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Speaking Notes Before the Committee November 22, 1999

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Rick Cousins, Deep River

 

SPEAKING NOTES BEFORE THE HOUSE OF COMMONS STANDING COMMITTEE ON TRANSPORT

BY: Michael Janigan
Executive Director/General Counsel
of the Public Interest Advocacy Centre (PIAC)
a Member Organization of the Canadian Association of Airline Passengers (CAAP)

We would first like to extend our thanks to the Committee for allowing us to present the views of the Canadian association of Airline Passengers (CAAP) concerning the future of the Canadian Airline Industry. The Canadian Association of Airline Passengers is a ad hoc coalition of public interest and consumer groups and organizations who are concerned with the delivery of this important public transportation service in a manner in keeping with the interests of the ordinary Canadian consumer. The coalition was formed during the summer of 1999, when the various proposals for merger of Canada’s two principal airlines were being floated and it appeared that the normal process for review of any merger by the Competition Bureau would be circumvented.

Rather than become emmeshed in the details of the ONEX and Air Canada cat fight, we chose to concentrate on making recommendations for conditions that would be advantageous for consumers, regardless of whether the services were being delivered in a competitive, monopoly, or near monopoly mode. The result is before you in the form of the Airline Passenger Bill of Rights which has been recently revised to incorporate comments and suggestions from interested stakeholders. The purpose of this was to establish some bottom line set of consumer protections which have to be addressed by all players in the Canadian airline industry. When this Bill of Rights was drafted, it was important, in our view, to attempt to focus the attention of policymakers away from the beauty show aspects of whether ONEX or Air Canada should become the dominant airline towards the issue how should Canadians be served.

Now that the perception of imminent disruption and chaos seems to have vanished with the ONEX takeover bid, it is time to assess how we can best achieve the objectives set out in the Airline Passenger Bill of Rights.

We certainly do not have all the answers but believe that a number of observations and recommendations may be pertinent to resolving key concerns. These include:

  • Mr. Milton and Air Canada’s plans for a three airline company (Air Canada, a bent, but not broken, Canadian Airlines, and Hamilton Discount Air) are interesting fodder for Air Canada shareholders. However, it only represents a model in which different business units of the same company propose to deliver service. As we have indicated to the Senate Committee on Transport, the idea that competition between these business units would be sufficient for the purpose of airline consumer protection breaks new ground in the well fertilized field of economic confabulation.
  • Canada is not migrating from a system of genuine airline competition to a monopoly or one market dominant player. We currently have a duopoly system in most domestic fare markets offering intermittently effective competitive substitutes. Lest there be any doubt concerning this, for those of you who travel between Ottawa and Toronto, you may have noted that your fares have increased for ordinary business travel by approximately 50% since the demise of Greyhound and Vista airlines. Let me assure you that it is highly unlikely that long-run marginal costs of operating these routes went up a similar percentage amount. It appears evident that the current players are able to enforce price increases in lockstep without suffering loss of market share. This may be choice, it is not competition.
  • One swallow does not make a summer. The presence of a potential competitor in several market niches does not constitute real competition. The view of many respected industrial economists is, at this juncture, that market dominance (the ability to enforce a price increase not reflective of changes in long run marginal costs, without loss of market share) commences at about a 40% market share and that at least 4-5 competitors are required to constitute workable competition. Similarly, in an industry where the financial outlay represents a significant barrier to market entry, one cannot simply assume that market forces will correct for price gouging or service and quality of service cutbacks. The normal behavior of a market incumbent with a dominant share will be to discount prices in any markets where competition exists, financed by revenues gleaned in the monopoly markets from price increases and reductions of service expenditures.
  • It is no solution to say we’re not going to regulate and market forces will overcome all difficulties. A policy of unregulated monopoly today, competition tomorrow, will only deny to consumers the benefits and protections they should of had yesterday.
  • Both in Canada and the United States (where the airline market is closer to workable competition) consumers have observed considerable deficiencies in the quality of airline service giving rise to substantial problems of convenience, health and safety. Judging from the U.S. experience, much of this customer unfriendly behaviour seems amazingly impervious to competition. The Airline Bill of Rights incorporates much of the current flavour of these complaints. We would suggest that many of the terms of the Bill of Rights should be incorporated into the licensing approval process set out in the Canada Transportation Act.
  • There is no magic bullet to fix all problems in the Canadian Airline Industry. What is needed is the establishment of appropriate framework that is flexible enough to adapt to changing circumstances and powerful enough to implement solutions that are beneficial to consumers and the industry.
  • The Competition Bureau may wish to deny a takeover/merger on the basis of lessened competition or impose such conditions as may be appropriate including removal of market barriers mandating, reciprocity of airline points, or divestiture of regional subsidiaries. The Competition Bureau’s intervention may not be sufficient superintendence for the purpose of addressing all issues. The Competition Bureau’s authority is specific to the objectives of the Competition Act and is not likely sufficient to obtain all necessary results desired by the public interest and the objectives of the Canada Transportation Act.
  • The Canadian Transportation Agency operating pursuant to the objectives of the Canada Transportation Act should be empowered:

i) To set just and reasonable maximum fares and conditions of service for those routes in which a carrier carries traffic where, in the opinion of the Agency, competition is not sufficient to protect the interests of users.

ii) The Agency shall refrain from setting fares or conditions of service to the extent it considers appropriate when there is competition sufficient to protect the interests of travelers purchasing carriage to and from any point in Canada.

iii) The Agency should have the power to deal with bottleneck facilities and other barriers to market entry. These powers should include, as they do in telecommunications, the right to order access by another carrier to the facilities of another subject to the payment of reasonable compensation.

iv) Where a carrier’s fares are subject to regulation, the Agency shall have the power to disallow any fare where the amount does not recover the costs of operating the service (predatory pricing). This would operate similarly to the CRTC’s imputation test is applied to tarriffed telephone services of the local carrier.

  • The form of the regulatory supervision, be it price or revenue caps, tarriffs or fare ceilings, based on a benchmarking, Performance Based Regulation or cost of service framework or a combination of the same, should be left to the determination of the Agency. The Agency should hold open hearings with appropriate public participation enabled by the exercise of the cost award powers of the Agency.
  • An Air Transportation Users Council modeled on the UK experience should be implemented. The size and the importance of this means of public transportation in Canada is too critical to leave to only those parties with the resources or economic interests to persevere in setting its policy. In the United Kingdom, the Air Transport Users Council which acts to recommend and advocate for policies and terms of travel on behalf of all transport users.

Over the past few months, ordinary Canadians have been somewhat frustrated by the relative opaqueness of a process for determining airline policy in Canada that revolved around a choice between competing monopolists. If this committee adjourned to the lounge of an airline terminal, one likely would hear differing concerns than have been expressed by almost all of the industry witnesses that this committee has heard over the past few weeks. Many of those concerns are reflected in our Airline Passenger Bill of Rights. The question that we would leave with the Committee is how likely is it that the Canadian airline industry will deal with these concerns in the year 2000 and beyond, without intervention to protect the interests of the ordinary passenger.

We would be pleased to answer any questions from the Committee concerning our presentation.

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