Competition in the Canada U.S. Transborder Airline Market

1
Competition in the Canada / U.S. Transborder
Airline Market

• Open Skies
• David McAllister
• Charles Schwartzman
• Competition Bureau
• November 21 , 2005
• www.cb-bc.gc.ca
• This presentation was prepared for delivery to a
  class at the the Economics Department at Queens
  University. The comments and conclusions herein
  are those of the presenters.

2
Overview

• History of the industry and deregulation
• International Airline Markets
• 3. 1995 Open Skies Agreement
• 4. 2005 Market Liberalization
• 5. Looking ahead

3
First, a word about the Competition Bureau

• Administers and enforces the Competition Act
• Commissioner of Competition is the champion of
  competition through
• enforcement merger review, criminal cartel
  investigation and prosecution, etc.
• regulatory interventions before boards and
  commissions
• competition policy advice within government
• Bureau very active in the airline sector, strong
  advocate of deregulation and allowing for greater
  foreign competition

4
Evolution of Competition

• Industry began as a virtual Air Canada monopoly
  in the 1930s
• Limited entry permitted (CP Air) in a highly
  regulated duopoly environment
• Consolidation as Air Canada acquired regional
  carriers
• Canadian Airlines arose out of a series of
  mergers
• (CP Air, Pacific Western and Wardair)
• WestJet entered in 1996
• Air Canada acquired Canadian in 1999
• Period of entry and exit CanJet, Canada 3000,
  Roots, Jetsgo

5
Evolution of Competition

• Entry and growth of competitors using the
  low-cost carrier model (WestJet/CanJet)
• Impact of 9/11
• Reorganization or bankruptcy of legacy carriers
• Simplified fare structure (one-way fares, fewer
  restrictions)
• Emergence and growth of the Internet as a cost
  effective means of ticket distribution

6
Deregulation

• 1984 domestic airline policy eased entry
  conditions
• 1987 saw the deregulation of fares, entry and
  exit via the National Transportation Act
• 1988 Air Canada was privatized
• 1995 Open Skies Agreement with the U.S.
• 2005 further liberalization with the U.S.

7
International Airline Markets

• Shaped by three major instruments
• bilateral agreements
• IATA conferences
• airline alliances

8
Bilateral Agreements

• International aviation governed by bilateral or
  multi-lateral air agreements between
  countries/jurisdictions
• Countries have sovereignty over their own air
  space
• Agreements require that airlines be
  substantially owned and effectively controlled
  by the government or nationals of the state
• Hence, foreign ownership restrictions
• 1944 Chicago Convention established the framework
  to govern international air agreements
• Modeled somewhat on marine shipping rules (e.g.
  restrictions on cabotage, terms such as flag
  carriers)

9
Terminology

• Core of the Chicago Convention is the ability of
  countries to extend freedoms or privileges to
  carriers from other countries
• Eight Freedoms
• fly across another country without landing
• land for fuel or maintenance
• unload passengers, mail, cargo
• load passengers, mail, cargo
• fly on from one country to a third country
• carry traffic between two other countries via
  home airport
• operate a stand alone service between two other
  countries
• carry traffic within the borders of another
  country - cabotage

10
Canadas Bilateral Air Agreements

• Negotiated individually with over 70 countries
• Specify origin destination city pairs,
  carriers, frequency of service, capacity,
  pricing regime
• Tariffs are filed with CTA
• CTA ensures that they are just, reasonable and
  not discriminatory complaint based - light
  handed regulation
• Few investigations

11
International Air Transport Association (IATA)

• Members are international carriers
• IATA sets interline fares for international
  travel
• Ticket (fare) is endorsed by all member
  carriers with whom they interline
• Seamless baggage handling
• IATA fare class ticket from Air Canada for
  Toronto-Paris-London
• Passenger can travel Toronto-Paris on Air Canada
  and then fly on British Airways for Paris-London

12
Airline Alliances

• Air Canada one of 16 Star Alliance members
• Code-sharing, equipment-sharing on routes
• Air Canada and Lufthansa will book on each
  others flights for Toronto-Frankfurt
• Subject to scrutiny by antitrust agencies
• Criminal law conspiracy provisions apply
• Test - whether it would lead to an undue
  lessening or prevention of competition

13
Canada / U.S. Transborder Market

• Prior to 1995, market constrained by regulation
• Governments determined
• which carriers could provide service
• which city pairs they could serve
• level of service and prices
• Focus on balancing revenues between carriers and
  ensuring financial stability
• Result was poor service and high airfares
• Air Canada served 14 scheduled U.S. destinations

14
Air Canadas Transborder Route Structure
15
1995 Canada U.S. Air Transport Agreement

• Significant step to opening the transborder
  market to competition
• Key elements
• Multiple designation of carriers
• Open 3rd and 4th freedoms
• No limits on capacity or frequency
• Pricing freedom
• More choice, lower airfares, better service
• Over 50 increase in traffic in first six years
• Air Canada now serves 49 U.S. destinations
• But not a full open skies agreement

16
Transborder Route Structure
17
2005 Open Skies Agreement

• U.S. had broader open skies agreements with 72
  other countries
• 1995 agreement now expanded to include
• Open 5th freedoms, e.g.
• Air Canada Toronto - Los Angeles Tokyo
• American Airlines Chicago Montreal Paris
• 3rd country pricing freedoms,
• Cargo 7th freedom rights, e.g.
• Air Canada Chicago Mexico City
• American Airlines Toronto Mexico City
• Co-terminalization for trans-border cargo , e.g.
• Air Canada Toronto Chicago Denver
• American Airlines Denver Calgary Edmonton

18
Looking Ahead

• Recent agreement is important, but represents
  incremental change
• Minister has also announced that foreign
  ownership limits on Canadian carriers may be
  raised from 25 to 49
• Potential future pro-competitive steps would
  include
• cabotage (the right to operate domestic air
  services in the other partners territory)
• right of establishment (right to establish an air
  carrier in the territory of the other partner to
  operate domestic services)
• common North American aviation market (free trade
  in air services)

19
Conclusions

• Deregulation and competition have proved
  beneficial to consumers
• Canada and the U.S. lagging behind Europe and
  Australia/New Zealand which have created a common
  aviation markets and allowed foreign owned
  carriers to operate domestic services (e.g.
  Virgin Blue)
• Resistance from airline unions, U.S. Congress and
  concern about the financial stability of the
  industry suggest that bolder steps toward a true
  open skies model will not occur quickly