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Speaking Notes Before the Committee October 27, 1999

SPEAKING NOTES BEFORE THE SENATE COMMITTEE ON TRANSPORT AND COMMUNICATIONS

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)

The Canadian Association of Airline Passengers (CAAP) is an informal coalition of organizations who represent ordinary Canadians concerned with the delivery of important public services such as airline travel. The constituent organizations of CAAP represent over one million Canadians. CAAP has been able to make representations on the issues associated with the proposed mergers, and the operation of the airline industry in general to the Office of the Prime Minister, the Competition Bureau, the Department of Transport and Members of Parliament.

CAAP has expressed frustration with the context of much of the airline debate to date. While the various corporate and legal machinations of the players associated with the two dominant airlines in Canada has been good media copy, it has not been instructive as far as the needs of the ordinary Canadian airline passenger.

As a starting point, it might be useful to refer to the statutory objectives that are contained in the Canada Transportation Act. The Act provides them in the form of a declaration under section 5:

“It is hereby declared that a safe, economic, efficient and adequate network of viable and effective transportation services accessible to persons with disabilities and that makes the best use of all available modes of transportation at the lowest total cost is essential to serve the transportation needs and shippers and travelers, including persons with disabilities and to maintain the economic well being and growth of Canada and its regions.”

The Act then further notes that:

“Those objectives are most likely to be achieved when all carriers are able to compete both within and among the various modes of transportation.”

The Act goes on to set out conditions under which objectives are presumably going to be achieved through competitive modes of operation. These include matters such as meeting the highest practical safety standards (section 5(a) ), fares and rates and conditions that do not constitute an unfair disadvantage or obstacle to the mobility of persons or interchange of commodities in Canada (section 5(g) )and ensuring that each mode of transportation is economically viable (section 5(h) ).

Unfortunately, before there has been a realistic assessment of how well the Act’s objectives have been met, we have come upon this current crisis, apparently driven by the inability of the ownership of Canadian Airlines to sustain further financial losses. However, even without a comprehensive assessment of the Act, we can state that the death or disappearance of Canadian Airlines is not a isolated cloud in an otherwise sunny sky. There are considerable current decrements that we perceive in safety and quality of service and little evidence that competition from the dominant duopoly has been effective in restraining, much less reducing the basic fare for airline customers.

At the same time, as we are experiencing this mostly made in Canada crisis, there is increasing evidence from the United States (in a market much closer to being workably competitive then ours), that significant consumer problems with quality of service and pricing are legion. If fact, consumer unhappiness led to the introduction in Congress this year of a Bill of Rights for Airline Passengers. The adoption of this Bill was narrowly averted after an intensive and expensive campaign of lobbying by the airlines coupled with their promises to implement their own codes reflecting consumer concerns.

Both to address problems with the status quo, and to avoid being sucked into the vortex of the ONEX/Air Canada battles, CAAP has attempted to draft a similar Bill of Airline Passenger Rights which, in our view, should apply across the board. The first version of this document is before you today and appears on the PIAC website (www.piac.ca/caap.htm).

We note, with some satisfaction, the statements of the Honourable Minister of Transport to the effect that the federal government now recognizes that the current crisis is more than a shareholder fight between corporate heavyweights and that a final result of having one dominant airline will have profound implications. These implications, without remedy, are subversive of the Canada Transportation Act, the Competition Act and normal expectations of Canadian consumers associated with the delivery of important public services.

We are heartened that the public debate has at least pulled the treatment of consumer protection into a perspective that accords with the 20th rather than the 19th century. We also note that the corporate players themselves have made efforts to align their interests with that of the consuming public. Interestingly enough, at the same time, both have been quick to claim the title of champion of maximizing shareholder value, an achievement not always consistent with consumer satisfaction.

We take no sides in this dispute, but will observe that the Air Canada supposition that the operation of three airlines (Air Canada, Canadian and Hamilton Discount Air) under one ownership will provide sufficient protection for consumers, breaks new ground in the field of economic confabulation.

However, we do wish to set out some observations which are pertinent both to the current and future airline market in Canada:

  • The Canadian and American experience appears to indicate that it is difficult to obtain desirable standards of safety, quality of service and consumer friendly regimes of pricing through the use of market forces alone. Incorporation of the principles of consumer protection set out in CAAP’s Airline Passenger Bill of Rights into the licensing conditions of all carriers is required.
  • The experience with competition to date has been only sporadically successful in ensuring lower fares for consumers. The basic fare market on popular routes in the duopoly system has seemed impervious to competitive rivalry, particularly after the demise of Greyhound and Vista. It is important that the passenger be protected from non-cost based pricing in those markets where no workable competition exists.
  • The principal players intend to apply any efficiencies and cost reductions gained by a merger to the benefit of their shareholders. These gains must be shared with consumers.
  • The need for consumer protection does not evaporate because of the possibility of competitive entry or in the presence of a market player competing in several niches. A merged airline would have over 90% of the Canadian domestic market. It would be able to enforce any price increase without significant loss of market share. If there is competition in several market segments, prices will likely be reduced in those segments financed by fare increases in the non-competitive market segments. You will thus have to have a regulatory framework to ensure reasonable pricing.
  • There is an increased need for vigilance with respect to ensuring barrier free entry of potential market participants. In addition, as is recognized by the Minister, a more pro-active approach to predatory pricing is called for.
  • Any price restraints must be coupled with service quality indicators which would ensure that in a situation of market dominance or monopoly, the dominant carrier does not reduce service to meet the price restraints and line shareholder pockets.
  • Realistic service commitments to small communities must be maintained by any dominant carrier.
  • The regulatory process presumably administered by the Canadian Transportation Agency must be transparent and accessible by important public and consumer interests.
  • Section 66 of the Transportation Act is inadequate as a basis for consumer protection. As the Competition Bureau has pointed out, it only operates with respect to basic fares. In addition, it contemplates disposition of single episodic complaints rather than imposition of a structure to ensure regulatory fairness.

We note the willingness of the Minister of Transport to engage in a dialogue to establish the appropriate policy framework fro airlines into the 21st century. We see the need for a framework that is firm enough to ensure basic standards of safety and consumer protection, open enough to encourage competitive entry and choice, and flexible enough to fill in the gaps that market forces cannot address.

One thing that is absolutely clear. A laissez-faire approach will not work now or in the foreseeable future. A strategy of unregulated monopoly today, competition tomorrow, will deny forever the benefits that airline customers should of had yesterday.

 

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