Airline Industry Restructuring in Canada

Senate Committee on Transport and Communications

Second Report

The Honourable Lise Bacon, Chair

The Honourable J. Michael Forrestall, Deputy Chair

December 1999


Table of Contents

Membership

Order of Reference

Airline Industry Restructuring In Canada

1. Introduction
2. The Appropriateness of Using Section 47 at This Time
3. Domestic Competition

3.1 Predatory Pricing
3.2 Unreasonable Fare Increases
3.3 Travel Agent Commissions
3.4 Slots
3.5 Computer Reservation Systems
3.6 Frequent Flyer Programs
3.7 Interlining and Code Sharing
3.8 Surplus Aircraft

4. The 10% Limit on Air Canada Shares
5. Service to Small Communities
6. Ownership and Control
7. International Services
8. Bilingualism
9. Treatment of Employees
10. Monitoring Dominant Carrier Commitments
11. Domestic Competition from Foreign Owned Airlines
12. Conclusions and Observations
13. Recommendations

Appendix - Witnesses


Membership

The Honourable Lise Bacon, Chair
The Honourable J. Michael Forrestall, Deputy Chair

And the Honourable Senators:

Willie Adams
*Bernard Boudreau, P.C. (or Daniel Hays)
Catherine Callbeck
Sheila Finestone, P.C.
Janis G. Johnson
Michael Kirby
Marjory LeBreton
* John Lynch-Staunton (or Noël A. Kinsella)
Raymond J. Perrault, P.C.
Marie-P. (Charette) Poulin
Fernand Roberge
Mira Spivak

 

Other Senators who participated in the work of the Committee:

Raynell Andreychuk, Norman K. Atkins, Ione Christensen, Erminie J. Cohen, Joan Cook, Pierre DeBané, Mabel DeWare, Joyce Fairbairn, P.C., Isobel Finnerty, Ronald D. Ghitter, Colin Kenny, Noel A. Kinsella*, Rose-Marie Losier-Cool, Shirley Maheu, Lorna Milne, Donald H. Oliver, Marcel Prud’homme, Nick G. Sibbeston, Nicholas W. Taylor, Charlie Watt.

 

* Ex Officio Members


 Order of Reference

Extract from the Journals of the Senate, Thursday, October 14, 1999:

The Honourable Senator Hays moved, seconded by the Honourable Senator Graham, P.C.:

That, pursuant to subsection 47(5) of the Canada Transportation Act, the order laid before this Chamber on September 14, 1999, authorizing certain major air carriers and persons to negotiate and enter into any conditional agreement, be referred for review to the Standing Senate Committee on Transport and Communications;

That the Committee hear, amongst others, the Minister of Transport;

That the Committee have the power to permit coverage by electronic media of its public proceedings; and

That the Committee submit its final report no later than December 15, 1999.

After debate,

The question being put on the motion, it was adopted.

 

Paul C. Bélisle
Clerk of the Senate


1- Introduction

On August 13th 1999, the Governor in Council signed an order under the extraordinary disruptions section (section 47) of the Canada Transportation Act, the effect of which was to suspend the application of the Competition Act as it applied to airlines in Canada, thus allowing discussions to take place concerning airline mergers, the kind of discussions which would otherwise have been illegal under the Competition Act.

On October 14th, The order was referred by the Senate to this Committee for review. On October 26th the Minister of Transport, the Hon. David Collenette, appeared before the committee and gave the background to the order in council. He asked the committee to give him advice on a number of matters related to airline policy. These included whether or not the law requiring the 10% limit on individual holdings of Air Canada voting shares should be changed, the question of the impact of any airline restructuring on competition, the adequacy of certain consumer protection sections (64 to 66) in existing transportation legislation related to pricing and service to small communities, the likely impact on the employees of the airlines involved of a merger between the two airlines or the bankruptcy of one of them and a means of monitoring the air market in which there could be a dominant carrier. He indicated the willingness of the government to take steps in all the above areas, though he said that there would not be any change in the present Canadian ownership and control requirements.

The Minister tabled with the Committee two documents on which it has drawn strongly during its deliberations. One was a Transport Canada document entitled "A Policy Framework for Airline Restructuring in Canada, October 1999". The other was a letter dated October 22nd to the Minister of Transport from the Commissioner of the Competition Bureau. The letter responded to a request from the Minister for the views of the Bureau on competition issues brought up by potential airline restructuring.

The Committee was not asked to comment on the relative merits to shareholders of the Onex and Air Canada restructuring proposals and does not propose to do so. As it happened, ten days into the hearings the Onex proposal was withdrawn after having been declared against the law by the Quebec Superior Court, since it would have broken the 10% ownership provision relating to Air Canada shares. The remarks here thus apply to the Air Canada proposal, essentially a plan to buy Canadian Airlines International and operate it as a separate company from Air Canada and to establish a low cost airline based on Hamilton, Ontario. While there may not be in future a dominant carrier, the Air Canada proposal clearly creates a dominant owner. As far as competition is concerned, the Committee sees no difference between a dominant owner of two carriers and a single dominant carrier.

In the course of its deliberations, the Committee heard from 53 witnesses including the Minister of Transport, the two major airlines involved, the Onex Corporation, the Commissioner of the Competition Bureau, several small Canadian airlines and a number of consumer and labour groups.

In making its report, the Committee is mindful of the tasks requested by the Minister and matters referred to in the following paragraphs are what are seen to be the key issues. Each is addressed briefly and in most cases a recommendation is made. As indicated above, these recommendations are based on the assumption that the Air Canada proposal will materialize. Should this not be the case, many of the recommendations in this report may no longer be appropriate.

 

2- The Appropriateness of Using Section 47 at This Time

    According to the Canada Transportation Act, section 47 is intended to be used where an extraordinary disruption of the national transportation system exists or is imminent and where no other legislative remedy under either this Act or any other act is available. It is not intended that this section be used where the disruption is caused by a labour dispute. The Act also speaks to remedies which might be used to stabilize a disrupted situation and mentions the imposition of capacity and pricing restraints as possibilities.

    The committee is aware of the possible consequences of the collapse of a major airline in a country. One witness spoke of the situation following the collapse of Eastern Airlines in the US, and suggested that in the event of a Canadian Airlines failure that in addition to the immediate chaos of stranded passengers and lost jobs, there would be seat shortages for several months and that any rebuilding that might take place under a new owner would take a year or more to complete, given the complications of equipment re-acquisition, training, recruitment and so on. Also, when the Minister appeared before the Committee he stated that there were three options for dealing with the problem. One was to help Canadian Airlines financially, the second was to allow bankruptcy and the third was to restructure the industry in some way. The instrument by which this process could be started was through the use of section 47(1)(c).

    While appreciating the above, the Committee is not convinced that the use of section 47 was appropriate in this situation. It has not heard what the full range of provisions which the Act mentions might have been, nor is it convinced that a disruption was imminent. Nevertheless the action was taken, the referral to this Committee made, and the committee is responding accordingly.

     

3- Domestic Competition

    Lack of competition is the main concern of the Committee under the Air Canada proposal. The new owner will dominate the domestic industry, holding about 90% of the market. The Committee shares the sentiments of the Competition Bureau that this raises serious concerns and it notes with interest their remarks about the need for comprehensive and urgent action to re-introduce competition and that voluntary commitments are a poor substitute for the rigour of a competitive market-place. This report address the introduction of some aspects of foreign owned competition later under heading number 11.0, but offers here comments on some safeguards that may be necessary to deal with such things as predatory pricing, excessive price increases and other practices which may be prejudicial under a dominant carrier or dominant owner scenario.

    3.1 Predatory Pricing

    Canada has seen the effects of predatory pricing in the airline business in recent years and the Committee agrees with the Competition Bureau’s comments that the current provisions of the Competition Act are inadequate to stop a predatory action while it is being carried out. It thus supports the Bureau’s recommendations concerning this matter. The ability to issue some form of cease and desist order to deal with blatant predatory action will, it is believed, be necessary.

    Recommendation 1, Predatory Pricing

    The Competition Act be amended as it concerns predatory airline pricing in order to ensure that cease and desist orders are available that can stop such actions while they are in progress.

    3.2 Unreasonable Fare Increases

    The Committee also agrees that the provisions of section 66 of the Canada Transportation Act do not appear to be adequate to prevent a dominant carrier from introducing unreasonable rate increases on monopoly routes. There will presumably be many more monopoly routes under current proposals, and in any event the provision only applies to full fares. One approach for consideration could be to limit overall fare increases on a monopoly route to be no more than the inflation rate rather than dealing only with the basic full fare. The objective here would be to prevent such things as all discount and seat sale rates being eliminated on a monopoly route, while the full fare stayed the same.

    Recommendation 2, Unreasonable Fare Increases

    It is recommended that section 66 of the Canada Transportation Act, which applies to unreasonable rate increases on monopoly routes, be revised with a view to ensuring that total revenue increases be subject to appeal and not just the basic fare.

    3.3 Travel Agent Commissions

    The smaller airlines in Canada such as Westjet, Air Transat and Canada 3000 perform a valuable service and compete quite effectively in some markets. They are small by comparison however and are vulnerable to some of the practices of the large carriers today, and will be much more vulnerable under the likely future scenario. We note that this situation is already recognized by the Minister and his policy paper outlines a number of situations where he indicated that action would be taken. Again, the Competition Bureau has made some useful comments and recommendations. They are reviewed here and in the text immediately following this section. Some of the recommendations from the Bureau are reiterated and restated as this Committee’s recommendations also.

    Large carriers often structure travel agent commissions so that larger percentages are paid as volume rises. This can work to the detriment of smaller carriers trying to compete. In a dominant owner scenario, such practices should be prohibited, and commissions linked to sales on a straight-line basis only.

    Recommendation 3, Travel Agent Commissions

    The dominant carrier/owner link its travel agent commission system to sales volume alone and not tie it in any way to travel agent loyalty.

    3.4 Slots

    It is important that any airline has access to slots and other airport facilities at required times. Slots are the time periods allocated to airlines in order that they can take off and land safely and on schedule. Small airlines or new entrants can be squeezed out of a market if there are no slots available at the time they want to fly. Access to facilities such as gates, ticket counters and baggage systems are also necessary for a successful operation. Slot availability is not a problem in Canada yet, with the exception of Pearson at certain times of day, though slot availability at some foreign destinations can be a problem for international flights. The Competition Bureau had a great deal to say about slots and related airport facilities in their report and made many recommendations on the matter. It is not proposed to repeat them word for word here, but the Committee is presenting the essence of them as its own recommendations.

    Recommendations 4 and 5, Slots

    It is recommended that the dominant owner commit to surrendering sufficient slots in key locations including overseas to allow effective competition at key times and that access to passenger facilities generally be structured on a common use basis in order not to exclude carriers competing with the dominant owner.

    A new regulatory framework for slots be established by Transport Canada such that they be surrendered if not used, that enough be available for new entrants and that priority be given to new entrants where facilities are being expanded.

    3.5 Computer Reservation Systems

    Sometimes computer reservation systems can work to the disadvantage of small carriers, particularly under code sharing, where one flight may appear on a travel agent’s screen as several flights with different numbers. This can push information about smaller competing carriers into the background. Also, information on reservation system booking is often made known to all member airlines, a practice that could be harmful to small airlines. The Minister’s report indicates that the government will examine this problem and the Bureau also has recommendations concerning the matter.

    Recommendation 6, Computer Reservation Systems

    The government revise the computer reservation system regulations with a view to eliminating the features which work to the disadvantage of small carriers.

    3.6 Frequent Flyer Programs

    Frequent flyer programs are a well-established marketing tool. For a new entrant, the inability to offer a comparable plan to the big carriers can be a decided disadvantage. The Bureau has a proposal under which a new domestic entrant would be allowed to buy points from the dominant carrier on reasonable terms and then award them to its own passengers. The points would have the same ranking as if they were earned by flying with the dominant owner.

    Recommendation 7, Frequent Flyer Programs

    The dominant owner be required to allow new entrants to purchase frequent flyer points in his plan at reasonable cost which would be awarded to passengers on the new entrant’s routes, such points having status as if they were earned with the dominant owner.

    3.7 Interlining and Code Sharing

    For a new entrant into the market, the ability to offer easy connections to the dominant owner’s routes is obviously a key element in its growth prospects. Again the Committee likes the Bureau’s approach to this matter and makes the following recommendation:

    Recommendation 8, Interlining and Code Sharing

    The dominant owner/carrier be required to negotiate interline and code sharing agreements on reasonable terms with all new entrants in the domestic market wanting such agreements.

    3.8 Surplus Aircraft

    New entrants require new aircraft and small companies usually start with used aircraft. The Committee understands that the process of importing and putting into service a used aircraft for use in Canada can be quite prolonged when compared with acquiring a similar aircraft in Canada. Should the dominant carrier not require all the aircraft in its fleet as a result of restructuring, a means should be found of offering any surplus aircraft to all interested parties in the domestic market before such aircraft are sold offshore.

    Recommendation 9, Surplus Aircraft

    As part of the commitments required of a dominant owner/carrier, the government shall require a commitment regarding the disposal of surplus aircraft on reasonable terms first to any willing Canadian buyers before disposing offshore.

     

4- The 10% Limit on Air Canada Shares

    When Air Canada was privatized under the Air Canada Public Participation Act of 1988, a limit of 10% was put on the number of voting shares that could be held by any one person. In addition, it was not permitted for persons associating with one another to combine their shares to exceed the 10%. The intention was to encourage wide public participation in the ownership of the airline. Similar restrictions were put on CN (15%) and Petro-Canada (10%) though not on other privatized companies such as Teleglobe.

    The 10% restriction has the effect of putting the company in the hands of management, since no shareholder can get enough votes to have much influence at annual meetings which elect the Board of Directors. There is a considerable body of opinion that claims a correlation between increases in the concentration of common share ownership with improved financial performance. Large shareholders have strong incentives to monitor managements’ performance and enough control to be able to remove non-performing incumbents. There is some evidence from the US airline industry that tends to support this thesis. On the other hand the prospect of any individual or company having enough shares to exercise de-facto control is not one which the committee wishes to contemplate and in this vein is drawn to suggesting a limit on the amount of voting shares that large institutional investors might hold.

    Accepting that the 10% limitation should be raised, the Committee has drawn on some of the deliberations of the Senate Banking Committee for guidance in proposing a revised limit. In that Committee’s report with regard to banking, Senators wrote that a 20% limit would tend to more closely monitor the performance of management than the 10% which now applies in that field.

    It is the considered view of the Committee that the 10% limit applying to Air Canada should be raised to 20%. Further, the limitations applying to restrict shareholders combining with associates for the purposes of voting their controlling shares should be removed.

    Recommendation 10, The 10% Limit on Air Canada Share Ownership

    The Committee recommends that the provision limiting ownership by an individual of Air Canada voting shares be raised from 10% to 20% and the provision preventing like-minded shareholders from agreeing to vote together be removed. It further recommends that consistent with restraints in the Bank Act, no institutional investor should be able to own more than 10% of Air Canada voting shares.

 

5- Service to Small Communities

    The Committee senses great concern about the problems faced by small communities under any restructuring scenario, and specifically concern that service to such communities will either decrease or disappear altogether. In the North, there may often be no alternative means of transportation, it is an essential service. The requirements often stated by Northerners with regard to remote area air transportation are safety, service and affordability.

    Sections 64 and 65 of the Canada Transportation Act are intended to help deal with the current situation, and they require the last and second last carriers serving any community to give up to 60 days notice of withdrawal from the service. This is intended to give enough lead time for another carrier to come in. There is obviously a balance here. If the withdrawal time is too long, a new carrier may be deterred from coming in at all. Nevertheless the provisions of the Act under a dominant owner scenario must be strengthened and continuation of service must be a requirement.

    The Committee heard concern from a number of witnesses about costs incurred by small airports already rising but which could be further prejudiced by revenue losses in situations where frequency of service might be reduced. This indicates a need for the government to review its pricing and rental policies for small airports under the restructuring scenario.

    Recommendations 11 and 12, Service to Small Communities

    The Committee recommends that sections 64 and 65 of the Canada Transportation Act be strengthened to guarantee that existing service from a dominant carrier to all communities now served by Air Canada and Canadian Airlines be continued.

    In the light of restructuring, the government review its pricing and rental policies at small airports bearing in mind their role as essential parts of the national transportation infrastructure.

     

6- Ownership and Control

    Under the law, for an airline to be Canadian it must be controlled in fact by Canadians and at least 75% of the voting interests must be owned and controlled by Canadians. The 75% may be lowered by regulation, but regulation cannot change the control requirement. Being Canadian allows the airline to offer service on Canadian routes and to be eligible to be designated by the government to offer international services as a Canadian carrier. The requirements in the law for ownership go back many years, and have their roots in the Chicago Convention of 1944 which set up the process for negotiating bilateral agreements for serving international routes.

    It is often argued that an increase in the limit of foreign ownership from 25% to 49% would increase access to foreign capital. The Competition Bureau argued that this might help the position of some of the small carriers in Canada both through access to capital and allowing better prospects of striking up alliances with foreign groups.

    Some members of the Committee are worried about raising the 25% rule. Concerns have been expressed that there are ways around the restriction. These may be financial, for example a foreign airline may not be a controlling owner, but could well function as an influential banker. Raising the 25% limit in general would exacerbate the concerns regarding influence. Nevertheless the Committee agrees on balance with the Commissioner of the Competition Bureau that an increase above 25% could be helpful to small carriers. Some merit is seen in a selective approach to this matter, and the Committee makes its recommendation mindful of the fact that authority exists in the law to vary the 25% up to the limit where Canadian control would be lost.

    Recommendation 13, Ownership and Control

    The Committee recommends that the government exercise its discretion under the Canada Transportation Act to raise the limit on maximum foreign ownership in a Canadian airline from 25% up to 49% on a selective basis in order to facilitate the access to capital of small carriers competing with the dominant owner.

     

7- International Services

    International services are negotiated with other countries under an air bilateral agreement and routes are then assigned to carriers on the basis of the government’s "International air policy". The policy evolved under a two large airline scenario, and makes accommodation for several small Canadian charters and scheduled service operators. It is under this policy that one or the other of the major carriers is either given exclusive rights to a route, or a majority position. A 300,000 scheduled passenger trips per year in a particular route determines whether more than one carrier is designated to use that route. Use-it-or-lose-it provisions apply if a carrier does not utilize all the routes it has been allocated. Recognizing that bilateral agreements are also dependant on foreign government policies, there are still provisions imposed by Canada on some routes which serve to protect the large carriers from any competition from smaller Canadian ones.

    Services to and from the United States are relatively unrestricted under the Canada/US open skies policy of recent years.

    Under one dominant carrier, the Committee believes that the international air policy should be reviewed. It understands that international routes offer in general higher growth prospects and profitability than domestic operations, and so it becomes important that the smaller Canadian carriers get as much opportunity as possible to participate in them in order to help promote their strength at home.

    To the extent that revisions to bilateral agreements will help, the Committee encourages this to be done.

    The provision of international charter services should not be neglected. The Committee learned that there are still some restrictions on the charter market which inhibit the flexibility of Canadian operators. One example was the inability to offer one-way fares.

    Again, given the importance of encouraging some of the smaller Canadian carriers to compete with the dominant owner, it is recommended that the international charter policy be reviewed with this in mind.

    The Committee was struck by one of the recommendations of the Competition Bureau with regard to alliances. The small carriers do not belong to alliances and in either restructuring proposal, one less alliance will be involved with a Canadian carrier. Also during the recent bidding wars, alliances seem to have wielded rather more influence than one might have expected. The Bureau recommended the adoption of a provision for it to review all new or renewed international alliance agreements entered into by the dominant carrier to ensure compliance with the Competition Act. This Committee supports this recommendation.

    Recommendations 14 and 15, International Air Policies

    It is recommended that the International Air Policy, including the policy for Charters, be reviewed under the dominant owner scenario with a view to increasing the participation of smaller Canadian carriers so as to promote their strength at home and that revisions to air bilateral agreements to assist this where necessary be negotiated.

    The Minister of Transport provide for the Competition Bureau to review all new or renewed international alliance agreements entered into by the dominant carrier/owner to ensure compliance with competition policy.

     

8- Bilingualism

    The Committee strongly supports the Minister in his intention to ensure that Air Canada or any new dominant carrier will continue to be required to provide services to Canadians in both the English and French languages and that the Official Languages Act will continue to apply.

    It learned from the Commissioner of Official Languages of a dispute under which Air Canada is challenging an interpretation of the law that requires that its subsidiaries, in particular its regional airline affiliates, be subject to the law also. The Committee believes that any ambiguity here should be removed.

    Recommendation 16, Bilingualism

    The Committee recommends that under a dominant carrier or owner scenario in Canada, all operations directly serving the public carried out by that carrier or owner and its subsidiaries be made subject to the Official Languages Act.

     

9- Treatment of Employees

    The Committee heard from a number of employee groups during its hearings. One of the main messages was that the restructuring process should be completed quickly, so that the sense of uncertainty hanging over them could be removed.

    Air Canada has given certain undertakings with regard to workforce stability and the conditions which will apply to layoffs. No doubt we have not seen the end of the negotiation process. The airline workforce is generally represented by quite strong union groups, and probably needs little help from government. Nevertheless when the commitments which government has said it will seek from any dominant carrier are discussed, commitments with regard to the rights of employees should be among the priorities.

    Many of the representations made to the Committee on this matter stressed the significance of seniority lists in airline operations, and the potential for creating very unpleasant working situations if the question of merging or transferring personnel were done without regard to the significance of seniority lists. In any overseeing role, it is thus important for the government to ensure that the fullest possible discussion take place between management and labour groups in order to minimize any adverse effects that could arise from this matter.

    Recommendation 17, Treatment of Employees

    In seeking commitments from the dominant owner/carrier, the government insists that fair treatment with regard to continuity of service or lay-off terms be accorded to employees. Special attention should be accorded to the sensitive matter of airline seniority lists.

     

10- Monitoring Dominant Carrier Commitments

    Whether the outcome of current discussions is a dominant carrier or a dominant owner, the government has indicated its intent to require certain commitments with regard to service, fares and treatment of employees. The Committee agrees with this approach.

    There should however be some formal accountability process at least on an annual basis to monitor the compliance with these commitments. The Canadian Transportation Agency, the body which issues licenses, is involved in dispute resolution and monitors compliance with air bilaterals etc. would seem to be well positioned to be involved in this work. The Committee strongly believes however that the Competition Bureau should also be involved and that the monitoring should be a joint effort. The accounting should be in public, in the form of hearings where compliance with the commitments is reported on and intervenors who may have criticisms or complaints will also be heard.

    The results of these hearings should be referred to the appropriate parliamentary Committee for review.

    Recommendation 18, Dominant Carrier Commitments

    The accountability process should be monitored in a public forum, such as through hearings held once per year by the Canadian Transportation Agency in co-operation with the Competition Bureau and open to intervenors and other critics and the report of these hearings should be referred to the House of Commons Transport Committee and the Standing Senate Committee on Transportation and Communications for Review.

     

11- Domestic Competition from Foreign Owned Airlines

    So far in this report the Committee has agreed with most of the courses proposed by the Minister of Transport in his presentation to this Committee to deal with the threat to competition posed by a dominant carrier and most of the detailed recommendations made by the Director of the Competition Bureau. These are reflected in the recommendations made in the report so far.

    The Committee is left however with a feeling of unease. There may be commitments made to holding the line on fares, but it is not at all clear where any drive for lower costs will come from or what remedies may be available if fares go up more than expected.

    This brings the Committee to some of the ideas about foreign competition. It rejects the notion of pure cabotage, under which foreign aircraft with foreign crews would operate routes entirely within Canada. This would simply be taking jobs away from Canadians. On the other hand cabotage as the extension of an international route may be more acceptable, but only if reciprocal rights were available to Canada.

    It is noted that the Competition Bureau put forward two ideas regarding foreign carriers providing competition in the Canadian domestic market. One was the modified sixth freedom service, the Montreal to Vancouver via Chicago kind of route, where unlike today, a US carrier would be able to market a through ticket from origin to destination. A second and more radical proposal was to allow what were referred to as Canada-Only Carriers. These could be entirely foreign owned, would employ Canadian crew and pay Canadian taxes, but would not have the privilege of serving international routes as a Canadian owned carrier would have. The Committee did not hear any support for the Canada-Only carrier idea. Even the one big foreign carrier who was asked for its views thought that the route structure of an all Canadian operation would not be particularly attractive. Small Canadian carriers did not offer any enthusiasm either.

    On the other hand the Committee finds appeal in the notion of allowing modified sixth freedom rights. This would seem a fairly straightforward way of introducing a significant element of competition into what is likely to be an otherwise largely uncompetitive scene. In negotiating such rights however, a reciprocal agreement to allow Canadian carriers to undertake through ticketed US to US journeys through a Canadian point should also be required.

    Recommendation 19, Modified 6th Freedom Rights

    In order to increase competition under a dominant owner/carrier regime, the government take steps to negotiate with the United States the necessary authority to allow through ticketing from one point in Canada to another through a US intermediate stop.

     

12- Conclusions and Observations

    The main conclusion of the Committee is that the structure of the airline industry in Canada under the most likely future scenario will result in one owner dominating about 90% of domestic traffic. All the recommendations made by this Committee are aimed at helping deal with this situation, through steps which will protect the customer directly and promote competition by encouraging the growth of small carriers and removing obstacles to new entrants.

    One major concern about the Air Canada proposal is the airline’s intention to set up a low cost carrier based on Hamilton. It is noted that one of the steps contemplated by the Minister in the restructuring process is submission of the whole package to the Competition Bureau for comment. In doing this we ask the Minister to ask the Bureau to pay particular attention to the Hamilton proposal.

    In the letter to the Minister from the Competition Bureau, the possibility of the ultimate requirement for divestiture of some of the affiliates of the dominant owner was raised. The committee did not hear any testimony in favour of this option, though it believes that the Bureau should take a close look at this matter also. Should it become necessary, the recommendations relating to matters such as interlining and code sharing set out in section 3.0 of this report would apply.

    The committee wishes to make a comment on airline operating costs. The restructuring of the industry will be successful in the long run only if the emerging dominant owner is successful in getting its costs under control and shifting the current system in which costs drive prices to a market oriented system in which prices drive costs. The high debt load of Canadian Airlines, with its associated high interest costs and for Air Canada the absence of a healthy competitor have allowed both airlines to develop domestic pricing policies which have been designed to cover these costs, rather than reducing costs in order to allow prices to be competitive in a competitive market place. The need to change this pricing approach becomes even more critical with the emergence of a dominant owner. Implementation of the recommendations contained in this report would help drive this change.

    While the Committee has addressed the matter of treatment of employees under section 9 of this report, those remarks were intended to apply to those who work directly for the two airlines involved and their affiliates. During the course of the Committees hearings, concern has been raised about the transfer of jobs related to such functions as computer reservation services out of the country. The Committee suggests that to the extent he is able, commitments related to retaining such jobs in Canada or repatriating any jobs already transferred also be pursued by the Minister with the dominant owner.

    Finally a comment on safety. The policy section of the Canada Transportation Act, section 5, puts safety as the first item in its declaration of national transportation policy. At a time of upheaval, there may be distractions which might unwittingly contribute to a deterioration in the safety level. We trust that all concerned will exercise exceptional vigilance in order to ensure that our Canadian system remains as safe as it is possible to be.

 

13- Recommendations

    Recommendation 1, Predatory Pricing
    The Competition Act be amended as it concerns predatory airline pricing in order to ensure that cease and desist orders are available that can stop such actions while they are in progress.

    Recommendation 2, Unreasonable Fare Increases
    It is recommended that section 66 of the Canada Transportation Act, which applies to unreasonable rate increases on monopoly routes, be revised with a view to ensuring that total revenue increases be subject to appeal and not just the basic fare.

    Recommendation 3, Travel Agent Commissions.
    The dominant carrier/owner link its travel agent commission system to sales volume alone and not tie it in any way to travel agent loyalty.

    Recommendations 4 and 5, Slots
    It is recommended that the dominant owner commit to surrendering sufficient slots in key locations including overseas to allow effective competition at key times and that access to passenger facilities generally be structured on a common use basis in order not to exclude carriers competing with the dominant owner.

    A new regulatory framework for slots be established by Transport Canada such that they be surrendered if not used, that enough be available for new entrants and that priority be given to new entrants where facilities are being expanded.

    Recommendation 6, Computer Reservation Systems.
    The government revise the computer reservation system regulations with a view to eliminating the features which work to the disadvantage of small carriers.

    Recommendation 7, Frequent Flier Programs.
    The dominant owner be required to allow new entrants to purchase frequent flyer points in his plan at reasonable cost which would be awarded to passengers on the new entrant’s routes, such points having status as if they were earned with the dominant owner.

    Recommendation 8, Interlining and Code Sharing.
    The dominant owner/carrier be required to negotiate interline and code sharing agreements on reasonable terms with all new entrants in the domestic market wanting such agreements.

    Recommendation 9, Surplus Aircraft.
    As part of the commitments required of a dominant owner/carrier, the government shall require a commitment regarding the disposal of surplus aircraft on reasonable terms first to any willing Canadian buyers before disposing offshore.

    Recommendation 10, The 10% Limit on Air Canada Share Ownership
    The Committee recommends that the provision limiting ownership by an individual of Air Canada voting shares be raised from 10% to 20% and the provision preventing like-minded shareholders from agreeing to vote together be removed. It further recommends that consistent with restraints in the Bank Act, no institutional investor should be able to own more than 10% of Air Canada voting shares.

    Recommendations 11 and 12, Service to Small Communities.
    The Committee recommends that sections 64 and 65 of the Canada Transportation Act be strengthened to guarantee that existing service from a dominant carrier to all communities now served by Air Canada and Canadian Airlines be continued.

    In the light of restructuring, the government review its pricing and rental policies at small airports bearing in mind their role as essential parts of the national transportation infrastructure.

    Recommendation 13, Ownership and Control.
    The Committee recommends that the government exercise its discretion under the Canada Transportation Act to raise the limit on maximum foreign ownership in a Canadian airline from 25% up to 49% on a selective basis in order to facilitate the access to capital of small carriers competing with the dominant owner.

    Recommendations 14 and 15, International Air Policies.
    It is recommended that the International Air Policy, including the policy for Charters, be reviewed under the dominant owner scenario with a view to increasing the participation of smaller Canadian carriers so as to promote their strength at home and that revisions to air bilateral agreements to assist this where necessary be negotiated.

    The Minister of Transport provide for the Competition Bureau to review all new or renewed international alliance agreements entered into by the dominant carrier/owner to ensure compliance with competition policy.

    Recommendation 16, Bilingualism.
    The Committee recommends that under a dominant carrier or owner scenario in Canada, all operations directly serving the public carried out by that carrier or owner and its subsidiaries be made subject to the Official Languages Act.

    Recommendation 17, Treatment of Employees..
    In seeking commitments from the dominant owner/carrier, the government should insist that fair treatment with regard to continuity of service or lay-off terms be accorded to employees. Special attention should be accorded to the sensitive matter of airline seniority lists.

    Recommendation 18, Dominant Carrier Commitments.
    The accountability process should be monitored in a public forum, such as through hearings held once per year by the Canadian Transportation Agency in co-operation with the Competition Bureau and open to intervenors and other critics and the report of these hearings should be referred to the House of Commons Transport Committee and the Standing Senate Committee on Transportation and Communications for Review.

    Recommendation 19, Modified 6th Freedom Rights
    In order to increase competition under a dominant owner/carrier regime, the government take steps to negotiate with the United States the necessary authority to allow through ticketing from one point in Canada to another through a US intermediate stop


Appendix - Witnesses

Name of Organization and/or Witness(es)

Issue Number

Date of appearance

Air Canada:
  • Robert A. Milton, President and Chief Executive Officer;
  • Douglas D. Port, Senior Vice President, Corporate Affairs and Government Relations;
  • Duncan Dee, Manager, Government Relations.

6

Nov. 9, 1999

Air Canada Pilots Association:
  • John Oakley, Captain, President.

6

Nov. 9, 1999

Air Line Pilots Association, International:
  • Michael Lynch, Captain, President, Canada Board;
  • Steve Linthwaite, Captain, Master Executive Council Chairman, Air Ontario;
  • Bruce McConchie, Captain, Master Executive Council Chairman, Canadian Airlines.

2

Oct. 27, 1999

Air Transport Association of Canada:
  • Cliff Mackay, President and Chief Executive Officer;
  • Les Aalders, Vice President, Engineering & Maintenance.

2

Oct. 27, 1999

Canada 3000 :
  • Angus J. Kinnear, President.

6

Nov. 9, 1999

Canada Airport Council:
  • Neil Raynor, Executive Director;
  • Paul Benoit, President and Chief Executive Officer, Ottawa International Airport.

6

Nov. 9, 1999

Canadian Airlines:
  • Kevin E. Benson, President and Chief Executive Officer.
  • Stephen Markey, Senior Vice President, Corporate and Government Affairs;
  • Scott Bradley, Government Relations.

4

Nov. 3, 1999

Canadian Auto Workers (CAW):
  • Buzz Hargrove, President;
  • Peggy Nash, Assistant to the President;
  • Jim Stanford, Economist, Research Department;
  • Gary Fane, Transportation Director.

5

Nov. 8, 1999

Canadian Transportation Agency:
  • Gavin Currie, Director General, Air and Accessible Transportation Branch;
  • Claude Jacques, Director, Legal Services Directorate;
  • Mary-Jane Gravelle, Senior Analyst, Licensing and Charters Directorate.

5

Nov. 8, 1999

Canadian Union of Public Employees:
  • Judy Darcy, National President;
  • Denise Hill, President, Airline Division;
  • Richard Balnis, Senior Research Officer, CUPE National;
  • Pam Betty.

6

Nov. 9, 1999

Commissioner of Official Languages (Office of the):
  • Dyane Adam, Commissioner of Official Languages;
  • Gérard Finn, Director General, Policy Branch;
  • Michel Robichaud, Director General, Investigations Branch;
  • Richard Tardif, Senior Legal Counsel and Director, Legal Services.

5

Nov. 8, 1999

Competition Bureau (Industry Canada):
  • Konrad von Finckenstein, Commissioner of Competition;
  • Raymond Pierce, Deputy Commissioner of Competition;
  • Richard Annan, Commerce Officer;
  • Richard Elliott, Commerce Officer.

2

Oct. 27, 1999

Consumer Association of Canada:
  • Gail Lacombe, President;
  • Jennifer Hillard, Vice-President, Issues & Policy.

2

Oct. 27, 1999

First Air:
  • Bob Davis, President;
  • The Honourable Jean Bazin, Member of the Board of Directors;
  • Sam Silverstone, Legal Counsel with Makivik Corporation.

7

Nov. 16, 1999

Onex Corporation:
  • Gerald Schwartz, Chairman and Chief Executive Officer;
  • Nigel Wright, Principal

3

Nov. 2, 1999

Star Alliance:
  • Rono J. Dutta, President, United Airlines;
  • Frederic F. Brace, Senior Vice President – Finance, United Airlines;
  • Shelley A. Lungmuir, Senior Vice President – International, Regulatory and Governmental Affairs.

6

Nov. 9, 1999

Transport Canada:
  • The Honourable David Collenette, P.C., M.P., Minister
  • Margaret Bloodworth, Deputy Minister;
  • Louis Ranger, Assistant Deputy Minister for Policy

1

Oct. 26, 1999

Transport 2000:
  • Harry Gow, President;
  • Michael Janigan, Executive Director, Public Interest, Advocacy Centre;
  • Andrew Reddick, Director of Research;
  • Peter Bleyer, Executive Director, The Council of Canadians;
  • David L. Jeanes, Canadian Association of Airline passengers.

2

Oct. 27, 1999

West Jet:
  • Stephen C. Smith, President and Chief Executive Officer.

7

Nov. 16, 1999


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