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STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 28, 1999

• 1533

[English]

The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good afternoon, colleagues.

We want to welcome to the committee Professor Rod E. White. He's with the Richard Ivey School of Business at the University of Western Ontario. He will be making a presentation to our committee this afternoon.

Mr. White, welcome. We look forward to your remarks.

Colleagues, this was in part my fault in scheduling. Mr. White had been scheduled to appear later, but we had a hole to fill, so Mr. White graciously said yes to coming before us this afternoon. We only have the document in English, so it won't be disseminated to the members until it is translated. Of course, the translation will occur as Mr. White reads the document, so I invite you to listen in on your earpieces. As I say, it's just a lag in time that we've had to get the translation done.

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): On a point of order, Mr. Chairman.

[English]

The Chair: Yes, Mr. Guimond.

[Translation]

Mr. Michel Guimond: Mr. Chairman, may I remind you that the rules we adopted just last week about documents tabled by witnesses did not specify, contrary to what you said, that documents would be translated in any event once the witnesses give their presentation. We said that each person who appears before us must have a brief in the two official languages of this beautiful country called Canada, as you put it.

Could you ask for unanimous consent in case the witness might want to...

Oh! I think I'm off-target here. He didn't table his brief because it is in English only. Fine.

[English]

The Chair: Thank you, Mr. Guimond.

Mr. White, when you're comfortable, please proceed. We allow 10 to 12 minutes so that we can ask questions.

Professor Rod E. White (Individual Presentation): Thank you, Mr. Chair.

• 1535

I would like to thank the committee for the opportunity to appear here today. My apologies for not having the document available in time to have it translated. The situation is changing so quickly that I was in fact adjusting my comments last night.

It might be helpful if I provide you with some of my background and the basis for my familiarity with the airline industry. I am a professor at the Richard Ivey School of Business at the University of Western Ontario, where I teach and do research on corporate and business strategy. My involvement with the airline industry began some 15 years ago, just as the industry was anticipating deregulation. At the time, another faculty member and I felt it would be instructive to study the strategies the firms would use as they adapted to this major change in their environment. Because our school had a relationship with Rhys Eyton, then CEO of Pacific Western Airlines, we approached him and asked if PWA would participate in an ongoing case study. He agreed, and in 1985 we produced a case study describing PWA's strategic position and options at that time, as well as a note describing the Canadian airline industry more generally.

As the industry changed and evolved, we rewrote and updated these materials several times. PWA, and after it became Canadian Airlines, participated throughout this process. The most recent version of this material was done in 1996. I have followed the strategies of Canadian Airlines, Air Canada, and the industry more generally throughout this time. I would be happy to provide the committee and its staff with all of the materials we have developed at the Ivey School of Business related to the airline industry. It is an interesting and in many ways an informative history.

My own interests and expertise are in business strategy and the strategic actions of companies and how these actions affect their performance and the evolution of their industry. The strategies of Air Canada and Canadian Airlines have proven fascinating during the years since the deregulation of the airline industry.

For the balance of my statement I would propose to review some of the past strategies of the key players so that we can better understand how the current situation has come about and use that understanding to better appreciate where things currently stand and how the situation might evolve. I will then be pleased to respond to your questions.

Canada now faces the prospect of a dominant air carrier for regularly scheduled passenger service. This dominant carrier may be led by the Air Canada group or the Onex-Canadian Airlines group, but it will upon its formation be an effective monopoly.

Was this situation inevitable? Should it have been possible to anticipate and therefore perhaps avoid this outcome? I believe the answer to this question is no. This outcome was not inevitable. Indeed, it was the result of the actions and strategic choices made by the key companies involved, principally Air Canada and Canadian Airlines. They have chosen to engage in a prolonged competitive battle with one another that has resulted in the situation we face today. It was not the inevitable result of government policy. It was the result of company decisions. They could have made other choices that would have yielded a different and perhaps more agreeable result.

It could not have been anticipated in the mid-1980s when the government of the day deregulated the airline industry that we would end up where we have. Reviewing a few of the major strategic decisions may help to illustrate this point. Following deregulation in 1986, Pacific Western Airlines negotiated the purchase of Canadian Pacific Airlines, which included at the time Eastern Provincial Airways, Nordair, and Quebecair in eastern Canada. In combination with PWA's regional strength in the west and CP's transcontinental routes, this grouping, which came to be called Canadian Airlines, challenged Air Canada on all of its domestic routes. Subsequently, Canadian Airlines acquired Wardair and with it some trans-Atlantic routes, thus extending the competitive challenge into Air Canada's most valued international territory. Canadian Airlines chose to challenge Air Canada on almost all fronts. It could have chosen to do otherwise. Did Canadian Airlines think Air Canada would not respond? Would Air Canada cede their dominant position to Canadian Airlines without a fight? Air Canada's retaliation was highly predictable.

As an aside, it is interesting to note that in 1986, prior to acquiring Canadian Pacific Airlines and going into direct competition with Air Canada, PWA was Air Canada's ally in western Canada. PWA provided the western regional feeder network for Air Canada. At the time, PWA and Air Canada were actually negotiating a deal that, had it been completed, would have made PWA Air Canada's national feeder airline. PWA would fly narrow-bodied jets in all regions of the country and feed Air Canada's wide-bodied aircraft flying transcontinental and international routes. These negotiations ended abruptly when Pacific Western consummated a deal for the purchase of Canadian Pacific Airlines. No doubt Air Canada felt a certain resentment towards its former erstwhile ally turned major competitor.

• 1540

Air Canada did not respond immediately to the emergence of Canadian Airlines as a major competitor. They had other priorities at the time, the most significant being their successful privatization. Air Canada emerged from the privatization process with a healthy balance sheet and a willingness to use this strength to attack Canadian Airlines on all fronts, even if its own profitability and share price suffered as a consequence. Air Canada added aircraft and capacity across the board, most significantly in western Canada, Canadian Airlines' heartland.

Eventually, Air Canada also gained access to some lucrative trans-Pacific routes, an area of the world where Canadian Airlines had traditionally served as Canada's exclusive flag carrier. As a result, Air Canada's load factors fell almost ten percentage points over this timeframe. Its profits were marginal, but the strategy was working. Canadian Airlines was cutting capacity in a vain attempt to increase load factors and profitability, but still Canadian Airlines was faltering.

Canadian Airlines, stretched financially by its earlier acquisitions of Canadian Pacific and then Wardair, was losing even more money than Air Canada. By the mid-1990s, Canadian Airlines was clearly on the ropes, and pleaded with Air Canada to stop adding capacity. Canadian Airlines even went so far as to ask the government at the time to reregulate the industry. The government took no formal action and Air Canada continued its attack on Canadian Airlines. What we have now is the endgame resulting from the decisions made by these airlines over the last dozen years or so.

What this situation describes is two competitors who have chosen not to reach a stable, competitive equilibrium. There was nothing inevitable about this outcome. It could have been otherwise. PWA and Canadian Airlines chose to assemble an overleveraged airline and challenge Air Canada across the board. Air Canada has chosen to continue to add capacity and routes and drive Canadian Airlines continually closer to the verge of bankruptcy, even though Canadian Airlines has asked repeatedly for an entente and Air Canada's own profits have been anemic at best.

Had they made different choices, we could have had a very different outcome. This is especially true of Air Canada's choice to continue the intense competitive battle with Canadian Airlines during the last six or seven years. Had Air Canada chosen to be less aggressive and allowed Canadian Airlines to survive, the industry would have had two viable air carriers and Air Canada could have been more profitable, with a much higher share price. In this sense, Air Canada's behaviours can be described as predatory. Through its actions, it has driven a competitor to the edge of bankruptcy.

No doubt the surprise for Air Canada was that Canadian Airlines did not slip quietly into oblivion while offering up its international routes to Air Canada at a bargain price in the process. Rather, Canadian Airlines, in conjunction with Onex, managed to assemble what amounts to a reverse takeover bid for Air Canada.

There are a number of instructive lessons from this history. Let me just point to one or two that may prove helpful in the committee's deliberations.

First, there is the 10% rule as it relates to Air Canada share ownership. This has been receiving a great deal of attention. This rule may have indirectly contributed to the difficulties of Canadian Airlines. If Air Canada had had a large shareholder who was able to exert more control over Air Canada's management, then profitability and share price appreciation may have been higher priorities. Less emphasis might have been given by Air Canada's management to capacity expansion, enhanced rivalry, and the extinction of Canadian Airlines. Shareholders with large blocks of shares can better attune management to shareholders' interests. In this instance, I believe, shareholders' interests and the public interest would have coincided.

The public policy objective of share ownership limits for specific commercial enterprises has never been clear to me. Having only one company in an industry protected by statute from takeover is not a level playing field in the market for corporate control. Who would be harmed by relaxing the 10% rule? Certainly not the existing shareholders of Air Canada. Furthermore, by preventing a large shareholder from having influence, that influence is de facto conferred upon the management of the company. How is management control of a company better than a large shareholder controlling a company? Arguably, in this case the 10% rule has not been beneficial to shareholders, nor to the maintenance of competition in the Canadian airline industry.

• 1545

Secondly, I would like to speak about effective Canadian control. As this industry illustrates with its alliances and service contracts between carriers, control is a slippery concept at best. Much has been made of the relationship between American Airlines and Canadian Airlines. To a large extent, their relationship is a normal commercial relationship: just good business practice between two transborder partners.

The more burdensome parts of the relationship began in 1992. At that time, Air Canada walked away from a merger deal with Canadian Airlines, and Canadian Airlines—in serious financial difficulty even then—negotiated financing from American Airlines. American Airlines quite naturally drove a hard bargain, and the financing required Canadian Airlines to enter into various service contracts. But had American Airlines not come through with the capital infusion, Canadian Airlines would have again confronted bankruptcy.

Would it have been in the public interest at the time to prevent the capital infusion from American Airlines on the grounds that it compromised effective Canadian control? Canadian control may be a desirable principle. It is much more problematic in practice. Should the committee decide to pursue this principle, I expect that writing legislation to define effective Canadian control will prove exceedingly difficult.

The third point I would like to make is that the strategies of companies generally change slowly. There is a certain constancy and consistency to the strategies of both Canadian Airlines and in particular Air Canada. This consistency can be seen in the proposals being put forward by the two contenders. I understand it is not the role of this committee to evaluate these specific proposals; however, it might be helpful in your deliberations to briefly explore how the strategies of the two major players are reflected in their proposals.

Although the government may make whatever demands it deems appropriate, the parties involved will naturally be more willing to accommodate those demands that fit most easily with their strategic intentions.

I would just caution the committee that this size-up is based only upon public statements. I've had no direct contact with the parties involved.

Let me begin with the first of the five principles, that of no price gouging. To my knowledge, Air Canada has not committed to price stability should their proposal go forward. This is understandable, since they plan to keep most of the capacity of the two merged airlines, and achieving cashflow and profits needed to pay for the merger can only be done by raising fares. Through public statements, Onex has given some assurance of price stability but has not indicated how this assurance would be monitored or enforced.

It is important to look not only at the price of the service but also its availability. Price is irrelevant if the service is not available at a convenient time and place. For airlines, availability is measured in terms of capacity and load factors.

On the question of capacity or load factors, the Onex proposal calls for aggressive restructuring of the system—reducing what they describe as redundant service—and thus driving up load factors and therefore the profitability of the merged airline. However, Onex has also indicated that they will maintain the existing access of communities to the air transport system. These actions are quite consistent with the strategy of Canadian Airlines before the merger was proposed. Air Canada has stated that it would streamline the system, but it does appear that they intend to cut capacity as dramatically as Onex. Employment and capacity go hand in hand; consequently, the Air Canada proposal calls for fewer employment reductions.

The recent letter from the Competition Bureau to the Minister of Transport lays out a number of actions that could be required of a dominant merged carrier in order to foster renewed competition. This report is very well done, and it should serve as a touchstone in the committee's deliberations. To my knowledge, neither of the two contenders has indicated which, if any, of these provisions they would be willing to accept voluntarily.

Apparently, the Onex proposal would form a single, dominant carrier, with all service consolidated under the Air Canada brand. Clearly, such a carrier could use its market power to dominate much of the industry. However, niches for low-fare carriers like WestJet might still exist. Air Canada has proposed to maintain both the Air Canada and Canadian Airlines brands and add a new low-fare carrier based in Hamilton. To my mind, this proposal has the potential to be more anti-competitive than having a single-brand dominant carrier. These three brands would give the consumer the impression of choice, but these different brands could in fact be positioned and coordinated in such a way as to deter competition while maximizing price and revenues at the same time. Coupled with past conduct, this proposal raises serious questions about Air Canada's willingness to assist in fostering competition.

• 1550

In summary, this examination suggests different relative strengths and weaknesses between the two competing proposals and how they adhere to the five principles put forward by the Minister of Transport.

On balance, I believe the reintroduction of competition in the domestic airline industry is the imperative.

A concerted effort to reduce the barriers to entry in this industry would have two benefits. First, it would limit any newly merged dominant carrier from increasing prices and/or reducing service. Second, new players might actually enter the industry and reintroduce competition and reduce the need for the regulation of the dominant carrier. Entry of new competitors cannot be guaranteed, but it should be encouraged.

At this point it is not clear which of the contenders will be most willing to engage the principle of fostering competition and the specific remedies proposed by the Competition Bureau. But to the extent that this committee can clarify the intentions of the parties involved, the Government of Canada will be better able to judge which proposal is best aligned with the interests of Canadians.

I thank the chairman and the honourable committee members for their time and attention. I hope you have found my comments helpful and I would be pleased to address your questions.

The Chair: Thank you very much, Professor White. Actually, your comments are very insightful.

Now we'll begin with questions from my colleagues, beginning with Ms. Val Meredith.

Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair, and thank you, Professor White.

It was interesting to go through a history. It was almost a feeling of, oh no, are we ever going to get beyond this? Your historical presentation shows that this kind of competitive aggressiveness has been ongoing forever. When I look at this proposed merger, either the Air Canada merger or the Onex merger, you're talking about taking these two cultures on these two different airlines and getting people to work together for the good of the travelling public. Do you feel it's possible at the end of the day for these two companies to merge their organizations and come up with a company that's working focused and working together?

Prof. Rod White: I think that will be a difficult challenge for the management, whoever it is, of the merged entity. The history suggests, again, that this would be the case. I hope I didn't bore the committee with too much history on this, but Canadian Airlines, with the merger of Wardair, for example, experienced considerable difficulty bringing together the employees in a coherent fashion between those two merged airlines. So this is a substantial management challenge. I think it will be a doable proposition, but it will be a difficult proposition.

Ms. Val Meredith: We've heard over a period of, I don't know, a month, a month and a half, two months, that Canadian is in the position they're in by their own corporate decisions. In your historical presentation, would you say that's a fair assessment, that Canadian asked for this to happen?

Prof. Rod White: I hate to give the academic's response of yes and no, or on one hand and the other hand, but in looking at the strategy that was pursued by Canadian Airlines early on, they did make the assumption that they could enter into direct competition with Air Canada and come out on top. That assumption proved to be invalid.

I don't know, however, that this excuses the subsequent behaviour of Air Canada, in the sense that they have pushed the rivalry, competition, between the two airlines right to the very limit. That might be acceptable if, during this time period, Air Canada had been profitable and had a rising share price. It has not had that. It has not been able to compete successfully with.... It has competed successfully with Canadian Airlines; it has not been able to do that and at the same time perform at the level shareholders would expect.

Ms. Val Meredith: Tell me if there is an international experience where you have airlines competing with each other without this end result.

Prof. Rod White: Actually, the U.S. airline experience is such that they have in fact been able to compete and reach a reasonably stable and profitable equilibrium.

They obviously had deregulation earlier than Canada. Following deregulation their industry went through a very unstable period, but they managed to in fact, through a variety of strategic moves, which I'd be happy to go into if you want to go down that road, reach a situation in the interaction between the competitors whereby in fact they have arrived at a competitive yet profitable equilibrium. Canada is different from the United States in some significant ways, but that industry did sort itself out.

• 1555

Ms. Val Meredith: Canada is quite similar to Australia in population and distances airlines have to travel, and yet I understand Australia has two competing airlines that are both making a profit. How can they do it and ours can't?

Prof. Rod White: There you see the idiosyncrasies of strategy. There are a number of potential explanations for that. One is, quite candidly, the animosity between the two carriers. They are at each other and not willing to let each other survive and be profitable.

Ms. Val Meredith: So you're saying it's the animosity in the Canadian airline industry, not the Australian.

Prof. Rod White: Well, since Air Canada has in recent history been in the driver's seat in the sense of being the stronger of the two competitors, it is they who have driven it to this state of affairs. Canadian Airlines, I believe in 1993, through Rhys Eyton and effectively through the press, asked Air Canada to manage their capacities down. That having failed, they then actually asked the government to reregulate the industry, and that reregulation would have been to limit capacities and allow for the profitability of both carriers.

Ms. Val Meredith: Thank you, Mr. Chair.

The Chair: Thanks, Ms. Meredith.

Mr. Fontana, please.

Mr. Joe Fontana (London North Centre, Lib.): Thank you, Mr. Chairman.

I too want to applaud the presentation, Rod, from a great school in London, Ontario—one of the best in the world, right, Rod?

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Between Hamilton and London.

Mr. Joe Fontana: To tell you the truth, I would have appreciated this briefing at the beginning of our meeting, because the historical perspective on what was happening between the two airlines could have given us some additional food for questioning to both Mr. Benson and Mr. Milton.

I really appreciated the assessment of both offers as they relate to the public interests we're trying to deal with. In the five categories, you did a very nice job of being able to say where the Onex proposal was coming from and where the Air Canada proposal was coming from, and what that was going to mean for pricing and service as well as those other employees and Canadian control. I appreciated that. We might ask you to do some more of that, because as we speak, the Onex proposal is being changed, so I'm sure between now and November 8 Air Canada is going to do something else too.

It must be getting pretty confusing for the shareholder. But to tell you the truth, I don't care about the shareholders who buy Air Canada and Canadian. I care about the shareholders who are the Canadian people, who essentially are left to have us make that decision to guarantee that they're going to have fair pricing and competition, that employees are going to be protected, and especially that regional communities are going to be served.

You said this is going to be an effective monopoly, when these two airlines come together. Tell me whether, in the real world, an effective monopoly can really guarantee good pricing, because Canadians are really ticked off with airfares as they are now; competition; and capacity, especially to the regional carriers or regions of this country. And can a monopoly really protect those jobs? Unless you have some ironclad guarantees in legislation, how can they guarantee an effective monopoly?

Prof. Rod White: That's in fact the mandate of this committee. You can't rely upon a monopolist not to exploit their advantage.

That being said, there is a role in having the contenders to this process state their positions on the issues of public interest. Would they be more or less inclined to voluntarily move in the directions of which of the principles?

• 1600

The people of Canada and the government have to have some process for following up on those assurances. You can't leave it to the good intentions or stated intentions of the merged dominant carrier to in fact follow through on all of those.

Mr. Joe Fontana: So over and above the commitments one company makes to the other's shareholders, there comes a next step, and that's how to make sure those commitments on the five public interests can be so constructed, by a binding agreement either to the people of Canada or to the Government of Canada, that they in fact will stabilize prices or reduce prices, guarantee some service to the areas, and guarantee jobs to those affected, both Canadian employees and Air Canada employees. What you're saying is the government needs some safeguards.

Prof. Rod White: Yes. I don't know the different statutory authorities of the entities involved, but certainly some undertakings by the dominant carrier and a mechanism to enforce those undertakings would be required.

Mr. Joe Fontana: You touched on the 10% rule, which we are looking at. You said it was probably wrong then, because it did absolutely nothing for the equation, and it's probably wrong now to continue a 10% single-shareholder threshold.

Prof. Rod White: Yes. It wasn't necessarily good public policy at the time of the privatization of Air Canada. In fact, as I outlined in my remarks, it may have contributed to the situation that has led to Canadian Airlines' difficulties, because had Air Canada had a dominant shareholder, then profitability and share price may have been more important than getting into the intense, competitive battle with Canadian Airlines.

Mr. Joe Fontana: I'm happy you discussed Canadian control, because that's a misnomer. We tried to talk about defining what effective Canadian control would be, because one could have an awful lot of foreign investment, as we've heard. Even the Air Canada proposal says the American alliance people are bringing $900 million to the table and don't want anything for it. They don't want equity; they don't want anything. That's nice. By the same token, somebody else—American, for example—could have helped Canadian down the road by giving all kinds of these things in order to gain some strength.

There is this 25% rule. I know the government, or at least the minister, says it's not there. If we were to construct new public policy, do you think the 25% foreign ownership...? Maybe that's a misnomer. Maybe it should be foreign investment in Canadian ownership. The Competition Bureau talked about raising that 25% to as high as 49%. The government could do it now. What are your views on the 25% foreign ownership? What degree of foreign ownership or investment could you have but still maintain Canadian control? That's essentially what we'd like to do.

Prof. Rod White: This case actually illustrates the difficulty of assuming that equity ownership can be associated with control. In fact in these global enterprises—that is, these global alliances of air carriers—there are so many relationships that go beyond just equity ownership that effective control can be exercised through these other types of relationships. Service contracts, maintenance contracts, and all of those kinds of agreements allow for substantial control that is essentially unrelated to equity control. So you get into the difficulty of defining what control is, and I don't think you can simply say a measure of equity will do that for you.

Mr. Joe Fontana: Then is it important to have any 25% rule or any control rules, as long as at the end of the day it's a Canadian corporation and you can define it as a Canadian corporation in some way, shape, or form? Can you give us some guiding light as to the approach one might take in order to achieve this? Essentially what you're saying is having the 25% rule is ridiculous or redundant, because you can exercise control not by equity but by debt and in other ways.

Prof. Rod White: Pragmatically it is very difficult to put mechanisms in place to limit control by foreign parties in this industry. Those are the pragmatics of the situation. It would be very difficult to do so.

The Chair: Thank you, Mr. Fontana.

Mr. White, can you name a couple of ways you can have that kind of control without a 25% rule?

Prof. Rod White: I'm sorry, Mr. Chair. The ways—

• 1605

The Chair: You said that instead of a 25% rule, there are other ways of ensuring Canadian control. Can you give us a couple of examples?

Prof. Rod White: There are other ways in which foreign entities can exert control over Canadian-based airlines. In fact, the difficulty is that there are so many ways in which they could in fact exercise control that for Parliament to try to limit those, it would get Parliament into basically the nitty-gritty of commercial contracts between airlines that are based in Canada and, in most instances, their global alliance partners.

The Chair: Maybe I'm misunderstanding something. We are dealing with the 25% rule that Mr. Fontana speaks of that is there to protect, to give effective control of an airline to Canadians. You're saying to Mr. Fontana that there is no need for the 25% rule because there are other ways of holding control of the airline without the 25% rule.

Mr. Joe Fontana: Not holding control.

The Chair: Or not holding control.

Prof. Rod White: I'm sorry if there is confusion about which side it is that we are speaking of.

The Chair: Thanks, Mr. White.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond: Thank you for your presentation, Professor White. I think your testimony has a great deal of credibility, because as a university professor, you are not paid by Canadian, Air Canada or Onex. You are what we usually call an expert witness, in court trials.

I would like to hear your opinion on the following matter. We are talking about a merger between two large Canadian companies, one with 17,000 employees and another with 20,000 or 22,000 employees, depending on the figures. We are not talking about two self-employed people who decide to work together under the same corporate name. This is a large merger.

A while ago, at 2:55, the president of Onex said in a counter- offer he made that in his opinion, we should move quickly and that the government should not submit his offer to the Competition Bureau for review if the Air Canada shareholders accepted it. Professor White, as a Canadian citizen and as an expert witness, you must certainly realize what Onex is asking for. Onex is asking for some kind of fast track.

[English]

The Chair: Mr. Guimond, just as a point of correction—

[Translation]

Mr. Michel Guimond: Yes.

[English]

The Chair: —the proposal, when accepted by the shareholders, will be examined by the Competition Bureau and the CTA. That's what the minister said.

[Translation]

Mr. Michel Guimond: Mr. Schwartz has asked for the fast track. He has asked that the Competition Bureau review things quickly.

[English]

The Chair: He can ask all he wants, but the minister stated here that it will go through a full Competition Bureau examination and a full CTA examination.

[Translation]

Mr. Michel Guimond: In any event, what is the Competition Bureau's role here? Do you think that in the case of a deal as big as this one, the Competition Bureau should play its role effectively? On Tuesday you saw that the Minister is thinking of grabbing extraordinary power to regulate and to table bills that could weaken or affect the Competition Bureau's role. Do Canadian consumers have to make sure that the Competition Bureau can carry out its role fully and effectively?

[English]

Prof. Rod White: The proposals that are coming forward do in fact create an effective monopoly carrier for regularly scheduled passenger service in Canada. As such, they certainly should be subject to intense scrutiny by the Government of Canada and its agencies in that regard.

• 1610

The fostering of competition, to my mind, should be one of the principal imperatives in this regard. If we have five principles, I would put that as number one. The process the government chooses to go through in engaging that review is up to the minister, Parliament, and this committee.

[Translation]

Mr. Michel Guimond: Professor White, in response to another question, you mentioned the example of U.S. Airways, which merged which Piedmont Airlines, if my memory serves me well. Let's take the example of the pilots. Did the two groups of pilots belong to the same union? I can guess the answer, but I'll explain to you what I'm driving at.

Do you see any problems—you talked about this a little bit—with combining the seniority lists if Canadian and Air Canada merge, particularly the pilots' seniority lists. On one hand, the Air Canada pilots belong to the ACPA. Their collective agreement has very clear provisions that specify that in the case of a merger, new pilots will go to the bottom of the seniority list. On the other hand, the Canadian pilots belong to CALPA. Do you expect problems when the time comes to combine the seniority lists?

[English]

Prof. Rod White: I should put forward that I'm a strategy expert, not a labour relations expert. I think, however, that it can be resolved. In the greater scheme of things, yes, there will be difficulties, but they will not be insurmountable difficulties. As much as the parties involved are making undertakings to shareholders in this process—and I believe that, as it is in fact unfolding, they are making their positions on public policy issues more clear to the Government of Canada and this committee—I believe they are also negotiating with the unions involved. In that process they will sort out the kinds of issues that you described—those of relative seniority in the merging of seniority lists and those kinds of things—in a way that, if not agreeable, can at least be resolved amongst the parties concerned. So while it is an issue in any merger, it is typically not an insurmountable issue.

The Chair: Thanks very much, Monsieur Guimond.

Mr. Comuzzi, please.

Mr. Joe Comuzzi: Thank you, Mr. Chairman.

Professor White, I was very impressed with your submission and more particularly with your bringing us up to date. As someone else mentioned a few minutes ago, the historical background would have helped us a lot in the last two or three days in terms of trying to assess whatever we're trying to do. I'm not sure yet what we're trying to do, but we'll get to that eventually.

I don't buy the concept that we hear at this point in time that there will end up being a dominant carrier. When I hear “dominant carrier equals monopolistic”, there's no.... I think you alluded to that.

I still am optimistic. Somewhere along the line, Canadian and Air Canada have to sit down, as the two airlines in Canada looking after the best interests of Canadians, and hammer out a deal, without any government interference or without any third-party interference.

Having said that, you didn't address the issue that if there is a dominant carrier—and there must be competition in the airline industry—cabotage may be an alternative to providing competition within the Canadian airline system. I'd appreciate your comments on that.

• 1615

Prof. Rod White: On the question of cabotage, there are a number of issues. Perhaps the largest one is the question of reciprocity, and it's something that's been raised before the committee before. Giving U.S.-based carriers access to Canada when Canadian-based carriers do not get reciprocal access into the U.S. is not the kind of negotiating position you want to be in if you are in these international trade-service kinds of negotiations. I think that is perhaps the largest issue.

In my view, a dominant carrier in Canada, one formed by a merger of Canadian Airlines and Air Canada—and this is a judgment call—could probably survive even full cabotage rights if we had reciprocal access to the U.S.

Mr. Joe Comuzzi: Reciprocity, then, would be the criteria by which to analyse—

Prof. Rod White: If we did not have reciprocity, the Canadian-based carrier would have one hand tied behind its back by the U.S. carriers having cabotage into Canada and our carrier, the Canadian-based carrier, the dominant carrier, not having reciprocal access into the U.S. Reciprocity becomes a very big issue in this.

Mr. Joe Comuzzi: Thank you.

I have one final question, Mr. Chairman, and I guess it may be more philosophical. That's what we do at school, isn't it?

We've heard about reciprocity, plus the international route acquisitions that we give to the two major carriers. In our terms, when we as a government give out what I call a privilege to fly to certain areas that have been negotiated by the Government of Canada, when that right is not used or can no longer be used, should that privilege that was given out by the people of Canada return to the people of Canada, or should that privilege then be allowed to be sold in the open market? Government largesse is what I'm talking about.

Prof. Rod White: Yes, it's an interesting question of property rights. I suspect my answer is that if the government in fact sold those rights to begin with, they would in fact become the property of whoever purchased them. The fact that the government chose to give them away at no cost raises the questions of whether that then means they should in fact revert, as you raised, or whether they had no value, little value, or marginal value when they were in fact conferred upon that party.

You would almost have to look at them on a case by case basis. We're talking about international routes. Air carriers quite often operate those routes at a loss during the initial years in order to develop the market. What was the value of them when they in fact were conferred upon the carriers by the government? That's an interesting question. If the government had asked them to pay for the routes and we had competitive bidding and a market for those routes, we would know the answer to that question, but we don't know.

The Chair: Thanks, Mr. Comuzzi.

Ms. Desjarlais, please.

Ms. Bev Desjarlais (Churchill, NDP): Actually, I just have a comment and a couple of questions.

You've indicated that what has happened could not have been anticipated. To my knowledge, however, the type of scenario we're in today was anticipated by a number of different people and groups at a time when deregulation was coming into place.

You did indicate, too, that there was a lot of head-butting going on between the two airlines for a period of time and that the government chose to take no formal action. What type of action should the government have taken at that time?

Prof. Rod White: That's a very delicate question. You're talking about the nature of competitive relationships between two players, and the government is reluctant—understandably so, I think—to get in the middle of those kinds of situations.

Ms. Bev Desjarlais: I'm curious as to what your opinion is. You made the comment that they took no formal action.

Prof. Rod White: That's correct.

Ms. Bev Desjarlais: So what type of action would you have seen them taking to address the situation?

Prof. Rod White: They could have—and perhaps they did attempt to—sent signals to Air Canada. One of the issues in this is that there are not, to my knowledge, many direct levers that the government can actually exercise here. While I would and did characterize what Air Canada did as a predatory practice, I do not think it is something that could actually be prosecuted under our anti-competition laws. So the government is left asking what the options are.

• 1620

My comments were specifically related to the request by Canadian Airlines for reregulation of the industry at that time. That would have been a substantial and precipitous move on the part of the government.

Ms. Bev Desjarlais: You also made the statement that reregulation would have ensured profitability for both airlines, so I'm wondering what the heck we're all arguing about here. If we're worried about competition with one airline, you've made the statement, with the wisdom of your knowledge and education, that reregulation would have ensured profitability for both airlines. We also have a number of people who will still sit here and defend the fact that deregulation was the answer, including the Competition Bureau, which saw Canadian Airlines' position as a success story.

Prof. Rod White: Might I respond?

In my comment, I was trying to make it clear that these companies made choices that have resulted in this outcome and that they could have in fact made other choices. I think one of the questions now before this committee may be whether we are going to reward the kinds of behaviours of the companies involved that have resulted in the situation we are in today. They have presented us with a situation in which we are presented with a de facto monopoly. I suggest that Parliament should think very carefully about that, because if you reward anti-competitive behaviour in this process, you will encourage it down the way. Reregulation or the regulation of the dominant carrier may in fact be a policy option for the government, or it may be a required policy option for the government given the circumstances we now confront, but it could have been otherwise.

Ms. Bev Desjarlais: But it wasn't, and it went on for a number of years, to the point of dollars going into one, employees taking wage cuts, and all the anguish we're going through today, all for the sake of maintaining that deregulation is the answer to everything. If, through some reregulation for whatever carriers are out there—I'm not just talking the dominant carrier—we have the same rules out there that say they abide by these rules or we do this, this and this, why aren't we doing it? Why are we risking a monopoly airline if we don't have to do that?

The Chair: The rest of the world has a monopoly airline.

Ms. Bev Desjarlais: No, I'm accepting this gentleman's comment—

The Chair: Order, order. Let's not do any crossfire. Ask your question to the witness and then your time is up.

Ms. Bev Desjarlais: Okay, my question is why we would not consider that. Why would we not consider reregulation?

Prof. Rod White: I think reregulation has to be considered with the emergence of a dominant carrier. The structure of that reregulation is an interesting question on its own, whether or not Parliament and the Government of Canada decide to just regulate the dominant carrier that emerges from this process or whether they choose to attempt to reregulate the entire industry.

The Chair: Thanks, Mr. White.

Mr. Dromisky, please.

Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): I find your point very interesting regarding competition, Professor White: that you would put it right at the very top of the list. Yet we have two companies that have been really competitive for a few years, and it's that spirit of competition that has really brought us to the mess we're in today.

We could end up with a dominant monopoly and another company could move its way in little by little and be competitive. Sooner or later, the more dominant company, or one of them, the one that's the most successful, will destroy the other one, and we'll be back in a position very similar to the one we're in today. It becomes a vicious circle, doesn't it? It goes round and round, of course, unless legislation is introduced to prevent that cyclical kind of pattern of destruction in the competitive environment with two major carriers.

Of those five principles that were mentioned by the minister—and I think you're aware of them because you mentioned them when you talked about them—you put competition first, but I'm very concerned about the others, too, and especially what the customers have to pay.

• 1625

I got the feeling from your presentation that there are weaknesses in both proposals—weaknesses to the point where, because we didn't ask the right questions at this committee level, the leaders of both companies have avoided presenting to us bits of information and a different viewpoint of any aspect of these five principles you have presented to us today.

So I'm left with a feeling of uneasiness. I'm saying to myself “Dromisky, don't trust them”. Maybe there's a heck of a lot more that we have to search for in order to try to get a more truthful picture of what each one of those companies is really proposing, to us and to the Canadian public.

My perception, in light of what you have said and what everybody else says.... I know you've been following this. Do you think there's some truth in it?

Prof. Rod White: I'm sorry?

Mr. Stan Dromisky: Do you think there is some truth in what I'm saying?

Prof. Rod White: I'm very sympathetic with your observations, and in fact the declarations the contenders have been making have been, at least initially—and understandably—principally directed toward the shareholders. But there is the public interest in this as well, and there are the five principles that have been declared. I think it is a reasonable expectation to have them address how they will deal with the five principles, how they propose to. And in fact to a degree they are doing that. But to the extent that this committee can get even further clarity on those principles, I think that will only assist the process, because to the extent that they are prepared to address these principles voluntarily, I think that's desirable. I also think they should think about how these principles should be monitored and followed up.

So Parliament has to decide that, but I think it's important to have the contenders, the parties involved, declare their positions on those issues and principles.

Mr. Stan Dromisky: I'm concerned, Dr. White...I'm not a corporate lawyer. I know there are all kinds of rules and regulations in that world so that when a monopoly operates, they can, using their own language and their own codes, come up with a position where they say, I'm sorry, we're going to have to cancel flights to those five communities. These are the facts. We can't maintain them. And there's nothing we can do about it. That's business. Why should we send a plane to this community simply because the chief executive officer of one of the airline companies said we will send a plane to every one of the communities that is receiving service right now? The day might come where they get one or two passengers a week, and they'll say to heck with it, we can't do that any more. But they'll make a decision contrary to what they have told us and what we have accepted as being the truth.

Prof. Rod White: In response to that, I think the parties involved are responding to the public interest as it has been defined by this committee and the Minister of Transport. But further clarity on that from them would be desirable, as would some direction, some thoughts from their perspective, on how that could be enforced, because enforcement will become an issue.

As was mentioned earlier, I don't think you can rely upon the...and as you suggest, situations can change and there will be arguments put forward for why they need to adjust the agreement. So any agreements struck between the successful dominant carrier and the Government of Canada to protect the public interest will have to have some form of review process, because I don't think you can accept that something can exist forever. But it will have to balance those public interests against the commercial interests of that dominant carrier. That effect is reregulation.

The Chair: Thank you, Professor White.

Mr. Casey, please.

Mr. Bill Casey (Cumberland—Colchester, PC): It's interesting that you said that market decisions by the companies have got us where we are today, and the minister has said he's going to leave this decision up to the market to decide. I don't know if that's good for the future or not.

• 1630

There seem to be two major issues. One is public policy to serve the country and the other is the commercial decisions. What seems to be happening is that the commercial decisions are driving the public policy. It seems to me it should be the other way around. The public policy should be established and the proposals or whatever be drafted to comply with public policy. But it's happening the other way around. The proponents are establishing public policy, or the public policy has to be established to fit in with the proponents.

Do you have a comment on that? Which should be first? Policy and proposal, or proposal and then policy?

Prof. Rod White: That's an interesting question, and I've personally given it some thought. I would agree with your assessment that it seems the way the process is being proposed is that the shareholders will decide which of the two proposals they like best, and then the Government of Canada will be left to say whether or not that proposal is adequate to meet the public interest.

When a monopoly is being proposed, I think you can argue—and we have two bidders to form this monopoly, basically—that perhaps the interests of Canadians should be addressed first. Through their representatives, they should select which of those two proposals best addresses the public interest. Then the shareholders should decide whether they are agreeable to that result.

I find myself in some difficulty saying this, because I am a business school professor, and it isn't my natural inclination to go in that direction.

I think the uniqueness of this circumstance is that we have two bidders, both wanting to create a dominant carrier, a monopoly in effect. The public interest should come first and the shareholder interest should come second.

Mr. Bill Casey: The problem is that when you talk to both airlines, their eyes light up when they start talking about Heathrow and Rome and Tokyo. They get a little dimmer when they start talking about Chicago and Los Angeles, and they go out completely when you talk about Halifax to St. John's, Newfoundland. But it's in the public interest and there should be public policy.

Actually, if it were left up to the marketplace, I don't think there would be very much in the way of regional air transportation. My impression is that they're not interested in it. They do it because they have to. But it would be a scary thing if it were left completely up to commercial decisions.

Prof. Rod White: One observation on that is that the most profitable U.S.-based carrier in the United States, as you know, is Southwest Airlines. They don't fly to Tokyo. They don't fly to Rome. They don't even fly to Heathrow. Yet from a profit point of view and a share appreciation point of view, they are the most successful airline over the last 15 years in the United States.

There is a certain amount of management ego that's tied up in the romance of being an international carrier as opposed to being a highly profitable domestic carrier, which Southwest is in this instance.

Mr. Bill Casey: I agree with you 100%. There are so many parallels here with the approach of banks in Canada, too. They're not interested in the small branches any more. As you can see in the recent announcements, they're going to start closing small branches in small communities. But they're interested in competing in the global market, and I think that has a lot to do with personalities.

I want to go back to another point you mentioned. The dominant carrier is the only one we're looking at right now, and earlier you said it could be otherwise. Are there options now? If you had a clean sheet, if the government came to you and said, why don't you lay out the appropriate structure for aviation in Canada, what would you do? What would your policy be?

Prof. Rod White: The difficulty I have with addressing the question is that we don't have a clean sheet.

Mr. Bill Casey: What if you did, though?

Prof. Rod White: Well, you'll have to tell me a little bit about what a clean sheet would mean.

Mr. Bill Casey: Well, let's say we didn't have the proposals on the table. We have the situation—one airline in trouble and the other doing relatively well—but we've got a year now to sort this out, not 90 days. What is the appropriate strategy to address public interests and the commercial interest? Is it two airlines? Is it one? Is it regional divestiture of airlines, or what?

• 1635

Prof. Rod White: Some form of competition, I think, if we could resolve it that way. There are a number of ways to think about it, but having a weak, debt-laden competitor like Canadian in competition with a stronger competitor now, Air Canada, that's emerging from that is not effective competition. At its whim, Air Canada can put Canadian Airlines over the brink, so that's not effective competition. You need to have two or more strong, viable contenders to create effective competition.

It is hard to imagine how to create that out of the existing circumstances. However, this is where I would go back to the Competition Bureau's letter to the minister, which I think lays out some guidelines for allowing, over time, the re-emergence of competition.

It's at least conceivable to think of going even further than the Competition Bureau has gone in some respects. Air Canada has proposed to keep Canadian Airlines operating as a separate brand. Since in some respects it created this situation, would it be reasonable to think about the possibility of imposing upon Air Canada that it would have to re-invigorate Canadian Airlines over the next five years and then spin it off as a separate competitor at that time?

That's fraught with a lot of difficulties, but it could be an undertaking. What we're asking in that instance is that Air Canada serve the public interest by recreating a competitor, a competitive environment.

Mr. Bill Casey: Thanks very much.

The Chair: Thanks, Mr. Casey.

My turn, colleagues.

Mr. White, I'm getting mixed signals from you, in that in your presentation, if I recall correctly, you said the Americans went through the experience of going from regulation to deregulation, that there were some bumpy times, that we are far behind the U.S. when it comes to the changeover to a deregulated airline, and that now the Americans have found that the dust has settled and there is competition, there is a balance between the players and they are all doing well. That's what you said.

Prof. Rod White: “All” would be a bit of an overstatement.

The Chair: But most are doing well.

Prof. Rod White: But the industry is—

The Chair: There are more than two that are doing well.

Prof. Rod White: Yes.

The Chair: All right.

Then, in your answers to the questions from Ms. Desjarlais, who clearly is enunciating a position of reregulating the industry, I hear you say you would like to see maybe the reverse happen, where it's the Government of Canada that looks at what is essentially a private sector deal, where the government creates a private sector deal for the private sector and then has it decided on by the shareholders, who might say to forget it, that they don't want anything to do with that government deal, or they might say, hey, that's a great idea.

At the end of the day, somebody has to pay. If you are going to ask in a reregulated industry for an airline to fly from Halifax to Newfoundland, that's a private sector company and it has to make the decision based on economics. If they figure they can't do this and make money, they'll say they can't do it. They'll say “Now, government, if you want to tell us to reregulate and to fly from Halifax to Newfoundland, terrific, that'll be $860 per flight per person. We'll look after you, and we'll make sure those flights are there, but you're paying.”

Now I don't think the government or the taxpayers of Canada are interested any longer in subsidizing private enterprise airlines to fly in Canada. They're saying to come up with the solution, to do whatever you have to do, and you had better make it good, because at the end of the day it's the Government of Canada that will look at that private sector solution and say either it's a good deal or we want more protection for the employees, control, etc.

Why isn't there a solution that says whatever monopoly airline—or dominant carrier, because I believe there's going to be a lot of competition coming into the picture, so I'm going to call it a dominant carrier, not a monopoly.... At the end of the day, the hammer the federal government has on the dominant carrier is to say to them: “You want to fly to Singapore? You want to fly these different international routes? We have the hammer on that. We decide whether you go or not.”

• 1640

Since there's only one airline now, not two, that means the one airline, the dominant airline, will be able to fly to all these different world connections—and make a lot of money. If they make a lot of money, they can subsidize the routes between Halifax and Newfoundland. So isn't that an opportunity?

Prof. Rod White: That is in fact my understanding of how regulation worked when we had it prior to 1985, that those kinds of agreements were struck between the carriers who handled international traffic and also had domestic routes, or who had profitable domestic routes, in order to get them to also fly to less profitable domestic routes. It was effectively a cross-subsidy between profitable routes and unprofitable routes, on the pure economics of that.

That kind of discussion really gets you into what I think is a reregulated environment, because we're not leaving it to competition and free choice for a carrier or the carriers to make their decisions about which routes they will fly. We are negotiating between the profitable routes, saying they'll get that one if they'll fly this one over here, the unprofitable one. In regulation, that was not just the international routes; it was also the more profitable domestic routes.

I don't know if that addresses your question, Mr. Chairman.

The Chair: I'm going to need some clarity, not necessarily from yourself, on what is regulation and what is like a contractual obligation between the government and the airline that's going to be the sole carrier.

Thanks, Mr. White.

Mr. Fontana.

Mr. Joe Fontana: Thank you, Mr. Chairman.

Mr. White, wouldn't it be the ultimate irony if two companies, under the two-airline policy—which was a government policy for the past number of years, under two governments, and one that I thought was working, until obviously the market forces and the two company behaviours forced the situation we're in today—came together as one and the government turned around and said now we're going to create two again?

Joe Comuzzi said that before you did. In fact, if you look at the Competition Bureau, some of the conditions for testing the ultimate offer, which is accepted by the shareholders first and then comes to the government, talk a little bit about divestiture of regional carriers or surplus equipment to entrants and so on.

I think we're going to have to look at that public policy, because I think Bill Casey was absolutely right: as some of us have said, public policy comes first and then you see what happens.

Let me talk about the clean sheet, if I could, because I want to just pick up on this. Is the box we're operating in now too small? Dominant carrier or monopoly, at the end of the day we're going to have one carrier instead of two. Yes, there are going to be regionals and discount airlines here, and there are going to be niche markets here and there. But assuming that this dominant carrier really ends up being an effective monopoly, as you said and as some of us believe, how do we get competition, which will ultimately determine price and service? How will we get that if the box is so small?

You started to talk about the question of cabotage with Joe, and you said that of course it would be insane to do it without reciprocity. The open skies agreement was designed with mutual benefits in mind, and at the end of the day, as Canadians, we're kicking some pretty good butt as opposed to the Americans; we're capturing 60% of that open skies market.

Who's to say that one couldn't negotiate a reciprocal agreement on cabotage? The box therefore would be not only Canada but the North American market, whereby competition will come to Canada. Consumers will benefit. Travellers in London, Ontario...I beg to differ, or I might be totally wrong, but I think Canadians want good pricing. I don't think they could care less whether or not they jump on a plane that says Air Canada, Canadian, Northwest, Southwest, United, American, and all that sort of stuff, if in fact they got service into their communities and the prices happened to be a lot lower.

• 1645

Let me ask you to finish your answer to Joe in terms of cabotage but to think about it in competitive terms. If the word “cabotage” drives everybody crazy, then let's talk about other agreements, such as co-chairing something, or a North American market as opposed to just a Canadian market, where the consumer becomes king and not the shareholder. I'm getting rather concerned that we're trying to make a darned case here for shareholders as opposed to the ultimate shareholders, the Canadian public, who want service and half-decent prices.

Prof. Rod White: In my own view, unrestricted cabotage—and that's reciprocal unrestricted cabotage—would be a desirable outcome. It would certainly promote competition. As you outlined, it would put the consumer first. So it would allow for that type of result.

I don't know what advice the committee has sought on the current—

Mr. Joe Fontana: We were told not to touch it with a ten-foot pole—

Some hon. members: Oh, oh.

Mr. Joe Fontana: —but forget it, we are going to look at it and talk about it.

Prof. Rod White: Fine. I understand that part. But if you wish to pursue this line of inquiry you may want to check with the appropriate authorities in negotiation with the U.S. transport authorities in this case. I haven't been close to this in a number of years, but the last time I was, my understanding was that there wasn't a great desire to talk about cabotage on either party's part—Canada for its reasons but the U.S. for its own reasons. In fact, cabotage with the European carriers is a significant issue for the U.S., and it isn't clear that they would resolve the Canadian issue until they had addressed the issue with the Europeans.

Mr. Joe Fontana: But, Rod, let me tell you, it exists in another form of cabotage. I'll tell you how.

Let's say someone wanted to get to their point of destination at the cheapest possible price and maybe in the quickest possible time. As an example, let's say you fly from Toronto to Chicago. You buy another ticket in Chicago and go to Los Angeles as opposed to going from a Canadian point, such as Toronto, right through to Los Angeles. Some people do that, but they're forced to buy two tickets, because it's illegal to buy one ticket on two carriers to get you where you want at a good price.

So it's happening through the back door. I'm sure it doesn't happen an awful lot, but it happens in that respect, doesn't it?

The Chair: But cabotage is not international. The cabotage we're speaking about, I believe, and are concerned about is the cabotage where an American airline comes to Canada and moves passengers from Vancouver to Toronto, or Toronto to Montreal, and then goes home.

Mr. Joe Fontana: Oh, sure, but reciprocally, a Canadian carrier going to Florida or anywhere could essentially do the same thing.

Prof. Rod White: I would just offer that whatever the form of cabotage, whether it's full cabotage or a modified cabotage relationship, reciprocity between Canada and the U.S. would be key.

Mr. Joe Fontana: I think that's a given, and I'm not absurd enough to think we could do that alone.

Prof. Rod White: Again, my suggestion to the committee would be to have you or your staff explore what the latest is between Canada and the U.S. on those types of discussions. I suspect they haven't gone terribly far.

The Chair: Thanks, Mr. Fontana. We're way over.

Val.

Ms. Val Meredith: Well, I never thought I'd see the day when I agreed with Joe Fontana, but I'd have to say that in all different modes of transportation we are dealing with the concept of a seamless border. So this whole concept of cabotage and having a continental marketplace is not out of line, because that's what the different modes of travel are starting to consider.

I want to go back to competitiveness and regional airlines and making sure there is service. I spent fifteen years in northern Alberta, where they did try scheduled air service. It didn't work. People were not willing to pay the money to use it.

To say that this service had to be provided to that community would not have been a good market decision, and neither was it even a reasonable decision to make. The number of people willing to fly on a charter or regular service just wasn't there.

But we had several other options. There were other carriers who were willing to move into that marketplace and provide that service. I think we have only to look at WestJet to see that if there is a market open, and if people need that service, low-cost airlines are in a position to move into that market.

• 1650

Now, when you have a dominant carrier, the big question is, how do you prevent that dominant carrier from doing what you have indicated has happened in the past, where you end up with this predatory attitude—and you called it “management egos” or whatever—that brings us right back into the same situation? This dominant carrier looks at somebody who, because they can fly people for lower costs, is able to develop that market. Once they develop that market and that demand, this big company then moves in and takes it over. So I think that can be dealt with.

I want to go back to what the competition commissioner brought up in his discussions with us. When he talked about getting back into regulatory elements, there were three parts to it.

This first was contractual. In the negotiations to accept this new merged airline, there would be certain contractual obligations placed on them. The second one was policy. The third one was legislative.

In terms of his regulatory practices, what he was saying is that the government has to be less regulatory, less involved in placing more of these decisions with the airport authorities or whoever deals out the gates—the berths, as it were—at airports and those types of things.

So where he spoke of regulatory, he meant getting government further out of involving themselves in the industry. Is that what you're talking about, or are you talking about the government moving in, going backwards, and the government controlling an industry to the extent they did in the early seventies and eighties?

Prof. Rod White: If we have a dominant carrier, I think it's unavoidable that there will be some degree of reregulation of the industry to protect consumers on fares and to the extent that public policy issues are at stake along with access of communities to the air transport system. All of those would lead to an effective reregulation of at least the dominant carrier.

Ms. Val Meredith: Which could be done contractually rather than legislatively?

Prof. Rod White: How the Government of Canada chooses in fact to execute that reregulation is I think an issue before the committee.

Ms. Val Meredith: Okay.

The Chair: Mr. Hubbard.

Mr. Charles Hubbard (Miramichi, Lib.): Mr. Chairman, I was just listening to Joe there, and I'm wondering if we have tunnel vision. It seems we're locked into the concept that however we fly in this country, we have to fly in an airplane owned by a Canadian company. But when we turn on our televisions, of 50 channels, maybe 10 or 12 originate in Canada.

On the door out there, Bill, we have.... We're the transport committee.

Now, I was checking on fares today for passenger travel between Ottawa and the island airport in Toronto, or to go to downtown Toronto by VIA Rail. It costs about $250 return to go to Toronto by rail and it takes about four hours. If we fly to the island airport in Toronto and fly back, it's over $600. So price is a big thing.

I think a lot of us have alluded to what it costs to travel in terms of passengers. I haven't seen your resume, and I'm not sure if you're just with air, but if we look at passenger travel, the transportation of people....

A few years back, the committee looked at high-speed rail, Michel.

In this country, do we have tunnel vision with regard to how we see our objectives as a government in terms of providing a service to people in this country to travel from one place to another? I wonder if you could comment on that.

Prof. Rod White: I am not a rail expert, so on the relative comparison between air and rail travel, the issue in this case, I think, is who would build this high-speed rail link, and could it in fact, if it absorbed all the costs implicit in that development, be economic? There is a variety of reasons as to why it costs only $250 to go by rail and more to go by air. One of those is the relative cost of the two systems. The other is the dynamic of competition.

If we had a WestJet flying between Ottawa and the island airport, it might not be $600. It might be something significantly less than that.

• 1655

Mr. Charles Hubbard: So what you're saying is there is a problem, at least here in central Canada, that we don't have enough competition in flying.

The other question I would like to ask is on regional flying. Have you done any study of Bill's trip to Halifax or to Moncton, or my trip to somewhere in northeastern New Brunswick? Will the regional service work to pay for itself in this country, or are the international and major domestic routes subsidizing across the counter those regional services?

Prof. Rod White: I'm not aware of any broad-based public studies in Canada, but certainly the accepted wisdom, such as it is, in the industry is that the international routes are more profitable than the domestic routes. By implication there is some degree of cross-subsidy there.

The Chair: Thank you, Mr. Hubbard.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond: Professor White, a few moments ago, when I asked you about combining the seniority lists, you told me that you were not a labour relations expert. I may not be any luckier with this question, but I'll ask it all the same. It has to do with the job losses that the two companies have announced.

On the one hand, the president of Air Canada told us this week that 2,500 jobs would be lost. On the other hand, the president of Onex will give us confirmation, probably next Tuesday when he appears before us, that 5,000 jobs will be lost if his offer is accepted, as he merrily announces during his tours, turning on the charm. Should we believe these figures that have been announced? Do you believe that Air Canada's estimates of job losses and Onex's estimates are realistic?

[English]

Prof. Rod White: My expectation is that both of the parties have done their numbers on this and that the differences you see are really a reflection of the differences in the strategies they will execute for the merged airline, for the emergent dominant carrier.

Both carriers have to make this thing pay at the end of the day. They are both going to take on substantial additional financial obligations, and one way or another they have to achieve the profitability and the cashflow sufficient to finance those obligations and to gain a return to shareholders.

The difference between the two proposals in this regard seems to be that the Onex proposal goes towards more dramatic restructuring—more dramatic reduction of redundant services, as they say. So they would basically take more capacity out of the system and hope the revenue side of the equation would still be relatively the same. They would extract capacity in a selective way, and capacity in this case relates to employment. They would reduce capacity and they would reduce employment more aggressively than it seems Air Canada is proposing to do.

Air Canada is proposing to keep the Air Canada brand intact, and to some degree, I suppose, the Air Canada system intact, and the Canadian Airlines brand and system intact. In addition, they're also proposing to launch this Hamilton-based low-fare carrier. In the process of doing that, they will keep more capacity in the system.

The question becomes, how are they going to make it pay? The only other variable you really have to play with here is fares. So to make this thing pay, one must suspect that they would on average be raising fares, even with this low-cost competitor, and I have my own suspicions about why they're doing that. But on average, the revenue side of the equation has to be increased.

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

The Chair: Thanks, Mr. Guimond.

Mr. Johnston, please.

Mr. Dale Johnston (Wetaskiwin, Ref.): Thank you, Mr. Chairman.

I'd like to thank the doctor for his presentation and for changing his schedule to accommodate us.

We've talked an awful lot about a dominant carrier versus competition, but in your presentation you led me to believe it was competition that got Canadian in this position in the first place. If we hadn't had competition head to head between Canadian and Air Canada at that time, I guess the alternative would have been some sort of collusion, and we certainly don't want that.

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I guess what we're saying is that if there had been a dominant air carrier in 1988, or whenever deregulation took place, we would have been in the situation we'll probably be in six months from now. So isn't it just a natural progression of things? You would have had a dominant carrier at that time if they hadn't been competing. Now we're worried that we're going to have a dominant carrier, and we're still worried about competition.

So this is a catch-22 situation, and one that I think market forces will rectify. Wouldn't the market forces have rectified it in 1988 or whenever, if they hadn't gone head to head?

Prof. Rod White: Well, we're talking about such small numbers, two major players. Markets usually imply a large number of players.

In this case we can see the specific actions of the players, the strategies basically, that led to the result we have today. Could it have been otherwise? I think so.

Reaching a profitable equilibrium between two players is not an unachievable outcome. Competition doesn't result in the survival of only one at the end of the battle, if you will. It's an ongoing relationship. You can position yourself in different ways, and you can have multiple competitors survive. We see that in most industries. Most industries are able to reach a stable competitive equilibrium. This one didn't, because of choices made by the players involved.

Mr. Dale Johnston: Right now, for instance, there certainly is competition. I was noticing in the Globe and Mail today that for $349 plus taxes you can get a round-trip ticket from Vancouver to Ottawa. The price of the ticket I'm flying back to Edmonton tonight on is $339, and that's a round-trip ticket. It's $360, with all the taxes, for a round-trip ticket. Are those predatory prices?

Prof. Rod White: I can't comment on those specific prices and whether they're predatory or not. In the greater scheme of things—and maybe this will answer the question—we've had too much competition.

Mr. Dale Johnston: That's my point.

Prof. Rod White: It's hard for me to say that, but it does occur: players can be too competitive with one another in an industry.

Most industries have disciplines in place that prevent that from happening. The one I referred to here is the 10% rule. Say Air Canada had had more active shareholders who said “Let's get some profits. Let's not worry about taking another market share point away from Canadian Airlines. Let's work on getting the profits of Air Canada up.” Then we would have a stable competitive equilibrium with two profitable players, not the situation we have today.

That's where the structural issue is related to the government, and Parliament has some influence over play into this kind of situation.

The Chair: The last questioner will be Bev Desjarlais.

Ms. Bev Desjarlais: Your comment about too much competition reminds me of the gladiators, where one has to fight to the death in order to win. That's what we've seen happening within the airline industry.

You've commented that the 10% rule has probably resulted in there not being competition. However, you did indicate that when Canadian came into the markets, they went into every line Air Canada was going into, and Air Canada then retaliated. So I didn't get the impression that it was necessarily initiated by Air Canada. Did I hear you wrong, or did you not indicate that in the historical perspective, Canadian went in there trying to get every route that was there?

Prof. Rod White: For Canadian Airlines and its precursor, Pacific Western, that's an accurate depiction of the history, yes.

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Ms. Bev Desjarlais: Okay. Bear in mind I believe the 10% rule is there to ensure broad public participation. It might shock some people, but not every shareholder sees equity as necessarily a dollar they're going to retrieve all the time, but rather equity as something you feel proud of...as being your national airline, that it's a service provided for the public, and that we're ensuring we have a stable airline industry.

I'm not getting around your thoughts that the 10% rule is what created the problem when Canadian went in and did what they did. I think you've had us look at things from a different perspective. Your comment that possibly the route to go might be to have Air Canada look after Canadian and let them back on the market on a competitive basis I don't think is way out of line, and I thank you for bringing a different perspective forward. That's, I think, what we want to hear in the transportation committee, if there are alternatives out there that we should be using, where we're not in a situation of having a monopoly carrier or a dominant carrier or however we look at it, but rather that there is fair competition.

My other remark is just because Mr. Keyes brought it up, commenting about the subsidies and we would never get into that. I might have misheard one of our honourable colleagues from the transportation committee—and I'm not sure what his riding is—Mr. Jackson, but I thought I heard him make a comment in the House today that we would have to have subsidies in some situations. So I just wanted to clarify that, that it wasn't even myself who suggested there might have to be subsidies, but rather one of the government representatives. Thank you.

The Chair: Good luck to both of you.

Mr. White, I have just one other question. I can't help but think we're not really reinventing the wheel here, surely. We have examples around the world—in Britain, in Germany with Lufthansa, in France with Air France. We have all these different examples where there is a single dominant carrier doing the international routes, etc., and there is another company on, say, the island in Britain, or in France, who are doing the domestic situation. Did you look at that at all?

Prof. Rod White: Certainly one model is to take whatever, assuming a dominant carrier emerges from this process, and ask it or require it to form a domestic airline and then have one international flag carrier. That doesn't overcome the problem of there still being a single dominant domestic carrier and the monopoly problems inherent in the domestic environment. International routes are something different. They are still regulated to some degree and there is competition from other flag carriers on those routes.

The question then, in many respects, becomes a relationship between that domestic carrier and the international carrier in this environment of global alliances that we have. It certainly could be a workable proposition. It might be a better structure overall, but it doesn't solve all the problems, particularly the problem of a dominant carrier in the domestic environment.

The Chair: Mr. White, thanks for your presentation with us today. It's refreshing, it's stimulating, and I'm sure my colleagues—they've told you they enjoyed it. So thank you very much.

Colleagues, we'll resume on Monday. Thank you.

Mr. Joe Comuzzi: One point, Mr. Chairman. Yesterday I requested that you ask the Minister of Transport for a copy of the letter, or whatever document was delivered.

The Chair: It's in the works.

Mr. Joe Comuzzi: Could you be more explicit? I know it's in the works.

The Chair: I don't deal with it. The clerk does that—

Mr. Joe Comuzzi: Could you tell me where we are?

The Chair: —and the clerk has put in the request.

The Clerk of the Committee: The request was put in.

Mr. Joe Comuzzi: When?

The Clerk: This morning.

Mr. Joe Comuzzi: And could you find out for us, please—

The Clerk: When?

Mr. Joe Comuzzi: —when it will be delivered and then notify...? I'd like to have it by Monday before the hearings.

The Chair: You probably have a closer relationship with the Minister of Transport than Guyanne. You might want to just tell him we need those papers.

Mr. Joe Comuzzi: I don't think so.

The Chair: Or just say you'll mention his name in every meeting between now and Hallowe'en.

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The Clerk: If it's in one language, Mr. Comuzzi, I have to translate it before distributing it, but I can forward a copy to your office.

The Chair: This meeting is adjourned.