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The Restructured Airline Market in Canada

The Restructured Airline Market in Canada – A Midterm Report

Nine measures to help establish a more level playing field between passengers and airlines in Canada.

It has been more than one year since Canada’s two major airlines were merged and a little over 7 months since the federal government’s response to the merger went into effect. An objective observer would have a hard time assessing the impact of these events by the contradictory stories and announcements that daily appear in the media. Consider these recent stories:

One day after Minister Collenette extolled the success of new competition to Air Canada in a letter to the Ottawa Citizen on February 14, 2001, the domestic airline CanJet announced plans to shelve its ambitious domestic expansion because of cut-throat competition from Air Canada.

While claiming that the merger guaranteed seven hundred million dollars worth of annual benefits for Air Canada (principally by not having a major competitor), Air Canada’s Robert Milton tells the Canadian Club of Toronto in February of this year that airline competition is alive and well.

After declaring victory in its 180-day campaign for service improvement, Air Canada is now frantically cancelling flights, restructuring schedules, laying off staff, grounding planes and slashing capacity on its routes.

What’s going on here?

First, as CEO Robert Milton told the Canadian Club, “the airline business is a tough business.” Unfortunately, as in war, the truth about the action on the battlefield is frequently obscured. As the dust settles, it would appear that the Air Canada/Canadian Airlines merger and the subsequent government response did accomplish the following:

  • It provided a means to bail out the financial investors of Canadian Airlines, in particular, the substantial bank investors.
  • It minimized employee job disruption and postponed airline job cuts for at least a year based on redundancy.
  • It gave Air Canada an overwhelmingly market-dominant position in the domestic airline market without effective and consistent regulatory price scrutiny.

Saving Canadian Airline employee jobs was used as a principal justification for the merger plan. A cynic might ask why most jobs would not have remained in the system anyway to serve the Canadian travel demand – a demand based on local geography rather than corporate entities. While the presence of a structured plan provided some needed certainty, the subsequent job cuts based on redundancy do tend to tarnish any “white knight” depiction of Air Canada’s role in the merger.

The merger solution satisfied the most powerful stakeholders in the mix and avoided the appearance of a complete collapse of government air policy. It also left customers of the merged airline with the task of soaking up Canadian Airlines red ink with non-competitive fares. On the other hand, with the addition of Canadian Airlines’ international routes, Air Canada got all the keys to the kingdom. In return for the temporary continuation of a zombified Canadian Airlines, Air Canada shareholders would pocket the windfall associated with elimination of competitive scheduling and pricing with its former rival.

This turned out to be too cozy a deal to pass a rudimentary smell test. Media and parliamentary criticism forced some public and competition protections to be implemented. The Commissioner of Competition eventually got commitments from Air Canada to relinquish control of key bottleneck airport facilities as well new legislative powers to swiftly roll back predatory pricing. A Complaints Commissioner was appointed to deal with mediation of passenger air travel complaints, which were legion by the summer of 2000. The Canadian Transportation Agency (CTA) was given the authority to prevent price gouging. And to evaluate the current solution, an Airline Transition Observer was appointed to study and report upon the restructured airline industry within 18 months.

What was not immediately evident is that while the government consumer protection solution was to hope for more Canadian-owned competition, consumers will not be meaningfully protected until the day a workably competitive market develops. As we have seen in the United States, this means more than one or two small competitors possessing a fraction of the Air Canada passenger market. To date, however, the CTA has refused to rule on Air Canada fare complaints if the possibility of a choice of an alternative carrier existed – a questionable legal and economic interpretation of its responsibilities.

However if the CTA has been reticent in its exercise of its newly-acquired consumer protection powers, other players in the continuing airline saga have been more robust. The Competition Commissioner has displayed a surprising tenacity and vigilance in his policing of Air Canada’s market practices to squeeze competitors. His emergency powers were invoked to roll back eye-popping price discounts used by Air Canada to fight CanJet, and last week, the Commissioner announced that the Competition Tribunal will be presented with evidence of predatory pricing by Air Canada that undercut both CanJet and West Jet Airlines. As well Airline Complaints Commissioner Bruce Hood, has confounded skeptics and shocked the Transport Canada and CTA bureaucracy by insisting that Air Canada take meaningful action in reasonable timelines to satisfy legitimate customer complaints.

If we are truly interested in achieving a domestic airline industry geared to efficiently serve the needs of Canadians, however, more must be done. Compelling evidence exists that the following nine measures would help establish a more level playing field between passengers and airlines in Canada:

  1. An Airline Passenger Bill of Rights that incorporates reasonable standards based on customer expectations of service, comfort and safety should be included in the conditions of carriage for every airline licensee in Canada
  2. Transport Canada should be required to maintain and publish key statistical information concerning airline service including company-specific data on flight delays, lost baggage, cancelled flights etc. (Senator Michael Kirby has recently introduced a Bill in the Senate (S, 19) to address this need).
  3. The Complaints Commissioner should be given formal authority to impose a solution for customer complaints within a reasonable set of parameters.
  4. Since the CTA has been so selective in the exercise of its current legislative authority over pricing complaints, statutory amendments should be introduced to require the Agency to fix reasonable fares where there is insufficient competition to prevent market dominance not just where there is no competition.
  5. Travel agents play a key role in dissemination of objective travel information to the customer. Consideration should be given at both the federal and provincial levels for protection of travel agents from attempts by airlines to diminish their ability to render this useful service.
  6. If Air Canada is obliged under its licence to serve some geographically-remote regions of Canada, the cost of such obligations should be borne by all players in the system as a whole, and not compensated for by lax supervision of Air Canada’s market practices.
  7. Canadians themselves have to become more vigilant and informed consumers of air travel.
  8. High-speed rail should be promoted as a desirable and competitive alternative to air travel.
  9. Finally, if we want airlines to act in the public interest, we have to provide the necessary public interest framework. If we want market forces to bring efficiencies and benefits to all stakeholders, we have to ensure that we have designed and maintained a workably competitive market.

In assessing how the Canadian airline market operates, we have to leave behind the Canadian tendency to label market protagonists as good guys or bad guys. Regardless of whether you think Robert Milton is a bully boy or a saviour, Air Canada is a company whose first obligation is to serve the interests of its shareholders. The same thing can be said for its former and current competitors. A privately-owned airline doesn’t want to compete, it wants to win the competition.

The job of the public authority is to ensure that the airlines achieve the public goals while pursuing their own. At the moment, the regulatory and competitive framework looks a little too shaky to conclude that this job is complete.

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.

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