telemarketers to not misrepresent themselves. They must now up front say who they are and why they are calling. We, of course, support those amendments. I would emphasize though that that related to a problem of deceptive telemarketing, and those provisions related only to telephone communication.
In Bill C-23, we also support the changes vis-à-vis deceptive contests in all forms of communication, not just through the mail. However, yesterday, the issue was deceptive telemarketing; today, the issue is deceptive contests; tomorrow, the issue may be deceptive something else. In a nutshell, the Canadian Survey Research Council is proposing is a logical combination of these legislative elements to broaden the legislation to prohibit all forms of deceptive solicitation, not just deceptive contests delivered by any medium of communication.
Senator Poulin: Mr. Greensmith, am I understanding you correctly, in that you are saying that, when Bill C-23 brings changes to avoid the deception and contests, you would like that amendment to the Competition Act to be even stronger to avoid all types of deception regarding solicitation, for instance?
Mr. Greensmith: Yes. The bill appears to have been recently changed to include other media than regular mail, electronic mail or other media. We are also suggesting that it would be helpful if it were extended to all forms of deceptive solicitation — some of those forms that have been already addressed in the Competition Act with respect to misrepresentation over the telephone. The broader issue has already been addressed to some extent; however, perhaps it would be more comprehensive to simply prohibit all forms of deceptive solicitation by any medium of communication.
Senator Poulin: This is a question on a totally different matter since you are a specialist on market research and your association even does surveys on surveys. One of our witnesses yesterday, a former Deputy Minister of Transport, was telling us that he felt that the definition of ``dominant carrier'' that we have been working with has different definitions in the transportation industry. In other words, maybe it should be defined regionally instead of nationally.
Let me give you an example. I am from Northern Ontario, and one of our main carriers in that area is Bearskin Airlines. Whenever we have been discussing the changes to the Competition Act and we have been referring to the dominant carrier in the airline industry, we have all thought of Air Canada because it occupies nearly 80 per cent of the market. How do you feel about that as a specialist in market research? How would you define the dominant carrier in transportation?
Mr. Greensmith: Basically, you need to determine whether you are talking about dominance in a national situation or in a regional situation. If one were focussing on a region, we would see who was dominating that region. That is how we would talk about it.
The Deputy Chairman: You talked about extending the focus of the act to include all deceptive advertising. I think that there are laws to stop most deceptive advertising.
In the area of telephone solicitation, do you think that there is a responsibility for the phone companies, much like there is for the broadcaster or the print carriers, to be policing what people are doing over the phones?
Mr. Greensmith: Certainly, the CRTC is interested in the phone companies playing a role like this. I am not.
The Deputy Chairman: How would you stop it? You can say that you cannot do something but you have to find a way to stop people from doing something. How would you stop people from being deceptive on the phone?
Mr. Greensmith: Obviously, there is a need to clearly define the kinds of deception one is talking about. You will remember that when I talked about our survey we found out that a high percentage of people were still being mugged by people marketing under the guise of research and not being honest about why they were calling. This is in spite of the fact that the Competition Act was changed in 1999. It is illegal to do that.
This needs to be brought to the attention of the appropriate authorities to take action. It needs to be reported. It is up to the public to make those reports.
From our perspective, much of this work is with the general public. If this happens in the business community, then it probably is more likely to get reported. The general public sometimes has a degree of tolerance or they do not know what they can do. They do not know that they can talk to the Competition Bureau or the CRTC.
One of our industry methods of self-regulation is that our surveys are registered. CSRC has a survey registration system. It is a kind of open-line dialogue with the consumer so that they can establish the legitimacy of the survey and can make complaints or comments.
As you say, the situation needs to be brought forward.
The Deputy Chairman: Thank you very much Mr. Greensmith.
The committee adjourned.