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STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 3, 1999

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[English]

The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good afternoon, colleagues. We have a bit of business first.

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Mr. Comuzzi had requested that correspondence that had taken place between the Minister of Transport and any of the players concerned be given to the committee. The committee clerk was in receipt of a letter between Canadian Airlines and Mr. Collenette, so we went ahead and had that letter translated. It has now been translated, so we will distribute that letter to you.

Now, on to business. Pursuant to Standing Order 108(2), this is a study on the future of the airline industry in Canada. We welcome Mr. Angus Kinnear, president of Canada 3000; and from Royal Aviation, we welcome president Al Graham, and Des Ryan, vice-president of customer service.

Gentlemen, welcome to the Standing Committee on Transport. We'll ask each of you to present to us a 10-minute presentation. At the conclusion of those, our members will direct questions to either presenter, so that we may get as many questions in as we can.

We'll begin with Mr. Kinnear from Canada 3000, if we might. Following Mr. Kinnear, I assume Mr. Graham will make his presentation. We'll then get into questions.

Thank you, gentlemen.

Mr. Kinnear, go ahead whenever you're ready.

Mr. Angus Kinnear (President, Canada 3000): Mr. Chairman, thank you for inviting us back to talk to the committee.

I've produced a small presentation. I hope each of the members of the committee have it.

First of all, just to remind you perhaps of the role that Canada 3000 currently plays in the aviation business in Canada, we were founded in 1988. We've been in the marketplace for 11 years, and our annual revenues amount to $740 million. After the two major carriers, we're the third largest passenger air carrier in Canada, with just short of three million passengers annually. We operate scheduled services in North America and charter services across the rest of the world. We serve 94 cities around the world. Eighty percent of our passengers buy air-only tickets, and 20% buy package holidays. In the domestic arena, on the scheduled services that we operate through the major cities of Canada, we currently fly 850,000 passengers a year, which is a 24% increase over the last two years. We operate 15 modern airplanes, which gives us the capability of a global operation down to a local domestic operation here in Canada. That's really how we sit in this marketplace today.

There are four things that I would ask the committee to pay particular attention to, because I believe they are very fundamental to the reshaping of the Canadian aviation industry.

The first one is in regard to airport slots at Canada's airports. It is our view that no airline, its affiliates, group of airlines, or commercial airline alliance should be permitted to or control more than 65% of the available runway slots at any airport in Canada during any 15-minute period. Perhaps I can illustrate.

At this present moment in time, Toronto operates 84 runway slots an hour for arriving and departing aircraft. That's 21 slots every 15 minutes. Our proposal is that there should be a restriction on any dominant carrier having more than 14 of those 21 runway slots in any given 15-minute period. That would leave 14 for the dominant carrier and seven for the rest of us. That would ensure that all of us could play a role in the future of Canada's aviation industry and not be shut out by a dominant carrier being able to take and monopolize all of the slots, particularly in peak hours.

We think it is very important that it is understood that if airlines do not have access to slots at airports, it doesn't matter how big they are or how small they are, they will not be able to compete with a dominant carrier who can block other competitors out of airports for hours at a time by taking over the most appropriate slots. That again is why I've suggested that the 15-minute period be the period of measure, so that no single hours or part-hours can be exclusive to one carrier or the next.

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Why 65%? Well, in a number of European studies that were done by the competitions people there, 65% is the number the Europeans have come up with. They believe this will prevent a dominant carrier being able to block out competition at airports in Europe. I have used exactly the same theory, in that what has been suggested in Europe should be applied across Canada so that we have a regulation that is acceptable on a more international basis.

My second point is in regard to access to smaller communities. It is quite clear that the dominant airline will have a large plethora of different types of air carriers, from the commuter-type carrier to the main-line type of carrier. In the main, the dominant carrier will be the one that serves the smaller communities in Canada, and it has given certain pledges that it will continue to provide service to those communities.

However, given the way in which airline fares are constructed, such that once a smaller community gets onto one of the mainstream carriers it can be kept there by the way in which fares are constructed out of the small centre, through a hub, and onward to the next large centre, really we're talking about what we call add-on fares. Therefore, my suggestion is that if any carrier has a monopoly position on any domestic route in Canada, it must make available to everybody an add-on fare, as if it were going to provide an add-on to its own carrier at its major hub. For example, suppose you were flying from Churchill, Manitoba, to Winnipeg, and were then proceeding from there to Denver. There would be an add-on fare from Churchill to Winnipeg to the mainline fare between Winnipeg and Denver. It would therefore give the people in Churchill the opportunity to change air carriers in Winnipeg. They could then fly with whichever carrier or whichever alliance they preferred, rather than being caught in having to fly their continuous journey with the carrier that originated their journey at the small centre.

The third point is in regard to the present air policy, and particularly the international air charter rules in Canada, which have been under review by the Department of Transport here for some years. We know the Department of Transport has had a number of conversations and has looked at reviewing the international charter regulations. I believe this may not have gone forward because of the anticipation of the circumstances we now find ourselves in, but if competition is to be improved, then the present outdated charter rules have to be changed. They should be changed so that all of us can compete on equal terms with the major scheduled air service providers on international routes.

Similarly, Canada's existing international scheduled air policy is anti-competitive in current circumstances because it was designed to serve the specific needs of the Air Canada and Canadian duopoly. Present circumstances dictate that a thorough review of Canada's scheduled air policy be undertaken and that an open skies policy be adopted for further competition to survive.

As an illustration, the United States has currently signed open skies policies with 36 nations around the world, allowing those nations to fly unlimited into the United States and for the United States' carriers to fly unlimited into those 36 foreign countries. Canada has an open skies policy with one country, the United States. We are in danger of being left behind if we don't open up our air service arrangements between all of the other countries that we have air service agreements with.

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Lastly, it's probably not fully understood that while we try to restructure the Canadian aviation industry, of course, other bodies elsewhere in the world are looking to restructure theirs. We are not alone in this endeavour.

The Association of European Airlines is proposing a complete overhaul of all legislation affecting airlines in Europe and the USA. The aim is to ultimately establish a free market zone with no airline ownership or cabotage restrictions. The Canadian government should seize the initiative to create a completely open skies environment within the NAFTA area of North America, which would then be expanded to incorporate NAFTA and European Union member countries. This would lead to a deregulation of air travel in Europe and North America and permit full and free competition between all carriers within this enlarged area.

My point again is that Canada stands to be left behind. At the present time, all the European airlines have free access to the market within the EU. The United States, as I said earlier, has signed 36 open skies agreements with the foreign countries around the world they have agreements with.

The next aim is to liberalize the air services agreement between the EU and the U.S.A. Canada has to be part of that greater liberal air service agreement; otherwise we will simply get left behind. If we get left behind, everything we're doing to try to restructure the industry in Canada will be for naught because we'll be back exactly where we started, in a place where we're uncompetitive.

Thank you, Mr. Chairman.

The Chair: Thanks very much, Mr. Kinnear.

Mr. Graham, please.

Mr. Al Graham (President, Royal Airlines): Mr. Chairman and members of the Standing Committee on Transport, I appreciate the opportunity to present Royal Aviation's perspective on the restructuring of the Canadian airline industry.

Royal Aviation is a Canadian-owned and -managed airline with both passenger and cargo divisions, headquartered in Montreal, Quebec. Royal has main bases in Montreal, Toronto, and Vancouver, where we employ approximately 1,000 Canadians.

Let me start by saying that we support the restructuring of our industry and sincerely believe that Canada needs a strong, profitable, high-quality flag carrier. Having said that, I do not intend to debate the merits of the Onex or Air Canada proposals; that will be up to the respective shareholders.

I would, however, like to dwell on what the industry will look like after the restructuring of Canada's two major scheduled airlines. In this respect, my statement will comment on the issues of regional feeder airlines, the importance of a level playing field, and operational and commercial concerns.

Let me start with the regional feeder airlines. Assuming there will be one dominant carrier—let's call it Mergco—there will continue to be a requirement for Mergco to have its own feeder network made up of either one national or several regional carriers across the country, as well as tier three carriers such as Central Mountain Air and Pacific Coastal Airlines in British Columbia, which serve some of the smaller communities in B.C.

The current feeder network is made up of wholly owned subsidiary airlines and airlines bound by very strong commercial agreements where no ownership is involved. In order to preserve the level of service enjoyed by some of the small communities, it only makes sense for the flag carrier to have a connector carrier presence in as many communities as possible. The question that remains is whether the feeder airlines need to be owned by Mergco, or should they be spun off to other interested parties, all the while maintaining their role as feeders bound by strong commercial agreements? That's what's open to debate, in my opinion. However, whether it be through ownership or commercial agreements, Mergco will require a strong efficient feeder system.

That leaves the low-cost scheduled airlines, such as WestJet, and the low-cost scheduled charter airlines, such as Canada 3000, Air Transat, ourselves, and any new entrants, to provide Canadians with a reasonably priced quality alternative.

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Can this alternative honestly be a viable, sustainable, cost-effective option for consumers? Will these carriers grow in order to fill the void created by the consolidation process of the two majors? The answer is a resounding yes. There are, however, caveats to that resounding yes, the most important one being the need for a level playing field.

That brings me to our second point, the level playing field. I believe the commissioner of the Competition Bureau stated that reregulation would be a bad thing for the airline industry, but conditions for a competitive framework would be required. I concur. In order to achieve the level playing field I mentioned previously, a competitive framework is a must.

There are several operational and commercial issues that must be addressed in order to achieve the level playing field. The new Mergco, because of its sheer size and dominance, could effectively control the entire airline industry and stifle competition if it so desired. Hence, certain safeguards must be introduced and strictly adhered to.

On the operational side of things, the two most critical levers for effective control are airport slots and airport facilities. At slot-controlled airports, slots are the deciding factor as to when and how often an airline can operate in and out of that airport. Airport facilities, such as check-in counters, departure gates, baggage rooms, and loading bridges can also be effective levers to hinder and deter competition if not allocated equitably.

The Montreal airport situation, while unique, is an example where low-cost charter and scheduled carriers cannot operate transborder or international flights out of the same airport as the two major Canadian airlines and their American counterparts. Today the low-cost and charter airlines can operate domestic flights only out of Dorval Airport and only until October 2002. Furthermore, we can only operate from a satellite terminal and never from the main terminal.

In order to ensure the level playing field and to guarantee quality competition, a formula must be developed to ensure that slots are reallocated to all other Canadian carriers, excluding, of course, Mergco subsidiaries and partners. Airport facilities need to be reallocated in order to ensure that all Canadian carriers, albeit on a smaller scale, have access to preferred facilities. The Dorval and Mirabel situation is probably best left for another day; however, it is a competitive issue nonetheless.

On the commercial side of the equation, the three most important issues from our perspective are the potential for predatory pricing and behaviour, international route designation, and Mergco straying from its current mission. I would like to start with the last issue first.

Competition could be significantly reduced if Mergco were permitted to form a Mergco charter airline, a Mergco low-cost airline, or a Mergco cargo airline. One airline cannot be permitted to be all things to all people, as that will effectively create a monopoly.

Predatory pricing and behaviour left uncontrolled have the potential of virtually eliminating competition. I'm not saying this is what would happen, but if the dominance of Mergco were left unchecked, it could happen.

In terms of international route designation, Mergco must not be able to hold all of the slots and rights of both carriers on routes where there is dual carrier designation.

In conclusion, you have probably noticed that I have offered only concerns and very little in the way of practical solutions. I don't have all the answers to these issues, but we certainly have our views on each and every issue. I would welcome the opportunity to work with other members of the airline community to discuss and formulate different options, limitations and allocations, to achieve the level playing field and ensure the healthy, competitive airline environment we as Canadians want and deserve.

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In short, we strongly support the restructuring of the airline industry and look forward to working with all interested parties to ensure the health of our great industry.

Thank you for your attention. I look forward to your questions.

The Chair: Mr. Graham, thank you for your presentation as well.

Colleagues, we'll go into five-minute rounds. It would be helpful to the chair, and probably the witnesses, if you'd direct a question to one of the two parties, Canada 3000 or Royal Airlines, so that they know which one is going to answer the question for us.

We'll begin with Val Meredith.

Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you.

I understand what you mean by the need to have slots opened and for airport facilities to be made available to charter and independent carriers, low-cost carriers, in the event that we have one major, dominant carrier. What I need clarification on is something you said, Mr. Kinnear, about these add-on airfares to other carriers, pro rata.

As I understand your explanation, the concern is that the major carrier will have the smaller communities tied up with their connections to the main hubs—Winnipeg, Toronto, Vancouver, Calgary, or wherever—and somehow there needs to be a control, if you will, to ensure that when the person in High Level or wherever buys a ticket to Edmonton, they have the freedom to use somebody else to go from that point on. How do you do that?

Mr. Angus Kinnear: The suggestion I have here is that fares are constructed by what are called add-ons. For example, let's say you're going to fly from Fort McMurray to Calgary, going to Japan. The add-on fare calculated from Fort McMurray to Calgary is in addition to the fare between Calgary and Japan. If the fare is a normal fare, Fort McMurray to Calgary, it will be higher than the add-on fare you're putting with the long-haul service. That means the dominant carrier could prevent anybody else from picking up traffic from any of the small communities, because they would have the preferential add-on fare.

What I am saying is if they have an add-on fare that they add to their own fares, that add-on fare has to be available to everybody else as well if they are a monopoly carrier.

Ms. Val Meredith: But that add-on fare is that company's fare.

Mr. Angus Kinnear: It's published.

Ms. Val Meredith: So what you're saying is the dominant carrier would then have to have a certain price for Fort McMurray to Calgary, and that price would be the same for all carriers. They couldn't offer a reduced add-on fare to Japan.

Mr. Angus Kinnear: No. What I'm saying is they can offer a reduced add-on fare to Japan, but if they make it available for themselves, they have to make it available for everyone else. I'm not saying you increase the fares for the smaller communities. What I'm saying is if they make a lower add-on fare available for themselves, they have to be made to offer it to everyone else.

Ms. Val Meredith: You're still losing me. Let's say Canada 3000 doesn't fly from Fort McMurray to Calgary, so they have to take this Mergco down to Calgary. That add-on fare is on the price from Calgary to Japan.

Mr. Angus Kinnear: It's two segments.

Ms. Val Meredith: Yes, but you can't provide the service from Fort McMurray to Calgary.

Mr. Angus Kinnear: Correct, but I can, for example, from Calgary to Honolulu. Let's use Honolulu as an example.

Ms. Val Meredith: So it's the fare from Calgary to wherever that you're not able to compete with.

Mr. Angus Kinnear: No, it's the fare from Fort McMurray to Calgary that I can't compete with, because—

Ms. Val Meredith: But you can't fly them from Fort McMurray to Calgary.

Mr. Angus Kinnear: That's correct.

Let's go back and try again. We have a situation where the major long-haul flight has a small add-on fare to a small community off of a hub. What we're saying is if Mergco is able to offer that small add-on fare to their international sector—if they publish an add-on fare out of Fort McMurray—then that add-on fare should be made available to everybody, not just be available to them to add to their own long-haul fare.

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Ms. Val Meredith: Okay. I think I do understand what you're saying. You're suggesting the government would have to somehow establish a regulation—

Mr. Angus Kinnear: No, it's published as an adult fare. It's right there. So if they have an adult fare, it's available to everybody.

Ms. Val Meredith: So you're saying it just has to be understood that that's going to happen. Or are you requesting...?

You've established a number of areas that are going to need some kind of agreement.

Mr. Angus Kinnear: It needs legislation.

Ms. Val Meredith: We need legislation or regulations that establish that Mergco can't hold more than 65% of the slot times—well, not Mergco, but we have to change the charter rules. Are you saying legislation or regulations have to somehow control the publication of the add-on fares or the allowance of the add-on fares going to all carriers?

Mr. Angus Kinnear: Yes.

Ms. Val Meredith: That needs to be covered under legislation?

Mr. Angus Kinnear: Yes.

The Chair: Thanks, Val.

Mr. Kinnear, is that just on Mergco? Is this a blanket policy you want, or is it for Mergco?

Mr. Angus Kinnear: I said it's if any company has a monopoly position between two points on a domestic route.

The Chair: All right.

Mr. Angus Kinnear: If there are two carriers serving the route—say WestJet and Mergco—we already have a deal with WestJet as an add-on fare, so they already give us that fare to add on to, say, a Vancouver-Hawaii fare out of the smaller cities in B.C. But we cannot get such a fare out of Air Canada or Canadian. What I'm saying is if they end up the sole monopoly carrier on any domestic route, then they have to make available their connector fares to the other carriers.

The Chair: Understood. Thank you.

Mr. Hubbard, please.

Mr. Charles Hubbard (Miramichi, Lib.): Permit me, Mr. Chairman, to follow up on the same line of questioning.

The argument would be, by the carrier providing the service to a small community, that they probably would be losing money in providing that service, and the benefit they would get from it would be from the extended fare. Do you really think that would be a business prospect that would be acceptable to the major carrier that would be providing the service to High Prairie or to Fort McMurray? Would it be realistic to expect them to do it?

Mr. Angus Kinnear: I thought the purpose of the whole of this was to contract the amount of services to ensure they were profitable and to be able to offer those levels of services to all of the people in the smaller communities.

We have to establish one thing in our minds. The scheduled air carriers publish roughly 20 fares for every route they fly. There are roughly 20 fare levels. That makes it very possible for them to say they're not going to increase the fares for the next five years, because all they're going to do is make fewer seats available at the lower fare levels, therefore forcing all the fares up. They're not changing the fares. They're just saying that instead of having 16 seats at the lowest fare, there will be two, and at the higher fare there will be 16.

So when you hear people promise they're not going to increase the fares, it's true they're not going to increase the fares; they're just going to restrict the availability of the lower fares.

Mr. Charles Hubbard: On another line of questioning, in terms of the slots, the airports have been divested, of course, and you're suggesting that Parliament or a legislative group should mandate to an airport. We probably have to be concerned—and we're hearing from the airports—that this whole process may cause a loss of revenue to most of the airports across this country. With that, of course, somehow that revenue has to be obtained from other sources.

No one has mentioned this in terms of NAV CANADA, but again, if we look at the efficiency this new group is going to have, a lot of the efficiency would probably result from a smaller number of flights going each day in terms of competition. Would either of your groups be concerned that, first of all, the slots can't be controlled, and secondly, with the fees being charged by airports and by NAV CANADA may put an increased burden on the service and the type of pricing you have at present?

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Mr. Angus Kinnear: One of our problems is that all of the airports in Canada are currently overbuilding their terminals. That's almost without exception. None of them, to my knowledge, has actually sat down and considered what this change in consolidation may mean. That's the first issue. It's true that everybody who's left in this process is going to get service and terminal fee hikes.

But if you do not control the access to the runways, you totally eliminate competition. You have this situation where if you don't limit his ability to control the slots at the airport, it will be a monopoly situation. For example, at the Toronto airport at the moment there are no slots available between 4 p.m. and 8 p.m. If you want to fly into and out of Pearson between 4 p.m. and 8 p.m., you can't get a slot. Now, approximately 83% of those slots would be controlled by Mergco. How can you compete with them if you are excluded for four hours of the day? When they reduce their number of flights, they will, of course, reduce them in the off-peak hours and not during the peak hours.

They can still continue to grow their business because they can in fact use larger airplanes on the same runway slot. One of the problems we have at Pearson is that because of the growth of the RJ services into and out of the United States, all of those runway slots have been gobbled up by small airplanes. So the actual number of people using a slot for each arrival and departure in Toronto has actually gone down in the last five years, not up. So if we're going to be able to consolidate the airplanes and therefore use bigger airplanes to do the same thing, there will be slots opening up as this process continues. What we mustn't do is allow Mergco or the monopoly carrier to actually hold all of those slots and to forbid anybody else from being able to operate. If that's the case, we will never be able to compete with them. If you lock up four or six hours of the day, it's impossible for us to offer services that are attractive to the consumer.

Mr. Al Graham: If I may add to that, one of the issues is that if you look at the constrained airports, the slot-controlled airports in Canada, you'll see that Air Canada is constrained today. They would like a lot more slots at Pearson. So you will not have surplus slots at Pearson, as an example. That won't happen. I can assure you that will definitely not happen. We will fill part of the void getting up to the 84 movements if we get the 65% rule. But Air Canada, or Mergco, whoever that is, will eat up all of those available slots, absolutely. You will have no vacant slots, not in the off-peak hours but in the peak hours when people want to travel.

The Chair: Thanks, Mr. Hubbard.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Mr. Chairman, I don't know if it's Mr. Kinnear or Mr. Graham who will be able to answer my question.

It seems that the further along we go the more mixed up I am. Neither your two companies nor Air Transat have the right to offer chartered services on a regular basis.

We mustn't forget that some years ago, Nationair tried to offer that kind of service between Montreal and Toronto but the competition, mainly Air Canada, declared a merciless price war. I wouldn't go so far as to say that's what directly caused Nationair to go bankrupt, but I will say that it was on the edge of the precipice and that helped it to take a step forward.

When we met the Minister or his senior officials, we asked them how consumers can be reassured that competition will be free and open if there's only one company in a monopoly situation. At the beginning, we called it Air Monopoly.

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We know that adjustments will have to be made concerning access to runway slots. Although I don't want to defend the Minister's position, I must admit that in his policy framework you can see some sensitivity to this aspect. Anyway, we'll have to see how this will materialize in the bill.

You seem to be part of the solution. Some people say that competition could come from the chartered carriers and I understand that you'd have to amend your licence to get the right to offer regular flights between Toronto-Vancouver, Toronto-Calgary or Montreal...

Mr. Al Graham: Mr. Guimond, our licences have already been amended and we have the right to offer scheduled flights, just as Air Canada does in Canada as well as the USA. That's why we say we represent a good part of the solution to what's going on right now with Canadian air carriers.

Mr. Michel Guimond: But you are availing yourselves of this right?

Mr. Al Graham: Yes, absolutely. We offer four daily flights between Montreal and Toronto and four between Toronto and Montreal. We offer exactly the same services as Air Canada and we have exactly the same kind of publicity. The only difference is that our rates are far lower than Air Canada's or Canadian's.

Mr. Michel Guimond: That's why I was saying before that the new dominant carrier shouldn't be able to offer low-cost tickets out of Hamilton or anywhere else.

Mr. Al Graham: That's exactly it.

Mr. Michel Guimond: If you're already part of the solution, how could you make up even more of that solution? You seem to think that there shouldn't be any other changes in your case.

Mr. Al Graham: As soon as consolidation begins, new possibilities will appear for carriers like us to offer more flights. For example, Air Canada has 11 daily Toronto-Vancouver flights while Canadian has 10. If there is consolidation, the new air carrier may perhaps only offer 12, 14 or 15 flights. As these two companies seem to be looking for the high heel clientele, that's a very interesting market opening for us between Toronto and Vancouver. We might even be able to offer two or three extra flights a day.

Mr. Michel Guimond: Is the situation the same internationally?

Mr. Al Graham: Of course. Earlier on, Mr. Kinnear mentioned the limits that restrict us on the international market.

Mr. Michel Guimond: In the document Canada 3000 submitted, it says: “The current international air charter rules in Canada are cumbersome and outdated”. Are you referring to Canadian regulations for international connections rather than to the international regulations?

Mr. Al Graham: Yes, exactly. I'll let Mr. Kinnear answer you for Canada 3000.

[English]

Mr. Angus Kinnear: At this present moment we can fly anywhere in Canada on exactly the same basis as Air Canada or Canadian, and we can fly anywhere between Canada and the United States in exactly the same way as can American Airlines, Air Canada, Delta, and Continental. So we have no difficulty with the arrangements in North America.

Once we get outside of North America, though, and into Europe or the South Pacific, we are in a situation where our regulations are different from those of the major carriers. That's where our licences become charter licences, and their licences are scheduled licences.

We have no argument within North America providing we have access to runway slots. But we cannot provide competition if you take away all the runway slots. Giving us licences to compete with Air Canada and Canadian is great providing we can land our airplanes on the runways. Unless you give us some guarantee that you can provide us with runway availability, we will never be able to mount a competitive service with these guys. If we couldn't fly between Toronto and Montreal between 4 p.m. and 8 p.m., what would be the point of running a service?

The Chair: Thanks, Mr. Guimond.

Mr. Jackson, please.

Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much, Mr. Chairman.

To our guests, through you, Mr. Chairman, one of the things we're here to do is to find out what is the public interest and how it can best be served. To any of our guests who want to tackle this question, if you were sitting in our position, where all of a sudden we have a crisis and we need to fix it forever, what would be the best service for Canadians in terms of the availability of flights at times they want them, to remote areas, at the best fare, and of course in the safest way?

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I have one other question. It's in my mind somewhere—and I'm not sure which group it was, whether it was AirNav or what have you, but the charter groups or groups like yourself do have a competitive advantage in some areas. You mentioned that you'd like to get some of the slots away from the big guys. What are you going to throw in as part of your competitive advantage to make the system better?

Mr. Angus Kinnear: I believe we already provide a very competitive service in all the routes we fly, domestically, transborder, and internationally. That's why nearly three million people fly with us each year. We believe we can go on offering the services we offer and keep a competitive air industry, provided we're given access. Al Graham's comment earlier was in regard to a level playing field.

I think I read a Globe and Mail article just after one of the last Air Canada announcements. They were going to start a low-fare carrier in Hamilton, and had been down to Hamilton with their cheque book and bought all the slots. Well, if they have held all the people in Hamilton hostage to the future and bought all the slots, I suppose that's very good for Air Canada, but I'm not sure it does much for the people of Hamilton.

We're saying it's not for the big carrier to come out with a cheque book and buy up everything that will prevent us from competing with them. We believe they have a job to provide a reasonable level of service across the country, and they will have the best opportunity to do that, but they cannot have a total monopoly on all the access into all the major airports at the exclusion of everybody else. That's the issue, and I think it's very important.

We will certainly make sure there's competition, provided we have one-third of the slots. That's all the rest of the carriers other than Mergco. It's not much to ask, but I think it's something that preserves competition both for foreign carriers and for ourselves.

Mr. Ovid Jackson: We talk of a monopoly and then we talk of a duopoly and a dominant carrier. Do we have to have that? What would happen if we opened up the markets completely to anybody who could fly and would do it safely under our regulations?

Mr. Angus Kinnear: That again is my fourth point in the common aviation area. What we're dealing with here is not a battle between two Canadian airlines, but a battle between two major international alliances. The alliances are there to subvert the requirements of ownership, because Air Canada can now feed Lufthansa in Germany and Lufthansa can feed Air Canada from their German provincial operations into Canada.

So you have two major networks that have totally subverted the idea of foreign ownership rules. You don't have to be in a foreign ownership situation if you have one of these major commercial alliances, because it obviates the need for them. So what we now see is a big play coming here between these major global alliance carrier connection systems, and we're in the middle of it. We just happen to be the bones they're fighting over. This is not the main game that's being played; we just happen to be the thing on the road that happens to get in the way right now.

I'm saying we have to take a more global approach to this and recognize that it isn't just Canada we're talking about; it's a much bigger area of the world and a much bigger influence. What we have to do is create a situation where we have an open air system in Europe and North America and totally free competition in all those marketplaces. But at the moment all that's happening is we are simply being manipulated by these global alliances, which are there to gain control of the passenger from wherever he originates to wherever he's going.

The Chair: Thanks, Mr. Jackson.

Ms. Desjarlais, please.

Ms. Bev Desjarlais (Churchill, NDP): Mr. Kinnear, I want to clarify. When you're talking in your presentation in regard to the current international air charter rules and that they need to be modernized to reflect current realities, allowing international charter services to compete on equal terms with scheduled air service providers, are you suggesting that you provide the same services while providing scheduled air service as well?

• 1615

Mr. Angus Kinnear: I think we virtually do.

For example, this summer, all summer long, we've flown a wide body A-330 to London-Gatwick, every day from Toronto, and it's just like any other scheduled service. But we're not a scheduled service; we're a charter service, so there are certain rules. For example, technically our passengers have to stay six nights. You can't use our service and go to the U.K. and come back in three nights. You have to stay six nights, and so on.

Ms. Bev Desjarlais: Okay. Regarding those rules that are in place, is that because of your Canadian licence, or are those international rules? I don't think it ever really came out clearly when you were answering.

Mr. Angus Kinnear: It's possibly both, depending on the country you're going to. It is certainly Canada first, and secondly, the agreement Canada then has with the country the bilateral licence is being negotiated with. That is why the Americans are having open skies policies with all of their foreign countries, so that people can fly into and out of those various countries from and to the U.S.A. without any restrictions. That's the purpose of the Americans opening up the skies to increased competition.

Ms. Bev Desjarlais: So what you want to see then is that you should be allowed to do whatever, the same way as the one dominant carrier would be. However, I believe it was you as well who made the statement that the dominant carrier should not be allowed to do charter carrying, because they can't be one thing or they can't be everything to—

Mr. Angus Kinnear: That was my colleague's statement, not mine.

Ms. Bev Desjarlais: I wonder, if in one position you're saying you should be allowed into the scheduled air service but the dominant carrier should not be allowed into the charter service....

Mr. Al Graham: Absolutely.

Ms. Bev Desjarlais: Was that what was being said?

Mr. Al Graham: That really wasn't what I said. It was that they should not be allowed to form a charter carrier, a separate company strictly for leisure to go out and compete against the charter carriers. By all means, they can do a charter flight, and they do charters today. They do sports charters against us today. That exists in the market.

Ms. Bev Desjarlais: So why would there be a need to restrict them from having their own?

Mr. Al Graham: If they go now and set up a low-cost carrier, which is not their mission today, if they set up their own cargo company, which is not their mission today, and the charter carrier is not their mission today—they can set up four subsidiaries in this country.

Ms. Bev Desjarlais: We would still need regulation then to say this wouldn't happen.

Mr. Al Graham: That is my feeling.

Ms. Bev Desjarlais: With regard to slots available at the airports, how are those slots allotted to chartered carriers right now?

Mr. Angus Kinnear: What happens is that there are two slot meetings in the world twice a year. One is in November, and it happens to be in Montreal next week. Everybody submits their requirements for runway slots to all the airport authorities around the world, and we all meet somewhere in the world twice a year to sort out who gets to fly when.

But most of the slots are what we call grandfathered. If you had a 3 p.m. slot on a Wednesday last year, then you get that 3 p.m. slot again on a Wednesday this year. It's only when you change schedules or slots become available that other carriers can obtain those slots. That's how it's generally done around the world. So we all meet in one city and negotiate what time we can fly from this city and what time we have to get to that city and hope we don't have to spend hours circling before we get a landing slot or whatever.

Ms. Bev Desjarlais: Who makes the final decision as to who gets what?

Mr. Angus Kinnear: It's the airport slot coordinator, who is a guy who operates on behalf of all the airlines through the auspices of IATA.

Mr. Al Graham: But if you look at the Toronto situation in particular...I was the general manager of Toronto airport for Air Canada back in 1987, and we were allowed 83 movements an hour. The engineering standard for the total airport was 83 movements. So you can see that if you look at who had the historics back in 1987, as an example, it was clearly the senior airlines, the airlines that had lots and lots of tradition. So you had Canadian and Air Canada.

Today at Toronto airport we're still at 83 movements an hour. I can assure you that carriers other than the traditional carriers have a very difficult time getting slots in the important hours. Of course, you can get slots at 11 a.m., if you so desire, but they're just not available in the peak.

The Chair: Thank you, Bev.

Ms. Bev Desjarlais: How many slots do you have at, say, Pearson in Toronto?

• 1620

Mr. Angus Kinnear: I looked at the statistics for this summer, and we have about 3.3% of the slots as Canada 3000. I think if you take us, Royal, and Transat, we probably hold just under 10% of the total slots at Toronto. The essence is, up until now there has been competition because Canadian and Air Canada have shared those slots between them. When you merge them together, then instead of each carrier having roughly 35% to 40% of the slots, the merged carrier has closer to 80% of the slots. So there is no competition. That's what Onex is buying.

Mr. Al Graham: Once you've consolidated those slots between the two carriers, they will keep the slots they own and they will give them to an Air Ontario...they're just going to keep their base. It's protection, and it's logical. I understand it, but it's very difficult for us.

The Chair: Thank you, Bev.

Mr. Comuzzi please.

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Welcome, gentlemen. I'm very interested in hearing your comments.

I guess I've got to confess a certain bias inasmuch as I can. I really have to compliment you today because your equipment is excellent, your service in the air when travelling economy is second to none, and your rates are very nice.

As an example, I was looking over at Ms. Meredith just a moment ago. She invited me to some—

Ms. Val Meredith: Don't blame it on me.

Mr. Joe Comuzzi: No, I'm not. But she lives in Vancouver and I had to attend a meeting there on Cascadia. I forget how long ago it was. I went on one of your airlines. The rate, back and forth, was something less than $600. Now, when I compared that with the other two major airlines, I was looking at a price of around $2,400 or $2,500.

I'm trying to arrange something this weekend, and your prices are somewhere less than $200. If I go on Thursday with one of the other majors, it's $600; but if I go on Friday—I've got to go someplace in the United States—it's $1,500.

A voice: Where are you going, Joe?

Mr. Joe Comuzzi: I'm not telling you.

Some hon. members: Oh, oh!

Mr. Joe Comuzzi: I think you folks play a very important role in the future of the Canadian airline industry, especially for the consumers in this country.

Before I get to that, I want to ask Mr. Graham a question. I'll take you back two or three years. I think you still fly into Thunder Bay, but there was a time when you introduced a flight from Toronto to Thunder Bay and back again. It was a very competitive rate, and you were getting a huge amount of traffic.

Then—and this is a question—I often wondered if what happened was that immediately the other two airlines matched your fare or lowered their fare, which kind of took you out of the market for a while. The minute you were out of the market, their fares went up. And you're not back in the market as predominantly as you once were. Obviously you weren't making a buck. Explain that to me, please. What happened, Mr. Graham?

Mr. Al Graham: Unfortunately, I wasn't there in those years. Would you mind if Mr. Ryan responded to that, sir?

Mr. Joe Comuzzi: Mr. Ryan, if you would.

Mr. Des Ryan (Vice-President, Customer Service, Royal Airlines): We launched a spectacular service to Thunder Bay from Pearson at incredible rates. The flights were full, and we started to gain market share.

The two major carriers awoke one morning to find out we had basically snatched the business from under their noses at spectacular rates. They in turn introduced predatory pricing and overnight took the business back from us—they basically threw us out of the marketplace. As you can see, the rates are back up there.

Mr. Joe Comuzzi: Your rates, I think, at that time were something less than $200 return. Do you recall?

Mr. Des Ryan: It was $199 return.

Mr. Joe Comuzzi: So that tells us a story about what's happening here.

Mr. Des Ryan: It certainly does.

Mr. Joe Comuzzi: They met the competitive rates for a short period of time until you were out of the market. Then when you were out of the market, the rates went back up to $800, $900, $1,000, or whatever they are now.

Mr. Des Ryan: That's why one of our key points is predatory pricing and predatory behaviour. It doesn't have to be just pricing. It can be the use of frequent flyer programs, which are very costly programs, that we, for the most part, are not into. So there are many ways of attacking from a predatory viewpoint.

Mr. Joe Comuzzi: That's very important, because I think every member of the committee should be aware of what happens. I'd be very interested in your comments on how, when we go down this road, and with whatever we end up with, we are going to prevent that from happening if you've got a dominant or a monopolistic carrier in the marketplace that can do that and can withstand the financial pressure. Obviously, in regard to withstanding the financial pressure, whether they can or not, they're going to do it anyway.

• 1625

Mr. Angus Kinnear: They'll have more than 65% of the slots.

Mr. Joe Comuzzi: Okay.

Mr. Al Graham: Slots are a crucial issue. They control a lot.

Mr. Joe Comuzzi: Even for Thunder Bay, where slots are not an issue—

Mr. Al Graham: But Toronto is.

Mr. Joe Comuzzi: Toronto is, okay.

Mr. Al Graham: But you're absolutely correct, if we stay on a Montreal-Toronto market, and we're going at $298 return, and if Mergco decides they're going into the market and they're going to charge $29 return to see who's got the deeper pockets, the end is inevitable.

Mr. Joe Comuzzi: Yes, exactly.

Mr. Al Graham: There is no question.

Mr. Joe Comuzzi: And you don't have as deep pockets.

Mr. Al Graham: No, no.

Mr. Joe Comuzzi: Tell me something about each of your businesses. This is my final question, Mr. Chairman. I'd like to know when you began, and...you're obviously a private company, so you don't want to reveal your financial statements, but—

Mr. Al Graham: We're public.

Mr. Joe Comuzzi: Oh, you're public. Okay.

I'd like to look at your financial health and how long you've been in business.

Mr. Al Graham: We started in 1992. We had some very good years at the beginning, when we had older aircraft. As we moved into the newer-vintage airplanes, and with our recent deal with one of the major tour operators in Canada, we renewed our fleet, and it was a significant cost to us. Last year was a very difficult winter in the charter industry across the country. But I'm pleased to say we've had an excellent spring and summer, and things are on the rebound.

Mr. Angus Kinnear: I gave you a synopsis in the handout you had. We've been in business for 11 years. We have a revenue of $740 million annually. We carry just under three million passengers. We serve 94 cities around the world. And in the domestic market, we have 852,000 passengers a year. So there are 852,000 Canadians flying with us domestically right now. We've built that business—it's increased 24%—in the last two years.

So we can compete. We don't have a problem competing, providing we're allowed on the ice. But if you keep us in the stands, then we can never compete with these guys. We can score goals and we can compete with them, providing we get ice time, and that means runway slots.

The Chair: Thanks, Mr. Comuzzi.

I was trying to get your attention earlier because I wanted you to ask that next question. When Mr. Graham responded, you said “If you give us the slots, we can compete”. But then there was the example of the $29 versus the $150 or $200 flight. Do you have any kind of suggestion on how we can prevent the deeper-pocket airline from taking you out? That's what I'd like to know.

Mr. Al Graham: Clearly, what we have to develop is some sort of basement or threshold, and I don't know what the formula is. That's why I was suggesting we need to develop those kinds of formulas, where a carrier such as Mergco just cannot go in. Because of the deep pockets, they could put us all out of business in short order.

The Chair: So you're saying regulate the price at the basement.

Mr. Al Graham: At the basement.

The Chair: Mr. Kinnear, you don't like that idea.

Mr. Angus Kinnear: You regulate slots, because they won't use expensive slots to sell $29 fares. They can't afford to. Look at the amounts of money that are being offered for these carriers. There's nothing low cost about it.

The Chair: Let's be a little more reasonable about it—$29 is ridiculous. If you're flying Pearson-Ottawa, you can get a rate in economy, full fare, at I think $600, but of course you've got 20 choices, and you can bring it down to about $350.

Mr. Angus Kinnear: Our regular round trip fare between Toronto and Montreal is $149.

The Chair: Right. What I'm suggesting to you is that the deep-pocket airline can say “We'll do Toronto-Ottawa. We'll put it on an economy-class ticket.” You can do it for $250 or $200. And your ticket's going to cost $200, ballpark, if you're flying main-slot time, right?

Mr. Angus Kinnear: I do not believe we should be asking for anybody to regulate fares—

The Chair: All right.

Mr. Angus Kinnear: —or frequency or anything else. The market will take care of what is necessary to do. But the only way you can have an open, free market is to limit the slot that is available to the carriers. The merged company will not use scarce slots to sell below-cost tickets. What they will do is use those slots to maximize the profit they can raise. As long as they have the ability to fly the programs, they will fly them. They're in business, like us, to make money too.

• 1630

The Chair: Thank you for that input and that explanation.

Mr. Bill Graham: The only caveat, if I may, Mr. Keyes, is that there are many airports in this country that are not slot controlled. In fact, there are really only two in this country that are slot controlled, those being Vancouver and Toronto—Montreal to a degree, but the real issue is Toronto. I agree totally with Mr. Kinnear on the Toronto slot situation. But there are many others, such as a Montreal-Halifax route, where slots are really not an issue.

The Chair: Then how do you control losing out? Do you have a suggestion on how you control losing out to the deep-pocketed airline on a Toronto-Halifax route?

Mr. Angus Kinnear: We have to make a commercial decision if we want to fly. If we think their fares are unreasonable, we'll put in competition against them. If they want to come down and match us, then it's to the benefit of the consumer. That's the war the consumer has been winning for the last ten years.

The Chair: But the logical extension is that you fear them having the ability to lower their prices to take you out of the market and then come back and put their prices back on top again. How do you try to control that? I guess you could go to predatory pricing stuff, but—

Mr. Angus Kinnear: We compete with them now. We carry 850,000 domestic passengers a year with a two-airline system that's running a price war. We still survive. We still move 850,000 a year in the present circumstances. Mergco is going to be wanting to increase its prices to cover the costs of this very expensive exercise they're going through. I don't believe it's Air Canada's management's thought processes or the Onex thought processes that they're going to buy all of these airlines and run them at a loss.

The Chair: Okay.

Mr. Angus Kinnear: As long as they have a higher cost structure than we do, at some point they're going to have to charge more.

The question is, can they run us off the road? The only way they can run us off the road is if they have a monopoly slot position, because if we can't operate, it doesn't matter what fare we charge; we can't be there.

The Chair: Thanks, Mr. Kinnear.

Mr. Casey, please.

Mr. Bill Casey (Cumberland—Colchester, PC): Thank you very much.

Mr. Kinnear, I don't remember all the witnesses who come to this committee, but I remember that your presentation last time was really positive and exciting.

You bring to the table the number one concern that we've heard, and that is competition. The example Mr. Comuzzi gave about how the charter entered the field, competed, and then was squeezed out emphasizes how important that is. The charters are going to compete from the main centres to the main centres, but there are an awful lot of regional destinations that there will be no competition on. That is kind of scary.

That was a comment, but I do have some questions. What can we do to regulate those slots? Does the Department of Transport develop legislation that says all airports must be required to designate 35% of the slots to other than the dominant carrier?

Mr. Angus Kinnear: Yes, I believe that is the answer. Secondly, remember that up until now there have been two regional airlines competing for the services to the smaller centres. To add a third or a fourth competitor wouldn't have been commercially viable.

That doesn't mean to say that as this consolidation happens and the two regional carriers become one, if that's the way in which this merge cooperates, there isn't a further ability for us to develop more services into smaller centres. But at this present moment, there's an overcapacity into smaller centres, not an undercapacity.

Mr. Bill Casey: Right.

Mr. Angus Kinnear: If that were to change, we would look at the opportunities and see whether it was worthwhile developing services to the smaller centres.

Mr. Bill Casey: I have another question. In your brochure you say, “The aim is to ultimately establish a free market zone with no airline ownership or cabotage restrictions.”

Would you recommend the Government of Canada do that without reciprocal agreements with other countries, like the United States? Should we allow cabotage without reciprocal rights?

Mr. Angus Kinnear: No. I am firmly against anybody offering cabotage without reciprocal rights for the same thing, although of course by default, I guess, you could say that American Airlines today has 50% of the cabotage routes in Canada.

Mr. Bill Casey: I suppose you could.

• 1635

Moving right along, you said you have a deal with WestJet on the add-on fare. Do you have a deal with either Air Canada or Canadian Airlines now?

Mr. Angus Kinnear: No, sir. They would not offer us an add-on fare.

Mr. Bill Casey: In the example you used—I believe it was from Churchill to Winnipeg to Denver—a person wouldn't ordinarily pay full fare from Churchill to Winnipeg if they were going on to Denver.

Mr. Angus Kinnear: Yes. Fares are constructed based on a whole series of things, including mileage or other concerns, but basically the major scheduled carriers operate out of hubs such as Toronto. If they're flying Toronto to Paris and they start in Thunder Bay or North Bay or somewhere, there's an add-on fare that gets them from there into the hub.

Mr. Bill Casey: That's not a full fare.

Mr. Angus Kinnear: That's not a full fare. That add-on fare is not available to us; it is available to them. I'm saying that if you have a monopoly route, if you're the only carrier, all we ask is that if you have a special fare you add on to your hub, you make it available to everyone else. That allows the small communities to be able to make a choice as to who they fly with when they get to the major hub airport, instead of being locked in to the carrier at the originating small community.

Mr. Bill Casey: So that could be another regulation in the new policy, one about add-ons. If they give a discounted fare to themselves for an add-on, it should be applicable to everybody—in the case where there's only one.

Mr. Angus Kinnear: Exactly.

Mr. Bill Casey: Where did you get the name Canada 3000?

Mr. Angus Kinnear: It's a long story and I don't think the chairman will permit me that amount of time.

Mr. Bill Casey: It can't be that long.

The Chair: Maybe you can ask him afterwards.

Mr. Bill Casey: All right. Thanks very much.

The Chair: Thank you, Mr. Casey.

I have just one quick question.

When we leave these meetings, many of us are approached by people. The talk out there is that if there is one dominant carrier at the end of the day there will certainly not be enough domestic competition and the dominant carrier will just take over.

Now, if there is regulation to ensure that one-third of the slots at the dominant airports are there for domestic carriers and if your other suggestions are followed through on, is there going to be enough domestic competition against the dominant carrier?

Mr. Angus Kinnear: Yes, undoubtedly.

The Chair: Mr. Graham.

Mr. Al Graham: Yes, absolutely.

The Chair: Thank you, gentlemen.

Mr. Calder, please.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.

Gentlemen, I have to apologize. We should get into the issue of cloning because I think we all need clones here too; it's just a matter of the amount of committees we sit on. I was at another one.

I'm curious, but maybe this question has already been asked. We have two proposals on the table and we actually have three options that could be looked at here. We have the Air Canada proposal, the Onex proposal, and also the possibility of the status quo and dealing with the Air Canada and Canadian issue.

You obviously are watching intently from the sidelines. Is there any deal you see that has an advantage for the regional carriers? Or is there a deal that doesn't have an advantage for them? Maybe you could comment on that.

Mr. Angus Kinnear: The only thing we can't have is the present status quo. It can't go on. Canadian has made it very clear that they will run out of funds in a relatively short time, so the shape of the Canadian industry has to change. The question is, do you allow Canadian to go out of business, which would be the normal course of events, or do you construct something different to prevent that happening?

It would seem that the government has decided that the first alternative isn't acceptable and that a second option has to be played. That's what we're watching. But none of us yet know what the final offers and the final intents of the two combatants are, so I think it's very difficult to comment on either side. But certainly, an awful lot of promises are being made, and I'm not sure they can all be kept.

Mr. Murray Calder: I have asked this question before, when Mr. von Finckenstein appeared in front of us. However this is going to be handled, there are probably going to be some surplus aircraft on the market. Air Canada, in their proposal, has already said they would be considering starting up a discount carrier out of the Mount Hope airport. I'd like your comment on that.

• 1640

The other thing is that with the surplus aircraft, the DC-9s, DC-10s, and 737-200s, if they were sold outside of the country, it would be very hard to bring them back in. Would that have any effect on you people if there was in fact a void that you could jump into and pick up, when you might need some extra aircraft, or is that not a problem?

Mr. Al Graham: From our perspective at Royal, there are some of the airplanes within their fleet that are compatible with our current fleet, so we would very closely watch the disposal of aircraft coming out of Mergco, if you will. Absolutely. But to add a DC-10 to our fleet, for example, would not be something that would make sense to us.

Mr. Murray Calder: Okay. I ask because the issue I made here is that if it goes outside of the country, it's probably a lot more difficult to bring it back in because of the safety standards we have here.

Mr. Al Graham: It is, but it's doable. We do bring airplanes back in, absolutely.

Mr. Murray Calder: What about the Mount Hope carrier, the proposal within Air Canada idea? What do you think about that?

Mr. Angus Kinnear: Well, it's very difficult to see how these guys can operate a low-cost carrier. The only way they could do that is by totally subsidizing it. By subsidizing it, all they would be doing would be trying to deal with the carriers in our ranking in exactly the same way that, for example, Air Canada has dealt with Canadian over the last 10 years. That is to put them out of business. So we are aware of that.

I suppose an interesting example is the British Airways experiment with their low-cost carrier, GO, at Stanstead in England. They've introduced a low-cost carrier there that operates 1037s. It has lost just over £35 million in the last twelve months, and obviously British Airways' main line is subsidizing that carrier.

It's back to the deep pockets thing again. How much does the new Mergco want to lose in order to put the rest of us out of business? If you don't let them have more than 65% of the slots, there's really no point to them putting themselves out of the business, because they can't use the other third of the slots when they put us out of business. It is down to access. As long as you control the overall access, they will not discount seats where they don't have to, because they have to produce a profit in the end as well. As long as you control the access, you will control their ability to put us out of business.

The Chair: Thanks, Mr. Calder.

Mr. Johnston, please.

Mr. Dale Johnston (Wetaskiwin, Ref.): Thank you, Mr. Chairman, and thank you to the witnesses.

Let me see if I have this concept of the slot business right. The slots are controlled by a slot authority, and there's one in every airport.

Mr. Angus Kinnear: In the major airports, yes.

Mr. Dale Johnston: Twice a year they have meetings and they allocate these slots.

Mr. Angus Kinnear: Correct.

Mr. Dale Johnston: If you had a slot last year, it's pretty likely you're going to get one this year because they're grandfathered.

Mr. Angus Kinnear: Correct.

Mr. Dale Johnston: If any one of us in this room decided to buy the competing airlines in the country, you would get the slots from Air Canada and from Canadian for use in the airports that you've traditionally had.

Mr. Angus Kinnear: Correct.

Mr. Dale Johnston: That would amount to about 80% of the available slots.

Mr. Angus Kinnear: It certainly would at Pearson.

Mr. Dale Johnston: And likely in all the other ones, because I suppose Pearson is fairly—

Mr. Angus Kinnear: Fairly typical.

Mr. Dale Johnston: —representative of the country.

So there's something that needs to be done. In your opinion, whoever is successful in the merger should be limited to about 65% of the slots.

Mr. Angus Kinnear: Yes, but it shouldn't—

Mr. Dale Johnston: That is going to require changes to the Air Transport Act.

Mr. Angus Kinnear: Correct, but it should still not limit their growth. They can use larger airplanes to utilize those slots, and therefore we get better value out of them, both from their point of view and from ours. But if you do not allow us access to the airports, we cannot compete.

Mr. Dale Johnston: Of course.

Mr. Al Graham: Mr. Johnston, the only other caveat to that is that you must perform in your slot times or you can lose slots. Over and above your historics, you still must be able to perform within your schedule in order to be able to hold them.

• 1645

Mr. Dale Johnston: So this is kind of a mixture of track sharing on the railroad and quotas for milk. If you don't use your milk quota, you lose it. Would you suggest, then, that if there were 65% given to the merger company and 35% to everyone else, there is the possibility of the merger company saying it needs these prime times, and you get from 4 a.m. until 6 a.m.?

Mr. Angus Kinnear: Well, that's why I said it would be not more than 65% of the slots in any 15-minute period. That way they can't block out any part of the day. They can't block out an hour, for example. You make it divisible every 15 minutes. I used the example of 84 slots at Pearson. Clearly, of the 21 slots every 15 minutes, they would get to use 14. The rest of the organizations would get to use the other seven. That's arrivals and departures, so we could probably do three arrivals and four departures every 15 minutes, whereas they could do seven arrivals and seven departures every 15 minutes.

Mr. Al Graham: The slots are conducted into movements per hour, Mr. Johnston. They're then broken down by the quarter hour. That's how we negotiate.

Mr. Dale Johnston: Oh, okay.

I think that does it for me, Mr. Chair. Thank you very much.

The Chair: Thanks, Mr. Johnston.

Mr. Comuzzi, please.

Mr. Dale Johnston: If I have a few minutes, I'd like to defer to—

The Chair: We can come back.

Mr. Joe Comuzzi: I'm amazed at that figure that says there are only 83 slots left. We spent a lot of money in Pearson.

Mr. Al Graham: So are we, sir.

Mr. Joe Comuzzi: I remember sitting in this committee ten years ago on this. Am I right?

Mr. Al Graham: Absolutely, you are.

Mr. Joe Comuzzi: What the hell are we doing? Didn't we build a couple more runways?

Mr. Al Graham: We have constructed a parallel north and south runway, but there is still a significant amount of construction going on at the airport, because they do intend to get it up to 104 slots as the new engineering performance standard for the airport. As of right now—and I know Mr. Kinnear met with the slot coordinator last night—we are still running between 78 slots and 84 slots an hour. It's tough.

Mr. Joe Comuzzi: Yes, that really surprised me.

Anyway, let's get back to the financial situation and the competitive aspect. I just assume that both your companies are able. Let me rephrase that: I think the ballgame changes next Monday. I don't know how it's going to change, but next Monday something is going to change in terms of what we're starting to discuss. I want an undertaking on your part that after it changes, you're going to come back to talk to us again.

Mr. Chair, I'd like to invite them back, because after next Monday we're going to need their guidance as we go down this road with a certain amount of fairness or a certain degree of fairness in this industry.

Mr. Angus Kinnear: We'd certainly appreciate that, I'm sure. The point is that it's very difficult to comment specifically right now. Just like you, we don't know the outcome of where this is going. Basically, I think those four points that I've given you cover any particular situation, but none of us will know how this is going to break out until a decision is made through one proposal or the other. Like you, I think we then have to sit down and think about what the future holds for all of us.

Mr. Joe Comuzzi: So would you help us work our way through that?

Mr. Angus Kinnear: Sure, certainly.

Mr. Joe Comuzzi: Thank you.

Mr. Al Graham: Mr. Comuzzi, I think the point is that regardless of the outcome, slots will continue to be an issue. There's no question about that.

Mr. Joe Comuzzi: Absolutely. That's what I wanted to get to. When we talk about the financial health and competitiveness both of your companies—and I guess there's another big charter company—

Mr. Al Graham: Air Transat.

Mr. Joe Comuzzi: Air Transat, yes. I don't know anything about them.

But you would be able to pick up some of the slack. You can do that. You're equipped financially, with all the manpower and everything you need, to do that in the event that the opportunity presents itself.

Mr. Angus Kinnear: I think it's very important to understand that although it may be decided which group becomes the owner of the largest air carrier in Canada next week, this process is probably going to take anything from nine to 18 months to effect any change. This is not going to be something that happens next Wednesday.

• 1650

Clearly, both organizations, having taken some note of what they plan to do, now have to get down into the detail, which is a lot more difficult than what you see in the newspaper advertisements. This is not something that's going to finish next week. This is just the first page of the first chapter of the book, and at this moment, none of us know how long that book is.

So we have to watch this thing going forward, and obviously a lot of decisions have to be made.

Mr. Al Graham: I can't speak for Mr. Kinnear's airline, but I can for ours: We've played out all of the “what if” scenarios going forward to best position our airline based on the outcome.

Mr. Joe Comuzzi: You'll come back and share that with us.

Mr. Al Graham: It would be our pleasure.

Mr. Joe Comuzzi: Mr. Kinnear, Mr. Graham, and Mr. Ryan, it appears to me—and it's tragic warfare we're in, this economic warfare, tragic for Canadians—that you're obviously very competitive with each other, but there are also some interests you share in common. Wouldn't it have been great to have the president of Canadian Airlines and the president of Air Canada sitting like you folks are sitting, discussing these issues to help us resolve the problem?

I still don't see why we can't get along in this country. I want to compliment you on being able to come here and put forward a position for not only your personal interests but particularly for the interests of the areas we have some real concern about.

The Chair: Thank you, Joe.

Mr. Asselin, please.

[Translation]

Mr. Gérard Asselin (Charlevoix, BQ): First, I'd like to tell you about the concerns people have in outlying regions. You have to know that in Canada there are a lot of regions like ours, in Quebec. I'm the MP from Charlevoix which is mainly on the North Shore. There's only one access road there and there's no rail link. The only rapid service is the air service offered by Air Canada through Air Alliance, and by Canadian through Inter-Canadian.

There's already competition between Air Canada and Canadian. After the reorganization, whether it's Air Canada or Onex who wins, we'll only have one company to serve us, either Air Canada through Air Alliance or Onex who will determine whether it's Air Alliance or Inter-Canadian that will continue to serve us.

Airplanes that carry only 20 passengers, 10 passengers in one and 10 in the other, an airplane landing at 9:05 and the other one at 9:15, none of that will exist anymore. A return air ticket for same day service between Baie Comeau and Montreal costs $900 while a ticket for a trip outside of Quebec, Baie Comeau-Montreal-Florida or New York only costs $285. What will happen after the merger? No matter who wins, either Onex or Air Canada, when you only have one air carrier to serve the North Shore, it may very well decide that a return ticket Baie Comeau-Montreal will sell for $1100. It's not complicated: the traveller will have the choice between paying that or spending 10 hours on the road. In weather conditions that can often be difficult, business people have no other choice than to take the plane.

When we met Mr. Schwartz yesterday, he guaranteed that if he became the owner of the new Air Canada, he would maintain services in the outlying regions over the next five years. That's a short period. After those five years, what will happen to the other air carriers, the excess planes and the excess staff? There will have to be cuts. Onex will have eliminated the competition between Canadian and Air Canada, but it will have made cuts. It will cut down on service and drop whatever service does not make money to minimize any deficit. It will invest the amounts saved to compete in other regions where the routes are more viable. It will enjoy a monopoly not only for domestic and interprovincial air travel, but also on the international market. Do you have the same concerns I do in that respect?

• 1655

Mr. Al Graham: Of course, I can't speak for Mr. Schwartz or Mr. Milton. The air carriers such as Air Quebec, Air Inuit and Air Montreal will doubtless examine the possibility of offering those short hops as soon as there's only one single carrier in those regions.

Over the long term, as a Quebec corporation, we're examining any interesting future prospect that is broad enough. It might be possible we'd be interested in offering such service with Montreal as the hub, but present demand isn't enough to justify that. If demand were to increase, we would be happy to serve that market.

Mr. Gérard Asselin: Some will certainly disappear. Air Montreal is already competing.

Mr. Al Graham: That's right.

Mr. Gérard Asselin: Even though the market served by that air carrier is more in the area of freight.

Mr. Al Graham: That's right.

Mr. Gérard Asselin: The hub is Dorval airport; it serves Montreal, but we must be mindful that the travellers who are travelling from one province to another or abroad come from all regions of Quebec.

I'm convinced that the federal government should allow free competition in those regions and that the consumers would then benefit through better pricing. The little lady from Baie Comeau going to Quebec city for health care doesn't really care about Aeroplan points and the Maple Leaf lounge. She doesn't want to hear anything about that even though these things do have an influence on the price of her ticket.

There are business people travelling everywhere in Quebec enjoying the benefit of a trip to Florida every year thanks to the Aeroplan points they've earned through the tickets their corporations buy for them. They get their coffee and cognac in the Maple Leaf lounges and, once a year, their employer indirectly pays for a plane trip to Florida for these people. In outlying regions we're paying for this service that we don't need and that we don't want anymore. We call those travellers “shotgun travellers”—they have no choice. If the holiday traveller wants to earn points, all the better for him.

The Chair: Do you have a question, Mr. Asselin?

Mr. Gérard Asselin: No, I've already put them and I've had the answers. However, I'm convinced that my comments are very much appreciated.

[English]

The Chair: Well, take a breath.

Voices: Oh, oh!

Mr. Angus Kinnear: Might I respond?

The Chair: Yes, please do, Mr. Kinnear.

Mr. Angus Kinnear: I come back to the initial proposition. There will be somebody to fly from Baie-Comeau to Dorval, if there is only one carrier and the rates are high, providing that carrier can land in Dorval and has a slot when people want to fly there.

It's back to the same issue. There will be more small carriers from the regions that will provide service, but if you don't let them land, if they don't have a slot, then they can't help.

So as long as the slot situation is protected, I am confident that a number of small Quebec carriers will operate services if they find that the prices allow them to do so. But they can't do it if they're excluded from operating at the airports.

The key is to make sure there is always some access preserved. Then you will get the competition you request.

The Chair: Thanks, Mr. Kinnear.

Mr. Graham, do you have a comment?

Mr. Al Graham: Just a very quick comment. It pertains specifically to the Montreal airport, where this lady decides she would like to go from Baie-Comeau to Fort Lauderdale. Well, that person does not have a choice of a low-cost carrier between Dorval and Fort Lauderdale—only an American carrier or the two scheduled airlines in this country. Even though she is a leisure customer, not a business customer, who just wants to go to Florida, we are not allowed to fly her.

The Chair: Thanks, Mr. Graham.

Ms. Desjarlais, please.

Ms. Bev Desjarlais: I'll just follow up on that one, Mr. Chairman.

The other scenario to this is that should the smaller airlines, say, not be allowed to provide a different pricing because of their alliance with whoever, are we not going to see a situation where they have to keep their rates so high it makes air travel for the people in those smaller centres prohibited?

For instance, you have one airline and they have an alliance with, say, Canadian. Now they can no longer provide some of the cheaper prices from, say, Thompson to Winnipeg. So they have to maintain higher prices because they can't afford to do it any other way. They can't drop their prices. They're tied with their alliance, so they're not allowed to do that any more.

How is that going to improve the fares or the service for the people living in Thompson?

• 1700

Mr. Angus Kinnear: There are two answers: number one, we believe there will be competition from people like Bearskin Airlines or those others.

Ms. Bev Desjarlais: It doesn't exist now—

Mr. Angus Kinnear: But it doesn't—

Ms. Bev Desjarlais: —but at least there's some reduction if you're tied to an alliance. It doesn't exist now.

Mr. Angus Kinnear: There will be smaller carriers opening up routes into the smaller communities. Unfortunately, though, where you have low traffic levels, it is expensive to provide service to those communities, and the fares generally reflect the cost of providing that service. If you live in a remote location, it is going to cost more to service you than if you live in a major metropolitan area. That's a fact of life.

Ms. Bev Desjarlais: But the point is that there is some reduction for, say, the person flying from Thompson to Winnipeg and continuing on to Fort Lauderdale. They do see at least some reduction if they go all the way with the alliance. But if you take away the opportunity for that reduction by not allowing them to offer a different rate, how is that beneficial to the people in—

Mr. Angus Kinnear: That's why I said that for access to smaller communities, if the carrier is a monopoly, they have to offer the pro rata reduced fare so that they can connect to Winnipeg and get the advantage of the lower-cost fare we offer from Winnipeg to Orlando, for example.

Ms. Bev Desjarlais: The point of the matter is that they may not get a lower fare overall between it if they were going to have a lesser cost from, say, Thompson to Winnipeg. What I'm saying is that I can't see the air carrier dropping that price down if they're not going to be able to continue on with that passenger.

Mr. Angus Kinnear: That's why I'm saying that there has to be legislation that says if they have a connector fare into their own service, it has to be made available to everyone.

Ms. Bev Desjarlais: How will they survive competitively if they have to do that, if they can't—

Mr. Angus Kinnear: Because they will set the connector fare at a level that allows them to survive.

Ms. Bev Desjarlais: That ensures that there's going to be a higher fare for the people travelling from those centres.

Mr. Angus Kinnear: No.

Some hon. members: No.

The Chair: It's nine to one, Bev.

Ms. Bev Desjarlais: No. I disagree that it would happen, because it hasn't happened now.

The Chair: Mr. Kinnear has been giving us great examples, so, Mr. Kinnear, why don't you give Bev an example of a fare structure with the flow-through connection versus—

Ms. Bev Desjarlais: Okay, because—

The Chair: No, this is important.

Ms. Bev Desjarlais: No, this is my question, Stan. I've heard Mr.—

The Chair: But, unfortunately, Bev, I'm the chairman.

Ms. Bev Desjarlais: Why are you—

The Chair: I won't take this away from your time. You can continue with your time. But I think it's important to understand the difference between a flow-through and the opportunity for another airline to supply the shorter trip.

Mr. Angus Kinnear: If I—

Ms. Bev Desjarlais: Bear in mind that part of that was due to the fact that you would not be going with a carrier. Who's to say that the little old lady from Thompson didn't want the travel points the same as everybody else but now isn't going to have the option?

The Chair: She is, but—

Ms. Bev Desjarlais: Okay. Go ahead.

The Chair: —we'll let the witness explain it.

Mr. Angus Kinnear: Basically, I think you have to divide the market into two types, and we need to understand those two types. First of all, roughly 15% of the people who fly, fly in business class, and they pay a high fair because they want on-demand air travel. Those are the guys who fly enough to collect points, and they are allowed to use their points as a reward for paying very high fares that keep the larger airlines in business.

Al and I look after the 85% of Canadians who just do normal jobs and don't fly three times a week and therefore don't collect enough points, unless they shop at a certain grocery store, to be able to fly on points. So we give people low fares, not points.

We try to do that by offering fares that obviously are economical for us to communities where we have sufficient volume to be able to offer those low fares. We can serve the people in the smaller communities by bringing them down to the hub airports and then offering them low fares from there, for example, to Paris, London, Orlando, Los Angeles, or Sydney, Australia, providing we can get a connector fare to add on to our fare. But if the monopoly carrier can force the fare to be high in the initial journey from the remote community to the hub, they can dominate the people in that remote community, because you can't afford to change carriers at the hub airport.

• 1705

So that's the issue. If you want us to be able to serve the remote communities, the way we can help do that is by making sure the monopoly carrier does not have a fare they connect to themselves that is lower than they would offer to us to connect. If it's good for them, it's good for us.

Ms. Bev Desjarlais: I recognize what you're saying, but in reality I don't see that working in a good many cases, because there isn't going to be an option for the carrier to survive by doing that. I think they're going to have to have their rates in order to survive, because they no longer have the alliance to ensure they are tied to it.

Mr. Dale Johnston: It's like a loss leader.

Ms. Bev Desjarlais: That's exactly how I see it.

Going to the next question, the airport authorities in essence are no longer controlled by Transport Canada. Say they can work out a really great deal, because a carrier is going to have many flights going in there, so they're going to give them certain rates. But say the airport authorities say “We can't afford this. We have to have the rates this high. We don't want to give them these slots, because if we give more to Air Canada, Mergco, or whoever, they're going to give us this much more money.” How do we say to the airport authorities “That's too bad. You have to give these slots to someone else”?

Mr. Angus Kinnear: The runway slots do not belong to the airport authorities. They operate the airports. The slots are given out by the committee, which is run through the auspices of IATA.

Please don't feel sorry for any of the airport authorities being unable to charge. Let me tell you, those guys know how to gouge without any assistance from this committee. They certainly don't have any problem learning how to charge the airlines for their services. I can assure you of that.

Ms. Bev Desjarlais: Listen, that may be the case in larger centres, but a lot of the smaller airport authorities are having a tough time of it. They are concerned that if they're not allowed to maintain certain prices, they're not going to be able to go along with it. My concern is that if we reach a situation where airport authorities say “We can't survive without increasing the costs”, which increases the costs all the way down the line, who becomes responsible, then, for ensuring that these airlines can continue with increased costs or that the airport authorities can continue?

Mr. Angus Kinnear: It's very simple. As the costs go up, so do the fares have to go up.

The question is, do we need a $1.4 billion new terminal at Pearson when we're about to halve the amount of airplane capacity? That is the question you have to ask. But the people who run Pearson Airport have made the decision, yes, we do.

Now, if you look at the costing when all of this building program is complete, it is said that in some cases Pearson is going to charge $54 a passenger for the use of that airport. In that case your $149 fare to Montreal will become $250, and the family of four going to Florida will pay $200 in airport taxes in order to use Pearson airport. Believe me, Pearson airport doesn't have a problem in charging. I can assure you of that.

Mr. Al Graham: My landing fees in Montreal are the same as Air Canada's, depending on the weight of my airplane. So if I have the same airplane with the same weight coming in, I'm paying exactly the same thing as Mergco's paying. So they don't lose a nickel based on the weight of my airplane.

The Chair: Thanks very much, Bev.

By the way, Hamilton airport—no, I won't go there.

Some hon. members: Oh, oh!

The Chair: Closing up will be Val Meredith.

Ms. Val Meredith: You may not want to go there, but I will. Isn't that precisely what will happen to Toronto's Pearson airport? If they build this new terminal and charge too much, then there will be other areas with open skies, such as Montreal, Vancouver, Winnipeg, and Calgary, that will start to pick up different kinds of traffic because they can provide it cheaper. Isn't there competition in airports as well?

I want to get back to this slot business, because it seems to be a key thing in how the airline industry has to be restructured. I heard that the airport authorities don't own the slots—

Mr. Dale Johnston: But they allocate them, or somebody does.

• 1710

Ms. Val Meredith: No, this other committee allocates them.

How does government control it if we don't own them? How does government control something that isn't owned by whom?

A voice: The same way they control—

Ms. Val Meredith: What's the cost? Do you just get it for nothing or do you buy the slot? It would seem it's a very important commodity for somebody to sell.

Mr. Angus Kinnear: At this present moment in time we don't pay for slots. The slots are there and you can apply to use them as they are. But in many airports that are restricted—for example, Heathrow—there has been a situation whereby slots have been bought and sold. There is also a big argument going on in most of the world where the slots can be bought or sold amongst airlines, depending on how valuable they see those slots to be.

For another example, there is a big argument in Europe right now because Lufthansa-Star Alliance has made an offer to buy British Midland. British Midland has 24% of the slots at Heathrow. So here we are back at slots again. The value Lufthansa sees in British Midland is the ability to get at British Airways-Oneworld by buying 24% of the slots at Heathrow by buying British Midland.

Ms. Val Meredith: So in essence what you're telling me is that the airlines own the slots.

Mr. Angus Kinnear: No.

Ms. Val Meredith: If you're buying and selling, there is an understanding that they own the right to buy and sell.

Mr. Angus Kinnear: The political argument that is still going on is whether they do or they don't. That's the question.

The question is, though, if you wish to maintain competition—and this is the European competition bureau looking at the same problem—they're saying we believe that no dominant carrier should have more than 65% of the slots.

As another adjunct to that, this morning, before I left to come to talk to you, on my desk there was a letter from the European Commission asking about the merger proposals of the airlines in Canada. It was asking me to give them my views as to whether when these arrangements go through there will be sufficient competition between Europe and Canada.

I believe the United States will also get into the act because the combined carrier will have something like 85% of the traffic between Canada and the U.S.A. So the U.S. competition bureau is also going to have a view of this thing and they also will set what they believe to be the appropriate level.

Ms. Val Meredith: So then internationally it would have to be established somehow in the bilateral agreements between Canada and Britain, Canada and Europe, Canada and the United States, that this 66% or two-thirds is the control.

Mr. Angus Kinnear: That's why I said it was a useful number to use, because it's one that's been adopted by the Europeans and I think it speaks to a reasonable level. Therefore, if, for example, this became the international standard, as we go to try to develop more open skies and have a common policy throughout the world, it would mean that the slot coordinators could then have guidance. We're not doing something in Canada that doesn't work in Europe or in North America. It will be a guideline created by the Europeans in their research as to what they thought was reasonable that will be useful for us to adopt.

Ms. Val Meredith: This is where the airline industry is going globally in the 21st century, controlling the slots to a dominant carrier?

Mr. Angus Kinnear: No, that's where the competition bureaus are going, not the airline industry. The competition bureaus are saying it is unreasonable for any dominant carrier to have more than 65% of the slots at any airport.

The Chair: Thank you, Val.

But as a follow-up, let's make it clear, even if IATA sensed that's the benchmark, it's still up to each individual country whether or not they'll regulate the slots.

Mr. Angus Kinnear: Yes, exactly. But of course the EU now has that authority over all of the EU members.

The Chair: Just as Canada would have over theirs or the U.S. over theirs.

Mr. Angus Kinnear: Or the U.S. over theirs. But it would seem a benchmark that is emerging from all of this, which Canada could adopt and which would put us in line with the conversation that's going on with the competition authorities around the world.

The Chair: With the standard.

Mr. Al Graham: Mr. Chairman, there is no buying and selling of slots today in our country.

The Chair: No. I understand that.

Mr. Al Graham: It does not exist.

The Chair: Or in the United States either.

Mr. Al Graham: Oh, yes, it does exist in the United States. Absolutely.

• 1715

The Chair: At all the airports?

Mr. Al Graham: At La Guardia, at some of the more congested airports—for instance, O'Hare—very much so.

The Chair: So you fly to New York?

Mr. Al Graham: I do not fly to New York.

Mr. Angus Kinnear: We stopped flying to New York in December, but Newark—

The Chair: And you'll have to buy your slot there?

Mr. Angus Kinnear: No, we can still get into Newark, but if you want to go into La Guardia, because it's completely allocated through all the major hours, the only way you'd get in there at a time you would want to go would be to go and buy a slot from a resident carrier.

The Chair: I see.

Mr. Casey, do you have a question?

Mr. Bill Casey: I do. Just on that, it's interesting. Why are slots not sold in Canada?

Mr. Angus Kinnear: I guess because the government hasn't yet found that a way of raising revenue, but after today it could well be the case.

Mr. Bill Casey: If the slot allocation is controlled by the committee, why couldn't one company sell to the other, or is it just accepted in the industry that you don't do that?

Mr. Angus Kinnear: It was accepted in the industry that you used an available resource. As congestion mounted at major airports, the idea was that we had to spread out traffic. Otherwise we'd just have airplanes circling overhead for hours waiting to land. So in order to make it an economic proposition we decided we'd have to space out the traffic according to the facilities at each of the airports. Each airport declares a certain peak hour demand and then we all try to work into that demand. That has gone on until...the major airports, of course, are now completely full. So the question now is, should you buy a slot if you want to operate at that airport? Or, from a government point of view, can you sell a slot? Is it yours to sell?

Mr. Bill Casey: We're all here because one of the airlines is in the soup. That's why we're here. I can't help but wonder, could other decisions have been made? Considering the opportunities available to Canadian Airlines, could they have survived and could they have competed? I don't mean to be critical of Canadian Airlines management, but given the opportunities they had available, could things have been different at some point in the last two years?

Mr. Angus Kinnear: Obviously, no. Otherwise they wouldn't be where they are today. I think to be fair, the Canadian management have tried a number of things over the years to sort this out. But again I go back to the example I had in the U.K. between British Caledonian and British Airways, which was the same situation.

There is a consolidation going on. We do have a population of 30 million people in Canada. We probably can support one major carrier, and that's what we're actually seeing happening.

The way forward from here is to have specialist carriers operating in different marketplaces. It certainly wouldn't be my company's view, but what we're about to do is go and fly wing tip to wing tip with Mergco and reinvent Canadian. That would be simply putting us back where we've just come from.

What we have to do is be able to evaluate the markets. We have to look at the volumes that may well become available, and we have to look at specific niches in those markets. It would not be my company's view that we should be going out to sell business class travel, but we should be going out to attract the niche that we've built ourselves and look after more of the leisure-type market rather than the business-type market. Mergco will provide a sufficient level of business at that end of the market.

If the fares get overly high priced, then somebody else will come into the market to deal with that issue. But the market in the end will control what happens here, provided we have access.

The Chair: Thank you, Mr. Casey.

Mr. Bailey, you have one question?

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you.

I took it in your comment that with the possibility—I don't think it's a possibility, it's going to be true—you're going to have a dominant air carrier and the number of flights in Canada between the existing air carriers, i.e. Canadian, is going to drop, the number of actual flights would drop by 40% in that way. Having said that, what is wrong with the thinking in Toronto to increase the size of the airport when there are fewer planes going to be landing? Secondly, if fewer planes do land, they're going to be charged with the building of a lot of air space or air runway that wasn't really needed.

• 1720

Mr. Angus Kinnear: Let's deal with two issues here. I think the first is that we will see a lower number of flights from the merged carrier in the first instance. You would believe that. But then if you believe what we've watched on the news and seen in the newspapers, with all of the guarantees that have been given not to reduce staff and not to do this and not to do that, I don't know what all these people are going to do if they're not going to operate the number of services. So there's something that's peculiar in all of that.

I don't think you have to worry too much about Toronto, because there will be an increasing demand, and as long as the economy continues to grow, which it is in Ontario quite significantly at the present moment, that capacity will be eaten up as it goes through. We will pay a higher price for the new buildings—a significantly higher price for the new buildings—but the capacity will get eaten up.

That may not be the case in the smaller centres like Winnipeg, Calgary, Edmonton, all of whom are expanding their airports, because the first thing any new airport authority wants to do is build a new passenger terminal.

Mr. Al Graham: But I don't think you'll see any kind of drastic reduction in the Montreal, Vancouver, Toronto slot-controlled airports. The demand will be there.

Mr. Roy Bailey: Slot control is more time control, isn't it?

Mr. Al Graham: That's correct.

Mr. Roy Bailey: I think that is confusing to some people. You say you're not selling a slot; you are virtually selling a time area to land.

Mr. Al Graham: That is correct.

Mr. Angus Kinnear: And of course I can come back again, Mr. Bailey, to my first point: that this will still not restrict Mergco. Instead of there being 20 A-320s a day flying between two points, half of them blue and half of them green, what we will probably end up with is 12 or 20 larger airplanes, all of them pink, or whatever they turn out to be. It means they will still be able to grow their business. They will just have to make sure they use a larger unit, rather than smaller units, and block everybody else out.

The Chair: Thanks very much, Mr. Bailey.

Mr. Kinnear, Mr. Graham, Mr. Ryan—poor Mr. Ryan didn't get much to say today; he left it to Mr. Graham and Mr. Kinnear—gentlemen, thank you very much for your presentation. I think I speak for the committee when I say it's been very informative for us, very helpful, and we do appreciate you being here. Thank you very much.

Colleagues, we're suspended until 6 p.m.

• 1725




• 1801

The Chair: Colleagues, we will now resume meeting number 15, with our witnesses from the regional airlines.

This evening we welcome four different carriers. We've just heard from Canada 3000 and Royal Aviation. This evening we will hear from Ontario Regional, represented by James Massie, the chairman; Mr. Robert W. Reding, president and CEO of Canadian Regional Airlines; Robert Myhill, president and CEO, and Derek Nice, first vice-president, planning and operations, of InterCanadien; and Mr. Carmen Loberg of Canadian North.

Gentlemen, welcome to the Standing Committee on Transport. Pursuant to Standing Order 108(2), we're studying the future of the airline industry in Canada.

We welcome your remarks. If you could each give us a presentation lasting no more—it certainly can be less—than 10 minutes, it will give us an opportunity to ask any one of you or all of you questions.

Gentlemen, when you're comfortable we'll begin with Mr. Massie from Ontario Regional.

Mr. James G. Massie (Chairman, Ontario Regional): Thank you, Mr. Chairman. I defer to Mr. Reding from Canadian.

Mr. Robert W. Reding (President and CEO, Canadian Regional Airlines Ltd.): Thanks.

Mr. Chairman, members of Parliament, I am delighted to be here with you this evening. Let me begin by giving you a little bit of a background about us.

Canadian Regional Airlines has been in operation serving regional markets in Canada for over 30 years. We employ 2,100 people, we carried over 3.5 million passengers last year, and we expect to carry almost four million passengers this year. We serve 31 communities in Canada and two in the United States. We operate approximately 400 flights each business day with 51 aircraft, consisting of 27 jets and 24 turboprops.

We're headquartered in Calgary and also have major maintenance bases in Vancouver, Calgary, Saskatoon, and Toronto, along with pilot and flight attendant crew bases in Victoria, Vancouver, Calgary, Saskatoon, and Toronto.

As a regional carrier, we are the backbone of the domestic industry in Canada. As a wholly owned subsidiary of Canadian Airlines, Canadian Regional provides its customers with many of the amenities and conveniences of a major airline, including connecting service to over 650 destinations world-wide, as well as access to Empress Lounges, business centres, concierge services, and the Canadian Plus customer loyalty program.

Our ties with Canadian also allow us to provide joint fares, typically at a cost lower than purchasing two separate tickets; one-stop check-in for our customers; coordinated flight schedules for better connections, and on and on. These are all very important attributes for our customers in the remote locations we serve.

With the reduced cost structure of a regional carrier and by flying smaller aircraft, we can provide daily scheduled service to communities that would not otherwise be able to economically justify service by a mainline carrier. In many markets we have strong competition from airlines such as WestJet, Alberta City Link, Peace Air, Bearskin, Athabaska Air, and a number of other regional competitors.

A regional network is as important to a mainline carrier as the mainline carrier is important to us. We rely on the hubs of Canadian Airlines to be able to offer our customers efficient connections to the rest of Canada and the world. Without that ability, many of our markets would not carry those connect passengers and would no longer be financially viable.

• 1805

This requires a close coordination of schedules and facilities between the regional and mainline carriers, so our customers don't have to wait five to six hours to connect to their flights or walk from one end of the airport to the other lugging their baggage.

Regional airlines are one of the key economic tools for most small and medium-sized communities in Canada, providing direct, one-stop links between major Canadian hubs and destinations around the world. For a business person in Sudbury to be able to tell a perspective client in Buenos Aires that travel between the two cities only involves a simple connection in Toronto can be a very powerful marketing tool indeed.

The second issue I'd like to address stems from our customers' concerns that airfares from smaller communities are much greater than prices charged for longer domestic and international flights. Who hasn't heard the horror story that service from Fort Nelson to Vancouver is more expensive than flying from Vancouver to London, England?

There is a basic reason for that. It costs a regional airline more to provide a seat to our customers than an airline that provides long-haul or international flights. The primary reason is that our fixed costs must be spread over fewer customers. As an example, we have the same fixed costs as an airline flying larger aircraft and the same costs whether the flight is 100 kilometres or 10,000 kilometres. You still have to make a reservation, check you bag, get your ticket, use the gate on departure and arrival, and get your bag, most of the time, at the end of your flight.

We carry an average of 31 people per flight, meaning we have to spread the cost of providing all of those services over those 31 passengers. By comparison, operators of a larger aircraft, such as a 747 or a DC-10 that flies to London, can draw from a larger market and would typically average 250 to 300 customers on that flight. So the cost to provide a seat to each customer is much lower.

Being part of a network helps to keep prices in check, but the fact is the best way for us to bring prices down on regional routes is to start filling our airplanes and using larger aircraft to bring down those fixed costs per seat.

Why do we support the Onex proposal for a restructuring of the industry? Onex remains the only company that has guaranteed their prices on airfares will not increase for five years. That's an unprecedented commitment to our customers.

Onex has also provided a written commitment, in their plan for the industry, to provide job security for our employees, since we will become an important part of the new Air Canada.

In Canada, 82% of the main routes are served by both major carriers, versus about 45% in the U.S. Up to 80% of those flights operate within 10 minutes of each other. This means there are lots of flights but not necessarily more choices for the customer. By combining the resources of the two airlines we would create the opportunity to maximize cost efficiencies and avoid wasteful duplication. We would also be able to become more competitive, since our combined network would have increased substantially.

In regional markets, we could combine two Dash 8 turboprop flights that now depart at the same time and possibly schedule a larger jet aircraft. The two 19-seaters could possibly be replaced by a Dash 8 aircraft, and the 19-seaters could be moved to provide service to communities that currently don't have any airline service, because you would have a much larger network and airline service would become viable.

Similarly, large aircraft such as the DC-9 or 737 could serve communities that we serve by our regional jets. This increase in the quality of service would be possible through the rationalization of existing services and the expected redistribution of the aircraft. In short, there would be more direct flights on larger aircraft in many of the communities we serve today.

The effective integration of the regional airlines into the network of the new Air Canada would give travellers to and from smaller communities the benefit of a full-service national airline. It would also create opportunities for enhanced service, with either better schedules or larger aircraft, to those communities.

For this reason, I believe the regional airlines of Air Canada and Canadian must be a key element in the success of the new Air Canada. I strongly urge the committee to ensure that regional airlines be allowed to partner and grow with what will become Canada's new national airline.

Whether we're married or living together, we truly depend on each other.

Thank you very much for your time.

The Chair: Thanks, Mr. Reding.

• 1810

From InterCanadien, we have Mr. Myhill.

Mr. Robert Myhill (President and CEO, InterCanadien): Thank you, Chairman. I'm here today to represent 1,100 employees. That is the basis of our company. They are in 24 different communities throughout eastern Canada where we fly.

With me today is Derek Nice, who is our senior vice-president of operations and planning and is really the fellow who figures out where we should fly, how often we should fly, and what kind of pricing we should have. He's available to take any questions that might arise out of our discussion today.

Most of you probably don't know a great deal about InterCanadien. We are the largest independently owned regional airline in Canada. Our head office is in Montreal. We fly in operations in six provinces in Canada. We have a proud 53-year history that originally started many years ago in Rimouski, Quebec.

When our passengers book on InterCanadien Airlines, they do not normally recognize that it's InterCanadien Airlines; they think it's part of Canadian Airlines. We fly with the colours of Canadian Airlines. Although we're completely independent, our ownership and management structure operates like a franchisee, if you will, of Canadian. We utilize the frequent flyer program. Our reservation system, how our customers are booked on our flights, is all through the Canadian Airlines system, headquartered and operated through Dallas.

Since September 1998, when InterCanadien, a small Quebec company, was sold to us from Canadian Airlines as investors, we have tripled in size. We now represent five different provinces to which we travel.

I'd like to comment today on three aspects of the issues that are in front of you regarding the mega merger: first, the need for the consolidation itself; secondly, what role government can play in this consolidation and going forward in a healthy airline industry; and third, the dangers InterCanadien might face as a result of the activities before you.

It is clear that the current structure does not work and is not viable. It makes sense that Canadian and Air Canada unite in some form, if nothing else, to save an enormous number of jobs in order to ensure that they're safe and a reliable service to the communities presently served.

However, we do not endorse the one airline theory. We're free enterprisers. We know nothing but competition, and we believe viable competition can exist in this country. We often hear in the press today that there will be competition from various airlines such as WestJet or perhaps Air Transat or Royal. These are charter airlines and low-cost airlines. Yes, they have a place in the community and they offer a great service, but don't be fooled by the fact that these are not direct competitors to the mega Air Canada. It's a different market; it's a different type of passenger service.

Passenger service done traditionally by Air Canada and the new mega Air Canada is business travel; it's travel that needs to connect beyond Canada, internationally and transborder. The services that are looked upon from these airlines are totally different. There's business class, executive lounges, and frequent flyer programs. These are not the traditional venues of charter and low-cost airlines.

The big danger we see before you is there might be a two-tier airline network. That is, if you live in Toronto or Vancouver or Halifax, you may have a choice of a few airlines, the mega airline and perhaps some charter airlines. But if you live in Fredericton, on the west coast of Newfoundland, or in the Gaspé, chances are you will have no choice; you will have one airline. The monopoly carrier will continue to offer service to these communities as they have guaranteed, at least for some period of time, and I think both Onex and Air Canada have committed to that. The point is, will they find the right connections? Will they find the right price levels? Will they find the opportunity to fly throughout North America and the world from Fredericton, as they currently would do from Toronto? To me, that is the question.

• 1815

The regional airline business offers that solution. That's what our job is, to make sure we can find a way to take you from Fredericton to Athens, Greece, easily, most conveniently, and at the same price levels as someone from Toronto.

So how can you ensure that this is going to happen, that there will be competition? Again, this is the second issue I want to raise, that is, the role that government can play. Government needs not to respond and react, but to take the leadership in the role that's before you.

We feel that the main leadership required is to ensure that the barriers to entry, the barriers to competition, are eliminated. We endorse the recommendations of the Competition Bureau. I, and most importantly, Mr. Nice, spent a lot of time with the Competition Bureau this fall. They've worked very hard and have come up with what I believe to be a solid list of recommendations that will help competition in this country, and we endorse them.

I won't go into great detail about all the issues they have brought up before you, but I do want to mention a few that I think the Department of Transport, which has indicated that they too agree with many of the points of the Competition Bureau, should follow. They should ensure that it becomes law and that they monitor it, that there is a watchdog to ensure that these barriers to entry are eliminated.

First, the dominant airline must be prepared to code-share on mainline routes. That means if we're going to be a competitor and we're going to fly from Sept-Îles, Quebec, into Montreal and we don't have a flight going to Vancouver, our passengers need to get there conveniently and connect properly, just as any Air Canada connecting regional airline would be able to do. So we need that right to code-share.

Secondly, the dominant airline must offer the regional competitor the right to participate in the dominant airline's frequent flyer program. Most of us probably don't really understand the significance of the frequent flyer program, other than that it's a good way to get our family on that trip to Florida in the wintertime. The reality is it's the most dominant marketing tool in the airline industry. It's the most single-handed strangling aspect of the airline industry and it restricts entry for any kind of competitor. If you put the two airlines together, you'll end up with one very large frequent flyer program. So a new fellow who comes along has nothing to offer, and most of us as travellers would not join up on the new airline if we're still earning points and trying to accumulate points on the old airline.

The Competition Bureau has recommended that any new competitor would have an opportunity to access that program and offer his passengers the point system as part of that frequent flyer program, and we endorse that.

The dominant airline must not have any restrictions on the regional competitor in terms of aircraft routes or airline partners. Currently, as a regional airline, we are restricted as to the size of airplanes we can fly because there are restrictions placed on us by our commercial agreement. In fact, there are scope clauses within their own unions that say we can't fly planes with more than 69 seats. That is not something that's good for Canada or for competition. These things must be eliminated. We must be able to operate as independent companies can compete.

The travel agency override commission in Canada is frightening. It is something that needs to be investigated. The Competition Bureau acknowledges this, and it is something that must be changed. It is a system that is based on the dominant carrier being able to entice the travel agency to give them 95% or 85% of all the business and he'll get a kickback, an override. But by doing so, that travel agency can't deal with a new fellow or his percentage will go down and he will lose the override. So the travel agency isn't the bad guy in this scenario; it's the system. It needs to be monitored, changed, and reviewed by the Competition Bureau so that a new fellow can play fairly.

The dominant airline must make gates and counter space and take-off and landing slots in domestic and international airports available for Canadian competitors—there is absolutely no doubt about that—or you'll have no competition.

Currently, as InterCanadien, we fly into some major airports. We originate in the communities, 24 communities throughout eastern Canada, but we fly into Halifax and Montreal, and until recently we flew into Toronto. We also fly into Ottawa. But we don't have the rights to those slots; we don't have the landing rights and we don't have the gate rights. Canadian Airlines owns those rights. We own the rights in Val-d'Or and we own the rights in Moncton, but without the rights to land the plane at the other end of the route, we have nothing. We're in the hands of the major carrier. We need access to those gates in order to be a competitor.

• 1820

If you want to fly into Toronto and take passengers to Toronto, there are two times in the day that you might be able to fly there. If I phoned up today, I could get a slot to go in at 11.30 a.m., but if I wanted to take you in there at 7.30 a.m., I wouldn't have a chance. Under the current situation, the mega carrier will have all the slots and rights.

Again, I think both the Competition Bureau and the Department of Transport have recognized this issue, and they have said they will work on making these slots available to anyone who wants to be a competitor. In the words of the Competition Bureau, where the dominant airline severs its existing relationship with the regional partner, the dominant airline must be required to provide the same level of financial and operational services it now provides for a reasonable transition period.

The point is that InterCanadien is relying on Canadian Airlines. I don't know all the places it goes through, but in our reservation system the cash you pay to fly on InterCanadien initially goes through Tulsa and Dallas and everywhere else, finally through Canadian, and ultimately to us. It's part of the system; it's a commercial agreement. There's nothing difficult or odd about that relationship, but the reality is that this is our relationship.

In order to be a competitor in such an environment, we need these services for some time to come. We need our reservations service, we need our ability to do our revenue accounting, and so on and so forth. There's a whole host of services that are in existence. The Competition Bureau has recognized that if it's severed, a regional carrier like InterCanadien must be allowed to have access to those services under a financial arrangement that is satisfactory.

The Chair: Could you wrap up for us, Mr. Myhill, please? Thank you.

Mr. Robert Myhill: I will wrap up by saying that because we're not owned by Canadian Airlines and because we're not part of Air Canada, InterCanadien itself is not one of the regionals that has been offered to be purchased. Therefore, in terms of what's in front of you with this mega merger, we're outside of it. We don't know if we have a code-share tomorrow. We don't know if we have a business tomorrow.

We have 1,000 employees, with 700 employees in Quebec and 300 employees throughout the rest of the eastern part of the country. All of those jobs are at risk today. As every day goes by, the customers in Canada are not having any more faith in Canadian Airlines than they might have had last summer. The message has been made clear that Canadian Airlines at this stage is either going to be merged or isn't going to be in business.

Our tickets are sold based on Canadian Airlines. Our customers don't buy a trip on InterCanadien; they buy it on Canadian. Therefore, our advance billings and our financial situation have changed dramatically because of these events. Unless something is done quickly, our company will not be offering these services in the future. We will not be in existence.

We think it's extremely important that the parties at the table trying to do this deal—either Onex or Air Canada—must include us in the deal. We must be part of whatever the transitional period is, and then we'll be prepared to be a competitor should we be severed from the group. We have put together a competition plan and we have made arrangements in order to be a competitor, but we can only do that if we're allowed to have a transition plan over the next three to six to eight months that has the support of the mega carrier.

Thank you.

The Chair: Thank you, Mr. Myhill.

Mr. Loberg, please.

Mr. Carmen R. Loberg (President, Canadian North): Thank you very much, Mr. Chairman, members of Parliament. I very much appreciate the opportunity to be here to speak with you this evening in order to give you a brief overview of what Canadian North is all about. I'd like to begin by identifying who our shareholders are.

Our shareholders are the Inuvialuit of the western Arctic and the Inuit of the new territory of Nunavut. Our parent corporation, Air NorTerra Inc., is a 100% aboriginally owned company. It has been recently recognized in the top 500 Canadian companies, as rated by the Financial Post.

• 1825

We acquired Canadian North in 1998. NorTerra's transportation investments also include the 1985 purchase of the crown corporation, Northern Transportation Company Limited, NTCL, an organization well known to many of you, certainly one with a long history in marine transportation in the north. NTCL is currently Canada's only pan-Arctic marine company providing sealift resupply throughout all of northern Canada.

A fundamental feature of our shareholders' view of the world and of their business acumen is that no land settlement funds have been invested in any of the acquisitions or operations of NorTerra. Our substantial growth has been accomplished through prudent management, reinvestment of earnings, and conventional financing. We are also very proud of the fact that even with our growth strategy, we have been able to return dividends to our shareholder companies.

Here are a couple of highlights of Canadian North's history as a business entity. Canadian North and the companies that preceded it, that owned or operated its routes in the early years, including PWA, Transair, Wardair, and Nordair, have served the north for over 75 years.

During that period of time, northern flying was an important part of each of those businesses, and in turn the operation of those businesses was vitally important to the infrastructure of the north and to the development of the north.

Canadian North, over those years, operated a dedicated fleet of Boeing 737 Combi aircraft across the north, carrying passengers and freight throughout northern Canada. As Canadian Airlines was formed and its focus shifted to its national and international business, northern activity became a dramatically smaller part of its total enterprise. Financial pressures, in due course, caused closure of Canadian North's northern Quebec operations and its service into Iqaluit on Baffin Island. Its northern Manitoba services were, over a period of time, turned over to Calm Air and to Canadian Regional.

Northerners in general, and our shareholders in particular, viewed the loss of Canadian's northbound service from Iqaluit as a serious deterioration in air service, which is so vital to our northern existence.

In 1998 our shareholders approached Canadian Airlines and entered into a comprehensive due diligence process and a series of negotiations, which culminated in Air NorTerra purchasing the business known as Canadian North in September of that year. In addition to the purchase of the assets related to Canadian North, we entered into a comprehensive commercial agreement with Canadian Airlines, which includes CP flight code, SABRE reservation services, revenue accounting, sales processing, the complete Canadian frequent flyer program, and airport services in our gateway cities of Edmonton and Ottawa.

Canadian North's current jet network connects nine northern points with our two southern gateway cities of Edmonton and Ottawa. In three of these northern communities, we are the sole provider of jet air service. Canadian North creates over 200 jobs for northerners.

Our northern network strategy differs distinctly from that of our major competitor, First Air. We believe it is very difficult to try to be all things to all people in northern aviation. Our business strategy is clearly focused on our jet network. We work together with local independent carriers to provide service into our more remote settlements. Our five northern local service carriers connect us with 29 northern points, and they are the sole providers of air service to approximately 15 of them.

Our shareholder acquisition of Canadian North has been widely applauded throughout the north. We have reintroduced service between Iqaluit and Ottawa and recently increased that service to six days per week. We continue to offer a broad range of competitive airfare choices and a comprehensive array of special promotions and seat sales. Our customers enjoy full participation in the Canadian-Plus frequent flyer program, and our communities enjoy extensive support for community programs and for special projects in their areas.

Canadian North is keenly interested in a resolution to the chronic difficulties facing Canadian Airlines and the industry today. The collapse of Canadian Airlines would result in unparalleled chaos in our industry and a difficult time of transition for Canadian North. Air NorTerra has the financial resources and the management expertise to implement our contingency plan, which would involve self-operating all of those services that we acquire from Canadian. But the consequences of such an outcome would have far-reaching effects on our employees, on our shareholders, and on the communities we serve.

• 1830

We believe it is essential that the destructive battle between Air Canada and Canadian Airlines come to an end. We urgently need a resolution to the uncertainty surrounding the Air Canada and Canadian Airlines situation, and we appeal for an orderly restructuring, with a carefully planned transition to whatever outcome arises.

From our northern point of view, we are not concerned about the basic principle of having a single, strong national carrier. Quite the contrary. We strongly support the establishment of such an airline. We are, however, deeply concerned about the uncertainty that prevails at the present time and about the process of implementing whatever comes from the shareholder deliberations.

Our major competitor, First Air, has been rather outspoken in the public regarding the dire consequences that could arise should the Onex proposal succeed. We are very concerned by this posturing, and we respectfully submit that our business plan contemplates that First Air will continue to exist and thrive as a major player in the north. Our shareholders are keenly interested in an ongoing competitive air environment, and we encourage First Air to recognize that their plan should contemplate the continued existence of Canadian North.

We believe that your committee, Parliament, and the Government of Canada have an important role to play in ensuring any proposal selected by the shareholders at Air Canada and Canadian Airlines appropriately addresses the fundamental problems facing the industry, and that such a proposal would succeed in correcting the dysfunctional situation that now exists. Equally important, the process must be put in place to ensure that regional services such as those we have in northern Canada will not be disadvantaged by this restructuring. Thank you very much. Merci.

The Chair: Thank you Mr. Loberg.

I think that completes our presentations. Thank you, gentlemen, for your presentations to the standing committee, and we'll begin with questioning.

Val Meredith.

Ms. Val Meredith: Thank you, Mr. Chair, and thank you, gentlemen, for appearing before the committee. The one thing I heard that seemed to be shared by all of you is the need for restructuring, that you feel the status quo as it exists right now cannot be maintained. Is it fair to say you all agree with that?

Voices: Yes.

Ms. Val Meredith: The other element I heard that was a concern to you was the timeframe. I want to ask you specifically if you feel that invoking section 47 was an appropriate vehicle for the government to use. Do you feel that time was of the essence, or is of the essence? The next question is, do you feel that your organizations, your airlines, can survive six months, a year, or 18 months of trying to settle this issue and restructure the airlines? I will let each and every one of you answer if you wish.

The Chair: Maybe not.

Ms. Val Meredith: Okay. Well, the—

The Chair: We have a problem Val, in that if you ask three questions and each one of them is allowed to give you an answer, we only have five minutes per person. So you're going to have to decide who you want this question addressed to, because I'm going to have to cut it off in five minutes to be fair to everybody else.

Ms. Val Meredith: Then I'll ask the one question on the invocation of section 47. Was it necessary? Do you feel it was justified?

Mr. James Massie: From Ontario Regional's perspective, we're a small turboprop operator in the province of Ontario. We operate to six different cities right now. If section 47 hadn't been invoked when it was to expedite this discussion, we feel the market would have deteriorated very quickly as we went into this winter with all the rhetoric surrounding the potential collapse of Canadian. Without bringing it forward and finding a solution, a company of our size would probably, as I think Mr. Myhill said, have had difficulty surviving through until next summer.

Mr. Robert Reding: From Canadian Regional's perspective, being wholly owned by Canadian Airlines, there was a need to do something quickly, and I think Mr. Benson has outlined already the need of doing something quickly. So we would have fallen under the same type of financial distress that Canadian would have if something wasn't done in a very timely manner.

• 1835

Mr. Carmen Loberg: I would echo my colleague's comments on that. Certainly if the difficulties that were in such high public profile from Canadian Airline's situation were allowed to continue, it would have been very difficult for us to continue a successful operation.

Mr. Robert Myhill: I don't really have an opinion on section 47, but I do have an opinion on your second question about six months, 18 months and so forth. Use weeks not months. This is a very serious situation. You just have to ask this question amongst yourselves at break: if you're planning a flight with your family, a vacation to visit grandma in January, are you going to book it on Canadian Airlines today? Some of you might very well say “Gee whiz, I don't want to take that risk”. Unfortunately, that's just common behaviour. I don't think you can underestimate that kind of thing. This must be settled.

What happened back in August is behind us now. It's what happens now. We need to get on with the process. There are enough people in the airline industry to fix this and get on with it. But if it stays in this, some things will happen that won't be very pleasant, and we are right up front.

The Chair: I just want to reassure those who may be watching outside of this room that it is important to stress that while Mr. Myhill has said there is some concern about booking a January flight, Canadian Airlines is still an operational airline and still has the wherewithal to continue its service into the next year.

Mr. Robert Myhill: I'm only speaking on behalf of InterCanadien. We all have different financial resources. I'm just suggesting this is a very difficult time. We're all full in the weeks over Christmas. I don't mean to overstate it, but I certainly cannot let us all feel it is not a very serious and timely issue.

The Chair: Thank you.

Ms. Val Meredith: Thank you.

The Chair: Thank you, Val.

Mr. Hubbard, please.

Mr. Charles Hubbard: Thanks, Mr. Chairman. First of all, I'd like to commend our regional airlines, because in my own part of the country, in fact in a great part of Canada, we would hardly exist as an economic unit without the service you are providing.

I'd like to follow up on the little word “franchise” I've been hearing here on occasion. I wonder if any of our witnesses would like to comment on that word. I know Mr. Myhill mentioned it. But is this going to be a factor in terms of what may be the outcome of this destructive battle between these two airlines? Will the franchise become a part of the system in the future?

The Chair: To whom do you ask that question, Mr. Hubbard?

Mr. Charles Hubbard: I would like a comment from any of them, if they feel that some major carrier will suddenly be issuing franchises or become a franchisee system and have the power to do that.

The Chair: Mr. Massie.

Mr. James Massie: Thank you, Mr. Chairman. I think Ontario Regional exists as a franchise now. We carry point-to-point traffic from small communities in Ontario—people who travel from Sarnia to Toronto or Sault Ste. Marie to Toronto. Half of our loads are Canadian passengers who travel from those same markets but not to Toronto. They may go from Sault Ste. Marie to Toronto to Buenos Aires, as Mr. Reding said.

Our airplanes are only half filled now. They are all Canadian passengers, but half are travelling somewhere else. So without a connection to the main line, I don't believe there is an opportunity for an airline like ours to be financially viable.

Mr. Charles Hubbard: To follow up on that problem, Mr. Chairman, the franchise system could then become a valuable piece of real property that might be sold by a major carrier. Are any of the regionals present fearful of a system of franchises that might almost cause your downfall?

Mr. Robert Reding: On behalf of Canadian Regional, I think I addressed it in my remarks. A franchise works two ways. It provides passengers to us from the main line through their hubs, but we are also then feeding those passengers from the smaller regional markets we serve into that mainline carrier. So they rely very much on us to be able to fill their hub flights, so they can provide the long-haul and international flights on an economic and profitable basis. So it is a franchise that's based on a mutual benefit for both parties.

• 1840

Mr. Carmen Loberg: Mr. Chairman, if I could add a comment from Canadian North's perspective, we certainly fly under the Canadian North brand, and that has significant attributes for our customers and the flow into the Canadian Airline system. But in the north we also have some very interesting dynamics whereby our shareholders and our customers in the north like the concept that we are a northern-owned carrier. We have an interesting relationship between that concept of brand, because with our acquisition, we're getting increasing interest from our customers and our shareholders in the north, in the communities we serve, to have a more distinct entity. In fact right now our entity is still very much that of, as you see, Canadian North being fully branded as part of Canadian Airlines.

So I think it varies by region, but certainly in our area the connection to Canadian is very important, but we also have a unique northern distinct regional identity as well.

The Chair: Thank you, Mr. Hubbard.

[Translation]

Mr. Guimond, please.

Mr. Michel Guimond: Mr. Myhill, it is true that Inter-Canadian is a corporation headquartered in Montreal and that it serves many regions of Quebec. You are the dominant carrier—if you don't mind my using this up-to-date expression—for the lower St. Lawrence, the Gaspé, the Magdalen Islands and the North Shore. I think you also serve the Lac-Saint-Jean region through Bagotville where you have about 50% of the market.

I'm concerned about the future of your company and its 1,000 employees. You took the torch from Air Atlantic when it ceased serving the Maritimes. You play an important role in regional air transportation. Have you already had discussions with the player or the two players who want to redefine air transportation, that is Air Canada's board of directors or Mr. Schwartz from Onex?

[English]

Mr. Robert Myhill: Thank you for your question.

Yes, it is an important issue of what happens with InterCanadien. We are a significant carrier in Quebec. As you suggest, we're at least a 50-50 carrier throughout the whole province, and in some areas the dominant carrier.

We have been very concerned about our role because there has been no public display about where we fit into this program. Our employees, our suppliers, our whole company has had a great deal of dissatisfaction with the process. However, I have received, just hours before our meeting today, letters both from Mr. Milton and from Mr. Schwartz, which is of some relief to us because we have been attempting to contact these gentlemen for months and they have now responded. Both of them indicated that should they be the fellows who move ahead with this mega merger, they would be prepared to sit down and discuss how we might be able to fit into the program.

The thing we want to emphasize is that regardless of how we fit into the longer-term program, we think we can become a competitor. We have a great business plan and we can be a real competitor, and I wish we had the time to share with you how that could offer Canadians a wonderful opportunity.

However, the issue really is, in the transitional period, whether it's Mr. Milton or Mr. Schwartz, that we need to be an integral part of that transitional plan on how you financially run a reliable mega merger during a transitional period. I say the transitional period begins next week, but it's now, and up until two hours ago we didn't know if we were going to be part of that program. So there has been an indication by both parties that they're willing to discuss with us how we could fit into the program.

[Translation]

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

My second question is for you, Mr. Reding. In the brief you presented to the committee, on page 7 of the English text you have this big title “Why Onex?”, then “Why do we support the Onex proposal for a restructuring of the industry?” Those two sentences end with a question mark. It's easy for you to answer that question. You only have to say that you are wholly owned by Canadian. In your document, you answered by stating that Onex was the only corporation to guarantee that the price of plane tickets wouldn't increase over a five-year period.

• 1845

Mr. Reding, why didn't you give those guaranties during the last five years? Are you going to tell us that we need a saviour, that Jesus Christ has to descend on earth to spread the good word? Your answer seriously lacks credibility.

Anyway, I would have liked you to be more specific with your thoughts and put a bit more meat around the bone rather than tell us that you support Onex because that company is guaranteeing its prices. You only have to do it. Do it. Drop your prices.

[English]

Mr. Robert Reding: The reason Onex, for Canadian Regional, is really number one is that theirs is the only proposal currently on the table for Canadian that would include Canadian Regional. It's the only actual written proposal we have received. As part of that written proposal, there is a guarantee for our customers that there will be no price increases for five years. There's also a plan that there would be employment guarantees for our employees as part of the Onex plan.

We provide service throughout Canada and continue to lower our fares to the lowest possible level we can, recognizing the importance of the service we provide. We endeavour continuously—we do not wait for a new program or a new carrier or a new saviour—to provide either fare sales or lower fares to our customers. We endeavour to do that on a day-in, day-out basis, and I think we do a very good job throughout Canada in serving our customers with the lowest fares possible.

As I outlined in my remarks, by being part of both an alliance and a co-chairing agreement, we are able to give our customers access to a full-service product throughout Canada and the world.

[Translation]

Mr. Michel Guimond: I put questions to Mr. Milton concerning the regional carriers that appear in Air Canada's proposal. He clearly indicated that Canadian Regional is there, but not Inter- Canadian. So he must see a promising future for Canadian Regional. When I asked him why Inter-Canadian wasn't on it, he answered that it was because it wasn't a company that belonged to... In any case, I'm taking everything you said with a grain of salt.

Can I have one last question, Mr. Chairman?

[English]

The Chair: I'm sorry, Monsieur Guimond, we have to move on.

Mr. Michel Guimond: Okay.

The Chair: Mr. Comuzzi, please.

Mr. Joe Comuzzi: Mr. Myhill, I gather from your presentation that you're not happy that the Competition Bureau has not been involved in this process.

Mr. Robert Myhill: Yes.

Mr. Joe Comuzzi: Would you enlarge on that, please?

Mr. Robert Myhill: In our estimation, the Competition Bureau has put their finger on the main issues that are really important. Whether they're involved today I'm not sure is important, but I am very sure their recommendations should be taken seriously and should be put into law. I'm then very sure that in the future we need to have a monitoring exercise in place to ensure that the mega merger is living by the rules and competition has its fair chance.

The Competition Bureau made one recommendation, which the Minister of Transport turned down...that we are disappointed in. We'd like to comment on that one issue, because it is the one the minister did not like. That is, the Competition Bureau said there should be—and perhaps up to a 49% equity—participation by foreigners into the airline.

We don't have a Gerry Schwartz. We don't have hundreds of millions of dollars' worth of people hanging around our airline. We're looking for about $25 million. We're not looking for....

We're small investors, and we need to attract small investors. But you can think about when you talk to your own financial advisers about whether tomorrow morning you would invest in the Canadian airline situation, and I think Canadians at large are not apt to want to do that tomorrow morning.

• 1850

Mr. Joe Comuzzi: Mr. Myhill, you don't agree with the statement in Mr. Benson's letter that the carriers and others need the lifting of scrutiny by the Competition Bureau.

Mr. Robert Myhill: No, we don't agree with that.

Mr. Joe Comuzzi: That was the rule imposed by section 47.

Mr. Robert Myhill: We think the Competition Bureau is—

Mr. Joe Comuzzi: Thank you. That's good.

Mr. Reding, you're talking really about cashflow. If I understand anything about this business, it's that you work on cashflow, and when there's some suspicion that you're not going to be flying and people stop buying tickets, the cashflow drops down and everybody is in difficulty. I think that's common throughout the whole industry, is it not?

Mr. Robert Reding: Mr. Chairman, that's very much the case. That's why timeliness is the crucial issue here. I think, as Mr. Myhill pointed out, once there's a perception that a carrier may not be around in the future, when people make decisions on travel plans, they then may lean toward not travelling with you. It's correct, Mr. Chairman, as you pointed out, that Canadian has indicated they certainly have the capability to survive through the early part of next year with the help of American Airlines forgiving some payments to them. It looks like their forecasted cash is sufficient to take them through—

Mr. Joe Comuzzi: I only get five minutes. I thank you. You've answered my question. You may not have answered the chairman's, but he gets five minutes on his own.

Mr. Robert Reding: I'm sorry.

The Chair: I didn't ask a question, Mr. Comuzzi.

Mr. Joe Comuzzi: No, but when you do, you'll get your five minutes.

The Chair: Thank you, Mr. Comuzzi.

Mr. Joe Comuzzi: You're welcome. Well, it's fair share, Mr. Chairman.

The Chair: You have a minute left.

Mr. Joe Comuzzi: That doesn't include the answer, Mr. Chairman.

Explain to me, Mr. Reding, the corporate structure of all of the regional carriers with regard to how they are associated with Canadian Airlines. Are you part of their corporate structure? Do you have separate financial statements? Do you have separate reporting? Do you have separate profit centres? Do you have a separate board of directors? Tell me what's happening with Mr. Loberg's company and your company. Mr. Myhill has already explained his corporate structure. Explain to me the structure of Canadian Airlines and Canadian Regional.

Mr. Robert Reding: If I may, Mr. Chairman, Canadian Regional is wholly owned by Canadian Airlines. I report to Mr. Benson. We are two separate entities. We report to the same board. I have a separate business plan, which I'm accountable for. We do combine our financials. We do not break out the financial reporting to the investment community. I am responsible for establishing a business plan, and I am held accountable for that business plan to a P and L in an operating plan for the entity. We have employees who operate under different labour and work rules than at Canadian.

As I indicated in my remarks, we do purchase services from Canadian Airlines at negotiated rates. We receive from Canadian Airlines what's called a connect incentive, which is an incentive to connect passengers to them. Just like independent carriers such as Ontario Regional, InterCanadien, or Canadian North, we actually receive a payment for connecting a passenger to Canadian Airlines' network.

The Chair: Thanks, Mr. Reding.

Ms. Desjarlais, please.

Ms. Bev Desjarlais: Should we have a situation where one of the rules that was put in place indicated that if there were a dominant carrier for what is termed add-on passengers, which is, I think, pretty much what you were just mentioning, you would get a connector's rate for it, if you were connecting—and I'm going to use Thompson because it's easy to do—from Thompson to Winnipeg, and then they were going to tag on to the Canadian International flight going out. Would there be a better rate given to the carrier for the Thompson to Winnipeg part of that?

• 1855

Mr. Robert Reding: It depends on the individual commercial agreement you have established with Canadian. It really varies by market and by individual agreement.

Ms. Bev Desjarlais: If one of rules that was put in place indicated that whatever rate you were given by the dominant carrier, in this case Onex, you had to give to anybody else who wasn't connecting, would that affect your business?

Mr. Robert Reding: If they would have to pay us a rate for a passenger—

Ms. Bev Desjarlais: You have to give the same rate you're giving the person connecting with Canadian to someone connecting with Canada 3000.

Mr. Robert Reding: Actually, Canadian pays us a rate, and they're connecting on to them. So we do not pay them any rate. They are actually compensating us for connectors.

Ms. Bev Desjarlais: Okay.

Mr. Robert Reding: And then we—

Ms. Bev Desjarlais: So if the charter carrier then paid you a connector fee, would that be the same?

Mr. Robert Reding: Mr. Chairman, I think that would be almost identical. If a charter carrier or Canadian would pay us a connector fee, that would be almost the identical scenario for us in receiving extra compensation for carrying that passenger through our system onto their system. So it's a sharing of revenue, if you like.

It's almost like an interline agreement. The industry in general works that if you do not have a separate commercial agreement, there are interline agreements where you are then paid a pro-rated amount of the fare of the passenger who is connecting based on either mileage or a portion of the fare. That's standard and industry-wide. If somebody books on Canadian Regional and then goes on to a destination that Canadian does not serve, that other carrier pays me what's called an interline rate, which is established in the industry as a proportion of that fare or of the distance, depending on what the agreement is.

Ms. Bev Desjarlais: Would that be the same rate as Canadian would be giving you?

Mr. Robert Reding: Generally, they're very similar because interline rates are established on a worldwide basis. When you have a commercial agreement established, it's because you are able to feed passengers to one particular entity, whose code you have on your flights, more efficiently than you normally would on a normal interline agreement.

Ms. Bev Desjarlais: Okay. That's fine.

The Chair: Thanks, Ms. Desjarlais.

Mr. Dromisky, please.

Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much.

The first question I have is a short one. I think Mr. Myhill in his presentation made references to Royal Airlines, Air Transat, and Canada 3000. I may have misinterpreted what you said in your statement. You gave me the impression that those airlines can compete with a predominant airline company. But I understand the ramifications of any company trying to provide a national as well as an international service. That's just impossible in this country. However, things grow. So what I would like to ask you is, isn't it possible that if the nurturing is there through legislation as well as other measures, any one of these companies can continue to grow and become a major competitor for the predominant carrier? Is that possible?

Mr. Robert Myhill: By all means. With government laws put in place, I think lots of different people could compete at some point. The word “grow” might not be my choice. The word would be “refocus”, because a charter airline is after a very distinct and different type of business from mega merger. So perhaps they might want to refocus.

I didn't mean to infer that they're not capable of doing that, but their current business is not a direct competition. We think we are in the same business as the mega mergers are. We travel to connect people around the world through our relationship with Canadian and Oneworld. We think if we were outside of that, we would be a wonderful competitor, developing our hub system out of Montreal and perhaps joining new partners in the world, such as new international carriers, instead of British Airways, and new American carriers other than Oneworld, if we severed those ties. We would be a more natural competitor.

Mr. Stan Dromisky: Okay.

• 1900

I'd like to direct a question to Mr. Loberg. Who are your competitors? I know you have nine major centres that you operate from and you have 20-some feeders...or you have so many partners. Five partners?

Mr. Carmen Loberg: Local service carriers.

Mr. Stan Dromisky: As a result, they bring in passengers from about 20-some different communities.

Mr. Carmen Loberg: That's correct.

Mr. Stan Dromisky: Now, who are your competitors?

Mr. Carmen Loberg: Our major competitor is a company called First Air, which operates a comprehensive network that begins out of Ottawa and travels all across the north. We overlap on a large number of our routes. As a matter of fact, there are very few routes for which either First Air, in operating all levels of service, or our company, in conjunction with our local service partners, don't provide some service.

Mr. Stan Dromisky: The reason I'm asking is that I got the impression after reading your document that you really didn't have that much competition. For example, there's the fact that you have seat sales, and that you're way up north. And you have statements such as “NTCL is Canada's only pan-Arctic marine company providing sea-lift re-supply throughout the North”. To me that indicates that you're saying, hey, we're the only ones. I think that's an ideal situation for any company, any businessman—to be the only one and have no competition.

Mr. Carmen Loberg: We definitely don't have that. Just by way of order of magnitude, our business is, to the best that we can estimate, about one-third to 40% the size of First Air. So we are, in fact, a smaller entity, recognizing, of course, that they operate all the way down to the local service carriers.

We find it vitally important that in our markets where we are the sole provider, we continue to offer a complete range of services, fare selections, joint fares, and promotional programs, and that we be very responsible citizens in those communities. It's just good business for us. Then, secondly, in a large portion of our communities, our shareholders are the travellers, and they won't tolerate anything but that.

Mr. Stan Dromisky: Okay, so you have a relationship with Canadian?

Mr. Carmen Loberg: That's correct.

Mr. Stan Dromisky: You have the 29 communities, and passengers buy tickets there. I know they transfer from a little plane to one of your planes, then from one of your planes to a bigger plane, to go to Europe or someplace else. Do they get travel points?

Mr. Carmen Loberg: Yes, they absolutely do.

Mr. Stan Dromisky: Even from the small communities—

Mr. Carmen Loberg: Yes, they do.

Mr. Stan Dromisky: —with the little planes.

Mr. Carmen Loberg: I think there's actually one community that doesn't get frequent flyer points because of the local carrier's decision.

The Chair: Thanks, Mr. Dromisky.

Mr. Stan Dromisky: Thank you.

The Chair: Mr. Casey, please.

Mr. Bill Casey: Thanks very much. I'd just like to have some clarification. Air Ontario and Canadian Regional are totally owned by Canadian Air, and Canadian North and InterCanadien are completely independent. So you have completely different perspectives here.

Mr. James Massie: Ontario Regional, Mr. Chairman, is a 100% privately owned company. It's owned by my partner and me. We have 160 employees, and it's all our money at risk and all our debt at risk. In response to the question I had earlier, that's why a delay in what's happened is very difficult for a small company like ours to work through, because we don't have the capital resources of Canadian, with American Airlines behind them. As Mr. Myhill explained, we're out looking for less money than Mr. Myhill is and having a very difficult time based on the status of the industry today.

Mr. Bill Casey: There are three independents and one wholly owned. Is that right?

Mr. Robert Reding: Yes.

Mr. Bill Casey: Is Canadian North totally independent too?

Mr. Carmen Loberg: Yes.

Mr. Bill Casey: Both proponents have said they're going to include the regional airlines. Have you been included in those discussions?

Mr. James Massie: We have not, and we're actually thankful for being able to be present at the committee today, because I think we've learned more today than from reading the newspaper, which has been our source of information, really, to date.

Mr. Bill Casey: So how do you face the future if you're not part of this restructuring of the airline industry?

The Chair: Mr. Loberg, please.

Mr. Carmen Loberg: Mr. Chairman, if I might answer that, we have not been particularly part of the discussions that have been taking place at the major merger level. We have a great deal of confidence in our ability to operate our airline in our environment, and although it's been disconcerting, we've hunkered down and carried on running our business. I guess we always believed that things would move their way down in due course, and like my colleagues, we're just concerned that the contemplation of what happens as it moves down doesn't take too long.

Mr. Bill Casey: It sounds almost like a franchise, as Mr. Hubbard mentioned. It sounds as if you're almost a franchise of Canadian Airlines, in a way. You have access to their business and logos and everything. Does Air Canada have the same thing with their regionals, or are the regionals totally owned? Are there any other regionals left out of this debate?

• 1905

Mr. Robert Reding: Mr. Chairman, I believe theirs to have the same basic set-up that Canadian has. They have some regionals that are owned and some that provide service and use the Air Canada code but are independently owned.

Mr. Bill Casey: We've got a head shaking down here the other way.

Mr. Robert Myhill: I'm not sure which ones would be independent. There might be some small ones.

Mr. Robert Reding: Bearskin.

Mr. Robert Myhill: Yes, Bearskin. But the essential regional airlines—like Canadian Regional in the west and us in the east—are owned by Air Canada, as are Air Nova, Air Ontario, and Air BC 100% owned by Air Canada.

Mr. Bill Casey: Okay.

One of the main recommendations of the Competition Bureau was that the regionals should be divested. What would be the impact of that? Three of you are already divested, but what would be the impact if all of the regionals were divested based on the Competition Bureau's report?

Mr. Robert Reding: Well, this would probably pertain to me, since that's the one that's wholly owned currently.

As I think Mr. Myhill pointed out, if you were divested, the important part would be having access to those important services and the code that the major carrier has, because that's how you then have access for your customers across Canada and globally.

Mr. Bill Casey: You should be telling us what you think should be done if either plan A or plan B evolves. You should be helping us, because you know more about this. Believe it or not, you have the answers, not us.

What can we do? What recommendations can we make? I think we would have to assume the regionals are not going to be divested, based on what we've heard, even though that's what the Competition Bureau has recommended. What recommendations should we make to the minister to enhance your ability to survive or prosper and provide competition?

Mr. Derek Nice (First Vice President, Planning and Operations, InterCanadien): We talked about the franchise system here. The risk we run if there's a consolidation of the industry is that there's one franchisee in each region. And if there's one franchisee, and only one franchisee has the right to operate with the code or to make connections, then there'll be no competition whatsoever—whether that franchisee is a Canadian Airlines franchisee or an Air Canada franchisee. So what is especially important, if there is to be competition, is that the regional carriers, whether they are divested or owned, have equal access to be able to connect their passengers to the mainline carrier. Without the ability to connect, the regional airlines cannot survive and cannot compete.

The Chair: Thanks, Mr. Casey.

Mr. Carmen Loberg: Mr. Casey, from our point of view, we would need access to whoever the dominant carrier was in the south, to pass traffic on to and to receive traffic from.

The Chair: Thanks, Mr. Casey.

Mr. Calder, please.

Mr. Murray Calder: Thanks, Mr. Chairman.

I just want to get a number of points clear on the regional carriers.

Basically, you run underneath the umbrella of what I'll refer to as a class one carrier, either being Canadian or Air Canada. You use their reservation system. You're basically reliant on their world alliance system, because you're looking at a seamless system of running your tickets through, right down to the small areas in Canada. You use their frequent flyer program, corporate identification, airport gates, and arrival and departure slots, and you probably get some financing out of them too, if you have any expansion plans. Would I be right in saying that?

Mr. James Massie: With the exception of financing.

Mr. Murray Calder: I just wanted to get that clear in my head, because it seemed to be Canadian Regional's...why Onex? Well, it's just because there's not going to be any increase in air fares for the next five years. That's the reason you are looking at the Onex deal, and no other reason.

Mr. Robert Reding: No. For us the Onex deal is really, as I indicated earlier in my comments, Mr. Chairman, the only one we have on the table currently. The Onex deal guarantees that regional is going to be part of the new Air Canada. That's why we're supporting the Onex proposal.

Mr. Murray Calder: Okay, but when you say that's the only one that's on the table, that's not what we've heard. There's also the Air Canada proposal that's on the table too, I would have to say. Now they're talking about keeping Canadian alive, but as a subsidiary. What do you think about that?

• 1910

Mr. Robert Reding: We have not yet received the formal written proposal from Air Canada. We expect that at any time.

We think it makes no sense to keep the airlines separate. Again, the industry needs restructuring. The restructuring is where you have a major carrier and the regionals have access to the network of that major carrier, thereby allowing us to become more profitable by having a larger network to feed into and allowing the regionals to grow.

Having a larger network means that communities that currently may not have any service can now get service with small aircraft. In communities where we operate a Dash 8, we would be able to upgrade. We've been very frustrated in that in many of the markets we serve—because our network is smaller, being a part of Canadian—we've actually had to downsize our service. We've taken out our Dash 8s and turned those over to 19-seaters. We would like to reverse that trend and actually grow our regional service back to larger and more efficient aircraft for the regional communities we serve.

Mr. Murray Calder: Let's say we take a look at the Onex deal, then, whereby you're going to merge the two airlines together.

The Chair: Excuse me. I'm only interrupting because I want to make sure...we're coming close to dissecting the proposals and what witnesses think of proposals. I think our mandate here is not so much to dissect a proposal or ask a witness what they think of this proposal or that proposal. I've been letting some of this go only because, hopefully, it might have something to do with what we're trying to do, and that is to strike the policy for what the new airline policy will look like at the end of the day.

I'll hear your question, Mr. Calder.

Mr. Murray Calder: My question—

[Translation]

The Chair: Mr. Guimond.

Mr. Michel Guimond: Mr. Chairman, I'm having some trouble following you. In their brief, these witnesses are taking a clear position in favour of some elements of the proposal we have before us, among other things the setting of prices and provision of services to our smaller communities.

Mr. Chairman, with all due respect, I believe that Mr. Calder's question was quite acceptable.

[English]

The Chair: Mr. Guimond, I understand your point, but that's why I thought I'd interject by saying that I have let a lot of these questions go only because it was mentioned in the proposal. I'm just trying to remind my colleagues not to get into the depths of these proposals.

Yes, they can say they support it or don't support it. I just don't want us to get into the depths of the proposals because I don't think that's what the terms of reference are for our committee. So far I've let these questions ride, but I think we have to be careful not to get trapped into starting to discuss the merits of either of the proposals at this committee, because of the terms of reference we have.

Ms. Carroll.

Ms. Aileen Carroll (Barrie—Simcoe—Bradford, Lib.): On a point of order, if I can just add to that, Mr. Chair—

The Chair: No. I'm going to close that discussion, Aileen.

Ms. Aileen Carroll: Oh, okay.

The Chair: Mr. Calder, go ahead with your question, please.

Mr. Murray Calder: My question was going to deal with the mechanics of the fact that yes, in fact they've looked at one proposal, which is the merging of the two airlines. There is an issue in here, which is the seniority ladder issue of melding the pilots of the two airlines—

The Chair: That's a good question, Mr. Calder. Go right ahead.

Mr. Murray Calder: —together. How would you handle that? That is going to be a big issue.

Mr. Robert Reding: A merger of a pilot integration obviously is primarily up to the labour groups themselves. The representatives of the labour groups, the union representatives, would have to meet to ensure that there is a fair integration of the seniority list. It's primarily labour that would come to management with a recommendation for seniority integration.

Mr. Murray Calder: Right now you have the regional pilots flying the aircraft they have. How, then, do you see them being handled in that situation? If you have this merged airline, would the regional pilots be able to go all the way on, up into the larger aircraft?

Mr. Robert Reding: Mr. Chairman, at Canadian Regional we currently have a limited flow-through capability for regionals. Under limited circumstances, regional pilots can flow through into the main line. That certainly would be an issue that would be discussed at the negotiating table with the labour groups in order to potentially provide that opportunity.

The Chair: Thanks, Mr. Calder.

Val Meredith, please.

Ms. Val Meredith: Thanks, Mr. Chair.

I'd like to get back to an issue that was raised a while ago: the Competition Bureau's recommendations.

• 1915

I understand, Mr. Myhill, that you don't have any problem with the foreign ownership being raised to 49%. I would assume that would also be shared with the independent or private ownership companies that might find themselves in a competitive position.

But there was another recommendation by the Competition Bureau commissioner, and that was to have a Canada-only airline that could be 100% foreign owned but could operate only within Canada, under Canadian laws, with Canadian support and employees. How do you feel about that competition also being allowed into the airline industry in the future?

Mr. Robert Myhill: Mr. Chairman, I'd like to respond to that and say that I know it exists, in Australia, I think. It would certainly open up a new opportunity for more carriers to look at Canada—American carriers, perhaps, which is a sort of a 100%-owned-subsidiary environment in Canada.

We personally don't favour it because we are a Canadian airline and we think we can become a competitor in Canada and offer good service to Canadians as a competitor to the mega merger. We think we can do that if 49% of our equity could be outside the country. We think we'll be able to attract enough capital to do that. That is a personal level of feeling, and we feel comfortable with it. We would really like to encourage the minister to reconsider his position—to between 25% and 49%. Frankly, from a cosmetic point of view, we understand the difference, but from an absolute point of view, I don't understand what the difference is.

Ms. Val Meredith: You don't? Fair enough.

Mr. Loberg and Mr. Massie, would you have a problem with the foreign ownership being raised? Would you have a problem with a Canada-only airline? Are you prepared to consider yourself as competition to the major merger, the dominant carrier? Or do you consider yourselves to be only a supportive carrier, a feeder carrier, to it?

Mr. James Massie: Ontario Regional, as a Beech 1900 operator, is really a support cog in the system. We fly and provide feed. For a 100%-foreign-owned airline flying domestically in Canada, we would probably be able to supply feed to them as well—I think Mr. Reding answered that question—on the same type of terms we currently have with Canadian Airlines.

I think it's essential, though, as Mr. Myhill has said, that whatever this committee recommends on the mainline carrier issue of foreign ownership being limited to 25%, it needs to be reassessed for the regional carriers, because we are a much different market. We are small regional operators. We need to find that capital outside of Canada, because in today's market I don't think it exists.

Ms. Val Meredith: Mr. Loberg, do you have a position on those issues?

Mr. Carmen Loberg: I don't have one that's different from my colleague's.

Ms. Val Meredith: Okay. So my understanding, from what I've just heard from you, is that you feel, Mr. Myhill, that a Canadian company, whether it is yourself or Canada 3000 or WestJet, can provide the competition to this big carrier, given the opportunity.

But there are some carriers that are content to be feeder airlines into that major airline. One thing we heard earlier, though, is that in order to compete you must have access to slots. How would you solve that issue? How do you feel we should deal with the issue of providing slots to your new airline if it's going to be a competitor, or to Canada 3000, or to whomever might be a competitor to this big airline? How do we solve that issue of access?

Mr. Robert Myhill: Again, in regard to the access to the slots, when the monopoly is formed, statistically there is going to be a whole host of slots that are available within that mega merger. I think some percentage should be set aside for competition, for the rights to be given off to new competitors. I don't see that as a difficult process. Currently the airports themselves are quite aware of what slots they have and they are more than able to set up to negotiate with various groups to do it.

The big deal in terms of getting a competitor like ourselves is the transitional period itself, because on day one you will not have a competitor. It is a transitional period. We are all connected today in all our services—our use of their slots and everything else.

• 1920

So there's going to be a transitional period. I think the government needs to be involved in that transition as a watchdog and in coaching the various constituents to make sure the slots are transferred.

The airline industry knows how to do this. The people in the business know very much how to transfer these slots. It's just a matter of whether the laws are in place to allow them to do it.

The Chair: Thanks, Val.

Mr. Guimond.

[Translation]

Mr. Michel Guimond: My question is for you, Mr. Myhill. I would ask you for a fairly quick answer because time is limited and I would like to give Mr. Asselin the opportunity to ask his question.

Yesterday morning, I had the pleasure of hearing Mr. Schwartz when he appeared before the Senate Transport Committee. He slammed Inter-Canadian's intention to buy Embraer aircraft instead of Regional jet aircraft from Bombardier. I do not know if you had an opportunity to see that, but he really slammed that plan.

On the other hand, I find it regrettable that Mr. Schwartz did not mention that the jet that his company provides for his use is a Gulfstream II built and registered in the United States. The registration number is M240CX. The plane is managed by Corporate Wings, an American company, and piloted by Americans. That is not really the point of my comments, but what do you think about what Mr. Schwartz said?

[English]

Mr. Robert Myhill: As I think I started our conversation this evening, we're entrepreneurs, free enterprisers, and we believe in competition. Mr. Schwartz undoubtedly has a different view about our ability to buy airplanes anywhere in the world.

A year and a half ago we offered Bombardier the opportunity to come to us and sell us regional jets. They suggested they would do better by selling them to others around the world than us, since we didn't necessarily meet the financial credentialing at the time.

My friends in Brazil seem to have found a way to deal with us, and we're more than delighted that they thought we were worthy of the business transaction. But I am delighted to report that, without Mr. Schwartz' help, Bombardier has since asked my colleague and I to dinner next Tuesday evening. They would like to talk about the possibilities.

If Mr. Schwartz would like to participate in the financing of these planes, I'd be delighted.

Voices: Oh, oh!

[Translation]

Mr. Michel Guimond: It would be good if, instead of ordering a Gulfstream II as he did, Mr. Schwartz ordered a Bombardier Challenger built by Canadair.

I now give the floor to Mr. Asselin.

Mr. Gérard Asselin: I would like to ask my next question as a long-standing Inter-Canadian customer and a member of Parliament for a North Shore riding which includes Baie-Comeau. Inter-Canadian is a company that takes the safety of its passengers seriously; it has recruited competent and qualified staff and works hard to ensure quality service at the counter and on board.

I know that if a merger takes place, there will no longer be an Inter-Canadian plane arriving at 8:40 a.m. and an Air Alliance plane at 8:50; there will only be one flight. In that scenario, I do not believe that the new Air Canada, whether it is run by Onex or Air Canada, would continue to subsidize a carrier or help it compete. I have difficulty understanding what would happen in that situation.

I would like you to explain the nature of your negotiations with Mr. Milton of Air Canada and Mr. Schwartz of Onex. Have you discussed a possible merger? Have you suggested to them that the new company should buy your carrier fleet or are you simply planning to maintain your services as an independent carrier and to compete with the other airlines?

[English]

Mr. Robert Myhill: We haven't had any discussions, but we're going to have the opportunity.

Really, we're not interested in necessarily selling our company, and we're not interested in discussions about a long-term relationship where we're part of a long-term merger. There's no reason they should have to support us in the long term. We're looking to be a free enterprise competing in the marketplace. However, this has been brought upon us. We didn't cause this. We didn't make the August 23 vote. We didn't tell the consumers to no longer book with InterCanadien.

• 1925

I just want time, and I think the fellows who are running this show should be giving us time and we should be working with them. I want time to transition ourselves into being a strong competitor. We will fight out of Baie Comeau against Air Nova any day once we have a level playing field, and we will offer you services that will be different from Air Canada—not necessarily better, just different; other alternatives. I think that's a free marketplace that will mean better service for Baie Comeau, but I need a transitional period and I need to be dealing with these gentlemen in transitioning that.

They have now sent me letters. I think they are men of their word. They wouldn't be in the positions they are unless they were men of their word, and I am delighted with the opportunity. But I do encourage everyone here to make sure this isn't the last time you hear of InterCanadien, that in fact this does happen, that we do have the opportunity to negotiate and come up with a viable transition period.

The Chair: Thanks, Mr. Myhill.

Mr. Comuzzi, please.

Mr. Joe Comuzzi: I want to carry on with Mr. Calder's questioning, because I think it really is relevant to the issue at hand inasmuch as both offers on the table talk about the strength of the regional carriers in so far as servicing the small communities in this country. That's what we are all about here, to make sure those services are maintained.

So we have in the hierarchy, Canadian Airlines, then the regional airlines, which is your division, Mr. Reding, and then the licensees or whatever, those not wholly owned or those not owned by Canadian Airlines, which is Mr. Loberg, Mr. Myhill, and Mr. Massie. Is that basically correct?

The Chair: Mr. Myhill, do you want to provide a flowchart for my colleague?

Mr. Robert Myhill: The question of them being different because some are independent and some are wholly owned is certainly the case. However, we are similar to Canadian Regional in eastern Canada because we fly not just to the small communities, but also on the main line, which are called the mainline flights. We fly jet service from St. John's to Halifax, Halifax to Ottawa, and Halifax to Montreal. So we are kind of a unique situation. We are not a true “only” regional. We are a quasi, a remnant. We are what's left over, in many ways a hybrid. We are a hybrid that hopefully has an opportunity to strengthen that.

Mr. Joe Comuzzi: You're a big short-liner.

Mr. Robert Myhill: A big short-liner.

Mr. Joe Comuzzi: Mr. Calder has the right idea, but he's not going to get a chance to ask this question, so I'm going to ask it on his behalf.

We have been assured that everybody is onside with supplying all these communities. We're not concerned about Montreal and Toronto and Halifax; we're concerned about Sept-Îles and Timmins and all those. We've been assured on both sides—and I guess we'll get a chance to do the Air Canada thing—that everybody is on board. As Mr. Massie said, he's learning more through this process in what has developed tonight than what he has heard up to this point in time, and he's a very vital link, as are you, Mr. Myhill and Mr. Loberg, in the services that we have been assured are going to be provided by Canadian airlines. But you are not consulted in the process.

Mr. Robert Myhill: It's a matter of definition of being assured you'll be supplied the services. If the mega merger decided to utilize Air Nova, as an example, as the sole provider for community service in eastern Canada, the communities would receive service everywhere we fly. So they would receive the service, and there would be no use for us.

But I think the way you asked the question was more what our role is in providing that service. I think only now Mr. Milton and Mr. Schwartz have come to the point where they have determined that we do play a role, because they have sent these letters today—and I am delighted that we are going to have that opportunity.

Mr. Joe Comuzzi: I think those are the questions Mr. Calder wanted to ask.

Mr. Murray Calder: Precisely. Thank you, Mr. Chairman.

The Chair: Thank you, Mr. Calder.

Mr. Comuzzi, we do have a policy on this committee that you can defer to your colleague to ask a question. You don't have to have all the TV time for yourself on these things.

• 1930

We have one quick question from Bev and one from Mr. Casey, and then we have to move on to our next witness.

Ms. Bev Desjarlais: In the case of the Canadian Regional pilots, you've indicated that there is a way to integrate, but it's limited by the collective agreement.

In regard to the other carriers, there's nothing like that in place because you're not part of it, correct?

Mr. James Massie: Correct.

Ms. Bev Desjarlais: I wanted to clarify that.

Both of the offers seem to say we are going to look after the regionals, but I think we all take that as meaning all the regionals—First Air, Air Nova, all the ones involved. Is there enough business out there for those regionals to survive if both of them have to have access to the dominant carrier?

Mr. James Massie: Mr. Chairman, if I can answer that one, because we're probably the smallest player in this equation, there is room, and as Mr. Reding said as well, I think what will happen is that more communities will open up.

For example, Mr. Jackson, Owen Sound, Ontario, is a market we've looked at, which with 19-seat aircraft would be a very simple market for us to go and service with support from the main line. We believe there is lots of room for us in that.

Mr. Robert Reding: If I may, on our behalf as the largest regional carrier here, we see wonderful opportunities: transporter, for example, out of western Canada and eastern Canada. Our network just isn't large enough to be able to make those services viable, but once we have a larger network to have feed customers coming into, we are then able to provide service to those communities transborder as well as within Canada. So we think even though we will reduce service between the two of us on a particular route and supplement it with larger aircraft, we'll reallocate those aircraft to some new destinations.

Mr. Carmen Loberg: Mr. Chairman, from Canadian North's point of view, there is very much ample business in the north to divide between First Air and Canadian North.

The Chair: Thank you, gentlemen.

Mr. Casey.

Mr. Bill Casey: I would like to know the top three things you would like to have in public policy that we can make a recommendation on to the minister.

The Chair: Mr. Reding, are you going to start?

Mr. Robert Reding: If I may, yes. First, the industry is broken, so we would like to see a single national carrier that we are part of, where we have access to their global network. We want to ensure that we have a relationship with that new dominant carrier—some people may call it a monopoly carrier—so that we're able to grow and prosper with them.

Mr. Bill Casey: I'd like to hear from the independents too.

Mr. James Massie: I think the three top things for us would be, again, that the industry is broken and we need it fixed, and we need the industry to be streamlined. I think this government can help make that happen.

Secondly, as has been said a lot by the independents, we need a transitional plan. We need to be involved in the process and we need to be told how we and our 160 employees work as we transition to this new streamlined industry. We just can't be left out of the equation.

I think the third and most important thing, which Mr. Myhill brought up as well, is that we need to allow foreign capital to flow in and help us capitalize our Canadian-owned, Canadian-controlled businesses, but let us find sources of capital outside of Canada.

Mr. Bill Casey: Is there anything at the other end of the table?

Mr. Robert Myhill: I would agree with my colleague Mr. Massie that the number one issue is that there must be a good transition plan to which we're party in order to make us all viable. Secondly, I see that we must have access to foreign capital, again as Mr. Massie said. Thirdly, as our separate little issue, we need access to the code-shares and to the gates and the slots in the major airports in eastern Canada so that we can fly a viable, competitive airline.

Mr. Carmen Loberg: I would add that probably the top item from our perspective at Canadian North is that the industry desperately needs to be rationalized at the major airline level. Second, we need the process of that rationalization to move as quickly as it can, recognizing all the important elements of the deliberations. Third, we need to make sure we have a clear implementation plan that includes a transition to whatever it is that evolves out of these major shareholder activities.

• 1935

The Chair: Thanks, Mr. Casey.

Mr. Massie, Mr. Reding, Mr. Loberg, Mr. Myhill, and Mr. Nice, thank you very much for your presentations to the committee and for answering our questions.

Colleagues, we are suspended for three minutes for Air Transat to take their place at the table.

• 1936




• 1940

The Chair: Colleagues, we're resuming our hearings with our last witness of this evening. From Air Transat, we have Mr. Philippe Sureau, who is president and CEO of Air Transat, and Mr. Denis Jacob, who is executive vice-president. Gentlemen, welcome to the Standing Committee on Transport. We look forward to your presentation of about 10 minutes. Then we'll get to questions.

Mr. Philippe Sureau (President and Chief Executive Officer, Air Transat): Mr. Chairman, distinguished members of the committee, Monsieur le président, membres du comité, since you've introduced me, I am not going to reintroduce myself. I want to say I'm sorry to understand that you have not been delivered our brief. Unfortunately, all this process is taking place in a very short lapse of time. The resources at Air Transat being what they are, I think you're going to get it during the week, of course in both French and English. So I'm very sorry to be slightly late today, and please don't blame it on the secretariat; it's my mistake, not theirs.

I would like to begin by thanking you, of course, for the opportunity to appear before you today during this critical juncture of the history of Canadian commercial aviation. It is my intention, given the new reality in the Canadian airline industry towards which we are heading, to offer you our suggestions as to potential public policy and legislative initiatives that will allow us to thrive well into the future, and hopefully enable us to best serve the Canadian travelling public.

[Translation]

To begin with, I would like to give you a brief overview of our company and its position in the Canadian air industry. Air Transat is the largest Canadian air carrier specialized in international charter flights. In 1998, we carried over 2,200,000 passengers from a number of points in Canada to over 75 destinations in 29 countries around the world.

In addition to our charter services, we operate scheduled flights to France and Cuba, as well as providing domestic services between a number of major Canadian centres. Air Transat operates a fleet of 23 aircraft, mainly large planes, and employs over 1,800 people, mostly in its three bases: Montreal, Toronto and Vancouver.

[English]

We are a wholly owned and key strategic subsidiary of Transat A.T. Inc., a holiday travel company with multinational interests in several major tour operators, airlines, travel agencies, franchises, and an airport ground handling company. In 1998 Transat posted gross revenue of $1.4 billion and a profit. We've made a profit, as a matter of fact, for the last six years. We employ over 3,500 people.

• 1945

In a nutshell, our business serves the holiday or leisure travel sector. We tailor our product to respond to seasonal travel demands and trends. We serve a consumer who is spending precious after-tax personal income and for whom the key factor is the price. Our success and growth over the last decade can be attributed, in my personal view, to a simple philosophy: offer the best quality at the lowest possible price and stick to what we know best.

Contrary to some of the wishful thinking we have seen expressed in the media over the last few weeks, we are not about to change our long-term game plan as a result of the events we are currently witnessing. Nevertheless, the probable emergence of a single network carrier in Canada will present some significant commercial opportunities for airlines such as Air Transat, and I can assure you that we fully intend to consider all of them, consistent, of course, with our main strategy of serving the leisure travel market.

However, it can also present risks to our viability and to our ability to compete, both domestically and internationally. Indeed, I would point out that over 65% of Air Transat's operating revenues are derived from services that are in direct competition with Canada's major carrier, that is to say the air-only as opposed to the package tour. I am stating here Air Transat as opposed to the parent company, Transat.

In brief, a level playing field must be maintained and safeguards implemented. In this respect, I propose the following.

[Translation]

I recommend implementation of a new policy and an oversight mechanism to ensure that Canadian infrastructures that play a key role in the air industry are operated in a way that reflects the public interest. At present, the major Canadian airports are operated by local authorities and boards of directors which, under the national airports policy, have the authority to make decisions that impact on the level of real competition in the domestic market. Among other things, airport fees, which are skyrocketing in some places, and the non-availability or the discretionary allocation of airport space such as slots, counters and gates are some of the issues that constitute potential barriers to the entry of any new competitor or the growth of existing competitors.

[English]

The second is new provisions in the Competition Act dealing specifically with predatory and anti-competitive behaviour in the airline industry. In the event of the emergence of a dominant network carrier, competition legislation must be able to react to and deal with situations or practices that would not normally be considered predatory in a contestable market. For example, in a market where two or more carriers with national domestic networks exist, a refusal on the part of one carrier to interline or negotiate joint fare with a smaller competitive start-up is a simple commercial decision. In a monopoly situation it would be a strong indication of predatory or anti-competitive behaviour, since it would practically be impossible to establish a viable integrated domestic and international network then.

The same can perhaps be said of refusal to allow participation in the dominant and well-established frequent flyer program, an extremely important marketing weapon, particularly with respect to the high yield business travel segment.

Furthermore, proving predatory pricing is almost impossible under the current standards, since sophisticated yield management systems employed by the major airlines make it almost impossible to establish whether a carrier is recovering its marginal costs through a low promotional fare. And we could say, what about the so-called practice of bracketing a competitor's flight in a clear effort to target a new service with substantial additional and short-term capacity?

• 1950

Thirdly, despite the obvious temptation in the context of some eventual monopoly, a return to formal price regulation must be avoided. As long as smaller, existing, or start-up carriers are provided a fair opportunity to enter and effectively compete in a particular market, it is our view that abusive pricing will not result, especially on major trunk and high-volume routes. This has been the case until now with charter carriers and regional independent operators, such as WestJet, providing the consumer with a wide variety of fair service options in the context of a current duopoly. However, we recognize that in certain smaller densities, remote or regional domestic markets where the only monopoly carrier may end up operating, the Canadian Transportation Agency will likely need to have the power to intervene upon complaints when average fares increasing over a certain period are deemed unreasonable based on various criteria, including increases in the cost of living, fuel price, major fluctuation of the Canadian to U.S. dollar exchange rate, etc.

A solution could be the establishment of a ceiling or approved range of percentage increases established annually by the CTA in consultation with carriers, consumer groups, etc., and applicable only to city-pair markets where monopolies do exist for at least six months.

The fourth is new international air and charter policies. The current international air policy is based on the reality of the two major carriers and by definition will become obsolete. All current restrictions on second and third designation in some markets must be replaced by an open designation approach similar to the Canada-U.S. arrangement. The government should be required, upon request by any interested carrier and not simply the designated incumbent, which may see no need to negotiate a more liberal agreement, to pursue negotiation with aviation partners. This will lead to the most liberalized bilateral arrangement possible. Furthermore, the current international charter policy dating back to 1978, and the subject of an ongoing review by government, should be amended as quickly as possible on the basis of a recommendation submitted by the four carriers, which are Royal, Canada 3000, ourselves, and Sky Service, to the Minister of Transport dated September 21, 1998—a year ago.

I think I'm on the fifth one now: increased foreign investment but not cabotage. There have been suggestions that opening up domestic routes to foreign carriers may be the only way to maintain adequate competition in a monopoly scenario. I disagree. The only carriers that could make practical use of such cabotage would be the Americans. Thus, while we could see improved competition in the short term, there would be substantial risk in the long term to smaller Canadian competitors, which would have to deal with both the Canadian and the U.S. behemoths. I will remind you that some of the U.S. majors are apparently not beyond anti-competitive behaviour, given the recent antitrust suit brought by the U.S. Department of Justice against American Airlines. Furthermore, the U.S. has already established that they would not be prepared or able to provide reciprocal rights or opportunities for Canadian carriers.

I would suggest that the better path would be to increase the allowable foreign investment level in order to give smaller competing Canadian carriers access to new capital essential for growth while ensuring that effective control remains in Canada.

I think the last one is

[Translation]

a mandatory evaluation process designed to assess the “new Canadian airline industry.” Given that our industry is about to undergo major changes, policy and legislative initiatives developed to deal with this new reality should be accompanied by a mandatory evaluation process.

[English]

This would ensure that we are moving in the right direction and would identify any threats or impediments to the realization and maintenance of a viable, competitive, and Canadian-controlled airline industry serving the interests of Canada's economy and its travelling public.

To this end, I would propose a review of the state of the industry by a commission of experts drawn from government, carriers, consumer groups, the labour movement, the financial community, as well as independent sources, not more than 18 months after the restructuring is completed and the creation of a new dominant network carrier is achieved. Recommendations, if any, would be submitted to the standing committee for follow-up. Another such review could be undertaken after five years.

• 1955

Thank you very much for your attention.

The Chair: Mr. Sureau, thank you very much for your presentation. It was very thorough.

We'll turn to Val Meredith for questions, please.

Ms. Val Meredith: Thank you.

Mr. Sureau, you have introduced a really good concept, and I thank you for it, which is a mandatory review being attached to any policy that's established. I again thank you for your suggestion as to who should be doing that review, because I think it's important to make sure that the people who are in the industry are the ones who decide whether or not what has evolved is actually working. So I appreciate those comments from you.

You mentioned some of the recommendations the Competition Bureau gave that talked about how to bring real competition into the marketplace if you have one dominant carrier. They suggested that raising the foreign ownership to 49% would allow foreign capital to help create that competitive airline. Do you feel that's a fair comment? Is it something you could support?

Mr. Philippe Sureau: Absolutely. I think it makes sense. First of all, if I may be blunt, the 25% is not really observed by most carriers in Canada. For a very long period two of the charter carriers were de facto controlled by British tour operator companies. That's the way it was. Today Canadian Airlines is de facto controlled by Dallas. We see that. We know that. It's not a disaster. It's just happening like that. So why not go to 49% right away and stop burying our head in the sand and not paying attention to the reality?

It would allow people like us to get on the capital market, if we needed to, and to have a wider range of possible investors. We are a profitable company. I think we could very well interest investors, be they from the United States, Europe, or elsewhere. The big game is in Europe in terms of large leisure companies. It would be very appropriate. We are involved in an airline in France in which we own the maximum the EC allows us to own, which is just below 50%.

Ms. Val Meredith: So you are on the receiving end of those kinds of policies.

The other thing I find interesting is you've indicated that your interest is in expanding your own market, which is the leisure market. In other words, you're not really interested in getting into the domestic carriers or in being a feeder airline. What you want is more of an open skies policy internationally that would allow you to fly into Mexico, Brazil, or wherever you thought there was a market you could fill. Is that fair to say?

Mr. Philippe Sureau: I wouldn't say so. The domestic market is comprised of both leisure and must-go travellers. Whoever is not a must-go traveller is my potential customer, including on the domestic main trunks. At this point in time, 10% of our revenue flows from the domestic market, and for us it is very important to be a contender in every market. I won't do Marketing 101 here, but it's very important to be in every single market where your competition is also present. It would not make sense for us to look down on the local market just on the basis that we have something else to do. I think it's an important market that is capable of bringing revenue, and we should be part of it as well.

To what extent, is the question. Should we get involved in the traditional way to sell our products and services and in trying to establish the kind of classical relationship airlines have had in the past with alliances, using the computer reservation system the way they do, going into the loyalty program, and such? At this point in time it is not our strategy. We think we have other ways to get to the market to distribute our products and services that are very efficient and that also reach the public. At this point in time we feel okay about that.

• 2000

Where we are concerned, as I said, is that even if we are a leisure company, we have to acknowledge that Air Canada and Canadian carry not only business people but also leisure traffic. Therefore, they are a competitor in that dimension.

What I think is very important to realize is that today the leisure market is not a secondary or small market, and it should not be treated as leftovers. For your constituents it's what they do with their very precious time, which is their leisure time, their free time. It's their money, and it's after-tax money, so they pay a lot of attention to what they do with their money. It would be very damaging to just think about business traffic as being the dominating factor in reorganizing air transportation. We are carrying the nuns, the péres, the elderly, the students, and what you call the “solos” as well.

The Chair: Thanks, Mr. Sureau.

Mr. Dromisky.

Mr. Stan Dromisky: Thank you very much.

Two of my questions have already been answered, but I'd like to carry the discussion on the domestic market a little farther. You say that about 10% of your revenue comes from the domestic market. Are those flights in the domestic market part of a regularly scheduled program, or are they all charter flights?

Mr. Philippe Sureau: I think this has already been explained to this committee. The concept of charter does not exist any longer in Canada. I am operating my flights under the same authority as Air Canada or Canadian.

If I read your question correctly, we don't operate the same way Air Canada does. We don't look at the schedule and say, I want a flight at 9 a.m., 10 a.m., and 7 p.m., and dedicate long-term capacity to this type of scheduling. We don't do that. We do have a schedule, which we stick to, but the schedule has ups and downs according to the demand for our type of traffic.

Mr. Stan Dromisky: On an annual basis.

Mr. Philippe Sureau: Yes. We fly year round to most destinations, as a matter of fact, but the frequency is not the same during the months of November and July depending on the destinations. We have winter destinations and summer destinations. Where we are good is that we are capable of changing the orientation of the fleet from east-west during the summer to north-south during the winter. We keep flying east-west and north-south during the low season as well, but to a lesser extent, of course.

Mr. Stan Dromisky: Just to follow through, you indicated that airport authorities could be, and in some cases are, providing major barriers for you and other colleagues in the same kind of industry. Could you expand on that?

Mr. Philippe Sureau: Absolutely. The two main bases are Montreal and Toronto, and today both airports are a risk factor for our group. Because of the duality of the airports, it puts us in the position where we are sort of second-class citizens. The way the Montreal airport is tailored, the bylaw about deciding who goes where has been drafted on who we are. It just says, you guys go there and that's it, and please shut up. I think today this is not totally discretionary.

Mr. Stan Dromisky: Way in the cornfield.

Mr. Philippe Sureau: This may be all right, but I would have liked to have been consulted and to have been able to discuss it and be part of an open process, such as is being done with this committee. We are in a democracy and we can talk about the subject. Whether or not we agree is another matter, but the fact is that we can talk. That's not the case with this administration. They make the decision and we follow. That's not to say they are bad people. I think they think they're doing it for the right purposes.

But what's going to happen tomorrow? I don't know and you don't know. But this is my business, and I have 1,500 people working with me out there. Where are they going to be working in five years' time? I have no clue.

In Toronto we have an airport that is trying to become one of the largest in the world. This is all very well, but to multiply by five or six times the fees you're going to be charged at Toronto airport just because it makes sense for Toronto to have a very large airport doesn't make sense. Again, we need to have renovations done at Pearson. We even need to have a new airport at Pearson. I do agree with that. But this should be made within a framework that is the framework of consultation. The national airport policy does not allow that.

• 2005

What has been done previously—what used to be called the LAA, the local airport authority—is even worse, because we have no accountability. They are a local monopoly. We talk about monopolies today. These guys are local monopolies, regional monopolies with technically no accountability.

The Chair: Thank you, Mr. Dromisky.

Mr. Stan Dromisky: I have one more part about NAV CANADA.

Mr. Joe Comuzzi: You can have my time.

The Chair: You can have all you want now, Stan.

Mr. Stan Dromisky: This is extremely important.

It regards NAV CANADA, in-flight services, and so forth. Is there any evidence whatsoever that NAV CANADA is treating you any differently from any other carrier?

Mr. Philippe Sureau: I would be very embarrassed to say anything wrong about NAV CANADA, because I was sitting in this chair in front of this committee five years ago advocating that we should start NAV CANADA. In all fairness, for us NAV CANADA has been a positive move, both in terms of its efficiency and the cost of operating, which for us is a key factor. Overall, the cost of operating in Canadian air space is now cheaper for me.

Mr. Stan Dromisky: Thank you.

The Chair: I think there's a joke there. Don't wish for something; you might get it. I'm teasing.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond: Mr. Sureau and Mr. Jacob, thank you for your presentations. As a user of your airline, I can tell you that your flight staff is very professional and very competent, and that your planes are remarkably clean.

If I understand correctly your fleet consists only of large planes. I have flown on Lockheed L-1011s, Boeing 757s and Boeing 767s. Following up on what my colleague Mr. Dromisky said, I would like to ask you which Canadian cities you have scheduled flights to.

Mr. Philippe Sureau: We operate scheduled flights from Montreal-Toronto, Toronto-Calgary-Vancouver and Halifax.

Mr. Michel Guimond: So you have scheduled flights every week?

Mr. Philippe Sureau: At certain times of the year, we have daily flights. For example, we offer daily flights on the Montreal- Toronto-Vancouver route, but not to Calgary. In the case of Halifax, there are four flights a week.

Mr. Michel Guimond: I asked the same question of your competitors in the last panel. One of our witnesses—I believe it was the Minister when he appeared here on Tuesday, October 26th—said that the charter companies could play a role in maintaining competition. How do you see that? Do you see a role for yourselves? I recognize that you usually fly to the South and to Europe, but do you believe that you have a role in maintaining competition?

Mr. Philippe Sureau: I will make two comments. I believe that we do have a role to play. I cannot really speak on behalf of the other charter airlines, but I can say, since you are asking me the question, that I do not see today how any Canadian charter carrier could change overnight—and I mean overnight—given the financial situation of these companies, the type of fleet, the kind of operations and whether or not they have alliances, into a major player. By major, I mean a carrier with 30% to 35% of the market, and not 5% or 6% of the market. That is nice, but it is not the type of competitor you are looking for. You need to grow alongside someone with clout, who is truly competitive and who is accountable. I do not see those players, myself. Some of my colleagues may have other views, but personally, I do not see these competitors, either in our area or in theirs. That does not mean, however, that we would not play a role. We are tough competitors because we are able to operate at much lower cost levels than companies like Air Canada or Canadian.

• 2010

However, there is no doubt that a company with diversified revenues may decide to make life impossible for us in certain markets. In that case, it is not even worth jumping in because you are going to have to jump right back out. The present situation is very difficult given the context. It is not easy.

Mr. Michel Guimond: It is worth remembering the sad experience of Nationair and Inter in the Montreal-Toronto market, when the big companies countered with 99-dollar flights. That may have contributed—I do not want to cry over spilled milk—to pushing Nationair toward the brink.

Mr. Philippe Sureau: One cannot really rewrite history in that case, since it can be demonstrated today—WestJet is a good example—that an organization determined to do so can succeed in beating these companies on their own turf, albeit within limited parameters. Does that mean it could become a national carrier? Maybe these companies have a better chance of growing. But in fact, they do not know what they are saying today.

Mr. Michel Guimond: But in your case, today, with the type of planes that you have, it would be difficult to see what role you could play on a much more regular basis or by increasing the number of flights with an L-1011.

Mr. Philippe Sureau: You are right. The decision that we will have to make, and that we can make, is as follows: will we dedicate certain types of aircraft for use on a domestic market only? As soon as we make that decision, it is obvious that we will increase our market penetration very substantially, but at the same time, and that is the risk or the decision that we have to make, we put ourselves in a risk situation. It will be up to us at Air Transat to decide if that is what we want to do or not.

Today, right now, it would be very inappropriate for me to tell you that we have made a final decision one way or the other. It would be premature to do that. I can definitely say that we are a bit opportunistic on that issue.

[English]

The Chair: Thank you, Mr. Guimond.

Mr. Calder, please.

Mr. Murray Calder: Thank you very much, Mr. Chairman. One of the things I heard, gentlemen, when you were answering Mr. Dromisky's questions, was the fact that frequency changes. In other words, you were saying that in certain parts of the year you concentrate on north and south and in other parts of the year you concentrate on east and west. How do you protect your time slots at the airport? Obviously that changes.

Mr. Philippe Sureau: Yes, but the slots are seasonal as well. For instance, look at an international airport such as Gatwick. Gatwick is a very desirable airport, and it's an airport where, if you don't have your grandfather slot, you won't get in. But the slots are seasonal. There is a winter and a summer IATA period, and the slots are related to that. We are not the only ones doing that. The airport itself is fit in order to comply or to respond to this type of demand.

Mr. Murray Calder: So in fact there is flexibility in the time slots then.

Mr. Philippe Sureau: Yes.

Mr. Murray Calder: I heard another thing. Your company is smaller than Air Canada and Canadian—that's a given—but you're doing something very similar to what those companies are doing, right?

Mr. Philippe Sureau: Yes.

Mr. Murray Calder: Okay. Would you make the same salary as Mr. Milton and Mr. Benson?

The Chair: Ask another question, Mr. Calder.

Mr. Murray Calder: I'm not asking for the figure, Mr. Chairman. I'm not going to do that.

Mr. Philippe Sureau: I don't think so. I'm the founder of the company, you know. I'm well paid.

Mr. Joe Comuzzi: How about Mr. Jacob?

Mr. Philippe Sureau: He's complaining a lot.

No, basically our cost structure is what you allude to. It's basically below Air Canada's or Canadian's. Air Transat is very unionized, so we have the pilots, the mechanics—we have a lot of mechanics—and the flight attendants who are unionized. We are under the pressure of the union as well to meet the demands set by the industry. Today we are under pressure to match higher labour costs.

• 2015

Mr. Murray Calder: Air Canada, for instance, has something like 120 people per plane, and Canadian has something like 180 people per plane. Would yours be close to that?

Mr. Philippe Sureau: It would be far below that.

Mr. Murray Calder: Far below that?

Mr. Philippe Sureau: Yes.

The Chair: Thanks, Mr. Calder.

Ms. Desjarlais, please.

Ms. Bev Desjarlais: Instead of having one major, dominant carrier that controls all of the international routes that are available right now for two, is it foreseeable that some of the charter carriers could take up some of that business and still offer competition, without having a huge monopoly carrier?

Mr. Philippe Sureau: Let me first respond slightly to the side of your question.

Today we already have a lot of competition on the international side. I don't think the international side is going to be the biggest issue for the Canadian industry, because of the nature of the bilateral agreements and the fact that competition is provided by the other side, the other international carriers. So competition does exist already, quite heavily.

On the other hand, carriers such as mine or the other Canadian charter carriers do not offer the kind of service that Air Canada or Canadian offers in business class. We don't have the same seat pitch, we don't have the same facilities at airports, we do not have the same kinds of loyalty programs, we don't have the same connectors, and so on.

So if tomorrow, the minister, in his wisdom, decided to allow us to fly daily to Tokyo, for instance, I wouldn't be able to. Even though I have the proper aircraft to do that, in terms of equipment—we have A33-200s, which are good aircraft to do that; it's a brand-new aircraft—it would be a very difficult thing for us to do right away, unless we had.... I heard previous people talking about a transition period. We would have to get organized to do that. It's not the job we're doing today.

On the other hand, we provide competition to that lower end of the market, which is a very important part of the market, as people were referring to, the ones who are not must-go travellers. Let's define them that way. They are a very large market too.

Ms. Bev Desjarlais: Okay.

I have one more question about your comment in regard to American Airlines already controlling Canadian Airlines and your previous comment that they have some anti-competition trusts going against them in the States. Should we be extremely concerned that they may be the ultimate controller of the whole industry in Canada?

The Chair: Not under proposal two.

Mr. Philippe Sureau: I don't know. I don't feel we are here to comment on the actual proposal. That's not the goal of this exercise today.

I don't have a real opinion about what you say. Are they the devil? I don't think so. Are they willing to be strong and dominating? Of course. Do they want to make cash? Sure. They are going to take all the means they have to take to do that. This is a jungle. This is not just for fun.

Ms. Bev Desjarlais: Thank you.

The Chair: But it's clear, Bev, that in this so-called proposal two, American doesn't have—

Ms. Bev Desjarlais: I think the point was that they already have control, even with 25%, let alone having increased control with the whole—

The Chair: No, but that's what I'm trying to point out to you, Bev. In proposal two of that deal, American is out of the picture.

Mr. Joe Comuzzi: [Editor's Note—Inaudible].

Ms. Bev Desjarlais: I just asked a question.

The Chair: It's a point of clarification, Mr. Comuzzi. I'm sure you'd be there for Air Canada in a moment.

Thank you very much, gentlemen, for your presentation to this committee, and thank you for answering our questions. We do appreciate it, and we might be back in touch with you, either individually or as a group. Thanks very much, Mr. Sureau and Mr. Jacob.

The meeting is adjourned.