The Life and Times of Airline Travel in Canada
PIAC report: High Hopes and Low Standards! – The Life and Times of Airline Travel in Canada
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Airline at the Trough
Opinion piece published in the Globe and Mail – copyright at bottom
The Sept. 11 slump is only one of Air Canada’s burdens. Worse is a corporate culture that takes customers for granted, says consumer advocate Michael Janigan
By MICHAEL JANIGAN
Thursday, October 4, 2001 – Print Edition, Page A17
As wary Canadian air travelers inch their way past ticket agents and airport security this week, they may be forgiven a nostalgic backward glance at the state of the airline service that existed in Canada a little more than two short years ago.
Canadian Airlines was then still vigorously contesting most domestic markets with Air Canada, regional airlines were offering full menus of service buttressed by a successful new entrant, WestJet, and customer service was a largely uneventful and predictable experience. This memory now recedes like a lost golden age. Measures can be taken to restore consumer confidence and satisfaction—but it will require political will and an understanding of how we got into this situation.
The restructuring of the Canadian airline industry that was triggered by Canadian Airline’s woes commenced at the close of 1999. Canadian’s shotgun marriage with Air Canada set air travelers on a forced march through a wilderness of delayed baggage and cancelled flights. Seat sales went missing.
Air Canada, now the only big kid on the block, seemed determined to act that way. Combative chief executive officer Robert Milton bristled at political and regulatory efforts to reel in his airline’s bull-elephant behaviour. After a year-long orgy of bad press, the airline finally took halting steps to improve customer service, only to be flattened by the economic downturn.
The events of Sept. 11 prompted Air Canada’s public posture as a supplicant. But Mr. Milton’s wild-eyed demands for $4-billion of relief were easily faced down by Transport Canada and its minister, David Collenette. However, Mr. Collenette seems destined to live out every verse of the children’s lyric, “There’s a hole in the bucket, dear Liza.” His efforts to patch government airline policy of the 1980s with quick fixes that usually require further repair have resulted in a framework that seems bereft of most of the benefits of either competition or regulation.
Certainly, Air Canada has company in a sea of red ink. Swiss Air and Sabena, once thought to be paragons of reliability, plummeted into court protection from creditors this week.
A financial tsunami rolled across the airline industry—already suffering from overcapacity—after the terrorist attacks. This prompted a swift U.S. response, understandably more extensive than the recently announced Canadian government package. However, the U.S.-based airlines, which reaped a substantial financial cushion from government coffers, also moved swiftly to restore passenger confidence and rebuild capacity with seat sales and customer service.
Meanwhile, Air Canada grumpily opined that fare discounts won’t sell more tickets, and made a beeline for the public trough (the optics of Air Canada’s compensatory claim arising from the Sept. 11 tragedies were somewhat compromised by the carrier’s penurious attitude to passenger expenses for additional accommodation and surface travel incurred for the same reason).
Still, if Canada must go back in the business of underwriting airlines, it’s an opportune time to insist on their operation in the public interest.
The process starts with the dominant airline. Air Canada was a laggard in terms of airline productivity before its merger, and this has largely continued. Notwithstanding this fact, Air Canada gambled on three outcomes to justify the assumption of Canadian Airlines debt and other commitments in 1999: that it would garner significant benefits in reduced costs as a result of the merger; that there would be continued economic growth in the markets served by Air Canada; and that it could set monopoly prices on most routes without loss of significant market share.
True, it has realized more than $700-million in annual reduced costs from rationalized services in the merged airline. But rising fuel costs and the economic slowdown made the merger conditions a millstone. And while customers continued to pay non-competitive airfares between many cities, Air Canada has tried to protect its market share with tactics that prodded the Competition Bureau into initiating corrective action.
With its high prices and indifferent service, the money-losing near-monopoly has prompted numerous calls for Ottawa to allow U.S. airlines to operate domestically between Canadian cities (without reciprocal rights being given to Canadian carriers to operate the same way in the United States). This strategy says we should rely on the U.S. airline industry to provide the market discipline that our government or new-entrant domestic airlines cannot.
While it’s pleasing to think of Air Canada’s comfortable stranglehold on domestic airline travel being loosened by players of comparable size or larger, let’s remember that U.S. airlines are also being criticized for failing to foster a nationwide competitive market and service that meets reasonable customer expectations. In many U.S. regions, the dominant carriers have carved up markets, employing the “hub and spoke” method of operation to squeeze out competition and charge prices based on their market power.
We need not seek a Made-in-America solution for our airline woes, but we do need political will to fix them. In this country, Transport Canada is responsible for ensuring that prices are properly aligned with costs on all routes where there is insufficient competition. But this isn’t occurring.
As well, Canada’s airlines should all have quality-of-service standards written into their conditions of licence. (Transport Canada is terrified that this measure might look like regulation and that there might actually be calls for enforcement, and so the job of persuading the airlines to make nice has been left to the Airline Complaints Commissioner).
But the main task is to get Air Canada to change its corporate culture—to root its corporate salvation in the policy of not taking customers for granted. This means abandoning tricky anticompetitive ruses, like starting a new discount airline. Above all, it means providing prices and service at standards that are sustained, fair and dependable.
Michael Janigan is executive director and general counsel of the Ottawa-based Public Interest Advocacy Centre.
Copyright © 2001 Globe Interactive, a division of Bell Globemedia Publishing Inc.
Air Canada treats passengers shabbily, letter to Minister Collenette, 2001
Dear Minister Collenette:
Re: Air Canada and Passenger Transit Problems, Events of September 11, 2001
The Public Interest Advocacy Centre is a founding member of the Canadian Association of Air Passengers (CAAP). PIAC has been involved in the policy discussions that have taken place since the onset of the restructured Canadian airline industry in 1999.
It has come to our attention that passengers of many airlines, including Air Canada, were shabbily treated during the traumatic events of last week. Stranded in Canadian airports, they were forced to seek accommodation, and travel to that accommodation, at their own expense. Air Canada had surreptitiously changed their “irregular operations ” policy in August, claiming that the abandonment of passengers is the current practice in the airline industry. While the tragic events of last week were unexpected, disruptive, and costly, the narrow perspective of Air Canada and other (but, not all) airlines was appalling. How might a passenger, subjected to the cavalier airline attitude of last week, react to this week’s airline encouragement to travel?
With respect, this episode illustrates the folly of leaving it up to airlines to determine reasonable passenger expectations when a ticket is purchased. We would urge the government to move swiftly to implement a passenger “Bill of Rights” that would be incorporated into the conditions of carriage for every carrier licensed to operate in Canada. CAAP’s previous submissions to your office and your department have detailed the minimum content for such initiative.
We would note that it is Air Canada’s intention to apply for a four billion-dollar bailout of its operations. While we do not support such a measure, we would believe that, at a minimum, Air Canada would take steps to compensate passengers for their loss arising from the same unfortunate events that have occasioned the airline bailout request. As well, Canadians will demand far better treatment and mandatory enforceable customer standards if public monies are so invested.
Executive Director/ General Counsel
cc: Mr. Bruce Hood, Air Transport Commissioner of Complaints
Speaking Notes before the Commitee
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 and the proposed amendments to the Canada Transportation Act. The Canadian Association of Airline Passengers is an 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. The names of the coalition members are appended to this document.
CAAP has been heartened by the general thrust of the response of the Minister and the government to the vexing problem of airline restructuring in Canada. The demise of Canadian Airlines as the only effective competition to Air Canada in most domestic markets means that, without effective consumer protection rules, the private monopoly will be disciplined only by the rather uncertain threat of effective competitive market entry. In devising the framework for the brave new world of airline service in Canada, the government has acknowledged that it must be guided by the twin goals of attempting to remove barriers to market entry in order to encourage the development of workable competition, and to institute consumer protection to prevent monopoly pricing or other consumer unfriendly practices. These consumer protection rules should, as much as possible, act as a proxy for workable competition without, unduly hampering the operation of the merged airline.
CAAP supports the efforts associated with the undertakings given to the Competition Commissioner by the merged airline and the proposed amendments to the Competition Act that allow the Commissioner to more swiftly intervene to prevent anti-competitive behaviour by the dominant airline. These measures should help to provide some security for prospective market entrants to compete for market share. In the United States, there is real concern that concentration in the airline industry has led to a diluting of the anticipated competitive affect upon output and prices. We are starting from a much less advantageous position from a consumer standpoint in Canada, with a dominant airline controlling approximately 90% of the domestic market.
Without necessarily abandoning hope for workable competition in at least some air travel markets in Canada, we must turn our attention to how best to proxy the competitive effect for the market served in the monopoly fashion. The Minister has proposed a package of initiatives, some associated with legislative reform as part of the amendments to the Canada Transportation Act (hereinafter “the Act”) contained in Bill C-26 and others to be put in place without the need for amending legislation. We will attempt to address both initiatives.
With respect to Bill C-26, our comments are also twofold; first directed with the need for some “housekeeping” amendments that are designed to carry-out, what we perceive to be the intent of the package, and secondly “remedial amendments” that are designed to promote the overall effectiveness of the government plan.
We have noted a number of possible problems with the current amendments in terms of matching the perceived intent of the amendments with the actual wording contained therein. CAAP’s concerns include the following:
- Conditions of Carriage
The stated intent of the legislation is to restore powers for the CTA to deal with conditions of carriage for domestic service (examples: lost baggage, and bumping). This is done chiefly by the amendment to sub section 67(3) of the Act:
“The holder of a domestic license shall not apply any fare, rate charge or term or condition of carriage applicable to the domestic service it offers unless the fare rate, charge, term or condition is set out in a tariff that has been published or displayed under subsection (1) and is in effect. ”
Section 86 of the Act sets out the powers to make regulations to enable the imposition of the appropriate terms and conditions of carriage. In particular,
Section 86 1 (h), with the proposed amendments, provides for the same but refers only to international service:
” (h) respecting traffic and tariffs, fares, rates, charges and terms and conditions of carriage for international service and
- providing for the disallowance or suspension by the Agency of any tariff, fare, or charge,
- providing for the establishment and substitution by the Agency of any tariff, fare, rate or charge disallowed by the Agency, and
- authorizing the Agency to direct a licensee to take corrective measures that the Agency considers appropriate and to pay compensation for any expense incurred by a person adversely affected by the licensee’s failure to apply the fares, rates, charges or terms or conditions of carriage applicable to the service it offers that were set out in its tariffs;”
While the definition of tariff in section 55 of the Act is inclusive of terms and conditions of carriage, and the Regulations to the Act provide for the composition of the tariff, it seems a difficult fit for the invocation of a power to set conditions of carriage for domestic service, given the way in which the enabling regulatory powers of Section 86 are set up.
Furthermore, returning once again to paragraph 86 (1) (h), the corrective measures associated with misconduct by a licensee can be construed as authorizing the Agency to take action only in the case of terms and conditions of carriage for international service. We would recommend both for clarity and for effect, that the term “domestic and” be inserted before “international service” in the amended paragraph 86 (1) (h).
2. Evidence of Unreasonableness
Section 66 (3) provides a list of the evidence that the Agency shall consider in determining whether a fare or cargo rate is unreasonable.
”(3) When making a finding under subsection (1) or (2) that a fare, cargo rate or increase in a fare or cargo rate published or offered in respect of a domestic service between two points is unreasonable or that a licensee is offering an inadequate range of fares or cargo rates in respect of a domestic service between two points, the Agency shall consider
- historical data respecting fares or cargo rates applicable to domestic services between those two points;
- fares or cargo rates applicable to similar domestic services offered by the licensee and one or more other licensees using similar aircraft, including terms and conditions of carriage and, in the case of fares, the number of seats available at those fares; and
- any other information that may be provided by the licensee, including information that the licensee provides under section 83.”
It is appropriate that the Agency consider matters set out in (a) and (b) of this section which may provide useful benchmarks for the Agency in making their decision. However, sub-section© limits the Agency to “any other information that may be provided by the licensee, including information that the licensee provides under section 83”. CAAP seriously doubts whether the intent of the drafters of this amendment was to limit the Agency to information provided only by the licensee. There could well be studies, measurements, or analyses both of the Canadian airline industry and the international airline industry available from sources other than the licensee. Such materials that might involve the examination of levels of costs, prices, outputs, or cost allocation and rate design that might be extremely relevant in the consideration of reasonableness by the Agency. The current section, as drafted, would prohibit consideration of such relevant information that may be provided by a complainant, Transport Canada, or any other person that would assist in the determination of a complaint. We would submit that this section should incorporate some latitude for the Commission to hear such evidence.
We would accordingly recommend that section 66 (3) (c) read:
“any other information that may be provided by the licensee including information that the licensee provides under section 83, or provided by any other person that may be relevant for the making of finding under subsection (1) or (2).”
We would note it is very unusual to find such a severe limitation on tribunal evidence in the constituting legislation of a tribunal. Ordinarily a tribunal is given some latitude to develop their own rules and determinations with respect to the form and kind of evidence that it may accept upon a given issue.
Consideration of Representations
Section 66 (5) contains a rather unusual provision that:
“Before making a direction under paragraph 1 (b) or subsection 2 the Agency shall consider any representations that the licensee has made with respect to what is reasonable in the circumstances.”
One would ordinarily expect that it would be part of the duty of the Agency making a finding to consider representations from the licensee as to what is reasonable. It is somewhat surprising that the Agency is instructed to do so. But what is more troubling is that, by implication, the Agency is only statutorily required to hear submissions on reasonableness from the licencee. It strikes us that such submissions as to reasonableness should be considered by the Agency whether they come from the licensee, the complainant, Transport Canada or an interested party.
We would accordingly recommend that this section read
(5) Before making a direction under paragraph 1 (b) or subsection (2) the Agency shall consider any representations with respect to what is reasonable in the circumstances.
When a monopoly exists in a important public service, the role of the regulatory agency is to ensure reasonable rates for user of the service. CAAP is uncertain why this role is best exercised in the manner proposed under section 66. While it is useful that a complaint process exists for the Agency to determine complaints from stakeholders, it should not be the main foundation for enforcement. Airline passengers, bereft of a competitive market for purchasing their air travel, want the security of knowing that their fare is reasonable, not simply that they have a right to complain. The Agency should be required to approve fare increases for monopoly services and, where appropriate, hold an oral or written hearing prior to the same. The reasonableness of existing fares may be subject to the complaint procedure or the procedure for redress on motion from the Agency set out in 66 (6).
As well, there should be some minimal procedural requirements associated with the hearing of a complaint. In most cases, a written process should be sufficient, and the complainant should be provided with the opportunity to respond to the submissions of the licensee or any other evidence that is brought before the Agency prior to the determination. Other matters may require a more formal procedure.
We would recommend that section 66 (1), be amended as follows:
“66 (1) If, on complaint in writing to the Agency by any person, the Agency finds that a licensee, including affiliated licensees, is the only person providing a domestic service between two points and that a fare, cargo rate or increase in a fare or cargo rate published or offered in respect of the service is unreasonable, the Agency may, after hearing the complaint, by order,”
In addition, some rather fundamental matters are not addressed. How is the public made aware of matters such as fee increases or the deliberations of the Agency? Currently, the Agency does not publicize fare increases. How is the complaint process made known to airline passengers? How do they effectively present complaints before the Agency? Because this section is the linch pin of consumer protection against monopoly pricing, it is rather important that these issues be addressed either in the Act or in the Regulations. It would be far better to put in place a structure which would enable effective Agency involvement from the start, rather than proceed from complaint to complaint as it were with a patchwork quilt of redress.
In addition, we would note that there has been a great deal of reluctance by the Agency to use the cost award powers given to it under section 25 of the Act to encourage informed and resourced public participation in important issues before the Canadian Transportation Agency. The Agency already has the power to act in a way that is comparable to other utility tribunals and commissions across Canada to ensure that public interests are effectively represented when important decisions are made. We would urge that the Agency take advantage of the cost provisions in the Act to enable a more informed deliberative process to take place.
CAAP is in strong support of the SCOT recommendation that an independent Ombudsman be appointed that would deal with public complaints regarding airline service in Canada. CAAP sees an Ombudsman as potentially performing an important role in advancing the concerns of passengers to the appropriate company source and seeking and obtaining redress where warranted. The Ombudsman could potentially be an important tool both in protecting the consumer from the possibility of abuse in a monopoly market, but, as well, function as an important and necessary scold to improve standards of service across the airline industry. CAAP sees the Ombudsman function as different than that of the proposed Observer and the appointment of such an Observer does not eliminate the need addressed with the Standing Committee’s recommendation.
Concerns outside Bill C-26
Passenger Bill of Rights
In CAAP’s view, our Airline Passenger Bill of Rights or its equivalent should be put in place as part of the conditions of carriage for all air carriers operating in Canada. We note that CAAP’s concerns are echoed by the Ontario Minister of Consumer and Commercial Relations in his recent report addressing regarding standards for air travel. CAAP believes these concerns are best met by having a set of rules reflecting normal expectations of air passengers for service and applying them to all airlines operating in Canada.
We understand that some of the measurements required to adjudicate compliance to such standards may involve additional expenditures. We believe, however, that in addition to the salutary effect of incorporation of such standards in the conditions of carriage for a carrier, there will be attendant pressures to comply as a result of unfavourable publicity associated with non-compliance. In this way, consumers will be informed and the competitive market will be enhanced.
CAAP concurs with the addition of the function of the Observer into the continued examination of issues in the airline restructuring process. CAAP however recommends that this function be carried out by the appointment of an Airline Users Council similar to the U.K. Air Transport Users Council.
In Britain, the AUC functions both as a sounding board for complaints and as a source of important policy advice for the Civil Aviation Authority and the government. It is composed of representatives of important user groups appointed by the government. Such a move in Canada would be helpful to making the Observer function both transparent and representative while carrying out the important role of industry review.
We apologize that we may have been unable to address all of the consumer concerns that are inherent in the restructuring process and Bill C-26, but we are prepared to deal with any questions concerning the same that may arise this afternoon.
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:
- 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
- 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).
- The Complaints Commissioner should be given formal authority to impose a solution for customer complaints within a reasonable set of parameters.
- 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.
- 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.
- 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.
- Canadians themselves have to become more vigilant and informed consumers of air travel.
- High-speed rail should be promoted as a desirable and competitive alternative to air travel.
- 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.
Letter to the Minister of Transport
VIA FAX AND MAIL
Honourable David Collenette
Minister of Transport
Place de Ville
330 Sparks Street
Dear Mr. Collenette:
Re: Proposed Airline Merger
Canadian Association of Airline Passengers (CAAP)
As a follow-up to our meeting with you in November 1999, we are writing on behalf on the Canadian Association of Airline Passengers (CAAP) to set out some principal concerns associated with the upcoming introduction of legislative amendments to the Canada Transportation Act. We hope that these comments may be of assistance to you and your officials in preparing such amendments.
First of all, we would commend you for your statement of December 21, 1999 concurrent with the approval of the Air Canada transaction to purchase Canadian Airlines. We are pleased that, despite the apparent attempts by Air Canada to water down the consumer safeguards, Canadian airline customers will have some protection against objectionable monopoly practices under the new regime.
There are some important points, however, that should be considered in the drafting of the legislation. Some of these points have been omitted or obliquely referred to in the report of the House of Commons Standing Committee on Transport. These include the following:
- Price Regulation Powers
As you have indicated, it is important that the regulator have “a full range of options to ensure it has the power to deal effectively with any price gauging including effective monitoring powers and sanctions as necessary”. We would suggest that the language of the provisions of the Telecommunications Act S.C. 1993 as amended are instructive with respect to the appropriate statutory measures to take to both encourage competition and to mandate consumer protection.
We would recommend that the Canadian Transportation Agency be given the authority to fix ceilings for fares by licensed carriers in much the same fashion as rates are set for carriers under the Telecommunications Act. Such a ceiling should also be based upon the “just and reasonable” standard. In addition, the Agency should have the power to disallow any fare charged by a licensed carrier where the fare charged does not meet the costs of providing the service. Finally, the Agency shall forebear from regulating any fare for services provided by a licensed carrier that are subject to competition sufficient to protect the interests of airline customers.
It should be noted that a “price freeze” is not necessarily the ideal solution to protecting consumers in the airline market. Mr. Schwartz of ONEX believed that joint Canadian Airlines and Air Canada costs could be cut by as much as 20% by operating as a single airline. This “monopoly dividend” will accrue only to Air Canada shareholders in a price freeze situation. Similarly, consumers have a right to expect that the airline industry in Canada will be at least as productive as its foreign counterparts in introducing efficiencies of operation which should result in lower ticket prices. All of these matters should be explored in appropriate proceedings before the Canadian Transportation Agency.
The reasons for empowering the Agency to impose fare ceilings are consistent with the objectives of the Government to prevent price gouging. As well, in order to promote and maintain competitive entry, it is particularly important to prevent the dominant air carrier from charging higher rates for services that are not subject to competition to gain additional revenues to subsidize advertising and price wars in competitive markets. Finally, similar to the jurisdiction exercised by the CRTC in telecommunications, the Agency should be given the power to disallow rates charged by a dominant carrier that are uneconomic. This is a vital measure to swiftly prevent predatory pricing and maintain conditions for market entry and competition.
- Quality of Service
It makes little sense to provide protection for ticket prices when the value of what is received for a ticket may be subject to diminution or compromised by a reduction in service by the monopoly provider. For example, a monopoly provider that competes in several markets may chose to increase expenditures to attract customers in the competitive market while reducing expenses to serve customers in the monopoly markets. This may mean a lower quality of service for such matters as on-board services and comfort, ticket handling, cleanliness, complaint resolution and possibly safety. In a monopoly market, customers are not free to chose to go elsewhere when service is reduced. The legislation should provide that the Agency may set standards with appropriate incentives or penalties for quality of service issues for services of a licensed carrier whose fares are subject to regulation as per the above.
It has been acknowledged that a complaint driven process is not sufficient to provide consumers with the appropriate standards for protection with respect to price and quality of service. The Agency must have the power to initiate effective monitoring and action where required to meet the objects of the Act and consumer protection in monopoly circumstances.
It is crucial that airline consumers and the organizations that represent them have access to the Agency for the purpose of public scrutiny and participation in important policy or rate making decisions of the Agency, in a similar fashion to the access afforded in important utility proceedings for telecommunications, energy etc… As well, the Agency should be directed to exercise its cost authority set out in section 25.1 of the Act to awards costs with a view to encouraging public participation. Telecommunications and energy regulators throughout North America have done so with good effect for several decades.
- Public Consultation
It should not take a crisis to stimulate productive discussions on the future of the airline industry in Canada. The Air Transport Users Council of Great Britain provides a useful example of what can be done to ensure effective public feedback. The Air Transport Users Council is a consumer watchdog that advises air travellers on issues touching upon consumer welfare and takes up problems with the industry on both a case by case and a generic basis. Their web site www.auc.org.uk provides considerable information on their operations. We would strongly suggest that efforts be made to implement a similar structure in Canada to assist airline passengers.
Finally, we would commend you and your staff for their openness to receive ideas from CAAP. We would be pleased to meet with you or your officials to follow-up on any of the issues in this correspondence that may be necessary.
cc: David Peippo, Transport Canada – fax only – 991-6445
CAAP Members – fax only
Speaking Notes Before the Committee November 22, 1999
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.
Airline Passenger’s Bill of Rights
House of Commons Committee on Transport
- Speaking Notes Before the Committee October 27, 1999
- Speaking Notes Before the Committee November 22, 1999
- Speaking Notes before the Commitee
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