Proceedings of the Standing Senate Committee on
Transport and Communications

Issue 19 - Evidence (December 4 meeting)

 [Editor’s Note]  

Correction

At page 19:44 of the printed Issue, third sentence from the bottom of the page, the text reads:

Senator Perry:  I am not a dance; I am a drummer.

The text should read:

Senator LaPierre:  I am not a dance; I am a drummer.

The Standing Senate Committee on Transport and Communications met this day at 9:09 a.m. to study Bill C-38, an Act to amend the Air Canada Public Participation Act.

The Hon. Lise Bacon (Chairman) in the chair.

[Translation]

The Chairman: Welcome, everyone. I would especially like to welcome the Minister of Transport, Mr. Collenette who is appearing for the first time before this committee studying Bill C-38.

Senator Finestone spoke on this bill at second reading and Senator Tkachuk replied for the opposition.

[English]

The text of this bill is very short; there are only three clauses.

The intended purpose of the bill is very simple. At present, no single person can legally hold more than 15 per cent of the voting shares of the company. When Air Canada was privatized in 1988, such a limit was seen as a means of ensuring wide ownership. In the present economic climate, this limit is seen as a barrier to investment, and the government wants to eliminate that barrier.

We will hear the views of two parties this morning, the Minister and officials from Transport Canada and the representatives of Air Canada. Questions will follow each presentation. The minister would like to leave at 10 o'clock, and we will do our best to comply with that request. Welcome to the committee, Mr. Minister.

The Honourable David Collenette, Minister of Transport: Thank you for that warm welcome, Madam Chairperson. You have outlined succinctly the purpose of the bill, so I will not go into all of that. The bill does not attempt to resolve any of the long-term issues related to Air Canada that have been raised over the last several years. The legislation is set forth simply to deal with an anomaly.

In 1987-88, when Air Canada was privatized, an artificial single shareholder limit was placed in legislation. This was also done with CN and with some other Crown corporations that were privatized. The logic, as I understand it, was to have the shares widely held in order to encourage public participation, and hence the name of the act, the Air Canada Public Participation Act.

This has been in effect for the last number of years. Then we began our talks with Air Canada and Canadian Airlines in the summer of 1999. During those talks we discussed merger proposals. In many respects my officials acted as facilitators at the request of both Canadian Airlines and Air Canada. When they could not make a deal, we used section 47 of the Canada Transportation Act to set aside the competition laws in order to have a private sector solution. In the rancorous debate that emerged Onex Corporation said it would make a bid for Air Canada if the 10 per cent single shareholder limit were lifted. The courts subsequently made a decision, which Onex chose not to appeal. The matter was left in abeyance until December of that year when the government made the deal with Air Canada for the takeover of Canadian Airlines. We agreed that we would not increase the limit more than 15 per cent. That 5 per cent increase was in Bill C-26.

The proponents of keeping the limit were those who wanted to have the shares widely held and not have the airline in the hands of any one individual or group of individuals or any one or two corporations. As you know, that is rather odd, because, in business there generally are no ownership limits. That was one side of the equation. Others argued that, the 10 or 15 per cent limit protects management and does not allow for shareholder input in the normal way and therefore, should be raised or eliminated.

This was the subject of an acrimonious debate. When we had discussions with the chairman and president of Air Canada about six or eight weeks ago, we talked about the various things that could be done to assist the company. We said we would look at this, and they subsequently said they had no objection. When Air Canada comes before you, they will explain why they have changed their point of view.

In the original legislation the shareholders could not talk to each other. Two 10 per cent shareholders could not say that they wanted to get rid of the management; that was illegal. We are asking you to pass this legislation so that provision will become null and void.

What will this mean to Air Canada? Well, they will tell you. However, we are facing an interesting dilemma. We had a policy that was passed by Parliament that was working before September 11. This committee was particularly helpful in Bill C-26. It was working in terms of generating competition.

Air Canada's domestic capacity was about 82 per cent when they took over Canadian Airlines, and their market share was somewhat the same. We estimate that, at the time of the terrorist attacks, it was 65 per cent or lower, and declining. In discussions I have had with Air Canada officials, the general acknowledgment is that this was the case on September 10. With the subsequent terrorist attacks and the bankruptcy of Canada 3000, Air Canada's market share has gone up to around 80 per cent, with about 90 per cent of all revenues going to Air Canada. This is untenable. It is untenable from the point of view of the government. It is untenable from the point of view of Parliament, Air Canada and the public.

We have had discussions recently about how we can deal with this situation. We will need to work together with Air Canada to manage a reduction in the domestic market share. Otherwise, we must look at some very serious options with the industry in terms of either re-regulating entirely or throwing the skies open entirely. The problem is that the Americans are so preoccupied that they have not been particularly interested.

In the meantime, what can we do to help Air Canada? Eliminating the single shareholder limit in this bill leads the way for others to take larger pieces of the company. It leads the way for lenders, those who have advanced money to the company by way of bonds, to convert debt to equity, so it gives the company flexibility. I would not call them creditors. It ensures that Air Canada must comply with the same rules as other corporations, so the shareholders can determine whether or not they like the direction that the company is taking. It makes management more accountable. Given the present environment everyone has recognized that we need that kind of flexibility.

I did not read my speech and my comments have been shorter. My officials will tell me if I have forgotten anything, but I do not think I have.

The Chairman: Do you have any concerns that the proposed changes could allow one investor to take effective control of the company and perhaps make decisions that would not be in the public interest?

Mr. Collenette: It depends what you mean by "not in the public interest." There are the normal laws governing corporations. It is a domestically deregulated environment, but it is regulated as far as international routes are concerned.

I suppose someone could come along and buy 100 per cent of the company, but that individual or corporation would be a Canadian corporation.

It is unlikely that anybody will buy total control of Air Canada, but you never know. The question is: who cares who owns it as long as the market determines who owns it? The only caveat the government draws is that that majority controlling ownership cannot be foreign, because we still have the 25 per cent limit on foreign holdings.

Only 10 per cent of Air Canada's shares are owned by foreigners, even though we have the 25 per cent limit. I say to people who argue that they need more foreign capital that they can get foreign capital easily because they are not up to the limit. I do not think it is a concern. Every other company seems to work with majority shareholders. I suspect that the investors would be a combination of pension funds and corporate investors who would act in the same way as any other publicly traded company; they determine who the board of directors are and approve the direction of the company.

The Chairman: Do you see major investors coming forward as a result of the change?

Mr. Collenette: We have been informed that there is money out there to invest in the airline business, and in particular Air Canada. The problem with Air Canada is that it has a large debt and that does not make it that attractive. On the other hand, Canadian Airlines has gone bankrupt, so that should help revenues, certainly in the short- and medium-terms.

Then there is the issue of whether some of those people who hold debt in the company are willing to convert that debt to equity. For example, Caisse de dépôt is a big institutional lender in the country, and I believe they have certain rights to convert the debentures into equity in 2009. We hope that this may give the company some flexibility to deal with those who have a financial stake in the company.

Senator Gustafson: Is there any indication that the government is going to invest back into Air Canada?

Mr. Collenette: There are a lot of people in the Liberal Party who would like that and a lot of people in the Liberal Party who do not think it should have been privatized in the first place. I think history will judge whether or not the privatization of Air Canada and the full deregulation of the airline industry was good public policy 12 years ago. It has created an incredible challenge both for the previous government and the present government, because it has not worked the way we would have liked it to work. The airline industry is a cyclical industry and Canada has been affected by its cycle as other countries have been.

Senator Gustafson: Would the parameters of this bill allow the government to purchase Air Canada?

Mr. Collenette: Yes, it would. The government could buy 100 per cent of Air Canada.

Senator Gustafson: Looking at the state of airline industry today, one would be foolish to buy shares in it. On the other hand, we need an airline. We need to get from one corner of this country to the other somehow. The practical thinking is that the government will have to accept responsibility for keeping the airplanes in the air.

I guess you have answered my question. This bill would open it up so that can be a possibility.

Mr. Collenette: I must tell you that I do not detect any appetite on the part of Cabinet to take a stake in Air Canada; certainly not a controlling interest. There are people in the Liberal Party who would advocate that, and I am sure in other parties too, but that is not an option that this government is actively pursuing. That is not a motivation for our bringing forward this bill. We have always said that we wanted a private sector solution.

Senator Callbeck: You were asked whether you have a concern that an individual, or a group of people, could get control of Air Canada and make decisions that would not be in the public interest.

I come from Prince Edward Island and the price of a ticket from Ottawa to Prince Edward Island is extremely high. If a group gets control of Air Canada, can they raise the prices as high as they like or is there a mechanism to control that?

Mr. Collenette: You do not need this bill; Air Canada can raise the prices as high as it likes under the present regime. People from your part of the country often argue that the company extracts higher prices on regional routes rather than on the main trunk routes. However, we had a provision in Bill C-26, which was about to be tested between Vancouver and Terrace B.C., for pricing on monopoly routes, to make a comparison where there is competition. There is protection in the Canada Transportation Act at the moment for what we call "price gouging." I think the CTA have the power to initiate on their own, do they not? Yes. So there is power there. It does not matter who owns the company, that power is there.

Senator Callbeck: Did you say that Air Canada has 90 per cent of the domestic market now?

Mr. Collenette: With Canada 3000 going bankrupt, it is back up to about 80 per cent of the domestic market share but90 per cent of revenue system.

Senator Callbeck: Did you say that the government is working with Air Canada to reduce that domestic share?

Mr. Collenette: Let me put it this way. We have said to them that the present situation is untenable and that we must find ways to reduce their domestic share. Otherwise, the Parliament will have to re-regulate the entire industry. You cannot have one operator out there without competition; you need to have some balance.

I think Air Canada understands about Canada 3000; people always like to see competitors not do as well as well as they do. Conversely, the present situation has created a public policy dilemma and a corporate dilemma for Air Canada. It is a situation that is unsustainable.

Senator Callbeck: Do you care to comment on some of the ways that the government might work with Air Canada?

Mr. Collenette: No, these are early days. We had a policy that was working well. The terrorist attacks caused a lot of disruption around the world, and you are seeing it being played out on the domestic airline industry. We always said that we wanted to re-evaluate after two years; that re-evaluation is here. I suspect that over the next few months we will have to come back to Parliament and discuss ways to ensure that we have a much more competitive framework.

Senator Callbeck: I do not know whether I should ask you this question or Air Canada: are there many people that own 15 per cent of voting shares?

Mr. Collenette: Air Canada will be able to better answer that question. The highest shareholder is likely in the 5 per cent to 10 per cent range.

Senator Callbeck: Have you given any thought to moving the 15 per cent to a 25 per cent figure?

Mr. Collenette: The issue is whether or not you want individuals, individual corporations, pairs of corporations or groups of corporations to have control. Once you hit the 20 per cent individual shareholder limit that gets you control. This is what Onex wanted to do back in the fall of 1999. The argument for 10 per cent or 15 per cent was to prevent a single shareholder or group of shareholders from becoming dominant.

I do not think it is sustainable in this particular environment. We have a dominant carrier with a large market share that needs capital any way it can get that capital.

Senator Spivak: The Canadian flying public is dissatisfied with the operations of Air Canada. We always get poor service when we fly from the West to Ottawa.

People feel that for the kind of money being spent by the taxpayer or the individual, that pretzels just will not fit the bill. It would be more agreeable, I suppose, for Air Canada to have a better basic policy.

This bill will hopefully assist Air Canada to get more money to get out of its problems, but I wonder if that is not just one piece of a more fundamental problem of management. You have a situation where a company had elimination of debt and nearly a monopoly situation yet could not make a go of it. Now it is attempting to knock out its competitors, that is to say, the Tango operation.

What powers do you have? Are you inclined to use any powers or persuasion to remedy the management problems? If this is an unsustainable situation why are you allowing predatory pricing with Tango when you have a perfectly functional discount airline that might expand more? It is curious. I believe many people have the same questions.

Mr. Collenette: In Bill C-26, we did give special cease and desist powers to the Commissioner of Competition. There have been discussions about strengthening those powers; the Competition Act is currently before the House and you will be getting the bill in the new year. Cabinet has been reflecting upon whether those powers should be increased.

With respect to Tango, the commissioner was about to rule at the time Canada 3000 ceased operations. You might want to ask him about that. He has argued that because of the problems Canada 3000 had he had trouble getting the requisite information to make a decision. However, he certainly had the powers, and he used them in the case of CanJet about a year ago. At that time there was an 80-day cease and desist order, and then the tribunal hearings were adjourned until the spring. That is the competition side. There are powers that the commissioner can use, and there are people that are arguing for increased powers and Cabinet may agree.

In any private-sector company, if the management is not performing, the directors hold the management to account. If the directors are not doing their jobs then shareholders replace the directors. This has not been the case with Air Canada, because no single shareholder had more than 10 per cent of the company and because of restrictions under the Canada Business Corporations Act definition of "associate" of behaviour, you could not collude. In other words, if you and I both owned 10 per cent and we decided that we did not like the management or the board of directors and we wanted to get rid of them that would have been illegal. With this legislation that will become legal. Air Canada is being brought into the mainstream of Canadian business life. After this bill passes, if there are people who question either the management or the board of directors, those shareholders will have the ability to hold the management to account, as they do with other publicly traded corporations.

Senator Spivak: We have another example. We have Canadian National, which seems to be doing very well. What you are suggesting is a type of laissez-faire situation. I understand why you are doing it, but in terms of public policy we cannot exist in Canada without some directions to airlines because we are so spread out, and most of those lines are probably not profitable.

It is not as if the Government cannot or should not have a role in how an airline is managed for that reason. It is not the same situation as in the United States or in Europe. We have one major route through the major cities, in which every airline could come in and compete, and then we have all the other cities.

The longer this is allowed to go on there might be carnage that cannot be repaired. Is there more to your direction and your policy with regard to the airline industry in Canada than is contained in this bill? I think this legislation might not correct the situation at all.

Mr. Collenette: We are not saying this is a panacea. We are saying that Air Canada has to operate like any other publicly traded company in the country and have its management and board of directors accountable to shareholders.

I suspect that the people who run the company, the board and the executives, own very few shares in proportion to those shares outstanding. Therefore, the people who own the company should determine whether they like the direction of the company. That is one benefit of this legislation. The other benefit is that it does say to people who want to invest, and want to have a controlling share, or team up with others, that they can invest because the individual limit is off.

Your other point about government direction is a matter of debate. This comes back to the point I made earlier. When the Mulroney government privatized Air Canada and fully deregulated the industry, it created a shock wave through the system. Canada had, prior to that time, operated with a public corporation that took government direction. That system had benefits and some disincentives, I suppose.

One could argue that political decisions interfered with management, and that the airline was required to serve certain communities. There was a public interest that was discharged and then there was a whole series of private companies that came and went over a period of time. It is a highly volatile business. That was the old model.

The new model is: Air Canada fully privatized and deregulated. When they were privatized they came on with a renewed fleet. I believe there were 35 of the A320s that were paid for by the government. They would argue that the government got its money back through the share offering. Then you had other companies scramble to meet the competition of Air Canada and you had what ultimately became Canadian Airlines through PWA buying up Wardair, Canadian Pacific and others. With older equipment, it was tough to integrate five airlines and Canadian Airlines was hobbled from the start. Both the Mulroney government and our government had to tinker to try to keep Canadians flying. By 1999 there was no room to manoeuvre. The government just could not tinker any more. The two-airline policy was effectively dead.

Canadian Airlines was going bankrupt, and we had to face reality.

We have to try to come forward with a regime that will be sustainable in the long-term. Before September 11, private companies were gaining domestic market shares, and Canada was doing quite well on the international front. Air Canada had 60 per cent of trans-border market. Actually, Air Canada drove it, but Canadian Airlines also had a piece of that. The Canadian carriers have been particularly adept at competing with the Americans, and that was a growing business. That business was hurt on September 11, and trans-border traffic is still down 30 per cent to 40 per cent. International travel is down about 10 per cent and domestic travel is down 10 per cent, depending on the part of the country you are in.

There are many experts out who do not understand the industry. Air Canada has a particular vantage point because it is trying to operate a business in a politically charged atmosphere. Government and Parliament are trying to give it the means of the private sector to operate but also look after the public interest. It is a delicate balancing act.

Senator Adams: Mr. Minister, there has been discussion of some airlines getting subsidies if they are carrying mail for the post office. Should the airlines be able to claim fuel costs, or would that count as a subsidy?

Mr. Collenette: Are you advocating that we get back into the subsidy business? We have gotten away from that. The mantra of the virile 1990s has been "no subsidies." I am not sure that is good public policy, but that has been the mantra. One could argue that we still subsidize in some ways. By and large, we try not to subsidize and have a repositioning of the economy and have market forces work.

The big debate is whether or not market forces, in the long-run, can answer all of Canada's needs. We think, in the airline industry right now, it can.

In northern Canada, where you are from, there is actually more competition than in places like Newfoundland or Nova Scotia and New Brunswick. You have First Air and Canadian North. You have smaller, feeder carriers. I was up at Kuujjuaq a few weeks ago, and they have competitive service going into the area of Ungava Bay. If you want to go to Yellowknife, you can fly either First Air through Iqaluit, or Air Canada through Edmonton. If you want to fly to St. John's, Newfoundland, all you have is Air Canada, although Air Transat has put on some flights over Christmas, which will give some choice.

This is a perennial debate. Can we get away with no subsidies? The mantra has been to reduce or eliminate subsidies. We have not entirely eliminated subsidies. The question of whether we go back in now with more subsidies is a subject of debate, but I do not think it has bearing on the specific issue of raising the shareholder limit or eliminating it for Air Canada.

Senator Adams: If the government was interested in buying some shares in Air Canada, would you have a limit, or could you take over 100 per cent? What is the policy?

Mr. Collenette: We could buy shares if we wanted to, but I do not think that is Mr. Martin's priority right now.

Senator Adams: So you have no limit. Taxpayers spent a lot of money to make it a private industry; and now the shareholders own it. However, the shareholders do not have any control. Will they want to sell their shares to the government or only to other corporations?

Mr. Collenette: The government could do a lot of things, but we are not buying back people's shares.

The Chairman: The Minister of Finance has other priorities.

Senator Adams: I want better services from Air Canada. I have travelled on their flight between Winnipeg and Ottawa, and I prefer flying First Air and Canadian North, going all the way up to Rankin. I do not know why, with a big corporation that faces the same costs, as the smaller airlines cannot provide better service.

Mr. Collenette: I am not an apologist for Air Canada, and I do not want to be contentious, but I think that people should step back before they start bashing Air Canada. If you fly on a U.S. carrier right now, you will see the difference in the quality that we have. Air Canada is an outstanding carrier on international routes and competes with the best in the world. I have been on American carriers, and I can tell you that I feel much more comfortable on Air Canada. I suppose it is annoying when you are hungry and you get a bag of peanuts and you are paying a business class fare. However, you get there on time, and the planes are clean and well maintained.

I do not believe there have been any orders from Transport Canada against Air Canada, in the last 10 or 15 years, from a maintenance point of view. They are incredibly safe. People have gripes on price, and that is part of the whole competitive issue. I think they have some real gripes on service in French, and I am appearing with Madam Robillard this afternoon at another committee to deal with that. I know Mr. Milton was at that same committee last night. That is an issue.

However, sometimes I think that we as Canadians are a bit too critical, and we have to be fair. This has not been easy for Air Canada. If you look at it on a macro basis, this is one of the better mergers in the airline industry. By and large, on a macro level, planes were deployed, service was maintained, and they had competition. The quality of service is reasonably good. It is clean. Bags do go astray, and sometimes flights are cancelled, but we have to try to step back and look at the entire picture before we really criticize them up too badly.

Senator Gustafson: On a flight to Regina there is nothing else to eat but pretzels. When you fly from Toronto to Ottawa, which takes 45 minutes, the stewardesses are rushed off their feet giving you a lunch. It does not take a rocket scientist to figure out that poor management has much to do with the problem.

The Chairman: I remind you that the Air Canada people are coming up next.

Mr. Collenette: I will take the rap for a lot of things, but not for pretzels on planes.

Senator LaPierre: I am all in favour of you buying shares in Air Canada because I believe that one dollar of government money should buy shares in the company. I am tired of the welfare bums of the capitalist system.

I was under the impression that the purpose of the private capitalist-free economy was to maximize the market share to make more money for your shareholders. You seem to question that.

Mr. Collenette: No, you are right in principle. The Government of Canada can allocate routes under bilateral agreements and our international air policy. As part of the deal with Canadian Airlines, Air Canada obtained all the international routes. So it has total freedom to operate on any international route where we have bilateral rights. We have open skies with the U.S. They can fly whatever size plane, at any hour and at any time to any community in the United States. They have done incredibly well.

The problem is in the domestic market. You are right; we want them to make money, but we also want to encourage competition. A shareholder of Air Canada will say, "If it is a free market, let us compete totally." On the other hand, we have to think about the public interest. This is a very difficult country to serve. That is why there must be some checks and balances.

We have told Air Canada that this big chunk of market share is unsustainable. How can it be managed so that it can still be profitable? Do not forget, they do not have to fly to some cities to make money when they can fly a 747 or other large plane from Toronto to Vancouver, which is the single most profitable route in the country. Toronto to Calgary is the second most profitable route. There are many profitable routes for them. So let the competition take the smaller routes where perhaps Air Canada is not making money.

Under Bill C-26 they have an obligation to serve those small communities until the end of 2002. That is something that we have to discuss. You cannot continue to force them to serve those communities and then expect them to make a market deal with us to reduce their market share. That it is why we have to work cooperatively with Air Canada; I think they are willing to do that.

Senator LaPierre: I share also your views about the pretzels. I find that Air Canada has sinned against more than that. The other day I was on the plane and the weather was awful. We waited for the pilots for about 20 minutes. Air Canada was not at fault; the delay was due to the weather. The people complained unbelievably about the airline.

Air Canada usually communicates with astonishing arrogance and stupidity. I hope that Mr. Donolo will put order into their system.

Another thing that bothers me is that you do not want to regulate them, yet you want to persuade them. Persuasion is as much an intrusion in the free enterprise system as is regulation. The Canadian people are annoyed that it is taking you so long to unravel the problems. Why do you not regulate what you want to regulate and the devil with them?

Mr. Collenette: I will take that as a representation.

Senator LaPierre: Is that possible?

Mr. Collenette: Anything is possible. We could nationalize; we could take a controlling piece of Air Canada. We could fire all the management. We could fly 747s to Windsor, Ontario, or to Chicoutimi. We could do all those kinds of things.

Senator LaPierre: I do not want you to do that.

Mr. Collenette: We have to try to make the business work properly.

Senator LaPierre: That is the government's job.

Mr. Collenette: It is the private sector, and Air Canada has trouble accepting that they are not totally in a private sector environment because there is, as other senators have said, the public interest. It puts the government and Parliament in an awkward position. It is a question of balance.

[Translation]

Senator Gill: If you compare air carriers everywhere, you have to admit that if Air Canada is not number one in the world, it is not far off. Air Canada is a good company. However, we have a problem in Canada. This is not a problem affecting high-traffic routes such as Toronto, Montreal or Vancouver. Air Canada and other air carriers can compete for these routes and all of them will make money. The problem area really lies in routes in the east and also probably in the west of the country. Perhaps there is more competition here. Small companies are dropping like flies. Carriers in these areas are taking a loss to offer low-ticket prices.

It is very difficult to provide air service in Canada. There are few flights and customers and distances are great. We are now entering an important stage in the airline industry. We are opening up the market. Will we have another stage where we will identify the routes to be governed by market forces and where we can assess what we can do to enhance services in other areas? We should not expect significant traffic.

Earlier on, it was mentioned that Air Canada has cut the number of flights. This is quite natural, there are fewer passengers. If we want air carriers to survive and if we do not provide subsidies, there have to be fewer flights. Do you not think that we could look at these two areas differently and assess whether the government could not take action in sparsely-populated areas of the country?

Mr. Collenette: Your question is a dilemma for the government. You have described the situation fairly well. Normally, we do have competition on routes between major cities. On these routes there are a lot of flights, good competition and good prices. However, in small markets, things are more difficult. Bill C-26 sets out a three-year safeguard for air services for small communities. Perhaps this does not suit Air Canada because on most of these routes Air Canada loses money. If Air Canada is restricted to routes between major centres, that leaves the way open for smaller carriers to fill the gap. As for the quality of security, it is the same throughout the country. As for the number of flights and the quality of services, that is market-driven. Current evidence shows that there is more competition in northern communities than in communities in the Atlantic region and northern Ontario. For the government, it is an issue of balance. It is a difficult one to get right.

[English]

Senator Callbeck: Yesterday, at the Charlottetown airport I was talking to the CEO of the Charlottetown Airport Authority and he was talking about increasing costs. He said that since September 11 they have had to upgrade security tremendously, which is having a big effect on the bottom line. Will the government consider offering assistance to the small airports for this added expense?

Mr. Collenette: This is a problem in all airports. We will be dealing with it very shortly. The airports have been very good; they put on extra police and security and have paid for it themselves. It is unsustainable to do this.

That is why we are looking at all the security costs that have resulted since September 11. Those costs include policing and new equipment purchases. We are looking at who does the screening, how it should be managed and how it can be improved. There will be a very high cost to all of that, and that must be paid either by the travelling public or the taxpayer. You are right to say that the smaller airports cannot sustain that kind of cost. That was not part of the deal, if you will. If the government imposes and the public agrees to the extra security, then it must be paid for in some way and it should not really be a burden on the airports.

Senator Spivak: There are a number of retired police officers across the country. Some of them have spoken to me, strangely enough, and I am sure they could be used as a work force for security. They are trained people.

I want to ask if there are any lessons from CN that could be applied to the aviation industry? Air Canada is not just a private corporation; it is not just business as usual. This is also a public utility, and so is the railway, which seems to be doing much better.

Mr. Collenette: I understand the analogy. There was deregulation in the railway; we privatized CN. Under the 1996 act the railways are allowed to abandon track. Although 80 per cent of the abandoned track has been short-lined it has been quite successful. However, there are challenges coming down the road. For example, many of these short lines can operate and make money but they do not make enough money to invest in the capital upgrades that are required. One particular problem that they have is that CN and CP are moving towards heavier railcars. Those heavier railcars cannot go on many of the short lines because they need better track, upgrades, ties, ballasts, and so on. The short lines do not have a way to pay for that. This is something we will be talking about next year when we come back with the Canada Transportation Act amendments, because there are some major challenges.

The difference between CN and Air Canada is that CN moves containers of wheat, coal and potash, and those commodities do not have comfort problems. Air Canada is in the people-moving business. CN is in the freight business and the analogy is not entirely accurate because when you are hauling millions of passengers a year that makes the operation much different from hauling millions of tonnes of commodities.

Senator Spivak: You can also look at the road situation to help the railway tracks, because roads are subsidized and railway tracks are not, never mind the tax write-offs in the railways. The railways are not able to compete in the same way.

Mr. Collenette: We are a little off topic, but I will say that since September 11 Via Rail has seen its traffic increase incredibly and is now the major transport competitor to Air Canada in the Montreal-Toronto-Ottawa triangle.

Senator Gustafson: I have a question on Air Canada's debt. Is this debt surmountable? We just had a major oil company go broke, and this morning you can buy fuel in Ottawa at 42 cents a litre; down from 80 cents.

Is bankruptcy a consideration? It seems to me that you are half in a Crown corporation and half in the business world. We are operating from the perspective of a Crown corporation and it is not working.

Mr. Collenette: It is a difficult situation for the reasons I gave earlier. We want a private-sector solution. That is why we have this bill. However, we still have to accept that there is a public interest that has to be dealt with and perhaps in some cases regulated, as with the Competition Act.

Senator Gustafson: Whoever is servicing the debt is obviously making more money on Air Canada than the corporation itself.

Mr. Collenette: I think you should ask those questions of the management of Air Canada.

The Chairman: We welcome witnesses from Air Canada at this time. Please proceed.

[Translation]

Mr. Peter Donolo, Senior Vice-President, Corporate Affairs and Government Relations, Air Canada: Firstly, I would like to thank you, on behalf of Air Canada and my colleagues, for inviting us here today to speak to this committee and to show our support for Bill C-38, tabled by the government.

[English]

Before we go into the specifics, I would like to take the opportunity to look at the big picture that Air Canada and the international airline industry has been faced with since September 11. September 11 was a catastrophe of unprecedented dimensions for North America and for the airline industry. It was the first time that airliners were used as weapons of mass destruction. The human toll has been horrible and the aftershock is still being felt. For the airline industry in particular it has been a body blow. We all know what Air Canada did in the immediate aftermath of September 11 terrorist attacks. We know that in the immediate hours following the attacks on the Pentagon and the World Trade Center, Air Canada was very active in working with the Government of Canada through Transport Canada to assist in the shutdown of Canadian airports and, more importantly, to host hundreds of planes and their passengers from international origins and destined for the United States. Their passengers were hosted in airports across the country, and I am proud to say on behalf of our employees, by Air Canada employees at airports particularly in Atlantic Canada, who were not accustomed to greeting large carriers from all over the world. I have to salute the employees who did such a wonderful job in receiving them.

The impact of September 11 on the airline industry has been devastating. We have seen well-known airlines such as Swissair, Sabina and others go bankrupt in the aftermath of September 11. We cannot overestimate the impact of September 11 on an industry which has razor thin margins and which has a history of instability and difficulty, even in the best of times.

It is in this broad context that the American administration provided a stabilization package for their American airline industry shortly after the events of September 11. Even so, more than 100,000 airline employees in the United States have been laid off. Layoffs have taken place throughout the world, including airline employees in Canada.

I want to take a few moments to explain some of the actions that we have taken post-September 11 to stabilize Air Canada through this unprecedentedly difficult period.

Within two weeks of the September 11 terrorist attacks, we moved quickly to reduce our capacity by 20 per cent. We took 84 aircraft out of our fleet and proceeded with very difficult labour cost reductions, targeting initially 9,000 people. We have been able to mitigate some of those layoffs through work-sharing programs where we have been able to achieve savings without having to layoff such large numbers of people. Air Canada is laying off a considerable number of people and it is a difficult situation that we approach with great regret.

At this point we have a tremendous struggle to continue reducing our very large cost structure at Air Canada; a problem faced by other large global airlines. The institutional problems of very large cost structures due to labour costs and built-in costs are different from the low-cost, low-fare airlines. For example, five years ago, Air Canada at Toronto international airport was paying $50 million in disbursements and rentals and last year paid $200 million in such fees. We have tremendous expenses up front that we are working very hard to reduce.

Shortly after September 11 we initiated a fruitful and constructive dialogue with the government on the state of the industry, and on sustaining ourselves through this difficult period. One item we put on the table was removing the 15 per cent ownership limit. We are pleased and very appreciative that the government moved Bill C-38 through so quickly to address this specific issue.

In proposing to eliminate the individual share ownership and transfer restriction, the government is recognizing that Air Canada needs to be able to access any and all necessary resources that may be available in the equity and capital markets. It will leave them unencumbered by artificial barriers. We view this as a positive development as the corporation continues to implement measures to strengthen its financial and operating performance in the post-September 11 environment.

Likewise, we would support an increase in foreign ownership limits to 49 per cent from the current level of 25 per cent. We believe that would be useful in attracting foreign equity. We also understand that it is not currently in Bill C-38, although the minister has stated that it would not require a legislative change but an Order in Council change.

While it is unlikely that a foreign carrier today, given the state of the international airline industry, would have much interest in making a large financial commitment to carriers in other countries, it would not preclude the possibility of further relations with foreign carriers. As you know, we are part of the very strong Star Alliance network.

Honourable senators, you have important work to do as you deliberate on the regulatory framework of our industry, and we are happy to cooperate. During Minister Collenette's presentation there were a number of questions and discussions relating to issues beyond Bill C-38. My colleagues and I will be happy to respond to those questions.

The Chairman: As a corporation do you have any concerns about a dominant shareholder having too much influence on the running of the business?

Mr. Donolo: That is implicit with the current regulations and obviously it is a possibility. One reason why we believe that the current status quo does not lend itself to investors coming to the table is that an investor comes to the table without an opportunity to have much influence for the money he or she is putting in. Part of the deal is that someone will want to come to the table and have some influence. That is a check on the performance of the management team and of the board, as the minister said. It goes with the territory.

The Chairman: Would the concern be greater if we were talking about an institutional investor?

Mr. John M. Baker, Senior Vice President and General Counsel, Air Canada: No, I do not think so. As the minister has indicated, there is a very fine balance that must be maintained between the ability of a company like ours to find and be part of a private sector solution, and the private sector solution should in theory allow any investment at any level from whatever source. The levers that a major investor would have with respect to the policy and direction that the company will pursue and the performance of the management team come with that territory.

Whoever that investor may be will have to live within the regulatory constraints that the government imposes on the airline industry, and on Air Canada in particular. We ask that the government provide regulatory clarity for us and for the other players in the industry, with respect to how operations should proceed in the future. That is one of the major preconditions of concern for any investor that is interested in investing in Air Canada.

The Chairman: In earlier remarks, you suggested the need for a thorough examination of the Air Canada Public Participation Act. What changes would you like to see result from such an examination?

Mr. Donolo: I think the issue raised by a number of opposition members, as well as some witnesses, was that Air Canada operates under constraints that our competitors do not operate under. These are constraints regarding head office location and official language obligations. I want to state clearly and categorically that we do not seek release from any of those. We operate willingly and sincerely, but often imperfectly in terms of our official language obligations; we do our best to meet our official language obligations in a very complex industry.

We had a positive and fulsome discussion last night with the Standing Joint Committee on Official Languages seeking ways in which we can improve our services. Hopefully, that committee can help to provide some clarity for us to ensure that our labour contracts reflect the primacy of the official languages legislation. There has been discussion about those issues. Our representation at the committee was that we have an obligation to deliver official languages services. We believe it would make sense for other Canadian airlines to have a similar obligation, but in no way are we seeking a lowering of the bar at all. This is a serious obligation that we take seriously.

Senator Gustafson: I have one compliment for Air Canada and that is on safety. I have flown from Regina for 23 years and made over 800 trips. Even at times when the passengers are a little jumpy due to the time, Air Canada is very good on safety. I compliment you on that, and I hope that continues.

Some areas of management could be improved without a great deal of cost. I mentioned my experience on a late-night flight to Regina. A dinner used to be served on that flight but the dinner has been cancelled; it is a difficult situation for the passengers. I heard many complaints on that flight. I do not think the cost of a meal would break Air Canada' budget. Those kinds of problems could easily be corrected.

How serious is Air Canada's debt?

Mr. Baker: Air Canada took on the debt of Canadian Airlines with the acquisition of that airline two years ago. Canadian Airlines went through a very rigorous and successful restructuring process under the Companies' Creditors Arrangement Act in the spring of 2000. Air Canada has engaged in an aggressive fleet acquisition and modernization program over the last number of years. All of the aforementioned have created a fairly high debt load.

We are confident we can manage our way through this. The major airlines of the world are all highly leveraged because of the major capital costs of acquiring and maintaining equipment.

The downturn in the economy and the shocking impact of September 11 has had a negative effect, but we think that with the returning traffic flow we will be sufficiently in the comfort range. Our liquidity position is strong; it is obviously of major concern and we monitor it on a daily basis.

Senator Gustafson: With the low Canadian dollar, would this bill invite a lot of foreign investment from the United States? That is what happened in the grain industry in the Prairies. Companies can come in and buy up a good portion of the country with very few dollars, when you look at the low Canadian dollar.

Mr. Donolo: The 25 per cent maximum for foreign ownership will still be in place. Currently there is a 15 per cent limit for a single owner and 25 per cent for cumulative foreign investors.

Currently, our foreign ownership is between 10 per cent and 14 per cent. In any case, your concern is addressed by the 25 per cent maximum. We believe, however, that you could increase the ceiling but keep it under 50 per cent, so that we would still get the benefit of having investment but without the risk of outright foreign ownership.

Senator Gustafson: If you had seven foreign investors could they buy up the industry?

Mr. Donolo: We should be very clear that it is not a bull market in the airline industry right now. These are skittish times. Even in the best of times, investments in any large airline are considered risky investments; they are not for the faint of heart. Warren Buffett has said that the surest way to make $1 million is to invest $1 billion in an airline and watch your investment dwindle. He was not talking about Air Canada at the time.

Senator Gustafson: I draw a comparison with the grain industry that is no high flyer right now either. However, American companies are investing big dollars in that industry right now. They are buying up Alberta Wheat Pool and Manitoba Wheat Pool, and the Saskatchewan Wheat Pool is about ready to go. The dollar difference is an issue in this day.

Senator Callbeck: Mr. Donolo, you talked about the effect of September 11 on the expenditures of Air Canada. What about before September 11? When you took over Canadian Airlines, you would have forecasted your expenses and your bottom line for a considerable period of time. It is my understanding that, before the September 11, your expenditures were much above what you had forecast. I know the price of oil went up. Is that true and, if so, what were the major causes of those increases?

Mr. Donolo: I do not want to leave the impression that everything was fine before September 11. The airline industry, particularly large, full-service carriers were experiencing difficult financial times prior to September 11. In many ways large airlines are like the canary in the mine shaft. If there is an economic downturn coming, we are among the first to feel it.

Business traffic took a nosedive in the year 2001 and one reason for that was the decline, or the quasi-crash in the dot.com or high-tech industry. Another reason is the general decline in economic performance. We saw our largest private-sector corporate client, which spent $100 million in 2000, reduce travelling expenses by 60 per cent. Even with the reduced expenditures the client remained our largest, with $40 million of business spent with us. That shows the impact of the economic downturn.

The airlines that did well during that period, and this is true internationally, were the low-cost, low-fare airlines with no frills serving a very price-sensitive market.

We have traditionally relied upon business-fare tickets to provide our profits, to be the real bread and butter of our operation. With the bottom dropping out of that market, we have been moving very quickly to try to get costs out of the system. We began that effort long before September 11; we began in January of last year. Some U.S. airline analysts have said that we were ahead of the curve in addressing costs, compared to large U.S. carriers. We have also been active, as you know, in trying to participate in the low-fare end of the business, which has become an issue of some controversy.

Senator Callbeck: So the major reason for those big losses was the decrease in the business traffic?

Mr. Donolo: It was the general economic downturn and the decrease in business traffic in particular.

Mr. Baker: It was also the rapidly escalating cost of fuel in 2001 that has only now seen some relief. It added about $600 million to our costs.

Senator Callbeck: Those are the two big reasons. You mentioned the discount airlines. I want to know the difference between the service that we get in the Maritimes, for which we pay full fair, and the Tango line. You say that Tango is "no frills," but I do not consider that we get any frills.

I fly home from Ottawa to Charlottetown. An economy return ticket runs anywhere from $1,200 to $1,400, unless you happen to get a seat sale. You leave here around 6 o'clock and get home around 10 o'clock. We used to get dinner, then it became a lunch, and now it is down to a bag of pretzels.

What is the difference in service between the Tango line with its low fares and the Maritimes service at high fares?

Mr. Donolo: The Tango product is designed, from step one, in a very different way from the main line. First, the plane is reconfigured; there is no business class in the plane. There are more seats, going from 130 to 159 seats. That enables us to get more revenue on the plane.

We are also reducing the number of flight attendants to 1 per 40 people, which is the Transport Canada minimum.

We are obviously able to increase the revenues on the plane. For everything on top of your base ticket on Tango, you pay extra. If you want a cup of coffee, you pay $1 for it.

You buy the cheapest ticket that you can get. A sandwich, a cup of coffee and earphones to listen to music or watch a movie is all extra. That allows us to reduce many of the costs in the main line system.

The vast majority of the bookings on Tango are done directly on-line. That eliminates many costs for Air Canada because you deal directly in a one-stop way with Air Canada to purchase your ticket.

We have taken out costs in every step along the way. That enables us to offer not only a low price, but also a low price without all the restrictions that normally go along with a seat sale price. The price that you pay booking on Tango a month in advance is the same as that that you pay if you walk up to the counter at the airport, if there are tickets available.

The consumer benefit is strong in terms of the clarity of the price. Costs to us are disentangled every step of the way.

Senator Callbeck: Are you saying that when we are flying Air Canada in the Maritimes we have more space in economy that we would have on Tango?

Mr. Donolo: The economy class does not have more space. The business class has more space.

Senator Callbeck: There is no more space in economy. Tango has a ratio of 1 flight attendant to 40 people. What do we have in the Maritimes?

Mr. Stephen Markey, Vice President, Government Relations and Regulations Affairs, Air Canada: On a 737, there would be three to four flight attendants, the way they are currently configured. On the new Tango plane, there would be a maximum of four.

Senator Callbeck: The small planes going to Prince Edward Island has 37 seats. Therefore, we would have one flight attendant?

Mr. Baker: That would be correct. The transport requirement is one attendant for each 40 passengers.

Senator Callbeck: I do not see any difference except that we are paying through the nose.

Mr. Donolo: There is no network feed for Tango. Tango is strictly point to point. You cannot change on to an any other planes. It is strictly point to point. It is designed to lower costs.

Mr. Markey: It is designed to be a simple product. As simple as we can make it in the airline industry, which historically, has not been simple. By our standards, it is simple. As a result, you shed costs by shedding complexity in the system.

Senator Callbeck: On Tango, you can buy a sandwich. We cannot even do that on Air Canada.

Mr. Donolo: That is a good point.

Mr. Markey: That has not gone unnoticed since we launched Tango. The Tango customers have an ability to do something that main line customers do not have.

Senator LaPierre: You have Tango now. Do you have Rumba coming, or some other dance that will be different from Tango?

Mr. Donolo: It will be somewhat different than Tango, because the plan for the low cost carrier is to have an agreement with our unions for them to work at a lower scale on this low cost carrier than they currently work on either Tango or the main line. That would mean increased cost savings, and that would allow us to form it as a separate subsidiary, which would have a low cost culture all of its own.

Senator LaPierre: It will destroy WestJet, but do not go there.

Mr. Donolo: With respect and great friendship, I need to respond to something like that.

Senator LaPierre: I was only kidding.

Senator Spivak: Why were you kidding?

Senator LaPierre: I happen to be a friend of Air Canada. Could you tell me how many shareholders you have? Could you find that out?

Mr. Donolo: Yes.

Senator LaPierre: Yes. Could you find out for me how many own the limit of the shares? Currently, there is a limit on the amount of shares that can be owned by one person.

Mr. Baker: The 15 per cent limitation that is the subject of this bill is the only limit.

Senator LaPierre: Yes, how many people own 15 per cent?

Mr. Donolo: None.

Mr. Baker: None.

Senator LaPierre: Do you have any shares outstanding?

Mr. Baker: We have some 120 million issued and outstanding.

Senator LaPierre: If I am to make a rational judgments to do this, I need some of that information.

Has there been a great movement of shares in the company since September 11?

Mr. Baker: There has been a fair amount of trading in the last number of weeks. The events surrounding Canada 3000 have created some activity. This legislation itself has created some interest.

Senator LaPierre: I see that.

Mr. Donolo: There has been a massive amount of trading airline stocks, in general. Many stocks are taking big tumbles. Our stock has gone as low as under $2. It is now around the $5 mark.

The other point worth noting is that there has been a trend in recent years towards greater retail holding of our shares. Small shareholders are more present now than a few years ago.

Mr. Markey: Much of the trading cannot be documented in detail because there is a lag time.

Senator LaPierre: If I buy 49 per cent of your company, do I control it?

Mr. Baker: If there is not a block that controls 51 per cent, yes.

Senator LaPierre: Why would any one want to buy shares in your company with the debt load that you have? People in the know tell me that you are the worst managed company on the planet. Why would any one want to buy your shares?

Senator Spivak: Speculation.

Senator LaPierre: It might go up.

Mr. Markey: There was significant speculation in the stock after September 11. It declined even lower than it is currently at.

Senator LaPierre: You buy low and sell high.

Mr. Markey: I am not recommending that it is a good time to buy right now. However, I believe that it is a good time to buy stocks. That is a judgment you will have to make on your own, but there has been a lot of trading. Many people have done well.

Traditionally, airline stocks have been very cyclical and highly explosive. As a general rule, they are not something that people have held for an extended period of time. They have been very much patterned as an investment.

Mr. Donolo: With respect, I echo the words of Minister Collenette. Air Canada is considered an excellent international airline. It has a very strong domestic transborder and international network. It is part of the large Star Alliance network. Therefore, over the long-term, notwithstanding the current upheavals in the industry as a whole, Air Canada is a strong horse to back.

Senator LaPierre: I find it interesting that the first thing you hear is that you are poorly managed. I would say that peanuts are not good on the airline. There are children who are allergic to peanuts and merely touching them might create a problem. Furthermore, pretzels are no good for anyone's health. I think that you should give them cookies or chocolate. That is the best thing to do.

Mr. Baker: We discontinued peanuts three years ago.

Senator LaPierre: I got them.

Mr. Markey: You probably have almonds or cashews.

The Chairman: Let's return to Bill C-38, please.

Senator Spivak: With regard to Senator LaPierre's remarks, it is considered in the industry that a shareholder with 20 per cent can control a company. That is a rule of thumb. You do not need 49 per cent in order to control a company.

You mentioned that you are after clarity of regulation and that you are after more certainty. Would you explain what you mean by clarity? Are you suggesting that you might be further regulated? Is that in connection with the minister's statement that it is unsustainable for you to have 80 per cent of the market?

Mr. Donolo: First, we did not go out asking for 80 per cent of the market. In fact, Robert Milton was quoted in the media as describing an 80 per cent market share as a curse.

In many ways, it is. We are so big that any complaint, no matter how large or how picayune, is directed at us because Air Canada is a large target. That is a reality with which we must deal.

In terms of constraints or obstacles, there are a number of them. This goes to the point we made about clarity. There are a number of obstacles that we believe are basically unfair. We operate an industry that is a necessity for Canada; it provides a transportation backbone for the country and regulation has an important role to play in the industry. We do not balk at that. For safety purposes, if nothing else, there is an important need for regulation. However, we take issue with some of the measures that have been used against us. We are currently appearing before a competition tribunal hearing over the ability of the Competition Bureau to prevent us from competing on price. That hearing has now been adjourned until March because of the crisis in the industry.

This goes to a point raised earlier by Senator Spivak when she used the term "predatory pricing." The fact is that Air Canada has not been found to be using predatory pricing by any regulatory tribunal or court in the country.

Senator Spivak: It was close though because the Commissioner of Competition was just about to lower the boom.

Mr. Donolo: The fact is that the Competition Bureau is able to prevent us from matching the price that is set by a competitor in a market. I am not talking about going in there and undercutting the competitor with a predatory price. I am not talking about driving them out of business. I am talking about going into a market and matching the price that has already been set. I would challenge anyone to name me one other Canadian industry where a specific company is prevented from matching the prices already set by a competitor.

Our concern extends even further. We are currently challenging the excessive powers before the tribunal. There has been talk on the part of the government about the possibility of augmenting what we consider to already be the excessive powers of the Commissioner of the Competition Bureau. We believe that is the wrong way to go.

Mr. Baker: I want to comment on the thrust of your question about clarity. We have, on the one hand, an uncertain framework established through the Competition Act regime. We are before the tribunal to determine what is called "avoidable costs." That test determines how we as a dominant carrier can price to meet competition. We hope that test will be determined at the hearing in the spring of next year. That will give all stakeholders some clarity. Pending that, we do not know how to price.

Second, under Bill C-26 there are the powers given to the CTA, which allow the CTA to look at our pricing structure and demand that we reduce prices on certain routes that are called "monopoly routes." The CTA has, from time to time, linked routes on which there are no competing services to routes where there are competing services. They have told us that the competitive route is comparable to the route where there is no competition and match your price.

We are in a situation where we are boxed in between one agency telling us to lower our prices to meet the lowest common price in the market, and the other one saying we are not allowed to do that. We and all other competitors in the marketplace are finding it difficult to deal with that regulatory lack of clarity.

Senator Spivak: It is not a surprise for a situation in which there is a monopoly. You do have a monopoly on business travel. It is not surprising in any democracy, or under any rule of law, that there would be an investigation from a judicial point of view into those matters. Any situation can be interpreted in different ways.

I am hearing from you that you would like to have less regulation in terms of price. Is that accurate? Are you saying that you would like the Competition Bureau to get out of your way in terms of your pricing?

Mr. Baker: We would like clarity of regulation with respect to pricing.

Mr. Donolo: With respect, I am still waiting for someone to point out another industry where a competitor is not permitted to match the price of another competitor.

Senator Spivak: There is a term called "predatory pricing." You may call it matching your competitor's price, but in the law as given to us from the Government of Canada, there is such a term as "predatory pricing" and the determination of that is done according to judicial practices.

Let me point out one other thing. Never mind other industries. The airline industry is, in some sense, a public utility. In fact, you were a public utility. There is still that remnant because if you were just doing business you would blow off all the unprofitable routes and concentrate on Vancouver, Toronto and Montreal. That is not at issue here.

Air Canada was the finest airline on the face of the earth. The concern of many people is not just the pretzels, et cetera, but the fact that perhaps Air Canada is being managed into destruction or into mediocrity.

In relation to the issue of the pricing and going into Tango, many people are asking: Why you do not concentrate on fixing your main problem? As you know, that is written about frequently, and that is a legitimate question.

Mr. Donolo: One of the ways we are trying to fix our main problem is to get our costs down. One of the ways we are getting our costs down is, unfortunately, like all the large American airlines, is to cut some meal services. We hope that is not a permanent situation. Also, we are trying to get our costs down by finding new areas of profit in which the airline is able to participate. One of those is on the lower fare end.

Senator Spivak: Air Canada has 80 per cent of the market. You should not be looking into where your competitors are in order to destroy them, but you should worry about your 80 per cent of the market.

Mr. Donolo: I would like to correct that. We are not looking to destroy anyone. We are looking to the market and the market has shifted in recent years towards the low fare end. If we cannot participate in that then we will be consigned to perpetual non-profitability. We do not think that is in the government's interest, we do not think that is in the interests of the taxpayers and we certainly do not think it is in the interests of the travelling public, who want low fares.

Senator Spivak: That is an amazing statement from a company that has 80 per cent of the traffic.

Senator Adams: My question is about costs. You said that Air Canada was losing money due to high costs and everything affecting the corporation at one time. After the privatizing of Air Canada, NAVCAN took over operation of the runways, as well as other functions. Perhaps you are overstaffed. What is costing so much? A few years ago you had 90 per cent control of the air passenger traffic in Canada. With 90 per cent, you should be able to make money even if you have good competition. Why, after privatization, has it gone down?

Mr. Baker: Some people describe the events of the last few years as "the perfect storm." We have been met by a series of factors that have all converged in a relatively short period of time. One factor was the acquisition of Canadian Airlines and its potential failure two years ago this month, as well as the unavoidable and increased costs that came with the integration of Canadian Airlines. There were costs attributed to the commitments that we made to government, in December 1999, for continual service in communities, and other costs such as employment guarantees as well as a whole range of costs that came together at one time. We had then, the incredible increase in the price of fuel that carved up the profitability of all airlines in the world and certainly affected us.

Over the past few years, we have seen a tendency toward what is described as the "Wal-Mart-ization" of the industry, a drive to commodity pricing. The consumer, as they go into a Wal-Mart, look for the lowest price, given that all other factors are equal.

That has very much changed the worldwide dynamic for the airline industry. The successful airlines are WestJet in this country, Southwest and JetBlue in the States, and Ryanair in Europe. Those are the only sustainable, profitable airlines over the last number of years.

That trend deeply affected all main carriers that were providing a host of products which were much more expensive to bear. We have had the impact of the recession on the economy. We now have the impact of September 11 exacerbating or augmenting all those situations. All of that came together at once to drive our costs higher and to drive our revenues away.

It is very difficult to reduce costs. Efforts to reduce costs understandably create reactions about pretzels. Efforts to reduce costs create massive unhappiness and resistance from our employee base. They thought we would be growing. We had reductions in commissions to travel agencies; that created unhappiness. This is not an industry in which it is easy to make substantial savings that do not pass under a microscope of immense scrutiny from every quarter.

Senator Adams: You have cut down on the number of aircraft you were operating. Are they back on again? Canada 3000 was charter-based but they are bankrupt now and that leaves their planes unused.

Mr. Donolo: We had to ground 84 airplanes as part of our cost reduction after September 11. There are no plans to add those planes back to the fleet. Remember, this is all within a 20 per cent reduction in our capacity. Tango was put on within that reduced capacity. Any new activities that we take on will be at a 20 per cent reduced capacity because the market is just not strong enough to sustain more. The market is not what it once was.

Senator Adams: How many aircraft were put on the market as a result of Canada 3000 going bankrupt?

Mr. Donolo: We will not be acquiring any Canada 3000 aircraft. We have more than enough aircraft of our own. That is why we are grounding so many. We are not looking to buy any more aircraft.

[Translation]

Senator Biron: You would like the foreign ownership percentage to be raised to 49%. Would that not give control of the carrier to foreigners? You said that a person holding 49% of a carrier's stock could indeed control that company. Are you advocating this approach because you believe that there is insufficient Canadian investment to cover your requirements?

[English]

Mr. Baker: Yes. In accessing equity capital, one looks not only in the domestic marketplace but also in equity markets throughout the world. Other airlines have that ability as well. It is a prime means of securing necessary equity infusion into the company. Companies worldwide are able to access that. The Canadian marketplace is just too small to provide the type of equity injection that is required to fund corporations like ours that have major capital expenditure programs with the cost of aircraft.

[Translation]

Senator Biron: Did Onex have the necessary capital?

[English]

Mr. Baker: We assumed that Onex had the necessary capital in conjunction with American Airlines with whom it was making the bid.

[Translation]

Senator Biron: To change the subject slightly, I believe that Bell Canada is experiencing the same difficulties in some cases, in terms of the prices it can charge its competitors.

Mr. Donolo: That is quite likely.

Senator Biron: Bell Canada was a former monopoly.

Mr. Donolo: Thank you for that information.

Senator Gill: Do you not find that saying, on the one hand, that Air Canada is poorly managed and, on the other hand, that it is the best company in the world, is a contradiction?

The newspapers have reported that Air Canada had asked the government to provide the 3 to 4 billion dollars that it needs. This statement is perhaps untrue. Perhaps your real requirements fall below or exceed the amounts put forward. There are two important factors in any business; income and expenditures.

Firstly, since the events of September 11, many air travellers are afraid of flying. However, people have always been afraid of flying. Do you not think that Air Canada could provide easily understandable information? This is really an issue of people not fully understanding how air travel security works. If Air Canada reassured passengers and urged them to travel, it could generate more revenue.

Secondly, you must have significant expenditures, including spending on maintenance and the reservation system. Your Star Alliance system may have raised your profile as a company, but it must have also significantly increased expenditures. Which areas are the most costly for you? Are your priorities maintenance and the reservation system? It goes without saying that you have other necessary outlays, such as fuel. What can Air Canada do to increase revenue and cut outlay?

Mr. Donolo: I think that your suggestion that Air Canada promote its security system, which is one of the most efficient in the world, is excellent.

[English]

It makes a profit annually. They do a lot of third-party maintenance work for other airlines and international airlines and are, therefore, a profit centre for the company.

Maintenance is not a huge problem for us in terms of dollars. Our biggest costs are labour costs. As you know, we have a series of very complex and very severe labour agreements with a number of unions. In a way, that is typical of large international carriers. Many of the large American airlines are hemmed in by similar contracts.

Mr. Baker: The reputation that we have in the area of maintenance for safety has resulted in us growing third party work, not only for international and U.S. carriers but also in the domestic market. That has been a growing area and is also a reflection of the good reputation that we have for maintenance.

Regarding our reservation systems we are looking for new ways of distributing our product. You will see in Tango one of the cost savings is the necessity to book on-line through our web system. That is a cost saving that is being employed throughout the industry; it reduces distribution costs.

Before September 11, we began a major task force within the company to look at every area of our list of expenses, to see where we could improve and achieve synergies with other partners whether in Star Alliance or elsewhere. We were trying to reduce the level of expenses across the board. We will continue to make progress in that area, but it is not in any single area that will be sufficient to get us there. It is in all areas. Labour is one area of huge expense, as is the rising cost of fuel and distribution costs.

Mr. Donolo: Those are our three largest expenses.

Mr. Baker: Labour costs make up approximately 25 to 30 per cent of our total costs, which is not totally out of line with other U.S. carriers, but it is significant.

Mr. Markey: That explains why, in parking 84 planes, we are hoping to achieve significant cost reductions through all of the areas that were just mentioned.

Mr. Baker: Recognize that when we park these planes, we are paying the lease costs at 100 per cent. Those are not avoided or avoidable costs. They continue to be born by us.

[Translation]

Senator Gill: What do you intend to do with the 84 grounded aircraft? I understand that these planes do not require maintenance, but they do represent equity.

[English]

Mr. Baker: Of the group, and we mentioned 84, that is the number that was developed immediately after September 11 as a goal to reach. We have not taken 84 out of the fleet completely. We have new fleet coming in. We took delivery of a new Airbus 321, our first in a series, just last week. The new fleet is replacing some old fleet. There is older equipment that we will be looking to sell that is part of the number of 84 in our continual effort to try to modernize and reduce our fleet.

[Translation]

Mr. Donolo: The problem is that the market is fairly small. The downturn affects all airlines. It is not easy to find buyers or people willing to rent aircraft right now.

[English]

Senator Gustafson: I have a question in regards to taxation that the company would face. Right now, you obviously are operating at a deficit, the way it sounds to me. If you are to make progress, you will have to eventually operate at a profit. Many companies, especially in Saskatchewan, but I noticed even the Greyhound buses, have their license plates in Calgary. I am told by business people that if you operate with your domicile out of Alberta, there is a savings of $10,000 on every $100,000 worth of profit just on taxation, to say nothing about PST and other advantages.

Senator LaPierre: Do you want them to move?

Senator Gustafson: Out of what city do you operate?

Mr. Donolo: Our head office is in Montreal, and there is no intention to move our head office.

Senator Gustafson: Even if it costs you 10 per cent of your profits to operate out of Montreal.

Mr. Donolo: There is no intention to move our office.

Mr. Baker: We are taxed federally; we are a federal undertaking. We pay provincial tax wherever we are in residence. It is not really a comparable analogy.

Mr. Donolo: The Public Participation Act obliges us to have our head office in Montreal. We do not seek a change in that.

Senator LaPierre: Besides, you make all the sacrifices necessary to keep our country going.

Mr. Donolo: We do not consider that a sacrifice.

Senator Gustafson: We make all the sacrifices.

Senator Callbeck: You said that Robert Milton said that having 80 per cent of the market is a curse. If that is the thinking of Air Canada, why are you trying to get the whole thing?

Mr. Donolo: It is not so much we are trying to get the whole thing. I think the issue is more that we are trying to get to where Senator Gustafson quite rightly wants us to go, and that is to profitability. The only way we can go to profitability is if we get some of the costs out of the system and participate in the area that the market is going in.

People have mentioned WestJet. WestJet obviously does not have anywhere near the market share we have, but they are a far more profitable operation than we are; profitability and size do not necessarily go hand in hand. We have seen many companies in other areas with large market share that, because they cannot adapt to the changing markets, do not have a future. We want to adapt to the changing market, and the market is changing dramatically in terms of the sensitive areas that people decide on when choosing airlines.

I think our economic and financial difficulties makes our ability to shed costs and to pass on benefits to consumers in terms of lower prices even more urgent than it was before.

Mr. Baker: I urge the committee to be careful of its analysis of market share as distinct from profitability. The airline industry is a complex industry. The complexity I want to alert you to is that for a full service carrier, as we and others are organized around the world, it is providing connectivity, connections to a customer to go from Kenora to Munich or to Bangkok. The connection in what is called "the network," that allows a passenger to do all that is how main line carriers are organized. They may not be profitable on the Kenora-Toronto route, but they are profitable on the next leg.

When we talk about reducing market share from 80 per cent to something one-half that, it actually misses the economics of the industry. We will have to find a way to become profitable while still providing a network service, unlike a WestJet and unlike a Southwest, to meet the needs of Canadians. That is in contradistinction with a rather simplistic analysis that says at 85 per cent Air Canada is an untenable business proposition but at 60 per cent it is, and at 40 per cent it is not. We need to look at the economics and how airlines actually operate worldwide in their strive to become profitable and, more importantly, to provide the services that customers have come to expect.

Senator Callbeck: Can Air Canada become profitable without having Tango and this other discount line you are talking about in the West?

Mr. Donolo: We believe it would be difficult for us to become profitable if we cannot disentangle costs from operation, and Tango enables us to shed costs every step of the way. We believe the subsidiary low cost operation would enable us to do that even more effectively. Also, in terms of a subsidiary, low cost operation, we have the explicit agreement of the Government of Canada from December 1999 that we could open such an operation, and we have what is really for us an historic agreement on the part of our union to operate at a lower scale. We think it would be a missed opportunity to shed cost and therefore move toward profitability if we did not seize this.

Senator Callbeck: When you say at a lower scale, does that mean the employees of Tango make less money?

Mr. Donolo: Tango is within the current labour contracts of Air Canada. This would be the separate, low cost carrier subsidiary, not Tango. With Tango, our flight attendants and pilots are paid the same as if they were doing main line work, but we require fewer flight attendants on a Tango plane than on a main line plane. That is one element of cost savings.

Senator LaPierre: I have a new mission for you. Why not, in order to increase your profitability, go into the charter business? You can have another dance. You might call it the Fox Trot Airline Company and go into charters. Have you ever contemplated the charter business?

Mr. Donolo: We have done charters and continue to do charters: Air Canada Vacation.

Senator LaPierre: Is that a separate line, separate entity, separate company?

Mr. Donolo: We should take this under consideration. I would not want to have to be hauled back in front of you to explain why we want to dominate that part of the business too.

Mr. Baker: We might call it LaPierre Air.

Senator LaPierre: I am not a dance; I am a drummer.

The Chairman: Thank you very much for your testimony this morning.

The committee adjourned.