TRGO Committee Meeting

STANDING COMMITTEE ON TRANSPORT AND GOVERNMENT OPERATIONS

LE COMITÉ PERMANENT DES TRANSPORTS ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, May 8, 2001

• 0902

[English]

The Chair (Mr. Ovid Jackson (Bruce—Grey—Owen Sound, Lib.)): Good morning, ladies and gentlemen. I think I see a quorum.

At the outset I would like to say to the committee, apologies again for not getting the documents to you. The clerk has assured me that in the future the documents will reach you as soon as he gets them. So we're going to hold his feet to the fire and make sure that happens.

This morning, in accordance with Standing Order 108(2), we have the review of the current state of airline transportation in Canada. With us we have Bruce Hood, Marian Robson, and Claude Jacques. I understand that Marian Robson will lead off, followed by Bruce Hood, for ten minutes.

Ladies and gentlemen, thanks for being here. You may start.

Ms. Marian Robson (Chairperson, Canadian Transportation Agency): Thank you very much, Mr. Chairman, for the opportunity to appear before you here this morning.

My name is Marian Robson, chairman of the Canadian Transportation Agency. With me is Mr. Hood, our air travel complaints commissioner. Unfortunately, our vice-chairman, Mr. Gilles Dufault, is out of the country and unable to attend this morning. Mr. Claude Jacques, the acting general counsel for the agency, is here in his place. Gavin Currie, director general of air and accessible transportation, is also here with us today.

We understand that you are interested in how well the new provisions of the Canadian Transportation Act, as enacted by Bill C-26, are working. I'd like to begin by describing what we have done since last July 5. Mr. Hood will then discuss the consumer complaint process, and we will then be pleased to answer your questions.

As you know, the amendments to the Canada Transportation Act gave the agency significant new responsibilities in four areas: air passenger complaints, domestic airline pricing on routes where there is no or limited competition, terms and conditions of domestic air travel, and discontinuance or reduction of air services. Section 66 of the Canada Transportation Act was amended to provide the ability to determine, on complaint, on routes within Canada where there is no or limited competition, and therefore no reasonable alternative air service, whether carriers are charging passenger fares or cargo rates that are unreasonable when compared with prices on similar domestic competitive routes. If they are unreasonable, or the range of fares is inadequate, the agency may order corrective action.

• 0905

As you'll note on your slide on pricing complaints, so far we have received 39 pricing complaints under section 66. Twenty-three are active, eight were dismissed for different reasons, seven were withdrawn, and we have issued one decision on non-competitive routes, on Air Canada's prices between Prince Rupert and Vancouver, British Columbia, where we found the prices to be unreasonable when compared with prices on a similar route between Winnipeg and Saskatoon. The act requires that the carrier be provided with the opportunity to respond to the finding before corrective action is determined. We are currently studying Air Canada's response and expect to make a final decision shortly.

With respect to domestic airline pricing and monitoring, a two-year period for this activity was established. This can be renewed by the Governor in Council for an additional two years. The agency may, on its own motion, monitor prices in Canada on non-competitive domestic routes. The idea here is to identify possible instances of unfair pricing. We can then order corrective action. But I should point out that we do not have a general power to monitor airline prices in Canada, only on non-competitive routes.

We have monitored 50 domestic markets during the year. We've been looking for pricing trends that are unique to non-competitive routes. We have found no price increases that apply only to non-competitive routes, although Air Canada did institute a 6% fuel-cost-related price increase on January 1 on all its domestic routes. We have found some new discount fares introduced only on some competitive routes, and these pricing actions were designed to match new entrants into some markets in the Atlantic provinces. This issue has been dealt with by the Competition Bureau.

With respect to terms and conditions of domestic carriage, there are new agency powers to ensure that terms and conditions of carriage are set out in the carrier's tariffs and are indeed being applied as published. If we find they are not, we can order a refund for the passenger or out-of-pocket expenses. This is a complaint-driven mechanism. In other words, we must receive a complaint in order to take action in this area. Also on complaint, we can determine if the terms and conditions of carriage are indeed reasonable, and if not, we can order that they be either deleted or modified.

We have received approximately 20 complaints about unreasonable domestic and international tariffs, mostly against Air Canada, but also against major charter carriers. There are a variety of very complex issues that have been raised in these complaints: limits on lost luggage, entitlement to bereavement fares, non-refundability of tickets. I must say that carriers, the complainants, and the agency have all found the process in this area more complicated and time-consuming than we would have liked. These are incredibly complex matters with potentially far-reaching impact for carriers and consumers alike, and we really feel strongly that we must get this right and allow the parties enough time to do their pleadings on these issues. The first decisions on terms and conditions are expected in the next few weeks.

With respect to the provisions on discontinuance or reduction of service, the legislation increased the notice period from 60 to 120 days. For new services 30 days' notice is required. The agency can give exemptions in this area. There have been nine requests for exemption, seven have been granted, and service was continued by another carrier. Three requests were for a reduced notice period. We accepted these, but with conditions to protect consumers.

Another area of interest I would like to raise is unruly passengers. While it's not directly related to Bill C-26, it is becoming a major issue for carriers, their employees, and consumers. We have received 11 complaints from passengers who were refused transportation due to their behaviour. In four cases we found that the carrier's action in removing the passenger was consistent with its tariff. However, in two cases, Holoboff and Abed, we found that the carriers' tariffs—and these were Air Canada and WestJet—were unclear and that passengers had been subjected to a lifetime ban that they could not reasonably have expected.

• 0910

In both cases, the carriers were ordered to amend their tariffs to provide for a graduated response to unruly behaviour and to clarify the actions that could lead to a lifetime ban on travelling with the carrier. The carriers were also asked to reconsider the bans they had imposed. The agency also asked the carriers to consider ways they could better communicate their rules on unruly conduct to the travelling public.

Air Canada has been requested by ATAC to act as the industry leader on this issue and has presented a revised tariff provision to the agency. This is currently under review. Indications are that once the revised tariff provision is approved by the agency, most Canadian carriers are prepared to adopt a similar provision.

As you can see, in summary, there has been a lot going on at the agency, and certainly in the aviation industry, as you all know.

As I last year advised SCOT, the Standing Committee on Transportation, your predecessor, plans for dealing with complaints at the agency were based on our estimate of 1,000 complaints per year. We really had no basis on which to make a calculation, because there was no experience and it's really a rather unique situation. So that was our forecast, and that's what our resourcing was based on. I must report today that if complaints continue at the current rate, we will have dealt with 3,000 in the first year of operation. That, I repeat, is with resources for handling 1,000 complaints.

That number shows that Canadians really are looking for help with their air travel problems. This high volume is resulting in a backlog, unfortunately, and despite staff's best efforts, we are falling further behind. We're actively seeking additional financial resources to enhance our staffing for the program. We have found generally that the complaints under the new sections are taking longer to process than anticipated, both for the carriers and for the agency.

In general, I believe we are making a difference and we are on the right track. We have to date actually processed more than 1,000 complaints, which was our projection for the entire year, in eight months. We have had a lot of very good feedback from satisfied customers. So I think we're doing some things right. It's just that we do need to expand our organization in order to properly give the services to consumers.

I will now ask Bruce Hood, the air travel complaints commissioner, to comment further on his experiences since being named to the position in August of last year.

Bruce.

Mr. Bruce Hood (Air Travel Complaints Commissioner, Canadian Transportation Agency): Thank you, Ms. Robson, and thank you, committee members, for this opportunity to explain my experience in the first nine months of my mandate.

Last summer I was appointed air travel complaints commissioner, charged with the responsibility of responding to complaints from passengers travelling on air carriers that operate within Canada or fly to and from this country.

My office has worked hard to fulfil the expectations of many Canadians who look to us as the place to voice their concerns about the quality service they felt was lacking in the air travel industry. Canadians who fly a lot have a lot more good experiences with air travel than bad, but that doesn't make the bad bearable. Whether you're a frequent flyer or a first-time passenger on your first flight, you deserve better.

The written complaints received usually contain a mixture of issues. Some fall within our Canadian Transportation Agency mandate, and some fall under another department or agency's mandate, and some don't fall under any particular mandate. All of these get attended to accordingly.

In presenting the program to the Canadian public, we want to avoid confusion and make the whole process as informal and consumer-friendly as possible. Therefore, we have a one-stop-shopping policy. We inform Canadians to send their air travel complaints to my office. Then we sort through these complaints and make sure they receive proper treatment. In some situations, that means sending a complaint or part of a complaint to another agency or department with a request that the department respond directly to the complainant. In others, the complaint is directed to the agency to deal with under its general rules. In the vast majority of complaints, we try to deal with the issue in an informal manner, in an attempt to procure a resolution favourable to the complainant.

We have received very few complaints that could be termed frivolous or vexatious. In fact, out of 2,000 complaints, we've had only five that would fall into this category. In approximately ten other cases, the correspondent was seeking restitution out of all proportion to the situation.

• 0915

There's no doubt that many Canadians are affected by the changes that have taken and are taking place in the Canadian air transportation industry. There is also no doubt that the overall majority of complaints—in fact, more than 70%—are against Air Canada, the country's single largest air carrier. That might seem like a given since it carries at least 70% of the passenger load.

Canadians are most concerned about three categories of complaint issues. First is quality of service. The majority of complaints about quality of service involve lack of communication by a carrier, a negative attitude exhibited by airline employees, and overall a lack of respect for the paying passenger. I am seeing better results on this, though limited, since my occupation of this office.

The second category is flight schedules. This includes delays to flights, as well as cancellations, plus problems that arise having to do with overbooking.

The third category is baggage. No one likes to arrive at their destination to find their luggage has not. I think we've probably all experienced that. The frustration is often compounded by an unsympathetic response from the people who lost the luggage in the first place. We're seeing improvement there as we proceed.

My report to Parliament on March 29 included six recommendations that I believe will strengthen the performance of the air industry. Among the recommendations, I suggest that air carriers be more willing to acknowledge a problem when it occurs, or as soon as it is brought to their attention.

I also urge the carriers to be more prompt and forthright about providing information about changes to scheduled flight times or route diversions.

I recommend they provide passengers with easier access to the terms and conditions of carriage as detailed in their tariffs.

There will always be problems that occur in air travel. What is most important to the customer is how that problem is handled by the carrier. What is also important is that the carrier take action to avoid similar systemic problems in the future.

I've included some statistics to the end of April in the information you have in the package. I'll be sending a letter to all the carriers that are involved with complaints, seeking their response or any initiatives they may have taken in regard to the recommendations of my report.

My next report will be for the current six-month period, January 1 to June 30, and that will be ready in September.

Thank you.

The Chair: Thank you very much, Mr. Hood.

We'll go right to questions, starting with Mr. Hill of the Canadian Alliance Party, for ten minutes.

Mr. Jay Hill (Prince George—Peace River, Canadian Alliance): Thank you, Mr. Chairman, and thank you, lady and gentlemen, for appearing this morning. Your attempt to further enlighten not only the committee but also the general public as to what's happening, and your service available to them, is greatly appreciated.

I'll start with Mr. Hood. I'm not sure how busy you are, but we can probably use your help tomorrow morning at caucus.

Mr. Bruce Hood: Shall I bring my whistle?

Mr. Jay Hill: I have a recurring complaint from an individual about luggage being boarded on a plane and then not removed. I think this complaint was forwarded to your office. This individual claims that in making a trip abroad, she missed the flight but her luggage didn't. I wonder whether that's something you deal with. Obviously it's a safety concern that this individual continues to raise with me.

I raised it when department officials appeared before us about six weeks ago, and I have yet to hear back from the department. I actually asked the ADM for safety whether that was something your office would deal with.

Mr. Bruce Hood: Very definitely. We have complaints in-house now that we're dealing with in that respect. In fact, the airlines generally will go through...

What has happened, as I understand it, in a few situations, is that the plane is already delayed, and the message doesn't get down quickly enough to the people who are going to have to open the plane up and retrieve the luggage. That's not supposed to be the case at all, for sure.

• 0920

We have similar luggage problems with people who get bumped off a flight. Then we go into the process of deciding whether to take the luggage off or not. They're not supposed to carry luggage unless the passenger is on board. That's another area.

These are all new areas we'd never heard of, even me, who has been in the business for 15 years and who travelled for 20 years before that. The new situations that develop almost weekly are very surprising.

Mr. Jay Hill: Just on that, are you aware of any penalties that can be enforced if the luggage stays on the airplane? Obviously, if there isn't any penalty, while they may pay lip service to the complainant it could be allowed to continue. It's obviously, as you indicate and I think everyone would generally agree, an unsafe situation to have luggage travelling without the owner on board, especially with foreign flights.

Mr. Bruce Hood: Basically, for anything that has to do with the airline's tariff, they have to meet the standards. That's when the rulings are made. There could be any variety of penalties assessed, not by me but by the agency, when it comes to anything about an airline where standards have to be met.

As for the instance you're referring to, I'd be happy to take some information from you and make sure we have it in our system and are able to follow up. With everybody I talk to I say “Put it in writing”.

Mr. Jay Hill: I think the individual question has been sent on to you, but I'll make sure I send you a copy of any correspondence from my office on that issue as well.

I noted in your remarks, Mr. Hood, that you said you urge—I think “urge” is the word you used—airlines to be more prompt and forthcoming with flight changes. I know that's a complaint I could make as an individual, and I'm sure other members of Parliament could. There's also another complaint we continually hear, that when service is dropped or altered significantly, in many cases you don't find out until you're at the airport. In some instances you don't even get the courtesy of a phone call saying that the flight has been dropped or whatever and that they've automatically booked you onto the next available flight, which might be two or three hours later that same day.

Is there any teeth—I guess that's the word I'm looking for—to what you can do other than, to quote you, “urge” them to be more forthcoming and prompt with their schedule changes?

Mr. Bruce Hood: Where it's at right at this moment... The report that came out was for the first six months in office. There's a major learning curve because it's a brand new scenario. As a result of that, those recommendations were made based on the complaints we dealt with and how we identified what the problems were.

First of all, we know there are going to be problems—it's inevitable—no matter how perfectly an airline tries to function. People and weather are involved, for instance. We know there are going to be problems. The airlines do not delay or cancel flights just at a whim. They have to have a reason for it, obviously. They do, in a lot of cases, make those contacts, but there's a lot more to it than that. It may be a case of people being in the airport for their flight, being checked in, and not knowing their flight has been cancelled. We've had people sitting at gates and wondering where everybody is, for instance.

So it's an in-depth thing, and they are working at it. Air Canada has come up with a customer services plan. It's not on the street yet, but yesterday it was out there. It says, for instance, that if you're in the airport, they're going to let you know every 15 minutes as to what the situation is with a delayed flight or whatever.

It's the same thing with phoning in advance. They do a lot of it, but they don't do it for everybody. There are a lot of reasons. They may not have phone numbers to reach people, or they may have to go back through a travel agency. We're there to keep them on their toes, to make them realize their responsibilities, and to make them better at it.

As I say, Air Canada has indicated they plan to be better at it. We'll find out when I go to the air carriers, the people who have had complaints about their services, and ask them what each carrier is doing in that regard.

Mr. Jay Hill: Just on this issue of notice if there's a flight scheduling change, what are the requirements? Are there any requirements that a passenger can feel comfortable... I know some people have been talking about a need for an airline traveller bill of rights or something, so it will be very clearly defined as to the requirements of notice and the steps to take.

• 0925

I respect the fact that, as you say, you have raised these issues with the airlines and they have indicated to you that they're trying to get better at this. They're trying to make the phone calls and contact the passenger in question. But what are the requirements, if any, to put it in a box? If they don't adhere to the requirements, what course of action other than making a complaint can the passenger take? It just seems as if it's complaint after complaint.

According to your own statistics, a lot of them are still unresolved. Yet I note that—I think it was Ms. Robson who indicated this—19 applications for reduction in services were approved. From a passenger's perspective, what are the requirements? What are the possible courses of action? What, ultimately, are the penalties if the airlines continually end up with angry passengers waiting at a gate, as you say, only to find out their flight has been cancelled or postponed?

Mr. Bruce Hood: As I indicated, the airlines set out in their tariffs the standards they're going to operate under, the rules and regulations they have for their passengers. The CTA's role is not so much to monitor it as, when people do complain, to relate it to the tariff.

Now, as I mentioned about my report...and you mentioned the passenger bill of rights, which is a pretty hot issue because in the U.S. it's been in and out and back and forth. They allowed the carriers to do their thing, which is kind of the way it is in Canada. What happens is that with the events, the learning process, and the ensuing recommendations, by the time the next report comes out it may in fact suggest something such as a bill of rights or regulation in specific areas, which then comes back to the people in the House who handle those kinds of things.

As far as what they do in their tariff, we have the responsibility to make sure they abide by that tariff.

Mr. Jay Hill: Is there a requirement right now that they have to provide a passenger with, say, a week's notice if they're going to cancel a certain flight?

Mr. Bruce Hood: There are provisions. Perhaps Gavin could respond.

Mr. Gavin N. Currie (Director General, Canadian Transportation Agency): Yes. In terms of—

The Chair: You have about a minute, Mr. Currie.

Mr. Gavin Currie: I'll be brief.

In terms of an ongoing flight rescheduled for some reason, there is no requirement in the tariff for any specific notification to the passenger. If you're talking about complete discontinuance of service, then there are requirements in the act for notice to be given. These are quite separate things. What Ms. Robson was talking about was the latter, where a service is discontinued completely, not where a flight for that day is simply rescheduled or cancelled.

The Chair: Okay. Thank you very much.

Mr. Hill, you'll get back in another round, and I'm sure Mr. Fitzpatrick will want to get in as well.

We'll go to the Liberals now for ten minutes.

Mr. St. Denis, you're going to share with Larry Bagnell?

Mr. Brent St. Denis (Algoma—Manitoulin, Lib.): That's right. Thank you, Mr. Chair.

Thank you for being here, and congratulations to the CTA and the commissioner for the first report from the complaints commissioner's office.

As you know, today is an attempt by the transport committee, or SCOTGO as it's now known, to get a snapshot of the industry, in particular because there is a major transition going on. We appreciate that we have a chance to spend a little time with you.

I have a couple of short questions, and then I'll pass to my colleague from the Yukon.

To either Ms. Robson or Mr. Hood, with respect to the recommendations you made in your first report, which are essentially recommendations to the industry, is there any other requirement—it's a report to Parliament—for the industry that they write you a letter or respond item by item to your report? Is there a protocol requiring that kind of official response from the industry?

Mr. Bruce Hood: No, not really. Again, down the road there could be; who knows? But at this stage, not really. It's a question of my seeking from them what they have. If they have reacted—or maybe if they've even read it—that's where it is.

Mr. Brent St. Denis: Okay. That's a good clarification to have.

The companies themselves have had, probably for a long time, their own official or unofficial complaints offices, and they would have their own logs of different kinds of complaints. Is there any requirement that they share with you the kinds of complaints they are receiving? Is there any organic link between your office and their office, so that the statistics you have for your office are somehow corroborated or differentiated from the kind of complaints they get?

• 0930

Mr. Bruce Hood: We'd like that very much, but it's not available here, it's not available anywhere. Air carriers do not provide that type of information, in the U.S. or across the water. It's more of their private scenario. An indication is that Air Canada has approximately 70 people who deal with complaints. The major carriers in the U.S. have similar numbers. As for getting down to total numbers of complaints and being able to say, “Well, we get 0.01% of what they get”, we really are not in a position to do that at this time.

Mr. Brent St. Denis: In a future scenario it might be possible, even if there weren't names and addresses, at least to see statistically that you're getting 10% baggage claim complaints and the industry is getting 10% as well. It would seem that your statistics are a subset of all of the complaints, and whether that subset reflects the total or not, it might be helpful to know. Whether we can require that by law remains to be seen.

Mr. Bruce Hood: We recommend that the airlines provide more information, not specifically into that area yet, but that they provide more information to us for similar purposes. They do in other parts of the world, but not here as yet.

Mr. Brent St. Denis: If I have a moment left in my share of this time with Mr. Bagnell, I have just a last question to Ms. Robson. You mentioned in your comments on the terms and conditions of domestic carriage that this system was complex. I'm wondering if you could elaborate a little bit on that complexity and whether there are some obvious things that could be done to make it better. We have to appreciate that the industry too doesn't need to be unnecessarily burdened by complexity, nor consumers. I wonder if you could comment on that.

Ms. Marian Robson: The area of terms and conditions is traditionally a very complex one, and this is a new provision in the legislation. When complaints come forward, our staff are then going to the carriers with the complaint and they're introducing a pleadings process, where the carriers have the opportunity to do the research and to come back to us. They're usually 10-, 12-, or 15-page, very carefully thought out legal documents, because in each of these provisions—limits on lost luggage—they have established terms and conditions already in their tariffs. Bereavement fares and non-refundability of tickets—they're all major policy areas for the carriers. So when they're being questioned—and we might look at making changes—we have to give them the opportunity to respond fully. That's why it's taking longer in this area than perhaps in others. But we're making progress and we do expect to have several decisions coming forward shortly.

Mr. Brent St. Denis: So there are some opportunities to improve the system without going into legislation, just within the management of it. Okay.

Thank you, Mr. Chair. I'll be pleased to pass to my colleague.

The Chair: Mr. Bagnell.

Mr. Larry Bagnell (Yukon, Lib.): Thank you. I could talk all day on this, so maybe in the next round I'll be back in.

Thank you for being here. I'm really happy the Canadian government and CTA have both Bruce Hood and Debra Ward, because I can't imagine the air rage if people couldn't vent all this stuff one way or another.

I think I've accidentally become MP ombudsman against Air Canada. I got in the media once, by accident, on an issue, and they just keep proliferating. I've blasted them once in the House of Commons for an issue, and people from many parties seem to agree. I see by your documents here too that a vast majority of the complaints are against Air Canada—not that I haven't had some good news stories too. But I don't want to get into the many issues I've had, both with Air Canada and in relation to what seems a dramatically unfair resolution of the pilots issue, which will come up later today.

I noticed at the end, Mr. Hood, you suggested that you receive only roughly 1% of the...because of the 70 other people at Air Canada. So from your figures, the 1,604 you got, that would make it, if I calculate right, 160,000 complaints against Air Canada, which is quite significant.

• 0935

Having worked at Industry Canada and dealt with industry a lot, I find it inconceivable that if this company weren't, in the present situation, in reality a monopoly, it would even exist, with the record on service that the complaints show here, the 160,000 complaints.

I don't know if you've had private sector experience before, but do you see this as conceivable in the natural operation of a company that's providing service? It's especially sensitive to me because it's got our name in it, Air Canada, because of its genesis.

Mr. Bruce Hood: First, to clarify, I hope I didn't mislead you by any indication of percentage. What I attempted to indicate was that we really don't know. We don't know about any carriers. In guesstimating, talking to the carriers, and trying to find out in an indirect way, we find there's a basic similarity. Air Canada folks have said to us that their complaints didn't increase this past year with the merging. They said they get 50,000 to 60,000 complaints a year. We don't have that anywhere in writing, but that's what they have indicated, the number they handle with the number of bodies they have.

To be fair to all carriers, my role isn't so much to do with the numbers of complaints any carrier has, other than where it's a systemic problem and they don't deal with it. The objective is to get much better treatment for the people who do have complaints, so that they don't get cast aside. In a lot of cases they never even get acknowledged, or they get a letter that doesn't even have their name on it, but somebody else's name. There are a lot of careless approaches in dealing with complaints. This is what caused a lot of bad-mouthing. This is what affects images of carriers, no matter who it is.

That's really my bottom line. You're giving that extra attention to the people who travel all the time, so why not give that type of attention to the person at the bottom end who has had a problem? Carriers all talk about it, they want quality service. They don't want any unsatisfied customers. And so I say, “I'm on your side, so work with me, and we can make this better”.

Mr. Larry Bagnell: I said I wasn't going to mention specifics, but I want to go on record on the reduction in bereavement conditions and sensitivity since the change from Canadian Airlines, because it's such a tragic thing for people. You're obviously in a sensitive position, but are there some points of considerable seriousness that you would like to raise, but you just couldn't raise in your report, things we should be concerned about that you could field for us now? I have no idea what those might be, and I know it's hard in your position to come out with those unless someone asks you.

Mr. Bruce Hood: Not really. In truth, the report did sum it all up. It was very honest and forthright. It maybe didn't give a lot of personal views about the individuals in dealing with some carriers and situations that developed, but that's a different thing.

You're talking about bereavement. That's not an easy call, even for the carriers. We get a lot of people who demand to have discount travel to go and attend an ex-wife's funeral. You wouldn't believe some of the requests we've had in that area. I think the carriers in general do a good job of that, but there's such an expanse of parameters, where do you draw the line? That's where the problem is. If it's straightforward, if it's close family, there's no problem—present the documents and whatnot and it's done.

Talking about Air Canada, our national, they have things they're planning to do that I've heard about. Just wait and see, and that comes with the next reporting, the next processing.

The Chair: Thank you very much, Mr. Hood.

Mr. Bagnell, your time's up.

We'll go to Mario Laframboise of the Bloc Québécois for 10 minutes, then we'll go to five-minute rounds, Mr. Fitzpatrick and Mr. Szabo.

[Translation]

Mr. Mario Laframboise (Argenteuil—Papineau—Mirabel, BQ): Thank you, Mr. Chairman.

• 0940

In order to properly understand how the Canadian Transportation Agency works, I will use a concrete example. Before simply cancelling all flights to Baie-Comeau, Air Nova decided last year or at the beginning of this year, to change its Quebec—Montreal flight by dividing it into two segments, namely Baie-Comeau—Québec and Baie-Comeau—Montreal. If there are people who were upset by Air Nova's decision to break up the Quebec—Montreal flight, did these people file a complaint to the Canadian Transportation Agency about a reduction in service or the interruption of a previous service? Did they file any complaints? If they didn't do so, should they have done so, since you are the person in charge of flight reductions and flight interruptions domestically?

Mr. Claude Jacques (Legal Counsel, Legal Affairs Division, Canadian Transportation Agency): As regards Air Nova, what happened in this particular case, is that the carrier had not used the service for at least one year; consequently, section 54 of the Canada Transport Act no longer applies. And that is why there was no notice given. Under similar circumstances, there could have been a notice if Air Nova had run the service for at least a one-year period.

Mr. Mario Laframboise: Therefore, you didn't have to look into this issue given that there was no notice. Is that correct?

Mr. Claude Jacques: That's correct.

Mr. Mario Laframboise: Could the users still have filed a complaint because the service was disrupted?

Mr. Claude Jacques: Citizens can always file a complaint, but given that it did not fall within the ambit of the legislation, the Agency was in a situation where it would have been difficult to act.

Mr. Mario Laframboise: Very well.

More recently, in January, costs have increased just about everywhere. The citizens of the regional councils of the Magdalen Islands informed me that there was already a 26 percent decrease of arrivals to the Magdalen Islands because of the monopoly and the fact that the costs were so high. Did you receive any complaints? If people were not satisfied with the rates that apply to flights to the Magdalen Islands after the increase in January, should they have filed a complaint with you?

Mr. Claude Jacques: Yes, that's correct. It has always been possible for them to file a complaint with us. However, it appears that we did not receive any complaints from people in the Magdalen Islands on this issue.

Mr. Mario Laframboise: Theoretically, complaints must be made to your office?

Mr. Claude Jacques: Yes, that's correct.

Mr. Mario Laframboise: When people make a complaint regarding fare increases, do you analyze and then make a decision, or do you try to negotiate or to come to an understanding as you indicated earlier?

Mr. Claude Jacques: Actually, no. The Agency analyzes the situation and compares prices. The Agency has jurisdiction on those situations where there is little or no competition.

Mr. Mario Laframboise: Would the Magdalen Islands constitute an example of this?

Mr. Claude Jacques: It could be an example. The Agency must first determine if, in the Magdalen Islands, this is a situation where there is little or no competition. Once that determination is made, namely that there is a route that is in that situation, the Agency can compare prices in order to determine whether they are excessive as compared to those routes where there is competition. And it is this type of comparison that is done. There are criteria set forward in the act which guide any comparison of this nature.

Mr. Mario Laframboise: When we analyze your documents, we see that there were nine requests dealing with a reduction or interruption of service and that you approved seven of these requests. Therefore, nine applications from industry were filed with your Agency. That means that on seven occasions out of nine—let's say seven occasions out of ten—the Agency approves the request.

• 0945

Mr. Claude Jacques: Normally, there is a 120-day notice. Under certain circumstances, it is possible for the Agency to make an exception. But in order to do so, a certain number of criteria set forward in the act have to be respected. Therefore, for example, it depends on the financial situation of the carrier. Let's look at the case of Regionair. The carrier was in bankruptcy and it would have been foolish to force them to maintain service over a given period of time, because they would have been incapable of doing so. The Agency must take certain specific circumstances into account.

In other circumstances, it may happen that a carrier abandons service in one area, but that it is taken up immediately by another carrier. Under these circumstances, there is no service interruption as such, even if one carrier in particular abandons the route.

These are situations that the Agency must take into account before making a decision, for example, as to whether notice of reduction of service must be provided.

Mr. Mario Laframboise: I'm going to come back to my example from the beginning. If I understand correctly, Air Nova had not offered service between Baie-Comeau, Quebec and Montreal for a year, and then reinstated the service.

Mr. Claude Jacques: That's not quite correct. The service had not been offered for a year. The legislation states that service had to have been offered for a year in order for the relevant section to apply. It must be an annual service. Given that this service was not offered on an annual basis, the legislation didn't apply to this service.

Mr. Mario Laframboise: Now that you are operational and that almost all services are being offered, does that mean that everyone, after a year, will be able to file a complaint if service is interrupted?

Mr. Claude Jacques: Yes, but you have to meet the requirements of the law. Obviously, when service is interrupted, there has to be only one carrier remaining who offers weekly services. That is the rule in the case of abandoning a route.

In the case of Baie-Comeau, this must be a regular air service with no stopovers, offered all year long. That is the first criteria, if the interruption is to reduce the total capacity on the route by at least 50 percent. If there is only one carrier operating this route during the period at issue, then the interruption could only apply to a regular, non-stop flight.

There are, however, criteria set forth in the legislation. It deals with very specific types of services. In other words, it concerns services where there is little or no competition. Under normal circumstances, if there is competition, we would expect that competition would have a tempering effect.

Mr. Mario Laframboise: But there is little or no competition between Baie-Comeau and Quebec City. The service should therefore be under your jurisdiction, but based on what you are telling me, since this service was not used, that is no longer the case. I find that very unusual, but so be it.

Mr. Claude Jacques: It's not so much that the service was not used, but rather that it was a new service which had not been in operation for at least a year.

Mr. Mario Laframboise: Thank you.

[English]

The Chair: Thank you very much, Mario, that was very good.

We'll go to Mr. Fitzpatrick for five minutes. Try to keep it tight, though, because we're in the five-minute rounds.

Mr. Brian Fitzpatrick (Prince Albert, Canadian Alliance): I've become a frequent flyer myself here in the last five or six months. I find flying a stressful experience, but sitting back and being objective about the whole experience, the quality of service, I really don't think I've got a whole lot to complain about. So that's my first comment.

A second point I'd like to raise on this concerns the 1,000 complaints in the course of a year you mentioned. If the health care system in this country created a position of ombudsman, I expect there'd be almost 1,000 complaints a day. It would seem to me that, just going through the Pearson airport, you've got 1,000 customers moving around at the very minute you're standing in there, if I can use that phrase. So to me it doesn't seem like we're really talking about a statistically significant number of complaints. Every complaint's important, but anybody in business has a percentage of complaints. If 10% of your customers are always mad and complaining, you've got a problem. If you've got a complaint level that is really hard to measure statistically, maybe it isn't that big a problem.

I have another suggestion. I wish the executives of Air Canada would take some time every once in a while to fly in the economy section. I'm six-foot-five, and I'm amazed that the front rows in the economy section are not reserved for people who have a disability—that is, that they're six-foot-two or higher. Those seats are not equipped for people of my size, and that front row gives people ample leg room.

• 0950

It seems to me that if the system would reflect that, you could do things like that. Also, for people who have babies or something, that area is a lot better than cramming them in the back end of the plane. As well, for larger people, the outside rows are a lot better than being crammed in the middle. There should be some system in place by which you could address those things.

Another complaint I have is finding your seat if you're tall. They have those seat numbers way underneath there and you could almost get a dislocated neck trying to find your spot.

I just wish some of these folks would actually go into the economy section and do some flying themselves every once in a while, and take notes. Some of these aren't major cost problems, it just means putting in some common sense provisions in how they handle the passengers who go in there.

There's another thing I'm going to raise here, and I'll probably frame it as a question to Ms. Robson. This is a big country with a very small population. I've generally found if you want cadillac service in this world, you have to pay for it. The remote, out-of-the-way areas in this country always pay more, whether it's for food or you name it. It costs more to get things to those areas.

Just from reading the Air Canada financial statements for the past while, I can see they're in a lot of red ink. Any business that's constantly in red ink is going to have to start doing some things, one of which is cutting back on the level of service it's providing and letting employees go. I'm a bit concerned, with more regulation and government imposition in terms of rate fares in some of these areas, whether you're not inviting more discontinuance of service, with poorer service and layoffs of employees eventually.

I can't see how Air Canada can continue to operate as they have in the last two quarters. They'll end up being like Canadian Airlines, the company they took over. So to me, this is a serious concern, and as policy-makers we want to make sure our airlines are viable as well. It may be a more politically good avenue to go down to beat on them or impose fares that are below the cost of operations and so on, but in the long run, I don't think we're serving the public interest very well, if that's where we're going.

I would like your comment on that type of problem.

The Chair: You have about a minute to answer that question, Ms. Robson.

Ms. Marian Robson: Thank you.

It's actually, I think, more properly addressed to the minister. It really is an issue of policy. The agency is essentially a tool of government policy, and we basically don't comment on government policy since we are an arm's length regulatory body.

We at the agency try very hard to take a very balanced approach in fulfilling the terms of our legislative mandate, but we are required to administer the law as it's passed by Parliament. I think we try to do that in as fair-minded and balanced a way as possible.

Mr. Brian Fitzpatrick: How many employees are in your department?

Ms. Marian Robson: We have a total of 274 people in the agency.

Mr. Brian Fitzpatrick: Are they all situated in Ottawa?

Ms. Marian Robson: All except six. We have regional air inspectors across the country, and the others are all based in Hull.

Mr. Brian Fitzpatrick: Do you know what your budget is for your department, annually?

Ms. Marian Robson: Roughly $24 million.

The Chair: Okay, Brian, you're out of time.

We'll go to Mr. Szabo of the Liberal Party for approximately five minutes, although four would be better.

Mr. Paul Szabo (Mississauga South, Lib.): Before Bruce's appointment, what was the percentage of valid complaints out of total complaints, and how does that compare with the experience since Bruce's position was created?

Ms. Marian Robson: I think I'll ask Gavin to answer that. I don't have the exact numbers.

Mr. Gavin Currie: Before the creation of Bruce's office, the complaints were dealt with somewhat differently. It was looked at very much in terms of whether or not there was a complaint against a tariff provision of the airline. We did not really look at them in terms of whether the complaints were valid or not, in the sense of being a frivolous complaint.

Mr. Paul Szabo: That's okay. We only have five minutes to do this, so let's move on to something else.

From all that you've said you're concerned about, volume is the only thing that really stuck in my mind. Do you have any idea of how the complaints you've received since Bruce came on relate to domestic locations as opposed to international ones?

• 0955

Mr. Gavin Currie: The great majority of the complaints deal with domestic travel, but there certainly are complaints against international carriers as well, and there are complaints against international flights by Canadian carriers. But I think the majority deal with domestic travel. In terms of numbers, I can't give you numbers offhand. But perhaps I missed the question.

Mr. Paul Szabo: This is a big point, Mr. Chairman.

If you look at the percentage, if 80% of flights are domestic, yes, the absolute number of complaints is likely to be higher. But in terms of baggage delay or baggage loss, do you have any idea whether that occurs more frequently as a percent on domestic flights versus those with international starting points or destinations?

Mr. Gavin Currie: We haven't done that analysis, no.

Mr. Paul Szabo: It's important. I just consider my own situation. Since being an MP, since 1993, I've done about 750 domestic flights, and I would think about 25% international. I've had three problems, and two of them were from international sources. There are connections, alliance partners, and all kinds of other risks associated with that.

You give us statistics on complaints. I notice, for instance, 80% of the pricing complaints were for Air Canada. How much of the business in Canada is Air Canada, as a percent of the total?

Mr. Bruce Hood: Well, it was at one time 83% or 84% across the country. But of course, with the changes that have come about, it is now down about 10%. It's down to around 73%—but this isn't official by any means.

Mr. Paul Szabo: Have you concluded that Air Canada's experience is any different from that of any other carrier? Is it significantly out of line?

Mr. Bruce Hood: Their service?

Mr. Paul Szabo: No, I'm talking about complaints. Is there any indication that one airline's experience with complaints is any different from any other's in terms of percentage?

Mr. Bruce Hood: Percentage-wise, I couldn't tell you. But I made the point before that the handling of complaints and the respect given to the people who have had complaints is the area of contention, you might say. Some carriers are right on top of it immediately and others are not. That's one of the things I've been working very hard on with Air Canada, to have them give better-quality service, not only overall, but to the individual—

Mr. Paul Szabo: In the pricing complaints you have dealt with—there were 16 of them—only one was a valid complaint. The rest were either withdrawn, dismissed, or whatever. How does that compare with before your position?

Ms. Marian Robson: I'll perhaps answer that. On the pricing complaints, we've had a total of 39 complaints. We have dismissed eight.

Mr. Paul Szabo: I saw the chart. Twenty-three haven't been dealt with, so we—

Ms. Marian Robson: The 23 are in the system.

Mr. Paul Szabo: Yes, but of those you have dealt with, from beginning to end, one out of 16 was a problem.

Ms. Marian Robson: One out of 16 so far has been found to be a truly non-competitive route where there has been a price difference with a comparable competitor.

Mr. Paul Szabo: Okay. How does that one out of 16 compare to pre-Bruce Hood?

Mr. Gavin Currie: Prior to Bill C-26 and the price revisions, we did not have the same sort of powers. We had very few pricing complaints. We had probably two in the previous five years.

Mr. Paul Szabo: Mr. Chairman, I would really encourage Bruce's report and the Transportation Agency to consider providing percentages instead of just absolute numbers, so we can get an idea of the magnitude of the problem.

If you tell me there are 180 complaints due to Air Canada, and that represents 80% of the complaints but they have 90% of the business, I would say, quite frankly, their experience tends to be better than other airlines', although it might be 10 times higher than everybody else's simply because they're that much larger an organization. Absolute numbers lead to too many misconceptions of the reality.

• 1000

Ms. Marian Robson: Perhaps I could just make one point on that, Mr. Szabo. As Bruce mentioned before, part of our problem is in getting data from our domestic carriers and certainly from international carriers. We don't have any ability to get at some of the data that you're talking about that allow a much more sophisticated analysis. That's part of our problem.

Mr. Paul Szabo: I'm glad you're here. It's given us something to think about.

The Chair: Thank you, Mr. Szabo.

We're literally out of time but I have some questions, so I'm going to give Mario two minutes, Alex two minutes, Jay two minutes, and that'll be it.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman. My question is to Mr. Jacques.

I'd like to get back to my example of Baie-Comeau. Air Nova for several years had been offering service between Baie-Comeau, Quebec City and Montreal. Three months before the Agency was up and running, while the legislation was coming into force, Air Nova divided the flight and offered Baie-Comeau—Quebec City and Baie- Comeau—Montreal. And in January, nine months later, they were able to abolish this flight because it had existed for less than a year.

If I were an Air Nova or Air Canada stockholder, I would consider that this is a sound business decision. However, for people living in Baie-Comeau, it is Machiavellian. They saw the legislation coming and they decided to divide the flight before it was too late and finally that meant that the legislation would not apply. Do I understand the situation correctly?

Mr. Claude Jacques: I don't know whether the facts as you have explained them are what happened and I don't want to impute any malicious motives to Air Nova. But, generally speaking, it is important for the carrier to be able to try out a new service to see whether it is profitable or not, and to be able to withdraw this service without any severe limitations. It is important that the carrier be able to take a certain number of risks in order to try to offer new services to the public. That is why, when the service has been offered for less than a year, the conditions for abolishing the service are less restrictive.

Mr. Mario Laframboise: But we know that Air Nova was doing this for competition reasons, with chartered flights. Does this mean that it would come under the responsibility of the Competition Bureau?

[Editor's Note: Inaudible]

Mr. Claude Jacques: —

Mr. Mario Laframboise: Thank you.

[English]

The Chair: Mr. Shepherd of the Liberals.

Mr. Alex Shepherd (Durham, Lib.): I'm going back to some of Mr. Szabo's questioning, Mr. Hood. Have you made any comparison with what happens in other countries regarding complaint mechanisms and so forth? And is Air Canada specifically poorer or better than the norm?

Mr. Bruce Hood: First of all, my position is the only position anywhere in the world. There isn't a person doing the same job as I am, so that's tough to compare.

There was an international convention last year which I attended in France...but only representatives from the carriers, so I can only get the feel from their perspective. I'm in communication with U.S. folks, some people in Great Britain, and this week some people in France to find out further data as best we can. It's not easy. We deal with what we have.

Mr. Szabo mentioned percentages; we did use percentages in my report. For instance, Mr. Szabo mentioned the furtherance of numbers instead of absolute percentages and also the idea of the difference of numbers with domestic and international, so it opens up another area. Since we put our system in place, we've altered...to get the stats we really believe we need. We have another avenue now.

Mr. Alex Shepherd: Sorry to interrupt you, but they're going to cut me off fairly soon.

In view of the fact that one of your requests was that you wanted more money from government, wouldn't it be appropriate to determine what the need is? In other words, is Air Canada that bad or, in reality, is it the norm of all other airlines in the world? Is there a need to increase your budget?

Mr. Bruce Hood: The point is, we're not just dealing with Air Canada. We're dealing with all the carriers. I had complaints on 50-some carriers in the six-month period, so it's not quite that cut and dried to judge everything based on what Air Canada is doing.

• 1005

The trends change all the time. I mentioned in my speech earlier the fact that the areas around overbooking are creating problems. So we see trends that come and go. I just feel that either you shut the thing down, and you know what happens...all those people out there.

The reference was made by the gentleman over here about the number of complaints. We did a survey a few weeks ago to find out how many people knew about the CTA, about myself, about my position, and it was less than 5%. So if you realize that less than 5% know that there is a place they can go to with a complaint, you realize the number of people that probably do have complaints. It doesn't mean that the service is wrong. It doesn't mean what any carrier is doing is wrong, but there are areas that they need to be better at perhaps. When people have a problem, it needs to be dealt with and probably in a better manner.

Mr. Alex Shepherd: I have a comment. When I see government set up these critique organizations, my personal experience is that they become self-fulfilling. If your job is to critique, then you're going to find more and more problems that justify your organization. I sometimes wonder if there is a point at which we should be measuring this, not comparing domestically or anything else but as a quality service in the world. I see Air Canada getting awards and so forth for having the best quality of service delivery in the world. So I look at that and I look at this process and I hear you asking for more money.

The Chair: Thank you, Mr. Shepherd.

Bruce, you have 30 seconds.

Mr. Bruce Hood: I guess the people will decide. We thought we were going to deal with 1,000 complaints. We have 3,000. A lot of people don't know about us. Gosh knows what there is out there. So basically the people will decide.

Ms. Marian Robson: Could I just add to that?

The Chair: Sure.

Ms. Marian Robson: I'd like to make a point that the complaints are not tailing off. We're not seeing a decline in complaints. We are seeing, in fact, an increase in complaints. So what we had thought originally might hopefully be a peak during the reorganization and so on last year, and then a drop off, we have instead seen a peak last August and September, sliding down, and going back up in December, of course, because it's Christmas. Now we're into charter season and it's going steadily up. We are not creating the workload. The public is creating the workload.

The Chair: Thank you, Ms. Robson.

Mr. Hill, you have the last question.

Mr. Jay Hill: On that point, then, we can easily forecast that the office will stay in existence forever.

Mr. Hood, first of all, since this is my last word I want to thank you and Marian and the others for appearing today.

Your power, if I can call it that, is really one of moral persuasion and embarrassment, not imposing penalties to ensure compliance. In your experience as a referee, do you believe, for example, that a Ty Domi would be more or less inclined to alter his behaviour without the imposition of penalties? That's my first question.

Other than your budget, just to give you the final word today, what other changes could you suggest to your role to ensure that your office becomes more responsive and has more teeth in order to actually accomplish what obviously you set out to accomplish when you took on this job?

Mr. Bruce Hood: On the Ty Domi thing, I'd like to address that because the rule book in hockey used to be about six pages long. It's over 100 pages now. The reason for this is that the method we ordinarily dealt with was “behave and stay in line”. It didn't work, so they kept imposing more penalties. Now in one incident there's any range of about six penalties that can be assessed and, of course, ejection.

In this situation, then, I have indicated in my report that there could be a furtherance of responsibility for this office. You mustn't forget we're not out there soliciting complaints. We're not out there advertising who we are. We're only reacting to the numbers and we're in over our heads and trying to keep the system flowing.

Some of the complaints I've received are regarding the airports, which we don't have the mandate for. I've had a lot of contact from airline employees. I've had a lot of contact from travel agencies, a lot of related things that are not in my domain. In the next three, four, five years it could well be that this position could be expanded to include whatever is needed, whatever the reasoning is out there that would justify such a thing.

• 1010

As I say, from August 1 through until probably January, it was not very comfortable. I was getting shot at from all areas. I was ready to say sayonara and go back to Mexico, where I spent the winter.

Mr. Jay Hill: If I could interject one last time... Perhaps you should be sitting with us, because I'm not sure you answered my question here; terrific politician.

Mr. Bruce Hood: I'm learning.

Mr. Jay Hill: What I am trying to get from you is, do you believe, without some imposition of some penalties, we're ever going to resolve some of the problems facing Air Canada? By your own admission, the complaints are ballooning, or they ebb and flow. Whatever it is, they're certainly not dissipating. Without some teeth in what you're attempting to do, are we going to solve the problems?

Mr. Bruce Hood: I think in a great deal of situations we will. I use the reference of the hockey rule book to say that there may be a need for further regulation in areas, very definitely, and it may come as soon as the next report. Where we see an existing problem, it's not our decision to make, obviously. It's up to you folks. We will paint the picture as it is. The next report may be in other areas. So the regulatory thing may happen without—boom—a passenger's bill of rights coming into being.

The Chair: Thank you, Mr. Hill.

Ms. Robson, Mr. Hood, and the rest of the guests, thank you very much for being here.

We'll suspend for two minutes while the next witness takes her position.

• 1012

• 1016

The Chair: Let's start. We're running behind.

Ms. Ward.

Ms. Debra Ward (Individual Presentation): Good morning.

[Translation]

Thank you, Mr. Chairman and members of the committee. I will tell you about my mandate, what I do and what are, in my opinion, the most essential issues.

I was appointed by Minister Collenette on August 1st last. My mandate is for 18 to 24 months, and reports must be submitted to the minister every six months.

The final report will include my recommendations. As you know, my first interim report was presented in February. I was asked, specifically, to take into consideration the points of view of consumers, urban regions, rural regions and remote regions, travel agents, airports, airline companies and their employees.

I was also asked to determine whether the responsibilities of Transport Canada, the Canadian Transportation Agency and the Competition Bureau are clear and whether they are properly managed; to see whether government oversight measures are sufficient; to evaluate industry support to the measures in Bill C-26, including Air Canada's undertaking and the federal government's responsibility to evaluate the linguistic obligations of Air Canada; and to determine the need for a passengers' charter of rights.

In my first report, I raised a certain number of sources of concern where change is needed. Some issues have been settled, others have yet to be dealt with.

I would like to go over the topics which, in my opinion, are most in need of evaluation.

[English]

Although we all expected that the period of airline restructuring would be a time of uncertainty, no one expected the roller-coaster ride we've been on. To say that the situation is dynamic is to describe the Atlantic Ocean as a bit damp. Let me try to grab onto a few of the wettest bits that I've seen in the past little while.

Regional service is problematic. The hundreds of comments I've received can be summarized in one statement: It isn't fair. Part of it is the reality that small and remote populations have to deal with, demand levels that can lead to less capacity and higher prices. However, another part of the problem is due to the way in which the restructured airline industry itself is emerging.

Right now, small communities are served by Air Canada regional carriers and/or independent regional carriers that may or may not have an agreement with Air Canada. If there is no agreement, connections to other destinations may become more expensive and more complicated.

The market favours allied carriers, since they would offer the most advantageous prices and connections. This makes it very difficult for new regional carriers to compete on smaller routes. By regional carriers I'm referring, pretty well at all times, to those regions served by smaller prop-planes rather than jet service.

As well, a number of communities may lose service in the future. Their restructuring issues will not really be completely known until late in 2002, when Air Canada will have the freedom to exit routes. I think we need some good, hard thinking about this today. You don't want to wait until the eleventh hour.

Another issue still outstanding is the fact that Air Canada remains the only full-service, globally allied carrier in Canada today. It's the only one of its type. That gives it an enormous advantage in long-haul traffic, especially in business and inbound travel. Moreover, it has the lion's share of the Canadian market, even with the expansion of WestJet and the changes and mergers of C3, Royal, and CanJet.

• 1020

There is still a great debate, which I don't think has been resolved yet, on how we should handle the airline industry. Some call for complete foreign access. Way on the other end of the spectrum, some are calling for complete regulation of the airline industry, and, in some extreme cases, for what amounts to the re-nationalization of Air Canada. Then there's every variation and flavour in between those two very wide points of view.

The key element in this debate is whether Air Canada's market size is so overwhelming that new market forces cannot themselves emerge, and whether something other than what we have now, which are the provisions in Bill C-26, is necessary to level the playing field.

For my part, I'm still weighing the pros and cons of the myriad points of view I've been hearing since August. They are all quite compelling, and each has enormous implications for not only Canadian transportation policy but Canadians as well. They have to be considered and thought about more before we can come, I believe, to the conclusion that serves us all best.

Through all of this turmoil we've been experiencing, I don't want you to lose sight of the fact that there's been some good news as well during the last six months. The expansion of WestJet and the changes in the merger with C3 and its partner airlines, Royal and CanJet, tell me that the marketplace to an extent is working and that new demand is being fulfilled through these other mechanisms. Looking at what WestJet has planned and being very hopeful about C3, I believe this will continue, and that even a larger number of Canadian communities will be served over time. But this is a slow process.

You've heard a lot from Bruce Hood and the CTA about impacts on consumers. I won't go into a lot of detail on that now, but I will say that it's been my experience, and the experience of the people with whom I've spoken, that although we are far from where we want to be in terms of quality of service in a lot of cases, there have been improvements.

I hope that Air Canada's recent statement on customer service will lead to, again, better service. I also understand from many of the communities with whom I've spoken that Air Canada is at least attempting to keep a dialogue going and to understand better community needs, and in fact has responded to a number of community issues. It's not all perfect by any stretch, but I'm beginning to see a very faint light at the end of this tunnel and it's one I hope will continue.

I want to turn very quickly now to some specific things I'm hearing across Canada and then turn the table back to you for questions.

First, people are a lot smarter now than when I first started out. The conversations I'm having with communities, with other stakeholder groups and with businesses, are far more informed. A greater number of people and groups are defining their issues, presenting solutions and suggesting where things ought to change rather than just describing a problem. When I first started out they were basically venting, and now they're actually having a conversation and trying to find solutions.

There's generally an agreement that the new regulatory abilities the government has to roll back prices and to use the cease and desist on predation are good moves and ones that seem to suit people very well. People feel they're appropriate. However, these tools have to be surgical and quick so that those who have grievances can be confident that their legitimate demands will be acted on in a timely and forthright way.

Everybody generally likes the intent. The concerns I have heard expressed have to do with how quickly these solutions can hit the marketplace to be in time to have a fair impact on the marketplace.

Some people, as you heard from Bruce of the CTA earlier this morning, are less enthralled with the tools for recourse that people feel they have. It could be there's a number of flavours of things out there, but a number of people feel that something other than the tools we have for recourse, or stronger tools, or different tools or extensive tools, might be necessary.

There are also concerns of course about how effectively Air Canada is moving towards fulfilling its obligations under the Official Languages Act. As I said earlier, that's part of my mandate. But Air Canada is still in the compliance process stage and I think they have another year or so before full compliance is necessary.

Another area I'm watching very closely is the impact on airline employees. This area is very complex, very sensitive, and one I am just now beginning to explore in any kind of meaningful way.

• 1025

[Translation]

And lastly, I will have to determine what we must do to obtain that which in my opinion must be the ultimate and final result: a healthy airline transportation industry, one that is competitive and which responds to the needs of Canadians. We obviously still have some way to go before we get there and I am very honoured to be able to do my part.

I could go on at length, but instead of taking your time, I would rather have you ask me those questions you feel are important, and I will do my best to answer them. Thank you very much.

[English]

Thank you.

The Chair: Thank you very much, Ms. Ward.

We'll go to Mr. Hill of the Alliance Party for ten minutes.

Mr. Jay Hill: Thank you, Mr. Chairman.

Thank you, Ms. Ward, for appearing today. It's certainly appreciated I think by all committee members.

As Mr. Bagnell said when Mr. Hood appeared just previous to you, I think we could branch off into any number of issues. I could ask you questions about yourself and the different roles you've been mandated with until the cows come home, to use an old farmer's saying.

I was going to ask you specifically to remark about the Mitchnick decision and how that ties in with the minister's commitment at the time of airline restructuring under Bill C-26 to ensure fairness in how all the employees are treated, in particular the Canadian employees. But by your own admission in your opening remarks I believe you said you've just begun to explore that in any meaningful way, so I would assume by this that any comments you would make on the Mitchnick decision would be pretty tentative at this point.

I'd like to maybe ask you about the number of complaints that have come in and how you've handled them, because part of your mandate, again judging by your opening comments, is to ensure a regional fairness with airline flights into the smaller communities.

I had an experience last summer, and I'm sure others around the table have similar ones, where constituents of mine in northeastern British Columbia complained vigorously that flights were cancelled at the last moment and they had connecting passengers coming from overseas for hunting and fishing at the lodges up in the north near the Yukon. I'm sure Mr. Bagnell had similar experiences. These passengers had booked months ahead and had planned in many cases the trip of a lifetime. It reflects extremely poorly on our tourist industry when you have foreign travellers of some affluence who book these flights and who then, after arriving at Vancouver at 6 a.m. to fly up to the north country, hear their flight is cancelled.

I would ask you, what degree of complaints have you received in that area, in terms of those flights servicing our smaller communities, and what specifically has been done to deal with it so we don't have a reoccurrence as we go into the busy tourist season this summer?

Ms. Debra Ward: I think you've put your finger right on what I perceive to be one of the biggest challenges and biggest problem areas as we move forward, Mr. Hill. In terms of what I do, I cannot ensure travel to a region. I can't call Air Canada and say put on another plane, nor should I be able to, I think. What I have done is meet with numerous communities all across the country, certainly not all of them but enough to get a flavour of what their issues are. And they're myriad.

It is not only the fact that, for example, in Îles-de-la-Madeleine they are totally reliant on air service, and it's expensive. It is also the fact they feel that by using propeller aircraft rather than jet service, which many of them had in previous times, they're not able to develop their region. That's a very key issue, and it's one of the things I hear time and time again.

So transportation access occasionally will really mess up, as in the case you talked about. That happened a lot last summer. It happened, unfortunately, at the height of tourist season at some of Canada's premier attractions.

• 1030

Those kinds of things can be reasonably corrected if the airlines look at, and live by, their own numbers. They could say they cut it too fine and will add some capacity. In fact, in a number of places in Canada, including a number of places in British Columbia, they have added a certain amount to capacity.

I think the other issue to look at is one you referred to, the long-term implications for the region.

Mr. Jay Hill: It doesn't please me to have to report this. I'm sure you've heard it from others. It wasn't only the fact that the flight was cancelled at the last minute. We have passengers flying in from Europe and staying overnight in Vancouver. They get up at 4 a.m. to catch a 6 a.m. flight. They arrive one hour early, as required, to catch the flight. They stand in line. They get to the ticket wicket and hear the flight is cancelled. No explanation is given other than “your flight is cancelled”. The attitude of the airline is absolutely unbelievable when dealing with these individuals.

You say there were a lot of complaints last summer. What assurance do we have it won't happen again? It's what our constituents are requesting from us. Should there be some requirement where these individuals, for example, would know about it at least a week ahead of time?

They show up. Then three-quarters of the way through an international trip from Zurich, Switzerland, or wherever, to a fishing trip of a lifetime, they're stranded in Vancouver. They're paying, in some cases, thousands of dollars per day for a one-week experience in the mountains of northern British Columbia or the Yukon. The attitude of the airline is “There'll be a flight tomorrow”. Tomorrow is not good enough.

Ms. Debra Ward: Yes. This is living proof that once an airline goes down the path and starts making these mistakes, it's so difficult to get back to where it should be.

I would dearly hope, first of all, the airlines would do this themselves. To me, government intervention is second-best for a couple of reasons. The primary reason is that I don't think government can react quickly enough and freely enough. My first and best answer is for the airlines to smarten up. You don't have to be a rocket scientist to figure out how or why, frankly.

Second, if government steps into something like this—and believe me, Mr. Hill, my background is in tourism, so I cringe when I hear such a story—what can government do in compensation for the poor guy down the road? At that particular moment, I don't think the government can do anything for him.

Mr. Jay Hill: I'm suggesting the same thing I suggested to Mr. Hood. And this is a non-partisan issue. I don't think it matters what party is represented here today. We share the same concerns for the travelling public and the consumer. It strikes me that with Mr. Hood, and you, there are no teeth. The point I was trying to make to him is the same point I'm going to make to you. Until the airlines understand there is some penalty, they can sympathize and empathize all they want. Ultimately, in the end, it's the travelling public that gets short shrift.

We're starting to see the backlash in the sea of red accumulating at Air Canada. It's a slow process for people to make a conscious choice not to travel at all. On many routes, there is no competition. They can't say they're going to move their business elsewhere, because they don't like the fact they arrived at 6 a.m. and the flight was cancelled at the last minute. They're going to make some other conscious choice. In other words, the pocketbook is going to dictate.

Ms. Debra Ward: They're going to go where they can, not where they want to.

Mr. Jay Hill: Exactly. As we're all aware, and it's part of the reason for today's activity with the committee, we're dealing with a virtual monopoly on too many routes. We're grappling with what can be done about it.

• 1035

Both you and Mr. Hood have been put in positions where I can sympathize with you. You're hearing thousands of complaints, and yet, in the end, other than trying to shame the airline into properly addressing this, there's not a lot you can do. Would that be fair?

Ms. Debra Ward: Not quite. My role, as I see it, is to observe and report to the minister so he and you, as elected representatives of Canada, can decide on the course of action. I think I best serve you and the minister by doing it as completely and fairly as I can. The downside is that it takes time. It's a very frustrating and slow process for people who have problems today. I respect that.

I heard the conversation with Mr. Hood. What you're telling me now puts me in mind of the old line about the art of diplomacy. The art of diplomacy is saying “nice dog” while feeling around for a big stick.

I certainly understand why. You're certainly not the only person who has expressed that to me. For me to get up right at this point and say we need punitive damages is premature. It's too early for me to say that is the best plan.

Mr. Jay Hill: Well, then, what course of action are you suggesting?

The Chair: That's your last question, Mr. Hill. Thank you.

Ms. Ward, please respond quickly.

Ms. Debra Ward: Respond to that question?

The Chair: Yes.

Ms. Debra Ward: The course of action for people right now is to max out the tools they have. I think Mr. Hood and the CTA have demonstrated they are a wonderful recourse to at least shine a light on it. Public and moral suasion do have power to a point.

I think the other provisions of Bill C-26 are also there to be used. There are public forums to express these views. The important thing is not to wait for the government to come around and find us a solution. People are not doing that. They're speaking up now. I think they're correct in doing so.

The final thing we have to do, if things get that bad, and there's no redress and no recourse, is to use the court system. That's what it's there for. We should use the courts and, as Canadians, use all the tools we have before we turn around and decide we need more tools.

The Chair: Okay.

Mr. Bagnell, from the Liberal Party, for ten minutes.

Mr. Larry Bagnell: Thank you.

I thank Mr. Hill for bringing up the issue. It's exactly correct. In fact, it doesn't end there. The customer not getting to the Yukon can cause massive disruption. The High Country Inn, for instance, which has only a short season, has to turn other people away. Now the rooms are empty and the outfitter's waiting there. He has flown in with a float plane from hundreds of miles away. He has to take hunters out and there's one or two missing. All the horses are waiting and the food is waiting.

I'd like to thank you for coming. We've worked closely together, and I appreciate all the time you've spent in the Yukon on our issues.

With respect to the Air Canada complaints, since I've been elected, with thousands of companies in my riding, I've never had any complaints about any of them. Well, to be safe, let's say I have, and I've forgotten, but it's only been by one person on any particular company. However, I've had many complaints about Air Canada.

The one point I want to raise—I've raised lots of other points with you personally, or put Yukoners on to you—is with regard to the Air Canada pilots. I want to get this on record. You can give a really short answer, if you want, so I could get on to my next question.

I think all of us have material and letters from Canadian Airlines pilots. I have more letters on this apparently unfair settlement than anything else since I've been elected. I can't imagine, if someone was just to reverse the decision, how the Air Canada pilots would feel.

I want to read one quote to give you a sense of it. I can't give you a sense of all these letters and how the people feel, but this particular pilot was a peacekeeper in a Third World country. He talks about before he became a Canadian Airlines pilot:

In most cases the warring parties were third world countries that lacked education and were ruled by tyrannical governments that were focused on annihilation of their perceived adversary. Today I find myself dealing with a situation that closely resembles many of the situations I witnessed during my role as peacekeeper...

The other item is the agreement, like this one. And these are people who have lost ten or twenty years of their seniority.

First of all, have you heard these complaints? Second of all, considering these two groups are going to be sitting in the cockpit together in the planes that all of us in this room are probably going to be flying a lot, and they depend on each other and work very closely together for our safety, how safe can that environment be?

• 1040

Ms. Debra Ward: You never ask the easy ones, do you, Mr. Bagnell.

Yes, I have received a number of letters from pilots who are unhappy with the Mitchnick award just for the reasons you describe here.

In terms of cockpit safety, I don't know what to say. I find it's new; it's very emotional; there's a great deal of anger out there. But I have extreme confidence in the professionalism of our pilots in Canada and their training. I have to be optimistic on that side.

Mr. Larry Bagnell: My second question is, since you were appointed to this job, have you had any meetings with Mr. Milton, and if so, could you describe the nature of those meetings and the content of the topics discussed?

Ms. Debra Ward: I have not met with Mr. Milton, at my own request. I haven't had a lot to ask him or tell him yet. I have met frequently with other Air Canada people basically when I have a question or concern, or concerns expressed to me.

Mr. Larry Bagnell: One person suggested to me there's an east-west issue. Have you heard that at all?

Ms. Debra Ward: It's hard to talk about Canada without an east-west issue somewhere when you're talking about national issues.

Yes, I perceive there is, and I think it has to do with the fact that, historically, Canadian was considered a west coast or western carrier, and Air Canada was the eastern carrier. I'm not sure how much of that feeling has any relevance today.

But certainly there has been skepticism of the process expressed to me by certain people, not so much east and west, but I would say outside of the centre of Canada. So you would hear similar kinds of things if you were in eastern Canada or in northern Canada.

The Chair: You have two minutes left.

Mr. Larry Bagnell: Okay.

My next question is on solutions. Air Canada is not a monopoly; in theory, anyone could come in. I think that would be great, and that is helping to solve some of the problems.

I think one of the points you alluded to in your report that made it difficult for competition is the point system. No other airline is going to come to the Yukon if people lose all their Air Canada points or can't use their points, and can't use them on connecting flights, which would make it very difficult for us to start a local airline.

Are there solutions to that? If we outlawed points in Canada, would that help that, and maybe give more money to Air Canada so they wouldn't be in these huge deficits or wouldn't have to charge me $5,000 for business class or roughly $4,000 for regular class from my riding to Ottawa every week, which I do every week, if I fly economy? You can go around the world four times for that. Maybe if they didn't have to take all these points people, they would have more money and fares could go down; I don't know. Are there solutions to make it more competitive, which might solve all the other service problems?

Ms. Debra Ward: There are a couple of answers. First of all, under the current regulatory environment, Air Canada has to sell points to any airline that earns less than $250 million a year. In fact, Royal was doing that until they were absorbed by C3, Canada 3000, which is now going to be offering AAdvantage points, which is the oldest and best-known point system. So for those people who want points, the points are out there.

Your larger question is a very interesting one, and as I said earlier when I was up in the Yukon, I believe we're a nation addicted to our points. Certainly what I have found when I have been talking to people is, if everything else is more or less equal, if you have a carrier who doesn't offer points, flying against Air Canada, which does, people will fly Air Canada, and the points will be one of the prime decision factors in why they do it.

That's a competitive practice. Air Canada is trying to sell to USP. It's a very seductive thing. They do it extremely well, as do the other full-service carriers worldwide. As consumers, we have the choice to accept or reject it. Air Canada must be getting this part of the equation right, because we seem to be accepting it.

• 1045

Can you stop it nationally? I don't think so. It's an international sort of currency now. I don't even know how you'd begin to put the brakes on something like that.

The Chair: Thank you very much, Ms. Ward. It's a good point.

Monsieur Laframboise, for ten minutes.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

First of all, Madam, I have a great deal of respect for your role as an independent observer and for the report which you will eventually have to present, particularly in an area where, and I believe these are your terms, things are not currently fair. And you are quite right: it isn't fair. The way the airline transportation industry works in Canada is not fair.

The government and the bureaucrats of Transport Canada tend to say that around the world we appear to be headed toward deregulation in the field of transportation. The only thing that is forgotten is that Canada is a vast country which has a relatively small population covering a very large territory, and census areas which are very often close to natural resources, which are, indeed, the strength of our country. This situation means that we have vast distances to travel between economically viable regions. Currently, we are under the impression that certain regions are being made less viable. And that is what is unfair, and you are quite right.

That is why I cited the example of Baie-Comeau and the Magdalen Islands this morning. I talked about Baie-Comeau because it is a striking, continually evolving example. You will be required to make a recommendation on what the various bodies, the Canadian Transportation Agency, Transport Canada and the Competition Bureau should do.

Air Nova used to operate a profitable service between Baie- Comeau, Quebec City and Montreal. Competition-based considerations led the company to decide to break this route up and to provide the service from Baie-Comeau to Quebec and another service from Baie- Comeau to Montreal. This move was designed to prevent competitors setting up charter flights out of Quebec City. Air Nova decided to concentrate its flights and passengers on Montreal and at the end of the day, to focus on long-haul flights. This is where the damage was done.

It is not fair for people to have to deal with the decision like the one Air Nova made when it axed its Baie-Comeau to Quebec flight, even if this decision does not breach the act. Three months before the act came into force, Air Nova took the voluntary decision to divide its service and, at the end of the day, it decided to serve new destinations. The company took this decision barely a year ago and it is quite within its rights to cut these services. This is not a fair situation for the residents of Baie- Comeau who, previously, had a schedule of flights to Quebec City, which were very good. Hospitals are complaining on the basis of safety, health and for many other reasons. It is against this uproar that you will have to make your recommendations.

This is why I said at the outset that I have a lot of respect for your position. I hope that your recommendation will reflect the injustice that some regions of Quebec and of Canada as a whole are experiencing. A private enterprise-based-approach has been adopted. State control has been rejected. You may take solace in the fact that you are not the only one whom Mr. Milton refuses to meet. We ourselves are unable to get a meeting with Mr. Milton. The Official Languages Committee has been unable to meet with Mr. Milton either. However, Mr. Milton will undoubtedly make an appearance at the shareholders' meeting, because, at the end of the day, he is accountable to his shareholders. Mr. Milton is working for his shareholders. These are the people who are making money on the stock exchange and who possess Air Canada shares. He is working for Canadians. He is working to make money for his company. That is not fair for isolated regions which do not often have sufficient passenger volume to have direct flight services. They often have to look to the competition which, because Air Canada is a monopoly, finds it difficult to break into the market and of course, to provide services for the regions.

My question is the following: Have you begun to think about the role that the Canadian Transportation Agency and the Competition Bureau should play, given the problems in the region?

Ms. Debra Ward: I do indeed have some ideas on this issue. At this stage, they are only ideas.

• 1050

Firstly, your question deals with one of the most important issues that Canada is facing right now, because the issue of air transportation is not just a transportation one but is also linked to the whole issue of regional development. These two issues are connected, but I do not believe that the entities looking at transportation issues have sufficient political or regulatory power to look at this in a comprehensive fashion. Therefore, I believe that we have to get the discussion going with all those government departments involved in regional development. I am referring to the Department of Industry, HRDC and the provincial and territorial governments. We have to involve everybody, including the communities and those people living in these communities. This is a very important step in coming up with solutions to satisfy everybody. There is a solution which meets the needs of everybody.

In terms of the specific Baie-Comeau situation, someone told me that one of the problems on the Baie-Comeau—Quebec route is that Hydro-Québec only uses its private air carriers and not Air Canada, Air Nova or any of the others. Therefore, what has happened is that

[English]

was that the commercial service was degraded because the main employer was not using commercial service but was choosing to use private carriers. As you know, when you pull that top-end piece out of what's a very small root, everything else falls apart. So I think they have a role to play as well.

[Translation]

All those people affected by air services will provide the solution.

Mr. Mario Laframboise: However, in terms of the Baie-Comeau situation, please allow me to mention that by dividing the service to these destinations and by scheduling a direct Baie-Comeau to Quebec flight at times which were not necessarily suitable for users, there was an incentive for private enterprise and private flights. This is the harsh reality. However, you are quite right. If, in the future, before any air carrier could make a decision, it had to consult with all regional development stakeholders, perhaps solutions would be found to avoid such dramatic situations as this one.

My second question deals of course with Air Canada's linguistic obligations. One of your tasks is to make a recommendation on linguistic obligations. You are undoubtedly aware of what happened to the people on a flight to the Magdalen Islands when they were rerouted to Halifax. They were unable to get service in French, even though Air Canada and its subsidiaries were required to provide French-language services. After all, this is a legal duty and I find it difficult to understand why Air Canada has not fully complied. It is a duty. Air Canada must enforce the Official Languages Act and it ought to have taken the necessary steps to do this. There was no phase-in period. There was no period for the company to phase in compliance with this requirement. It is required by law. Air Canada was required to comply with the Official Languages Act. As you know, we are currently seeing many complaints. The Commissioner of Official Languages receives many complaints. Have you thought about the recommendations on official languages and on the obligation for Air Canada to enforce the Official Languages Act?

[English]

The Chair: Thanks, Mario. That will be your last question. I hope Ms. Ward will answer it fully for you.

Go ahead.

[Translation]

Ms. Debra Ward: That is also a difficult question. Air Canada has to comply. That's the law, as you have said. However, they have three years to do it, I think. I am currently looking at what Air Canada can do right now. I think that compliance is really taking too long. I had hoped that it would be a much simpler process.

[English]

I've spoken to many people about this, and I believe that... This is a tough one. Air Canada has to do it. All I can do is see if they're getting there, and they're not there yet, pas encore.

• 1055

The Chair: Thank you, Ms. Ward.

I'll go to Mr. Fitzpatrick. Then I have Mr. Shepherd and Mr. St. Denis, and that will be it.

You have five minutes, Mr. Fitzpatrick.

Mr. Brian Fitzpatrick: Ms. Ward, you mentioned that pricing seemed to be a concern with some of the groups you're dealing with. As a comment or an observation, I don't think anybody in business, if they ever do a survey of their customers...usually number one on the list is price.

I'll give you an example. Food in this country takes up about 11% of our GDP, and I actually saw a survey not long ago where the number one complaint of people in Canada wasn't the service or the choice in food and so on. Their complaint was on pricing. We're the second lowest of any country in the world as far as our food basket goes. So I'd be a bit leery of that because everybody wants a better deal, and they'll spend a lot of time trying to find a better price, but pricing is a high priority of most people, and until something gets to zero, I think there will always be people who will be unhappy with pricing.

The complaints I've heard today from people are more of a service sort of thing than they are a pricing thing. So I think we should keep our eye on the ball and not get distracted by that sort of thing.

I come from Saskatchewan, and I want to say that I think we should be focusing on some good news. WestJet is going to start flying from Saskatchewan—a direct route to Ottawa from Saskatchewan, from Regina and Saskatoon. That's never happened in Saskatchewan, and Canada 3000 on May 1 is going to start a daily service in Saskatchewan. We're going to have three air carriers serving that remote area. As far as service in most of that province goes, outside of Saskatoon and Regina there is zero air service. We're talking about the quality of air service in some areas of the country—there is zero, unless you can find somebody with a private plane or an outfitter or so on that can handle the flying. You've got to drive to those centres to get air service, but we're going to have three services there.

That really brings me to a question that does concern me because I've talked to various people about this WestJet service from Saskatchewan to Ottawa—whether people are going to use it or not. Guess what keeps on cropping up: “Are they on Aeroplan?” In a lot of ways, I'm starting to think Aeroplan is a non-competitive type of measure.

I've often wondered, why can't Aeroplan be like Visa or MasterCard? WestJet could join the club and participate in that. It shouldn't be a club just for certain people and exclude other carriers. If we really want to get some effective competition in our system, I think this is a serious concern because a lot of people that are using business class aren't paying the tab. The company or somebody else is paying the tab. So it makes no difference to them, but if you really want a competitive airline system in the country, I think something like that is going to be something we should be looking at. I wonder if you have any comments on that.

Ms. Debra Ward: I think you have a couple of very good points.

When I was referring to price, the airline industry and its pricing has become like the weather. We're Canadian, and we all complain about it. Some of the complaints are more legitimate than others.

Pricing is a legitimate complaint to me insofar as its relation to a destination is competitive. So if it costs you $800 to get to one location and $300 to get to another, there are implications for regional development and tourism, and I think in that sense it's an issue.

In terms of WestJet's expansion, WestJet is Canada's success story, not only in the west but all over Canada. I've read some of its press releases in terms of its expansion, and I think it's terrific.

Now, I can't speak for WestJet, but I can say that airlines, as I said earlier, that earn less than $250 million can sign on. I don't think WestJet's in that.

But WestJet is just transportation. If you want points, and the cost that goes along with points, and the cost that goes along with the business class and the lounges and the super elite and the elite... I don't perceive that as something that WestJet does. WestJet just gets you there and tries to make it fun and at a fair price or at a price that fits its own cost structure.

On the fact that we are, as I said earlier, to my mind addicted to our points, you're absolutely correct, and at some point we have to make choices as consumers. What is more important to us? What is the most important thing when we're choosing? In a perfect competitive environment, consumers are free to choose, and lots of them in that competitive environment choose their points. That's a free market at play.

• 1100

Mr. Brian Fitzpatrick: But in a way it can be interpreted as an indirect way of bringing some predatory pricing into the market. I mean, there's more than one way to skin a cat in our economy—

Ms. Debra Ward: I've heard it described as a very anti-competitive tool. It's certainly a very powerful tool and one, just parenthetically, that I way underestimated. I don't like them particularly, so they're not that important to me. But I was taken aback when I was reading reports about points playing a role in divorce settlements as a deemed value. But other than reminding consumers that we are all consumers, and we do have some powers, don't sign on to that system.

Mr. Brian Fitzpatrick: I have one other concern that I'm going to express. A lot of the things I'm saying may not be politically popular here; maybe I should be concerned about recall. But if I look at the books of Air Canada the way it's being going in the last two years, we can make all the regulations and laws that we want here, but the reality is that it's in a sea of red ink. Any business that's going to stay in a sea of red ink is going to end up facing some serious decisions down the road like less service, laying off employees, and a whole lot of other things.

I think a lot of us should be looking at how we sustain a national carrier in this country. This isn't the United States. We don't have 280 million people spread all over the country. We've got 26 million people in a big, big country, and it's not the same thing. Very often I think we look there and ask, why don't we have things like they have? Well, when you've got 26 million people, it isn't so easy. And everybody would like first class service no matter where they live, but there's a cost involved with that. I guess I'm concerned about the future of that airline, and I don't know if the government, Transport Canada, and the Minister of Transport are all that much focused on that point.

The Chair: Thank you very much, Mr. Fitzpatrick. I'll switch now to Mr. Shepherd.

Mr. Alex Shepherd: You touched in your opening remarks on predatory pricing, and I think you were making a general comment that it's too hard to react, and we don't react very quickly to that.

Ms. Debra Ward: Yes.

Mr. Alex Shepherd: So the bottom line is that you have actually seen evidence of predatory pricing.

Ms. Debra Ward: What I meant by this was that, when I'm speaking to air carriers and asking, “Is this stuff working, and is Bill C-26 doing what it's intended to do, which is to protect the marketplace from monopoly and dominance practices?”, the general feeling is that it's really good to have these tools like the cease and desist. It's a brand new tool so the Competition Bureau can stop and say “Stop right now. We don't have to investigate. Just stop while we're investigating.” That's the new tool.

But the rules of the game have to be clearer. The new entrants have to be assured that somebody's watching—that the CTA or the Competition Bureau in predation is really watching their back and can respond quickly enough—so that it's not a Pyrrhic victory, so that six months down the road you don't see a situation where the bureau rules in favour of the plaintiff, but they're already gone.

Mr. Alex Shepherd: That's right.

Ms. Debra Ward: So there are two things here. First, do we have the right tool? Secondly, are we using it as well as we can? Are we using it appropriately? Generally people are telling me, yes, this is the right tool, but it has to be used as quickly as possible and as forthrightly as possible.

Mr. Alex Shepherd: But getting back to reality, the whole object for you is to watch this transitional period. I'll ask you the question again: Do you have or has there been evidence of predatory pricing on behalf, presumably, of Air Canada towards some of the smaller carriers?

Ms. Debra Ward: Yes. The rulings have demonstrated it. Sure there has been.

Mr. Alex Shepherd: So they continue to use predatory pricing whenever they feel the need to?

Ms. Debra Ward: Predatory practices and what we call predatory pricing are two different things. By predatory pricing, do you mean that they're matching...

Mr. Alex Shepherd: I suppose it's when a market is contested by another carrier at a presumably lower fare, and then their fares drop down, or even get lower or whatever the case may be, and it does away with that competition.

Ms. Debra Ward: That's not considered predation the way I understand it in Canadian competition. Predation is a combination of lower prices and higher capacity in selling tickets below cost. When the Competition Bureau appears before you, I'm sure they will do a much better and more accurate job of describing that. But I believe that's what it is.

• 1105

Mr. Alex Shepherd: I could lower my margin on that, and it's quite legal to do that. I just can't have a negative margin.

Ms. Debra Ward: That's right. It's considered to be a competitive business practice.

Mr. Alex Shepherd: When some of these newer airlines tried to get into the scheduled airline business, such as Royal, the evidence you have is that Air Canada dropped their prices on some of those routes.

Ms. Debra Ward: In CanJet's case they did get the cease and desist. Air Canada had to raise their prices and could not compete directly against CanJet. So the system did seem to function.

Mr. Alex Shepherd: So as a critique, there's no mechanism within Bill C-26 to deal with that in the first place. Is that your comment?

Ms. Debra Ward: The Competition Bureau always had the ability to stop predation.

The new piece they have in Bill C-26 is that they can put a cease and desist on it immediately, while they're investigating the allegation. So it's not the case that Air Canada or the dominant carrier—it could be anybody, it doesn't have to be Air Canada—can keep on doing it while the bureau is investigating. They have to stop as soon as the cease and desist is ordered. So that's a more effective piece for the—

Mr. Alex Shepherd: If you take the two concepts of what I call predatory pricing, which is the ability to simply lower my rates on those routes, plus travel points, obviously, if you can equalize the price competition and you still have the advantage of travel points, it gives you a significant competitive advantage on those routes, and it will possibly lead to the elimination of your competition.

The Chair: Thanks, Mr. Shepherd. That's your last intervention.

Ms. Debra Ward: You're right. What you have then is a case of letting consumers decide which is most important to them. Is it the accumulation of their points or their ability to develop support for and eventually strengthen competitive air carriage?

I've had lots of examples of people yelling and screaming about taking an Air Canada flight at a high price and not taking a lot cheaper flight of a new entrant, which is situated right beside them. I'd say, why didn't you take the new entrant? They'd say, it's the points. It's not only the points, we also have to connect. It's not only the fact that we have to connect, it's also the fact that we have to go from one side of the terminal to the other.

What that tells me is that, regardless of how we complain about the service, Air Canada is providing a service that these people are willing to pay for, and they have made a choice to pay for it. We may not like the results of that choice because it does strengthen the market dominance of Air Canada. But at the end of the day people are saying, I want my points, my connectivity, and my business class seat. Is there a government response to a consumer decision?

The Chair: Thank you, Miss Ward.

I'll go to Mr. St. Denis very quickly so that we can maybe catch up on our time.

Mr. Brent St. Denis: Thank you, Mr. Chair. I won't take up too much time so that we can stay on schedule.

Thank you for being here, Ms. Ward. I think the issue of points is really interesting. I live in Elliot Lake in my riding and, without naming names, I remember many occasions when local corporate tickets were purchased in a nearby city. People would drive there rather than use an emerging local supplier, who eventually went out of business. The difference in price might have made a difference, but in most cases it was an issue of points.

The transition has a time sense to it. We talk in terms of two years from the merger date. In your view, what is the transition period? I'd also like to know what you think the air industry in Canada will look like in 10 years.

I'll leave it at that, Mr. Chair.

Ms. Debra Ward: In terms of the restructuring, my window was eighteen months to two years, which means it would end in either February or August of next year. Depending on the moment you catch me, I think either is good.

It's changing so quickly. Part of me would really like to feel that we can resolve this, and I'd like to be able to come forward with some good recommendations that would at least stimulate debate early on and that I hope would be acted on. But every time you pick up the newspaper or turn on the radio there is something else you have to add in.

• 1110

So I think “As quickly as possible” would be the fair answer for everybody. Certainly, it's not in my interest or anybody else's to prolong this waiting for final recommendations.

In terms of my view of the perfect world, in general I have the philosophy that wherever possible the marketplace should decide what's happening for people, because that means people themselves are deciding. I think that when government intervenes, there's always an unanticipated outcome, and we have to be ready to deal with those outcomes if we want government to get back to being involved in some fashion.

However, on my earlier point, I think this issue is more than just transportation. I think all levels of government, private citizens, and companies have to get involved in this conversation in order to find a resolution. It's not simple.

I'd like to see Oneworld back in Canada. I think that will be important. It will also eventually impact on Canadian regional carriage. Oneworld is a global alliance. There are so many things you can talk about here. We have Air Canada and Star Alliance now. We used to have Canadian Airlines, whose global alliance was called Oneworld. We lost Oneworld, which meant we lost these beautiful, transparent, invisible, elegant links to a bunch of other carriers globally. We now have the Air Canada “pipe”, which is Star Alliance. It's a good pipe, but it is one pipe. I'd like to see two elegant pipes to take Canadians around the world. We don't have that yet.

I'd like to see independent regional carriage set up. I'd like to see communities have some kind of stability in their service so that they can use it to develop regional access strategies. I'd like them to do a little more hard thinking on what they themselves are doing to increase demand opportunities. Have you done a, b, c, and d? Have you done everything you can? What's left? Maybe that's where government will want to step in, when everything else has been done.

The Chair: Thank you, Ms. Ward and Mr. St. Denis.

I think I'll finish this session off and thank you very much for coming.

• 1111

• 1115

I now welcome our next group of witnesses, members of the Department of Industry and the Competition Bureau. We have Madeleine Dussault, Mr. von Finckenstein, and Mr. McAllister.

We're ready to go, so if you want to lead off we'll give you time to tell us some things about what you've been doing, and then we're going to ask some questions.

Mr. Konrad von Finckenstein (Commissioner of Competition, Competition Bureau, Department of Industry): Thank you very much, Mr. Chairman. I have a short statement to make, and then I'll gladly answer your questions.

[Translation]

The committee has adopted an ambitious agenda to look at the current state of the operations of air carriers in Canada. Given that time is limited, I would like to go to my three major questions.

Firstly, what does the Bureau think of the advantages of allowing greater foreign participation in the domestic air carrier market? Has the Bureau's opinion been altered by recent developments in the industry?

Secondly, to what extent have the commitments made by Air Canada during negotiations with the Bureau been effective in reducing obstacles to new competitors on the domestic air carrier market?

Thirdly, what has been the experience of the Bureau, to date, with regard to the amendments made to the Competition Act involving the air transportation industry, related regulations setting out monopolistic practices, and the authority to impose temporary orders of prohibition during an inquiry?

[English]

I think these are very relevant questions. Let me answer them in sequence.

On the state of competition, the failure of Canadian Airlines has dramatically reduced the level of competition for Air Canada and domestic airlines. Prior to the merger, consumers benefited from competition between the two airlines on the largest 200 domestic city pair routes. Air Canada was approximately 55%, and Canadian was approximately 30%, and they offered competitive choices to consumers and through their affiliation with the two leading international airline alliances on flights outside Canada.

Since the time of the merger, there have been some developments affecting competition in the domestic market. WestJet has expanded eastward, CanJet entered the market in eastern Canada, and Royal expanded scheduled services. All these are pro-competitive moves. In addition, Skyservice airlines, through Roots, sought to carve out a niche in the business market between Toronto and western Canada.

However, within the first two months both Royal and CanJet were acquired by Canada 3000. Roots Airlines commenced operations only six weeks ago but suspended service on May 4 pending what they call a strategic partnership—which we consider a merger—with Air Canada to launch a low-cost service. So they went from one end of the market—namely, high-end business class—to the other end, and they now want to become a low-cost, no-frills service. The bureau will be closely examining these arrangements and will rule on them in the future.

With the presence of WestJet and Canada 3000, some competitive alternatives are developing, but only to a limited degree. This competition is largely confined to major urban areas and primarily for the leisure or time-insensitive sector of the business market. Even with the growth of Canada 3000 and WestJet, Air Canada is 13 times larger than its next competitor in terms of domestic passenger revenues. Air Canada has virtually no effective competition for business travellers, and most local and regional markets remain monopolies.

The inability of CanJet, Royal, and now Roots to operate profitably suggests that while entry in the scheduled domestic market may be possible, there are serious doubts about the ability of such firms to remain as sustainable competitors in the face of Air Canada's dominance.

The need for significant legislative and regulatory changes to promote competition in the airline industry remains strong. You will recall that in October 1999, at the request of the Minister of Transport, we issued three recommendations.

• 1120

First, the government should create a class of licensees under the Canada Transportation Act to allow 100% foreign ownership of carriers that can fly only within Canada—i.e., carriers that are licensed in Canada, use Canadian labour, buy Canadian gasoline, etc.—and so compete on an equal playing field with Air Canada fly only within Canada. In return, these carriers could be foreign-owned. Such a system exists in Australia right now.

Secondly, make the legislative changes to the Canada Transportation Act to allow what we call “modified sixth freedom” on either a reciprocal or unilateral basis. Modified sixth freedom means you can fly from one point in Canada to another via a hop in the U.S.

For instance, right now there are flights going from Montreal to Detroit and from Detroit to Vancouver. But you will not find them if you look on the reservation systems. They are not allowed to be marketed as one flight in Canada. We suggest that they should be marketed, and let the consumer decide whether to go that way and have the hassle of going through a foreign port or go directly.

And third, permit up to 49% of the voting shares of the Canadian carriers to be held by foreigners. The government believes Canadian carriers should be Canadian-controlled, but that doesn't mean the participation of foreign ownership has to be held at 25%, as it is right now. It could be up to 49% without losing control, thereby giving those carriers access to cheaper capital.

The current market structure of the Canadian airline industry, where one player holds in excess of 70% of the market and the remaining share is fragmented among smaller rivals, is not optimal from a competition perspective. In order for the industry to become more competitive, the changes we recommended in October should be implemented.

[Translation]

Let's move on to Air Canada's commitments. I am proud to be able to report that the commitments taken by Air Canada in terms of the Competition Bureau have had a positive impact in reducing non-regulatory barriers to new competition. For example, Air Canada has withdrawn from 42 peak-time slots at Toronto's Pearson Airport. These slots have been taken up by new competitors, such as Royal, CanJet, Canada 3000 and Roots.

Secondly, Air Canada is required to sell its Aeroplan points under reasonable business terms to any carrier posting less than $250 million a year in revenue from domestic passenger services. Royal used this commitment to offer Aeroplan points on its flights. However, when Royal was acquired by Canada 3000, it was no longer eligible under the revenue criterion. Canada 3000 has annual revenue of over $250 million.

WestJet was eventually able to use the Hamilton International Airport for access to the Eastern Canadian market. Air Canada had reserved all the Hamilton facilities for itself but was required to make them available to any carrier offering low-cost services in Eastern Canada. Without these commitments, WestJet would not have been able to come into Hamilton.

Furthermore, as I result of these commitments, Air Canada delayed the launching of its own low-cost carrier in Eastern Canada until September 2001. At the time of the merger, there was some concern that if Air Canada had been able to start such a service, it would have been able to remove any opportunities for new competitors on the market. That means, for example, that if Roots becomes a low-cost carrier, it will have to wait until September 2001 before starting its service.

[English]

On enforcement experience, you will remember that Bill C-26 was enacted to enable the government to specify by regulation conduct that would constitute a practice of anti-competitive acts in the airline industry. This was done for the purpose of putting meat on the abuse-of-dominance provisions in the Competition Act and to explain how they apply to the air industry. These regulations came in force on August 23, 2000.

Now, Bill C-26 also empowers the Commissioner of Competition, during the course of inquiries, to issue temporary cease and desist orders. Temporary orders can only be issued under certain conditions to preserve competition before a case can be brought before the Competition Tribunal.

To date, the first and only temporary order was issued on October 12, 2000, against Air Canada in respect of the CanJet investigation. This is an extraordinary power and has to be used prudently. We will only use it where circumstances warrant.

• 1125

Over the past year, enforcement activity related to the airline, as you can imagine, has been a major concern of the bureau. Most of our activities are subject to confidentiality, and there's also litigation pending before the courts, so my comments will be limited by those two factors.

The bureau has not received any complaints raising issues under access to essential services and facilities under the regulations. However, what has emerged as the key issue, and by far the most difficult one, is the whole issue of predatory pricing. You will appreciate that it is not easy to distinguish between aggressive and legitimate competition, and predatory conduct that may harm consumers over the long run.

Since March 2000, we have received nine major complaints from smaller carriers against Air Canada. Of these nine complaints, only two—the ones by WestJet and CanJet—have resulted in formal inquiries. On March 5, 2000, we went to the Competition Tribunal, and are seeking an injunction to enjoin Air Canada from certain pricing practices. Prior to doing so we released, on February 8, 2000, enforcement guidelines on the abuse of dominance in the airline industry. I believe you have them all in front of you; I asked for them to be distributed. These outline the approach we will take to enforce new legislation and the regulations pertaining to the airline industry.

These guidelines specify that a dominant airline, in order to comply with the Competition Act, must offer flights at above avoidable costs, and set out in detail how those costs can be calculated. Basically, these guidelines are a code of conduct. If a dominant carrier does not want to come into conflict with the Competition Bureau, they should price in accordance with these guidelines.

Although the bureau believes that the avoidable cost standard provided gives Air Canada substantial flexibility in pricing, the whole approach set out in these guidelines is disputed by Air Canada. In view of the complexity of the issue, and given that we have legitimate differences of interpretation, both the bureau and Air Canada have approached the Competition Tribunal and asked that there be a ruling on the whole issue of avoidable tests, on an expedited basis. Public hearings on this application will commence in the summer. We hope that as a result of this court case, there will be clarity for all stakeholders, as to what Air Canada may and may not do, in terms of pricing and capacity, and the end result will safeguard competition.

In addition to pursuing these investigations, the bureau has also faced a number of legal challenges from Air Canada. These have included challenges to the commissioner's powers under section 11 to gather evidence and subpoena information; challenges to the issue of the temporary order; challenges to the effect of the temporary order; and a constitutional challenge as to whether the whole provision is constitutional. All of these are being vigorously defended.

So far we have been successful on all these fronts. However, it just shows you this is not a harmonious relationship. We are, in effect, very much challenging Air Canada legally, where we can, or they are challenging us because this is new territory. It is unclear, and both parties want to establish very clearly what the rules of the game are.

In summary, the entry and consolidation that has occurred in the market has not changed the fact that Air Canada remains in a dominant market position. Air Canada does not currently face effective competition, in our view, on a national basis, or for the important business sectors where flight frequency and network connections are imperative.

The new provisions introduced in the Competition Act to respond to potentially anti-competitive behaviour on the part of Air Canada are helpful. They have undoubtedly constrained Air Canada to some extent, but they will not be sufficient on their own to create a competitive domestic airline market. For this to occur, the domestic market should be open to greater foreign competition, along the lines we specified in October, by allowing foreign-owned Canada-only carriers; by allowing transportation from one part of Canada via a foreign hub; and certainly by increasing the participation of foreigners in the airlines from 25% to 49%.

• 1130

Thank you for your attention. I'll gladly answer any questions you may have.

The Chair: Thank you very much, Mr. von Finkenstein.

We'll start with Mr. Hill of the Alliance Party for ten minutes.

Mr. Jay Hill: Thank you very much for appearing this morning. We appreciate that. I think we will all echo the same thing: we'd love to have you here all day to exchange points of view and enlighten us, in particular about the role of the Competition Bureau.

I want to touch on two issues, hopefully, in the ten minutes I have for an opening round, although I could touch on dozens.

In September of last year, CanJet filed an abuse of dominance claim against Air Canada with the Competition Bureau, yet it hasn't been heard some nine months later. I would certainly argue—and I think many would argue—that part of the problems they experienced was because of the inability to deal with that, which ultimately resulted in them being taken over by Canada 3000.

My first couple of questions on that issue are, why has it taken so long to deal with that complaint? Is it still going to be heard, and will there be a ruling on it, even though the situation has changed dramatically?

Mr. Konrad von Finkenstein: First of all, you appreciate just the mere fact that because somebody makes an allegation doesn't mean there's predatory behaviour going on. We have to investigate, we have to get the details.

CanJet launched its complaint with us on September 7. We had to obtain the documents from Air Canada. We had to go to court and get a court order, a subpoena, to get the documents from Air Canada. We commenced an inquiry on September 28. We issued a cease and desist order on October 12. So basically a month later we told Air Canada that on those flights we were investigating, they were pricing in a predatory fashion and had to cease and desist that.

In addition, we threatened to do so again in December, and Air Canada voluntarily rolled back some prices rather than waiting for us to issue a second order.

Our order, of course, was contested by Air Canada in terms of both constitutionality and the order. The court upheld us on the first one; the constitutionality is still going on. Air Canada has appealed the order, and the order has since expired. So as you can see, there's vigorous litigation going on.

In the meantime, we brought a case before the tribunal on March 5. In that case we were saying, “Air Canada, your pricing vis-à-vis CanJet and WestJet on certain routes that are mentioned is predatory. You know what is predatory. On February 8 we issued these guidelines. These guidelines, while they are probably very turgid and difficult for a layman to read, actually set out, in as clear a fashion as we can think of, what predatory pricing is and what you can do.”

Our basic position to Air Canada is, “You can sell at any price you want, but you can't go below your avoidable costs. Since you already have a market share of 80%, there is no business rationale for wanting to extend your market, so if you price below avoidable costs, so you can't recuperate your avoidable costs, there can be only one purpose—that you want to drive that company out of business—and you can't do that.”

Air Canada disputes, first of all, the whole concept of avoidable costs, the methodology in which we calculated them, and also says, “We have the right to match anybody. If anybody comes on the market at a certain price, we can go down to match that person.” We dispute that very much, because we believe they are really different products. If you fly with CanJet or WestJet, they are low-priced carriers. They basically give you flights from point A to point B. You don't get any meals, you don't get frequent flyer points, you don't have any interconnection, any interlining, you don't have the whole network of Air Canada. It's really a different product, so why should they be able to match prices? They are in a different market. That's what we're trying to establish in these proceedings with those competition tribunals.

I don't control their schedule. I've asked for expedited hearings, but the best they can tell me is the end of the summer.

• 1135

Mr. Jay Hill: All right. Obviously we could go on and on about that particular issue of predatory pricing and whether the Competition Bureau has the teeth necessary to properly eliminate the use of predatory pricing by Air Canada and of how long a delay it takes before things kick in and the damage that can be done. We could discuss that all day, but I want to get on to one other issue in the short time I have.

You made some pretty strong statements today—I certainly applaud you for that—in regard to Air Canada's dominance and that even with the tools now available to hold them to account it isn't going to be sufficient, to quote your own words, “to create a competitive domestic airline market”. One of your suggestions is at least the marketing of connected flights through the U.S. from within Canada.

You also talked about foreign-owned Canada-only carriers. I guess what I'm looking for is a definition of that, and whether you looked at other situations when you proposed that. To my knowledge, in Australia, for example, they allowed Virgin Airlines to come in with certain criteria that have to be met—the planes have to be serviced in-country and they have to have Australian crews. So they're not given carte blanche to come in. Is that what you mean when you say we should be looking as well at wholly foreign-owned carriers, but Canada only? What is your definition of that?

Mr. Konrad von Finckenstein: Precisely. It imports the Australian model. You would have a carrier that has to be operated in Canada, has planes that are certified in Canada, has Canadian crew, pays Canadian taxes, buys Canadian fuels—all of that. But it may not fly across the border. It flies only within Canada. It could be foreign-owned and therefore it would create something like a Virgin Canada, which would then fly in Canada and offer competition to Air Canada.

Mr. Jay Hill: Okay. Could you enlighten us as to what you sense is the reaction from the minister and the government to that proposal?

Mr. Konrad von Finckenstein: I believe he's appearing before you this afternoon, so you might want to put—

Mr. Jay Hill: Oh, rest assured, we will.

Could you just elaborate a little further on this whole idea of foreign ownership—where you think it has to go? You've proposed a number of things. I guess you can tick them off by going down the list of what you say is the marketability—in other words, the advertising of connecting flights to the U.S. Obviously moving toward the Virgin model imported from Australia would be another avenue, as well as lifting the foreign ownership to 49% to allow the smaller regional carriers more access to financial resources to expand their airlines and create a better environment for competition on the small routes that are certainly of concern to me from northeastern British Columbia.

Are there other things? Do you see it as a package where they're all contingent on one another to ensure the success of competition in the Canadian airline industry?

Mr. Konrad von Finckenstein: I have been consistently saying the same thing since October two years ago, that we need more than the amendments to the act. I think the amendments to the act are very helpful, and the cease and desist power allows us to restrain Air Canada's conduct to some point. But that alone is not... It's unhealthy to have a situation where somebody has a 70% market share.

We have tried to fashion a remedy, which deals with the Canadians now; we're not touching the international part. That's why you have this Canada-only model, which imports the Australian one. You don't necessarily have to take all three of those measures at the same time. You could take one, then the other. But we believe that without those measures, notwithstanding some of the competition that we have seen evolve in Canada, you're not going to have a competitive market. The new entrants—Canada 3000, WestJet now, the others having disappeared from the scene—are not a full network, as Canadian Airlines was before. They in effect are concentrating on niches. They're providing a service that is based purely on price. It appeals primarily to the leisure travel or the business-insensitive travel.

• 1140

To a businessman, most of these flights are not acceptable. If you fly to B.C. and you find out there's not another flight back until the next day, that's not good enough. You want to be able to take a later flight. Having interconnections and frequency of service is vitally important. Plus you have the whole regional network. All the smaller centres are served now by basically affiliates of Air Canada. There are some very small airlines, which are unaffiliated. But I think one can say without exaggeration that the regional network is owned by Air Canada.

The Chair: Thank you, Mr. Hill; you're out of time.

I'll go to Mr. Szabo for ten minutes.

Mr. Paul Szabo: Thank you.

Mr. von Finckenstein, can you tell me how you would characterize the quality of competition before the Air Canada and Canadian Airlines merger?

Mr. Konrad von Finckenstein: I think before the merger we had two full-service network airlines with regional partners competing with each other. You had in effect a duopoly. There was no question about it. The consumers had the benefit of choice and the benefit of lower prices.

Mr. Paul Szabo: Was it a viable, competitive environment?

Mr. Konrad von Finckenstein: No, it turned out to be not viable, but I don't think it was for a competitive reason. Part of the problem was that Canadian had a huge debt load, which they never managed to get under control. They went to two restructurings. Both times they did not really significantly restructure—either their routes or their fleet. So notwithstanding those financial restructurings, they never managed to get themselves on an even footing.

I don't go so far as some observers in saying Canada cannot support two viable, full-service networks. I think that remains to be seen. Because of over-expansion and huge debt load, Canadian did not succeed, but that does not mean that there is a structural problem in having two airlines in Canada.

Mr. Paul Szabo: Now we have a situation where Air Canada has assimilated that history of financial management. It's put Air Canada under some duress as well. Are we going to be able to clean this up so that the Air Canada entity—the combined entity—is itself going to be able to compete if we were to open up substantially to additional foreign ownership or foreign-owned airlines operating out of Canada?

Mr. Konrad von Finckenstein: First of all, you're going to talk to Air Canada this afternoon, I believe, so you can ask them those questions.

I believe they have some restraints right now imposed upon them by the Department of Transport as part of the merger, such as no layoffs and no relocations of employees, which they find very onerous. As part of a restructuring you always generate savings, and they're deprived of that. But that being said, that's only temporary, as you know. These commitments come to an end. But Air Canada's situation, overall, is not as difficult as they like to make out.

My colleague, Mr. McAllister, is the expert, and I'll ask him to answer this question.

Mr. David McAllister (Senior Competition Law Officer, Competition Bureau, Department of Industry): I'll just add a few remarks, if you don't mind.

One of the things we looked at, although surprising, is that Canada is the fourth-largest airline market in the world. It's related somewhat to population, geography, and income. We did some research that indicated that although we're the fourth-largest, there are at least 15 other countries that have more than one carrier. So I don't think the case has been made that there isn't room for more carriers and more competition in the Canadian market.

With regard to Air Canada, I have a couple of comments. First, I don't think you do anyone any favour by protecting them from competition, because they simply will become less efficient and their costs may become out of control. It will simply in the long run make the problem worse. I think Air Canada has proven that in competing with U.S. carriers on the transborder markets it's been a very aggressive and successful competitor. It's not having any problems competing with the U.S. carriers. I don't think it should necessarily be a problem.

I think there's a broad question of whether or not we should be protecting small competitors from Air Canada and protecting Air Canada from international carriers or in guaranteeing success in the market. I think the question has to be what's in the public interest in terms of opening the market to competition.

• 1145

We think that Air Canada can compete. I think we ought not to focus necessarily on the quarterly results of the low season of the year. They're coming into the high season. There are some reasons to explain their situation currently financially. I think if you look closely, the situation is not as bad as it necessarily appears.

Mr. Paul Szabo: One of the concerns that I guess Canadians have expressed historically has been the reliability or the accessibility of routes as a basic unifying factor in Canada. To the extent that moving away towards more concern about pricing tends to put more pressure, I would think, on cherry-picking—abandoning less economic aspects of an operation—are you in fact at all concerned that increased competition would not be broad-based, but rather be targeted on those areas in which a perspective competitor could meet their margin requirements, as opposed to meeting real competition in a broader base of routes?

Mr. Konrad von Finckenstein: Yes, cherry-picking is what you're talking about, and undoubtedly when you have new entrants coming into the markets they will go on routes that they think are most lucrative. That's the starting point. But they will expand and need feeders, and they need traffic for that.

When you look at the various parts that Air Canada serves, I don't think the case has been made that they serve it out of a sense of national destiny or national unity. They serve it because there's money to be made on these routes. The question is how do you serve those—what planes, the frequency, the type. Maybe Air Canada's cost base is too high and they will abandon some of those, and then another carrier that has a lower cost base will come in. But as long as the traffic is there to warrant service, you will have service. You're more likely to have it on reasonable rates in a competitive climate than in a climate dominated by one airline.

Mr. Paul Szabo: My last question is on the area of concentration of market share. Have you any words of wisdom for us in terms of how large one economic entity could be before what you refer to as effective competition could not exist? Is there a size at which... And in fact if there is, should we have legislation saying that there shall not be a concentration beyond a certain point? I raise it because of my knowledge of Trans-Canada PipeLines as a gas transporter. It makes no sense to create a more effective competition situation there, simply because of the obvious flaws of trying to create a competitive environment in a non-competitive industry.

Mr. Konrad von Finckenstein: Success is the only question. You have to look at various entries. You have to look at technological innovation and all of those factors. The Competition Act sets out a whole bunch of factors that one needs to look at in order to make a determination.

What we feel very strongly about in the situation right now... Air Canada has around 70%, depending on how you measure it. So first of all, it takes a brave competitor to take them on. You have to convince the people who finance you that you have a case. Secondly, you essentially are driven to look at niches not being served by them. If you take them head-on, you're going to be faced with a giant who has an enormous concentration and will concentrate his power on you and others to drive you out of business. Now, we have powers to try to stop that, but as you can see from what has happened so far, it's questionable to what extent we can succeed—whether people are prepared to face it. It's a legal fight; it's the uncertainty; it doesn't help you in terms of marketing your product. It's not a very desirable situation.

What's the magic area? I would say that as long as somebody has over 50% of the market, you certainly have a major problem.

• 1150

The Chair: Thank you very much, Mr. Szabo.

I'll move to Monsieur Laframboise.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

I am having a bit of trouble understanding your recommendations. Basically, you are telling us that in the present situation, with the legislation as it is, you are involved in a significant legal debate with Air Canada and this is not in the interest of users. I agree with you on that point. However, instead of asking for amendments to the existing legislation to increase your power so that your guidelines, for example, would be binding on Air Canada and require it to adhere to the Bureau's position, you are telling us that this sector should be opened up to competition from foreign carriers in our domestic market.

Later on in your comments you say that we shall be hearing from Air Canada this afternoon and we will understand what its obligations are with respect to the maintenance of certain links as well as the need for streamlining and staff cutbacks in Air Canada. That is what I have trouble understanding. If you are saying that there should be full deregulation of the transport sector so that the market forces can hold sway, that will be a catastrophe for all the regions of Canada. They will concentrate on the highly profitable routes where there will be a great deal of competition and there will be nothing for the rest of Canada.

I have a hard time understanding your position. I would like you to try to explain it to me. Will the deregulation or the open competition that you seem to be advocating mean that people in remote, often resource-based areas, will be forgotten? Does this mean that we will have to forget regional development and concentrate all activity in urban centres? I have trouble understanding.

Mr. Konrad von Finckenstein: I am sorry if I wasn't clear. It seems obvious to me that previously, when we had two airlines with subsidiaries, service was provided to all regions of Canada and there was competition. What we are suggesting here is that competition be encouraged. The ways now available for us to restrict Air Canada are limited. We can work on the side but basically, if you want to have competition in the Canadian air travel sector, then the regulatory system must be changed. You saw what our recommendations are.

I think that the result will be the arrival of new players in the market and these new arrivals will stay because they will have an opportunity. At the present time, in view of the fact that Air Canada has a 70% dominance, I don't see how there can be real competition in the market without a change to the regulatory system.

I don't see why you conclude that this would mean that the rest of the country would not be served. I don't see that at all.

Mr. Mario Laframboise: You told us that we were going to hear from Air Canada. Air Canada is obliged to provide service to the regions. As part of this opening up to competition, would the other companies that come in also be required to serve remote regions? At the present time, Air Canada has a monopoly but it also has certain obligations. I think that the company is not fulfilling these obligations and I agree with you. Of course, we should encourage competition but if that means sacrificing Air Canada's requirement to provide service to certain areas... That is where I have a problem.

• 1155

Mr. Konrad von Finckenstein: No, I was not talking about that at all. I was referring solely to the company's obligation to not lay off its employees. It must retain its employees for three years. I was only referring to that obligation. As for its other obligations, like serving certain regions, the commitments are in place, but these obligations apply—

Mr. Mario Laframboise: And you would maintain these commitments for Air Canada?

Mr. Konrad von Finckenstein: Well, everything depends on what you change, on the number of changes you make to the system. Naturally, the goal is to maintain the services.

Ms. Madeleine Dussault (Assistant Deputy Commissioner of Competition, Competition Bureau, Department of Industry): Sir, allow me to add that one of the points suggested by the commissioner is to introduce a single domestic carrier. It would be in the best interest of this domestic carrier to develop a good network that would serve major cities, but also the regions to feed into its main lines. I do not think regional transportation is being neglected. On the contrary, when there were two carriers in competition with each other, there was very good service in the region. There were very good alliances, and very good partnerships among carriers.

I think that it is where the suggestion gets interesting. It would be advantageous for a single domestic carrier to develop its network.

Mr. Mario Laframboise: But Air Canada would still be required to provide service in the regions. Is that what you are saying?

Ms. Madeleine Dussault: That would be the ideal situation.

Mr. Mario Laframboise: But everything would depend on the changes that are made, as the gentleman said. It could also have to be reviewed in terms of competition, and that is what worries me. We will not relive the same reality, where two companies each had their own territory. That is no longer the reality. So if the suggestion is to encourage another company, and I fully agree with you on that, we will have to keep the requirement to provide service in the regions. If that requirement is not met by Air Canada, the act will have to impose the requirement on other companies that set up shop. We will have to make sure of that. Otherwise, if you completely deregulate the system, all that the companies will keep are the lines that are profitable, and they will fight over those lines and drop the rest.

Mr. Konrad von Finckenstein: Prior to the merger, Air Canada was not required to serve remote locations, but these regions had service. I do not agree with you when you say that as soon as we open up the market, there will automatically be a disaster in isolated regions. That was not the case prior to the merger. How can you be so sure that it will happen immediately? Of course, the changes will have to be made gradually. There will have to be a phase-in. They cannot be made overnight. But I do not agree that an immediate outcome would be a disaster for isolated regions.

Mr. Mario Laframboise: One of the results of Air Canada's monopoly is precisely that there are problems in isolated regions. For example, look at Baie-Comeau and the links that used to exist with Quebec City. They no longer exist. Quebec and the rest of Canada are currently facing problems because there is only one carrier. I have trouble imagining that once competition has been opened up, Air Canada will maintain all of these links and that other companies will necessarily set up in areas that are less cost-effective. I have a lot of trouble believing that. Moreover, that is why the legislation included this obligation for Air Canada. If everyone were convinced that Air Canada would continue to provide service throughout Canada, the legislation would not have included a requirement for Air Canada to maintain these city pairs. So maintaining these city pairs was made a requirement for Air Canada. At any rate, I have a lot of trouble with that.

Ms. Madeleine Dussault: We agree that prior to the merger between Canadian and Air Canada, service in the regions was better. So we are saying that by introducing foreign competition, or by opening up the borders, or with a single domestic carrier, we will have that kind of service again. We can practically go back to what we had prior to the merger: better service in the region and better choices for transportation between main points. That is what we want to achieve.

[English]

The Chair: Thank you.

We're into the five-minute round. Mr. Hill.

Mr. Jay Hill: I'll start out by agreeing with the last statement.

• 1200

I want to follow up on Mr. Szabo's comments about what's widely viewed among the general public as the pending acquisition of Roots Air, given they can clear all the necessary hurdles.

Perhaps for the general public, if for no one else's information, you could enlighten us on the criteria right now that a single shareholder can't own larger than a certain percentage. Will this 30% acquisition of Skyservice be in default of that?

Mr. Konrad von Finckenstein: No. The single shareholder whom you refer to relates only to Air Canada. There is no restriction on the shareholder in the whole of Skyservice. What Air Canada is doing is they're buying into Skyservice.

Mr. Jay Hill: So they could own 100% of any other...basically keep buying out their competitors, provided they had deep enough pockets to do that.

Mr. Konrad von Finckenstein: We would probably have a problem with that. Under the terms of corporate law there's no problem and no restriction.

Mr. Jay Hill: Okay. Judging by the feedback I've received from the general public on this since the announcement, they view this not as a merger, but as an outright acquisition, buying out a competitor.

In follow-up to the previous questioner the airline industry faces two problems at the moment with the predominance of Air Canada. There is no viable competition for the business traveller on the main domestic routes, never mind talking about the short hauls, the regional carriers, the regional routes.

Roots Air was supposedly going to try to penetrate that market. If the government wasn't to follow up on your recommendations about allowing some restricted foreign carrier access to provide that competition, air travellers, especially business air travellers effectively wouldn't have any other option. Would that be accurate?

Mr. Konrad von Finckenstein: Let me start at the beginning. I'm concerned about the whole Roots Air transaction.

For the purposes of the Competition Act, it's a merger, so we're going to review it and we're going to see whether it's anti-competitive, and if so, we will deal with it.

The business model of Roots, as you quite rightly pointed out, was based on giving an alternative to Air Canada in the business traveller market. The question is whether that was a realistic business model or not. They threw in the towel rather quickly. And there are some observers who suggested, for a business traveller, having a network, having reliability and having alternatives is far more important than anything else.

Roots tries to provide a tremendous level of comfort and convenience, but their services are not very frequent. They're not part of a network. They don't interconnect. They don't give frequent flyer points, etc. So therefore it was a flawed business model.

We haven't started looking at it, so we don't know.

Mr. Jay Hill: Perhaps I could interject. One concern is a viable alternative or option for business travellers, the so-called “high-end” traveller.

I hear another concern expressed, and I would like your comments on it. By acquiring Roots Air through the acquisition of a dominant share of Skyservice, Air Canada now basically through the back door, if it's allowed to stand, could mould that new airline or new entity into a viable discount airline competitor to WestJet. Mr. Milton has indicated this consistently. He wants to be able to penetrate the discount airline market to go head to head with WestJet and Canada 3000.

I'm just asking for your comments on that, because that's what I hear from the travelling public.

• 1205

Mr. Konrad von Finckenstein: Undoubtedly, that's what he wants to do, and there's no law against him going into this discount market. Here in eastern Canada he has to wait until September 1. In western Canada, he can do it now. But if he does it, we will very carefully look at it and make sure that there's no cost subsidization—that any services that he renders to Roots Air, or whatever the airline is called, are done at full market price. If he doesn't, then in effect it can become a predatory pricing activity—a fighting brand trying to drive out the others. So if he wants to own a discount airline and run it and so on, he'd better make sure it's at arm's length, and there's no cost subsidization. If there is, then we would step in.

Mr. Jay Hill: Just following up on that, how would you ensure this arm's length so that all of us could be comfortable that Air Canada's resources wouldn't be backing up whatever this new entity was called?

The Chair: This is your last question. A quick answer, please.

Mr. Konrad von Finckenstein: We have full power to look at the books. We can investigate, we can audit, we can subpoena them, etc. We could find out whether, indeed, that inter-company pricing was done on an arm's-length basis or not.

The Chair: Okay, Mr. Shepherd.

Mr. Alex Shepherd: Yes. I guess the concern I still have in spite of your comments, Mr. McAllister, is that the world the way it was... Canadian Airlines in some way still exists because Air Canada in fact absorbed most of the debt that Canadian Airlines had. We know that Standard and Poor's has downgraded Air Canada's debt structure.

So I'm less convinced than possibly you are of the viability of that airline, in spite of Mr. von Finckenstein's comments that this was a perfect world or something because we had competition. In fact, it wasn't a perfect world because Canadian Airlines continued to stumble and fall, not over the short period of time, but over a 20-year period of time—a long experience of two airlines being unable to compete head to head in the Canadian market. So that concerns me. Saying that you're interested in bringing in foreign competitors, who in my mind are simply going to, as Mr. Szabo says, cherry-pick, take the best routes...

What is the analysis between Air Canada's market share currently? You're saying it's 70%. How do we break that 70% down between so-called business class and so-called regional, the regional areas? Because it seems to me that it's the business class, the high-end class, that people want to compete in. As to the regional business, they wouldn't be that interested in it.

Mr. David McAllister: I'm glad you asked.

I think our statement said that market share is in excess of 70%. I think it depends on how you measure it. It's a little hard to get data, but our estimate is that Air Canada still has about 85% of the domestic passenger revenues, about 80% of the passengers carried, and about 75% of the seat capacity. So we said it is in excess of 70%.

So it is substantially dominant by any measure that you would want to make. Another way to look at it is to look at it on a route-by-route basis. But overall, this is very substantial.

I guess the other thing, and I can give you a few comments...we have done a little bit of looking into Air Canada's results and so on. I think that, if you look at the full year 2000 net of the Canadian operations, setting aside the one-time expenses that were incurred for the merger, their operating earnings for 2000 were $181 million. This was in spite of a $500-million increase in jet fuel costs to Air Canada.

We note also that Air Canada projected $700 million in annual merger synergies when it acquired Canadian, of which $350 million was savings that it thought it would get through increased yield management, higher prices, and lower costs in having to market and compete with other carriers.

We've also noted at the year-end that they've reported that their domestic market yield—that's the average domestic fare—is up by about 7.5%. Some people say fares haven't gone up. That might be true—maybe a fare of $199 is still on the books that was there before, but how many seats are being sold at $199? So you have to be kind of careful about that. But our information suggests that fares have already gone up by 7.5% domestically.

Mr. Alex Shepherd: Okay. I'm interested in another aspect. You talked about this dispute you're having regarding your cease-and-desist orders. You used the words “avoidable cost”. Most accountants would use the concept of variable cost.

I'm assuming that in proving predatory pricing, one doesn't have to include their fixed cost.

• 1210

Mr. David McAllister: That's right.

Mr. Alex Shepherd: Isn't that—

Mr. David McAllister: I'll just take a minute, and I could maybe explain the difference between variable cost and avoidable cost and fixed costs.

First of all, from the first principles of predatory pricing, the courts have generally established that predatory pricing consists of selling below some appropriate measure of cost. In the airline industry, the concept that we have adopted is so-called avoidable cost, and that includes all of the direct operating costs of operating a service—the fuel, landing fees, ticketing, and so on. Those costs are incurred as you operate that flight.

In addition to that, there are other costs associated with operating the flight such as the aircraft costs, and the pilots, and the crews. So it includes all of those costs but does not include the overhead costs of the head office and so on, which are fixed and which are not affected by offering that service or not.

What we're saying is that, on average, the revenues from fares have to be sufficient to cover those avoidable costs of operating this service. If they're not, we're saying that this is the standard by which predation should be judged.

Mr. Alex Shepherd: What's the logic of not including fixed costs, because obviously the competing airline has to incur fixed costs? It may have lower fixed costs. It may have newer equipment, more efficient equipment, and so forth making it more competitive.

Mr. David McAllister: Some people would include the aircraft costs as a fixed cost. We don't. We're saying that the fixed cost is an avoidable cost that is not sunk in terms of providing service on a particular route. So the only costs that are excluded are the head office and administration costs; they're ongoing. All of these other costs are included as part of the test.

Mr. Alex Shepherd: But we've already said that one of Air Canada's competitive advantages is the fact that it has routing and it has the ability to make all the connections. All that comes out of their head office, but you don't include that cost as a determinant of so-called avoidable costs?

Mr. David McAllister: Well, if Air Canada is covering its avoidable costs and making a contribution to its overhead costs, most people would assume that is still a rational business decision on their part.

Mr. Alex Shepherd: What if it's not? What if it's just covering its avoidable costs?

Mr. David McAllister: If it's just breaking even on its avoidable costs? Well, then I think you're in a very grey area, but if you're below avoidable costs, we say it's clearly predatory.

It makes no sense to be losing money on every flight. You're economically worse off. If you're covering your avoidable costs and making a positive contribution to your overhead, then we would not say that's predatory.

Mr. Alex Shepherd: What's Air Canada's point of view on avoidable costs—

The Chair: Mr. Shepherd, a very quick response, and then we're going to stop this.

Mr. David McAllister: Where does our opinion with Air Canada differ on avoidable costs? They believe that the standard should be applied on a route as opposed to specific flights, and we believe that the flight is the relevant unit.

They believe that we should stand back and measure their performance on the basis of a year's performance, and we think that competitive harm can occur in much less than a year, and I think the Roots example is a pretty good one.

There's also some dispute about to what extent we ought to take into account their so-called beyond revenues, in terms of connecting passengers and so on. I suppose the final thing is that they say, no matter what, that as long as they're only matching a competitor's fares, that should trump everything, that's okay, and that's a bulletproof defence. We strongly disagree with that for the reasons that the commissioner has explained already.

The Chair: Thank you very much, Mr. McAllister, Mr. von Finckenstein, and Madam Dussault. Thank you for being here. We appreciate your input.

We'll suspend for two minutes while the labour group takes their position.

• 1213

• 1215

The Chair: I'd like to reconvene. We have many witnesses here. I want to remind you that we are here for an hour. Since there are five...if you could keep your remarks short so that most of the time could be left for questioning, I would appreciate it.

I'm not sure who's going to lead off, but if you want to start, let's go.

Mr. Gary Fane (Representative, Canadian Auto Workers Union (CAW)): Sure, I'll begin.

The Chair: Okay, go head. Remember, if you can keep it to between two to five minutes, that would be nice.

Mr. Gary Fane: Mr. Chairman, ladies and gentlemen, my name is Gary Fane and I work with CAW Canada.

We have about 15,000 people in the airline industry, and we've represented employees in the major carriers for many years. We also represent employees who work in the regional carriers. Our union supported Bill C-26. We have about 250,000 members in our union. When we supported the bill...

This is a massive reorganization of the airlines. We've been through five or six mergers. All the others were small compared to this one. We did EPA, Wardair, and Transair, but the biggest one of course is the merger of Air Canada and Canadian.

We're now taking part in the restructuring of Air B.C., Air Nova, Air Ontario, and Canadian Regional, and probably next month we'll be starting with the merger of Canada 3000, CanJet, and Royal Airlines.

First, on the question of foreign ownership, we believe the current rules are fine the way they are, but we also think individual Canadians should be able to hold up to 25% or 30% of Air Canada shares.

On the question of cabotage, we think this would be a disaster for the Canadian industry. We think the idea of inviting foreign carriers to compete would make absolutely no sense. You'd be starting the whole ball game over, and you might as well contemplate giving away the industry.

Quite candidly, I guess I would just ask all of you how much you enjoyed your last ride on an American Airlines flight or a United Airlines flight. They have a different quality of service in the United States and they have a different market; the market with 250 million people is different from our market here.

The members we represent are the people who serve you. They serve you when you make a reservation. They serve you when you come to the airport. They make sure you get to where you're going. And our members enjoy their jobs. They enjoy what they do. They enjoy serving the public. They are not content when customers are unhappy, and it won't surprise you that we've had some unhappy customers of late.

The state of labour relations with the CAW is probably a little different, but there are some similarities with the other unions. This was a massive undertaking. You have two different cultures in the airline and you're trying to put them together. It's not an easy task. It's a very difficult task, especially when the two airlines have been competing with each other for five or ten years and were basically brought up on this idea of trying to ensure their airline was better than the next one.

The most outstanding problem we have in labour relations is the question of seniority. It's in front of an arbitrator now and will be resolved by September. I'm sure you'll hear from my colleagues, the pilots, about their seniority situation, which is different from ours.

• 1220

We've negotiated and ratified new collective agreements at Air Canada. The employer has treated us decently on the new collective agreements. They've all been ratified. The corporation did some good things, such as increase job security. The legislation had two years; the employer increased it to four. There were wage improvements, financial bonuses, and pension improvements.

I often tell the employer that every day they have a new opportunity to treat their employees better because they're on a learning curve.

When we come down to the question of the policy and the policy framework, on the competitive questions right now for competition, we argued for many, many years against predatory pricing. We think it's a serious evil. We think that, as representatives of the government, you have to make sure it does not happen again. It should not happen. Air Canada shouldn't be doing it to WestJet or anybody else.

We believe competition is important. At the same time, we think it's important that you don't punish Air Canada for having won the labour war or the war over the skies. They had bigger pockets. They used predatory pricing when they dealt with Canadian Airlines, and predatory pricing is dangerous. At the same time, we do believe that Air Canada should not be put out of the market. There were a number of times—for example, CanJet introduced a lower fare to travel from Halifax to Montreal or Halifax to Toronto or Halifax to Ottawa. Air Canada published a fare a little higher and the Competition Board said no, no, you're not allowed to do that.

The Chair: Mr. Fane, could you wrap it up? You're getting into a little more detail here.

Mr. Gary Fane: Certainly.

You can't be telling the national carrier that they can't match lower fares, unless you don't want to have a national carrier. We think it's important to do so. So we don't like the enforcement guidelines of abuse of dominance in the airline industry. Just look at the name. The name says it all. Why don't you kick the company?

We have a lot of problems with the company, which we work very hard to straighten out, but we have one thing in common—the company, the unions, and the employees: to give quality air service at a reasonable price to Canadians. That's what we expect to do.

The Chair: Thanks. We'll go to Mr. McInnis.

Mr. Robert McInnis (Representative, Former Pilots, Canadian Airlines International): Thank you.

My thanks to the committee for inviting me to appear today on behalf of the former pilots of Canadian Airlines International. I will restrict my comments to the state of labour relations in the industry, and in particular to how the former Canadian Airlines pilots have been affected by airline restructuring. In the brief time available, I will touch on several contractual issues and the process and result of the integration of our seniority lists.

From our pilots' perspective, this merger is not going well. Contrary to the clear commitments to fairness made by the minister and Air Canada's CEO, Robert Milton, at the outset of this restructuring process, the former Canadian Airlines pilots are being treated as second-class citizens. Air Canada has fostered, directly or indirectly, an apartheid with its former Canadian employees, especially the pilots. This relationship is affecting motivation, job satisfaction, and job performance. It's creating intergroup conflict and high levels of stress among usually very composed professionals. None of these factors should exist among airline pilots, and none will contribute to the optimal proficiency in the cockpit.

In March 2000 the Canadian pilots agreed to transition their union contract, including work rules, to the Air Canada system. This was critical to Air Canada's plan to integrate the pilots. The Canadian pilots agreed to an early transition to assist Air Canada in integrating the workforces. This was also a critical step in Air Canada's need to obtain a Transport Canada common operating certificate. Part of this transition was the promise that Canadian pilots would receive all terms and conditions of the new Air Canada pilots, or ACPA, contract.

Last fall, I'm sure all of you will remember, ACPA negotiated a new contract. One of the terms and conditions of the new contract, as proposed by mediator Bruce Outhouse, was a contract signing bonus worth approximately $15,000 per pilot. Air Canada has refused to give a similar signing bonus to the Canadian pilots, despite the fact that we, the Canadian Airlines pilots, had committed to an early transition in our new employer's interest.

• 1225

The two pilot groups have different pension plans. Both are fully funded. The Canadian pilots believe that all pilots from both groups should accrue the same pension benefits. Air Canada claims it would be too costly to give the former Canadian pilots the same pension benefits and they will not provide an equivalent pension. They plan to also increase the pension benefits for the former Air Canada pilots at a rate that is faster than the rate for the Canadian pilots. This will dramatically exaggerate the differences and unfairness over time, and almost certainly deepen the resentment of many former Canadian pilots.

When Air Canada integrated Canadian employees into the new company, life insurance, dental, and health care plans were amalgamated or converted to the Air Canada system. To maintain these benefits after retirement, an employee requires 15 years of employment with Air Canada. Our service with Canadian Airlines will not count, as though our careers at, our sacrifices for, and our loyalty to Canadian Airlines counts for nothing. In effect, Air Canada destroyed our accrued benefits and has no plan to replace them. We are treated as brand-new, off-the-street recruits. We've been degraded.

Oddly enough, when it is in Air Canada's best interest, we are considered Air Canada employees from the date we started working for Canadian or its predecessors. For example, sick banks were recalculated on the Air Canada method back to 1965. That recalculation was to Air Canada's sole advantage.

The whole attitude of Air Canada in its relationship with the highly trained and experienced pilots of Canadian Airlines will be very familiar to students of apartheid and systemic prejudice. It is no exaggeration to say that we have been assigned to the back of the corporate bus. Our travel passes are a perfect example. An Air Canada employee with six months of service will be seated on an Air Canada flight before I will, and I have 31 years of airline service. We ask if that is fair and equitable, and is that a model of employee relations behaviour?

The Chair: Thank you.

Mr. Robert McInnis: I'm just concluding.

The foregoing contractual concerns, although very serious, pale in comparison to the shock, disbelief, and anger that the former Canadian pilots feel concerning the seniority merger process, and the initial result of an attempted resolution through arbitration.

Seniority, as you know, is more important to pilots than it is to any other employee group. Seniority determines every aspect of our working lives, including pay, pension, schedule, vacation, where we're based, and so forth. Every aspect of our career is affected by our place on our seniority lists. Seniority is the career protocol that governs our lives.

In its second report, Airline Industry Restructuring in Canada, the Senate Committee on Transportation and Communications said unequivocally, and I quote: “Secial attention should be accorded to the sensitive matter of airline seniority lists.” Air Canada and the government seem not to have understood the critical importance of this caution. In fact, they've done absolutely nothing to date that would preserve the critical value of our seniority.

The Canada Industrial Relations Board accepted an arbitration award that decimated our seniority rights, and we fully intend to challenge the award at the board and in the courts if necessary.

This award wiped out an average of nine years of each pilot's service to our airline. But the average impact is mild compared with the impact on specific individuals. For example, a pilot who was hired by Canadian Airlines more than 25 years ago will be junior to Air Canada pilots with just five years experience. Most Canadian pilots will be categorized as too junior to fly wide-bodies when vacancies are created by Canadian pilot retirements. In effect, the award creates a windfall for Air Canada pilots, and that's a complete violation of the principles of fairness in the matter of seniority integration.

Our vice-president of flight operations, Captain Hayden Acheson, hired in 1976 by Canadian Airlines and obviously highly qualified as a pilot and as a leader, will by this award be junior to pilots he might have interviewed for employment in the late 1990s. What's worse about this award is the punitive nature of it becomes worse over time.

I have provided the clerk with relevant documents so that the committee may review the award and some of our analysis in detail at their convenience.

• 1230

Ladies and gentlemen of the standing committee, Air Canada's labour relations with its former Canadian Airlines employees, and particularly the pilots, are in a sorry state. The once-proud pilots of Canadian Airlines began this process full of hope and ready to do their part with their new colleagues and peers to make the dream of a strong national carrier a reality. We stand before you today totally disappointed.

Thank you.

The Chair: Thank you very much, Mr. McInnis. You should keep it short, because I'm sure we want to ask you some questions. You have presented us with that material.

Mr. Erlichman, please. Five minutes.

Mr. Louis Erlichman (Canadian Research Director, International Association of Machinists and Aerospace Workers (IAM) in Canada): I'm in between the pilots here.

The International Association of Machinists and Aerospace Workers is the largest union in this sector. We have 18,500 members working at Air Canada and other carriers as well as a variety of airline service companies. So your deliberations are clearly very important to our members.

The committee put forward five general questions or issues to respond to. Given the shortness of time, I'm not even going to try to respond in any kind of depth. We've made submissions in the last few months to the CTA review panel, to the International Air Policy Review. There's a GATS, General Agreement on Trade in Services, initiative. I've brought and distributed, I hope, submissions on those issues as well as our submission to the predecessor of this committee last year on Bill C-26.

I want to make a few points today. First and foremost, we hope that this committee will understand the nature of this industry. It's a cornerstone of national development, an industry that provides essential social and economic services in this country. It's an important source of Canadian employment, both directly and indirectly in the aerospace sector and in industries that provide services to air transport.

Air transport is an industry that tends, in the absence of public regulation, to concentration and monopoly. The evidence from around the world is clear: deregulated airline industries get more concentrated and less competitive. The U.S. is the largest market in the world, and it's dominated by three carriers that have over 50% of the U.S. market. They are taking over a couple of others and it's getting more concentrated all the time.

The myth that unrestricted market entry can create textbook competitive markets in the airline business has been proven false time and time again. The choice is between unregulated monopoly or oligopoly and a monopoly or oligopoly regulated in the public interests. Unfortunately, the Canadian government has to date clung to the myth of competition and taken a passive and defensive approach to this sector, up to and including Bill C-26. The passive-agressive approach of the Competition Bureau focusing on barriers to entry and predatory behaviour is totally inappropriate for the air transport industry. This is a highly cyclical and a high-fixed-cost industry, where dominant players like Air Canada and the major U.S. carriers can and do lose large amounts of money. You're not supposed to do that if you're a monopoly, according to crude economic theory.

The government needs to finally step in and provide a clear policy direction for this sector. We would urge you very strongly to resist the calls for allowing foreign control of Canadian carriers or cabotage rights for foreign carriers. Rather than increasing competition, allowing big foreign carriers in will simply allow them to weaken or kill Canadian carriers and put us at the mercy of even bigger foreign monopolies.

If your concern is the cost of quality of service to Prince George, Sault Ste. Marie, or Baie Comeau, you won't get any help from foreign carriers. If they're interested in anything, it will only be in a few major routes.

Canadian air transport needs a regulatory framework with elements like service requirements for carriers, a fare-setting mechanism, and an ongoing worker assistance program. We are particularly concerned about the potential extension to all our services of the General Agreement on Trade in Services. The market access and national treatment provisions of the WTO would allow foreign legal challenges to any Canadian policies to maintain service, safety, or environmental standards, effectively precluding us forever from dealing with crucial public interest issues.

I don't want to say much about the continuing labour relations mess that has resulted from the Air Canada and Canadian Airlines merger except to say that it is expensive for employers and unions and it continues to create discomfort and insecurity for our members. Because our union represents a broader range of workers than the other unions in the air transport sector, we've been dealing with an additional layer of complexity required in defining new bargaining units. We have also seen the collateral damage of job loss at service companies that are losing work because of the merger but are without the job protections we negotiated for Air Canada and Canadian Airlines members.

• 1235

Economists often treat mergers and the resulting adjustments as simple and virtually costless. This is clearly not the case in the airline industry, where mergers have a major and long-lasting impact on the airlines and their workers. The evidence in Canada and the U.S. is that airlines pay a significant long-term price for mergers.

The air transport industry is not just airlines. Over the last decade the federal government has divested itself of the major airports in this country and handed them over to local airport authorities. As a result, these major, publicly built facilities, with huge economic and environmental impact on the region, are in the hands of unelected and largely unaccountable bureaucracies. The airport divestiture process and the airport authorities present serious problems with transparency, accountability, and potential conflicts of interests, some of which have already been raised by the Auditor General. We encourage the committee to consider airport authority structures and governance as part of their review of the air transport sector.

Apart from the challenges this presents in the general use of our airports for the public interest, the airport authorities present particular problems for our members working at airports. The airport authorities have been delegated the authority by Transport Canada to issue and revoke airport security passes and the airside driving permits, both of which are requirements of continuing employment for many of our air transport members. Our members are subject to arbitrary withdrawal of security passes or driving privileges by the airport authorities, meaning loss of employment without access to an independent appeal process. We have for a long time protested this denial of natural justice to both the federal government and the airport authorities, with, to date, no positive response. We hope your committee can offer us assistance in this matter.

The Chair: Good.

We move to the Mr. Hardisty, then Mr. Johnson after that.

Captain Kent Hardisty (President, Canadian Airline Pilots Association): Thank you, and good afternoon, Mr. Chair and honourable members. I will try to be brief.

I'm Captain Kent Hardisty, Canada board president for the Airline Pilots Association International. ALPA represents the collective bargaining and professional interests of 66,000 airline pilots, who fly for 47 airlines and for whom we have bargaining rights in Canada and the United States. We appreciate the opportunity to appear before you again to discuss the current state of airline operations in Canada.

Most of the pilots we represent in Canada are currently engaged in some phase of restructuring of their airline as a result of the Air Canada and Canadian merger. The pilots at the Air Canada regional airlines are grappling with seniority issues that have arisen as a result of the merger of the four separate airlines, and their negotiating committee is engaged in the difficult process of bargaining a single collective agreement. The pilots at Canadian Airlines, who are appearing separately before you today, are no longer represented by ALPA, after the transfer of their bargaining rights to the Air Canada Pilots Association. Pilots of Canada 3000 Airlines are now engaged in the early stages of dealing with the labour consequences of their company's acquisition of Royal Airlines and CanJet. To say the least, a review by this committee of the current state of airline operations in Canada is both timely and important.

The first point we wish to address involves labour protections upon merger of airlines in the context of Bill C-26. Because the employees are some of the most important stakeholders in the airline industry, labour relations play a critical role in the successful outcome of any airline merger. For that reason, we consider this committee's recommendation and the government's subsequent action in extending a degree of job security and protection to the employees of Air Canada and Canadian an extremely positive response. The job security and relocation guarantees, limited as they may be, have enabled collective bargaining to take place between employers and the unions in an environment that offers a degree of stability. That important factor would not have been present had the government not acted in this manner.

Although the collective bargaining processes in the merger have been and continue to be difficult, many of the successes in it can be attributed to the presence of these job protections. However, unlike the permanent protections extended to consumers and to other industry stakeholders, the labour protections in Bill C-26 were of an entirely ad hoc nature. As a result, the legislation, as it currently stands, simply does not require the government to take into account the impact an airline merger may have upon employees.

In recognition of this important issue and of the successes that the protections provided in the course of the last merger, we propose that a review of employee concerns be made a mandatory step in the government's process of approval for airline mergers, and further, that the presence of adequate protection for the employees concerned be made a condition of government approval.

Before leaving the topic of labour relations, we would like to note that the Canada Industrial Relations Board, which has been charged with resolving the structural labour issues arising out of the merger, has been helpful to the parties in developing a constructive labour relations environment within which the parties may function. Of considerable importance has been the recently amended Canada Labour Code, which seems tailor-made for the circumstances facing us today.

• 1240

Additional points for comment include foreign ownership and cabotage. On many occasions before this committee CALPA has voiced its opposition to legislative changes that would entail the introduction of the carriage of domestic Canadian traffic by foreign carriers. In our view, the events of the last several months, during which a number of carriers have entered the marketplace, make it clear that a competitive domestic market is a genuine possibility.

In this light we submit that the discussion of foreign ownership and cabotage is seriously out of place at the present time. Canadian carriers such as WestJet and Canada 3000 or any other potential market entrant must be given the opportunity to compete in the marketplace before resorting to what is, in our view, so desperate a solution as to not really constitute a solution at all.

Changes to foreign ownership rules and the introduction of cabotage should only be considered by the government in the event that the current Canadian air policy framework has clearly failed to provide for a viable and competitive domestic market. Domestic operations by foreign carriers would likely be fatal to the Canadian airline industry and of questionable long-term benefit to consumers. The U.S. or other foreign carriers would enjoy significant advantage over Canadian carriers serving the domestic marketplace due to their sheer size and attendant economies of scale. Cabotage would expose Canadian carriers to financial pressures that would very likely lead to financial distress or failure. This solution, we submit, would put us no further ahead, and the only real achievement would likely be the destruction of our industry.

Furthermore, we consider it important to point out that any introduction of foreign airlines into Canada would be on a unilateral basis. CALPA is closely involved in governmental affairs in the United States in respect of this issue. The issue of reciprocal cabotage is not on the U.S. government's agenda. Therefore, the opening of the skies to U.S. carriers would not permit our own carriers to exploit the U.S. markets. Simply put, this is not the solution to the problem of industry concentration.

In closing, we thank the committee for the invitation to participate in this discussion, and we look forward to future participation as the realignment of the industry continues.

Thank you, Mr. Chairman and members.

The Chair: Thank you. Well done.

Mr. Don Johnson, please.

Mr. Don Johnson (President, Air Canada Pilots Association): Good afternoon, Mr. Chairman and honourable members. My name is Don Johnson. I'm the president of the Air Canada Pilots Association. We represent the 3,500 pilots employed at the main line of Air Canada.

I want to start with the statement that I find it inappropriate that the former employees of CAIL would bring their seniority dispute in front of this committee. I believe that both sides agreed to a process in determining seniority in the integration of the pilots into the new Air Canada. That process was agreed to well in advance, and we both agreed on a well-respected independent arbitrator, Mr. Mort Mitchnick.

We agreed at the beginning that all parties would have a full opportunity to make whatever presentations they wanted to make on the issue, and we had an agreement that the arbitrator's decision would be final and binding except for an opportunity to have the Canada Industrial Relations Board review it under its reconsideration powers or by way of a judicial review by the courts. An agreement was also reached that the arbitrator's decision would be made an order of the board, and that has been done. The CIRB processed the protocol as part of an agreement that Air Canada and CAIL were a common employer for the purposes of the Canada Labour Code, and the protocol became part of the board's order.

There are ongoing transition issues among the Air Canada pilots, the former pilots of Canadian Airlines, and the company. Those issues have to do with the bonus, the pension issue, and 10% callback pay. Those issues are going to be put forward as a grievance, and an arbitrator is in the process of being named to hear those issues.

• 1245

With regard to some of the issues Captain McInnis brought up and just by way of example, in the past a Canadian Airlines employee with 25 years would come behind an Air Canada pilot with one year seniority, and that is exactly the same issue as where an Air Canada employee with 25 years would come behind a CAIL employee with one year seniority when flying on a Canadian Airlines airplane. So the issue is one of transition. We are dealing with those issues. It has always been an ACPA initiated discussion. We hope those discussions will carry on and that we can solve this problem. That's all I have to say.

The Chair: Thank you very much, Mr. Johnson.

We'll start with our questioning. I hope our questioners will direct questions to specific witnesses, because if all five answer, we will be here for quite a while.

I'll start with Mr. Hill of the Alliance Party.

Mr. Jay Hill: Thank you, Mr. Chairman. I'll bear that in mind.

Obviously, under this format we're not going to be able to direct questions to each individual participant. Therefore, I'm going to limit my questions and direct them to individuals.

As I understand the issue, I'm disagreeing in the sense that I think that if there is a dispute as to whether or not the commitment made by the Minister of Transport and the head of Air Canada to treat Canadian Airlines employees fairly, it should be rightfully be addressed by this committee.

First of all, I'll direct a question to Captain McInnis. As I understand it, the Canada Industrial Relations Board was responsible for transferring the bargaining rights of the former Canadian Airlines pilots from the Canadian Airline Pilots Association to the Air Canada Pilots Association. Is that correct?

Mr. Robert McInnis: That's correct. We have no dispute with ACPA's handling of these transitional labour relations issues at this point. We expect they will be solved in due course.

Our major concern and the reason we're here is to bring forward the seniority issue for your information.

Mr. Jay Hill: In fairness, both you and Mr. Johnson can reply to my next question. How is it possible that the Air Canada Pilots Association can represent the former Canadian Airlines pilots in this dispute? They're obviously in a conflict of interest. They're trying to represent two groups that have now been combined under their umbrella in a dispute against one another, and they're trying to sort that out.

Mr. Robert McInnis: I did leave one thing out, and that is that the CIRB gave the Canadian Airline Pilots Association standing to represent the former Canadian Airlines pilots just for the seniority issue in front of them. In all other ways we are represented by ACPA, but in front of the CIRB for seniority purposes we retain a degree of independence.

Mr. Jay Hill: I'll ask Mr. Johnson if he wants to reply to that specific issue, in other words, what would appear to me to be a bit of a conflict of interest in putting yourself and your group and your organization in a very uncomfortable position, I would suspect, and whether it wouldn't have been better to leave the Canadian Airlines Pilots Association—I recognize it's a transitionary thing—in place, at least until such time as this thing has been settled and it's gone through the appeal process.

Mr. Don Johnson: That is in fact what is in place at this time. The CIRB has ruled, as Captain McInnis has said, that ALPA will remain seized of the issue of all things relating to seniority integration, so we are dealing on a one-to-one basis with that issue. In other words, ALPA is representing the former CAIL employees and ACTA is representing the Air Canada employees.

• 1250

Mr. Jay Hill: All right. I'll direct a question to Mr. Fane.

In your brief I note you use some fairly strong language and there is at least what I view as a potential conflict of opinion. At one point you say you're strongly opposed to predatory pricing, an evil that has seriously hurt the industry. You continue to stress that predatory pricing hurts consumers, shippers, and all Canadians.

Then further on in your brief you make reference to the enforcement guidelines on abuse of dominance, and obviously any potential abuse of dominance would manifest itself in predatory pricing. You make the statement that you would like to know if the author hates Air Canada, because the proposals appear to be vicious and vindictive.

First of all, who's the author you're referring to? I notice you couch your words with “if” and “appear”. Don't you think those two statements are in conflict with one another?

Mr. Gary Fane: No, sir, I don't. Let me explain to you why I don't.

We think the government has a role in making sure the industry is properly governed, on one hand. We argued for years about predatory pricing when we had two major airlines, which is what we wanted to continue to have. Unfortunately, nobody was listening when we were having that debate. When we read the enforced guidelines on abuse of dominance in the airline industry it appears to us that the Competition Bureau has said three times now, and it is going to do it again, that the dominant carrier is not allowed to match low fares. You can't have it both ways. You can't say to the dominant carrier, you can't match low fares, but, oh, by the way, we're going to scream when you're charging too much. The government agency should scream if there's predatory pricing, which means you're selling your air service at a lesser cost than it is to produce it.

The WestJets of the world, for example, have an opportunity to get into the market and they have a much lower fixed cost and they have a much lower labour cost. So I think there's a role for the government. And smart regulation, if I can use that term, would be to ensure there was no predatory pricing on one hand, and on the other hand, make sure there's no price gouging.

Mr. Jay Hill: We've just had testimony from Mr. von Finckenstein and his associates who indicated in reply to a question from Mr. Shepherd on that very issue of what constitutes predatory pricing that fixed costs were not part of the calculation.

In other words, when they're trying to calculate and assess whether predatory pricing is actually taking place they only count in avoidable costs in trying to determine whether or not the airline is actually prepared for a short period of time to operate at a loss on certain routes in order to drive a competitor out of business.

Mr. Gary Fane: Yes, I heard those statements. I'm trying to understand, in the name of competition, is if you go from Prince George to Vancouver for $500 and one carrier can do that, surely Air Canada should be able to sell the same service for $500 and not be told they should sell it for $600 or $700.

If you do that, there's not going to be a lot of competition on that route for a long time. Even Air Canada will want to be getting out of the market. When they get out of the market, sir, I trust there's going to be a lot less competition.

Air Canada is a national carrier. We have a lot of arguments and fights at Air Canada about things we're not happy with, but we used to have two national carriers. We want to make sure, now we're down to one, that we keep having one. We want to make sure, at the same time, that the WestJets can operate. We don't want Air Canada's predatory pricing putting them out of business, but at the same time we don't want the Competition Bureau putting Air Canada out of business. That's contrary, sir.

• 1255

Mr. Jay Hill: In conclusion on that point, I guess it comes down to how you define predatory pricing. Say that for a short period of time an airline has been operating on a certain route, to use your example, at $600. All of a sudden, because they have competition and they know they're going to lose money at $500, they're allowed to match that price and lose money for a short period of time. Perhaps they have superior equipment, they offer frequent flyer points, they have all the other incentives that the larger carrier can offer to entice those travellers away from their competitor, while matching the price at a loss for a short period of time. I would suggest, sir, that this constitutes predatory pricing.

Mr. Gary Fane: Sir, we could have a debate on predatory pricing for a long time and we would have some agreement. And I don't disagree with you that many customers travel with travel bonus points. The people we represent, quite candidly, think that they can do a good, quality job, providing good service to the customers, and particularly, they don't control the question of price.

We didn't like predatory pricing when Air Canada kicked the shit out of Canadian Airlines. We didn't like it then. We still don't like it. On the other hand, we want to make sure the government is not treating Air Canada at a disadvantage so that they'll be losing money and then we'll get into other silly talk about cabotage and that type of competition.

The Chair: Thank you very much.

I want to remind both the questioners and the answerers that the chair is still here and the questions should go through him.

Mr. Jay Hill: My apologies.

The Chair: It's just so you don't get into a debate.

We'll move on to Mr. St. Denis of the Liberal Party.

Mr. Brent St. Denis: Thank you, Mr. Chair.

With great respect to the former Canadian Airlines pilots and to Air Canada pilots, I'm going to avoid asking any questions about that, due to the potential for litigation that might seem to be ongoing, by Mr. McInnis's suggestion.

I'm going to one of my favourite subjects, a subject that Mario was pursuing with Mr. von Finckenstein and others, which is that a lot of members of Parliament represent rural areas where there is either some scheduled service, perhaps one or two flights a day, such as in my northern Ontario riding, or areas where there is in fact no service, or there used to be an airline service but for different reasons it no longer exists.

I'm going to ask a question that I asked Ms. Ward. If we can somehow imagine that five, ten, twenty years down the line the ideal is good, fair competition, there is ample service between the major urban centres, including good, solid service, broader than we have now, to the rural and northern areas of the country...

I know you're representing the employees and pilots. You have a view of the industry based on solid research and a feel for what is happening on the ground because of your grassroots organizations. So I'm going to ask one of you who perhaps hasn't spoken on that.

Mr. Erlichman, how do you see the state of the Canadian airline industry ten or so years from now, given the trends you have seen so far?

Mr. Louis Erlichman: I've been coming here and other places for about twenty years, singing very much the same tune and largely getting ignored. It's actually the 17th anniversary probably tomorrow of Mr. Axworthy's deregulation statement that deregulated the Canadian industry. And what we've had is concentration; we haven't had more competition.

The only way you're going to get fair service to small communities is if the government comes straight out and says this is a regulatory regime. Right now you have a regulatory regime. The regulatory regime is Mr. von Finckenstein and the government occasionally coming in to say we need service in this country. We have this very defensive legal argument that if this isn't working, what's predatory pricing? We need service to smaller communities. We need it to be fairly priced and so on, and if it involves cross-subsidization so that you can get service at a reasonable price to Sudbury, so be it.

• 1300

That's the only way it's going to happen. If you continue down the road that we've been going in for really 17 years in this country, basically Air Canada's going to be bigger. Obviously there's a game that Air Canada has to play, because if they get too big, then they're going to get hit over the head. So they are hoping that WestJet stays just big enough and this Canada 3000, CanJet, Royal thing stays just big enough.

I think there has to be a reversal in government policy, and government has to say we're not just going to be chasing after this chimera of competition. We're going to have to actually actively decide that this is the kind of service that this country needs, and we're going to make it happen.

Mr. Brent St. Denis: Mr. Chair, in the interests of my colleagues having some time with the witnesses because we're getting out of time, I'll forgo the rest of my ten minutes.

The Chair: Larry, you had some questions.

Paul, you didn't want to ask that question, did you?

Mr. Paul Szabo: Sure I did.

The Chair: Go ahead. You have about six minutes.

Mr. Paul Szabo: When we talked to the Commissioner of Competition, he made a statement to the effect that—and this is for the pilots—if one party has more than 50% of the marketplace, as that increases, the effectiveness of competition diminishes, and we were talking about Air Canada's current 70% to 75% position. If it's the objective to improve competition, which means to bring in more players, and assuming that the intent is to reduce the concentration of dominance of Air Canada in the industry, what does that do in terms of the demands of pilots to be more mobile, to migrate from Air Canada, and what's that going to mean?

Mr. Don Johnson: As far as pilots migrating from Air Canada, the biggest problem that airline pilots face in the world is that essentially they're on a seniority list. Historically, if they quit one company and go to work for another company, they start at the bottom again. That is the fact of life. If I was to quit Air Canada and go to work for United Airlines, for instance, I would start at the bottom of the list, which is untenable for me. So once you're in with a major airline, you're pretty well in for your career. So there is no free market shift of labour as far as pilots are concerned.

Does that answer your question?

Mr. Paul Szabo: Yes. Well, are the best pilots the ones who've been there the longest? They're the ones who get paid the most.

Mr. Don Johnson: As a general rule, I would say yes. The more experience you have at operating an aircraft, the better qualified you are to do the job.

The Chair: Okay, Larry, you've got three minutes left in the Liberal time. Then I'll go to Mario for his ten minutes.

Mr. Larry Bagnell: Okay, I have just a comment for Mr. Fane.

I think it appears, from everything we've heard today and beyond, that obviously monopoly isn't working well, and that therefore something has to be done. If cabotage or foreign ownership isn't the answer, then hopefully you'll be able to lobby to get some type of Canadian solution in there—as you said, you liked it when there were two—before the other step has to be taken.

I disagree with Mr. Hill. I don't think this is our issue related to the pilots because there's a process in place, and hopefully it will come to a successful conclusion. I'm not going to make any recommendations or anything, but for my own information I just want to ask a couple of things. I've had amazing input, as you can see, from Canadian Airlines pilots and talked to a number of them. Whatever the reality of the situation, obviously they're very upset and emotional.

Mr. Johnson, you were saying, I noticed, in one case...you lose 25 years to go on Canadian, and then it would be the same vice versa on Air Canada planes. So does that mean that if the seniority provisions were just reversed between the groups, it would be the same?

• 1305

The pilots of both companies are great. They're fantastic professionals. I don't think it was the result of the pilots in either company that led to this unfortunate situation, and everyone's going to have to work together, so hopefully it will work out. Because it's not our business, hopefully the Canadian... Robert, you'll ensure that all this stuff that we've got goes to whatever levels of appeal or processes that it's supposed to be going to, so that they have this information.

Pilots are human beings, and if something serious...if one of you lost a child or had something serious like that happen, would you get on a plane? Would you be exactly 100% capable? Well, your career has been proven to be very high on that list of emotional impacts on people, and you don't control your emotions—humans can't, totally. It's involuntary. So if you're working together in this emotional state when this all comes out, the way it sounds here is that it couldn't possibly be a good situation. I don't think either of you could guarantee you could control that. So hopefully this will be resolved so that it will be safe and happy for all of us.

The Chair: Monsieur Laframboise.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

My first question is for Mr. Fane. The representatives from the Competition Bureau told us that Air Canada's problem is that there are too many employees. They would like to see a major reduction in employees at Air Canada so that the company will be more competitive, which would probably make it easier to apply the Competition Act.

Personally, I think that solution is a bit too easy. When Bill C-26 was adopted, we knew we were dealing with two competitors, and integrating the employees was a condition set out in the act. We know that apart from the fact that there were some sporadic job losses, jobs were maintained. Is that actually what happened, Mr. Fane? For example, did most of the workers you represent keep their jobs?

[English]

Mr. Gary Fane: Yes, sir. In the collective agreements that we have signed, we have job security for up to four years, which was an addition to the two years that the legislation had provided. The next challenge will be to have job security for the regional employees, who are from Air Nova, Air Alliance, and the three or four other ones.

• 1310

For the employer, the job security is not the biggest burden in the world. We have negotiated financial arrangements where people will volunteer to leave. We represented 9,000 people, and we had 1,000 people volunteer to leave. The package they received was the equivalent of one year's work. My experience in labour circles is that the employer can always downsize; it's just a matter of negotiating the cost, preferably on a volunteer basis. So you take care of the employees, and the employer continues to do this and requests to do this as the market changes.

[Translation]

Mr. Mario Laframboise: I assume that attrition will run its course and that the company will be able to remain competitive. That is what all of the stakeholders are implying. Each of your union groups will face some attrition and that will enable the company to remain competitive. That is what I assume. I simply want to counter the statements made by the Competition Bureau, which said that for Air Canada to be more competitive, it will have to make huge staff cuts. For my part, like you, I assume that attrition will run its course and that the company will always be competitive.

Can you answer that, Mr. Erlichman?

[English]

Mr. Louis Erlichman: The point of the merger was to reduce the size of the combined carrier.

They went in with the expectation of 2,500, and, as Gary said, much of that will be done through attrition, through buyouts, and a variety of other things. Now they're talking about going a little farther in terms of the reduction.

It seems to me that the competition commissioner has a very narrow view of the world, and maybe it's required by his job. But this is an industry where, in a downturn, airlines lose a lot of money. Air Canada lost $1.5 billion in the early 1990s, more than Canadian Airlines did, and they're not in good financial shape at this point because of the merger.

The costs of the merger are much, much higher than the kind of short-term costs of buying out a few thousand employees and those kinds of improvements. You've got to integrate all those systems. The evidence from carriers—you look at USAir; you look at Canadian airlines itself, and it's the poster child for what goes wrong with mergers. So the costs are much more extensive, and it's going to take a lot longer for Air Canada to get solid, which is one of the reasons we're nervous about this talk about extending cabotage and everything else right up front.

[Translation]

Mr. Mario Laframboise: I will conclude with two comments, Mr. Chairman.

You obviously know why we are here today. It is because there have been complaints against Air Canada, but also because as elected officials, we hear recriminations and our constituents complain about service no longer being provided by Air Canada or Canadian. Clearly, we cannot congratulate Air Canada for its action network-wide. Service has been cut. That is obviously what I have retained from the comments by the Competition Bureau. They say that if there were two competitors, as there were in the past, there would be better service to the regions. That is an inviting element.

Personally, if I had some criticism for Air Canada, it would be that Air Canada has not maintained the service it should have maintained in all regions of Canada, as required by its monopoly. With a monopoly comes the requirement to maintain service. And there was a second requirement to provide service in both languages for most destinations.

As an employee representative, I hope you are also concerned with... Because the company did not maintain service in the regions and because there have been lots of complaints about official languages, we must hear from Air Canada and all stakeholders following this integration, which, for most Canadian citizens, has not been very successful. I agree with you that the employees are not responsible for this.

However, there are undoubtedly things you can help the company achieve through your action and with the influence you have in the company. Service to the regions must be maintained. We must stop the divisions. We must ensure that service to the entire country is as good as it was when both Air Canada and Canadian existed, and that service is provided in both languages. That is what I am hoping for.

I will conclude by saying that the situation regarding the integration of pilots is deplorable. They have gone to arbitration. I read about that. I come from a municipal background. There will be a merger. Municipalities are merging throughout Canada, at least in Quebec, and there is legislation stipulating that seniority must be honoured.

• 1315

The decision that was reached, through arbitration, stated that one company was going bankrupt and that the employees of that company should not expect the same job security as those in the other company, when in reality, it was a straightforward merger. Imagine what would happen if in a municipality, the employees from the richer city had more seniority than the employees from the poorer city. It would be hell.

There would probably be an appeal, and I encourage you to take the matter to the courts. I think the government should have provided guidelines. When it comes to mergers, it is convenient to prevent an arbitrator from using labour laws in force in the private sector, whereas these are private companies but with public connotations. They wanted to maintain a monopoly, to encourage one company to survive, and so they authorized the arbitrators to use private sector rules and ended up with aberrations like that. Two pilots with 25 years of service should have the same seniority, in my view. It does not matter whether the pilot came from a business that was going bankrupt or a business that was doing well. It was a merger and not a bankruptcy. I think the arbitrator made a mistake, but that is just my personal opinion.

Thank you, Mr. Chairman.

[English]

The Chair: Thank you very much.

Are there any further questions of our witnesses?

Thank you very much, gentlemen. We have your briefs. We have the information for input. I'll suspend until 3:30, when the meeting will continue.

• 1317

• 1529

The Chair: I'd like to reconvene the meeting and welcome our interveners from the Association of Canadian Travel Agents. We'll start right with five minutes each, ladies and gentlemen.

Randall Williams.

Mr. Randall M. Williams (President, Association of Canadian Travel Agents): Thank you, Mr. Chairman, for the opportunity to speak to you today.

• 1530

Since August 1999 it has been a hectic time for everyone involved in the airline industry. The emergence of Air Canada as the sole dominant carrier has presented as many challenges to government as to industry.

We at the Association of Canadian Travel Agents are pleased to be participating in this review. We find it encouraging that Air Canada is facing increasing competition from the likes of Canada 3000 and WestJet. However, the absorption of Roots Air by Air Canada shows how difficult it is going to be to bring about a healthy, competitive airline industry in this country.

Underlying the developments of the last two years is the strategic debate over whether we need to allow foreign carriers a greater role in bringing about healthy competition or whether we can cultivate our own competition through careful regulation. While reasonable people can disagree on what strategy to follow for more competition, ACTA would like to draw the committee's attention to less visible forms of anti-competition.

In this context, ACTA would like to refer to the Competition Bureau's draft enforcement guidelines on abusive dominance in the airline industry. These guidelines have been developed in order to help all stakeholders interpret the regulations that came into effect in August 2000. On the whole, ACTA believes the guidelines are too intrusive and go beyond the appropriate degree of regulation. For example, there's too much fine tuning with regard to the definition of avoidable costs. Not enough room is left for reasonable flexibility.

But today ACTA would like to focus on the particular guidelines that deal with travel agency commissions. They can be found at paragraphs 73 and 75, and are meant to elaborate on regulation 1(f), which defines one kind of anti-competitive conduct as:

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.

Apart from the expression “for the purpose of”, which we would like to see replaced with the expression “with the likely effect of”, our concern is that the bureau, in its guidelines, has taken too simple-minded a view of how agency commissions can be used to affect competition.

To begin with, members of the committee must understand that this regulation is supplemented by a legally binding undertaking on the part of Air Canada that prevents it from basing its override commissions on domestic market share. The simple rationale for this undertaking is that no incentive program should be allowed that would reinforce Air Canada's already high level of dominance in the domestic market. In all other respects, it is entirely up to Air Canada as to how they compensate travel agencies.

The draft guidelines reflect this legal undertaking, as well as the regulation. ACTA believes they are misguided for the followings reasons.

First, the guidelines treat commission overrides as something similar to frequent flyer programs. In fact, they're not at all analogous. One practice is transparent to the public; the other is not. One is incidental in an economic sense, while the other is an integral part of the business's revenue.

Secondly, the guidelines ignore the structure of Air Canada's actual compensation plan, called Horizon 2000, which, while respecting the letter of the undertaking, defies its spirit by linking domestic compensation with U.S. and international sales.

Thirdly, the guidelines treat the matter of commission overrides separately from the matter of base-level commissions and other evolving forms of compensation. In practice, one form of compensation cannot be regulated without having a distorting effect on all the rest. ACTA believes that now that we have the right to negotiate collectively, the bureau should not be attempting to regulate how commissions are worked out. What should be regulated is the dominant carrier's access to data that makes for unfair negotiations by informing it of the specified percentage of an agent's passengers that are booked on that carrier. And this brings me to my next point.

• 1535

Fourthly, the guidelines appear to ignore the role currently played by computer reservation systems, or CRSs, in determining the structure of incentives. Without knowing the percentage of a particular travel agency's business that goes its way—which is made available through CRSs—the dominant carrier would not be in a position to use unfair incentives. ACTA has brought to the attention of Transport Canada the need to amend the CRS regulations. For us, a small business's right to have its proprietary information protected is being violated under the terms of the current regulations.

The fifth point is that it ignores the fact that Air Canada's relationship to travel agencies is not just that of a dominant supplier who may want to discipline a competing carrier, but also that of a retailer. Air Canada is a retailer that may want to eliminate or reduce traditional retailers. In other words, there is an element of vertical integration being achieved by all suppliers that is being ignored in the guidelines.

Finally, another marketing conduct issue that ACTA would like to bring to the committee's attention—and this addresses a large carrier's role as a retailer—is the creation of Orbits. Orbits, which will be launched in June, is an online agency for the five biggest U.S. carriers. ACTA believes this will result in anti-competitive behaviour, as it will provide consumers with exclusive access to discounted Internet fares. At some point, such a joint venture could also become an occasion for price collusion, and the U.S. Government also has very heavy concerns with Orbits.

Orbits raises the question of joint or cooperative marketing ventures, and of alliances on the part of airlines that are supposedly competing with one an other. ACTA notes that the European Commission has begun to examine how international airfares could be set in a more competitive manner.

In conclusion, ACTA recognizes that the issues that we have raised with you today are complex, but they are all driven by a simple idea of fair competition. We hope these comments will feature prominently in your report to the House.

I want to thank you again for your attention.

The Chair: Thank you very much, Mr. Williams.

Mr. Janigan, please.

Mr. Michael Janigan (Executive Director and General Counsel, Public Interest Advocacy Centre): Thank you, Mr. Chair. I furnished the clerk with a copy of my speaking notes last week. Apparently they will be distributed when they are translated.

I appear today on behalf of the Public Interest Advocacy Centre, which is a founding member of the Canadian Association of Airline Passengers, a coalition of organizations that have been attempting to advance the consumer interest and issues associated with airline travel. We appreciate the opportunity to appear today to give some brief remarks on the current state of airline operations in Canada.

There have been several favourable developments since the approval of the government's response to airline restructuring and the passage of Bill C-35. These include the fact that several Canadian players have challenged Air Canada in the domestic market and appear to have been successful in making some preliminary inroads in different segments of that market. Some consolidation of the new entrant players has taken place, with the expectation that the consolidated entities may be financially better able to withstand competition in their chosen markets.

Secondly, the airline complaints commissioner has been an effective champion of passenger interests in complaints with Air Canada and other airlines. Mr. Hood has proved to be a resilient, fair, and efficient mediator for frustrated passengers.

Thirdly, the Competition Bureau has been vigilant in the exercise of its new responsibilities, and has moved with speed to halt any competitive actions on the part of the dominant air carrier.

There are, however, a number of worrisome developments or continuing problems. While there have been new entrants in the domestic market and some loss of market share, Air Canada retains overwhelming dominance. Its position in the market, its frequent flyer program, its access to financial resources, and its staying power make it a formidable market player. There is little prospect of any wing tip to wing tip competitor emerging in the near or mid-term future to challenge Air Canada's position.

• 1540

Secondly, Air Canada is resolutely challenging the actions of the Competition Bureau where the bureau has acted to prevent anti-competitive conduct by Air Canada. These challenges include contesting the bureau's initiative against predatory pricing involving WestJet and CanJet. It is expected that Air Canada's position will be litigated in the Competition Tribunal and the federal courts.

Thirdly, the Canadian Transportation Agency responds to complaints about Air Canada ticket pricing only when there is no other airline operating in the same market. This is questionable economic and legal theory. If we are interested in consumer price protection, the question should be whether or not Air Canada is dominant in the market in which it's offering the ticket price that is the subject of complaint. If it is dominant, then Air Canada can enforce any price it chooses without any significant loss of market share, regardless of whether or not the carrier serves the same market. It is price gouging by the dominant industry player that we must seek to prevent.

Fourthly, quality-of-service complaints continue to abound, and recent cuts in Air Canada airline personnel bode ill for a speedy end to such complaints for the dominant airline.

The terms of reference for the matters under discussion by this committee today also include the consideration of whether or not international carriers should be allowed to commence domestic competition with Air Canada. I would note that whatever the merits of this concept are in the long term, a relaxation of rules at this juncture might be troublesome in terms of continuation of existing competition. The government plan contemplated a review at the end of a two-year period, and in terms of fairness to these new entrants, it may be appropriate that this timetable be followed. However, there are a number of measures that we would urge to provide a mid-course correction.

The Canadian Transportation Agency should be empowered to review fares for flights and routes where an airline is dominant within the meaning of the Competition Act. The airline complaints commissioner should be given the authority to impose a resolution upon the airlines when he is unable to achieve a settlement on certain kinds of complaints. As well, the power to issue orders and fines to correct behaviour should be considered. Thirdly, there should be a set of reasonable customer expectations, similar to the passenger bill of rights, incorporated in the conditions of carriage for airlines licensed to fly in Canada.

The Chair: Mr. Janigan, you're over by two minutes already, so you have to wrap it up.

Mr. Michael Janigan: Okay.

Quality of service information should also be collected and widely disseminated, similar to Senator Kirby's proposed legislation. As well, we would urge less sloppiness of thought about competition in general. Real competition does not mean simply a couple of marginal players operating in different niches in the domestic airline industry.

I would be pleased to answer your questions on our submission.

The Chair: Thank you very much.

My next intervener is Mr. Gow. Go ahead.

Mr. Harry Gow (Transport 2000 Canada): Thank you, Mr. Chairman. In fact I am replacing, au pied levé, Mr. David Glastonbury, who was unable to come because of a competing requirement for the use of his time.

Transport 2000 Canada would underline the points made by the Public Interest Advocacy Centre and the Canadian Association of Airline Passengers that it represents, as we at Transport 2000 are also members of that coalition. We have not made a separate written submission, so as to simply support the position of our legal advice and assistance centre, PIAC, as well as the coalition.

We would, however, underline the points made at the end. The question of the quality of service has been underlined in Mr. Hood's interim report, issued around a month ago. He outlined such things as lost baggage, and problems with information and the accessibility of standard information, as well as the conditions of carriage. Transport 2000 Canada therefore supports Mr. Janigan's contention that for certain situations the complaints commissioner should be given enhanced powers.

I think the remark we would make at Transport 2000 is that there is still a certain culture within the dominant carrier—which remains a quality carrier; I do not mean to imply that this is not a good airline—an impression that simply issuing a form letter will solve a consumer's complaint. It will not. Individual and specific responses to individuals' specific complaints and needs should be built into the system. If they are not supplied, then the necessity of an imposed solution emerges.

• 1545

The notion of a passenger bill of rights is one that seems to be working its way into the system, but it has not yet been made part of it. We urge you to examine this question with all due diligence.

We believe the complaints commissioner should be reappointed at the end of his term—and we'll add something that has not been mentioned previously. In the belief of Transport 2000, at least—I can't speak for the other groups in our coalition—we have a bit of a loss of unity in decision-making when the Competition Bureau will order that, in effect, Air Canada must raise fares in the eastern or in the Atlantic corridor, but then the CTA tells Air Canada to lower fares on the west coast. These are not totally similar markets, but there seems to be a different set of philosophies driving this.

Whether this is brought about administratively, in a regulatory manner, or through legislation, greater unity of regulatory decision-making would seem to be advisable to avoid a “push me, pull you”, “do this, don't do this, but do that” situation in which you get the airline that is like the famous horse Hercule. And I'll tell this one in French, because it doesn't translate.

[Translation]

Mr. Chairman, there was a horse called "Backward". Over time, it became schizophrenic, because the man at the reigns kept yelling: "Go forward, Backward." The poor horse did not know in what direction he should go.

[English]

I don't know if that could ever be translated, but that is our way of illustrating this situation.

I'll close by stating that the important thing for the passenger is to have information and to get a sensible reply. In my own case, I've dealt with Air Canada on a few occasions with my own consumer complaints, and I've gotten good answers, but that was several years ago. In the business we're in now, air clients have become mass transit. Unfortunately, the individual and the consumer tend to get lost in that situation, so we would urge attention to this matter of appropriate response to complaints and low-quality service where it occurs.

I think I'll close with that.

Thank you.

The Chair: Very well done, Mr. Gow.

Mr. Mackay, for five minutes.

Mr. J. Clifford Mackay (President and Chief Executive Officer, Air Transport Association of Canada): Thank you, Mr. Chairman.

I represent the Air Transport Association of Canada, and the first thing I'd like to do is just let the committee know that the air industry in this country, of course, is much broader than just Air Canada. Just to give you a sense of the size and scope of it all, we have 320 members, and we serve all elements of the industry. I recently gave the chairman a list of 15 regional carriers that doesn't include any of the majors, either WestJet, Canada 3000, or Air Canada's regional operations.

I'd like to remind the committee that while the focus of attention has of course been on Air Canada, both in the media and here, you should please remember that this industry is much broader and more complex than just Air Canada. I think we need to remind ourselves of that from time to time.

With that, I don't intend to go through my full brief. You have it. It's a broad-ranging backgrounder on what brought us here today, and I'd like to highlight three points.

The first thing I'd like to say is that we have been through a very traumatic time in the industry, and in our view it's not over yet. I think we have at least another year or two to go before we see the firm outlines of what it's going to look like. We would therefore fully subscribe to the view that caution would be advisable. Let things happen and let the market respond to the various things that have gone on in the last year or so before there's any further consideration of further governmental activity. We fully subscribe to the two-year moratorium that was suggested by the Minister of Transport. Let that process happen.

There is some goods news, and some of it has been mentioned. Just to give you some examples, Air Transat, which is a very large charter company, has increased its domestic market in the last two years by approximately 50%. You're all aware that WestJet has committed to acquiring thirty new jets, which is an enormous change in one company, and that company is growing very rapidly. And you're all aware—so I won't take any time with this—of the goings on at Canada 3000 and the recent transactions that have resulted in the merger of that company with Royal and CanJet. We agree that will strengthen the amount of domestic competition.

• 1550

There are already signs that some of that is having an effect on the market, if you look at what independent analysts are saying. Air Canada's market share has probably dropped by at least 10%, on average, from what it was when the merger took place. In many city pairs, that number is significantly smaller. It's in the sixties, and there are one or two instances where analysts are arguing that Air Canada is no longer even the majority server of the market. They're now down to less than 50% market share.

So there are a lot of dynamics going on out there, and I would urge the committee not to be too hasty in jumping to any conclusions too quickly.

The second thing I want to say is the fundamental fact of life, particularly in the deregulated market my members live in, is that cost is king. If you do not control your costs, you will not be in business; it's just that simple. That is a reality that is fundamentally different from back in the old regulated days, when you had certainty on your prices and your markets, and you could be more relaxed about your costs. That reality also needs to be brought home to government officials.

There are many costs that our industry is now bearing that are directly related to government actions. If the committee wanted to look at some of the things you could do constructively to improve the domestic competitive scene, I would strongly advise you to look at what government can do to take some of the cost burden off the industry and allow more people to get into it.

Just to give you some examples, there are fuel taxes, airport security costs, airport policing, and user fees. There are hundreds of different user fees we pay to government, totalling $20 million to $30 million a year, and by far the largest single cost is the rent the major airports in Canada pay to the federal government, which this year is in excess of $230 million and is forecast to reach $500 million in the next seven to eight years.

So I would argue that one of the things government can do to try to very seriously help improve the situation for Canadian travellers and for domestic competition is look to your own house and what you can do on the cost side, to take some of the burden off industry.

I won't take much time on airports policy because my colleague, Mr. Raynor, is going to speak briefly to that, and we are also a member of a broad coalition there.

The last point I want to make has to do with international competition. There's been a lot of talk that we should open the Canadian market up to international competition, either unilateral cabotage or various other schemes.

Again I would argue that particular approach to life would probably result in a diminution of domestic competition, not an increase in domestic competition, because the first people to go in that environment would be the new entrants and the small carriers. I would strongly advise the committee to be very careful about going down that road.

The industry is in favour of trade liberalization. We have been big supporters of open skies and other liberalization processes that have gone on. We continue to support that, but it must be on a level playing field basis—in other words, reciprocal.

With that, Mr. Chairman, I will conclude my remarks.

The Chair: Thank you very much, Mr. Mackay.

Mr. Raynor.

Mr. Neil Raynor (Executive Director, Canadian Airports Council, Coalition of Concerned Airport Users): Mr. Chairman, honourable members, thank you for the invitation to the Coalition of Concerned Airport Users. I'm going to use the acronym CCAU from hereon in, to address your committee today.

We've met with individuals before, but it's a pleasure to be here collectively.

My name is Neil Raynor and I'd like to send our chairman's apologies. His name is Tony Pollard. He's the president of the Hotel Association of Canada. Unfortunately, he's out of the province on business.

The coalition was established in August 2000 to facilitate a national public dialogue on the need for higher-quality, competitive, cost-effective airport services in Canada, and to seek fairer treatment from the federal government for Canada's air travellers and airport user community.

Coalition members represent thousands of individual businesses and air travel consumers who are affected by the current national airports policy and to whom the cost and quality of air travel in Canada are extremely important.

Before talking about the coalition's key concerns, I want to dispel what I believe may be a misconception about the objectives of the CCAU.

First, the CCAU is not seeking a wholesale review of the national airports policy. The coalition fully supports the principles of airport devolution and the broad thrusts of the government's policy in this area.

In most respects, local control and management of airports has been a positive public policy development. However, after six years of experience with the national airports policy and nine years since the first airports were devolved, it is now apparent that aspects of the policy need modification if Canada is to retain its world-class air transportation infrastructure.

• 1555

The reason the coalition is here today—and it may not be entirely apparent, given the subject—is that we're also talking about competition and how we can enhance competition.

Secondly, the coalition has not taken a position on the makeup of Canada's airport infrastructure. By this I mean the coalition has not said at any time, and will not say, that all existing airports in Canada are sacrosanct. That is a debate and subject for a separate discussion amongst all the stakeholders. However, the coalition is concerned about the continuing viability of the smallest airports across Canada.

So having told you what the coalition isn't looking for, what are the CCAU's objectives? As you know, Minister Collenette will soon report to his cabinet colleagues with the results of the first significant review of the national airports policy since it was established in 1994. In our view, this is an appropriate time to consider modifications that will improve the overall effectiveness of Canada's airport system. Our objective is to seek those needed changes here.

In the crispest of terms, we believe the federal government should be taking less money from the larger airports, in the form of rents, and should identify a suitable mechanism to make more funding available to smaller airports in Canada. I'm including the smaller, so-called national airport system airports in that mix of smaller airports.

Last year, those six or seven major airports had rental charges levied on them that generated about $220 million for the federal treasury. As my colleague stated a few moments ago, based on current Transport Canada projections, these charges will rise over the next decade to roughly $500 million each and every year, by 2010.

We're urging the minister to immediately freeze all airport rents, and further urge the minister to work with the airport community to establish a new rental formula, based on a cost-based methodology that allows for a reasonable rate of return to the federal government.

At the same time that the federal government has been extracting those large sums from the major airports, it hasn't been reinvesting enough back into the small airports across Canada. We think this is vital. I realize I'm running out of time, but the coalition urges the federal government to act quickly to establish fairness and balance to the air transport sector in this country. It's our collective concern that failure to do so could imperil the future viability of our national airports infrastructure.

I thank you for the time today and welcome your questions.

The Chair: Thank you, Mr. Raynor. I'm trying to keep you on track because we have some imperatives here. We have the minister, and then there will probably be bells ringing. We do have your brief and its general gist.

Mr. Fitzpatrick is next for ten minutes, please, starting now.

Mr. Brian Fitzpatrick: Thank you, gentlemen, for appearing before this committee. It would have been helpful if each one of you had commented on exactly who you represented. I think the ticket agent one I can figure out, but on the other ones I'm doing a bit of guessing. Who are members of the Air Transport Association of Canada, and that sort of thing? I don't want to get us bogged down on that at this point because I only have ten minutes—

A voice: Nine minutes.

Mr. Brian Fitzpatrick: —or nine minutes.

It's your concern, Mr. Raynor, if I heard you correctly, that the rental fees are kind of a revenue generator for the government, sort of like a tax.

Mr. Neil Raynor: I think that would be a reasonable assessment. We believe the rents are too high. We've never argued that the airport shouldn't pay rent; it's just that the rent's too high.

Mr. Brian Fitzpatrick: Right.

Maybe I'm wrong here, but it's my impression that in Canada we have a safe air system, by world standards; it's reasonably priced, by world standards; and the vast percentage of people, despite what Mr. Hood would have to say, get to their destinations without any undue hassles or concerns about getting there.

• 1600

Mr. J. Clifford Mackay: If I could answer that, the answer is yes to all of the above. And just to give you a sense of who ATAC represents, it's all of the commercial carriers: Air Canada, WestJet, Canada 3000, Transwest in Saskatchewan, a lot of helicopter operators, a lot of flight schools, all the regional operators—basically, commercial aviation in the country.

Mr. Brian Fitzpatrick: Right. And I know we have an ombudsman, Mr. Hood, to report on problems in the airline industry, but I've been scratching my head. Where do we stop and start with that sort of phenomenon? I imagine there would be a lot of parents in this country who wouldn't mind have an ombudsman to complain about the quality of education for their children, or people who deal with the health care system could have tons of complaints on that.

It seems to me that a thousand complaints, statistically, when you consider the number of flights there are in this country... As we speak, I'm sure there are a thousand people moving through the Pearson Airport. It doesn't seem to me that this is a statistically large number for anybody to get really worked up about.

Mr. J. Clifford Mackay: Statistically, sir, it's extremely small. We move tens of millions of people a year through the system.

Mr. Brian Fitzpatrick: Right. Mercedes-Benz might get more consumer complaints about their cars in a year than Mr. Hood is getting. That's the point I get.

I'm also kind of concerned about how the government can coach private industries on how to provide better customer service and so on. My experience in dealing with a lot of government departments is they could certainly take a lesson from the private sector on how to provide timely, meaningful service, and so on. In a lot of ways, it seems to me it's kind of the blind leading the blind to have the government try to tell private industry how to provide better customer service. Maybe they know something I don't, but it hasn't been my life experience to find that they're the leaders in customer service.

Mr. J. Clifford Mackay: I could just comment on that. In general, we subscribe to that view. It's our strong view that our customers are our primary purpose for being, in the sense of providing service. Any airline that consistently ignores the views of their customer usually doesn't do well in the bottom line. And that obviously causes concern for shareholders.

One of the things that governments can do, and they can be very constructive in this, is to try to help the industry by setting the right environment to encourage competition, to encourage good service, to encourage safety. It's in that area that we would continue to urge the committee to look for ways and means of trying to make recommendations to Parliament and to the government to try to do that. Some of the cost items I mentioned are in that category.

I would say that on the safety side, Canada has an extremely enviable record worldwide. We are among the safest aviation systems in the world. And the government officials who are involved in that are frankly world-class experts and they work very closely with the industry.

Mr. Brian Fitzpatrick: Right.

There's another area I would like to get a comment on, if I can. The competition people have sort of indicated that the financial situation with Air Canada might only be a temporary thing and in their view they could be on a very strong base in a short period of time. But I have a problem with that, in that the market capitalization of WestJet, if I read things right the other day, is more than Air Canada. This is investors and analysts and people who supposedly know the airline industry from a different angle. Their prognosis of WestJet and Air Canada is considerably different from that of the Competition Bureau. I'm not exactly sure I would be as enthusiastic on their prognosis as I would be on the market analysis of this scenario.

If I'm reading it right, Air Canada has some problems on the horizon. Rather than looking at ways to beat them up or interfering more in their operations, people had better start looking at how they can get an environment that helps this outfit get on its feet.

I would welcome responses on that.

Mr. Randall Williams: I'm Randy Williams, representing the Association of Canadian Travel Agents.

I would say that Air Canada, in our opinion, is very safe ground, and we're not too concerned about Air Canada's viability in the marketplace and its market strength. We see it as certainly a dominant carrier that can wield a heavy hand and a forceful hand. We certainly concur that we don't want to hurt it by over-regulating, and that's a challenge right now. At the same time, we need regulations to ensure that the dominant carrier isn't in a position to abuse that strength. So that's the challenge.

• 1605

One of the things we're suggesting the committee should look at is possibly setting up an industry-led advisory commission to look at the issues. These are large, macro-level types of issues. Maybe it needs to have Air Canada and WestJet and airline people on a commission along with Competition Bureau people, Transport Canada, the distribution network, travel agents, and so on, to look at the broad issues. The more government gets involved in trying to tinker with regulations to try to fix it, the more I think we will have a scenario for problems with that kind of solution.

Mr. J. Clifford Mackay: If I can just add, I don't disagree that Air Canada's fundamentally stronger than what we had prior to the merger. Its balance sheet is in good shape. But having said that, its cost structure—and many independent analysts would agree with this—is out of line and it needs to become more cost-competitive to be more competitive into the future. It has some difficult decisions to make in the next six to twelve months.

Mr. Brian Fitzpatrick: It also has a huge debt problem, does it not?

Mr. J. Clifford Mackay: Yes, but by the standards of our industry, I'm sorry to report to you, most carriers are in that kind of position. We are a heavy capital industry. And if you look at the balance sheets of air carriers around the world, you'll find that they all carry huge amounts of debt, except—and this is a very important point—some of the new discounters, Southwest and WestJet in Canada. That's one of the reasons they're so unbelievably successful and the darlings of the investment community, and rightfully so, because from an investor's point of view they are a very attractive company.

Mr. Jay Hill: I have one quick question for Mr. Mackay, if I might just finish off the time, Mr. Chairman.

In your submission, if I understood you correctly, you said you're opposed to foreign competition in any form right now unless it's reciprocal. I think that's a non-starter, from my understanding of the issue. Basically, you're opposed to foreign competition. I wrote it down. You said the first people to go under in that scenario would be the new people or the latest entrants into the airline industry. Obviously we don't share the same opinion on that. I think you're shortchanging airlines such as WestJet and Canada 3000. Given a level playing field, I think they could compete with anybody.

A voice: Hear, hear.

Mr. Jay Hill: Having said that, I would ask you, sir, through the chair, if you've looked in any depth at the situation that evolved in Australia when Virgin Airlines was allowed to come into Australia and provide competition even though they were a foreign airline. But there were certain criteria they had to adhere to, sort of to provide a level playing field so that they couldn't undercut the domestic competition.

Mr. J. Clifford Mackay: We have looked at that. Our assessment of the Australian situation at the moment is... The most polite word I could put on it is “mixed”. You've had two bankruptcies, one in Australia and one in New Zealand. You have one of their major carriers in serious financial problems at the moment. That market is pretty chaotic right now. So it is mixed.

Mr. Jay Hill: What I would suggest to you, sir, is that you look at CanJet and Royal and you can go down a long list of what's happened in this country as well.

Mr. J. Clifford Mackay: Yes.

If I could just answer the question, Mr. Chairman, the key to what I said was “level playing field”. If you can show us a way... We're not opposed to more competition in the country, but we're opposed to opening our market up and giving it away to somebody else without some quid pro quo and without some reasonable assurance that the Canadian carriers can have a good shot at it too.

The Chair: Mr. Szabo, please.

Mr. Paul Szabo: This morning the Commissioner of Competition, Mr. von Finckenstein, painted a picture that I guess basically supported the characterization of Air Canada as having a dominant position. I don't have his direct quotes, but certainly it will be on the public record. What I heard was that for someone who has such a large position, it would be very difficult to have an effective competitive environment with that. It raises the question that if Air Canada... You mentioned something like 50%. Maybe that is what is projected, but it did sound like we were talking more of a 75% position now. If he is correct and we want an effective competitive environment, that means Air Canada's share of the market has to go down. He said that if anybody does hold more than 50% of the marketplace, it becomes the antithesis of an effective competitive environment.

• 1610

What does that mean? What does that mean to you? What would it mean to the industry—I guess it affects the travel agents as well—if all of a sudden we get a decline in the position of Air Canada, and many of the things that Mr. Mackay talked about come to pass? What does that mean?

Mr. J. Clifford Mackay: To start off on the numbers, I tend to rely on independent analysts when I look at these market share numbers, because I find they're the people who least have an axe to grind. So I watch carefully what the investment analysts and others are saying. Most of them are at the moment in the 70% range for Air Canada. Air Canada itself, I think, is 73%, and I think the Competition Bureau is around 75%. You can argue about the numbers, but the trend is down, and many people believe that will continue.

I don't think you'll find anybody who thinks you'll get to a point in Canada where Air Canada is less than 50% of the market share, at least not in the foreseeable future. And I'm not sure very many people would agree with the competition commissioner, who says you're dominant if you have 51%. In the days of Air Canada and Canadian, Air Canada routinely had something over 60% of the market share. We considered it to have an extremely competitive market situation.

I don't believe you're going to get, as it was called, a wing tip to wing tip type of competitive environment in the future in Canada. We've been there, done that, and it's pretty obvious that the Canadian market can't sustain two of those. I do believe what you're going to see is competition in particular market niches. You'll have Air Canada trying to play across a wide range of markets, and you'll have other players trying to play in particular market niches and, I think, in those niches providing strong competition with Air Canada in certain areas. We already see it, in some respects, in what WestJet has done to the Air Canada regional operations in western Canada.

Mr. Paul Szabo: Can I follow that up? The other thing we talked about this morning was increased competition in the form of cherry-pickers or going after the most lucrative, where meeting Canadians' needs and expectations of having “my route when I want it or where I want it” is opposed to “I'm in business, I've got a heavy debt load as a characteristic of my industry, I need to have an efficient operation”. How do we deal with cherry-picking and get competition for the same routes, as opposed to, you take those and we take these?

Mr. Randall Williams: I think that's a great question, and it's a difficult one. How do you resolve that issue? That's why ACTA is saying that these are pretty heady discussions, ones that maybe need a lot of industry people thinking outside the box in an open environment, where we can really start to think about what the right number is. It's very difficult for a private business to try to lose market share. It's counter to the way they were born and developed. And yet it seems like we're beating up Air Canada all the time for trying to be successful. That's basically what we try to tell every other company to do, and here we are disciplining them for it.

At the same time, we need to be concerned about it, because a monopoly is not good for Canada, whether it's 70% or 80% or whatever it is, or 60%. It isn't good for Canadians, and it isn't good for the travel industry in this country.

• 1615

So we need to set up a group of people who can talk freely in a room, who are good decision-makers, who are very experienced, knowledgeable, and intelligent on these matters, and have the ability to take the time and come back and make recommendations. Right now it's happening in pockets at Air Canada and pockets here and pockets there. We need to bring all these intelligent people together to come up with a Canadian-made solution, because this country is so different from anywhere else in the world.

Mr. Paul Szabo: If I may, Mr. Chairman, I would engage maybe the passengers ahead of the panel. This morning Mr. Hood gave us some statistics. One that stuck in my mind was that the number of complaints is seven times greater than it was prior to the creation of his position. It probably has a lot to do with the significant announcement and publicizing of the position. Interesting enough, in an important area like pricing complaints, of the 16 complaints that had been processed from beginning to end only one was a valid complaint. I asked the panel, which included Mr. Hood, how that compared with pre-Mr. Hood. We couldn't get an answer, because the nature of the complaints, the process, etc., didn't allow comparison. So we don't know whether or not it's worse.

With that as a preamble, if we have a passenger bill of rights—and this is something a lot of people have raised—that may again add to this thing. They were concerned about volume of complaints. We continue to feed the passengers with all these things, and now we have a bill of rights maybe. What is that going to do in contributing to an efficient, productive, economic, competitive marketplace, if the passenger becomes the driver, or we move in that direction where the passenger is a driver of sorts.

Mr. Michael Janigan: In some respects I think that's what we want to have happen in the industry, that the industry be customer driven. It's yet another aspect of putting the customer first in the airline industry.

Presumably, anything in the passenger bill of rights would contain reasonable expectations of what people should get when they're on a flight. It should be a plain, vanilla, white-label kind of set of expectations, so that if you stop a person in the airport asking what they think they're going to get with their air ticket, they can say, this is what I think I should get, this is what should happen if I'm delayed, this is what should happen to my baggage. This sort of thing is incorporated into conditions of carriage of every airline, not just Air Canada. Air Canada, in some respects, does a better job than some of the other airlines in dealing with these matters.

But what would happen in that circumstance is the establishment of a set of standards that everybody would have to live up to. If they didn't live up to them, they would have either a penalty by way of publicizing the fact that they didn't live up to it or a penalty levied by someone like a complaints commissioner.

The Chair: Thank you, Mr. Szabo.

I'm going to Monsieur Laframboise from the Bloc Québécois.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

Of all of the statements that have been made, I remember one, from the Association of Canadian Travel Agents, because it clearly reflects my views on what has been said this morning. The second paragraph of their brief reads as follows:

Underlying the developments of the last two years is the strategic debate over whether we need to allow foreign carriers a greater role in bringing about healthy competition—or can we cultivate our own competition through careful regulation?

In reading your brief, Mr. Williams, we can see that you have chosen the second option. You would prefer Canada to promote competition through careful regulation. Am I summarizing your position accurately?

Obviously, you are speaking more specifically about commissions or what travel agencies collect, which is good, because commissions were allowed under Bill C-26. You say that the act should be clarified to prevent unfair competition in your area, which is good.

If I understand the position of the Air Transport Association of Canada, Mr. Mackay, you share this point of view and feel that competition by foreign carriers will not solve our problem. We need to cultivate our own competition through much stricter regulations and give the Competition Bureau more power so that Air Canada can be forced to avoid unfair competition. Does that summarize your position?

• 1620

That leads me to the following question: why does the Competition Bureau say in its conclusion that the only way to solve the problem is by allowing competition, by allowing foreign carriers to set up in the system? Can someone help me here? Why is the Competition Bureau making that kind of recommendation, when industry and people in this field tend to say that we need to fine-tune our act and make it more realistic to allow for competition?

Mr. Mackay, you are saying that that is not true. This morning, the representatives from the Competition Bureau said they were dreaming of a carrier that would come in, like in the past, and compete with Air Canada on all routes, whereas you were saying that that is not what you want because it would not occur. You are saying that there would be competition in more specific areas, and that is what I think. I sincerely think that Air Canada has to continue offering service throughout Canada, in accordance with the act, and that in some areas, there will be healthy competition so that we can have better fares.

Try to help me understand the Competition Bureau's position if you can, Mr. Mackay.

[English]

Mr. J. Clifford Mackay: I will try. The first thing I must tell you is that I haven't had the privilege of seeing all the Competition Bureau's analysis, if they have it, as to what led them to those conclusions. But from our point of view, I will give you two or three points.

First, if you open up the Canadian market to foreign competition, it is highly likely that most foreign carriers would want to concentrate on those markets that would have the greatest yield potential, the markets that have the greatest potential to yield the greatest revenue or profit margin. Those markets tend to be the markets that are already fairly well served by competition. They're the long-haul markets, the city pairs Toronto-Vancouver, Toronto-Calgary, these sorts of markets. It's unlikely that foreign competitors would be interested in some of the regional or rural markets, because it is extremely difficult in those markets, frankly, to make a living. So they would opt for the other markets and they would do what we call marginal pricing. They would price to meet or beat any competition in that market and drive the prices down, there's no doubt about it. That would have a disproportionate negative impact on Canadian carriers flying in that market, because that's their home-base market and that's their base revenue, as opposed to an American company, which derives its base revenues from their domestic market and is essentially cherry-picking the Canadian market. Any good businessman would take about five seconds to figure that out, see the business opportunity, and go and do it. So that's one of the concerns we have.

The second concern is for small carriers. Transwest in Saskatchewan is a company I know well. Transwest is doing very well. They're serving, basically, the north-south market in Saskatchewan, and also into Manitoba and into Alberta in smaller centres. But it is a darned tough place to make a living as a carrier. If you were to allow, again, a foreign carrier to come in and go into direct competition, it wouldn't take much to force Transwest out of that market.

So you have to be very careful here. We're not simply talking about Air Canada, we're talking about a lot of small carriers across the country. It has to be thought through extremely carefully.

[Translation]

Mr. Mario Laframboise: Thank you.

There might just be one conflicting opinion. Mr. Janigan, you want the Competition Act to be strengthened, but you were perhaps a bit more critical of Air Canada. Are you in favour of opening up competition to foreign carriers or should the current Competition Act be strengthened?

[English]

Mr. Michael Janigan: As I indicated in my presentation, I think the minister's two-year moratorium set up a standard that the new entrant competitors are attempting to live up to. The expectation of those people who went forward to invest in competition at this stage was that, at least for a two-year period, there would not be international competition on domestic routes.

• 1625

It would probably be unfair to come forward now and say we're still not happy with what they're doing and accordingly we're going to open up to international airlines because we think it is the only way to achieve competition. This might be the end result of the entire exercise, but in fairness you have to give the plan a chance to develop.

In response to an earlier question put to Mr. Mackay concerning the Competition Bureau's position, the difficulty is in Air Canada's overwhelmingly dominant position in the marketplace; it has 73% to 75% of the market.

When we're talking about “dominant”, we don't mean dominant in the lay sense of the word. Dominant here means the ability to enforce price increase. It's an economic definition of dominance. Dominance can start at market-share levels as low as 35%; 35% is the trigger level for mergers, for example, attracting Competition Bureau scrutiny. Most economists believe dominance comes into play in the economy somewhere around a 40% market share.

Air Canada's position of 75% dominance is very dominant. It's going to be very difficult to have a circumstance where their market share is going to get down to a level—or where the competitors are sufficiently rivalrous in all markets—that you'll have a workable competitive market.

This doesn't necessarily mean you discourage competition, but this is one of the drivers of the Competition Bureau's position, and it's matched by other considerations about what's going to happen in all air markets in Canada if you allow international competition. There are other concerns that have to be met, but this triggers all of the concern. We're dealing with a common carrier in an incredibly strong position.

The Chair: Mario, I have one quick question. I would like to stop it right at half past, because the minister is going to be here. Do you have one quick last question, Mario?

Mr. Mario Laframboise: No, that's okay.

The Chair: Oh, okay.

It will be Madam Desjarlais then, for the rest of the time until half past.

Mrs. Bev Desjarlais (Churchill, NDP): Thank you.

Mr. Raynor, you've commented on the need to lower the rents the government is charging to major airports—others did as well, but you have it specifically documented in your report. Can you tell me the real estate value of the airport in Toronto?

Mr. Neil Raynor: I don't have the figure at my fingertips. I can get it for you.

Mrs. Bev Desjarlais: Can you get it for me?

Mr. Neil Raynor: We can get it for you.

Mrs. Bev Desjarlais: I've been asking about this for a couple of years now and no one seems to have been able to come up with that figure. The researcher will acknowledge this as well. Although airport users are concerned that too high a rent is being charged, no one seems to be able to tell me what the land being used by the airport in Toronto would be worth if it were put up for sale.

Mr. Neil Raynor: To pick up on your last point, we can find out what the value was on the date of transfer, because there were some comments around the year 1994 on the federal government's having a value for those properties.

Mrs. Bev Desjarlais: Let's get it for a bit later than 1994, because we'll all acknowledge that real estate rates in Toronto have changed drastically since then.

Mr. Neil Raynor: But you have to value it as an airport. You can't value it as industrial or real estate. It is an airport and it's for airport uses only. That's the value of the land, and you have to value it appropriately.

Mrs. Bev Desjarlais: Absolutely. You won't get any argument there.

I would suggest the people of Canada turned over to airport authorities infrastructure worth a fair bit to those authorities. Now the government is charging rent on it. Numerous people have criticized the government for not being business minded, saying they shouldn't be involved in business, but isn't it good business practice that you're going to charge a reasonable or a market-value rent on the existing property?

Mr. Neil Raynor: It's entirely reasonable to charge a reasonable rent, and we've been arguing for it.

Mrs. Bev Desjarlais: Okay, but you don't know what the value is.

Mr. Clifford Mackay: May I comment on this?

No one here is going to say the government shouldn't get a reasonable return on its assets. At the time of privatization the airport assets transferred in Canada—not sold, but transferred—were valued at about $1.26 billion. Those were Government of Canada numbers. At that time the Treasury Board advised that a reasonable return on the investment would be somewhere around 8%.

• 1630

If you did the calculations now in terms of rents, you would find the government receiving somewhere between 15% and 20% return on the investment.

I'd remind the honourable member that the whole purpose of this transfer was to get airport assets into a more cost-competitive and managed position to better serve the travelling public. It wasn't intended to be a means of taxation for the Government of Canada.

The Chair: We're out of time, but I'll allow Mrs. Desjarlais to ask for some responses.

I want to remind our guest that any information would come to the clerk and be dispersed to the whole committee.

So, Bev, if you want to put in a couple of things, and then that'll be it...

Mrs. Bev Desjarlais: I have to fit them all in here. Let me see which one I want to get here.

Mr. Raynor, I know Mr. Fitzpatrick touched on this a bit, too. I actually know who all the other groups represent, but can you tell me specifically when your coalition came into existence, who your members are, and what type of meetings you have? Do you meet on a regular basis?

Mr. Neil Raynor: Yes, we have regular meetings. The coalition came together in August of last year, August 2000. Our membership includes the Canadian Chamber of Commerce, the Hotel Association of Canada, tourism associations across Canada, airport and airline associations, business groups, individual—

Mrs. Bev Desjarlais: Is there any passenger membership?

Mr. Neil Raynor: Yes, the passenger coalition is a member as well. It's a very broad-based business, passenger, and industry coalition.

Mrs. Bev Desjarlais: Okay, thank you.

The Chair: Thank you very much, gentlemen, for your interventions. I appreciate your input.

We will pause briefly for about a minute and suspend while the minister takes his place.

• 1632

• 1633

The Chair: In the light, Mr. Minister, that we may have to go to vote, I'd appreciate it if you would give your intervention, and then we'll have as much time for questions as possible before the bells start ringing. So if you don't mind...

Welcome, Minister.

Hon. David Collenette (Minister of Transport): Thank you, Mr. Chair. Merci, monsieur le président.

I'm very pleased to be here this afternoon to give an update on the government's point of view as to what's gone on in the last couple of years.

First, I just want to remind you of the situation we found ourselves in in December of 1999. Canadian Airlines had two days' cash left on December 21 when we made the deal. They couldn't meet payroll on the Friday before Christmas. That would have resulted in untold chaos across the country. There was not the domestic capacity, or the foreign capacity, to move those thousands of Canadians going home for Christmas.

Mr. Chairman, the government had options: use taxpayers' money to bail out Canadian Airlines. We rejected that—and I'm sure most members in the House of Commons would reject that notion.

The second option was to allow a bankruptcy. We checked with all the bankruptcy lawyers available to us and found that we didn't have the luxury of a chapter 11 like the one in the United States. We couldn't have had an orderly, court-supervised reorganization of Canadian Airlines. So we tried the next best thing, which was to merge the two airlines.

[Translation]

I must start by saying that we are not only concerned about service, but also about the future for employees, service to small communities and Canadian ownership of the companies.

• 1635

We had a number of concerns and, faced with the possibility of a financial collapse by Canadian Airlines International or their acquisition, which could lead to the emergence of a dominant national carrier, the government took specific steps to protect the public interest.

[English]

And this committee is to be commended for passing Bill C-26 or being involved in Bill C-26 last year. The work of this committee preserved Canadian ownership and control. It brought forward measures in fostering competition, protected consumers, ensured service to small communities, and recognized the rights and concerns of employees.

Now throughout this whole process

[Translation]

I invited the Competition Commissioner, Mr. von Finckenstein, who already spoke today, to tell us about his point of view, and he provided me with clear recommendations on competition. We accepted most of his recommendations, but frankly, there are certain areas where we do not agree with him.

I am prepared to answer specific questions on areas where the commissioner and I have different opinions.

[English]

But what have we seen in the last year, Mr. Chairman? We've seen a remarkable job—and I mean a remarkable job—by Air Canada in taking 41,000 employees and 375 aircraft serving hundreds of destinations at home and abroad and making Air Canada the world's 11th-largest airline, an airline that, despite all the complaints, has one of the best service records in the world. You want to fly an American carrier or fly Air Canada? There's no choice—you stay with the Canadian carrier. We're better than most airlines in the world, and I'm sure those of you who fly around the world are proud of Air Canada.

But there have been some bumps. There have been some bumps that were in Air Canada's control to avoid, and the president of Air Canada has admitted some mistakes. Capacity was cut too much, especially in western Canada. That caused concern. I think there was an error made in not transferring international flights to terminal 1 in Toronto and operating domestic flights in terminal 2, as suggested by the airport authority, at the time of bringing in the spring schedule last April. I think that was a mistake on Air Canada's part.

But Air Canada can't be blamed for the bad weather last year that caused havoc in places like Toronto, which is the major hub for not just the eastern part of the country, but the entire country. And the bad weather in New York and Chicago and the whole eastern seaboard—they weren't to blame for that. They couldn't really be held responsible for the fact that you had record levels of people travelling in North America last year. They couldn't be held responsible for the fact that there are true constraints in the U.S. air traffic control system and airport capacity that affect Air Canada.

So, Mr. Chairman, I think we should look at the bumps we've had with a bit of perspective and a bit of kindness. We were all disrupted last year. By and large, those disruptions are somewhat concluding, if not over in most cases. And of course the economy has softened, and that means that demand has been down.

But the essential part of the government's policy was to foster domestic competition to Air Canada, not to invite foreign competition in here. But we believe we have the men, the women, and the skills in the Canadian airline industry to compete with the best in the world and of course to compete with Air Canada.

I believe this has been borne out by what we've seen in the last year. We saw the expansion of Royal Airlines. We saw the startup of CanJet. We saw the expansion of WestJet. We have now seen the consolidation with Canada 3000 and CanJet and Royal Airlines.

We had one notable failure of the last few weeks, which is regrettable, on RootsAir. It's not for me to pass comment on their business plan or the timing or whatever; I'll leave that to other observers. The fact is that it's unfortunate, and we're disappointed. But the notion that the brief rise and then failure of RootsAir, with three aircraft in service serving Calgary and Vancouver with limited frequencies, somehow undermines the whole policy, as has been written by some in the media, as absolute rubbish.

• 1640

Mr. Chairman, this policy is working. It's working because on the major city pairs in this country we have competition; we have choice, and we have lower prices. We have prices that you haven't seen in the domestic market for years.

In the good old days of Canadian Airlines and Air Canada, there wasn't really price competition. You had flights leaving at the same time; there was too much capacity, and the prices were up there. It was a duopoly. We now have competition, and we have aircraft on order by WestJet and Canada 3000—both ambitious programs. Right now we have 63 planes with those two airlines competing with Air Canada. They're not competing with the 375 planes that Air Canada has. Many of the planes that Air Canada has now are sitting there not being used, and they're up for disposal. That was made public by Air Canada some time ago.

Many of the planes are used on transborder routes. Many of the planes are used on international routes. So let's get some perspective here in what we have to compete with Air Canada. We have a good nucleus of planes, which is growing. Canada 3000 is taking delivery of nine A319s over the next 18 months, and WestJet has orders, including options, for up to 94 737-700s, which is the state-of-the-art aircraft in that range.

The Canadian entrepreneurs...incidentally, two Calgarians, Mr. Beddoe of WestJet and Mr. Lecky of Canada 3000, have shown that you can have domestic competition.

So what about this thing about foreign competition?

I'm presuming some of the questions, Mr. Chairman, and then I'll wind down before I wind up too much.

What about foreign competition? Well, let me tell you about foreign competition. As I said in the House to a very eloquent question from Mr. Hill, the U.S. government's not interested. The U.S. carriers aren't interested. The U.S. unions aren't interested. About the only one I know who is interested is Richard Branson, and he wants to set up an operation like he set up in Australia. I would invite you to look at the consequences of what has happened there. It's already resulted in one failure of a local airline company.

Mr. Chairman, I think the policy has not been easy. It hasn't been easy for travellers. It hasn't been easy for the employees. But, by and large, when you think of what's happened—when you think of taking all those people, preserving those jobs, preserving the service to communities, and maintaining Canadian control, I think that we—the government and Parliament—have done a great job.

I take great pride in the fact that the members of this committee made a great contribution in that Bill C-26 went through without a recorded vote. There were some proposed changes here and there, some amendments accepted, and some rejected, but by and large there was an absolute consensus in Parliament last year, and I'm grateful for that.

I think what we have seen in the last 12 months bears out the faith that the people around this table have had, and other members of Parliament have had, in the fact that we can develop a homegrown industry to compete with Air Canada, and we can have Air Canada as one of the world's greatest airlines.

Thank you.

The Chair: Thank you, Minister Collenette, and I'm glad that the past chair, Mr. Keyes, is here to get that accolade.

We'll start with questions from the Alliance.

Mr. Hill, please. You have ten minutes.

Mr. Jay Hill: Thank you, Mr. Chairman, and thank you to the minister and his officials for appearing today.

Certainly, I would concur when you made the statement during your opening remarks so eloquently, Mr. Minister. I believe you said something to the effect that we have the men and women who can compete with the best in the world. I would certainly concur with that, Mr. Minister, and therefore I find it a bit surprising that we seem to be so afraid of competing with the best in the world.

You remarked on the failure of one airline in Australia with the allowance of Virgin Airlines to come in and compete in that country. Of course we're faced just now with the demise of RootsAir. We're not sure what that's going to mean. We've seen that CanJet, which launched several complaints with the Competition Bureau, ultimately was absorbed by Canada 3000. We've seen Royal absorbed by Canada 3000. So I would suggest to you, Mr. Minister, through the chair, that we haven't been without our own set of problems in providing adequate competition, especially on the long-haul domestic routes in Canada.

I believe that at least one of the roles of the Competition Bureau is to suggest to the government that we need adequate competition in Canada. By their submission this morning, very clearly they're at odds with what you've just indicated to the committee.

• 1645

I'll read from their submission. In the summary it says:

Air Canada does not currently face effective competition on a national basis, or for the important business sector where flight frequency and network connections are imperative.

Further on they say:

The new provisions introduced to the Competition Act to respond to potentially anti-competitive behaviour on the part of Air Canada are helpful,

—they recognize that—

but will not on their own be sufficient to create a competitive domestic airline market.

Very clearly, Mr. Minister, you appear to be at odds with the recommendations that the Competition Bureau has made back in October and reiterated to the committee again this morning. I wonder if you'd care to remark about that.

Mr. David Collenette: Well, look, the bureau has a legislative mandate to look at any issue strictly through the lens of competition. If the commissioner would have come here and said anything other than what he said this morning, I would be surprised. He has to say that. That's his role. He'll take competition anywhere he can get it. That's his role, and I respect his role.

But as a politician elected by the people of Canada, elected to look after the national interest, who believes Canadian sovereignty means something in our everyday life, including in many of our institutions, including the airlines, I would say that we can have our cake and eat it too. We can have competition, and it can be domestic competition.

You've asked me in the House about routes there and that therefore we need competition, and I gave that normal 35-second answer, but I should perhaps go on from what I said. If we allow foreign carriers in here, notwithstanding the fact that the U.S. government and carriers don't appear to be interested, but let's say Virgin, where is Richard Branson going to compete? Why has he become a multi-millionaire? He's become a multi-millionaire because he's a good businessman, and he'll take the good markets.

The Richard Bransons of this world will run planes from Toronto to Vancouver, Toronto to Calgary, with all their gizmos, massage parlours, and all the rest, and take business traffic. But he won't serve Fort St. John, where you live, or Prince George, or any of these other small communities, or our friend Madam Desjarlais from Churchill. Do you think any of these companies are going to serve the smaller communities in Canada? No.

But what will happen is they'll serve the trunk routes, where you make the money. I believe Toronto-Vancouver is the most profitable route in the country, followed by Toronto-Calgary. They'll skim the cream off those routes. They'll put WestJet and Canada 3000 up against the wall, and they'll cause problems for Air Canada as well. They won't—

Mr. Jay Hill: I'd like to interject for a minute—

Mr. David Collenette: Wait a minute. Let me finish.

Mr. Jay Hill: I have only ten minutes. You're going to use it up.

Mr. David Collenette: Your question was longer than my answer.

Mr. Jay Hill: I'm not sure of that.

Mr. David Collenette: They won't serve the small communities.

Do you know who will serve the small communities? The government will be called upon to get back into the airline business. That is the truth.

Mr. Jay Hill: Well, I guess what I'd like to put to you, Mr. Minister, is that it has been our observation, I think all of us, that there is a responsibility on the part of politicians also to ensure competition, adequate competition, for the travelling public. I think that's one of our primary responsibilities.

What I have noted, with all due respect, is that Air Canada is already pulling out and reducing service quite dramatically to some of the outer regions through their regional carriers.

So on your argument, sir, with all due respect, that somehow if we allow some foreign competition on a level playing field, on the main routes—that seems to be the bugaboo here—that if we allow Virgin Atlantic or somebody like them to come in and compete on the main domestic routes, that won't benefit the outer regions. Perhaps Air Canada will start to refocus through their regional carriers on places like Fort St. John and elsewhere.

Mr. David Collenette: All right, but where they pull out, they're being replaced by other local carriers.

Mr. Jay Hill: So what's the problem?

Mr. David Collenette: The other week I was up in your backyard in Prince George for the ceremony there—remember? What did I hear? I heard that Prince George was becoming a regional hub. You have WestJet in there, Air BC, Canadian North, and you have some other smaller prop carriers, Peace Air, flying in there.

The mayor of Quesnel told me, well, it's true, we've lost one of our Air BC flights; we had three of them. He said, I don't like that. I asked why, and he said, well, that's because people are driving to Prince George to get the deals, and the competition that exists in Prince George.

• 1650

There's a radical realignment that's going on, not just in the major cities of the country, the major markets, but in the smaller communities. It's not going to be perfect, and in some cases, I think in particular in rural Québec where Mr. Chevrette has actually raised with me the possibility of the Quebec government having to subsidize some of the routes, there certainly are problems.

But I would submit that the alternative to the current regime is to allow foreigners in if they wanted to come in, but that would only help those people who have competition already, in the main markets. It wouldn't help people up in your neck of the woods in northern B.C.

The Chair: You have two and a half minutes.

Mr. Jay Hill: To reiterate, I would submit that the policy is working, by and large, with some problems here and there, in the outer regions. We have competitors, Hawkair, Peace Air, the ones that I'm familiar with in western Canada. They're doing quite well and offering an alternative service, and as long as they're allowed to do that on a fair playing field in competition with Air Canada or its regional subsidiaries, I think we will see that flourish and continue to expand.

What we're talking about here, and what I understand the commissioner of the Competition Bureau is talking about, is the lack of competition and sufficient flights between the major centres in Canada. That is the whole point in allowing some foreign competition to come in, on a level playing field, similar to what they've done in Australia, where they would have to run Canadian crews and have to service the planes here so that we get the benefits of employment opportunities here. There can be certain criteria laid down, but to just discount out of hand what the commissioner is saying because somehow that's going to potentially bankrupt WestJet or Canada 3000, I don't see that.

The Chair: You have 45 seconds, Minister.

Mr. David Collenette: I'm not attacking the commissioner here, but look what has happened in the last year. Air Canada's market share has gone from 82% at the time of the merger to a figure somewhere around 70%. Mr. Milton said publicly, two weeks ago, 73%. We at Transport say it's closer to 70%. Some analysts I've talked to say it's closer to 65%, going towards 60%, and hopefully it will stabilize. That's a remarkable readjustment in just a year.

Mr. Larkin of the Hongkong Bank said the capacity on the summer schedule being offered by Air Canada is only 61%. How can you have 73% or 80% of market share if you're only offering 61% capacity, unless your planes are chockablock?

The fact is, and I don't know why people don't see it, when you get Mr. Milton here, he'll tell you about his reconfiguring of aircraft. He'll tell you about his adjustments on schedule, because the competition is having its desired effect.

The Chair: Thank you very much, Minister Collenette.

We'll move now to Mr. Szabo of the Liberal Party for ten minutes.

Mr. Paul Szabo: Mr. Minister, welcome.

The newspapers today are talking about how we increase competition in the Canadian airline industry, and interestingly enough, they continue to raise the spectre of foreign competition, and even cabotage, about which I don't think I've heard any witness come forward. I think you made the statement fairly clear, but it does bear emphasis, particularly since you said there could be a situation in which there would be routes that were not taken up by anybody and the government would have to get back in. How do you square it? Is there a scenario under which foreign competition would be necessary?

Mr. David Collenette: My point is that if foreign competition is allowed to come here and scoop up the cream, that takes revenues away from Air Canada, WestJet, and Canada 3000. In Air Canada's case, it makes it more difficult for them to deploy resources into smaller communities, and when the three years are up under the deal, they'll get out and we may not have the competition for those smaller communities.

There is a shift, though. A year ago, everybody was talking about cabotage. Mr. Milton welcomes cabotage, providing it's reciprocal. That's the only way we could ever cabotage with the Americans, if it was reciprocal. But if the Americans aren't interested, we're not going to have it unilaterally. We didn't go through all this pain to then have Air Canada take it on the chin.

We want to create a healthy environment. Even some newspapers are now talking about, not cabotage as they were a year ago, but limited forms of competition.

• 1655

The commissioner has two main remedies. One is modified sixth freedoms, whereby you sell a cross-Canada ticket through a U.S. point, which you cannot legally sell now, i.e., Toronto, Chicago, Vancouver, with a layover of a couple of hours in Chicago. You market that as a single fare. Who's that going to hurt? Is it going to help the business people? No, it's not going to help the business people because business people don't want to layover two hours in Chicago if they're going to Vancouver. The people who will use that will be Mr. and Mrs. Jones on vacation who say, American Airlines is 25 bucks cheaper than WestJet or Canada 3000. That will hurt our own competitors we are developing.

We have to be reasonable about this. There's a period of restructuring; I've said it's up to two years. Frankly, I am stunned by the amount of competition. I didn't think we would be where we are today. I thought I'd be here with a lot tougher explanation to give you.

If I come back in January after the break, Mr. Chair, when we have the two years, you'll see market share probably 60% to 65% domestically for Air Canada. While that's not perfect, that shows there's a rebalancing going on and it's being reflected in fares.

You ask travel agents about the fares available. If you really want to go somewhere in Canada, whether it's business or pleasure, you can get some good deals. Where there's been a problem is for the full-fare, business class passenger who has only had one option, Air Canada, and who has rightfully, I suppose, in their mind, taken advantage of it. As of June 1, Canada 3000 will be offering a business class fare on the major city fares, and that will give more competition on the business side.

Mr. Paul Szabo: Mr. Chairman, I'm going to yield to Mr. Keyes. We're splitting time.

Mr. Stan Keyes (Hamilton West, Lib.): Thanks very much, Mr. Szabo. And thank you very much, Mr. Chair.

Minister, welcome. Thank you for your remarks.

Going back to when we did Bill C-26 and the whole focus of the bill...the work of your government...the opposition's interjections and some of their good amendments were made because we were in a position of trying to find that delicate balance between competition and serving the customer. Frankly, interestingly enough, I haven't heard the word “consumer” mentioned once during this entire discussion, thus far.

You, sir, are stunned at the amount of competition that's taken place since we had the bill. I frankly am a little concerned at the lack of competition that has come forward. From what I've read and what I've seen, the competition that has come forward has run into difficulty for, as you say, many reasons...quite possibly some business plans of certain airlines.

On the other side of the equation—and I gather that's why this committee has convened and it is discussing this issue—is it because the small airline didn't have the financial resources needed in order to pursue a route within Canada? Or is it because this particular small airline wanted to go head to head, but realized it was under a great deal of competition from Air Canada, and therefore—and even by witness to the RootsAir—was absorbed by Air Canada as a discount service that will be started up?

These issues concern consumers. Roots had a shot; Roots didn't make it. Was it the culmination of not having the proper management skills to do it, or was it because they didn't have the money available to continue to pursue an option for consumers to compete against Air Canada? Or was it because Air Canada was so damn big as a monopoly that they just absorbed them, no problem?

To wrap up, I would agree with you, sir, that full-blown foreign competition to allow American Airlines, United Airlines, any airline, to come into this country and compete against Air Canada at this time would be a move too far, too big, too large, and it would in all likelihood cost us and Air Canada.

At the same time, can we take incremental steps to protect the consumer, to give the consumer a shot, and perhaps even possibly, through competition, reduce the damn high price Air Canada charges between even Ottawa and Toronto or Toronto and Ottawa? Can we allow, say, the foreign investment limit to be raised from its current level of 25% to something a little higher, perhaps not 49%, but perhaps 35%? This would allow airlines like Roots to get the cashflow necessary to perhaps even sustain themselves long enough to establish themselves between city pairs in order to be competitive against Air Canada.

• 1700

I understand your fears, and I was part of those fears when I was on this committee, but we don't need to take the whole hog at one end, and we don't have to be completely protectionist on the other. Maybe there's a middle ground here.

Mr. David Collenette: Mr. Chairman, it's a good question. I welcome Mr. Keyes back. He was an excellent chair of the committee and we went through a lot of tough times together through this debate.

He raises a very good point. In the case of Roots, I understand they wanted to go the market with $40 million and they raised $35 million, so they were $5 million short. Still the baseload of planes and the delays and coming in when they did at the lower end when the market was softening obviously created a problem.

On this issue of the 25%, last summer I was over in London, and the number two for Virgin asked to see me. At the time Canadian Regional was on the block, as you remember, as part of the deal and there was Canada 3000 and Royal, and I said, why don't you invest? Why don't you take a 33% equity in one of these carriers with 25% voting shares, as was permitted by the CTA with the American Airlines deal on Canadian. You will have your entree into the Canadian market, and then you can feed in on the transatlantic.

They said, we're not interested in 33% equity and 25% voting shares. We want total control. Why do they want total control? They want total control not just to get a return on their investment, but I would submit it's because they're a British company and the skilled jobs will be in Britain.

One of the arguments about American Airlines' investment in Canadian Airlines is that all the high back-end jobs were down in Dallas-Fort Worth. When Onex was going after Air Canada, that was one of the things they had to deal with, and they couldn't satisfy the committee and other commentators.

The fact is that if you lose domestic control of an industry, you more or less lose the good jobs, the high-end jobs, the decision-makers. What you do is you leave in Canada the operators.

When I was in the executive recruitment business after the free trade deal came in, I saw this in spades in the consumer packaged goods industry, where the HR VPs, the finance VPs, the IT VPs, all were repatriated to New Jersey and everywhere else, and what we were left with was the VP of sales and marketing, the operational people.

I'm a Canadian; I'm not quite going to give you the beer ad commercial, but I'm proud of it. I believe there are institutions in this country that are worth preserving to preserve our unique society. I think the airline industry is one of them.

I would submit that the answer is not to get foreign capital in, although maybe it will help lower the cost of borrowing to some degree. The answer is to create an environment, which we have done, to allow the WestJets and the Canada 3000s to go out there and buy or lease new equipment, and not change the rules on these people in midstream. These are Canadian entrepreneurs. They've taken great faith with us and we should not break that faith.

The Chair: Thank you very much, Minister.

Mr. Keyes, you're out of time. We go to Mario Laframboise from the Bloc Québécois, please.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

First of all, I would like to ask the witness a question. I would like to point out that the Bloc Québécois supported Bill C-26 for two very important reasons. First of all, we wanted to ensure that service to isolated regions would be maintained. There was a requirement for Air Canada, in certain cases, to continue providing service to certain areas, not only in Quebec, but throughout Canada. The second reason was to ensure that obligations with respect to official languages were honoured, as set out in Bill C- 26.

Since then, complaints have been lodged in both of those areas. There have been cases of dissatisfaction, not only here, but throughout Canada, especially with respect to service to outlying regions. That is why we are asking Air Canada to appear before the committee, because there are situations where we feel the act has not been respected.

• 1705

Moreover, the Competition Bureau raised a worrisome point, Mr. Minister. The witnesses who spoke earlier were unaware of the conclusion of the report tabled this morning. What the Competition Bureau told us is simple:

The new provisions introduced to the Competition Act to respond to potentially anti-competitive behaviour on the part of Air Canada are helpful, but will not on their own be sufficient to create a competitive domestic airline market. For this to occur, the domestic market should be opened to greater foreign competition, along the lines of our October 1999 letter.

According to the Competition Bureau, amendments to the Competition Act will not solve problems with competition, as illustrated by the two complaints lodged in the case of WestJet and CanJet. The solution is what the Bureau was advocating in October 1999: create a new category. The Bureau makes three recommendations in its letter: create a new class of licensee to allow foreign ownership of carriers that can fly only within Canada; make legislative changes to the Canada Transportation Act to allow modified sixth freedoms, either on a unilateral or reciprocal basis; and permit up to 49% of the voting shares of a Canadian carrier to be held by foreigners.

Its conclusion goes against all the recommendations. I have listened to all the witnesses today. In addition to the Alliance which is requesting it—and we may presume that the Competition Bureau does not work for the Alliance—all the other witnesses are asking that the Competition Act be amended so that what happened with WestJet and CanJet does not happen again.

Air Canada has a monopoly. That gives rise to obligations, the obligation to maintain services in remote regions and the obligation to provide service in both official languages on certain flights. Air Canada has obligations and, in return, it is entitled to a type of monopoly. To ensure that there is competition and that consumer interests are served, we want the Competition Act to allow businesses to develop, which is happening now. However, what happened with WestJet and CanJet does not encourage competitors to set up shop, especially since the Competition Bureau, which is the body that could take retaliatory action against Air Canada, has no power and, what is more, tells us that it can see no solution.

It concludes that the only solution is to open up foreign markets. This morning, it affirmed that we need another competitor, as in the good old days, when there was Air Canada and Canadian. We need two airlines competing with each other, which will foster regional development and service in the regions. This strikes a chord with me, because I would really like to see regional service return to earlier levels, to where it was when there were two fierce competitors. At least then, there was service to all regions of Canada.

But the company is telling us that, in the end, the situation will never return to the way it was. There will be very isolated competition in clearly specified locations, but we want competition to help us develop our regions.

Mr. Minister, my question is the following: what are you going to do, since the Competition Bureau no longer believes in the laws that were passed, in Bill C-26, nor in the amendments to the Competition Act, and states that the only right way to react is to open up the market to foreigners? How do you respond to that?

Mr. David Collenette: Mr. Laframboise, in my opinion, the solution is to continue with our current policy. We are seeing the results of our bill. The fact that we have made changes as a result of the Competition Commissioner's report, and that we now have Canada 3000, which has 40 aircraft, and WestJet, which has 23 and will soon have 35 aircraft, ensures that there is competition in the major markets across Canada. There are other companies such as Hawkair, as Mr. Hill said, as well as other small companies leasing and purchasing aircraft and offering services.

• 1710

One year ago, we accepted most of the Competition Commissioner's recommendations. For example, there is the power to stop a practice, which was used three times and was successful because we said that rates could be raised in Canada. There is also the recommendation not to subsidize competition—namely, the companies providing service on secondary routes—with the money that Air Canada receives for major routes.

What we did reject was the recommendation to raise the foreign investment ceiling. I answered a question from Mr. Keyes on that subject. Furthermore, we rejected the "Modified Sixth Freedom" and the concept of cabotage, for the reasons I outlined earlier.

Most travellers in Canada—75% of Canadians—have access to air transportation services in a competitive context. Seventy-five percent of Canadians have the possibility of taking flights for which there is a competitive offer, and this is a good thing. The figures are much better than they were last year.

Mr. Mario Laframboise: What are you doing about the fact that the Competition Bureau does not appear satisfied with the amendments? Are you doing something or have you decided to leave it alone?

Mr. David Collenette: As I said earlier, we need two years to adjust to the situation. I pointed out that the market share had fallen. Even the President of Air Canada, Mr. Milton, recognized that the market share had dropped by 7 or 8%. In our opinion, it is even more, perhaps even 10 or 12%. There are some airline industry analysts who think that currently Air Canada's market share is really 65%.

That means that the government's policies are working well. Some of the government's policies were shared with this committee. You worked very hard and you made recommendations to us, many of which we accepted. In a period of 18 months, we have reached the point where Air Canada is now competing with WestJet, with Canada 3000 and with many other small airline companies, which there are numerous in the province of Quebec. This is good news for the consumer.

[English]

The Chair: Thanks. Mario, you're out of time.

I'll go to Madam Desjarlais.

Mrs. Bev Desjarlais: Mr. Minister, thank you for coming.

I must say I agree with you on the foreign carrier issue, because I don't think there's any question that's what would happen. But I somehow see Air Canada being in the same position in a couple of years, just cherry-picking routes. Once they do the couple of years where they have to maintain services that were in place, they may do the same thing and just cherry-pick certain areas and not continue to provide the service to smaller communities and more remote communities. So I certainly am pleased that we're not willing to do that to the entire country.

To move from the issue about the foreign carriers, one of the travel agents' concerns is that they have to release their information regarding their bookings to the other airlines. What's your position on whether or not that should be changed, so that they can restrict that information and have better control over it?

Mr. David Collenette: As you know, we are concerned about this. There is a committee working on a solution. Madame Dufour and I met with them, I briefly, but she stayed for the lunch and can perhaps give you an answer on that.

• 1715

Ms. Valérie Dufour (Director General, Air Policy, Transport Canada): Well, we made a commitment when we began this exercise to do a study on our CRS regulations.

We're about to begin a series of discussions with the travel agent community as to how we can protect their private commercial information in a way that has not been done anywhere in the world up until now, but is an issue in this new environment.

But our rules are not dissimilar from those in Europe and the U.S.

Mrs. Bev Desjarlais: Okay. My understanding is that there is legislation before the House on the Competition Act. Is there the possibility of incorporating protection in this area within that legislation?

Mr. David Collenette: We could do that under the Aeronautics Act.

I think we can do it anytime, can't we?

Ms. Valérie Dufour: Well, we have regulations made pursuant to the Aeronautics Act. We wouldn't slip those into Bill S-11...or whatever it is.

Mrs. Bev Desjarlais: Okay.

This is for Mr. Keyes' benefit, because he mentioned that he hadn't heard the word “consumer” once. That's because there are those of us who see passengers wanting service as more than a consumer. So he would have heard the term “passenger” but not necessarily consumer.

Thank you.

The Chair: Okay.

Mr. David Collenette: Mr. Chairman, since Madam Desjarlais raised what Mr. Keyes said, what I have to say to Mr. Keyes is, as a result of this restructuring, the great city of Hamilton and the airport of Hamilton will be well over 200,000 passengers this year and is offering terrific service, terrific bargains by WestJet. It's great for his area and for the entire catchment around the west part of Toronto.

The Chair: Okay, we'll give Mr. Fitzpatrick a quick shot at it, then Mr. St. Denis.

Mr. Brian Fitzpatrick: Actually, I thought we were back in the future here for awhile. It seemed we might have been in Pierre Trudeau's era in talking about fear and the pre-free trade thing.

I do have a concern, because I'm going through a lot of sectors here—everything from farm machinery, retail, autos, forestry, oil and gas, and so on. We don't have all these requirements on foreign ownership. If I accepted your strategy, we would have kept Wal-Mart and Costco out of here to keep Eaton's in business. Whether they were providing good service or not would be irrelevant. We would be protecting those people.

But I just want to raise one question on this thing. Other than merger laws and so on, what would prevent a company such as Southwest from taking control of WestJet or Canada 3000? You have special ownership requirements in a sacred cow called Air Canada. WestJet and Canada 3000 are just as Canadian as Air Canada is. What's so magical about Air Canada? Is it some icon or something in your mind that needs special...

Mr. David Collenette: It applies to WestJet and Canada 3000—same thing.

You can't compare the airline industry to—

Mr. Brian Fitzpatrick: All the other sectors.

Mr. David Collenette: —the retail trade. You talked about Wal-Mart, etc. You can't compare the two.

But let's say we want to raise the 25% limit. Why would we do it unilaterally? Why wouldn't we use that as a bargaining chip with the Americans, who have a 25% limit of their own? Why do we want to give up things unilaterally? There are things we want out of the Americans in future air arrangements. Why would we give up something like that unless we have to?

The Chair: Is that the last word?

Mr. Brian Fitzpatrick: Well, I guess one other question I would raise with you was raised earlier in the day when Mr. Hood made his presentation.

My actual experience in flying Air Canada would be a lot like your impression. I think the quality is reasonably good, I get to my destination on time, and it's safe. I think their prices are good and so on. I really think 1,000 complaints for Air Canada in a period of one year—or whatever it is—is really such a statistically small number of complaints. A lot of industries would say this is indicative of top quality service.

I'm really wondering whether we should have an ombudsman in every sector of our economy—education, health, and everything—to monitor all the complaints everybody's going to be filing. What kind of a thing are we going to get in here? We're going to have a growth industry in ombudsmen in this country. I'm not quite sure whether we really need that position.

Mr. David Collenette: Well, you're knocking your own committee because—

Mr. Brian Fitzpatrick: Yes, I know.

Mr. David Collenette: —Mr. Hood specifically came out of the recommendations of this committee and the government listened. It listened to the ordinary members of Parliament around the table, and it has worked out well.

The Chair: Thank you, Minister.

Thank you, officials, the rest of the staff.

I'll suspend until seven o'clock so that we can go vote.

• 1720

• 1901

The Chair: I'd like to reconvene the meeting and welcome Mr. Hill from WestJet. Mr. Hill, you have half an hour with us, so are you ready to go?

Mr. Mark Hill (Vice-President, Strategic Planning, WestJet Airlines): I'm ready to go.

The Chair: All right. Let's have it.

Mr. Mark Hill: Thank you.

First of all, I'd like to thank you for inviting WestJet to present our views on the airline industry to the committee today.

WestJet commenced service in February 1996 with two 737s, 220 employees, and 96 flights a week between five cities in western Canada. We currently operate in 17 cities with 23 737s, including a number of smaller communities such as Comox, Grande Prairie, Fort McMurray, Prince George, and Brandon. We've carried about 10 million guests since we commenced operations, and after Air Canada we carried more Canadians than any other carrier in the year 2000, with an average one-way fare of about $94. We are very proud of the fact that WestJet was one of only three airlines in North America to be profitable in the most recent fiscal reporting period, along with our mentor, Southwest Airlines, and Continental Airlines. Indeed, we have shown a net profit in every month since March 1997.

Like our role model, Southwest Airlines, we forego the high-cost trappings of other airlines such as multiple aircraft types, frequent flyer points, meals, free liquor, in-flight entertainment, high debt service—WestJet is net debt free—ticket offices, tickets, and multiple classes of service. We are extremely efficient, operating with half as many employees per aircraft as our competitors.

This is important because we recognized six years ago that there's no such thing as a fare war—it always boils down to a cost war. We'll take delivery of the first of 36 new-generation Boeing 737-700 jets in about three weeks' time, and with the launch of our summer schedule, we'll operate about a thousand flights a week this summer, including the only non-stops from Ottawa to Hamilton, Saskatoon, and Regina.

Even though we continue to do exceptionally well in the marketplace, there are a number of issues that trouble us and should be of concern to all Canadians. Unfortunately, this business has a frightful attrition rate, with 97% of new airlines collapsing within the first year of operations. In Canada, since 1995 we have seen the demise of Astoria, VistaJet, Greyhound, Air Atlantic, Canadian, Royal, CanJet, Roots, and, apparently, Skyservice. The reason we have so little successful competition in this country is that we have not provided the Competition Bureau with the tools they require to rein in airlines that continuously abuse their position in the marketplace. I think we all know whom we're talking about.

As long as you allow this to continue, I believe it is unlikely Canada will see any new carriers appear to challenge Air Canada's dominant position in the marketplace. The fundamental problem is the concept of avoidable costs. According to current legislation, an airline is not allowed to price its product below avoidable costs. The problem is that there's no generally accepted definition of avoidable costs. Big airlines have their definition; profit-focused smaller airlines have their definition. There will never be any middle ground. The burden of proof is virtually impossible. The Competition Bureau faces an extremely difficult task, and we sympathize with their plight.

• 1905

High-cost airlines have created a method of accounting that is based on avoidable cost in order to prove to regulatory agencies that virtually all routes are profitable. By reallocating costs around the system, they can make any route appear profitable. However, while the time-consuming exercise of attempting to prove anti-competitive activity is underway, the dominant carrier behaves like a mischievous schoolyard bully, daring anyone, be they competitors a fraction of the dominant carrier's size or the federal government, to challenge its overwhelmingly dominant position in the marketplace.

We believe the time has come for radically new thinking if we want to see sustainable, vibrant, growing competition in Canada. We must throw out the concept of avoidable costs and focus on universality of fares. Simply stated, all airlines must be free to charge whatever they feel is appropriate in the domestic marketplace. However, airlines with a dominant position in the marketplace must ensure that those fares are consistently applied throughout their domestic network.

For example, if an airline wishes to offer a $99 one-way fare in a market of about 700 miles, or 14¢ a mile, it must charge 14¢ a mile for all markets of similar distance and provide an equal proportion of capacity at that fare. The penalty for violation of those rules would be a multiple of the damages caused by the anti-competitive activity, and, importantly, the fine would be paid directly to the victimized airline. This simple guideline would ensure that a dominant airline cannot continue to cross-subsidize losses on routes where competition exists, with windfall profits where monopolies exist, and it would provide a prohibitive financial penalty for such activity. WestJet is fully prepared to live by these rules to ensure fair competition in the marketplace, and I would urge the committee to consider this approach.

As many of you know, WestJet launched our first predatory complaint in our history in May 2000. We provided our overworked friends at the Competition Bureau with reams of information under affidavit in mid-August 2000. We are now providing additional information to the bureau, and we understand that our case may be heard commencing the week of August 27, 2001. In other words, it will be over fifteen months since our initial complaint before any action will commence. This is far too long, especially when one considers that since our complaint a year ago, CanJet routes and Royal routes have come and gone in the marketplace. In the meantime, Air Canada continues to undercut our fares and is now adding even more capacity to the Toronto-Moncton route, even though their overall domestic capacity has dropped 5.5%.

We are heartened by the news that the Competition Bureau will undertake a full merger review of the proposed Air Canada-Skyservice deal, a deal in which Air Canada will, very clearly, effectively control the airline. Given that WestJet's complaint has been on the books for over a year and that the proposed arrangement between Air Canada and Skyservice is specifically designed to target pesky, low-fare competition that dares to challenge Air Canada's overwhelmingly dominant position in the marketplace, we assume the merger will be methodically and painstakingly analysed. At the very least, we would expect that our predation case, which commenced one year ago, will be completed well prior to any conclusions being drawn in the merger review.

The final point I'd like to discuss is cabotage. There are some who believe cabotage will resolve the perceived problem of lack of competition in the airline industry in Canada. Unlike other jurisdictions in which cabotage is permitted, the Canadian airline industry lies in the shadow of the largest airline market in the world, the United States. As is the case already in the U.S., you will not see high-cost, foreign-based carriers offering service into markets the size of Grand Prairie, Fort McMurray, Comox, or Brandon. Flying in these sorts of markets in the United States is contracted out to 19-to 30-seat feeder airlines that operate with unit costs three to four times higher than those of a carrier like WestJet, making low fares unsustainable. If U.S. carriers are unilaterally permitted to operate in Canada, they will undermine the industry on routes where low-fare competition already exists.

The airline business is one of high fixed cost and low margins. In WestJet's case in 2000, about 18 passengers per flight made the difference between operating at a profit and operating at a loss. Allowing foreign airlines the right to cherry-pick routes without reciprocal privileges for Canadian carriers in the U.S. will drain all—and I mean all—airlines in Canada of their profitable routes. These routes are needed to support expansion and growth into smaller markets where competition is required.

In summary, given a fair competitive environment in which the dominant carrier is restrained from anti-competitive activities, sustainable new competition will develop in Canada and market niches will be filled. In order to be sustainable, the growth will have to occur in measured steps, as has been the case of the growth of WestJet from two to twenty-three aircraft in a little over five years.

WestJet is not a proponent of a big-bang theory of airline expansion, having already seen multiple examples of overexpansion in the domestic industry in the past six months. WestJet has targeted approximately 35 communities in Canada for low-fare service. We respectfully ask that you consider our comments when contemplating the future of airline competition in Canada.

Thank you.

• 1910

The Chair: Thank you very much, Mark.

I'll go to your cousin, Jay Hill, followed by Marcel Proulx of the Liberals.

Mr. Marcel Proulx: I thought they were brothers.

Mr. Jay Hill: I wouldn't want to condemn our guest with something like that.

Thank you for appearing this evening. The first subject I'd like to touch on is this whole definition of predatory pricing, because the committee had some discussion about that earlier in the day. One of the gentlemen, I think it was Mr. Mackay from the Air Transport Association of Canada, was of the opinion that Air Canada should be allowed to reduce their rates on any comparable flight to whatever the competition has, and that would not constitute predatory pricing. I hasten to add that this is not my opinion of a definition of predatory pricing. Perhaps you'd like to explain your position.

Mr. Mark Hill: WestJet has been in business for five years, and Air Canada, and prior to that, Canadian, have matched our fares from day one. So matching the fares is not a major issue for WestJet. We've lived that way for, as I said, about five years and operated very profitably in that regime.

Predatory pricing or predatory activity encompasses two different areas. One is undercutting fares and the second is adding capacity or dumping capacity on top of us. So there are really two areas needing to be looked at. If they choose to match fares, with their cost structure, they lose a lot of money, and last week's numbers—or whenever they came out—pretty much indicate what happens when a high-cost carrier tries to match a low-cost carrier. But adding capacity and trying to absorb as many of the price-stimulated passengers—or guests, in WestJet's terms—is the element that's very dangerous. In the market we're looking at, the Moncton-Toronto, Moncton-Hamilton market, Air Canada came in, undercut our fares in order to ensure we could not achieve a compensatory fare, and dumped about 50% more capacity in the market, to ensure they took every last price-stimulated passenger away from us. We don't think that's fair ball.

Mr. Jay Hill: And that's why you launched a complaint about that?

Mr. Mark Hill: Absolutely. They've matched our fares from day one, and we were, quite frankly, sitting back waiting for them to go over the line, and we think they went over the line in that marketplace.

Mr. Jay Hill: I noticed in your opening remarks you referred to cabotage, but there have been some remarks today made by a number of individuals about some form of limited foreign carrier access to the Canadian market. I'm not speaking of cabotage as such here. The minister just appeared before we had to break to go for a vote and said there were no U.S. carriers, at any rate, interested in that type of limited access, flights originating and ending within Canada, and having certain restrictions imposed upon them to operate here. But at least there's been some expressed interest from Virgin Atlantic. What would be your thoughts about them?

Mr. Mark Hill: I consulted Virgin Blue in Brisbane, Australia, and I'm very familiar with the Virgin model. First of all, it's not Virgin Atlantic. Virgin operates three airlines. One is Virgin Atlantic, which does very well. Virgin Express, out of Belgium, is a disaster. It went public a couple of years ago at $15, it's trading at about $1 right now, and if it weren't for Mr. Branson putting in his own money, it would be gone. Virgin Blue is an airline that started up out of Brisbane in September last year, operating the grand total of four 737-400 aircraft, operating in one of the largest O and D markets in the world, Sydney-Melbourne and Sydney-Brisbane. They didn't pick Rockhampton, they didn't pick Hobart, they didn't pick Townsville, they didn't pick Cairns, they picked off the key route, the equivalent of the Toronto-Montreal route in the country. So I'm very familiar with the business plan of Virgin Blue, having consulted with Mr. Branson personally on this last summer.

Frankly, I get quite amused at the comment that Virgin is the airline that's going to save Canada from high fares. All you have to do is take a look at the P and L of Virgin Blue in Australia, and certainly Virgin Express, and it's a very different story. So I have my opinions of it. I can't say a whole lot more on that, but again, there's probably nobody in the country who knows more about the way Virgin operates than myself.

• 1915

Mr. Jay Hill: So in other words, you've got some difficulty with those recommendations made by the commissioner of the Competition Bureau. What's been said by a number of witnesses appearing today, including the minister, is that there's a real concern that were we to allow anything like that to happen in Canada, the first ones to feel the pinch, if you will, would be yourselves and Canada 3000.

Mr. Mark Hill: I think you'll find that any time a low-cost competitor comes into the market, the people who are going to feel the pinch the most are the high-cost carriers. As for U.S. carriers coming in, the U.S. carriers lost more money between 1990 and 1993 than had been created cumulatively since the start of the business. What they learned from that is that if you don't fly to a hub, you don't fly it at all, but 95% of high-cost carrier flying is to a hub. To start operating point to point in Canada completely goes against everything they learned in those terrible years back in the early nineties. I don't think you'd see any significant interest from a U.S. carrier in coming to Canada, other than to pick off the Toronto-Calgary, Toronto-Vancouver markets. They're not going to go anywhere near the Brandons and the Comoxes of the world.

As for Southwest Airlines, they have 340 or 350 airplanes. They've never flown outside the United States. They have an average fare of about $70, and taxes in Canada would push that up way higher than $70. They don't need to be in Canada, and I think if you had Herb Kelleher sitting beside me, he'd tell you flat out, as he's told us directly, they have no interest in coming to Canada.

I think the reality of the situation is that you're not going to see very many carriers, and certainly not many sustainable operations, appearing in Canada. If they do, it's going to be to pick off the key routes. They're not going to provide competition where it's really required, in the sorts of markets that WestJet's prepared to go into, the Comoxes of the world and the Brandons. If WestJet can make it with seven daily 737s in a city the size of Comox, there are lots of cities the size of Comox in this country.

Mr. Jay Hill: I just want to make the statement for you to digest, before I get to the last issue. There's certainly some talk, and I think where the commissioner for the Competition Bureau is going on this issue is that there needs to be additional competition on the main routes as well. I guess that's contrary to what you're saying. I certainly share some of the concerns that there's not adequate competition on some of the major routes—consumer choice, that's really what we're talking about. When Mr. Keyes was present briefly this afternoon, he mentioned that we can't lose sight of the consumer's interest in this whole issue.

The last issue I want you to have the opportunity to voice your opinion on is the announced intention by Air Canada to pick up 30% of Skyservice. There's a very real concern—I don't know how real it is, but certainly we're hearing lots of talk about it—that this might give Air Canada the avenue or the opportunity to transform routes, whatever it's going to be called afterwards, into a low-cost discount airline, which is something Mr. Milton has repeatedly said he would like to do, and then go head to head with companies like yours. I would certainly welcome your comments on that proposal to buy a substantial interest in Skyservice.

Mr. Mark Hill: There's no question that no matter how they frame it, effective control of Skyservice, or whatever they call themselves, will be held by Air Canada. In this business, whoever controls the schedule and controls the revenue controls the airline. Air Canada said as much. That's what they intend to do. There are many ways to define market share, and I would base it on revenue. Air Canada still probably has 80% to 85% of the revenue share in this country. They want to control every element of the business, everything from a 19-seat aircraft up to 400-seat 747-400s. They want to control business jets, they want to do this, they want to do that.

At what point do we have to say as a country, look, guys, you've got enough of the market, enough opportunity to do lots of things, we can't have you guys marching into the low-cost business? If Air Canada had an interest in truly offering low fares, you wouldn't be seeing the fares you see today between Ottawa and Quebec City, which are probably four times what they are, say, between Calgary and Prince George. They have no interest in low fares. They have a lot of interest in stifling low-fare competition, so it doesn't expand and ultimately they can push low-fare competition out and raise fares. They're a high-cost carrier; they can't do anything about their high-cost carrier. So the only thing you can do about it is to effectively push low-cost competition out of the way and raise fares. That's the way the game's played. They've been doing it for years in the States.

• 1920

Yes, as a country we have to decide whether or not we want to see a dominant carrier have an even higher percentage of the market. I look at the U.S. Airways and United Airlines deal, and it's just not going to happen. They perceive that deal as United having far too much market share in the States. I think it would be under 40% still. We're talking about Air Canada at 85% to 90% trying to pick off the last remnants of competition that exist out there.

WestJet is readily able to provide the competition, but there's no way WestJet can go and buy 25 or 30 airplanes and put them into service. The principal reason why airlines collapse is because they over-expand. We have to allow the competition to develop.

I can't speak for what Canada 3000 has. Again, it's taken us five years to get the 23 airplanes. We have up to 36 firm orders and 94 altogether—737s and 700s. We can do a lot of interesting things in the next year, but we have to be allowed the leeway to do what we and what Canadians need. We need to be able to go to markets like Quebec City and the Kamloops, Thompsons, and Churchills of the world.

It's going to take time. Airlines that do it too quickly collapse. We've seen three of them go in the last six months.

The Chair: Okay, thank you.

We will go to Marcel Proulx of the Liberals.

Mr. Marcel Proulx (Hull—Aylmer, Lib.): Thank you, Mr. Chair.

Mr. Chair, we have the speaking notes from Mr. Hill; however, they're only in English. I'm told that we're going to get a translated version, I assume, as quickly as tomorrow.

The Clerk: Not as quickly as tomorrow, but as quickly as possible. It will be translated through the House.

Mr. Marcel Proulx: Okay, fine.

Mr. Hill, you're clearly indicating that the Competition Act, according to you, is not getting the job done. Can you expand further on the difficulties you've raised concerning the definition of “avoidable costs” and any additional thoughts you may have on how to address the weaknesses of the act?

Mr. Mark Hill: I think the bureau or another witness discussed the avoidable cost argument a little. Basically, high-cost carriers tend to try to account for routes in some way, shape, or form that makes it look like they're profitable, by reallocating costs around the system and things of that nature.

High-cost carriers have used avoidable costs for many years, be it in Europe, especially in the United States, to basically get away with their activity.

When you're a high-cost carrier you can allocate costs any way you want. You could set up a sky service or a light product and say that instead of charging the market rate of $250 for ground handling, we'll just charge the low-cost carrier $50 for handling and we'll bring them into our insurance deal or we'll provide subsidized fuel. In other words, they can make the costs anything they want to make.

This is what Shuttle by United has done, which is United's low-cost carrier. With Metrojet, U.S. Airways has done the same thing. Delta Express has also done the same thing. It's a game that's played.

The problem is that the definition of “avoidable costs” is almost impossible to get to. The way we define our costs and the way they define their costs...we speak Greek, they speak Swahili. How do you get a common approach on what the costs really are? It's a definition we'll never get our hands on.

A case in point is what's going on with our complaint. It's going to be 15 months before we even get into a courtroom. In 15 months airlines can lose a lot a money really quickly. And all the time we're doing that, we're taking it on the chin and Air Canada's sitting back saying, 15 months, let's make it 27 months, we don't care. They can just continue to put the pressure on.

I think the problem is avoidable costs, and that's why we've been trying to find a very simple way of resolving this problem without having anything smell of re-regulation. It just seems to us the common-sense approach is you charge what you want, but you'd better make sure that if you're charging a $69 fare from Vancouver to Calgary, you should be charging a $69 fare from Toronto to Quebec City. It's precisely the same distance. It's a common-sense approach. That will force the other carriers to act from a rational economic perspective and not to cross-subsidize profits to basically run other airlines out of town.

Mr. Marcel Proulx: Any additional thoughts on how we could modify or better the Competition Act?

• 1925

Mr. Mark Hill: There are lots of areas one could look at in terms of anti-competitive activity. Fundamentally, I think it's the avoidable cost argument. Until we resolve how an airline like Air Canada with a 17¢-mile seat cost is able to undercut an airline with a 13¢-mile cost and claim it's profitable, it doesn't even pass the giggle test. As long as we have this unusual definition, airlines such as WestJet and Canada 3000 and any other new competitors are going to find it very difficult to get into that marketplace and make a difference.

Mr. Marcel Proulx: I know the ratio of flight attendants to seats is an issue for your company. Could you quickly elaborate?

Mr. Mark Hill: The rule in Canada is you have to have one flight attendant for every 40 seats. Basically, in all of the western world it's one flight attendant for every 50 seats. WestJet has 125 seats on the airplanes. We're only able to sell 120 seats unless we put a fourth flight attendant on, which costs a lot of money.

We're concerned there's a problem with capacity and not enough low fares in the marketplace. By Canada reverting to the rule that's consistent with the western world, we can instantly increase our capacity by 2% or 3% for the summer with no impact on safety.

As an aside, if we were to allow cabotage in Canada and Alaska Airlines wanted to fly from Seattle to Calgary to Vancouver and back to Seattle, Alaska Airlines could be carrying Canadians on aircraft in Canada using the 1:50 rule. We'd be handcuffed with a 1:40 rule. It just doesn't make any sense in our minds.

The Chair: Thank you very much, Mr. Proulx.

Monsieur Laframboise from the Bloc has the floor.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

My question is for the witnesses. I have managed to form a fairly clear opinion from what the various witnesses have said this afternoon. Their positions go from one extreme to the other.

I am pleased to refer to the position of the Association of Canadian Travel Agents, which described the situation as follows:

Underlying the developments of the last two years is the strategic debate over whether we need to allow foreign carriers a greater role in bringing about healthy competition or whether we can cultivate our own competition through careful regulation.

After analyzing the situation, they opted for cultivating our own competition and beefing up the Competition Act to make the Competition Bureau more effective.

That is the position that was adopted by a large part of the witnesses who appeared before us. I assume that it is your position too. It is not foreign competition that you are interested in, or the fact that the market would simply be opened up. That is the message you were sending us, was it not?

[English]

Mr. Mark Hill: The economic reality of foreign competition is that it's not going to happen. Whether it's Virgin or Acme Airlines, any business looking to start up in Canada is going to want to make a return for their shareholders, and if the ability is not there they're not going to do it. And whether you raise foreign ownership and allow foreigners to invest more fully in airlines in Canada, you have to have a business plan. It has to make sense.

We've never had a problem raising capital in Canada. If you have a good business plan, you can do it. So the short answer is I don't think it's really going to happen from an economic perspective.

British Airways and a number of the other carriers go... I see what's going on, and I don't think it's going to happen.

[Translation]

Mr. Mario Laframboise: That is fine with me. However, I am concerned about the Competition Bureau's report that concludes, after analyzing the situation, and after noting that as far as avoidable costs are concerned, there are legal challenges against Air Canada that will take a great deal of time to settle... The report mentions the complaint that you filed, which will also take much time to settle. In concluding, the report states, and it is important that I quote it:

• 1930

The new provisions introduced to the Competition Act to respond to potentially anti-competitive behaviour on the part of Air Canada are helpful, but will not on their own be sufficient to create a competitive domestic airline market.

That is why they come back to their October 1999 letter, and that is where things get pretty serious. The Competition Bureau's position is that a new class of licensee be created to allow 100% foreign ownership of carriers that can fly only within Canada.

Therefore, the Competition Bureau, for its part, seems to be giving up on the most recent amendments to the Competition Act. Finally, in its recommendations, it squarely tells the government that it must open the doors to foreign competition, that this is the only way out. Their representative even told us, told the committee, that we must go back to the situation that we had before, when Canadian was there. There has to be another company that is as big as Air Canada, that is capable of competing with it, and the only way this will happen, is by allowing foreign investment.

I have a problem with the Competition Bureau's report and its conclusions. You have dealt with the Competition Bureau: do you find the conclusions to be reasonable, or do you not feel that the Competition Bureau could propose some changes to the Competition Act to allow for healthier competition for the users and ultimately, Canadian passengers?

[English]

Mr. Mark Hill: I think the more reasonable solution is to give the Competition Bureau more ammunition to ascertain whether predatory pricing is occurring in the marketplace and deal with it quickly and so on. But we disagree, I guess, in that I don't think we need to open up Canada to foreign competition. From the perspective of economics, I don't think it'll happen.

Secondly, Virgin Blue in Australia has four airplanes. WestJet and Canada 3000 are going to add I think twelve airplanes next year. So even if you allow them in, what's going to happen? You'll have four airplanes scooting around in Canada, probably not making any money, which is the case for Virgin Blue in Australia.

So I don't think opening up the market to foreign competitors is going to be a solution. I don't think it'll work from an economic perspective. If I were making a business plan... I just don't think it will work.

Secondly, you have enough competition in Canada. You have to remember, Canadian Airlines had 80 jets in Canada, with probably less than 40 of them dedicated to the domestic marketplace. Well, WestJet has 23, going to pretty much 30, by the end of this year, and Canada 3000 has a bunch of airplanes. I'd venture to guess that within 12 months all the capacity that was perceived to be pulled out by Canadian's competitive position in the marketplace will be replaced.

[Translation]

Mr. Mario Laframboise: I will conclude by saying that the last word, of course, belongs to the minister.

You are probably victims of your own success, because the minister told us that in the end, everything is going well. According to him, no changes are necessary. I quote:

You should also know that the domestic airlines competing against Air Canada have firm orders for 40 new aircraft to be delivered in the next few years.

Therefore, according to the minister, things are going well for you. The minister feels that things are going well, and I did not sense any will to make changes on his part... He does not wish to open up air transport to other countries, as the bureau recommended, but neither did he seem to want to amend the Competition Act, which as I understand it, is causing you a great deal of harm given the time that it takes to settle complaints. In business, 15 months is a lifetime; we all know that.

Therefore, you are suggesting that there be an amendment to the Competition Act, correct?

[English]

Mr. Mark Hill: Yes, I think we should. WestJet is fortunate to have pretty much the highest margins on the continent right now, so we're able to withstand the kind of nonsense that Air Canada is throwing at us. But we've seen three airlines that have not been able to withstand it. One lasted 40 days. So we do need to do things and provide simpler definitions so that the bureau can make a much faster decision to rein in this type of activity. It's very important, and I think that's the message we bring.

To us it's inconceivable that our case could still be pending with the Competition Bureau. They've worked very hard on this, and I give them a lot of credit, but we could be sitting here in six months, still waiting for a decision. Meanwhile Air Canada is trying to ram through a merger with Skyservice that's going to basically throw a tanker load of oil onto an already burning fire. I think it's a very dangerous issue.

• 1935

The Chair: Mrs. Desjarlais.

Mrs. Bev Desjarlais: Mr. Hill, you mentioned that you wouldn't be able to fly into Thompson and Churchill. I haven't quite seen WestJet there yet, so is there a plan to fly into Thompson and Churchill?

Mr. Mark Hill: As I said, we have 37 Canadian markets on the hit list, and Thompson and Churchill are on it, absolutely.

Mrs. Bev Desjarlais: When Mr. Steve Smith appeared before the committee, he indicated, if I recall properly, some criteria—a population of about 40,000, you had to be able to fill your planes, 120 passengers. Does that sound right? Are those still criteria you're using?

Mr. Mark Hill: Well, Steve was with us for a little bit of time, and he had his opinions. Our business plan, which I wrote six years ago... I guess I would say this. We operate into Comox, British Columbia, which I think has a market of about 20,000 people. We have six or seven flights a week now, going to nine flights a week in about three weeks' time. If WestJet can operate 737s in a market the size of Comox, there's a ton of other markets in Canada the size of Comox.

Mrs. Bev Desjarlais: You're still operating the same size of planes throughout?

Mr. Mark Hill: Yes, the existing ones are 120-seaters. The 700s are 140-seaters.

Mrs. Bev Desjarlais: Okay.

As part of one of their agreements, I believe, Air Canada's local carriers or their partner carriers still can't fly jets into certain areas. It all has to be done under Air Canada's... You're aware of that?

Mr. Mark Hill: Yes.

Mrs. Bev Desjarlais: Do you see that as being a problem for smaller communities in terms of their being able to have access to the same type of service?

Mr. Mark Hill: Well, the economics of the business are such that, at the cost structure they're talking about, it just doesn't make a lot of sense in terms of pilots' contracts or whatever. I could spend a day discussing that, but I won't bore you with it. I don't think it's a huge issue. I think the overall cost structure of these airlines makes it prohibitive to operate full-sized jet equipment into smaller markets. We're fortunate enough that we have the cost structure that we can do it.

So I don't really see the scope clause as being anti-competitive or anything like that.

Mrs. Bev Desjarlais: Okay.

With regard to universality of fares, could you see that as a way for most airlines in Canada to operate or just the dominant carrier?

Mr. Mark Hill: Certainly any time you have a carrier with a dominant position in the marketplace who has the ability to cross-subsidize fares and take windfall profits from some markets and then dump them into, for example, Toronto-Moncton, to subsidize losses—real losses, not paper losses—I think it's something that should be explored. Certainly WestJet wouldn't have a problem with it.

You know, we have a dominant position in a number of markets in Canada. We're dominant in Calgary-Edmonton. We were the monopoly carrier in Abbotsford-Calgary until, after 60 years, Air Canada suddenly discovered Abbotsford as a marketplace.

So we wouldn't have a problem with it, because you'll find that our fare levels from Brandon to Comox are no different from from, say, Vancouver to Winnipeg. We charge about the same per mile. There's a little bit of leeway, give or take 5% or 10%, but...

Mrs. Bev Desjarlais: You mentioned the cost of about 13¢. Is that right?

Mr. Mark Hill: Our cost per seat is about 13¢ a mile, and theirs is about 17¢ a mile. The gap is actually a lot wider than that because of the economics of the business. Short-haul flying tends to cost a lot more.

Mrs. Bev Desjarlais: Just out of curiosity, what is the Brandon-Comox fare?

Mr. Mark Hill: I couldn't tell you.

Mrs. Bev Desjarlais: Roughly? I'm just trying to compare here.

Mr. Mark Hill: We have 127 city pairs. I really couldn't tell you, sorry.

Mrs. Bev Desjarlais: That's fine.

The Chair: I'll take a quick question from Mr. St. Denis and then we'll wrap this session up.

Mr. Brent St. Denis: Actually, this is more just a comment, Mr. Chair, because I know we're running late. I appreciate Mr. Hill being here.

• 1940

I represent a rural northern Ontario riding, and many of my colleagues around the table represent rural areas as well. Like Mario, we're especially interested in that service to rural Canada, to the populations of 20,000, 30,000, and 10,000. So it's fascinating to hear the success that you have had.

I really wonder, for example, if we look at company A, company B, and company C, is there a way to measure the profitability, notwithstanding the average population served? In other words, let's say the average community you service is 40,000, to pick a figure, and the average population that another company services is 100,000. So right off the bat, if company A is serving an average population of 40,000 and is profitable, company B, averaging a service to communities of 100,000, maybe is also profitable but wouldn't be serving 40,000. I'm wondering if there's a way to quantitatively measure the ability of an airline to profitably serve the smaller communities. I think that's where we have to go to make sure our communities are served in the future.

Mr. Mark Hill: I'll let you in on a little secret of the airline business. As far as WestJet's concerned, there's very little difference in cost between serving a Vancouver and a Brandon. The big airlines like to say there's a huge cost. In our case, there isn't. It's never really entered our equation.

Secondly, I want to make the point that if you allow high-cost carriers to start scooping all the traffic of low-cost carriers, such as WestJet, we need the Calgary to Vancouvers and we need some of our other routes that make good margins to be able to allow us the opportunity to take chances and go into the Comoxes of the world. If these guys come in and scoop our traffic, you're not going to us see us go into the Brandons and the Comoxes and the Timmins and the North Bays and the Sudburys and Sault Ste. Maries that are our hit list.

This business is not as complicated as, I'm sorry to say, some other people make it out to be. It's actually a pretty simple business.

The Chair: Thank you very much, Mr. Hill. We appreciate your input. It was valuable to hear from you.

I'll invite the Air Canada people, Mr. Rovinescu and Mr. Markey and Mr. Payson, to come to the table.

Mr. Payson, who is going to be the lead? Do you have your routine worked out?

Mr. Russell Payson (Chairman, Chief Executive Officer and President, Skyservice): We're just trying to work on the microphones.

• 1945

The Chair: Can we start with your presentation, please?

[Translation]

Mr. Calin Rovinescu (Executive Vice-President, Corporate Development and Strategy, Air Canada): Mr. Chairman, my name is Calin Rovinescu and I am Executive Vice-President, Corporate Development and Strategy at Air Canada.

I believe you received a copy of my notes, which were filed with the clerk. I hope everyone has a copy.

Mr. Chairman, honourable members, ladies and gentlemen, I would like you to know that Air Canada greatly appreciates your interest in the developments within our industry, and that I am very pleased to be here with you tonight.

Let me first begin by introducing my colleagues. Russell Payson is the founder and President of Skyservice Inc. His commitment and contributions to this industry are well known. Furthermore, the fundamental strength and value of his operation are a testament to his leadership. There is also Stephen Markey, who is Vice-President, Government Relations and Regulatory Affairs. Until last year, he was with Canadian. I am sure you are all very familiar with him, as he is based here in Ottawa. Stephen Markey has the very simple job of keeping everyone in government happy with us on a daily basis.

[English]

Mr. Stephen Markey (Vice-President, Air Canada): I've failed miserably so far, Mr. Chairman.

[Translation]

Mr. Calin Rovinescu: Along with the rest of the executive team, we all share in the responsibility of delivering the safe, reliable and efficient air travel network that Canadians have come to know and trust for over 60 years. Our history is one comprised of innovation and growth—no more so than during the last two years. In fact, almost two years ago the process that led to our eventual integration with Canadian Airlines began with the first in a series of proposals to merge the two carriers, which eventually resulted in Air Canada's successful offer to purchase the shares of Canadian Airlines.

[English]

Since that time, Mr. Chairman, much has happened. Mostly there have been great developments and admittedly many challenges, but we have lived up to each and every commitment made to the Canadian public, to the Canadian government, and to our employees.

Let me start first with the challenges. There's no doubt that during the tumultuous summer of 2000 in particular, many of our passengers experienced some unacceptable situations. Indeed, Mr. Chairman, the entire North American industry experienced difficulties in dealing with dramatic increases in the number of travellers, weather difficulties, and general congestion in the air.

At Air Canada these problems were compounded by the challenges of dealing with our first integrated schedule with Canadian Airlines. The lack of union intermingling agreements, the use of two different computer systems, and the move of Canadian Airlines from Terminal 3 to Terminals 1 and 2 at Pearson caused some major headaches.

Fortunately, however, we have, as you know, invested heavily to put many of these problems behind us. With the arrival of last summer's integrated schedule we hired thousands of additional staff across Canada to deal with some of the inevitable confusion. In October we migrated Canadian's computer systems, which involved millions of bits of data, over to Air Canada's platform. Since then, we've secured the intermingling agreements with our union groups, and while the work of integration continues, things are much improved. And lest you be told otherwise, our customers are clearly telling us this.

This is due in no small measure to the efforts of the men and women who make up the new Air Canada. I can assure you that there is no easy way to combine two businesses like this into a nearly $11 billion enterprise without the occasional hiccup.

Indeed, our integration is unprecedented in Canada's aviation history and perhaps in North America, where two companies of equal size, competing wingtip to wingtip with one bankrupt, have been brought together. Through it our employees have kept the airline running while dealing with a tremendous amount of adversity.

It's important to remember that we've accomplished this restructuring while saving the 16,000 jobs at Canadian Airlines and committing to continue to serve all communities that had previously received service, all without a penny of government money, without increasing domestic fares in 2000, and without one layoff.

• 1950

So while we've worked hard to minimize the impact on the travelling public, we've paid a tremendous price for our efforts, certainly as a result of the unexpected downturn in the economy.

Many of you will have heard our first quarter financial results were released last week, and they demonstrate very tangibly the kinds of challenges we are facing. Air Canada reported a net loss of $168 million, or $1.40 per share, and an operating loss of $293 million for the quarter. The weaker economy, reduced high-yield business travel, increased low-fare domestic competition, higher salaries, wages, and benefits, including millions paid out in voluntary severance packages, and higher fuel expenses adversely affected operating results in the quarter. Increased fuel costs, in particular, have proven to be a huge cost burden for us.

Much has been written about our market share. It's easy to throw around, somewhat simplistically, numbers like 70% or 80% market share. But what really matters in any industry is profitability. We're not interested in being big; we're interested in being competitive and profitable, while offering the best service possible.

That's why we announced last week this exciting partnership with Skyservice Investments. We have signed a letter of intent providing for a strategic investment by Air Canada in Skyservice Airlines, which currently operates both a low-cost vacation charter business and the Roots Air scheduled operation, as well as Skyservice's highly successful corporate jet division.

Air Canada will acquire an equity interest in Skyservice and will have the right to appoint certain directors, but we will not have the right to manage or direct the carrier operations. This exciting partnership with Skyservice is a win-win situation for Air Canada's customers, employees and stakeholders. When the deal is completed, our customers will have access to one-stop shopping for their air travel needs.

Aeroplan's six million members will benefit from attractive mileage redemption opportunities to popular vacation destinations. Our employees and shareholders will benefit through a comprehensive commercial agreement providing such services as aircraft maintenance, ground handling, information technology, revenue accounting, insurance, security and emergency response services.

The existing Skyservice low-cost vacation charter product and the Roots Air product will be repositioned, and Mr. Payson will explain his plans in this regard.

The partnership allows Air Canada to participate on a competitive basis in the increasingly important low-cost sector of the industry. We believe it's extremely important that we be permitted to participate in it.

The Chair: Mr. Rovinescu, the committee prefers you to answer questions, and you've been going since 7:45. Mr. Payson is also going to be making an intervention. It will be long reading, so I would ask you to wrap it up and condense your remarks a little bit.

Mr. Calin Rovinescu: Yes.

Let me just say a word about competition. Clearly, that is one of the issues that has come up in many of these discussions, and I understand from the reports I've had today, it has come up during the course of the day. We're reminded constantly about the inconsistencies in the regulatory environment. I think that as a country we need to choose whether we really want a competitive air service or a regulated air service. But we can't have a butchered hybrid of both.

We have seen the pressures the Competition Bureau has put whenever we've sought to reduce our fares, and the CTA has put when the fares have gone up. We are into what we're calling the Goldilocks pricing matrix, of the prices being neither too high nor too low, but just right. I think we have to understand whether we're in a competitive pricing environment or in a Goldilocks structure.

While the Competition Bureau attempts to make the theoretical models fit the airline industry, it's important to understand what this means for us. Any inability to compete will require us to exit route after route, and I don't think that will ultimately lead to a competitive outcome. Our sense is that will lead to something that will be significantly uncompetitive.

Some of you may have heard that in the United States last week, the courts ruled against the United States Justice Department in their case against American Airlines. It's quite clear that anywhere else in the world where there has been evidence of competing carriers, the notion of matching a competitor's price is seen to be competitive, not anti-competitive.

So while there are significant challenges ahead for us, it is clear we're committed to addressing them and making this airline work for our customers, our employees and our shareholders, as well as all Canadians. We look forward to working with the government to strengthen the health of our industry.

With that, Mr. Chairman, I will turn it over to Payson to say a few words before answering your questions.

The Chair: Mr. Payson.

• 1955

[Translation]

Mr. Russell Payson: Mr. Chairman, honourable members of the committee, ladies and gentlemen.

[English]

I will briefly refer to our efforts with Roots Air and indicate that while we did achieve high levels of customer satisfaction and our load factors were building significantly in the last few weeks—and I must say we were very pleased with them, as they were well above our projections—the introduction of a significant amount of capacity on the runs that we were flying forced us to reach a decision that we would run a significant risk of failure if we continued on through the summer and into the fall.

As a consequence of that, we arrived at a decision to cease our operations, and motivated by a desire to protect our passengers we did approach Air Canada. These discussions subsequently evolved into a discussion of a partnership in forming a low-cost carrier. Our discussions—and I want to be very clear—have focused exactly on that: as a partnership. Certainly there has been a lot of discussion about a merger and about Air Canada taking us over. I can tell you quite candidly here that at no time in our private discussions has that form ever been discussed.

Our partnership will permit Skyservice to preserve the jobs that we have created recently, and it will also enable us to focus on the job that we know well, which is the low-cost market where we have operated for the past seven years.

I realize time is of the essence, Mr. Chairman. I would be pleased to answer your questions and turn it back over to you.

The Chair: Thank you very much.

We'll start with Mr. Jay Hill of the Canadian Alliance Party.

Mr. Jay Hill: Thank you, Mr. Chairman.

Thank you, gentlemen, for appearing this evening.

I don't even know where to begin. I'm sure all of us feel that way when we get to discussing Air Canada these days. This is by way of a retaliatory comment, if you will, on behalf of a lot of air travellers across Canada. I'm absolutely amazed that you can say in your opening comments:

I can assure you that there is no easy way to combine two businesses like Air Canada and Canadian Airlines into a $10 billion enterprise without the occasional hiccup.

I would suggest, gentlemen, if you believe that what we went through over the last year could be described as an occasional hiccup, you must not be living on the same planet I've been on. I can't even begin to do justice to all the issues of overbooking, cancelled flights, lost luggage, baggage on planes without passengers, and passengers without baggage.

I'm going to start by asking Mr. Payson, seeing that he brought it up, your projections were proceeding with Roots Air even better than you had hoped for, and yet, because of increased capacity being put on the same routes that you were flying or intending to fly, that altered—this is what I'm gathering from your comments—your projections to the point where you realized that your business, I'm assuming, would have been in jeopardy had you continued. Where did this increased capacity come from?

Mr. Russell Payson: Air Canada had reduced capacity and Canada 3000 announced some time in the middle of April that they were going to add a lot of capacity on the two runs we were on. Essentially, when I said our load factors were up significantly, they were. What had happened was we achieved a high degree of success in the low-cost business, which were our economy fares, but in the front of the airplane, where we were configured obviously for business class, the yields were just not there. Those were the main factors that contributed to us reassessing our model. When Canada 3000 announced they would also be offering the business class model, that was when we saw we would have major trouble.

Mr. Jay Hill: You couldn't forecast that at all until you'd been operating for six weeks?

• 2000

Mr. Russell Payson: Let's put it this way. I think if you look back at the facts, we've had a consolidation of three carriers happen at once. Canada 3000 has for years focused on a low-cost strategy, much as WestJet has done. They've never deviated from that.

Our model never took into consideration that in the weeks that we got into business we would have three carriers get together and go into the same business we were in. We just did not see that.

Mr. Jay Hill: So if I follow your rationale, what you're saying is that you're basically forced out of business or forced into a partnership, if you want to call it that, with Air Canada, because Canada 3000 began a business class service. But now you're suggesting that you're going to alter your business plan to a low-cost discount carrier and go head to head with Canada 3000 and WestJet. Is that correct?

Mr. Russell Payson: We would essentially go into a low-cost carrier scenario, but actually our strategy would be slightly different. It would focus a lot more on transborder operations.

Mr. Jay Hill: I see.

I want to ask the gentlemen from Air Canada a couple of questions. We just heard from WestJet. You may have been in the room when they put forward a suggestion. During your opening remarks, you talked about matching competitors' prices. WestJet has put forward a proposal that would require any airline, but especially the dominant airline, if they're going to drop their price on a specific route, such as a 700-kilometre route, to have roughly the same equivalent fare on a per-mileage basis everywhere within their system. Can you explain to me whether you agree with that, and if not, why not?

Mr. Calin Rovinescu: We're a network carrier, first of all. I think that when you start comparing strategies of network carriers to point-to-point, you have to take into account that what we are supporting is not just one route. We're not supporting that one route, at one time, on one evening. We have a structure that takes into account the overall expenses of the entire network.

If we go into a market and match competition to be competitive on that route, that may in effect result in a higher price than what we do on a different route where there are different pricing ingredients. We look at the entire network to see whether or not we're able to derive profitability.

The simple answer to your question is that we look at pricing matrix on a route-by-route basis, judging on who the competition is, what the structure is, what the market dynamics are for that given route.

Mr. Jay Hill: I'm led to believe from your answer then that you wouldn't be in favour of this.

Mr. Calin Rovinescu: You're correct.

Mr. Jay Hill: In other words, you need to be able to use the entire structure, as you term it, in order to subsidize some routes with your operations elsewhere. How does that differ from what another carrier would allege to be predatory pricing?

Mr. Calin Rovinescu: The question of matching a competitor's price is where you come to the essence of what competitiveness means. If there is price on a route—and this is the issue that has come up in the United States recently with American Airlines—matching a competitor's price is not predatory.

I only came in for the tail end of the WestJet presentation, and it may have been earlier on in the discussion, but I think what the WestJet folk would have the country do is create a protectionist environment where we say the Competition Bureau is going to protect the route. Remember, the Competition Bureau is there to protect competition, not to protect competitors.

Mr. Jay Hill: But the Competition Bureau or anyone else can hardly protect competition if ultimately the pricing forces all the competitors, as has just happened with Roots Air, to fold their tent.

Mr. Calin Rovinescu: Yes, but I think you heard from Mr. Payson that the pricing of Air Canada had nothing to do with the Roots Air situation.

Mr. Jay Hill: In this particular situation, yes.

Mr. Calin Rovinescu: Right.

Mr. Jay Hill: But he did say, if I understood him correctly, that one of the big concerns that made him re-evaluate his business plan was the increased capacity that Canada 3000 was going to be putting on the same routes. That's exactly the same argument we hear from other carriers where Air Canada's concerned. You not only match prices, but you increase capacity.

• 2005

Mr. Calin Rovinescu: That's what I was going to say. I think you're raising a different issue. First you started on the pricing situation, then you went to capacity.

I think on pricing the question is if there's a route and you have an established competitor matching an entrance price, that is considered to be competitive, not anti-competitive. Therefore, you have two prices, and let the one that has the better product, the better situation, and the better schedule fight for its share of that market. That's called matching a price; that's called being competitive.

In terms of capacity, clearly there are issues where if you dump lots of capacity on a route, that can cause problems. As Mr. Payson indicated, we've removed capacity in Canada. What we've done in the last quarter is we have taken capacity out of Canada and redeployed it to our transborder markets, as well as some to our international markets. There's too much capacity in Canada. So I think, with respect, the issue of increased capacity has not been an Air Canada situation in the last quarter.

The Chair: Mr. Hill, you have about a minute. You'll get a second round, of course.

Mr. Jay Hill: Well, I'll just make one final comment to this round then, Mr. Chairman.

Maybe I'm missing something and you'll be able to enlighten me further later on, but it seems to me that you want it both ways. You say you're the champion of competition. You want to be able to match prices. And yet my understanding is that you don't support, for example, the recommendation from the commissioner of the Competition Bureau that limited access to foreign carriers be allowed in Canada. Or do you?

Mr. Calin Rovinescu: Well, it depends what we're talking about as limited access.

Several of the commissioner's proposals from this morning would make sense if they were available on a reciprocal basis. If they want to have this so-called modified sixth freedom right where a U.S. carrier can come into Canada and connect through Canada to another destination, we have no problem with that, provided we can do the same thing in the United States.

So if the question is like for like, competitive for competitive, we have no problem. We just don't like it when the playing field is not level.

Mr. Jay Hill: Some of your competitors would say the same exact thing.

Mr. Calin Rovinescu: Well, we're all on the same wavelength.

The Chair: Okay, Marcel Proulx of the Liberals.

Mr. Jay Hill: I don't think you are.

Mr. Marcel Proulx: Thank you, Mr. Chair.

[Translation]

At Air Canada, do you consider your arrangement with Skyservice as a merger or as an investment? If it is an investment, do you believe that the Competition Bureau is right to examine this transaction? In what way could you mitigate the bureau's concerns, and why do you really want to become involved with Skyservices' specialized sectors, business flights, business aircraft, the chartered aircraft fleet?

Mr. Calin Rovinescu: In answer to the first question, I think that the agreement with Skyservice represents first of all an investment, and secondly a partnership, a joint venture if you will. It is neither an acquisition nor a merger. Air Canada does not have the ability to manage Skyservice's operations. Air Canada will never control the majority of Skyservice's voting shares. There will be no integration. We have no intention of integrating Skyservice's employees with ours. Mr. Payson, who has been in business with his company for 15 years, will continue to be the chief executive officer of the company with his management team. We have no intention of getting mixed up in that. Therefore, this represents an investment. Having said that, it is a very strategic investment for us, which will result in a joint venture, a partnership.

The Competition Bureau has the right to examine any transaction that it sees as potentially being a merger according to the definition found in the Competition Act. Obviously, we will provide them with all necessary information for their review. We are confident that an analysis of what we are doing will show that this is not a purchase for control.

Secondly, as you are perhaps aware, when we finalized our purchase of Canadian, we had discussions with them concerning our setting up a discount company, a "low cost", and we received permission subject to certain restrictions, to not begin service in Eastern Canada before October of this year.

• 2010

The Competition Bureau has already accepted the premise that we can begin to do business in this area, but says that a waiting period is necessary. If we have the right to start up a company ourselves, I believe we may invest in an existing company that has an infrastructure, that already has a product and whose costs are more reasonable that ours.

As to your second question, I believe we will proceed with the Skyservice transaction in all three sectors, not only in the low- cost one, but also in the area of vacation charters. We intend to do so because we feel that there are two other market sectors that we serve profitably for our shareholders. We will continue to examine opportunities to increase the value for our shareholders.

You must remember that the company is a privately held firm. It is not a Crown corporation. We intend to continue to take advantage of strategic opportunities that can improve the value for our shareholders, and secondly, to find ways to redeem aeroplan points. We will have the ability to offer opportunities to our clients to redeem aeroplan points with Skyservice.

Mr. Marcel Proulx: On this topic, in your customer service plan, you discuss a point you call: "Guaranteed number of seats for frequent flyers". You are reserving 10% of available seats in airplanes for travel rewards, per month. Do you intend to apply this 10% rule at any time during the month, or do you intend to target three or four days where very few people want to travel and...

Mr. Calin Rovinescu: No. In fact, we intend to do this...

Mr. Marcel Proulx: It is not very clear.

Mr. Calin Rovinescu: We intend to do this throughout the month, on a pro rata basis. If we have the ability to increase the opportunities with Skyservice products, we will have even more than this 10%, in the end.

Mr. Marcel Proulx: Thank you.

[English]

Thank you, Mr. Chair.

[Translation]

The Chair: Mr. Laframboise from the Bloc Québécois, please.

Mr. Mario Laframboise: Thank you, Mr. Chairman.

I was looking over your document quickly. In the end, you are making demands of the committee. I see that you are asking us to tackle the excise tax, to make recommendations in order to save money, regarding this tax that no one wants to pay, not only airline carriers but also all Canadians.

Next, you want us to support you with respect to the Competition Bureau, because you do not want the standards or regulations to be changed. As we speak, I must say I am having some difficulty supporting Air Canada. At the time, the Bloc Québécois supported Bill C-26 and Air Canada's demands on two conditions, one of which was that flights to remote regions be maintained.

With respect to this obligation, I must say that when I take the example of Baie-Comeau... You will tell me that it is in accordance with the legislation and that there is no problem. Three months before the act came into effect, when you were already negotiating, Air Canada decided to split its Baie- Comeau—Quebec City—Montreal flight, which was profitable, and make it into two flights, from Baie-Comeau to Quebec City and from Baie-Comeau to Montreal. Finally, nine months later, you were able to abolish the Baie-Comeau—Quebec City flight. A number of people who follow these matters have seen that you decided to deal harshly with the competition, in the form of charter flights, that might leave from Quebec City. You said that it would be simpler to go to Montreal, and that you could save money by offering reduced prices to those who would take the charter in Montreal. That is a rumour. Perhaps you will say that this is merely an urban legend, but it does exist.

That is not the only situation of this type in Canada. Elsewhere in the country, there are cases where you maintained your flights in certain remote regions, but offered them at such inconvenient hours that almost no one takes these flights, and they are not profitable for you. They are not even profitable for the people taking them, who have started using other services.

• 2015

Your second obligation was to provide service in both languages. Of course, you know that two or three weeks ago, on a flight that was rerouted to Halifax, you did not comply with your obligation to provide service in French. You failed in this duty for five hours. When we see examples of this type, it is difficult for us to take when you come and ask for things. You want our help. I know there is a study underway and that you would like to purchase some gates at Dorval and control them, which would be very attractive for you. You would also like to control the competition. It is difficult to trust you when we see such things.

I would like some answers to my questions.

Mr. Calin Rovinescu: Yes, of course. I think you have asked a very good question.

First of all, as regards the urban rumour, it is really more of an urban legend. It is true that we are going to look at our flights to Baie-Comeau and other remote locations with a view to meeting our commitments first of all, but also with a view to profitability. If we find that some things are not cost-effective, we would do the minimum on these routes. There is no doubt about that.

As I was saying earlier, this is not a public service. From the point of view of operations, we lost almost $300 million in the first quarter, and we do not intend to continue at this rate. Otherwise, a year from now we will be in the same position that Canadian was in a year ago, or 10 years ago. So we have to do things that make money. In the short term, we can consider going to these remote locations, regardless of the bottom line, but we cannot do it on an ongoing basis. We will find solutions; for example, Regionair or other airlines can provide services at a cost different from ours.

As for bilingual service, if you look at all the service companies that operate nationally in Canada, you will have a hard time finding one more bilingual than Air Canada, one that offers bilingual services from one end to the country to the other.

That said, given how fast the merger with Canadian occurred, there is no doubt that some individuals will occasionally find themselves on flights that are not properly bilingual. I certainly agree with you that such things should not happen. We have taken note of this situation and we take the matter very seriously.

As you may know, we do our own polling to determine where we should be providing bilingual services. I can tell you that our system is quite strict. I think we offer bilingual services throughout Canada, even in places where there is no real demand for them.

Consequently, I agree with you, and we will continue to improve our bilingual service.

Mr. Mario Laframboise: In any case, the act requires that you provide bilingual services for some destinations. Don't try to make me think that you are being generous here. You have an obligation to provide bilingual service.

Mr. Calin Rovinescu: I would ask you to look at the percentage of people who may be affected. If the demand is over 5% in a particular location, we provide the service even though the government's percentage is higher.

Mr. Mario Laframboise: That was not the case with respect to the flight between Îles-de-la-Madeleine and Halifax, was it?

Mr. Calin Rovinescu: Yes.

Mr. Mario Laframboise: With respect to the Competition Bureau, I am having trouble following what you mean. I have no trouble with you making investments or being more competitive in all areas. That is fine with me, because those are healthy business practices. However, when we talk about predatory pricing, this is actually happening, and I have trouble understanding that you will not agree to changes so that we can settle matters such as the one involving the complaint in the case of WestJet. It takes 15 to 18 months to deal with a complaint, and it may take three years. I do not understand. At the moment, this is to your advantage, but some day, there may be a complaint against you, and you might want to have effective legislation in place to protect the interests of the various economic players in this market.

• 2020

I fail to understand. You seem to have convinced the minister, because he does not seem to want to amend the legislation, but when there is unfair competition, regardless of the country... I find this hard to understand because the Americans are quite strong on antitrust and anti-monopoly legislation. It seems to me that the act that was passed is weak, too weak, and that the amendments introduced are weak as well. Even the report from the Competition Bureau says that not much can be done and that we will simply have to open up the market to foreign companies. That is what the Competition Bureau said in its report. It spends its time before the courts arguing with you about criteria and guidelines. You disagree and you do not want to discuss the matter with the Bureau. Costs that can be avoided do not suit you. Ultimately, nothing suits you, so much so that the Competition Bureau tells us that we should be opening up the market to foreign investors so that, as in the good old days, Canada would have two equally-strong companies that could guarantee service to the regions. The commissioner told us this morning that that would guarantee service to the regions.

If you are thinking mainly about the profitability of your company, how many regional destinations will you be closing down in the next year and a half, sir? How many of them will you be closing?

Mr. Calin Rovinescu: First of all, we have made no decision to close anything whatsoever for the time being. Moreover, I think you are very mistaken to think that an American company will come in here and serve our remote regions. That is another urban legend that is developing.

As regards your question about unfair competition, with all due respect, considering the situation, I do not think that one could consider this unfair competition. Look at the situation in the United States. I think that the decision which came down two weeks ago regarding American Airlines is quite an interesting one for you. It seems fairly clear that even if there is competition... The following words were used in the United States.

[English]

“The competition, while brutal, from American Airlines was not illegal.”

[Translation]

The issue is whether the competition is fair or unfair. It is not just a simple matter of someone deciding that it is unfair competition. As I mentioned, we believe that the ability to offer the same prices as a competitor is perfectly acceptable, and we will continue to do so. I believe that this is what Canadians want. They want to have competition on all of these routes, and we will be in a situation where two companies will be offering the same prices.

[English]

The Chair: We're out of time, Mario. Thanks.

I'll go to Mrs. Desjarlais of the NDP, please.

Mrs. Bev Desjarlais: Thank you, Mr. Chair.

I have a couple of questions. First, how many passengers have been compensated for overbookings on flights? Do you have a figure?

Mr. Calin Rovinescu: I don't have a figure. Do you have a figure?

Mr. Stephen Markey: No, I don't have that figure. We can get it for you.

Mrs. Bev Desjarlais: I noticed in the customer service plan, and it's probably following along the 180-day plan, how things are going to become wonderful. I do want to point out that for the most part, things do seem to have improved since the time the mergers took place, certainly from my perspective in the travel I've done. But there are areas where I think there really has been little or no improvement, and the overbooking of passengers is certainly one of them.

I notice in your service plan here it says “If you'd like to know if your Air Canada flight is overbooked, just ask and we'll tell you.” It reminds me of that negative marketing scam that goes on out there. I somehow find it unacceptable to require the passenger to ask if you're overbooked, when you're selling the seat. Why isn't it the responsibility of the airline to say, there are no seats available, we can put you on a list? This happened to me personally, so of course, now when I'm booking, I'm saying I want a seat number. If I don't get a seat number, I don't take that flight. I do something else, or at least I know. But a lot of passengers out there don't know, they don't fly on a regular basis. So I would suggest to you that this isn't the right route to go. I just want your thoughts on it.

• 2025

Mr. Calin Rovinescu: The overbooking situation is one that, obviously, nobody likes from a passenger perspective, and from an airline perspective, it's an essential reality of the way the business operates, because the seat, once somebody books it and doesn't show up at the airport, is perishable, it's gone, it can never be recovered again. So overbooking is, sadly, a necessary evil.

As to the communication of the fact that a flight is overbooked, that is another kettle of fish, and there are many ways of doing it. I think that putting additional responsibility on the airline is a fair suggestion, and we certainly can take that back to our customer.

Mr. Stephen Markey: If I may add, there are many reasons why you get overbookings, not just the reason we're talking about. You have a lot of travel agents who end up making duplicate bookings. You get this kind of problem in the system. We've managed the overbookings in the last year down to as narrow a margin as possible while still maintaining loads at the levels we think are best for the airline. It's a complicated thing, but we'll get that information for you.

Mrs. Bev Desjarlais: Maybe travel agents are part of it, but prior to the merger there might have been times when both carriers were overbooking. In my time I might have seen six, eight, and at the most twelve one time, where they were overbooked. As the two little girls cried because they couldn't go to their grandfather, I was feeling my pangs of guilt. But now I've seen situations where 20 have been overbooked. My thought is that it's probably not the traveller on excursion rates, who have to do a certain time or certain fares, where they're paying the bare minimum to fly, so they've got to be there at those times or they're not going to be able to change their flight. I think it's more than likely the full-fare passengers who haven't shown up, because they have the reason to change. The people who are probably not able to afford all this inconvenience are the ones who are really getting the brunt of it, people who may not be flying as often and may not know all the particulars of it.

You call a restaurant and say, I'd like to make a reservation, you get there, and you're told, I'm sorry, but we won't have anything till tomorrow. If you think that's acceptable in business, then I would suggest you change your approach in this code of service that you have here, because I don't think it's acceptable to expect the passengers to ask whether you've overbooked? I think it's just totally unacceptable.

Given the passion with which you made this comment about the butchered hybrid of both regulated and competitive, obviously, you feel very strongly that there is no middle ground between the two. From my perspective, I think there has to be a middle ground between the two, and I would suggest that if we used a refined or cultured hybrid of both, we might be meeting the needs of the passengers a whole lot better.

Mr. Calin Rovinescu: This is a very tricky area, because once you dip your toe into the regulatory water, it's very difficult to say you haven't got it wet. I think this is what you're really facing. Once you start down this path of regulation, you're going to have a regulated environment. Far be it from me to suggest to Parliament how they should operate, but you either deal with a regulated environment or you don't. To have a situation where pricing on a route is subject to some CTA intervention, to some Competition Bureau intervention, and to some yakking going back and forth, whether it's before the courts, before the Competition Tribunal, or wherever else, I think that that's a problem.

I think that, with respect, one of the refreshing remarks that came out of the merger of CanJet into Canada 3000 was when Angus Kinnear, the president of Canada 3000, said that as far as he's concerned, this is competition. He said, you're going to see offered the best price, the best product, the best time, and I'm not going to get involved in any of the nonsense that was going on previously with CanJet, seeking the support of the Competition Bureau to protect my route. So you have to look at the situation and ask whether you want a regulated environment or a competitive environment. If you want a competitive environment, then let the people compete. It's as simple as that.

The Chair: Thank you very much, Mr. Rovinescu.

I'm going to go to Mr. Hill, before I go to Serge in a little while. Mr. Hill, you have the floor.

• 2030

I want to mention to the guests that anything that's requested of you from members of the committee comes to the clerk of the committee and it should be distributed to everybody. And just remember the chair, so that we don't get too personal with our remarks. Thank you.

Mr. Jay Hill: Thank you, Mr. Chairman.

Mr. Rovinescu, could you explain to me how the Mitchnick decision regarding the merging of the seniority list for the former Canadian Airline pilots and the Air Canada pilots honours the commitment of Air Canada to be fair to the Canadian employees?

Mr. Calin Rovinescu: Absolutely. You embark on a process that you perceive to be a fair process—i.e., you appoint an arbitrator, you give the arbitrator all of the facts, the gory details: when someone was hired, how long he's worked, what aircraft he flies, etc. You put before that arbitrator all the data, all the witnesses, all the information. You pay for the arbitrator, or you offer to pay for the arbitrator, and that process becomes a fair process. The outcome, like the outcome before a court of law, like the outcome before a competition tribunal, like the outcome before a regulator, is not guaranteed.

So I think that what we have done for all of our pilots, the people who are on the Canadian Airlines side or from the Air Canada side, is put forward a process that was fair, equitable, and reasonable, in front of an intelligent arbitrator, who then decided, based on what he heard and what he understood. Air Canada did not influence that process. As you know, the seniority integration is an issue that is decided between unions, not with the employer, and we think we provided the environment for a decision that everyone, ultimately, ought to respect.

Mr. Jay Hill: I wasn't so much asking you whether you felt the process that arrived at the decision was fair. I was asking you whether you feel it's a fair decision.

Mr. Calin Rovinescu: My views on whether the decision was fair or not are totally irrelevant, because the fact is we set that—

Mr. Jay Hill: You're representing Air Canada here tonight. I'm asking you whether you believe it's a fair decision.

Mr. Calin Rovinescu: It's totally irrelevant.

Mr. Jay Hill: Does Air Canada feel it's a fair decision?

Mr. Brent St. Denis: I have a point of order.

Mr. Jay Hill: That should be through the chair.

The Chair: Yes.

Mr. Brent St. Denis: I want to know, in regard to the question itself, if it's in order to ask a witness for an opinion that he's clearly said is not an opinion that's...he didn't use the words “within his mandate”, but clearly it's irrelevant to the discussion. So I question the question.

Mr. Jay Hill: I'll let it drop.

Mrs. Bev Desjarlais: Actually, I have a point of order on that, Mr. Chair, which is the fact that I personally heard Mr. Milton say to those employees they would all be treated equally, that neither would lose out. So I think Mr. Hill's question is quite fair, that Air Canada should let us know whether or not they think it's fair.

Mr. Jay Hill: At any rate, in respect to the guests, I'll drop it. I'd like to get on to something else.

From your submission, I understand that Air Canada's first quarter loss for this year, 2001, constituted almost $300 million. Can you tell me what the loss was for the last quarter of 2000? Or was there a loss?

Mr. Calin Rovinescu: For the similar quarter of last year?

Mr. Jay Hill: Yes, the last quarter of the calendar year 2000.

Mr. Calin Rovinescu: Yes, the fourth quarter was about $100 million and change...

Mr. Stephen Markey: It was $149 million.

Mr. Calin Rovinescu: It was $149 million.

Mr. Jay Hill: Is it fair to say, then, that in the last half-year you're approaching half a billion dollars in loss?

Mr. Calin Rovinescu: If you added $300 million and $149 million, yes, I'd say something like that.

Mr. Stephen Markey: Very close to that.

Mr. Jay Hill: How much money is actually changing hands with the purchase of Skyservice? I mean cash money?

Mr. Calin Rovinescu: What we have said is that the total amount going out at the outset is approximately $15 million.

Mr. Jay Hill: Can somebody explain to me how Skyservice is going to be profitable? In the submission you made, you say:

With ever-diminishing yields playing against our cost structure, this company would find itself in a financial straitjacket in no time.

Therefore, that's your argument for getting into the discount airline business. How will you be able to run Skyservice profitably if you can't run Air Canada profitably?

• 2035

Mr. Calin Rovinescu: First of all, we're not going to run Skyservice.

Mr. Jay Hill: How is it going to impact on the viability of Air Canada then?

Mr. Calin Rovinescu: By offering a low-cost product and being a shareholder in the company.

Mr. Jay Hill: So is that how you're intending to offset any future losses with Air Canada, by using the hopefully profitable Skyservice to then subsidize Air Canada losses? Is that how—

Mr. Calin Rovinescu: No, I think you're confusing a couple of things here. Let me help you out.

Mr. Jay Hill: Thank you.

Mr. Calin Rovinescu: The Skyservice investment is a way to get an investment in the low-cost business in this country. That is what it is, and by doing this we expect we will have the ability to realize some return from it. It does not mean that it is the panacea to Air Canada's problems.

Mr. Jay Hill: I have one final question, Mr. Chairman, on this round.

I would assume that many of the costs you refer to in your brief that contributed to the unprofitability of Air Canada in the last two quarters are going to be the same for Skyservice: high fuel costs were noted, and landing fees, I'm assuming, would be the same. A lot of the operational costs of running an airline would be the same, I'm assuming, unless you can enlighten me otherwise. So how is Skyservice going to be profitable when Air Canada can't be?

Mr. Calin Rovinescu: I'll turn it over to Mr. Payson on that.

Mr. Russell Payson: We have significantly lower costs than those of Air Canada, number one. I think that probably our cost level was a surprise to them. We were far below them, so that is where we're coming from. Basically I think we have a very well articulated business plan to go forward. Certainly we're quite comfortable with it. Obviously, so is Air Canada.

The Chair: Does that answer your question?

Mr. Jay Hill: I'm sure my five minutes was up a long time ago. Thank you for your patience, Mr. Chair.

The Chair: And I didn't mind your line of questions, simply because some other people told us that the large ones do it by predatory practices, and I knew you were going along that line, so that's fine.

Serge Marcil from the Liberals.

[Translation]

Mr. Serge Marcil (Beauharnois—Salaberry, Lib.): Thank you very much, Mr. Chairman.

I have two questions. I will not dwell on those that have already been asked. There are two issues which concern me, one of which Mario Laframboise raised earlier: it is the issue of bilingualism within Air Canada.

I believe that Air Canada has a role to play when it comes to bilingualism. After all, it began as a government company. Even if it is a public company today, there is certainly, not an emotional bond, but certainly a business relationship with the government of Canada.

People often think that bilingualism is solely for Quebeckers, for French-speaking Quebeckers. There are francophones in New Brunswick, in Nova Scotia, in Prince Edward Island, in Newfoundland and in all of the other Canadian provinces. There are many francophones outside of Quebec. If we were to add up all of these francophones, we would see that they make up more than 25% of Canada's population. Many people will say that francophones living in Manitoba must all speak English and therefore that services should be provided in English.

I have a question regarding your hiring criteria. Are your hiring criteria the same throughout Canada, or do they differ from one province to the other?

Mr. Calin Rovinescu: Clearly in British Columbia, for example, we hire less bilingual persons than in Manitoba, New Brunswick or in other places where there are a greater number of francophones.

However, we always seek to hire francophone people throughout Canada, including in areas such as Victoria, Vancouver and other areas.

[English]

Steve, do you want to add anything else?

Mr. Stephen Markey: No, I think you've captured the spirit of what we try to do, Calin.

[Translation]

Mr. Serge Marcil: What I mean by this is that at Air Canada, at Canadian at the time and at any other airline in Canada, new employees are first assigned at the regional level; then, they are assigned to the national level and, later still, to the international level. It is a question of seniority.

• 2040

Thus, a unilingual employee hired in Victoria will one day work on flights to Montreal and Quebec. I understand that there was a merger with Canadian, but why would Air Canada not include bilingualism in its hiring criteria? I understand that they are trying to hire people who are trilingual or multilingual, but in order to respect the policy...

Mr. Calin Rovinescu: In fact, bilingualism is one of the requirements. When it comes to flight attendants, for example, we prefer francophone employees because they are more bilingual. This is often the case. When promoting, we ask for a bilingual francophone, because as you know, francophones are more bilingual than anglophones in these areas. It's the opposite, if you will. Within the company, there is a trend and even a bias; we prefer francophones for promotions in areas where there is a need for bilingualism.

When we find bilingual people, we hire them immediately. However, it is much more difficult to find francophones in Victoria than in Manitoba.

Mr. Serge Marcil: Here is another question. Since we are talking about bilingualism, there was an article this morning in the newspaper regarding the francophone representation here, in Canada's Parliament and in the Canadian public administration. There are many francophones, but they are the ones who drive the green buses, the ones who work in the cafeteria and the ones who work security. In the key positions, there are less and less here in Ottawa. What is the situation within management at Air Canada?

Also, what is the percentage of women occupying management positions at Air Canada? Oftentimes, women are hired as flight attendants, but within management positions, what is the percentage of women, not necessarily francophones? Is there some policy to encourage more women to apply for management positions?

Mr. Calin Rovinescu: I do not know the percentage, but we could provide that for you later. Stephen Markey will give it to...

Mr. Serge Marcil: Would you say that on the board of directors, there is less than 20%?

Mr. Calin Rovinescu: In upper management, yes. In upper management, there are three or four persons in very senior positions, including Lise Fournel, who is our senior vice-president—business, and Danielle Poudrette, in marketing. Therefore, there are women in very high levels in the company. The vice-president of technology, known in english as the Chief Information Officer, is also a woman. Our vice-president in human resources is a woman. So, I think that nonetheless there is a certain number of...

[Editor's note: Inaudible]

Mr. Serge Marcil: —

Mr. Calin Rovinescu: Yes, there is a fairly high number of women in senior management positions.

Mr. Serge Marcil: My comments were meant as positive.

Mr. Calin Rovinescu: Yes.

Mr. Serge Marcil: I am convinced that Air Canada can play a significant role in implementing bilingualism throughout Canada.

Mr. Calin Rovinescu: Thank you very much. We completely agree with you and we will continue to improve bilingual services.

Mr. Serge Marcil: In addition to recruiting women.

[English]

The Chair: Thanks, Serge. I'll go to Mr. Szabo now.

Mr. Paul Szabo: Probably a lot of Canadians out there would want to say congratulations to Air Canada for dealing with the situation the minister reminded us all about when he was here, when Canadian had two days of cash, 16,000 jobs on the line and a bunch of Christmas travellers with a lot of commitments. It could have been a pretty ugly story if Air Canada hadn't been prepared to say, “We see some potential value and synergies, and we're prepared to do something”.

One of the rubs about Canadian was its cashflow and particularly its debt load. That seemed to be pretty concerning to a lot of people, and it's been assumed now by Air Canada. How does your debt load, your debt equity ratio, compare to domestic competition, and maybe more relevantly, to the industry internationally?

Ms. Calin Rovinescu: First of all, thank you for your earlier remarks. I appreciate that. I think that is in fact something that is often overlooked in the environment we're in, when we hear lots of griping. We even heard some of the members tonight say they had difficulty containing themselves from expressing these gripes. I think we often forget about what happened in December a year and a half ago.

• 2045

In terms of the debt level, we assumed a significant amount of debt, something in the vicinity of $1.7 billion. That was after having had a fairly acrimonious debate with the creditors of Canadian to achieve some debt reduction through the court-ordained restructuring process.

We nonetheless added $1.7 billion to our balance sheet. That goes a long way toward explaining some of the difficulties we had in the last quarter and this quarter. We're carrying an unnaturally high debt load, relative to what Air Canada was carrying before. The debt-to-equity ratio is something like 97%.

We have a very small thin piece of equity left in the company. Nonetheless, we are able to generate the EBITDA to service that debt, and we believe that once we see our way through the difficult environment coming through the economy and the downturn generally, that can be turned around. That debt-to-equity ratio is not one we want to see long-term, so we're going to be working on improving our balance sheet and getting it more in line with the North American standard and where we were before.

Mr. Paul Szabo: It's interesting that someone commented today—I forget who—they weren't concerned about the long-term viability of Air Canada. Notwithstanding the financial fundamentals, I think they recognize the genesis and the actions being taken, and the fact you do have a positive cashflow from operations, which is obviously very important to keep in mind, even though there may be an accounting loss.

Mr. Calin Rovinescu: That's correct.

Mr. Paul Szabo: I guess I want to finish this by focusing on the competitive environment. Air Canada is a public company. I would think that your CEO would have, first and foremost on his mind, shareholder value. That requires a lot of things to happen, including keeping people happy and running a good ship, etc. But it has to translate into shareholder value. I think when each of you is hauled on the carpet, it's a matter of what you have done for shareholder value.

If that, in fact, is your motivation, it seems logical to me that Air Canada will not be just sitting back and letting opportunities go by. Your obligation to the company, the employees, and the shareholders is to be as successful as you possibly can.

The commissioner, Mr. von Finckenstein, has suggested we need an effective competitive environment. We need a competitive environment, and it's not there. You're the dominant carrier. It's almost like people have been characterizing you as the bad guys, and I'm not so sure I agree.

He said that if anybody holds more than 50% of the share of the marketplace, you basically reduce the effectiveness of the competitive marketplace. If you're sitting somewhere between 70 and 75, routes effectively can add more to that... I'm a little concerned. This is awesome.

If the commissioner's objective, or maybe the objective being suggested to the decision makers, is that Air Canada shouldn't really have much more than a 50% share of market, we're looking at a one-third reduction in the business of Air Canada. Something doesn't compute here.

Obviously there's a conflict of objectives here. I'm wondering how you feel an effective and competitive environment can be achieved, without Air Canada having to basically forgo opportunities and market share, so others can occupy that space, and there could be these rules. How do we have this win-win situation when it appears that Air Canada can't win, if that's the scenario?

Mr. Calin Rovinescu: First of all, in terms of the commentary on shareholder value, you're absolutely right. When we look back to what's gone on in the last 18 months, we made the decision to acquire Canadian Airlines following the discussions with both the Minister of Transport's people and the Competition Bureau people. We made a decision at that time that we would save the jobs, save the Canadian Airline's people, as you heard from the minister today, with two days of cash left to service that company.

• 2050

The first thing we did was take care of the employees of Canadian Airlines. The second thing we did was restructure the debt of Canadian and put that on our balance sheet, which was a reduced amount to what they had, and had to go through that process. Then we had to restructure the operations to make it through the difficult summer that we had last year, when we added all these additional people because we couldn't intermingle, etc.

So we took care of the employees, we took care of Canadian, and now it's time to take care of our shareholders. You're absolutely right that in this piece the group we work for first and foremost and we have to pay attention to are our owners, and we intend to do that.

Therefore we will look at every single opportunity. We will look at competing aggressively. We will look at having discussions with the Competition Bureau and others as to what we think we can legally do to push the envelope to the maximum limit we can to be able to squeeze the last drop of juice out of the lemon, and we're going to continue doing that over and over again.

The answer, I think, is that we expect to be able to compete in an environment where the playing field is truly levelled, and we don't expect to have the Competition Bureau improperly prop up a competitor who is complaining on a given route. We expect to have the kind of reaction, frankly, as I said, from Canada 3000. They said we're going to compete openly, actively, and may the best person win on a given route.

That ultimately is the answer here. To have a successful and viable Air Canada we need to be able to compete. And if we believe that through a partnership we will have participation in a low-cost alternative, where we can in fact provide the kind of competition that we need with an infrastructure that has that low-cost environment already built in, then we will endeavour to do that. If we want to try to compete in a vacation charter market and offer additional product in the vacation charter business, and again to do that in a lower cost structure in partnership with somebody who has that capability, we'll look to do that, etc. We think we will explore every single alternative that's available to us to build shareholder value.

The Chair: Thank you.

I will go to Mr. Laframboise before I come back to Jay.

[Translation]

Mr. Mario Laframboise: Thank you, Mr. Chairman.

Along those same lines, for the regions, the worst has yet to come. You said that for now, you will maintain service to the regions, except that it is your intention to be more predatory and to try to be as cost-effective as possible everywhere, because, as you stated, you are not accountable to us, which is incidentally the reason why Mr. Milton is not here. You are accountable to your shareholders. Thus, when the deadline has expired, you are going to take the bull by the horns—pardon the expression—and become much more competitive.

However, there is one thing which you must not forget. You control between 70 and 80% of the market. If that is not a monopoly, then what is it? If we give you free reign, this will continue. Quite clearly, you have every intention of destroying everything in your way and you certainly do not want the Competition Bureau fudging—pardon the expression—it up for you. Your position is clear: you do not want the Competition Bureau to get involved, and starting from today, especially given the quarter that you have just had, which seems quite catastrophic...

I have looked at your economic situation. Last year, you made $264 million in earnings. Your non-recurrent labour costs were $178 million and you had $213 million in losses. You are not a company that... I did not analyze the last quarter. It appears disastrous, so much so that you have decided that you are going to swallow up everything that is in your way. This is worrisome.

All members who took part in the consideration of bill C-26 agree that there should be a certain monopoly, but with some conditions. You have a monopoly and there are conditions that you must meet. I thought that you were obliged to continue serving the regions and providing bilingual services. This obligation does not seem to be weighing too heavily on you.

By the way, I am not the one spreading urban legends. It is our friend from the Competition Bureau who, probably naively, told us today that the only way to prevent you from becoming too strong a competitor was to open the market to foreign airlines. That is what he told us. I am not the one telling you that this is an urban legend. He came and told us today that the only way to stop you was to open up the market to foreign competition. I did not agree with him, but the more I listen to you, the more interesting I find that idea, sir.

• 2055

Mr. Calin Rovinescu: You use the word "predator" seemingly to mean that if we try to make money and be a profitable company, we are being a predator. Did I understand correctly?

Mr. Mario Laframboise: You enjoy a monopoly; you have 80 percent of the market and you are telling us that you want 100 percent. That is probably everyone's dream. You feel that the word "predator" does not apply. I think that you already have a big share of the market.

Mr. Calin Rovinescu: To answer your question directly, if there was a question, I would say that we will be working with the regions. We will be holding discussions with them about who will serve these regions. Will it be us, some of their partners, companies that we are investing in or a company affiliated with us that can offer services at a lower price than we can? We will be discussing all these issues. We will definitely not abandon all the regions. But we will not act blindly, providing service whether it is profitable or not. That would not be a viable situation in the longer term and we do not intend to take that approach.

As for bilingualism, no one has said anything about abandoning services in that regard. Perhaps you misunderstood. We have no intention of reducing the level of bilingualism. In fact, as you may know, we have increased the level of bilingualism, over the past year, of people who have come to us from Canadian Airlines, and these people are now at a higher level. They were much less bilingual than Air Canada employees. We have a program in place to improve the situation.

[English]

The Chair: Thank you very much.

Mr. Rovinescu said he was going to leave at nine, and I've got a couple of questioners. So if we're quick, maybe you'll have him. He seems to be a good answerer.

Jay, you're on next.

Mr. Jay Hill: He sure does. You know, before tonight I didn't realize that Air Canada was Santa Claus. They saved the day—boy, oh boy.

Anyway, somebody has to play the bad cop role, but I don't want to leave the impression, since this is my last intervention, that it's all been bad news, or that my life's ambition is to continuously beat up on Air Canada. I certainly don't intend to denigrate your efforts or the employees of Air Canada. I will admit, and I think it's probably widely shared, that there has been quite an improvement over the last few months in the service and a smaller number of problems confronting the travelling public.

That having been said, my last intervention's going to deal with the projected profitability of this future Skyservice, or the discount airline that Skyservice is going to provide.

Perhaps in answer to my question you can deal with how the cost structure is lowered. Does that mean lower wages? Specifically, how will the wages of Skyservice compare to the wages of... For example, compare them to the Air Canada pilots' wages.

My specific concern in this regard is how would you address concerns that may be expressed by your own employees of Air Canada about a fear they may have that if this is allowed to proceed, they can gaze into the crystal ball and see a very real potential for a shift of jobs and focus to this new discount airline, as in the future potentially Air Canada would drop routes?

By your own admission here this evening, Air Canada's been having some problems the last two quarters in showing a profit. By your own admission again, in what you said tonight and in the brief, you're fully expecting this new discount airline to be profitable. So if you put those two together, one would have to assume there's a potential for a shift of jobs over a period of time from Air Canada, which has, by your own admission, a high cost structure, to a lower cost structure—i.e., Skyservice.

• 2100

I would think that if I were an employee of Air Canada, a pilot or flight attendant or a baggage handler, I would be quite concerned looking down the pipe at the potential for a shift and potentially a lower-wage job. How are you going to address that?

And thank you for appearing tonight. This will be my last chance to say that.

Mr. Calin Rovinescu: Thank you very much, Mr. Hill.

We have looked at the question of our employees, and in fact met with all our union group yesterday, with the exception of one, and had this discussion with them.

Essentially, what we're looking at is if we have certain routes that would be serviced by say a Skyservice or whatever—a lower-cost provider than we were in partnership with—and we diminished flying that we were otherwise doing on some of these routes... This hasn't been determined yet, but let's say we're losing money on route X and we determine after a certain period of time that we would prefer to exit route X and have somebody we were in partnership with serve route X. We then have the ability to redeploy our capacity, redeploy our aircraft, redeploy our crew to more profitable flying, which we have already started to do, as I said earlier. We have taken capacity out of Canada and redeployed it to transborder and redeployed it to the international markets over the last quarter.

If we continue doing that, it doesn't result in net job losses. In fact it results in the ability that we have to keep the people employed rather than simply exit because we can't afford to continue. So I think that what we will see is if in fact that happens, and there are some routes that we exit or diminish the flying on, we'll have lots of opportunities for the people on redeployed flying as well as, in some cases, people who will provide services.

As I mentioned earlier, part of the partnership with Skyservice includes having Air Canada provide service to Skyservice if the services can be provided on a cost-competitive basis. In other words, we're not going to impose a higher cost to Skyservice by buying a service from us, whether it's maintenance or baggage handling or anything else, if that's going to drive their costs up. But we have opportunities to have our employees provide service, so I think that is going to be a net benefit to them.

Mr. Stephen Markey: Do you want to perhaps add to that, Russ?

Mr. Russell Payson: Yes. I'd like to be clear that there's no question that in all of our discussions we have pushed the point that we will be totally independent in these decisions. So it's not as if Calin can tell me, “Well, you're going to do your maintenance here”. That is not the issue. We will make the decision.

To be fair, what we have said is that all things being equal, it has to be equal in terms of cost and service. And service is probably one of the big issues. For example, if we bring maintenance to Air Canada, one of the things is they have to be able to do it in the timeframe that we need. But definitely the decision will remain with us.

The Chair: A quick one.

Mr. Jay Hill: Just to clarify what I was trying to get at, Mr. Payson, if your enterprise—which would be completely separate, if I understand it correctly—were to be profitable, which you're projecting it to be, and be another success story like WestJet, and all of a sudden it starts growing, quadrupling in size, putting on more airplanes, I think there's a very real risk that the Air Canada structure could be downsized at the same time, even though they're totally separate entities except for the shares that Air Canada holds in Skyservice. That is the worry on the part of the Air Canada employees that I was trying articulate.

Mr. Stephen Markey: We understand that's the worry, Mr. Hill, but it's certainly not our intention to do that. Our plan is to succeed with both companies.

Mr. Russell Payson: And I think it's fair to add that where Air Canada might be forced off a route because of competition on that route by low-cost competition, where they're ill-equipped, possibly, to compete, then they're better able to compete on let's say some international routes.

The Chair: Okay. Thank you very much.

Mr. St-Denis.

Mr. Brent St. Denis: Thank you, Mr. Chairman. In view of the time I'll just make a quick comment.

It seems obvious to me that the job of the Competition Bureau and that of the government sort of juxtapose with slightly different objectives in mind. It's a very unenviable task. As the late Right Honourable Pierre Trudeau one time suggested, having the U.S. next door is like sharing a stall in the barn with an elephant and a mouse. Well, I'm sure that for other players in the industry—with Air Canada, with its international and transborder business like nobody else in Canada—there is a sort of an elephant and mouse situation.

• 2105

The Competition Bureau and the government are trying to make sure that Air Canada continues to succeed and the new players continue to start up and succeed. I don't think anybody wishes anybody ill at all in the future. The tough questions I think are just fair in the context of everybody trying to move this whole thing forward. So I just want to add my own vote of thanks for you being here tonight.

The Chair: Are there any further questions of our guests? Seeing none, I want to thank you very much. I think you did a great job. We appreciate you coming here. Mr. Rovinescu, you stayed past the time, and thank you very much.

Mr. Calin Rovinescu: Thank you very much.

The Chair: Good night.

This meeting is adjourned until Thursday.