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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Tuesday, November 16, 1999
The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good morning, colleagues. Pursuant to Standing Order 108(2), we'll resume the study on the future of the airline industry in Canada.
This morning we welcome as witnesses in the 9 a.m. slot the Canadian Airports Council. Joining us from the Canadian Airports Council are the executive director, Mr. Neil Raynor; the chair, president, and CEO of the Winnipeg Airport Authority, Mr. Sigler; and the vice-chair, president, and CEO of the Ottawa Airport Authority could not make it this morning, so substituting for Mr. Paul Benoit will be Mr. Hopkins. Mr. Hopkins, you are with...
Mr. J.A. Hopkins (Chairman, Winnipeg Airport Authority Inc., Canadian Airports Council): I chair the board of the Winnipeg Airport Authority.
The Chair: Thank you very much.
Gentlemen, welcome to the Standing Committee on Transport. We look forward to your presentation of about 10 to 12 minutes, and then we'll get into questioning. So when you're comfortable, please begin.
Mr. R. Neil Raynor (Executive Director, Canadian Airports Council): Thank you, Mr. Chairman.
Mr. Chairman and hon. members of the standing committee, on behalf of the Canadian Airports Council I would like to say how very much we appreciate the opportunity to appear before you today to talk about the pro-competition stance of Canada's airport industry. I'd also like to note that this is the first time the Canadian Airports Council has made a submission before the honourable members of the committee, so this is a particularly significant event for each and every one of us.
I know our submission has been circulated to the honourable members, so I don't intend to repeat verbatim that text, and I note that we have somewhere around 10 to 12 minutes for our verbal submission this morning and then we'll be open obviously for questions, but rather I will highlight the issues we think particularly important for the standing committee to consider.
What we, as airports of Canada have to offer, is a distinctly different perspective.
Although today's submission was drafted in English, we have prepared a French version for you.
So let me jump right in, and we'll start with just some background on the Canadian Airports Council, which represents local, regional, and national airport system airports across the country, from St. John's, Newfoundland, to Victoria, British Columbia, and stretching across the north of the country through the Northwest Territories. Airports the size of Grande Prairie, Alberta, to airports the size of Lester B. Pearson International in Toronto are all members of the CAC. In fact, over 95% of all domestic travellers use CAC member airports to start and complete their journeys safely and securely.
Mr. Chairman, the CAC is the voice of airports in Canada.
CAC represents airports of many different sizes, as I've already indicated, in different stages of development, and with different growth opportunities. Clearly no one solution, no one size, is going to fit every need. The CAC encourages the standing committee to take account of these local differences and to seek the views of individual airport authorities in crafting solutions that we're here to discuss today. However, we can state absolutely categorically at the outset that CAC member airports are agents for competition because of the benefits competition brings to the communities and the travellers they serve.
The question before the standing committee today is one that has been debated not only within Canada but within the United States and across Europe. As I mentioned, we recognize that airports have a role to play in promoting competition both in terms of the airlines that serve their communities and the non-airline services provided to travellers. Airport executives and their teams take those responsibilities very seriously.
With me at the table today are both an executive of an airport, a major airport of Canada, Mr. Murray Sigler, who's also the chair of the CAC, and with a community perspective, which presents the opportunity perhaps for you to pose some questions on that level, I have Mr. Sandy Hopkins, who is the chair of the Winnipeg Airport Authority.
It's a little over seven years since the first of Canada's major airports were commercialized. Devolution of control of Canada's airports has been a major policy initiative of successive Canadian governments. Our experience is that the locally focused and accountable airport authorities better serve their communities. Those same communities enthusiastically endorse the airports as economic generators in their region.
The principal aim of airport authorities, to maintain a safe and secure operation while enhancing efficiency and delivering cost-effective services, has been achieved to a remarkable degree in a very short period of time. The airlines now, by their own admission, today have greater influence on capital investments and acknowledge that airport management is focused on their needs as never before. The only cloud in this story—and it is a success story, and I want to stress how successful the devolution process has been—is that of the financial return the federal government is extracting from the system, which is creating problems.
Transport Canada got out of the business of running airports and in the process saved $100 million each and every year. The federal treasury now receives over $200 million in rent each and every year, and by simple math we can see that's a $300 million turnaround in five to seven years, and it's likely to increase. While successful from the federal government's fiscal perspective, that same rent extracted from the system represents a dramatic increase in costs to airports and their users.
In looking at the question before the committee today, we agree with many of the views you've heard, particularly from the Competition Bureau, that to ensure competitive service new carriers must be able to attain reasonable access to landing slots and airport-based operating infrastructure such as ticket counters, baggage systems, gates, and loading bridges. Our detailed submission contains the rationale for our position on these issues, so I'd like to take a moment and very briefly look at each one of those in turn before drawing a conclusion on our recommendation of the way ahead.
In terms of the first one, slot control, it's very much an everyday experience in the United States at the larger airports, but perhaps that position is changing there too. In the era of effective flow control by the air traffic control system, slot control is often viewed as reinforcing incumbent carriers at the expense of new entrants, and I think we have to take note of that. It's often viewed in the United States therefore as anti-competitive. In Canada only Pearson has slot control, although any airline that applies will get a slot.
We wish to make two points with regard to slots. First, from our airports' perspective, slots are a public and not a private good. Our view is that they should not be owned by the airlines. They should not be available to be traded amongst and between the airlines.
Second, we believe that slots should be allocated on the basis of clear principles, and in our paper we list three. We believe that slots should be allocated to foster competition on a basis of “use it or lose it” and to reflect Canada's international obligations.
The second issue of airport facilities is that after years of underfunding, the newly created airport authorities are having to finance an abnormally high system-wide series of capital programs right now. The opening up of the transborder markets has reinforced this need for investment. The financing burden created by these essential capital projects, projects that reflect the needs and wishes of the airlines themselves, has partly been financed by a modest increase in costs to airlines, costs that are still below any objective observer's definition of significant in terms of cost to the airline. By their own figures—by ATAC's own figures—it amounts to no more than 3% of their total costs. So operating for all the airports in Canada would be less than 3%. I hope that puts that into perspective.
The airports across Canada are working very closely with the Air Transport Association of Canada and the individual airlines to conclude agreements, including agreements with Air Canada and Canadian, for the airlines to collect airport improvement fees directly from the passengers. Again, this is used as a source of financing for the future of that essential infrastructure that's going to be in place.
In terms of those agreements, those so-called AIF agreements, we believe that user interests are being fairly represented and their views, the views of the airlines, firmly taken into account in the development and operation of Canadian airports, particularly in regard to capital planning measures.
I'd like to turn to the viability of smaller airports. CAC has consistently represented its concerns about the financial viability of smaller airports in Canada to the federal government. We've been doing it consistently for the past two to three years through meetings with the department.
While the specific effects of rationalization—what we're here to discuss today—will depend on the current service overlap between the carriers at any particular airport, assuming they already have competition in the markets, it will depend on the size and operating structure of the specific small airport and on the level of discretionary versus non-discretionary passengers, leisure versus business travel, and the availability of alternative modes.
So there are lots of parameters that have to be taken into account in talking about the likely effect on the small airports. But we do have some recommendations, and I'll come to those in a moment in terms of the smaller airport.
Lastly, but very importantly, although it may not be immediately apparent, the level of crown rents is significantly affecting airports' ability to address the current competitive concerns. Rent paid to the federal government significantly impacts the airport authorities' financial viability and is seen, including amongst the international airline community, as a hidden tax, and is represented by bodies like IATA in that way.
All those issues are covered in our submission in some depth. I would be very happy to pick up on questions, but in terms of the time constraints I should move to our conclusions.
The federal government and honourable members are right to be concerned about the potential for a dominant domestic airline to abuse its contractual obligations to thwart competition. However, in our view, which is consistent with that of ATAC, the heavy hand of regulation or reregulation is not the answer to the airlines' current problems and should not be implemented.
Airport authorities are willing to participate in helping solve the airline industry's restructuring problems. The devolution of airports has created the right conditions for airports to respond proactively to facilitate a smooth transition and, to the extent possible, ensure the consumer enjoys the best possible service at reasonable prices.
So we would make the following recommendations on those issues I mentioned earlier.
The airport rent burden has to be reduced to a reasonable level, and we believe the federal government should take some immediate action. First of all, Transport Canada has to acknowledge that it has a part to play to enhance Canadian airports' fiscal ability to create a pro-competition environment. As an indication of good faith, we believe that all those rents, currently about $200 million, should be capped at the 1999 levels. Transport Canada should involve the industry in the development of a set of key principles to actually decide on what is an appropriate and fair level of rent payable to the federal government.
On the issue of smaller airports, which I'm sure is of great concern to this committee, we believe that essential services must be guaranteed to the smaller airports. We believe that regulation, such as it may be imposed, must not establish a de jure monopoly or restrict real competition to any airport, whatever the size. The federal government must increase the size and scope of its capital assistance programs to those smaller airports.
On the slots issue, if slots are needed at Canadian airports, and it is an “if”, they should remain in public ownership and be managed by the airport authorities. With clear rules for allocating slots, there is no reason to create a new regulatory arm to deal with the issue, and it is best left to the appropriate airport authorities to manage.
Lastly, in terms of the facilities at airports, common or shared-use facilities result in lower overall capital financing and operating costs. Common use directly contributes to decreasing airlines' costs at airports and to enhancing competition. However, airlines like to tie up such scarce facilities because of the competitive advantage such action confers.
As part of the federal government's agreement to any scenario that creates a dominant domestic carrier, that airline should be required to forego its so-called majority in interest rights under current agreements and surrender to the airport authorities its rights to facilities that could be converted to common or shared use such as gates, loading bridges, ticket counters, baggage systems, and common display systems.
The CAC believes that with appropriate incentives to help it, such as a reduction in the crown rent, more airports would adopt such policies to provide those sorts of facilities. They would have the financial wherewithal to carry out that task.
Mr. Chairman, that is the conclusion of our formal submission. We're available for questions.
The Chair: Thank you, Mr. Raynor, for your presentation to the committee.
Just for some clarity and for the information of the committee, I wonder if you could quickly walk us through who determines and how it is determined who gets what slots at an airport. We've heard much said at this committee, especially by those airlines that would want to compete directly with a dominant carrier if there is one at the end of the day. We've heard their desire, of course, to ensure there is an availability of slots for them, especially during prime time at Pearson or Vancouver International.
Mr. Neil Raynor: Mr. Sigler is going to pick that one up.
Mr. Murray Sigler (Chair, President and CEO, Winnipeg Airport Authority, Canadian Airports Council): First of all, in Canada there really isn't an issue of slots other than at Pearson, so you have to put the whole Canadian scene in that context.
At all the airports where there are commercial air services there's an airline operating committee that all the airlines operating out of the airport become a member of. They meet a couple of times a year around the pending schedule changes to try to come to an agreement amongst themselves on how the slots relative to the gates and facilities at the airports will be accessed, particularly the common-use ones. If there's any issue between them, if they can't agree, then the airport authority or the airport operator is the arbitrator they fall back to.
In the case of Pearson, where there are and have been slot issues around peak times more so than at other airports, then there is an actual slot allocation process there. There's a slot allocation entity. It's really a notional party of one, an airline person who deals with that. Again, if they can't come to grips with it, then it reverts back to the airport authority under today's model.
In all cases they've fairly well worked it out. The issue comes up that we have a new carrier that isn't in the group at a certain airport. They surface. Then they have to join that committee and try to get access to it. Again, they quickly become part of it, and it's in fact tended to work itself out at all airports around the country, even Pearson.
The Chair: At what point are we looking at IATA in this equation? Apparently, it's IATA that is involved in this slot protocol.
Mr. Murray Sigler: It's all under IATA. With the carriers it's evolved under IATA. There are rules that respect international obligations, where international flights have priority to respect the treaty obligations. So under the slot or gate allocation rules the international flights take priority, and then you get into the domestic flights.
There's a whole segment of rules on prioritizing the allocation of them at Pearson. We could get this information for the committee if it was useful, Mr. Chair. We could get a copy of how the Toronto mechanism works for you today.
The Chair: We'd appreciate that. Thanks very much.
Mr. Dromisky, please.
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): My first question concerns your concern about deregulation or regulation. I'm sure you're all quite aware of the five principles within the policy framework the minister presented to the House. Operating within that framework, if they become applicable in whatever situation might arise in the future, they're going to have a direct or indirect impact on your operations. I'd like your comments related to that.
The second area of concern I have is regarding the 700 or so landing strips we have in this country. Many of them do have commercial service, passenger service, and you're advocating $105 million for those airports. I have a big question mark regarding that in light of the kinds of needs we're aware of that many of these airports have. I'd like your comments about that area too, please.
Mr. Murray Sigler: The first aspect was how we might be affected by the impact of the current airline?
Mr. Stan Dromisky: Just for clarification, Mr. Chairman, those five principles could result in definite regulations.
Mr. Murray Sigler: We endorse the five principles that the minister has set out. They make good sense. I think everybody involved in the process should address those five principles. They're sound. All those five principles have always been part of airport and airline management in this country. There's nothing new in that, but they're crisply set out and they're good benchmarks to go by in looking at any specific proposals.
Airports are at the front lines of the airline wars. We're where the battles are fought out and we have to settle the aftermath of it too in terms of sorting out the fray in terms of the facilities.
We're community-based organizations. We're public bodies even though we're not-for-profit companies. We're representative of our communities and we have to deal with those facilities. We also have to deal with any hostilities that might be there between airline employees and so on in the wake of mergers or how that affects overall service around our airport.
I think we're lucky in Canada that we have this airport authority model in place ahead of this airline industry restructuring. We have a structure in place that's publicly driven, that's accountable at the community level, and that is subject to the national airports criteria for accountability and so on to protect the interests. And it's done at the community or regional level rather than on a national basis. So I think we truly are allies for competition and for sorting out the aftermath of any restructuring.
In terms of applying that to smaller communities and the amount of public funding that may be necessary to ensure their viability, I'll turn that over to Neil.
Mr. Neil Raynor: Thanks for that question.
As I said during my presentation, we have taken our concerns about the financial viability of smaller airports in Canada to the federal government on many occasions over the past two to three years. So this would not be a new message that we're delivering to the department.
In our view there is a nuance in terms of this program called the ACAP, the airports capital assistance program. The ACAP program is only for air-side facilities; it's not for those ground-side facilities like access roads and such. It can only be applied for safety and security measures on the air side.
Right now, we're trying to work within that framework, and our view is that $105 million does it. At the moment that part, that ACAP funding, stands at $35 million, and it clearly isn't enough for the unmet need that's out there. Our view is that we've done this proactively, and we believe the federal government has lots of capability to actually make that appropriate $105 million contribution.
Mr. Murray Sigler: I'm pleased to pick up on that, Neil.
We went airport by airport and asked each of the airports what it thinks is needed. Many of the smaller communities feel the current program doesn't have the flexibility it requires, nor does it have enough money in it to really take it to airports that aren't now eligible. Under the terms now, you have to have scheduled air services to be eligible for any of it, so we think the eligibility should be reviewed as well.
At the end of the day, there are capital costs and operating costs that the airport has to handle. We don't think the smaller airports are able to do all of their capital requirements. They can't handle them. They can probably handle their operating expenses on user fees and whatever, but the capital side of it is unknown. When you have to rebuild a runway or do a major airside improvement, it comes in big dollars, and more than can be sustained by whatever level of activity there is at that community level. It then goes back under the current model. If there are no federal funds under ACAP, then it goes back to the province or the city or the municipality that really ends up owning and operating that airport.
The Chair: Thanks, Mr. Dromisky.
Ms. Meredith, please.
Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair.
I am interested in the accountability of the airport authority. Who do you have to account to for the decisions you make on where the money's going to be spent and how much is going to be spent in certain areas?
Mr. Murray Sigler: We're accountable on several fronts. Maybe Mr. Hopkins could start with that one.
Mr. J.A. Hopkins: Thank you.
There are really two levels of accountability to the question as you posed it. In the first instance, we have a number of different accountability requirements by law. We have accountability requirements built into our leases with the federal government and into our bylaw. We also have accountability within our community, because the individuals on our board and on the boards of the other airport authorities across the country are nominated by community organizations, by the municipal governments, and so forth.
The other part of your question was on how the capital is spent at airports. In most instances, that is an agreement that is reached between the airport authority and the airlines at that particular airport. The committee Mr. Sigler referred to a few moments ago also addresses the capital requirements at the airport.
Murray, you may want to pick up on that and provide a little more detail in terms of how that process unfolds.
Mr. Murray Sigler: On these AIF agreements, Mr. Raynor mentioned that Kelowna, Calgary, and Winnipeg were the first three airports to put them in place. There are about 11 or 12 airports that have them, and about 15 will soon have them. It's becoming a bit of a benchmark. In signing the agreements within the airport, the ATAC and the airline industry, there's a process required, a formal involvement by the airlines and the capital projects, and there are checks and balances. From an airport authority perspective, it's good because it's a sanity check in terms of what they're proposing for capital works. From an airline perspective, it's good because they have their input and it gives them some control over the fear of a spendthrift, out-of-control airport authority surfacing somewhere where there's nowhere to check it.
We're working closely now with the airline industry, ATAC, to come up with some formal type of an appeal that would be open to an airline to challenge an airport authority on its rates. At the end of the day, if it still didn't feel the process was fair and that it wasn't cost-based, if it didn't follow ICAO principles, the airline would have an appeal mechanism somewhere. So we're trying to work an agreement with ATAC, and we're now quite close to one that would provide that kind of a mechanism.
Ms. Val Meredith: Is there not flexibility in the administration of the airport authorities so that you don't end with the same mindset for a medium-sized city that you would for a small town? Is there flexibility in how you operate, how you collect airport improvement fees, how you charge your users so that you can adapt?
Mr. Murray Sigler: I think it's the real, underlying merit of the current system. From a federal government perspective, the policy has been successful in its objectives. From a community or regional perspective, it allows a site-specific approach. The AIF agreement with the airlines provides some consistency for an airline that has to go into different communities. For those customers who are flying, there's some consistency in approach. Under the agreement, there's only a single AIF rate, so the $5, $10, or $15 rates are replaced with a single one. It's up to the airport authority and the airlines to agree what the rate ought to be for, say, Winnipeg, whether it's $5 or $10, but there aren't three or four different rates. The collection methodology is then consistent and an airport authority doesn't have to have any rate.
While we're here, I should mention that you can equate directly the amount of rent airport authorities pay to the federal government to the amount of AIF. If you look at Vancouver, they pay about $60 million this year in rent, and there is $60 million collected from their AIF. It's the same thing if you look at Ottawa or if you look at Winnipeg's case. There's a direct correlation from what's been bled off the system.
Ms. Val Meredith: What's the basis of the rent you're paying to the federal government? Does it equate to what you take in on AIF, and they then just take it from the airport authority?
Mr. Murray Sigler: No, it just ends up working out that way because the rent mechanism was set in place at the time the airports were transferred, based on historical figures of activity. The way the airports have grown, the way the traffic has grown in Vancouver, Calgary, and other airports across the country, it has been a windfall for the federal government. Apart from the capital benefit, it has been a windfall on an operating level. In effect, that amount is what the airport authorities are now having to raise through AIFs.
Ms. Val Meredith: But how does the federal government collect the rent? What is it based on? How does the government determine how much rent Vancouver's going to pay versus how much rent Calgary is going to pay?
Mr. Neil Raynor: It's actually done on a site-by-site basis. It's not done—
Ms. Val Meredith: Is it volume of planes? Is it volume of passengers?
Mr. Neil Raynor: It's a forecast of revenues.
Honourable members, I recently joined the Canadian Airports Council as executive director. Prior to that, I was executive director at the Halifax International Airport Authority, and my responsibility was to negotiate the financial terms of the transfer. From sitting at the table with Transport Canada, I can tell you that the way they develop their rent is by looking at their historical data. They then project it ahead and say that if they were to continue operating the airports for 60 years—because these leases are 60 years long; they're 60 plus 20, as a matter of fact—how much money would we make? That becomes what they call the base rent.
The federal government has said that if it continued to operate these airports, this is what it would make. Therefore, it has said it will take that from airport authorities because it believes the airport authorities can do better than that. The government has also said that if the airport authorities do better than that, if their bottom lines—these are not-for-profit entities, you have to remember—go into surplus, the surplus gets ploughed back into the business for those capital programs Mr. Sigler was talking about. The federal government says that if the airport authorities do create any surplus over and above what the government is taking in, in that base rent that is its assumed rent, its assumed revenue, income for the federal government, then it will participate in that upside as well. That participation could be up to 35%, and this is creating a huge wedge of potential costs for the airports in the future.
Mr. Murray Sigler: What the airports are proposing is replacing the current complex mechanisms with something that does have a rationale to it, so that basically they're on a cost-based approach that is based on what the federal government had invested in airports at the time of the transfers or on the market value of it at the time. But there has to be some rationale for the return, because for the excessive amounts the number is a staggering one.
The total amount is $1.3 billion. That's what is going to be paid in rent by the airport authorities in the five-year period beginning in 1998. That's a windfall. It's great from the fiscal policy perspective of the federal government, but that's a huge drain on the system. I can't speak on this because we haven't discussed it as the board for all the airports, but in the case of our own, if we had a rent decrease it would be passed on directly to the airlines in the way of savings. I think that would be the case for most of the airports.
The Chair: Thanks very much, Val.
Mr. Sekora, please.
Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): Thank you very much. I'm sorry I came in a little late, but I had a caucus meeting.
You're talking about rents that are too high. You're talking about the $100 million and the $200 million, and you said they were way too high. I want to get a handle on this. In your opinion, what would you see as more sensible, more reasonable? What kinds of figures?
Mr. Murray Sigler: We want to get precise about it, based on some book value of the assets that are involved and on a fair economic return to the Government of Canada as well. We want to work that through with Transport Canada. For starters, though, we do think that if they are capped at today's levels of about $200 million a year, that would be a fair return for ballpark purposes. The way the leases are now structured, today's levels of $200 million will grow to about $280 million over the next three or four years, and they've already grown over the past few years. At the very least, we could just cap them where they are today.
Mr. Lou Sekora: When you talk about capping them where they are today, you mention that the rents are in fact too high, along with a few other things. Yet you're saying to cap them at a 1999 level. If that level is too high, why would you want to cap them at a 1999 level?
Mr. Murray Sigler: In an ideal world, we wouldn't, but there's an air of practicality in terms of something that's easily digested. It can be quickly implemented and can at least provide some basis for planning going forward by both the airports and the airline community. It's a simple way to start it, and then we could continue to work on the bigger question of what is the right formula going forward. Ideally, though, it should be reduced for sure.
Mr. Lou Sekora: But the fact is that 1999 levels are too high, so why would you want someone to struggle at the 1999 level for two or three years before it starts making some sense?
Mr. Murray Sigler: I agree that we wouldn't, but the way that machine works, if we don't cap it there, we're going to face the 2000 levels and the 2001 levels. Before you know it, we're going to be talking about a level that's 50% higher than where we are today.
Mr. Lou Sekora: You all talked about small airports and their financial viability, and I want to get a handle on that. In British Columbia, where I come from, airports that have 600 acres of land to them are being devolved to the cities. Why would that make a lot of sense to a city? I was a mayor for many years in a city, and I would have loved to get 600 acres of land next to the airport and be able to do a few things with it. I wouldn't want it all in one way on a few other things, but I could surely put in some industrial buildings and housing there. Why wouldn't it be a big windfall for a city?
Mr. Neil Raynor: I can start that one.
Of course, many of the cities and smaller communities that have taken on these airports see those opportunities. One of the agreements with the federal government is that, certainly for the foreseeable future—10 years or whatever—you'll maintain that site as an airport, because that's what it was. It was often transferred for a dollar, because there were no underlying revenues in those airports. You will continue to operate it as an airport, but there are opportunities for development, be they light industrial or be they perhaps even housing around an airport—although I hate to think of that, because it always becomes an issue; you only have to look at what's happening in Toronto.
But there's a balance here. In some communities, the airports—and the airport in Ottawa is a very good example, and Ontario also has other very good examples—have taken a huge hit in terms of property tax. It's the second-largest cost of many airports after the federal rent, particularly in Ontario right now.
Mr. Murray Sigler: I think you're right, though. The municipalities strategically want to pick up the airport property from an overall municipal and even regional planning area. It makes sense for the municipality to pick up those airport properties.
They take some comfort in it being transferred from the federal government, but it's a capital burden still. Unless there is some hot industrial market, it becomes a burden for the capital costs of the safety or the airside runway reconstruction costs. Those are a pretty big pill for most smaller municipalities to swallow, so I think they're looking to find some capital relief from the federal government for the airport operations side. And if they are successful in developing the lands around the airport, that's great news for the municipality.
Mr. Lou Sekora: So I guess what happened before, when the federal government owned these airports, was they paid a municipality a grant in lieu of taxes, on a commercial rate or whatever it is. That would be much higher when compared to residential rates, and that's where the problem comes in.
Mr. Neil Raynor: Also, elements of the airport—for instance, the runways under the GILT or PILT system—normally weren't valued, but they are now. That's creating significant problems, particularly in Ontario but also across the country. The communities have taken on these facilities. They mustn't gouge them. They're there, and they can drive the economy of their region. But many of those smaller airports are not generating significant revenues after costs.
Mr. J.A. Hopkins: The airports are subject to reassessment in each of the communities whenever that process occurs in the community.
Mr. Lou Sekora: I see this as being a problem for all sides. If there were an airport in my city and I tried to tax them at a residential rate rather than a commercial or industrial rate, whatever it may be, I know that I'd be challenged in court and I'd lose. So that's the problem. I think that's where the problem lies in that municipalities have no other choice but to charge them on the rate they fall under.
Mr. Murray Sigler: I think it's more of a problem here in Ontario than anywhere else.
The Chair: Thanks, Mr. Sekora.
Colleagues, it's my job as chair to sometimes point out a few things. While the discussion is very interesting, we want to try to bring the questioning around to the terms of reference that have been set for the committee. There is a bit of a bootleg going on here by the Airports Council vis-à-vis the fees they pay, etc. There were a couple of mentions in their presentation vis-à-vis their dislike for reregulation and slots. But perhaps we can try to twist it back to the terms of reference of the committee so that we can get something useful for our report.
Mr. Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de-Beaupré-Île-d'Orléans, BQ): Mr. Chairman, I have a question concerning landing slots, which ties in with the committee's mandate. However, before I put my question, I have a comment to make.
I've noted that in both your oral and written submissions, you act a little like King Louis XIVth, who was called the Sun King because the sun never set on his empire. I remind you, because you seem to forget it, that the airports handed over to you to operate were paid for, financed and developed by Canadian taxpayers.
You entered into this arrangement of your own free will. No one put a gun to your head or forced you to sign the agreement. I'm not about to shed a tear for you and I'm not interested in finding out whether you are making money or not. Remember, you received something from the taxpayers. As a democratically elected representative of the people, I think it's my duty to put things in their proper perspective.
Here's an example of a statement in your submission which highlights your tendency to overlook certain facts. In your submission, which doesn't have numbered pages, you note the following about airport facilities:
New infrastructure has generally been built on a common use basis,
financed by the airport operator.
To "financed by the airport operator", I would also add "and by the $10 airport user tax". You have to realize—I won't say that you have to honestly acknowledge—that passengers helped to finance these facilities through the $10 tax they paid. In any event, you referred to the airport improvement tax. These are the kind of statements that make my hair stand on end. Moreover, I have trouble at times keeping my emotions in check. When I hear statements like this, I almost blow a gasket, if you pardon the expression. That's all I wanted to say on that subject.
Now for my question. The committee heard from representatives of charter airlines that offer charter flights. I think we can agree that this is one possible solution to maintaining competition within the industry. They realize this and have told us so. The committee also realizes this and I think this should be included in our recommendations.
However, a word of caution is in order. No agreement will be possible if the government moves to amend the 10% rule.
The charter airlines have told us that all carriers want to land at Pearson at 8 o'clock, at Dorval at 8:30 and in Vancouver at the end of the day. Everyone wants to fly, but no one wants to land at Pearson at 11:30 at night or at 1:30 in the morning.
In your submission, you note the following: "With clear rules for allocating slots...". I agree with you on that score, but since I'm still considering the matter and I wouldn't want to have either officials or people from the minister's office suggesting these clear rules to us, could you, as an expert in the subject of landing slots, suggest some clear rules to us? What should these rules stipulate?
The Chair: Thanks, Mr. Guimond. The question was exactly five minutes long.
Mr. Raynor, do you want to respond to that, please?
Mr. Neil Raynor: Can I just address your comments, sir, which were very well made, and thank you for those.
One thing we've said consistently is that we recognize that these facilities were developed and paid for by Canada's taxpayers, and we're among them. The federal government did a tremendous job in priming the system when the industry couldn't do it, and that's important to note. We accept that.
We also accept that we have to pay rent on these facilities, unless we totally privatize the system. That's another debate, but not for today. We accept that we should pay rent. Our argument is that we should pay a fair rent and a fair return, and we believe it's not fair. It has become a usury rent right now. So that's our argument. We don't disagree with many of your comments.
If I can turn to the landing slot issue, we've said in our paper that the primary principle is that whatever rules are developed in terms of slots, if indeed we need to have slots at Canada's airports, we must ensure that it fosters competition. We must ensure that if in a rationalization of the airline industry a dominant carrier emerges that perhaps takes over one of the other carriers, in some way it has to divest itself of the slots the airlines would see as being transferred as part of that process.
Mr. Murray Sigler: If I can just interrupt you for a second there, Neil, that reflects the history of where it's at today. Canadian and Air Canada combined totally dominate each airport across this country. In the scenario where Air Canada acquires Canadian in one form or another, having them pick up all of Canadian's leases and commitments and say they're now Air Canada's would leave the airport authorities unable to deal with making their airport facilities available for other airlines to come in on some basis. It wouldn't just be the percentage of market that's controlled by Air Canada. They would dominate and control every airport in this country. So that's what has to be addressed. Today each airport has different contractual arrangements.
Mr. Neil Raynor: When we talk about slots in a formal sense, we're talking about landing slots. But if you wanted to expand that definition, it would include those things Mr. Sigler has referred to and we referred to in the paper, such as check-in counters. If one airline owns all the check-in counters in your airport, where does the new entrant go? It has nowhere to go. So those lease terms have to be reviewed as well, we believe, as part of this process.
The Chair: Thanks, Mr. Raynor.
Mr. Jackson, please.
Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much, Mr. Chairman.
I'm still going to stick with what is the public interest and how can we best serve it. I think it's a matter of balance. These whole discussions are arbitrating among people competing for more resources, and I guess it is an important exercise that one group looks at the other group to see who's making a dollar and how they can get hold of it.
What is perplexing is, as a government, when we're losing $100 million, we're inept and stupid; when we make $200 million, we're gouging. We get the air navigation people who say, privatize us and things will work out all right. Then they've got the legal strike that can shut the whole thing down and control it. Not only that, but the $1.3 billion that was supposed to be passed on to the customer is not getting there.
We heard from ATAC this morning. They told us that we are gouging, for example, with their landing fees every time they land an aircraft. There's nobody regulating us, and all of a sudden the prices go up exponentially from $75 to $500.
We're compared sometimes to the United States. When you want to compare yourself to the United States on a world market, they control 47% of the share; the Japanese about 11% to 13%; the Europeans 26%. We're at 2%. We produce 3% of the knowledge base in the world as well, and stuff like that. So when, as Canadians, we talk about our taxes and how much we pay, we must take into consideration our population, our remoteness, and the good quality of life we have. They say it's excellent. It has made us number one in the world.
So it comes back that there are going to be limits to growth. I mean, you can't grow and grow, having more aircraft and then clogging the skies. That's going to become a problem. So what you end up with is these alliances, having these slots, and having small airports feed into the big ones, and then the big ones make the money. Municipalities that have large airports... Let's take Mississauga, for instance, where Pearson is located. They have about 20,000 employees at least. So they do benefit from these airports.
The Chair: Do you want to wrap it up there, Mr. Jackson?
Mr. Ovid Jackson: Yes. The question I have, Mr. Chairman, is that I think we need to get from these airport authorities exactly where their revenues come from and why. I mean if there are security arrangements, for instance, in terms of how you move people around, or radar detection systems, and so on. I want to have a look at what you're doing, so we can see...because a lot of people are saying you're passing on a lot of costs that are unnecessary.
The Chair: Mr. Sigler.
Mr. Murray Sigler: We're a not-for-profit organization, our books are open, and we make full disclosure of all the financials, not only to the airlines but to our communities. We'd be pleased to get you the financial information that you need on any of our airport authorities so you can take a look at them yourselves and draw your own conclusions.
But I agree, it's a balancing act. To have a competitive airline industry you need the airport infrastructures in place to serve those airlines, the airlines have to be able to access those airports, and we have to work closely with Transport Canada along the way. It is indeed a balanced approach that's needed.
Mr. Ovid Jackson: Mr. Chair, I just want to make this small point. The government helps to pay for environmental damage. The government has to pay for security—sometimes they would ask us for the RCMP.
The Chair: No, that's not correct Mr. Jackson.
Mr. Ovid Jackson: Okay, but they're also asking us to build smaller airports as well. Where is that money coming from?
The Chair: Mr. Sigler.
Mr. Murray Sigler: Those areas have been shifted right to the airport authorities. We have to provide the security and policing at the airports. Environmental responsibilities have been shifted to the airport authorities. So again, it's part of the success from the federal government point of view of downloading liabilities and financial responsibilities and getting a great windfall.
The Chair: To be fair, probably to both players, it's been a learning curve here. We're at our infancy when it comes to the devolution of what we've done on the airport side and what you people are learning through this process in order to make it work.
Mr. Murray Sigler: I agree, Mr. Chair, and right now there is a review. The reason we're looking at these is not to shirk contractual obligations, as might have been hinted at. It's because there is a review taking place, and we're party to that, as are ATAC and the communities.
The Chair: Thank you gentlemen.
Ms. Desjarlais, please.
Ms. Bev Desjarlais (Churchill, NDP): I have a couple of questions, and aptly, Mr. Jackson's points are exactly that. It was like going into another world when we went from that meeting to this meeting. One was accusing the other of doing this, and ultimately, if you get right down to it, both think the government shouldn't charge anything, pretty much, for utilizing the service.
But as far as airports in the U.S. go—because we often do compare to the U.S.—what are the rents that would be paid there?
Mr. Neil Raynor: The model in the U.S. is very different, because generally the airports in the U.S. are operated by the municipalities. It's a direct cost on city hall. So it's a completely different model.
Mr. Murray Sigler: But at new airports like Denver, which is the one new airport that's been built in the United States, the rates are exorbitant. I don't know that we can get the numbers again, but it would be a big multiple of what anyone would pay at Pearson or at Vancouver's new airport facilities.
Mr. Neil Raynor: But if I could just go back to your question of what rent was paid to the municipality, or the U.S. state or—
Ms. Bev Desjarlais: What types of rents would the authorities, as such, pay to whomever—
Mr. Neil Raynor: In terms of lease rent, not in terms—
Mr. Murray Sigler: They don't have that model. They're owned by the municipality.
Mr. Neil Raynor: Yes, it's a completely different model.
Ms. Bev Desjarlais: Okay. So in essence there are taxpayers' dollars operating the facility.
Mr. Neil Raynor: In the United States? Yes, absolutely.
Mr. Murray Sigler: But there's a federal program as well that's available to all airports to subsidize—
Ms. Bev Desjarlais: Okay. So there are federal moneys that go into—
Mr. Murray Sigler: There's a large federal program. It's complicated, but it's a whole different system.
Ms. Bev Desjarlais: So no matter how you look at it, the government in the U.S., whether it be municipal, state, or federal, puts money into their airports. So in some cases, we're going to see a situation where that's the reason it might be cheaper to go into those areas, or, in the case of Denver, theirs is higher because of the development they're doing.
Mr. Murray Sigler: The high cost of that development is passed on, but there's a PFC program, as they call it in the States, which is equivalent to our AIF, which the federal government oversees.
Ms. Bev Desjarlais: I had another question for you here, and I've got to find it.
You indicate that, say, in Vancouver, $60 million is being paid, and I believe it's fairly high in Toronto as well. What would you see as fair market value? Looking at the land that's incorporated into the airport, the runways, and everything in the infrastructure, if you were buying or renting property in Toronto, what would you pay for that amount of land and infrastructure?
Mr. Murray Sigler: The rent that Toronto will pay as its lease payment for the current year is going to be just under $120 million.
Ms. Bev Desjarlais: In the city of Toronto, though, what would you pay?
Mr. Neil Raynor: I'm sorry, we don't have that sort of data. All we're saying, going back to our rent, is that we agree we should pay rent, and it should be a fair—
Ms. Bev Desjarlais: How can you justify saying, we believe we should pay fair rent, when you cannot tell me what the real estate value of that property would be in the city of Toronto?
Mr. Neil Raynor: Because I don't have that detail, so—
Ms. Bev Desjarlais: How could you make the statement that—
Mr. Neil Raynor: —but we could determine—
Mr. J.A. Hopkins: There is a key principle that has been missed in the discussion on rent.
As we have said several times, we fully agree with the principle that airport authorities should be paying rent, because the facilities we received at the time of transfer were paid for by the taxpayer and a return on that investment is required.
But if you subscribe to that principle, then you should also subscribe to the principle that over time, given that the airport authorities, from the day the transfer occurs, put all of the capital on an ongoing basis for both maintenance and new development into the airport authority... The federal government puts not an additional cent into any of those facilities. So at a point in time, the federal government has been repaid entirely—the taxpayer has been repaid entirely—for the investment that was received at the time of transfer. And all of the investment that's in the airport authority at that point has been paid by the airport authority through the surpluses it manages as a result of fees less expenses.
Yet the rent formula, as it's constructed, sees the federal government's share increase over time, rather than decrease. So the economics associated with the payment of rent are inverted. Rather than following market principles, it follows the opposite of market principles. And that is our argument.
Ms. Bev Desjarlais: To go back to Mr. Guimond's point, you signed a contract knowing all that ahead of time. Okay?
You're here now suggesting that you're paying an unfair amount, but you cannot tell me what the fair value would be within the city of Toronto. So I have a hard time believing you've really looked at the whole picture; rather, you're just kind of ticked off that you're having to pay that money.
Mr. Murray Sigler: The net value Transport Canada put on their books, which they were using at the time of the negotiation of the transfer, was about $300 million for Toronto. I told you what rent they're getting for this year. You can draw your own conclusions.
We're not saying we're not going to live with our agreements. We're saying there's an aviation industry in financial crisis here in this country. The airlines are saying they can't afford the charges they're paying. They're saying they need facilities. We're saying there's a drain from the whole system now. The subsidy from the federal government has been replaced by a windfall. Let's look at the total economics of the system.
Mr. J.A. Hopkins: This is the power of money. We're community organizations; we're not-for-profit entities. So this isn't our money that we're complaining about losing.
The Chair: That's it, Ms. Desjarlais; your time is up.
Mr. Comuzzi, please.
Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Thank you and good morning, gentlemen. We've heard evidence that the largest single subsidy in the Canadian aviation industry is the rent that is charged to airports or airlines in order to operate a business. So when we sit around, Mr. Chairman, and talk about the fee structure or the rent structure, I have to tell you folks, it's not going anywhere with this part of the committee. Maybe we should, through our study, look at the whole Airports Council and perhaps wonder whether it shouldn't be restructured too.
I wasn't at all happy with your answer to Ms. Meredith about your accountability. When airports were evolved, they were called local airport authorities and we thought your accountability would be to the local communities. I'm advised, and know through personal knowledge, it's really not the case. You're not accountable in any way, shape, or form to the local communities you're supposed to represent. I just make that statement and I'd like you to address it before the end of this session today.
We have two different agendas. We've got an airline industry that I gather is more concerned about the global consequences of feeding passengers into the large hubs in different parts of the world; that seems to be their motivation. Air Canada and Canadian are both the same. Yet we have a committee, I think, that's trying to ensure equity and fairness to the Canadian traveller. We're at different ends of the spectrum.
Our concern is the Canadian traveller; we're not concerned about the global entity. I want to know what your position is. Is your position to look after the equity and fairness to the Canadian traveller, or is it to satisfy the airline that the global entity is the end result of what we're trying to accomplish?
The other question I have is, I want to know where you get your money. I want to know where you get your revenue, where you derive your revenue, and how you base these fees that are at some airports, to get into an airport to use it, and other airports don't have it.
Thank you. Those are my questions.
Mr. Murray Sigler: On the accountability question for the airport authorities, the current government after the 1993 election came out with what they called the national airports policy. They took the original airports policy that had been initiated by the prior government and took a look at the issue of accountability. The new national airports policy had the accountability principles set out clearly, which were to deal with the concern that airport authorities have to be accountable to the communities the airport is located in. Agreed, that's the objective of the policy.
There are different ways that's addressed. It starts with the policy itself, which sets out requirements for disclosures of information, public meetings, public inputs. The nominating entities that nominate to the boards of airport authorities are the community organizations. They're the municipalities, by and large; they're the provincial government, and also the federal government. They're the nominating entities.
So there's accountability through the nominating entities. We don't have shareholders; we have nominating entities behind us, and they're all public bodies.
You could take another look at our accountability through the lease agreements we have with Transport, with Her Majesty. There are something like 1,200 pages of documents; that's accountability to a large degree. A lot of it is financial formulas, but there are all kinds of rules and restraints that are put on airport authorities.
We're also incorporated under the Canada Business Corporation Act, another federal legislation that, as companies, we make disclosures. We have to abide by the corporate requirements for disclosures.
In addition to that, all the airports across the country looking at their practices have pretty much adopted the TSE guidelines for disclosures of companies. Even though they're not shareholder companies, they have adopted the TSE guidelines.
The Vancouver International Airport Authority has put out a corporate disclosure document with its annual report. In Winnipeg we disclose the same as if we were a publicly traded company. So there's a lot of disclosure, a lot of accountability, and I would suggest a lot more accountability to the public and to the communities than there ever was when Transport Canada operated those airports. There's a much higher degree of accountability now.
There's also much more input by the public, by the consumers, by the airlines, in the planning and development process at every airport across this country. It's a much more effective model from the element of public accountability. We're much more accountable than any airline in this country is.
That's another aspect I'd like to emphasize. Having an airline that dominates 65% of the market come and talk to us about accountability to the communities we serve is a bit of an insult, I think, to community-based bodies. So you say review the airport authority structure because we're not accountable. We're not private bodies. We're community-based organizations.
Mr. Joe Comuzzi: Get back to the next question.
Mr. Murray Sigler: Well, that was your first question, sir.
Mr. Joe Comuzzi: Yes, thank you.
Mr. Murray Sigler: The second question was the revenue question. Again, it varies site by site, but basically probably 60% to 65% of the revenues are derived from the airlines in terms of airline landing fees, terminal charges. That's kind of the traditional break. Probably today 25% to 30% comes from airport improvement fees, which are used for capital projects. Then it's rounded out by concessions, the retail parking concession, revenues from the retail activities at the airports, and in some airport cases there's land development initiatives that are taking place. Again, it's quite a diversity, and we'd be pleased to provide you with each of the airports' financial statements so you can take a look at them.
The Chair: Thank you, sir.
No, time's up. You can ask directly which airport you're interested in.
Mr. Joe Comuzzi: I'm interested in all of them.
Mr. Murray Sigler: We'll give you the ones we have and if there are others you're interested in, sir, we'd be pleased to try to get those.
The Chair: Mr. Casey, please.
Mr. Bill Casey (Cumberland—Colchester, PC): Good morning. I have a question about regional airports, which has always been my focus on this because I come from a region of Canada that's all regional airports, almost.
The minister, in his five principles, laid out the conditions for the new airlines that said regional air service must be protected.
If regional airports can't survive, how can the minister impose on regional airlines that regional service be protected? What's your thought on that?
Mr. Neil Raynor: Well, I think there's a linkage because none of the airlines can operate without the infrastructure in place. What we have to ensure is twofold. One is the economic viability of those airports long-term, and the other is that the airlines continue to serve them and they don't, as a part of rationalization, pull out of those small communities. That's the position we've taken.
Mr. Bill Casey: We had one presenter earlier say they estimated that 10 to 15 airports in Canada right now are not viable even before reductions in revenue come in and even before the new emergency measures standards are applied. Is that about right? Are there 10 or 15 airports right now that aren't viable?
Mr. Neil Raynor: I can think of 10, 15, 20 airports that aren't viable, and sometimes the communities have got to take a wider view of what the airports... On a purely operating basis, those airports may not be viable, but on the bigger picture issues of what that means to the community...I've left a document on the economic impact of Canadian airports with you, and I would encourage you to look at that.
You can look at the bigger picture in terms of what economic advantages they bring to a region, what jobs they generate on the airport, off the airport, taxation—municipal, provincial, and federal taxation—that is generated by the airports being there. Sometimes in those small communities, the communities take the view that the benefits, the wide, bigger-picture benefits, would justify perhaps an operating subsidy.
Mr. Bill Casey: So in a smaller community that isn't viable, perhaps there is a way to make them viable, or the community has to decide, even though it's the minister's own standard that regional service must be maintained. Then they're imposing on the community that they must maintain them. Is this what you see as the only way they can continue to operate?
Mr. Murray Sigler: First of all, in Canada today, if you look at the smaller airports across the country, there's quite a variety of ownership. Some are still owned and operated by Transport Canada. In some communities some are owned and operated by provincial governments and some are in the hands of municipalities. So when they look at the financial aspects of that, equating that to who's the owner and operator of the airport I think is an important piece of it. I think at a local level they could try to cover off the operating expenses through landing fees, user fees of some kind, but there has to be help on the capital side. That is what it boils down to.
Mr. Bill Casey: You can't apply the same principles for a high-traffic airport to a low-traffic airport, because they don't have the opportunities to do the economic development within the airport as Calgary and Vancouver would. So there has to be a different formula for regional airports, the smaller airports.
What is the break-even point, or when do airports seem to break even in terms of movements a year. How many? Is it 100,000 or is it less than that?
Mr. Neil Raynor: It's normally in terms of passenger throughput, and then you have airports that are really cargo airports on a whole different level. We generally see that about 800,000 to one million passengers tend to make the difference. But within that there's no hard and fast rule. I can think of a B.C. airport of about 800,000 that is hugely successful because of its position, but others that are larger airports in Canada are marginal. So to go back to a point that both Mr. Hopkins and Mr. Sigler have made, you have to do this on a site-by-site basis.
Mr. Bill Casey: Mr. Sigler referred to some airports that had not been divested. There are some that have not been divested. Are they being treated differently now from the ones that have been divested by Transport Canada?
Mr. Murray Sigler: No. I think in terms of the regulatory function and safety, the technical side, it's applied fairly and consistently across the board in terms of looking to user fees. The federal government has put in big increases in landing fees and terminal charges, I think, at the airports it continues to operate.
Mr. Neil Raynor: The problem is they've grown faster in fact at the federal-controlled airports rather than the airport authority-controlled airports.
Mr. Murray Sigler: Their fiscal approach is similar as well.
The Chair: Thanks, Mr. Casey.
Mr. Fontana, please.
Mr. Joe Fontana (London North Centre, Lib.): Thank you, Mr. Chairman.
I think you've said it best. Obviously the policy that was put in place some time ago is the right policy. Obviously we're all going through a learning process. A government that used to have to pay $150 million to look after all airports now is making, I suppose, a little more. Before it was Vancouver, Pearson, and I believe Calgary that were paying the freight for the whole country, and now it's gone to a user-based system. Perhaps there is an opportunity for us to look at airports some time in the future, because we are going through it and I know the Airports Council is trying their best too.
But I'm getting a little ticked, because part of accountability is that when the heat starts to be applied, you have to start taking a little bit of that responsibility and not try to pass it on and say “Oh, by the way...”. I'll tell you, the heat is coming, and we've heard it. ATAC is not very happy with you. I have consumers who are saying you're building mausoleums. For the price of tickets at the end of the day they're blaming the airlines, they're blaming the airport authorities, they're blaming the federal government for taxes, and they're blaming the municipal government. At the end of the day—and Ovid said it right—let's get back to what the purpose of this is all about, which is looking at the consumer, the person who has to pay the freight. They don't know in that ticket where that money is going, but that should be the benchmark.
We have to drive down those costs for the consumer. We all have a part to play in it—the federal government, the airport authorities, you name it. I think we have to get those prices down because Canadians are getting a little peeved. I think we can work together on this.
Let me deal with what's at hand here. If in fact in restructuring, and I think you pointed it out, there's one dominant carrier, which essentially means they will have an awful lot of clout at airports—regional airports, small airports, big airports. They're going to be very big and powerful. In fact they may start to drive the agenda as opposed to the other way around, where you have a good competitive climate. We know we have competition. We want to grow competition by the independence of the regionals. But if in fact you have a dominant carrier, what's going to happen to your revenue base at some of your airports, which will cause some of them to perhaps become even much more financially at risk? What's going to happen to competition and your cost? At the end of the day one dominant monopoly—and this is what we've heard—in terms of competition, in terms of the consumer, the public interest, is going to have a heck of an impact on your airports, because you might very much drive the costs and start dictating what they're going to pay for landing fees, what they're going to be paying for concessions at your airports?
I'm wondering if you can give us an idea of how you think we ought to approach it. What do you think we need to do in order to spur competition? We want to grow competition. If there's going to be a dominant air carrier, that bodes ill for you, because in the absence of competition you're going to suffer some big-time problems. So what do you think you can do to help the puzzle so that we can grow competition in terms of your cost in this new restructuring we have to look at?
Mr. Murray Sigler: In the longer term, if it's a competitive structure the economy should drive the degree of air service. There should be some direct correlation. What we're worried about in the short term is that a super-dominant position of one carrier, which picks up control of all the airports, will thwart the competitive environment from working, and those objectives are the right objectives to be considering.
In the U.S. this issue has been a big one for a number of years because in the U.S. there tends to be one airline that basically owns a hub city. They don't have three or four airlines sharing one. One airline is dominant at Dallas-Fort Worth; another one is dominant at Denver. So they've had to look at what the rules are in terms of ensuring the capital programs at airports are fair to all carriers, not just preserving and entrenching the dominant carrier position, and that's where these majority and interest clauses come into play.
The airlines have to be involved in the capital programs at any airport, but what percentage vote of the airline should be allowed to tell the airport authority to go ahead with the program? The sixty-six and two-third percent kind of vote certainly allows a dominant carrier to block any other carrier getting access. So that's one aspect of it.
Then there's the access to those facilities once they're built and in place. How do we sort out the access to the infrastructure? That's where you need the rules on the gate allocation. You need a fair, neutral, and pro-competitive entity that deals with any disputes that arise between the airlines that they can't resolve.
That's why I say in Canada I think we're fortunate to have the airport authority model in place to do that sorting out, because the airport authorities, as Mr. Raynor said at the start, are very much an agent for competition, because they're also agents for economic growth in their communities.
Mr. Joe Fontana: Just to pick up—
The Chair: Very quickly, Mr. Fontana.
Mr. Joe Fontana: Yes. To pick on Bill Casey, in any scenario you're going to have winners and losers, and perhaps in the airports and communities. At the end of the day I think our committee wants to make sure there is service to the communities and that there is regional competition, because in fact not only the airports but the very viability of communities are dependent on that.
In the event that we have to construct a new competitive policy to make sure we have domestic competition within a dominant carrier, what in fact should we be doing with regard to the costs at airports? We have to find a way of reducing your costs, or you reducing the costs, so that regional carriers can develop. Domestic new entrants may want to develop and be much more competitive, and obviously we've heard from ATAC that some of your costs—I don't care who is responsible—at the end of the day are too high.
Mr. Murray Sigler: We agree with that.
Mr. Neil Raynor: We agree with that, and the largest single cost to the airport authorities is the federal rent.
The second point—
Mr. Joe Fontana: Yes, but you negotiated it in good faith, and then you want to renegotiate.
The Chair: Let's not get into a debate.
Mr. Neil Raynor: We accept that entirely, but that is the answer to the question. The single important thing you could do is to ensure access, because with access you will get competition, and that means you will get the best prices for the communities that these individual airports serve.
The Chair: Thanks, Mr. Raynor.
Colleagues, we have two questioners left, Mr. Bailey and Mr. Hubbard, and then we'll have to move on to our next witness.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Chairman.
We were a little late getting here. Over half of this committee were at breakfast with the Air Transport Association of Canada, and, as you would be aware, we heard their story about their costs. It's a chicken and egg thing. It keeps going round and round. Some of the things they said were outstanding in terms of how their operating costs have risen. You say the rent isn't fair and they say their costs are too high, and then the ticket agent and the people who we represent, the travelling public, say it is too high. And we're going around in a circle.
I must congratulate you, however, for a statement you made. It was a very positive statement, because you said that in terms of this realignment, whatever takes place in the future with the airline you would be cooperative. I've no reason to doubt what you've said is true, but it is of utmost importance, because without a very cooperative attitude from the airport authorities this whole thing could drag on for a long time and we could really get hurt with the travelling public in Canada. So I hope you will remain true to that statement.
I want to get back to the leasing. Your leasing is with the federal government, and as I understand it, that leasing is a huge document. On what conditions could that leasing be broken by either yourself or the federal government?
Mr. Murray Sigler: I don't know if there's a short answer to that question because it is such a long document.
Mr. Roy Bailey: Then give just a short one. There are conditions—
Mr. Murray Sigler: Financial defaults and going offside the national airports policy basically.
Mr. Roy Bailey: Would you gentlemen agree with me that in terms of your PR with the community you serve now—if you serve a small city like the area I'm from—this authority has not done a very good job of letting the public understand what this new airport authority is all about? There seems to be a lot of confusion out there. And whether it be the chambers of commerce or yourself, or the city or whatever, I think if you're under review at the present time, may I suggest to you that this is, first and foremost, one of the things you have to do.
Mr. Neil Raynor: I think it's a very good point, and it's well noted, yes, sir. Thank you.
Mr. Murray Sigler: I think that's essential for the airport authority. It has to have community support. That's the whole basis of it. But as part of the review, there are outstanding levels of community support for the airport authorities all across this country. So the review did in fact confirm there is strong community support for the airport authorities.
Mr. Neil Raynor: Perhaps I could ask Mr. Hopkins, as a chair of one of those authorities, in this particular case in Winnipeg, if he has a couple of comments on this issue as well.
Mr. J.A. Hopkins: Thank you for that.
Speaking to the Winnipeg example, I can assure this group, and you can easily verify these comments, that we have an outstanding relationship with our community, with the nominating entities in the community, with the travelling public, and with the general public. We do that because we're a very open organization.
Let me give you a practical, tangible example of accountability in Winnipeg, and this likely applies in other communities as well. A short while ago we launched a long-term strategic planning process. It took us nearly a year to put that together. The reason it took us this long is that we included virtually every type of stakeholder group you could imagine, and some that perhaps you wouldn't, in our deliberations. We met with all of our major customers, we met with the air carriers, we met with our tenants, and we met the public. We have a community consultative committee that represents virtually every aspect of our community. We did presentations to them and had inputs from them. We received inputs from chambers of commerce and other types of organizations that have a keen interest in the financial viability and economic development in the community. We took all of that information and distilled it into a strategic plan.
One of the outcomes of that strategic plan is the need to redo our airport master plan, which we're in the process of doing now. We were following the same type of open public process that encourages consultation from virtually every corner of the community and every organization in that community that has an interest in the airport. I would tell you without hesitation that the process we have followed in those two examples, and in many others I could provide to you, far exceeds anything any air carrier in this country is doing, and in fact exceeds anything any crown corporation in this country is doing. So we have gone far beyond the accountability principles the federal government included in our lease and in our bylaw to ensure there is community input on an ongoing basis to the airport authority.
The Chair: Thanks, Mr. Bailey.
Mr. Hubbard, please.
Mr. Charles Hubbard (Miramichi, Lib.): Mr. Chair, we seem to have spent most of our time talking about the NAS airports.
In your submission you say your council represents local, regional, and national airports, and I think, Mr. Chair, we should look for a few comments from our witnesses here in terms of how they perceive the local and regional airports that are outside this 26-airport system. We've heard, and I know, that some of the 26 complain about their future. I think the NAS must address and be concerned with some of the airports. Some have not already been divested; others complain their future doesn't look that bright. In terms of what we might hear from your appearance this morning, would you make some comments on local and regional airports and how they perceive the future of their existence in terms of what's happening to the airline industry?
Mr. Neil Raynor: If I can make some general comments, I'll then run again through three points we make in the report about smaller airports.
First of all, I will state that we, the CAC, the Canadian Airports Council, represent those airports that I mentioned at the beginning, and they're of all sizes. One of our most active committees is what we call the level two airports, the smaller airports, committee. It's a very active, very vocal organization.
I have to tell you that the majority of my time running the national office is spent on small airport issues. The reason for that is because they're the ones that need the help. The Winnipegs of this world have the resources, quite frankly, to do that for themselves. The small airports can't afford that sort of representation.
It's an issue we're working very closely on with ATAC. I wish to say, by the way, that we are working on a number of issues very closely with the Air Transport Association of Canada, and I think we are getting great benefits from doing that. One of the issues we're working on right now is in terms of the ERS, the emergency response service, that is being considered for the very smallest airports. It was removed four or five years ago as Transport Canada was transferring these airports to local government. There is now a proposal on the table from the federal government to reintroduce it, with a huge cost burden. That cost burden flows through the airport and flows back to the airlines and the consumer at the end of the day.
So we're working very closely with the communities, with the small airports, and with the airlines too, to address many of those issues.
Again, to reiterate, I spend easily 75% of my time on those sorts of issues. What we said, and this has come directly from the smaller issues, these comments, is that they believe something has to be put in place to ensure that essential service is maintained, is guaranteed, to communities served by carriers today. Whatever structure appears from this current restructuring process, they are very keen that whatever regulation may be put in place—and we've made an argument against regulation or reregulation—if regulation is established, then it must not create a monopoly that would stop competing airlines going into those smaller airports.
The last one was the one about the capital program to assist those smaller airports and ensure that they have a viable future.
Mr. Murray Sigler: All the small airports are concerned about their financial viability today, particularly on capital items, such as we talked about earlier. So before any restructuring, they had concerns, and they are even more concerned today. I can pass that on.
I've heard from some of them that there is a concern that when they hear the commitment that their services will be maintained, and must be maintained, they wonder who's going to pay the bill for that. There's a concern about that, about what is the price tag of maintaining the service. I'm sure the airlines are concerned about it. I'm sure the airports are also concerned about who's going to pay the bill for that. When you equate that to the smaller airports, they don't have a lot of depth of resources on a stand-alone basis. In many cases, even in the municipality it operates in...it's municipal and it doesn't have money to shift into maintaining that. So it is a legitimate concern, and it varies a lot from city to city.
Mr. Charles Hubbard: With the issues of safety and visibility that are coming to the table now, is your group very much aware of this, and will you be making representation on behalf of the smaller airports in terms of addressing those two issues?
Mr. Murray Sigler: On the whole, we are. We're involved jointly with the air transport industry.
In terms of the point you mentioned earlier in the question about ATAC, the one thing the airports haven't done a good job on as an industry is communicating with the airlines as an industry and working together. I agree totally, and we're trying to fix that up. That equates itself to the smaller airport, the technical side of it. We're also partners with Transport Canada in that.
We wouldn't want you to leave here today thinking there's an adversarial relationship between the airports and Transport Canada, because there very much is not. They're always responsive to our input, and we're talking about these issues with the senior policy people at Transport Canada.
So it's not an adversarial process, and I wouldn't want to leave you with that impression. We're all trying to find solutions to these issues.
The Chair: Thank you very much, Mr. Hubbard.
Gentlemen, you've been asked, or may still be asked, by some of our colleagues for information pertaining to any related subject. Perhaps you could pass that information along to the clerk so that the clerk can distribute that information to all members of our committee.
We now have to move along to our next witness.
Mr. Raynor, Mr. Hopkins, and Mr. Sigler, thank you very much for your presentation and for answering our questions this morning.
Colleagues, we will suspend for five minutes.
The Chair: Order, colleagues.
I would ask the photographers to put down their weapons.
Our next witness this morning, colleagues, is Regional Airlines Holdings Inc. Joining us is the president and CEO, Mr. Robert J. Deluce; the executive vice-president, André Lizotte; and a director with Newcourt Capital, Mr. Gordon Thompson.
Gentlemen, welcome to the Standing Committee on Transport. We look forward to your presentation of between 10 and 12 minutes. Then we'll have questioning from my colleagues.
Please proceed whenever you're comfortable, Mr. Deluce.
Mr. Robert J. Deluce (President and CEO, Regional Airlines Holdings Inc.): Thank you.
Good morning, ladies and gentlemen. My name is Robert Deluce, and I'm the president and chief executive officer of Regional Airlines Holdings Inc. On behalf of my associates, I'd like to thank the committee for inviting us to appear before you to share our vision of the future of Canada's airline industry. With me here today is André Lizotte, executive vice-president of Regional Airlines Holdings Inc., and Gordon Thompson, a director with Newcourt Capital.
Ours is an industry undergoing unprecedented change. What the outcome will be is still unclear. However, it is our assumption that in the near future we could see a single national carrier emerge, one that would be focused primarily on long-haul domestic and international routes.
It is in the context of this unfolding situation that we are today outlining our vision to you, one that we believe presents a realistic, commercially viable proposal that would have a positive, pro-competitive impact on the marketplace. It is also important to note that we are prepared to move forward quickly should a single national carrier be the result of the current restructuring process and should the government consent to impose certain conditions upon that single national carrier.
Our proposal envisages the formation of a Canadian-owned, regionally focused, independent airline dedicated to serving Canada's small market communities and providing competitive choices to Canadian travellers. It is a proposal that would not only preserve but also improve on the service to Canada's regions by providing Canadian business and leisure travellers with more choice and convenient, reliable service to domestic, transborder, and international destinations.
Regional Airline Holdings Inc., a newly formed corporation, would acquire, finance, restructure, manage, and expand the operations of the regional airline subsidiaries of Air Canada, made up of Air Ontario, Air Nova, and Air B.C., and of Canadian Airlines, comprised of Canadian Regional Airlines. It is an option we believe would fit well within the federal government's policy framework. It is based on a financially sound business model. And it is an option that, given the optimal regulatory environment, we are confident will not only succeed but will also have a favourable impact on all stakeholders, including consumers, regional communities, and the employees of the regional airlines.
The business model we have created is based on the expansion of regional service, and because of this anticipated growth, we do not expect any job losses. In fact, employees will have more career opportunities in this expanding airline, particularly because of our intention to introduce more modern technology aircraft, including regional jets.
However, before I expand on the details, I feel I should tell you a bit more about who we are. My family and I have been in the regional airline business for almost half a century, in my case for almost 32 years. My own career began in the late 1960s working for my father's airline flying in and out of remote hunting and fishing locations in northern Ontario. We have owned and operated a number of regional airlines throughout Ontario, Manitoba, and Quebec, including Air Ontario, Air Alliance, Air Manitoba, Great Lakes Airlines, Air Creebec, Superior Airlines, Austin Airways, and White River Air Services.
I also had part ownership in and served as president of Canada 3000 Airlines, one of Canada's leading charter operators.
Mr. André Lizotte (Executive Vice-President, Regional Airlines Holdings Inc.): My name is André Lizotte and I'm one of the operators of the oldest air carrier in Canada. I'm the founder of Pro-Can Aviation and was formerly the President and CEO of Nordair Ltd and Québécair, as well as a board member and chairman of the Audit Committee for Air Alliance. From 1989 to 1992, I also served on the Federal Ministerial Aviation Task Force.
Mr. Robert Deluce: On Gord's side, Newcourt Capital is a recognized world leader in regional aerospace financing, having provided over $14 billion U.S. in regional aircraft finance solutions. Newcourt Capital is part of the CIT Group, the world's largest publicly traded, commercial finance company, with more than $93 billion in assets.
Based on our many years of experience, both André and I fully understand the importance of air travel to Canadians who live in our smaller cities and towns. We understand that they, as much as those who live in Montreal, Toronto, or Vancouver, rely on air travel to conduct business, to take holidays, to attend school, or simply to visit family and friends.
We do not suggest that Canada's smaller cities and towns are not already well served by air, nor do we suggest such service to the regions will diminish once a single national carrier emerges.
What we want to make clear is that we have the expertise, experience, and understanding to provide and grow these services better and more efficiently while at the same time allowing the emergent national carrier to focus on what it does best. So while they concentrate on providing service to London, England, our plan will be to serve London, Ontario; Saskatoon as opposed to Sao Paulo; Timmins—my home town for almost 14 years—rather than Tokyo, Japan.
By creating under independent ownership a competitive network of regional connectors, the new airline, which I will refer to in future as Regco, would offer a competitive service on regional routes as well as interlining and feeder services to the emergent national carrier.
It would be narrowly focused, concentrating its expertise and experience on the regional services it understands so well.
It would be flexible in its code-sharing arrangements with both the national carrier and other domestic carriers wherever feasible. So, for example, a tour operator might be able to offer a complete travel package from Sudbury to Barbados instead of having to base its fares and services on arriving and departing from major centres such as Toronto.
It would concentrate its services on lower density markets and short-haul routes that are unattractive to major airlines and low-cost carriers operating larger-capacity jets. At the same time it would provide feeder service into the hubs of code-sharing partners.
It would provide employees with the best training possible, greater decision-making responsibility, and a financial stake in the overall performance of the company.
In order to grow it would seek to identify new market opportunities in terms of new routes and alliances and develop and integrate these new routes and alliances into our existing operations. Most importantly, it would seek to continually improve the services available to consumers in a growing number of communities across Canada.
Mr. André Lizotte: Structurally, the new carrier would serve Canadians right across our vast country. It would employ approximately 5,000 airline professionals and operate a combined fleet of more than 125 aircraft ranging in size from 19 to 70 seats.
It would consist of two divisions: one situated in Eastern Canada and the other in Western Canada, with route networks built around point-to-point, high frequency services connecting major urban centres, small market communities and a variety of destinations between Canada and the United States.
Regco would also operate in both the Western Canada triangle—comprised of Calgary-Edmonton-Vancouver—and the Eastern Canada triangle—made up of Toronto-Ottawa-Montreal - and would develop new service patterns within each region: Calgary-Regina- Winnipeg, for example. Maximizing the utilization of our resources will be achieved through the rapid turnaround of aircraft, optimal route configuration—including the expansion of transborder operations - and by enabling employees to handle multiple roles.
Mr. Robert Deluce: We believe our proposal is financially sound and commercially viable, and can, given the right conditions, succeed. Clearly, however, achieving commercial viability and the pro-competitive market impact that our proposal offers will depend upon the appropriate regulatory environment being in place.
It is critical that the matters I will outline for you form part of the conditions of approval incorporated by the Ministry of Transport into any recommendation to the governor in council and be enforceable in the event of a single national carrier.
Voluntary commitments or non-enforceable undertakings will not be sufficient to overcome the financial risk associated with a potential non-recourse breach by a dominant carrier.
Mr. Gordon Thompson (Director, Newcourt Capital, Regional Airlines Holdings Inc.): Regional believes the following conditions, each of which must be agreed to prior to the approval of any single national carrier scenario, will facilitate our competitive entry into the marketplace while safeguarding the interest of Canada's travelling public.
First, the emergent national carrier must divest itself of its regional feeder airlines and be prohibited from re-entering this sector of the market for a period of 10 years.
Secondly, the emergent national carrier must also be required to interline and code-share with Regco for feeder traffic exclusively.
Thirdly, the scope clause provisions of the Air Canada labour agreements must be removed if regional carriers are to expand and grow their businesses. This would allow regional carriers to utilize modern technology aircraft, including regional jets.
Fourth, Regco must be allowed to enter into additional code-sharing commercial agreements with other carriers, both domestic and international, at cities in both Canada and the U.S.
Regco must have access to a sufficient number of slots in close proximity to the dominant carrier and other major airlines, and other airport facilities, such as counter space, baggage handling facilities, etc. Regco must also be allocated a sufficient number of slots and gates at major airports in Canada and at New York's La Guardia and Chicago's O'Hare airports during the prime time travel periods each day.
Sixth, as well, there must be a level playing field for Regco in dealing with travel agents and other distribution channels and no bias in computer reservation systems or discriminatory commission structures.
Lastly, any consent order allowing the creation of a single national carrier to proceed should include the condition that failure by the emergent carrier to abide by any one of the necessary conditions for divestiture would be subject to sanctions.
Mr. Robert Deluce: The airline business is a good business. Having been involved in this industry for my entire adult life, I believe that with the appropriate conditions in place, there is an exciting opportunity ahead of us.
The proposal we have put forward today is intended to encourage further dialogue on the future of Canada's rapidly changing airline industry, while specifically addressing the needs of regional consumers. We believe our proposal speaks directly to the five fundamental principles set out by the transport minister and that it offers the best chance of achieving the government's vision of a safe and healthy airline industry capable of competing with the biggest and best airlines in the world while serving all parts of the country at fair prices and controlled by Canadians for Canadians.
The experience of our management team, built upon a solid track record of owning, financing, and operating regionally focused airlines, combined with a pro-competitive policy framework as set out by the federal government, will allow us to offer a commercially viable alternative to the major established carrier in Canada.
Canadians in small-market communities would have greater choice and more service options when travelling either domestically or internationally through feeder service provided by Regco to the emergent national carrier and others.
We hope to work closely with the federal government, the national and regional carriers, and employees and their unions to establish the optimal environment for realizing our vision of a stand-alone airline. With limited government involvement at the outset in setting the rules, this private sector, Canadian-owned solution would provide important benefits to all stakeholders across the country, including consumers, regional communities, and the employees of regional airlines.
Thank you very much.
The Chair: Gentlemen, thank you for your very frank and straightforward presentation to the committee this morning. I am looking forward to the questioning.
Ms. Meredith, please.
Ms. Val Meredith: Thank you, Mr. Chair, and thank you, Mr. Deluce, for giving us an interesting thing to consider in the restructuring of Canada's airline industry.
I'm going to ask you a couple of questions, but the first one is this. Is there not a parallel between what you're trying to do and what Canadian Airlines International did, and what makes you think you'll be any more successful than they were in competing against a dominant air carrier, a dominant national carrier?
Mr. Robert Deluce: If I can answer that, the Regco proposal is a regionally focused concept, and our vision basically is that in the event that a dominant carrier emerges, we would basically put together the various regional airlines that are involved in Air Canada and Canadian Regional into one carrier, regionally focused and concentrating on the markets that others aren't really likely to be involved in.
We think that basic concept will bring a lot of benefits to the regional communities that are involved. They'll end up with improved and better service. They'll probably have improved opportunities. Because our business plan contemplates the introduction of newer, more modern technology aircraft, including regional jets, that would be an improvement. There's bound to be a strong economic impact on some of the communities that are involved, and I think there's a distinct difference between what Canadian has tried to do and what we are proposing to do. We will be regionally focused.
Without going on too long on that question, I think the other thing is that our concentration, as I mentioned earlier, will be on London, Ontario, instead of London, England, and Saskatoon instead of Singapore. So it will make a difference.
Ms. Val Meredith: The other issue you raised in your presentation that I think needs to be addressed is one of your conditions, and that was condition number 2, which Mr. Thompson brought up. That's that the emergent national carrier must also be required to interline and code-share with Regco for feeder traffic exclusively. I noticed in the number of regional airlines you're talking about bringing in, there are some that are missing that are in existence now. When you start talking about an exclusive arrangement, are you suggesting you would have a monopoly on regional feeder into the dominant carrier, leaving out InterCanadian, First Air, and some of these others that you don't seem to be interested in acquiring control of?
Mr. Robert Deluce: Let me talk first about First Air and maybe Canadian North, because they sort of fall into one category, and we don't see our business model impacting on either of those airlines. Whatever they're doing today they should be allowed to continue doing with the dominant carrier, and they can have code-sharing arrangements with that dominant carrier, or they can have arrangements with us, or a combination of those two things. That shouldn't impact on either of those carriers.
With regard to InterCanadian, we see the Regco solution as potentially encompassing InterCanadian. I think there's room for InterCanadian within that solution. Frankly, we've had discussions with individuals at InterCanadian, and although nothing definitive has come out of that, we think there are options both of us want to explore in that regard. So there's a way of making the InterCanadian thing work as well.
Ms. Val Meredith: Then how do I define exclusively? You seem to be indicating to me that Canadian North and First Air could operate the way they are now, which means they would have co-chairing and interlining. If InterCanadian would be exclusive, that doesn't seem to very exclusive.
Mr. Robert Deluce: It would be exclusive with respect to the routes the regional carriers are presently flying and are presently feeding to the dominant carrier. There needs to be this transitional business commitment on the part of the dominant carrier, with the regional carrier, and the network we hope we will be able to acquire and expand.
If you look at Canada generally, the most lucrative markets, domestically and internationally, have not been able to sustain two principal mainline carriers. If you look at the regional markets, they're even more fragile. So it's almost inconceivable to think there could be more than one carrier in some of these regional markets. Some form of transitional business commitment on the part of the dominant carrier, with this newly set group of connectors or regional airlines, is essential.
The Chair: Thank you, Val.
Mr. Fontana, please.
Mr. Joe Fontana: Thank you. Let me welcome a fellow Timmins knight and Londoner back to Ottawa. It's nice to see you, Mr. Deluce, Mr. Lizotte, and Mr. Thompson.
In the perceived crisis we are looking at today, certain opportunities sometimes evolve if you have a dynamic private sector solution. This may very well be an opportunity this committee has at this time, if we're looking at restructuring our airline industry and the dominant carrier should evolve.
There are all kinds of scenarios, and I think you've pointed them out. Even the Competition Bureau has talked about them. What happens if there's only one dominant air carrier? People have said it would be a monopoly that could have a stranglehold on pricing and service, especially to regional communities—small towns that very much depend on airline service.
I know you talked a little bit about the five principles. While you didn't outline what the minister's principles are, they seek to define what that public interest is and what we're trying to do here. You've defined that it will be Canadian owned, operated, and so on, the employees will be taken care of, and regional communities will be looked after. Maybe we could get into that a little more—that there will be a regime where the consumer is essentially protected.
I would like you to expand on that. What will this mean to the consumer? Obviously that's where we're coming from. Canadians are very ticked off about the prices they have to pay for flights and service. Obviously with a dominant air carrier all kinds of scenarios loom possible, such as prices that might go through the roof when a monopoly exists, and in fact service may be confined to certain areas.
I would like to ask you to tell the consumers of this country what that means to them. I think you've addressed service, but I want to know a little about pricing. You're asking for an awful lot of guarantees from the Government of Canada in order for you to become viable. What will that really mean to consumers?
Secondly, you've come forward with this proposal, but because you've been in the airline business for such a long time, what do you think about the dominant air carrier scenario that has evolved? Do you believe that a dominant air carrier controlling the regionals, putting in place another discount airline in this country, and controlling essentially all the slots at the airports by virtue of their pure dominance in the market is good for Canada? Should we be left with this scenario of one dominant air carrier controlling the regionals, making a discount airline—essentially controlling all aspects of travel in this country?
Mr. Robert Deluce: Mr. Fontana, do you want me to start with that last question, then?
Mr. Joe Fontana: If you like.
Mr. Robert Deluce: I think it's pretty inappropriate for us to comment on the Air Canada proposal; it has to be judged on its own merit or otherwise.
Our vision is that if there is a dominant carrier, we will acquire, finance, restructure, manage, and expand a regional airline network made up of the various airlines I described, right from Air Nova to Air B.C., Canadian Regional and Air Ontario.
Looking at that and considering the fact that our entire business plan is based on service to small communities and regions, you can expect improved and expanded service to those regions out of that.
The other thing you have to look at is the fact that our focus will be just on the regions and smaller market communities. We won't be thinking of international routes. Our focus will be regional and not international. That will have to have a positive impact on the communities involved.
The other thing I want to put across is the fact that to a large extent, because of the very restrictive scope clauses that exist today in some of the collective agreements, the regionals have almost been in a cage. They haven't been able to introduce the newer high-technology equipment you would find south of the border in similar marketplaces. We want to introduce those aircraft, and our business plan very much contemplates being able to do that.
Mr. Joe Fontana: What about the consumer and prices?
Mr. Robert Deluce: The consumer will also be a beneficiary of this. When you put together a collection of airlines of this sort, you generally get some efficiencies of scale or size that relate to a lot of the overhead and other things of that nature. We would expect those efficiencies to translate into better fares, quite frankly.
Mr. Joe Fontana: In the absence of your proposal, the only proposal on the table is for one dominant air carrier that would control the regionals—therefore a perceived lack of competition. Do you think that's healthy?
Mr. Robert Deluce: It's probably inappropriate for me to comment on Air Canada's proposal. All I know is that what we're proposing—
Mr. Joe Fontana: Apart from Air Canada, in terms of making a public policy, do you think it is healthy policy to have one dominant air carrier that controls the skies regionally, nationally, and internationally? What do you think? You've been in the air business. Could you survive? Could you start a new airline in that scenario, without having to buy the regionals?
Mr. Robert Deluce: Our proposal is based on there being a dominant carrier. I guess you have to bear in mind—and I think what we're asking for here—that the dominant carrier must be required to divest itself of those regional carriers. That's the number one essential thing on our list.
The second thing is that any policy framework you put in place must allow for the expansion and improvement of this newly formed regional carrier on a basis that will remain commercially viable. Mr. Thompson outlined some of the conditions that would make such an enterprise viable. I think those are important considerations.
The Chair: Thank you, Mr. Deluce.
Mr. Guimond please.
Mr. Michel Guimond: Mr. Deluce and Mr. Lizotte, as you pointed out in your brief, you have considerable experience in the regional airline business. We can appreciate that. No one could deny your credibility.
You know as well as I do that when it comes to regional airline service, people living in the regions basically want three things: reasonable air fares, frequent service and quality service provided by certain types of aircraft. Your brief makes very little mention of these concerns. What is your position on air fares? When we began our study, we heard from one party who wanted to make an offer to acquire Air Canada. This offer was subsequently ruled illegal by Quebec's Superior Court. That particular owner had suggested that fares be frozen for a period of five years. The feeling, however, is that air fares are already pretty high. It's one thing to freeze fares that are affordable and reasonable, but freezing air fares that are already unreasonable doesn't make them acceptable for all that.
In terms of formulating public policy, what should our committee be considering in the way of commitments to regional airline services?
Mr. André Lizotte: If I may say so, you've highlighted three very important considerations: air fares, frequency and quality of service. Our organization's focus is regional service and, in accordance with the business plan drawn up with the regions, we try to provide service geared to their needs. Air fares are not are sole consideration, although we realize that something truly needs to be done on that front. We believe in the importance of working closely together with other stakeholders, be they members of boards of directors, senior officials, employees or unions. We constantly strive to work together with the regions.
As you know, fares are naturally a function of the frequency of flights and passenger volume. Consider the example of the Saguenay—Lac-Saint-Jean region. If we have to operate six flights per day to meet the demand, then we will do so. Our goal is to support regional economic development. It can be a matter of providing service or offering special deals on air fares.
Mr. Michel Guimond: I don't wish to argue, Mr. Lizotte, but after all, yours is not a philanthropic or charitable organization. You have to admit that profitability is your bottom line. Don't tell us that your sole objective is to help the regions.
As far as the type of aircraft used, it's the old chicken and egg question. Are passengers interested in taking a flight on a Beechcraft if other options are available to them? When I met in Quebec City with Joe Randall, the President of Air Nova, I discussed with him the fact that he had held on to some Beechcraft planes painted in the Air Alliance colours. I told him that I made 26 round trips between Quebec City and Ottawa every year and that given the choice, I would probably prefer to fly on an Inter- Canadian ATR-42 than on an Air Alliance 19-seat Beechcraft, where no in-flight service was available and where the co-pilot did double duty as the flight attendant. He would almost need three or four hands to take care of everything. It's also a question of supply. When Québécair offered flights on BAC-111s... What are we supposed to think of your proposal? What are we to believe? Do you have a magic wand that you plan to wave and revolutionize the industry in the process?
Mr. André Lizotte: Earlier, Mr. Deluce stated that our corporation needed some financing in order to standardize our fleet of aircraft. This is very important. An airline's economic situation is tied to fleet operating costs. It's a very costly proposition to operate a fleet consisting of a variety of aircraft.
You mentioned Beechcraft. However, it is not up to me to comment on the fleet operated by other airlines. In order to improve service to the regions and reduce our costs, we plan to standardize our fleet of aircraft. This is something that we need to do to ensure adequate regional service. We plan to introduce a type of aircraft that will meet the needs of regional residents.
I'm not here to pass judgement on the Beech 1900D, the ATR or the Dash 8. I'm here to share with you our proposal to form a corporation with a regional focus. Our mission, in all honesty, is to help the residents of the regions, whether they live in Abitibi, Rimouski, Quebec City or the Saguenay. We want to help them and work with them.
Of course, if we had an aircraft that we could operate at a reasonable cost in the regions, then we could meet the needs of the residents. How many seats would this aircraft need to have? How often would flights be scheduled? I can't talk to you about these considerations today, but we do plan to provide a service to meet the needs of regions across Canada.
The Chair: Thanks very much, Mr. Guimond.
Mr. Comuzzi, please.
Mr. Joe Comuzzi: Good morning, gentlemen.
There are some famous people coming out of Timmins these days, Mr. Chairman.
Are you folks resigned to the fact that as of this moment we're resigned to a single dominant carrier? Is that the only alternative that's available to the Canadian traveller?
Mr. Robert Deluce: Well, in answer to that question, certainly our vision is based on there being a single dominant carrier. We think the situation is headed that way. I think that to a large extent, rightfully or wrongfully, Canadians are prepared for that to happen. They might not have been five or so years ago, but I think they are psychologically prepared for there to be one dominant carrier. The two-carrier policy does not appear to have worked. Our vision basically is to set up this airline based on that single dominant carrier proposal.
We know our proposal is well financed; it's been well thought through. It's a credible group that we've put together. The individuals who make up our team, besides myself—and I've had about 32 years in the business and have been flying since about 16 years of age, or at least licensed at 17—include Newcourt Capital, who are very well recognized as a strong player in terms of financing regional aircraft. The second individual, of course, is André Lizotte from Montreal, with better than 30 years of experience in the business. He's also recognized as one of the leading safety experts in the country. Another individual who makes up our team is Ron Joyce. Ron is a well-known and very successful Canadian entrepreneur and—
Mr. Joe Comuzzi: Mr. Deluce, the chairman is going to cut me off, and you've answered my question. From your comments, you're resigned to the fact of the demise of one of the national carriers. Is that correct?
Mr. Robert Deluce: Our business plan is based on there being one dominant carrier, and we have been planning around that scenario.
Mr. Joe Comuzzi: What we're going to develop, Mr. Deluce, is a dominant national carrier and, through your proposal, a dominant regional carrier in Canada. Would that be a correct statement?
Mr. Robert Deluce: I would say that the regional carrier will be focused on improving and expanding service to the small-market communities, number one. Number two, we will be competing on the two triangles with Domco, if we can refer to the remaining national carrier as Domco. We'll be competing with them on those triangle areas. We will be competing with the remaining national carrier on transborder routes. As well, we know we'll have competition from companies such as WestJet that are out there now, and there may be others like them that emerge. I think our proposal is one that, if anything, will bring about a healthier airline situation in the country.
Mr. Joe Comuzzi: Mr. Fontana is prompting me here. He wants to know how much money you're going to invest in the Canadian airline industry.
Mr. Robert Deluce: I can tell you that we're well financed.
Mr. Joe Comuzzi: The people who got more press recently than the airline industry are Newcourt.
Mr. Robert Deluce: I can tell you that we are well financed. The business plan has been well thought through. I think it's inappropriate to talk about the actual price right now, because we haven't had direct discussions with the dominant carrier. I can tell you there are probably 5,000 people involved in this collection of regionals. They presently do in excess of $1 billion in revenue, so it's a relatively large enterprise.
The one thing I didn't mention is that as part of our team we also have another large financial institution that's committed. I can't give you the name of that institution at this point. We are not allowed to disclose it. We will be in due course.
Of course the other thing I want to mention—and I think this is important for you to know—is that there will be some other investors, who will be announced shortly, and there will be some Deluce family members who put real money into this because they're committed to working with the communities and they believe in what we're talking about.
The Chair: Thanks, Mr. Comuzzi.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: I have four questions and I want to get them all in here.
How recently were you formed?
Mr. Robert Deluce: The company has been formed within the last month.
Ms. Bev Desjarlais: Okay. You indicate that you're not interested in going into international markets. Condition 4, page 5:
Regco must be allowed to enter into additional code
sharing/commercial agreements with other carriers, both
domestic and international at cities in both Canada and
I consider the U.S. an international market.
The Chair: Mr. Deluce, did you want to respond to that?
Mr. Robert Deluce: Did you want me to respond to that?
Ms. Bev Desjarlais: Certainly.
Mr. Robert Deluce: I would consider it international as well, but often it's referred to as a transborder market, as opposed to international. So we're sort of drawing it out as domestic, transborder, and international. So for the purposes of our presentation, we're referring to it as a transborder location. But you're very right, it is international.
Ms. Bev Desjarlais: So it's clear that it is an international market.
Mr. Robert Deluce: Yes.
Ms. Bev Desjarlais: This new dominant regional carrier, what effect do you see it having on, say, Canada 3000 or WestJet, or let's say, where we have Canadian Regional, Calm Air, and Bearskin flying into, say, The Pas? What effect would this dominant national carrier have on those situations and those companies?
The Chair: Dominant national or dominant regional?
Ms. Bev Desjarlais: Regional, sorry. Thank you.
Mr. Robert Deluce: If I can respond to that, what we do will be complementary to what some of these third-level carriers are doing and will continue to do. Quite frankly, our program should complement what they are all about.
With respect to Canada 3000, it's a company I'm well familiar with because I was involved there for a number of years. Their focus is certainly on international and long-haul domestic, so I see our proposal as being quite complimentary to that which they are offering. Of course, we can't speak for Canada 3000, and I don't propose to speak for them. From my perspective, though, I see what we're doing as being complementary.
Ms. Bev Desjarlais: Again on the situation of Canadian Regional, Calm Air or Bearskin flying into The Pas, if you become the dominant regional, you would then have Canadian, Bearskin, and part of Calm Air.
Mr. Robert Deluce: When you look at Calm Air, there's now a relationship between Calm Air and Canadian Regional, and we would expect that this relationship would in fact continue.
Ms. Bev Desjarlais: But what's going to be out there to ensure that we have some competition at the regional level?
Mr. Robert Deluce: We're talking about competition on a transborder basis. We're talking about having expanded and improved service to some of the smaller-market communities. We're talking about being able to provide feed not only to the remaining dominant carrier, but also to other carriers out there that we would have code-sharing commercial arrangements with. This is something new. For the first time, it will allow some of the trans-Canada charter couriers to actually sell a ticket right through from Vancouver to Timmins, for instance, as a result of having this commercial code-sharing arrangement in place.
Just to reiterate my earlier remarks, the only other thing I'd like to add in regard to that is that we've seen where the most lucrative markets within Canada can't sustain two mainline carriers—or haven't been able to sustain them so far—and the regional markets are even more fragile.
Ms. Bev Desjarlais: That was another thing I wanted to comment on, because we have been told that the regional airlines are very strong. That's certainly the impression I got from the regional carriers when they met with us.
Bearing that in mind, I still see you having sort of the only game in town. If we use the situation of Canadian, Calm Air or Bearskin going into The Pas, you're not going to have the whole pie. But why wouldn't we simply put some rules in place for the carriers we presently have so that we don't have this dog-eat-dog world out there and so that we ensure we're getting the service and the competition?
Mr. Gordon Thompson: As I see it, and as Mr. Deluce has said frequently, what we're trying to do with our proposal here today is a number of things. Very quickly, first of all, we're trying to create a viable airline operation regionally and for small communities in Canada, and one that's financeable. Secondly, it's to provide a quality of service to the Canadian travelling public so that they're getting something out of it, relative to Joe's question—
Ms. Bev Desjarlais: Can you tell me in all honesty that Newcourt's first reason is to do that and it's not to make money?
Mr. Gordon Thompson: Newcourt, or any of the other investors that are involved in this airline.
Ms. Bev Desjarlais: Let's be clear then that, first, that's your goal.
The Chair: Okay, Bev. You've asked the question. Let's get the answer, and then we'll move on.
Ms. Bev Desjarlais: Okay, fair enough. Let's get the answer.
Mr. Gordon Thompson: The answer is that with an economically viable airline, we can provide that kind of service.
I guess what I wanted to get to was the point that seems to be somewhat misunderstood. I remember appearing before this committee once before, when Reg Alcock was the chairman. His frequently quoted comment always was “Don't tell me about Ottawa to Montreal. I don't want to hear anything about Toronto to Halifax. Tell me about Wawa to Winnipeg.” And what Mr. Deluce's team here is trying to solve is the problem of Wawa to Winnipeg.
The reality in Canada is that there are many areas where competitive regional service can be very viable. There may be several players in the triangles, for instance, with lots of people entering that marketplace and lots of competition, but there are also many places in Canada where one airline is too many. What we want to do is be able to introduce a service that addresses that problem and not only provides profitable service for us in the key areas but also serves profitably those smaller communities. That's what it's really all about, and that's what makes us different.
The Chair: Thanks, Mr. Thompson.
Mr. Sekora, please.
Mr. Lou Sekora: When I'm listening to you here today, to me, pricing, service, and employees are what I'm after—the price of tickets, the job creation and job losses, and service to different communities across Canada, not one part of Canada or the other.
When you're speaking, I'm wondering why you people haven't been to see Mr. Benson from Canadian and Mr. Milton from Air Canada. Precisely, it would work very well if you took all the regionals and everything across Canada and if they took the internationals. Have you seen them? Have you thought about it? Why are you here before us saying you want to create this regional airport or these flights exactly when Air Canada and Canadian Airlines are looking for somebody like you?
Mr. Robert Deluce: If I may, I will address that question. Certainly our plan is to put together this regional network of regional carriers, but on the assumption that this dominant carrier actually emerges, we must have some help in ensuring that the dominant carrier is required to divest itself of those regional carriers. We don't think they'll do it on their own without a little bit of nudging from you. Quite frankly, we think that's an essential part of us being able to do what we want to do.
In fact, we might not be the only ones out there who are interested in this; we don't kid ourselves for a moment. But we have spent a fair bit of time on this plan and we think it's well founded.
The second thing that has to happen, of course, is that the policy framework accompanying the divestiture has to be in place to ensure that there is a solid platform on which to grow and expand that regional airline. That means addressing some of the things we've outlined in our statement that pertain to airport slots, gates, counter space, and all those types of things, along with fair treatment with the travel agencies, computer reservations, displaying, and those types of issues.
The Chair: Mr. Deluce, I've heard Mr. Sekora's question. Maybe it would help if you gave a bit of a definition as to what a regional service is versus what a national service is. Of course we know what the international means, but having heard Mr. Sekora's question, national versus regional might be a help with the difference there.
Mr. Robert Deluce: Our proposed airline will be focused initially on the 19- to 70-seat aircraft range. I think we'll be using staged lengths of under 800 kilometres—that sort of stage length. It means any of the small market communities. It means short-haul routes. It means triangles in both eastern and western Canada. It means short-haul transborder routes. That is what we consider to be regional, focused airline service.
Mr. Lou Sekora: I'm from British Columbia. What would you do that's different from regional air service in British Columbia now? What would you be doing? Have you thought about it at all?
Mr. Robert Deluce: Basically it comes back to how we're going to serve those communities. Our plan is based on expanding and improving. Our basic focus, as I indicated earlier, will be on Kamloops instead of Hong Kong; it will be on London, Ontario, instead of London, England.
The other thing, of course, is that our fleet plan contemplates the introduction of newer, more modern, high-technology aircraft, including regional jets, which should be positive for any of the communities that are involved and presently being serviced by regional carriers.
Mr. Lou Sekora: You have 125 aircraft, you're saying, ranging from 19 to 70 seats, with 5,000 professionals. I believe that in the regional airline business now there are probably 7,000 employees, not 5,000, so are you talking about cutting out 2,000 employees?
Mr. Robert Deluce: No. Our business motto contemplates expansion, and because our business motto contemplates expansion, we do not anticipate any job losses to occur as a result of it. As a matter of fact, we will probably need more people. That really is the premise; it is certainly part of our business plan to grow and expand these services, and we think it can be done.
The Chair: Thanks, Mr. Sekora.
Mr. Casey, please.
Mr. Bill Casey: First of all, I just want to say I like your focus on Timmins and Saskatoon rather than Heathrow and Rome, as we've heard before.
However, there are some questions. I want to hone in on that feeder traffic exclusivity. For instance, InterCanadian now serves Moncton to Halifax and feeds Canadian Airlines from Halifax to Toronto or wherever. If your regional airline provides the same service and they are guaranteed exclusive feeding rights to the single dominant carrier, what happens to InterCanadian and the other independents? I just use that as an example because I'm familiar with it. If they cannot feed anyone else, what happens to them?
Mr. Robert Deluce: I think the InterCanadian situation is a difficult one. They're going through a difficult time at the moment. We think our solution can encompass them, and as a matter of fact, we would welcome it. We've had discussions with them. We're exploring some options. Quite frankly, I think there's a solution there somewhere.
Mr. Bill Casey: That brings up some other questions. You had discussions with the other airlines. For sure, in some ways this is going to be reduced competition, where you've said their two airlines can't viably serve the same market. Have you brought this to the Competition Bureau? Would it require another suspension to the Competition Act to go through this process?
Mr. Robert Deluce: I don't believe it would. We're operating on a premise that we don't have to. We wouldn't even be considering anything like that.
In regard to the Competition Bureau, we've made submissions to them. We've made submissions to Transport Canada. This is the first official submission we've made to government, but we have had these verbal discussions with them. We have presented what we see as the conditions that need to be in place to make viable an airline such as the one we've described.
Mr. Bill Casey: When did you make a submission to the Competition Bureau?
Mr. Robert Deluce: We made two submissions to the Competition Bureau during the last 30-day period.
Mr. Bill Casey: Have they drawn any conclusions or anything? Have you had feedback from them about what would be required? They were very specific in their report they did for us regarding a dominant carrier. One of their recommendations was to have a Canadian-owned regional type of airline. Was your plan designed to tuck under that criteria?
Mr. Robert Deluce: Our plan certainly envisions the formulation of an independent, Canadian-owned, regionally focused, commercially viable airline that basically is dedicated to serving the small market communities and providing a competitive alternative to Canadian travellers. We think it fits well within the Competition Bureau generic report; we think it fits well within the policy framework that Transport Canada has tabled. I think we're pretty much on track in terms of fitting into that definition of what is envisaged here for the Canadian airline industry.
Mr. Bill Casey: I may have gotten it wrong, but from the major dominant carriers and their proposals, I got the impression that the regional routes were not viable but served as feeders to their international routes. Di I have the right impression? If so, how can you be viable when they say they're not viable? That was my understanding.
Mr. Robert Deluce: I think we can be viable by being more efficient and by putting together this collection—right now, a loose collection—of regional carriers. We can better serve and expand service to these smaller communities. Additionally, I think some of these routes are viable now and some of them aren't, but with the right combination of equipment and a motivated and dedicated workforce in place, I think these things will all be very positive for what we're talking about.
Mr. Bill Casey: There are a lot of companies involved here. Have you talked to all of them? Are they receptive to this proposal, or is this a less than friendly proposal?
Mr. Robert Deluce: We have had a couple of informal discussions with Air Canada, but they have not made any commitments, and I wouldn't expect them to make any commitments at this particular point.
Our vision is basically based on the assumption that there will be a dominant carrier. For that vision to actually take form and become reality, what we need is someone to say to them that for them to be a dominant carrier they must divest of their regionals. If they do that, put some conditions on them that allow that regional carrier to in fact launch on a reasonable platform in order to be viable and at least have some transitional period under their belt.
The Chair: Thanks, Mr. Casey.
Colleagues, we've done one round.
Gentlemen, we're dealing with a situation right now where we're faced with what do we do if eventually there is a dominant carrier in Canada? How do we ensure pricing and the five principles that have been outlined ad nauseam?
What you're suggesting to us is a dominant regional feeder in the lucrative markets to feed the dominant national carrier. We're trying to find a solution to address the principles. You have a great business idea, there's no question of that. I think everybody here would congratulate your seizing an opportunity. Of course, it's all built on the premise that we'll have one carrier, but all we've heard so far in the press and from Mr. Robert Milton is that they have every intention of having Canadian operational and that they will be a wholly owned subsidiary, and so on, and they're working out possible scenarios with Canadian being active.
So if Air Canada decides to have Canadian as a wholly owned subsidiary doing their thing and Air Canada doing its thing, your proposal doesn't see the light of day.
Mr. Robert Deluce: Perhaps Gord could speak to that, but we see Canadian as a wholly owned subsidiary of Air Canada still being one dominant carrier. We don't make any distinction between Air Canada acquiring Canadian and merging it or operating it as a separate subsidiary.
Mr. Gordon Thompson: I think one of the things in the discussions we've had with the Competition Bureau and others, as Bob has alluded to, and certainly with people whom Bob and André are very familiar with in the industry...nobody knows what the outcome of this is going to be. It's not necessarily a balance-sheet issue as to how they're going to sort out the debt with Canadian. It really is a public policy debate, which was greatly stimulated by Mr. Schwartz's proposal. But in the context of a public policy debate, we're trying not to speculate on what the whole industry is going to look like at the end of the day. I think that's probably for others.
We're here today because I think we have an exciting proposal that we can lay on the table, and we can say, in the context of the redesign of the airline industry in Canada, that there is a group of very experienced Canadians who are prepared to put a proposal on the table.
The Chair: Mr. Thompson, in fact you have to speculate on what the last scenario looks like at the end of the day. It's all through your report that in the event there is one dominant carrier... So you are speculating that in the event there is a dominant carrier at the end of the day, here is your proposal to look after regional services.
Mr. Gordon Thompson: Yes, I understand that.
The one thing, though, where we've gone beyond that sort of discussion, which we haven't had an opportunity to talk about here today, is that quite likely in this industry in Canada, when the dust settles, you will have a dominant carrier in the big airline business and you may have a dominant carrier in the regional airlines, but with several others that are dominant in markets we're not in, and we're certainly up to competition in the key triangles.
Third, you could have three or four very large charter airlines that dominate the charter business in Canada that have feeder arrangements with either the national carrier or the regional carrier.
Fourth, for certain you're going to wind up with at least two or three very dominant discount operators in this country in WestJet, Air Canada Light, or whatever the Hamilton one is.
So I think you're going to have three tiers of airlines providing all sorts of competition in Canada. Each of those tiers are bound to have, hopefully, a dominant, viable carrier.
The Chair: How much does Air Canada make with its regional carrier?
Mr. Robert Deluce: It's difficult for us to answer that, and I think we'd be speculating. One of the difficulties in this exercise is that we have a very strong business model. We're working through our business plan, and we think it's well-financed, but—
The Chair: But you must have some idea that Air Canada has a regional service and it makes money, correct?
Mr. Robert Deluce: We know different elements or some parts of their regional service do make money, but we can't tell you what they make or what elements of it do make money. The difficulty is that we haven't had access from Air Canada to any financial information, nor have we had access to any information from Canadian Regional Airlines, and until such time as we have that, we really can't be definitive in terms of what the business model will look like.
The Chair: This committee has heard that Air Canada has a successful regional service, and given that Air Canada has told us that they have a successful regional service, have you been given some indication that Air Canada is prepared to say this sounds like a great idea, go ahead, fellows; Regco, take the Air Canada regional service? Have you had any indication of that from Air Canada? Quite frankly, why should Air Canada give it up anyway?
Thirdly, how do you propose to take it from Air Canada if Air Canada says they're not interested, that this makes them money and supplies their own ships with people?
Mr. Robert Deluce: On your first question, we've had no indication from them that they're willing to sell us the Air Canada connectors or, in the event that they acquire Canadian, the Canadian Regional Airlines group.
Secondly, our vision basically contemplates acquiring these airlines if and when there is a dominant carrier and if and when the dominant carrier, as a condition of approval, is told they must divest. If that is forthcoming, then we'll have a carrier that is interested in talking to us. Until such time as we hear from government in terms of that particular divestiture question, then I think they are going to sit there and wait until...
I'm speculating here to some extent, and I can't speak for them, but my guess is that it won't happen until they're told.
I'm sorry, what was your last question?
The Chair: How would you acquire if they said they were not interested?
Mr. Robert Deluce: I think there is no way for us to acquire these regional airlines presently owned by Air Canada and Canadian unless they are willing to sell them.
The Chair: Thank you.
Mr. Stan Dromisky: Thank you very much, Mr. Chairman. Some of my questions have already been answered. But this model is very interesting and it shows me that the industry is quite healthy, that someone is ready to come in and present a different model.
However, the success of your model depends upon a great number of factors. Some of them have already been dealt with, but I would like to look at just one and get some clarification from you. When you talk about enabling employees to have multiple roles, who are you talking about? Most of these people belong to unions, and unions have definite stipulations regarding the kinds of roles they have to play. I'd like some kind of reaction in that area.
Then I take a look at your conditions, the five of them you have stipulated. When I look at them overall, I see, in light of the fact that you have already stated that to be competitive these conditions must be met, what you're really saying is to be competitive you would like the support of probably the government and the dominant carrier and others to eliminate competition. There's a contradiction there.
I would like your response to those statements, especially the one about the unions, and in light of condition 3.
Mr. Gordon Thompson: I think the best way to describe this is if Air Canada woke up tomorrow morning, or indeed Canadian had during their battle, and decided they could probably sell the regional airline to somebody for—pick a number—$300 million or $400 million, and they were to sit down and negotiate with this group or any other group, therefore, to buy the regionals—and they're doing this on their own; they're not being mandated to do it—most of the conditions you see here today in this document would be items that would be negotiated on the table by whoever was buying that regional airline, because you're not going to buy Air Canada's regional airline if you don't have gates and slots and feeder. So we're not buying aircraft; we are buying that franchise. That's the context in which this either happens by negotiating with them, whoever winds up at the end of the day, or if they're not prepared to do it and it's acceptable to the Government of Canada that they be the dominant carrier in every aspect of the business, then fine, we're out of the game. If it's not, then that's the process we would have to go through. It would be to negotiate those conditions.
So they're there whether they're mandated by somebody or negotiated by a buyer.
Mr. Stan Dromisky: How about the unions?
Mr. Robert Deluce: Let me deal with the employee-related question. Basically, our business plan is one of expansion and growth, so we see this as being a positive thing for the employees that are involved.
Firstly, because it's an expansion-related plan, we do not anticipate any job losses.
Secondly, with regard to the restrictive clauses presently in place in the Air Canada collective agreement, if you remove the effect of that by selling off the regionals to somebody else, that effectively removes those clauses. If you remove those, you have an opportunity to introduce modern technology equipment. That means more opportunities, we believe, for the employees, including pilots, flight attendants, and others in these companies, and they haven't had that available for some time.
With regard to the unions, we recognize that there are many unions in place, and we would intend to work with the employees and their unions to bring about whatever changes have to be made in order to make this thing viable. We think it will be a lot easier for a regionally focused airline whose priority is its employees, to negotiate with, talk to, and take care of those employees and their unions, than it will be for an airline that's internationally focused and thinking about Tokyo and all those good places.
We are all very aware that there are competing interests between the mainline carriers and those that are regionally based. That's playing itself out at this very moment in some matters that involve the common employer issue that's before the CIRB.
So those issues, we think, go away, and the situation is a plus for Air Canada. Whether or not they recognize it, it's a plus for them and for the employees. It's a plus for this new airline if in fact we can put this together.
The Chair: Mr. Bailey, please.
Mr. Roy Bailey: Thank you.
After one month, you say, of being in operation, you come into this room and we'd almost think there was some kind of divine intervention here, but I didn't see any halos on any of your heads. Your plan is well devised.
Obviously, you've had some reaction. You're going to have to deal with Air Canada, Canadian, the workers, and all of this.
I'm interested in the comment you have on page 5, in the fourth paragraph, where you say:
Clearly, however, achieving commercial viability,
and the pro-competitive market impact that our proposal
offers, will depend upon the appropriate regulatory
environment being in place.
By “the appropriate regulatory environment”, do you mean that you would ask the government in some way to say to Air Canada or Canadian, look, these people have a good plan, now enter into a deal and negotiate properly and we'll have a dominant regional carrier? Is that what you were thinking of when you made that statement?
Mr. Gordon Thompson: Yes, certainly. None of us may have any control over it anyway, but if at the end of the day we wind up with one dominant carrier, then obviously the rules of engagement for everybody else who operates in this industry are going to have to change. Right now those two dominant carriers control all of the gates and all of the slots. How are the rest of us to compete at any end of the market if there are not new regulations put in place?
Mr. Roy Bailey: Does it make any difference to your group—and you're new on the scene, the new kids on the block—whether you take all of Canadian plus the regional lines of Air Canada, or would you rather just bid on the regional lines and let Canadian become whatever it will become?
Mr. Robert Deluce: Are you asking whether we would go ahead with just the Air Canada connector carriers and not including Canadian Regional Airlines?
Mr. Roy Bailey: No.
Mr. Robert Deluce: I'm sorry, I don't understand the question.
Mr. Roy Bailey: We have two dominant carriers. Canadian is the one that is in trouble right now. Your whole premise is based on one dominant airline. You want to get access to the regional carriers the two airlines have. What's going to happen to the national routes of Canadian and to that part of the company if you just go that route?
Mr. Robert Deluce: Our proposal is based on the assumption that in fact there'll only be one national carrier. Whether that is in the form of a merged entity, which now looks unlikely, or one carrier only and the other as a wholly owned subsidiary, we still consider that to be one national carrier. We haven't considered what would be done with Canadian, because we think that's outside of what we're focused on. Essentially, our focus is regional. We've looked at and are not interested in Canadian Airlines. That's for others.
Mr. Roy Bailey: Thank you.
The Chair: Thanks, Mr. Bailey.
Mr. Hubbard, please.
Mr. Charles Hubbard: That's okay.
The Chair: Mr. Comuzzi, please.
Mr. Joe Comuzzi: Thank you.
You have been involved with Canada 3000. I've always been impressed that those folks or the ones at Royal or the other charters can fly to some places with the same planes and sometimes provide better service than the nationals for about a third of the price. No one has ever been able to tell me why.
The Chair: More people have tried.
Some hon. members: Oh, oh!
Mr. Joe Comuzzi: But I still haven't got the answer.
I'll be frank. Regional airlines charge way too much money. The other day I took a 45-minute flight from Thunder Bay and it cost almost $600 return, going back on the same day. I could have walked around the counter to WestJet and flown to Calgary for about $280 return.
Mr. Deluce, with regard to service and the nice things you folks talked about this morning, sometimes the very price of the service means you have no service, if you get too far out of line. I see that in a lot of northern communities.
How are we as a committee going to lower the prices for the people who fly in the areas you anticipate flying in? How are we going to lower the cost of the service? I don't want to hear about maintaining the prices because of the cost of inflation, etc. The prices charged by the regional carriers in this country have to come down.
Mr. Robert Deluce: Our proposal basically speaks to bringing these four to five carriers together, and when you operate a larger regional network, there are efficiencies. Generally when you have efficiencies, those efficiencies should get translated into lower fares. And that's what we would intend to do.
The other thing that becomes a factor here is that when you allow these regionals to interline and code share with other parties besides the remaining dominant carrier, that in itself introduces some level of competition. You have for the first time an opportunity to interline and connect from a Canada 3000 or a Royal or a Transat flying from Vancouver to Toronto and on to Timmins and connecting at Toronto with the regional carrier. This is something that will introduce competitive downward pressure on some of those fares that you're obviously concerned about.
Mr. Joe Comuzzi: Everybody in the smaller communities is concerned. We have to have some assurance that these prices are going to come down.
Mr. Robert Deluce: I agree with you fully. I've lived in northern communities.
Mr. Joe Comuzzi: I know you have.
Mr. Robert Deluce: Our track record I think in that regard speaks for itself, and the team we've put together here really involves a lot of years of airline experience; it involves Newcourt Capital with good funding. You've got to go into these things on a good solid platform, and we think we're set up to do that.
Mr. Joe Comuzzi: Mr. Deluce, your prices...
[Editor's Note: Inaudible]
...when you sold out to Air Canada. You were operating a pretty good airline there and then you sold out to Air Ontario.
Mr. Robert Deluce: Well, I can't comment on what happened to prices after we sold.
Mr. Joe Comuzzi: You and Mr. Fontana have that elusiveness about some of those answers.
Mr. Robert Deluce: It would be inappropriate for me to comment about what happened to prices after we sold.
Mr. Joe Comuzzi: Thank you.
The Chair: Thanks, Mr. Comuzzi.
Mr. Michel Guimond: Thank you, Mr. Chairman.
The Chair: Just a reminder, colleagues, it's 12.06 p.m.
Mr. Michel Guimond: And the next witness will be at 3.30 p.m. We still have time.
The Chair: If you don't mind paying for the room from 12 p.m. until 3.30 p.m., Mr. Guimond.
Mr. Michel Guimond: Mr. Chairman, I'll try to be quick about it and go through my series of questions. The witnesses can take note of them and then respond. Mr. Casey did ask one of the questions I was planning to put to the witnesses regarding Inter- Canadian.
My first question is directed to Mr. Thompson. You can take it down and respond later. I'd like a little more information about Newcourt Capital. I believe the company is now listed on the stock market. Are the company's head offices located in Canada or in the United States? I'd like to know more about this company. If you have a copy of your annual report, I'd appreciate your forwarding it to the clerk, so that we can learn more about Newcourt Capital.
My second question is for Mr. Deluce. You talk about establishing two divisions, one in Eastern Canada and one in Western Canada. I'd like to know where you intend locating your head offices? Would they be in London, Ontario or in Hamilton, Timmins, White River, Montreal or Toronto? Can you answer that question for me?
My third question is somewhat more complex. As you know, one of the fundamental rights Canadians enjoy, one as important as the right of freedom of speech, freedom of expression or freedom of association, is the right to own property. You are successful, experienced businessmen. I'm confident that there are many future projects in the works for you. Life doesn't end at 40 years of age.
You're proposing that the new national carrier be required to divest itself of its regional feeder airlines and be prohibited from re-entering this sector for ten years. Do you realize what you're asking?
In short, you're asking the government to order a form of expropriation. In other words, if an agreement cannot be reached with the new management of Air Canada, or Air Canada II, over mutual acquisition, you're saying that the government should adopt, or that the committee should recommend that the government adopt, regulatory measures requiring Air Canada to divest itself of its regional feeders and prohibiting it from re-entering this sector for 10 years. This would be a clear violation of the fundamental right to own property. Would you care to respond to that?
The Chair: Mr. Deluce, do you want to comment on that? Or Mr. Thompson?
Mr. Robert Deluce: If I could address first the requirement for them to stay out for the 10-year period, I think this is not an unusual provision. We're familiar with 10-year agreements. We've seen them recently; the 10-year agreement that presently exists between Air Canada and the Star Alliance would be one example. A 10-year agreement is not unusual in the context of aircraft financing. Additionally, the agreement we entered into as Air Ontario with Air Canada back in 1987 was a 10-year agreement. So we think that's not out of the context of reality. We think that's needed and that's sort of normal.
Mr. Michel Guimond: I want to hear about the expropriation. In the first recommendation, you say the emergent national carrier must divest. This is a kind of expropriation you ask of the government. I don't want an answer only on the 10-year period. On the first part, is it in the direction of the right of property, of Air Canada to keep their regional lines, if they want to keep those lines? Will you ask the government to force the new Air Canada to sell those lines?
Mr. Robert Deluce: That is what we consider one of the essential conditions of our vision, in terms of the airline we're proposing to be involved with this network of regional carriers. We don't think there will be divestiture unless the condition of divestiture is attached to the approval they are given in return for being allowed to have the only mainline carrier.
You either want it one way or you want it the other way. If you want them to own not only the mainline carriers but all of the regionals and Air Canada Light and anything else that is moving, then I guess that's one consideration. But if you want there to be competition, then our basic business plan envisages a new company to be formed that in fact would be focused on the regional marketplaces, the small market communities. It would be committed to providing an alternative choice to Canadian travellers, and that's positive.
The Chair: Thanks, Mr. Guimond.
Mr. Joe Fontana: Mr. Guimond should know that the Competition Bureau in Canada, or even the justice department in the United States, always after they receive a proposal that it's mandated they look at, just like the CTA, may very well...
The Competition Bureau has already said a dominant carrier may have to do a number of things. This is what this committee and the government are going to have to consider, if in fact Air Canada and Canadian reach an agreement and there is a proposal. A public interest test must be done, and the Competition Bureau may tell them—
An hon. member: —
Mr. Joe Fontana: I'm saying that's going to be part of the scenario too. It's not as if the government is going to expropriate anybody, for God's sake.
The Chair: Okay, Mr. Fontana—
Mr. Joe Fontana: Can I just ask something? This is important.
There are a number of ifs here, but in terms of investment, do you think the 25% American rule is adequate? Have you any view on that, based on where you're going to raise your capital?
Secondly, will you be code-sharing, for instance, with the Oneworld Alliance and/or U.S. carriers in order to give maximum benefits to Canadians in those communities that... As you know, Canadian has one code-sharing arrangement with Oneworld and Air Canada has the Star Alliance. I think what you're asking for is maximum code-sharing with anybody and everybody in order to give consumers the choice.
Thirdly, if certain things happen, we're left, as a committee, to decide whether or not we want an independent regional-based company operating, as opposed to one that's controlled by the dominant carrier. At the end of the day, that's going to be the tough decision: whether an independent carrier, such as Regco here, is going to be the better choice for consumers than one that's controlled by a dominant carrier.
Could you just answer with regard to the investment and the code-sharing?
Mr. Gordon Thompson: I'll do the investing first, because the answer is short.
It's not a problem for us. The people who are investing in Mr. Deluce's airline are for the most part people who are involved in the financial service industry. They're not another airline trying to seek control of this operation. So we would abide by whatever the rules of the country are in that regard.
Mr. Robert Deluce: I can add to that, though, that in the submissions we made to the Competition Bureau, we did indicate to them that we had no difficulty with, and as a matter of fact supported, changes in the level of foreign ownership, up to a maximum of 49%. That was contained in our submission to the Competition Bureau.
In regard to the question of alliances, certainly alliances somewhere down the road need to be considered. We think it's a bit premature on our part to be thinking about who we would align with. We haven't yet found somebody willing to in fact talk to us about buying these airlines, so that's our first priority.
Mr. Joe Fontana: Code-sharing does the same thing. Would you be code-sharing with United or somebody else—USAir, Delta? Would you be looking for those kinds of code-sharing opportunities?
Mr. Robert Deluce: Without aligning ourselves with any particular alliance, we feel there should not be any restrictions on Regco in terms of who it could code-share with and who it could have commercial agreements with. That's essential if you really want competition.
Mr. Joe Fontana: Agreed.
The Chair: Just as a bootleg, I'll ask one quick question and ask for a quick answer from you, Mr. Thompson, since you're the financier. Mr. Deluce answered the question on the 25%. What about the individual ownership and the 10%? Should it be 15%, 20%, unlimited?
Mr. Gordon Thompson: The proposal before you contemplates the 10% rule, but the answer is very much the same, in that if that rule were to be changed, we would be supportive of a higher limit. But it's not germane to this proposal. We can live with it.
Mr. Joe Comuzzi: You can live with what's there?
Mr. Gordon Thompson: That's right.
The Chair: But they wouldn't be opposed to raising it.
Ms. Bev Desjarlais: I have three quick questions that can probably have quick answers.
First, what date did you make your presentation to the Competition Bureau?
Second, do you not consider the 10-year limit as a 10-year guarantee of you having the market strictly to yourself?
And third, by enabling employees to handle multiple roles, are you talking about specifically pilots being able to go to different aircraft, or are you talking about, say, flight attendants cleaning the plane instead of other things? I want the specifics of enabling them to handle multiple roles.
Mr. Robert Deluce: In answer to your first question, we made two submissions to the Competition Bureau. November 1 was one date, and the earlier date I think was somewhere around October 20 or so. If that's important, I can certainly get you those dates and we can get back to you with that. I don't know the specific dates. I'm informed by Mr. Thompson that November 1 was the date of one visit.
Secondly, dealing with the 10-year provision, 10 years is very much in line with the length of time that normally is in place when one buys something such as we're contemplating. You need some guarantees with respect to the business you're actually buying. Otherwise you might as well be out buying equipment and just doing a new start-up. So that's not an unusual provision.
With respect to competition, does that put us in any kind of dominant position? The position we'd take on that is there are still First Air, Bearskin, Canadian North, and others, such as WestJet. And we always will be competing head-on with the dominant regional carrier on the triangle and on some transborder routes. We're not looking to have exclusivity or this transitional business commitment with respect to transborder routes, but strictly the regional routes where the dominant carrier doesn't presently have competition.
Ms. Bev Desjarlais: And I asked a question on the employees handling multiple roles.
Mr. Robert Deluce: That's something that needs to be developed in discussion with the employees and their unions. We're not—
Ms. Bev Desjarlais: You speculated as to what you saw this being, so I'm asking what you saw it being, because you put it in your presentation.
Mr. Robert Deluce: We saw it being a cooperative effort in developing potential role-sharing opportunities and efficiencies, and—
Ms. Bev Desjarlais: To put this in a presentation, you must have had some idea of what you were looking at, so please clarify.
Mr. Robert Deluce: To try to clarify that one ahead of time, without having had discussions with the employees and their unions, really would be inappropriate for me to do. There are many things one could consider, but they're all very much dependent on discussions with the employees and discussions with their unions.
Ms. Bev Desjarlais: So I'll get no answer, obviously.
The Chair: Thanks, Ms. Desjarlais.
Mr. Bill Casey: Thank you.
Actually, as Mr. Fontana said, this boils down to the fundamental purpose of our committee: to help the minister develop policy. This has to be a policy if you're going to have any success. Is the government going to divest the regionals or force the divestiture of the regionals, or is the government going to allow them to not divest the regionals?
I don't know exactly when, but at the beginning of the minister's discussion on this issue, he said his preferred choice was to divest the regionals, if I remember correctly. I'm not sure where he said that, but he did say that. We haven't heard much about it lately, but we did hear about it at the beginning.
I'm just wondering what your timeframe would be. Assuming the minister did say we're going to develop a government policy on transport—which he hasn't done yet, but if he did say this was going to be the policy—then you'd have to negotiate deals with Canadian Airlines or Air Canada. Then you'd have to deal with the interests of First Air, InterCanadian, and all the other airlines in Canada. Then you'd have to go through the labour negotiations. What would you be looking for as a timeframe?
Mr. Robert Deluce: We're prepared to move very quickly. We're funded. This game plan has been developed over a period of time. We see the main obstacle that keeps our vision from being realized as the divestiture of the regional carriers by the dominant carrier. Until such time as that is put in place, there is very little more we can do.
Some of the issues, as they pertain to employees and as they pertain to unions that represent the employees, will be dealt with over a longer time period, while these airlines are being integrated. The one thing I can say that's positive in that respect is that our business plan contemplates expansion, and we don't anticipate any job losses resulting from what we're proposing to put together.
Mr. Bill Casey: If it were to go ahead, if the minister decided the policy in Canada was to divest the regionals, what would be the impact on the Air Canada plan? They have a three-prong plan: Air Canada, Canadian Airlines, and a low-cost airline. How do you think that would impact on them if they lost the regionals?
Mr. Robert Deluce: I can't speculate on that. That's something Air Canada has to size up and react to. I do know the plan itself is well thought through.
It ultimately comes back to whether we want better and improved service to some of these smaller communities and whether we want competition, both domestically and on a transborder basis. Our plan offers that.
Mr. Bill Casey: You'd really be competing with the dominant carrier on lines such as from Halifax to Montreal, right?
Mr. Robert Deluce: That's what's anticipated, yes.
Mr. Bill Casey: Okay, thank you.
The Chair: Thanks, Mr. Casey.
Mr. Deluce, Mr. Thompson, and Mr. Lizotte, thank you very much for making your presentation to our committee and answering all our questions. If you have any information to forward, please do so through the clerk of the committee so that we may all receive it. Thank you.
Mr. Robert Deluce: Thank you very much.
The Chair: Colleagues, we'll see you at 3:30 for our next meeting. We're adjourned.