Canada's Airline Restructuring Legislation

Opening remarks by
Konrad von Finckenstein, Q.C.
Commissioner of Competition
Competition Bureau

Standing Committee On Transport
Ottawa

April 12, 2000

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Thank you for inviting me to appear before you to discuss my views on Bill C-26, the legislation relating to the restructuring of Canada's airline sector.

Principal amendments to the Competition Act

I would like to briefly highlight the principal amendments to the Competition Act covered by Bill C-26.

Firstly, the temporary exemption from the Competition Act for travel agents.

This will allow travel agents to negotiate collectively with a dominant carrier for commissions on domestic ticket sales. In this context we should recall that travel agents are by far the most important distribution mechanism for air travel, accounting for more than 75 percent of ticket sales by scheduled airlines in Canada. This exemption is temporary and will only last as long as the dominant carrier has 60% or more of revenue passenger kilometres of all domestic service over a preceding 12 month period. In all other respects, the Competition Act will continue to apply to travel agents.

Secondly, the Bill provides for defining, by regulation, of airline-specific anti-competitive acts.

I am tabling before you today a draft copy of the regulations which will be pre-published once the Bill is enacted. The regulations outline the type of behaviour - including predatory pricing - that is likely to be challenged. What is pro-competitive behaviour and what is abusive behaviour is often a fine line to distinguish. The tabling and publishing of these regulations will set out the boundaries for the industry as to what is acceptable behaviour. We invite all stakeholders to send their comments to the Bureau.

Thirdly, there will be a new 'cease and desist' power.

These powers allow the Commissioner to take swift action to stop predatory or other anti-competitive behaviour before there is permanent damage. The airline industry is unique in Canada in that it has a carrier that is overwhelmingly dominant. Moreover, this is an industry with highly mobile assets and low variable costs. An order can only be in place for up to 80 days while we investigate, and is reviewable by the Competition Tribunal. It is worth mentioning that the Bureau has consulted with the Department of Justice to ensure that these powers are consistent with the Charter of Rights and Freedoms.

Fourthly, the Bill introduces new merger review procedures for airlines.

The Bill sets out a step by step procedure for notification by merging airlines with the Canadian Transportation Agency, the Minister of Transport and the Competition Bureau. It places the responsibilities for final approval with the Governor in Council. This process thus allows for both competition and public interest issues to be addressed at the same time. In addition, the Bill enshrines into legislation all of the Undertakings agreed to by Air Canada in negotiations with the Competition Bureau before Christmas. It deems the merger to have been approved under this new procedure. As a result, the Undertakings will become legally binding and enforceable. Put simply, any contravention of these commitments can now result in fines and imprisonment.

Finally, the Bill provides a mechanism to allow the Commissioner and the Minister of Transport to share confidential information on airline mergers.

This will eliminate the current restriction that pertinent information required by both my office and that of the Minister of Transport can not be exchanged or compared. It will provide for a more efficient process and the sharing is only for the purpose of approving an airline merger.

However, this legislation alone does nothing to attract new competitors into the market. While the undertakings provided by Air Canada lower some of the barriers to entry - for example the freeing up of airport access -  they provide no guarantees that new entrants will come forward, or that existing carriers will expand.

I take some comfort from the fact that the Minister of Transport has liberalized Canada's international charter policy, essentially along the lines of our recommendations.

While these amendments, the policy changes made by the Minister, and the closing undertakings provided by Air Canada address many of the recommendations put forward by the Bureau, I remain concerned about the state of competition in Canada's airline industry.

Air Canada, post-merger

To illustrate my concerns, let me add some perspective. With this transaction – which has yet to be finalized – Air Canada will emerge with:

• more than 80% of domestic passengers;
• close to 90% of domestic passenger revenues; and
• a jet fleet exceeding 230 aircrafts.

Clearly, emerging carriers and new entrants flying domestic routes will face a formidable competitor. I don't harbour any fears about the future financial health of Air Canada. In early February, the airline reported the following financial results:

• a record high operating income of $503 million.
• an operating margin of 7.7 % - the highest in 27 years.
• a share price of more than $15 dollars, up from just $6 dollars last summer.

Competition Bureau recommendations

I maintain that a truly competitive environment can only be achieved by opening up our domestic market to competition.

You will recall that in my letter of October 22nd to the Minister, and in my discussion with you in my previous appearance before this Committee, I made three recommendations in this regard, one of them requires a regulatory change and the other two require legislative changes:

• that the limit on foreign ownership of voting shares of Canadian air carriers be raised by regulation to 49%, from the current 25 percent;
• that the government of Canada immediately attempt to negotiate reciprocal modified Sixth Freedom rights with the US for passenger service. This would allow US carriers to market -  as a single ticket -  travel from one Canadian city to another, via a US destination; and
• that the Canada Transportation Act be amended to allow for the licensing of Canada-only carriers, and that these carriers should be free of any Canadian ownership or control restrictions. Under this system, carriers would be restricted to serving points within Canada and would not be allowed to fly to a foreign destination.

Thank you for inviting me to be here today. I would be pleased to answer your questions.