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STANDING COMMITTEE ON TRANSPORT
LE COMITÉ PERMANENT DES TRANSPORTS
[Recorded by Electronic Apparatus]
Tuesday, October 26, 1999
The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good morning, 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 morning, colleagues, we welcome the following witnesses from the Canadian Transportation Agency: Mr. Gavin Currie, director general, air and accessible transportation branch; Mr. John Jacob, acting director, licensing and charters directorate; and Mr. Claude Jacques, director, legal services directorate.
Gentlemen, welcome to the transport committee. You may begin with your presentation, wrapping it up in about 10 to 12 minutes, I hope, in order to leave enough time for my colleagues to ask you the pertinent questions.
Thank you very much. When you're comfortable, please begin.
Mr. Gavin Currie (Director General, Air and Accessible Transportation Branch, Canadian Transportation Agency): Thank you, Mr. Chairman.
Good morning, ladies and gentlemen. I should like to thank the committee for the opportunity to appear before you to talk about the work of the Canadian Transportation Agency.
My understanding is that your main interest lies in the issue of Canadian ownership and control and how the agency in fact determines control. I will focus on this after providing some brief context. I've prepared a deck to guide my opening remarks.
Before proceeding, I should perhaps mention that since the agency is a quasi-judicial body, I'm not permitted to explain past decisions of the agency beyond what is found in the written decisions. As I'm sure you understand, I cannot comment on the substance of applications currently before the agency.
The Agency's legal basis is found in the Canada Transportation Act, which came into effect in July 1996. The Agency has seven members, including our chair, Marian Robson. These members must make decisions on a variety of topics pertaining to transportation in Canada. They are supported by a staff of approximately 200 employees.
In the air transportation sector, the Agency protects the interests of both consumers and carriers by ensuring that airline carriers meet certain minimum economic requirements. To do this, the Agency administers a licensing system for airline carriers, international air agreements and fees for international airline services.
As for accessible transportation, the Agency has to ensure that there are no unnecessary barriers impeding the movement of people with deficiencies, in the transportation systems that come under federal jurisdiction.
On page 4, you will find a list of the general licensing functions of this system. I would simply like to give you an idea of the type of work we do in this sector. I do not intend to talk about this system in detail now, but I would be pleased to do so later on if you would like.
Page 5 deals with domestic licensing requirements. The license applicant must meet certain requirements. The applicant must be Canadian or the firm must be owned and controlled by Canadians. The applicant must have a Canadian Aviation Document for safety purposes, which is issued by Transport Canada. The applicant must be adequately insured. The applicant must not have sold tickets prior to holding a license.
In addition, applicants proposing to provide service with aircraft having more than 39 seats must satisfy financial fitness requirements.
The first three requirements are ongoing and must be complied with at all times.
Turning next to Canadian ownership and control requirements, section 55 of the act defines “Canadian” as follows:
“Canadian” means a Canadian citizen or a permanent
resident within the meaning of the Immigration Act, a
government in Canada or an agent of such a government
or a corporation or other entity that is incorporated
or formed under the laws of Canada or a province, that
is controlled in fact by Canadians and of which at
least seventy-five per cent, or such lesser percentage
as the Governor in Council may by regulation specify,
of the voting interests are owned and controlled by
So as you can see, there are two principal elements to the ownership test—the voting interest and the control in fact.
In terms of the voting interest, it is normally reasonably easy to determine for private corporations. Normally there is a limited number of shareholders and their voting interest is fairly readily established. For publicly traded corporations, however, it is somewhat more difficult. Indeed, large airlines do have monitoring systems in place to ensure that at no time is more than 25% of the voting interest in the corporation owned by foreigners. These monitoring systems have been approved by the agency.
The second element is that the carrier must be controlled in fact by Canadians. Generally speaking, the control in fact requirement is a more complex issue in determining if a company is Canadian.
I should mention that control in fact is not unique to Canada. It is also used in other countries.
Control in fact can be viewed as the ongoing power or ability to determine or decide the strategic decision-making activities of the company. It can also be viewed as the ability to manage and run the day-to-day operations of an enterprise.
In order to determine where control in fact lies, one must examine all operational, financial, and managerial matters relating to an actual or proposed air carrier. Every case is unique, and one must examine the substance rather than form, with nothing left excluded from review. The factors are assessed and examined individually and collectively.
As part of the process, the applicant typically would be required to submit the following kinds of material: incorporation documents; details of capital stock issued; detailed information on all major shareholders; shareholders' agreements; loan agreements; management agreements; operational, service, and other related agreements; and pro forma applicant financial statements.
The process at the agency is normally triggered by an application for a licence and it's subject to the 120-day statutory time limit in the act. Since most of the information to be assessed is confidential, the ownership review is typically conducted as a file hearing, that is, by written submission. Agency members review the material submitted, with the assistance of staff analysis. In complex cases it's normal for supplementary material to be requested.
There has been one oral hearing dealing with Canadian ownership and control, and that took place in 1993 and concerned the acquisition by AMR—that's the parent company of American Airlines—of an interest in Canadian Airlines. I should stress, however, that that was part of a broader public interest review under the National Transportation Act of 1987. Under that act the agency was responsible for reviewing mergers and acquisitions to determine whether or not they were in the public interest. That power is not in the current Canada Transportation Act.
That hearing took five weeks. It was a very long hearing, with extensive testimony and cross-examination of experts in the airline industry, plus many from senior management in all the companies involved. It was a major exercise.
Before concluding, I'd just like to mention some other domestic regulations. The domestic air transportation market is very largely deregulated from an economic point of view, and I've already talked about the requirements to obtain and hold a licence. Apart from that, there are really very few regulatory powers of the agency, but I just mention the following, which still do exist.
With regard to fares, upon complaint regarding an unreasonable basic fare or fare increase on a monopoly route, the agency may order corrective action if in fact the fare is found to be unreasonable. With regard to discontinuance of service, the act requires 60 days' notice if a carrier is the last or second last carrier serving a point. If notice is not given, the agency may order the service to be continued for up to 60 days if in fact it's practical to do so.
Talking about the terms and conditions of carriage, which the airlines apply to the services they provide, the act requires a carrier to publish or display a tariff, and the regulations specify items must be included in the tariff.
That concludes my presentation, Mr. Chairman. Of necessity, it has been brief, but I hope it focused on the issues of interest to the committee. My colleagues and I will be happy to provide additional explanation of any of the issues I have raised. Thank you.
The Chair: Thank you very much for your presentation, Mr. Currie.
Ms. Meredith, please.
Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Chair.
I would like to thank you for your presentation. It certainly answered some of the questions I raised with the department.
In looking at the role of the CTA in air transportation, I noticed that included in that are international air agreements and the international air tariffs. I'm going to be up front and ask you if you have any comment to make on an airline signing a 10-year deal in an international air agreement when it's in the throes of merger talks. Do you feel that is something that is legitimate, or would you have questions to ask the air carrier in that case?
Mr. Gavin Currie: When a carrier signs agreements for cooperation with another carrier, these agreements typically come to the agency for approval of certain aspects of them; for example, things like code sharing, which is often part of an agreement. At that time, the agency will look at the agreement and decide whether or not it is reasonable. The terms of the agreements vary very significantly.
I'm not aware of the detailed terms of these particular agreements and can't comment on them. It would appear to be a commercial agreement, and I have no idea what it contains at this stage. At some point I would expect that if there are elements of it that require agency approval, they will come to the agency for approval—as I say, for things like code sharing.
Ms. Val Meredith: So you're telling me then that an international air agreement or international air tariffs would not necessarily come before you for approval.
Mr. Gavin Currie: An agreement between two carriers can cover a very wide range of things. Generally speaking, agreements between carriers are primarily commercial agreements. They talk about the various ways in which they cooperate. They may talk about things like how they deal with baggage and interline baggage and things like that. So there are many aspects that would not come to the agency for approval. I mentioned code sharing. It's one that comes to us most often. There's a requirement in the act that if an air carrier is making use of an air carrier with flight crew from another carrier, they come to the agency for approval and we make sure the terms of the agreement, the way it's set up, are in accordance with the act and regulations.
Ms. Val Meredith: So your ability to look at international air agreements would be more on a country-to-country basis as opposed to a carrier-to-carrier basis.
Mr. Gavin Currie: Generally speaking, it is on the basis of country to country, yes.
Ms. Val Meredith: In the event that changes had to be made to an agreement that one country had with another, would you get involved in the process before the agreement was signed or after? Are you involved in the negotiating process?
Mr. Gavin Currie: The government-to-government negotiating process?
Ms. Val Meredith: Yes.
Mr. Gavin Currie: Yes, we are involved. It's normally a team of representatives from Transport Canada, who are responsible for the policy issues; Foreign Affairs, who provide the chief negotiator and the negotiating experience; and the agency, which provides information on more of the technical articles of the agreement, or the doing business articles, as well as things like tariffs and capacities. These are the issues we would tend to deal with. But yes, we do get involved in the negotiation of bilateral agreements, and more and more of these agreements do have information or provisions to deal with code sharing both between the carriers of the countries and the carriers of third countries as well. It's become a very common part of bilateral agreements now.
Ms. Val Meredith: Would you be involved in the negotiations if Canada were ever to look at cabotage? Would you be part of that process as well, or is this outside of the parameters of tariffs and code sharing that you would be operating under?
Mr. Gavin Currie: I would expect that the agency would be involved in the negotiating team. However, the decision on whether to offer cabotage to another country is essentially a policy issue, and the decision on whether to offer it and under what conditions would really be a decision of the minister and Transport Canada rather than of the agency. We would be involved more in terms of how it would be put in place in a practical sense, from a licensing point of view, for example.
Ms. Val Meredith: Let us just look to the future and say cabotage is an accepted thing. Would you then have to license the American carrier or the carrier from whatever country that would be offering that service within Canada? Would you be licensing them under your parameters?
Mr. Gavin Currie: Yes, I'm sure we would. Right now foreign carriers are licensed for any services they offer to and from Canada. If the service extended to situations where they carried traffic within Canada, I would expect that the current licensing scheme would be expanded to include that.
Ms. Val Meredith: Thank you very much.
The Chair: Thank you, Ms. Meredith.
Mr. Jackson, please.
Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much, Mr. Chairman.
I'd like to ask our guests to aid us in the decision-making process here. As far as I can see, we have to have a strong carrier to make sure there's competition in the marketplace, but some of the things are on the periphery, and maybe you might tell me that's a political decision. If you can give us any advice, I'd like to have it.
Service to small communities always seems to be thrown in. It becomes a kind of a distraction from what's happening here in the marketplace, the fact that we have a crisis in one industry. Each time we seem to subsidize it. It goes away for a while and then it seems to come back. I think we have service to the community, job loss or job dislocation, so we have the pilots coming to us—and everybody tells us they have a better deal. The third factor here is the unions, the machinists' unions and these other people. They are also approaching us.
Mr. Gavin Currie: Our decision-making is fairly tightly constrained by the legislation. As you can see from the presentation, our main decision-making is in terms of issuing licences for carriers to operate.
The requirements for issuing a licence are laid out in the act, as I described this morning. The act reads that the agency shall issue a licence if the requirements are met, so we really have very little scope to consider other aspects such as employment or service to particular communities.
Right now, the way the licensing system works in Canada, once a carrier has a licence to operate a service within Canada, the carrier may operate between any points they wish without any further economic authority from the agency. They may have to get landing slots and so on from the particular airports, and they may have to get particular technical approval from Transport Canada for certain things they wish to do, but in terms of the economic authority, it is not distinguished any more by point.
This is a contrast to the previous legislation, the National Transportation Act of 1987, that did in fact approve that service to specific communities in the designated area, that is, in the north.
That's the long way of saying that the answer is really no; we can't go beyond what the act specifies to deal with things such as you've mentioned.
Mr. Ovid Jackson: Mr. Chair, this leads to the next question. If a carrier or somebody came up with an idea that breaches that 10% or 25% rule, would we need legislative changes for that?
Mr. Gavin Currie: That is my understanding. The agency does not regulate the 10% rule for Air Canada. That is in the Air Canada legislation and it is Air Canada's responsibility to carry that out. In terms of the 25% rule, that is something we do look at very carefully, to ensure that the voting interest of a carrier's licence to operate within Canada does not exceed the 25% voting interest.
Mr. Ovid Jackson: In the normal procedure, then, should we have an offer, it would come to you and you would give us a recommendation. It seems that you have quite a lot of expertise on your board.
Mr. Gavin Currie: In terms of an offer—I'm talking about a carrier coming to us for a licence—they would certainly have to meet the current requirements in the legislation and the 25% voting interest, or in other words, no more than 25% foreign control in the voting interest is certainly something to look at and look at carefully, but I don't think we would approve a deal beyond that. It's really a question of looking at the ownership and control aspects of a particular situation. Other aspects would be dealt with by other bodies, by the minister or other bodies.
The Chair: Thanks, Mr. Jackson.
Mr. Guimond, please.
Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Mr. Currie, my first question deals with the notion of de facto control and the 25% foreign ownership. In your presentation, you said that the test was quite strict. You stated that there had been only one oral hearing dealing with foreign ownership and control in 1993, when AMR acquired an interest in Canadian Airlines.
When a foreign company is in compliance with the 25% restriction pertaining to ownership in a Canadian company but, in fact, has the right to veto any acquisition, transaction or merger, does the Agency feel that de facto Canadian control requirements are being met? Don't you think that there is some contradiction here? How can someone who owns 25% or less of the shares of a Canadian-owned company have a quasi-absolute veto right over this company? Isn't this a contradiction?
Mr. Gavin Currie: I don't think so. Everything pertains to the details surrounding the veto right. It is possible to have a veto right on certain aspects of the company in order to protect the minor interests in the company. The Agency has to examine the details of each case. The details are different for each case. Accordingly, it is possible to have a veto over certain aspects of the company without actually having de facto control.
I will ask Mr. Claude Jacques to elaborate on this point.
Mr. Claude Jacques (Director, Legal Services Directorate, Canadian Transportation Agency): When the Agency examines de facto control, it looks at the control over the daily operations of the company. Often, the veto right is there to protect the interests of investments made by foreign companies. These veto rights are used in rather unusual situations such as mergers or things like that and do not necessarily have an impact on the day-to-day operations of the company. Although, at first glance, we may think that there is some type of contradiction, it is very possible that there is no contradiction in fact. And, as Mr. Currie said, every situation is reviewed on a case-by-case basis. Thank you.
Mr. Michel Guimond: Let's say that I'm half satisfied with the answer. Let's see if I'm luckier when it comes to the 10% limit set by law for public participation in Air Canada. Could you quickly refresh our memories and explain the underlying rationale for this rule which was imposed on us by the government in 1988, at the time of Air Canada's privatization? Why was the limit set at 10%, and not at 12% or 8%? What did we want to protect by doing this? You understand that if the government succumbs to the temptation of amending this rule, we would be happy to tell it that it is going against the rationale it used in 1988, when it established this rule.
Mr. Gavin Currie: The 10% rule that pertains to Air Canada does not come under the Agency's jurisdiction. I cannot, therefore, comment on it. Mr. Jacques, have you anything you wish to add?
Mr. Claude Jacques: No, in fact, the predecessor to this Agency was not even part of the negotiating process and therefore we are not in any position to say why this limit was set at 10% or at 12%.
The Chair: Thanks, Mr. Guimond.
Mr. Hubbard, please.
Mr. Charles Hubbard (Miramichi, Lib.): Thanks, Mr. Chairman.
First of all, as a prelude to this, I'd like to say that in terms of many of our rural communities and small towns, this is a very important issue, because we're dealing not only with service but with pricing. The Atlantic provinces, especially, are very much concerned with the future of their airports and the future of air service.
With that, we have to look at the history of this. We find that Canadian Airlines, of course, is a new player on the Canadian scene in terms of the marriage that occurred among the various smaller carriers that make up that company. Most of the problems we talk about and hear about today centre around Canadian.
Were there decisions made in the past 10 years at Canadian that should have been reviewed by the Government of Canada and that have brought about this crisis in terms of Canadian's economic viability for the next year, for the future? Are there things that should have been controlled by your agency or by some other government department in terms of the decisions their board made, decisions that caused the crisis that we see in this country in air service?
Mr. Gavin Currie: I can't think of anything the government could have done to have changed that in terms of certainly the role of the agency. The agency's role is fairly tightly circumscribed by legislation.
For example, financial fitness, which is perhaps one area that might relate to your question, was not a factor in the National Transportation Act of 1987 and therefore was not in place during most of the period you're talking about.
The financial requirements that exist now, that came into legislation in 1996, are only for start-up carriers and only refer to the start-up period. They do not carry on as an ongoing requirement. It's simply a question of trying to make sure that when a carrier starts up, it does have the financial resources to give it a good chance of success during its initial period.
In terms of putting that together, my understanding is that the government felt that trying to monitor financial fitness on an ongoing basis, or looking into too much detail in terms of the operation of the company, was not reasonable. The marketplace should be allowed to proceed.
Really, there was nothing in the time period about which we're talking here that gave the agency any authority to look at the financial situation of Canadian and therefore any opportunity to comment on any of the commercial decisions taken during that period that have led to the company developing as it has.
I really have nothing much else to add to answer your question here. It's a fairly limited answer, I'm afraid.
Mr. Charles Hubbard: I know, Mr. Chairman, what's being said, but the point is, what has happened has been a type of catastrophe, you might say, in some areas, in terms of the future of air service in this country. Certain things must have been missing.
With the 25% rule, certainly other groups must come to you with concerns. Are they arguing that there is not the economic basis in this country to support an airline? Is this where we're coming from, that they have to go to an international financier or company in order to get the money that's needed to keep their airlines afloat? What are the arguments being developed in terms of the 25%, which is a concern today, and with the things that this committee may hear?
Mr. Gavin Currie: The 25% rule is very much a policy issue. Consequently, we really don't get people coming to us saying we should change the 25% rule. They tend to take that to Transport Canada and the minister.
We certainly do occasionally find companies coming in for licences where the way they're structured gives more than 25% of the voting interest to non-Canadians. The companies then either restructure to change that or they don't get a licence. It's only in that context we would get involved, really.
In terms of people asking for it to be changed, that type of request tends to go to the minister as a policy issue as opposed to coming to the agency as a regulatory issue.
Mr. Charles Hubbard: But I'm asking, though, what the arguments are for. Is the money not available in this country to maintain at least a 75% ownership?
Mr. Gavin Currie: In a general sense, the types of argument I hear are that Canada, in the overall scheme of things, is a relatively small country. It obviously does have significant financial resources, and we have airlines that are financed entirely within Canada. On the other hand, if you look at the rest of the world, there's obviously a lot more financial capacity there than there is here.
There is a comment made from time to time that if it were possible to tap bigger financial resources, it might be possible to have a more successful airline. These are the kinds of arguments put forward. However, perhaps I could put it into an international context. The types of ownership rules we have here in Canada are very typical of other developed countries'. The actual voting percentage does vary from place to place. In some cases it's like ours, 25%, and in other cases it could go up to 49%.
Perhaps the key thing as well is that the control in fact—as Claude was saying, the operations must be controlled within the country—is quite typical of not only Canada but also the United States and European countries. They expect the operation to be controlled within the country.
The Chair: Thanks, Mr. Hubbard.
Ms. Desjarlais, please.
Ms. Bev Desjarlais (Churchill, NDP): Following a bit behind Mr. Guimond's question on the 25% foreign ownership and the veto right of the company within the Canadian market, you said—and I may have misunderstood—it all depends on where the veto is allowed. If it's there to protect the interests of foreign investors, any kind of veto that would protect foreign investors but may not necessarily be of benefit to Canadian investors....
As long as it ensures that foreign investors are going to make a profit and everything is going to work their way when it still could jeopardize Canadian investors or the Canadian industry, I see that as not being beneficial in terms of Canadian involvement. Is that what you're saying, that as long as it looks at just the foreign investors, that would be okay?
Mr. Gavin Currie: No. Clearly, these types of veto tend to be found in the shareholder agreements. The shareholder agreements do lay out in detail how the different shareholders interact and what rights each shareholder has.
Generally speaking, the rights of the shareholder tend to be related to the voting interests in the company. Nonetheless, you do find in shareholder agreements provisions that are there to protect the minority shareholder under certain circumstances, such as major capital investments, major acquisitions, mergers, or sale of major assets, things that could materially affect the relative value for the minority shareholder. This is not uncommon in other industries as well, where the shareholder will have certain rights to protect their investment.
In terms of whether that translates into control in fact on an ongoing basis, it has to be looked at in terms of the particular situation. But the very fact of having a veto over certain things does not necessarily translate into control in fact. If it was a veto over the normal day-to-day running of the company and all strategic decisions, then that would probably translate into control in fact. If it relates to certain things under certain circumstances, then I think a veto does not necessarily translate into control in fact.
I might ask John Jacob, who has considerably more experience in this area than I have, to comment further.
John, would you like to comment on that?
Mr. John Jacob (Acting Director, Licensing and Charters Directorate, Canadian Transportation Agency): Yes, I would.
If you have a foreign investor who makes a very substantial investment in a Canadian airline, they're going to want to protect their investment to some extent. When the airline initiates very major transactions that could potentially be very damaging to the company, if the transactions were not thought out clearly and they could be damaging to the investor, who could lose his money, then the investor is going to want to have some veto rights. The veto rights would be there to protect the investment.
Now, the veto rights would certainly be a constraint on the company. Whether or not the veto rights would result in control in fact accruing to the foreign shareholder, that determination would have to be made on a case-by-case basis.
You would have to look at the specific case, the specific veto rights, what transactions can occur without a veto authority, what are the veto rights. So you would have to look at the specific situation to determine whether or not this was a control in fact problem.
Ms. Bev Desjarlais: Following on what Mr. Hubbard has said, should there have been things done over the past number of years to avoid the crisis we're in?
You indicated that after the company is operating, those are decisions that are made in the operation of the company, but I would go back to the control in fact documentation you ask for when a company is applying. You ask for all of these different documents and agreements probably to ensure exactly where the company stands at a particular point. Would it not be reasonable to follow up and ensure that's happening on an ongoing basis?
Mr. Gavin Currie: It depends on what you mean by following up on an ongoing basis. If, for example, there are major changes to these agreements, then certainly the agency would expect to be told about them. In fact, there's a requirement in the legislation that the agency be informed if there are significant changes in the company that might lead to change in Canadian ownership and control.
In addition, the agency does have a monitoring program, and under the monitoring we would certainly look at major changes. For example, if we found out a company has a major new loan or has issued new stock, we would certainly be in touch with the company to find out the details of that and try to determine whether or not these changes would have an impact on the control of the company, either the voting interest or the control in fact.
In terms of the set-up at the start of a company, certain things are there that really you'd expect to carry on right through. Others clearly are there because of start-up, and therefore you would not expect them to carry on.
Let's take a shareholders' agreement as an example. Say there are certain voting rights for shareholders that you expect to be there throughout. If these change and, for example, it gives a minority shareholder additional rights over and above what they had to start with over the operation of the company, that's something they'd certainly want to look at to see whether or not, because of that change, the previous ruling of control in fact is no longer valid.
You would expect that there would probably be changes in things such as loan agreements and so on over time, which is the normal evolution of a company as loans get retired and new loans come out. But if there are major changes in the financial or management relations in a company, between the company and its shareholders, we would certainly expect to rule on these. So there is an ongoing process here.
The Chair: Thanks, Ms. Desjarlais.
Mr. Dromisky, please.
Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you very much, Mr. Chairman.
I'm going to bring this whole discussion to a different level, a different plane. I'm going to try to look at it from the consumer's viewpoint.
By looking at your mandate and by looking at the kinds of functions your agency has, I find your agency sort of overlaps—maybe not so distinctly, but still there's an overlap—with the Competition Bureau. The mere fact that you will accept complaints regarding fare increases and so forth....
The general public is not interested in these highfalutin, upper-level manipulations of high business. What they're interested in is “What do I have to take out of my wallet to pay for an airfare?”
I'll give you an example. From Thunder Bay for several years, full economy fare has kept increasing at a regular rate. But it doesn't make any difference which of the two major airlines you take and it doesn't make any difference what size of the plane or how many employees are involved in each of those planes. As soon as one rate goes up by one air carrier, the other, within hours, goes up an identical amount. That has been going on for several years—five years that I know of.
So as far as the general public is concerned in Thunder Bay, there is no competition between those two air carriers. It doesn't make any difference if somebody complains about it, because we get all of these really academic answers as to why this exists and how good it is for competition. In the mind of the public, there is none.
Here I have an example. You say in your mandate that you're going to grant exemptions to certain provisions of the acts or regulations. I'm wondering if you will grant any kind of exemption in the areas that will have a direct impact on competition.
I would like your definition of a monopoly. We have a proposal before us by one of the major air companies that could possibly end up with three distinct corporations or companies controlled by one mother company. In other words, one company is really divided up into three parts. So where do you fit into a situation like that?
I would like your remarks to be based on my premise and the parameters I've set up—that is, competition as it relates to your responsibilities in the Canada Transportation Act.
Mr. Gavin Currie: As I mentioned during my presentation, the degree of regulation the agency has within Canada is really quite limited. For example, the agency has no control over who serves Thunder Bay. As soon as a carrier—any carrier—has a licence to operate within Canada, they may choose or not choose to serve Thunder Bay, and they don't have to come to the agency for any approval regarding whether or not they do it or what prices they charge.
The only time the agency gets into the regulation of price is on what I called a monopoly route. A monopoly route in this case is one defined as having only one carrier serving that route. Within Canada right now there are probably comparatively few significant routes where this happens. At one time, for example, the route from Ottawa to Iqaluit had only one carrier on it. I think it has two now. From time to time, Vancouver-Whitehorse only has one carrier on it. At the times when there's only one carrier providing the service, these are monopoly routes.
But certainly a community such as Thunder Bay, as far as I know, has two carriers, as you mentioned, and there may even be smaller carriers that serve it from time to time as well. So frankly, the agency, under its current legislation, has no power at all to deal with this. Even if you got a complaint that the fares are unreasonable, say, from Thunder Bay to Toronto, we couldn't look at it, because there is more than one carrier providing service from Thunder Bay to Toronto.
This is a reflection of the fact that the market in Canada is very largely deregulated—that was the policy decision several years ago—and that the agency's economic regulation is really limited quite tightly to the kinds of things I mentioned to you: certain requirements to issue a licence and very few situations where we can actually regulate beyond that.
Mr. Stan Dromisky: When it comes to this responsibility you have to grant exemptions to certain provisions of your act, what kinds of exemptions are we talking about here? Do any of them have any direct or indirect relationship to fares?
Mr. Gavin Currie: The exemption power is very broad. The agency can exempt from any provision of the act or regulations except those related to being Canadian, having insurance, and having a Canadian aviation document. Apart from that, the agency can provide an exemption if appropriate.
Given that there are so few regulations domestically, it very rarely happens that any domestic exemption is given by the agency. It occurs occasionally, but it's not really related to price. Occasionally foreign carriers are given permission to operate a single flight within Canada. That requires an exemption from the minister, Transport Canada, and us. That's a one-off thing. Perhaps a big piece of equipment has to be moved from point A to point B.
Exemptions tend to be, by their very nature, unusual, and we don't grant them on an ongoing basis. They tend to be used much more on the international side, where we do have additional regulation and more extensive regulation. So you're more likely to find exemptions granted relating to international transportation than to domestic. It can happen, but it's unusual. The reason it's unusual is there really are comparatively few regulations to which an exemption could be granted.
The Chair: Thank you, Mr. Dromisky.
Mr. Stan Dromisky: Thank you.
The Chair: Mr. Casey, please.
Mr. Bill Casey (Cumberland—Colchester, PC): Thanks very much.
Have you had an opportunity to even do a preliminary review of the two proposals that have been made now to merge the airlines?
Mr. Gavin Currie: We have obviously seen what's in the press and have looked at that in some detail, because we're interested in it. We have received some documents on an informal basis from Onex describing the relationship they would have and the agreement they would have. They have been provided to staff as background documents on an informal basis, the idea being that if and when an application comes in, if one ever does come in—we don't know that will happen—then staff will be better prepared to provide analysis to members on a more expeditious basis. But obviously these documents were provided to us on a confidential basis, and I can't comment at all on what's in them.
Mr. Bill Casey: You don't have copies for us, eh?
Voices: Oh, oh!
Mr. Gavin Currie: I'm afraid not.
The Chair: You could probably get one, Mr. Casey. Just call your friend at Onex.
Mr. Bill Casey: Yes.
When did you get those?
Mr. Gavin Currie: I believe we got these on October 5.
Mr. Bill Casey: That's very good.
Under “Domestic Licensing Requirements”, you say:
Applicants proposing to provide service with aircraft
having more than 39 seats must satisfy financial
A lot of the great debate swirling around here is about how urgent this situation is. We've heard the word “crisis” here today. Would Canadian Airlines qualify for a licence right now under the financial fitness requirements, if they applied?
Mr. Gavin Currie: If they applied in the current state? Frankly, I would need a lot of very detailed work to look at their financial requirements.
The financial requirements are very much based on start-up. What they are designed to do is to try to make sure that when a carrier starts up it does have the financial resources to give it a chance at some success. Basically, what it has to have are the resources, the funds necessary to cover all start-up costs in the first three months of operation without any revenue. That's basically what the financial fitness test is in the regulations. In addition, there is a requirement that half of that comes as capital stock, as opposed to loans, to ensure that there is a real significant interest in the company by the owners and it's not just being funded purely on a loan basis.
I can't comment on whether Canadian would meet the requirements or not because frankly their current situation is very complex and it would take a fair bit of extensive analysis to see whether they met it or not. Of course it's very unusual for a start-up company to have the kind of extensive network that Canadian has. We've never looked at financial requirements of anything of that magnitude. It tends to be a company with one or two aircraft. It's much easier to look at the financial requirements for an operation of that size than an operation the size of Canadian.
Mr. Bill Casey: Is it fundamentally three months of cash—did I get that correct—about three months of operating costs?
Mr. Gavin Currie: Yes. It depends on the nature. The start-up costs can be quite significant as well, but basically it's a question of making sure that the funds are there in order to cover both start-up and three months of operation. Frankly, before these requirements came in we had quite a number of applications from individuals wanting to start an airline on a shoestring. We had a couple of occasions when things sort of half got started and before long they had failed and caused trouble. So the financial requirements mean that before an applicant can come for a licence to operate reasonably large aircraft, they must be serious and have serious financial backing in order to come forward and hope to get a licence.
Mr. Bill Casey: What will the role of the agency be now, from here on, on this merger process, as much as you can predict what might happen—if you can, which nobody can, I don't think, at this stage?
Mr. Gavin Currie: The primary role of the agency will be to ensure that whatever companies come out from this restructuring process and have licences to operate in Canada do meet the Canadian ownership and control requirements. To do that, we will have to examine in detail the corporate structures of the companies and their relationships in particular to foreign investors. Certainly the proposals of which I'm aware, the most recent proposals, have significant foreign investment involved in them. I would expect the agency to be looking at the nature of that investment, the nature of the agreements relating to it, and assessing whether or not that translates into control, in fact, by non-Canadians. So that would be certainly the role of the agency, as I understand it.
Mr. Bill Casey: Mostly it will be focused on the ownership issue?
Mr. Gavin Currie: Ownership and control, yes.
Mr. Bill Casey: Thank you.
The Chair: Thanks, Mr. Casey.
We've all had a round here, so I'm just going to interject here with a question or two myself.
Gentlemen, I want to thank you for the explanation of what constitutes control, but for my benefit, and maybe some of the viewers who are watching your presentation today, you gentlemen are really the cross bearers for whatever policy is decided on. Whatever legislation comes forward, then you have the book in front of you and you apply whatever it is you're told in the regulations against the industry.
Now, given that, we have a 25% rule, which means any foreign investor can't own more than 25% of a Canadian airline. We also have the 10% rule, but the 10% rule only applies to Air Canada under the Air Canada Public Participation Act. When Air Canada was privatized, there was concern that control of Air Canada might be lost if there weren't a 10% rule.
If yesterday we thought a 10% rule was important for Air Canada, in your opinion—because you see a lot of this, and you look at control and the control issues—in a situation tomorrow where we might see a monopoly situation in the country, one airline, is the 10% rule just as important tomorrow as it is today?
Mr. Gavin Currie: The 10% rule is not administered by the agency, as I've said. What it does mean, however, is that you do get a whole range of shareholders, as opposed to one dominant shareholder. And obviously under the Canada Transportation Act you'd be up to 25%, as you mentioned. So it does mean that currently you can't have a single investor getting up to 25%, which under certain circumstances, depending on the nature, could perhaps be a controlling interest.
The Chair: Let me stop you there. If there is one airline limited to 10%, and the other airline—Canadian in this case—has a 25% interest by a foreign investor, AMR, taking it to the maximum under your rules, the CTA rules, do we even need a 10% rule any longer? Does a 10% rule protect a company and keep it in control in Canada by Canadians?
Mr. Gavin Currie: I think they serve different purposes. The 25% rule is clearly aimed at making sure the company is owned or controlled within Canada. I think the 10% rule, as I understand it, is somewhat broader in application: it's intended that there would not be any one entity, either within Canada or outside Canada, that controls the company, Air Canada.
Although I was not involved in that and I don't really have detailed understanding of the policy implications behind it, my understanding is that it was designed to prevent any entity, even a Canadian entity, taking control of Air Canada.
The Chair: Yes, but you are the body that deals.... I don't want you to comment on policy, and I don't want you to comment on anything else. You've seen the evidence of where the 25% rule on foreign and the block rule on 10% chunks works. I'm asking you, is this 10% limit really necessary to ensure that any entity in the future remain Canadian or in Canadian control?
Mr. Gavin Currie: I don't believe so. I see it as being a different purpose. I really do see it as being separate functions.
The Chair: Do you see a level at which it would be necessary to ensure Canadian control, or does the 25% rule look after all of that?
Mr. Gavin Currie: Well, the 25% rule would look.... For example, let's hypothetically say that the government decided to take away completely the 10% rule for Air Canada. Nonetheless, foreign investment in Air Canada would still be limited to 25%. So the foreign investor could not have an unlimited interest in Air Canada. The 25% rule would still be there—assuming that wasn't changed at the same time.
The Chair: So that is an explanation why we really don't need a 10% rule, because if there is in Canada someone with deep pockets who wants to have more than 10% of the new airline, it's still in the control of Canadian hands, as opposed to ensuring that we remain at the 25% rule internationally. So it's not controlled—this new airline—outside of the country.
Mr. Gavin Currie: I agree with you. The 10% rule I've never seen as being a Canadian ownership or control issue. It was a broader issue of making sure that Air Canada was not controlled by one other Canadian entity.
In fact I believe that in the Air Canada Public Participation Act there is a rule regarding non-resident ownership as well, which I think is 25%. It is similar but not identical to the provision in the Canada Transportation Act, which of course is the primary law in this area.
The Chair: And is the CTA satisfied with its level of authority? Is there any suggestion that you could make to us today as a committee that would say “We would be more effective as the Canadian Transportation Agency if only we could...”? You fill in the blank.
Mr. Gavin Currie: I think I'd have to leave it blank, Mr. Chairman.
The Chair: Chicken.
Mr. Gavin Currie: True.
The Chair: Sorry, Mr. Currie. I didn't mean to put you on the spot, but I thought in this particular instance, on this particular issue, in this particular sector, there might be something where the CTA could say, if we had increased authority in one particular area, it would be in this particular area, to the benefit....
Mr. Gavin Currie: No, in this particular area I think the agency already has the power it requires to look at Canadian ownership and control. The ownership is currently set at 25%. That can of course be changed by Order in Council, as you know. In terms of control, in fact that is really a judgment call by the members of the agency, and they have total discretion in that regard based on the facts of any particular case. I can't really see how that should be changed. The agency really has full discretion in that area.
The Chair: Thanks, Mr. Currie.
Mr. Bailey, please.
Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Chairman.
I want to go down the road, or the airway perhaps would be a better statement at this time.... From what I can gather, I think Canadians are looking at the future where there is in fact one airline. I want to assume that in my questioning to you, sir.
On page 11 of your regulations I note what Mr. Keyes has said, that the use of the word “may” appears. Under the discontinuance of service.... At the present time, when I go into the airport at Regina I find that Canadian and Air Canada are leaving for Winnipeg. Under your discontinued service, it says if the carrier is the last or the second last.... My question to you, to get something straight here, is this. Why would you require the second last carrier to provide you with a 60-day notice?
Mr. Gavin Currie: My understanding of the thinking regarding that provision relates really to remote communities. Although it could in principle apply to Regina, it's unlikely to apply to a city in the south. It's more likely to apply to a city or a settlement in the north or a remote settlement. The idea was to try to make sure that the settlement had as much warning as possible if it's going to have its air service significantly reduced.
That I think is the reason for not just waiting for the very last carrier but having the second last carrier provide notice as well. I should emphasize it does not stop the carrier from discontinuing service. It simply says you have to give 60 days' notice before you stop the service.
I didn't put it in here in the interests of brevity, but I should mention that if a carrier wants to stop within the 60 days, it can apply to the agency for a shorter notice period. We do get such applications from time to time, particularly if a carrier is finding that services are uneconomical. They will come and ask if they can do it with 30 days' notice instead. The agency then has to look at the situation—the alternative air services and the other alternative transportation services available. So it's really there as a protection for remote communities to make sure they don't suddenly find that their air service is lost. That's the purpose behind it.
Mr. Roy Bailey: Let's move up on page 11 to fares. If this one concept, this one airline, evolves in Canada, of course you're going to have a great deal of monopoly routes. Right?
Would the requirement on fares, which says “upon complaint regarding an unreasonable basic fare or fare increase”—that being a statement about the concept of more than one company flying. Now you wouldn't have more than one company flying, even out of a city the size of Regina. It says “the Agency may order”, on a basic fare or fare.... The agency “may”. That “may” gives a lot of latitude; they “may order corrective action”.
I do want to ask you this question. Have you ever used that corrective action during your time with your committee in which you have taken corrective action about the basic fares or fare increases?
Mr. Gavin Currie: No, we have never ordered corrective action. We've had comparatively few complaints of this nature. There was something similar under the NTA 1987. I believe we didn't have any complaints at all. I think under the CTA in the last two or three years we may have had two or three.
The agency had feelings on the issue from the parties involved. Essentially the agency looked at the basic fare on this route and compared it with the basic fare on comparable routes where there was competition. It tried to look at routes serving places of similar size and distance apart, and it did this sort of analysis on the grounds that given that competition is a fundamental determinant of fares within Canada, if one level of fare occurs on routes that do have competition...if the fares are similar on routes without competition, that is still a reasonable fare. We did that analysis for the fares and also for the fare increases. The agency concluded that the fare was not unreasonable, there had been no unreasonable increases, and consequently dismissed the application. That is the way it's been done.
I agree with you that if you have a situation where there are many more monopoly routes in Canada, then it's going to be more difficult to do that. Of course, we don't know whether this provision will be there in a one-carrier situation or whether the government will decide to change it in some way. But if we have to administer the provision as it currently exists, then I think we will have some work to do as an agency in trying to make sure we administer it in a reasonable way. I think you're right. It is more challenging.
Mr. Roy Bailey: I have one final question. Maybe I'm being a little bit selfish in this question, but under the one airline within Canada, I see the current shorter airlines, i.e., WestJet, operating with some satisfaction in western Canada. Under your organization, or any other government organization, on interference, would they allow the larger single company, whatever it's going to be called in Canada, to attempt to gain a route from a route that is operating successfully, in order to increase their service, but in doing so may destroy the one that is currently giving service, for example, the run from Regina to Edmonton with WestJet? This new airline, whatever it's going to be called, would say, look, we want to get in on that quick short run as well. Without studying the passenger load, etc., their intervention into what appears to be a monopoly may be a bit destructive of the first airline and you would end up with poor service, if you follow me. What organization within government would give that protection to maintain that type of service?
Mr. Gavin Currie: Under the current legislative framework I don't think there's much protection at all. Certainly under the Canada Transportation Act there is nothing we can do about that. As I said, once carriers have a licence they can decide where and when they fly. If an existing carrier decided to double or triple its capacity on a route and drop its fares to try to kill a competitor, there's nothing we can do under the Canada Transportation Act.
Under the Competition Act something might be possible. I don't know how rapidly the Competition Act could do something under the authorities there, but in principle that could happen.
I might just comment that in the United States this has become quite a significant issue. The department of transport there has been looking at the response of established carriers to new entrants and has proposed prohibiting certain kinds of action that would be seen to be detrimental to the new entrant. I'm not quite certain about exactly what stage that has reached yet. It is an issue that people are very much aware of. Certainly if we in Canada ended up with one major carrier, it's a concern that I imagine the government would wish to deal with.
The Chair: Thanks, Mr. Bailey.
Mr. Dromisky, please.
Mr. Stan Dromisky: Mr. Chairman, I have two questions. The first one will be very easily handled.
The first one pertains to the oral hearing that you had in 1993. First of all, look at it this way. Who called that meeting? Will there be a meeting involving the present situation? If there's one being contemplated, who will call it and who will take part in it? The third part of that, of course, is this: is your agency involved and will you make that final decision?
Mr. Gavin Currie: In the case of the 1993 hearing, it was a hearing called by the agency. It was called primarily to look at the public interest aspects of the proposed acquisition of an interest in Canadian by Aurora, the AMR subsidiary. That was required under part 7 of the National Transportation Act of 1987.
The fact that we looked at ownership or control was decided by the agency and was looked upon as being partly related to the overall public interest. Generally speaking, ownership and control issues are handled on a correspondence basis with the applicant. Normally, no other parties have an interest in it. It's done this way because the great majority of the information is confidential, and it makes sense to keep it confidential.
In this case, if there were to be an oral hearing related to ownership and control, that would be decided by the agency, by the agency members involved in the consideration of an application. They would decide once an application is received and once they've looked at the application and at all the factors surrounding it. It would really be up to the agency to decide, but now, as I understand it, it would be limited simply to ownership and control issues. It would not cover the broader public interests. We would not have that power under our current legislation.
Mr. Stan Dromisky: Okay. Now for the second part, Mr. Chairman, and you'll be keenly interested in this.
I would like to know the role of the Canadian Transportation Agency in a situation where one of the major carriers right now is contemplating starting up a low-cost domestic airline. Would your agency have any part to play if we find out that this airline, in operating this low-cost domestic airline, is using its funds, its power, and its monopoly situation to control prices? Cross-subsidization would be involved here. Would your agency have any part to play in this? Would you be involved in influencing or in making decisions pertaining to that situation?
Mr. Gavin Currie: Our role would be limited to licensing the carrier and making sure the carrier meets the requirements I've mentioned: that it would be owned and controlled in Canada; that it would be insured; that it would have appropriate safety authorization; and that it has the funds to start up to allow it to operate.
Once it has its licence, the way in which it operates is up to the carrier. Those would be commercial decisions. Under the current legislative framework, we would have no power to determine where it flew and what it did in terms of competing with other carriers, like the fares it offered and so on. We have no power to regulate that at all.
Mr. Stan Dromisky: Thank you.
The Chair: Thanks, Mr. Dromisky.
Mr. Asselin, please.
Mr. Gérard Asselin (Charlevoix, BQ): My question to the representatives of the Agency reflects my concern regarding the increase in price for services provided by regional carriers and the distinction made between forced travellers and vacationing travellers.
I see no problem with vacationing travellers having access to outside carriers nor do I oppose these carriers providing these people with certain advantages. The problem arises when we're dealing with travellers coming from the regions, the ones that I refer to as forced travellers. These people have to leave their region in order to get access to health care or professional services or to do business. These travellers may be members of a chamber of commerce, a municipality or a small business.
It is the forced traveller who is paying for the one on vacation. When this person has to travel from Baie-Comeau to Montreal, Toronto or Vancouver once a year for business or health reasons, Aeroplan points and access to the Maple Leaf Lounge don't matter very much. This person would rather see reduced prices, accessibility and excellent service.
When a traveller who is employed by a company has to travel between Montreal, Vancouver and Toronto, the company pays for his trip to Florida once a year. This traveller accumulates Aeroplan points to the detriment of the company or municipalities that hired him. This person may be a small consultant who provides services in the various regions and bills the client for travel costs.
I think that we should allow greater competition amongst international carriers, regardless of whether or not they have been merged, and small domestic carriers. WestJet's business increased by 500% because this company was able to provide its clients with excellent, affordable service. I believe, and please tell me if I'm right, that by allowing greater competition amongst the international carriers and by putting a stop to these infamous promotional perks, domestic carriers will be able to provide greater accessibility and increase their services.
We know that the business traveller has to dish out $900 for a two-way plane ticket between Baie-Comeau and Montreal and when he travels the same distance and then goes on to Paris, Florida or Mexico, the price of his plane ticket to Baie-Comeau—Montreal drops to $285. What is the rationale?
Mr. Gavin Currie: It is difficult to explain the rationale. It is always difficult to understand how fares are set. Nevertheless, I do think you're referring to services that are quite different, namely, chartered seats on a regular flight to Florida or Paris, and regular flights between Baie-Comeau and Montreal.
The government is currently reviewing the regulations. Our Agency has no control over fares. This issue is decided by the airline companies, and no regulations apply to this aspect.
The Chair: Thank you, Mr. Asselin.
Just as a supplementary, Mr. Currie, I wonder if you can tell us this. If it's determined that by next year we're into one airline operating in Canada, one international airline—and I throw in the word “international” because if we look around the world there's one international carrier out of Britain, one out of France, one out of Germany, etc.—one domestic international carrier, could it really be called a monopoly if indeed, on the domestic side, this particular country offers to anybody to start up the airline, provided of course that they pass this fitness test that you spoke of and that they can fly from any point A in Canada to any point B in Canada free of regulation? Are we fooling ourselves by saying that we'll end up with a monopoly airline in this country? Are we really dealing with a monopoly airline in this country domestically? Can we call it a monopoly?
Mr. Gavin Currie: I prefer to use the term “dominant”, in the sense that I believe that if we have the current regime—I don't know what changes the minister will suggest—where any person wanting to start an airline can do so, provided they have the funds, then you still will have competition.
It seems to me that right now, although we tend to talk about competition between Air Canada and Canadian, we have charter carriers providing quite a significant amount of service on the major routes across the country, people like Air Transat and Canada 3000 and so on. And as someone mentioned recently, we have WestJet operating quite a significant service out west. There are others like First Air operating service to the north. So we have quite a number of carriers who are not related to either Air Canada or Canadian providing a certain amount of competition.
So I personally don't like to use the term “monopoly” in terms of a larger carrier. I prefer to use the term “dominant”. If you have one carrier with 80% of the traffic in the country, I think probably “dominant” is a good word for that, but it certainly doesn't mean that there would be no competition. How effective the competition would be I really can't comment.
The Chair: Thanks, Mr. Currie.
Mr. Comuzzi, please.
Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Thank you, Mr. Chairman.
Good morning, gentlemen.
Would you confirm some evidence we heard here last week with respect to the other air carriers in the country, all of them? By and large, we were advised that the air transportation industry in Canada is in very good shape, with the exception of this war that's going on. You monitor it, so you should know.
Mr. Gavin Currie: Yes, we do monitor it, there's no question about that, but we don't monitor specifically the financial health. We monitor more the relationships between the carrier and shareholders, this sort of thing. Nonetheless, we are, generally speaking, aware of the financial health of companies in the country.
I think that the majority of what we might call second tier carriers do seem to be operating at a profit right now. How healthy they are overall, we haven't looked at them in enough detail to be able to go beyond that.
What we really look at in terms of financial health is what is published information. We don't, on a routine basis, go in behind that to look at the health of a company. The only time we would have a legitimate reason for doing that is if we felt that in some way Canadian control in fact was changing because of the financial situation.
John, do you want to comment on that? You probably look at this in more detail than I do.
Mr. John Jacob: I think what you said is right. I think the second tier air carriers are doing very well, by and large, as reflected in their annual reports for the ones that are public corporations. We certainly look at those financial statements very carefully for Canadian ownership. We also look at their financial health, and I think by and large they're doing quite well.
As far as the smaller air carriers are concerned, we don't have as ready access to their financial statements, and therefore I am really not in a position to comment on that generally, although I would say some of them are doing well and perhaps some of them are not doing well. I think there'd be a big mix there.
Mr. Joe Comuzzi: Mr. Currie, from your vantage point, you would know if they were not doing well. So as a general rule you would say that those airlines, with the exception of Canadian Airlines, in Canada are all doing fairly well.
Mr. Gavin Currie: Yes. I think I have to be somewhat cautious in the sense that we do not look specifically at the health of the industry. There is a monitoring function at Transport Canada that does look in more detail at the status of the industry. They do publish a report each year, and they specifically go out and find out more detailed information than we do.
Our perspective is more aimed at the licensing requirements, ownership and control. What we know about the health tends to be as a side issue related to that. That's why I hesitate to say too much. There is another body that can give you more definitive information than I can.
Mr. Joe Comuzzi: But if they're really terminally ill, you'll know about it, if you're looking at their general health.
Mr. Gavin Currie: We would know, but on occasion that can happen suddenly. It can happen that the first time you find out they're terminally is when they've passed away. We try to avoid that, but it can happen.
Mr. Joe Comuzzi: I have one more question. Subsection 47(1) says:
the Minister and the
minister responsible for the Bureau of Competition Policy, by order, take
Now, with the suspension of that particular section, were you advised? I'm sorry, that may be an unfair question. Are you the agency to which this article refers?
Mr. Gavin Currie: I believe so. I would refer it to my director of legal services. I believe we are, yes.
Mr. Joe Comuzzi: Tell me the process that you folks went through when this section was invoked.
Mr. Gavin Currie: As far as I'm aware, the minister did not give us any directions under this order, and therefore there was nothing specific for us to do. It says “may...direct the Agency”. I don't believe there was any direction of the agency in this case.
Mr. Joe Comuzzi: Okay. Let's go through this, just to be clear: “the Governor in Council may, on the recommendation of the Minister and the minister responsible for the Bureau of Competition...”—which is the industry department—“by order, take any steps, or direct the Agency...”. So what you're saying to me now is that he did not discuss this with the agency; he took other steps.
Mr. Gavin Currie: That is my understanding.
The director of legal services.... Claude, do you want to...?
Mr. Claude Jacques: Yes, absolutely, that's it. The agency was not involved at all in this matter.
Mr. Joe Comuzzi: Thank you, Mr. Chairman.
The Chair: You're welcome, Mr. Comuzzi.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: In these types of circumstances, in the past, would the agency have been involved? Is it the normal practice not to involve the agency?
Mr. Gavin Currie: This is the first time that section 47 has been used. It is a new provision in the Canada Transportation Act, which did not exist in the previous act. So really there is no experience for me from which to answer your question.
Ms. Bev Desjarlais: Would you have thought that you should have been requested?
Mr. Gavin Currie: I would only expect the agency to be involved if the nature of the order related specifically to the responsibilities of the agency or if the minister had some policy direction he wished to give the agency as a result of this. Under certain circumstances the minister can give the agency policy directions and require us to carry out certain activities. If that had been contemplated, then I would have expected the minister to have warned the agency ahead of time so that we would know about it. But as I say, this is the first time it's been used, and therefore I can't really say anything about the past.
Ms. Bev Desjarlais: And you'll only respond on any issue if requested by the minister or if there is a new licensing that's required? Is there any other way in which you would become involved?
Mr. Gavin Currie: The agency of course acts either in response to an application or it can take action on its own motion in certain areas within the act. The act gives the agency fairly wide powers in certain areas, but we have to act within these powers. So there are situations where the agency would act on its own motion and others where the agency simply responds to an application of complaint that is lodged with it.
Ms. Bev Desjarlais: In keeping with that then, would you not see that you should be acting on what's taking place today or in the last couple of months?
Mr. Gavin Currie: Well, the obvious area where we have responsibility is ensuring that any new entity that comes out from this restructuring will be Canadian owned and controlled. Certainly we are preparing ourselves internally to make sure that we can deal with any application that comes to us from such an entity so that we can do the reasonably complex analysis that is likely to be required to satisfy the agency that the new entity is Canadian owned and controlled. As I mentioned before, we already have some background documentation we're using to prepare ourselves.
In terms of public activity by the agency, there really is nothing at present where I think we could or should be acting.
Ms. Bev Desjarlais: Okay. Thank you.
The Chair: Mr. Casey, please.
Mr. Bill Casey: Thank you.
You mentioned a few minutes ago that Transport Canada had a division that monitors the financial aspect of air. What is that division?
Mr. Gavin Currie: It's economic research, I believe. Its primary responsibility is not to monitor the health but to do a review of the transportation industry. They publish a report every year that provides an overview of the status of the industry. Certainly within that it would talk about the structure of the industry and I think the financial performance of its various elements.
So it is not restricted to air. It covers off all transportation modes.
Mr. Bill Casey: Okay. I have a couple of other quick ones.
The minister indicated, or I think he did, that he would prefer the regional airlines be separate from any proposed merger, but both the merger plans appear to include the regionals. Do you have a position on which is best?
Mr. Gavin Currie: Not really. I think it's really up to the minister to decide what kind of policy he would wish to have.
Mr. Bill Casey: Good point.
Mr. Gavin Currie: As I understand it, the minister could put conditions on any agreement he approves, and a condition could be to divest them.
Mr. Bill Casey: Okay.
In the Globe and Mail, you got honourable mention today, or your agency did. It says in there basically what it says in your brief as well, that the agency has the power to roll back price increases if a carrier is guilty of price gouging. Have you ever done that?
Mr. Gavin Currie: We have never rolled back prices. We have had two or three cases where complaints have been brought.
I should emphasize that the power is rather narrow. It applies only to a monopoly route, and there are comparatively few monopoly routes. The great majority of routes in Canada would have more than one carrier providing service between points, so it's quite limited.
We've had only two or three complaints, and in only one of these situations did we actually get to the point where we in fact found that it was a monopoly route, and got to the point of reviewing the prices. We found that in that case the prices were not unreasonable based on a comparison of prices on comparable routes where competition did exist.
Mr. Bill Casey: If either of these proposed mergers we have on the table now—and maybe there will be more—go through, most of them will be monopoly routes, then, will they not, and you'll be a little bit busier?
Mr. Gavin Currie: Certainly the number of potential routes for which complaints could be lodged would probably increase, yes.
Mr. Bill Casey: Thank you.
The Chair: Thanks, Mr. Casey.
Colleagues, I have one name left on my list, unless you indicate to me otherwise.
Ms. Val Meredith: Thank you, Mr. Chair.
I want to address my question to an issue that has come up in the conversations around the merge deal, and that's service to remote areas, to smaller communities. In your licensing of new carriers, looking at the financial commitments they have to be willing to make for the licensing requirement and also the notices of termination that would be provided to you, do you think it is reasonable to put an expectation on anybody to provide service in all areas that are presently being served by a schedule carrier?
Let me follow that up with this. I assume you also license the smaller charter airlines or companies that would provide charter service in some of these remote areas to allow them to have air service outside of their areas.
Mr. Gavin Currie: To answer the last part first, yes, the licensing does apply to any carrier within Canada operating a publicly available air service, whether on a charter basis or on a schedule basis. The choice of how the service is operated is left with the carrier, with no difference in the licensing. I guess the great majority of our licensees are in fact small carriers, and many are providing service to more remote locations.
In terms of whether or not it's desirable to put some conditions on a carrier to continue to provide service, that's really a policy issue that I guess would have to go to the minister.
What I might comment on is that in both this and previous legislation, there is no requirement for a particular community to be served. There is a requirement to give notice before a service is discontinued, but that's really just to give an opportunity for other carriers to come in and perhaps replace the service and give the community a chance to work on encouraging other people to come.
I've been involved in this area since around 1990, and I'm not aware of any community actually losing service completely. They may certainly lose service from a particular carrier. They may have a different kind of service. Many communities have found that the nature of the service has changed quite significantly. But as far as I know, I am not aware of anywhere where the service has disappeared completely.
One of the reasons I mention this is that under the previous legislation—that's the NTA of 1987, not under the current legislation—there was a provision for the government to provide subsidized service to a point if necessary, and that provision was never used. It was something the agency would have been responsible for. It didn't happen. That's why I know that if in fact any community lost its service, it never got to the point where it came and made an application for a subsidized service to be provided.
That kind of history suggests maybe there's enough competition at the level of smaller carriers to make sure smaller communities would continue to be served. That at least has been the experience in the past. One can never be quite certain what will happen in the future, but to date smaller carriers seem to have provided service to the smaller communities when there's a need.
Ms. Val Meredith: So then your professional experience would tend to support the concept that if a void is created, if a scheduled service no longer is feasible in some of these areas, it gives an opportunity for some of these smaller chartered companies to fill that void and to bring a more competitive service to the area. Or is it non-competitive? Is that the issue—that the smaller charter airlines may charge considerably more for the same transportation outside the area than a scheduled service?
Mr. Gavin Currie: I really can't comment. I don't have any detailed information on the fares being charged. I was just saying the experience to date does suggest that carriers do move in to fill the void and that communities continue to receive some service. Whether they receive service at prices and fares they're happy with is something else.
There's been a lot of unhappiness about airfares, and some of it's been expressed this morning. Everyone is aware there is unhappiness with that, and the whole pricing issue is a very complex one, but in terms of whether or not service is provided, it does seem to be provided, at least at some price.
The Chair: Thank you, Val.
Ms. Val Meredith: Thank you.
The Chair: Mr. Dromisky, please.
Mr. Stan Dromisky: I'd like to follow through on the line of thought Mr. Casey was presenting, regarding the establishment of a monopoly.
The chance of a financially fit carrier coming into the picture to provide competition with one major company to me seems very remote. A vacuum was created. Another company came in on a national basis, and it has been failing month after month, year after year. So we have this situation we are dealing with at the present time.
How in the world can someone come in now to fill the vacuum if, after all this process we're involved in, we end up with one major carrier? Is the financial fitness test that your agency has to deal with really a major hindrance for any company contemplating trying to fill the vacuum?
Mr. Gavin Currie: I don't believe the financial fitness test would be a hindrance. Our experience prior to a financial fitness test being in place was that those carriers that were likely to be successful had significant financial backing and in fact would have met such a test if it had existed. The ones that normally had troubles were those that had, shall we say, limited financial resources, tried to do things on a shoestring, and just couldn't make it. So really the financial requirements are quite reasonable, and most carriers starting out would expect to have at least that level of financial resources.
You asked if it's possible. Obviously it is possible for carriers to come in and be successful. We have one example, WestJet, which has only been in operation for a few years. It started small and it's grown significantly. It seems to have found a niche, a mode of operation, that is successful and that allows it to operate in competition with the two major carriers, and it seems to have done so very successfully. WestJet certainly met our financial requirements when it came in, and had no trouble doing so. It was a well-financed operation. There was no hindrance there. So it is possible for carriers to come in.
Is it possible for another carrier to come in and replace all the services currently being provided by Canadian? That's obviously a very much bigger proposition, and I really don't know whether there would be anyone there with the resources to be able to do that. That's quite a different proposition from starting up reasonably small, as WestJet did, and then expanding into additional markets. It was a very clear business plan with a clear method of operation, which they seem to have been able to carry out with success.
The Chair: Thanks, Mr. Dromisky.
Mr. Stan Dromisky: A perfect question...well, really, I'm getting a little more confused—
The Chair: Very quickly, Mr. Dromisky.
Mr. Stan Dromisky: —regarding your role. You talk about the shoestring operations that have failed, and we've had quite a few failures in this country in the last 10 or 15 years. If that is one of the criteria you people examine, somebody is making the wrong kind of judgment in allowing these companies to operate on a shoestring and then collapse.
Therefore, I still go back to my basic premise that it will be an extremely difficult situation for anyone to come forth to meet the financial fitness test so that you can classify them as not operating on a shoestring. Their chances of success, according to what you've just finished saying, are enhanced if they are very wealthy and have the money, in other words.
Mr. Gavin Currie: I'm not quite sure exactly how to respond to your question.
It is certainly true that carriers have failed. That doesn't mean they didn't start off with significant financial resources. Unfortunately, there are many examples around the world where people have started airlines with significant financial resources, have been unsuccessful, and have lost the resources they had.
I would like to emphasize that all we do is to make sure that at start-up the company has financial resources. We do not monitor on an ongoing basis; we have no power to do so. Once the carrier is up and running and if it has met the requirements, it then depends on the business plan, the business decisions, as to whether it's a success or not. Some, like WestJet, are and others are not. Even some that have met our financial requirements have failed despite the fact that they were well financed. It doesn't guarantee success; it just gives you a better chance of success.
I think it is our experience that if a company doesn't have reasonable financial resources to start with, the likelihood of being able to offer a consistent and ongoing service is much reduced, but having the financial resources to start with doesn't save a carrier from unfortunate events or poor management or unfortunate business decisions.
The Chair: Thanks, Mr. Dromisky.
One more questioner, colleagues, and then we have to break off because this room is taken at 11 o'clock by another committee.
Ms. Desjarlais, please.
Ms. Bev Desjarlais: Just for clarification, I think it was Mr. Dromisky who was asking you about when you would go in if there were a monopoly. You indicated that it had only happened once, and it was compared to another carrier and they were similar costings. You don't necessarily look to see whether or not the price that, say, both carriers are asking is way up there. Rather, you would just do comparisons. Or would you look at whether or not the price is reasonable rather than comparing with another carrier?
Mr. Gavin Currie: The agency has in fact the ability to decide what constitutes a reasonable price. In this case, the agency chose to do it that way, the reason being, given that the basic framework in Canada is competition, if prices are at a particular level on that kind of route where competition does exist, the agency said that this provides us with a reasonable benchmark from which to determine whether other prices are reasonable or not.
That's the way the agency chose to do it. It would not have precluded the agency from trying to use some other methodology for deciding whether a price was reasonable or not. That was the way the agency chose to do it in that particular case, and it seemed to make sense under the circumstances.
Ms. Bev Desjarlais: So you could, in essence, look at what the operating costs are, and if you know their price is way above what the operating costs indicate, you could suggest that the price is too high.
Mr. Gavin Currie: In principle, yes. Obviously the relationship between cost and airline prices is not a simple matter. It would certainly be complex to do it. It might be very difficult to do in a very convincing manner, given the wide range of prices that exist and the fact that our control relates only to the basic fare, which is one of a series of fares the airline charges on a particular route. I think trying to do it that way would be difficult, but in principle it could be done.
Ms. Bev Desjarlais: One more question. If a smaller airline has an agreement with a regional airline or their partners, and then they're partnered with the bigger airline, if the partners are the only carriers in a community, would you consider that a monopoly?
Mr. Gavin Currie: You mean there are two airlines providing service, one of which is a subsidiary of the other?
Ms. Bev Desjarlais: Say you have a smaller airline and then you have a regional airline and then you have Canadian International—let's use Canadian. You have a smaller airline going into a community. Then you would have say Canadian Regional going into the community. Would you consider that a monopoly or would you consider that two airlines?
Mr. Gavin Currie: I think that would have to be looked at. We would have to look at the details of how the services were provided. If the main carrier was controlling the services provided by the subsidiary carrier, then I think that would probably be a monopoly situation. If on the other hand they were being operated as completely separate entities, with the subsidiary carrier having the power to decide where and when it flew, it might be considered competitive. It would depend on the circumstances.
The Chair: Thank you, colleagues.
Mr. Currie, Mr. Jacob, Mr. Jacques, thanks very much for your presentation to the committee this morning.
Just by way of a little bit of a wrap-up, there has of course been much discussion on how a proposed airline merger would be examined and approved under all the different legislative bodies. The slowness of that process has been written about in particular. Much of that criticism, of course, has been aimed at the Competition Bureau, and if they did do an examination how long that might take. The same argument is also levelled against the CTA and how long it might take the CTA to look at this proposed airline merger.
Should the CTA be looking at some kind of a fast-track process, or would we need to constitute a new body to do that, or could there be some kind of an adjustment legislatively to give you the opportunity to attempt to fast track a decision if one should need to be done?
Mr. Gavin Currie: I don't believe there would be any need to change legislation to allow the agency to fast track it. The only stipulation right now in the legislation is that we have to do it within 120 days. That is the maximum we could take to process an application, unless we get the agreement of the parties to extend it. However, many applications are less than that. I think the time the agency would take would depend very much on how quickly and how completely we got documentation from the parties. We find that when we take up to 120 days it tends to be because the parties have not provided the documentation to us. The documentation is not complete; things have to be finalized. If we get the documentation expeditiously in a complete form, the agency can often make a decision in a matter of a few weeks. It really depends on the particular situation.
The Chair: That's very good information.
Gentlemen, thank you again for your presentation.
Colleagues, we're going to stand adjourned until 3.30 this afternoon, at which time we'll hear from the Minister of Transport, the Honourable David Collenette.
Mr. Bill Casey: I have a point of order. The schedule says we go to 11 a.m. and we're not, and I just wanted to file that.
The Chair: Mr. Casey, we still have to clear this room.
Mr. Bill Casey: The schedule should say we go to 10.50 a.m. then. That's all I'm saying.
The Chair: We're at 10.50 a.m. now.
Mr. Bill Casey: I know, but the schedule says 11 a.m. We're here until 11 a.m. and I still have questions and I can't ask them.
The Chair: Thank you very much, colleagues. Thank you, witnesses.
The meeting is adjourned.