AIRLINE RESTRUCTURING

IN CANADA

Topical Information for Parliamentarians

Library of Parliament TIPS-45E
23 October 2002

S ince the deregulation of the Canadian airline industry in 1987, Canada’s domestic airline
industry has gone from a virtual Air Canada monopoly to a duopoly with Canadian Airlines
International Limited (CAIL) and now back to a monopoly with the merger of Air Canada and
CAIL. This merger was necessitated by CAIL’s financial difficulties, which were perhaps not
surprising given that the domestic market can likely only support one major air carrier.

As a result of this change in the domestic airline Canada-only carriers;

industry, during the 36th Parliament, the House of
modified sixth freedom rights;(2) and
Commons Standing Committee on Transport
undertook two initiatives related to airline Canada’s international air charter policy.
restructuring in Canada:
Recommendations designed to protect the public
a study which resulted in the December 1999 interest focused on:
report entitled Restructuring Canada’s Airline
Industry: Fostering Competition and Protecting safety;
the Public Interest; and
government oversight of air fares;
hearings on Bill C-26, which implemented
air services to small and remote communities;
many of the recommendations made by the
Committee in its December 1999 report. financially vulnerable airports;
airline employees;
During its study, the Committee’s witnesses
presented testimony on two themes: how to foster travel agent commissions;
competition in the airline industry; and how to
monitoring and review of the impact of a
protect the public interest. Both themes were felt to
restructured airline industry on the public; and
be particularly critical in a dominant carrier
environment. commitments by a dominant carrier.

On the former issue, recommendations were made
concerning government control over:
predatory behaviour;
airline ownership limits;
access to airport slots and facilities;
interlining and code-sharing arrangements;
regional affiliate divestiture;
reciprocal cabotage;(1)
As noted above, many of the Committee’s
recommendations found legislative expression in
Bill C-26, An Act to amend the Canada
Transportation Act, the Competition Act, the
Competition Tribunal Act and the Air Canada
Public Participation Act and to amend another Act
in consequence. The legislation did not address
reciprocal cabotage, Canada-only carriers, modified
sixth freedom rights, international air charter policy,
and financially vulnerable airports for one of two
reasons:
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the government did not wish to change policy at
the time (for example, reciprocal cabotage); or
legislative changes were not required to
implement certain changes (for example, some
changes to international air charter policy).
A year after Bill C-26 came into effect, the House
of Commons Standing Committee on Transport and
Government Operations examined the situation
again. It was felt that although other carriers – such
as WestJet – had an increasing presence in the
market, unanswered questions remained: Is
(3)
competition being fostered within the airline
industry? Is the public(4) being protected?
The Committee undertook to answer these questions
by holding public hearings. The Committee’s
report, Canada’s Airline Industry: After the
Acquisition, was submitted in May 2001.
Is Competition Being Fostered?
There was a difference of opinion about the extent
to which competition exists within the Canadian
airline industry. Some argued that only limited
competition had developed in the last year or two,
and that this had occurred largely in major urban
centres and primarily for leisure or the time-flexible
sector of the business market. People with this
perspective argued for additional regulatory and
legislative changes to promote competition.
Others indicated that the industry is dynamic, and
cited the emergence and expansion of air carriers.
They stated that there is a competitive option on all
routes that together carry at least 75% of all
passenger travel in Canada. One opinion was that
the future will see the emergence of carriers who
will operate on selected routes offering lower-cost
and more modest service, where they can be
competitive without excessive risk.
On the key issues of reciprocal cabotage, Canada-
only carriers and modified sixth freedom rights,
most witnesses before the Committee
overwhelmingly opposed the introduction of these
measures to enhance competition.
Witnesses noted the lack of a long-term policy for
Canadian air services and the need for active public
oversight and direction, given the importance of air
transport to Canada’s economic and social well-
being.
Is the Public Being Protected?
The Committee heard of complaints about: the
quality of service; schedule changes; prices; lost,
damaged and delayed luggage; reservations;
restrictions on bereavement fares; non-refundability
of tickets; and refusal to carry passengers due to
their behaviour.
Some appearing before the Committee argued that
the powers of government agencies, such as the
office of the Air Travel Complaints Commissioner,
to review fares and issue orders and impose fines
should be expanded. Several also mentioned the
idea of a Passenger Bill of Rights.
Many commented on airports in Canada,
highlighting the urgent need for an airports policy
that is coherent and consistent with the Canada
Transportation Act. There is concern that these large
public assets, with their power and influence, are
being operated by private management without
significant public scrutiny or accountability.
The Committee remained convinced that fostering
competition is the best means of protecting the
public interest. During and since the Committee’s
review, both the Air Travel Complaints
Commissioner and the Independent Transition
Observer on Airline Restructuring have made
several reports to the Minister, bringing many of
these issues to his attention.
What is Ahead?
Based on what the Committee heard, concerns
remain about the merged Air Canada.
Parliamentary interest in issues of competition and
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protection of the public is likely to continue, and
could focus on whether:
reciprocal cabotage, Canada-only carriers and
modified sixth freedom rights should be
pursued;
the powers given in 2000 to the Competition
Bureau respecting predatory behaviour are
appropriate, sufficiently broad and having the
intended effect;
the 25% foreign ownership limit should be
changed;
sufficient slots, gates and airport facilities are
available to Air Canada’s competitors; and
the provisions enacted in 2000 regarding the
Canadian Transportation Agency’s review of air
fares and discontinuance of service and
regarding the Air Travel Complaints
Commissioner are sufficient to protect the
public interest where there is a dominant carrier
in the airline industry.
Concerns will be heightened in light of the fact that
the requirement that Air Canada must retain service
on former Canadian Airlines routes expires in
December 2002. Some routes have been slated to
lose service and it is possible, or likely, that more
will be.
Interest could be given a sharper focus as a result of
recommendations made in the course of the
statutory review of the Canada Transportation Act
and the report of the Independent Transition
Observer on Airline Restructuring.
Both the Canada Transportation Act Review Panel
(final report, Vision and Balance, July 2001) and
the Independent Transition Observer (final report,
September 2002) recommended some form of
foreign carrier participation in the Canadian air
travel market. The Independent Transition
Observer called on the government to “fully
liberalize the competitive marketplace for air
service to and within Canada.” Vision and Balance,
a year earlier, called on the government “to create a
North American Common Aviation Area in which
carriers from Canada, the U.S. and Mexico would
compete freely.”
The Minister of Transport explicitly rejected this
course of action on both occasions.
As a second-best solution, Vision and Balance
recommended the government negotiate for
reciprocal sixth freedom rights, and the
establishment of foreign-owned domestic carriers.
The Independent Transition Observer recommended
that the liberalization of air services go ahead in the
absence of reciprocal agreements if there is an
advantage for Canadians.
Another focus of attention will likely be the effects
of the several new fees charged to air passengers.
Included are fees for increased air transport security
in the aftermath of the September 2001 terrorist
attacks on the United States, and airport fees
charged to the traveller. Proposed airports
legislation is intended to improve accountability for
the imposition of airport fees.
Notes
(1) Cabotage is the right of an airline to carry local traffic
in a foreign market in the course of international travel.
(2) Modified sixth freedom rights would allow U.S. carriers
to offer service between two points in Canada via a U.S.
hub.
(3) Rather than re-regulating the airline industry, the most
appropriate way to foster competition may be to lower or
remove as many barriers to full participation in the
marketplace as possible. Barriers to entry can be created in
a number of ways, including by governments and by firms
within an industry. Within the context of the airline
industry, entry barriers are impediments that protect a
carrier from competition from potential new entrants and
existing carriers. Thus, attention might focus on the
following factors:
predatory behaviour;
ownership limits;
slots;
airport facilities and related issues;
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interlining and code-sharing;
regional affiliate divestiture;
reciprocal cabotage;
Canada-only carriers;
a modified sixth freedom; and
charter carriers.
This footnote summarizes points made in the Committee
report Restructuring Canada’s Airline Industry: Fostering
Competition and Protecting the Public Interest
(December 1999).
(4) The ultimate objectives of competition within the
Canadian airline industry are choice, low prices, and high
levels of service for the public. With these goals in mind,
there may be a need, particularly in the short term, for the
government to take proactive measures to protect the public
interest. If “public interest” is broadly interpreted to
include the travelling public, communities and employees,
mechanisms to protect the public interest might focus on:
government oversight of air fares;
preservation of air services to small and remote
communities;
assistance to financially vulnerable airports;
protection for airline employees;
opportunities for travel agents to “negotiate”
commissions;
a monitoring and review process to assess the impact
of a restructured industry on the public; and
commitments by a dominant carrier.
This footnote summarizes points made in the Committee
report Restructuring Canada’s Airline Industry: Fostering
Competition and Protecting the Public Interest
(December 1999).

prepared by

John Christopher, June Dewetering and Joseph P. Dion

Parliamentary Research Branch

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