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Airline fees, services, advertising and on-time performance

Senate Standing Committee on Transport and Communications
April 3, 2012

Speaking notes

Michael Janigan
Executive Director and General Counsel
Public Interest Advocacy Centre (PIAC)
Ottawa, ON

Introduction

The Public Interest Advocacy Centre, (PIAC) is a national non-profit organization based in Ottawa that attempts to provide representation, research and support for the position of the ordinary and vulnerable consumer in the marketplace, particularly with respect to important public services. At the time of the transfer of control of Canadian Airlines to Air Canada, PIAC became engaged in the policy debate associated with the restructuring of the industry through its participation in a coalition of organizations under the title the Canadian Association of Airline Passengers (CAIP).

PIAC later was part of a coalition of consumer groups and the travel industry formed in 2005, and styled as the Travel Protection Initiative (TPI). TPI was dedicated to a number of consumer protection goals including all-in pricing for airline advertising, improved financial monitoring of airlines, and maintenance of publicly available performance statistics.

We have recently made some progress on that agenda, as the government has initiated a long overdue process to put in place all-in pricing for airline advertising that will result in airline advertising rules similar to those in existence in the United States and Europe. It will also level the playing field by imposing the same responsibilities on airlines that have been in existence for travel agencies for most of the decade.

The mandate of this Committee’s study is a large one, and our resources and expertise cannot address all of the components. We will try and concentrate on the subset of issues that fall under Part C of the mandate – the business relationship of the airline industry with its passengers. There are a number of timely issues to be addressed under this general heading.

What is basic service?

The last decade has seen a winnowing of those elements of the passenger experience that formerly were provided with the purchase of a ticket at the economy or lowest fare.

From withdrawal of ancillary items such as complimentary food service, blankets and pillows, to the imposition of baggage fees, seat selection fees as well as curtailing of responsibility of passengers in transit, it is difficult to set out exactly what is the package of rights and privileges a passenger is purchasing when boarding an aircraft.

This makes comparability of fare pricing a difficult exercise for passengers, and leaves open the possibility that the pared down level of service obtained is not what the customer expects. Transport Canada’s (TC) Flight Rights Canada 2008 document is not much more than a recitation of airline policy with minimal rights or remedies for passengers.

A definition of basic service is urgently needed that addresses minimal passenger expectations, and provides a floor that protects consumers from airlines cutting corners.

Pricing

A study published in the January 2002 Report of the Federal Reserve Bank of San Francisco showed that unlike the United States, where air fares dropped 40% during the restructuring of the airline industry, Canadian air fares had not been reduced by the restructuring exercise and the Canadian market showed about 1/3 the percentage growth of their American counterparts.

Today, Canada’s average domestic fare, as of quarter 1 of 2011 was $188.30, while the average domestic fare in the first quarter of 1983 was $119.80. The figure based on CPI measured inflation would be $249.20, showing that price performance across the Board has been sufficient to halve the expected rate of inflation.

However, as noted above, average domestic fares in the first quarter of 2011 cover a reduced package of services compared to what existed in 1983, and there is the likelihood that any price benefits have flowed largely to more travelled city pairs.

Indeed, some of the pricing for less competitive city pairs, such as Charlottetown to St. Johns, seems based on Ramsey pricing principles intent on capturing revenue for discounts made elsewhere. There seems to be official ambivalence to this phenomenon, not matched by customers. The fact is, saving for some possibility of competitive entry and occasional resort to other forms of travel, there is little price discipline for air travel between city pairs where insufficient competition exists.

Finally, given the country’s geography, where there are vital routes that are uneconomic to serve at reasonable fares, a system derived subsidy, similar to local service telecommunications, should be used to achieve the transportation objective. It should be available to a potential provider on a competitive bid basis.

Loyalty Programs

The time should be long past when these programs are regarded as some kind of frill bestowed upon customers at the sole discretion of suppliers. The accumulation of points redeemable for air fares or other products has become a driver for purchase decisions. While such points are part of the consideration flowing to the customer, they have been characterized by the merchant as inherently valueless for the purpose of monetization.

The increasing use of accumulated points and credits to tie consumers to particular buying practices has a large potential impact on the range of choice that might be available to consumers and the ability of new entrants to penetrate existing markets with better prices and products. As well, the unilateral right to change aspects of such programs, gives rise to the suspicion that customer’s loyalty has been given in exchange for hollow promises.

The retreat from regulation in many industries has meant that consumers are reliant on competition in the market to provide value and choice. If their choice has been induced by a perception of value that is not there, the program is both subversive of healthy competition based on efficient delivery and a bad bargain for consumers. These are not idle concerns. We note that Aeroplan was frequently cited as the reason that Canadian Airlines failed to penetrate Eastern markets in the 1990s.

We suggest that basic rules be put in place that disclose the number of reward seats available on potential travel involving loyalty points, providing minimum notice period for changes, and measures to ensure that any changes do not diminish the value of existing points.

Financial monitoring and Compensation Fund

One alarming aspect of Canada’s regulatory framework is the non-existent financial monitoring of airlines after the initial approval period. If a major carrier fails, the advance payments of customers will not be protected by any TC governance model. In fact, TC does not have access to the basic tools of assessment such as the P & L and balance sheet, to assess the prepaid liability versus cash on hand.

While the industry relies on fewer advance payments, with sector fares and little lead time requirements for advance booking, the government’s failure to put in place a program of financial monitoring or insist that airlines participate in a national passenger compensation scheme will again be called into question in the event of a large failure.

Can we rely on the credit card processors to pick up the tab for charge backs in this case?

Provincial travel agency regulators such as TICO do protect the failure of an end supplier air carrier, up to $5 million per event notwithstanding the fact that the airlines do not contribute to the TICO Fund. However the losses may be greater than the limit and only passengers using agencies in Ontario, B.C. and Quebec will be eligible to be reimbursed.

Performance Statistics

There is little point in relying on competition to discipline the airline travel market, and then fail to collect and publish information that would enable a carrier’s superior performance to reward with higher market share. The U.S. Department of Transportation and the Federal Aviation Authority publish extensive information concerning on-time arrivals, lost baggage, tarmac delays, and cancelled flights.

The U.S. Department of Transportation provides financial disincentives for carriers exhibiting poor practices in the form of fines and other formal penalties. Canadian customers need this information to make the best choices in the market and the regulatory framework needs enforcement of service quality to ensure that reasonable expectations of passengers are met.

Complaints Commissioner

The incorporation of the complaints resolution process inside the Canadian Transportation Agency has not been successful. Despite the promises made by TC officials when the office of the Complaints Commissioner was discontinued in 2007, there has been scant publicity concerning this function of the agency, most of it directed to discouraging its use. The window on airline customer practices, opened when Commissioner Bruce Hood and his successor were in office, has closed.

Airline passengers, and the industry itself, need a complaints commissioner with the power to handle customer disputes, and to impose solutions when agreement is impossible. Similar to the situation in telecommunications (where more robust competition exists), there is a need for an independent ombudsman to mediate and resolve customer disputes.

As well, a commissioner can call attention to generic service problems and suggest possible solutions. The CTA’s formal procedures are not attuned to passenger needs and are designed to establish formal rules based on existing regulations in a quasi-judicial fashion. Most passenger difficulties do not need or reach that level of adjudication.

Passenger Involvement

Airlines were an early experiment in deregulation and their governance is reflective of the prevailing ideology that all that was necessary was to stand back and let the market work. The government lacks the information and the means to appropriately assess the state of customer satisfaction and consumer protection, and TC has been distressingly disinterested in devising any metrics of airline performance and the monitoring and enforcement of the same. Outside of some academic studies mostly geared to airline financial performance, there is a dearth of empirical studies designed to shed light on what is actually working.

The position of the airline passenger in the market is mainly defended by a scream threshold triggered when airlines design some cost-cutting measure that is injurious of the passenger experience.

There is a need, at a minimum for an Airline Users Council to provide push back on behalf of consumers and to make inroads on what appears to be a state of bureaucratic lethargy or regulatory capture. And while the finances of some airlines are less than robust, the record appears to indicate that customer dissatisfaction is hardly the recipe for financial success in the long term.

 

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