As part of the Competition Bureau's (the "Bureau") continuing efforts to ensure a transparent and predictable enforcement policy, these guidelines set out the approach that the Bureau takes in investigating and enforcing new amendments and regulations (the "regulations") under the abuse of dominance provisions contained in sections 78 and 79 of the Competition Act (the "Act") with respect to the Canadian airline industry.¹
The Bureau views the airline regulations that were enacted following the restructuring of the Canadian airline industry as a 'code of conduct' for air carriers. By publishing these guidelines, the Bureau seeks to inform all industry stakeholders about the type of conduct which the Bureau is likely to challenge. The Bureau's objective in doing so is to facilitate as high a degree as possible of compliance with the airline amendments to the Competition Act and the related regulations, thereby minimizing the need for enforcement action under the Act.
Following its acquisition of Canadian Airlines in December 1999, Air Canada became the dominant domestic airline carrier with more than 80% of domestic passenger traffic and close to 90% of domestic passenger revenues. Given this degree of market dominance, the Government concluded that additional safeguards, beyond those available under the existing provisions of the Competition Act and undertakings provided by Air Canada as part of the merger approval process, were necessary to protect the competitive process.² This conclusion was based on the recognition that not only would a dominant carrier have an incentive to engage in anti-competitive behaviour, but that certain characteristics of the airline industry (e.g. highly mobile assets) would provide an opportunity for it to do so wherever existing competitors expand or new competitors emerge to challenge its dominance.
To address these concerns, the Competition Act was amended to provide authority for the Governor in Council to specify, by regulations under section 78(2)(a) of the Competition Act, anti-competitive acts or conduct on the part of a person operating a domestic airline service as defined in subsection 55(1) of the Canada Transportation Act. A further amendment contained in section 78(1)(k) relating to access to and supply of essential services and facilities was also introduced together with authority for the Governor in Council to specify by regulations services and facilities that are essential for the purpose of applying this provision. The regulations adopted under these provisions came into force on August 23, 2000.
In addition to these changes, the Act was further amended to allow the Commissioner of Competition to issue temporary orders in the airline industry under certain specified circumstances.³The purpose of this additional power contained in section 104.1 of the Act is to enable the Commissioner to intervene to prevent injury to competition, the elimination of a competitor or loss by a competitor of significant market share or revenue between the time when an inquiry under the Act has commenced and when the matter can be brought before the Competition Tribunal in the form of an application under section 79.⁴
The undertakings provided as part of the merger approval process are pro-competitive, legally binding obligations on the part of Air Canada. Any actions taken by Air Canada and its affiliates which are required by the undertakings would not constitute "anti-competitive acts" within the meaning of section 79 of the Competition Act or as defined in the airline regulations. However, compliance with the undertakings regarding the merger will not otherwise shield Air Canada from the application of section 79 or the regulations. In addition, implementation of airline specific amendments to section 78 and the enactment of the regulations does not limit the application of the other provisions of the Competition Act, including the existing provisions under sections 78 and 79, to Air Canada or any other air carrier.
The airline regulations refer to anti-competitive acts of a person operating a "domestic service". However, in keeping with the existing provisions of section 78, the Bureau approaches complaints directed against any carriers (domestic or foreign) on a similar basis and will challenge conduct before the Competition Tribunal based on the merits of each case.
The airline specific amendments and regulations under the Competition Act define the boundary between legitimate and unacceptable conduct on the part of dominant airline carriers. In drafting these guidelines, the Bureau recognizes the difficulty associated with distinguishing anti-competitive behaviour from aggressive, but beneficial, competition in the marketplace. The Bureau also recognizes the need to ensure that the application of these provisions does not unduly hinder the competitive process. The regulations defining anti-competitive acts by a dominant air carrier are not intended to inhibit Air Canada or any other carriers from competing for the business of Canadian air travellers. Nor are they intended to protect airline carriers from competition.

2. Anti-competitive Acts Defined by Legislation and Regulations

In summary, predatory, exclusionary and other conduct which have been defined by regulation as anti-competitive when carried out by a dominant airline carrier include the following:

(a) operating capacity on a route or routes at fares that do not cover the avoidable cost of providing the service;

(b) increasing capacity on a route or routes at fares that do no cover the avoidable cost of providing the service;

(c) using a low-cost second-brand carrier in a manner that is described in paragraph (a) or (b);

(d) pre-empting airport facilities or services that are required by another air carrier for the operation of its business, with the object of withholding the airport facilities or services from a market;

(e) to the extent not governed by regulations respecting take-off and landing slots made under any other Act, pre-empting take-off or landing slots that are required by another air carrier for the operation of its business, with the object of withholding the take-off or landing slots from a market;

(f) using commissions, incentives or other inducements to sell or purchase its flights for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market;

(h) altering its schedules, networks, or infrastructure for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in a market.

In addition, section 78(1)(k) of the Competition Act specifies an additional anti-competitive act under section 78:

the denial by a person operating a "domestic service", as defined in subsection 55(1) of the Canada Transportation Act, of access on reasonable commercial terms to facilities or services that are essential to the operation of an "air service" as defined in that subsection, or refusal by such a person to supply such facilities or services on such terms.

Facilities and services that are essential to the operation in a market of air service are defined by regulations as those:

(a) that are required in order to provide a competitive air service,

(b) that cannot reasonably or practicably be purchased, acquired, provided or replicated by another air carrier on its own behalf,

(d) that can be feasibly provided to another air carrier, having regard to operational or safety considerations, or legitimate business justifications of the air carrier referred to in paragraph (c).

In addition, the regulations specify that for the purpose of the preceding paragraph,

facilities and services may include, but are not limited to, take-off and landing slots, interline arrangements, airport gates, loading bridges, counters and related airport facilities, maintenance services, and baggage handling infrastructure, equipment and services.

It is important to note that, consistent with section 78 of the Competition Act, the above list of anti-competitive acts is non-exhaustive for the purpose of section 79, the provision dealing with abuse of a dominant market position. In other words, the Bureau is not confined to challenging only those practices defined in the regulations or in section 78. Similarly, the Tribunal is not limited to only making orders about these practices.
The abuse of dominance provisions provide broad powers of remedy to the Competition Tribunal. Where the Tribunal finds that the elements of section 79 are met, it may make an order prohibiting a respondent firm or firms from engaging in the practice of anti-competitive acts. In addition, or alternatively, if the Tribunal concludes that such an order may not be adequate to restore competition, it may make an order directing any such actions, including the divestiture of assets or shares, as are reasonable and necessary to overcome the effects of the practice of anti-competitive acts.
The role of the Competition Bureau is to carry out investigations under the Competition Act having regard for the public interest associated with competition. With the exception of the Commissioner of Competition's limited authority to issue temporary orders in respect of the airline industry, the Bureau does not have the authority to directly compel change in business behaviour. In order to do so, it must make an application to the Competition Tribunal and take on the role of a litigant.

3. The Abuse of Dominance Provision

Abuse of a dominant position occurs when a dominant firm in a market, or a dominant group of firms acting together, engage in conduct that is likely to eliminate or discipline a competitor or to deter future entry by new competitors, resulting in competition being substantially prevented or lessened. Section 79 is not intended to prohibit dominance or the presence of market power. Rather, the section seeks to address the "abuse" of a dominant market position to substantially prevent or lessen competition.⁵
Section 79 sets out the following three essential elements, all of which the Competition Tribunal must find to exist for it to grant an order:

one or more firms are dominant in that they substantially or completely control a class or species of business;
the firm, or firms, have engaged in or are engaging in a practice of anti-competitiv acts;
the practice of anti-competitive acts has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market.

When the Bureau receives a complaint, a determination will be made as to whether the complaint is likely to warrant a formal inquiry under the Act. Making this determination requires reason to believe that a practice of anti-competitive acts has occurred which is likely to result in a substantial prevention or lessening of competition. Assessing the requisite reason to believe will usually require the provision of information from the complainant as to the specific conduct being complained about and its impact on competition. Once the Bureau establishes grounds for an inquiry, the Bureau can invoke formal powers under the Act to require the production of the relevant information from all market participants.

3.1 Dominance in the Context of the Canadian Airline Industry

The first factual question that the Bureau must address when examining an allegation of abuse is whether an air carrier is dominant in that it "substantially or completely controls, throughout Canada or any area thereof, a class or species of business."⁶ For the purposes of enforcing section 79, the Bureau treats the elements "class or species of business" as being synonymous with a relevant product market. Likewise, it sees the element of "throughout Canada or any area thereof" as being synonymous with a relevant geographic market.⁷
The Bureau considers "substantially or completely control" in section 79, or dominance as it is commonly referred to, to be synonymous with market power. To determine whether a firm possesses market power, the Bureau assesses a number of qualitative and quantitative factors, the most important of which are market share and barriers to entry. The Bureau's view, given the high barriers to entry, is that a national carrier that dominates the overall airline industry in Canada establishes the basis for a prima facie finding of dominance regardless of its actual presence in any one regional or local market. Barriers to entry include regulatory barriers related to foreign ownership and cabotage.

3.2 Market Definition

When assessing whether a particular airline is dominant the Bureau examines whether there are existing competitors that are likely to constrain the ability of the firm or firms to profitably raise prices, maintain high prices or otherwise restrict competition. Identifying all competitors faced by an airline requires identifying both the geographic areas over which firms are competing (geographic markets) as well as the types of competing services (product markets).

3.2.1 Geographic Market

An origin-destination city-pair will generally constitute a geographic market for the purposes of analysing the airline industry.⁸ While the relevant geographic market may frequently contain only one origin airport and one destination airport, this is not always the case. When two airports are in reasonable proximity to each other (e.g. Pearson International Airport and Hamilton International Airport), it is possible that travel to or from one airport could be considered to be a substitute for travel to or from the other for some portion of travellers.
Whether or not travellers consider two airports to be substitute origins or destinations depends on several factors, including how passengers are distributed geographically in the area, the ease of travel to each airport and the amount of time required to travel to each airport, the airlines serving each airport, the flight schedules at each airport, the schedules and availability of connecting flights and differentials in available fares. In addition, the origin or destination area is more likely to include multiple airports when the distance between the origin and destination areas is greater. For example, while customers may be willing to drive for one hour to an alternative airport when the time of air travel is five hours, the same passengers may be unwilling to drive the hour if the flight time is less than an hour.

3.2.2 Product Market

As a rule, it is expected that air transport will be considered to be in a separate market from other modes of transportation unless the distance to be travelled is very short.⁹ For example, a passenger might substitute bus for air travel when travelling from Ottawa to Montreal, but would be unlikely to substitute bus for air travel when travelling from Ottawa to Vancouver. In addition, the Bureau may consider business travel as a different market segment than leisure travel due to their different demand characteristics.
Depending upon the time-sensitivity of passengers, the overall length of the trip and the fare differential, passengers will be less likely to substitute one-stop or multiple-stop service for a non-stop service . Hence, these services could be found to constitute separate product markets.

3.3 Practice of Anti-competitive Acts

Having defined relevant product and geographic markets and determined that dominance exists, the second element required under section 79 is to establish that the firm or firms in question have engaged in a "practice of anti-competitive acts." The word "practice" is normally taken to mean more than an isolated act. Within the meaning of section 79 and as reflected in the jurisprudence, a "practice" can encompass one occurrence that is sustained or systematic over a period of time, or a number of different acts taken together that have an anti-competitive effect.

4. Anti-competitive Acts in the Airline Industry

What follows is a discussion of the Bureau's interpretation of the specific airline anti-competitive acts referred to in section 78(1)(j) and 78(1)(k) of the Competition Act and the Bureau's approach to ascertaining whether they have taken place.

4.1 Operating/Increasing Capacity at Fares Below Avoidable Cost

The Regulations 1 (a), (b) and (c) define the following behaviour as anti-competitive acts:

(a) operating capacity on a route or route at fares that do not cover the avoidable cost of providing the service;

(b) increasing capacity on a route or routes at fares that do not cover the avoidable cost of providing the service;

(c) using a low-cost second-brand carrier in a manner that is described in paragraph (a) or (b).

For the airline industry, the regulations state that operating or increasing capacity on a route or routes, at fares that do not cover the avoidable cost of providing the service constitutes an anti-competitive act.
The pricing and capacity decisions of a dominant carrier will have an anti-competitive effect if they result in higher prices and reduced output due to the elimination or disciplining of a rival, or the exclusion of a potential rival. For example, a dominant airline may offer a large number of seats at low fares on a route on which it faces competition. As a result of this conduct, one or more of the airline's competitors may be driven from the market. Such conduct may also deter remaining airlines from engaging in aggressive fare competition, or deter other airlines from entering routes on which the incumbent airline operates. As another example, a dominant airline may increase capacity on a route in such a way as to attract passengers from a rival carrier, while not attracting a sufficient number of passengers to cover its avoidable costs.
In the Bureau's experience most complaints under regulations 1 (a), (b) and (c) will come from established carriers or new entrants alleging that the dominant firm has responded to their entry or expansion in a market by "targeting" them with lower prices or some other competitive variable. While the Bureau closely examines allegations of targeting, the focus of the Bureau's inquiries is whether the revenues earned from passenger fares, cargo services and other sources are sufficient to cover the avoidable cost of the dominant carrier in providing the service.
The practice of operating capacity at fares that do not cover the avoidable cost of providing the service does not require that the fares charged by the dominant airline be lower than the fares set by the competitor in order to be considered anti-competitive. Airlines differ in many ways, such as in the quality of service they provide, the schedule they offer, and their frequent flyer programs. The Bureau does not consider that matching the dollar price of a competitor for travel on a specific flight is the same as charging the same real price for the same quality and quantity. An airline with a superior frequent flyer program or schedule could meet the dollar price of a competitor, and in fact force the rival to set substantially lower fares to attract customers. Price matching can be anti-competitive, where the revenues earned by the service fall below the avoidable cost of providing the service.

4.1.1 The Avoidable Cost Test

To apply the avoidable cost test, the Bureau compares the revenues earned as a result of providing a service to the avoidable costs of providing that service. Avoidable costs refer to all costs that could have been avoided by the dominant airline had it chosen not to offer the service in question. If the revenues the dominant airline earns from the service do not cover the avoidable costs of a particular service, then the Bureau would conclude that the airline is engaging in anti-competitive conduct.
In the airline industry, the relevant unit of capacity for cost and revenue analysis is a flight. Carriers adjust capacity by adding and subtracting flights or by changing the size of the aircraft used to provide the service. Carriers can and do cancel badly performing flights such as those with low load factors and those with revenues that do not cover cost. Badly performing flights are sometimes removed from a route even if the overall route is profitable. Alternatively, a carrier could maintain an unprofitable flight on an otherwise profitable route for the purpose of drawing passenger traffic away from a rival carrier. The latter act could lead to the disciplining or elimination of a competitor from the route.
Under the avoidable cost test, the Bureau considers whether the revenue from each flight on a route covers the avoidable cost of the flight on a daily basis for a period of at least a month. For the purpose of these Guidelines, the term 'flight' is used by the Bureau to refer to departures on a city-pair route which occur at identical or similar times.¹⁰ Because of the common costs incurred in providing airline service, the Bureau does not consider it appropriate to conduct the avoidable cost test by comparing a particular fare with the avoidable cost of a flight averaged over all the seats in the aircraft.
For example, suppose that an airline has responded to entry by adding a new flight to a route on which it has previously offered service. In computing avoidable cost, the Bureau would consider all costs that the airline had to incur to offer the additional flight. These would include all costs that vary with the number of passengers served, as well as those costs that need to be incurred to operate the flight but that do not vary with the number of passengers carried on the flight.¹¹
As a general rule, rather than focus on a specific fare class, the cost-revenue analysis under the avoidable cost test will be applied to flights. In this regard, the Bureau recognizes that a carrier such as Air Canada has numerous fare categories on any given flight. Rather than focus on a specific fare class, the relevant issue is whether the total revenue earned from a flight is sufficient to cover the avoidable cost of providing the flight.
Avoidable costs that vary with the number of passengers served would include costs such as passenger commissions, some portion of fuel and oil expense, food and supplies. Flight specific fixed costs are also avoidable unless they would still be incurred or could not be reallocated in the event the flight is cancelled. These would include base fuel, flight and cabin crew costs, aircraft costs, navigation fees, landing fees, maintenance labour and aircraft service labour.
Avoidable costs would not include any common costs that the airline needs to incur to offer service beyond the flight in question. For example, common costs may include fixed overhead costs, such as maintenance facilities, corporate offices, and executive salaries that are required to offer any service from a particular city.
Whether a cost is considered avoidable will depend on the length of time required by the airline to adjust its schedule and its capacity in the market. In some cases, an incumbent carrier might anticipate where and when entry will occur several months in advance of the actual commencement of the entrant's service. An incumbent carrier might add a flight in a market in anticipation of a rival carrier's entry. Or a flight might be maintained in a market when it would otherwise have been cancelled in the absence of an entry threat. In these cases, the incumbent carrier's aircraft costs and other associated flight specific costs will likely be regarded as avoidable for a flight.
With respect to the Afares that do not cover the avoidable cost of providing the service", the Bureau examines whether the revenue generated by the fares for a given flight cover the avoidable cost of the flight. The Bureau carries out its revenue/avoidable cost comparison on a daily basis. For a given flight the Bureau considers whether that flight's average daily revenues over a month cover its avoidable costs, as well as the number of times that flight's revenues did not cover its avoidable costs.¹²

4.1.2 Avoidable Cost Categories

The following table illustrates how the Bureau is likely to categorize various costs as either avoidable or unavoidable with respect to the airline's decision to cancel or add a flight. As shown below, costs are grouped into four general categories: outright avoidable, avoidable through redeployment, potentially avoidable and unavoidable. Note that some costs are not exclusive to one category. For example, aircraft costs could be avoidable either outright through sale or through redeployment to other routes.

Cost Category	Examples	Discussion
Outright Avoidable	- Travel Agent Commissions - Fuel and Oil expenses - Navigation Fees - Landing Fees - Aircraft costs	The airline would no longer incur the cost for these items in the event that it cancelled a flight. Similarly, if a flight was added these costs would need to be incurred.
Avoidable through redeployment	- Flight crew labour - Cabin crew labour - Aircraft costs	These costs are avoidable in the sense that upon cancelling a flight, the airline would likely redeploy the aircraft and crew to an alternative route. Similarly, if a flight was added the airline would likely redeploy the needed aircraft and crew from another route.
Potentially Avoidable	- Maintenance labour - Ticketing agent labour - Baggage handler labour - Reservation labour	To the extent that these costs are specific to a flight and could be either avoided outright, or avoidable through redeployment of labour to another route, they would be considered avoidable.
Unavoidable	- Executive salaries - Building expenses - General overhead	These costs are not specific to a flight and thus are unavoidable in the event that a flight is added or cancelled.

4.1.3 Fares and Revenues

A flight's revenue consists in part of revenue from passengers just flying between the airports serving the route under examination. It also consists of the prorated portion of revenue obtained from passengers that are travelling beyond the destination airport serving the route under examination or that begin a trip at an airport different form the origin airport serving the route in question. The proration can be calculated on the basis of the proportion of total distance travelled represented by the origin-destination route in question. It can also be calculated as the proportion of total (separate segment) economy fare revenue represented by the economy fare of the origin-destination route in question. The Bureau generally uses a carrier's prorate formula to allocate revenue generated by through or connecting passengers to a particular route provided the Bureau can verify that the formula is normal business practice and consistent with general industry practice. Finally, the Bureau also includes cargo and miscellaneous (e.g. bar service) revenue in its calculation of revenue generated by a flight.

4.1.4 Low-Cost Second-Brand Carrier

In the case of a dominant carrier introducing a low-cost second-brand carrier, as described in regulation 1 (c), the Bureau will take a similar approach to determine whether or not it is operated below avoidable cost. Moreover, should the Bureau receive a complaint that leads it to believe that the dominant air carrier is using a low-cost second-brand carrier to engage in an anti-competitive act, it will closely examine the low-cost carrier's costs to determine whether it is receiving the benefit of any cross-subsidy from the mainline carrier for services or other inputs to its operations that would facilitate anti-competitive behaviour.
A cross subsidy from the mainline carrier could take the form of cost shifting from the low-cost carrier to the mainline carrier. This would result in an understatement of the low-cost carrier's true economic costs of operation. It could be done to signal a potential entrant that its costs are lower than they really are, or to pass an avoidable cost test. The Bureau compares a low-cost second-brand carrier's costs to those of the mainline carrier with an eye to determining whether reported cost differences are real.

4.2 Exclusionary Conduct

Regulations 1 (d), (e) and (h) define the following exclusionary conduct as anti-competitive-acts:

Exclusionary conduct is conduct by an incumbent firm to keep potential rivals from entering its markets or to keep existing rivals from expanding in one or more markets. For example, the incumbent firm may take control, on a pre-emptive basis, of essential inputs, services, or facilities required by a rival firm to compete with the incumbent, raising a rival's costs of providing a good or service, or contracting with customers so as to preclude them from becoming customers of a rival firm.

4.2.1 Pre-empting Airport Facilities

In the Bureau's view, the anti-competitive act defined in regulation 1 (d), "...pre-empting airport facilities or services that are required by another air carrier for the operation of its business...", is meant to apply when a dominant carrier obtains access to and control of certain airport facilities or services (e.g., gate space, counter space, baggage handling facilities) before a competing carrier has an opportunity to enter into or expand in the market. "Market pre-emption" usually carries with it the idea that an investment is being made before it can yield a positive return on a flow basis. Hoarding of inputs essential for the production of a good or service, in order to keep them from being used by a potential rival, would be a pre-emptive act if the inputs were not immediately contributing towards higher returns for the firm. In other words, the firm would have acquired the essential inputs or production capacity in excess to its present requirements in order to keep new entrants out of the market. By pre-empting the market and keeping new firms from entering, the dominant carrier will be able to charge higher fares and earn higher profits than would have been possible if new entry did occur.

4.2.2 Pre-empting Takeoff and Landing Slots

The anti-competitive act defined in regulation 1 (e), ". . . pre-empting take-off and landing slots that are required by another air carrier for the operation of its business . . .", is similar to anti-competitive act described in the previous paragraph in that pre-emption is the act. However, airport slots have been distinguished from airport facilities and services, in part, because they may be regulated. An airport slot is a scheduled time of arrival or departure available or allocated to a particular airline on a specific date at an airport. A dominant carrier's pre-emption of slots would entail acquiring control of slots that it had no immediate use for, but that it wished to hold in order to keep entrants out of the market. If the carrier had to use the slots in order to maintain control of them, it might be able to schedule some service in the slots just to occupy them (even if the service operates at a loss).
Pre-emption of the latter type could be referred to as pre-emptive scheduling. It involves the expansion of capacity in the market at a time before it can generate at least a competitive rate of return on a flow basis. In the absence of potential entry by a new carrier into the market, the incumbent carrier would have no incentive to expand capacity prematurely because its overall profits would be higher by delaying the increase in service until market growth justified it. It is the threat of new entry that drives the incumbent to expand its capacity, and the capacity expansion acts as an entry barrier. In the presence of a "use it or lose it" slot allocation policy, the Bureau determines whether a dominant carrier has preempted take-off and landing slots on the basis of whether the carrier is covering the avoidable cost of offering the service in the slots for which pre-emption is alleged. It should be noted that for pre-emption of take-off or landing slots to be an anti-competitive act, it must be done with the object of withholding the take-off or landing slots from a market.
Pre-emption of slots could adversely affect competition at airports where the preempted slots are arrivals or departures during the peak travel periods, or at airports that are slot constrained. Currently, Toronto's Pearson Airport is the only Canadian airport that faces slot constraints. However, slot constraints could develop at Vancouver or Dorval airports in the future.

4.2.3 Altering Schedules, Networks or Infrastructure

Finally, regulation 1 (h) states that it would be anti-competitive for the dominant carrier to alter its schedules, networks, or infrastructure for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market. The Bureau does not regard changes in the dominant firm's network, schedule or infrastructure facilities in the normal course of business as necessarily or even usually anti-competitive. However, the Bureau would be concerned about changes in the dominant carrier's network, schedule or infrastructure facilities for which an anti-competitive purpose and effect had been identified and for which no valid business reason had been articulated.
As an example, assume a rival carrier has negotiated an interline arrangement with the dominant carrier. Assume further that the rival carrier required the feed traffic provided by the interline arrangement in order to make its service on a particular route profitable. In addition, assume that the rival carrier scheduled its flight and began marketing its service on the route given certain assumptions about the dominant carrier's announced schedule. If the dominant carrier altered its schedule subsequent to the interline arrangement in a way that made the rival's service unprofitable, and if the change in schedule was not motivated by some valid business reason, then it may be an anti-competitive act as set out in regulation 1(h).

4.3 Essential Facilities and Services

The new anti-competitive act added to section 78 also defines the following form of exclusionary conduct as an anti-competitive-act:

78(1)(k) the denial by a person operating a "domestic service", as defined in subsection 55(1) of the Canada Transportation Act, of access on reasonable commercial terms to facilities or services that are essential to the operation in a market of an "air service", as defined in that subsection, or refusal by such a person to supply such facilities or services on such terms.

And section 2 (1) of the airline regulations provide that:

For the purpose of paragraph 78(1)(k) of the Competition Act, facilities and services that are essential to the operation in a market of an air service, as defined in subsection 55(1) of the Canada Transportation Act, are those:

(a) that are required in order to provide a competitive air service;

(b) that cannot reasonably or practicably be purchased, acquired, provided or replicated by another carrier on its own behalf;

(c) that are effectively controlled by the air carrier who denies access to them or refuses supply of them; and

(d) that can be feasibly provided to another air carrier, having regard to operational or safety considerations, or legitimate business justifications of the air carrier referred to in paragraph (c).

Section 2 (2) of the airline regulations state that for the purpose of the above paragraph:

Raising a rival's costs could be the outcome of the anti-competitive act defined by paragraph 78(1)(k), "the denial by a person operating a 'domestic service' . . . of access on reasonable commercial terms to facilities or services that are essential to the operation in a market of an 'air service' . . . or refusal by such a person to supply such facilities or services on such terms."¹³ This type of practice could lead to either an increase in a competing carrier's fixed costs or variable costs of operation. With respect to a possible impact on fixed costs, a situation could develop at a particular airport where a dominant carrier contracts for all or most of the available space within the terminal facility, including passenger service counters and gates. The carrier may be willing to sublease space to a rival carrier, but only at a lease rate that would either make the rival's operation unprofitable or inhibit the willingness of the rival to expand its service. A dominant carrier could also have third party agreements that give it exclusive access to certain airport services. Again, a competing carrier's fixed costs could be raised relative to what they would have been in the absence of the third party agreements, assuming that the costs of the services do not vary with the number of passengers being carried.
With respect to a possible impact on variable costs, the dominant carrier might have third party service agreements that grant it exclusive access to certain airport services that are necessary to offer an air service, but that are not available elsewhere in the market. A rival carrier would only be able to commence service by either purchasing third party services through the dominant carrier or providing the services for itself. If the prices the third party charged for these services, or the costs of providing services for itself are sufficiently high, the rival carrier could find it either unprofitable to serve the market at all or to expand its service. The exclusive third party service agreement, in conjunction with the refusal to make the service available on reasonable commercial terms, could constitute an anti-competitive act.

4.3.1 Criteria to Identify Essential Facilities and Services

In order for a carrier to be in possible contravention of 78(1)(k), the denial of access must be "on reasonable commercial terms" and it must be to facilities or services that are essential to the operation of an air service. The airline regulations contain four criteria that the Bureau will use to determine whether a service or facility is essential to the operation in a market of an air service. They also contain a non-exhaustive list of facilities and services that may be essential.

4.3.1(a)Essential to Provide Service

First, the facility or service must be required in order for the air carrier to provide a competitive air service. In other words, it must not be possible to offer the competitive air service without the facility or service for which access is being denied. In every case of alleged denial of access, the Bureau examines whether the carrier being denied access could have arranged a substitute facility or service on reasonable terms. For example, in the case of a complaint that a carrier is denying access to interline arrangements on reasonable commercial terms, the Bureau will consider whether the complainant could have provided a competitive air service in the market without the interline arrangement (e.g. with direct service).
The inclusion of the phrase "competitive air service" means that a carrier cannot defend its denial of access to an essential facility or service on the grounds that the facility or service is not required for the operation of an air service. For example, if passengers expect a carrier to provide a certain service, such as flights from airport A, and would not view a carrier as offering an acceptable substitute at an alternative airport B, then denial by the dominant firm of access to the airport A could imply the inability to operate a competitive air service. In addition, if the complainant carrier can only obtain access to the service on unreasonable commercial terms or at unreasonable times, then that could also imply the inability to operate a competitive air service.
The phrase "competitive air service" is not meant to imply identical air service. Nor is the dominant carrier expected to subsidize the provision of an essential facility or service in order for an air carrier to provide a competitive air service. Such an expectation would contradict regulation 1(d), which refers to the feasibility of providing the facility or service, as well as 78(1)(k) itself, which refers to access on reasonable commercial terms.

4.3.1(b)Cannot be Reasonably Replicated or Acquired

The second requirement for a service or facility to be essential is that it cannot reasonably or practicably be purchased, acquired, provided or replicated by another carrier on its own behalf. The Bureau seeks to determine whether the service or facility for which access is being denied is available anywhere in the market on reasonable commercial terms. The Bureau also considers whether the complainant carrier could have provided the service or facility for itself on reasonable terms. For example, a carrier might complain that the dominant carrier is the only provider of baggage handling or maintenance services at a particular airport facility, and that these services cannot be reasonably purchased in the market. In the event of this type of complaint, the Bureau needs to consider whether baggage handling or maintenance services could be replicated on reasonable terms by the complainant carrier.
The ability to replicate a service could depend on who has effective control of the facility associated with the service. If the dominant carrier has contracted for all available facilities at a given airport, a rival carrier might be unable to replicate or provide a service for itself at that airport. For example, if the dominant carrier has contracts for all of the gate space at an airport, or all of the airport related baggage equipment (e.g. the baggage conveyor belts), then a rival carrier might be unable to offer air service from that airport.

4.3.1(c)Controlled by a Dominant Carrier

The third requirement for a service or facility to be essential is that it be effectively controlled, directly or indirectly, by the air carrier refusing supply or access. This requirement makes it clear that simply because the dominant carrier is using a particular facility or service does not imply that it has effective discretionary control over the use of the facility or service. A dominant carrier could refuse to supply a facility or service because it is not within its contractual authority to grant access.

4.3.1(d)Feasible to Provide

The fourth requirement for a service or facility to be essential is that it can be feasibly provided to another air carrier, having regard to operational or safety considerations, or legitimate business justifications of the air carrier denying access or refusing supply. In the case of an alleged refusal to supply an essential facility or service, the dominant carrier might be able to defend its refusal on valid business grounds.
While it is difficult to anticipate what valid business reasons might be offered for the refusal to supply, several examples can be suggested. For instance, a dominant carrier might try to defend its refusal to supply on the grounds that it does not have sufficient capacity in place to meet its own requirements as well as those of the rival carrier. Meeting the rival carrier's request for service might require the dominant carrier to invest in new facilities, and such an investment might be unreasonable to expect. Alternatively, the dominant carrier could be required to cancel its own service in order to meet the rival's request for service, and such a requirement might be unreasonable. A second valid business reason for refusal to supply could involve legitimate concerns regarding the safety procedures of a rival carrier. If the situation requires, the Bureau will obtain the expertise of an independent third party to assess the validity of claims advanced by a dominant carrier that it is infeasible for it to provide access.

4.3.2 Application of the Essential Facilities and Services Regulations

As with other acts in section 78, the denial of access on reasonable commercial terms to facilities or services that are essential to the operation in a market of an air service is only an abuse of dominance if the practice has had, is having or is likely to prevent or substantially lessen competition in a market.
The behavior described by 78(1)(k) could also be challenged under section 79 of the Competition Act where the act involves an airport authority that refuses to make available unused airport facilities or services for the operation of a competing carrier. A dominant air carrier in a market could attempt to contract with an airport authority to obtain exclusive access to the airport facility and services provided by the airport, paying a price higher than the airport authority would be able to obtain from a competing carrier. This could prevent the competing carrier's entry in a market because it would not be feasible for the competing carrier to construct its own airport facility.
Over time, all facilities at the airport may have been taken up by the various carriers serving the airport. At some point, a new competing carrier may only be able to commence operations at the airport if (a) the airport expands (but this decision may not be under its control), or (b) it is able to obtain unused airport facilities, such as underutilized gates, on reasonable commercial terms, from the carrier(s) or airport authority that controls them. Then a denial of access by the dominant carrier to essential facilities or services on reasonable commercial terms could be an anti-competitive act under section 78.

4.4 Marketing Conducts

The Regulations 1 (f) and (g) define two other anti-competitive acts as follows:

(g) using a loyalty marketing program for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market.

Travel agent commissions and frequent flyer programs are instruments that can be used by airlines to build a loyal base of customers and travel agents. Frequent flyer programs award points to travellers which can be later redeemed in the form of travel on other routes. Because the number of points the customer has with a specific airline depends on the amount of business the customer has given to that airline, the customer has an incentive to fly as much as possible with the same carrier. In addition, such frequent flyer programs will induce consumers to choose to fly on airlines with large networks that provide a larger number of routes on which the frequent flyer points can be redeemed. All of these features contribute to the ability of a frequent flyer program to induce loyalty from consumers.
Similarly, airlines can use the structure of travel agent commissions, and in particular commission overrides, to reward travel agents for booking flights with the airline. A typical commission override program grants an increased commission to a travel agent provided that the agent books a specified percentage of its passengers on the carrier with which it has the agreement. This commission structure gives travel agents the incentive to book as many flights as possible on the same airline.

4.4.1 Frequent Flyer Programs

An airline can potentially use a passenger loyalty programs such as frequent flyer programs to foreclose a potential or existing rival. For example, suppose that the dominant airline faces new entry on a particular route. As part of a campaign to eliminate the new rival, the dominant airline may increase the frequent flyer awards on this route beyond what it would normally offer on similar routes on which it faces competition. This increase would have the same effect as lowering fares on the route; a package of greater value is being offered for the same price. If the increase is justified only because it eliminates or disciplines the new entrant, then it would be considered anti-competitive.

4.4.2 Travel Agent Commission Overrides

Similarly, travel agent commissions can be used as an instrument to foreclose a potential or existing rival. In response to entry on a route, the dominant airline could increase the commission bonus earned by travel agents that book a large percentage of their passengers with the dominant carrier. Where the increase in bonus commissions is sufficient to induce agents to book flights of the offering carrier with the consequent effect of eliminating or disciplining a competitor, the Bureau will consider the increased offering to be an anti-competitive act.

4.4.3 Corporate Discount Programs

Besides commission overrides that may be anti-competitive, regulation 1 (f) permits the Bureau to challenge certain types of corporate discount programs that might be anti-competitive. It may be possible, for example, for a dominant incumbent carrier to contract with firms, public institutions, or governments to be the preferred air carrier for their employees, offering discounts as inducements for such loyalty. Such contracts could be of concern if they cover a sufficiently large part of the market so as to have a material impact on competitive airline operations. These types of contracts could affect the ability of a rival carrier to attract sufficient passengers to make its operation profitable. They could also have an impact on a dominant carrier's ability to cover its avoidable costs.

The Bureau anticipates that the manipulation of frequent flyer rewards, travel agent commissions, and corporate discount programs would most likely be anti-competitive when their manipulation is part of an overall anti-competitive strategy. Therefore, the Bureau considers whether loyalty programs are being employed in order to contribute to or enhance the effects of other anti-competitive strategies listed in the regulations. However, the Bureau does not rule out the possibility that the manipulation of frequent flyer programs and travel agent commissions could be sufficient to achieve an anti-competitive aim.
It should be noted that for the acts defined in regulations (f) and (g) to be anti-competitive, there must be evidence to indicate that the dominant carrier is engaging in them "for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market". The mere use of commissions, incentives, or other inducements to sell or purchase its flights, and the mere use of loyalty marketing programs, are not in and of themselves considered anti-competitive acts under the airline regulations.
Finally, with the exception of the first three regulations dealing with anti-competitive pricing, all of the other regulations require evidence of some anti-competitive purpose or object. In this regard, the Bureau would note that the jurisprudence under section 79 has held that the element of anti-competitive intent or purpose can be established either with direct evidence or by inference based on the likely effect of a practice on competition in the particular circumstances of a case.

4.5 Other Anti-Competitive Practices

In addition to the anti-competitive acts defined for the airline industry by regulations and in paragraphs 78(1)(j) and (k), section 78 provides a non exhaustive, illustrative list of anti-competitive acts as follows:

(a) Margin squeezing by a vertically integrated supplier against a customer-competitor;

(b) Acquisition by a supplier of a customer to foreclose a competitor;

(c) Freight equalization on a competitor's plant to eliminate or impede competition;

(d) Selective use of fighting brands to discipline or eliminate a competitor;

(e) Pre-emption of scarce facilities or resources required by a competitor;

(f) Buying up products to prevent price erosion;

(g) Adopting incompatible specifications to prevent entry or eliminate a competitor;

(h) Requiring or inducing suppliers to sell only or primarily to certain customers;

(i) Selling articles below acquisition costs to discipline or eliminate a competitor.

The anti-competitive practices described above will be discussed in more detail in the forthcoming general enforcement guidelines to be published by the Bureau with respect to sections 78 and 79. It is important to note that the general list of anti-competitive practices contained in section 78 can also apply to the airline industry.

5. Substantial Prevention or Lessening of Competition

4. In order to establish grounds for an order under section 79, the Tribunal must be satisfied that the practice of anti-competitive acts is likely to result in a substantial prevention or lessening of competition (i.e. the third essential element in section 79). Anti-competitive acts involve actions which are either predatory, exclusionary or disciplinary in nature. The meaning of "lessening competition substantially" is established in case law. The question to be decided is whether the anti-competitive acts engaged in by a firm or group of firms are likely to serve to preserve, entrench or enhance their market power by eliminating or disciplining a competitor or deterring entry into the market.
5. The Bureau's approach in assessing anti-competitive activities in the airline industry focuses on determining whether the activities are likely to have the following effects: (i) raising rivals' costs or reducing rivals' revenues, (ii) foreclosing existing or potential rivals from essential services or facilities, and (iii) eliminating or disciplining competitors.

6. Conclusion

This document outlines of the Competition Bureau's approach to enforcing the abuse of dominance provisions contained in sections 78 and 79 of the Competition Act and regulations enacted under section 78 (2) with respect to the airline industry.
The Bureau cannot, however, provide guidance for every situation and the circumstances of each case will ultimately determine how the Bureau will exercise its enforcement discretion. Under its Program of Advisory Opinions, the Bureau has historically provided its views on proposed actions by businesses. Consequently, airline carriers can seek advice on whether or not a proposed course of action would raise an issue under the Competition Act.
For further information, contact the Competition Bureau:

Information Centre
Competition Bureau
Industry Canada
50 Victoria Street
Hull, QC K1A 0C9

Tel.: (819) 997-4282
Toll free: 1 800 348-5358
TDD (for hearing impaired): 1 800 642-3844

Fax: (819) 997-0324
Fax on demand: (819) 997-2869

Web site: www.cb-bc.gc.ca

E-mail: compbureau@cb-bc.gc.ca

Annexes

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Proactive Disclosure

Enforcement Guidelines on the Abuse of Dominance in the Airline Industry

Table of Contents

1. Introduction