Proceedings of the Standing Senate Committee on Transport and
Issue 2 - Evidence
OTTAWA, Wednesday, October 27, 1999
The Standing Senate Committee on Transport and Communications, pursuant to
subsection 47(5) of the Canada Transportation Act, met this day at 1:35 p.m. to
consider the order authorizing certain major air carriers and persons to
negotiate and enter into any conditional agreement.
Senator Lise Bacon (Chairman) in the Chair.
The Chairman: Honourable senators, we are here today to discuss the Order in
Council authorizing certain major air carriers and persons to negotiate and
enter into any conditional agreement.
Our first witnesses this afternoon are from the Consumers' Association of
Ms Gail Lacombe, President, Consumers' Association of Canada: Thank you for
giving us the opportunity to make CAC's case for Canadian consumers.
The Consumers' Association of Canada is a 52-year-old, voluntary organization
with a national office in Ottawa and branches in the provinces and territories.
CAC is a member of Consumers International and bases its policies on the
internationally accepted Consumer Bill of Rights. These rights include the
right to participate, to receive balanced information, and the right to choice
in an open marketplace.
CAC has always been supportive of the federal Competition Bureau. We were active
in lobbying for the establishment of that agency, have made many submissions to
the bureau, and believe that it serves a critical role in protecting the right
of Canadian consumers to adequate choice in the marketplace.
CAC divides its work into issues committees, networks, and task forces. It sets
core priorities for each year at its annual general meeting. Frequently, we are
forced to set our priorities aside to deal with essential emerging issues. This
year, bank mergers and the re-creation of a monopoly in the Canadian airline
industry have kept our trade task force quite busy.
Ms Jennifer Hillard, Vice-President, Issues and Policy, Consumers' Association
of Canada: I should like to touch on some of the major points of concern for
Our first concern was with the suspension of the Competition Bureau under
section 47 in August. We felt that it was not a justified suspension of the
rules. We did not feel that there was an extraordinary disruption in the
effective, continued operation of the national transportation system. After
further delving into the research behind this, we find that in fact Canadian
Airlines has a very similar number of occupied seats and capacity to other
airlines. In looking at the way it has been managed over the last few years and
the number of times it has been bailed out, we felt that in fact what was
happening was that one poorly managed airline was going under. Rather than
letting the market forces work and allow someone to buy it out, we seem to be
being pushed into a monopoly situation of one kind or another. As a consumer
organization, we do not like monopoly situations.
We lobbied hard for deregulation of the airline industry. We have been very
happy from a consumer perspective with what has happened in the industry since
we got rid of the monopolies and much of the regulation. Many small airlines
have sprung up to serve the remote communities. Entrepreneurs have gone to work
and set up services, for consumers, that meet the needs of small areas. The two
major airlines have served the large centres, while holiday trippers use the
charter airlines, which only carry about 20 per cent of the volume of
The first proposal that seemed realistic was the Onex proposal. As you all know,
that has gone through several stages since it was first announced. We have many
concerns, as do many other Canadians, about the degree of American influence in
the Onex proposal. That is not to say that we are opposed to changing the 25
per cent foreign ownership rule. On the contrary, if that would enable us to
keep some competition in the airline industry, we would gladly have that rule
changed, but not in a monopoly situation. So long as there is a dominant
carrier, we would not want that carrier to have more than 25 per cent foreign
ownership. However, if a foreign owner would buy Canadian Airlines and operate
it effectively with Air Canada, we feel that would be an ideal situation for
We are also worried about some of the other aspects of American influence in the
Onex deal, particularly the reservation system and the food suppliers, and the
impact that that may have as a spin-off on Canadian influence and Canadian
We have gone specifically through some of the principles that Onex provided,
although we agree very much with Mr. von Finckenstein's comment that voluntary
commitments and principles are no substitute for market forces in a competitive
Regarding ticket prices -- and everyone is talking about capping ticket prices
and not allowing gouging of consumers -- when you travel on an airline today,
you are faced with a smorgasbord of airline fares. I defy anyone to tell me
which ticket prices they are planning on capping. We are concerned especially
for our northern members who are working on this issue. We have asked not only
our trade committee, but also our members from the Northwest Territories and
from the new territory of Nunavut, to provide us with their perspective because
it is difficult for those of us who live in cities to understand the issues.
They are concerned about what will happen to ticket prices in the North,
especially since they are beginning to see some competition in some of those
smaller places. They are really reaping the benefits.
The next commitment from Onex was with regard to fairness to employees. Our
research shows that both the Canadian airlines have a much higher number of
employees per passenger mile flown than American airlines. We think that is
reflected in the quality of service that we enjoy. Actually, Canadian Airlines
has more employees per mile flown than Air Canada. We feel that if they
rationalize and come together, that number will have to drop down to closer to
the American level. The quality of service will probably go with it, as will
the fairness in treatment of employees. On the other hand, we have not spent
too much time on that issue because we feel that the unions will do a good job
of presenting their case to you.
The issue of service maintenance to smaller communities is another commitment.
Our big concern here is: How do you define "smaller community" and
how do you define "similar quality of service"? Presently, our
members from Saskatoon complain heartily that they have great difficulty flying
directly to Ottawa and Toronto. They are transported through Calgary, Winnipeg,
and Regina. Will we put Saskatoon aside as a smaller community? If we do that,
then how do we deal with Churchill, Thompson, Yellowknife, or some of the even
smaller communities? If we are to deal with maintenance of service to smaller
communities, we must look at what they have presently, determine some long-term
commitments, set some benchmarks, and devise a timely review process to ensure
that the maintenance of the service is satisfactory for consumers.
The next commitment from Onex was that seat sales would continue. We feel that
seat sales are mostly stimulated by competition and unbalanced capacities.
While we are aware that there will always be cheaper fares while they try to
fill empty seats, once the fixed-price seats have been sold, there will not be
the sort of bargain basement sales that we have experienced over the last few
years. There is also a concern that continued seat sales may be a cloak for
predatory pricing that would be used to effectively eliminate the competition.
The next commitment was to the quality of inflight service. We have been
concerned about the lack of attention to customer service. Here, they are
talking about inflight service. We feel that most of that quality will continue
simply because employees will have to be trained to compete on international
routes with the quality of service on international carriers. We are also
worried about the quality of service in the terminals. How quickly you can
check in, how quickly your baggage arrives, and how you are treated if
something goes wrong are all important to consumers. We do not feel enough is
being done in looking at how that sort of quality of service will be maintained.
Bilingual service will be enhanced, we are told. Again, we must set some
benchmarks, look at the current situation, and ensure that it is maintained and
The next promise was on frequent flyer points. Both airlines have committed to
honouring frequent flyer points. Partly because of the sort of "selfish"
attitude of consumers, when this merger was first proposed, most of the calls
to our regional offices were from people who were concerned about whether or
not their points would be honoured. Both alliances have agreed to honour them.
However, we wonder whether they will either bring in a "use them or lose
them" policy, or devalue them so that it will suddenly cost you 30,000
points for a trip instead of 15,000. This was of particular concern to our
northern members because they build up their 15,000 points for a domestic flight
quite quickly and it saves them a lot of money.
The other level of concern on this issue was from our people who were often
flying for business reasons, but not necessarily as business travellers. These
people go up through the steps and the perks of the frequent flyer programs.
They are asking: If there is a monopoly situation in Canada, what incentive is
there for airports that do not serve a lot of international traffic to maintain
the larger business centres and other things that are quite important to people
who travel a lot?
We are concerned about review and compliance. We do not think that the
ombudsman, as proposed by Onex, would be independent enough and we feel that
the suggested once-a-year reporting indicates the low priority they are placing
on it. Again, we are concerned about how the commitments will evolve through
the adjustment period.
The Air Canada proposal is much less detailed. We hope that, once they come out
with information for their shareholders on November 8, we will have a lot more.
On the surface, it sounds considerably more consumer friendly and more "made
in Canada" than the Onex proposal. On the other hand, when you take a
closer look, it is still a monopoly in sheep's clothing.
We spent a lot of time looking, through our members, to see if anyone could find
another industry where one company had attempted to run three different
businesses in competition with each other. We have not been successful. We have
looked at the banks and the bank-owned insurance companies, but the glass walls
there did not work and we had to bring in tied-selling legislation. We looked
at the publishing industry and some newspapers that had bought out broadsheets
and tabloids in competition with each other, but those cater to a different
market. We do not see how they propose to run three separate airlines with one
company managing them all. The small one out of Hamilton is a little different
because it is located in a different market. On the other hand, it will also
present a barrier to entry into the eastern market for a competitor like
We are encouraged by the possibility of Canadian partnering with Delta in North
America. We think that will offer more consumer choice. However, if they really
want to run these as two separate airlines, why do they want to pull Canadian
out of one area instead of leaving us the option of the two different alliances
on international routes? The most encouraging feature of the Air Canada proposal
is that they want the Competition Bureau to look at it, whereas that is not the
case with the Onex proposal.
Both of these proposals are for a monopoly situation. We feel that, if we step
back and slow everything down for a little while, there may be another option
for the government and the Competition Bureau to consider. For example, perhaps
a foreign company will buy Canadian so that we will still have some competition
in the marketplace.
We have looked at the barriers to entry for competition and we have gone through
the recommendations that Mr. von Finckenstein made to Mr. Collenette. He
addressed most of our concerns in his paper and we were pleased with that. It
strengthens our conviction that the best way to deal with this is through the
Competition Bureau, which has proved an effective protector of Canadians over
the last few years.
In conclusion, we hope that you will urge the government to slow down on this
matter, bring the Competition Bureau back into the mix to look at both
proposals thoroughly and, perhaps, talk with Mr. Collenette about an
alternative to a monopoly situation for Canada. We echo what Mr. Chrétien
said on October 4, that the government is responsible for making sure that
consumers are protected.
Senator Forrestall: Welcome. I could not agree more with what you are saying. A
perception has been expressed that the airline industry in Canada was in a dire
situation, an extraordinary situation, which led the government to take this
draconian step of suspending the role of the Competition Bureau. I want to ask
you about that perception.
In my experience over the last 30 years or so, the Consumers' Association of
Canada has been a very able watchdog. You are diligent and do your homework.
Had there been a major crisis in the passenger airline industry, I assume you
would have noticed and addressed it, but you have not. Why is that?
Ms Hillard: We did not see the situation as a crisis. We have seen Canadian
Airlines bailed out a few times. It seems they are not able to manage in the
market. They have made a few not-very-wise decisions. They bought Wardair when
it was loaded with debt and they could not merge the cultures of the two
airlines. Consumers did not get the benefits that were promised out of the
merger, which were to maintain the high quality of Wardair service along with
the convenience of Canadian Airlines. We have seen Canadian Airlines bailed out
by the government and yet still not managing to recover.
I am not a big-business manager. I am not sure what they were doing wrong, but
they just do not seem to have managed their airline properly.
Senator Forrestall: Many people are concerned about how long this process may
take under the present circumstances. The minister has suggested things could
be accomplished in a matter of months. I have a different view and I would be
interested in yours.
Ms Hillard: I watched Mr. Keyes' reaction yesterday when he was asked to have a
report in before the end of November. I do not know the reason for the untimely
rush. Canadian Airlines is claiming they have enough money to continue until
next summer; however, as a result of all this, their passenger volume has been
dropping off. That may cause some pressure that otherwise would not be there.
We feel the matter has been going in the wrong direction. We could see there was
a danger of Canadian Airlines going bankrupt. Obviously that would have had the
same monopoly effect as the two airlines joining. We also realize that this
government has a very large majority. We recognize that the Competition Bureau
rules on airlines were very restrictive in terms of how the parties were able to
talk to each other.
Perhaps suspending section 47 was going too far. The government could have
better explained the process to the Canadian public in terms of our peculiar
situation here. This is not Europe. This is North America, where the airline
industry is an essential service. We cannot function in Canada without it. Our
railways are gone. There is no other way of getting around efficiently. The
Prime Minister could have explained the necessity of bypassing the rules so
that everyone could discuss the options openly and seek a solution that is best
for Canadians, rather than best for the two airline companies. Perhaps then we
would have some more positive ideas on the table from a consumer perspective.
Senator Forrestall: You commented on the 25 per cent aspect. Do you have any
particular suggestions for the committee with respect to the present 10 per
cent ownership limit per shareholder?
Ms Hillard: There did not seem to be any interest in changing the 10 per cent
until the Onex proposal came forward. That does not look good. The timing of
that decision is unfortunate. I would rather have seen them looking more at the
25 per cent than the 10 per cent, but unfortunately Mr. Collenette made the
opposite announcement yesterday.
Senator Forrestall: Thank you for coming. I too wish we had a couple of days to
dialogue with you on this question, which is of great importance to Canadian
Senator Poulin: I also thank you. Any organization that is 52 years young and
still run by volunteers merits our full attention, respect and admiration.
You raised two issues respecting consumer needs and the importance of regional
airlines because of our country's large size and many small communities. Did
you hear the minister's presentation yesterday to either or both of the
Ms Hillard: I watched the entire Commons committee proceedings and have a
printed copy of it. I also have Mr. von Finckenstein's report.
Senator Poulin: The message we received from the minister yesterday was that he
was also very concerned by those two areas, the consumers and the regional
airlines. Has your association had any opportunity to do comparative research
on the airline industries of other countries with comparable geography and
Ms Hillard: We at CAC like very much to compare ourselves with Australia. It is
a much smaller country with a much smaller population, but the population
distribution and density are very similar. Their population is clustered along
the coast and ours on our southern border, but the number of people per square
kilometre is almost exactly the same.
Australia has two domestic airlines. Ansett is 49 per cent foreign owned but
only operates within Australia and in a few isolated South Pacific areas.
Qantas competes nationally and internationally. Their example leads us think
that it might be a good idea to allow more foreign ownership and so provide
competition with our one big domestic airline, whichever one it happens to be.
Senator Poulin: Are your members comfortable with your position that we should
increase foreign ownership?
Ms Hillard: The majority are. I would not say that everyone is jumping on that
bandwagon. We have a democratic consensus. We work it out and come forward with
a majority position. Definitely, our members would not be happy with greater
foreign ownership of a monopoly airline.
We could not have chosen better words than those of Mr. von Finckenstein in his
report. We should let foreigners compete on Canadian domestic routes. We should
permit cabotage but we must retain Canadian control over the dominant carrier.
Senator Poulin: If you were to draw for us today a picture of a new airline
industry, what would it look like? Please take into account the situation that
we have today because I do not think this problem dropped out of nowhere.
Canadian Airlines identified a very real problem. How would you see this new
airline industry restructured?
Ms Hillard: We must ensure that the barriers are down for the CANADA 3000s, the
WestJets, and, hopefully, the "EastJets", so that sort of vacationing
type of Canadian can have access to those services. However, those are not very
useful for business travellers, and of course whatever happens to business
travellers eventually comes back to the consumer. We pay for it all in the end.
A very good possibility is to let American airlines service Canadian airports,
perhaps flying in and out of one of the hubs of Minneapolis and Chicago. That
would keep some competition going. We would still like to see someone other
than Air Canada buy Canadian and continue its operation, at least within
Canada. It could be set up as a North America-only airline with Air Canada
operating all the international routes.
There are many options that have not been considered because we have been
dealing with these two vicious and competing hostile takeovers and the
responses, and now we almost seem to be in a position where Canada and Canadian
travellers are in fact pawns in a tug-of-war between STAR Alliance and One
World. It seems it has moved out of the realm even of Onex and Air Canada at
Senator Poulin: Have you had a chance to read this document entitled "A
Policy Framework for Airline Restructuring in Canada" that was prepared by
the Department of Transport Canada?
Ms Hillard: I believe that is one we do not have yet.
Senator Poulin: You were hoping for greater involvement by the Competition
Bureau. I believe that page 14 of this document really sets out the process
well, and the minister spoke to it yesterday. Some of your concerns might be
alleviated when you read that.
What is your opinion of the 10 per cent ownership restriction on shareholders of
Ms Hillard: Air Canada can keep within the 10 per cent. The addition of what
Lufthansa, United Airlines and CIBC will own, as I understand it, will still be
within the 10 per cent. Therefore, there is no requirement to change the
current legislation for the Air Canada proposal. However, as I understand the
Onex proposal, it would be 14.9 and we would need to change the rule.
Senator Roberge: You stated in your brief that we should have let the market
follow its own course, let the market decide what will happen. Do you not think
that if Canadian Airlines had been an interesting proposition on its own
someone would have made an offer? Second, if the situation deteriorates into
next summer and Canadian goes bankrupt, what happens to the 16,000 jobs?
Ms Hillard: Obviously if Canadian went bankrupt we would be in a similar
position to what we will be in with a merger. That is why I find the proposed
5,000 job layoffs difficult to understand, how they will keep that number so
Senator Roberge: That is the first offer.
Ms Hillard: The second one is even lower, yes. There may have been some
requirement to sweeten the pot; however, there did not seem to be anyone
looking at buying Canadian.
Senator Roberge: Why do you say that?
Ms Hillard: I believe that is because it is so debt ridden and so locked into
American Airlines. No one looked at all these options. It all happened at once
-- we got the Onex proposal, section 47 was suspended, and suddenly we are off
into this set-up.
Senator Roberge: Perhaps people in the market looked at buying Canadian and
figured that they should not touch it with a 10-foot pole. That is the
situation they are in today.
Ms Hillard: That could be; however, it does not make us any happier with a
Senator Roberge: Of course not.
Senator Kirby: I understand your opposition to monopolies and therefore that
does not surprise me. I believe all of us hold exactly the same position. The
question is, what does the country do in a situation where one of the two
airlines, by all accounts, is effectively about to go under? It was about to go
under in 1992 and the government of the day stepped in and saved the airline.
This is the third time it has been on the verge of going under and, like
swimming, the third time you go down you drown. Therefore, if Canadian Airlines
were a viable business proposition, it is a reasonable assumption that
somewhere along the way someone would have bought it, or at least attempted to
This is not a new event. Therefore, it does seem to me that the real problem is
that one ends up with a dominant carrier, either through a merger or through
the bankruptcy of Canadian Airlines. There does not seem to be any other option
on the table since Canadian is clearly not a viable business proposition and
has not been for 10 years. It has been supported by governments in all kinds of
ways, whether it was grants, tax refunds, or whether it was giving them foreign
routes. A whole variety of strategies has been tried and none has worked. That
has been done through several different managers, so I am not even sure you
could blame the specific individuals who were operating the airline.
If the outcome is a single dominant airline, then it seems to me that we need
your advice on two things. First, do you prefer that we get there through a
merger or a bankruptcy or are you indifferent? You may not care, which is okay.
Second, once we arrive at one dominant airline by either process, your comments
-- including some you did not make in your summary -- lead me to believe that
your preference, out of the proposals in the Competition Bureau letter, would
be to focus on giving a much increased role to foreign investors, i.e. foreign
airlines. Since they are the only entity that would logically do it, you would
not support an attempt to keep foreign airlines out and use instead a more
regulatory approach to protecting the consumer interest. Is that also a fair
Ms Hillard: Absolutely it is a fair conclusion. Obviously, on your first
question, a merger is the best alternative because you have more control over
it than you do over a bankruptcy. However, we are not a group that favours much
heavy regulation. We prefer the marketplace to take effect and we would
definitely agree with the Competition Bureau that that is an alternative. In
addition to which, the minister himself would not be pinned down at the commons
committee hearing on what sort of regulations, if any, would be brought in. At
the same time, we have not seen any proposals for any sort of alternative
measures to heavy regulation to protect consumers. They are not talking about
ombudsman's redress systems, complaint systems, quality standards setting. No
one is talking about any of that yet.
Senator Maheu: I wish to make a few comments on some of your remarks about a
poorly managed airline going under and being bailed out by the Canadian
government three times. How many times do you think we should bail out an
industry like Canadian Airlines? You say you are not in favour of monopoly and
yet you seem to insinuate that if we had several airlines operating, that we
should still control the dominant server. Are we not treating that as part
You talked about our country fearing a lack of service in the North. Is First
Air not serving the North now? Are our major airlines going there? I am not
familiar with all of the routes.
Ms Hillard: There is some competition from some of the feeder airlines as well.
Certainly in Yellowknife and Nunavut they have some competition.
Senator Maheu: That competition, as far as you are concerned, is healthy?
Ms Hillard: Our members there have found much improved service and better prices
since there has been some competition.
Senator Maheu: You made a comment about American airlines having fewer employees
than our airlines. Is that not a sign of things to come? Can we assume that if
Onex's plans do come into effect, we could be looking at just as many job
losses as with the Air Canada proposal?
You spoke about a lack of attention to inflight service as well as airport
arrival and departure services. I am fully conscious of what you are speaking
about. I have waited hours in one airline line-up to get a boarding pass and
the same applies to the service when waiting for your luggage.
One of our other airlines, which I am not going to hide, is Air Canada. You can
get through there very quickly compared to Canadian Airlines, and my
experiences are at Dorval.
I should like to address one last point, the Official Languages Act. I have
noticed on my trips on Canadian Airlines flights that just in the last month
there has always been a bilingual flight attendant available. Prior to that,
French-speaking people travelling from Montreal had difficulty finding a
French-speaking flight attendant.
How do you feel about American airlines coming into the market and how would
that affect our official languages service?
Ms Hillard: I will start from the top in terms of the poorly managed airline and
how often we should bail them out. I would not like to put a number on it, but
I certainly think we have bailed them out often enough. I would not want to see
us bail them out yet again.
In terms of being poorly managed, their percentage of seats filled is about the
same as the North American average. There must be something wrong if they
cannot make that work. It is not that people are not travelling on Canadian
Airlines, because they have the same number of seats filled as the other North
American airlines. Somewhere they must be doing something wrong.
On the subject of control of the dominant airline, we are bound to come out of
this situation with a dominant airline, even if it is not a total monopoly
situation. If you want to encourage smaller, regional players, feeder airlines,
foreigners in the marketplace, you are almost forced to skew the level playing
field to enable them to compete without getting steamrolled by a major airline,
especially one with really deep pockets such as the authors of these proposals
I believe you are absolutely right about the job losses. In the future,
whichever of our airlines becomes dominant, we will gradually slip back into a
similar number of employees per passenger mile flown as the Americans. That is
the direction in which we are going. It is especially unfortunate since Air
Canada won a major international quality service award last year.
In response to your comments on customer service at the airport, that has been
totally ignored throughout this debate. We need to be setting some benchmarks.
Maybe we need "mystery flyers" out there timing things and looking at
the current situation.
One prime example is the chaos that occurred last January during the storm in
Toronto. I do not know whether Air Canada had more passengers than Canadian,
but the complaints at that time were all about Air Canada and the poor way they
handled their customers. They lost many passengers. They had to launch a really
aggressive marketing scheme to get some of them back.
If you look at Terminal 3 in Toronto where all the competitive international
desks are at one end, and you are now going to have the non-competitive,
domestic desks at the other end, when there is a problem, where do you think
your staff will be? They will not be helping these poor Canadians, they will be
helping the people who next time might fly on Delta or United or one of the
other big, foreign airlines.
We must look very carefully at this subject. A completely separate study could
be conducted on what are acceptable service standards, how are they going to be
enforced and who is going to monitor them? What sort of arbitration, customer
complaint, ombudsman and consumer redress systems will there be?
We do not have to reinvent the wheel. There are many things you can look at in
Canada that already exist to deal with that, but so far our discussions have
not encompassed those subjects. When we talk about service, we only seem to be
talking about servicing small communities.
In terms of your concerns on official languages, I could not agree more. I
unfortunately do not speak French, but while returning from France with my
daughter a couple of years ago there was a problem with what we now call "air
rage" on the plane and my daughter actually had to translate for the flight
attendant. The flight attendants on an Air Canada flight from Paris to Toronto
could not communicate with the French passengers and my 20-year-old daughter
had to step in and translate difficult instructions like telling people that if
they did not stop drinking and sit down, she was going to close the bar.
We should start looking at customer service now. We should look at the current
service and make sure that it does not slip below those levels in the future.
That is the first step on that road.
Senator Maheu: On the language issue, do you agree that American airlines would
have enormous difficulty in meeting our two official languages requirements?
Ms Hillard: Yes, I do agree. However, it is not just the two official languages.
We are a multicultural country. We are not a melting pot like the U.S. In
Winnipeg, the second most frequently spoken language is not French, it is
Ukrainian. In Winnipeg you can often find a flight attendant who speaks
Ukrainian or Tagalog or whatever the passenger needs.
Senator Maheu: I would point out that there are only two official languages in
Senator Losier-Cool: I would like to follow up on Senator Maheu's comments. I
refer to the bottom of page 7 of your document where mention is made of "where
necessary" or "lorsque cela le justifie".
It is fundamentally important for a consumer association representing all
Canadians to uphold in principle the provisions of the Official Languages Act.
I do not feel that mentioning this is appropriate and I would like to know your
views on the subject.
Ms Hillard: The "where necessary" applies to enhancement, enhancement
where necessary. There may be places where enhancement is not needed. As you
can tell, I am not bilingual enough to know where it needs enhancing. Our
service may be adequate in some places but need fixing in others. Yes, we
should be bilingual everywhere. We fully recognize and acknowledge the official
languages legislation. However, there are places where it may already need
Senator Adams: Ms Hillard, in your brief you mention that you are concerned
about people from Nunavut and the territories. We do not have the same services
as people in the south. We do not have any highways or railways or buses or
anything like that. People must rely on airlines.
I am glad to learn that you are concerned about people living in the North and
how a change in these services will affect their lives.
First Air is owned by natives and is very successful. If Canadian Airlines goes
bankrupt, we will have only First Air.
I could not make an advance booking to come to Ottawa to attend this committee
meeting, so my ticket from Rankin Inlet to Ottawa via Winnipeg cost $1,800 one
way. I travelled to Europe about 10 years ago and it cost me about $600. For
the cost of a one-way ticket to Rankin Inlet, I could go to Europe five or six
People working in the North do not earn more than people working down south. If
they work for the government, the government will pay their way to Winnipeg and
from there they are on their own.
I have been on the Transport and Communications Committee for 20 years and there
have been many changes in that time. NAV CANADA has taken over airports in the
communities and airlines have had to increase their rates. The landing fee is
the same for a 737 as for a Cessna 180, although a 737 can carry 100 passengers
and a Cessna 180 can carry only two. The government subsidizes fuel costs in
the North, so why should it cost three times as much to fly there as it does in
Ms Hillard: You would have to ask NAV CANADA that.
One issue that I perhaps did not emphasize strongly enough in my remarks is that
in the North, air transport is the only way to bring freight in, unless you
happen to be in an area where there are winter roads. Therefore, there is added
cost to everything you purchase.
Senator Adams: I checked freight rates. Canadian Airlines charges $3.80 a kilo
from Ottawa to Rankin Inlet. First Air charges $6.40 per kilo. That is a big
difference. From Winnipeg, First Air charges approximately $3 per kilo. From
Ottawa to Baffin Island, they charge over $6 per kilo, because there is no
Senator LeBreton: I have no biases on this issue. I am totally open-minded, but
I believe, like many Canadians, that Canada cannot sustain two major airlines
both operating domestically and internationally. I do not think we are
well-served by trading horror stories or success stories, pitting one airline
against the other. I am sure that we have all had good and bad experiences with
Does your membership believe that only one major airline can survive, and do
views on a solution differ between the west and the east?
Ms Hillard: No, views do not differ between the east and the west. We are fairly
harmonious on not wanting a monopoly but recognizing that that seems to be
where we are going. There are very similar concerns in the east and the west.
The one area in which we are not entirely of one view is the Canadian ownership
rule. Some people get very nationalistic and are more concerned about having
everything Canadian than about having effective competition.
No, there is not a difference of views. On our trade committee, which looked at
this issue, we have people from Alberta, Manitoba, and the East Coast.
Senator LeBreton: There is not great concern about job losses in different
regions; for instance, with Canadian Airlines in the west?
Ms Hillard: In fact our Alberta members seem the most frustrated with the way in
which Canadian Airlines has managed itself.
Senator LeBreton: Yet when the Onex proposal was advanced in August, one of the
first reactions was from the Premier of Alberta, who seemed to be generally
supportive of the emergence of one major airline. I sensed that he thought it
was a way to save Canadian.
Ms Hillard: Our people are not politicians; they are ordinary, grassroots,
volunteer consumers and they are looking at it from a grassroots consumer
perspective rather than a regional political perspective.
Senator LeBreton: It is your view that consumers would be the big losers if
either the Onex or the Air Canada proposal were to be successful?
Ms Hillard: Consumers are going to be the big losers in a monopoly situation. No
matter which proposal is successful, we will be the losers.
Senator LeBreton: Both Air Canada and Onex purport to be very cognizant of
consumers' views and people are assuming things without hearing an explanation
of how they plan to compete and how they will support regional airlines. Are we
jumping to conclusions too quickly?
Ms Hillard: We have asked both Onex and Air Canada a lot of questions. From our
perspective, there seems to be a lack of depth on consumer issues. They have
scratched the surface but have not dug down to see how they will make it work.
I asked the representative from Air Canada how they could think of operating
three competing airlines. There is all this talk about service, but what about
customer service? There has been no thought given to benchmarking what they are
doing for consumers now. Have they thought about how to keep the ombudsman
independent? How will he report back? What will be the complaint or redress
system for consumers? Those questions do not seem to have gone through their
process at the moment.
In fact, Onex employed a law professor from the University of Toronto who, in
the 1970s, was a vice-president of our association. We met with him and he
could not address these questions. A couple of days before they were published,
he was helping Onex frame their principles. He could not answer most of these
questions. For example, we asked: "On which fares will you lock in the
prices?" It is a little unnerving to see this thing rushing downhill
without the in-depth study of the issues that are of great concern to
Senator LeBreton: Perhaps that will be the happy result of all this.
Senator Spivak: I want to compliment you on your brief. You have touched upon
the major issues, which are competitiveness, foreign ownership, and quality of
service. I have some questions on each of those points. However, my major
concern at the moment is the process. Perhaps you could give us your point of
view on that issue.
What had been our two-airline policy was changed into a government-sponsored
monopoly situation without the involvement of the Competition Bureau. The
advice of Parliament was not sought and there certainly was no input from the
public. The reason given was the extraordinary circumstances. As you pointed
out, the extraordinary circumstances probably were not there, any more than
they had been since 1992 or before that. The issue is the deadline that we have
to meet. The minister wants a report and the bill to go through by Christmas.
All of the alternatives could have been canvassed, including the lead up to
this, a year or two ago. You mentioned the Australian situation in this vein.
There is more to this question of restructuring the airlines than just this huge
fight between two global alliances and Air Canada or Onex. What do you think of
the deadline? Would we not be well advised, no matter what the deadline is, to
canvass all these alternatives in Parliament? That might be done through the
Competition Bureau looking at these mergers at that stage and then giving us
their advice. Of course we will have legislation, regardless of their advice,
on which the minister will decide.
Ms Hillard: The one-page document that we provided and that is attached to the
front of our detailed brief best answers your concerns. That sets out the heart
of our concerns.Whether or not the suspension of section 47 was politically
activated, that is the way it appears to the Canadian public. The Competition
Bureau is at arm's length from the government, although the minister will always
make the final decision. We always support those boards that are at arm's
length from the government, such as public utility boards, the CRTC, and
others. These sorts of tribunals appear to be less political. They are
transparent and accessible to the Canadian public. As I say, we have been well
served by the Competition Bureau over the last few years. The U.K. is in the
process of setting up a competition bureau at the moment. The person
responsible for its implementation has come to Canada to talk to people like
When we received Mr. von Finckenstein's brief today, I saw that he covered the
points we wanted to see covered. It reinforces for us that that is the ideal
way to go for consumers. If Mr. Collenette did that, he might be able to
recover a little from the appearance of political consideration in what he has
done to date.
Senator Spivak: With regard to foreign ownership, my understanding is that there
is an exemption for Air Canada in NAFTA. It is listed at 10 per cent, and 25
per cent for foreign ownership of domestic airlines. If there is discrimination
against foreign investors, that would be a violation of the trade treaty that
could nullify the exemption. Have you looked at that issue?
Ms Hillard: I must admit I have not looked at that issue. However, we have
looked at the cessation of the discussions on the Open Skies policy, which
might be a solution to our problem by letting American airlines fly Canadians
through one of their hubs, or through cabotage, even if we cannot have a
Senator Spivak: I take it you are in favour of leaving the 10 per cent ownership
rule in place so that there is widespread ownership.
Ms Hillard: That is right. We have not seen a logical reason to reopen that
issue. We think this might be the time to reopen and discuss the 25 per cent
Senator Spivak: In terms of the service quality issue, apparently the United
States has 120 jobs per airplane. Air Canada has 145, Canadian Airlines has
197, and WestJet has 74. Have you looked at the connection between service
quality, most definitely including safety, and the number of employees? Is
there a level at which both safety and service quality are jeopardized?
I agree with you that Air Canada has an enviable reputation. I do not know why
we seem to be fixing things that are not broken. Certainly, service on many of
the American airlines does not compare with the service on Canadian airlines.
You have only to look at Northwest and what happened during the storm. I am
curious to know if you have done any study on the link between the number of
jobs and service quality.
Ms Hillard: We do not have the resources to do an adequate research job. All we
can do is come forward with anecdotal evidence. As you said, anyone who has
flown on an American airline will immediately say that service on either of the
Canadian airlines is eminently superior.
Senator Spivak: The issue is one of timing. It seems to me that AMR is not
investing in Canadian for the good of their health. They are not likely to let
Canadian go down the tubes quickly. I do not know why a government bailout is
the only answer.
Would you be happy to see Parliament spend a good deal of time on this matter
before the issue is concluded? That is a real concern for us. In that way, we
could look at all of the alternatives, not just the alternatives that were
forced upon us because of this precipitous decision.
Ms Hillard: I definitely agree it is an issue of timing. It does not have to
drag out into a two-year-long Competition Bureau review. It can be done quickly
and efficiently. We definitely need the open doors and more transparency.
Senator Kirby: In many of your comments you have emphasized the role of the
First, I wish to point out that the government -- and Senator Poulin referred to
this earlier -- made it clear in the documents that were tabled with us by the
minister last night that any agreement reached will be subject to the
Competition Bureau review that you requested.
Second, I wish to correct something Senator Spivak said. The minister did not
say that legislation would be passed by Christmas, he said it would be
introduced by Christmas.
Senator Spivak: You are correct. He said that we need to have legislation tabled
Senator Kirby: The more interesting question relates to the 10 per cent rule. I
have been opposed to a 10 per cent rule on a whole variety of industries in
this country. My comment has nothing to do directly with the airline industry.
The reason is simple. You said that you like the idea of avoiding a major
shareholder -- not a majority shareholder -- because you think that has some
implications for the way in which the firm is likely to operate. However, if
you keep the 10 per cent rule, then you are saying that you are happy to let
management run it, because there is no constraint on management in a widely
held company. In a widely held company, management runs it. There is no way you
can ever influence management because no one can ever obtain control of the
board under the 10 per cent rule. What you have then is a self-perpetuating
group that will simply run the airline or the company in their own interest. In
this particular airline, you have virtually no shares held by management. The
real question is: Do you think consumers are generally worse off with a company
in which management is uncontrollable -- and there is no way the board can ever
confront them because you cannot have a controlling shareholder -- and in which
they have no investment? Or are consumers worse off with a situation where
there is potential for a major shareholder, if not a majority shareholder?
Presumably, there is some way you can get at him through the stock market. In
either case, you have a problem. I am curious as to why you prefer one to the
My experience with widely held companies in which management knows there can be
no controlling interest -- and we can think of several industries that meet
that test -- is that that has not helped consumer service one iota.
Ms Hillard: We have not discussed the 10 per cent rule in the same depth that we
have discussed the 25 per cent rule because we, like you, have been pushed to
the wall on this. We are volunteers and information has been pouring in on all
Senator Kirby: Your report is terrific, given the short time available.
Ms Hillard: I will certainly take your concerns back to the trade committee and
see if we can clarify our position on that with someone who has more of an
Senator Kinsella: Focusing on that shortness of time that you have alluded to on
a number of occasions this afternoon, this order was issued under the Canada
Transportation Act on August 13. The government had the opportunity that day to
contact the house leaders in the other place and the leadership in the Senate
and convene Parliament the following week. However, that did not happen. The
Senate returned to the chamber on September 7 and the government could have
tabled the order then. Section 47 requires that it be tabled within seven
sitting days of the date of its issuance in both Houses of Parliament. It was
only after repeated requests by some of us in the Senate that on the day before
we rose, it was tabled, followed by prorogation. Efforts to have the committee
get down to work right away were not successful. Many of us were concerned with
the time question and made efforts to deal with it.
Continuing with the time theme, there are about 13 days left under this present
order and about 12 days left before shareholders in the private sector will be
making some decisions, as they should. We are advised that there are at least
two proposals. It is my sense that they will probably end up making amendments
to the proposals before them, but at the end of the day they will make a
decision. They could decide to accept one of the proposals, or the shareholders
could decide to accept none of the proposals put forward. That scenario could
occur in a matter of 13 days -- that is, when this order runs out. You have
stated in your excellent brief that you failed to see what extraordinary
circumstances were afoot that justified the government using section 47 to issue
that order and hold the competition mechanisms in abeyance. That is to say, you
did not at that time, namely, on August 13, see any imminent disaster
In two weeks time, should the private sector not decide on any of the proposals
that are presently before it, will the apprehension of imminent disaster or
extraordinary disruption be less extraordinary or less imminent? If so, why? Do
you have any advice for the government as to what it should do under that
Ms Hillard: That would be the ideal time to put in place a good, public,
transparent review of the best solution for Canadians, not for one of two big
companies or for One World or STAR Alliance. Obviously the government must
again play a role in this industry that they have not had to play for the last
few years. There will have to be more regulation of one kind or another or more
control. That announcement from Mr. Manley and Mr. Collenette came out at 4:30
on a Friday afternoon. It just happened that we were all at a meeting in
Ottawa. The media caught up with us quite quickly. We had visions of them
slicing up the country like a pie. That is what we thought they were going to
do. We were then hit a month later with the Onex proposal and the American
Airlines influence and now this vicious infighting.
If the shareholders vote with the best interest of Canadians at heart, as
opposed to with their pocketbooks, and reject both of these, then the minister
has the opportunity to say, "We have gone through all this and we have
lots of ideas. How can we, in typical Canadian fashion, talk this through and
come up with a solution that suits the needs of Canadians?" Canada's needs
are quite different from those of other countries. One of the big issues is, if
we have a strike in the airline industry -- and we had one at Air Canada last
year -- and we only have one dominant carrier, what will happen? Are they going
to declare that it is an essential service and not allow these people to strike?
We medevac people out of remote areas, where we have fewer and fewer
full-service hospitals. We also fly in perishable goods to those areas. What
happens if there is a major strike? Do we just shut down? This is not like an
airline industry in the U.S. or in Europe, where there is some alternate method
for people to get around.
Senator Kinsella: What advice would you give the minister in to trying to meet
his responsibilities? Will you be advising him that what he thought was an
extraordinary disruption is not true, or is it less true or more true? If it is
true, what would be the logic behind not doing what he did on August 13 and
issuing another order?
Ms Hillard: We do not feel it was an extraordinary circumstance. We had and we
still have one of our major carriers on the verge of going bankrupt. We do
believe there were alternatives other than section 47 in August. If everything
is not worked out by the middle of November, we still believe there are other
alternatives. It does not have to be conducted by a committee that drags on for
Put realistic timelines on solving the problem. Call together some senators,
some MPs, the stakeholders, the Competition Bureau. You people will have a
wealth of information and suggestions by then, as will the Commons committee.
The paper is flying. We will keep the forestry industry in business for a year
with this. Faxes and e-mails are flying too. There is an awful lot of
information to be assessed.
After some of the knee-jerk reactions and after the shareholders decide what
they want or do not want, then the minister should call together the
stakeholders -- who are not necessarily the same as the shareholders -- and
have them do the typical Canadian thing, which is to come up with a solution
that best meets the needs of Canadians.
Senator Kinsella: This committee has, in a sense, a double mandate. One mandate
is to examine the order that has been tabled by the Senate with this committee.
We also have the larger question before us. The minister indicated yesterday
that he would like to have a report from both parliamentary committees by
Is that, in your opinion, a reasonable timeline for reasonable men and women to
get their heads around this subject matter, without even having the opportunity
to visit some of the different parts of our diverse and multiple-interest
country? It would not be physically possible for my colleagues on this
committee to visit many places outside Ottawa between now and November 26 and
then write a report. These issues are very complicated but extremely
interesting and obviously of fundamental importance in terms of the next many
As an example, one thought that goes through my mind is that the paradigm seems
to be changing. I will ask you this question. In part, are we dealing with a
trade-off between an open, competitive airline industry in Canada with minimum
state or government regulation, as compared to, in the new terminology, a "dominant
airline" in a more regulated environment? Is this the paradigm within
which committee members and Canadians elsewhere must conceptualize this
Ms Hillard: It seems as though we are being driven to the point where we have no
alternative with regard to the timeline. I am not sure about trailing all over
the country. Hopefully you have senators from different parts of the country
who could bring the perspectives here. Certainly that date does not give you
much time for sober second thought, or even, in the other place, much time for
Yes, we are driven into one of the two alternatives. In fact, unless we look at
foreign competition in Canada, which obviously cannot happen by the end of
November, we have no alternative at this point. We must deal with a dominant
airline. We must decide how to minimize the negative impacts of that situation.
The Chairman: Thank you both for your presentation.
Our next witnesses are from the Air Transport Association of Canada. Welcome.
Mr. Cliff Mackay, President and Chief Executive Officer, Air Transport
Association of Canada: Honourable senators, I will not read our brief. Rather,
with your permission, I will simply highlight the key points.
The Air Transport Association of Canada is a trade association that represents
commercial aviation in this country. We have about 300 members. We represent
all aspects of commercial aviation, everything from the large national
carriers, the future of which you have been discussing today, through to the
charters, the regionals, the cargo operators, many flight schools, helicopter
operators, et cetera.
If you look at all commercial aviation activity in Canada, our members would
probably represent something in the order of 96 or 97 per cent of total
revenues for the whole industry. We like to think that we represent their views
I want to add one caveat to my comments before I start. This is included early
in our brief. It must be fairly obvious, from the description I have given,
that our members have very different views on this subject matter. That being
so, the association has a standing policy that when members have very differing
views, particularly on competitive issues, we do not take a position in that
context. I would ask the chair for your indulgence if, on some questions, I
decline to be very precise, depending on the nature of the question.
Senator Spivak: Can you offer your own personal opinion?
Mr. Mackay: If you had invited me for my personal opinion, I would be here in
It is clear that the current situation is causing and will cause significant
instability in the industry. The short-term implications of restructuring one
or both of the major carriers will have an impact on the entire structure of
the industry, not just on that particular tranche, and that is for obvious
The short-term impacts are not really up for debate. However, the longer-term
impacts concern us as an association and they are much less clear in terms of
the situation that will exist in 18 or 24 months from now. We would urge
committee members to think about that in their deliberations.
Past history suggests that, given open market conditions, airlines tend to come
and go in the marketplace. We have seen it in Canada, in the U.S., and in other
markets around the world. Sustained success in our business seems to be a
function of the quality of the business plan, the skills of the management and
employees in the particular company, and the adequacy of financing. There have
been good examples of both successes and failures in Canada in an open market.
The conditions for new entrants in this country are never better than when the
established players become too complacent and too lax in looking after the
needs of their customers. We can point to some good examples of that here and
in other countries.
Our key point in this context is that a long-term regulatory framework should
not be used to respond to a short-term set of concerns. We would like to
emphasize that point to committee members. It is too early to draw conclusions
about what the competitive impacts will be for one very simple reason; we do
not yet know which of these various proposals will see the light of day from a
shareholder interest point of view. That is important.
Should shareholders decide in the next few weeks which plan will respond best to
their interests, I feel the committee and the government would be in a better
position to consider the public interest that stands to be affected and
whatever remedies you feel are appropriate.
Speaking on behalf of our members, we urge the committee to be cautious in
assessing the Canadian marketplace and in its consideration of any demands to
modify the existing market-based regulatory structure and policy framework
controlling our industry. We have been in the process of deregulation in Canada
now for almost 15 years. It is important to note that over that time, there have
been major changes in the structure of the industry and you need to keep that
kind of time frame in mind.
Today our domestic industry market is essentially an open market. There are no
barriers to prevent any licensed Canadian carrier from serving any Canadian
city-pair or, for that matter, any city-pair in North America, as long as it is
trans-border. Access to airports in Canada is not a major issue. Pearson is the
only airport in the country that at certain hours has some restrictions on
slots. There are significant expansion plans at airports across the country;
therefore we do not anticipate that slot control will be an issue in the near
future. Even in the United States, where congestion and delays are issues, most
of those are not attributable to airport capacity problems. There are four
exceptions to that; La Guardia, JFK, O'Hare, and Washington (Reagan). These are
congested airports. Apart from that, in general, U.S. airports are not
restricted by those sorts of issues.
We would just remind committee members to look at the capacity situation from a
point of view of airports. We do not see any reason why, in Canada or in the
U.S., given our understanding of existing capital plans, that this should
become a major issue in the future. However, there will always be some airports
where during certain times there will be congestion simply because the market
demand is outstripping the capacity.
Governments should resist the temptation to use long-term changes in the
regulatory environment to address a short-term problem. There will be
inevitable dislocations brought on by restructuring and that will invite
pressure from a number of quarters to introduce greater and new regulatory
measures to the industry. We would advise you very strongly to think long and
hard before you go down that road. It is a road that is counter-productive to
creating a long-term, competitive industry, and we would also argue that it
runs against the grain of international trends around the world.
Also, if you look back at the "good old days" of regulated
transportation in this country, you will find that it was expensive, not
customer oriented, and led to a situation where we did not have the right
equipment flying on the right routes. We were nowhere near as efficient as we
are today. We were not able, at that time, to provide anywhere near the range
of choices to consumers that we can currently provide. The range of choices you
have in flying from one point to some other point in Canada, or for that matter
anywhere in the U.S. or around the world, is much greater than it once was.
I can remember being a public servant in this town and commuting to Washington.
It was no fun. I spent many hours in the Syracuse airport. Thankfully, those
days are behind us and we would not wish to return to them.
International routes today account for over half of our traffic in terms of
revenue. It is simply not possible, in our view, to ask a highly regulated
domestic industry to compete in a deregulated international marketplace, with
all of the economic disciplines, production costs, et cetera, that that demands
of companies. Again, it is very important to consider the international
dimension in this context.
We believe Canada's current air policy is consistent with global trends. I have
said that in the past two decades, the government has gradually removed
economic regulation from commercial aviation within Canada, while at the same
time moving towards a more open and competitive environment in the
international sphere. Today, licensed Canadian commercial airlines are permitted
to serve any domestic or trans-border city-pair market they choose, with no
government intervention on prices, aircraft type, or frequency of operation.
Airlines make their own decisions and operate in an open and competitive
Governments have already removed economic regulation in domestic markets in the
U.S., the European Union, Australia, and New Zealand, and they are moving in
that direction in Asian jurisdictions. The U.S. alone has negotiated over 30 "open
skies" agreements with countries around the world. We are not aware of any
major country that is moving to regulate the air transport industry. The global
trend is the other way.
Open markets, combined with new technologies, have revolutionized our industry.
In Canada, removal of the domestic economic regulations and an open skies
policy have dramatically increased the level of choice and the size of the
marketplace available to Canadian carriers. At the same time, technological
advances like e-tickets, Internet sales, and the arrival of new-generation
aircraft such as the regional jet, have made a major difference in our ability
to provide service.
A further innovation that has emerged in the last three to four years is the
global alliances. STAR Alliance and One World, which are the two largest, have
demonstrated how airline entrepreneurs and strategists can find new ways to get
around the longstanding relationships between governments that have restricted
their ability to access international markets. This has made a major difference
to the range of options that we have been able to offer consumers, particularly
in the last three or four years. It has also significantly improved our ability
to be more productive and efficient because we have been able to combine, to
some degree, the use of computer reservation systems and interlining to provide
a better service.
Therefore, if all of this is so, and in general we see this as favourable, why
do we have a crisis in the Canadian industry? It is partly because of the
competition these developments have engendered. However, at the same time, we
have also generated some home-grown pressures. Perhaps the most important one
to flag for the committee is the privatization of the aviation infrastructure in
this country, particularly in the last five to six years. I am sure you are all
aware of the devolution of both airport and air navigation systems, as well as
more minor services such as security, to user-pay models in the last number of
years. Let me hasten to say that the industry is in favour of that policy
because it does generate more businesslike management practices in those
Notwithstanding that, it has resulted in an enormous new cost burden being
imposed on the industry all at once. Just to give you some examples, airport
devolution has resulted in new costs to our industry of $800 million-plus a
Some highlights in that respect include the fact that the net subsidy to
airports from the federal government used to run at approximately $150 million
a year, while government now receives over $200 million in revenue to the
treasury. That is a net, from our point of view, of $350 million, and there is
at least an additional $500 million a year in costs associated with a large
number of capital projects going on across the country.
In addition to that, the air navigation services have imposed an additional
cost, which is now flowing through our income statements, of about another
one-half billion a year.
I hasten to add that the industry generally sees NAV CANADA as a great success
story. It certainly is from a customer point of view because it has already
resulted in good service at lower cost. From the airlines' point of view, these
costs are now showing up on our balance sheets and we have to deal with them at
the same time as we are dealing with the competitive pressures I mentioned. So
those issues are very real for us and need to be recognized.
I now move to some final comments. First, we think that the committee's
deliberations should address what is in the best interests of creating a
long-term, viable, competitive Canadian air transportation industry for the
future. We believe that is synonymous with the public interest for a range of
reasons: service to smaller communities in the country; our economic and
competitive interests abroad and at home; and, frankly, knitting this country
together and providing the widest range of service possible to Canadian
That is the fundamental point we would like to leave with you. There are a
number of specific actions that you could consider in that context, apart from
the fundamental point of not moving back to the good old days of command and
control regulation. I have listed them in the brief. I do not want to take the
committee's time to go through each one. However, essentially, if you view them
as a package, they remove some significant costs being faced by the industry
that do not contribute in any way to our competitiveness or productivity. We
hope that the committee will look at those sorts of items in addition to the
specifics of the advantages and disadvantages of one or other of the proposals
that are currently on the table. It is very important that the committee try to
take as broad a view as possible on this issue.
Senator Forrestall: I wanted to return to the question of the minister taking
Did the ATAC have any sense of a building crisis, one that might warrant such an
extraordinary step by government? Was there any premonition of this drastic
move? Usually, we spend years going through this turnaround process; now we are
doing it in months.
Mr. Mackay: In the sense of any kind of premonition of the particular decision,
no, we were not consulted. We did not expect we would be.
There has been a general feeling in the industry that at some point in time --
precisely when was always very difficult to nail down -- we would probably see
more restructuring, simply because of the intensity of the continuing
There was a broadly held view in the industry that some further restructuring
would take place. I cannot say whether or not August of this year was the
precise point for the crisis. The government had information and took that
Senator Forrestall: What impact will this restructuring have on airports that
are still Canadian airports and those that have gone through the devolution
process to not-for-profit organizations?
Someone mentioned earlier today that the same number of people will be flying
and the same number of seats will be needed to accommodate them. One would
expect that at some point there would be a return to normalcy. Could you
comment on that?
Mr. Mackay: Most airport authorities would tell you they would anticipate a
short-term disruption, probably not major, but not insignificant, in their
revenue projections if there were a disruption of service even by way of a
cessation of business or something of that nature. Most airport authorities
would agree with your view that that would be relatively short term. Most of
that revenue would be restored over time.
One area that deserves a little more careful thought is small airports in
smaller centres. In that context, members of our association have held the view
for quite some time that there are some viability problems that we need to
address, regardless of this particular issue. This could simply exacerbate
those problems to some degree. We believe that does require some further study
and careful thought on what can be done to ensure that facilities are available
in smaller centres.
Senator Forrestall: We do not have to extend the car drive to get to an airport?
Mr. Mackay: That is correct. In some parts of the country, the car drive can be
a long one.
Senator Forrestall: To what degree do you believe restructuring will lead to
greater re-regulation of the industry? We have only had a deregulated industry
for probably 15 or 16 years now. Could you comment on that?
Mr. Mackay: I do not know the degree because that will be a matter for ministers
and the government to decide. Our hope is that it will be minimal. Whatever
parliamentarians decide, they need to do so along those lines. They should be
minimal and as short-term as possible in order to return to what we believe is
the right model, which is an open and free market. We believe that is the best
way to provide service to the customer.
Senator Poulin: Mr. Mackay, in your presentation you explained very clearly on
behalf of your members the instability that we are seeing in the industry now
and about which we are all concerned. This instability is resulting from
changes that are not always within our control. One of the major ones is the
technological change, which has an impact on our way of doing business in all
You are inviting us to be extremely cautious in our recommendations to the
government. Do you feel that we have the appropriate infrastructure at the
federal level to permit us to respond to various situations at the appropriate
The minister appeared before this committee yesterday. He shares your objective
of having a healthy airline industry. He also spoke about the importance of
safety. He told us that he wishes to have our airline industry owned and
controlled by Canadians. He wants our airline industry to serve all parts of
Canada at fair prices and to be capable of competing with the biggest and best
airlines in the world.
Do you believe that our infrastructure at the federal level can respond
efficiently and effectively as the industry evolves? As you said, there are
many situations that we cannot forecast.
Mr. Mackay: I believe that we have extremely good safety infrastructure. The
structure of the Aeronautics Act and the processes that exist to review and
oversee safety in this country are world-class. The International Civil
Aviation Organization, ICAO, recently completed an audit on Canada and gave us
very good marks. Although we have a very good system, I am not saying that we
cannot make it better. It is our business continuously to improve safety. I do
not believe that there are any concerns on that front.
With regard to economic oversight and regulation, we believe that the
combination of the Competition Bureau, the CTA and the tribunal provide the
infrastructure to ensure that public interest is protected.
Last night I read the report of the commissioner of the Competition Bureau. We
have not had a chance to analyze in detail all of his suggestions, so I would
not want to comment on those. There may be ways to improve things at the
margin, but I think the fundamental infrastructure is in place.
Senator Maheu: Your association represents all carriers in Canada. In your
opinion, how are the Onex and Air Canada proposals different in terms of
affecting the future of small Canadian carriers?
Mr. Mackay: The fundamental difference between the proposals seems to be one of
approach. One proposal advocates jumping in with both feet and merging the
companies now. The other seems to advocate a more gradual approach of trying to
run different parts of the system separately and focusing them on different
markets. There are advantages and disadvantages to both approaches, but it
would not be appropriate for me to critique them.
Senator Maheu: Without critiquing them, can you say what the impact might be on
our smaller airlines?
Mr. Mackay: Most of our regional airlines are owned by either one company or the
other. It is very difficult to know what the outcome would be because neither
group has been explicit about precisely how they would manage their regional
There are other regional carriers -- Air Athabasca, Bearskin Air and
Inter-Canadian -- which are independent but which have various agreements with
the major companies. As long as those agreements stay in place, I do not know
that in the short term there would be a significant impact. It is very
difficult to know what would happen in the longer term. I would have to
speculate on what the structure would be when all is said and done.
Senator Maheu: Do you think that the present trend to alliances in international
transportation will reduce competition on international routes?
Mr. Mackay: No, I do not think that alliances will reduce competition. I think
that they will change the nature of competition. Competition is now becoming
truly global. It used to be that particular carriers would participate in
particular markets in the international world. An airline would be an Atlantic
carrier or a Pacific carrier, or its market would be north-south in North
America-South America. With global alliances, competition is becoming truly
global. These alliances offer service literally anywhere in the globe, and they
compete on that basis. There is a lot of competition going on, but it is of a
Senator Kirby: I agree completely with your comment about not going back to
In response to Senator Poulin you said that you have not yet had time to look at
the letter from the Competition Bureau which was tabled yesterday. Could you,
in next few weeks, go through the Competition Bureau letter and tell us which
elements of it are acceptable to you and which are not? I ask that because, as
I read the letter, the reference to predatory pricing mechanism is not a
reference to what I would call the old-style price regulation that existed in
airlines in the 1960s and 1970s. Nevertheless, it moves into the potential for
Are some elements of that letter clearly unacceptable to you? I am with you on
not going back to the old style but, on the other hand, you must agree that if
by one means or another we wind up with a dominant carrier, we need to ensure
that dominance does not drive everyone else out of the marketplace. The
Competition Bureau letter was designed to address that concern.
The industry's reaction to the proposals in the letter would be helpful to us.
Mr. Mackay: To the degree that I can get a view that is common enough to be
helpful to you, I will do that.
Senator Kirby: I believe that you may be able to get reasonable consensus on
that because, whatever the outcome, there will still be an element of
regulatory structure involved. Any help you can give us would be appreciated.
Senator Kinsella: Gentlemen, in the middle of page 3 of your brief you draw our
attention to the technological advances that have taken place. Included in your
list of those changes is the appearance of the regional jet in the fleets of
Do you have concerns that Transport Canada, in its management of the devolution
process, particularly of the regional airports to local authorities, has caused
a problem, especially in terms of the length of runways? The regional jet
requires a lot more runway to land and take off. That kind of technological
change speaks directly to the level of service available in the regions. The
minister recognizes the importance of that. Indeed, he said that regional
service is one of the factors that he must consider.
Are you concerned about the slow pace of lengthening runways in regions where
the regional jet either is excluded because of the length of runway or is
flying in on minimal length runway?
Mr. Mackay: The runway question has not been high on the list of things that we
have been worrying about with regional airports. To make your question a little
more generic, we have been very much concerned and we have expressed our
concern to governments and others.
In our view, the issue with regard to smaller or regional airports is this: Is
there enough traffic to be able to generate the revenue necessary to cover
their operating costs and to put aside enough money so they are in a position
to finance the capital improvements and upgrades necessary to the continue to
provide a very high level of service to their communities? Frankly, we are
concerned that, in a number of instances in Canada, the answer to that question
may be "no".
That then raises a more fundamental question about the level of service. It is
an easy question to answer in a pure market model: it will be what the market
says it will be. However, it is much more difficult to answer for our members,
particularly when they are the only significant carrier going into a community.
To say that we are not going to provide service to a community is a serious
thing. We take it very seriously, and we are struggling with the problem of how
to deal with that question. There is a public interest there, too, which we
think needs to be recognized.
Senator Kinsella: You hit the nail on the head for many of us who represent
regions, particularly regions that do not have large populations. We can only
function as part of the Canadian family if we are well connected with the rest
of the country. What kinds of questions or issues do you think we ought to be
zeroing in on, given the short period of time we have to study this?
Mr. Mackay: Some of them have already been mentioned. If you must move to some
regulatory framework, what should it be? How do you let the market work to the
maximum degree possible? That is a fundamental question.
I believe strongly that you should examine some of the cost elements that have
been a part of all this.
With regard to airports, I would make two observations. First, some costs being
imposed on airports, primarily by the federal government, are not contributing
in any way to the system. They are simply taking money out of the system.
Senator Kinsella: Could you give us an illustration?
Mr. Mackay: The lease costs currently being paid by airports to the federal
government now amount to over $200 million a year, and not one cent of that is
being put back into the system in any way. It goes into the federal treasury
and then it is gone. That is a lot of money. You could also look at the taxes
that the industry pays -- and there are a series of them listed here -- which do
not in any way encourage better or more productive competitive behaviour but
simply take money out of the system and put us at a cost disadvantage to our
The question of small airports and levels of service is very important, and we
have made some suggestions to the government. For example, the government could
perhaps expand its capital assistance program, which would help ease that
burden with smaller airports over time. We are also beginning to have
discussions with airport authorities about ways we could perhaps work with them
to collect fees and thus offset some of their cost problems. That is a fairly
difficult process because, while we think it is a necessary conversation, we
never want to get into a situation where airports are simply imposing fees on
local travellers, who are our customers, in a process with no discipline. That
would be returning to the good old days of pure monopolies.
Senator Forrestall: I have a very brief supplementary. The problem is not just
in the one area of leases. There is also the issue of federal and provincial
fuel taxes, and there are many other areas where devolution has removed the
government's financial obligation, and yet we continue to tax the facilities,
and hence the industry, which in turn recovers these costs from the users, you
and me. It seems to me that this smoke-and-mirrors game to get money that the
government is not really entitled to has perhaps been carried just a little too
far. When you add all these costs up, I suspect that you are looking at a lot
Mr. Mackay: Some of the costs are legitimate because these are services, but in
the last five years, my industry has been asked to absorb well over $1.3
billion of new costs a year. Our total revenues are $11 billion. This is a big
Senator Forrestall: That would not include GST on transborder travel, which must
be very significant.
Mr. Mackay: It is.
Senator De Bané: Sir, let me paraphrase from your brief and get your
meaning of that sentence. On page 2, you write that government should resist
the temptation to impose long-term changes in the open and competitive market
policy and regulatory environment in which the industry operates today. You
thus say that government should resist the temptation to change either the
environment or the competitive market. The government has just announced that
the 10 per cent ceiling will be increased. The government has also announced
that the Competition Bureau will not be looking into that. Has the government
not already followed a different course from the one you are suggesting?
Mr. Mackay: I am not sure the government has announced that they are going to
increase the 10 per cent. My understanding, senator, is that they are prepared
to consider it in certain circumstances. I am not clear on this, but I think
the government's intent is to allow the Competition Bureau to do its job under
current legislation once a proposal emerges from the various alternatives on the
table. If that understanding is correct, then I am not sure the government has
changed the framework at the moment, but obviously there is nothing to say that
the changes could not emerge.
What we are trying to communicate in that sentence is that, if the government
moves to some change in the regulatory structure, we would like that change to
be as minimal as possible and to err in favour of a free and open market as
opposed to erring in favour of further regulation.
Senator De Bané: My next comment deals with a typographical error in the
French translation. In the English text you state on page 5 that the business
revenues of that sector amount to $11 billion. In French, it says $11 million.
Mr. Mackay: I am sorry.
Senator De Bané: My final question is on something I do not understand. I
do understand that you are a lobby for the industry, but please explain to me
why you say on page 6 that we should reduce the government financial take from
You explained that Government of Canada revenue collections from airports
represent another form of hidden tax, which amounts to $200 million actually on
air transportation and Canadian competitiveness. Surely, if we have spent
billions of dollars to build those airports, the government should be entitled
to a take on all the tenants and stores in them, just as any store in a shopping
centre pays a percentage. Why should the government not run its affairs like
Mr. Mackay: We would be very happy if the government accepted business-like
conditions on their leases. The simple fact of life is that they have not. They
are not investing one cent in those assets. They are not managing or
controlling them in any way, other than safety oversight, which is a regulatory
context. Those assets are being depreciated. The assets are being invested in by
the airport authorities and the industry and the travelling public today. Yet
the government is insisting on inordinate levels of return.
I can show you the analysis indicating that at the time of the transfer of these
assets, the government's own independent valuation of their book value was
something in the order of $1.2 billion. The government's own calculations
showed that the fair return on that investment for taxpayers would be in the
order of 8 per cent. Today, the government is getting 17 per cent on those
Senator De Bané: Surely, you know, as do I, that the book value, the
market value and the cost value are different concepts. We can ask members of
the private sector what value they would place on airport facilities like the
ones in Ottawa, Vancouver and Calgary, which are relatively new.
Mr. Mackay: Vancouver has been paid for since then.
Senator De Bané: As the owner of a store, should I not expect to pay
something on my sales every year?
Mr. Mackay: We have told the government that we are prepared to sit down to
negotiate a lease on business principles. What we are concerned about, senator,
is that the current lease structures are not based on business principles. Not
only will the lease costs increase over time, but there is a provision for
something called "participation rent." If in the future someone else
invests, then the government will receive a piece of that income as well.
We believed that the purpose of the devolution of airports was to create a
better and more efficient airport system, not to create a tax revenue pot for
the Government of Canada, which is what seems to be happening here.
Senator De Bané: When a lease expires, no one is obliged to put forward a
tender or a submission to rent that space.
Mr. Mackay: Senator, if we were allowed to have an open market on airports, then
we would feel better. However, the government has not allowed that to happen.
They decided what the framework for the ownership structure should be along
with the lease terms.
Senator De Bané: At the end of a lease, there is a public tender.
Mr. Mackay: There is no public tender, senator.
Senator Spivak: On page 6, you state:
Don't go back on the open market, pro-competitive policy and regulatory
framework for commercial aviation. That framework has worked, is working, and
should remain the fundamental principle to guide the Committee in its
We have already gone past that point. Even if legislation is not passed before
Christmas, it will be tabled. Once legislation is tabled, you will be headed on
a certain route and you will not be able to discuss the alternatives. Your
statement makes me think that you are not in favour of monopoly but in favour
of a competitive situation. Do you think the public interest would be better
served in a competitive environment rather than in a monopolistic environment?
In your brief, you seem to suggest something that is the opposite of the two
proposals on the table.
Mr. Mackay: There is no ambiguity. If you were to quiz Air Canada or Canadian,
they would say the same thing. We want a competitive open market. I grant you
that we have a problem, and I am not arguing that point for a moment. In terms
of the general position of the industry, the industry wants a competitive and
open marketplace to the degree that it is humanly possible. That is what we are
We are not naive enough to think that in a situation from which one dominant
domestic carrier could emerge, the government may not feel there is some public
interest in doing something. We are simply arguing that that "something"
should be minimized. We say that because we are concerned that once you start
down that road it is easy to keep adding more layers of regulation.
Senator Spivak: I believe what you are saying is that you recognize there may be
one dominant airline and you are hoping that there will be competition between
the feeder airlines and the regional airlines. You are not talking about
foreign competition. I am trying to make more sense of what you are saying
Mr. Mackay: Even today in the foreign market, there is significant competition,
as I am sure you are aware. You do not have to fly a Canadian carrier if you
want to go to Europe, Asia or wherever.
Senator Spivak: I am talking about the domestic market.
Mr. Mackay: Because of the restrictions, if we end up with one dominant domestic
carrier, which still remains to be seen, then the Competition Bureau should do
its job and give us advice on what they think is appropriate.
Senator Spivak: One of the proposals on the table was specifically designed to
prevent the Competition Bureau from doing a proper investigation of the
competitive aspect. Apparently, there will be some change to that. However, you
are taking the view that this is not the way to go, that we should look at the
most competitive environment. You are not telling us how that should occur.
Mr. Mackay: With respect, senator, you have a very difficult job, because I do
not know yet what you are assessing.
Senator Spivak: You are giving some principles as to what you would like to see.
Can you be more specific? Of course, we will be examining specific features. I
am wondering if you have any opinion as to how this might be accomplished
regardless of what proposals are on the table.
Mr. Mackay: There is a structure inside government today for that purpose. I
think I answered that question earlier. I suggest that you rely on that
The Chairman: Thank you, gentlemen, for your impressive brief and the clarity of
your answers to our questions.
Our next witnesses are from the Air Line Pilots Association, International. We
will allow you approximately 15 minutes for your presentation and about 30
minutes for question period. Welcome to our committee.
Captain Michael Lynch, President, Canada Board, Air Line Pilots Association
International: With me today are Captain Bruce McConchie, from Canadian
Airlines, and Captain Steve Linthwaite, from Air Ontario. I wish to thank you
for inviting us to be here this afternoon. In the handout I have outlined for
you the structure of our organization, which we hope is a fairly democratic type
The two proposals that are under discussion are complex schemes of restructuring
the airline industry in Canada. We have scrutinized them to the best of our
ability with the information currently available to us. Both the Onex proposal
and the Air Canada proposal directly affect six of ALPA's 10 Canadian-based
carriers. The pilots' groups we represent may have differing perspectives about
these proposals. Each group is committed to ensuring that the best interests of
their pilots are secured. At the forefront of our consideration is the impact
that this potential merger will have on the viability of our industry and on
the security of our members' future careers.
Proposals of this magnitude evoke much emotion, sometimes to the point of
overlooking sound business principles. We believe that any solution must
address the interests of both our members and the flying public in a fair and
balanced manner. We also believe that the solution to the industry must ensure
the stability and the competitiveness of the industry in Canada while, at the
same time, addressing the critical need to improve Canada's position
On the emotional side, many of our members, especially in the Canadian family,
have survived several airline mergers in the past. My count is up to five.
There is no doubt that mergers can create stressful working environments.
Nevertheless, airline mergers are a fact of life within the industry.
Our members are highly trained professionals. They have an established track
record of skilled conflict performance in the face of such difficulties, as has
been proven in the past. Our pilots are proud of the fact that the safety of
the travelling public is paramount to all other considerations at all times.
That is a brief introductory statement. I now invite Captain McConchie and
Captain Linthwaite to present testimony on behalf of their respective pilot
Captain Bruce McConchie, Chairman, Master Executive Council, Canadian Airlines,
Air Line Pilots Association International: I must tell you that I am much more
comfortable in a cockpit, but I am delighted to be here. I thank you for the
opportunity to take part in this process.
I have delivered copies of my presentation in both official languages to the
clerk. I hope you have a copy of that. I do not plan to read that brief but I
should like to summarize some key points in it.
As pilots on the front lines of passenger service, we have come to the
realization that the airline industry in Canada is in trouble. Despite a
growing economy over the past 10 years, both Air Canada and Canadian have not
been able to develop as strong players and returns to investors have been
dismal or non-existent in some cases. One reason for this situation is a
corporate rivalry that has proved to be very disruptive. Another is the
continuing overcapacity in the domestic market. These business strategies have
weakened both companies and continue to detract from their ability to compete
I should now like to make four key points. First, restructuring of the airline
industry in Canada is inevitable. The pilots of Canadian Airlines fully support
your efforts to address the problems of this airline industry. We also support
the principle that a solution should come from the private sector and be
developed and controlled by Canadians. Also, restructuring should not take place
during a period of chaos. We feel that if Canadian Airlines fails, travel would
be grossly disrupted. It would take two to three years for another carrier to
train pilots, put sufficient aircraft in service and develop a safe working
knowledge of routes. The interim period would be chaotic for the Canadian
traveller. Also, let us not forget the more than 16,000 employees of Canadian
in any restructuring efforts. The effects of a failure of Canadian airlines
would be felt not only by the employees and their families but also by the many
closely associated businesses and communities.
Second, we support a principle of a single merged carrier. As I mentioned
earlier, the financial performance of Air Canada and Canadian over the past 10
years proves that this country cannot support two national main line
competitors. Canada needs a single strong carrier to provide Canadians with
dependable domestic air travel at competitive prices and to compete effectively
in the global market. Also, Canada cannot afford to lose the professional
expertise developed by the pilots of Canadian. My fellow aviators have spent
many years pioneering new routes around the world and developing a standard of
safety that is the envy of other airlines. We also must look to the
possibilities of the future. A single strong airline will be able to enter the
next millennium with the ability not only to survive but also to prosper, and
that creates more jobs for Canadians.
Third, the concerns about job losses for pilots in a merger scenario can be put
to rest. As you can tell by my advanced age, I am near retirement. Like me,
almost one-third of the pilot group in the combined work force of both carriers
will be retiring in the next five years. If you take into account retirements,
training needs and future growth, merging the two carriers will provide junior
pilots flying for either airline with the best opportunity for advancement in
the last 20 years.
Fourth, we are willing to help out in the restructuring efforts. We have the
knowledge and the experience gained from surviving in the private sector to
enable us to contribute to a safe and orderly transition period. We understand
why the pilots of Air Canada are worried. They are concerned about the unknown.
Something that has never been experienced is always a concern. The pilots of
Canadian have had to adapt to no less than five mergers -- personally, I have
had to adapt to four -- and we have successfully managed to maintain the
highest level of professionalism and safety in our cockpits. The pilots of
Canadian and Air Canada have often worked together in many areas of flight
safety, developing policies and procedures that are envied by countries around
the world. We are willing to work hard to ensure the success of any
restructuring efforts. We would be willing participants with our fellow
aviators at Air Canada in merging operating procedures that would result in the
best level of safety possible.
The airline industry in Canada is at a crossroads in its development. The path
chosen now will affect many Canadians: those who travel for business or for
pleasure, those who are employed directly in the aviation industry and
especially those of us who have devoted our careers to the advancement of
aviation in Canada.There is an opportunity here for the Canadian airline
industry to emerge in the next millennium as a strong and stable part of the
economy. The pilots of Canadian are ready to meet that challenge.
Captain Steve Linthwaite, Chairman, Master Executive Council, Air Ontario, Air
Line Pilots Association International: Honourable senators, I am also here
today representing the interests of the other Air Canada regional MECs, being
Air Nova, Air Alliance, and Air BC. I am also allowed to speak on behalf of the
Canadian Regional Airlines' master executive council. All these carriers are
100 per cent owned by our "mother carriers," if I can use that term.
We represent nearly 1,500 pilots in total.
I have provided this background because we get somewhat lost in the battle
between the Air Canada and Canadian Airlines. We are often linked with them,
but in fact we are quite a distinct group. The roots of some of our airlines go
back to 1934. We are not entities created by nor available to be destroyed at
the whim of the major airlines.
If you combined all employees from all categories, non-pilots and pilots, at
Canadian Regional Airlines and all the Air Canada regionals, we are talking
about over 5,000 employees. That does not include the employees of
Inter-Canadian, Calm Air, and all the third-party contract people that handle
us in some out-stations. Nor does it include the IAM and CAW employees of
Canadian and Air Canada who depend on us for their work; they handle our
ticketing and baggage processes.
I say that to give you the context for my further comments about the suggestions
that are being thrown out to provide competition in the industry.
Our concerns are quite simple. We want quality jobs; we want long-term solutions
and long-term jobs. The majority of our members have been through a merger
already. I experienced the merger between Air Ontario and Austin Airways. The
Air Alliance/Air Nova group just went through a merger. Canada Regional
Airlines, itself, has had a number of mergers. For example, there was a merger
between Ontario Express and Time Air to create CRA. You will find that the
regionals know what happens in mergers. They realize that there is short-term
pain in any merger but that our interest is in the long-term solution.
Everyone wants a long-term solution so that we need not come before committees
such as this one every 10 years, trying to change the industry.
Inside the Air Canada regional family right now is a committee formed by Air
Canada to decide on our future: Should we be consolidated or should our focus
within the Air Canada family be redefined?
In terms of our stance on the Air Canada/Onex proposal, we are neither in favour
nor opposed to either proposal. This may be one of the few times that I have
agreed with ATAC, but they mentioned the lack of detail about the fate of the
regional airlines. For that reason, it is hard for us to voice an opinion and
we try to remain neutral.
Certain issues have arisen, which we would like to address. One solution being
put forward by the Competition Bureau -- at least according to the newspapers
-- is to force the major airlines to sell off the regionals in order to provide
competition. On the surface, that seems like a logical choice. They have
airplanes, pilots, maintenance and counter staff. However, it is not quite that
simple. Being part of the Air Canada or Canadian family means that there are
certain functions that we do not have any more -- marketing, reservations,
ticketing. We also have certain restrictions on the types of airplanes we can
So, are we immediately able to compete? Well, no. It takes quite a lot of time
to bring a fleet up to standard. It takes time to refocus a company in that
There are wider issues such as worldwide alliances, frequent flyer points, and
financing. All those issues can be addressed, but, in total, they create a
large handicap to a company that is tossed out and told to make the most of
this big chance to be the competition.
We are not looking for the short-term gains that may accrue to some members.
Some may have a chance to fly bigger airplanes, which can mean more money. That
sounds good, but our concern is for the long term. That solution is a very
scary scenario. We may consider ourselves somewhat pigeonholed in our careers
but at least we have careers. Throwing us out as an experiment to try to solve
a problem in the short term is very scary for our members. That is why we want
to highlight that. It is not as simple as it appears on the surface.
That solution would not be practical for other reasons, too. Everyone seems to
realize that if we do go down the road of one dominant carrier that can compete
on the international market, it will need a good domestic regional feed. To
eliminate that feed does not seem logical to me. It would handicap the dominant
carrier in the world market.
There was some talk about getting rid of the regional carriers to provide
competition. As I understand it, 30 per cent of the market is now carried
domestically by other carriers, such as Air Transat and Canada 3000. They are
already competing in some of the longer-haul domestic markets. They have the
fleet and the operational backup in place. I am certain they could get extra
airplanes and bring them up more quickly than any regional airline.
Our members are also concerned by the Competition Bureau suggestion of
code-sharing, allowing the non-owned carriers to provide feed to Air Canada. As
the current regional feed, our members see that as diluting the market. It is
like having two restaurants side-by-side both selling Big Macs. Both
restaurants will be weakened. That scares us because our bread and butter, our
reason for existence, is to feed Air Canada. That is why we exist. If that
workload is diluted, it will hurt our members.
We are worried about a return to the old regional airline policy of the 1970s.
If we put all these restrictions just on the regional industry, we are
effectively returning to the old policy and creating unnatural barriers. In 10
years, we will be discussing how to help the regional airlines that are in big
trouble because of those unnatural barriers.
I highlight those issues as the concerns of our members.
Senator Forrestall: If you are not in a position to answer this, I will
understand. Can you indicate the total ownership, shares plus options, that
your association members may hold in Canadian Airlines International?
Capt. McConchie: Senator, that is an excellent question. I am an expert at
flying airplanes. I am not an expert in finances. I do not have that
information here, but I can get and would be pleased to deliver it to the
Senator Forrestall: That would be appreciated. I am concerned about seniority.
As have most Canadians over 25, I lived through your battles about seniority.
We fully appreciate the nature of the seniority rights, not just in your own
companies but with merged companies or with inter-company transfers within the
same union. At the same time, you have the whole question of portability of
pension rights and options.
Could you deal first with the question of seniority? What would be the scenario
with respect to sorting out who will be flying and who is not, notwithstanding
the fact that you have a large number who will take normal retirement and the
availability of attractive packages? There will still be a large amount of
shuffling. You will have people with 25 years service being shunted to the
right-hand seat, and someone with 10 years shunted to the left-hand seat. That
will happen, and it always has. I cannot see why it would not happen this time
Could you shed some light on this, in the sense of a concern about the rate at
which we are approaching a resolution of the problem? Are we going far too
fast, which is what the government apparently wishes to do, in the general
Capt. McConchie: Senator, seniority is very important to a pilot. When we join
with a mainline carrier, we start at the bottom of the seniority list, and it
is only our seniority that allows us to advance through the ranks. That
seniority is utilized to move into positions that vary. For example, in the
carrier I work for, you would move from a second officer on the DC-10, third
pilot, and progress through to the co-pilot position, then to a captain
position and then maybe to overseas co-pilot position and back to a captain.
Your seniority dictates everything that happens in that regard.
As I mentioned earlier, regarding the aging group of pilots that we have right
now there is an opportunity for those at the very bottom of the seniority list
to take advancement much more rapidly than they have in the past number of
years. In particular, at Canadian Airlines we have not hired a new pilot for a
period of eight years. The first pilot who gets hired after that will have more
of an opportunity to move up, in effect, an eight-year leap over anyone else in
The issue of merging seniority lists is important. We belong it ALPA, at
Canadian Airlines. The Air Canada pilots belong to a different association, the
Air Canada Pilots' Association. We sit down at a table and we agree on the
principles under which the seniority list would be merged. One carrier comes
with its own equipment, the other carrier with its own equipment; you then meld
the two groups of equipment and the two seniority lists. The result is an
agreed, mediated, or arbitrated solution to those issues.
Senator Forrestall: It has been suggested in the presentation this afternoon
that there might not be a problem. Well, good luck to you. You have never gone
through this kind of shake-up without having a major problem. I do not like
this. I fly frequently, I suppose too much for my own good, and I do not like
people warring on the flight deck of planes on which I travel. I understand
that. I have been through it before, and I do not find it comfortable.
What resolution process is in place to avoid that?
Capt. Lynch: This will be a very long process. We recognize that. It is an
emotional process. My own experience in going through five mergers in the past
is that I do not think you can attribute one cockpit incident or one safety
incident directly as a result of a merged seniority list. It is a difficult
time. Everything results and rotates on it. We do not expect for one moment that
the merger will be easy. Nevertheless, at the end of the day, I should like to
think that all my colleagues in the industry are professionals, can do the job,
and the safety of the public is not compromised as a result of the seniority
Senator Forrestall: There is a perception that it is comprised when the pilot is
not talking to the co-pilot except in the execution of his work. That
constitutes a danger to the passengers in that aircraft and nothing you could
ever say will change that view, because I lived through flying in and out of
Atlantic Canada during a critical situation over this question of seniority, and
the merging of interests and the acquisition of interests.
I hope you are right. I hope for everyone who needs to fly, including your crew,
that you are right. However, I suspect that this will be a major issue.
Might you just comment on the length of time you think this will take?
Capt. Lynch: I would venture to say that it might take up to two or three years
before the seniority lists can be merged, the training that we have mentioned
to be done, the changeover of fleets, the absorption of one fleet into another.
Of course, much depends on which of the proposals will be accepted and the
final shape of the airline at the end of the process.
Senator Forrestall: What kind of delay would result if the shareholders throw
out the first round of proposals? I am looking to the time when you will be at
the peak of retirements. The question of seniority does not change, however,
the flexibility of meeting the requirements of the seniority-based procession
is much easier.
Capt. Lynch: We tend to mix up seniority with ongoing operational requirements.
In that respect, there is a retirement bulge coming. It is approximately three
years ahead of us now. That is happening in both airlines because of the major
hiring that took place in the 1960s. Those positions will be filled as long as
the airlines are operating, and will continue to be filled.
Capt. McConchie: I did not answer the question about the speed with which we
need to address this problem. I bring to you an urgency in dealing with this.
The industry is in crisis. At Canadian Airlines in particular, there is a sense
of urgency; in fact, in the entire industry there is a sense of urgency. Both
cups are quickly emptying; not just Canadian, but Air Canada's cups are emptying
on this issue. Let us not allow both cups to become empty before we need to fix
the hole in the bottom of them.
Senator Maheu: Mr. McConchie, I should like you to respond -- or Mr. Lynch,
perhaps -- to an article in yesterday's Le Devoir about the collective
agreement for American Airlines pilots. That agreement gives these pilots the
right to exploit or to apply for trans-frontal flights, which means they could
work to the detriment of Canadian. When the margin hits 6.4 per cent or more on
any route, which has been developed with great expense by Canadian, is it not
possible that you can go through the cut via American Airlines? In their
collective agreement, when we have American Airlines strongly invested in a
position of power, should the Onex deal go through, would you be greatly
affected by the 6.4 per cent usage by American Airlines pilots over Canadian
Capt. McConchie: At Canadian Airlines, we see a number of opportunities, as a
transborder, overseas, and domestic operation, that we have been unable to
realize for the very reason of the problems in the industry. One does not
develop a strong enough asset base and make enough money to go out and buy the
equipment to take advantage of market opportunities.
The 6.4 per cent restriction has not really affected us because, as yet, we have
not been able to take advantage of further opportunities. That is why we are
promoting the idea of the single carrier with the strength to take advantage of
new opportunities, not only within Canada, but transborder and globally.
Senator Maheu: Do you feel that you would be able to overcome the collective
agreement that the American Airlines pilots have?
Capt. McConchie: Yes, I do.
Senator Poulin: Historically, Canada's airline industry has had a remarkable
safety record. It is thanks to you and to your colleagues that Canadians can
Mr. McConchie, you said in your presentation that you identify very clearly and
realistically the problem in the industry linked to three causes. First, in the
context of the growing economy, we have not been able to sustain two major
carriers in the domestic market. One of the reasons you attributed this to was
the fact that there seems to be an unhealthy competition between the two
carriers. Could you tell us more about this so that we can better understand to
what you are referring?
Capt. McConchie: Yes. I am daily in a lineup behind another flight that is
pushing back from the gate going to the same destination. We get in that lineup
together at the airport and there is probably a considerably long lineup of two
flights leaving at the identical time to the identical location within Canada
by competing carriers.
Not only does this delay our departures, it sometimes restricts us as to when we
get airborne. Hence, we are burning more fuel, which costs more money.
If there is are two competing departures at the same time, to me it is as if two
neighbours are fighting over who gets to use the garden hose to water the lawn
when the dam is ready to break upstream from them. They are participating in
destructive competition and pricing with each other, while they are missing
global opportunities. The global community is laughing while we fight in our own
Senator Poulin: When you said your members are very comfortable with moving
towards a single carrier, you said you felt that the solution must come only
from the private sector. Could you explain further what you mean by that?
Capt. McConchie: I enjoy the private sector being involved and Canadians being
entrepreneurial, being able to take those risks. I like the fact that Canadians
are willing to take on the challenge -- for example, Gerald Schwartz from
Winnipeg. It makes me proud to be a Canadian.
In Canada, in our industry in particular, we can find amongst our talent, our
entrepreneurialism, someone who is willing to take on that challenge. Our
pilots fully support the idea of keeping this in Canada, under the control of
Senator Poulin: In terms of finding the appropriate restructuring method, I
trust that you are not excluding the responsibility of the federal government.
You are saying that the inclusion of private industry is essential.
When we met yesterday with the minister, it was extremely important that we
realize that, finally, all the witnesses agree with the vision of the
government in terms of a safe and healthy Canadian airline industry, owned and
controlled by Canadians, serving all parts of Canada at fair prices and capable
of competing with the biggest and best airlines in the world. However, it is
the partnership with which you agree; correct?
Capt. McConchie: Very much so.
Senator Kirby: Mr. McConchie, I was stunned by the statement that a third of the
pilots between the two airlines are retiring. Is that because there is a
compulsory retirement age or is it a matter of years of service? Are they maxed
out on pensions?
Capt. McConchie: We are required to retire at age 60.
Senator Kirby: That would imply that somewhere in the early 1960s many people
Capt. McConchie: The baby boom resulted in a boom time in the industry, yes.
Senator Kirby: You are suggesting that five years from now, with a third of the
pilots gone, that avoids the notion of having to lay pilots off.
Let us assume that people were offered a package that got them through to the
end of the five years. At that point in time, all of the pilots who are now
employed by both airlines and who had not reached retirement age could be
gainfully employed by the airline.
Capt. McConchie: Most definitely. To add to that, you bring up a good point in
regard to the training question. It takes approximately three months to train a
pilot for a new position. Every time a pilot retires off the top of a Boeing
747, that creates another five training positions. At any one given time, a
carrier must have a fair bit of its workforce in training.
Senator Kirby: I cannot resist asking you, how does losing one person create
five positions? In the Maritimes, we used to call that job-sharing, but it was
viewed as being unfavourable by the former unemployment insurance program. How
did you do it?
Capt. McConchie: I wish I had a diagram here. If a captain of a 747 retires,
someone moves out of a position to be trained into that position, thereby
creating a vacancy. That creates another vacancy, and son on, right down to the
bottom of the list.
Senator Kirby: Ultimately the training is completed?
Capt. McConchie: That is correct.
Senator Kirby: Would Air Canada pilots agree with this statement?
Capt. McConchie: The figures speak for themselves. If they look at their
retirement levels within their carrier, they are roughly double ours.
Senator Kirby: I turn now to Mr. Linthwaite. First, do you think it is possible
for a smaller airline that is entirely owned by another airline to genuinely
compete with the main airline?
Capt. Linthwaite: We have tried to stay neutral.
Senator Kirby: I am just asking a generic question. If it was your airline, can
you give me a couple of illustrative examples of the sort of thing that might
be in the interests of your airline but would not be in the interests of the
holder of the shares and therefore you would not be allowed to do?
Capt. Linthwaite: I can think of examples with our airline. I know that
generally the pricing is affected.
Senator Kirby: Could you explain what you mean by that?
Capt. Linthwaite: For instance, when you have similar routes.
Senator Kirby: Canadian Partners and you have a similar route from Sudbury to
Capt. Linthwaite: Do you mean in terms of separate regionals airlines, if they
are both wholly owned by Air Canada?
Senator Kirby: You are saying you could not lower the price to compete to get a
greater market share.
Capt. Linthwaite: Any shareholder would say, "Why am I having a price war
with myself?" That is the simple answer.
Senator Kirby: I interrupted you on pricing. Are there any other examples?
Capt. Linthwaite: I would think that schedules would be an issue. I am just
using the example of how our regional airline works with our shareholder, and
those are some of the issues that have come up. I do not know how it would
relate to their particular circumstances.
Senator Kirby: Why are you not allowed to fly jets?
Capt. Linthwaite: Because there is a letter of understanding in the collective
agreement between Air Canada and the Air Canada Pilots Association that
restricts the size and type of airplane we fly at the wholly owned regional
Senator Kirby: The wholly owned regional carriers are not allowed to fly jets
because that is part of the labour agreement with the Air Canada pilots?
Capt. Linthwaite: That is correct.
Senator Kirby: This is just a comment, because you cannot comment on it. One can
see no evidence as to why that would change, in light of some of the proposals
on the table, but we will leave that.
Capt. Linthwaite: I can add to that, if you wish.
Senator Kirby: I would be delighted. Go ahead.
Capt. Linthwaite: We have similar concerns but, as I said, there have been no
details given on that aspect of it so I cannot really comment. What is thrown
across the table casually and what will actually happen in the end are two
different things, so I really cannot comment. I would hope that we would have
an expanding opportunity inside our airline, but I have seen no assurances of
that. They have been very vague in terms of the future of the regional airlines
in both proposals.
Senator Kirby: I have a question with respect to Mr. McConchie's view on the
merger of the pilots. The regional airline pilots are not included in that
comment about a third, is that correct? In other words, you were talking about
merging the Canadian Airlines pilots and the Air Canada pilots, not the pilots
with the regional airlines of either Canadian Partners or Air Canada's regional
Capt. McConchie: Yes.
Senator Kirby: Strictly what I would call the parent airlines.
Capt. McConchie: Yes, mainline to mainline; that is my comparison.
Senator Kirby: Have you looked at what happens if you do the same analogy at the
Capt. Linthwaite: At the regionals, generally the workforce is younger. The
growth from the regionals was mainly in the 1980s. For that reason, retirement
occurs later. We do not have a huge amount of retirement. Air Ontario is one of
the more senior regional airlines, and I know that we have fewer than 10 people
coming up for retirement soon.
Senator Kirby: Out of how many?
Capt. Linthwaite: Out of 300, but part of the reason is that the retirement age
in our collective agreement is 65. That could change, but it is the present
Senator Kirby: Is it reasonable to guess there would likely be some layoffs at
the regional level that would not occur at the parent company level?
Capt. Linthwaite: We have been given assurances by both parties that that would
Senator Kirby: It might happen aside from those assurances.
Capt. Linthwaite: That is correct. There could be something else that affects
the industry thereby causing the layoffs. I am not naive.
Senator Kirby: But that would not be part of either of the restructuring deals.
Capt. Linthwaite: If I could add something further, I see Senator Forrestall is
here so I should like to say something about conflicts in the cockpit. I went
through a merger between Austin Airways and Air Ontario. I do not think you
could get much more of a cultural difference than between those two. Austin
Airways was more of a bush-type operation, although I hate to use that term,
while Air Ontario used to be what might be called a shirt-and-tie airline. You
could not get a bigger personality difference than between those two airlines.
However -- and this goes back to what I said before about short-term pain for
long-term gain -- in the end, we became a stronger airline because it brought
two different mentalities together. After you have been doing the same old thing
for a few years, you get into a bit of a rut. The merger revitalized the
airline; fresh ideas came forward and we realized that we were not doing
everything right. We literally had first officers from Air Ontario in the same
cockpit as the captain from Austin Airways where the first officer was being
paid more than the captain. We did not have any bad incidents. All our pilots
were very professional. I have total confidence in my pilots. When the cockpit
door closes, those sorts of issues will go away.
Senator Kinsella: I would like to talk a bit about the fleet and the variety of
equipment that your members are currently flying. Approximately how many
different types of airplanes do you have in the fleets that you are flying?
Capt. Linthwaite: Inside the Air Canada regional airlines, there are Dash 8s and
British Aerospace 146s and Beech 1900s. In CRA, I believe there are F28s and
Senator Kinsella: Do you see merging the fleet as a major problem, a medium
problem, or a small problem?
Capt. Linthwaite: In terms of the regional airlines, I do not see it as a
problem because the Dash 8s are common; and, if I am not speaking out of turn,
the F28s are coming up for replacement soon so they will have to be replaced
anyway. Air Canada regionals are due for fleet replacement.
Senator Kinsella: Does your collective agreement, or any other agreements you
have with your respective companies, give your membership any say over the type
of equipment that would be purchased by the company?
Capt. Linthwaite: Not generally, except for the fact that some of our members
may be on the board that selects the equipment.
Senator Kinsella: Currently, if a regional carrier that uses, say, the British
Aerospace planes wanted to buy or rent or lease two more British Aerospace
planes, there is nothing in the collective agreements or agreements of any
other sort with the pilots that would impede that?
Capt. Linthwaite: Currently for us?
Senator Kinsella: Yes.
Capt. Linthwaite: There is.
Senator Kinsella: Would you describe the limit that this agreement places upon a
decision by the management of Air Nova, for example, which has approximately
six British Aerospace planes, to increase that number to 10? As pilots, what
say do you have over that, by way of agreements that you have with the company?
Capt. Linthwaite: The British Aerospace 146s that are currently in the Air BC
and Air Nova fleets are grandfathered. There is a scope clause that Senator
Kirby was asking about that restricts the Air Canada regionals airlines to
planes less than 70 seats. As well, there is an additional restriction that
there be no jets. However, because Air Nova and Air BC had those aircraft
previously, they are grandfathered; thus, they are allowed to operate them.
However, there is no provision for replacement or expansion of those fleets.
Senator Kinsella: Effectively, your association has strong control over the
acquisition of new equipment. What is the rationale behind that? When you were
negotiating for that, what was your objective?
Capt. Linthwaite: Perhaps I am mixed up. I did not negotiate the restriction. I
am with the Air Canada regionals. Perhaps Mr. McConchie can comment on that.
Senator Kinsella: Since you are with the Air Canada regionals, let us take the
case of Air Nova. If Air Nova wants to have more British Aerospace aircraft, is
there a limitation or not?
Capt. Linthwaite: That limitation is imposed on Air Ontario as well. It is a
provision in the collective agreement between Air Canada and the Air Canada
Pilots Association. Thus, there is a restriction.
Senator Kinsella: When considering merging, we talked about seniority being a
difficulty that would have to be overcome. To what extent will this be another
type of difficulty that will have to be taken care of?
Capt. McConchie: Senator Kinsella, you have brought up a good point, one that
makes the opportunity for a single merged carrier work. At Canadian Airlines,
we have 747s. Air Canada has 747s. We currently have DC-10s, which we are
slowly phasing out to 767 operation. Air Canada has 767s. We have Airbus A320s,
as does Air Canada. The difference in the smaller jets is the Boeing 737 and
the DC-9s, which, I would hope, are due to be renewed in a stronger carrier down
the road. Already you have some equipment types that meld beautifully. Training
costs will be kept down in a single merged carrier. When you have those pieces
of equipment, not only is it easier to train, you can incorporate them on to
the different route structures much more readily.
Senator Kinsella: In your industry, is it common practice around the world that
pilots' associations have these kind of special agreements that speak to
equipment acquisition? Are there some agreements that include clauses that
speak to the investment or expansion of a given airline, for example? Is it
true or not that the American Airlines pilots have an agreement with their
company that the company may not invest more than 15 per cent without the
concurrence of the pilots?
Capt. Lynch: That is correct.
Senator Kinsella: Does that speak to why in one of the proposals in the private
sector that 14.9 per cent was the level of involvement in the first offer?
Capt. Lynch: There are many different agreements and every contract is an
individual one. You mentioned correctly that the American Airlines pilots'
association has that agreement with their company. United Airlines is a company
in which the pilots own a significant portion of the airline. They have no such
veto; however, they have other provisions concerning scope clauses. Scope
clauses vary tremendously from airline to airline, depending on the
circumstances under which they were negotiated. Thus, it is very difficult to
draw a parallel from one to the other.
Most airlines in the world have some form of negotiated settlement with regard
to jobs being taken out of that airline, regardless of its size, and put into
another airline at a lower cost. Basically, that is what the management of
these companies are trying to do. It is essentially what economics are trying
to force upon them. We are trying to preserve some career stability for pilots
within the associations.
Senator Losier-Cool: In answer to Senators Forrestall and Kirby with regard to
seniority and pension rights, you seemed to have a positive reaction on behalf
of your members to the merger plan. Did you identify any negative impacts on
the pension rights of your members?
Capt. Lynch: Generally, the airline pension schemes vary from company to
company. They are generally supplemented beyond what is allowed under
government regulations. These supplements would disappear with the demise of a
I am also a Canadian Airlines pilot. We have been living with this for a long
time. Nevertheless, those of us who are reaching pensionable age feel that,
regardless of which of these proposals goes ahead, the pensions will be carried
to the other carrier, as long as the carrier survives in one form or another.
That is the positive side with regard to pensions.
Senator Losier-Cool: Is there no negative side?
Capt. Lynch: I am sure there are some negatives. The negative is that we will
not stay in business. At Canadian, we have been faced with this for close to 10
years. We have gone through a tremendous number of restructurings and
downsizings. We have made many contract concessions. There has been a great
deal of effort to try to make the thing work. Thus far, it has not been that
successful. We are looking forward to some solution, as Captain McConchie said,
from within the industry to try to make a very strong airline industry. One
dominant carrier in any way, shape, or form would be preferable to what we have
all faced in the past, not only for us but for the public as well.
Senator Losier-Cool: Would you say that pensions and attrition would ease the
Capt. McConchie: Based on the projections of retirements and training needs, we
do not foresee any layoffs among the pilot group. That does not take into
Senator Kinsella: For clarification, you used the phrase "scope clauses."
How do you spell the term, what is its etymology, and what is the French
translation for it?
Capt. McConchie: My compatriot used that term. Often, in pilot talk, we use
certain terms. I imagine in government you have many abbreviations and terms
that come to you and that mean something to you but which would go right over
It is spelled "s-c-o-p-e." The French, I believe, is very similar;
however, I am not sure.
It is something that enables the pilots of the company to have at least some
control over a company's use of our code. For example, a passenger who buys a
ticket and expects to get on a Canadian Airlines aircraft to go somewhere may,
in reality, get on another carrier's aircraft. The company must ask for our
consent to enable them to enter into the code-sharing arrangements that allow
our passengers to go on their particular jets.
A strong single carrier would be able to operate many more flights with its own
jets on which Canadian citizens might be flown by Canadian crews and Canadian
flight attendants. We do not have the asset base to continue expanding our own
Capt. Linthwaite: Most collective agreements talk about scope of work. That is
the root of the term. It defines the scope of your work as set out in the
The Chairman: Gentlemen, thank you for your presence here today. It was most
appreciated by all of us.
I welcome the representatives of Transport 2000. We would be pleased to hear
your brief and then to ask a few questions when you have finished.
Mr. Michael Janigan, Executive Director/General Counsel, Public Interest
Advocacy Centre, a Member Organization of the Canadian Association of Airline
Passengers (CAAP); Transport 2000: Thank you for having us here today. The
Canadian Association of Airline Passengers is an informal coalition of
organizations that represent ordinary Canadians concerned with the delivery of
important public services such as airline travel. I do not believe that there is
a list of the constituent organizations of CAAP appended to our airline Bill of
Rights, but they include the organizations that are here today, as well as some
large organizations, such as the Ontario Council of Senior Citizens
Organizations, the Manitoba Society of Seniors, and Rural Dignity. The
organizations represent over 1 million Canadians.
CAAP has been able to make representations on the issues associated with the
proposed mergers and the operation of the airline industry in general terms to
the office of the Prime Minister, the Competition Bureau, the Department of
Transport, and members of Parliament.
It has been noted that CAAP has expressed frustration with the context of much
of the airline debate to date. While the various corporate and legal
machinations of the players associated with the two dominant airlines in Canada
has certainly been good media copy, we do not believe that it has been
instructive concerning the needs of the ordinary Canadian airline passenger.
As a starting point, it might be useful to refer to the statutory objectives
that are contained in the Canada Transportation Act. The act provides them in
the form of a declaration under section 5, where it states:
It is hereby declared that a safe, economic, efficient and adequate network of
viable and effective transportation services accessible to persons with
disabilities and that makes the best use of all available modes of
transportation at the lowest total cost is essential to serve the transportation
needs of shippers and travellers, including persons with disabilities, and to
maintain the economic well-being and growth of Canada and its regions...
The act then further notes that "those objectives are most likely to be
achieved when all carriers are able to compete both within and among the
various modes of transportation."
The act sets out conditions under which the objectives will presumably be
achieved through competitive modes of operation. These include matters such as
meeting the highest practical safety standards, and fares, rates and conditions
that do not constitute an unfair advantage or obstacle to the mobility of
persons or interchange of commodities in Canada, as well as ensuring that each
mode of transportation is economically viable.
Unfortunately, before there has been a realistic assessment of how well the
act's objectives have been met, we have come upon this current crisis,
apparently driven by the inability of the ownership of Canadian Airlines to
sustain further financial losses. However, even without a comprehensive
assessment of the CTA, we can state that the death or disappearance of Canadian
Airlines is not an isolated cloud in an otherwise sunny sky. There are
considerable current detriments that we perceive in safety and quality of
service and a little evidence that competition from the dominant duopoly has
been effective in restraining, much less reducing, the basic fare for airline
At the same time as we are experiencing this mostly made-in-Canada crisis, there
is increasing evidence from the United States -- and I note here that this is a
market that is much closer to being workably competitive than ours -- that
significant consumer problems with quality of service and pricing are legion.
In fact, consumer unhappiness led to the induction in Congress this year of a
Bill of Rights for airline passengers. The adoption of this bill was narrowly
averted after an intensive and expensive campaign of lobbying by the airlines,
coupled with their promises to implement their own codes reflecting consumer
Both to address problems with the status quo and to avoid being sucked into the
vortex of the Onex-Air Canada battles, CAAP has attempted to draft a similar
bill of airline passengers' rights that should apply across the board. The
first version of this document is before you today and appears on the Web site
of my organization, the Public Interest Advocacy Centre.
We note with some satisfaction the statements of the Minister of Transport to
the effect that the federal government now recognizes that this current crisis
is more than a shareholder fight between corporate heavyweights and that a
final result of having one dominant airline will have profound implications.
These implications without remedy are subversive of the Canada Transportation
Act, the Competition Act, and the normal expectations of Canadian consumers
associated with the delivery of public services.
We are heartened that public debate has at least pulled the treatment of
consumer protection into a perspective that accords with the 20th century
rather than the 19th century. We also note that corporate players have made
efforts to align their interests with that of the consuming public.
Interestingly enough, at the same time both have been quick to claim the title
of champion of maximizing shareholder value, an achievement not always
consistent with consumer satisfaction.
We take no sides in this dispute, but will observe that the Air Canada
supposition that the operation of three airlines, namely, Air Canada, Canadian,
and Hamilton Discount Air, under one ownership will provide sufficient
protection for consumers breaks new ground in the field of economic
confabulation. However, I wish to set out some observations that are pertinent
both to the current and future airline market in Canada.
First, the Canadian and American experience appears to indicate that it is
difficult to obtain desirable standards of safety, quality of service, and
consumer friendly regimes of pricing through the use of market forces alone.
Incorporation of the principles of consumer protection set out in CAAP's
Airline Passenger Bill of Rights and to the licensing conditions of all carriers
Second, the experience with competition to date has only been sporadically
successful in ensuring lower fares for consumers. The basic fare market on
popular routes in the duopoly system has seemed impervious to competitive
rivalry, particularly after the demise of Greyhound and Vista. It is important
that the passenger be protected from non-cost-based pricing in those markets
where no workable competition exists.
Third, the principal players intend to apply any efficiencies and cost
reductions gained by a merger to the benefit of their shareholders. These gains
must be shared with consumers.
Fourth, the need for consumer protection does not evaporate because of the
possibility of competitive entry or in the presence of a market player
competing in several niches. A merged airline would have over 90 per cent of
the Canadian domestic market. It would be able to enforce any price increase
without significant loss of market share. If there is competition in several
markets segments, prices will likely be reduced in those segments financed by
fare increases in the non-competitive market segments. Thus, you must have a
framework to ensure reasonable pricing.
There is an increasing need for vigilance with respect to ensuring barrier-free
entry of potential market participants. In addition, as is recognized by the
minister, a more proactive approach to predatory pricing is required. Any price
restraints must be coupled with service quality indicators, which would ensure
that in a situation of market dominance or monopoly the dominant carrier does
not reduce service to meet the price restraints and line shareholder pockets.
Realistic service commitments to small communities must be maintained by any
dominant carrier. The regulatory process, presumably administered by the
Canadian Transportation Agency, must be transparent and accessible by important
public and consumer interests.
Section 66 of the Canada Transportation Act is inadequate as a basis for
consumer protection. As the Competition Bureau has indicated, it only operates
with respect to basic fares. In addition, it contemplates the disposition of
single episodic complaints rather than imposition of a structure to ensure
We note the willingness of the Minister of Transport to engage in dialogue to
establish the appropriate policy framework for airlines into the 21st century.
We see the need for a framework that is firm enough to ensure basic standards
of safety and consumer protection, open enough to encourage competitive entry
and choice, and flexible enough to fill in the gaps that market forces cannot
address. One thing is absolutely clear: A laissez-faire approach will not work
now or in the foreseeable future. A strategy of unregulated monopoly today,
competition tomorrow will deny forever the benefits that airline customers
should have had yesterday.
Mr. Harry Gow, President, Transport 2000: I will now quickly review some of the
most important sections of this Airline Passenger Bill of Rights, a document
that we are submitting to bring about changes. These changes would, of course,
be managed by various existing bodies as set out, at least in part, in the
Canadian Transportation Act.
The general principle underlying this bill of rights is as follows: Airline
passengers flying in and out of Canadian airports or on flights operated by air
carriers based in Canada are entitled to a safe flight, with a high quality of
service at affordable, predictable prices on a year-round basis. A major
component of this statement is the section on public participation.
We would like to see increased public oversight and fair, enforceable rules to
protect passenger rights. Moreover, we deplore the existence of numerous
outstanding issues relating to safety, pricing and service which must be
resolved in the public interest.
Great Britain, France and the United States each have, in their own way, much
broader and more stringent provisions than the ones already in place in Canada
where we have some regulatory pricing provisions and everything else is pretty
much left to individual complaints.
We believe the Minister of Transport should require any party proposing
substantial change to state in their proposal how passenger interests will be
accommodated in both a transition period and the longer term. Thus far, we have
only heard a great deal said about the transition period.
The Minister of Transport should establish a public involvement process. We also
think that persons participating as consumers in these organizations should
receive a moderate per diem. Public interests representing passengers should
also be given status on the boards of airports, air carriers and the air
navigation system in Canada,
For us, safety is our foremost consideration, followed by service quality and
pricing. The media often refer to pricing, somewhat less to safety and even
less so to service quality.
As everyone knows, in the U.S. market which until now has been more or less
deregulated, the number of passenger complaints about a variety of issues,
including safety, has soared in recent years. The situation is somewhat calmer
here in Canada, but we anticipate that with the prospect of future changes in
the industry, safety, service quality and pricing could also be in for a rough
ride and the number of complaints could increase.
We are seeking assurances on the following points: priority of public safety,
normal and emergency levels of services and a culture of safety or one that is
safety-oriented. We would like to see special procedures in place to deal with
potential threats to passenger safety and full access to safety information --
in other words transparency at various levels.
Furthermore, we would like to receive additional information about accidents or
incidents involving aircraft. Service quality covers the following areas: full
passenger information disclosure, onboard quality and general service
The airlines' complaint service should include a designated staff person at each
airport to handle customer complaints. The designated person's name, phone
number, and e-mail address should be made available at ticket counters and
gates. Complaint forms that can be mailed in should also be available. The
airline should be required to answer every complaint within 30 days. One
important initiative would be the appointment by the government of an
independent ombudsperson. Mr. Gerry Schwartz has already promised to appoint
someone to this position within his service. The ombudsperson would be required
to issue quarterly reports on the complaints received and how they were
We would also like to see the full list of complaints received on the topics
listed on pages 5 and 6 published within 45 days.
Fares in rural, remote and northern regions should be affordable and reasonable.
Fare increases in these areas should not exceed the national average for such
increases. Any differential in cost for these markets should be justified and
be the result of a public process.
Lastly, here is a word that has been banished from our politically correct
vocabulary in recent years: regulation. The word is quickly coming back into
vogue as people grow concerned about a possible monopoly situation. The
Canadian Transportation Agency should mandate through new regulations passenger
regulations, oversight procedures and redress mechanisms. Public participation
should be required as part of the CTA's monitoring and regulatory activities.
Senator Forrestall: You mentioned the possible formation of an airline
passengers' bill of rights. I assume that that plan flows naturally from events
in the United States that, in no small part, arose from the treatment of not
only the victims of tragedies but, more important, in reality, the families of
those victims. Am I correct in that assumption?
Mr. Gow: You are right, sir. That is exactly correct. The inspiration from this
is in large measure American and is indeed somewhat inspired by an association
related to ours, the International Association for Safety in Air. Their
president, Lyn Romano, was a speaker at a recent conference that we held. There
is some American and British inspiration as well. There are various charters of
rights for various modes in Britain. In France, consumer participation is
generally assured in state or regional bodies through the nomination of
representatives of associations such as Transport 2000. You are exactly right.
Senator Forrestall: In the event of a merger, all the major airlines seem very
conscious of the need to move more swiftly and with much more accuracy through
some determined process to accommodate the families of victims. Canadian
Airlines and Air Canada have gone about developing this capacity within their
own ranks. They all seem to go at it slightly differently. What would be the
effect of a merger on those efforts? Would there be a detrimental impact in the
early stages? Could it possibly cause Canadian Airlines or Air Canada to slow
the development of a process for handling the tremendous aftermath of a
Mr. Gow: Indeed, a number of works on mergers in the transport industry have
been completed. The most notorious was the wreck of Penn Central, where two
corporate cultures were combined, resulting in a disastrous clash in terms of
finances and then somewhat in the area of safety.
Different technical standards and different operating procedures did lead to
certain heavy fender-benders in the northeast corridor in the United States.
However, the main disaster was financial. We do not anticipate anything quite
as spectacular here. The question of airline safety is so fraught with the
delicate balance that exists already between so many factors, some of them
competing with each other for attention on the part of the operator and the
unions, that, yes, we believe there is a risk. We could not say what the
results would be; however, it seems to be a risk and possibly this would lead
to some prudence and some slower development in certain areas.
Mr. Janigan: In the event of a merged or a dominant airline, it would be an
opportune time, at the same time as the culture is changing, to change some of
the safety and consumer protection standards inherent in our bill of rights.
Senator Forrestall: I hope that in our report we can lend some emphasis to the
need for government to exercise due diligence in this particular area. We have
just started to make some gains and the prospect of backsliding is a little
scary. We learned very valuable lessons with Swissair, as we have from the two
previous major ones in the United States, and I would not wish to see us black
slide in that respect.
Mr. David Jeanes, Transport 2000: To reply, first, on the external influences,
we had our own made-in-Canada influence also, which partly triggered our
formation of an airline passenger safety group within Transport 2000, and that
was the Fredericton air crash and the response to the report arising out of
that crash and a certain measure of dissatisfaction with the processes that were
being followed. We should not say that it was just external international
pressures that caused us to act.
The other point is that on the question of the airlines themselves having
adequate internal responsibility for safety oversight, whether separate or
merged, we think that the commercial motive, which they must keep in mind,
needs to be matched by some external independent regulatory mechanisms and
adequate public input mechanisms to avoid some of the kinds of problems that we
have seen in other places in the world recently, notably in Britain in the rail
industry, with respect to safety.
Senator Forrestall: You strike an interesting chord there. How do you see the
way towards improvement of this line of communication from the public to the
regulator with respect to safety and all of these questions generally? Is there
anything we can learn as we look at this merger?
Mr. Gow: Yes, I believe we can. The Fredericton incident and the Swissair crash
led us to believe that the victims or their families, or both, should be
getting more up-to-date information quickly and that persons should be named as
the fixed point of responsibility. We mention this in the charter. For example,
at each airport, there should be a location where a person can automatically go
to such an individual for information. Obviously, such a person would be
swamped at a time like the Fredericton crash; however, it would be a beginning.
Beyond that, other systems should be in place. The telephone systems of the
airlines are not particularly person-friendly in an emergency. You are referred
to many different numbers and when you are distraught that is not, perhaps, the
There are probably other things that do not come to my mind. We suggest a much
more systematic gathering of information on incidents and on complaints, which
are then fed back to the public, and I assume to the regulator and the media,
as a result of having a more complete information reporting system of accidents
on the one hand and consumer complaints on the other.
What we are looking at here is setting up some kind of feedback loop, whereby
more information being available makes for more responsive airlines, airports,
and regulators, as well as NAV CANADA and all actors acting in a field where
the level of consciousness is much higher on all sides. This would lead to more
informed debate, less hasty speculation by people like myself when asked
questions by the media at midnight about a crash that has occurred in Iqaluit.
That is difficult; however, with more information it would be possible at least
to react intelligently and more quickly on all sides. I include in that
consumer associations as well as regulatory and operating authorities.
Mr. Andrew Reddick, Director of Research and Government Relations, PIAC: You
touched on the need for a diverse approach to provide information to the public
on different circumstances, whether it is generalized market overview
information about what is happening in the industry, but also specific to
incidents or accidents. Also, in the airport itself, when you arrive at the
airport and your flight is delayed, or your baggage is lost, or you are being
bumped off the plane, how that is dealt with. There are many different levels,
whether it is the customer on the front line or whether it is the general
overview information on the industry itself. There is a real lack of opportunity
to get good information in a timely fashion. There is a multiple approach here.
Senator Forrestall: The enormous complexity of it has led me in the past to
believe that perhaps the International Red Cross should be invited by the
United Nations, or some other body, or should simply assume a growing interest
in providing a directional capability. I had hoped that Mrs. Dole would have
taken that on during her tenure as president of the Red Cross in the United
States; however, she had other ambitions.
We need consistency in the process. When you have 400 people on a plane going to
different destinations, with many different ethnic and cultural backgrounds,
suddenly that gives you an insight into what some person, some small group
based in the primary carrier, must face immediately. The larger the
organization, the older the organization, the greater its reputation, the more
it is likely to function smoothly because it has the international systems in
I would hope that in your work you would keep this in your minds. I can think of
no better group of people to promote this form of advocacy with the government,
with the airlines, particularly as we go through the possibility of Air Canada
deciding not to spend $1 million on this until they are sure where they are
going and Canadian being affected doubly by that kind of decision process.
Whatever you could do would be appreciated.
Senator Poulin: Before I put my question, I would like you to tell me a little
more about Transport 2000. How did this organization come into being and under
which circumstances? What are its goals?
Mr. Gow: Transport 2000 was founded in Canada in 1976, following its
establishment in Europe in 1973, first in England and France, and later in
other European and Commonwealth countries. We are affiliated on an informal
basis with one or two U.S. agencies. Transport 2000 represents users of urban,
inter-city and international public transport services.
Our primary areas of interest include urban transportation issues and
inter-modal rural links. We are not focused on any one mode of transportation
in particular. Early on, Otto Lang called on citizens to get involved in the
process of change involving railways. We heeded his call. Subsequently, we
received other requests from other group and again, we rose to the challenge.
Transport 2000's national executive is composed of representatives of most
provinces. We have regional sections in the Maritimes, Quebec, Ontario and
Western Canada. We maintain active links with other branches, primarily with
groups in Great Britain, the United States and France. Our symposiums cover a
wide range of topics. This year, we are hosting a one-day seminar on air safety
and another seminar on public and private rail services partnerships.
Senator Poulin: I appreciate very much receiving this information. It lends
perspective to your presentation. I am especially intrigued by the airline
passenger bill of rights.
The people seated here around this table are required to travel a great deal on
business. Airlines were rarely responsible for the problems we encountered.
Quite often, our fellow passengers were the culprits.
Do you feel that, in addition to an airline passenger bill of rights, there is
also need for a declaration of passenger duties and obligations?
Mr. Gow: I would not want to disappoint you, but we have given the matter some
thought. In this passenger bill of rights, we have included the right of
passengers to travel without being harassed or subjected to the obstreperous
behaviour of other passengers. We have begun to consider this and we will give
some thought to your suggestion.
Passengers need to know that they have certain obligations. Unfortunately,
particularly in the case of charters, there are always passengers who quickly
lose sight of their obligations. David Jeanes has something further to add to
Mr. Jeanes: Thank you, Senator Poulin. I would just like to add that many of the
accounts that have been read recently about air and road rage among airline
passengers and road drivers have been traced to a kind of disintegration in the
conditions of travel that have happened in both modes. We think that the
airline passengers' bill of rights would actually address some of those root
causes that have resulted in an increase in negative behaviour by certain
Senator Poulin: I look forward to reading the research.
Senator Kirby: Just a couple of questions. First, I cannot resist the
observation that I quite loved your paragraph "that the operation of three
airlines, Air Canada, Canadian Airlines, and Hamilton Discount Air, under one
ownership will provide sufficient ground for protection of consumers breaks new
ground in the field of economic confabulation."
I have never heard the word "confabulation" before, but it certainly
summarizes my view. The only conclusion I came to when I first read the Air
Canada proposal was that Mr. Milton must think everyone in Ottawa is truly dumb
enough not to be able to see through it. However, we will seek his views on
that question when he appears before us.
I have two specific questions for you. First, I really like the idea of your
passenger bill of rights. My first question is: How similar is the passenger
bill of rights that you have outlined here to the U.S. one? I know the U.S. one
conceptually; I do not know the details.
Is this essentially the U.S. proposal? If it is not, just explain or touch on
the big differences.
Mr. Gow: Based on a suggestion by another association, one that is not in our
coalition, we started with the common human needs of passengers.
Senator Kirby: Is this the safety piece that Senator Forrestall discussed with
Mr. Gow: Among other things, yes. This led to a reflection that made us create a
document de novo. There is, however, a page that is lifted from the American
draft charter of passenger rights that did not pass as legislation but which
seems to have influenced the airline companies to at least make a show of
guaranteeing some rights to passengers. That is the only part that is lifted
directly from the American document. The rest is composed by various members of
this association, including people particularly interested in air safety and
regulation. A variety of Canadian participants crafted this to meet Canadian
Senator Kirby: I must ask about the pricing section. Up to there I do not have
any problem. I will read the sentence because it underlines your approach to
the pricing. You say:
In the event that services are being provided by a carrier in a monopoly or
market dominance environment, prices should be set by cost of service
regulations and an allowed rate of return.
That takes us back to circa 1960, or thereabouts, lasting until the late 1980s
or early 1990s. However, cost-based rate-of-return regulation existed in this
country for all modes of transportation and telecommunication and so on.
In the past decade, that type of regulatory approach has all but disappeared,
not merely in air regulations but as a tool of government implementing public
policy. It has been replaced by some form of market forces or market forces
with added features such as the Competition Bureau and so on.
What is intriguing to me about your proposal is that it flies in the face of
everything we have heard from everyone else, only in the sense that we all
agree on the objective that needs to be met, which is to avoid price gouging to
avoid suppliers of air service to small communities where its a monopoly
service from taking advantage of their monopoly position and so on.
From a public policymakers viewpoint, there are two ways to achieve that: First,
by means of the detail pricing regulation you propose; second, using
competition policy and many more detailed elements of competition policy that
were proposed yesterday by the commissioner of competition policy in the letter
that was made public yesterday.
In all the discussions on this issue, no one other than yourselves has gone back
to the old model. I am curious why you did that in light of the fact that the
trends worldwide would not be in that direction but would be very much in the
direction of doing everything you can to let modified market forces be the
That is a philosophical question, but it is important that we understand why you
are where you are.
Mr. Janigan: First, this document is, in effect, a work in progress, and there
are segments of this section on fair pricing rules that we will be revising
Senator Kirby: I accept that that is an underlying principle.
Mr. Janigan: First of all, this particular segment refers to those elements of
the market that are currently operated under monopoly or in a situation of
market dominance where there is no workable competition.
In that circumstance, you must find some way to set a price that is based on
reasonable costs. That means at least de novo, whether or not you go to a
continuing series of cost-of-service reviews, but you must have the costs
aligned with prices and whatever.
Once you have done that, you may wish to go to a system that incorporates, for
example, price caps related to increases associated with increases in inflation
and less productivity increases, and that sort of thing, and also a process to
forebear from regulation when sufficient competition develops in the market
such that there is evidence of rivalry and you no longer need regulations. It is
important to note that this only applies in the circumstances where there is no
You continue to do those kinds of things, as well to encourage market entry by
competitors with the hope of encouraging competition.
A similar approach was taken with long distance telephone service, where, in
essence, Bell Canada's long distance tariffs were regulated until there was
evidence of sufficient rivalry. You forbore from regulation at that point in
time and the market has gone off as it is. In local service, the same thing is
happening; you are under a system of price caps.
Mr. Reddick: I would like to add two comments to that. First, we continue to
regulate basic cable television prices, to the point that there will be
sufficient level of competition, which has not been achieved anywhere in the
country at this time.
Second -- and I think philosophically this is useful -- if you look back over
history in terms of other utilities -- and I count transportation as a key
utility -- at different points in time there has been more or less government
regulation of pricing and service in different countries depending on how
competitive the marketplace may be. If you look at the 1905 telephone hearings
held by the House of Commons Select Committee on Telephone Systems, for
example, they came about because of market dominance and monopoly, but before
that there was a lot of competition. If we look at the monopoly formation of
the steel industry or oil companies, again we find that in various countries
there was government intervention to examine how prices and services were set.
We are going through the same thing again with Microsoft.
The market is a dynamic entity. There are market winners and losers, and when
there is just one winner and market dominance, often that requires a public
policy response. Whether that is long term or short term depends on the public
policy goals and the needs of public.
Senator Kirby: I hear you. I do not want to get off onto the telecommunications
issue, except to make the observation, for those who think that there is
genuine competition now in the long distance market, that one can make a very
good argument that the CRTC's elimination of forbearance was done probably five
years too soon.
Mr. Janigan: That was our argument, too.
Senator Kirby: That may be an issue we want to deal with in this committee in
the future. Let me stick with airlines. My problem is not with the concept you
are proposing, with the exception of three things: First, the history in this
country has been that cost-based rate-of-return regulation has not worked all
that well; second, the question of how you determine when there is sufficient
competition to take the regulation off; and third, the evidence we have before
the committee is that some 90 per cent of the Canadian market will have a
dominant carrier. It is not as if there are 30 small communities that would
have to come under this. The reality is that, under your definitions, virtually
the entire country would come under it. At that point, we have to ask ourselves
whether that is the approach we want to use, or do we in fact try the
competition policy approach, recognizing that this ultimately becomes a
fallback position. I am curious that you ruled the competition one out right off
Mr. Peter Bleyer, Executive Director, The Council of Canadians: The pricing is
relevant to this. You mentioned history, and my colleague Mr. Reddick mentioned
the broader historical context.
Senator Kirby: I was not around in 1905.
Mr. Bleyer: We do not have to go back quite that far to find the kind of
historical evidence that is useful in this discussion. For example, you can
look simply at the level of prices in the airline industry since deregulation.
You referred to the late 1980s or early 1990s. If you compare CPI to the real
cost of flying between the decision to deregulate in the early 1990s and today,
you will see a huge difference. In fact, yesterday, one of your colleagues in
the House of Commons asked the minister why his cost of the flying back to his
riding had more than doubled in the last six years. I do not think the
minister's response was appropriate, but that is not the issue.
The issue is that the duopoly that we have had has not served the purpose. So
where we are at today is that we have an opportunity, whether we like to or
not, to set some objectives. Are the objectives that we believe in competition
or in regulation? Are they ideological blinders, or are they having us sit down
and asking what will work to achieve what Canadian citizens and consumers need
and what the Canadian economy needs? Will we take the perspective of looking at
regulation or competition or, frankly, short-term shareholder value?
We are arguing that we should lay out some very clear objectives. Those
objectives should be about safety and about reasonable price -- not bargain
basement prices but reasonable prices, ones that makes business possible in the
airline industry. They should include a number of other objectives, such as the
one you referred to of ensuring that small communities have service. However,
the notion that we have any kind of proof from recent history that competition,
whether managed or not, actually works is just wrong. The historical record is
that, in the Canadian context, it has not worked. As to whether that would work
in the future or not, all I can draw on is that past experience.
Mr. Janigan: I do not think it is an either/or proposition. At the same time as
you may be attempting to establish a workably competitive market, you must
recognize that, while there is market dominance or monopoly, there must be
protections in place. It may in fact be correct that once you have established
the prices in line with cost you may not need to do a cost-of-service review
every year. You may do it by way of regulatory mechanisms. It is not a matter
of saying that we will let competition deal with it if you have a situation
where 90 per cent of the market is already covered by the dominant player. That
particular player has the mechanism to enforce price increases, which is, in
essence, an abuse of his position as a monopoly dominant provider.
Senator Kirby: I think I should say that the witnesses have done the committee a
real service because the issue of whether, in the case of a dominant airline
with 90 per cent of country, we ought to return to what I would call the more
historical approaches to market regulation as opposed to using competitive
forces or managed competitive forces as the market regulator is an issue that
this committee will probably have to wrestle with, because it is a fundamental
public policy choice. I think they did us a real favour by putting it on the
Senator Poulin: Following on that thought of my colleague, Senator Kirby, I have
a supplementary to address to Mr. Bleyer. You say the objectives would have to
be extremely clear. Yesterday, the minister reminded us very clearly of the
objectives that the government has given itself. The vision is a safe and
healthy Canadian airline industry, one that is owned and controlled by
Canadians, that serves all parts of Canada at fair prices, and that is capable
of competing with the biggest and best airlines in the world.
Following up on what Senator Kirby has said, what is your recommendation to this
committee in terms of structure, regulation, how many airlines there should be,
and regional service? What are you recommending to us, Mr. Bleyer?
Mr. Bleyer: I am sure my colleagues will want to add to this. Obviously, we are
recommending a bill of rights for passengers. What is interesting about what
you see before is you that there is an incredibly powerful coming together of
citizens and public interest groups around this bill of rights and around
broader issues. We each bring certain strengths to the table; each of us also
has specific interests. For example, the air safety group is specifically
interested in safety. From the perspective of my organization, the Council of
Canadians, one of our concerns is with respect to what formerly has been, and
what I hope will soon no longer be, a four letter word, "regulation"
-- the longest four letter word in history -- and what still seems to be one
for Senator Kirby.
The minister made some very positive statements yesterday. He laid out
objectives that we all share. You need to ensure, through our input, through
your input and others, that there is some meat in the sandwich because the
reality is that the evidence is quite to the contrary. The trend has been to
deregulation, not only in the airline sector but others. The trend has been to
disinvestment. We have the issue of the regional airports, but we also have
issues around air traffic controllers, just speaking of that industry. That
trend is present in other sectors as well.
The public sector has been withdrawing. I am not just talking about jobs and so
forth; I am talking about taking responsibility. The notion that it is up to
Mr. Milton or Mr. Schwartz or Mr. Benton to come up with a solution potentially
makes this country the laughing stock of the world. It is not their job to come
up with a solution; it is their job to come up with a profit-making proposal for
the people they represent. Anyone who thinks that they will come up with the
solution or wants to have them meet that challenge is heading in the wrong
direction. The responsibility is for elected officials to come up with the
framework that can solve the problem that we face today. It is our hope that we
are making some contribution to that in terms of the bill of rights. The major
emphasis is on not leaving to the private sector what needs to be looked at by
government. We need a role for public interest and citizen groups and consumer
groups in any process that emerges.
Mr. Reddick: The role of government in this process is important. The airline
passenger bill of rights is not a remarkable document. What is remarkable is
the fact that we had to produce such a document. When we talk to people about
what is in here and they look at the objectives, practices, and principles,
they generally assume that this is the normal course of doing business -- that
this is what you expect when you get airline service. In any other industry,
these are basic, common standards of what you normally would expect a
competitive market or any other market to provide in return for what you are
spending as a consumer.
We must go back to the bottom line and say, "What you would take out of
here? What is so radical in this document that should not be in there and will
offend the airlines or government or someone else?" I defy anyone to say
you should not have one of these basic rights. It is that basic, really.
It is interesting that the bill of rights was not passed in the United States
because the airlines adopted a voluntary code. My understanding is that Air
Canada and Canadian have both signed the code in the States but have not signed
our bill of rights, which is very similar in many ways. That is just an
Senator Adams: I would like to find out a bit more about Transport 2000. How
does your organization work?
Mr. Jeanes: Transport 2000 is a public advocacy organization. We do not provide
any transport services, but you would be surprised how many calls we get for
Canada 2000, and also how many calls we get for Transport Canada. After we were
founded, the Ministry of Transport changed their name to Transport Canada.
We are a consumer advocacy or public advocacy organization, and we work with
carriers in various modes of transport. We talk to the airlines, to the railway
companies, to bus companies, and we talk to other public interest groups that
have interests in the transportation area. We are not a carrier nor in any way
provide any kind of transportation services.
Senator Adams: Are people who are employed in the transportation industry also
involved in your organization?
Mr. Gow: Our membership base is mostly people who are passengers, or in some
cases people who would like to be passengers. We do have, as members, pilots,
locomotive engineers, ferryboat captains, and others, who join the association
on an individual basis; as well, sometimes local unions sign up. We do not have
in our membership any national unions, and I do not suppose we could really
accept them in any case as a member, though I suppose we would have to consider
it. We certainly have a few local unions and retiree groups involving these
Senator Adams: You say you deal mostly with airlines, but also with any other
modes of transportation.
Mr. Gow: Yes, on a broad base. We act in an advisory position. We do not
actually provide the service.
Senator Spivak: The experience of the airline industry is a textbook case,
demonstrating that those with a touching faith in market forces are mistaken. I
do not place my esteemed colleague in that category.
Senator Kirby: Just so we are clear, she means she does not place me in the
category of "esteemed."
Senator Spivak: I happened to be in the Senate when the privatization of Air
Canada took place. I remember the lofty goals and objectives and the statements
that prices would come down, et cetera. That did not happen. Look what has
happened. "Ruinous competition" was Onex's term. Ruinous competition
now means that we need to go back to a monopoly, and I find that very
The same has proven true in the railroads with regard to the agriculture
industry. Competition was supposed to make prices come down. The prices are now
flat out because of this competition.
I am in accord with my colleague in thanking you for bringing a bit of balance
to this discussion where everything is "globalization" and "privatization."
This must be justiciable or it does not mean anything. Have you considered
whether this is indeed something that, if it were to pass, could be
justiciable? Obviously, that is what they were worried about in the United
Mr. Janigan: We envision this as being implemented through a variety of
different means. Some of these conditions may well become part of licensing
conditions. Some of them may be agreed to as part of the implied contract with
airline passengers, if the airlines so agreed. Some of it may be incorporated
with respect to other regulations that are put in place or associated with
licensing by the Canadian Transportation Agency. With the document in its
current form, you are right that in order to have it such that there would be
legally enforceable rights would be very difficult at present, but it presents
the framework going forward that we would like to have implemented in a variety
of different ways throughout the airline system.
Senator Spivak: I asked that because I am very leery of voluntary codes and
consultation without any decision-making. Nothing works.
You talk about the profound impact of a monopoly. The final result of having one
dominant airline will have profound implications. One cannot say for certain,
but it looks like this is a direction in which we are heading. That brings into
focus the role of the Competition Bureau. They have said that their role is to
maintain competition and not to sanction monopolies. Well, we will see. They
also said previously that the kind of thing visualized here, where you have a
dominant airline and existing charter carriers and feeder routes, will not
provide adequate competitive discipline. We will have legislation that the
minister has suggested, among other things, will then give him or her sole
authority to remove this whole matter from the Competition Bureau other than as
an advisory role. The minister will make his decision. What do you think are
the profound implications? How do you view that whole tension between the
Competition Bureau and the minister's powers, and so on? How do you think that
should be handled so that the public interest is protected?
Mr. Reddick: The Competition Bureau is largely set up to deal with competition
between companies. If we have a monopoly, they will not be in the picture.
Senator Spivak: It is clear that they will review these.
Mr. Reddick: There is no question about that. However, in the longer term this
raises the question of the role of the CTA, the transportation agency, and the
minister, and what new regulations may need to be introduced at CTA, whether it
is a Bill of Rights or other issues. In other words, what legislation needs to
be put in place through policy with the minister? Mr. Janigan probably wants to
add to that.
Senator Spivak: Will you present suggestions to the minister in terms of how
this could be handled?
Mr. Reddick: What kind of public process should be part of that as well is very
Mr. Janigan: We envision that the Competition Bureau does have an important role
to play. We read with interest the letter that was sent yesterday by the
commissioner to the minister outlining the different steps that would have to
be taken to ensure that market barriers are removed or not in place to enable
competitive entry. Having said that, at the end of the day the competition
commissioner may be presented with a situation where, as it stands at the
moment, we may be left with a dominant airline or a monopoly situation. In that
circumstance, we must look to a system of regulation that protects those
markets that are not subject to competitive pressure and implement the kinds of
things the competition commissioner has suggested to ensure that those barriers
to competitive entry are removed or are not put in place by dominant airlines.
We have alluded to some of the profound implications, and not just price. There
are several concerns. Some have an impact on choice; others have an impact on
the way in which service is delivered by the airlines. What impetus is it for a
dominant airline to put an extra reservation clerk at the desk when a lineup
occurs if there is no other competitive alternative? These sorts of things must
be addressed with respect not only to pricing restraints but also to service
quality and safety indicators upon which an airline will be marked, as well as
the appropriate financial incentives to ensure compliance. That is what occurs
in a monopoly or a dominant situation. You cannot simply wait for competition to
save you; you have to do something until it occurs, try to remove the barriers
so that there can be market entry.
Senator Spivak: You may not have time to answer this question, but I am curious
as to your thoughts on the foreign ownership question and the recommendations
of the Competition Bureau regarding foreign ownership, which I found to be
Mr. Janigan: That is not particularly surprising from the Competition Bureau,
given its philosophy.
We are concerned -- and this has been raised in the last few days -- about the
implications for NAFTA if there is any change to the 10 per cent rule. In
1993-94, the Council of Canadians was one of few organizations that went before
the national transportation agency, among others, to oppose the proposal to
have AMR take over the airline. At the time, we argued effective control of
Canadian Airlines. Unfortunately, as in a few other areas, this has borne out
to be true. We are concerned because it bears on the issue of regulation as
well. The notion that if you cannot get airlines that are owned and located
here in Canada to effectively meet the needs of Canadians and of Canadian
airline passengers you will have any better chance of doing that with airlines
that are owned and controlled out of Dallas, or wherever you want to put them,
is insane. I would apply that to a number of other industries. You could apply
that to the banking industry as well. The problem that we have is that there is
a precedent -- and here I am speaking for the Council of Canadians -- dealing
with this notion of "widely held." Our concern with "widely held"
is the foreign ownership implications. There are also implications in the
banking sector. Recently, the Minister of Finance defined "widely held"
as 20 or 30 per cent. I did not hear Minister Collenette make such an
interesting contribution to the lexicon. However, rather than saying, "We
will not remove `widely held,' we will just redefine what it is," I
suspect that he will follow what the Minister of Finance has said and come back
with something like that. We do have concerns about foreign ownership; we also,
like you, think that a voluntary code is just as much of an oxymoron as
voluntary labelling, on which you are not keen.
Senator Kinsella: I have two areas that I should like to explore, but I have
been motivated to move it up to a third area because of Senator Spivak's
interesting focus on your proposed airline passenger bill of rights and the
question of the model of "justiciability" that would be appropriate.
With bills of rights, there are two fundamental methods of "justiciability."
One is where there is a process before some kind of tribunal. There are
administrative agencies to handle part of what is contained in your proposed
bill of rights.
There is a second form of "justiciability," which is like an audit.
The non-governmental organization plays a major salutary role in civil society,
including our own society in Canada. I would encourage you to look at the idea
of conducting an audit yourselves on the performance of the industry and all
the players in it against these standards that are fundamentally identified and
The question of leadership and leadership in the public interest has arisen in
this discussion with you. It is an important discussion and it is key to our
talks. While I do not share the political party of the Minister of Transport, I
think that he, as any Minister of Transport, is interested in seeing that the
public interest in the matters of transportation is pursued vigorously under the
given minister's watch.
Our role as senators or colleagues in the other place is to hold the minister of
the day accountable and to be of assistance. This is the common purpose of the
honourable senators on this committee.
Do you think, as often is the case, that that sort of compromise or middle road
is generally the end product; that is to say, at the end of the day, if we were
to look for a type of compromise between a totally private driven sector and a
totally regulated sector?
Senator Spivak: Do you mean to say competition if necessary, but not necessarily
Senator Kinsella: No. You have competition driven by the various players in the
private sector but in the public interest it is well regulated, which is not to
say "returning to regulation." Would you comment on that, please?
Mr. Janigan: First, let it be recognized that you resort to regulation only as a
proxy for the competitive market. Where the competitive market does not exist,
you have to resort to regulation in its place. That having been said, I think
the expectation for the future, based on the results of the past, is that we
will likely not have an airline system in Canada that is either completely
competitive or should be completely regulated. There appear to be avenues where
there will be effective competition and choice that might be provided. There
are certain niche markets where that is being provided now. We should continue
to encourage that because, where you can get a workably competitive market, it
is preferable to a system of regulation.
At the same time, we must recognize there are circumstances in which there is no
workable competition. Then a system of regulation which is flexible and which
enables the regulatory agency to forebear when it is no longer necessary should
be put in place.
In addition, there are certain standards, as we have suggested, for safety, for
consumer protection, and for quality of service. These should be implemented
across the board in a competitive or non-competitive framework.
Mr. Reddick: We have to be careful. What do we mean when we talk about
deregulation? In other sectors, such as telecommunications, over the last
several years, we have moved into a very competitive market. The regulator
there, the CRTC, has made more decisions in the year since we started the
process than in the previous 10 years. Getting a competitive market to work and
to work well and to continue to work well requires a lot of oversight,
management, and different types of regulation and rule-making between different
It would be fair to say that, in most competitive markets, there is ongoing
selective regulation, intervention, in and out by the government or government
bodies or agencies, depending on how that market changes and what the dynamics
of that market may be over time.
It is not an "either/or." It is a question of how much of one or the
other. It may not be the whole market but it may be within different components
of the sub-market as well. It is some kind of mix. The government needs that
discretion. The question is whether it should be done through the minister or
through the agency or through some combination. The process must be dynamic but
also very public. There must be some means or mechanism for public groups and
other organization to come forward and highlight a problem. We should not have
to wait until we are faced with mergers or monopolies to deal with some of
these issues. That is an important point as well.
Senator Kinsella: I would invite you to comment on what I perceive to be a
necessary partnership between the many players who must be active in the
airline industry beyond the airlines themselves. They include the Ministry of
Transportation and its responsibilities, either directly or indirectly, with
the airports that have been turned over to local authorities.
With the new technology, many jets, particularly the regional ones, are flying
into airports where Transport Canada have not assured, on an ongoing basis, the
extension of the runways. As everyone knows, the RJs come in very hot and need
a lot of runway.
I live in Fredericton where we are quite sensitive to this issue. I take one
particular flight quite often. I have no question at all in my own mind in
terms of my safety; I think it is very safe. I am not concerned with the safety
issue. The report that was chaired by Benoît Bouchard was a good report.
I am concerned about poor quality of service. Because the runways are so short,
on rainy days half the passengers are taken off the flight to Toronto. That is
not the airline's fault. It is a problem with the runway, which speaks directly
to the your organization's concern with service. What are your comments on that
Mr. Reddick: I am also a resident of Fredericton, so I sympathize with your
point of view.
I noticed the other day in the Fredericton newspaper that the committee that is
negotiating with Transport Canada for the privatization of the airport has
asked that the airport be extended at a cost to federal government. The
government is not willing to do that. This butts up against the responsibility
of the department and of the federal government to oversee the safety of the
overall system. In terms of fire and rescue safety, Canada has fallen below
standards in most airports in the country. There are safety questions about the
length of runways and other service areas that are not specific to any airline
but to the overall operation of airport services.
There is a major public policy role and a major public interest role for the
government to ensure that the communities and passengers in the industry work
well and in a healthy way. That is not necessarily the responsibility of the
airlines. These are infrastructure issues, which are very much a part of the
Senator Fairbairn: I have heard your comments about the bill in the United
States and that its adoption was narrowly diverted because of this lobbying and
the promises of the airlines to implement their own codes reflecting consumer
concerns. Is there someone like you in the United States who will monitor
whether those promises are being kept? It is all very well to make promises,
but vis-à-vis Congress will there be some mechanism to monitor those
Mr. Janigan: I do not know if there is a mechanism. The Consumers Union in the
United States has testified in front of the committee on commerce in the United
States Senate, together with the Consumers Federation of America. I would
assume that they will continue their efforts to try to monitor airline
compliance with these voluntary codes. I would expect that we will hear from
them probably in the next term of Congress as to whether or not those efforts
have been satisfactory.
The Chairman: Thank you, gentlemen.
Our next witnesses are from the Competition Bureau of Industry Canada.
Welcome. Please proceed.
Mr. Konrad von Finckenstein, Commissioner of Competition, Competition Bureau
(Industry Canada): Honourable senators, thank you for inviting us to appear
before you to discuss our views on the competition issues related to the
potential restructuring of the Canadian airline industry.
As you are aware, the Bureau has not examined any specific restructuring
We were asked by the Minister of Transport to advise him on how the outcome of
the restructuring of the airline industry would be as pro-competitive as
possible. During the last two months, we have interviewed most of the players
in the airline industry, airport authorities, consumer groups, academics, as
well as hired economists and lawyers.
Our conclusion is that there will be a significant competition concern in most
domestic airline passenger markets if a dominant carrier emerges from the
current restructuring process.
In requesting our advice, the Minister of Transport asked us not to look at
government policy on foreign ownership, cabotage, and the carrier designation
under open skies. I am pleased that in his statement yesterday the minister
asked you to consider many of the bureau's recommendations.
In a typical merger review, where the Bureau finds that the merger would lead to
a substantial lessening of competition, the Bureau imposes conditions to remedy
the substantial lessening. The merging companies must satisfy these terms in
order to move forward without the objection of the Bureau. The aim of these
conditions generally is to facilitate the entry into the market of new
competitors or to allow existing companies to expand and provide real
In our letter to the Minister of Transport, we outlined some conditions that
might be imposed as a term of airline restructuring. These include the
following: surrendering arrival and departure times, known as slots; returning
airport facilities to the appropriate authority for reallocation; changing the
way airlines pay for airport services; ensuring that any new airline competitors
are able to purchase the dominant carrier's frequent flyer points; changing the
method of calculating travel agents' commissions; offering to transfer surplus
planes to any new entrants; the possible divestiture of regional carriers; and
ensuring that new and expanding airlines be able to interline and code-share
with the dominant carrier.
In addition, we recommend the establishment of a more effective way of fighting
this predatory behaviour by the dominant carrier. Predation can constitute a
major barrier to entry.
We focused our analysis on the emergence of a dominant carrier. However, we feel
that many of our recommendations could be implemented in a non-dominant carrier
environment to the benefit of all Canadians.
While we have outlined recommended conditions that could be required in
connection with the approval of a restructured airline, this may not be enough.
The Bureau feels that the government should consider implementing the two key
recommendations which would allow new competitors to create real choices for
the flying public and impose price discipline on the dominant carrier.
These are allowing a modified 6th freedom which would allow US carriers to pick
up passengers in one Canadian city and fly to another Canadian city via the US
and allowing the creation of a Canada-only carrier, which carriers would be
free of any foreign ownership and control restrictions.
These two recommendations are required because we have no assurance that
existing charter carriers and regional carriers are likely to expand to provide
sufficient competition to a dominant carrier. Let us not forget that a dominant
carrier resulting from the merger would have 80 per cent of the domestic
passenger traffic and account for 90 per cent of domestic revenues.
What do we mean by a modified sixth freedom? A modified sixth freedom right
would allow foreign carriers to pick up passengers in Canada and fly them to
another Canadian city via an American destination. At the moment, it is
possible to buy two tickets, one from Toronto to Chicago and another from
Chicago to Vancouver, but carriers cannot market and sell such tickets as a
single ticket and establish a low price for such a ticket.
We recommend that the Minister of Transport try to negotiate a reciprocal
agreement with the U.S., so that, for example, a dominant Canadian carrier
could take passengers from New York to Los Angeles via Toronto and U.S.
carriers could fly routes such as Toronto-Chicago-Vancouver. Such a reciprocal
arrangement would be beneficial for carriers in both countries. However, we go
further. If within two years after the creation of a new dominant carrier there
is compelling evidence that competition is not being provided by other
carriers, the bureau recommends that the minister should allow a modified sixth
freedom on a unilateral basis.
The second essential recommendation is the concept of a Canada-only carrier.
Under this proposal, a new class of air carrier would be created. The carrier
would be allowed to fly only within Canada and serve only Canadian airports.
Being Canadian-licensed carriers, these carriers would have the same cost base
as the dominant carrier; that is, pay the same costs for fuel, crews and meals,
and be subject to the same licensing, noise control, and other regulations as
the dominant carrier. In addition, they would be paying Canadian income taxes
and employ Canadian personnel.
The Canada-only carrier would be free of all foreign ownership and control
restrictions but could not apply for designation as a Canadian carrier under
any bilateral agreements.
We fully understand that ownership restrictions are needed in support of the
designation system under international agreements. However, we do not see any
need for them in the context of an air carrier that is not permitted to cross
international boundaries. This model would provide a greater opportunity for
creating strongly capitalized new entrants aligned with knowledgeable foreign
operators who have the expertise to operate as efficient and effective
competitors to the benefit of Canadian consumers.
A similar model is in place in Australia and to our knowledge it is working
Senator Forrestall: Thank you very much for appearing before our committee. You
have had so much to say to Canadians in the last week or 10 days that it is
difficult to keep abreast of you. It seems that you have narrowed your views
and you seem to have a thrust, and it is a very good one. I expect that you
will defend it vigorously.
In the development of a modified sixth freedom, I presume that the flight from
Toronto to Vancouver would be required to land in and take off from Chicago.
What about customs clearance, et cetera?
Mr. von Finckenstein: You can buy today a ticket with Northwest to fly from
Montreal to Minneapolis and a second ticket to fly from Minneapolis to Calgary.
You can fly that way if you so choose, or you can fly directly with Air Canada
or Canadian Airlines from Montreal to Calgary.
If you take the Northwest route, you have to clear customs; you have to deplane
and board another plane in Minneapolis. There is some inconvenience associated
with that. Northwest cannot market and sell that arrangement as a single
ticket. They have to sell you two separate tickets and then account market it.
Why not let them market it? If we are going to have a merger that results in a
dominant carrier having 80 per cent of the traffic and 90 per cent of the
revenue, there should be some alternatives. The alternatives come at the price
of the inconvenience of changing planes and clearing customs; however, if the
price differential is sufficient it will act as a discipline on the dominant
carrier, and Canadians will have the choice. If you want to go directly, you
will pay extra; if you want to travel more cheaply, you will go via
Senator Forrestall: It seems to me that you are doing by one means that which
you cannot do by another. This is cabotage as I have always understood it.
Mr. von Finckenstein: No, you said it is cabotage. Cabotage is a foreign carrier
coming to Canada and taking a passenger from one place in Canada to another.
That is not what we are talking about. In this situation, the carrier is going
from Canada to the United States, back to Canada. You can do it today. It is
allowed. All we are suggesting is that it be marketed as such. We are suggesting
that the minister negotiate it on a reciprocal basis with the United States.
Senator Forrestall: Cabotage being a reciprocal arrangement -- you would never
grant cabotage to U.S. carriers without a quid pro quo. I am still suggesting
that you are doing by one means that which the government has invited you not
even to look at. They did not want you to look at cabotage or any of the other
options that were out there.
I am not trying to put ideas in your mind, or in the government's mind, but that
is the way it has appeared to me. Am I that far out in left field?
Mr. von Finckenstein: I appreciate that the minister said cabotage is not on the
table, and I specifically did not talk about cabotage. What I pointed out is
that there is an existing arrangement that could be used and I suggested that
he negotiate on a reciprocal basis.
I suggested that, after two years, if it is unsuccessful and we have a true
competition issue on transcontinental flights, such as the example I gave you,
he might consider doing it on a unilateral basis. That is what we are saying.
Senator Forrestall: It could work. You suggest that, under this proposal, a new
class of air carrier would be created, which would be allowed to fly only
within Canada and to serve only Canadian airports. While they might be subject
to the same costs, such as fuel, I doubt if pilots would come into it, unless
you are talking about the gradual reintroduction of a second predominant and a
dominant carrier, an obvious competitor. If it is not that, how could it turn
out to be competitive?
Mr. von Finckenstein: Let me first make a couple of points. Our Canadian
carriers are doing extremely well on cross-border and international flights.
Under Open Skies, the Canadian carrier share of total transborder passengers
has gone from 42 to 49 per cent. We are clearly competitive on the transborder
Regarding the two main routes from Canada to the U.K. and from Canada to Japan,
Canadian carriers have 72 per cent of the total seat capacity from Canada-U.K.
and 68 per cent Canada-Japan. Internationally, our carriers are doing well and
they are competitive.
I am suggesting that domestically, post-merger, there will be a tremendous
concentration. We are suggesting an alternative. Clearly, the whole system of
designating carriers under international agreements is based on the fact that
you have a Canadian owned and controlled carrier.
We are suggesting that you create a new class of carriers who cannot be
designated. They must be in Canada. They must compete on equal terms. They will
have the same labour costs as Air Canada and the same fuel costs. They will be
subject to the same noise regulations, in fact to everything that Air Canada is
subject to. They will not be allowed to fly across borders, but within Canada
they can and they will give competition to Air Canada. They do not have to
comply with Canadian ownership and control requirements so that they have
access to foreign capital.
Let me give you an example. If you live in Sudbury, post-merger, you will have
only one way to go to Toronto. That is with the new dominant carrier, because
the only two companies that fly from Sudbury to Toronto are Air Canada and
If you live in Sudbury and you want to go to New York, post-merger, your option
is to fly Air Canada from Sudbury to Toronto, Toronto to New York. What we are
suggesting is that the Canada-only carrier would take you from Sudbury to
Toronto, and then from Toronto to New York you would fly with the interline,
whether it is TWA or United or Northwest or whoever. So there is an alternative.
As I say, I am not worried about the transborder traffic because our Canadian
carriers are doing extremely well on the transborder traffic. I am worried
about the domestic leg. To ensure that there is reasonable competition, we
suggest this Canada-only concept.
The Australians have a similar model, which works very well.
Senator Forrestall: I looked at that model just a few short months ago.
I am drawing in my own mind a scenario that would involve the remaining DC-9s
that Air Canada has in storage and the proposal to create a Canadian airline.
Would that be the basis of an airline that you would have in the back of your
Mr. von Finckenstein: I leave it up to entrepreneurs to decide what planes they
want to fly and from where to get them.
In one of our recommendations, as a condition that might be imposed on the
merger, we point out that there will be surplus planes. If there is a merger
between Air Canada and Canadian, they will have more planes than they need
because they will have efficiencies. These planes will be certified for
Canadian use, et cetera. Rather than being parked in the desert or being sold
somewhere else, we suggest that Canadians may want to buy them and a new
airline or existing one would get a right of first refusal. Obviously, they
must pay fair market value for those planes, but they should have access to
Senator Forrestall: Would you suggest that, perhaps, this new airline should not
be owned by the dominant carrier? Does it matter in your view?
Mr. von Finckenstein: I would suggest that it definitely not be owned by the
dominant carrier. The whole idea is to get away from the dominant carrier and
to create some competition.
Senator Forrestall: To create competition. That is fine. You could have said
that in one sentence.
Mr. von Finckenstein: You got there much faster than I did.
Senator Spivak: Concerning the Canada-only carrier proposal, why could this not
be Canadian? Then you would not have to go through the merger. You would not
need all of that, if the government would institute this sort of a policy.
Mr. von Finckenstein: There is nothing to stop anyone from setting that up
today. Any Canadian who wants to set up an airline that only flies in Canada
can do that. There is no prohibition whatsoever.
Senator Spivak: We have an existing situation. That is what I am asking you. The
existing situation is that you have two merger proposals and a huge poison pill
fight between international carriers. What would your opinion be if the
government wanted to institute this policy and use Canadian as the domestic
Mr. von Finckenstein: You mean Canadian Airlines; I thought you meant a Canadian
Senator Spivak: Canadian Airlines, that is what I am talking about. Would that
not achieve the same purpose?
Mr. von Finckenstein: Senator, you are now asking me to comment on the specific
Senator Spivak: Are you not allowed to comment?
Mr. von Finckenstein: I am certainly allowed to comment. What I am saying is
that I cannot speak knowledgeably about it because I have not been allowed to
It may well be that because of restructuring you could have a pared-down
Canadian Airlines who flies within Canada and gives domestic competition to Air
Senator Spivak: In a previous tribunal decision, the Competition Bureau said
that regional airlines could never give enough competition, even if they
expanded, to the dominant carrier, if you had a dominant carrier. That was in
1994, I believe. How is this different?
Mr. von Finckenstein: We are not talking about regional carriers. We are talking
about a carrier that would fly across the country.
Senator Spivak: It is a regional carrier, in that it flies all across Canada
while others do transborder.
Mr. von Finckenstein: That is why we are suggesting that these Canada-only
carriers would be free of any ownership restriction. They may have a parent who
has the muscle, the expertise, and the marketing intelligence to give good
competition to the dominant carrier.
Senator Kirby: I should like to begin with a couple of general policy questions
and then move into the specifics of your letter.
By the way, may I say that you and your staff, in generating that 32-page
letter, did an unbelievable job in a relatively short period of time. You are
to be commended for that.
We just had witnesses from Transport 2000 give their presentation. Largely, they
are an affiliated group, which is the air passenger organization. They argued
for, in the case of movement to one dominant airline, a return to a cost-based,
rate-of-return regulatory system, at least in those markets where there was
clearly a relatively small amount of competition, which, presumably, would, at
the very least, be the small places in the country. I asked them
philosophically how they compared that with your approach, which is essentially
trying to find market-type mechanisms. They maintained their position. Would
you care to comment on that approach?
The two philosophical approaches governments have used have been rates of
return, on the one hand, and market forces, on the other. We now have a
knowledgeable group arguing for an approach that is totally different from
Mr. von Finckenstein: It will not surprise you that I am not in favour of
reregulation. What we must do, and what we suggested in our letter, is set the
conditions so that there will be the possibility of competition. Even if we
have a merger resulting in a dominant carrier, we could put the safeguards in
place in terms of predatory behaviour, access to airports, the commission
overrides, and all the other things we mentioned. The reason for this is so
that the dominant carrier cannot take undue advantage of their position.
Going back to reregulation just encourages inefficiency. If you have a
guaranteed rate of return, why would you improve service, why would you try to
find a better way of doing business? The demonstration in any industry that you
care to look at that has been deregulated are the tremendous efficiencies that
have been released, the innovation that has followed. If you look at the
telephone industry, for many years it was regulated. When you think of the rate
of long-distance calling now compared to what it was 10 years ago when we had
regulation, and what the rate of return was, it is a no-brainer.
Senator Kirby: You would argue that even the movement to a dominant carrier is
not sufficient to cause you to rethink the merits of reregulation?
Mr. von Finckenstein: No. It calls for special safeguards. For instance, one of
the things we suggested in our letter is a special regime to deal with
predatory pricing. Someone as dominant as this carrier will be, having 80 per
cent of the traffic, can throw its weight around and drive people out of
business quickly. Therefore, special mechanisms are needed.
Senator Kirby: I should like to know on the basis of your experience if you can
give me an illustrative example where this works, where you have a case of a
holding company owning two subsidiaries, or a parent owning a subsidiary, where
there is genuine competition between the two subsidiaries of the same holding
company or the parent subsidiary. Do you have any example that you can think of
where there is effective competition between those two companies?
Mr. Raymond Pierce, Deputy Commissioner of Competition, Competition Bureau,
Industry Canada: In competition law, we would consider that that is one entity
and that they are not competing with each other. They are not independent
entities competing with each other. They are controlled by the same person.
Senator Kirby: From your point of view, the notion of whether it is two or
three, as some people have proposed -- I am staying away from the specific
example -- all owned by the same company, it is essentially one company and,
therefore, they cannot by any reasonable interpretation be deemed to be
competing with each other.
Mr. Pierce: Exactly.
Senator Kirby: I will move on to a couple of your specifics. First, I wish to
ask you a question about the modified sixth freedom. I referred to it as the "modified
cabotage" when I spoke to the minister last night, on the grounds that it
was not carrying a Canadian directly from one Canadian city to another, that it
was carrying it over an U.S. hub. I understand that you are not pleased with
that description; therefore, I am happy to give you right of rebuttal.
Mr. von Finckenstein: If you call that quasi-cabotage, then you can say that
Boeing is actually quasi-stealing. It is something quite different. We are not
talking here about taking people from one place in Canada to another. That is
what cabotage is and that is what the term means. That is how it is used. We
are talking here about an existing right. I keep coming back to the example of
Northwest Airlines. If you wish to go to Calgary, there is nothing preventing
you from doing exactly that. I checked it, I know the price, the plane is there
and you can fly tomorrow morning to Calgary via Minneapolis. Northwest,
however, cannot market it as one and does not market it as one and so right now
it is more expensive than flying Air Canada.
Senator Kirby: When you say "market" I believe I know what you mean;
however, it is important to have this on the record. "Market", to the
layperson, implies advertise. What you mean is that they cannot price it as a
Mr. von Finckenstein: More important is that when you go to a travel agent and
say that you wish to go to Calgary from Montreal, it does not show up. It shows
up as a flight to Minneapolis. You must go to a different screen to see the
flight from Minneapolis to Calgary.
Senator Kirby: May I suggest to you a better example, because you can go
directly from here to Calgary. A better example is Edmonton, which cannot be
reached directly. You must change planes somewhere, or, at the very least, you
must stop in Calgary or change in Winnipeg. You can go non-stop Minneapolis to
Edmonton, because I have done that.
What you are saying is that if a passenger must change planes somewhere, that
passenger should have the right to opt to make that change in an U.S. city
rather than a Canadian city?
Mr. von Finckenstein: The comparison is that you can fly directly from Montreal
to Calgary, or you can go via Minneapolis if you have the modified sixth
freedom. It is more inconvenient, it takes more time; however, it may be
cheaper. You may make the choice of which one you want.
Senator Kirby: You might be willing to take more time to get a lower price.
On page 23 of your letter, you talk about developing a more pro-competitive
international air policy. Typically, as I understand it, international policies
are developed largely on the basis of international negotiations. Of the points
you list on page 23 and the top of page 24, how many of those could be done
unilaterally by Canada, as opposed to having them as the result of an
Mr. Richard Annan, Commerce Officer, Competition Bureau, Industry Canada: I
believe the ones that are imposed by us unilaterally relate to, for example, a
rule that we do not designate a second carrier.
Senator Kirby: The 300,000 passenger?
Mr. Annan: The 300,000-passenger rule. That is point number one.
Senator Kirby: Where does that come from?
Mr. Annan: It was developed as a part of the ministerial air policy.
Senator Kirby: There is some basis in theory and some in fact?
Mr. Annan: As you know, we had this division of the world policy between Air
Canada and Canadian, and there was some dispute about when can you designate
the other carrier to those markets. This was the rule that was adopted.
Second, there are a number of bilateral agreements where we have the right to
designate a second carrier; however, that has not been utilized. We are
suggesting that where we have that right to award a second designation,
essentially we use that. That should be used even if the second carrier would
only co-chair services that would help support competition.
In addition, we also have a use-it-or-lose-it policy, to which we are suggesting
some modifications, to make it more pro-competitive.
Senator Kirby: You are saying that all of those things can be done without
Mr. Annan: Yes.
Senator Kirby: On your Canada-only carrier policy, you referred in your
statement, Mr. von Finckenstein, to the Australian example. I assume Ansett is
the example you are using.
Mr. von Finckenstein: Right.
Senator Kirby: I understood, and I may be misinformed, that Ansett was only
permitted to be 49 per cent foreign owned. Is that wrong? Was that when it
Mr. Annan: The Ansett structure, as it now stands, is as follows: There is an
Ansett holding company, 50 per cent of which is owned by Air New Zealand, and
50 per cent of which is owned by News Corp.
Senator Kirby: News Corp is Murdoch?
Mr. Annan: Right. We understand that Singapore Airlines has expressed interest
in buying the other 50 per cent at the holding company level. Below that level,
there are two separate companies: Ansett Australia, which only flies within
Australia and which is the analogue that we are talking about; and Ansett
International, which has international services.
Senator Kirby: Take the current 50/50 model. Is the 50 per cent owned by Air New
Zealand capped by the government, or is it just that that is the business deal
they struck with Murdoch? In other words, could air New Zealand buy out
Mr. Annan: There would have to be a modification, in the sense that they could
buy 100 per cent of Ansett Australia but they would not be able to get more
than 49 per cent of Ansett International.
Senator Kirby: That is the piece I missed. The 49 per cent in fact only applies
to a portion of Ansett and not the whole.
Mr. Annan: Concerning international services, you still have to be
Australian-controlled for their bilateral obligations; but for domestic-only
services, that does not apply.
Senator Kirby: You should know, by the way, that the Consumers' Association of
Canada also testified before us today, and they very much like your proposal,
in part because they use Australia as not a bad model for a number of their
other issues. To buttress your arguments, you may want to get their testimony
Concerning the length of the merger review process, in the minister's statement,
he talked about the three steps, and then he made a statement that talks about
the length of time. The statement says that all three tracks -- yours being
one, the agency's being a second, and the government's being the third -- will
be conducted as expeditiously as possible with due regard to the financial
health of the companies involved.
Do you have any sense of how long it would take you to do the merger review
process outlined in the minister's statement once a particular proposal was
Mr. von Finckenstein: The minister's statement really suggests a three-key
approval process, very analogous to what is involved with the banks where the
Minister of Finance has to approve and we have to approve. Here it would be the
minister and ourselves.
If it is a healthy carrier, and we do a full review, it would take us somewhere
around four to five months.
If we are talking about a failing firm, meaning one that is bankrupt or nearly
bankrupt, then you really have only one issue to examine, which is to determine
what is the best way of using these assets. It may be through a merger, or it
may be that there is there a better way that they can be reused, perhaps
through a restructuring, with or without bankruptcy, and who are the people
likely to pick it up. If it is a failing firm, I would think it would take us
six to eight weeks maximum.
Senator Kirby: I realize you have not looked at the books, but on the basis of
the public information available, your guess would be that this would more
likely fall into the failing firm category?
Mr. von Finckenstein: If you believe the statement of the president of Canadian
Airlines, that would seem to be the case; but, as I say, I have not looked at
Senator Kirby: I realize you do not have the evidence.
Mr. von Finckenstein: When someone is talking about running out of cash, it
sounds as though that business is failing.
Senator Kirby: Yes, it certainly moves it in that direction.
My next questions deals with your predatory pricing power, which is outlined on
pages 29 and 31 of your letter. I understand why the letter deals only with the
airline industry, because that is all you were asked to comment on in this
letter. In other appearances you have made before the Standing Senate Committee
on Banking, Trade and Commerce, we have had an opportunity to discuss this
general policy area.
If the government decides to proceed in this direction -- and indeed the
minister's statement indicates that the government is prepared to -- what is
your reaction to giving you that power, not merely restricted to the airline
industry but, in fact, as a general power of the Competition Bureau vis-à-vis
Mr. von Finckenstein: It is an interesting thought. I would say that is
something that could certainly be done. The reason we suggest it here is that,
under the civil provision we are talking about here, to establish predatory
pricing you have to establish first that there is dominance. In this case, it is
not very difficult to establish dominance if one company has 85 per cent of the
airline traffic in this country. In most other cases, that is an important
issue: Is there dominance?
The second issue is this: Are they taking steps to drive someone out of business
or are they just competing fiercely? It is a very tough call to make. This
provision undoubtedly would help. We have drafted it airline-specific, and we
have also suggested that there be power to define by regulations acts that in
the airline context would be considered predatory. If you make it generic, then
that ability to define certain acts as being predatory pricing would have to be
made generic as well.
Senator Kirby: I realize that. You response was that you found it an interesting
thought, which was a careful answer.
Let me tell you why I say that. You know the trouble you had getting your act
amended the last time. It hung around here for two or three years, or longer. I
am really trying to understand whether there is something absolutely unique
about the airline industry that says this is where you ought to have the power,
or, given the views that many of us have that you do not have enough power to
act effectively at the present moment, whether, if one is going to amend the
act anyway, and all of the aggravation that will cause you and us, one should
not do it right. My definition of "right" would be to expand it
beyond airlines. I am trying to understand whether, in fact, from your point of
view that actually makes sense.
Mr. von Finckenstein: It makes sense.
Let me put two points on the table. First, I hate to raise expectations that
cannot be met. If you have an industry that is not dominant, if you have many
players, you cannot use it because section 79 suggests that you have to be
faced with a situation where you have a dominant player trying to prey on the
other competitors. If you make it generic, you might give rise to the
expectation that it can be used in other situations where it cannot be.
You asked me what is specific about the airline industry. There are two things.
First, it is a network industry. They are interconnected through the
reservation system. They have tremendous information about what everybody is
doing and what they are charging, and so on. Second, it is a mobile industry.
You can shift your assets quickly. Therefore, you if start a new airline that
has flights between Thunder Bay and Toronto, it is simple for Air Canada to put
extra capacity on that route and kill you even before we can finish our
investigation. That is why these specific powers of cease and desist are there,
so the activity can be stopped while we investigate.
Senator Kirby: That is a rather qualified response to my question.
Mr. von Finckenstein: Let me unqualify it. Yes, there is no question about it,
you could apply it generically. I would love it. What I am saying is that we
must ensure that we do not raise the expectation that this is a panacea for all
Senator Kirby: It is usually politicians who raise the expectations and then you
have to deal with them.
Mr. von Finckenstein: Exactly.
Senator Kirby: That is your problem and not ours.
For purposes of our report, could you give us a letter in the next 10 days that
indicates the changes that would need to be made in the recommendations on
pages 29 to 31 if we were to broaden the power to other industries?
Mr. von Finckenstein: I can certainly do that.
Senator Kinsella: Mr. von Finckenstein, one of the purposes of this committee
meeting is to deal with the order that was issued on August 13, because section
47 of the Canada Transportation Act provides that the minister shall cause any
order made to be laid before both Houses of Parliament, and that every order so
laid before each House of Parliament shall be referred for review to the
standing committee designated.
The Senate has designated that this committee examine this matter. Thus, in our
report, we will have to comment on the order.
Subsection 47(2) provides that the minister, before recommending an order be
made, may consult with any person who the minister considers may be affected by
the order. Did the minister consult with you or the officials in your bureau?
Mr. von Finckenstein: I was consulted about a week before the order was made as
to the wording of the order and, as to the report that I have issued, whether I
would be prepared to issue a report if requested by the minister along the
lines that he set out in his letter to me.
Senator Kinsella: Do you consider yourself, as the Commissioner of Competition,
a person affected?
Mr. von Finckenstein: The wording of the statute refers to persons engaged in
the airline industry.
Senator Kinsella: Has the order affected the ordinary activities of the
Mr. von Finckenstein: Clearly. It suspended certain parts of the act.
Senator Kinsella: Did you have a comment to make as to the appropriateness of
the issuing of that order, mindful that subsection 47(1) lays out the terms
upon which an order could be issued?
Mr. von Finckenstein: Subsection 47(1) calls for the government to make a
decision based on -- and I do not have the wording in front of me -- imminent
breakdown of the transportation system, or words to that effect. That is a call
that they must make, and that is what they did. It is not for me to question
their judgment or the basis on which they made the order.
Senator Kinsella: You did not reflect upon the apprehension of extraordinary
disruption being imminent and contrary to the interests of users and operators
such that it would impact directly, impede, set aside, or stop.
Mr. von Finckenstein: With all due respect, I read the act differently than you.
You see persons affected in section 47. You have the benefit of having it in
front of you. I do not have it in front of me at this time. The whole tenor of
that section talks about persons affected being the users and suppliers of air
transportation. It does not talk about government administrators.
Senator Kinsella: One of the reasons that we invite witnesses is to help the
honourable senators on this committee make determinations. One of the matters
that this committee will have to consider, and your advice to this committee
would be extremely helpful, relates to subsection 47(6), which states that this
committee could decide that we would bring forward a resolution directing that
the order made under this section be revoked.
Based upon all of the work that you have done now, do you think that this
committee ought to give serious consideration to whether or not we should move
a resolution to the effect that the orders be revoked so that the Competition
Bureau could examine it in the normal manner?
Mr. von Finckenstein: As you know, the order expires on November 11. There was a
challenge to the order before the courts, which challenge was discontinued by
Air Canada. However, the Attorney General, on behalf of the Government of
Canada, laid down the interpretation on behalf of the government. If I may
summarize, the position of the Crown was this: The order did suspend the merger
notification and the merger review provisions of the competition act. It went
further and said that notwithstanding that, and notwithstanding a conditional
agreement being approved by the Governor in Council, any resultant merger still
must undergo full merger review by the Competition Bureau once the order
expires. Therefore, come November 11, there will be full review by my office of
whatever merger is on the table.
I do not really see the need in any way to deal with the existing orders or to
pass a resolution along the lines that you suggest.
Senator Kinsella: If the affected shareholders who will make a determination as
to the various offers that are before them decide to accept neither of the
proposals, are we still in a situation of the apprehension of an extraordinary
disruption that is imminent? Are we in the same situation or in a worse
situation or a better situation than we were on August 13, from your point of
Mr. von Finckenstein: You are asking the wrong person because I do not have the
information. As I told you, I have never been able to look at the books of
either Canadian Airlines or Air Canada. I do not know what shape those
companies are in, nor would I venture to guess what a failure of Canadian would
mean in terms of disruption of the air market. You need to talk to air traffic
experts on that.
Senator Kinsella: If the minister decides in 13 days time when the orders runs
out that the circumstances of the orders of August 13 are still before him, and
if he decides that he would like to give the opportunity that he gave when the
order was issued for more play in the private sector outside the purview of the
review that normally might be conducted and decides that another new order
should be issued, would you have concerns with that?
Mr. von Finckenstein: It is a provision under the law that the government may
invoke, assuming the conditions are there. Perhaps the government could do
that, and they will be held accountable for it. If they do what you
hypothetically suggest, it may well be that it will be challenged, and it would
be up to the courts to decide whether there was a proper invocation of that
section or not. It is not for me to comment on government action.
Senator Kinsella: Is it typical, Mr. Commissioner, or common practice that
stated cases are presented to the Competition Bureau? Do you consider that the
letter that you received from the minister on August 30 was sort of a stated
case? It was hypothetical, and your views were invited. I agree with my
colleague Senator Kirby that it was an excellent response, given the timeline
under which you were working. Is that normal practice?
Mr. von Finckenstein: I have a dual role under the act. I am the champion of
competition and the guardian of competition. This is my exercise of my
championship role. We make submissions as suggestions to all sorts of
government bodies, regulatory tribunals, and courts as to what measures to take
in order to promote competition. Here, the minister, faced with an imminent
restructuring, was concerned that it would be done as pro-competitively as
possible. He asked me for my advice, and I gave it to him. That is part of my
duties under the act.
Senator Kinsella: Do you feel that the giving of advice in a sort of stated case
manner or under a stated case circumstance would in any way compromise the
position of the bureau should the bureau down the road be examining or
reviewing a proposition in detail?
Mr. von Finckenstein: As you can see from the letter, that was one of the
concerns we had. We were careful in our recommendations to the extent that they
deal with recommendations that could be connected to a merger approval in any
way. We were careful to use the subjunctive and qualifiers to make it quite
clear that this is looking at it generically. It depends very much on the
specific case, and we actually say that, very specifically, at the outset.
Mr. Pierce: That is found in the second paragraph, on page 2, which states:
These recommendations are not a detailed list of terms and conditions for
remedying any substantial lessening of competition that results from a
particular merger proposal.
Senator Kinsella: I recall reading that, but I also took the sense from the
entire letter in that vein. For me, that posed another type of public policy
question, namely, whether or not, by having done what they did, they placed the
Competition Bureau in somewhat of a conflict situation. Do you have any
concerns further to that?
Mr. von Finckenstein: As a bureau, we issue many guidelines and many bulletins
to tell people how we examine the act, how we look at things, and so on, so
that businesses can conduct themselves in such a way that they will not be in
conflict with the act. To some extent, if you want to say that we are showing
our hand, I think we should. That is our role. We should be as transparent and
as predictable as possible and say, "Section 47 of the act is vague. What
does it mean? We think it means this and that." It is the same here. I am
saying that if I have to look at a merger review, I will look at such things as
regional divestiture. It is clearly an issue that needs to be addressed. The
conclusion that we will reach will depend very much on whether such a regional
airline would be feasible or viable or whether they are willing to be spun off
their purchaser or whether they have the necessary free traffic arrangements,
et cetera. Clearly, it is an issue that should be addressed in order to promote
competition as a result of restructuring. I do not think I am in conflict here.
Basically, I have outlined several issues that anyone who is involved in
airline restructuring would have to address in any event.
Senator Kinsella: On page 28 of your letter, you make the recommendation
concerning raising the level of foreign ownership to 49 per cent. You have a
rationale for that, which you might want to remind us about. If you are faced
with examining a concrete proposal and there is no change in the legislative
regime in terms of the 25 per cent foreign ownership rule being maintained, is
it not true that sometimes that line is not crystal clear? Consequently, having
shown your hand, you might be erring on the side of an expanded 25 per cent?
Mr. von Finckenstein: No. In that recommendation, we have said that the airline
industry is a capital-intensive one. They need to have access to capital.
Undoubtedly, there are huge pools of foreign capital easier to tap into than
Canadian ones, and they should have access to them.
We specifically said this should not be at the cost of Canadian control. The
Canadian Transportation Agency looks at transactions to see whether or not they
are Canadian controlled. That depends on the degree to which a single
shareholder has the capacity to influence the running of that company. It may
be reflected in share ownership, but not necessarily. If it is a widely held
company, you can have 10 or 12 per cent ownership and still control it. We are
saying that, if it is possible for them to raise capital abroad, for example,
through an IPO, that does not result in anyone getting control, why not? Why
not allow these would-be entrants or the expansion of existing ones to have
access to that capital as long as it is not controlled? Whether or not raising
capital abroad in any way raises an issue of control would be something that
the CTA would have to rule on and decide. For me, it is clear that access to
capital is a major impediment and it can be lightened by hiking the limit from
25 per cent to 49 per cent as long as it does not impinge on the foreign
Senator Fairbairn: I am from Lethbridge, Alberta. I have a strong interest in
the regional airline situation and I am pleased that you spoke about it a
minute ago. In your letter to the minister, on page 19, you note that regional
carriers are financially and operationally dependent on their parent carriers.
You also note -- and I believe this to be true -- that:
Without transitional measures to ensure these services continue for some time,
the parent carrier could put the regional carrier out of business overnight.
I come from a community in Western Canada, and there are many the size of my
small city across this country. This is an issue that causes considerable
anxiety for the passengers who require these services and for the smaller
airports and the effect it might have on their well-being or their survival.
Your recommendations are based on the assumption that the divestiture of
regional carriers is feasible and would result in viable competitors. In that
sense, the government needs to address these points. I should like you to take
me through this. In some cases, the smaller airlines that have come into what
would be called a regional block, in and of themselves, may not be considered to
be viable competitors. In any transitional measures, does there not have to be
a consideration of the enormous gap in service that the disappearance, say,
overnight of such a carrier would cause? Is there a method whereby there can be
some obligation on a dominant carrier to see that the gap does not remain? We
have been through this in Western Canada, where services are pulled out. You
then wait for some time for an enterprising soul with the staying power to
arrive and bring in that competition.
This is a real concern in a part of the country where there are huge distances
involved. We are not talking about Montreal and Ottawa or Ottawa and Toronto;
we are talking huge distances where this is a vital transportation link. This
is an anxiety that is being felt currently in my part of the country.
Mr. von Finckenstein: We were careful when we wrote this recommendation to say "on
the assumption that it is feasible and viable." Several of those regional
carriers have come forward to us and have said, "We want to be
independent. We can fly, et cetera." Having not looked at their books and
having not looked at the books of the dominant carrier, it is hard for me to
decide whether or not that is viable. We would be careful to ensure exactly
what you have said, namely, that there is no disruption of service and that it
is feasible and viable. Of course, nothing is risk-free. That is why we are
suggesting transition areas, to ensure that we take the necessary steps toward
guaranteeing as much as possible that the spun-off regional airline would be
able to live on its own.
There were suggestions regarding gates and counters, et cetera, but also
regarding code-sharing or frequent flyer programs or whatever. As with all of
this letter, it is generic. We think it would be very good for competition.
There is, however, a big question. Is it economically feasible and viable? The
answer also depends a bit on the management structure and the business model
that they adopt. You are undoubtedly familiar with WestJet because you come
from that part of the country. It is a successful company but essentially they
fly only one plane. They serve no meals. In effect, they fly in a circle. That
is different from other regionals who see themselves principally as feeders.
Can they change from one model to another? What would it take and how long
would it take?
Mr. Annan may have something to add in terms of the viability of the spun-off
Mr. Annan: The main conditions we have to be worry about are listed on pages 19
and 20. Obviously, the regionals are very dependent on the parent carrier for
many internal operations like reservations, accounting systems and maintenance.
They need transitional measures to ensure that those operations are in place
for a period of time before they become independent. In addition, they will
need access to a frequent flyer program. They will need access on an airline
code-sharing basis to the trunk routes of the main carrier for a period of
Senator Fairbairn: In your answer, I would fasten upon the word "risk".
For the kind of communities I am speaking about, the services that come to us
are far smaller than WestJet. That is why, if the whole merger concept of one
dominant airline should occur, which seems to be the expectation, extraordinary
methods will be needed to ensure that all parts of the country have these
competitive opportunities. Otherwise, at least for a period of time, those
regions may risk not receiving that kind of service.
Mr. von Finckenstein: Senator, we are aware of the risks. We are very careful in
the way we couch the language here. Without an actual case and actual numbers
and an understanding of the dynamics of a given market, it is hard to be any
Senator Fairbairn: Thank you for putting in this section. It highlights the
opportunity on the one hand and it highlights the problem on the other.
The Chairman: We appreciate your presence here with us.
Honourable senators, at 9:30 next Tuesday morning, Onex will appear before us.