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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Wednesday, October 20, 1999
The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good afternoon, colleagues. We may find ourselves interrupted due to a vote. It will be a half-hour bell. Since we'll go by the rule of ten to twelve minutes for a presentation by a witness, we should be able to at least get the presentation in and maybe even begin questioning and then we can return after the vote to wrap up with our witnesses.
Mr. Bill Casey (Cumberland—Colchester, PC): I have a point of order.
The Chair: Yes, Mr. Casey.
Mr. Bill Casey: Considering the fact that you have a conflict of interest with the Hamilton airport issue—
The Chair: No, that's out of order, Mr. Casey.
Mr. Bill Casey: It is a point of order.
The Chair: I'm deeming it out of order. There is no conflict of interest.
Mr. Bill Casey: I think you should step aside until the airport thing is done.
The Chair: You can take it to a higher ground if you like, but I'm not taking that as a point of order.
Mr. Bill Casey: What higher ground?
The Chair: Colleagues, pursuant to Standing Order 108(2), a study on the future of the airline industry in Canada, we have our guests with us prepared to make a presentation. They are from the Air Transport Association of Canada: Mr. Cliff Mackay, president and CEO, and Geoffrey Elliot, executive vice-president, policy and strategic planning.
Good afternoon, gentlemen. Welcome to the Standing Committee on Transport. We look forward to hearing your remarks within a ten-minute to twelve-minute guideline.
Mr. Clifford J. Mackay (President and Chief Executive Officer, Air Transport Association of Canada): Thank you, Mr. Chairman.
We have prepared a brief, which we have left with the clerk, which is a more detailed explanation of some of our views on this particular matter. What I propose is to just highlight some of the key points in the brief for you.
I will start simply by saying to the committee that the Air Transport Association of Canada basically represents commercial aviation in the country. We have over 300 members, operating as well as associate, and they cover the gambit of commercial activity in aviation in Canada, everything from the very large national carriers through to the charter outfits, the cargo outfits, the regional carriers, down through to many smaller members who are in the business of flight training or small charter operations of various shapes and sizes. Our members represent approximately $11 billion worth of revenue and we employ over 50,000 people in the sector. While numbers are never precise, we basically represent probably 96% to 97% of the total commercial aviation revenues that are generated in Canada. So that is a bit of background on us.
Today we are here to provide a point of view from the Air Transport Association's perspective on the restructuring discussions and debates that are going on at the moment. Before I do that, I think I need to make one point; that is, our primary raison d'être is to represent our members, and in this particular situation it is very obvious to everyone that there is not a consensus among our members on what is the right answer at the back of the book.
The Chair: Welcome to the club.
Mr. Clifford Mackay: So while we have, as an association, quite strong views on some policy framework matters, as a matter of policy the direction I have from my board is obviously to not take a position on behalf of the association with regard to the efficacy of one particular proposal versus another particular proposal. I wanted to make that clear to committee members up front before we begin.
Let me start off with a brief discussion of why we are here today. What has created this situation of instability in the Canadian airline industry structure?
Basically, our view is that it's a combination of factors that has led to the current debate that's going on. Past history has shown us that this is not an unusual situation in the airline industry worldwide, if you look at what has gone on in other countries. What we are debating in Canada today has been discussed and debated in other countries, particularly over the last 10 to 15 years, and continues to be debated in other countries in a number of different frameworks. So I think it's worth noting that we need to look at this thing in a global context as to what's going on in the industry worldwide.
That being said, it remains clear that the short-term implications of restructuring involving Canada's two major carriers will probably have a substantial impact on the industry generally. However, in the longer term, the implications of a restructuring of the two largest two carriers is frankly much more difficult to come to grips with. If we assume that the current regulatory system remains in place, then there's nothing to prevent the marketplace from adjusting itself to changes that are being proposed by one or the other of the major carriers.
Past history has suggested that in open-market conditions, which we essentially have now in Canada, airlines have tended to come and go. Basically, the success formula has been that those companies that are able to put together a first-class business plan, able to bring together the management and employee skills, and able to be well financed tend to be the companies that stay in play in our business.
The conditions for new entrants when one company or another becomes arrogant or complacent are good. We've seen examples in the United States and other places where there have been quite successful new entrants come into the market when current players have not been as market-conscious as they should be with regard to consumer demands and other things.
So the first point I want to leave you with is that in an open regulatory environment, which is what we have in Canada today, the market does tend to adjust itself. We have some good evidence of that in other jurisdictions around the world.
We believe that long-term regulatory changes should not be used to address very short-term concerns, even though those short-term concerns are very real. It's too early, in our view, to jump to any conclusions as to what the competitive impact of the various restructuring proposals that have been floated in the last while will be. We don't know what all of the potential alternatives are yet. We've seen two to date; there may be others out there. And we certainly don't yet know what the decision of the shareholders is going to be. I think both of those points would lead us to conclude that before the government comes to any general conclusion as to what is best from a public interest point of view, you still need further input, both from the shareholder groups as well as perhaps from others. So we would suggest that waiting a little while longer wouldn't be a bad thing.
Let me talk a bit about the current market situation in Canada. Today, as I've said, the Canadian domestic aviation market is an open one. There are no barriers that prevent any licensed Canadian carrier from serving any Canadian or transborder city pair. Access to airports is not a major problem in Canada today. With the exception of four controlled airports in the U.S., which are La Guardia, JFK, O'Hare, and Washington, the Reagan airport, obtaining landing and takeoff rights and times and slots in U.S. airports is not a major hurdle.
In addition to that, of course, in North America the other pieces of infrastructure and navigation systems and what not are in place and are not an impediment to market entry in any significant way.
Canadian government policy restrictions still apply to a number of areas of the marketplace in the international routes, but the trend in Canada and elsewhere has been to remove these restrictions in order to allow more open market forces to play on the international side. There's no reason that we can see at the moment why these trends will not continue and be available to future players as the market develops.
We believe there is little doubt that a merger or some sort of similar restructuring of Canada's two largest carriers would create market opportunities for realignments, adjustments, and expansions in other existing Canadian carriers, several of which have modern competitive aircraft that are suitable for serving domestic as well as transcontinental and international routes. Many of them typically have lower unit cost structures than the two major carriers.
In our view, within the Canadian industry structure today there are existing players that I think would, if a market opportunity were to present itself, look very carefully at it in terms of whether or not they would take advantage of that opportunity.
We believe quite strongly that the government should resist the temptation to impose long-term changes on the current open and competitive market and policy and regulatory environment in which the industry operates today. Inevitable dislocations brought on by restructuring I'm sure will invite pressures from a number of quarters to call for greater industry protection and the preservation of the status quo through a return to the old style of government command and control regulatory environments that characterized the aviation industry, frankly, since about World War II, up until about fifteen years ago.
On behalf of our members, ATAC categorically rejects the idea of going backwards, going back to a regulated environment. We believe that a return to regulated markets would dull competition, discourage initiative, and foster a cost-plus or utilities type of environment in our industry. It could lead to regulatory approval of prices, routes, and even capacity offered. Conspicuously missing from that sort of environment would be the disciplines regarding airline production costs. Over time, we believe this would inevitably result in higher costs, poorer service, erosion of the competitive edge of the Canadian industry, higher ticket prices, fewer consumer choices, and pressures, frankly, from poorly managed Canadian companies for more protection, not less, in that kind of environment.
I think I have made my point clear. We are not in favour of going back to a regulated industry.
International routes today account for over half of the total revenue of our industry. It's simply not possible to think about creating in a domestic world a re-regulated industry while at the same time hoping that our industry can compete in a competitive environment internationally.
The third point I would like to make is that we believe that Canada's existing air policy is consistent with trends that are going on globally. Over the past two decades the Canadian government has gradually removed economic regulation from commercial aviation in Canada, while at the same time moving to a more open and competitive environment in the international environment. The open domestic market for Canadian carriers is consistent with the global environment. Canada has already removed all of our restrictions on domestic markets in the U.S. In the EU they are doing the same thing. Australia and New Zealand have done the same thing. The United States has now negotiated over 30 open skies agreements with countries around the world. So we are very consistent with what is going on in the rest of the world.
The second point I would make with regard to globalization is the emergence of the alliances—Star and Oneworld of course being the two largest—demonstrating yet again that the move to a global industry is very much a part of the reality we need to deal with and recognize in setting policy frameworks in Canada.
Do we have a crisis here in Canada? The answer is obviously yes. What created it? I think some of the pressures I have just talked about have been a part of it. I think it needs to be said that Canadian domestic changes have also been a part of it.
In the last five years our industry has been asked to absorb well over a billion dollars' worth of new costs that they were not having to deal with in the previous environment. That is primarily as a result of the devolution of the air infrastructure, both the air navigation systems and the airports, into user-pay, private type models.
Let me hasten to add that we are in favour of the policy, but what has gone on is of course we have had an awful lot of things happen at the same time. On the government side, the government used to subsidize airports and the air navigation system. Now the government derives well over $200 million a year out of land leases to airports, with frankly no payback to the system. The air navigation system is costing my members roughly $500 million more a year that used to be collected through a tax. So there are a number of those sorts of cost pressures that have hit our industry in the last three to four years at the same time as we've had competitive pressures from the marketplace.
We note in our brief, Mr. Chairman, a number of specific suggestions, which I would commend to the committee's attention as some of the things the committee may wish to consider doing. But let me make one final point. We would hope that in the deliberations the committee would take a broad view and focus on this issue from the point of view of what is necessary to change in the policy environment to foster a strong and vibrant industry. In our view, we have made some specific suggestions in here as to some of the things the committee could consider in that context.
With that, I would close and say thank you very much for your time.
The Chair: Thank you, Mr. Mackay. Your request to this committee is exactly what this committee is seized of. We thank you for your presentation. We have a bell ringing, so we have to go for a vote. We invite you to avail yourselves of the wonderful House of Commons coffee at the back of the room, and we will be back as quickly as possible.
Colleagues, please return as quickly as possible so we can try to meet our evening commitments.
We stand suspended until after the vote.
The Chair: Welcome back, colleagues.
For those who are just joining us at the committee, we had an interruption for a vote. We've had a presentation delivered to us by our witnesses from the Air Transport Association of Canada: Mr. Cliff Mackay, president and CEO of ATAC, and Geoffrey Elliot, the executive vice-president of policy and strategic planning.
Gentlemen, thank you once again for your presentation to the committee this afternoon.
Colleagues, we'll begin our round of questioning.
Ms. Meredith, do you have questions?
Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Yes, please.
I'm interested, gentlemen, in the six issues you raised at the end of your presentation, things you feel contribute to the situation in the Canadian airline industry. What I'm looking for from you is a recommendation.
You indicated that you like the deregulated, market-driven airline industry and that you don't really object to the policy of user-pay. Yet in here you've indicated that the costs—fuel taxes, airport fees, navigation fees, and that—have all added to creating the situation, the crisis, that the industry is in. If you believe in the open market system and in user fees and what not, how do you compromise those two ideals?
Mr. Clifford Mackay: Let me start off by saying we believe fundamentally that user charges are the way to go if they're in a market-based system. There are some particular circumstances in Canada, though, where because of the monopoly nature of the service we're buying—for example, an airport or air navigation service—we think we need to ensure there's some protection in the way in which the services are priced.
We've made some suggestions to the Department of Transport, as part of a review they're doing, on how to ensure pricing is cost-based and is transparent. That's one of the issues we're concerned about: that there aren't capricious pricing practices in the marketplace.
We're not saying we shouldn't be paying for legitimate services at a reasonable price; we're saying we want to make sure it is a reasonable price and we have a good level of service. There are a couple of instances where we're concerned about that.
You'll notice that we're also concerned about a number of other things on that list, things such as special taxes, taxes that aren't generally applicable to the private sector in this country, or things such as the land leases that airports are currently paying to the government that, in our view, are not based on sound commercial principles. Rather, they are based more on a situation where the government negotiated with an entity, which was created and given a local monopoly, and then said, okay, we'll give you so much money and we'll collect it from the travelling public and the airlines.
I'm sorry, we weren't invited to those negotiations, so from our point of view, there are some things of that nature that need to be addressed to ensure that we're not putting unnecessary costs on the backs of the industry and, frankly, the travelling public.
Ms. Val Meredith: Can you give our committee an idea as to whether or not this policy of taxes specifically for one industry, taxes that don't apply to the other transportation areas, is common practice in, say, the United States, your major competitor, or is this a made-in-Canada solution?
Mr. Clifford Mackay: This is made in Canada. I'll give you two or three different examples.
In the United States, the taxpayer pays for air navigation systems and the taxpayer generally pays for airports. We don't subscribe to that approach, because if you go to the States today you'll find that the Federal Aviation Administration is having a lot of problems. We don't have some of those problems up here, thank heavens, but from a cost-competitiveness point of view, that means more cost to us relative to their industry.
More importantly, the Americans are moving over time to reduce fuel taxes in our industry across the board. They've been pursuing that policy now for four or five years. There has been no movement in Canada to get rid of those types of special taxes in our industry.
Ms. Val Meredith: Thank you.
The Chair: Thank you, Val.
Mr. Dromisky, please.
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): I have just a couple of short points, which I'll come back to later on if I have your permission to do so, Mr. Chairman.
On page 1, you clearly indicate—of course it's common sense—that at the present time your association is not taking any definite position or any side regarding any of the proposals that have been appearing in the press and so forth. That's understandable. With regard to your long-range planning, however, in terms of the problem we have right now, where do you see your association plugging into the entire process and contributing in a meaningful manner?
Mr. Clifford Mackay: I'd give you two points to that, sir. First, what we're doing today is trying very hard to get the message out that as a matter of policy framework, all of the players should be looking to achieve a viable, internationally competitive industry. There are some policy framework issues that need to be addressed in that context, the most important one of which is not to turn the clock back and go back to the good old days of command and control regulation.
In addition to that, we have made a number of specific suggestions that we would encourage the government and other players to look at by way of making the industry more cost-competitive overall.
Regardless of the eventual outcome of the current debate between some of the players with regard to precisely what is the right restructuring answer, if you get the framework right and you ensure that you have a good cost structure for the industry, you will have a stronger industry. Our view, then, is that we should be advocating those types of positions.
In addition to that, we have been making ourselves available to provide background briefings and other information just with regard to how the industry works and what's going on internationally for anyone who wishes to have that kind of data.
Mr. Stan Dromisky: Okay.
Mr. Chairman, I don't know whether or not the second question will be permissible, but I'm going to put it on the floor, and you can tell me whether or not you will permit it.
This pertains to your statement on page 2, where you say there is no doubt in your mind that:
any merger or similar restructuring of Canada's
two largest carriers will create new market opportunities
for the realignment, adjustment and expansion of other
existing Canadian carriers....
Would you play out that scenario? What do you have in mind there? What is it you're envisaging that brings you to the point of putting those types of statements into this document?
Mr. Clifford Mackay: Every time in the last number of years since we've had deregulation in Canada a piece of the market has not been well served, you've seen either new entrants or some existing player adjust their business practices to fill that niche. That's really what we're referring to.
If, for example, there was only one carrier offering service in the Toronto-Montreal corridor, I don't think it would be very long before you would see some other players enter that market with regard to offering services. We saw it in the west with the development of WestJet. There was clearly a demand for low-cost but efficient scheduled service. That demand is being met by a new entrant in that particular case.
So that's really what we're referring to, sir.
Mr. Stan Dromisky: That's a very good answer. Thank you.
The Chair: Thank you, Mr. Dromisky.
Mr. Gérard Asselin (Charlevoix, BQ): On page 4 of your submission, you state the following:
Airport devolution will cost airlines $800 million more every year:
1., The annual federal government airport subsidy of $150 million
Later, you go on to state this:
Transport Canada continues to provide modest subsidies to small and
remote airports, but those expenditures amount to only about $30
What do you mean by “small airports”? Are you referring to those found in remote areas, for instance, the airports located on Quebec's North Shore which provide regional services to passengers?
Mr. Clifford Mackay: The $30 million we're referring to, sir, is a program called ACAP, the airports capital assistance program. This program targets both smaller airports and capital assistance primarily for the purpose of safety at airports.
We're not opposed to the program. We think it's a good program. In working with airport authorities across the country, we are even suggesting that some expansion of that program for small airports would be useful. However, it does not address itself to any of the major airports in the country.
Mr. Gérard Asselin: You stated that these $30 million could be used to ensure the safety of small airports. The problem stems from the fact that the federal government has turned responsibility for airport management over to NAV CANADA with a view to making regional airports, among others the Baie-Comeau airport, profitable, and from the fact that NAV CANADA has reduced the number of air traffic controllers, closed some control towers and done away with firefighting services. As a result of these initiatives, it was able to balance the airport's budget.
One has to realize that the regions are already at a disadvantage and that NAV CANADA transferred $65 million in revenues to Canadian and Air Canada in 1998. Shouldn't the $65 million in revenues collected by NAV CANADA as a result of cutbacks at regional airports be redirected to those who have made some sacrifices? Personally, I think we've created a situation where passenger safety is threatened. Shouldn't this money be reinvested in the regions in order to keep the equipment in sound running order and to maintain the necessary infrastructure for regional economic development?
Mr. Clifford Mackay: I think you've asked me about half a dozen questions there. Let me try to answer as many as I can.
With regard to NAV CANADA and the way in which it sets fees and collects revenues, there's no direct relationship between what it is doing and what is going on with regard to fees and charges in any individual airport in the country. The only financial connection between airport operations and NAV CANADA is a deal that was done at the time of privatization, where at a nominal cost NAV CANADA has access to facilities at particular airports. There's no direct connection, then, from the point of view of how one institution or the other is financed.
With regard to airport firefighters and emergency response systems, this matter has been debated in the industry since the beginning of the industry. A very recent set of discussions has gone on, and we have recently completed, in cooperation with the Canadian Airports Council, a very detailed review of the need for airport firefighters and emergency response systems at smaller airports in Canada.
Our conclusion, sir, is that it does not in any significant way contribute to passenger safety at these airports. If we had access to further funding for the purposes of improving safety at airports, increasing the number of firefighters at airports would be a very low priority. We would be advocating that the money be spent on a number of other things first.
If you wish to see that study, we'd be more than happy to provide it to the committee for your review.
The Chair: Thank you, Mr. Asselin.
Mr. Jackson, please.
Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much, Mr. Chairman.
Mr. Mackay, I have a couple of questions for you today. The first comes from one of my constituents. It has to do with a fee, which I think is paid yearly, that goes directly to ATAC. It's for small aircraft. Every year they have to pay a $60 or $70 licence fee. I had a complaint about it.
You say the system should be fair, and it should be based on user pay. This gentleman didn't like it. He said it was similar to the stamp tax and some of the other taxes we've had in the past. He said it was morally wrong.
The government passed that on to you. How do you explain collecting that particular fee?
Mr. Clifford Mackay: First, sir, we don't collect it. What I think you're referring to is the flat annual fee paid largely by private pilots or private aircraft owners to NAV CANADA for air navigation services and airport terminal services. They introduced last year, as they finished off getting to a full cost recovery system, a flat fee of $60 a year, primarily for small private owners, in consideration of the use of their services for those owners.
The way the fee was structured, sir, was that there was a lengthy consultation process legislated under their act, which they're required to go through, that resulted eventually in the approval of a set of fees. That was part of it.
The idea of going to a flat, once-a-year, annual service very similar to what you would pay for your driver's licence was that when it comes to very small operators, basically private operators, trying to charge them in more sophisticated ways—the number of movements, the size of the airplane and everything—it frankly just didn't make any administrative sense and would have been a significant burden on the general aviation community.
Your observations with regard to different people having different views about that subject are very accurate, sir.
Mr. Ovid Jackson: Okay.
My other question had to do with taxes and fees collected by the government. You alluded to some $500 million, then another $200 million. Should we give that money back to you guys or give it back to the airports? What should we do with it?
Mr. Clifford Mackay: My suggestion is that you should encourage the government to negotiate what I would call a businesslike deal with regard to their collecting land rents for what they own. We're not objecting to the government receiving a reasonable return on the assets at airports in which they've invested, but if you go and look at the long-term leases that are currently in existence between airports and the Government of Canada, you will find that they have not negotiated on what we would call commercial terms. They go on forever. They escalate. You don't make any further investments in the assets themselves, and yet you continue to collect more money, not less money, from those assets. So our argument is that it's just not a good business deal.
We think the taxpayer should be entitled to a fair return on their previous investments, but we'd like to see it negotiated in a businesslike fashion rather than in the types of structures that currently exist.
The Chair: Thanks, Mr. Jackson.
Ms. Desjarlais, please.
Ms. Bev Desjarlais (Churchill, NDP): Actually, in the course of probably an hour, you've suggested that NAV CANADA is price-gouging. You've suggested that the airports are price-gouging, and now the Government of Canada, so, hell, we're doing well here today.
There are a couple of points I want to clear up, following along the line of what Ms. Meredith had questioned. You seem to give absolute support to an open market system. However, you recognize that because of this open market system and this going away from government control, the increased costs have been part of the creation of the crisis we're in.
Yet in point 6 on page 6, you talk about introducing new governance obligations. To me that's just a nice way of saying regulations for airport authorities. So you somehow think it's not okay for you to be regulated as a group, or to re-regulate the airline industry, but you think there needs to be more regulation for the airport authorities. Again, I'm caught in the hypocrisy: It's okay, but if it's affecting us, it's not so good.
Mr. Clifford Mackay: Let me start off by saying that today in Canada, there is absolutely no regulation of airport authorities, other than safety. There is no economic regulation whatsoever of airport authorities in Canada. They don't have to file tariffs, as we do. They're not subject to the same sort of price-setting structure that NAV CANADA is.
All we're arguing is that we would like to see in airport authorities the same sort of framework that exists for other major monopoly providers of monopoly services in the country. This is not anything new. If you go back and read the Chicago convention, which was agreed to in 1944 and has been the benchmark for the industry ever since, it basically says that when you're providing common services, you should price them on the basis of costs, the pricing should be transparent, and everybody should be treated in a fair and equal manner. Those structures, those regulations, do not exist for airports in Canada today. All we're arguing for is to put that in place so that we have certainty.
To their credit, most airports in this country follow those principles. But unfortunately we've had a number of instances since privatization where individual airports have been quite capricious about the way in which they've priced. It's been a detriment to our members, and frankly it's been a detriment to the travelling public.
Let me just say, with regard to NAV CANADA, we do not believe NAV CANADA is price-gouging. If you read the brief, we're very complimentary of NAV CANADA and where they've come from.
Ms. Bev Desjarlais: Yes, and actually, just to follow up, we have had submissions from NAV CANADA to our transport committee—we've had the opportunity to meet with them—in which they do indicate where they're making their cuts to costs and where their cost is incurred within each area. They've done northern studies, and I guess if we've accepted the information they've given us as being accurate, I would take it as meaning they are giving the best cost for dollar and aren't price gouging. That's my take on NAV CANADA.
You've mentioned that some airports or airport authorities aren't doing that, so I would ask for specifics in regard to those airports. Also, you mentioned that many of the new, smaller airlines that would come in typically have lower unit-cost production. You're using the term “many”, so I would like you to give me some specifics as to who those many ones are.
We seem to not be able to get specific figures as to how airlines are operating and the costs for these airlines to operate. So if you have the specifics, since you're using the term “many”, I'm assuming you must know the names of those carriers and that their production costs are less. So if you could share them with us, I'd love to hear them.
Mr. Clifford Mackay: I can't share their production costs. If you want the production costs of a particular carrier—
Ms. Bev Desjarlais: I want the names of the carriers.
Mr. Clifford Mackay: —you'd have to get them from the carrier. But it's certainly no secret in the industry that the charter carriers' unit costs are lower than the main line carriers'.
In Canada there are four major charter companies: Transat, Canada 3000, Royal, and Sky Service. If you look at the unit costs of some of the regional carriers—Air Ontario, Air Nova, and Canadian Regional, for three—you'll find their unit costs are in general lower than the full-service national carriers' unit costs.
The Chair: Thanks, Ms. Desjarlais.
Just as a quick supplementary, it might be helpful to the committee to explain the difference between NAV CANADA and what happened with the airports. As you know, Cliff, NAV CANADA was all part of this business of through legislation, whereas the airports were not legislated, but rather it was a policy decision of government to commercialize.
Mr. Clifford Mackay: That's correct, Mr. Chairman.
The history of this is that airports were the first parts of the infrastructure to be privatized, if I can use that term. Rather than going with legislation, the government chose to negotiate long-term leases in the hope that they could structure whatever economic oversight processes into the leases.
Unfortunately, that particular element has proved to be unworkable. The leases, in our view, are a bit like sledgehammers. The government has very few options to influence the behaviour of a particular airport—its economic pricing and that type of thing—through the lease structure.
While most airports in the country have been quite responsible in terms of the way in which they're pricing, some haven't been, and frankly, short of spending an awful lot of money on lawyers and going to court, there's no recourse to try to find a better way. That is very unsatisfactory.
In the case of NAV CANADA that mistake was not made. Pricing principles were enshrined in the act to privatize the company, and the process through which they set their pricing was enshrined. They've now successfully implemented that process. While there will always be some members of our community who are not happy with the price, we get very little criticism of the process, or the way in which they set their prices.
The Chair: Including appeals to the government, etc.
Mr. Clifford Mackay: That's correct.
The Chair: Mr. Comuzzi, please.
Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Thank you, Mr. Chairman.
I gather from your evidence, Mr. Mackay, that you are claiming that everything in the Canadian airline policy, as it presently exists, is adequate, in place, and is fulfilling its purpose. Is that correct?
Mr. Clifford Mackay: What we are saying is that the fundamental policy direction is correct. We should be moving toward further liberalization and we should be trying to do what we can to encourage a competitive industry structure in a global marketplace.
Having said that, I think we point out a number of areas where we think there needs to be some action taken to fix some problems that have come up. I don't think there's been any malice aforethought here. This is a massive undertaking that the government embarked on a number of years ago. We just believe everything wasn't anticipated, and we need to go back and fix a few things.
Mr. Joe Comuzzi: But by and large, the policy under which you and your membership operate is satisfactory—
Mr. Clifford Mackay: That's correct, sir.
Mr. Joe Comuzzi: —and we shouldn't go back to a regulatory environment.
Mr. Clifford Mackay: That's our view.
Mr. Joe Comuzzi: Okay.
You made the statement that you think the marketplace will adjust to the current problem we're faced with.
Mr. Clifford Mackay: Yes, sir. We believe that in an open market, such as the one we have, if a market opportunity is created because of a restructuring in the industry, someone will come along and take advantage of it.
Mr. Joe Comuzzi: With what's before us today, and given the fact that we're on this issue because of the inability of one airline to operate profitably over a number of years, it seems to me that the marketplace, or the regulatory air policy for Canada, isn't functioning properly. If it was, we wouldn't be in this situation.
You say everything is okay, but we find ourselves in a serious dilemma. I'm having difficulty reconciling those two points.
Mr. Clifford Mackay: I guess the only point we're making, sir, is that in an open market, companies come and go. Entities of various shapes and descriptions come and go. While we don't for a moment want to underestimate the seriousness of this situation in the short term—there are significant public interests here—I don't think it should come as a surprise to anyone that in an open market you get some companies succeeding and some companies not being as successful.
Mr. Joe Comuzzi: The organization you represent would not like to see that happen, but you're willing to accept it.
Mr. Clifford Mackay: We take the position that an open, competitive marketplace is the right way to go for the industry. If you take that position, you have to be willing to live with the consequences.
Mr. Joe Comuzzi: Okay.
Just as an aside to that question, there seems to be some dilemma about the ability of a carrier to carry on because of lack of funds. Does the creditors relief act in Canada not apply to airlines as well as other enterprises? That allows a period of.... It seems to me that one of the large retailers in Canada just went through several processes whereby they wanted to restructure. You apply to the court and you restructure. You try to make it work. It didn't work. They went back again and so on. Is that not available to any of your membership?
Mr. Clifford Mackay: I'm not a lawyer, sir, but my understanding is that the CCWA is available to any corporate entity in the country.
Mr. Joe Comuzzi: So with the dilemma and the haste we faced in arriving at this problem, we find it's really not terminal; it has some solution—not that the solution may not be terminal, but there is not the tremendous pressure whereby we've been advised that unless something is done quickly, you may see the demise of an entity.
Mr. Clifford Mackay: Sir, I can't talk to those specifics. All I can say in that context is that at least some of our members are pretty much certain that there's going to be a business problem if something doesn't happen soon. As president of the association, it's not appropriate for me to comment on whether that's a good, bad, or indifferent statement.
Mr. Joe Comuzzi: I understand that. But there is an interim solution.
Mr. Chairman, I have one final question.
The Chair: You have one minute left.
Mr. Joe Comuzzi: Let's talk about competition. You said there's adequate competition in the marketplace. I think that's the thrust of one of the reasons we're here, which is to try to see how the airline industry can stay competitive in Canada. I'd like you to expand on that. How do you foresee that if one or the other of the offers is accepted? Both offers, I think, eliminate competition per se. How do you see competition of that proportion, international and national?
Mr. Clifford Mackay: Let me just try to take that in pieces. On the international side, particularly wherever we have an open skies agreement, there's lots of competition, and there will continue to be lots of competition, in our view. Secondly, the existence of the alliances is increasing access for Canadians to international routes, much greater than they used to have. So our view is that while there may be some short-term issues to deal with—and, frankly, without knowing the details of what the particular proposal would be, it's very difficult to speculate on what those issues would be—in the long term, if you pursue an open market policy and if their market is not being properly served, it's our strong view that in an open market situation Canadian entities will come along to serve that market.
Mr. Joe Comuzzi: Talk about the competition within Canada, Mr. Mackay. I'm not interested in the international market. Talk about competition within Canada. On the basis of those two proposals, which I'm told eliminate competition between the two major carriers in this country, how do you see competition in the industry? That's an issue I'd like to get your thoughts on.
Mr. Clifford Mackay: I'm not going to comment on either of the specific proposals.
Mr. Joe Comuzzi: No, I don't expect you to.
Mr. Clifford Mackay: Leaving aside the international market and the transborder market, in Canada there are essentially three markets domestically: there's the long-haul market, which includes routes such as Montreal to Vancouver or Toronto to Vancouver; there's what's called the regional market, which is, for example, all of the various feeders in the prairies into places like Winnipeg, Calgary, or Edmonton; and then there's what's called the triangle, which is the market that exists primarily in central Canada. But there are also a couple of other nodes in the country where you have very high volume but short-haul routes. Montreal to Toronto or Edmonton to Calgary are the two best examples in the country. Those are the three fairly discrete markets in the country.
At the moment the long-haul markets are primarily served by the two national carriers, but at least two of the charters are now starting to offer what could be generally construed as scheduled service. For example, if any of you had been looking recently for a relatively cheap flight from Toronto to Vancouver, I think you would find that Canada 3000 offers some very competitive rates. That service is pretty much scheduled; it goes and it comes back at a specific time. So there's a fair bit of competition in that market already.
In the regional market, the situation in the country at the moment is somewhat mixed. In some areas there is very lively competition; in other areas less so. The liveliest competition in Canada at the moment in the regional markets I would say is in the prairies and in B.C., where you have, on any particular pair, quite often two, sometimes three, carriers offering services. It's less so in the Maritimes. In central Canada here it's a bit of a mixed bag.
Then the third market of course is the high-volume short-haul in the hub. In western Canada again you have WestJet operating in the Toronto-Calgary corridor, as well as the others. Here at the moment you have two players, Canadian and Air Canada, and then of course some of the regionals operating out of ancillary services, such as Toronto Island.
In the event that you ended up with one player, I would be surprised if that situation lasted for any period of time, given the volumes and the attractiveness from a profitability point of view of some of the routes in central Canada.
The Chair: Thank you, Joe.
Mr. Elliot, we thank you for joining us and being part of this presentation this afternoon.
Mr. Geoffrey Elliot (Executive Vice-President, Policy and Strategic Planning, Air Transport Association of Canada): Thank you, Mr. Chairman.
The Chair: Thank you, sir. We won't ask you what plane you're flying on.
An hon. member: His own.
Some hon. members: Oh, oh!
The Chair: Mr. Casey, please.
Mr. Bill Casey: Thank you.
Thank you for coming today.
Actually, some of the comments you made about competition were addressed in the Competition Bureau's review in 1993, when they analysed a potential merger between Canadian Airlines and Air Canada. They said the charters would not make up for the reduction in flights, other than to the main destinations, as you're talking about, from Toronto to Vancouver and so on.
Anyway, I know you're not going to take a position on one or the other of these two proposals or any other, but could you give us an idea of your impression of what the impact would be of going from two national airlines to one, as far as flights, ticket prices, and service go?
Mr. Clifford Mackay: Again, it's very difficult to answer the question.
First, what timeframe are we talking about? If you're talking about a very short timeframe—for example, the first few months or something—it's obvious there will be some disruption to the marketplace. There's no doubt about that, and I don't think anybody would question that. If you're talking about a longer timeframe—six, 12, or 24 months—it's very difficult to say. It depends on how the market would react. It would depend very much frankly on what you and your colleagues on the government side would decide to do with regard to competition policy or other issues you may feel you need to look at from a public interest point of view.
I'm not trying to duck the question, sir. I just don't know how to answer it without understanding specifically what it is we're talking about. Frankly that's an impossible question to answer at the moment.
Mr. Bill Casey: That's the question we have to answer.
The Chair: Mr. Casey, you have a very good question. I'm sorry to interrupt.
Mr. Mackay, if you take away the proposals and keep them out of your mind, Mr. Casey is asking if there is one airline operating, one of the big ones—either one.... To my recollection, neither one of those two big airlines is saying they're going to slam the two airlines together and start operating in the short term. From what I've heard and read in the newspapers, this is a longer-term proposition.
So let's make an assumption. Let's assume that you won't have two airlines come together as one within a short period of time, but say in a year's period of time. So let's make the assumption we have one airline operating in one year's time. Then Mr. Casey's question stands. What's your opinion of one airline operating in this country in one year's time?
Mr. Clifford Mackay: I'll try to answer that particular question.
If there were only one airline operating in Canada, then obviously the amount of consumer choice that currently exists would go down and you would expect prices to go up. I've been trying to make the point, sir, that I don't believe that's a realistic scenario, unless the government moves back to a command-and-control type of regulatory structure, which would inhibit entry into the marketplace and competition. I believe a more realistic scenario is that you're going to see either new entrants, or probably more likely, the existing players out there moving to take advantage of any competitive opportunities they see as a result of this restructuring. So I think you will see competition in the marketplace.
The Chair: Sorry to interrupt, Mr. Casey. Please continue.
Mr. Bill Casey: That's my next question.
One of the proponents has suggested that revenues to regional airports will go down because landing fees and terminal fees will be reduced. I think you'll agree that some of the regional airports are now precarious already, without any reduction in revenue. What will happen to these regional airports, in your view, if the revenue is reduced and there is no other way to replace the revenue?
Mr. Clifford Mackay: You've raised a very serious problem. That problem exists today. We have expressed concerns particularly about smaller airports and their viability. If you let the market work and there's a rationalization of service to meet whatever the market level is....
There are some airports in the country that today are operating very close to the margin. Some airports are in fact imposing special charges on passengers to cover operating deficits today, and that's a serious problem. If in fact there's a reduction in traffic, that problem will get worse.
You've put your finger on probably the most intractable problem for us as an industry in the country: How do we ensure we're providing a good level of service to smaller communities, but do so in an economic way?
Mr. Bill Casey: The proponents say they will guarantee regional service, and the minister says that's part of his criteria, that they must guarantee regional service. But if the airport itself isn't viable, they can't guarantee regional service, unless somebody is going to put money into the airports.
Mr. Clifford Mackay: That's a logical conclusion.
There may be a lot of creative things that can be done at airports to make them more cost-competitive. Some airports frankly have gotten rid of a lot of overhead by rolling their overheads into the local municipal government structure, which is a good step in the right direction. Other airports have tried some fairly creative ways to create new sources of revenue for themselves so that they can continue to operate. But notwithstanding all of that, if in fact there isn't a market there, then there is a fundamental problem, and frankly it's not a problem a private company can fix.
Mr. Bill Casey: Do you have any idea of the percentage of regional airports now that are struggling financially?
Mr. Clifford Mackay: I can't give you a precise number. We have had some discussions with the Canadian Airports Council and some of the regional airports councils. I would suspect that if you did a survey, you would probably find at least 10 or 15 airports in small communities across the country that are struggling. There may be more.
Mr. Bill Casey: You mentioned earlier that some airports were quite capricious in their pricing. I don't want you to name anybody. Could you just think of one in your mind and tell us, as an example, what happened at that airport?
Mr. Clifford Mackay: I'll give you one example: some of our members received a notice advising them that in 48 hours, their airport landing fees were going to double.
Mr. Bill Casey: From what to what roughly, for a typical Dash 8, for instance?
Mr. Clifford Mackay: This was in a cargo environment, so it's a larger aircraft. I can't remember what the precise number was, but I can find out for you.
Mr. Bill Casey: In 48 hours, they were going to double.
Mr. Clifford Mackay: That kind of makes a bit of a mess of your short-term business planning.
Mr. Bill Casey: It does.
What's your thought on cabotage as a way of supplying competition?
Mr. Clifford Mackay: The problem we have with the idea of cabotage is this. With the hub-and-spoke system that currently exists in the air industry, what would tend to happen if you opened up the Canadian market to cabotage is that the U.S. carriers, who would probably be the ones most interested in taking advantage of that market opportunity, would likely look for routes that would maximize their ability to feed their hub. So you would probably end up with more competition on those routes that are already well served, and on those routes where you're really hoping to improve the amount of service you won't get the competition because they don't feed the hubs. For example, you would get a lot of competition out of Toronto down into Minneapolis or Chicago or Detroit, but it's unlikely you would get American carriers moving into some of the smaller cities in rural Ontario.
Mr. Bill Casey: Or Saint John to Moncton.
Mr. Clifford Mackay: Quite possibly...a good example.
The Chair: Thank you, Mr. Casey.
Mr. Fontana, please.
Mr. Joe Fontana (London North Centre, Lib.): Mr. Chairman, for a moment I thought we were doing a study of the viability of airports as opposed to one on the viability of airlines. I know that the two might be connected—
The Chair: They are connected.
Mr. Joe Fontana: —but it's a stretch, and if we as a committee in fact want to review the airport policy, of course, I think—
The Chair: Probably the questions might be better asked of the Canadian Airports Council, which will be appearing before us.
Mr. Joe Fontana: Thank you for your submission, gentlemen. I want to follow up on some of the questions of Mr. Comuzzi, because I think he was getting to the crux of the matter. I think your submission said that the regulatory framework or the policy framework seems to be working well domestically and transborder and is internationally still regulated, and for all intents and purposes don't go back; in fact, maybe, look at further liberalization. But as far as the policy and regulatory framework are concerned, I think you said that it's pretty good, not to go back. Then, in answer to the questions about the free marketplace, you're going to have companies that come in and out, and it's not because of the policy framework.
I'm just wondering. You have 300 members, from big to medium to small. What is the state of the domestic situation in the country in terms of all of these companies? What's the return on investment? Would you characterize the domestic health of our airlines as excellent, good, poor, or bad, generally speaking? I'm sure there are some that are making really good money and some that are not making any, but I want to know the general health of our domestic airline industry. How would you characterize it?
Mr. Clifford Mackay: Let me try to put it relative to other countries because then it at least gives you some comparison. Generally speaking, I would rank the aviation industry in this country on the plus side of the 50 percentile; in other words, we're healthier than most. We're not as profitable on average as the American airlines are, but a number of our smaller airlines are very profitable and are doing well. The two larger airlines, partly because of the competition they've had among themselves, frankly, have not made as much money as their American counterparts.
Look at other parts of the industry, like the cargo part of the industry, which has been growing nicely in this country. It's doing well, although their margins are pretty thin. That's traditional in that business; they're not worse off than some of their colleagues.
Recently, particularly in the last three or four years, a number of the flight schools and whatnot have been doing extremely well. They're growing. We have a growth market for pilot training and whatnot in Canada. We offer a highly competitive product and we're starting to attract significant numbers of foreign students into our flight schools.
In general, the industry's prospects in the last three or four years have not been bad. They've been relatively good.
Mr. Joe Fontana: So the policy framework and regulatory framework, according to what you've just said, apparently seem to be working well overall, save and except the caveat that you have two big airlines beating their brains out competitively in certain markets and therefore not making the profits they should be making compared to their American counterparts, with one in more trouble than the other. I can hardly wait until those two get in here so that we can ask them some real good questions about why and what they're doing and not doing.
But I look at the policy framework. You also said that we need to look at a more competitive industry structure. You didn't address those issues, except that what you are essentially saying, for the good of your members—and I'd like to know where the consumers come in here—is “Get rid of the taxes. Get rid of the fees.” I hear this from everybody. You're saying to get rid of all of these costs that your members obviously have, like fuel taxes, I suppose, airport taxes, and NAV CANADA taxes, and you're saying to let you write off meals as—where is your great list here?—travel deductibility for flight crews. That's about $1 billion there.
If we gave you that, can you tell me if the average consumer would get a break on the excessively high ticket prices?
Mr. Clifford Mackay: I think if you were to—
Mr. Joe Fontana: Or is the company just going to take it as profit? In fact, that's what you could assume from this list: that all of your members are getting gouged and that if we did all of this for you they would be better off, and you would think they're going to pass on those savings to the consumer. Is that what you're telling me?
Mr. Clifford Mackay: I don't think there's much doubt that in an open market the consumer will get a break if we get rid of some of these costs. But let me just say, sir, that a lot of the costs we're talking about here are new costs that have been imposed on the industry in the last six or seven years. This idea of us now—
Mr. Joe Fontana: Yes, but those costs were in one way, shape, or form somewhere else.
Mr. Clifford Mackay: They were being paid for by the taxpayer.
Mr. Joe Fontana: And through the ticket prices to the airlines—
Mr. Clifford Mackay: And through the ATT. Those were the two major sources.
But we're not saying we shouldn't be paying our taxes or anything. We're saying that you're imposing on us special costs above and beyond what is normally imposed on normal businesses in this country, and we don't know why. We pay pretty high fuel taxes. For other industries there used to be a manufacturers' sales tax. That's gone. Now there's a GST. We pay GST. Why are we also paying fuel taxes? You're not paying for any of the infrastructure out there. In the good old days the government used to argue, we're paying for all this infrastructure, so we should be charging you some extra taxes for it.
Mr. Joe Fontana: No, my point is are these the competitive factors you're talking about? The competitive factors are not with the U.S. carriers that essentially are not allowed in this country.
Mr. Clifford Mackay: Whoa, wait a minute. U.S. carriers can fly anywhere in Canada.
Mr. Joe Fontana: No, on the domestic side. Mr. Casey asked you about cabotage. I want to see where the consumer fits into this whole equation. It seems to me that every one of your members pays exactly the same kinds of fees.
Mr. Clifford Mackay: Let me try to answer the question.
The Chair: Let's let the witness answer for a while now.
Mr. Clifford Mackay: I'll give you two examples. We're not opposed to paying user fees. I've said that a number of times here. So that's not the issue. We have a couple of issues with the way in which airports price. I think those are fixable problems.
We're opposed to special costs that are imposed on the industry and follow through to some degree to the customer. We certainly haven't passed a billion dollars' worth of costs onto the customer in the last three or four years. That simply has not happened. But we're opposed to costs that are being imposed on the industry that don't lead in any way to an improvement in the productivity or the competitiveness of the industry. We don't think those are reasonable.
The Chair: You have one minute left.
Mr. Joe Fontana: I asked some transport officials for some information on this. Since deregulation, do you track numbers such as revenues, costs, and ticket prices? Do you do all that for your industry?
Mr. Clifford Mackay: We don't do it formally, but we can certainly get you numbers.
Mr. Joe Fontana: Yes, I'm trying to find some numbers. Since 1988 when they deregulated, Transport Canada have not been doing some of the stuff we would want to see.
But I think some of the things you've indicated, such as the general health of the domestic airlines, are very helpful. Obviously, there are always costs built in that would help the bottom line of the airlines. But with the exception, as my colleague, Mr. Comuzzi mentioned, of one so-called troubled large airline, what you're saying is that for all intents and purposes everything is fine and hunky-dory, and we shouldn't react too quickly in the short term and start reregulating the industry.
Mr. Clifford Mackay: I think that's true. But I want to make two points: one, everything isn't fine and hunky-dory. We've given you a list of things that we think need to be addressed, and we're serious about them. We think if some of them are addressed, we'll be more competitive, not less competitive, and we'll be able to offer better prices to consumers if we're more competitive.
The second point I'd like to make is that if you look at the range of consumer choice that exists today for the average person wanting to travel in Canada compared with what existed ten years ago, you'll see that we are light-years ahead of where we used to be. In terms of the range of destinations, the number of different choices you have as to the kind of seat you want to travel on and where you want to go, we are light-years ahead of where we were ten years ago.
The Chair: Thank you, Mr. Fontana.
Mr. Bailey, please.
Mr. Clifford Mackay: You don't agree. Okay.
Mr. Joe Comuzzi: Maybe internationally, but not in Canada.
The Chair: Order. Mr. Bailey.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Mr. Mackay, when this issue broke this summer, I don't think it surprised anyone on this committee or people like yourself in the airline industry. I think it maybe came at a very appropriate time because the politicians were all at home and so on. If you happened to live in western Canada, the immediate issue and the immediate phone calls dealt with the region, and that's a natural thing. Geographically in Canada, that's what you assume: that your phone will light up and they'll say “Thank God! At least we have WestJet”, and so on and so forth. But then as the issue progressed to the general public, it moved to a national issue, and there we have the two national carriers, if you want to use that word, and the proposal to merge as such.
What I want to get to is that there is a third issue, and it's an international issue. We learned yesterday of the percentage of people relying on international alliances that we have at the present time.
My question leads up to this. Today we have two international alliances—i.e., Star Alliance and Oneworld. Many things could happen with that present restructuring, but no matter what happens, it would appear that either Star Alliance or Oneworld is going to lose the Canadian partner, if you want to use that word—or that's a possibility.
If one airline emerges out of the two we have now, which we could call a national airline, would that one airline be able to meet the commitments that are presently held through, you might say, international treaties with both Star Alliance and Oneworld, in order to serve the Canadian public?
Mr. Clifford Mackay: Well, first there are four international—
Mr. Roy Bailey: These are the two main ones, yes.
Mr. Clifford Mackay: These are the two biggest.
I am not an expert on the details of the obligations you take on when you join one of these alliances, but it is clear in general that if you're a full-fledged partner of one, it is very unlikely that you would be allowed to continue as a full-fledged partner of another alliance. So I don't think that's a realistic option. I don't think you could see a Canadian entity being a full-fledged partner of two world alliances. I think it would be one or the other.
Given the competitive factors out there and given that internationally, increasingly airlines are marketing their product under the umbrella of one or the other of these kinds of alliances, to be in two camps at once I think would be pretty difficult, from a business point of view.
Mr. Roy Bailey: That's exactly the reason, Mr. Mackay, that I posed the question in the way I did, because that leads up to the second question.
These alliances are governed by the.... This is a governmental treaty, you might say, between the different nations.
Mr. Clifford Mackay: No, that's not true, sir. To some some degree, these alliances emerged as a means of doing business around all of these international restrictions on a country-to-country basis. It was a way of getting around those rules.
Mr. Roy Bailey: But somewhere, Canadians, through one major airline, will.... Of the overseas alliances, one will be dropped, as you suspect, and as I do too. One airline in Canada will not serve the overseas market like we have at the present time. Is that a correct statement?
Mr. Clifford Mackay: I'm not sure I would agree with that, because if you look at the destinations that exist under one or the other of these alliances, you'll find that with few exceptions, both of them are truly global. You can fly almost anywhere in the world under the Star Alliance. You can fly almost anywhere in the world under the Oneworld alliance. So in that sense, your choices would not be restricted, as a Canadian person wanting to fly abroad.
Mr. Roy Bailey: This is my last question, Mr. Chairman.
I suspect that with the one major airline, you're going to see some major new entries into the market. That's almost inevitable, and I certainly don't shy away from that. But I have a concern that with only one airline, maybe some of the smaller regional airlines will be inhibited from growing and in some way kept on a regional basis. Do you understand what I mean?
I know this is where your organization.... They are members of your organization, and they would rely on your organization to help them grow, not only within the region, but into the national market. Do you see any hope?
Let's take WestJet as an example. It is limited outside the region. Do you see an airline company such as that coming to you and saying “Look, Mr. Mackay, we need some help to get into this national market”?
Mr. Clifford Mackay: Well, first things first. If WestJet were to decide to fly someplace, they wouldn't need anybody's permission. In the market in Canada today, they'd just go do it. It's entirely their decision.
Mr. Roy Bailey: Yes, I realize that.
Mr. Clifford Mackay: One of the realities, though, that I think you're alluding to is that regional airlines derive their revenue really from two kinds of traffic. One is origin-destination traffic—in other words, people who want to fly from Grande Prairie to Calgary or Edmonton and back again. Secondly, they derive a significant amount of traffic from what are called connectors—people who want to fly from Grande Prairie to Tokyo, and the first stage and the last stage of their journey are through the regional carrier.
In that second category of passengers or customers, it's quite important, if you want to offer seamless service to your customer, that you have what are called interlining agreements. In other words, when you go to buy your ticket, you may be flying on two or three different carriers, but you have one ticket, and you're allowed to go all the way through. That's important to their businesses, and if there were a suggestion that somehow that sort of process was going to be inhibited, I think there would be some concern from some of our members.
Others of our members—and WestJet is the best example—don't care about that. They do not interline, because interlining costs money, because you have to pay your share of that great overhead of all of those reservation services and whatnot on that international system. They'd rather offer you a cheaper price, and if you want to go and fly somebody else when you get to Winnipeg or Calgary, buy another ticket.
So it depends on what market you're targeting and what your sales strategy is.
Mr. Roy Bailey: Thank you.
The Chair: Thanks, Mr. Bailey.
Mr. Drouin, please.
Mr. Claude Drouin (Beauce, Lib.): Mr. Mackay, I apologize for missing your presentation. I was attending another committee meeting.
In your report, which I have subsequently read, you conclude that the industry must continue to move in the same direction. When we compare today's airline industry with the situation a decade ago, we can see that the situation today is positive, even though you make some recommendations on the heels of airport devolution which you claim cost you $800 million. You make some recommendations to the government with a view to cutting future costs. However, you don't put a dollar figure on these recommendations. I believe my colleague Joe talked about them. I would be interested in finding out what the cost of implementing these recommendations would be. Perhaps you could share that information with us, as you did with the Standing Committee on Finance.
You are urging us to stay the course. I'd be interested in hearing your views on the past as well as the current situation.
Mr. Clifford Mackay: I'm sorry; I'm not sure I understood the question well.
Mr. Claude Drouin: I'll rephrase my question. First of all, I asked you if you thought the Canadian airline industry is healthier today than it was a decade ago.
Secondly, you mentioned the cost associated with airport devolution, but you don't say what it would cost to improve the situation and it's important for us to have those figures. Do you have some idea of the cost involved?
Mr. Clifford Mackay: Yes.
We've given you these numbers to try to put in context some of the pressures that have come onto the industry as a result of the change in the short term.
Let me again say this isn't the fault of particular airport authorities. To be quite frank with you, one of the things that happened in government, for a number of years before these airports were transferred, is that there was very little investment. So we've had a groundswell of investment from the airport community, some of it quite legitimate, and quite a bit of it we have encouraged as an industry, because we need the facilities and we need them to be efficient and to operate well.
So we're not arguing that we should just stop investing in airport infrastructure. What we're trying to do is to encourage in every way possible a very businesslike and efficient approach to this. We want infrastructure that's world-class and very efficient and effective, because the better the infrastructure is in that context, the more competitive we can be as an industry.
To give you a sense of some of these costs, the biggest single cost for an airline is its people. That has always been true. But once you get beyond the people, you start getting into the second largest category of costs, which is normally the fuel. Then once you get beyond the fuel, the third largest category of costs is usually what's referred to as commissions and external costs. These are things such as airport fees, navigation fees, and travel agency commissions.
What we've seen in our cost structures in the last few years is a significant growth in those costs relative to other costs in our business. We're trying very hard to find ways and means to make sure those costs are under control and that we're getting the maximum value for what we're paying for. That's really what we're saying.
I hope you're not getting the impression that we're arguing that we don't need to see good businesslike investment in airports or air navigation services. We do need to see it, but we need to see it in such a way that it maximizes our competitive advantages.
Mr. Claude Drouin: Thank you, Mr. Chairman.
The Chair: Thanks very much, Claude.
Mr. Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Ile d'Orléans, BQ): Mr. Mackay, I'm sorry I missed your presentation. I was told that the committee would not convene before the voting took place. That's was I was unable to be here. However, I have listened closely to my colleagues' questions.
My first question concerns an item on page 2 of your submission. Your association bluntly asks the committee and the government to preserve the status quo. Specifically, you state the following in the second paragraph:
In that regard, the Association [...] urges that the Committee
exercise great caution [...] in its consideration of any demands
for modification to the existing market-based regulatory and policy
Further on, in the fifth paragraph, in referring to the government, you note the following:
Government should resist the temptation to impose [...] changes in
the open and competitive market, policy and regulatory environment
in which the industry operates today.
Clearly, all of these comments refer to a deregulated market. I can understand why you don't want to revert to a regulated market, but your comments about policy changes are rather vague. You say the government shouldn't change its policy or regulatory environment. Are you talking strictly in terms of competition?
I have two examples for you. I'm not asking you to comment on the offers, but do you think the government should amend its existing limits on foreign ownership, that is 25% foreign ownership and 10% individual ownership in the case of one of the country's major airlines?
You're also urging the government to exercise caution. Isn't that correct? The two rules I just mentioned can affect the way the industry operates. If Canadian airlines were foreign-owned, for example, by Americans, a decision could be made to turn these airlines into feeders and to have flights for Asia depart from Chicago, Los Angeles or Dallas. Do you understand my question?
Mr. Clifford Mackay: To answer your first question first as to are we simply advocating within the context of the Competition Act or is it broader, when we refer to having an open market, we're talking more broadly. We're talking about the ability of companies to decide Rwhere they fly and where and at what price they offer their services. So that goes somewhat beyond the strict elements of the Competition Act as to who they partner with and all of those normal things that go on in a marketplace. So we're thinking in broad terms.
With regard to your specific question with regard to foreign ownership restrictions in the industry in Canada, to be very candid with you, the view of our members is that there is not a clear consensus on that. Some members have expressed a view that they'd like to see some of these rules relaxed and other members have said quite clearly that they're very comfortable with the status quo. So as an association we have not taken a position to advocate for change in the current structure.
Your observation that if the industry were completely controlled from outside the country and whether or not that would lead us to a pattern where we wouldn't have any major hub development in Canada—I think there's a debate on that. Hubs, in our general view, develop because of economic circumstances and where people think they can maximize their economic advantage. It is competitive. In Canada we have what we would call two international hubs, very strong ones, and a third that is doing reasonably well, and that's Vancouver, Toronto, and Montreal.
I think there would be some concern among our members if we were to completely move away from ownership restrictions in the industry, not just because of the economic decisions that may get made, but also because the practice internationally still exists where routes are regulated by governments, and governments tend to negotiate on behalf of the airlines in their jurisdictions. If you didn't have Canadian-owned airlines, you could run into all sorts of complications in that context. That's a reality we have to live with, at least for the foreseeable future.
Mr. Michel Guimond: Mr. Chairman, I'll conclude with a comment. I greatly appreciated your statement to the effect that airport devolution will cost airlines $800 million more every year. I also appreciated what you said about the costs of privatization and the commercialization of NAV CANADA, which amounted to $500 million. Your comments are consistent with the position taken by the Bloc Québécois and by me as a member of this committee. We predicted this outcome in 1994 and 1995. The mere fact that Mr. Fontana is so determined to challenge your statements is proof that the truth hurts. You may recall that Mr. Fontana was once parliamentary secretary. Quebeckers don't soon forget. Our motto is: Je me souviens.
The Chair: Thank you very much, Mr. Guimond.
Mr. Calder, please.
Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you very much, Mr. Chairman.
I want to follow up on what Mr. Bailey was talking about with the alliances, Star Alliance and Oneworld. Any way you look at it, either one of the deals that are on the table right now, you're going to see either Canadian being moved from Oneworld into Star Alliance or Air Canada being moved from Star Alliance into Oneworld. The ultimate result will be, for instance, that a Canadian passenger wanting to go to the United Kingdom is only going to have one Canadian international carrier to deal with. Is that going to affect the ticket prices, or is there any way we can get around that?
The other issue I'm concerned about is if one deal is allowed to go through, there is the issue of using either GENESIS or SABRE. Not everybody is the same as us. We're all frequent flyers sitting around this table, so we know basically how the ticket system works. But if, for instance, somebody doesn't fly all the time and wants to fly from Toronto to Calgary under one particular deal, they could find themselves going from Toronto to Chicago to Calgary. I'd like your comments on that. Do you think that is a problem?
Mr. Clifford Mackay: First, let me try to address the consumer choice question, if there was only a Oneworld or only a Star Alliance. If you wanted to fly on the Canadian carrier that was part of that, then, yes, you have one choice, but the other thing that's gone on in the last number of years with the opening up of international traffic is that there are a lot more other choices that now exist. For example, if you didn't want to fly on that Canadian carrier from Montreal to London, there is nothing that would stop you from flying British Airways or some others. Frankly, Virgin is thinking of picking up some rights in Canada as we speak. So I think there are going to be other choices for the international traveller.
On your second question of routing, that's conceivable, that could happen, but if you were wanting to travel from Toronto to Calgary, unless we change the cabotage rules, which we're not advocating, then you would obviously look for a service that was direct Toronto to Calgary. As a consumer, that's what you'd be looking for. It's hard for me to see a situation where that service wouldn't be offered, because it's a very profitable route. So why would anybody buy a ticket to route through Chicago or Detroit to do that?
Mr. Murray Calder: For instance, if you had a company that had a huge amount of debt load and you were one of the contributors in there, through the ticketing you could actually have those people flying on your line instead of the one that's...thereby contributing to a higher debt load again and a possible bankruptcy.
Mr. Clifford Mackay: I suppose through pricing you could try to encourage that, but there are conventions that would not allow a central reservation system to force that kind of routing. The conventions generally require you to route the most direct route unless the customer demands otherwise.
Mr. Murray Calder: That's fine.
The Chair: Thanks, Mr. Calder.
Bev Desjarlais, please.
Ms. Bev Desjarlais: Thank you.
I just have to follow up on your comment that we are light-years from where we used to be. Mr. Comuzzi chuckled, as did I and I'm sure others probably did, because if you're in the smaller centres in Canada, you certainly don't feel as if you're light-years away from it. If someone could come here and tell me where they've seen the benefits in a cost reduction in ticket prices, I'd like to see it. Even with the two carriers, there always seemed to be the same ticket pricing. There never seemed to be any kind of real savings. So I think there's a real fear that with one less airline to work with, the ticket pricing is going to be that much worse.
You made the statement that we're light-years away from where we used to be, when we're actually back to where we kind of began many years ago, where we have an airline supposedly in trouble and we're supposed to come up with what's best for the whole airline industry in Canada.
I'm not so much going to ask you a question as just make a statement. You stated that in an open market everything is left up to the companies, including the price, where they fly, the whole bit. However, you really don't want to see that same approach put into the airports or anything else.
I'll certainly be questioning what the price is that everybody is paying for the airport leases. Maybe in Toronto it's seen as being an exorbitant price, and I guess if you compared Toronto real estate, I would have to question whether it's an exorbitant price. But in the smaller centres I don't think the leases have been that great. But I'll certainly be checking to see if that's the case.
But again I'm getting the impression that you think the market is okay. You're saying that everything in the system is okay. We just let it go. If that's the case, then I think you're saying that we let Canadian Airlines go into bankruptcy and hope someone else comes in to meet the market demand. So if your view is to let the markets decide in the case of what we're seeing now, where one airline is saying we have to have something happen, are you suggesting that we should just let the markets go, let that company do whatever it's going to do, and if it survives, it survives and if it doesn't, so be it?
Mr. Clifford Mackay: I think you made three points. Let me try to address all three.
With regard to my comment that we're light-years ahead, what I really mean by that is in the context of the total range of consumer choice in the marketplace. Ten years ago you didn't have the kind of vibrant charter industry we have today, and you didn't have the range of players in the industry we have today. You didn't have all those choices.
I can't argue with you. In smaller centres in some cases the choices have not grown. They've either stayed the same or shrunk to some degree. I used to live in Saskatoon, and the service in Saskatoon today compared with what it was ten years ago is probably not as good. But I have to come back to my basic comment. Is it competitive? Is it meeting the market in terms of what the market will bear? That's an issue. If you believe it's in the public interest that service should be greater than the market will bear, I'm not going to quibble with that or argue with it, but I'm not sure that the industry should be asked to do that job. That's really the point I'm making.
The Chair: Thanks, Mr. Mackay.
We only have two interveners left, colleagues, and then we can go in camera for one matter we must deal with this evening. So we have Mr. Comuzzi and Mr. Casey, Mr. Comuzzi first.
Mr. Joe Comuzzi: Thank you, Mr. Chairman.
Mr. Mackay, I thank you. You've been a very important witness to us today.
But just clarify for me that your organization, the Air Transport Association of Canada, represents commercial aviation in Canada, and in your organization you represent Canadian and Air Canada. Because of their size, because of their representation, do they have any particular benefits as compared to a smaller airline, or is all your membership treated equally? Talk to me about the structure.
Mr. Clifford Mackay: Sure. The way our bylaws are written, sir, is that the two major net carriers pay the largest fees. Our fees are structured on revenues generated by company, so there's a schedule, which we can provide to you if you wish. But they get a seat on the board, so they each appoint one member to the board. The bylaws then have categories of membership. There's a cargo category, there's a regional airline category, there's a category for what we call local service operators, there's a category for helicopters, and each category, within itself, appoints or elects a certain number of members to the board. That's how our bylaws are structured and that's how our governance systems work. So the two major carriers each appoint one member, and I think the total board structure is about 17 or 16 members.
Mr. Joe Comuzzi: I'm glad to hear that.
So what you've said to us today is that—Mr. Fontana's question—on a scale of one to ten, you're not as profitable as some of your American colleagues, but you're about a six; that you're very happy with the policy system as it's in place today; that you're representing all the airline industries in Canada; and that the commercial aviation industry in Canada is in pretty good shape. I don't want to get into detail, but we'll look at those other things that you've recommended we look at. But by and large, it's in pretty good shape and it shouldn't be changed.
Mr. Clifford Mackay: Yes. We believe the general policy direction the government has been going in for a number a years now, which is toward deregulation in an open and competitive market, is the right direction. Our view is you should continue to go in that direction.
Mr. Joe Comuzzi: And the reason we're here today is not because of the system but because of the corporate policies of two of the larger airlines.
Mr. Clifford Mackay: I don't know whether that's what it's all about, but my understanding is that the reason these hearings are going on is that there's a significant probability of a restructuring in an industry that has a lot of public interest involved in it. I think you're struggling with where the public interest is and how you best express that.
Mr. Joe Comuzzi: You're saying you're satisfied basically with what the public policy is as of now.
Mr. Clifford Mackay: The general direction, yes.
Mr. Joe Comuzzi: Thanks. That's what I wanted.
The Chair: Thanks, Mr. Comuzzi.
Mr. Casey, and then we'll wrap it up.
Mr. Bill Casey: At the ad hoc committee meetings you attended in September, we also had some presenters who were concerned about NAV CANADA's board of directors and their management. Many think Air Canada and Canadian Airlines already have an inappropriate amount of influence on NAV CANADA's direction on the board of directors, and they fear that if we go from two major airlines to one, they would completely take over the direction of NAV CANADA and people like Mr. Jackson's constituents may end up paying more than their share, or whatever. Do you have a comment on that?
Mr. Clifford Mackay: Let me just say how NAV CANADA's board is structured, for those who don't know it. NAV CANADA is a not-for-profit, non-share corporation whose board is appointed as follows.
We, ATAC, on behalf of the industry, appoint four members to the board, and we have an internal process through which we go to determine who are appointed. All members appointed to that board have to meet conflict guidelines, so you cannot appoint anybody to the board of NAV CANADA who would be, by definition, in conflict. For example, no employee or officer of any of the commercial aviation companies in the country that receive services directly from NAV CANADA can sit on the board of NAV CANADA. That's a conflict.
So we appoint four members. The general aviation community through the CBAA, which is the Canadian Business Aircraft Association, and COPA appoint a member to represent their interests. Through a series of similar kinds of structures the unions appoint two members. The Canadian government appoints two members. Then, if my memory serves me correctly, there are six members at large appointed to the board, who are basically appointed through a fairly standard nomination process that most boards have. That's the structure of the board.
So with regard to the influence of the commercial aviation community on the board, we appoint four out of—I don't remember what the figure is—
Mr. Bill Casey: It's fifteen, I think.
Mr. Clifford Mackay: Fifteen. Those appointees are obviously scrutinized from the point of view of any conflict with regard to any direct relationship with commercial aviation.
The Chair: Thanks, Mr. Casey. Thank you, colleagues.
Thank you, Mr. Mackay, for appearing before us on behalf of the Air Transport Association of Canada.
Colleagues, we now will move in camera for a motion we must deal with. Thank you, everyone.
[Proceedings continue in camera]