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Permanent holding pattern for Canadian air travellers

Despite advantages and perks, Air Canada fails to deliver dependable service and reasonable prices to air travellers

Most air travelers have a collection of airline horror stories which are recounted with a “can you top this” flair to fellow passengers whenever contretemps occur en route. There can be little doubt that the shock value and volume of these stories were vastly enriched by the performance of Air Canada in 2000.

In December, Air Canada punctuated what had been the “annus horribilis” for weary Canadian travelers by announcing plans to cut 3,500 jobs and raise domestic fares an additional 6%. While Air Canada’s president Robert Milton continues to burble about the success of his 180 day commitment to increased customer service, increasing skepticism abounds whether the Canadian domestic airline market will ever be consumer friendly. In a four-part series of articles, we will try to give the frequently-overlooked consumer perspective on the current crisis in airline travel in Canada.

Air Canada was more interested in benefits for shareholders than for the ticket-paying client public so it threatened the collapse of its Canadian Airlines rescue plan if it did not get its way

In order to understand how we got here, a brief review of recent airline history is required. By the summer of 1999, Canadian Airlines had stumbled through a decade of mostly consistent losses and had shown little success in attracting market share in profitable eastern markets dominated by Air Canada. Canadian Airlines ownership was desperate to rescue their investors and bring about an end to its losing battle with Air Canada. This was not how the brave new world of deregulated airline service was supposed to evolve when it was launched in the 1980s by the Mulroney government. Market forces were to unleash a raft of new airlines to compete with the newly-privatized Air Canada.

It didn’t happen. In fact, by the time that the merger wars between Air Canada and the Gerry Schwartz- owned ONEX Inc. commenced in the fall of 1999, most major Canadian airline markets were served by a duopoly that was only intermittently competitive. The duopoly, however, had been successful in squeezing out competitors such as Greyhound and Vista Jet in eastern airline markets in the 1990s. The result was that by 1999, fares for major routes had increased almost 50% since the collapse of the competition in mid-decade.

When Air Canada finally emerged victorious from its takeover struggles with ONEX, the federal government was faced with the dilemma that it now had a deregulated merged air carrier with market dominance, controlling over 80% of the domestic airline market in Canada. There were few easy escape routes for the government or the Minister. After years of deregulation and cutbacks, Transport Canada lacked the information, expertise, and most importantly, the will to impose public interest regulation on the fares and quality of service of the new monopoly. Air Canada, clearly wishing to direct the efficiency benefits of the merger to their shareholders, rather than the ticket-paying client public, chafed under any suggestion of regulation of financial return and threatened the complete collapse of its Canadian Airlines rescue plan if it did not get its way. Critics of the entire merger process, including the federal Commissioner of Competition, and the House of Commons Standing Committee on Transport, argued that international competition for Air Canada on domestic routes was the only way to protect consumers.

Air Canada rationalized the operations of two merged carriers with the finesse and sensitivity of Idi Amin, resulting in over-booking, flights canceled without explanation, lost baggage, and frequent delays

In the end, the government imposed some makeshift solutions and tried to scuttle crabwise away from the problem. It refused to regulate airfares on monopoly routes but left the Canadian Transportation Agency the option of rolling back fares upon complaints based upon the Canadian historical record of fares (which given the pre-existing duopoly was hardly an onerous test for Air Canada). It gave the Commissioner of Competition new powers to intervene to deal with predatory pricing by Air Canada and made Air Canada enter into undertakings to allow sharing of essential facilities with new market entrants. Finally, it appointed a Complaints Commissioner and an Independent Observer to report on the airline industry within a two-year time frame.

Air Canada, meanwhile, went about the business of rationalizing the operations of the two carriers with the finesse and sensitivity of Idi Amin. Its efforts to maximize load on all routes led to over-booking, flights canceled without explanation, lost baggage, and frequent delays. Changes to longstanding carriage arrangements at Toronto’s Pearson airport exacerbated the confusion. At the same time, minimal or non-existent customer service fueled a national sense of exploitation by Canadian customers left without an airline option.

Robert Milton told Air Canada investors in November the merger had earned $700 million. Customers are still waiting to see their share.

By the end of the summer of 2000, Air Canada was moving to smother the flames of customer disenchantment with Milton’s 180-day service commitment. At the same time, the company crowed in the financial pages about increases in operating income achived by cost-cutting measures that helped to cause the service problems. Air Canada’s December announcements seem to put such even those limited commitments in doubt. While Milton told investors in November that the merger had generated $700 million worth of annual benefits for Air Canada, customers are still waiting to see their share.

The federal government placed most of its consumer protection eggs in the basket of increased Canadian-based competition to Air Canada. However, there were no controls placed upon the ability of Air Canada to subsidize price cuts in competitive air route markets with fares charged on monopoly routes. This was unlike standard regulatory practice in place in such industries as telecommunications or energy to encourage market entry where there is a player with market dominance. While the government assured Canadians that Air Canada was under an obligation to charge reasonable fares on all routes, the airline’s actions in immediately reducing fares by over fifty percent in markets where competition emerged seemed to mock the claims of the government that Canadians were not overpaying on monopoly routes.

Air Canada’s determination to fight the loss of market share to new competitors with deep discounts was so transparent that the Competition Commissioner was compelled to issue an interim order restraining Air Canada’s price cuts on routes serviced by CanJet pending a full investigation. The order was sustained despite two judicial appeals by Air Canada. And while Air Canada’s current and erstwhile competitors are hopeful that they can survive in their own market niche, the December announcement of substantial fare hikes by the main player leaves no doubt who still has carte blanche in the domestic air travel market.

Michael Janigan is Executive Director and General Counsel of the Public Interest Advocacy Centre (PIAC), an Ottawa based NGO providing legal representation and research on behalf ordinary consumers of important public services. They’re on the Web at www.piac.ca/

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