Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 14 - Evidence, November 27, 2012
OTTAWA, Tuesday, November 27, 2012
The Standing Committee on Transport and Communications met this day at 9:32 a.m. to study the subject-matter of those elements contained in Divisions 5, 12 and 20 of Part Four of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.
Senator Dennis Dawson (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I call this meeting of the Standing Senate Committee on Transport and Communications to order.
[English]
This morning, the Standing Senate Committee on Transport and Communications continues its pre-study of Divisions 5, 12 and 20 of Part 4 of Bill C-45.
[Translation]
We are pleased to have with us Pierre Houle, Treasurer of Air Canada.
[English]
He is accompanied by Laura Logan, Director, Security Systems and Regulation.
[Translation]
Welcome, Mr. Houle. We will begin with your remarks and then we will move to questions from committee members. The floor is yours.
Pierre Houle, Treasurer, Air Canada: I would like to thank the members of the committee for inviting me to speak here today about Air Canada's views regarding the legislative amendments to the International Interests in Mobile Equipment (aircraft equipment) Act, tabled by the government through Bill C-45.
As you are aware, the proposed legislative amendments are related to Canada's ratification of the Cape Town Convention and Protocol as related to aircraft equipment, which is aimed at providing airlines with the means to achieve meaningful savings and efficiencies in respect of the financing or leasing of aircraft.
Canada was a signatory to the 2001 Cape Town Convention, but has not yet ratified it. Ratification of the 2001 Cape Town Convention is critical for Canadian airlines to benefit from its provisions.
Air Canada previously expressed that it welcomed the proposed amendments to the act. Air Canada, together with a number of interested parties, have been advocating for the ratification of the 2001 Cape Town Convention since it was signed.
From an airline's perspective, full implementation of the convention and protocol will result in a reduction in actual financing costs to acquire aircraft equipment. Beyond the airlines, full implementation in Canada would benefit all aviation industry stakeholders, including aircraft manufacturers, airlines, financiers, lessors, and ultimately, passengers.
Implementation of the convention and protocol is a rare opportunity for the government to implement a virtually cost-free measure that can be taken by government in support of our industry and one that would have only winners and no identifiable losers. In fact, the delay in ratifying the convention and protocol before has cost Air Canada many millions of dollars in higher financing fees or margins, on previous deliveries, paid to parties that would have been indifferent to receiving lower fees or margins had they been lending to an airline in a country which had ratified and implemented the Cape Town Convention.
[English]
Why is this? Lenders charge lending fees and loan margins based on the perceived risk of making a loan to a particular borrower. When loans are made to borrowers in jurisdictions having ratified the Cape Town Convention, the risks associated with the loans are perceived as being lower and, in efficient markets, lower risks always translate to lower fees and margins. Financiers are therefore able to reduce risk premiums and offer more favourable lending rates, which in turn would result in significant cost-savings for the Canadian aviation industry.
One of the things to bear in mind here is that this financing is for aircraft that are very expensive. For example, Air Canada's future large aircraft deliveries will each cost in excess of $100 million. Therefore, even small changes to the interest rate or fee percentage can have a meaningful, positive difference for us.
What attributes of the Cape Town Convention lower risk? Essentially, the Cape Town Convention provides for certainty with respect to repossession rights that an aircraft financier may have if a borrower defaults. In addition, the Cape Town Convention provides for greater certainty for registrations of security interests created in aircraft by creating an international registry where all security and rights in aircraft, engines and certain equipment must be registered. Such certainty translates to lower risks for the aircraft financier, which allows the financier to offer more favourable terms to its borrowers.
In addition to lowering borrowing costs for existing sources of aircraft financing, the ratification and implementation of the Cape Town Convention would allow airlines to access sources of financing aircraft that would not otherwise be available in the absence of such ratification and implementation. An example of an additional source of funding is the capital markets in the United States and elsewhere.
One could argue, and Air Canada certainly has tried to argue, that changes previously made by the federal government to the bankruptcy rules in Canada provided benefits to aircraft financiers equivalent to those available in jurisdictions having ratified the Cape Town Convention. Unfortunately, financiers have not viewed this as being sufficient. When lenders can lend in numerous jurisdictions, it is much easier for them to simply check the Cape Town Convention box and lend in jurisdictions where they understand the rules as a result of the Cape Town Convention being applicable, than to lend in those jurisdictions where they need to be convinced that they would be in the same position. As a result, many of these lenders limit themselves to lending only in jurisdictions where the Cape Town Convention has been ratified. Any time you have fewer potential lenders, by definition you have higher potential borrowing costs.
Although it has been a long process, Air Canada is pleased the federal government is taking these steps toward ratification of the 2001 Cape Town Convention. With ratification, Canada would join the growing number of countries benefiting from this important international agreement that will provide Canada's airlines, including Air Canada, with access to more competitive aircraft financing and leasing terms in international financial markets. In particular, Canadian airlines would be able to more easily secure aircraft financing on terms that have been available to U.S. airlines for many years, thus allowing Canadian airlines to be more cost competitive in a North American market.
I will close by noting that the timing of this measure is very positive for Air Canada as we are undertaking some major fleet renewal projects. We recently announced that we have firm orders to purchase five additional Boeing 777 aircraft, which will be delivered next year and in early 2014, and our delivery of 37 state-of-the-art Boeing 787 aircraft begins in 2014. Therefore, prompt ratification is key to achieving the savings on the financing of these aircraft.
I would now be happy to answer your questions.
The Chair: Thank you. I have a short question to start with. Is there an opportunity for Bombardier to get better financing for selling outside the country?
Mr. Houle: The financing benefits are across any jurisdiction in terms of the ability to borrow at cheaper rates.
For Bombardier, as a manufacturer of aircraft, to the extent financing becomes cheaper, they would see that as a benefit in terms of their ability to sell more aircraft because they would be able to have, in general, cheaper financing for those aircraft.
The Chair: They would also need the ratification?
Mr. Houle: As far as I am aware, they have been one of the parties pushing for ratification since 2001.
Senator Merchant: I have a couple of questions. First, why has the federal government been reluctant to ratify the Cape Town Convention for over 10 years now?
Mr. Houle: At the outset, what the government did was change the bankruptcy laws to mirror Cape Town. Effectively, the government at the time thought it had done sufficiently what was required to be able to provide borrowers with the attributes of Cape Town to get lower financing rates. I think that was probably what took place at inception.
However, as I stated in my remarks, lenders are more likely to lend, to the extent it is easier, and it is easier by actually ratifying Cape Town. I would say at this point it is more form than substance, as the rules already exist in the bankruptcy laws, and this is simply giving it a different form, which is beneficial to the industry.
Senator Merchant: Second, you mentioned that several countries have ratified the convention. I know you mentioned the U.S., but can you name a few more countries? How many countries have ratified?
Mr. Houle: I am not aware of the number of countries at this point. That is something that can easily be provided to you, if need be. I do not have the list in front of me.
Senator Merchant: Finally, could you elaborate a little bit? You said this would create an international registry where all security and rights, aircraft engines and certain equipment must be registered. "Security" is a word we hear a lot. What are you talking about there?
Mr. Houle: When a financier lends money to someone, they take security over the asset that is otherwise being financed, in this case an aircraft. Absent the Cape Town Convention, the security registrations are done locally, so in a provincial jurisdiction. Typically in Canada it is done with provincial registries.
With Cape Town there is now an international registry for this purpose. For all aircraft being financed, the security registration will be done internationally. I believe the registry is in Ireland.
[Translation]
Senator Boisvenu: Congratulations for your very educational brief that allows us to understand the nature of the convention, its impact and its advantages. I was wondering how the convention would make life easier for carriers.
In the last 10 or 20 years, Air Canada has been in some fairly significant financial turbulence. This has led you to renegotiate all your collective agreements with your workers downwards in order to increase Air Canada's profitability. I do not understand why Air Canada has never declared publicly that Canada should ratify this convention, given that you are saying that it will bring millions of dollars in benefits. What has Air Canada done politically in the last 10 years to put pressure on governments, both Liberal and Conservative, to get the convention signed?
Mr. Houle: Over the years, representations have been made to the government pointing out the importance of ratifying this convention.
Senator Boisvenu: It has been done quite discreetly.
Mr. Houle: It is done through the federal bureaucracy. I do not know at which level it happens, but certainly, representations have been made on a number of occasions.
Senator Boisvenu: It was not you?
Mr. Houle: No, it was the legal department.
Senator Boisvenu: What will the impact be? Canada has signed the convention that seems to match your expectations in all aspects.
Mr. Houle: Yes.
Senator Boisvenu: What will be the effect on ticket prices for passengers?
Mr. Houle: You cannot make a direct link with the price a passenger pays for a ticket. We can say that, to the extent that the convention leads to lower costs for Air Canada, it will be reflected in lower prices for our passengers over time. But there is no direct link.
Senator Boisvenu: Have the Americans signed the convention?
Mr. Houle: I think so.
Senator Boisvenu: With Canadian and American airports competing in some places, the Americans, not us, get an advantage from the fact that they have signed the convention.
Mr. Houle: The Americans had an advantage already. The convention reflects American legislation on bankruptcies they call the 11-10. They always have had an advantage in access to capital and financing markets. It just gives the same advantage to the other countries that signed the convention.
Senator Boisvenu: How many countries have signed the convention at the moment?
Mr. Houle: I cannot answer that.
Senator Boisvenu: Are there countries in Europe that have signed the convention?
Mr. Houle: Yes, countries in Europe have signed the convention.
The Chair: If you could send the number and the list of countries that have signed the convention to our clerk, it would be greatly appreciated.
Senator Verner: You must have been very pleased with the convention has been signed after waiting for 11 years. You mentioned the reason that it had to take so long when you answered a question from my colleague. Canada has chosen to do things a little backwards. Do you know why they decided to do things the way they have been done for these last 10 years, instead of just signing the convention? What factors were involved? But it still seems like very good news for you. It will give you some decent breathing room in your financial operations. Do you have any idea?
Mr. Houle: Not just for Air Canada, for the whole aviation industry in Canada.
Senator Verner: For them too.
Mr. Houle: I do not know why that approach was chosen in 2001. As I said before, they probably thought that it was enough, that it provided benefits, even though they were not in the same form as if the convention had been ratified. There were some benefits because the Bankruptcy Act was changed to reflect it. Unfortunately, over time, a lot of lenders are asking for complete ratification in order to really give us full access to the benefits in the convention. I cannot say why things were done that way.
[English]
Senator Eggleton: The registry that you say is being set up gives information to people who are financiers or lenders: They know where the aircraft is and what the inventory is. You are saying the existence of this agreement leads to greater confidence on their part, which results in lower borrowing costs. I understood all that.
This is also based on having access to this aircraft if they need to seize it for any reason. If something goes wrong, there is a default. How does that part get any easier with this agreement? I take it they still have to go to local courts in the country, provincial or federal courts in our case.
Mr. Houle: There remains political risk that the country will not respect the convention, but to the extent the country does respect it, the convention is clear in terms of the rights of the financier in the context of a default by the borrower.
The ratification of the convention does not change the legal obligations that already exist in Canada. It just changes the form to make it more transparent to international financiers. Without adopting the convention, financiers have to fully understand the legal regime in Canada, so that requires a fair bit of work for them. A lot of times they would rather not do that and lend somewhere easier. The Cape Town Convention makes it easier in terms of saying yes, Canada is a signatory; go forward and lend on the basis wherein they know what that means without doing significant legal work.
Senator Eggleton: However, it does not diminish the opportunity of the borrower to access the court system to defend their case.
Mr. Houle: Absolutely. It does not change anything.
Senator Unger: Thank you for your presentation. It was very helpful.
Effectively, Cape Town is a rubber stamp for lenders. If someone is a member of Cape Town, the lenders feel reassured. As you said, Canada has a mirror process, but it is really not good enough.
Mr. Houle: It is not good enough in the sense of attracting the greatest amount of potential lenders to the industry. A lot of lenders are big and therefore have the resources to do a jurisdictional analysis and say Canada is a good place to lend, irrespective of whether it has adopted Cape Town or not. A lot of lenders do not have the capability to do that. For Air Canada to attract lenders, we have to educate them on the legal system in Canada. Having the Cape Town Convention ratified eliminates that requirement. Lenders need to know the Cape Town Convention and know that it is the same in every country. It makes it easier for everyone and makes it simpler in terms of the ability to lend. Ultimately, it makes it less risky and therefore provides for lower costs and for savings for the industry.
Senator Unger: It makes it easier for both sides.
Mr. Houle: Yes.
Senator Unger: Going forward, how long will it take for this process to be fully ratified?
Mr. Houle: My understanding is that once it is ratified in Canada, it needs to be deposited with the UNIDROIT and then there is a process with them in terms of adopting it at that level. I do not know how long that would take. I suspect probably two to three months.
Our first delivery occurs in June of next year, and we will be looking to finance those in advance of June, maybe the March time line. To the extent all is ratified, deposited and approved at the UNIDROIT level, then we will be able to effect the savings that we are talking about. That is why I referred to proper ratification being important to Air Canada.
Senator Unger: If it is not ratified quickly, it could affect the purchases that you are planning for.
Mr. Houle: The financing of these aircraft, yes.
Senator Unger: Does foreign exchange have any issue here because it is dealing with interest rates?
Mr. Houle: There are no foreign exchange issues.
The Chair: Ms. Logan, since you will be saving all of this money, there will be costs to the interactive passenger information list. You have to build up a list, manage it and share the list with the CBSA. Has Air Canada made an evaluation of what it can mean for them to have to manage these lists?
Laura Logan, Director, Security Systems & Regulatory, Air Canada: It all depends on how it is actually enacted because there are interactive advance passenger information requirements, or iAPR, in place in a number of countries. If we can work with the CBSA to follow the standards already there, the costs of bringing it online in Canada are actually minimal. If they demand non-standard requirements in terms of methods of communication or the information that is required, then the costs start to rise from there.
Typically, some of these systems have costs in the order of a million dollars to implement. The ongoing transmission costs can also be substantial, but that will be there regardless of what way the information is actually formatted.
Yes, there are costs associated with doing it, but there are also potential savings for us. If we are able to identify passengers who will not be admitted to the country prior to bringing them to the country, then we save the inadmissible fines and return costs. There is a trade-off.
The Chair: That leads me to thanking you for both your presentation and your comments this morning.
I would like to remind the audience and honourable senators that tomorrow evening the committee will hear from the Office of the Privacy Commissioner of Canada on Division 12. After the witnesses, we will meet in camera to discuss a draft report. As you know, we will have to make this report available. Contrary to last time, Senator Greene and I will not be appearing in front of the Finance Committee; the report will be tabled directly in the chamber, normally on Thursday. We will be meeting after the witnesses tomorrow to look at a draft report for the chamber.
(The committee adjourned.)