TRAN Committee Report

AIR LIBERALIZATION

Canada — U.S. OPEN SKIES

Air services between Canada and the United States are governed by the air transport agreement between Canada and the U.S. signed in February 1995 (Commonly called the “Open Skies” agreement). It allows for any number of Canadian and U.S. carriers to operate air services between any points in either country using any aircraft and frequency and to effectively offer any prices without restriction. The agreement does not allow for cabotage.

While this agreement has resulted in rapid expansion of air services between the two countries, many witnesses told the Committee that it falls short of a true open skies agreement and that Canada and the U.S. should be moving towards such a goal. Airports, tourism associations, and communities called for expansion of the agreement with fifth freedom rights. Fifth freedom rights (sometimes called “beyond rights”) is the right of an airline from one country to land in a second country, to then pick up passengers and fly them to a third country where passengers then deplane. An example of this would be a flight by a Canadian air carrier from Canada to the United States that is going on to Mexico. Traffic could be picked up in the United States and taken to Mexico by the Canadian carrier. American carriers would be able to do the same thing flying through Canada.

Proponents of this told the Committee that fifth freedom rights would allow travelers greater choice, lower prices, and more service to secondary airports by U.S. carriers. The larger airports would benefit from new and/or more services by larger aircraft needed for the longer international flights, resulting in higher airport revenues. Canadian carriers would gain access to the lucrative U.S. international market and could benefit as the ability to top up loads with U.S. traffic might make otherwise unviable services to Latin America and other southern points profitable.

Opponents told the Committee that U.S. carrier service to Europe and Asia via Canada could provide greater revenue potential than Canadian carrier service to points south via the U.S. based on market size. U.S. carriers may be able to divert more traffic from Canadian carriers than Canadian carriers may be able to divert from U.S. carriers. We also heard testimony that an expanded open skies agreement with the U.S. and other attempts to increase competition (e.g., right of establishment) would not necessarily mean that there would be more competition and better service to all points in Canada - That some areas would benefit more than others. The impact of such a scenario will have to carefully be considered if Canada is to proceed with negotiations for a new open skies agreement with the United States.

It bears noting that in this discussion of an expanded open skies agreement, cabotage is not on the table.

The Committee is also aware that some stakeholders have been advocating an even more open Canada – U.S. air agreement, one that calls for the creation of a single aviation market as is the case in the EU. As this is an interim report, and it is the intention of the Committee to seek input from U.S. stakeholders as to their views on an expanded open skies agreement and a common aviation market, a definitive recommendation will not be made until this stage of our work is complete. We would note however, that in any negotiations on a new open skies agreement it will be necessary to ensure that access to gates and slots at U.S. airports are a part of the negotiating process. Without this, Canadian carriers would not have adequate access to the U.S. market and a new open skies agreement would not provide real commercial opportunities for Canada’s air carriers. We recognize that this is a significant policy issue for the government, and one that must be dealt with as quickly as possible, especially in light of the fact that the U.S. is in the process of negotiating more open air bilaterals with other countries. We would also note that the establishment of a more liberal agreement with the U.S. would likely give Canada more leverage in its negotiation of bilaterals with other countries.

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Cargo

The Committee heard many opinions regarding the liberalization of air cargo services between Canada and the United States. The central issue in the debate was that of co-terminalization. Cargo co-terminalization would allow Canadian carriers to carry Canadian originating or destined traffic to and from multiple points in the U.S. on the same plane. It would also grant U.S. carriers the same right in Canada. An example of this would be, FedEx could fly from Memphis to Montreal, drop off U.S. originating traffic, fly on to Quebec City, drop off U.S. originating traffic and then fly back to Montreal to pick up U.S. destined traffic before returning to Memphis. It could not carry any Canadian domestic cargo from Quebec City to Montreal – this would be cabotage.

Co-terminalization is an issue because when the U.S. signed the Open Skies agreement with Canada 10 years ago there was an understanding that this issue would be revisited quickly. That did not happen. If Canada is to enter into a more liberal Open Skies agreement with the U.S., it will again be on the table for negotiation.

Proponents of co-terminalization told the Committee that allowing this would improve efficiencies, potentially lower rates, and improve service times thus providing shipper benefits. It could also provide more traffic to Canadian airports thus improving their revenues base.

Opponents, Canadian all-cargo carriers, have stated that that the Canadian courier/cargo market is more competitive than the U.S. with more air carriers operating here rather than the duopoly that exists in the United States and providing lower prices to Canadian shippers. In addition, Canadian all-cargo carriers benefit from contracts with U.S. carriers to carry transborder cargo beyond the initial gateway. If U.S. carriers could operate beyond the initial gateways, it might result in loss of jobs and revenue by Canadian carriers and in turn impact on their ability to provide economic service to remote areas of Canada.

Concern was also expressed by “transshipment airports” that co-terminalization might adversely impact on their ability to maintain and grow their cargo business. Airports with a transshipment designation (e.g., Winnipeg) enables underutilized airports to receive cargo with a foreign origin and destination, sort and handle it, and then have it transshipped to its final destination.

On the surface, the concept of co-terminalization seems attractive from the shippers and airports perspective – offering more options for shippers and more traffic for airports. However, we require more study to assess the impact this would have on Canadian all –cargo carriers and the effect it would have on cargo service to small and remote regions of Canada. It is vitally important that we examine the U.S. perspective on this issue before issuing a final recommendation.

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International Air Bilaterals

Scheduled air services between Canada and other countries are governed by the provisions under the applicable bilateral air agreement some being more restrictive than others.

Canada has over 70 air agreements or arrangements with other countries, each of which is separately negotiated. These agreements specify, for example, whether there are any limitations on the number of airlines from each country that may operate and the possible routings and frequency of such services. These limits may have been imposed by Canada or the bilateral partner pursuant to its own air policies. With few exceptions, all agreements specify that countries may refuse to permit an airline (or airlines) designated by the other state to operate the negotiated services unless the airline is substantially owned and effectively controlled by the designating state or its nationals.

The Committee heard from many stakeholders that they favoured an opening up of these bilaterals so that they would be more in line with what Canada has negotiated with the United States and with what may be negotiated with the U.S. in the future. Airports especially, told the Committee that these bilaterals were outdated and had too many restrictions. For example, it was pointed out that many Canadian airports have limited access to foreign carriers – only 40% of Canada’s bilateral aviation agreements allow foreign carriers access to Vancouver while 90% of these agreements allow access to Montreal and 70% access to Toronto. To help redress this situation, many airport authorities felt that they should have representation on the bilateral negotiating team.

In contrast to this opinion some stakeholders told the Committee that a cautious approach to opening up the bilaterals should take place and that this should only be done on a case-by-case basis where true demand is present.

As is the case with the U.S. Open Skies issue, the Committee intends to conduct further studies on the international bilaterals. We have yet to canvass the views of foreign governments, airlines and other stakeholders on negotiating a new approach to international bilaterals. However, it would seem fair to say that the status quo is not serving the needs of the travelling public and the present agreements are too restrictive in nature.

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Right of Establishment

The Right of Establishment was an issue put forward by some witnesses for further liberalizing Canadian air services. Under this concept, Canadian interests could establish domestic air carriers in the U.S. to feed traffic to their mainline operations at their U.S. gateways. U.S. carriers would have the same right in Canada. Such carriers established in Canada would use Canadian labour and Canadian registered aircraft and would operate according to Canadian safety regulations. Right of establishment exists in Australia, New Zealand and the EU.

Those in favour of this concept cite the fact that Canadian carriers are currently constrained in their ability to attract capital because of foreign ownership restrictions. They believe the right of establishment could increase equity capital for Canadian carriers and increase the level of domestic competition.

Opponents believe that Canadian carriers should largely be Canadian owned and fear that right-of-establishment carriers would only serve the main markets and threaten the viability of existing Canadian carriers.

The Committee is of the view that it requires more information on this subject and intends to examine the experience in other countries with this concept before making a recommendation.

Charter Operators

Charter operators were generally in favour of air liberalization and had the same concerns with airports (in terms of rents and charges) as the scheduled carriers. In fact, we were told that Canada’s restrictive charter rules continue to impose onerous administrative obligations on the carriers and that the rules should be completely liberalized.

The Committee believes that, if air liberalization is to take place, the implications for charter services should be taken into account. We wish to further explore this area, especially as it relates to international air bilaterals before making further comments on this subject.