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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Tuesday, November 2, 1999
The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good morning, colleagues.
Pursuant to Standing Order 108(2), this is a study on the future of the airline industry in Canada. We have two witnesses with us this morning, one at nine o'clock and one at 10:30. Our nine o'clock one is Professor Douglas Reid, who is with the School of Business at Queen's University.
Mr. Reid, good morning, and welcome to the Standing Committee on Transport. We hope you can give us your presentation in ten to twelve minutes so that my colleagues can address some questions to you.
Professor Douglas A. Reid (School of Business, Queen's University): I shall do my best, Mr. Chairman, and thank you very much.
I must apologize at the outset for not having this presentation translated. It was completed yesterday as certain final inputs were being generated. I understand based on comments from your clerk that apparently this will be accomplished, but I apologize for not having it done when I arrived here.
The Chair: All right, then. Colleagues, if you need to hear it translated, you have your translation devices.
Mr. Reid, start when you're comfortable.
Prof. Douglas Reid: I'd just like to begin by thanking a couple of individuals for their assistance in helping me develop this presentation. One is Michael Athersych, who is my research assistant. He has been an invaluable source of advice in helping me refine the airline database from which I'll be speaking today. Secondly, Ryan Doersam, a Queen's commerce student, has helped me with background financial research on both Air Canada and Canadian Airlines. I wish to acknowledge their contribution to this presentation, although any errors or omissions are mine alone, of course.
Today I'd like to cover briefly the role that alliances play in competition within the global aviation industry. In doing so, I intend to take the perspective of an academic researcher who is interested in the strategic aspects of cooperation between companies. I don't come from the airline industry, so I have no interest for or against either of Canada's two carriers, their alliance partners, or any particular proposal that happens to be presently before their shareholders. My comments will thus be grounded in my own research, and will be based squarely on my training and strategy in economics.
Let me begin by observing that alliances between airlines are now the dominant mode of competition in global aviation. In today's aviation industry, alliance membership is as important to an airline as its fleet, cost structure, and access to lucrative markets. Cooperation in aviation dates back to the earliest days of flight. Due to the fragmented nature of the global aviation system, carriers have long cooperated through what were called interlining agreements, which predate marketing alliances or code-sharing.
My own research, which has examined 1,051 code-share alliances formed between 1978 and 1997, supplemented by secondary research into marketing alliances, has enabled me to characterize the global aviation industry as having experienced three waves of cooperation. The first wave involved marketing alliances. These proliferated in the 1980s after American Airlines launched its advantage frequent flyer mileage rewards program in 1981. Most marketing alliances enable the passengers of one carrier to travel on the flights of another, yet still collect the frequent flyer points of the first. As these relationships were easy to form, and because they link just one part of a carrier to another, usually the marketing departments, they were easy to break.
The second wave, which built on the sporadic successes of marketing alliances, was the use of code-sharing. As the name implies, code-sharing is the joint listing of a single flight operated by one carrier with two or more identifying codes, one from the operating carrier, and the others from the code-share partners, whose principal function in this form of collaboration is marketing the flight.
While there are many forms of code-sharing, usually differentiated by intensity of collaboration and the incident of risk to each carrier, we see that pretty well all forms of code-sharing have been active in Canada at some time. Some apply to single routes, which means that collaborating carriers actually remain competitors on other routes, and others apply to a large proportion of the routes on which two carriers compete.
While isolated examples of code-share date back to the 1950s, its widespread use is a relatively recent phenomenon. Yet the primary goals of code-sharing—higher load factors, additional departure times, and the ability to redeploy aircraft freed up from these efficiencies—have met with only limited success. My own examination of alliance patterns suggests that in the 1980s and early 1990s, most top airlines formed lots of alliances and then began withdrawing from them as the temporary advantage they conferred was competed away.
The problem was that a large number of low-commitment alliances not only cost a lot to manage and maintain, they didn't deliver sufficient performance savings due to the cost structure of most airlines. Let me explain that briefly. Aviation is a high fixed-cost business. Together with the fact that demand for airline travel is derived, meaning that it comes from the need to be somewhere for business or personal purposes, a high fixed-cost structure means that it is difficult to reduce capacity in an orderly way in falling markets.
One of the consequences of this type of cost structure is that most airlines post single-digit net-income figures in good years, and in poor years most suffer substantial losses.
According to data from the IATA, about two-thirds of an average airline's operating budget is associated with expenses connected directly with flight operations. The remaining one-third covers ground-side operations—ticketing and sales, and general corporate overhead costs. While alliances have improved load factors on code-shared routes, for most airlines a collection of route-based alliances has done little to improve the productivity of ground-side assets. That's why the newest wave of alliances is so important.
The third wave of cooperation, which is this new wave of alliances, is represented by global ties such as Star and Oneworld. These go beyond integrating the best of marketing and code-share relationships. Not only do they attempt to improve the productivity of flight assets through code-sharing and leveraging branding through worldwide marketing, they're designed to improve the return on non-flight assets through other sharing activities, principally involving various types of co-location.
Co-location includes sharing airport-specific assets, such as departure gates, with millions of dollars of assets in baggage-handling and ground-handling equipment tied up with such assets, and non-airport assets such as ticketing offices and shared corporate sales forces.
Cooperation has also reached the electronic world. I understand that, within the last few weeks, a customer can now visit the Star Alliance website and book travel on any Star Alliance carrier. This may also be true for Oneworld, or if it isn't presently, it certainly will be in the next little while.
My point here is that these new high-commitment alliances entail considerably higher degrees of cooperation and coordination than ever before. They give member carriers access to large potential savings at the cost of elevating certain decisions about route scheduling, capital investment, and marketing to the alliance level. That means that governance of airline assets is shared. Legally, carriers own these assets, though practically, they're subject to the shared governance of an alliance.
I'd like to note that this governance operates independently of equity ownership between airlines. One carrier need not own any part of another carrier to be influential on how that second carrier does business. Equity control and operating control are two very distinct and different things.
Having said that, this new generation of alliances is also the industry's best hope, given the prevailing regulatory environment for achieving an acceptable level of economic return. While alliances have been good for airlines so far, and may be great for some of them in the future, from the perspective of many carriers they are a poor second-best alternative to control-based ownership. I say that because the airline industry around the world has suffered from chronic overregulation of ownership and market-entry decisions. This has prevented the industry from rationalizing capacity in response to shifts in demand in the same way that nearly every other industry in the world has done, through merger, acquisition, bankruptcy, or other form of corporate combination.
Let me put this into perspective. I recall when I was an undergraduate student at the University of Toronto in the 1970s we were told Canada had a branch-plant economy. This meant we had production facilities that were too small to operate at efficient scale, had high cost structures, and relied elsewhere for significant product or process innovation. Since then, advances in the global economy and the integration of markets through the FTA and NAFTA meant that production could be allocated across North America on a more rational basis.
The Chair: Mr. Reid, I wonder if you could just slow down just a touch for our interpreters.
Prof. Douglas Reid: Oh, sorry.
The Chair: They have to translate everything you're doing.
Prof. Douglas Reid: I shall attempt to be a little bit slower, but at the expense of time. So please bear with me, Mr. Chairman.
The Chair: Thanks, Mr. Reid.
Prof. Douglas Reid: Consequently, the focus of competition shifted to developing a low cost structure or a high differentiation capability that was intended to serve customers, rather than meet national public policy tests that emphasized domestic-origin manufacturing.
In practice, this meant that unprofitable facilities were closed down and most of their employees redeployed to begin other work. New entrants challenged lazy incumbents, unused capacity was retired rather than left to sit idle, businesses merged when it made sense, and companies organized their affairs based on where customers were, not where lines on a map were.
The result today is a stronger, more competitive economy in this country, healthier companies that are genuinely capable of succeeding at a global level, and customers who are far better off than ever before. Except in aviation. Here, for reasons that are unclear, lines on the map still matter. The rationalization paths that other industries took through acquisition, merger, and corporate failure were not open to the global aviation industry, except in the United States. And thus, the number of alliances seems to rise, for airlines have no alternatives as to how they improve the economics of their business.
In brief, the rules that surround the organization of the airline industry are based on the same discredited model that Canada escaped when it embraced trade and global competitiveness more than a decade ago. We still have a branch-plant industry structure in Canadian aviation. This industry will never be competitive at a world-class level without two things: first, the scale needed to improve efficiencies; and second, the discipline of real competition to keep the executives and employees focused squarely on serving customers. Without the former, we will remain firmly within the second tier of the international aviation industry. Without the latter, we risk slipping further behind to the detriment of Canadians everywhere.
Thank you very much for your attention. I look forward to your questions.
The Chair: Thank you very much, Professor Reid.
Mr. Bailey, please.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Chairman.
Mr. Reid, you mentioned that about one-third of the airline business is basically on the ground, with your ticket sales and so on. I have two questions. One relates to the phenomenon that's happened since this whole thing came to the front. I'm sure that every ticket agent in my constituency—we've heard from them all—is really concerned about two things. The first is their position, as they've dropped somewhat in their commission sales lately. The second is the possibility that being able to book a flight on e-mail will eventually lead to the demise of their position entirely, or in such a way that it's not a profitable enterprise for them to have.
Prof. Douglas Reid: I think the answer to the second one is yes. It's entirely conceivable that the rise of electronic ticketing via the Internet is going to—the term is “disintermediate”—in effect move out of the middle the very valuable services that travel agents provide.
This speaks to a question of what happens to aviation if there is a change in negotiating power within the industry. The reason I say that is that across North America there has been a general fall in the level of travel agent commission rates from somewhere on the average of 8% or 9% to about 5%. This is a fairly severe cut for a travel agent. Airlines wish to recapture that saving because the operating margins for an airline, in general, are so bad that almost any way to save money is considered worth pursuing. That is why they're now moving to structure. They're trying to get better productivity out of their non-flight assets or their ground-site assets, simply because there are very few ways to increase productivity on the planes in the air, which take two-thirds of their expense line.
The short answer is the travel agents have a lot to fear from a monopoly market, where their commissions can be pushed down even further. Travel agents, like most people, will always be better off if they have the ability to deal with more than one supplier at a travel service.
Mr. Roy Bailey: Should I then envisage, with a dominant or monopoly carrier, that they will eventually move to the ground in that small area of sales and handle it all by themselves?
Prof. Douglas Reid: It's possible that a carrier could forward-integrate to take on a travel agent function. I'm not sure why they would want to, though. Travel agents do more than sell airline tickets, as we all know. Whether a dominant airline carrier is a monopoly carrier or simply an oligopoly, I don't think that's really their business. However, I think they will try to squeeze as much of the margin as possible from the commissioning of tickets and take that back.
There is no question that the commission structure for travel agents is in peril, the more concentrated the Canadian industry becomes—particularly the airline industry.
Mr. Roy Bailey: Thank you.
The Chair: Thanks, Mr. Bailey.
Mr. Jackson, please.
Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much, Mr. Chair.
Welcome, Professor Reid. We didn't get a chance to look at your presentation beforehand. Two of the significant questions we're asking are what is the public's interest and how can it best be served?
You have obviously spent some time thinking about this from an academic point of view. You mentioned the fact that perhaps the size of the operation is an important factor, and you also talked about real competition.
Since we don't have a copy of your dissertation, how can we best improve, from a public policy point of view, the role of prices, as we move to legislation?
Prof. Douglas Reid: The best way to think of that is to recognize that there are multiple interests at work here. Certainly the interest of the public will always be best served by having low fares and frequent departure alternatives. The research shows that the availability of departure times is a major factor in carrier selection.
I can't imagine how a member of the travelling public, particularly in a country of Canada's size, would be better off with less choice of carrier than more choice. I don't think that's very radical thinking. I just sense that most people would prefer to have a choice, rather than be consigned to dealing with a monopoly entity of any kind.
Public interest to me is very distinctively different from the interest of shareholders of companies, of employees of companies, and of the management of companies. I would hope—and I say this more as an individual than as a researcher in the area—that whatever recommendations your committee makes will have a very clear and ringing declaration of public interest, as opposed to simply amplifying the interest that shareholders have.
The point here is that the public is best served by something that doesn't help shareholders: competition. In effect, shareholders in every other industry take on the risk that the business they invest in may not perform well, but they're also prepared to accept the benefits that come with that industry performing better. In aviation, on the other hand, the risk of an investor has been socialized to some extent by the fact that we don't have sufficient competition to give customers the level of choice they need.
Mr. Ovid Jackson: The public and a lot of my colleagues are being pushed and shoved in all directions by the pilots' unions, the machinists' unions, and corporate interest—people trying to make money. As a member of Parliament, I should be focusing on the public interest and what's best for everybody. Notwithstanding that from time to time there will be crises in just about any industry, I prefer to have what I call good change rather than bad change. Most people don't like change at all. That starts as early as 11 years old.
We now have both Air Canada and Canadian, and before they got off the ground we gave them all these assets. The Canadian public invested a lot of money in Air Canada and Canadian. One reason Canadian is flying is because they got hundreds of millions of dollars. Are you advocating that we should prop them up for a little while longer, in order to keep this dual competition? Is there a better way? Could something better come out of what's happening right now?
Prof. Douglas Reid: If I were giving the Government of Canada advice, it would be to get out of airline regulation, other than for safety. If carriers cannot meet the test of the market by making products people wish to buy, I have to wonder why Canadians would be better off having more than one carrier in the field, simply to preserve an artificial market structure that restricts access from true competitors.
Find a way to retreat from everything, other than just ensuring the aircraft and the practices of the airlines are safe. I can't imagine why the aviation industry has to be treated differently from every other industry in the country—in fact, almost every other industry in the world. The focus of government regulation should be on preserving safety and relying on market mechanisms to ensure customers have choice and low prices and in effect get what they want.
Mr. Ovid Jackson: The United States are ten times the size of us. They have 250 million people, their budgets are trillions of dollars, and so on. What complicates our situation is we're the second-largest country in the world and we have to move people around to smaller communities. So when you put that into the mix, it sort of goes at odds with your raw competitiveness. What will happen to people in remote areas? How will we service them?
Prof. Douglas Reid: Remote areas will be serviced by any airline, regardless of the regulatory regime, as long as it is profitable to do so. I think one of the better changes that's happened in the last 15 years has been the move, on the part of airlines, to match the size of the aircraft to the demand in each market. So you no longer have jets flying at 20% capacity into communities, just to make a symbolic gesture. Small aircraft are flying with sufficiently high loads, so the company is actually making a return on the use of that equipment and the people. So they can continue to do that. The best guarantee of access to small communities will be the ability of new entrants to compete against established players.
As a younger man, I lived in Thompson, Manitoba, for a number of years. If I were in that community today and felt the need to have airline service, I would like to feel there would be a market structure that would enable me to start an airline, if I could assemble the capital and the resources to do it. With a structure that merges and moves to monopoly, I have to wonder whether that would be possible.
The Chair: Thanks, Mr. Jackson.
Just as a supplementary, if a domestic carrier kicks in and runs flights from Halifax to Newfoundland, thinking it can make a profit, and suddenly it doesn't have the money to make a profit, it may cease to run that particular route. On the other hand, if you have a monopoly airline in this country and it is seized of all the money-making international flights, some would think we might be able to regulate, or in some way ensure the profits from some of these big international flights the government gives them to operate are used to subsidize some of these smaller, money-losing but important shorter regional routes.
Prof. Douglas Reid: It's certainly a point of view. It's not a point of view I would say is endorsed terribly widely, beyond the Hill, but it's a point of view that certainly seems to have some currency these days. I might suggest, though, that would turn the focus of the monopoly carrier's attention, not to serving customers and running a profitable business, but to keeping their government masters happy.
Would that be a wise use of airline management time?
The Chair: You say it would keep the government people happy. But we're trying to ensure the people who live in those communities and need airline service have it. Those are the people the airline should be trying to keep happy. If the airline sees there's no money to be made there, they're not going to run the service.
Prof. Douglas Reid: That's quite right.
The Chair: What's your suggestion? A monopoly airline will make buckets of money, literally, because it won't be flying wing tip to wing tip with its competitor because its competitor won't be there any more. It will be running at 80% load factors in the triangle, in the popular routes. It will be getting the international flights and it will be making a lot of money there. How do we address this issue with this particular monopoly? How do we say to them that there are these smaller routes that must be served because they have been served in the past, and you can't just look at them and say you're not going to make any money there so you're pulling out your routes? How do you ensure that they do continue to serve that community?
Prof. Douglas Reid: I honestly don't have much advice on how to suggest that one tell a monopoly to do anything.
The one thing I might point out, though—and this arises from research that has been done on international businesses—is that the bargaining power of any company changes after it does a deal, that is, the best time to get concessions from any company is before a deal is consummated. The moment you have a monopoly, whether it's in an airline or in anything else, in an area that is of importance to Canada for whatever reason, the ability of that entity to change the terms of relationships ex post facto, its ability to exact concessions based on unforeseen contingencies, goes up; it doesn't go down.
What that means is if the government is interested in obtaining some kind of concession or guarantee—which I still believe, frankly, to be a poor second alternative to having competitive markets—the time to do it would be before any deal is consummated. After that, the monopolist's power vis-à-vis the government goes up—and goes up considerably.
The Chair: Therein lies our dilemma of the month.
Michel Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de-Beaupré— Île-d'Orléans, BQ): Professor Reid, thank you very much for your presentation as a witness before the committee.
He's perfectly bilingual. He understood what I said.
Professor Reid, as I was saying—I would not want you to think that I am a victim of Alzheimer's disease and that I don't remember having said that already—, I just want to thank you for appearing before us.
My question concerns the role of the Competition Bureau. Do you think that, with respect to the decision by Air Canada's shareholders—since they, at the end of the day, are the ones who are going to take that decision on November 8—the Competition Bureau should fully play its role, whatever that decision might be?
The Competition Bureau just acts as a watchdog to protect the consumers' interests. It's simply a barrier erected for the protection of the Canadian taxpayers. Do you think that, when a transaction of such importance is proposed, in terms of jobs affected, in terms of the economic output of two Canadian businesses, in every region of the country, the Competition Bureau should fully play its role, whatever the issue of such a transaction might be?
A supplementary question, I'd like to ask you whether you think that we should disallow, reject or avoid an expedited process to deal with such a megatransaction.
Prof. Douglas Reid: The answer, sir, is yes. I think the Competition Bureau should evaluate this merger as it would any other. I would find it disturbing if there were any variation of the rules to facilitate a restructuring of this industry where there are already normal procedures in place to handle corporate failure. I would prefer this, personally and for reasons that might be evident from economics, in regard to why the Competition Bureau should be involved in its normal way.
Mr. Michel Guimond: Mr. Reid, Mr. Jackson has asked the question I wanted to ask myself regarding the 10% rule and the public interest. I will not ask the same question again. Rather, I'm going to try to go a little bit further.
You are an academic, someone who is neutral and who receives no money, directly or indirectly, from any of the players involved in this deal.
When the Transport Minister announces, as the process is already under way, that it would be desirable to change the 10% rule regarding the Air Canada shares, do you feel that it's as if the rules are changed in the middle of the game? I would ask you to answer this question as someone who can remain neutral. Don't you feel it's like a referee suddenly deciding, as one hockey team is losing 0 to 8, that it's time the teams change sides since the action is always taking place at one end of the rink and not at the other?
Don't you feel that, by agreeing to have our hands tied by such an important legislative amendment as a change to the 10% rule, we change the rules while the game is already in progress? Please feel totally free to give us the answer of a very neutral witness, since it's in this capacity that you appear before us.
Prof. Douglas Reid: Monsieur, you've asked me a controversial question. As an academic, I naturally avoid controversy at every opportunity.
Voices: Oh, oh!
Prof. Douglas Reid: I would probably have to say that in general terms it's preferable for businesses to have clear rules established at the outset. And this isn't any industry. At all times, businesses generally tend to prefer clear rules, a consistent interpretation of the rules, and no variance in the rules.
This matter has been made complex by the fact that there have been rule changes and policy changes in the midst of a transaction. It would be fair to say that it has made the matter much more complicated.
I might find that it would be preferable not to have had those changes. It's generally preferable, I think, from the perspective of being able to make consistent decisions, to not have to worry about the rules changing. Using your hockey analogy, the referee may make different decisions. Generally speaking, transactions are facilitated when there is consistency of expectation and consistency of interpretation.
The Chair: Thank you, Monsieur Guimond.
Mr. Dromisky, please.
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much, Dr. Reid. I found your presentation very interesting. There were quite a few areas I'd like to question you on, but we don't have time for it all.
I guess you've been following the development of the scenario for quite some time and have been very conscientiously studying everything that has been presented through the media. I'm sure you have been studying and very carefully watching the scenario as it has been played out day by day with the two airlines and with what's happening here on the Hill.
You know that the minister has put out a policy framework. There were five specific areas within that framework. He did also indicate that as far as the 10% rule is concerned it would be up to the committee and the government to consider. He did not make any statement that it was already completed or, in other words, that an absolute decision had been made.
Regarding the policy framework, can you tell me how you react to that policy framework in light of what is happening here between the two major airlines? What impact do you feel it could have? Are there weaknesses? Are there strengths? In light of the fact that you said we should not be involved with the aviation industry—
Prof. Douglas Reid: Other than that—
Mr. Stan Dromisky: Are there safety...?
Prof. Douglas Reid: —in general terms, what I found a bit disconcerting about the policy framework was the fact that it attempted to do things that were incompatible. It may well be that it's not possible to preserve the extent of service that is desired by the minister. It's likely that you cannot forgo fair increases in a monopoly; it just doesn't make sense. The idea of preserving competition when you have dominance at a 90% level is laughable; it's just absurd. You have a dominant carrier that is virtually a monopoly.
When you attempt to then consider what competition means, you cannot use shaded language. You have to be very clear and ask, what does competition mean? Does it mean the ability of someone to enter the market? Does the nationality of the entrant matter? What is the purpose of aviation to Canadians? Is it to move people around the country at the lowest possible cost with the highest possible safety, or is it to ensure that investors in the airline industry have a reliable source of return due to a market structure that in effect extracts more money from passengers than they should otherwise have to pay?
So the short answer is that I sense there were inconsistencies, but I am not terribly well versed in the matters of politics, shall I say, so I don't quite understand some of the motivations. I hope that's an adequate answer for you. I just don't know how to—
Mr. Stan Dromisky: I'd like to zero in on one specific area, and that's the rights of the employees. Both the airlines, especially one airline, have stipulated that there be no layoffs. Another airline with over 16,000 workers—I don't know what they're going to say. Is it possible for an amalgamation to take place with many, many thousands of employees and for the chief executive officers of those companies to state that there would be, in the short term—because all they're talking about right now is the short term—no layoffs?
Prof. Douglas Reid: It's strange credulity. Perhaps the best way to describe it is this. Let's look at the motivations, why companies combine. They do so in order to obtain the benefits of scale, which are really the benefits of size. They do so to improve operating efficiencies, not just in terms of load factors and passengers carried but in things like the number of employees per aircraft. They try to get more output from every unit of input.
With the number of restrictions that the companies have accepted, I wonder, frankly, how they're going to be able to make the deals work. Normally in any merger or acquisition, you look for savings by selling off parts of the business that aren't profitable. You look at terminating certain employees who may not be essential to the fulfilment of the company's purpose. You look for the combination of certain parts of what's called a value chain in order to realize these illusive synergies. And frankly, if you're a monopolist, you raise fares because you can; you have the market power to do so. You also withdraw service from places where the demand is not sufficient.
Now, I seem to recall that everything I've heard by both proponents, Mr. Schwartz and Mr. Milton.... All of those savings are forgone. They've all pledged they will not take them. Thus I have to ask myself why bother doing the deal at all? What is the point of doing this transaction, from an economic perspective, if the normal savings that are associated with making a company stronger through acquisition or merger aren't being taken up? I actually have to wonder whether or not you get into a situation where either the claims are not credible or, secondly, whether the company, if there is a merged company, will have to return in a year or two and say “Oops, we had some troubles, so we need to vary the terms of our agreement”, which might mean, as I mentioned in response to Mr. Keyes' question earlier, post facto changes to contracts. Right now, in my mind there seems to be a substantial clarity as to whether or not any of these deals makes economic sense without any of the synergies that are claimed to be present being realized.
The Chair: Thanks, Mr. Dromisky.
There are a few factors, of course, that you haven't been figuring in, and maybe it's just for lack of information for yourself. But some of those synergies also include the fact that if you only have one airline operating, that means all your international routes, for the most part, are going to one airline instead of two—the synergy of flying in the Montreal-Ottawa-Quebec City-Toronto triangle, for example. You're no longer competing with 30% or less load factors; now you have 80% load factors. So all these synergies will kick in as well to offset some of those things you're speaking about.
When it comes to the jobs, both sides have made it pretty clear that they're not slamming these airlines together as soon as they cut their deal and next February you have one tail running across the country. It's two airlines for still another two years, where natural attrition in the jobs is taking place and where, over a two-year period, 16 to 18 months, you have 2,500 jobs at each of the airlines being lost through attrition, through retirements, through a voluntary leaving of the company, etc. A lot of those jobs are made up. But that's all the detail we're receiving as a committee.
So some of those synergies kick in as well.
Prof. Douglas Reid: Actually, I'm quite familiar with them, and I still think, based on those alone....
You have two kinds of synergy. The first is asset-based synergy, where you actually can move aircraft from place A to place B and know, with a high degree of precision, what you're going to get out of it. The other kind of synergy is human-based synergy.
All of the research in merger and acquisition is very clear in indicating that when mergers are hostile, where there is a high degree of acrimony between the acquiring party and the target, any of the synergies based on human cooperation usually fail to materialize.
So I would agree with you that you're going to be able to get the synergies from assets, the things they own, the airplanes and other equipment. I don't think you're going to get the synergies from the human meshing anywhere close to what is being claimed.
In fact, if you look at the Onex circular, you will find that it goes through, in two or three pages, all of the difficulties involved in making a merged airline work. Many companies in fact engage in merger and acquisition without having any clue as to what the synergies are going to be. It's unclear, given the number of constraints that both proponents of the current set of transactions have embraced, whether or not any of these synergies are ever going to be realized.
The Chair: Ms. Desjarlais, please.
Ms. Bev Desjarlais (Churchill, NDP): Thank you.
I don't think there's any question that we have to go beyond looking at just the economics of the airline industry. We can't deal with it strictly from one vision.
You made a couple of statements here, and I can't help but comment on them. You talked about businesses wanting to know the rules ahead of time, almost implying that this is how they best operate. But from my perspective, if you look at competition as being strictly for the sake of competition, I guess businesses would want to know the rules and would like them to be in place, unless, of course, they could skirt the rules and come out as the benefactor. That is just the nature of things.
I guess if they were all good sports, principled players and here for the good of all, we would say, well, heck, I don't want these rules to change, it just wouldn't be fair for the other guy, so there's no way I'm going to do this.
It's like being in the Stanley Cup final and you get a goal that gets waved off, but the goalie says, no, there's no way, that goal went in, you got it, the game is yours.
That just doesn't happen in the world of business, at least not anything I've seen in the last number of years. I think we've seen the situation with two airlines that seems very much similar to the situation with the two rail lines, where you give them the cake on the platter, they then fight and squabble, and we say, oh, my goodness, these guys just aren't getting along, what are we going to do?
The bottom line is, we need to ensure that the service is there for Canadians. We can end up in the same scenario as we did with the two railroads or we can do something about it before we have a situation where either one or the other is ruling the roost, with no rules in place.
With regard to some other comments you made about the cost of airlines performing, I wonder whether or not in your view we are unreasonably expecting the airlines to provide a lower cost. In your view, are the fares too high, or are we expecting low fares when the cost of running the airline means it's just not possible to give low fares?
Prof. Douglas Reid: The issue of how airlines establish fares is a science all its own. Perhaps it's more like alchemy—difficult to understand unless you've really seen it work close up.
I recall reading in the last few years an issue of Fortune magazine in which they looked at an American Airlines plane with I believe 150 seats on it. They noticed that for the people travelling on that plane, there were at least 100 different fares.
So one of the questions I like to ask is what is a fare? What fare are we talking about when we talk about keeping a fare capped? Is it the fare that a full-fare passenger pays when he or she has to get, say, from Toronto to Vancouver tomorrow for a business reason, or for a family reason where the fare is high, or is it the fare that I might pay as a leisure traveller, booking eight months in advance for a similar trip to Vancouver to visit family or friends?
With respect to the structure of the airline, I think the answer is that the way fares are calculated in general has some relationship to what's called stage length, the length of the flight. But quite commonly you get odd circumstances where an individual flying say from Toronto to Thunder Bay, Ontario, return will pay twice as much as an individual flying from Toronto to London, England, return. It makes people confused. Why would that be so?
The answer has to do with aircraft type, load factor, when the ticket was purchased, and so on. But there doesn't seem to be, at least in the eyes of the public, a consistent way that fares are set, according to some metric such as distance, that is understandable to all.
Do we expect airlines to be able to make money? Yes. Some airlines do make money. Southwest Airlines in the U.S. is the only airline that has made money consistently in the last decade.
Ms. Bev Desjarlais: The question was whether we are expecting airline fares to be too low compared to the cost, not whether or not airlines make money.
Prof. Douglas Reid: I'm not sure I understand the question. Are you saying airlines should take a loss on selling tickets?
Ms. Bev Desjarlais: Are we, and generally is the public, expecting a lower fare, when the cost of running the airline just doesn't warrant anything lower than what's there?
Prof. Douglas Reid: I don't know the answer to that. The public probably believes everybody else on the airplane got a better deal than they did, but that's just because of the nature of how fares are calculated. They use systems called yield management.
A colleague of mine at Queen's, Jeff McGill, who's one of the world's experts in yield management systems, can explain in copious detail how airlines price and how they optimally price to maximize the revenue from each aircraft. What it means, though, is that certain seats are sold at a very low cost and others are sold at a very high cost, and it may well be that those passengers are sitting next to each other.
Does it make sense? It does in a kind of peculiar way, given the characteristics of the industry and given the characteristics of the product they sell.
The Chair: Thanks, Ms. Desjarlais.
Mr. Hubbard, please.
Mr. Charles Hubbard (Miramichi, Lib.): Thanks, Mr. Chairman.
We've opened up so many avenues of thought here that it's almost perplexing. First of all, we have two airlines, neither one making any great deal of money. One is losing money and the other is not paying anything to its shareholders. Both of them are making great promises to the Canadian public on what they're going to offer and what we can receive. And lo and behold, a great number of Canadians are very suspicious of this whole activity.
I was rather amazed by your comment that only one player will have the rights to international flights. I think you mentioned that a few minutes ago. That would certainly be a concern, if we're going to talk about competition and what might result.
I received yesterday some comments from the Greater Moncton Airport Authority, and they're very concerned with what is happening in the smaller areas. They see only one major carrier now coming to their airport, and of course the divestiture of airports was a major event that happened in the past few years.
Their basic thesis is something along these lines. Probably the single most important economic development tool a community can have is their air service. In the media release, they say they are concerned that these two offers on the table may not be best in terms of schedules that would be offered and in terms of prices and how they might be affected.
They also make the very rash statement that at present, the cost of tickets in the regional areas is actually subsidizing the cost of airlines and seats at the bigger centres. I have some difficulty with that, but it's a point they do make. When we look at what some of these tickets are costing back in the regions, we wonder if the regions really are paying for and subsidizing some of these flights that operate between our larger centres. It is a matter of record, and they put it out to the press yesterday.
You have made a great number of very good comments and observations. We as a committee are operating under a very close deadline to report back to Parliament. In fact it's within the next three weeks. In your opinion, can we do a realistic and appropriate study and report that would reflect the concerns Canadians have about the air industry? Do you think this committee is on a realistic path?
Prof. Douglas Reid: That again is one of those controversial questions I'm not sure I can answer in full. Perhaps I can try to interpret that another way to you.
It may well be that the issues you have to grapple with are actually quite simple ones, and perhaps you have enough information presently to be able to reach a conclusion. The issues I might suggest you consider are the following.
Secondly, what makes airlines different from every other industry in Canada and probably every other industry in the world? Why are airlines treated in a way that is so peculiar, so unique, so idiosyncratic that they have different sets of rules from anybody else about who can own them, where they can fly, and who cay fly where?
I would think those are the essential questions that most people would find of interest.
Pragmatically, as a resident of eastern Ontario working in the city of Kingston, a great city that's been described as one of Canada's nicest and most centrally isolated communities, my concern would be different. It would be, how do I get access to the major airports so that if I have to travel internationally, I can do so?
The questions are quite elemental. Who is competition here to benefit? Who are airlines here to benefit? That's really about it.
Mr. Charles Hubbard: Kingston is a great amalgamation of people from all across this country. You have people there who probably reflect every community in Canada. Say you want to go home for the weekend or visit your friends or whatever. I would think a major concern to the people of Kingston would be access to all parts of Canada—not simply to fly to Vancouver or Calgary or Toronto, but rather to be able to go to Gander, Newfoundland or to Prince George, British Columbia.
You are from the community of Kingston. Would it be a major concern to the people there that they have access to all parts of the country at a reasonable price and with a reasonable service? This process could mean they'd only be able to go there one day of the week. Should they be able to go there any day of the week?
Kingston is a wonderful, picturesque community, but it's made up of people from all across Canada. Your community probably best reflects what Canada is all about in terms of how it's put together, with the military college, the prisons there, and the great university you represent.
The Chair: Do you have a question here, Charlie?
Mr. Charles Hubbard: It's a great historical place. The Father of Confederation, this guy up here, was born there, wasn't he, or worked there?
The Chair: But as the expression goes, Charlie, you can't get there from here.
Anyway, do you have a question here, Charlie?
Mr. Charles Hubbard: The point is, as a committee, do we have to be concerned about the regions as much as about the larger centres?
Prof. Douglas Reid: Feeling wistful about my employer's hometown, I understand what you're saying.
People living in places such as this probably have a concern about having choice. You've helped me in way, by focusing this question even more narrowly. The real issue before the committee is, should Canadians have choice or not? If an individual living in Kingston wishes to visit any of the wonderful communities you mentioned and many more besides, the question that has to be grappled with is, should they be forced to fly on an airline sanctioned by the government, or should they have the choice of who they wish to fly with, whether that's Air Canada, Canadian Airlines, British Airways, or any airline in world? How do customers best get served?
Really the answer is rather elemental. They should have the proliferation of the most choice possible to enable them to get around their own country or anywhere else in the world at a reasonable price and at times that are convenient to them.
The Chair: Thank you, Charles.
Mr. Casey, please.
Mr. Bill Casey (Cumberland—Colchester, PC): Thanks very much.
One of the issues that's come up quite often is regional airlines and the great debate. I believe the government prefers a divestiture of the regional airlines. I'm not sure of that, because it's hard to tell what the government policy is.
The Chair: Oh, you're not an expert on the government just yet, Bill?
Mr. Bill Casey: No, I'm not an expert on the government, and I'm not privy to their policy, if they have one. But anyway, from statements they've made, I think they'd prefer to see the regionals divested. However, both proposals include the monopoly assuming control of the regionals. I just wondered if you have a thought on whether they should be divested or part of the monopoly.
Prof. Douglas Reid: The regional airlines are very important to both carriers now to provide feed to their long-haul flights. They act in Canada in the same way the spokes do in the U.S. hub-and-spoke system. So I can understand the reluctance with which the airlines would part with them.
In general, because of the aircraft they fly, they are not viable competitors to long-haul aviation. You could not fly from Toronto to Vancouver on a Dash plane without stopping often for gas. In that sense, their role is limited by their physical capabilities.
As to whether or not they should be divested, in terms of the overall effect it would have on customer choice, it's almost irrelevant. The more substantive matter is whether or not any of the other carriers who can compete in long-haul domestic and/or international are allowed to compete in the Canadian market.
Mr. Bill Casey: Currently the regionals are limited to the size of their planes. They are limited to turboprops. They're not allowed to have jets other than those that were grandfathered. That's just a deal with the parent airline organizations. If they were allowed to just compete, would that provide the competition most people are looking for? We hear a common thread here: people are concerned that there is no competition with either one of these plans.
Prof. Douglas Reid: I think the answer is no. You're not going to take on a carrier with 80% dominance by using a regional carrier with expertise in a small part of the country's market. No, it's not even close.
Mr. Bill Casey: So you're not optimistic that there's going to be a lot of competition here.
Prof. Douglas Reid: That depends, of course, on what the policy presumably is going to be with respect to market entry, the so-called fifth freedom or cabotage. That's fundamentally going to be what will decide whether or not we have choice.
I think the thing to appreciate is that we have an airline industry in Canada that has a number of different segments. The functions performed by the charter carriers, the regional carriers and the discount carriers like WestJet, are very different from the functions performed by Canadian and Air Canada. While they all fly in the same air, they're not necessarily head-to-head competitors. They do different things. They have different fleets for different reasons.
In order to give people the benefit of choice, you need to be able to have carriers, whether it's one or two, competing with similar types of entities, other carriers that have jet aircraft that are able to fly long distances. We don't have any of those in the country presently.
Mr. Bill Casey: If you were commissioned by the government to design the ideal aviation policy—one airline, two airlines, ten airlines, regionals, whatever—what would your basic vision be?
Prof. Douglas Reid: It wouldn't be a very long policy. The principal role of the government is to ensure that all aircraft and aviation practices are conducted to the highest standards of safety. There should be no restriction on ownership, and there should be no restriction on market access. Anyone who is airworthy should be allowed to compete here so long as they can gather revenues from customers to do it.
Mr. Bill Casey: What about foreign airlines? No limit?
Prof. Douglas Reid: None at all. I can't imagine why there would be.
This comes back to a point I made earlier. Aviation is treated very differently from any other industry with respect to competition. Canada does not have a lot of industries that are essential to our survival. In the Globe and Mail there was an article in which the author said we don't have a national computer industry, whereas computers and telecommunications are absolutely vital to competitiveness in this century.
Mr. Bill Casey: Most people feel the aviation business is kind of like a utility, that it's a necessary thing. In talking to the airlines, as I say, you see their eyes light up when they start talking about Heathrow and Rome and those places, but they grow very dim when you talk about Miramichi to Moncton. If it were entirely left up to the market, I believe there would be a lot of airports and a lot of regions that would lose their service.
Prof. Douglas Reid: With respect, I disagree completely.
The Chair: Thanks, Mr. Casey.
Mr. Volpe, please.
Mr. Joseph Volpe (Eglinton—Lawrence, Lib.): Thank you very much, Mr. Chairman.
Dr. Reid, thank you very much for the responses you gave to some of the questions. They certainly go a long way toward clarifying some of the issues, at least in my own mind.
In commenting on one of the offers, on the weekend one of your colleagues reflected your view, which I suppose is a business school point of view: if you don't get any of the savings, if you don't lay off any of the people, if you don't cut any of the routes, and if you don't do a lot of the things that are required for a company to make ends meet, what is the value of the offer?
I'm assuming again—and I hope I'm not putting words in your mouth, but this is what I thought I heard you say—that the two offers as they stand don't really make a lot of economic sense, so there must be something else there. Maybe this committee is considering that.
I wanted to ask you something a little bit more specific, and I'm going to be very parochial, not from Miramichi or Moncton, but from Pearson. If one of the offers does eventually get accepted and there is a merger of the two airlines, could you walk me through what is likely to happen to all those people who are on the ground side of the business at Pearson?
Prof. Douglas Reid: My first question, sir, would be which offer? The offers have fundamentally different structures.
Mr. Joseph Volpe: Well, the first Air Canada offer really said there weren't going to be many layoffs, that there were going to be maybe 2,000, but they weren't going to come from the Air Canada workforce. The latest Onex offer says there are not going to be any layoffs until 2002 or 2003, but I can't recall which. So in the short term, there really aren't going to be any.
Prof. Douglas Reid: My understanding is that the Onex offer proposes to merge the airlines. Admittedly, these things don't happen overnight, but in effect it will be the merging of all operations. The Air Canada offer seems to say it will retain two corporate entities plus start up a third airline, headquartered at Mount Hope Airport. They are fundamentally different offers. If your question is what happens at the level of the people working, it really depends on the decisions taken by the management of the entity as to whether or not they're going to combine or share facilities beyond what they presently do.
In the case of the Onex proposal, if you have one airline, the practical questions include what you do with Terminal 2 or Terminal 3 at Pearson. Do you use both of them? Where do you house your partners? How do you get the benefit of origin destination pairing when you don't have co-location? There are lots of different questions that this raises. The Air Canada one effectively asks what you do when you don't have integrated corporate structure and don't have the opportunity to take advantage of the prospective savings that exist.
I'm not sure I can answer the question until we go to one level below that: pick an offer and talk about what really is working there.
Mr. Joseph Volpe: I'll come at it from the point of view of a consumer and a user. It's probably not as visible at Pearson as it is in say Vancouver or Calgary. When you look down the corridors, you see one airline's ticket agents and baggage handlers and you go down a little bit further and you see the other airline's ticket agents and handlers. We're told that capacity now is, on the average, something like 60%. It doesn't really make a lot of sense to have two airlines going within ten minutes of each other on some routes. If there's a merged entity and the capacity is now restructured, some of the workers looking down the aisle at their colleagues will turn around and say “Mr. Volpe, can you imagine a scenario in which the two of us would be doing exactly the same thing in a merged entity?” Representatives from both airlines have said that what will happen is that business will increase, so nobody will lose their jobs. I'm going to ask you whether or not that is a likely scenario, from the point of view of a business analyst.
Prof. Douglas Reid: Let me take that in two phases. First of all, the load factor for Air Canada is 70.9%. The load factor for Canadian Airlines is 71.9%. The source of those figures is the passenger airline rankings for the year 1998 in Airline Business Magazine. So you're dealing with situations in which you have about a 71% or 72% load factor, on average, in the system.
What you're really asking is whether you are likely to have more travellers if you have a merged airline versus the status quo. I think you have to look at why people travel. Most researchers would tell you that the demand for travel was considered to be a derived demand. It's derived from the need to do something else. Whereas I might load my family in the car on a Sunday afternoon and go for a drive in the countryside because it's nice to do so, very few people will go up in an airplane just for the fun of being five miles above the ground. You take air travel because you have to get from point A to point B for a business meeting, for a vacation, or for some kind of family reason. The demand is therefore effectively derived from the need to do other things. It's highly dependent on the business cycle.
There is an argument that says that you could lower airline fares to the point at which people would be able to look at driving, taking the train or flying if they were going from Toronto to Montreal. Given my own preferences, if I felt some of the airline fares were low enough, I might say I would be happy to fly as opposed to driving or taking the train. You're going to have some modal shifting. Will there be more people taking more trips just because you have a merged airline? I can't see how that would be. In that case, the answer to that would be no.
Mr. Joseph Volpe: Thank you.
The Chair: Thanks, Mr. Volpe.
Mr. Bailey, please.
Mr. Roy Bailey: Thank you, Mr. Chairman.
Dr. Reid, I want to thank you for sharing your obvious insight into this. You are more than qualified by your responses and you are a very good witness.
This committee is not left with much of a choice in this study. This is a study that we just touched upon last year, and we had a few witnesses, but this is an area so large that to try to compact a reasonable report from this committee to the minister is, well, just to put it mildly, a difficult thing.
My concern is that here we are, as a committee, and we are left with really two choices to evaluate. Those are the choices that the public has out there, and the war is being fought in the newspaper. I don't know how one individual keeps up with all the different data that keeps coming in, one contradicting the other. Would it be too simple for this committee just to summarize our attempt here—we're going to meet many more witnesses—to say that we're not quite sure that we have all the evidence this committee needs? There are some things that I'm quite sure I would like to have put before committee, and we may never get them.
So what's your advice?
The Chair: Mr. Bailey, that might be an awkward question for the witness, given that he doesn't have our schedule of witnesses who are coming before us for the next month. And of course, Mr. Reid, we should probably make it clear that no one is forcing us to have this thing done by the end of the month; it's the necessity of time. Canadian Airlines is in trouble, and there has to be a resolution yesterday. So that's why we have this....
Mr. Reid hasn't seen who is coming before us and so on. Mr. Reid, perhaps you'd like to answer that question, but it's kind of awkward.
Prof. Douglas Reid: I'm not sure I'd be much help, Mr. Chairman.
The Chairman: Mr. Bailey.
Mr. Roy Bailey: Our choice is very clear. No matter what happens, there's going to be a dominant airline, and that's the term we're going to use. Now, to apply any other type of economics to the fact that there is going to be a dominant airline.... The responsibility that we have, as representatives of people from all over Canada who have elected us, is to give service and to give fares that are reasonable, whatever that means. How do we ever attack that when we know that, whatever deal is cut, we're going to have one dominant airline?
Prof. Douglas Reid: The simple answer is that your competitive markets will do that for free. Every other industry—and again, sir, this is a theme I've touched on two or three times already this morning—in the country has the same characteristics. Every competitor in every industry wants to be dominant. The trouble with airlines is that there just happens to be too few competitors, so any carrier that happens to become dominant is really quite visible.
I think the answer is that the easiest way, in effect, to give your constituents and your colleagues' constituents what it is they wish—and I don't wish to put words in your mouth, but let's assume those things are low fares, frequent departure times, and customer responsiveness, meaning that you don't get treated badly by the carrier—is competition. It's not a very hard decision. It's actually quite simple.
I'm not trying to portray competition as a miracle cure; I'm simply saying that in any market where you have it, you tend to have the kinds of behaviour that your constituents desire: low fares, choice, responsive companies. In any markets where you don't have competition, you have high prices, lack of choice, and bad service. We can think of many examples, I'm sure, in our own lives where we have encountered companies who have been in privileged positions in markets, where we felt we, as customers, had no ability to get what we wanted, or we didn't have the ability to get a fair deal. You only get a fair deal when the company knows your threat to walk across the aisle, as it were, to the other competitor is a genuine one.
I'm not sure what your schedule of witnesses is, but frankly, with respect to getting what it is your constituents want, I don't think you have a terribly complex decision to make. Actually, I think you have a very simple decision to make.
The Chair: Thanks, Mr. Bailey.
Mr. Calder, please.
Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you, Mr. Chairman.
Professor Reid, I found this very interesting. I want to deal with two components out of the two deals, first the Air Canada one, where they make the statement that Air Canada and Canadian will not be merged—the airlines will operate as separate entities and Canadian will become a subsidy of Air Canada. I have a concern with that.
I can see, for instance, say 18 months down the road, after they've worked with this, all of a sudden they come back and say “Gee, we really tried hard, but we just can't make this work. Of course we're kind of out of the loop now, because Canadian is now a subsidiary of Air Canada, and Air Canada decides that because it is just not profitable, we can't save it, we can't operate, and it's gone.” So I have a major concern for the employees in this situation. That's out of the Air Canada deal.
Out of the Onex deal, which is putting forward the possibility of merging the two together, there's the other issue here of the seniority ladder, where you have the pilots, for instance, in Canadian having more seniority than the ones who are in Air Canada. How do we meld that together without causing a lot of consternation among the employees at the same time? How would you address those two issues?
Prof. Douglas Reid: Let me take your second one. First of all, I don't think it's up to this committee, and hopefully the Department of Transport, to do the melding. The company has to do the melding based on whatever rules it negotiates. One thing I will say about pilots in my experience—and it's not as great as it is in some other areas of the research I do—is that they're very professional. They will attempt to do the right thing. What I can say is that all of the research that's been done on merger and acquisition shows very clearly that the moment you have intensively acrimonious transactions, the ability to actually put those companies together goes down. Cultures just don't merge as simply as milk does in coffee. It's a very complicated problem. In fact it may take decades to overcome.
The point here is that while the pilots and other staff will conduct themselves professionally, in a manner consistent with safety, it may not lead to the realization of the synergies and savings that bid proponents claim.
Let me deal with your first question. I honestly think that your first question about Air Canada coming back and saying that they don't think they can make Canadian work now and they have to do something about it is an example in general of the problem that all governments face with respect to monopolies, which is that once you actually create or allow the creation of a monopoly, governments become subordinate to that monopoly in the sense that monopolies will increase their bargaining power. The monopoly can come back to government a year or two after the deal is done and say “We had some troubles in the marketplace, we didn't anticipate them, we did our best, but this is where we're at today. Now we have to vary the terms of our agreement, whatever our agreement was, and if we don't, things will be bad for us. Therefore, by extension it will be bad for the government.”
So what most governments will do is quite happily accede, so that the matter goes away and the company can go off and do whatever it had to do in the way of restructuring, which they probably should have done in the first place.
So I think a very real issue is whether or not the committee is going to accurately be able to forecast whether either entity is going to come back in a couple of years, let's say if there is a recession, and say there are factors beyond their control—either there's a recession or the price of fuel went up—and they really have to change the terms of whatever agreement they happened to strike.
In competitive markets you eliminate part of that problem. So I think what you have to understand—and I say that with respect—is that the moment you sanction a certain type of market structure, you are locking in a certain pattern of bargaining power for a very long time.
Mr. Murray Calder: Okay. From that point I want to go to the big picture. I see three options. You have the two deals, and then there's status quo. Now, Kevin Benson said to us that time is the greatest enemy of Canadian Airlines. Yet if you take a look, you see you have Star Alliance on one side, which has United Airlines, Air Canada, and Lufthansa, and you have Oneworld, which has American and Canadian. I used the two at the very top, because now you've got the old rivalry between American and United Airlines. Either one of those deals is either going to take Air Canada out of Star Alliance and put it in Oneworld, or it's going to take Canadian out of Oneworld and put it into Star Alliance.
Prof. Douglas Reid: No.
Mr. Murray Calder: Why?
Prof. Douglas Reid: I'm just simply correcting the record. Apparently the Air Canada proposal would have Canadian Airlines affiliate with Delta—
Mr. Murray Calder: Yes.
Prof. Douglas Reid: —which is not a member of Oneworld.
Mr. Murray Calder: Okay, that's something that got by me then.
And then, of course, the third one—the status quo—would be that if it's allowed to go the way it is right now, as Kevin Benson says, Canadian will go bankrupt and disappear out of Oneworld.
In your opinion, would American Airlines stand by and watch that happen, the status quo? They've already injected some money into Canadian. Do you think there's a possibility they would inject more?
Prof. Douglas Reid: I don't know the answer to that question. Let's put it this way. What we know from media reports and from the company's own declarations, American Airlines, and indeed any alliance partner to any of the principal carriers, has a considerable vested interest in that carrier remaining alive and in their alliance. American Airlines benefits to a substantial degree by a passenger fee that it gets from Canadian. I've seen estimates anywhere from $250 million to $500 million a year of traffic. I don't really know which number is accurate; it depends on what you constitute as the basis for the calculation.
Suffice it to say that in that situation, any airline will have to make a decision as to what is in its best interest. And if it's in its best interest to keep its partner going, it may give it a cash injection, although I think right now American would be hard-pressed to justify that, given Canadian's performance.
I might disagree with one thing Mr. Benson said—and I don't know Mr. Benson, so I'm going to assume that your quote represents him fairly. Time may not be the greatest enemy of Canadian Airlines. The greatest enemy of Canadian Airlines may well be the inability for them to sell product and services that people want to buy, on the first hand, and on the second hand, to run an airline with a low enough cost structure to be able to make a profit in this industry. Time is merely cleansing out the industry in the way it usually does, except for government regulations that prohibit airline failures or make it difficult for the orderly retirement of capacity.
Mr. Murray Calder: This will be my last question. Do you see in the foreseeable future Canadian Airlines being profitable?
Prof. Douglas Reid: I don't believe any analyst has projected profitability in the future, and I don't know any reason current trends would change. A worrisome trend, for instance, has been the reduction of traffic on Canadian Airlines. They just released their third-quarter report—I believe a week or 10 days ago—that indicated their traffic was down 16.8% year to year, which is a very disturbing trend. Customers may have decided that Canadian Airlines is not going to succeed—I don't think that's accurate, by the way—and they may already be voting with their feet.
So in order for Canadian to return to a healthier financial state, they'll have to reverse that view. They'll have to reverse customer opinion, and that's a very difficult chore.
The Chair: Thanks, Mr. Calder.
Colleagues we'll have one last questioner, Mr. Comuzzi. Then we'll suspend for five minutes, and we'll have our second witness.
Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): If we're running late, Mr. Chairman, I'd be happy to—
The Chair: No, it's all right. We have time.
Mr. Joe Comuzzi: Thank you, Professor Reid.
I think all of my colleagues have said how confusing this issue is, but somewhere along the way you indicated that you didn't know why we treat these businesses in any special way, and I agree with that. Cut to the chase. If there is one airline after this war is over, you can guarantee—of this there will be no doubt—less service, higher prices, and less respect for the smaller centres in this country. You can guarantee right now there will be a tremendous loss in the workforce, by attrition and by other means. So those are givens, regardless of what anyone says.
The dilemma we find ourselves in is that the very people we're here to protect are the very people who built and paid for through their taxes every airport in this country, big or small, whether it's Moncton, Hamilton, Winnipeg, or wherever it may be. Taxpayers in this country over a period of time have paid for every airport in this country. The taxpayers in this country have paid for every runway in this country. The taxpayers in this country have paid for every air navigation system in this country.
If we allow this to happen, and this is my question, those very people who paid for the factory for these businesses in which to operate—and that's all it is, a business, and the Canadian taxpayer has paid for every facility for them to operate, and they buy the airplanes—if we allow this to happen, the very people we're here to protect are going to get the shaft. I'd like you to comment. How do we stop it?
Prof. Douglas Reid: Well, I think you've summarized eloquently and concisely the problem. I can't disagree with a word. I think I would add the following interpretations.
First of all, the problem is that monopolies behave in a very consistent way, regardless of what they claim they're going to do. This is not an airline phenomenon; it's the phenomenon of monopoly as a way of doing business. It does not serve the interest of customers. Monopolies are hostile to the interest that this committee has described as being paramount. That doesn't require a lot of education to tell; anybody who's studied first year economics will tell you the same thing.
I think the second thing is the facilities you've talked about constitute, in effect, not only a subsidy to the carrier, but also a substantial part of the national infrastructure. I'd like to suggest it's in the national interest that infrastructure yield the best return to the taxpayer who paid for it, presumably through the movement of people and goods with frequency in the lowest-cost-possible service.
I would like to suggest that the way to do that best is to start to treat airlines the way every other business in Canada is treated; that is, welcome foreign competition—not because our domestic product is bad, but welcome foreign competition because competition in general benefits customers from any quarter. Also, ensure that foreign competition serves to increase the utilization of those facilities while it benefits customers.
So I can't disagree at all with what you said. I believe what you said is actually quite insightful and wise. The dilemma then is how do you as a committee move to assert strongly the paramountcy of the customer interest, as opposed to the shareholder interest or the management interest in this matter? Because to do so, sir, is in effect declaring very simply that competition has to be in effect for Canadian aviation just as it is in every other service Canadians benefit from.
Mr. Joe Comuzzi: Thank you, Dr. Reid. I would assume then your thesis is that the Canadian airline industry, whatever it might be, should enter into the NAFTA age, that it's free and open competition, and if we're going to guarantee what I would like to see guaranteed at the end of the day, then it's wide open.
Prof. Douglas Reid: Yes, sir.
Mr. Joe Comuzzi: Wide open—let anyone come in that wants to fly, let anyone come into this country that can prove to us they operate a safe airline industry, let them come in for the benefit of the people who paid for the facilities they're going to be using.
Prof. Douglas Reid: Yes, sir, that's exactly right. I would just add again the one small point, if I may. I don't think there should be any irrational fear that the bulk of those entrants will be American. I think you may find we would be surprised, actually, given that Canada's a fairly multicultural country, at the number of airlines that might see this as an attractive place to do business. I don't think we should be worrying about an American invasion. I think we should worry more about a Canadian monopoly that will harm customers. So I would agree entirely with what you said.
Mr. Joe Comuzzi: Thank you, Dr. Reid.
Mr. Chair, this isn't a question, but there's something that happened as a tragedy over the weekend with that Egyptian air flight. I know we've discussed cabotage, and I wonder if perhaps somebody could research this for us. That airplane landed in Los Angeles from wherever, then picked up passengers and discharged passengers in Los Angeles, landed at JFK and picked up passengers and discharged passengers at JFK, and then had the tragedy. That's cabotage. How come they're operating in that way?
The Chair: We can get the research done for you, Joe.
Mr. Joe Comuzzi: I'd like to find that out. I mean, that's something we've been advised or told that....
The Chair: There are reciprocal arrangements between countries, the U.S. and others.
Mr. Joe Comuzzi: I think we should look at the kind of agreement that airline has with the United States.
The Chair: Sure, it might set a template for us. Thanks for your question, Joe. I'm going to put you down, Joe, as the first questioner for Onex this afternoon when they come out. It's a good question; you could ask them.
Not all mergers in Canada are successful, correct? What would be the failure rate or success rate? Is it 30%, 50%, 75% of all mergers? Do you know off the top of your head?
Prof. Douglas Reid: It will vary from industry to industry. I think these days double-digit failure rates close to 50% are not abnormal. Again, it depends on what you mean by failure. Does a failure mean that the two merged companies actually go bankrupt, or does it simply mean that a company post-merger is unable to compete economically in the same way it did pre-merger? Not to hedge the bet, again all the research that's been done on merger acquisition shows that most acquisitions generally do not create value for shareholders and that in many cases they destroy it. That's a rather arcane way of saying that they probably are neutral at best in terms of performance and may actually be bad.
Controversy in academia is light, to say the least, compared with the real world, but within academia this whole question, particularly in strategic management, as to whether or not merger and acquisition is a good thing to do or not is an unanswered question. But the thinking today is that companies that get too diversified, companies that fail to focus on what it is they do best, companies that engage in endless acquisitions as a way to grow as opposed to growing organically are probably not companies that are competitive in the long term.
The Chair: Mr. Reid, thank you very much for your presentation. Our committee thanks you.
Colleagues, we're suspended for five minutes for our next witness, Mr. Janda, to appear before us. Thank you.
The Chair: Colleagues, we will resume with our next witness, Mr. Richard Janda, who is with the law faculty at McGill University.
Mr. Janda, welcome to the Standing Committee on Transport. I understand your notes are on your computer, so we don't have a translated copy for the committee.
Colleagues, we'll have to go to our earpieces again.
Mr. Janda, when you are comfortable, you have 10 to 12 minutes and then we can start some questions. Thank you.
Mr. Richard Janda (Law Department, McGill University, Individual Presentation): Thank you very much, Mr. Chairman. I'd like to note that if members of the committee wish to ask me questions in French, I don't mind at all, but I'm going to make my presentation in English.
I have two points to raise with the committee this morning. The first is that section 47 of the Canada Transportation Act does not give the power to the Minister of Transport to impose the suspension of ordinary merger review under the Competition Act. This committee should report back to Parliament, saying so under the terms of the report that we'll be making in advance of November 26.
Secondly, the minister's plans to introduce retroactive legislation that would substitute cabinet review of an Air Canada-Canadian merger for that of the Competition Bureau is misguided. It will be administratively unworkable. It will undermine the credibility of Canadian competition law and it will give rise to potential trade frictions. It will undo the government's own transportation policy. And what is worse, it will subject what ought to be an independent process to the possibility of political interference.
This committee should recommend that the minister not introduce such legislation.
If we're discussing the restructuring of the air transport industry today, it is because on August 13 the Minister of Transport introduced through cabinet Standing Order 99-344. That standing order purported to invoke section 47 of the Canada Transportation Act and to suspend the application of the Competition Act with respect to a merger in the airline industry and with respect specifically to a merger between Canadian Airlines and Air Canada.
I should remind the members of the committee that under section 47 there is an obligation on the part of the minister to depose this standing order in Parliament and that it should then be referred for review back to the designated standing committee.
This is an extraordinary legislative power that exists under section 47. It's an emergency power. It's a power to go outside the framework of the Canada Transportation Act in cases of extraordinary disruption to the effective, continued operation of the Canadian transportation system.
There has to be a finding on the part of the minister that there has been such an extraordinary disruption. If there has been such an extraordinary disruption, then it is supposed to be submitted to a rigorous parliamentary review, including a review by this committee.
I have four points with respect to the improper use of section 47.
Point number one is that there has been no finding of an extraordinary disruption to the Canadian transportation system. If there is an imminent bankruptcy of Canadian Airlines International, that imminent bankruptcy has been on the horizon at least since 1993, when the Competition Tribunal looked into the possibility of the failure of Canadian Airlines International. You've heard from the competition commissioner about the continued surveillance of the possibility of the failing Canadian Airlines. So there's nothing new. Nor has it been made clear in the standing order what this imminent disruption is.
Point number two is that under the terms of section 47, if there is alternate legislation that makes it possible for the government to act, the extraordinary emergency power should not be used. There is alternative legislation. There is the Bankruptcy Act, which allows for the reorganization of a carrier if it should go into insolvency, and there is the Competition Act itself, which allows the competition commissioner to take into account the possibility of the failing firm under the terms of section 93. So there is a legislative framework in place.
Finally, under the terms of section 47, the minister has only to act in such a way as to take the minimum necessary steps to deal with issues such as pricing restraints and capacity restraints. There is no mention of merger review at all in section 47. The committee may be aware that there was in fact litigation pending before the Federal Court on this point that was ultimately dropped by Air Canada, but this was essentially the point that Air Canada was going to make before the Federal Court. And I think it still reposes in this committee to ask itself, was the section properly invoked? This was the court of last resort with respect to section 47.
The proof of the pudding that section 47 can't be used in this way is that the merger process allows the competition commissioner to review mergers for three years after they've been concluded. Section 47 has a 90-day sunset clause. This means that after the 90 days expire, the competition commissioner's jurisdiction remains intact. If the minister is proposing new retroactive legislation to give him the power to review the merger, it's only because section 47 doesn't give it to him. So I think it is incumbent upon this committee, which after all has to maintain the integrity of the legislative process and the emergency powers, to tell the minister that in its consideration section 47 cannot be used in the way it's been used.
In conclusion, this is not just a formalistic point being made to you by a law professor. This has to do with the right way to do policy. Let me make a contrast between what the Minister of Transport has done and what the Minister of Finance did in the case of the bank mergers. In that instance, the minister announced a process to review the policy and the Competition Bureau itself engaged in developing new merger guidelines to deal precisely with the problem of bank mergers. Incidentally, there is specific legislative provision in the Competition Act to allow for the review of bank mergers by the Minister of Finance, which does not exist with respect to airline mergers.
So the Minister of Finance launched a process to look at the restructuring of the banking industry. And, as you know, the banks jumped the gun. They announced a merger before that process was complete and they suffered the consequences, because the minister made it clear that this was illegitimate in the context of the whole review policy that was taking place.
What we have here, by contrast, is the minister saying go and figure out a merger and then we'll find out what the policy is afterwards. We'll invent the policy after the merger is complete. And this is not what section 47 was designed to achieve. Section 47 was designed to deal with emergencies facing the system. Airports are not available, a Y2K problem arises and air traffic control is out of whack. It was not meant to deal with a problem that has existed in the industry at least since 1993.
I want to touch on my second major point, which is related. It has to do with the minister's statements before this committee that he will be introducing legislation designed to give him retroactive powers to review this merger. I mentioned this to my first-year law class, and somebody said they were told that retroactive legislation is not a good thing and bills of attainder are not good things. We shouldn't be legislating with respect to specific individuals and specific transactions, and this is the character of the legislation the minister would introduce.
I've read closely the statements of the minister to this committee, and my understanding is that the minister wants to integrate the process of Competition Bureau review with review by cabinet.
I'll make a very simple recommendation to this committee. If the minister intends simply to supplement what it is that the Competition Bureau itself would impose by way of conditions, I can live with the appearance of retroactive legislation in this case. But if, as I think is the case, the minister plans to vet the Competition Bureau's conditions and choose which ones are applicable and which ones are not, then I think we have an undermining of the competition process in Canada.
The simple fact is that this committee has been asked to study the very conditions that the Competition Bureau could impose upon a merger. You were asked by the minister a week ago this very day to look at frequent flyer programs, computer reservation systems, travel agent commission overrides, surplus aircraft, unaffiliated regional charter carriers, and so on. These are the very areas of policy that the Competition Bureau itself could address through a merger review. There is no need to have second-guessing of these things, and this is why the public is concerned that there is meddling with a process which should otherwise be conducted independently.
I urge you to recommend to the minister that the competition process be maintained in its integrity and that the recommendations of the Competition Bureau with respect to this specific merger be the ones that govern the transaction.
The Chair: Thank you, Mr. Janda. You are aware that the minister has stated that there will be a full Competition Bureau review of whatever comes down the pike at the end of the day.
Mr. Richard Janda: Absolutely, but you will also note, Mr. Chair, what the minister has said in the appendix to his policy, annex A. I think I can quote to you from it.... The minister reserves the right to take account of the recommendations that are made by the Competition Commissioner and to impose other conditions that may be consistent with whatever Canadian transportation policy might be at the time.
Now, if this means that the conditions imposed by the competition commissioner will govern and that the minister can add further conditions, for example, with respect to job losses, which would not be within the purview of the Competition Act, that's one thing.
But if it means that the competition commissioner's recommendations, for example, with respect to frequent flyer points, with respect to computer reservation systems, with respect to majority and interest clauses at airports, if it means that these are all subject to review by the minister, I say that's illegitimate. The concern is not a purely hypothetical one, since the minister has come before this committee and has said to study those very areas where the competition commissioner has jurisdiction.
The Chair: Just before we move on, you give the perception, though, that there's some kind of closure once the minister or cabinet has made a decision and has put forward legislation, retroactive or otherwise. But in truth, at the end of the day, if legislation does come forward, whatever its content or however it was built, it still has to come back to this committee when introduced in the House of Commons after first reading.
Mr. Richard Janda: Fair enough, and I trust that this committee will do the right thing. My point has to do with—
The Chair: My point is that there is no closure at the point where the minister makes a decision on the policy and legislation is struck. Legislation still has a way to go before it can be adopted by the government.
Mr. Richard Janda: Fair enough, but we've been given a very clear signal as to what the minister is intending with respect to merger review in this instance.
I would like to remind the committee that the Canadian Transportation Act was designed to give the Competition Bureau jurisdiction with respect to merger review in Canada. That was one of the main policy thrusts of the 1996 legislation. Before that time, the National Transportation Agency also had some review powers. Now here's the first major test of the new legislation, and what happens but the minister says, well, we're not sure that we want to maintain it within the purview of the Competition Bureau.
I have no understanding as to how the minister and cabinet could enforce upon a merger conditions of the kind that would be placed on a merger by the competition commissioner through the competition tribunal process. There's a way of enforcing conditions before the competition tribunal.
I put it to you, Mr. Chair: what's going to happen if, for example, the competition commissioner says he thinks majority and interest clauses at airports should be struck, that those provisions should no longer exist to allow for new entry? Now, the minister has said that we may or may not accept that condition, which I find problematic. But even if the minister accepts the condition at the end of the day, how will it be enforced? Are parties going to run back to cabinet to enforce those conditions?
It seems to me that we're unnecessarily miring a process that is clear, independent, and in place. It's the process that is led by the competition commissioner and goes before the Competition Tribunal.
Just to put it in a trade context, you are well aware, I'm sure, that the European Commission is interested in the competition consequences of this transaction. Our neighbours to the south may be interested in the competition consequences of this transaction. They have independent processes for reviewing mergers.
I think Canada could find itself in an awkward situation if there were any sense that the ordinary, independent competition process was undermined or an end run was done around it. I'm not saying that's what the minister wants to do, but I think there is no justification for creating the impression.
The Chair: Mr. Bailey, please.
Mr. Roy Bailey: Thank you very much.
Mr. Janda, from day one on this committee it has bothered me that...and you have even made it worse, and you did it very well. The responsibilities of this committee, when we are working under a cloud of some doubt, boggle my mind. The sun hasn't shone through, for me, at least. Now you come along, very eloquent, and that cloud is even thicker, more dense, and I don't think I'll ever see the light.
There are the idea of revoking section 47, the idea of retroactive legislation, all of these things in a short time when Parliament wasn't in session, this committee wasn't in session, and we weren't called into session. The war was going on in the newspapers and the Canadian public was left there with their mouths open almost every morning when they picked up the newspapers.
Yet this committee has the responsibility—and it is a good committee, I can assure you of that—and we have to return in short order to report to the minister. What are we going to report? We may say, as you suggest, that we should do this, this, and this, but we're not going to be telling the minister anything he doesn't already know, because he is the one who brought it all about. So my question is, what can we do in this short period of time?
Mr. Richard Janda: I agree that the mess has been made.
First, I think there is a virtue in the committee taking its power to review the exercising of section 47, saying, for the future, that you don't think this is an appropriate way to use section 47. Even if it's done in gentle terms, I think that's a useful thing to say.
The mess can be cleaned up in part if what I take to be a somewhat ambiguous statement in appendix A of the minister's new policy is clarified so as to make it crystal clear to everyone that the competition commissioner's independent assessment of this merger, including the conditions that will be placed upon the merger, will stand, and that the only thing that the minister will do is add additional conditions—not substitute conditions, but the conditions that the commissioner has come up with.
I can well understand that the Minister of Transport is concerned about job losses, for example, and is concerned about guarantees in that regard. That is not within the authority of the competition commissioner. I can understand the minister wanting to have, as a package, conditions in addition to the conditions that are recommended by the competition commissioner.
I would strongly urge this committee, as it was invited to do by the minister in his remarks of last week, to give its input in assessing how practical and effective the measures recommended by the commissioner would be. I would strongly urge this committee to say no, we think the commissioner has pronounced, he has the expertise, those are conditions that fall within his jurisdiction, and they should simply be allowed to stand. That would be a very useful signal for this committee to send.
Mr. Roy Bailey: Thank you very much, sir.
The Chair: Thanks, Mr. Bailey.
Mr. Sekora, please.
Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): Thank you very much.
I listened with interest to what you're saying: that certainly section 47 is improper and that there are a few other things the minister is doing that are improper. But isn't that really only your opinion?
What I'm really addressing is that with me—I come from municipal politics—it is always the case, a fact, that if you get one lawyer in the house, you get one opinion, if you get another lawyer in the house, there are two opinions, and if you get another lawyer in the house there are three opinions.
Mr. Richard Janda: Well, I would certainly invite you, sir, to seek other opinions on the subject. I don't claim to be the cat's pyjamas as a lawyer. But I would suggest that if there was litigation before the Federal Court that was dropped, it's because it was understood within at least a cross-section of the legal community that there was an issue here. I would simply say that it falls to this committee to review the exercise of section 47. That's made clear in subsection 47(5).
You may come to a conclusion opposite to the conclusion I've reached, and that's fine, but I would urge you to come to a conclusion. I think it's important for the exercise of any emergence of power that the committee exercise its jurisdiction and consider whether the power is properly exercised. If you come to the conclusion that it was properly exercised, fine, but I urge you to put that in your report on November 26.
I'm telling you that I think it was not properly exercised, for the reasons I've given, and I leave it to your judgment as to whether or not I'm right.
Mr. Lou Sekora: You see, to me, things go to court and they get overturned, and then it goes to a higher court, and they're overturned or not overturned. The fact is, that is where the law society comes in. Lawyers intervene and fight, because they have studied the law and they know it this way, while another lawyer knows it this way. It differs, and rightfully so. You have your opinion but there could be another lawyer who has another opinion altogether.
I feel I'm here to decide, one, what is best for Canada, and two, what is best for the employees. Those are the two things I'm really interested in. Whether it be Air Canada or whether it be Onex or whatever, it's what's best for Canada from one coast to the other, not for one part of Canada when for another part of Canada it's not that good, and what's best for employees.
Mr. Milton, who was here the other day, said they'd have 2,500 job losses, and Canadian over 5,000. But when you really look at it, they're both wrong. Both figures are wrong. The fact is, Air Canada has 24,000 employees. I asked Mr. Milton how many retirees there were on a yearly basis. He didn't give me a figure, so I asked him to give me a percentage. He said 3%.
Well, 3% of 24,000 is 720. If Canadian Airlines has 16,000 and they have another 3%, that is 1,200 people a year retiring. In five years it's 6,000; it's more than 5,000. Those are normal attrition retirements.
So I think the figures from both sides are very fictitious. They're not true figures. To me, they just don't make any sense. They don't add up.
To me, most important is the service to small communities, service across Canada, and the employees. Those are the first things I must weigh out here. You know, I don't care what law is right, what law is wrong, or whatever it may be, right or wrong. The only thing is that the courts can decide that. Certainly the lawyers won't.
To me, then, that's the most important thing.
Mr. Richard Janda: If I may, Mr. Sekora, I understand your concern about job losses. Surely that's a major issue this committee and the minister will face. My point, though, is not just a technicality. It has to do with the integrity of the Competition Act process.
Why do we care about that? Consumers care about that. The competition commissioner has made it very clear that a monopoly will be a bad thing for consumers and that the only way we can have air monopoly is if we have some pretty stringent conditions attached to it. I think the commissioner has made a very strong case, an effective case, as to how to try to protect consumers against the backdrop of what is an unfortunate turn of events for the Canadian airline industry.
Let's think about employees, fine, but let's think about consumers as well. My concern is that if the minister is faced with the temptation—I'll put it very bluntly—of taking off conditions that would be imposed through a merger review so as to favour the merging parties.... In other words, it will be easier for you to survive if you don't have to face competition, and by the way, if you up the ante a little bit on the number of jobs you're protecting, then take away these unnecessary conditions that the competition commissioner wants to impose.
The Chair: Thank you, Mr. Sekora.
Mr. Asselin, please.
Mr. Gérard Asselin (Charlevoix, BQ): Mr. Janda, since this whole thing started, in January, there have been discussions between Onex and the Minister of Transport. In June, following discussions, correspondence and negotiations between Mr. Schwartz of Onex and the Minister of Transport, the latter has decided to invoke section 47 of the Competition Act. It seems to me that the whole process lacks transparency. It seems to me that it smacks of collusion between the Minister of Transport and Onex.
Of course, Onex and the Minister of Transport, given the financial problems faced by Canadian, saw a wonderful opportunity to start such discussions. The Minister's interference in this matter is obvious. To accommodate Onex and their wish to acquire one or both airlines, that is Air Canada and Canadian, the Minister invoked section 47 of the Competition Act so that Onex could make an offer. He even went as far as to announce that it might be possible to raise the 10% limit. This is something that has always been forbidden to banks, Petro-Canada and the Caisse de dépôt et placement du Québec, when it got involved in the CP Rail and CN deal.
Of course, it's up to the shareholders to accept one offer instead of the other. Assuming this offer is accepted by the shareholders, could the Canadian government, having interfered by invoking section 47 or amending the act to raise the famous 10% limit, be involved in a legal battle by people wishing to prove that the federal Minister of Transport gave Onex preferential treatment to the detriment of the other proponent? Don't we run the risk of getting ourselves in a fine mess for nothing, because the whole matter would be challenged in court or there would be injunctions regarding various aspects of the deal, which means that we would be faced with this problem for a year and a half or two? Is that possible?
Mr. Richard Janda: Mr. Asselin, I share your concerns, among which, I think, the most real is the possibility of rather complex legal actions by other jurisdictions such as the United States or maybe the European Commission. I am not really concerned by legal proceedings being instituted in Canada.
I am going to give you a very specific example of what could happen. For an alliance to be recognized in the United States, according to the American Federal Aviation Act, you have to be granted what is called antitrust immunity by the American Department of Transport.
The Department of Transport has always taken into account the way air transport is regulated in the other country concerned. For instance, when British Airways and US Air struck an alliance, both companies had a lot of trouble with the Department of Transport because other carriers, such as Delta, United, etc. opposed such an alliance saying that the process, in England, was not transparent, did not promote competition, etc.
So you can well imagine that in case Onex has its way on November 8, United Airlines is not going to be very happy and will take the necessary steps so that the Department of Transport does not grant antitrust immunity to that alliance in the States. This would lead to a lot of legal actions and problems in the United States.
I can't really say what other steps could be taken by United or other companies if that did not work, but we know very well that many legal proceedings have been taken, even before any agreement has been reached. So it's very easy to predict that lawyers are going to be kept busy by this matter.
The Chair: Thank you, Mr. Asselin.
Mr. Comuzzi, please.
Mr. Joe Comuzzi: Thank you, Mr. Chair, and welcome, Professor Janda.
Some of my questions will reflect my interest in administrative law, which I learned under your colleague who taught me, Professor Rod Macdonald. Give him my best. He's with the Law Reform Commission.
I'm interested very much in what you started your lecture today on, the imposition of section 47. I don't know if you're aware of it or not, but we have been requesting from the minister and from Canadian Airlines the official document that had to be presented to the government or to the Minister of Transport on the request by Canadian to suspend the operation of section 47. In that document, if I'm correct, they just can't say they want to suspend section 47; they have to show the extraordinary disruptions that would be caused. They have to give the reasons.
This is how this committee operates: we operate in a vacuum. Mr. Chair, we still have not received that document. We have requested the document. Don't take my time from Dr. Janda, but what's the disposition of this committee on receiving this document?
The Chair: Maybe we'll ask the clerk to respond to your question immediately, Joe. Your clock is stopped; we'll start the clerk's clock.
The Clerk of the Committee: The department had no problem releasing the paper. They wanted to check with Canadian Airlines officials and they're still in the process of getting the permission.
The Chair: Because...?
The Clerk: Confidentiality.
Mr. Joe Comuzzi: I don't know if that's confidential. It's a document that's sent—
The Chair: That's what we were told by the Department of Transport.
Mr. Joe Comuzzi: That's the reason they gave you. So they would sooner not release a document than give us a document.
The Chair: No, they just want to check. It's a document from one unit to another, so they want to check as a courtesy.
Mr. Joe Comuzzi: When do you think we will have a response?
The Clerk: Today.
Mr. Joe Comuzzi: Maybe I should rephrase the question. When do you think we will get the document?
The Chair: Now you're starting to eat into your time, Joe. You'd better turn your attention back to the witness. We're working on it; we'll get it as quickly as we can.
Mr. Joe Comuzzi: I just think it's so important that we have it. Do you agree with me?
Mr. Richard Janda: I certainly agree with you. The standing order itself, as I'm sure you are aware, does not explain what the nature of the extraordinary disruption is.
Mr. Joe Comuzzi: That's right.
Mr. Richard Janda: We can only glean from the surrounding circumstances that it has to do with the financial condition of Canadian Airlines International.
There was, as you may know, some effort at the time the legislation was introduced on the part of Air Canada to clarify the scope of section 47 and to add a provision that would state clearly that a bankruptcy was not an extraordinary condition; just as a labour disruption is not an extraordinary condition, so a bankruptcy is not an extraordinary condition. That was not added to the legislation at the time.
So I think the fairest thing to say—really following up on what Mr. Sekora said—is it remains unclear whether a bankruptcy can be an extraordinary disruption. But the fact of the matter is we haven't been told about that. Whatever the case may be, this committee is asked to review the reasons that are given. Presumably, if you're going to review you need the documentation.
Mr. Joe Comuzzi: Let's go one step further, because I like your analysis. The thrust of my argument since this committee started is whether section 47 was properly imposed. The jury's still out on that. I agree with you fully that the reasons are paramount. But on top of that, there are the procedural considerations that are enclosed in the statute to which you referred.
Let me take you one step further on that order. Every order laid before Parliament under section 4 shall be referred for review before the standing committee. Our terms of reference in this review do not include that. That order has still not been laid before the proper parliamentary committee, the transport committee, for review of that particular document exclusively. Would you agree with that?
Mr. Richard Janda: I would agree with that, and it's troubling to me. This is not just—
The Chair: Mr. Janda, I'm sorry to interrupt.
Joe, as a point of information, this committee is in receipt of the House of Commons order on section 47.
Mr. Joe Comuzzi: I haven't seen it.
The Chair: The clerk has it.
Mr. Joe Comuzzi: I stand corrected, but I have not seen it, and therefore the document to which I refer is the request for the application that has to be put here and that must be attached. Why are we here?
The Chair: That's a debate we can have later, but we are in receipt of the parliamentary—
Mr. Richard Janda: If I may, Mr. Chair, I had asked the clerk that specific question just before this session to clarify for myself what the state of affairs was. My understanding is that you have not yet been specifically requested under your terms of reference to review. I would simply recommend to this committee that as part of the documentation in the report you will be preparing to the minister for November 26, that review should be part of the document.
The Chair: Your opinion is noted.
Mr. Joe Comuzzi: I can't support your opinion unless I can see the document. There's a document—
The Chair: One minute, Joe.
Mr. Joe Comuzzi: I'll take off my tie, Mr. Chair. This is procedural.
The Chair: You have one minute, Joe.
Mr. Joe Comuzzi: That doesn't refer to the reasons section 47 was imposed.
The Chair: No. You said you hadn't seen it referred to committee. All I did was point out verification that it has been referred.
Mr. Joe Comuzzi: It has been referred to the committee, but the reasons for the—
The Chair: I haven't seen those.
Mr. Joe Comuzzi: You haven't seen the reasons and that's what we have to deal with, Mr. Chair, the reasons.
Dr. Janda, they're going to cut me off now, so I appreciate very much. I completely concur that your analysis of section 47 is accurate and is worthy of consideration. That's the starting point as we go down this road to discuss all the other issues. Do you agree with that?
Mr. Richard Janda: I agree with you.
Mr. Joe Comuzzi: Thank you.
The Chair: Thank you, Mr. Comuzzi.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: I want to comment and to assure you as well that I also think it's imperative that some comment be made in regard to the invocation of section 47.
I don't think there's any question from what I've seen or heard but that it was not necessary. And in further information that's come out, specifically some memos I have in front of me, there's an implication that it shouldn't have been done and was done in a very underhanded manner. So I agree with you, no question, and I agree with him wholeheartedly.
The Chair: Is that it?
Everybody settle down now. Mr. Dromisky, please.
Mr. Stan Dromisky: Yes, thank you very much.
Professor Janda, at the beginning of your presentation you claim there was no extraordinary disruptive situation that really warranted the action on behalf of the Minister of Transport and the Minister of Industry in August.
I can see you coming from a very clean-cut position as a lawyer. You stated that there doesn't seem to be any kind of definition of what is an extraordinary disruptive situation. So you're in a position where you could make a value judgment and make a declaration that what action took place was not warranted.
However, I think we could take a look beyond the economic results you referred to. You said that bankruptcy or the declaration of bankruptcy or the threat of bankruptcy really was really no justification for bringing this clause into the prominence it's obtaining today. However, I think there's more than just bankruptcy. I think we, as politicians, as individuals concerned about what's happening in our country, have to go beyond that. We have to look at what the results of a bankruptcy are—the social results, the economic results, and so forth. I can go on and on.
If I put all of those factors together in one package and say this is going to have a tremendous negative effect on a multitude of lives in our country—not only the 16,000 people who are directly involved, but thousands of others who are indirectly involved—the spin-offs will be horrendous, very disruptive and very negative.
As a politician who is concerned about Canadians, because there is no clean definition of what a disruptive situation this might be that's extraordinary, I can put all of this in one package and say that I think this is extremely extraordinary. It is a very disruptive situation, and we must act before disaster strikes this country.
Mr. Richard Janda: I certainly sympathize with your perspective, sir, and I think it is incumbent upon you and the minister to be concerned about job losses and the implications of bankruptcy. Just as we're now concerned about the Boisbriand plant in Quebec and the implications of that, for example, we would also be concerned about the potential dislocation from an insolvency of Canadian. With all due respect, though, that's really beside the point.
What we're talking about is an extraordinary disruption that justified the suspension of the Competition Act. There is nothing that prevents the minister, this committee, or cabinet from taking measures—just as it's trying to take measures in Boisbriand—to assist employees or to deal with whatever dislocation might arise out of a transaction. But if I may ask, where does that translate into the need to suspend the Competition Act when the Competition Act itself has provisions in it that are designed to take account of a failing firm?
The competition commissioner hasn't come before you and said he's just going to block this merger because it's a bad thing. The competition commissioner has had to take account of the fact that there will be a failing firm, and he has said to you that there are some important conditions that should be attached to any merger. So I just don't understand why, even in the name of protecting jobs and in the name of dealing with valid public policy considerations, the government needs to suspend the Competition Act. That's the part of it that doesn't compute.
Mr. Stan Dromisky: Okay, thank you very much.
The Chair: Thanks, Mr. Dromisky.
Mr. Casey, please.
Mr. Bill Casey: Thank you.
I have a technical question for you. In the Onex notes that were tabled at the court case in Quebec, there is a list of important meetings that they scheduled. One is with John Manley, who is the Minister of Industry, and it says:
...important that he
be informed if he is staying in his current role as he
and the Minister of Transport, acting together, can
action change without resorting to Competition
Is that accurate? Could the two ministers circumvent the competition board without using section 47, or do you think they're referring to section 47 there?
Mr. Richard Janda: Unfortunately, I don't have the document before me, but I do know the board of Onex met prior to August 13. According to reports in the newspapers, the board was seeking specific assurances that section 47 would be invoked. So we know that the fact that Onex was prepared to proceed with its transaction was, at least in part, contingent upon some lighter touch with respect to competition review. That's the part of it that is very disturbing, that's the part of it that smacks of interference, and that's the part of it that I think is unnecessary.
It seems to me that it's worth putting this in a slightly broader perspective. The reason we don't have cabinet review of mergers is unlike, for example, cabinet appeal from the CRTC or cabinet appeal from other kinds of regulatory bodies. That is to preserve the independence of a body that is going to be dealing with inherently significant financial interests. The only exception to that in the Competition Act is with respect to bank mergers, and the reason for that exception is that there is a domino effect that can be introduced into the financial system if a merger is not allowed in some instances.
This means that the Minister of Finance may sometimes prefer to see a merger even if it looks anti-competitive, in order to see a flight to quality in the banking sector rather than seeing other banks affected by contagion effect. But there is no such argument in the airline industry. Our neighbours to the south don't have review of mergers by cabinet. There's no cabinet review or its equivalent in Europe. No other jurisdiction that I know of has tried to create a parallel power, and it's because there's no rationale.
Mr. Bill Casey: If you're uncomfortable with that, you might consider that on that same list of meetings that Onex is proposing—they have several meetings—one is with Kevin Lynch, the Deputy Minister of Industry. He's important due to his influence at the competition board. Prior to that, it says:
Another key player is the clerk of the Privy
Council, Mel Cappe.... Mel Cappe will make the final
changes at the Deputy Minister level and knowing our
plans may influence his choices.
How does that make you feel?
Mr. Richard Janda: Not good, frankly.
The Chair: What's he reading from?
Mr. Bill Casey: These are documents from the Quebec court case. They are internal Onex notes on their strategy and their plans.
Mr. Richard Janda: If I may say so, Mr. Casey, as I understand it, there was a two-pronged strategy. One strategy was to avoid the Competition Bureau through section 47. The other strategy was to get their way with the Competition Bureau. I myself am relieved and pleased to see the vigour with which the competition commissioner has produced recommendations here, and I dare say that the fact the competition commissioner was a little bit off the hot seat helped in getting vigorous recommendations. If this committee says those recommendations should be adhered to, I think we'll have a reasonable outcome. I think there was certainly a danger of influence in the competition process itself, but that's another story that we can discuss if you want to.
Mr. Bill Casey: Here's another one I'll run by you for your interest as a law professor:
Will need to change the Canada Participation Act in
order to remove the 10% voting ownership restriction on
Eastco's shares. Seeking to do so may result in serious
political debate in the House of Commons. Our timing
of seeking approval during the summer recess will be
helpful in curbing that debate.
Mr. Richard Janda: I will restrict myself to saying that section 47 calls for the minister or the cabinet to set before Parliament, within seven sitting days, its use of this extraordinary power, and then to send it to committee. The idea is that there's a 90-day window and it's an emergency power, so there should be strict scrutiny of this. There should also be quick scrutiny of this. I find it very problematic that this was done over the summer in order to make scrutiny difficult.
Mr. Bill Casey: The phrase “curbing that debate” is their words.
The Chair: Thanks, Mr. Casey.
Mr. Joe Comuzzi: I have a point of order.
The Chair: Yes, Mr. Comuzzi.
Mr. Joe Comuzzi: We're referring to documents of which we don't have a copy, and we're referring to a document that is purported to be out of whatever the action is called in the Quebec Superior Court. Perhaps we should be precise on this. Are these the pleadings before the court? Are they being read verbatim from the pleadings? I think it's very important that—
Mr. Bill Casey: I can help you.
Mr. Joe Comuzzi: —if these documents are going to be referred to in this committee, Mr. Chairman, before we go any further—
The Chair: Let's ask Mr. Casey what they are.
Mr. Bill Casey: They're from Airline Industry Revitalization Co. v. Air Canada. They're a list of privileged documents supplied in the court case, and they're available.
The Chair: They're available publicly?
Mr. Bill Casey: Yes.
Mr. Joe Comuzzi: What court are they before?
Mr. Bill Casey: The Quebec Superior Court.
Mr. Joe Comuzzi: The Quebec Superior Court. And is that case still being heard?
Mr. Bill Casey: Yes, it is. In fact it's being heard today as we speak. The case is about Air Canada taking exception to the fact that Onex is making a proposal that's against the law, that being the 10% participation law.
The Chair: Colleagues, in order to distribute these documents, they have to be translated. We have to have a unanimous motion to do this without translation.
Mr. Joe Comuzzi: I think we need them.
The Chair: Are there any dissenters on whether we get these documents done?
Ms. Bev Desjarlais: Actually, I thought we agreed that we wouldn't do exactly what you're doing now, what you're asking about.
The Chair: No, there's a rule in the committee that says that before I circulate a document, it has to be translated unless there is unanimous consent from the committee to proceed.
Does anybody dissent on whether or not I should get these distributed? Monsieur Asselin.
Mr. Gérard Asselin: Mr. Chairman, I don't want to slow down the committee's work and I am willing to agree that the document, which is only available in English be distributed to members who wish to have it in English, although I'm asking that it be translated in French and that a copy of this translation be sent as soon as possible to me and to Mr. Guimond.
The Chair: Yes, we'll get copies done right now.
Mr. Casey, you have one minute.
Mr. Bill Casey: Well, where do I start?
The Chair: With the official court document, please.
Mr. Bill Casey: How about this one:
Onex would not proceed with this transaction unless we
received clear assurances from Ottawa that...the
combined airline would not be burdened in the future
with cumbersome regulatory requirements.
Do you have a thought on that? They have a monopoly here now, and they're saying that a condition of that is they don't want to be burdened with cumbersome regulatory requirements.
Mr. Richard Janda: Mr. Casey, I was astonished to see in the newspapers a discussion among stock analysts of why this looked like a good deal, either for Onex or Air Canada, on the grounds that it was going to secure a monopoly and thus would be a good investment. Some of you may have seen that in the business pages of the National Post. The fact of the matter is that there should be stringent regulatory controls on this transaction, and precisely of the kind the competition commissioner has outlined in his letter to the minister.
The Chair: Thanks, Mr. Casey.
Colleagues, I've come to the end of the question list. Thank you very much.
Mr. Janda, thank you very much for your presentation to our committee.
We stand adjourned until 3:30.