Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 16 - Evidence


OTTAWA, Tuesday, June 6, 2000

The Standing Senate Committee on Transport and Communications, to which was referred Bill C-26, to amend the Canada Transportation Act, the Competition Act, the Competition Tribunal Act and the Air Canada Public Participation Act and to amend another act in consequence, met this day at 9:30 a.m.

Senator Lise Bacon (Chair) in the Chair.

[English]

The Chair: Honourable senators, we are continuing our study of Bill C-26. Our witnesses this morning are from the Competition Bureau .

Please proceed.

[Translation]

Mr. Raymond Pierce, Assistant Deputy Commissioner of Competition: Thank you for inviting the Competition Bureau to appear before you to discuss its views on Bill C-26, the legislation relating to the restructuring of Canada's airline sector. The Commissioner of Competition, Mr. von Finckenstein, would have liked to address you today but he is representing Canada at the OECD meetings on competition law and policy.

I would like to briefly highlight the principal amendments to the Competition Act covered by Bill C-26.

Firstly, the temporary exemption from the Competition Act for travel agents. This will allow travel agents to negotiate collectively with a dominant carrier for commissions on domestic ticket sales. In this context, we should recall that travel agents are by far the most important distribution mechanism for air travel, accounting for more than 75 per cent of ticket sales by scheduled airlines in Canada. This exemption is temporary and will only last as long as the dominant carrier has 60 per cent or more of revenue passenger kilometres of all domestic service over a preceding 12 month period. In all other respects, the Competition Act will continue to apply to travel agents.

[English]

Second, the bill provides for defining, by regulation, airline-specific anti-competitive acts. I am tabling before you today the most recent draft copy of the regulations which will be pre-published once the bill is enacted. A previous version of this draft was tabled before the House of Commons Standing Committee on Transportation.

The regulations outline the type of behaviour, including predatory pricing, that is likely to be challenged. The distinction between pro-competitive behaviour and abusive behaviour is often a fine line.

The regulations set out four classes of anti-competitive acts. First is predatory conduct that arises from operating at fares that do not cover the avoidable cost of providing the service. Second is the pre-emption of airport facilities or takeoff and landing slots. Third is any practice that can contribute to a campaign of predatory conduct, such as the use of travel agent commissions or frequent flyer awards to eliminate or discipline a competitor. Fourth is refusal to provide essential services and facilities.

The tabling and publishing of these regulations will set out the boundaries for the industry as to what is acceptable behaviour. We invite all stakeholders to send their comments to the bureau.

I would also like to comment on the changes to the provision that were adopted by the House of Commons Standing Committee on Transport. A number of carriers that appeared before that committee expressed concerns about the refusal by the dominant carrier to provide access to various services and facilities. These amendments were made to ensure that the denial of access on commercially reasonable terms to services and facilities essential to the operation of an air service would be covered by the new regulations. They are consistent with competition law principles relating to essential services and facilities found in other countries, including the United States.

[Translation]

In order for such a refusal to constitute an anticompetitive act, four conditions must be met: the service is required to provide a competitive air service; the service cannot reasonably or practically be purchased, acquired or replicated by another carrier; no valid business reason exists that makes concurrent use impractical or such use cannot be reasonably accommodated; that such services are effectively controlled by the carrier refusing access. When these four conditions are met, it is the Bureau's view that competitive harm can result from such refusal.

Thirdly, there will be a new `cease and desist' power. These powers allow the Commissioner to take swift action to stop predatory or other anticompetitive behaviour before there is permanent damage. The airline industry is unique in Canada in that it has a carrier that is overwhelmingly dominant. Moreover, this is an industry with highly mobile assets and low variable costs. An order can only be in place for up to 80 days while we investigate, and is reviewable by the Competition Tribunal. It is worth mentioning that the Bureau has consulted with the Department of Justice to ensure that these powers are consistent with the Charter of Rights and Freedoms.

[English]

Fourth, the bill introduces new merger review procedures for airlines. It sets out a step-by-step procedure for notification by emerging airlines with the Canadian Transportation Agency, the Minister of Transport and the Competition Bureau. It places the responsibilities for final approval with the Governor in Council. This process thus allows for both competition and public interest issues to be addressed at the same time.

In addition, the bill enshrines in the legislation all of the undertakings agreed to by Air Canada in negotiations with the Competition Bureau before Christmas. It deems the merger to have been approved under this new procedure. As a result, the undertakings will become legally binding and enforceable. Put simply, any contravention of these commitments can now result in fines and imprisonment.

Finally, the bill provides a mechanism to allow the commissioner and the Minister of Transport to share confidential information on airline mergers. This will eliminate the current restriction that pertinent information required by both the bureau and the Minister of Transport cannot be exchanged or compared. It will provide for a more efficient process. The sharing is only for the purpose of approving an airline merger.

[Translation]

However, this legislation alone does nothing to attract new competitors into the market. While the undertakings provided by Air Canada lower some of the barriers to entry -- for example the freeing up of airport access -- they provide no guarantees that new entrants will come forward, or that existing carriers will expand.

We take some comfort from the fact that the Minister of Transport has liberalized Canada's international charter policy, essentially along the lines of our recommendations.

While these amendments, the policy changes made by the Minister, and the closing undertakings provided by Air Canada address many of the recommendations put forward by the Bureau, the Bureau remains concerned about the state of competition in Canada's airline industry.

To illustrate these concerns, let me add some perspective. With this transaction -- which has yet to be finalized -- Air Canada will emerge with more than 80 per cent of domestic passengers, close to 90 per cent of domestic passenger revenues and a jet fleet exceeding 230 aircraft.

[English]

Clearly, emerging carriers and new entrants flying domestic routes will face a very formidable competitor. The bureau does not harbour any fears about the future financial health of Air Canada. In early February, the airline recorded the following financial results: a record high operating income of $503 million and an operating margin of 7.7 per cent, the highest in 27 years. The financial outlook for Air Canada is reflected in its current share price of more than $19, up from just $6 last summer.

The bureau maintains that a truly competitive environment can only be achieved by opening up our domestic market to more competition. You will recall that in the commissioner's letter of October 22 to the minister and in the commissioner's discussion with you in his previous appearance before this committee, he made three recommendations in this regard. One of them requires a regulatory change, and the other two require legislative changes: First, that the limit on foreign ownership of voting shares of Canadian air carriers be raised by regulation to 49 per cent from the current 25 per cent; second, that the Government of Canada immediately attempt to negotiate reciprocal modified sixth freedom rights with the U.S. for passenger services, which would allow U.S. carriers to market -- as a single ticket -- travel from one Canadian city to another via a U.S. destination; and third, that the Canada Transportation Act be amended to allow for the licensing of Canada-only carriers, and that these carriers should be free of any Canadian ownership or control restrictions. Under this system, carriers would be restricted to serving points within Canada and would not be allowed to fly to a foreign destination.

Thank you for inviting us here today. We would be pleased to take your questions at this time.

Senator Forrestall: I wish I had time to read, in particular, the regulations. To have had an advance look at regulations sometimes makes dealing with matters as complex as this somewhat easier.

I gather from the tone of what you are saying -- and I might have misheard or misread you -- that by and large you are rather pleased with the progress that has been made. The government seems to be going in the right direction. Am I overstating your position?

Mr. Pierce: That is a fair statement. The powers accorded under the Competition Act are very important to us. Certainly this bill is a step in the right direction. It gives the Competition Bureau valuable, new powers in terms of issuing cease and desist orders that are essential to us in investigating situations of predatory pricing. We want to be sure that we have the necessary tools to react rapidly to that kind of situation before new entrants are knocked out of the market. The cease and desist powers are absolutely essential in that regard.

In addition, the ability to specify by regulation what constitutes anti-competitive conduct under our anti-monopoly provisions is also important because it sets a code of conduct for the dominant carrier which, hopefully, we will not have to enforce through the courts of tribunal. Those are important powers to us under the act.

At the same time, we should not be complacent. Essentially, we have an unregulated monopoly here. There is no regulation of the quality of service. While very high prices and very low prices are subject to some scrutiny by government, by and large we have an unregulated monopoly. That is why we have said, and we have been consistent with our messages from the outset, that those other three avenues for increasing competition on the Canadian market are extremely important for increasing the level of foreign competition.

Senator Forrestall: You made the point that the limit on foreign ownership and voting shares should be raised by regulation to 49 per cent. That is a further legislative change, I gather.

Mr. Pierce: My understanding is that that could be done by regulation.

Senator Forrestall: It can be done by regulation, but it is not touched upon in this bill. Why do you think it was not done in this round?

Mr. Pierce: I do not profess to speak for the Minister of Transport. I do not think it is off his radar screen. I think the position he has taken on all those issues is a wait-and-see approach to see how the market evolves and whether domestic competitors can emerge to fill the competitive void that has been left by the disappearance of Canadian Airlines.

Senator Forrestall: Do you still feel strongly about the modified sixth freedom rights and that we should avail ourselves of that tool to enhance competition?

Mr. Pierce: Absolutely.

Senator Forrestall: That got quite an airing the first time out. Would you care to elaborate on that at this point? I tend to agree with you. I believe it is a useful tool. You cannot turn it off easily, but it is helpful.

Mr. Pierce: No. Again, it is not a panacea, but it would help provide some discipline to an overwhelmingly dominant carrier. Let me emphasize that by reminding you of the figures that I provided in my opening statement. When I said that Air Canada will hold 90 per cent of domestic passenger revenues, that likely understates their position in the business market because those figures include both leisure and business travel. Many of these smaller competitors are targeted more at the leisure market. Charters, for example, are targeted at that end of the market. Air Canada is very much overwhelmingly dominant in this market.

Senator Forrestall: Yesterday WestJet told us about their woes in Moncton, the massive undercutting and the additional seats. Is that skirting on anti-competitiveness if not downright running roughshod over it?

Mr. Pierce: There is certainly reason to be concerned. We are looking at that situation seriously under both the criminal and civil provisions of the Competition Act to determine whether or not Air Canada is abusing its market power and engaging in predatory pricing. Recently, we have gone to the stage of initiating what we term a formal inquiry under the Competition Act. Yes, we are looking at it extremely seriously. We have not yet come to any final conclusions in terms of whether we think the law has been violated, but we are taking a close look at it.

Senator Forrestall: I have always believed that part of a good business process is the capacity to move swiftly and not to be held up by unduly lengthy decision processes. Are you relatively happy with the degree of your ability to seize yourself of this, to handle it, and to see it through the proper processes?

Mr. Pierce: This is a prime example. If we had the cease and desist powers, we would be seriously considering whether we could use them there.

Senator Forrestall: Hypothetically, what would you do if you had them today?

Mr. Pierce: If we had them today, we would be looking seriously at whether or not it was something we would want to use in the circumstances.

Senator Forrestall: I wish to return to the more broad suggestion. Generally speaking, are we tending to go in the right direction in removing the impediments to the decision-making process?

If I had my druthers, I would put you in charge of the software and let the agency handle the hardware. I think a proper decision can be worked out on that. Are you happy, and is the board happy, with your capacity to move generally or not?

Mr. Pierce: By nature, we must be sure that we are not creating some kind of chill on legitimate competition. It is difficult to determine, in some instances, what constitutes a predatory price or anti-competitive price and what constitutes a legitimate price. With the qualification that I made about the fact that we would be happy to have the cease and desist powers, yes, I think we have the ability to move quickly in these circumstances.

Senator Callbeck: I certainly agree with your concern about the state of competition in Canada's airline industry. I wish to follow up on Senator Forrestall's question with respect to the situation in Moncton. Mr. Smith, who appeared here last night, indicated that when WestJet started operating its service to Moncton, they charged from $129 to $339 for a one-way ticket, whereas Air Canada was charging $605. As soon as WestJet started operating, Air Canada's price went down from $605 to $249, and they also increased their capacity by 67 per cent, whereas, before WestJet appeared on the scene, they had reduced it by 9 per cent. The ticket from Toronto to Halifax is still $678. That certainly appears to me to be predatory action.

If this legislation were in effect, how would you respond to this? What would be the time frame, and so on?

Mr. Pierce: Perhaps I can call on my colleague, Dave McAllister, who is closer to the circumstances, to walk you through some of the proposed regulations which would deal specifically with these kinds of circumstances. We have built into these anti-competitive acts, acts which prevent predation. We are trying to develop a specific code of conduct to prevent this kind of thing from happening in the first place.

Mr. Dave McAllister, Senior Commerce Officer, Competition Bureau:First, I will avoid talking about the particulars of the WestJet Moncton situation. As Mr. Pierce has said, that is a matter before the bureau now, and under our very strict confidentiality constraints with respect to ongoing investigations, I need to be fastidious about that. However, I will respond in a generic way as to how the bureau would proceed with respect to an inquiry, what we have now, and how the new powers would come into play once we get them.

Obviously, most investigations in the bureau proceed by way of a complaint or by the commissioner becoming aware of a situation through the press or some third party. We receive a complaint with some facts that appear to raise an issue under the act, and we initiate what we call a preliminary examination. We gather whatever publicly available facts there are, interview complainants and other market participants, and then make an assessment of that and decide whether this preliminary inquiry provides a sufficient basis to believe there is ground to go to the Competition Tribunal for an order and to warrant a formal inquiry.

If we conclude that there are grounds for a formal inquiry, the commissioner initiates a formal inquiry under the act, which involves a couple of things. First, he is then in a position to exercise the so-called formal powers under the act of search and seizure, to compel witnesses, and to subpoena documents.

Once a formal inquiry is initiated by the commissioner, it can either result in an application to the tribunal or a criminal charge, or if there is no basis for it, the inquiry must be discontinued with a report to the minister and a report in our annual report.

Generically, that is how inquiries proceed. Unfortunately, they are somewhat labour intensive and time consuming, but that is the process and the steps along the way.

We now have the existing criminal provisions relating to predatory pricing, and the abuse-of-dominance provisions of the act. The new powers will codify what will constitute anti-competitive practices within the airline industry. This would be helpful in terms of predation. Three of the proposed regulations deal specifically with predatory activity -- lowering prices, adding capacity, or using potentially a second carrier, as a strategic way to lessen competition. We do not have those regulations now. They are not there yet to guide the Competition Tribunal if they were to hear a case. However, there is nothing to prevent us from bringing a case under the existing provisions.

We do not have the cease and desist powers which would give us a bridge between the time of initiating an inquiry and making an application to the tribunal. That would be helpful. Once we do make application to the tribunal, we can then get a temporary order from the tribunal itself. The new law will provide a bridge for us from the time of an investigation being commenced to the filing of an application or some other disposition, and an opportunity to check the conduct in question before there is irreparable harm.

Beyond that, I do not think I can say much more. I would be happy to answer any other questions you have.

Senator Callbeck: What, roughly, is the time-frame before you can have one of these cease and desist orders?

Mr. McAllister: Each case would be different. It would depend upon the quality of the information. I have seen cases go from complaint to inquiry in a matter of a couple of weeks. In some cases, they may take months. Airline competition is the number one priority in the bureau right now, so we are looking at airline cases very quickly. There is no fixed rule that says you have a 30-day limit to start a formal inquiry. It depends on the quality of the information, and how that fits within the act. Once an inquiry has started, then we typically retain experts and involve legal counsel from the Department of Justice, and proceed with an intensive look at the facts.

Senator Callbeck: Are you hiring a lot more people to deal with this?

Mr. McAllister: In a typical case, we would use our own staff and supplement that, if necessary, with industry experts or expert economists. We would, of course, retain legal counsel as part of our team approach in developing a case.

I will let Mr. Pierce answer the rest of that.

Mr. Pierce: No, we are not in the process of hiring more people. The bureau always welcomes more available resources. If we find that we need those resources as a result of the volume of work, we will approach Treasury Board for them, but there are no plans to do so at this point.

I wish to add to the point that Mr. McAllister made on cease and desist orders. A threshold has to be met. The commissioner must be on formal inquiry. That is to say, he must have formed the belief that there are reasonable grounds to believe that an order could be made by the Competition Tribunal or that a criminal offence has been committed by the parties. That is an important threshold. Currently we have no means of assuring that a new entrant into the market that is trying to take on a dominant carrier will not be knocked out before we have a chance to reach our conclusions, to determine whether or not there has been monopoly conduct. That is an important bridge for us. There is no sense taking this case through to conclusion, taking it to the tribunal or to the courts, if there is no longer that entrant in the market and they are not interested in coming back.

Senator Roberge: From a quick scan of the regulations, I think they are quite impressive. I must admit there seems to be a lot of meat on the bone.

I have a question about the travel agency incentive. Are you aware of the letter of May 18, 2000 from Air Canada to the Canadian travel agency business?

Mr. Pierce: No, we are not.

Senator Roberge: Basically, it says that domestic payments as an incentive would only be made should the travel agency meet the USA and world international performance criteria. In your view, would that be a predatory situation?

Mr. Pierce: We are generally aware of those circumstances. I cannot speak to the specific letter, but representations have been made to the bureau suggesting that Air Canada's current commission override scheme is anti-competitive. We are looking at it, but we have not arrived at any conclusions as of yet.

The Chair: Senator Taylor, are you replacing another senator?

Senator Taylor: I am representing Senator Kirby.

On page 8, you say that Canada-only companies should be free of ownership and control restrictions. I am a little puzzled. Why would someone who flies outside the country face Canadian ownership restrictions, while someone who flies within the country would not?

Mr. Pierce: This is an industry which requires a great deal of capital. It is important to access offshore pools of capital.

We have structured the recommendation to create a level playing field. Accessing foreign pools of capital can create a level playing field in Canada. The new class of carrier, the Canada-only carrier, would be staffed with Canadians, would use Canadian fuel and food, and would pay Canadian taxes. There would be an equal playing field with the other domestic carriers.

Senator Taylor: Is there no concern that they would turn out to be a delivery apparatus for other airlines coming to our borders? Would they become feeder companies for the American airlines or the parent companies?

Mr. Pierce: They would be on the same field as all other domestic airlines in the country. If they wanted to interline, they could do so with their own airline. For example, Delta Canada could interline with Delta U.S., but they would have to do it at their own hub and change planes, et cetera.

Senator Taylor: Delta comes to Edmonton now.

Mr. Pierce: Delta comes to Toronto, too.

Senator Taylor: Delta could own a feeder line in Canada then?

Mr. Pierce: Exactly.

Senator Taylor: Does that help competition?

Mr. Pierce: By doing it that way, those Canada-only carriers would stay on side with our international obligations in the air bilaterals with other countries.

Senator Taylor: That sounds like a good idea.

My next question deals with cabotage. One way of keeping Air Canada honest -- if you will pardon the expression -- is to practise a little cabotage between the major centres like Toronto, Vancouver, Calgary, Ottawa, Montreal. We could let anyone from Alitalia to British Air pick up and deliver. It would be just a little touch, just enough so that the fares for Air Canada do not get unreasonably high. Have you thought of that as a competitive discipline?

Mr. Pierce: No. The bureau has not opined on cabotage per se. In our letter of October 22 last year to the Minister of Transport, cabotage was specifically taken off the table because the minister's position was that there would be no policy change there.

Senator Taylor: It might help you to carry out your duties in talking to Air Canada if you mention that there is at least one senator who favours cabotage. Let them know that there is one spook in the closet who is not dead yet.

Senator Forrestall: They know there are others around, like me.

Senator Taylor: Senator Callbeck's question about Moncton intrigued me. A small airline could be short of capital, especially if it is not Delta-owned. Air Canada could hack their ticket prices between two delivery points. If it takes 60 or 90 days before you find out whether they have sinned, then the victim could well be down the drain.

Could we have a fining mechanism for predatory pricing so that when you make such a finding, the offending airline must pay to the other airline any losses suffered?

Mr. Pierce: There are two issues here. If we have cease and desist powers, and those powers are recommended in this legislation, we would have the ability to quickly impose the status quo before the new entrant arrived in the market.

In terms of damages, that is the purview of the courts. If a criminal offence is made, then the aggrieved party can sue for and recover damages under the Competition Act.

Senator Taylor: Would your finding then constitute evidence in a criminal case? I am not a lawyer.

Mr. Pierce: It is not necessarily so. If a conviction is registered, the evidence introduced in the course of pursuing that conviction can then be used by the party claiming the damages.

We do not want to go through the criminal law system unless it is extremely egregious. We want a quick remedy to stop the practice. We need to get in quickly so the bureau can issue a stop order to protect the new entrant in the market. Recovering damages after you have been knocked out is a second-best solution.

Senator Taylor: Going back to Senator Callbeck's question, how long does it take? If a complaint is received that, say, Air Canada has dropped fares by two-thirds on a certain route, how long does it take before you can act?

Mr. Pierce: As Mr. McAllister said, it depends on the circumstances and the quality of evidence. Once we get to the stage of a formal inquiry, we would be in a position to use those cease and desist powers. That gives us sufficient time to carry out our investigation and then to apply for a remedial order from the Competition Tribunal. Once we are in the tribunal, those cease and desist powers are essentially extended because the Competition Bureau can issue an interim order to maintain the status quo.

Senator Taylor: Give me a general window of opportunity. Are we looking at six months, a year, or 30 days to obtain a cease and desist order? The quality of information should be fairly simple. You just make inquiries about the price of the fares. Do you require an affidavit in triplicate or something?

Mr. McAllister: I am not sure I can add too much more to what I have said. It will depend on the specific case and the particular facts of the matter.

Senator Taylor: What about Moncton?

Mr. McAllister: I cannot talk about Moncton and there are proper reasons for that. I have to stay away from talking about a specific place.

Senator Taylor: You have to stay away from Moncton?

Mr. McAllister: As Mr. Pierce said, that issue is now before the bureau and is part of an investigation. There are confidentiality provisions within the act relating to the conduct of inquiries. We really should not be talking about the specifics of a situation.

WestJet can say what they like, but we are subject to the specifics of the act which say that all inquiries must be conducted in private. We are not in a position to discuss the specifics of the matter. We go into it with an open mind and get all the facts. We determine the facts and then we determine the appropriate course of action.

In terms of time, we could be on an inquiry in two weeks or a month. By the same token, in certain situations -- and I am not in any way suggesting this is about WestJet -- a competitor may complain about Air Canada's low prices. Competitors usually do not like low prices. We must look at the complaint closely and impartially. We need to determine whether the low prices are subject to legitimate competition or whether they appear to be part of a predatory strategy.

We do not want to be ordering an airline to raise its prices unnecessarily. We must proceed carefully. We require some analysis, some detailed information and we must reach some judgement. Certainly we could be on inquiry in a couple of weeks or in a month, at which point the cease and desist powers could kick in.

Senator Taylor: I was wondering who moves faster, the banks or you. It sounds like you move faster.

I am worried about competition. I do a great deal of business in the North, and Senator Adams will probably have more to say on this, where the only competition is a boat. There may be only one airline flying into a certain town.

Senator Adams: Such as Rankin?

Senator Taylor: Yes. The price is high. It is expensive to even just cover the costs. After all, Canada was built on subsidies to transportation from east to west. Now that we have north to south, is there any thought of doing that, or is it completely out of your mandate to suggest a subsidy to whoever supplies Rankin or, say, Coppermine?

Mr. Pierce: That is not our mandate. Our mandate is strictly competition.

Senator Taylor: This is competition between an airline and a boat that comes in once a year. You do not look at it that way. You just look at competition between airlines.

Mr. Pierce: That is primarily the way we look at it. The best guarantee of the lowest price is to have a truly competitive market and to take away and lower the barriers to entry into those markets.

Senator Taylor: I am saying that no matter how wide open you make it, the cost is prohibitive. You do not look at yourself as an instrument like the old railroad which subsidized wheat and so on.

Mr. Pierce: That is not in our mandate.

Senator Taylor: I was just trying to give you a chance to seize a little more power.

Senator Adams: I wish to begin with the travel agencies and how they are set up. For example, say an airline wants to increase its fares. They tell the travel agent, "We will give you a percentage if you give us more passengers." Do travel agents work that way? Sometimes, for example, if I want to travel with my family or by myself, I can negotiate with them. Do the airlines have a monopoly with travel agents? Some agents might advise that you search out airlines that have cheaper fares. Do the airlines tell the travel agents, "You cannot work with other companies, only with us"?

Mr. Richard Annan, Senior Commerce Office, Competition Bureau: The travel agent industry is essentially a two-type commission structure. One is based on a percentage of sales or base commission, which has been rapidly declining over recent times. The second is the commission override, which is a bonus that is paid over and above the base commission, depending on a number of factors. One of the factors which was common in the industry was based on market share. Actually, in the undertakings we would be negotiating with Air Canada, we removed the possibility, domestically, to base a commission structure solely on market share. A carrier would have, for example, 80 per cent of the market and say, "If you book 80 per cent of your bookings on our carrier, we will give you the extra bonus. If it is 75 per cent, you will not get it." That could be a powerful disincentive for travel agencies to book new entrants into this environment. As part of the undertakings enforceable under this bill, that will not be allowed domestically.

Senator Adams: It still costs you about $80 to cancel a scheduled flight. Does that go to the agent or to Air Canada? That seat is supposed to be there, and I did not show up but instead cancelled my flight. Right now they are charging an $80 cancellation fee.

Mr. Annan: Various terms and conditions apply. For example, if you are on a restricted ticket and want to change that ticket, you will pay a change fee. I am not sure how those proceeds are distributed, but there are certainly terms and conditions that the various airlines impose on tickets, depending on whether or not it is a restricted or non-restricted ticket.

Senator Adams: Yesterday, WestJet told us that the cost to fly from Toronto to Moncton was only about $200. From Ottawa to Moncton was $500. I asked the witness, but he did not answer me, if that was because of the number of passengers on that aircraft. They may have more passengers going from Toronto to Moncton, so it is cheaper. The distance from Ottawa is about 300 miles shorter. I do not know how the system works because of the set up with the competition with the airlines.

Mr. Annan: The way fares are determined is always a mixture of supply and demand and cost factors. As you mention, high travelling density between two points can certainly lower costs. However, there are also demand factors. Competition does have an impact. When you are the only game in town, you can charge more, no doubt about that, regardless of your clients.

Senator Adams: Air Canada has 230 aircraft. Does that include those it acquired since merging with Canadian Airlines? Is it the same now, or are there more? How many aircraft did Canadian Airlines have before?

Mr. Annan: That number of 230 refers to jet aircraft. If you include the regional turbo prop aircraft and so on, the number is considerably higher than that. I do not have the exact numbers in front of me for Canadian, but I think their jet fleet was something like 70 or 80.

Senator Perrault: The presentation made to us this morning felt like real fear of an overwhelming dominance of Air Canada. I am intrigued by your statement. Your recommendation almost has a note of urgency. It states:

...that the government of Canada immediately attempt to negotiate reciprocal modified Sixth Freedom rights with the US for passenger service.

I presume that is a reference to cabotage. Is that possible there?

Mr. Pierce: No, it is not cabotage. There are Sixth Freedom rights which exist in Canada.

Senator Perrault: It continues:

This would allow US carriers to market -- as a single ticket -- travel from one Canadian city to another, via a US destination.

Mr. Pierce: For example, Northwest now flies from Montreal to Calgary through Minneapolis, but they cannot market it as a single ticket. We are saying we should allow them to market that as a single ticket to bring fares down to increase convenience factors, service, et cetera, and to provide some discipline. There may be many business travellers, for example, who do not want to take advantage of that kind of service because it involves a stop in Minneapolis, but there are others who would. In that respect, it will provide some price discipline to the common carrier.

Senator Perrault: You seem to be somewhat apprehensive about the commitments given by Air Canada that they welcome vigorous competition. There is almost a sense of urgency that you do it immediately. We value your opinion.

Mr. Pierce: We are apprehensive about the competition situation in Canada because Air Canada is so overwhelmingly dominant in this market.

Senator Perrault: Are we putting the rabbits in charge of the lettuce patch in this case?

Mr. Pierce: From the outset, this file has been consistent. The way to inject true competition in this market is to increase the level of foreign participation.

Senator Perrault: You recommend that the Canada Transportation Act be amended to allow for the licensing of Canada-only carriers. These proposals will make it even more competitive, and that is welcomed.

Mr. Pierce: Absolutely. That recommendation on Canada-only carriers follows the model which has been adopted in Australia and seems to be working well.

Senator Perrault: Do we have other examples where this type of increased competition is now available to travellers in those nations?

Mr. Pierce: It is certainly available in Australia.

Senator Perrault: How does it work?

Mr. Pierce: Perhaps I could call on Mr. Annan, who is probably more familiar with that, to give you the answer. I believe Virgin is providing service there.

Senator Perrault: Is Virgin in Australia as well?

Mr. Annan: Yes, they are. They are setting up this type of carrier. I am not sure if it is called "Virgin Australia," but that is the concept.

Senator Perrault: That is interesting. Will you require additional personnel at the bureau with expertise in air travel to give real meaning to this program?

Mr. Pierce: We already have considerable expertise. The people sitting beside me here have considerable expertise in the air file. Mr. Annan has been involved in various air files with the bureau and before the Competition Tribunal over the past 10 years. There are others like him in the bureau. We think we have sufficient expertise, but when we are looking at complaints like WestJet, for example, we go outside and hire economists, accountants and industry experts to help us out on those files, to ensure that we are getting the best advice possible.

Senator Perrault: This information is all very heartening. We wish you success in your endeavours. You will need the wisdom of Solomon along the way as well.

Senator Furey: I have a few short questions.

I wish to go back to the issue of cabotage raised by my colleague, Senator Taylor. I realize it is a policy of reciprocal cabotage, in that Canadian companies will not infiltrate the domestic U.S. market any more than U.S. companies will infiltrate the Canadian domestic market. That is all very well and good while we have a normally competitive domestic market in Canada. However, when we find ourselves in a situation such as the one we are in now, where we have one dominant airline, is this not something that the Competition Bureau should be giving some serious thought to? In saying that, I realize you have indicated that you have not opined on it. That is my first question.

Second, you indicated that some of the things that you are implementing to try to ensure that you have reached the objectives that you have set out here this morning are matters such as having cease and desist orders. You have indicated that to ensure they comply with the Charter of Rights, for example, you have sought an opinion from the Department of Justice. What did Justice say about that and how strong or weak they were on it.

Mr. Pierce: First, on the issue of cabotage, you are asking the wrong person about that. It is not within the power of the Competition Bureau to implement that kind of policy. That is within the domain of the Ministry of Transport.

Senator Furey: I asked it from the following point of view. If you are charged with the responsibilities of the Competition Act, would it not be something that you would at least think about as a possibility of ensuring that good competition remains in the domestic market? I realize you cannot change policy.

Mr. Pierce: No. In providing our advice to the Minister of Transport last fall, we were guided by the considerations that he outlined to us as to the kind of advice he was looking for. That did not include any advice on cabotage. We respected those terms and conditions and provided the best advice we could within those guidelines.

Senator Furey: Within the framework that you were given?

Mr. Pierce: In the framework that he was looking for.

As to your second question about the advice that was given by the Department of Justice, I cannot speak specifically because, first, I have not seen the opinion, and, second, it would be privileged under solicitor-client privilege. They provided us with the advice that we are on firm ground here with respect to respecting the provisions of the Charter.

Senator Roberge: At the beginning of the process, you recommended to the minister the divestiture of Canadian Regional Airlines. I am curious as to your rationale for not recommending the divestiture of both regional airlines.

Mr. Pierce: By both, you would include Canadian Regional and what else?

Senator Roberge: Air Canada as well.

Mr. Pierce: On the advice of the minister, we said that was something we would consider. We did look at it, and received the undertaking from Air Canada just before Christmas. That undertaking requires that the parties offer for sale Canadian Regional Airlines. We focused on Canadian Regional because it seemed to be the best. It had the most extensive network. It had significant passenger volume and sales, and so on. It seemed to be one of the strongest regional airlines. We are now at the point in the process where we expect that Canadian Regional will be offered for sale sometime in the third quarter of this year -- the third quarter beginning in July.

Why did we not go for more? A proposal was made to us back in the fall that Air Canada and Canadian should be required to divest of all their regional airlines, but that looked to us a lot like creating another monopoly in regional airlines. Under the circumstance, Canadian Regional was sufficient to provide a opportunity for new entrants. For example, if there was interest in buying an airline, it would provide an opportunity to offer those interline opportunities, et cetera, for other airlines.

Senator Roberge: There is no question it would be much more interesting for someone to purchase an airline if the foreign ownership rule was changed to 49 per cent.

Mr. Pierce: I would agree with that.

Senator Forrestall: Perhaps we will get American after all. I hope it is not a too far-fetched idea.

Returning to WestJet and its expansion into Atlantic Canada, it examined and had lengthy discussions with the management of the Halifax International Airport as well as with the airport at Moncton. They found that Moncton was an affordable centre for them, but Halifax was not.

I have a concern that airports like Halifax, which has all of the costs of a major airport without anywhere near the traffic, are having to charge more for rental services. I can only see this as an impediment to competition. I wonder if, in the regulations, there is any provision to allow you to examine that. I am not suggesting that they have any other recourse than to sit down and work out a deal, or not, but the bill says that services and facilities may include but are not limited to takeoff and landing slots, parking slots, interline arrangements, gates, loading bridges, counters, related terminal facilities, maintenance services, baggage-handling services and related infrastructure and equipment. You can do quite a bit with that as a package by way of deterrent.

Mr. Pierce: The answer to your question is no. We are not a regulator of airport fees. The way to look at these regulations is that they apply to airline-to-airline activity. If Air Canada or a dominant airline is trying to disadvantage, somehow, an existing or a new competitor, then we can step in and take action. If Air Canada, for example, were leaning on the Halifax airport, and saying, "You should charge these guys a higher rate to discourage their entry," then we could take some action on that. If Air Canada were bullying the airports or there was some exclusive contract involved as there was in Hamilton, we could act, but we have no authority, nor do we want the authority, frankly, to regulate airport fees. That power is within the domain of Transport Canada.

Senator Forrestall: You qualified it. Unless you discover that the practices are detrimental to competition -- and competition is what you are about -- you are not precluding it completely. You could not, as a matter of fact.

Mr. Pierce: Exactly. If Air Canada were throwing its weight around the market, we could act, yes.

Senator Forrestall: It appears that, for 75 per cent of services at the airport in Halifax, we will only be served by one carrier. Not everyone wants to go to Toronto. Many go from Halifax to Moncton or Fredricton or Deer Lake. Those services may not be available because they are not affordable. There is no competition and, in the absence of competition, the airline can set its own prices.

I appreciate your evidence. There seems to be a growing trust in the tribunal.

Mr. Pierce: We appreciate that very much.

Senator Spivak: Will your regulations "A" and "B" cover the situation that exists between Moncton and Toronto?

Mr. Pierce: Are you talking about operating capacity?

Senator Spivak: Yes, and reduction of fares; both.

Mr. Pierce: Absolutely. The regulations are designed to deal with predatory pricing and predatory activities.

Senator Spivak: Yesterday, I asked the minister why it would not be in the interest of competition to preclude Air Canada from entering the discount market. I think he said that that was the deal negotiated with Air Canada on the advice of the Competition Tribunal. Could you speak to that?

Mr. Pierce: The undertaking which the Competition Bureau negotiated with Air Canada just before Christmas was that, in Eastern Canada, they would not start a discount airline service. Eastern Canada means from the Manitoba-Ontario border east.

That allows a head start for new entrants. If no company enters that market by September 30, 2000, then Air Canada is free to come into the market. WestJet is an exception because they had indicated interest in coming in and they are an established airline in the west.

If a new entrant does come in, then Air Canada is precluded from initiating a discount airline service to Eastern Canada until September 30, 2001. That allows a head start so new entrants can get a foothold.

Senator Spivak: Air Canada has 85 or 90 per cent of the main market. It has very deep pockets and no debt. Surely, even with that head start, a proper competitive arena may not exist in the discount market. Can Air Canada enter the discount market in Western Canada?

Mr. Pierce: They are free to get into the discount market in the west, if they choose to do so.

Senator Spivak: What is important about two years?

Mr. Pierce: Two years is important to a new entrant coming into the market. It allows them a foothold and an opportunity to become established. It is important to keep in mind that the code of conduct and the proposed regulations would govern that type of situation. If Air Canada begins to throw its weight around by engaging in abusive practices and monopolistic practices, attempting to knock out those new entrants through illegitimate means, then we have the power to act.

We have cease and desist powers. If predation is occurring, we can act quickly to stop it.

Senator Spivak: You are confident there will be an active discount market which is not also dominated by Air Canada.

Mr. Pierce: We cannot predict how the market will evolve. WestJet is growing. They have announced expansion plans. CanJet has been on again, off again, but their most recent announcement indicates they are interested in operating a discount airline somewhere in the east. We must give the market a chance to evolve and see how it operates.

Senator Spivak: Why was it not a good idea to get Air Canada to divest itself of its regional airlines?

Mr. Pierce: A proposal was made to have Air Canada divest all the regional airlines, but it looked like that would just create a monopoly of regional airlines. It would not necessarily compete with Air Canada on its main routes. We thought that divestiture, the offering for sale of Canadian Regional, was the best way to go. It was the most lucrative of the regional airlines. It has a national network.

Senator Spivak: You have a monopoly in the main market and that outfit now also has a monopoly in the regional market. I do not understand. Why was that such a bad idea?

Mr. Annan: Last fall, the House of Commons Standing Committee on Transport and perhaps this committee, too, heard the proposal about purchasing both sets of regionals. As Mr. Pierce said, the problem there was that, essentially, the business plan was to feed into Air Canada and not to compete directly with Air Canada. Over the longer term, they might go into competition, but that was not the original intent. In fact, they were looking for some guarantees that they would not have competition in the regional markets from Air Canada for a period of time.

Under the Canadian Regional proposal, it is true that Air Canada will have its regional network, but even if Air Canada were forced to divest those, because of the nature of the business, Air Canada would likely set up new regionals unless specifically prohibited from doing so.

That would not be the most efficient solution because, being a large network carrier, they need regional feed from somewhere.

Under this scenario with Canadian Regional being sold, competition will exist in the regions.

Senator Taylor: I am intrigued by the sale of the Canadian Airlines' feeder lines. Does your group have authority to monitor the bid document which goes out?

Mr. Pierce: Yes. We are very much involved in that process. Air Canada has retained a selling agent.

Senator Taylor: Can you look at those agreements?

Mr. Pierce: We are very much plugged into that process, yes.

Senator Taylor: I remember when PetroCan sold its refinery off Newfoundland. They agreed that no gasoline was to be sold back into Canada. Can the same thing happen here?

Senator Forrestall: Air Canada is the seller. They cannot buy their own goods. Is there anything that protects against a member of the alliance buying the feeder in question?

Mr. Pierce: They must respect the foreign ownership rules so they would need to partner with someone. If a member of the alliance expressed interest in buying Canadian Regional, we would look at that carefully in terms of whether it would inject fair competition into the market, given their relationship with Air Canada.

The Chair: Thank you, witnesses.

The committee adjourned.