TRAN Committee Meeting

STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, April 20, 1999

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[English]

The Vice-Chairman (Mr. Roy Cullen (Etobicoke North, Lib.)): Ladies and gentlemen, I'd like to call the meeting to order. This is meeting 52 of the Standing Committee on Transport.

Today we're about to begin our study of the competitiveness of Canada's air transportation system. We have with us, from the Department of Transport, Mr. Louis Ranger, assistant deputy minister, policy; Brian Carr, acting director general, air policy; Valérie Dufour, director, domestic air policy; and John Forester, director general, environmental affairs.

Before we get into the presentation, I would like to deal with a housekeeping item. We've all seen the terms of reference for the study. The committee staff have prepared a one-page abridged summary. This is sent out to potential witnesses to describe the terms of reference for the study. I think you have it in front of you.

Could I have a motion to adopt the abridged terms of reference?

Mr. Cannis.

Mr. John Cannis (Scarborough Centre, Lib.): I so move.

(Motion agreed to)

The Vice-Chairman (Mr. Roy Cullen): Thank you.

I'd like to turn it over to Mr. Ranger. I gather you have a presentation with your officials of roughly an hour, to teach us more about the air transportation sector. Then we'll entertain questions. With that in mind, Mr. Ranger, please proceed.

[Translation]

Mr. Louis Ranger (Assistant Deputy Minister, Policy, Transport Canada): Members of the committee, we are obviously very pleased that you have invited Transport Canada to appear before you as you are beginning your study on the competitiveness of Canada's air transportation system.

[English]

Mr. Chairman, you've already introduced my three colleagues from Transport Canada. I would also like to introduce Mr. Eric Mainville. He is our senior economist who also specializes in the field of air transportation. He will be available for questions later.

We basically see our role today as one of providing information that will form a backdrop against which you can carry out your review and reach your own conclusions about the competitiveness of our airline industry. Our intention, as you mentioned, Mr. Chairman, is to use the first hour to take you through some of the fundamentals of how the air industry operates in this country. We will focus on the elements that we believe are relevant to the issues identified in your study outline. Much of what we will present to you today was guided by that initial outline.

With your permission, I will first ask Valérie Dufour to take you quickly through the current regulatory framework and provide you with a picture of our domestic market environment. Then I will ask Brian Carr to look at the international side of the picture, focusing first on the transborder market, which is very significant, and then on the remainder of the international sector.

Lastly my colleague, John Forester, will take about five minutes to address the question you had at the end of phase one of your outline, which dealt with the Kyoto commitments or targets. John is responsible for the environmental issues of the department. Then we can use the last hour to answer any questions you may have.

Mr. Chairman, as I mentioned to you briefly before we started, we have here what I would say are people who are among the top experts in this country on air transportation issues. They will take you through the presentation.

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I've asked them to keep it as short as possible, so there is much more material in the written presentation than they will actually cover. I seek your guidance, Mr. Chairman. If you think we're going into too much detail, please indicate to us the direction you would like us to take.

I leave it to you as to whether you want to allow some quick questions of clarification as they take you through their presentation. We're in your hands in terms of how this will unfold. I will then ask Valérie Dufour to start with the domestic sector.

Ms. Valérie Dufour (Director, Domestic Air Policy, Transport Canada): Good afternoon, Mr. Chairman.

[Translation]

Good morning, gentlemen and Madam Clerk.

[English]

I will make my presentation in English. I have about half of this deck that I would like to cover with you, but I'm not going to read it. On the contrary, I'm going to effleurer the points that are covered here. I'm sure you're sufficiently comfortable with the general aviation environment. If that's not the case, I'm sure you will ask me additional questions.

Let me just begin with the general framework, our policy and legislative context. The expression of our national transportation policy has been in the Transportation Act since 1988. The most recent one, in 1996, sets out the regulatory economic framework for licensing publicly available air services for this country.

Our regime is essentially deregulated domestically and continues to be regulated internationally, although not always tightly controlled. Our regulations of an economic nature are in the air transport regulations. Safety is covered in the Aeronautics Act, and the Competition Act applies to the transport sector, and aviation in particular.

The general framework includes our obligations for licensing of carriers. There are now five, including that they be controlled by Canadians. That includes the 25% limit on foreign ownership that only the Minister of Transport can change, by way of exemption, for Canadian operators. As always, they need to be certified as safe and properly insured. In 1996 we added two new elements. They must be financially fit at start-up and must not have sold tickets prior to licensing.

Foreign carriers need to have licences from Canadian regulatory agencies to operate in Canada. I know you're familiar with the Canadian Transportation Agency as our licensing authority.

On general features that are in addition to the basic licensing framework, the governor in council still has authority to issue policy direction to the agency. The Minister of Transport and the Minister of Foreign Affairs can also issue directions, particularly related to international matters and in the case of aircraft where crews from foreign countries are operating on behalf of Canadian carriers.

The minister, with the approval of the GIC, can direct the agency to conduct inquiries. The governor in council continues to have the right to overturn, on its own motion or in response to a petition, the rules, orders, and decisions of the agency. Appeals on legal matters go to the Federal Court of Appeal. A new item in the 1996 act was the ability of the governor in council to retain some ability to act in the case of imminent extraordinary disruptions of the system, except in the case of a labour dispute.

We want to explain a little further the issue of foreign ownership, because it is more front and centre in the public domain at the moment. The foreign ownership rules are in section 55. They give a statutory limit of 25% of voting shares for a foreign operator, but this ratio of 75:25 can be changed by the governor in council. There is a second requirement, to be controlled in fact by Canadians, which would require an amendment to the act. We've always said there are two tests to control by Canadians—one in fact, one in law.

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The Investment Canada Act also applies to Canadian airlines. It comes into effect in any case where investment exceeds 33 1/3%. Just quickly go back and think that American Airlines chose 33% equity in Canadian Airlines to stay outside of the implications of the Investment Canada Act. So this is an act that triggers when equity is acquired, especially by a single foreign investor, beyond 33 1/3%. They have their own thresholds and tests, which I won't dwell on further.

These limits on foreign ownership are common to most countries. Our control approach is identical to that of the U.S., and we believe it continues to ensure the carriers benefiting from Canadian international route designations are controlled by Canadians. As a matter of completing the picture, I spoke a moment ago about American Airlines having 33% of the equity of Canadian Airlines. At the moment Air Canada has no foreign shareholdings from any of its partners, nor does it have any ownership in any other carriers, except for its domestic affiliates, but not on a foreign level at all.

To highlight your interest in competition, in the study we put together a list of what we consider the competitive features of the framework. There is freedom of entry and exit for domestic operators and international charter operators, and international scheduled air services are governed by lateral agreements. Another feature is the notice that's required of the second-last and last carriers leaving a domestic point. The intent is if a point is losing service, there's an obligation to signal to both the community and other carriers that a commercial opportunity exists that otherwise might not have be taken up.

There's pricing freedom in the domestic, transborder, and some international markets. Confidential contracts are allowed. They've been allowed since 1988, and that has permitted a lot of corporate travel arrangements to take place. They're filed with the agency. The agency retained in 1996—after discussion in this committee—the ability to review basic fares and fare increases on monopoly routes in Canada, as well as to roll back fares and order refunds when it's practical. Again, as a competitive feature, the Competition Act applies.

Another issue is the consumer protection features of our framework. There's the financial fitness test that applies to new entrants. It's not a continuing obligation, but it does mean new entrants must be able to carry on for at least three months, put simply. They must be able to sustain operations during the initial start-up period without the revenues generated by ticket sales. That led us to the prohibition on sales prior to licensing. There were enough bad experiences in the last 10 years that in 1996 this prohibition was added to ensure carriers did not sell tickets and then run with the money and never provide the service.

We also added in 1996 the requirement of significantly more public disclosure of just exactly who was flying. You might call it our no surprises requirements. Not only in our computer reservation systems regulations, but in the other regulations we have indicated it as an obligation on travel agents and carriers to tell passengers exactly whose airplane they're stepping into. This is particularly important as more and more services are code-shared or when substitute aircraft are being used.

There's a continuing obligation to publish terms and conditions of carriage and only sell what you publish.

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In the charter sector, we have continued to retain regulations respecting the protection of advance payments to tour operators for travel on charter carriers.

So that's the regulatory framework. From this point, I'd like to begin by giving you a general notion of what we view as the industry structure and then, depending on the time, possibly more detail on various regional markets.

Our perception of the industry structure is that we continue to have two large full-service carriers—Air Canada and Canadian—that provide domestic, international, and transborder services. They have regional affiliates or commercial partners that offer service everywhere in Canada.

Some changes are taking place in the regional mix and in the size of regionals. A number of affiliates no longer have ownership links. Inter-Canadien and Northwest Territorial Airways are no longer affiliated on an ownership basis. Inter-Canadien is now a fully independent company operating out of Montreal. Northwest Territorial Airways is now owned by First Air, which is owned by Makivik Corporation, and therefore no longer owned by Air Canada. The regionals are merging to create larger regional carriers.

Air Canada has experienced growth over the past five years; Canadian Airlines has not. Four leisure charter carriers—Air Transat, Canada 3000, Royal Aviation, and Skyservice operate transcontinental and long-haul services in Canada. They sell their services on the international level through tour operators for air only and for vacation packages in leisure markets.

There's a new significant major jet operator in the west—WestJet. There are independent regional carriers throughout Canada, particularly in the more remote and northern regions.

The bulk of our passenger traffic in the domestic market is concentrated in eight major markets. The top 25 airports in Canada carry about 90% of domestic emplaned and deplaned traffic. These are the 1997 numbers. Air Canada and Canadian Airlines dominate, but they limit their presence to the busiest markets. Air Canada serves 17 markets and Canadian serves 13. But if you add to that their regional and commercial affiliates, Air Canada serves 79 points in Canada and Canadian Airlines serves 106.

Domestic passenger traffic slipped and has rebounded to be about 26 million passengers in 1998, but the growth is uneven. The growth is primarily in those eight largest cities, and more of the growth is in western Canada than in eastern Canada.

Head-to-head competition between Air Canada and Canadian takes place in terms of routes, flights, and fares. High frequencies cater to the business traveller, but not necessarily at the lowest cost. Affiliates are used to provide service to regional markets and feed those main-line services.

The charter air carriers have become increasingly aggressive in the transcontinental and Atlantic Canada markets. While they're not a factor in the business market, they have brought some new services to Atlantic Canada. They have more flexibility than the majors because they come and go from markets with more flexibility.

WestJet is the big new feature in western Canada, offering low fares but lower frequencies than the two majors. It has stimulated demand and depressed yields. Its fleet and number of points served are growing. Two other recent entrants weren't quite so successful.

How are we doing? I could take you through our regional markets. We have in fact distinguished the transcontinental market and regional markets for each—the east, west, central, north, and—

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The Vice-Chairman (Mr. Roy Cullen): Could we skip the regional markets for now and get into the... What is the next one after that? The domestic air fares?

Ms. Valérie Dufour: Yes. What I have left, on page 18, is domestic air fares, and then I would turn over the mike to my colleagues.

The Vice-Chairman (Mr. Roy Cullen): Shall we do that then? We can come back to the regional markets later if we need to.

Ms. Valérie Dufour: On the matter of fares, we don't discern a lot of price differentiation between Air Canada and Canadian, because as one offers a fare, a seat sale, or a reduction, it's normally matched. This is predictable behaviour in the air services sector.

Competition by WestJet and the charter airlines is clearly affecting fares charged by the majors, especially where the two compete directly, for example in the case of WestJet, in western Canada, or the charter operators on the transcontinental services. Fares in northern Canada are the highest, with those in Whitehorse and Yellowknife slightly higher than in other parts of Canada.

Fares for business travel have been increasing more rapidly than inflation while fares for leisure travel are running slightly below or close to the rate of inflation.

Scheduled carriers manage yield by offering a wide range of fares with various fences, and generally, the fewer fences the higher the fare. But the key is that 85% of domestic travellers continue to purchase a form of discounted fare.

I would stop there, Mr. Chairman, and perhaps let you turn it over to Mr. Carr.

The Vice-Chairman (Mr. Roy Cullen): Mr. Carr.

Mr. Brian Carr (Acting Director General, Air Policy, Transport Canada): Thank you, Mr. Chairman and members.

I would like to start with a brief discussion of the transborder market, particularly the Open Skies agreement.

While the domestic markets of Canada and the United States remain separate, we do have an Open Skies agreement that produces a very open border for air services that has stimulated traffic enormously. I'll come to that in just a minute.

I'll provide a touch of background. For some years we were engaged in a series of negotiations with the Americans, trying to find some way to open up this particular bilateral air agreement. When we got into the talks that led to the 1995 agreement, our objectives at the time were to open up the transborder while attempting to ensure that Canadian carriers could continue to remain viable competitors. This approach led to an agreement with full, open access for all Canadian and U.S. carriers in the transborder market from day one, except for phasing for U.S. carriers—a three-year transition at Toronto, a two-year transition at Vancouver and Montreal, and a one-year transition for all cargo carriers.

I think it's certainly understood that the stakeholders and the public in both countries really did herald this agreement as a breakthrough, and with good reason, as it says on slide 20. Before the agreement, some 114 Canada-U.S. city pairs received non-stop scheduled or charter air service. After the agreement this number increased to 154. In total there are about 103 new transborder services offered since 1995. That's just counting the ones that are still in the marketplace. It's not counting some services that were attempted and then subsequently dropped by the carriers as they experimented with what the market could take.

In terms of passenger traffic, the numbers have gone from about 13.5 million in 1994 to over 18.5 million in 1998. That's an increase of almost 40% and an average increase of 8.5% per year.

Not only has the traffic increased, but also most Canadian airports now enjoy improved access to the major U.S. destinations, and several U.S. cities that were quite poorly served before now receive quite good access from Canada. Some examples are listed here: Atlanta, Denver, Minneapolis, and St. Louis.

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The new agreement has allowed Air Canada and Canadian Airlines to develop their key hubs with a lot of growth because of the additional flow of U.S. traffic, but Air Canada and Canadian Airlines are not the only Canadian carriers that are still active in this market. Air Transat, Canada 3000, and Royal Aviation have also remained active. In some cases they've converted their charter services to scheduled services, while others insist they'll remain as charters.

Turning to the next page, I wanted to say a few words about alliances and code sharing in this market. The code sharing provisions of the agreement and the antitrust immunity granted by the U.S. Department of Transportation have helped Air Canada and Canadian Airlines to develop not only a close relationship, but also a much firmer grasp of the marketplace. Canadian Airlines and American Airlines obtained antitrust immunity in 1996. Air Canada and its partner, United Airlines, achieved the same goal in 1997. Now the flights of Canadian and Air Canada have full access to the domestic feed generated by their partners, and particularly their partners' hubs.

One of the advantages of this type of code-share relationship is that the partners feed each other traffic across the border. So there is now a flow of traffic from the U.S. to Asia and from the U.S. to Europe that flows on Canadian carriers. The alliance relationships have also led to a lowering of the cost of entering new markets, allowing partnership carriers to jointly use check-in and other facilities at airports, and to combine together in marketing efforts, computer reservation systems, and so forth, all of it diluted over a much larger traffic base than otherwise would be possible.

At the same time our analysis would indicate that there is no evidence that the U.S. partners of these alliances are developing new transborder routes at Air Canada's or Canadian Airlines' expense. Both are still very active in the own equipment side of the market, flying a lot of their own services.

In terms of the competitiveness of the Canadian industry, the Canadian industry share of passengers increased from 43% in 1994 to 49% in 1997. Just to put that into perspective for a moment, when we got into the Open Skies talks, I would have to say the Canadian industry was not at all convinced this was going to be a win-win situation for them. They were quite concerned about the potential impact of an open agreement on them. Well, it's proven to be the opposite. A large part of that, of course, is because of the alliances. In the case of Air Canada, it's also because of changing technology. Their regional jet has really allowed them to get into a number of smaller markets quite effectively and, more important, efficiently. So they have done well.

A number of new cities are now accessible in the U.S. for Canadian carriers and in Canada for U.S. carriers. Both carriers have assigned additional fleet, additional aircraft, to their transborder services by internal transfer, and in the case of Air Canada, by acquisition of additional regional jets.

I should just mention a word about slots and how important the landing slots have been at some of the key U.S. airports. One of the provisions of the agreement was to provide Canadian carriers with additional slots at the four major congested airports in the U.S. that are slot controlled. At the same time it provided them an opportunity to acquire additional slots in the marketplace, which they have done. In comparative terms, although we haven't done an exhaustive study of the subject, our understanding is that the Canadian industry is cost competitive with the major U.S. carriers.

That's what I wanted to say as a background on the transborder market. Let me just say a few words on the international market. This builds to some degree on what Valérie has already indicated, that competition in the international market, which is in part the subject of your study here, is very much affected by decisions and policies of government, because this sector is still regulated.

So let me just explain how this works. At the end of the Second World War there was a conference in Chicago to address the issue of how international civil aviation would be regulated in the coming years. It was understood, agreed upon, and accepted by the various countries that attended that conference that every state had sovereignty over its air space. Hence they had control. No other countries' airlines could fly in their airspace without their permission. This permission has been granted for things like overflights and so forth, through multilateral conventions. But the actual exchange of economic privileges, the opportunity to fly into another country's airspace and land at their airport for commercial purposes is now established through bilateral air agreements between governments. The Chicago conference essentially came to the conclusion that this was the way regulation would be handled in the future and developed a standard formulation for such agreements.

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Moving to page 24, I'll talk about some of the major players on the Canadian side. The Minister of Transport has the power to designate Canadian carriers for international scheduled air services. Just to clarify what that means, our bilateral air agreements establish rights for Canadian and foreign carriers to fly in a marketplace, but the agreements themselves don't name airlines. They just indicate, for example, if there are restrictions in the number of carriers and that sort of thing, but they don't actually name them. It's then up to the Minister of Transport, in our system, to determine which carrier will operate. He has that power. He also has the power to direct the agency with respect to the exercise of its powers regarding the performance of any of its duties or functions relating to international air services. In particular instances, he can give direction to the agency.

The agency in turn, under the Canada Transport Act and its predecessors, has the power to issue, suspend, cancel, or condition licences for scheduled and non-scheduled—charter—services, and to implement these bilateral air agreements. They are the custodian in the agreements and they look after the implementation of the individual provisions. They can even authorize, on a temporary basis, services not provided for by an air agreement. Sometimes that can be very useful when both sides are quite happy to see an additional service added, but they realize the formalities in negotiating and changing the treaty and so forth would take a while. So the agency can authorize additional service.

Let me just say a word about the evolution of Canada's international transportation policy. For quite a few years we had a policy that was familiarly known as a division-of-the-world policy. It essentially divided the world into two sections: one that would be flown by Air Canada and one by what was then CP Air. This basic separation, however, began to erode in the mid-1980s, when Wardair was designated to serve the United Kingdom. Since then, there have been a number of further developments of the international air policy, and since 1987, Air Canada and Canadian Airlines have no longer been guaranteed exclusive access to specific markets. Any carrier could then apply for additional designations.

There has been progressive evolution away from that division-of-the-world concept since. In December 1994, as it explains on slide 26, this was the first component of Canada's current international air policy. It includes a substantial “use it or lose it” provision, such that if an airline is designated in a market and then does not use it, the minister has the authority to remove that designation and give it to a carrier that is willing to operate in the market. Clearly, this is an effort to ensure these scarce resources are utilized to the maximum.

A few months later, in March 1995, a second component of this policy was issued by the then minister. This related to the designation of a second Canadian carrier in large markets. This policy would indicate that where a market is over 300,000 passenger trips per year in size, two Canadian carriers could be designated; whereas in markets that are smaller than that, there would be just one Canadian carrier that would be designated.

The idea here is that there's a recognition that it takes a certain size of market before an airline can really provide a viable service. Currently what airlines attempt to do is to get to daily operations as quickly as they can. With a daily product they can appeal to the business traveller who wants to have flexibility in terms of when he or she flies. Offering a daily service in a very small market really doesn't work. So the concept was, over a certain size, that there should be room for a second Canadian carrier to enter.

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Last summer the minister announced some additional route opportunities for the two major carriers in response to expression of their needs. Some additional rights were going to be sought for Air Canada to add new flights to Hong Kong from Toronto, and for Canadian Airlines to offer services between Vancouver and Osaka. At the same time, the minister indicated that there will be flexibility for code-sharing such that each of the two major carriers could select an additional five markets for code-sharing with their partners.

Charter services are handled quite differently from scheduled services. Normally they're not the subject of bilateral negotiations. Every country determines its own policies and its own regulations for charter; therefore a charter carrier that wants to operate in a market needs to follow the rules of the country at both ends of that particular route.

Our current policy dates back to 1978. It provides for all carriers to be able to compete equally in the leisure market for protecting the year-round scheduled air services from being undermined by lower-priced seasonal charters. Other objectives of the policy are to ensure the broad acceptability of Canada's charter regime to the destination countries, to help Canadian carriers capture as large a share as possible of the Canadian-origin charter market, and to protect consumers financially against performance failures.

The non-discretionary traveller—that is, the business traveller or must-go traveller—has been steered towards scheduled services through the use of what we know as fences in the air transportation regulations, such as requirements for advance booking, minimum stay, and return transportation.

We conducted a study of the charter policy in 1998, and this indicated that there was quite strong support for further liberalization of the charter policy.

With respect to the role of the government regarding international scheduled air services, its role is to develop policy, to negotiate and implement bilateral air agreements, and to allocate international routes to Canadian carriers. The Minister of Foreign Affairs and International Trade is responsible for the conduct and management of those negotiations, and he and his colleague at Transport Canada are responsible for determining the instructions to the Canadian delegation that goes to these negotiations, the mandate for their talks. Once there is agreement on a new agreement, because these are treaties, following their negotiation the governor in council issues an order in council to bring the agreement formally into force.

As stated in slide 29, there are currently about 2,000 air agreements in the world. Canada has 69 bilateral agreements. They cover a lot of technical matters, like the rules of commercial activity, dispute settlement provisions, how to terminate the agreement in the case of irresolvable dispute, and so forth. But the key focus of negotiations is on the commercial rights: the routes, the capacity, the frequency, the type of aircraft, the number of carriers, and that sort of thing.

I'll go a little bit faster, if you agree, Mr. Chairman.

Page 30 talks about the allocation of international routes from 1994 to the present. These are the provisions of our “use it or lose it” policy. Essentially, if the designation is underutilized, then the minister reserves the right to reassign it. He calls for bids from the industry and assesses those bids. He then determines, in the case of an underutilized route or a route that's not utilized at all, which carrier has submitted the best proposal and awards the designation along those lines. He looks at such things as frequency, the directness of service, the number of Canadian carriers having convenient access, how negotiable the new route will be with the other government, and so forth. Since this policy was introduced in the spring of 1995, nearly 60 carrier selections have been conducted.

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Talking about the services themselves, international air services are very important to our major carriers. They generate well over 50% of their revenues from international service, including the transborder market. The largest international markets we have outside of the U.S. are the U.K., Japan, Hong Kong, Germany, France, and Taiwan, and these are the markets in fact where the second designation policy applies and the minister has designated a second carrier.

In world terms, Air Canada is the 19th largest carrier and Canadian Airlines is 25th. But just as a point of comparison, United Airlines, the world's largest, is three times their combined size. The measure here was revenue, passenger, kilometres.

Air Canada is the strongest Canadian carrier in Europe, and it's the main Canadian carrier in the Caribbean. Canadian Airlines is strongest in Asia, and is very strong in London too, of course, with its partnership with British Airways. It also has a significant presence in South America.

On international routes, the competition is mostly with the foreign carriers, although in some instances there is also competition between Air Canada and Canadian Airlines, such as in the Canada-London market. There is limited competition, but it does exist, between the carriers in Hong Kong and Japan.

On the charter side—on slide 32—Air Transat, Canada 3000, Royal, and Skyservice operate a combined fleet of over 50 jet aircraft to a large number of international destinations, leisure destinations. They compete with each other and with scheduled carriers for leisure traffic, and they tend to operate seasonally, normally to Europe in the summer and to sun-spot destinations during the winter.

The largest charter market for Canada and for Canadians tends to be countries such as Mexico, United Kingdom, France, and the Dominican Republic. Our charter carriers have developed through necessity very close working relationships with a number of tour operators to help market their packages, and in some cases they have developed vertical integration with travel agencies as well. The family of Transat A.T. is a good example.

With respect to airfares, international airfares have not kept pace with the rate of inflation. In some cases they've actually decreased. Here is one example: for Montreal to Paris, the average fare paid has dropped by 26% over a 10-year period. Internationally, even the higher percentage of travellers tend to travel on discount fares internationally than is the case domestically. There seems to be, as well, little regional disparity in international airfares. In other words, Montreal-Paris and Toronto-Paris fares are going to be very similar. It used to be that fares to Asia, on a distance basis, tended to be substantially higher than fares to Europe, but that gap has been narrowing over recent years.

I'll say a word or two about alliances because I know that's one of the areas you're interested in exploring. There is a range of forms these alliances can take. They are designed primarily to give daily access to a larger number of markets than otherwise would be possible. I can recall that in the mid-1980s, when we were attempting to build fairly extensive networks for Canadian carriers to fly, through our bilateral air negotiations, it was always extremely difficult to get those rights and also very difficult for Canadian carriers to manage extended networks on their own, but alliances make both those issues much more straightforward—both obtaining the rights and maintaining the networks.

While the airlines retain their identity, they do coordinate their flight schedules and promote a common brand name. The alliances generate enormous revenues just by encouraging increased traffic flow. They also provide cost benefits to the members of each alliance and provide consumers, especially business travellers, substantial benefits through a global network of destinations, networks that fit together, schedules that fit, and the perception of it all being a single airline.

Air Canada is a member of the Star Alliance, and its member carriers are listed here: Air New Zealand, Ansett Australia, United Airlines, Lufthansa, and so forth.

Canadian Airlines is a member of Oneworld, with American Airlines and British Airways being the two major partners in that alliance. These alliances really have benefited Canadian carriers.

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As I understand, you intend to meet two major carriers. They will tell you that they have focused a lot of attention over the last few years on becoming very much a part of these alliances. This is really where their strategic thinking is focusing, because this is where they see their future viability.

The alliances allow the Canadian industry, the two major carriers particularly, to exploit Canada's geographical positioning between the U.S. market and Asia and the U.S. market and Europe, as I mentioned before. Also, reciprocally, they provide a lot of traffic to their foreign partners, for example, feeding traffic from Canada down to points in Central and South America that aren't served directly by Canadian carriers.

How is it that airline alliances may affect our route allocation? This is one of the questions that you're raising in the agenda put forward. An alliance allows a Canadian carrier to put forth a very viable route proposal in a carrier selection process. It allows them to provide a high level of frequency, a whole variety of different routings, and a large number of destination points for service from a large number of points in Canada.

One of the other questions that was included in the study outline was the question of whether there is a relationship between alliances and the concept of cabotage, that is, the concept of a foreign carrier providing domestic service in the internal market of another country. Our thinking on this is that, no, alliances will not encourage cabotage. It hasn't happened to date and they wouldn't really expect it to.

What the alliances are looking for is the international traffic that can be generated in their partners' countries. They want to be able to obtain a share of that, as opposed to the domestic services offered within that country.

Historically, there really is little incentive for airlines to seek cabotage rights. It's been very difficult to obtain a presence in the internal market of another country. Most airlines have no brand recognition in that kind of a domestic market. And they would have to concede the right of entry of other carriers into their own domestic market if they wanted to gain access to some other domestic market.

It really has not been an issue that has attracted a lot of attention within the industry, and therefore it has not attracted a lot of attention with governments. It has not been a major subject of discussion at bilateral air negotiations.

Regarding the airline alliances and whether or not they have an effect on hub airports, we believe that alliances probably generate some additional traffic at hub airports, but it's not the major source of the development of new traffic for the airports. Similarly, will alliances impact on the future competitiveness of Canada's airlines? It is very difficult to see into the future how alliances will continue to evolve and their ultimate effect is not yet clear. It is clear that both of Canada's major carriers put a lot of stock in the importance of alliances for their own futures.

Thank you.

The Vice-Chairman (Mr. Roy Cullen): Thank you, Mr. Carr.

Colleagues, I wonder if you would like to pause and ask some questions based on the two presentations, or go straight to the Kyoto presentation first.

Mr. Lee Morrison (Cypress Hills—Grasslands, Ref.): Let's have a little question break.

The Vice-Chairman (Mr. Roy Cullen): Let's start then.

Mr. Morrison.

Mr. Lee Morrison: On page 8 of your presentation, in the second last paragraph you talked about the review of basic fares. How does that sit with the current trend towards deregulation? That seems to be a bit of a contradiction there in the policies that have been developed. And when you review these fares, I know you refer specifically to fare increases, but what about deep discounts? Are they also regulated?

• 1625

Ms. Valérie Dufour: No. In the domestic market prices are essentially unregulated and they have been for 15 years. The notion that remains in the legislation is that the agency will review the fare only on a monopoly route. In that case they will look at the basic fare, which is the economy level fare, and determine if it is valid. If an increase in it is acceptable, and if neither of those meet their approval, then they can order a cessation of that price and in fact order a roll-back if it is practical. That's been there since 1988, and it's never been used successfully, I might add.

Mr. Lee Morrison: So on a truly competitive route, it would be no problem at all with airlines offering deep discounts.

Ms. Valérie Dufour: None whatsoever.

Mr. Lee Morrison: On page 27, there is a reference there to protecting consumers financially against performance failures by charterers and charter carriers. We all know horror stories where it's gone wrong. How do you protect consumers against performance failures? What's the modus operandi there?

Mr. Brian Carr: The primary procedure is through a protection of advance payments. The tour operators are required to hold onto the moneys they receive from the passengers and then provide it to the carriers within a few days before the flight. So the airlines that actually fly the charter passengers are not in a position, for example, to use those funds long before the actual flight, even though the person may have paid months before the flight.

Mr. Lee Morrison: The agency, then, can take the money and run and it never gets to the airline or the air carrier. There's no protection there.

Ms. Valérie Dufour: There are two requirements. They are bonded so they can't in fact do what you are saying, and there's no history of Canadian tour operators doing that. As well, the carriers are supposed to keep the money in a trust account until they actually operate. Part of the key is that there's only limited federal authority to order this kind of behaviour and it is complemented by three provinces that have additional coverage for tour operator and travel agency behaviour.

Mr. Lee Morrison: I can't remember the names of the specific tour operators, but I know there have been fairly heavy losses sustained by consumers in the last seven or eight years. There has been lots of TV coverage of people sitting at airports with no airplane to fly on. It's not unknown with Canadian carriers.

Ms. Valérie Dufour: We're aware of it, and I believe the travel industry association of Ontario changed some of its rules in fact in order to close some of those doors.

Mr. Lee Morrison: On page 33, you say that the average fare on the Montreal-Paris route decreased by 26% between 1987 and 1997. At the same time, the fares that I pay getting back and forth to western Canada have increased by at least 50%. Are there any rules or controls with respect to internal cross-subsidization by a carrier?

Mr. Louis Ranger: No, there are no such rules. We alluded to the fact before that there is a whole range of factors that affect fares. Frequency, the type of aircraft operated... but surely volume is probably the most determining and critical factor because it does generate economies of scale. There are certainly no rules on cross-subsidization that would prevent such a thing.

Mr. Lee Morrison: The domestic planes are full all the time, but they still keep jacking up the fares.

The Vice-Chairman (Mr. Roy Cullen): Mr. Guimond.

• 1630

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Mr. Ranger, I would have expected that Transport Canada set an example and do what we always ask our witnesses to do, i.e., make a presentation of approximately 15 to 20 minutes. You have sent the document and prepared a 15 or 20- minute résumé so that there would be time for questions. If the other witnesses—

[English]

The Vice-Chairman (Mr. Roy Cullen): The request was made because we're starting from a very low knowledge base. So the department's not to blame. We said an hour's presentation for the department to brief us reasonably comprehensively so we could have some informed discussion.

[Translation]

Mr. Michel Guimond: This is why the brief prepared by our researcher, Mr. Christopher, did not deal with the points in phase 2 that we should be examining in the fall.

Mr. Ranger, I have been a member of the House of Commons since 1993. At that time, Canadian international carriers were experiencing another difficult period. I believe that it was the second, since there had been another before 1993. At that time, there was talk of the possibility that the two major Canadian carriers begin discussion on a single national carrier, as is the case in other countries, namely British Airways, Alitalia or Air France. At Transport Canada, have you studied the advantages and disadvantages of such a hypothesis, or have you concluded that this was up to two private companies and that it was not up to—

Mr. Louis Ranger: Since the market has been deregulated, it is basically market forces that determine the industry's structure. We always refer to the two large carriers, and it is true that they occupy a very large share of the market. However, as I was reminded a little while ago, we have close to 1,000 certified carriers in the country. There is intense regional activity.

If we had only a single carrier, we would constantly we worrying about providing competition in the marketplace. Would we count on the rest of the industry to fill the breach and discipline the market? We obviously have to address this concern whenever we consider the single carrier hypothesis.

Mr. Michel Guimond: My question is for Ms. Dufour. If you have no objections, Ms. Dufour, I shall ask my question in French, since I am a francophone. Page 13 of your document states:

Air Transat, Canada 3000 and Royal compete in all transcon airport services concentrated out of Toronto, Calgary and Vancouver.

You do not mention Mirabel, which confirms that Mirabel is really a negligible quantity as far as Transport Canada is concerned. Air Transat offers many services in Mirabel, and there must be a reason for not mentioning it.

Do you have data for these airports and for others concerning domestic passengers, namely, passengers travelling within North America, let's say within Canada and the United States, compared to charter passengers? Is it possible to obtain this information by airport? If I ask you about the traffic at the airport in Quebec City, are you able to separate domestic passengers from those on charter flights?

Mr. Eric Mainville (Senior Policy Advisor, Transport Canada): The answer is yes.

Mr. Michel Guimond: The answer is yes? I don't know whether this would involve a lot of research, but I would like to have the figures on domestic and charter flights from Toronto, Calgary and Vancouver. Could you provide this information to the committee? It occurs to me that the charter flights might include American flights, for example, Calgary-Miami or Calgary-Tampa.

Mr. Eric Mainville: We have separate figures for trans-sector domestic, transborder and international flights.

Mr. Louis Ranger: We will provide you with this information to the extent that we can do so without violating confidential agreements.

• 1635

Mr. Michel Guimond: You say that you will provide them to the extent possible, but I am not seeking data on individual companies. I want to know, for example, that at the Quebec City airport, 300,000 people took charter flights in 1997 and that this figure had dropped to 250,000 in 1998. This is the kind of information that I would like to receive through our clerk, please.

Mr. Louis Ranger: In both languages.

Mr. Michel Guimond: Naturally. I would like to have information on the Toronto, Calgary, Vancouver, Mirabel et Quebec City airports. Are the figures for 1998 currently available?

Mr. Eric Mainville: No.

Mr. Michel Guimond: When will they be?

Mr. Eric Mainville: We do not have the complete figures, but we can make an estimate.

Mr. Michel Guimond: When will we have the true figures?

Mr. Louis Ranger: Mr. Mainville, will you please be seated at the table, because of the microphone?

[English]

The Vice-Chairman (Mr. Roy Cullen): Could I ask the witness to come to the table, please?

[Translation]

Mr. Louis Ranger: While Mr. Mainville takes his place at the table, I shall answer your first question, concerning Montreal. In referring to Montreal, we do not designate specific airports: we refer to the Montreal airports. In all our international agreements, we refer to Montreal without specifying Dorval or Mirabel. You are reading too much into our words.

Mr. Michel Guimond: I have no problem with this, but I am capable of reading: "with services concentrated out of Toronto, Calgary and Vancouver." I did not speak of Montreal, I said that Mirabel was not listed. So shall we agree that Montreal does not figure on page 13?

I would like to have the data for the three airports, Toronto, Calgary and Vancouver for 1996-97 and 1998, as well as for Mirabel and Dorval, because in 1996, international flights originated at Mirabel. So I would like to have the figures for the Mirabel, Dorval and Quebec City airports.

[English]

Mr. Louis Ranger: Mr. Chairman, in my experience this sector is the sector that has by far the most data. It's very well-documented, and to every extent possible we will provide the information you're seeking, as I said, with the caveat that we will not break the confidentiality rules. That should not be an issue, given the nature of the questions.

The Vice-Chairman (Mr. Roy Cullen): Did you say whether you have it broken down, Mr. Ranger, for Montreal, Dorval, Mirabel, or is the data all in one?

Mr. Louis Ranger: It is broken down.

The Vice-Chairman (Mr. Roy Cullen): Okay. Thank you.

[Translation]

I will give you the floor in the next round, Mr. Guimond.

[English]

Mr. Casey.

Mr. Bill Casey (Cumberland—Colchester, PC): Thank you very much.

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): He's new to the committee.

Mr. Bill Casey: I am new to the committee. Thanks a lot. I appreciate that vote of confidence.

I'm curious about the NAV CANADA costs to Canadian Airlines and domestic airlines. How does the cost of navigation get transferred to the airlines? How are they charged? What's the rate? How is it calculated? Is it competitive with air traffic control costs in the U.S.? Do Canadian Airlines and Air Canada have to pay for air traffic control in the U.S. and do foreign airlines have to pay for air traffic control in Canada?

The Vice-Chairman (Mr. Roy Cullen): Could I just interject for a moment, Mr. Casey?

The department can answer if they want to. I just want to remind members of the study outline that talks about the work we'll do in the spring and the work we'll do in the fall, and NAV CANADA is included in the fall phase.

Mr. Louis Ranger: To tell you the truth, we assumed that the NAV CANADA issues would be discussed at another time.

The Vice-Chairman (Mr. Roy Cullen): Yes, that's the intent.

So, Mr. Casey, would you move on to something else, please?

Mr. Bill Casey: It would be my pleasure.

I notice that at some airports I go to there are extremely low levels of traffic. With divestiture, what happens if an airport has an extremely low level of traffic and the airlines can't justify maintaining the routes to these places? First of all, is this happening? Are there airports in Canada that have been reporting...

Mr. Louis Ranger: Again, I don't want to bring a level of refinement here that blocks the discussion, Mr. Chairman. I thought the management of airports and their capacity to survive was an issue that we could discuss later.

The Vice-Chairman (Mr. Roy Cullen): Yes.

Canada's airport management system, Mr. Casey, may I remind you, is in phase 2. So if you could stick to the study outline, Mr. Casey, I certainly would appreciate it.

Mr. Bill Casey: I'm running out of questions here. You're giving me a hard time.

Some hon. members: Oh, oh!

Mr. Bill Casey: On the list I mentioned before, Mr. Guimond asked for a statistic for other airports. I'd like to have the Halifax airport and the other Atlantic Canada airports added to the list, if that's possible.

• 1640

That's all right. You take it from here.

The Vice-Chairman (Mr. Roy Cullen): Thank you.

Mr. Bailey.

Mr. Roy Bailey: I have a couple of quick questions. Does the Department of Transport have anything to do with the percentage of fares charged by a chartering company? Do they enter into that at all? The reason I ask that question is because I received a letter about this, and they were complaining bitterly about the percentage of their saleable tickets. They used to work on this percentage, but somehow they've been... I didn't understand the situation.

Mr. Chairman, I want to get back to the issue of the regulation. Mr. Casey alluded to this. To me this is very serious. You have, say, two airlines serving a sparse carrier population. Do they agree among themselves that should become a monopoly-carried system? Who regulates that? Both would be losing money on a route, but if only one were operating, maybe one could make a go of it. Who would make that decision, the airlines involved or the department?

Mr. Louis Ranger: Again, the market would dictate that one airline would step down and the other one would remain, realizing that perhaps there's not enough room for two. But, certainly, it would not be for government to establish a process on how airlines get together. It's quite to the contrary. The market will dictate that.

With regard to your first question, I assume you were referring to commissions paid by the airlines to the agents.

Mr. Roy Bailey: Yes.

Mr. Louis Ranger: I'm not aware that we regulate that. Clearly, that's a world of its own, and probably the carriers themselves would be much better placed than we are to deal with that.

Maybe Valérie wants to add something.

Ms. Valérie Dufour: Speaking to your question about a thin market, one of the phenomena is that if they're too large a carrier in a market, they will in fact hand down to a smaller carrier, which will make a connection for them. So we have the example of a major carrier handing down to a regional, and they may find the market too thin and hand it down to an even smaller carrier. Central Mountain Air and Alberta Citylink are examples where you try to fit the airplane to the size of the market you're serving before you ever decide to leave a market.

The Vice-Chairman (Mr. Roy Cullen): This will be your last question, Mr. Bailey.

Mr. Roy Bailey: How many airports are left to go under their own authority? Do you know?

Mr. Louis Ranger: I don't have the exact figure. All the big ones have been transferred, as you know, but there are quite a few small ones still to go. But I don't have the figure here.

Mr. Roy Bailey: They may never go. Is that right?

Mr. Louis Ranger: I didn't say that. They're still on the list. We could certainly provide the committee with the latest count, but I don't have it with me.

Mr. Roy Bailey: Thank you.

The Vice-Chairman (Mr. Roy Cullen): Thank you.

Ms. Desjarlais.

Ms. Bev Desjarlais (Churchill, NDP): In the comments on air fares it was mentioned that 90% of passengers travelling on the overseas routes travel on discount fares. I would imagine that you have a breakdown of what the fares are like within Canada. As Mr. Morrison indicated, he would certainly say that his have gone up probably 50%. People who travel, say, from Winnipeg to Thompson, Manitoba, would suggest that their fares have also increased, and they feel they're sort of subsidizing the Montreal to Paris and Toronto to Paris routes. Do you have those figures as well?

Mr. Louis Ranger: I'll ask Eric to answer more specifically, but I'd just like to make a general comment. From our perspective, in terms of analysing how fares have evolved, there are, quite frankly, fewer and fewer passengers who travel on a full economy fare or even on a full business fare. Even the businessmen now take advantage of frequent flyer points, and they cash them in. Sometimes you don't have two individuals on an airplane who have paid exactly the same price. That's the way airlines are managed today. It's called yield management, where blocks of seats are sold at different prices at different times as you get closer to departure.

Not to bore you with details, but there's a bit of a methodological problem when you start comparing the average fare, which the airlines call the yield, which is so many cents per mile. But to the extent that we can trace that on a sample basis, we do that.

• 1645

I'd like Eric to perhaps elaborate.

Mr. Eric Mainville: When we track average air fares, the problem is we are unable to release them on a city pair basis.

Ms. Bev Desjarlais: If we can say that over 90% of passengers travel internationally on a discount fare, why can't you tell me what they do domestically?

Mr. Eric Mainville: We've already said that domestically it's 85%.

Ms. Bev Desjarlais: Sorry, I missed that.

The Vice-Chairman (Mr. Roy Cullen): Thank you.

Are there any questions over here? Claude.

[Translation]

Mr. Claude Drouin (Beauce, Lib.): Mr. Ranger, you have explained that we cannot intervene directly with the price, but can we make a comparison when we know that an aircraft with so many passengers normally costs a given price for a certain number of kilometres? In my region and just about everywhere in Quebec, It is often said that it is more expensive to go to the Magdalene Islands than to Paris. By the same token, it is very expensive to go to the Canadian West, even more expensive than to go to the Magdalene Islands. And yet, this is our country. Could we make a comparison? Can we determine how much that might cost? Are the carriers using domestic flights to subsidize their international flights, at the expense of Canadians? Can this be verified?

Mr. Louis Ranger: The problem is that you have to be able to compare apples with apples. When you compare Air Canada and Canadian, you will discover that one carrier has a higher cost structure than the other. Is this bad? Air Canada, generally, has somewhat shorter flights than Canadian. The major costs are related to take-off and landing. Canadian has long trans-Pacific flights that cost less, mile per mile, than Air Canada's flights, which, on average, are shorter. In the case of Air Canada, the airport, take- off and landing costs are amortized over a shorter distance. They have different aircraft and traffic volumes and, we have to recognize that there is also the competition factor. The more competitive the route, the better the passenger rates.

Mr. Claude Drouin: That's what I've always thought. Fortunately there are two carriers, because if we had only one, it would be very expensive.

Mr. Louis Ranger: That's not the only factor.

Mr. Claude Drouin: I don't wish to compare the two. What I'd like to know is the cost for a given plane that is transporting 270 passengers over so many kilometres, including take-off and landing. In theory, the price should be more or less the same, but I don't know whether that's automatic. Could one not, in this way, do a comparison to determine whether or not domestic travel is subsidizing international travel?

Mr. Louis Ranger: Once again, you are implying that one service subsidizes the other. We're talking about the private sector; Air Canada is no longer a Crown corporation.

Mr. Claude Drouin: Yes.

Mr. Louis Ranger: It's like asking whether we have made comparisons between Loblaws' and IGA's prices. It's the private sector that sets prices according to its cost structure and the cost margins for which it is aiming. These are decisions made by the private sector.

Mr. Claude Drouin: Transport Canada is not able to issue directives so that they will not be entitled to directly subsidize travellers flying abroad at the expense of travellers flying within Canada?

Mr. Louis Ranger: No, just as we don't have any regulations saying that ham will subsidize hamburger this week. These are decisions that companies make on their own.

[English]

The Vice-Chairman (Mr. Roy Cullen): Thank you. Mr. Dromisky has a question, and then we'll go to Mr. Forster for five or ten minutes. Then what I would like to do, colleagues, is go in camera at 5.15 p.m., because we need to talk about future witnesses, travel, etc.

So, Mr. Dromisky, you could put your question, and then we'll go to Mr. Forster.

Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you, Mr. Chairman.

• 1650

I'd like to follow through with comparing apples with apples and this whole field of competitive services being provided by the two major carriers.

I'm not that concerned about what the carriers are doing, because that's the private sector. What I am concerned about is where the Competition Act comes into the picture and how the ministry of transportation plugs into this whole scenario. If we compare apples to apples... We can't compare an apple with an orange, and by that I mean a full economy fare with a seat sale. Those kinds of comparisons are always being made and that is not fair. But when you have a full economy fare with each carrier, they're identical. They're always identical.

My staff and I have been keeping track of this since January 1, 1994, and we find that the rates go up anywhere between 2% and 3% just about every four months—sure, there's some variation there—with the two carriers. However, take all the other factors into consideration. For instance, the size of the plane does not matter, although the industry will tell us that one plane will cost so much per mile and the other plane costs so much, because one is bigger, one is smaller, and you need more staff or fewer staff, or more of whatever is required to keep it going in the air. That doesn't seem to hold true. It doesn't make any difference what size the plane is, you're still paying the same amount. I'm wondering, is there anything in the Competition Act that will guide us in this respect so we'll be able to look at this type of so-called competition, which does not exist when we're comparing apples with apples.

Mr. Louis Ranger: I'm sure my colleagues will add to what I say.

As I alluded to earlier, you're quite right. When you look at economy fares, they're quite similar. The reason being that the average passenger doesn't pay that fare. One will be travelling on a 20% discount, the other one will be travelling on a 25% discount, the other one at 40%. Another one may pay the full fare, but he's getting triple his traveller's points. It's the total of those factors that you have to look at.

Again, this would certainly be a good question for the airlines. I assume they work on averages. But you should also ask the airlines how they actually sell their seats. Each flight is a product in itself, and you start selling on those flights months ahead of departure time, and there are certain blocks that are reserved for certain purposes, others that are reserved at other prices. They work on averages and they target average yield, in other words, cents per passenger mile. But, as I said, you could have two passengers on board who are not—

Mr. Stan Dromisky: I understand that.

Mr. Louis Ranger: You'll hardly find people paying the same price.

I don't know if my colleagues want to...

Mr. Brian Carr: I have something. You were asking about the role of the Competition Bureau in this. I'll only say a little bit about that because the Competition Act is clearly not our area of responsibility. That's handled elsewhere in government. But if you're talking about the domestic environment, which is not regulated any more, for economic purposes, by government, my understanding is that the Competition Act does apply in that case. There are provisions in the Competition Act against conspiracy, which is a criminal offence, and so forth. But I'm not at all aware that there is generally a conspiracy between the two major carriers or otherwise, even though the fares are very often the same, as you say.

Mr. Stan Dromisky: They are always the same.

Mr. Brian Carr: Okay.

The Vice-Chairman (Mr. Roy Cullen): Thank you, Mr. Dromisky.

One of the disadvantages of being chair is you can't ask questions. I had a bunch. I'm going to do the dishonourable thing and sneak in one.

We hear the expressions code-sharing and alliances, and I thought I had somewhat of a layman's grip on it until someone told me the other day that they were in Hong Kong and saw a Star Alliance plane. I said that's just in the ads, that's a marketing gimmick, and they said it had been a real plane. I asked if that was just a marketing gimmick or if they were actually putting out real Star Alliance planes. It just exemplified to me that I didn't have it really nailed down. What is a code-share? You talked in your presentations about code-shares within alliances. Could you expand on that and give us some examples?

Mr. Louis Ranger: Let me try, and maybe, being more of a generalist, I have a better chance of explaining that than my expert colleagues.

• 1655

Basically, code-sharing is the ability an airline has to sell its tickets for use of seats on another airline. For example, you go to your travel agent and say, I'd like to fly to Frankfurt. There is an Air Canada flight number so-and-so leaving Toronto at a given time. You go to the airport and that evening it's Lufthansa operating that flight. So you bought an Air Canada ticket for a seat on a Lufthansa aircraft. Vice versa, the next day you may have a German passenger who bought a ticket on Lufthansa, and guess what, it's Air Canada that's operating the flight that evening. That's code-sharing.

It takes place most of the time between alliance partners, and there are a number of alliances. There's the Star Alliance—I'm not aware there's such an aircraft—and it's getting longer every day. The other one is Oneworld. Basically, those partners code-share with each other. It allows Air Canada, for example, to say we now serve so many hundred points with our Star partners, because indeed you can take a connection in London with one of these Star alliances to go to points well beyond London.

The Vice-Chairman (Mr. Roy Cullen): Thank you. That'll be good enough for now. That was excellent, but it's a complicated topic.

I think we'll ask Mr. Forster now to do his presentation, then we'll have some questions, and then go into in camera.

Mr. Forster.

Mr. John Forster (Director General, Environmental Affairs, Transport Canada): Thank you, Mr. Chairman. I'll do this quite briefly. I think you have a copy of the presentation. It's in front of you. It's called “Kyoto Targets and the Canadian Aviation Industry”. I won't read through all those slides, but I will touch on a few of them as I go.

Basically, the Kyoto protocol is an agreement that has been negotiated and signed by most of the developed countries, but has not yet been ratified. Canada has not yet decided to ratify. What it asks all countries to do is reduce their emissions of greenhouse gases that scientists believe will lead to climate change. Canada, under this draft agreement, has agreed it would try to reduce its emissions to 6% below 1990 levels. Different countries have different targets.

For Canada, though, that is a challenge. Don't think of it as 6%; think of it as where we will be in 2010, which is the target year. We estimate our emissions will be anywhere from 20% to 25% above 1990 levels. We have to get to 6% below 1990, so we're really talking about a reduction of about 30% from where we think we will be in 2010, which is a significant challenge.

Most of the greenhouse gases come from the way we use energy. So while this is an environment issue, it's obviously an economic issue as well, and of key concern is transportation. Under the protocol, however, it does tell us that Canada doesn't have to worry about the international emissions from international aviation and marine transport—boats and planes travelling not for domestic purposes, but from one country to another—as part of its target. The International Civil Aviation Organization will have to deal with how international emissions from airplanes will be dealt with under the protocol.

What Canada has done is that the first ministers have decided that before we ratify this, we need to understand what it means, how we would do it, and what it would cost. The prime minister and the premiers have launched a process to do that. They've asked for some options, and we hope to have by the end of this year a final strategy on how we might do Kyoto by 2000.

As part of that process, we've put in place a series of expert tables with stakeholders, industry, and provinces. One of those tables deals with transportation, and there are 26 people on that table. The aviation industry is there. I believe you're going to be talking to Cliff Mackay tomorrow, and he is the air representative on that table.

We are doing a range of studies to look at options for how you might mitigate emissions from transportation. We are looking at the costs and benefits of different ways we might do that and different studies underway. Our goal is to produce by summer an options paper that would then feed into a larger process where they'd look across the economy and see how we might do this.

• 1700

Moving to slide 8, I want to spend a bit of time in terms of what transportation is and how it relates to emissions. In that graph you'll see emissions from the different sectors of the economy. Transportation is the largest single source of emissions we have. It's 27% of the total. It's also forecast to grow, as you'll note, between now and 2010 and 2020. It's one of the fastest growing sources of emissions we have. So we think in transportation our emissions will be about 26% higher than they were in 1990 levels.

Slide 9 shows you specifically within transportation where those emissions are coming from. By far, the bulk is from road transportation.

Of interest to you in your study, then, is where is aviation in this mix? About 8% of our emissions come from the air sector. So that's reasonably good news. It's a lot less than the Europeans at 12%. One of the concerns, though, is that it is one of the fastest growing parts of the emissions issue in transportation. Generally, as to how it compares to other modes of getting from one city to another, it emits about twice as much per passenger kilometre as a car or a train, and about four or five times as much as if you took the bus.

Where we expect aircraft emissions to be by 2010 is about 27% higher than they were in 1990—1990 is always the baseline when you're dealing with Kyoto—and about 42% higher by 2020. So they're growing quite quickly.

The aviation industry is very fuel efficient. They've improved their fuel efficiency by about 50% since 1960, because it's a big chunk of their costs. They have an inherent interest in squeezing out every nickel they can in reduced fuel consumption, but the simple fact of the matter is we can only go so far in fuel efficiency. Just the growth in passenger travel will outstrip whatever efficiency gains we can get. So the table will be looking at what options we might have, ranging from how we might reschedule how planes are routed from one airport to another, what we can expect from ongoing improvements in engine technology, and so on. We hope to have that study available on the air sector by next month, in May.

Finally then, on slide 10, what is ICAO doing on international emissions? They do have several working groups set up. They are under the protocol task to deliver on how we might deal with international emissions. They're looking at a range of things, from standards to technology, as well as taxes and charges. Sweden and Switzerland are now starting to charge for emissions from airplanes, because the growth of air travel is skyrocketing in Europe. It's up 50% in just ten years. Between 1985 and 1995, their air traffic went up by 50%.

So that's basically a five-minute version of Kyoto, and I'd be happy to take any questions you have.

The Vice-Chairman (Mr. Roy Cullen): Thank you, Mr. Forster. I have one question, if no one wants to...

If you had, let's say, two points in Canada—let's make it simple, Montreal to Toronto—and you had to decide in terms of Canada's greenhouse gas emissions whether you would put a diesel passenger train, fly people, or put them on an electrified track, which would be better or worse in terms of greenhouse gas emissions?

Mr. John Forster: In terms of emissions in an intercity context, what you'll find is plane travel per passenger kilometre will emit about twice as many greenhouse gases as, say, a car, if we all got in a minivan and travelled, or took the train, such as a VIA Rail train, and about five times as much as a bus. However, it emits far fewer emissions than you do getting to work, in an urban context, driving your car to work every morning. It's much less than that.

The Vice-Chairman (Mr. Roy Cullen): Thank you.

[Translation]

Mr. Guimond.

Mr. Michel Guimond: Thank you, Mr. Chairman.

• 1705

My question is for Mr. Carr. On page 20 of the English version of the document, which has the heading "Canada-US—the Transborder Market", we have some details of the impact of the Open Skies Agreement on the Canada-US market. We read that the Agreement:

Has allowed Air Canada and Canadian Airlines to develop their key hubs based on US traffic.

Which Canadian airport has benefited the most from the coming into force of the Open Skies Agreement with the United States?

[English]

Mr. Brian Carr: Do you want to answer that one, Eric, in terms of which Canadian airport has benefited the most in terms of the Open Skies agreement?

[Translation]

Mr. Eric Mainville: The airport that has benefited the most in terms of routes is clearly Toronto. We have also seen significant increases in Vancouver, Calgary, Montreal and Ottawa, which are pretty much in keeping with the level of traffic per airport.

Mr. Michel Guimond: Did you list the airports after Toronto in any particular order? Does this mean that Montreal is in fourth place, or were you just reciting them from memory? My question is not a trap, by the way.

Mr. Eric Mainville: Montreal is in third or fourth place. I'm certain that Vancouver comes after Toronto.

Mr. Michel Guimond: It's thus in keeping with the relative size of airports in Canada, Toronto being the largest, then Vancouver and so on.

Mr. Louis Ranger: You've raised an important question. For historical reasons, Montreal was very well served compared to other Canadian cities and Air Canada had obtained some attractive flights going out of Montreal, given that the number of flights was limited under the former system. Montreal was already in a good position before the Agreement was signed. We have to put this in perspective.

Mr. Michel Guimond: Still on the same page, you say: "Before the Agreement, some 114 Canada-US city-pairs received non-stop schedule or charter air service." Therefore, before the Agreement, there were 114. The next point reads: "After the Agreement, the number of such city-pairs increased to 154." So, there were 40 new city-pairs. Could the department provide a list of these 40 new city-pairs to our clerk?

It's the next point that I don't understand. I've asked other people this question, because sometimes I have trouble understanding. It reads: "In total, there are about 103 new transporter services offered since 1995." What does this figure of 103 have to do with the figure of 40 that is given earlier? I don't understand the figure 103.

[English]

Mr. Brian Carr: They're counting different things. In the first case, it's a new city pair—they are two cities that have not been linked by a service before. On the 103, several airlines could be offering services on that city pair, but the same city pair is being served. Perhaps it confused you by counting different things. In the first case, it's just a new city pair link. In the second case, we're talking about the number of airlines that are starting services.

[Translation]

Mr. Michel Guimond: Could you give me an example of one of these 103 new transporter links offered since 1995?

[English]

Mr. Brian Carr: Okay. An example is Canadian Airlines serving Miami from Toronto. Toronto-Miami was already served by Air Canada before, so it would not be counted as a new city pair in moving from 114 to 154. There was already some service. However, Open Skies allowed new competition, so Canadian Airlines is now offering service on that same city pair. So it counts in the 103, but it does not count in the increase in new city pairs.

[Translation]

Mr. Michel Guimond: The Toronto-Miami example is a very good one; that helped me understand. Are you going to provide us with a list of the 40 new links that have been introduced since the Open Skies Agreement?

Mr. Louis Ranger: Yes. We have always monitored the situation very closely. For example, in our 1997 annual report, we outlined the situation at that time. In our 1998 report, which will be released within a month, we will provide more recent figures. We will forward them to you.

Mr. Michel Guimond: Thank you.

The Vice-Chairman (Mr. Roy Cullen): Thank you.

I have a short question to ask, please.

• 1710

[English]

There has been some discussion that some of the chartered services are becoming scheduled services. I wonder if you could comment on that. Is there any reality to that statement? If so, is there any action that anyone is contemplating?

Mr. Brian Carr: Are you talking about the transborder market, Mr. Chairman—the Canada-U.S. market?

The Vice-Chairman (Mr. Roy Cullen): I wasn't really narrowing it to any specific market. I have been told, for example, that you can take the Canada 3000 3 p.m. or 4 p.m. flight, just as from a regularly scheduled airline. Is that the case?

Mr. Brian Carr: I think maybe you're talking about the domestic services.

The Vice-Chairman (Mr. Roy Cullen): I wasn't really distinguishing in my question. If there's a differentiation between international versus domestic, that's fine. I'd like to know about both.

Mr. Brian Carr: There is a differentiation—if you don't mind, Valérie, I'll just state it. Domestically, because we have a deregulated environment, there's technically no such thing as a difference between a scheduled service and a charter service; they're just services. So Canada 3000 does operate. Services we used to call charters—because in a regulated environment they were operated under charter rules—will still be marketed as international charters, through tour operators and so forth, and probably not through computer reservation systems. Nevertheless, technically we don't call it a charter service versus a scheduled service in the domestic market.

In the Canada-U.S. market, there were a lot of services that used to be operated as charter services, that is, pursuant to the charter regulations as opposed to being offered under the air agreement—this was before Open Skies—largely because their agreement was so restrictive. There wasn't an opportunity for services to be offered under the air agreement; charter was the only avenue to get a service into the market.

Now with Open Skies, carriers can make their choice, and so many have switched. I'm not sure if the major carriers operate flights any more between Canada and the U.S. as charters. With advance payment protection and that sort of thing under the charter rules, they operate them like any other transborder service as a scheduled service through their computer reservation systems, without having to follow the advanced booking rules that would be required in the case of a charter.

Internationally, there's still a wide range of scheduled and charter services provided. To give you a couple of examples, Air Transat is now Canada's designated carrier to both Cuba and France—or it's one of our carriers to France; Air Canada is the other one—so they are now operating pursuant to bilateral air agreements, which means scheduled services, whereas previously it was strictly charter. So they offer both charter and scheduled services to Cuba currently, depending on which destinations they serve.

The Vice-Chairman (Mr. Roy Cullen): Okay.

[Translation]

Thank you very much, Mr. Ranger, and your team as well. There's a lot for us to learn.

[English]

I expect we'll have you back here in the fall, if not before. Thank you very much.

We'll go in camera now, please, committee.

[Editor's Note: Proceedings continue in camera]