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STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 17, 1999

• 1534

[English]

The Chairman (Mr. Stan Keyes (Hamilton West, Lib.)): Good afternoon, colleagues. I call this meeting to order pursuant to Standing Order 108(2), a study on the future of the airline industry in Canada.

This afternoon we'll be having a video conference, which means we'll be talking to someone far away via telephone and television. Our first witness is Mr. Herschel Hardin, who is a consultant with Herschel Hardin Associates. We'll also have witnesses at 4.15 p.m. and 5 p.m.

You will have to be understanding, in that I may have to cut off questioning. We'll have to stick right to schedule because of the vote and the circumstance of video teleconferencing.

• 1535

Keep in mind that it's lunchtime back where Mr. Hardin is right now and there can be difficulty if there is a lot of ruckus in the room, because Mr. Hardin will have a hard time hearing us and we'll have a hard time hearing him. But it looks pretty lonely and quiet where he is.

There is also a time lag in your questioning. You will have to wait until he's completely finished his remarks before you ask your next question, or you'll just be stepping on each other when you're trying to question each other.

Without further ado, I want to welcome Mr. Hardin to the Standing Committee on Transport.

Mr. Herschel Hardin (Consultant, Herschel Hardin Associates): Thank you very much.

Hello, everybody, members of the committee.

[Translation]

Good afternoon. I'm very pleased to be speaking to you today.

[English]

I should say there is a construction crane that swings to my right, so if I glance to my right it's not because I want to avoid eye contact with you, it's because I wonder whether I should duck or not.

The Chair: Very good. Just wait until we start the questioning, Mr. Hardin. You may be ducking—

Mr. Herschel Hardin: Maybe I should jump on that crane as it goes by.

The Chair: You have 10 to 12 minutes for your presentation.

Mr. Herschel Hardin: Perhaps I should say something about myself. I'm an author and only occasionally a consultant. I've had a longstanding interest in air transport going back 25 years or more. In 1974 I wrote a book called A Nation Unaware, which dealt with the development of the Canadian political economy. There was a section on the Trans-Canada Airlines domestic monopoly and the monopoly model.

Some time later, in 1989, I wrote a book on the ideological basis of the privatization movement, and there was a chapter in that book on the privatization of Air Canada. I've also written short pieces from time to time on our air transport dilemma.

As an author, I've also done major work on the private sector corporate world, particularly in the United States on regulation, and on investment and enterprise, not just in North America, but also in Britain, western Europe and Japan.

I just happen to also be on the board of a major corporation, the Insurance Corporation of British Columbia, although I should add that the views expressed this afternoon are strictly my own.

What I would like to do at the committee this afternoon is take you beyond the dogma of the day, particularly the dogma of market competition in all situations, and especially beyond the taboo against crown ownership and crown enterprise in this country. I also want to take you behind the game playing and fumbling we've witnessed in the last few months.

I would like the committee to focus exclusively on the business case, particularly the compelling business case for a single crown-owned integrated national carrier in the country. It's the only structure that makes sense for Canada.

What is that business case? If you've read my release, and I hope you have, you'll understand that the main element in air transport economics is the passenger mode factor—the use of capacity. By having monopoly control over all flights, schedules and equipment, one can match capacity to demand in the optimum fashion.

Secondly, a monopoly allows for the optimum distribution of flight times and the economics of scale of larger aircraft. It similarly optimizes the domestic and international route interconnections. All of this translates into lower fares and better service. It translates into lower fares and better service if you take the next logical business step, which is crown ownership, because only public ownership can protect air travellers against fare gouging.

That's the main argument, but I want to touch on some aspects of the model of a crown-owned monopoly I'm presenting this afternoon.

• 1540

First of all, regulation of the private monopoly carrier or private dominant carrier just won't work in this situation. It doesn't take into the account the ability of a powerful player to manipulate the regulatory agency. This is known in economic language as regulatory failure.

Secondly, a public monopoly paradoxically enhances competition. At home, the monopoly is an intense benchmark competition against American fares. Of course it competes internationally against other carriers and alliances, but with a stronger integrated airline, in order to meet that competition.

We're looking at two altogether different dynamics in this situation. One is crown ownership, which favours travellers, and the other is private monopoly ownership or private dominant ownership, which works against passengers.

Let me explain. If it's owned by private shareholders, virtually controlled by a corporate bureaucracy serving institutional investors, the main impulse is to maximize returns and hence maximize fares. That's the main dynamic of that kind of model.

With crown ownership, on the other hand, the internal dynamic is to show how good one is and bring fares down to the American level and below the American level, even though the American industry has higher densities. There's also tremendous external pressure on the single publicly owned carrier to bring fares down. There's no incentive at all to maximize fares—quite the contrary.

You have two different dynamics. One is to maximize fares, which is the current structure of ownership of Air Canada if it becomes a single dominant carrier. The other is a crown-owned carrier, whose main dynamic is to bring fares down to the lowest possible level. Competition in that case is against the United States, taking advantage of our Canadian situation.

I might add that this whole situation is being looked at as a dilemma and a problem. But if you're ready to consider crown ownership, it becomes not a problem but a tremendous opportunity.

Another element of the model is integration. Integration has its own dynamic, using control over flights, aircraft and connections to optimize the best use of your airline and hence bring fares down. So integration, far from being a negative because it eliminates market competition, is actually a tremendous positive because it introduces a dynamic in favour of the travelling public.

Finally, if the public is going to pay for the restructuring of our airline industry, which it is going to do willy-nilly, then it might as well own the airline at the same time; otherwise it will just be giving money away.

So there it all is: a single carrier, optimizing the use of capacity, the economies of scale of larger aircraft, and the use of its international routes and domestic routes together, in favour of lower fares for the public if it is crown owned.

[Translation]

That's the result of the analysis: a single integrated airline, and in order for it to be used to the advantage of the country's passengers, ownership of that airline by the public itself. That's the only solution that suits the situation here in Canada.

• 1545

[English]

I'm assuming you're going to take my place, and I'll tell you why. For the last 25 years we've heard rhetoric and arguments about the wonderful beauties of market competition and deregulation. Take it all away. Remove the barriers to entry, and there's going to be all kinds of new entrants, fares will plummet, and we'll all live happily ever after. All of the blind, dogmatic business academics, all of the financial business columnists, and—I hate to say this—almost all of the politicians, cabinet ministers, and ministers of transport went through the same dogmatic rhetoric.

On the other hand, despite the taboos about it and despite having to fight against conventional wisdom, all this time I argued the benefits of integration, because I was arguing in terms of business cases and the airline industry itself. I've been proven right, and the others have been proven wrong. So it's likely that in arguing the second logical business step, crown ownership, I'm also right.

The Chair: Mr. Hardin.

Mr. Herschel Hardin: I'm right because I'm not dealing with dogma, theory, or speculation in both those cases.

The Chair: Mr. Hardin.

Mr. Herschel Hardin: Thank you very much, and I'll take questions.

The Chair: Thank you very much, Mr. Hardin. You said you're assuming we're going to take your advice. I was in television news for 16 years, and the first rule I learned was that you never assume anything.

We'll go to questions, colleagues. Just a reminder to make sure you let the witness finish speaking first, or we'll be stepping on each other because of the way the system operates.

Our first question will come from Val Meredith.

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

Mr. Herschel Hardin: Hi.

Ms. Val Meredith: I think it will come as no shock to you that I totally disagree with your premise. I think the facts will show that crown corporations do not bring lower prices. They often create huge bureaucracies. I think we can look at Petro-Canada, which cut its workforce from 11,000 employees to 4,600. They never brought down the price of gasoline at the pumps. There was never any real competition. We can look at the railways. The same thing happened there. We can go closer to home and look at BC Ferries. We can look at where there were very bad management decisions. We've seen an increase in the consumers' price to use the ferries.

I would suggest to you that crown corporations do not offer any competition because they're protected. They don't have to worry about the bottom line or efficiencies because they use the taxpayers' largesse. I think you will find with Petro-Canada, the railways, BC Ferries—I could go on and on—that they are not competitive, they don't bring prices down, and they don't bring efficiency.

So you will not find any support from me for going backwards in time and having governments and the taxpayers being on the hook for industries such as the airline industry.

I think we've seen around the world that the move in the 21st century is toward competition, privatization, being efficient, being good at delivering a service, and being competitive.

I will not give any kind of support for what you are recommending here. I will give you a few minutes or a minute to respond to my comment.

The Chair: Thank you, Ms. Meredith.

Mr. Herschel Hardin: I was wondering if there was a question there.

Competition isn't the way things are going in the airline industry, except competition between very large alliances. Integration is what brings economies into the airline industry, which is why things have been going that way, contrary to the theory about the last 20 or 25 years that you have just put forward.

With regard to the relative efficiencies of crown and private enterprise, it all depends on how you pick your cases. I've written a book on it, The Privatization Putsch, and if you have $30 and want to give it to me, I'll be glad to send you a copy.

A voice: That's capitalism for you.

Mr. Herschel Hardin: Major cuts and efficiencies have occurred in state enterprises or in Canadian crown enterprises, depending on where business management is at the time. Trans-Canada Airlines, with its domestic monopoly, was a wonderfully efficient and superb airline, and Air Canada, as a crown carrier in a somewhat competitive market, was also a very good airline. We have very good models of how a crown monopoly works. Automobile insurance is far more efficient under monopoly crown ownership than it is under private market control. Although we're getting beyond corporations, we might mention the same thing for medical care systems.

• 1550

This is an important question, and I appreciate your bringing it up, because I think this is the real problem, an ideological screening out of crown enterprise and a selective choice of examples. When I looked into the subject, I went back to where the privatization movement began in Britain under Margaret Thatcher, and I discovered there was no practical reason for wholesale privatization, that it was ideologically driven.

Let me give you the context.

The Chair: You have 30 seconds, Mr. Hardin.

Mr. Herschel Hardin: Yes. The comparison was made between Britain, the sick man of Europe, and France and Germany, economic miracles. The basis of the difference was largely the automobile industry and the spinoffs that occurred from it. That was the difference between the three countries. In France and Germany the major automobile companies, Volkswagen and Renault respectively, were state owned. In Britain a major failure, British Leyland, was privately owned.

So if you look at the big historical picture, you'll see that crown enterprises and state enterprises have played a dynamic, creative role in the development of western economies. Again, I would be willing to give you a copy of my book.

A voice: No, thank you.

The Chair: Thanks, Mr. Hardin.

Mr. Sekora, please.

Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): I was just wondering what was in your tea this afternoon when you were drinking it.

You show me one business the government has ever gotten into that has been very successful. Show me one that became successful after the government took it over, outside of maybe the liquor stores and what's happening in British Columbia. If a businessman went in there, it would probably be twice as successful.

Mr. Herschel Hardin: Mr. Sekora, come on.

Mr. Lou Sekora: Well, tell me. I'm trying to listen.

Mr. Herschel Hardin: Trans-Canada Airlines and now Air Canada are wonderful airlines. CN, depending on exactly when you measured it, was a very good railway line. I've done work on the benchmarks over the history of the CNR.

Automobile insurance is another case. Let's take the companies that were most recently privatized. Manitoba Telephone System and the municipally owned Edmonton Telephone were efficient, dynamic, creative telephone systems. They weren't privatized because they were inefficient; they were privatized for ideological reasons.

Mr. Lou Sekora: I don't know that the automobile association is so successful with the government running it. I haven't seen anything so successful...for instance, the air care and stuff and just pouring millions of dollars into it. How efficient is that?

So we can go back and argue over and over again, but I'll tell you what, Mr. Hardin. I'm from British Columbia. You couldn't get me to even discuss the federal government putting millions of dollars into a hole and keep putting millions of dollars back into the hole, and this dark hole keeps going deeper and deeper, and the taxpayers are forever paying for it.

So I think you and I disagree, which is fine, but that's one tune I'm not going to play.

Mr. Herschel Hardin: Do I get a chance to respond, Mr. Chairman?

The Chair: Yes, Mr. Hardin, please go ahead.

Mr. Herschel Hardin: Very briefly, the lowest automobile insurance rates in Canada are in Saskatchewan, Manitoba, and B.C. They are publicly owned partial monopoly systems. The operating expense ratio of ICBC is half the average operating expense ratio of private companies in the automobile industry.

Now, Mr. Sekora, I'm not going to convert you or Ms. Meredith if you're not willing to look into the particulars of the situation. There's nothing I can do. But what I would like this committee to do is to accept the possibility that crown ownership is the best possible solution and to take your time and look into it.

The Chair: Mr. Hardin.

Mr. Herschel Hardin: This is what we're looking at—a simple carrier, a dominant carrier.

The Chair: Okay, Mr. Hardin.

• 1555

Mr. Herschel Hardin: By this time, I think that is a given. If you have a dominant carrier, then what is your next step? Do you leave it under the kind of ownership Air Canada has now, which I think can be disastrous for passengers, or do you bring it under crown ownership, whose dynamic favours the air-travelling public?

The Chair: Thank, Mr. Hardin.

You might now want to use CN as an example, since CN was losing $100 million a year before it was privatized and now makes $600 million a year under its present system.

Mr. Michel Guimond, please.

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Thank you for your presentation, Mr. Hardin. I will try to stay serene in the face of it.

Don't you think that your proposal is going somewhat against the tide? In my riding, we have Montmorency falls, that are 30 feet higher than the Niagara falls. I get the impression that you're in a little rowboat that's aimed directly at the falls at that you're rowing against the current. I therefore have some difficulty understanding your presentation.

However, I respect the opinion you have expressed because it comes from you. Our committee hears testimony in order to find out the opinions of various people, and I thank you for your presentation.

If our committee supported your presentation, that would mean that it felt that the decision taken recently in England regarding the privatization of British Airways was a bad one. That would also represent an avowal of the failure of the government of the time that privatized Air Canada. In other words, what you're asking for is for us to take a step backwards.

[English]

Mr. Herschel Hardin: Let's deal with the waterfall first. We're at the top of the waterfall, and of course I'm paddling upstream. I don't want to go over the waterfall, and I want to stop you and this country, stop decision-making in this case, from allowing that disastrous course to happen.

Yes, I do believe the privatization of Air Canada was indeed a mistake.

I want you to think about it. You've been talking about how I'm arguing against the current, which is true. We've been talking about how this is a different kind of opinion, and you're a bit surprised because there has been a taboo about arguing the business case. What I would like the committee to do is to get beyond that and to look at the actual particulars of how the airline industry works, at the actual history of crown enterprise in Canada, and make the decision in terms of what is the most compelling business case. If you get that far, then I'm confident that once you get into it and begin thinking about a different option, beyond the taboo, you will see the practical business logic of what I am recommending.

The Chair: Thanks very much, Mr. Guimond.

Mr. Murray Calder, please.

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

Mr. Hardin, it's very interesting. I'm reading through here. In fact I'll give you some of my background history. I was on the CN task force in 1995 for the privatization of that company. The history behind Canadian National is that it was formed in 1934, and from 1934 to l995 the Canadian taxpayer put $100 billion worth of taxpayers' money into a company that had at that time a book value of around $5 billion and was carrying $2.5 billion in debt. We had to sell off real estate to get them up to a triple-B credit rating so we could issue common shares. That is the history behind CN.

• 1600

I'm interested, though, because you're following along a little bit in line with some of the things I've heard.

You're talking about a public monopoly carrier, so you're talking about one air carrier here in Canada. You're saying the passenger load factor makes a lot of sense because the planes would be running at pretty close to 100% capacity and basically the optimum use of equipment.

What we as a committee have been charged with is, first of all, to see whether we can't find a vision of what the passenger airline system is going to be in Canada in the future, and then from that, once we've established that vision, to try to put policy around it to make that vision happen. I would like to hear what you think we should be doing in the line of establishing policy for a one-airline carrier. Whether it's a publicly owned one or a privately owned one, that would kind of fall.... But what type of policy would you see we should have in place to achieve that?

Mr. Herschel Hardin: There are really two parts to your comments, and I should address them.

CN was actually formed in the 1920s, not the 1930s, and it had periods of great productivity, particularly during World War II, and particularly in the 1920s before the economy crashed. But you also have to remember when you discuss the CN that the CN was under a legislative obligation to maintain inefficient branch lines or branch lines that just weren't sufficiently productive, and they were very costly.

Those kinds of costs were not of CN's own making; they were of the making of public policy. If you look at the benchmark comparisons of railways in the 1970s that factor in the obligations that CN had to maintain those branch lines open and make some adjustment accordingly, then CN ran very well among railways in North America.

So one can't make sweeping statements about the performance of a company without looking into the particulars, what actually affects that company in particular kinds of results.

In terms of the recommendations the committee might make, I can only repeat what I've already said. On that integration, not 100% of capacity, because you balance off service against maximum use of capacity—I'm talking about optimum use of capacity, scheduling, flight times, aircraft, and international connections—I think we all must agree by now that a single integrated carrier or a major dominant carrier is the logical business option.

So if you've got that far, then the next question arises. It's not a secondary trivial question that falls by the wayside; it is the major question about what you do given that option. If you have a single dominant carrier or a monopoly carrier, if you look at the dynamics of a public monopoly competing against American benchmarks, with no incentive to raise fares, as different from a private carrier with every incentive to play the regulatory agency on a string and to raise fares in order to please institutional investors, I think you'll actually see the crown ownership option has a lot of logical sense to it.

The Chair: Thanks, Mr. Calder. Thanks, Mr. Hardin.

Ms. Bev Desjarlais.

Ms. Bev Desjarlais (Churchill, NDP): Thank you, Mr. Hardin. I just want to tell you that I appreciate your bringing a different perspective.

I believe we as a committee, and certainly I as a committee member, feel that it would be irresponsible of me as a representative of this committee to not hear all the options that are out there. To have voiced outright that I was not willing to do that as a committee member and to automatically be opposed to an option simply because I have an ideology in my head that just doesn't fall into line with it is, I think, irresponsible. So I want to thank you for bringing your option forward for all Canadians to hear, so that it can be looked at.

As you've indicated, Air Canada as a crown corporation was not a failure. It was profitable, and it wasn't until it was privatized that it began to lose that profit. Competition and deregulation have led us to this crisis, and I think we have to look at some way of changing the status quo so we don't continue going over that waterfall.

• 1605

I know you've suggested that crown ownership is the route to go. You as well as I know that there doesn't seem to be a great climate out there for crown ownership even though your arguments are very valid. In a lot of cases I think you could prove that crown ownership has been successful in a good number of instances.

Should crown ownership not be seen as an option, do you see any other options out there where there is some hope of success? Is there any chance, in your mind, that two airlines may still be able to survive? Is there anything we can do that would give two airlines an option of survival?

Mr. Herschel Hardin: Niche carriers are going to survive anyway, so that's not really a major question. We're talking about two major carriers. You can have two major carriers where they allow fares to rise to the point where both of them are secure and comforted and they make money and pay their executives the large salaries executives come to expect. You can have all of that, but you lose the efficiencies of integration. I can visualize it, but why would anybody recommend that?

Even if one could stabilize Canadian Airlines and have two major carriers, we would go back into the position of a phoney competition, where effectively the two carriers agree on what the fare structure would be.

The history of most of our airline industry since the monopoly was broken up in 1958 is that capacity was not properly utilized and fares were much higher than they should have been. I don't think any of us want that. On the other hand, the public monopoly model optimizes the efficiencies.

I want to make a comment, though, on what you said about there not seeming to be much of a groundswell for this option. It's not surprising, because everybody is afraid to talk about it, everybody is afraid to breach the taboo. Start talking about it; spend some committee time, resources, and research into developing the model so you have the model to compare other possibilities with.

The Chair: Thanks, Ms. Desjarlais.

Just to correct the record a bit, Ms. Desjarlais had mentioned that Air Canada was making money and that it was a mistake to privatize it. It did make money in some years, but whenever it needed new aircraft or equipment it came to the Government of Canada for it. That's why when we privatized that airline we forgave the debt of Air Canada, which was between $600 million and $1 billion.

So the profitability is there if you don't have to buy the equipment. The proof of that, of course, is how much money had to be forgiven on the debt of Air Canada when it did privatize.

Mr. Herschel Hardin: Buying equipment is a capital expense and presumably in one's results one's paying for the depreciation on that capital expense, the cost to the shareholder. So if you're a private company and you issue shares, is that the kind of subsidy? No, it's new investment. In the case of the crown, it helps to provide the—

The Chair: The difference between your shareholder, which is the Canadian taxpayer, and my shareholder or someone else who believes we should not go to a crown-owned corporation is that the shareholders are the people at the stock market who make the investment. There is a huge difference in who our shareholders are.

I have one more questioner for you, Mr. Hardin.

Mr. Bailey.

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): I'm glad you mentioned my province, in particular, and automobile insurance. I'm not going to get into that, but I want to make reference to what you describe as the great success of Air Canada.

I'll ask you this question: If that airline was such a great success, what gave rise to such airlines as Wardair, Canadian Pacific Airlines and many others? It was simply that that monopoly was not providing a service, and it left an opening there for these people to come in and provide a service. A monopoly does not guarantee a service nearly as much as competition does. You probably would have to agree with that.

• 1610

Mr. Herschel Hardin: No, I don't agree, because it wasn't the case.

Mr. Roy Bailey: But it was.

Mr. Herschel Hardin: Pick up a copy of my book, A Nation Unaware—I'm sure it's in the parliamentary library—and read about the Trans-Canada Airlines monopoly model. The monopoly was broken up not for any practical reason. The government commissioned a consultant study by a British economist called Stephen Wheatcroft. He did a thorough analysis of Trans-Canada Airlines. He found that it was a superb airline except in one respect: public relations. The public just did not believe how good it was.

I'm not saying this is my opinion. I was just a teenager in 1958. This was Wheatcroft's analysis that Trans-Canada Airlines was doing a superb job.

John Diefenbaker and George Hees followed the American model. Ever since then our fares have been higher than they should have been.

Read my book, read the case, go back in history.

The Chair: Mr. Hardin, the Standing Committee on Transport, my colleagues, want to thank you for a refreshing presentation from your point of view on a single crown-owned Canadian national airline. We appreciate the time you spent with us.

Mr. Herschel Hardin: It was a pleasure, and I hope you will look further into it. Thank you very much.

The Chair: Colleagues, our next witness is Mr. Daryl Atamanyk, who is an educationist.

Mr. Atamanyk, we welcome you to the Standing Committee on Transport. We invite you to give us a 10-minute presentation so then we can embark on questions to you.

Mr. Daryl Atamanyk (Individual Presentation): My mother wanted me to be a lawyer when I was an 11-year-old kid, but I wanted to be an efficiency expert in industry. I pursued wisdom instead, philosophy and psychology first, and later theology and history. I find it somewhat odd that I've come full circle now, seeing myself facilitating the human efficiency in industry, happy, conflict-free, coming back to my childhood dream.

The implementation of this proposal will produce happiness in 40,000 employees upon whom depends the happiness of 80,000 children and spouses at home, and in the air the happiness of every single customer.

• 1615

The most important thing I can impress upon you at this moment is a sense of the numbers reflecting my proposal's advantage for Air Canada shareholders over and above Air Canada's present trajectory of purchasing 35% of outstanding common shares for $16 per share.

In front of you is a chart. This is not rocket science. This represents 10 shares and what they'll be worth in 10 years. In the left-hand column, purchasing 35% of the outstanding common shares for $16 per share—we have, of the 10 shares, 3.5 shares purchased at $16 per share, which is $56. The remaining shares, which it is expected will be worth approximately $14 per share, times six and a half shares, is $91. If the shares happen to double in the next 10 years, you have another $91. And for the sake of argument, your actuaries can plug into this template the most accurate of numbers. If there are 7% dividends on the original $91 in shares over the next 10 years, you have money doubling at 7% in 10 years, another $91.

The original $56 provided to the shareholders, if invested at a gain of 7%, would yield another $56. So at the end of 10 years you have $385, doing it the Air Canada way. The left-hand column adds up to $385.

The right-hand column represents the method by which I will do it—$14 per common share for 100% of the common shares, plus half a share for the common share presently owned in the new entity. So right off the bat they get $140 for their 10 shares. Their half a share for each of the 10 shares times $7, half a share, is $70. If this doubles in 10 years, you have another $70. And because my proposal suggests that long-term corporate debt be paid to zero before any dividends are paid on the common shares, there's no entry for dividends for the shares. However, this doesn't mean there isn't any value being created by those dividends being plowed back into the company. Lastly, if we have that original $140 they receive for their 10 shares on day one, you have another $140 after 10 years if they make 7% on that per annum.

So you can see from these two charts that for the Air Canada shareholders, shareholder value is more if the shares happen to double.

If you go down another level, you'll see that if the shares triple in value, doing it my way allows for even greater shareholder value. It's only when the shares begin to quadruple and quintuple that the Air Canada shareholders are financially better off doing it their way.

The point of taking you through these numbers is to show how it is that Air Canada's shareholder advantage is realized by having employees participate in the manner I will soon outline for you.

Immediately before I outline this for you, let us all be cognizant of this. Before fantastical capital gains can be allowed to accrue in the airline industry we must verify that the public interest is satisfied. If you make it quite clear that the price of shares will not be more than tripling or quadrupling in the next 10 years, it opens the door to that which I propose for employees and Air Canada shareholders.

Even if Air Canada shareholders can just equal their return on the present trajectory, implementing the proposal I'm about to outline, the profound social advantages, corporate advantages, employee advantages, management advantages, customer advantages, and on and on, provide for the shareholders a course of action that only wisdom dictates.

You must make clear what the numerical facts are so that all parties can made a decision in the public interest based on the facts.

Please turn to page 2 of my presentation. We'll begin at what is proposed, paragraph 6.

The new company retains the Air Canada name, the common shares of which will be owned 100% by present Air Canada shareholders, who also will receive $14 per common share for 100% of their present stake.

In a new company, the number of non-voting common shares equaling the number of voting common shares will be owned 100% by the present employees of Air Canada and Canadian Airlines. They will have equal shares each, labour and management alike.

• 1620

The voting and non-voting common share ownership above precludes an undue pressure being brought to bear on the management of Air Canada from any one deemed entity. It further allows labour to work out its problems with management as per usual by way of the present methods used, with which all labour and management are familiar.

The offer to all concerned is conditional on employees giving management unfettered freedom to transform the airlines into the planet's best, subject to protection of safety; preservation of wages and benefits as per collective agreements; 5,000 positions immediately eliminated; no lay-offs, the rationalization of labour occurring by consensus; shareholders of Air Canada agreeing; accommodating AMR, that it may retain its service agreements with a Canadian entity, namely Canadian Airlines, which will remain a subsidiary of the new company; AMR also subject to having a seat on the board of directors for Canadian, although no common share equity stake or veto power; and AMR's agreeing to be treated like all other creditors in the financial restructuring, done pre-insolvency or after, whatever it is that AMR decides—and what it decides will be in the public interest as well as AMR's best interest, the two, I suggest, being co-related—and lastly, government regulation and concurrence, respecting the public interest.

When conditions are met, then a bid for $2.667 billion is made for Air Canada and $83 million for Canadian, a total of $2.75 billion, $900 million of which is financed by cash on Air Canada's books, and the remainder, $1.85 billion, financed by employee self-rationalization of labour, saving money enough to pay dividends payable annually on preferred shares issued by the new company—this is a straight dividend preferred share issue, just to keep it simple at the moment—which raises the $1.85 billion required by employees.

For example, the dividends payable annually on preferred shares totalling $1.85 billion, with an 8% dividend, equals $148 million. With 5,000 positions eliminated at an average of $59,000 in annual wages and benefits per position, the annual savings before tax is $295 million, leaving after taxes enough to pay the dividends on the preferreds. So $148,000: one-half of the annual savings of $295 million pre-tax.

I explain it to employees like this: Your sacrifice of 5,000 jobs, your suffering, saves enough money that it becomes attractive for someone to purchase the companies. Your suffering, in effect and actuality, puts the company into someone else's pocket. I suggest to you that if your suffering will generate profits enough to pay for the purchase of the company, why not put the company into your pockets, at least in proportion to what your suffering can finance. I suggest to you as a target 50% of the company born from these proceedings. It's a simple equation. Either your sacrifice flows into someone else's pocket or your sacrifice flows into your own, using corporate financing.

At the end of the day, there is only one question: do you want to suffer to put the company into someone else's pocket or have it go into your own? Guess how employees respond? I know how they respond.

Let the market decide. Don't stampede the shareholders. Don't cause events to be so rushed that employees do not have a chance to respond consensually to this proposal in the public interest.

If and when this proposal is realized, we then will see the companies eliminate the major problem, namely overcapacity, and proceed thereafter by building, including the Hamilton hub, three independently run—trivesturable, in contrast to divesturable—business entities, planned with trivestiture in mind, timed to occur when long-term debt is reduced to zero. Let us plan it for 10 to 12 years, a long-term investment with a rather large secondary offering upon trivestiture.

Now, I have just mentioned long-term debt at zero. In order to esthetically and practically finesse that which I propose, I would like to see prospective owners promise to use all corporate net profit before any common share dividends are paid to pay down long-term debt until that debt is zero, zero at the time of trivestiture. May the holders of this long-term investment let Robert Milton exercise his expertise by way of a method that satisfies Robert psychologically. You have in Robert a competent, well-motivated fellow—in touch with his ideals, I surmise. Inspire him with your trust; he does great things for you. Think of this: all three entities following trivestiture will be debt free, able to keep balanced budgets, any deviation from which thereafter is something that is readily apparent. Imagine using the yardstick of freedom from indebtedness to measure financial health.

• 1625

What does this do, this freedom from indebtedness? It creates three very healthy, competitive, progeny companies. More importantly, however, it creates a model way of returning to health, corporations made ill by the business class.

I ask you, why should employees not have a say in who purchases the companies? If they have a say, are given a real say by you, they just might say yes to self-ownership. But give them a say; not the unions, the employees. They have a right to say and they have a right to respond with consensus to a viable alternative proposal.

In this presentation, I lay out before you not only a viable alternative proposal but also one that's far more enlightened than the other two by themselves with respect to the public interest.

This is a six-step transaction. First, the federal government facilitates meeting employees, and then focus groups immediately, followed by general meetings.

Second, if by consensus employees will themselves to do this, then those who wish an equal share each of 50% of the company's common shares can sign the agreement. Consensus is defined as 95% to 100% in agreement. Those not wishing equal shares can choose to not receive them.

With the agreement signed, a team of government-appointed personnel, representative of Canada's airline and financial industries, meet with institutional investors to determine, by consensus, the fairness of provisions to be found in an expected private placement of preferred shares, the value of which equals $1.85 billion—

The Chair: Daryl—

Mr. Daryl Atamanyk: —the funds so raised for repayment of interim financing, if such financing is at all necessary.

The Chair: Daryl—

Mr. Daryl Atamanyk: On achieving consensus, institutional investors—

The Chair: I'm sorry, Daryl, but you're at your time now. If you want to take a few seconds to wrap up, we can ask you a few questions. Just take about 30 seconds.

Mr. Daryl Atamanyk: Certainly.

I have a prepared text for the following questions: How is this in the public interest? What did I learn from my CN Rail experience, attempting to privatize CN into employees' hands? What do I have to say to all the players? Why am I doing this? And what do I mean in point 11 of my executive summary?

I'm finished, Mr. Chair.

The Chair: Thank you very much, Daryl, for your presentation.

We'll go to questions now, starting with Val Meredith. Val.

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

Mr. Daryl Atamanyk: Please, call me Daryl.

Ms. Val Meredith: All right, Daryl.

You made a couple of points in your presentation that I would like to follow up on. You said the offer would be conditional on the employees giving management “unfettered freedom” to transform the airline.

I think what we've heard from witnesses is that the management in Canadian and Air Canada have unfettered decision-making, and that it hasn't always been the best decisions. So I think you would find that there would be resistance from the employees toward giving management complete control and complete authorization on their behalf to make decisions that may not be in their best interests.

The other issue I want to raise with you is the employees investing in the corporations. I could be wrong, but I believe Canadian employees definitely have invested in Canadian Airlines International, and I believe Air Canada employees have also invested in their company. So I don't think what you're presenting is a brand new idea. Employees, if they have confidence in the companies, already invest. The question is whether they want to invest everything and not have something else there for them to provide job security and financial security.

I would like you to respond to those two issues of management being endorsed by their employees to do whatever the heck they want and the fact that employees may be a little bit resistant to the degree to which you would want them to invest.

Mr. Daryl Atamanyk: I put it to employees in this manner. I suggest to them that by way of this preferred share method of financing, equal share each of 50% of the company, they have an opportunity to free themselves from both exploitation and conflict in the workplace without having to put out a cent from their pocket. They find that there is a great deal of appeal in this idea.

• 1630

It's been popularly suggested—for example, in the CN Rail experience—that the employees need a certain amount of cash to invest in the company. I suggest to employees that what they need is not cash but equity, and they have the equity in the form of offering their cooperation.

For example, Air Canada is suggesting 2,500 layoffs. I would be suggesting to employees that they could in fact offer that 5,000 positions be eliminated as easily as this: working four hours per week less, on average, this year; three hours less the following year; two hours less the following year; and through attrition, after four or five years, work the full number of hours a week again, as they normally do.

So it's as easy at that to spread the pain in an egalitarian way to help Air Canada realize far more efficiency gains than they otherwise would.

Offering unfettered freedom does not mean we'll go back to the days of the early Industrial Revolution. It's a method of conveying to management that there will now be cooperation between unions and management, somewhat more than before. It will facilitate communication between different unions, between the same unions in different companies. It will facilitate communication between union and management, with everyone being on the same frequency. It will facilitate the communication down the chain of command of management. It will facilitate communication between the employees and the public.

The social health advantages alone, if they could realize this ideal of working in a relatively conflict-free environment, would be immense.

The Chair: Thanks very much, Val.

Murray Calder, please.

Mr. Murray Calder: Daryl, very interesting.

I'd like to go to page 7, the executive summary, point 8, where you write, “5,000 positions eliminated; no layoffs”.

Explain that to me. Do these people just get the pink slip; “It's been fun, see ya”? Who are these 5,000 employees? Are you talking about 5,000 employees out of Air Canada or 5,000 employees out of Canadian?

Mr. Daryl Atamanyk: What I'm suggesting, in the first place, is that rather than eliminating the employees we should be eliminating the positions. I would prefer to see employees kept on. I think it's a poor use of capital to buy out employees and then lose these valuable trained employees.

It's to have everybody realize, in their pocket on day one, the equivalent of approximately $33,000 of stock, which, over time, it's assumed, will appreciate due to their cooperation and growth in the company. It's better to keep these employees.

The no layoffs gets back to what I was saying to Ms. Meredith. They can eliminate 4,000 positions simply by working four hours less, on average, per employee for one year, in the following year work three hours less, and the following year work two hours less, and the following year work one hour less, and then back up to full-time.

Mr. Murray Calder: Daryl, perhaps I can interrupt here. When you say “eliminating positions”, doesn't that just mean to say that you're eliminating their jobs? As well, by coming back and saying they're going to work four hours, isn't that a part-time job? How would these employees be able to survive on a part-time job?

Mr. Daryl Atamanyk: No, what I'm saying is that of the 38,000 employees, if they want to put $33,000 worth of stock into their pocket and together own 50% of all these jumbo jets, etc., and if they don't want to have anybody laid off—and it seems to be a priority of theirs not to have people eliminated—then next year, just for one year, they can work, on average, 36 hours instead of 40 hours; the following year, 37 hours; and the following year 38 hours. Attrition allows them to work an hour more a year.

But working those four hours less this year and then three hours less the next year and two hours less, and then one hour, and then back to a 40-hour week, will allow them to pocket stock that may, in ten years, through gains in efficiency and growth of these companies, yield them $100,000 worth of stock in their pocket for these minimal sacrifices up front.

• 1635

The Chair: Thanks, Mr. Calder.

Mr. Guimond, please.

Mr. Michel Guimond: Hello, Daryl, Michel Guimond speaking.

I will speak in English because I would like to be clear on the facts for the record.

I met you in September. I was in my office in Ottawa and received a phone call from the security guard that there was a person who wanted to see me. I opened my office to you for 10 or 15 minutes, and you asked to appear before the committee as a witness. I gave you the phone number and the name of our clerk. So this is why you are here; our clerk invited you.

As I mentioned when we had our meeting in September, I have a problem understanding what your main goal is in this field, and I still do when I read the paper in front of us. For example, you state on page 18:

    ...I desire to initiate in schools a fund raising project, the goal of which is to see schools financially self-sustaining in one and one half centuries (or so).

I don't know if we will be there in 150 years, but do you have a shorter goal than that to have money? I also have a problem understanding this type of comment in terms of how to link it with the study we're doing.

My second question is very short. I have here your press release dated November 10. You sent out a lot of copies. I still have a problem understanding what they do with our study. You sent a copy to Cardinal Ambrozic, a representative of the Vatican. I don't know why. You sent a copy to the White House, to the special assistant to the President, and another copy to the People's Republic of China ambassador.

I have a problem understanding why they are interested in our study.

Mr. Daryl Atamanyk: Thank you.

I'll begin with the People's Republic of China. They're about to embark upon a path where literally millions and millions of people are going to be laid off. The social dislocation will cost more than just money; psychologically and socially, the cost will be immense.

I hope to create a model whereby layoffs become unnecessary and the pain is spread amongst all the employees more or less equally. Immediate financial gains would not be realized right now. The game plan would allow them not to lay off so many millions of people but to look down the line in ten years to be able to retain those people. Maybe everybody would earn a little less in the beginning years of the privatization of these Chinese corporations, but then later, through attrition, it would start to make them gradually more efficient and save them from the acute social dislocation costs they will otherwise experience.

It went to the Vatican because I'm a Roman Catholic, and I'm very sensitive about certain actions that I'm taking now in the public interest. There is a debate between special interest groups with regard to the philosophy of humanism, where individuals are allowed more influence through direct electorate activities. With campaign finance reform and lobby reform and business transparency coming, the power that is the electorate will soon be in their hands, so I like to keep my authorities informed of my activities.

• 1640

With regard to my other aspirations, I wrote that in the context of why I want to do this. Part of why I want to do this is that, being a nobody, I have no credentials except what I have up here, and I'd like to have credentials to be able to begin to pursue some other very profound projects I have in mind, Monsieur Guimond.

The Chair: Thanks very much, Monsieur Guimond.

Daryl, thank you very much for your presentation to the committee. Thanks for your interest in the subject, and thank you for sending us the documentation you have. We appreciate everything you've done and we wish you well, sir.

Mr. Daryl Atamanyk: Feel free to call any time.

The Chair: Thank you very much, Daryl.

Mr. Daryl Atamanyk: You're very welcome, Mr. Keyes.

The Chair: We'll take a few minutes now to change witnesses.

• 1641




• 1645

The Chair: Professor Stanbury, I apologize for that bit of a delay, we're just doing some business here. Boy, through that camera lens, if you knew Julian Reed, member of Parliament for Halton, I'd pass you as his twin.

Professor W.T. Stanbury (Faculty of Commerce and Business Administration, University of British Columbia): Do I get to vote, Mr. Chair, in that case?

The Chair: No. Do you want his money, though?

Anyway, Professor Stanbury, thanks very much for being with us, the Standing Committee on Transport, on this issue. We look forward to your presentation of between 10 and 12 minutes, and then we'll have some questions for you, sir.

Prof. W.T. Stanbury: That's fine, Mr. Chair. Thank you very much.

The Chair: Thank you. Whenever you're comfortable.

Prof. W.T. Stanbury: Thank you.

I want to begin by thanking the committee for this opportunity. By now you should have received copies of the full text of our presentation. We're going to try to respect the time limits and get it done very promptly.

One caveat we want to be on the record right at the outset is to note that I was an adviser to the competition commissioner in the preparation of his report, and that needs to be disclosed. Also, both of us want to make clear that we are representing only our own views and not those of our employers.

We endorse the analysis and recommendations of the competition commissioner, although as usual the devil is in the details and, as academics, we reserve the right to modify some of them in a few cases.

The focus of our presentation is on a few key policy levers available to the federal government to constrain the power of the near-monopoly carrier that will emerge soon in the domestic market. The core of our presentation is the matter of foreign ownership and cabotage, or modified sixth freedom rights, as antidotes to the power of that dominant carrier.

Our primary concern in our analysis lies with some of the statements of the Minister of Transport. With the greatest respect, he is placing too much weight on the interests of the emerging near-monopolist carrier and its employees in what we like to call the “maple syrup solution”. The focus of federal policy we submit should be on the interests of Canada's air travellers.

What I propose to do is discuss the policy goals that we think are appropriate for the carrier and then introduce my colleague to address the matter of barriers to entry, and then it will come back to me for a few additional points, including the matter of foreign ownership.

We suggest that the committee strongly propose to the minister a single well-defined policy objective. So what we're concerned with particularly, and we suggest as the central objective, is economic efficiency. We emphasize, however, that economic efficiency is also the means to serve the interests of Canadian air travellers, who we think are central to the system. To fail to do so is in fact to fail to optimize the system and maximize the well-being of Canadians.

A near-monopolist, we emphasize, can harm air travellers in more than just increasing fares. For example, the monopolist can provide fewer discount seats. At present we should note that 90% of travellers travel on some kind of a discount seat, whether it's a 10% discount or a 60% discount.

Second, there will be shallower discounts from the unrestricted economy fare. So the deepest discounts may end up being $699 between Toronto and Vancouver instead of $399. We think there will be reduced frequencies on many routes or city pairs. This is of most concern to business travellers, because for them frequency and convenience is more important than price, although they do care about price as well.

Service from airline personnel could be reduced, and, indeed, one of the problems with monopolists is you tend to pay high prices and get poor service. Moreover, it's likely also that the benefits of frequent flyer programs will be reduced, because they'll have a unilateral ability to simply devalue those points if they want to do so.

We want to emphasize that at the same time a dominant carrier may not be generating excess profits. Why? Because the higher levels of revenue could simply be absorbed into higher costs. In fact it may increase the costs of this monopoly carrier to placate the demands of organized and vocal interest groups, pilots, employees, and, I may add, the federal government itself.

The point is that all of those higher costs have to come off the backs of air travellers in the form of higher fares or lower discounts.

• 1650

I'd like to ask my colleague Tom Ross to take up the matter of barriers to entry, which is also central to our presentation to your committee.

Professor Tom Ross (Faculty of Commerce and Business Administration, University of British Columbia): Thank you, and hello. I'm very pleased to be here. Let me add my thanks to those of Bill. It's a great pleasure to be able to address this committee on an important matter.

What I want to talk about very briefly are barriers to entry in this industry. If we're moving into a situation of having a single dominant or near-monopoly carrier, having low barriers to entry is our only hope to reinvigorate competition in these markets. The commissioner of competition devoted a lot of his letter to detailing various barriers to entry that exist, some of which are controllable, at least subject to the influence of government policy. And we agree with the commissioner that many of the levers should be pulled to improve the opportunities for new entrants in these markets.

Some of the barriers that exist in these markets are created by government—in fact, some of the most important ones, such as foreign ownership limitations, cabotage rules and the like. Some are created by just basic economic conditions of the industry, like economies of scale and density. Some are created by firms in the industry through their competitive behaviour. For example, predatory behaviour can serve as a deterrent to entry, and frequent flyer programs can make it more difficult.

What I wanted to get to next was to talk about some of the barriers to entry that seem to us to be important in this industry, and particularly some that the government can do something about. Some of these barriers can be addressed by attaching conditions to the amalgamation of Canadian and Air Canada, if it comes to that. Some could be addressed through regulatory initiatives, short of legislation, and indeed some will require legislative change.

To give you a few of the examples, it is true that in some airports at some time, getting adequate terminal space and other facilities at the airport, landing slots and takeoff times as well, can be very difficult. Certain changes in government policy could give priority to potential entrants and facilitate entry of new carriers.

The frequent flyer plans could be opened up. This could be a condition of the evaluation. This is not without its problems and it's something that needs to be thought through. But it is one possibility to make life a little bit easier for new entrants.

There's also been talk about travel agent commission overrides making it particularly difficult for new carriers to get started. Obviously conditions could be attached to an amalgamation to address this.

Going beyond what you can do to the merging parties, or the joining parties, you can think about regulatory changes such as negotiating the modified sixth freedom rights. We think that could be quite helpful. For example, the modified sixth freedom would allow American carriers to serve Canadian transcontinental markets, but through American hubs. It's not as good as direct connections through Canada, but it will provide some sort of price discipline to the domestic dominant firm.

There's also been some talk about making some changes to the way the computerized reservation systems work that might facilitate anti-competitive behaviour or at least make it more difficult for new entrants. We advocate certainly looking at those as well.

Without legislative change, the government could relax the foreign ownership restriction up to the point of 49%. We think that's worth looking at, although in fact we would prefer—this is my next point—that some legislative initiative be undertaken. We see advantages certainly in opening up Canadian industry to foreign ownership—even greater than 49%. Bill is going to speak a little bit more about this in a minute.

• 1655

We particularly find ourselves intrigued by the proposal that was in the commissioner's letter for Canada-only carriers. These would be carriers that service only Canadian destinations, city pairs. They would be able to operate completely foreign owned. Because they wouldn't fly outside of Canada, they wouldn't have any impact on our multilateral or bilateral agreements with other countries, and they would seem to provide the best way we can see right now, that even closely looks like it's on the table, for expanding competitive opportunities in domestic markets.

One thing the commissioner did not take up, except to mention it in passing—and let me leave this with you—was the issue of cabotage. The minister had taken it off the table.

We present an argument in our paper for unilateral action on cabotage to in fact even allow foreign carriers to pick up and deliver Canadian passengers. We think the time is coming. If we're confronted with a domestic dominant near-monopoly, we think this is a policy change that we just have to look at.

Thank you very much.

Prof. W.T. Stanbury: If I may, Mr. Chairman, I have a few more comments on three issues: foreign ownership, exploring another option, and then, finally, the concern about backing into economic regulation again.

The Chair: You have about three minutes, Professor Stanbury.

Prof. W.T. Stanbury: All right.

We argue that foreign ownership matters, and in particular, we're concerned about the minister wanting to rule out changes in the 25% limit and, as Tom said, ruling out cabotage. The minister says this industry is of particular significance to Canada, and he says air services are a vital feature of our ability to meet our personal, commercial, and national objectives.

We don't think this is terribly convincing. We think that Freddie Laker described the business remarkably well when he said that it was the business of “putting bums on seats”. In fact, an unvarnished and an unromantic perspective on this industry in industrialized countries like Canada indicates that the airline industry now is essentially a producer of commodity-grade services using familiar technologies in a highly routinized fashion.

In other words, the Canadian airline industry is little more than a fleet of intercity buses with wings subject to strict safety regulation.

The point of that is that we see no basis for regulating foreign ownership as tightly as we do, on the grounds that this is not a strategic industry.

We want to ask the committee to put on the policy agenda the exploration of the possibility of restructuring or even re-engineering Canadian Airlines under creditor protection. We don't have an exact formula on how that would work, but we don't think that option has been raised and discussed and we would urge that it be.

We think that in light of American experience, where a number of carriers have gone through chapter 11—which the American version is called, as you know—have come out the other side, and have been able to become more viable competitors.... We refer to Continental Airlines, TWA, and America West.

Finally, we are concerned that the minister, in setting a host of conditions associated with the restructuring of the industry, may well end up backing into economic regulation once again. Our concern is that this may be necessary, given the monopolists, but our concern is that it not be done in the minister's office, because that is not as transparent a method as we usually expect in terms of using specialized independent regulatory agencies.

If I may have one more minute, Mr. Chairman, we make several recommendations.

First, we think the committee should adopt the recommendations of the commissioner of competition in his report to the minister.

We think, second, that the government should eliminate the limit on foreign ownership of carriers that serve only the domestic market.

Third, we believe cabotage should be permitted on a unilateral basis.

Finally, we believe it's desirable to carefully assess the option of restructuring Canadian airlines while under the protection of its creditors.

Thank you very much. We invite your questions.

The Chair: Thank you very much, Professor Stanbury and Mr. Ross, for your presentation.

We'll begin with Val Meredith. Val.

Ms. Val Meredith: Thank you, Mr. Stanbury and Mr. Ross. I must admit I found your comments interesting and your support for the competition commissioner's report valid.

You're almost the first witnesses we've had appear before us who really felt that perhaps there could be a restructuring of Canadian, that we aren't automatically looking at a single dominant airline carrier in Canada. What makes you feel this is so? Is it because of the experiences you listed from the United States that you feel that's possible?

• 1700

Prof. W.T. Stanbury: Yes. In my case, I also had a chance to talk to some other people in the industry and asked, is this a possibility? Tom and I don't have a master plan on how to do it. But we say that option should be explored, and that's really what we're trying to do.

The American experience suggests that it is possible for an airline to reposition itself, restructure itself, re-engineer itself—for example, relocate where its hubs would be, in which markets it's going to concentrate, dropping other markets, and so on—and emerge out of the other side of this process in better shape than when it went in. We're just suggesting that be explored.

Ms. Val Meredith: How do you prevent what has taken place over the last six, eight, or ten years from happening again, where you have—I don't want to say for certain—what would appear to be a predatory attitude between the two airlines?

Prof. W.T. Stanbury: I should declare my interest. About eight years ago, I was an adviser to Canadian and American Airlines on the case they brought on exactly that issue against Air Canada.

Tom and I have had long discussions about that, and frankly, we think the Canadian law is defective. We think the American law is defective as well, because it focuses very narrowly on predatory pricing. In the airline industry, it's better to think about predatory behaviour and to take into account that, for example, one way you can harm another carrier is by excessive expansion of capacity.

We're not suggesting these people learn to perfectly coordinate their behaviour as if they were a monopoly; we don't want to embrace that. In fact, we were surprised at how much warfare there has been. But one of the bounds is that our competition law is limited in this regard. We have made some suggestions to the director about how that may be modified, and I think he's open to those suggestions that we actually have to change the law.

Ms. Val Meredith: Are you implying, as I understand it, a requirement or a request for maybe something like a cease and desist for a period of time until the competition commission could look at predatory behaviour or attitude and make a determination, a cease and desist period of time where there would be a cooling off, or at least stopping that behaviour from happening until it could be looked at?

Prof. W.T. Stanbury: Yes. I want to emphasize that you need that, but you need as well a new definition of predatory conduct.

The reason for the cease and desist is you need to stop it quickly, because the bleeding can be rapid. So you have to stop it, and then you have to ascertain what the law violated. But you need to change the law.

Perhaps Tom could add a couple of comments on that point.

Prof. Tom Ross: Yes. I want to underline a couple of things that Bill just said.

We're not convinced that Canadian could be restructured, but we don't think people have given it serious enough thought. We do draw some inspiration from the American cases, but also Bill and I have had conversations separately with a number of people in the industry. Some of them feel there is something of value there that could possibly be preserved, although it might have to change.

A voice: Dramatically.

Prof. Tom Ross: Dramatically, perhaps.

Some of Canadian's problems can be attributed to business decisions that at the time maybe were reasonable but just turned out badly—taking on too much debt, for example. Other of their problems could have been attributed to predatory behaviour on the part of Air Canada.

So we think there's the chance that a well-capitalized Canadian, protected, as other carriers would be, by new legislation on predatory pricing and predatory behaviour that allows them to act more quickly and be more likely able to actually afford action, might make a case for another national carrier. It might make it a viable business case.

We're not sure that is true, but we just don't hear people talking about it, people who in fact know more than we do about how the books would look with something like that. But people we've talked to have said, yes, that's a possibility.

Ms. Val Meredith: Thank you very much.

The Chair: Mr. Sekora, please.

Mr. Lou Sekora: Thank you very much.

When you're talking about restructuring and getting rid of...are you absolutely saying get rid of the 10% and leave it wide open?

Prof. W.T. Stanbury: That's one of the changes that should be done as well. We think that's an undesirable provision on the grounds that it gives management effective control of the airline. We think shareholders should control the airline.

The other thing is, if you're going to get rid of the foreign ownership requirement, as we would propose, at least for the domestic carriers, then that has to go as well. In other words, you have to change the 10% when you get rid of the 25% limit on foreign ownership. But I would do the 10% in any event.

• 1705

Mr. Lou Sekora: But what you're recommending also is that you get rid of the 10%, but have it in such a way that Canadian Airlines could not be moved to Dallas.

Prof. W.T. Stanbury: Our concern is with keeping the fares down and the service available to Canadians high. We submit that, frankly, it really doesn't matter a lot whether the ownership of the airline is in Wall Street or Bay Street. If I can quote the late Premier Deng Xiaopeng, he said it doesn't matter whether the cat is black or white, as long as it catches mice.

The analogue here for air travellers is good service, low fares, and lots of frequency. I think that's what they really want. Frankly, I don't think ownership matters a heck of lot.

Mr. Lou Sekora: But if you restructure Canadian Airlines, probably a few years from now you would still have the same problems as we have today, unless....

What type of restructuring are you talking about? Are you talking about getting rid of—

Prof. W.T. Stanbury: It's not our area of expertise to redesign this airline.

Mr. Lou Sekora: Okay.

Prof. W.T. Stanbury: The point we're trying to bring to the attention of the committee, and to the public more generally, is that this has happened in United States and it has worked. By the way, it didn't work in every case. In fact some of them ended up failing, as you say, after a few years. That's true.

On the other hand, if it prevents a monopoly, it seems to us worthy of exploration. That's incidentally why we want to change the foreign ownership rule, because when you have a monopolist, the natural instinct of a monopolist is to raise the price and give you lousy service.

That's the reality, and I think we know it. So the issue is, why not let the foreigners come in? Why not allow this modified sixth freedom so I could travel cheaply to Ottawa via Chicago or Minneapolis, and so on? Sure it's going to take a little longer, but hey, if it's $699 instead of $3,000, that's a deal.

The Chair: Thanks, Mr. Sekora.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond: Gentlemen, I'm able to follow most of the points you made regarding protection of competition, but I had some difficulty with other aspects of your presentation.

On page 10 of the French version of your brief, it says:

    What is evil, dangerous or adverse to the public interest about flying between Vancouver and Toronto, or Halifax to St. John's or Winnipeg to Thunder Bay on an airline owned entirely by foreigners (provided all Canada's safety requirements are met)?

You don't seem to be avid defenders of Canadian nationalism. It's quite strange that I'm the one to defend that here. According to what you're saying, the Government of Canada should have accepted the intrusion of American magazines as they saw fit and the Minister of Canadian Heritage should not have tabled a bill to protect the small Canadian market from the American giant. The Government of Canada, through the CRTC, should accept American networks just charging in here. Before agreeing to have a foreign company fly here, we have to examine the whole plethora of services that the owners of the airline purchase in their own country, be it maintenance services, catering or anything else.

For example, if the Air Canada reservation system was repatriated to Dallas, we would lose, among other things, 1,400 information technology jobs at IBM. Incidentally, it's not only Quebec that would be affected by these job losses, but the rest of Canada too. That's what preaching Canadian nationalism means; it's doing what needs to be done so that our industries here can be protected. In any event, I'd like to hear your views on that.

I also have some problem when you tell us not to believe proposals that forecast minimum job losses, because this is unrealistic and that such losses should not be underestimated.

Chapter 8 of your brief is entitled: “Protecting jobs is both inefficient and unfair.” I have a lot of trouble with comments like that.

• 1710

I can follow the rest of your argument very well, including the level of protection and competition, and I recognize the merit of the thought you've given this, but there are two points that remain that give me a lot of trouble.

[English]

Prof. W.T. Stanbury: Let me address the question of services and so on for air carriers, because I think that's an important question. I think you should realize now that some Canadian suppliers are already serving American carriers. Some of the repair work and the maintenance and so forth is being done in Canada for foreign carriers. In other words, we're exporting those repair services. And some jobs go out of country because the specialized services are only available elsewhere.

My overall concern is that any time you set up a protective nationalist regime, you will raise the costs, and you end up raising the prices to the buyers of those products. I have difficulty with that. It's fine if you want to volunteer to pay more for a product. You're free to do that. But if it's government policy and the effect is that you're forcing other people to pay higher prices than the competitive market would provide, my ethics say that's improper and inappropriate.

If I was on the receiving end of these higher prices and so forth, maybe my attitude would be different. But my concern is that once you start into this protectionist game, there is no logical boundary. You just keep adding more and more costs to protect more and more things because you'd like to protect jobs here at home. I'm concerned with the unemployment rate as well, but I think government policy should focus on macroeconomic levers to keep the unemployment rate down, not on a host of specific protectionist policies.

On the question of the fairness of job protection, I'd ask my colleague Tom to add a point on that, if I may.

Prof. Tom Ross: What we were concerned about was getting the worst of all possible worlds, which to us was travellers facing a domestic monopoly or dominant firm that was effectively inefficient because it was being pushed to preserve jobs. We have nothing against airline workers. We say that it may indeed be necessary to have a program to help them adapt to new employment or to move to new jobs in the airline industry that may be created through the development of new carriers.

But it seemed to us that the worst of all possible worlds would be to be subject to a monopolist that was itself inefficient. Its prices would not only be too high because it's a monopoly, they would be that much higher because it couldn't produce very efficiently. It seemed to us that in terms of the plans offered by some of the parties to merge these carriers and protect all the jobs, they just don't seem to wash with us when we're also hearing stories from them about how competition had been ruinous and there was way too much capacity. It seems to us that if there's anything good to come out of a merger here, it's that there could be some efficiencies generated. We could provide air services more efficiently and at a lower cost than we do today.

Once again—and this is the final point that I would make related to this—if we do get the kind of competitive industry that we would like to see, if barriers to entry are reduced and we see new carriers come in, in the long run a competitive industry will have more employment, in our view. Competitive industries will produce more output and will need more labour. It may not be for the particular firms any more, but it may be that this labour is in start-up firms, in the new operations of foreign carriers coming into Canada, or something else. The point is that in the long run, we think there's more employment in a competitive industry.

Prof. W.T. Stanbury: If I can add just one quick note to that, that was the record in Canada and the United States following deregulation. Initially, it was a short-run, adverse effect, but then the industry grew because prices fell. Everybody and your grandmother were flying on cheap fares, and the result was that they scheduled more flights, more carriers came into the industry, and there was expansion. That was the real reason, and the result was that total employment went up.

• 1715

The Chair: Thank you, Michel.

Mr. Calder, please.

Mr. Murray Calder: Thank you very much, Mr. Chairman.

We have been charged with the fact that we have to come up with a policy on this industry. First, what I would like to do is ask if you think the industry would be better off if there was one airline carrier or two, as you have been suggesting. Which do you think is the best?

Prof. W.T. Stanbury: I think our approach is to make sure the barriers to entry are minimized. If they are and entry is easy, you may end up with one carrier but no market power, or very little. I think we're both pragmatic on that. If barriers to entry are medium or high, it's better to have two carriers. But if entry is in fact easy, the number of carriers really is not of terribly great significance. The market will sort that out based on the comparative efficiency.

The Chair: Tom, could you add to that?

Prof. Tom Ross: Could I just add one thing?

Other things being equal, it would be terrific to have two national carriers. Up and down the line, you would then get competition and you would have organizations ready to jump into new opportunities as soon as they presented themselves. But as Bill said, we're pragmatic. There are a number of people who have studied this industry and who do feel there may only be room for one large national carrier. If that's the case, we could live with that if the barriers to entry are low enough so that, if they try to take advantage of their monopoly position, there are people ready to pick off their business.

Mr. Murray Calder: The reality we're dealing with right now is that we do have two national carriers, but those carriers are taking off wingtip to wingtip and their planes are half empty.

Prof. W.T. Stanbury: Actually, I'm sorry, Mr. Calder, but the data on passenger loads don't indicate that. It may be true of the odd flight, but the reality is that the average passenger load factor is over 70% in this country. That's the overall average.

Now, let me tell you, Tom and I fly the midnight special to Vancouver more often than we like, and those flights are most often full. So if you look at the data, they're at over 70%. The overall average utilization of the seats is approximately 70%. It's not true that there are lots of empty seats overall.

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): On the long hauls.

Mr. Murray Calder: On the long hauls, okay.

Prof. W.T. Stanbury: No, I'm talking overall. These are the overall national statistics.

Mr. Joe Comuzzi: Yes, but on the long hauls it's 90% or 95%. Combined with the short hauls at 45%, it comes out to 70%.

Prof. W.T. Stanbury: Yes, that's true, there's a difference, but the national average....

Incidentally, airline people who specialize in this will tell you that if you get above 80%, you're really pushing the limit, because then the must-go traveller often gets refused at the last minute even though he or she is willing to pay the full fare. So for practical purposes, you can't really get above 80%. You can in some charter operations, but not as a practical matter.

Mr. Murray Calder: I'm beginning to find this a little bit confusing right now. If what you're saying is in fact true, why do we have one carrier that has a cashflow problem right now?

Prof. W.T. Stanbury: That's a very complex story. Unfortunately, it would take a book-length book to be able to explain that. As Tom alluded, I think part of the difficulty is that they made some bad decisions. There has been intense competition, with sometimes near-warfare conditions that were not constrained by law because our law was inadequate.

The carriers started in asymmetric positions. Air Canada was already a fully integrated airline when the game began and the duopoly emerged in the mid-1980s. Then deregulation occurred. Canadian is effectively an agglomeration of several different airlines. At least in the U.S. and other countries, history indicates that it takes a long time to integrate and fully turn things into a completely unified carrier. Air Canada had a substantial advantage in that.

Next, they began the game in different financial positions. Tom's a real expert on the game theory of how duopolists and small numbers of people compete, and he'll tell you that if you have a relatively small edge in a repeated game, the results can magnify over time into a large edge. I believe that's correct.

Prof. Tom Ross: Yes, that's right, so they've gotten themselves into trouble.

Whether all their decisions were bad at the time may be neither here nor there. The point is that the combination of certain strategic initiatives undertaken by Canadian and its predecessors, combined with the natural advantages that Air Canada enjoyed, have led us to a situation in which one carrier is in a difficult financial situation. That just makes it that much more interesting for the other carrier to behave aggressively, because it knows it has someone on the ropes. To a certain extent that's good competition, but at some point perhaps it crosses the line. One of the things that Bill and I have argued—and the commissioner has as well—is that if we can change the rules on determining what predatory conduct is for this industry at least, then perhaps Canadian or carriers like Canadian would have a better chance.

• 1720

The Chair: Thanks very much, Mr. Calder.

Ms. Desjarlais, please.

Ms. Bev Desjarlais: What type of rule would you put in place to address the predatory behaviour? Be really specific.

Prof. W.T. Stanbury: Okay.

One place to start on that is to take a look at the proposed rule in the United States that talks about constraints on changes in capacity. I don't have it exactly in front of me, but what you have to do is switch from the idea of predatory pricing to predatory conduct. The conduct includes expanding capacity in particular routes just to match the entrant carrier in a particular place. In some cases, it means selling below your variable cost, or it can mean trebling your frequent flyer points, or some combination of these.

We are in favour of tough competition. The problem is how to draw the line between illegitimate competition and legitimate. That's why this is not an easy thing to do, but they've begun to do so in the U.S. I should point out that this rule that was proposed by the Secretary of Transportation has been subject to considerable controversy, but I would start there and then modify it to suit our circumstances.

I want it to cover a range of things. By the way, one of the things it should cover is situations in which you go in and grab up all the prime time landing or take-off spots. If you can't get past that, you can't compete at prime time, when a lot of people want to travel. That's the kind of thing that would be included in that kind of predatory conduct.

Ms. Bev Desjarlais: I'll just go on to the travel agent commissions. Do you have some suggestion on how we can approach the whole issue of the travel agent commissions? I know they're going through a rough time right now because they're constantly being cut. Do you have some suggestions along that line?

Prof. Tom Ross: We don't have anything terribly specific, other than that the commissioner noticed that the way travel commission overrides are structured gives a huge advantage to the larger carrier booking more business. Then you really want to go with them, because you get what we call a non-linear relationship between the business you give a carrier and how much commission you get back. For whatever firm is a little bit bigger, that gives it an advantage to get still bigger. So one simple thing is just to say to keep that relationship linear.

Prof. W.T. Stanbury: You get 7% or 9% or 11% across the board.

Prof. Tom Ross: You can get your 7% or your 9%, and it doesn't matter what fraction of your business you give to us. We give you a commission based on the volume of business you give to us, not the market share of it. I think that's the best.

Prof. W.T. Stanbury: Can I add one more point there?

The new information technology is on the side of substituting alternative ways, such as direct booking over the Internet and so on. I hate to say it, but I think the travel agent may be an endangered species.

Ms. Bev Desjarlais: Good point.

Prof. W.T. Stanbury: That doesn't mean you don't pay attention to this issue. I just note it in passing.

Ms. Bev Desjarlais: That's it for now.

The Chair: Thank you, Bev.

Mr. Comuzzi, please.

Mr. Joe Comuzzi: Thank you. I just want to make a note on that last comment.

Thank you, Professor. I'm very interested in your paper today.

Prof. W.T. Stanbury: Thank you.

Mr. Joe Comuzzi: I'm one of the few people who continually questions the fear of a single dominant carrier. I think I'd go to any lengths not to have that happen in Canada, mainly because of what non-competition does to the consumer. So I was interested in what you folks said about trying to arrive at a solution with Canadian. Canadian has a lot of assets, a lot of good people, and we should be spending—

• 1725

Prof. W.T. Stanbury: And some great routes.

Mr. Joe Comuzzi: And some great routes, yes. We should be spending a lot more time on how we can save it rather than take for granted that it's a has-been.

Prof. W.T. Stanbury: Right, but we want to be clear: we're not advocating government subsidies here—

Mr. Joe Comuzzi: Oh, absolutely.

Prof. W.T. Stanbury: But a restructuring based on private sector knowledge and including, Mr. Comuzzi, the possibility that there are other managers and other investors who can, frankly, use those assets better—that may be true.

Mr. Joe Comuzzi: Absolutely.

Prof. W.T. Stanbury: I think the market, in a sense, allows that to happen. What I'm worried about is whether the market will have that chance or whether the thing will be folded together before that possibility is seriously explored.

Mr. Joe Comuzzi: Right. You see, I'll tell you the mess we've got ourselves into here. If you were involved with the Competition Bureau...you know we invoked section 47. I've got the letter here where Mr. Benson is writing to the minister, and it goes on in several places to say we need section 47 to lead to a solution. Well, what the hell, we haven't got a solution. With the events of the last 10 days, there is no solution. It's a dominant carrier. We could have done that three months ago.

So that leads to the reading of this.... You know, we've come full circle on section 47. What can we do? We're going to try to solve our problems by ourselves, and we're back to the demise of Canadian, the carrier.

The thing that really disturbs me in subsection 47(1)(3) of that particular act is paragraph (c): “there are no other provisions in this Act or in any other Act of Parliament”. Well, hell, you alluded to the Bankruptcy Act, section 11, in the United States. I think the first airline that went into that was Eastern Airlines, long before your time, if I'm judging your age correctly.

But we have a creditors relief act in Canada, and it seems to me—and let me just go through this as quickly as a I can, with your indulgence, Mr. Chairman—that you make an application to the court, and in this instance I think it would be the Federal Court, that you're in financial difficulty and you need some time to restructure your company. There's a whole host of companies in Canada that have done that in the last three years. In that process the judge grants you the permission to set aside your current obligations, and you put those aside so that you're not obligated with your cashflow while this business doesn't miss a heartbeat. You put all those debts aside, and you don't have to deal with those debts immediately, while you're going through the complete restructuring process of how you think this airline or this business can be successful. The judge usually gives you 90 or 120 days, and if that's not enough, you make a reapplication and he'll extend it for a little bit of time, because this is a huge problem in Canada. Then you come up with a solution.

Now, the hazard is that if all of the creditors don't agree to the solution, then you automatically go into bankruptcy. It's not the Bankruptcy Act; you're applying under the creditors relief act. But in the event that you can't get creditor support, you're in trouble. That's the fear.

Why didn't we do that? Why didn't Canadian—

Prof. W.T. Stanbury: Well, I'm afraid we don't have the answer. But there is another problem in addition to the one you mentioned.

Mr. Joe Comuzzi: Tell me.

Prof. W.T. Stanbury: For airlines, the stock in trade is very ephemeral. Once you close the door on that flight and there are empty seats, they're gone forever. You can't put them into inventory. The other thing we know is that it's very easy for people to switch over, and if they're fearful about losing their frequent flyer points and they're worried about whether their journey is going to be interrupted by a bankruptcy or something, then you can lose business.

Mr. Joe Comuzzi: I understand that.

Prof. W.T. Stanbury: That's a concern for Canadian right now. They literally watch the cashflow daily.

Mr. Joe Comuzzi: Absolutely. The whole business is run on cashflow. I don't think Air Canada is much different, or any other airline, and they're coming up to the Christmas season. Those are the facts we're faced with.

• 1730

The very fact that you make an application to the court and you get all of this debt, including the American debt, the AMR debt, and you get that put aside until you come back with your restructuring plan.... From where we are today, that takes you well past the Christmas period, the most important part of the travelling year. You're not going to interfere with your cashflow. You should be able, if we put our heads together, to come up with a plan to restructure Canadian Airlines, to find out where they fit in the scheme of things, and therefore not expose a Canadian person to a dominant carrier.

Am I making some sense to you folks?

The Chair: Thanks, Joe.

Prof. W.T. Stanbury: Absolutely. But we would urge you to invite in front of your committee people who are much more expert than we are on how you do these things, maybe bring in someone from the United States who has been through it and tells you what the dangers and risks are. But remember, the whole scenario starts when the company in trouble takes the initiative to make the application under the law to a judge to get the law applied so that they can undertake the restructuring. Canadian hasn't done that. Nor have we heard any suggestion that they would like to give that serious thought.

Prof. Tom Ross: It may not necessarily be in Canadian's interest to come forward this way, because in fact it may be more profitable to Canadian and Air Canada if we go to a monopoly scenario. So they may see that what's best for them is working out an accommodation with Air Canada. In a merger, going down the bankruptcy road or the reorganization road—restructuring mode—might be better for taxpayers and Canadian air travellers, but if it doesn't serve their interests, we may not want to expect them to do it.

The Chair: Thanks, Joe. I hope Mr. Comuzzi asks that very question to the top dog, Mr. Benson, when he comes before us next week.

Mr. Casey, did you have a question?

Mr. Bill Casey (Cumberland—Colchester, PC): We've had several people come to our committee. I remember one evening we had four airlines: First Air, I believe, WestJet, InterCanadian, and another airline. They all came and said very clearly that they wanted us to understand that we don't have an industry in crisis, we have an airline in crisis. Do you agree with that? Is the industry in crisis, or is it just an airline?

Prof. W.T. Stanbury: I think you have to look at the relative importance of Canadian to the industry. It's not 50% or more of the industry; it is a substantial chunk of the industry. So it is predominantly an airline crisis, rather than an air industry crisis.

If you lower the barriers and make it easier to get in, you'll have far less of a problem in terms of serving the Canadian public. That's why we keep hammering away at this. There are lots of ways to get people around and across the country. There are other people who might well be willing to invest. But the easiest way to invest would be to do it, as the competition commissioner suggested, possibly as a franchise of an existing U.S. firm that has lots of experience—a brand name—but you hire Canadian assets and you hire Canadians to run the airline in Canada. We think that's a useful suggestion.

Mr. Bill Casey: Another point came up the other day, and it was reflected in the Competition Bureau's report. They recommended that the regional airlines be divested, and we've had several different versions of that. What's your feeling about divestiture of the regionals, assuming that the dominant carrier theory is the one that prevails?

Prof. Tom Ross: We do have some views about that. It would not be a bad thing, we think, to divest the regionals, but we think the potential benefits are easily exaggerated and we don't want them to be exaggerated. The way the airline industry works is that they're—Bill keeps using this term—symbiotic, and that's really true. The large carriers, to a certain extent, live off the small ones and the small ones off the large ones, because they feed traffic to each other and they need each other.

What could happen if they're divested is they just become partners. They don't have any equity stake in each other necessarily, but for all intents and purposes, they coordinate schedules, they coordinate fares perhaps, and they certainly have very good information about each other. To what extent would they actually be competitive? If you were a small regional carrier and you depended on the dominant carrier to bring you 80% of your passengers, how likely are you to start a price war with them on the one route where you do actually compete? I think you're very unlikely to do it; you need them too badly.

So it's not going to hurt to do that, in terms of the effect on competition. But I think it's easy to exaggerate how important it will be.

• 1735

Prof. W.T. Stanbury: It's unlikely to do any harm, and I'll tell you why.

In the U.S. they've experimented with a variety of arrangements from ownership to pure contracting, and the pure contracting works as well. You won't cause harm to efficiency if you insist they divest, but remember they will be contracting with each other, or at least some of them will, because of what Tom said. They need each other to supply the large network that you and I want, that seamless service from Vancouver to every small town by connecting through Toronto or wherever.

Mr. Bill Casey: Have you had a chance to look at that proposal? Have you seen any details on the proposal that was just presented yesterday or the day before yesterday?

Prof. Tom Ross: We've read the press release, that's all we've seen. I don't know if many more details were provided to you yesterday. We read press reports then too, but we didn't get a lot of details out of them.

Mr. Bill Casey: No, I'd say that was pretty much it there. They wouldn't be able to go any further unless the government developed a policy about divestiture. The government would have to say they were going to force the main line, the dominant carrier, to divest. They wouldn't do it voluntarily, I don't think.

Mr. W.T. Stanbury: But you'll notice that the first condition they made after that was that they would be free to contract back with the monopoly, or the dominant carrier, to supply feeder-type services. We perfectly understand that.

But I go back to Tom's point. You have this relationship in which most of your business would be done with the dominant carrier. Then you do some other business that may be no competition at all. But there's a third kind of business where you in effect enter one of the dominant carrier's markets. You buy yourself another plane or two and you go in, and now you go head to head. Let's get real about this. How much competition could that really be if he's also your biggest customer?

Mr. Bill Casey: Right. Okay, thanks very much.

Mr. W.T. Stanbury: Thank you.

The Chair: Not a bad request for a 10-year period, either. I remember yesterday his saying it's a great deal: and by the way, if you give us the business for 10 ten years or let us do this for ten years....

Mr. Bailey, did you have a question? Go ahead.

Mr. Roy Bailey: Thank you very much, both of you. This is very interesting. We're at a point now in this committee where we have seen many witnesses. We've heard some mighty good witnesses, and I might say we've heard some that don't reach that calibre.

There's an old saying I heard from an old chap one time that I think maybe zeroes in on our position right now, and maybe the airline industry's: if you haven't suffered enough, it's your God-given privilege to suffer some more.

I think we're at the period of time when we don't want to have any more suffering. We have two main airlines and we have workers at each one. In both cases, I think it's incumbent upon this committee that whatever happens.... Maybe it's fundamental that we protect the workers, and then we look after the travelling public, which has nothing to do directly with this committee whatsoever.

Now, to both of you gentleman, if we're going to revive the concept of the two dominant carriers in this country, then I think what has to happen is.... We recognize the regional carriers supplying them, we recognize their position in Canada, but there's a growing world market and they both have alliances and so on.

It seems to me that if we're going to revive Canadian to where they should be, we have to create a level playing field. At that point I think we have to say that Canadian came in and they will never be able to compete unless there's some type of intervention, unless we do some dividing up here, so that both Canadian and Air Canada can survive in the Canadian and overseas markets.

Therein lies the rub, in my way of thinking. The dividing up of the routes and saying, here, go at it. What's your opinion of that? Do you think Canadian can survive if we don't go through some type of regulatory feature and get the playing field level for them?

The Chair: Thanks, Mr. Bailey.

Prof. Tom Ross: One thing you want to avoid is what's sometimes called the spoiled child—someone who gets pampered and protected by big brother government. We want these to be free private companies competing vigorously for air travellers.

Your question is still a very good one, though. Can we get there from here without a little bit of tinkering? If it's temporary tinkering and if it has something to do with rights to fly to certain foreign countries that sit well in one firm's portfolio and might be quite advantageous, maybe that's something we have to look at. We're not enthusiasts for these kinds of interventions, but face it, the government is in that business of allocating these things, so it might as well be in the business of reallocating them if it serves air travellers for them to be reallocated.

• 1740

So if what you're talking about in terms of interventions is something sort of temporary to, as you say, level the playing field, that's certainly a path we should explore. If you're thinking about a regulatory agency—

A voice: No, no—

Prof. Tom Ross: —to keep these firms off each other, we think not, although we do argue for some stronger controls for the commissioner of competition on predatory pricing.

Mr. Roy Bailey: I have just one final comment, gentlemen. If we don't go that route, if we keep coming back to this one dominant carrier route, if we allow the existing carrier, i.e., Air Canada in this case, to create the terms of how Canadian is going to operate, I don't think government can sit back.... At least I, as an individual, don't want to sit back and have those terms dictated by the dominant carrier at the expense of the smaller carriers and the workers and so on. I think that's as big a mess as we could get into. That's why I said that if you haven't suffered enough, it's your God-given privilege to suffer some more.

Prof. W.T. Stanbury: I think your observation is right on. This idea of keeping Canadian alive and legally independent from Air Canada but owned by Air Canada is a temporary dodge. They want to avoid taking on the debt and the pension liabilities. That carrier won't survive. It'll go and the employees will eventually go. You're just delaying it.

You can overemphasize this protection of employees. Both of us are certainly market-driven economists, but here's what we would favour: if you want to protect employees, don't protect them as airline employees, protect them by giving them grants to make the transition from this job to another one, grants for retraining, travel assistance, and a whole variety of things. It should come out of the taxpayers' pockets as a whole—not the air travellers' pockets—as a continuous tax and higher fares throughout an indefinite period of time.

The Chair: Thanks very much, Mr. Bailey.

As a supplementary to Mr. Bailey's question, in your view, gentlemen, which entity should be the final authority in deciding the merger acquisition? Should it be the CTA? Should it be the Competition Bureau? Should it be the Minister of Transport? Should it be the Governor in Council? Which one, in your opinion?

Prof. Tom Ross: Let me start with that. I know Bill has views as well.

This is obviously a big issue. Is it something you want the commissioner of competition to handle on his own? Bill and I have both worked with the commission on various projects. We have a lot of confidence in their abilities, their impartiality, and their focus on efficiency and consumer welfare. We have a lot of faith in them. Nevertheless, there are perhaps bigger issues at play here—other than purely competition—and other people rightly have a responsibility. At the end of the day, it probably is going to have to come down to the minister and cabinet and maybe even Parliament if we are talking about legislative changes.

I would lean very heavily on the recommendations of the commissioner of competition in a case like this.

Bill.

Prof. W.T. Stanbury: I would reinforce that. I appreciate that the complexity of it means that other ministries have to be involved; it's not avoidable. For example, if you like our idea of transitional assistance for employees, the employment and immigration department has to be involved there, and so on. We appreciate that, but at the end of the day, you want an efficient airline industry and you want one that will deliver benefits to consumers. That's where to keep your eye on the ball.

The danger here in your committee is that you're pulled in 20 different directions simultaneously. I think you have to focus on a couple of key policy objectives and make the rest of the policy coherent with that.

The Chair: Professor Stanbury and Mr. Ross, thank you very much for your presentation to the committee. It's most valuable. Thank you for answering our questions.

Prof. W.T. Stanbury: Thank you. It was a pleasure to be here.

Prof. Tom Ross: Thank you very much.

The Chair: Thanks.

Mr. Joe Comuzzi: Before they go, Mr. Chairman, I didn't have a chance to ask questions on cabotage. If they have any papers that they've prepared on cabotage, I'd be very interested in receiving them.

The Chair: One of our members is asking about cabotage. You may have heard the question. If you have any paper that you can supply to our clerk for distribution to our members about your feelings on the cabotage issue...?

• 1745

Prof. W.T. Stanbury: If I could just refer you to the national commission on passenger transportation in 1992, they recognized the prospect that we may go to a monopoly air carrier and endorsed the idea of unilateral cabotage in that report. I believe there's some additional discussion of it in there as well.

The Chair: Thank you very much.

Prof. W.T. Stanbury: I'll see what else I can provide you with.

The Chair: Thanks very much, Professor.

Gentlemen, again, thank you very much. We appreciate your participation today. Have a good afternoon. I don't have to say “have a safe flight”.

A voice: Think of the money we've saved.

The Chair: Colleagues, there is just one thing before you go... [Technical Difficulty—Editor] ...in a way. First, we asked the companies to give us the information they had, right?

Mr. Joe Comuzzi: Yes.

The Chair: Onex says go to court. Well, that figures, because they're no longer involved in anything. They say if we want the papers we can go to the court, because they're all filed there. We went to the court, and it turns out that just the appendices would cost about $2,000 in photocopying fees. The entire package would cost $5,000-plus.

Mr. Joe Comuzzi: Mr. Chairman, to show how frugal I am as a member of Parliament, I'm going to give these documents for the court decision to the clerk—

The Chair: That's the decision. You asked for all the paperwork. That is what all the paperwork was going to cost us.

Mr. Joe Comuzzi: —and the additional subpoenaed documents, which are here. I'm going to save you $5,000.

The Chair: That's about $1.98. If you want all the papers you were requesting, Joe, it's a stack that high, and they wanted $5,000-plus.

Mr. Joe Comuzzi: Do you want this, Mr. Chairman, or don't you want it?

The Chair: Yes.

The other thing, colleagues, is that we have of course received their documents from Air Canada. Their documents make a pile that high.

Now, Mr. Guimond says, look, don't bother translating it on my account.

Thank you very much, Mr. Guimond.

But he says that if we want to see these documents we don't want to have to photocopy them all. Rather, he says, we could have them at the clerk's office with Sharon, Guyanne's assistant. If anybody wants to see them or go through them—not necessarily you—or even if you want to send a staffer over to go through them, they're at the office. Sharon will be there. You can go through them if you need to.

Mr. Joe Comuzzi: I will go through them.

The Chair: Is that all right with you?

That's all. Thanks, colleagues. Have a good evening. We'll see you tomorrow morning back in Centre Block, in room 237-C.