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STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, October 27, 1999

• 1528

[English]

The Chair (Mr. Stan Keyes (Hamilton West, Lib.)): Good afternoon, colleagues.

Pursuant to Standing Order 108(2), this is a study on the future of the airline industry in Canada.

We have a full afternoon and part of the evening, beginning with our first witnesses before us today, from the Competition Bureau, the commissioner of competition, Konrad von Finckenstein; Raymond Pierce, deputy commissioner of competition; and Richard Annan, who is the commerce officer.

Gentlemen, welcome to the Standing Committee on Transport. We look forward to hearing your presentation, but first we have to ask the media to either put down their cameras or leave the room. Thank you.

Mr. Commissioner, when you're comfortable, please begin your presentation. We'd like it to be between 10 and 12 minutes, and then we can get right into questions from my colleagues. Thank you.

• 1530

Mr. Konrad von Finckenstein (Commissioner of Competition, Competition Bureau, Department of Industry): Thank you, Mr. Chairman.

I have a short opening statement, and then we'll be ready to answer your questions.

[Translation]

Thank you for having invited us to appear before you to discuss our views on issues related to the potential restructuring of the Canadian airline industry.

As you are aware, the Bureau has not examined any specific restructuring proposals.

We were asked by the Minister of Transport to advise him on how the outcome of airline industry restructuring could be as pro- competitive as possible.

During the last two months we have interviewed most of the players in the airline industry, airport authorities, consumer groups, academics, as well as hiring economists and lawyers.

[English]

Our conclusion, simply put, is that there will be significant competition concerns in most domestic airline passenger markets if a dominant carrier emerges from the current restructuring process.

In requesting our advice, the Minister of Transport asked us not to look at the government policies on foreign ownership or cabotage or at the carrier designation system under open skies.

I'm very pleased that in his policy statement yesterday, the Minister of Transport asked you to consider many of the recommendations we made.

In a typical merger review, where the bureau finds that the merger would lead to a substantial lessening of competition, the bureau imposes conditions to remedy the substantial lessening. The merging parties must satisfy these terms in order to move forward without the objection of the bureau. The aim of these conditions generally is to facilitate the entry into the market of new competitors or to allow existing companies to expand and provide real competition.

In our letter to the Minister of Transport, we outline some of the conditions we feel might have to be imposed in an airline restructuring. These include surrendering arrival and departure times, commonly known at slots; returning airport facilities to the appropriate authority for reallocation; changing the way airlines pay for airport services; ensuring that any new airline competitors are able to purchase the dominant carrier's frequent flyer points; changing the method of calculating travel agents' commissions; offering to transfer surplus planes to any new entrants; the possible divestiture of regional carriers; and ensuring that new or expanding airlines be able to interline and code-share with the dominant carrier.

In addition, we also recommend the establishment of a more effective way of fighting predatory behaviour by the dominant carrier. Predation, as you know, can constitute a major barrier to entry.

[Translation]

We focussed our analysis on the emergence of a dominant carrier. However, we feel that many of our recommendations could be implemented in a non-dominant carrier environment to the benefit of all Canadians.

While we have outlined recommended conditions that could be required in connection with the approval of our restructured airline, this may not be enough.

[English]

The conditions we outlined may not be enough. The bureau feels the government should consider implementing two key recommendations that would allow new competitors to create real choices for the flying public and impose price discipline on the dominant carrier.

[Translation]

The first recommendation involves giving a modified sixth freedom that would allow you as carriers to pick up passengers in one Canadian city and fly to another Canadian city via the US. The second recommendation is to allow the creation of a Canada-only carrier, which would allow new competitors to create real options and impose a certain discipline on the dominant carrier with regard to rates.

[English]

These two recommendations are required because there's no assurance that existing charter carriers and regional carriers are likely to provide sufficient competition to a dominant carrier. Let's recall that a dominant carrier would have 80% of the domestic passengers, and its business would account for 90% of domestic revenues.

What is a modified sixth freedom? A modified sixth freedom would allow foreign carriers to pick up passengers in Canada and fly them to another Canadian city via a United States destination. At the moment it's possible to buy two tickets, for example one from Toronto to Chicago and another one from Chicago to Vancouver, but carriers cannot market and sell a single ticket at a low price for such a flight.

• 1535

We recommend that the Minister of Transport try to negotiate a reciprocal agreement with the United States so that, for example, a dominant carrier could take passengers from New York to Los Angeles via Toronto, and a U.S. carrier could fly routes such as Toronto-Chicago-Vancouver. Such a reciprocal arrangement would be beneficial for the carriers in both countries. However, if within two years after the creation of the new dominant carrier there is compelling evidence that competition is not being provided by other carriers, the bureau feels that the minister should even allow a modified sixth freedom on a unilateral basis.

The second recommendation is the Canada-only carrier. Under this proposal, a new class of air carrier would be created. These carriers would be allowed to fly only within Canada and to serve only Canadian airports. Being Canadian licensed carriers, these carriers would have the same cost base as the dominant carrier—i.e., they would pay the same costs for fuel, for crews, for meals, etc.—and they would also be subject to the same conditions in terms of licensing, noise control, and other regulations as the dominant carrier. As well, they would be paying Canadian income taxes.

This Canada-only carrier would be free of all foreign ownership and control restrictions, but could not apply to be designated as a Canadian carrier under any bilateral agreement.

We fully understand that ownership restrictions are needed in support of the designation system under international agreements. However, we do not see any need for them in the context of a carrier that is not permitted to cross international borders.

This model, in our view, would provide a great opportunity for creating strongly capitalized new entrants aligned with knowledgeable foreign operators who have the expertise to operate as efficient and effective competitors to the benefit of Canadian consumers. A model along those lines is in place in Australia, and to our knowledge it is working well.

[Translation]

Thank you very much for inviting me before you today. I would be pleased to answer any questions you might have.

[English]

The Chair: Thank you very much, Mr. Commissioner, for your presentation to our committee. I'm sure it will spawn some very interesting questions.

We'll begin with Val Meredith.

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

Thank you very much, Mr. von Finckenstein, for appearing before the committee. I find it very interesting that the Competition Bureau has made two key recommendations that would in effect protect the competitiveness in the Canadian airline industry. Yet my understanding is that the minister is not considering what you would consider to be two key recommendations. Would you agree with that impression I have?

Mr. Konrad von Finckenstein: First of all, we did not only make two key recommendations; we made a lot of recommendations throughout the letter.

In terms of those two key recommendations that I mentioned just now in my address to you, I feel these are things that should be considered seriously in light of the creation of a dominant carrier. The minister, in his statement, as far as I understand it, is asking for the views of this committee and the Senate committee on various points. He has indicated that he welcomes your view. I don't see that he has explicitly ruled out those recommendations, nor has he accepted them.

Ms. Val Meredith: Thank you.

I'm not going to debate the point, but I would like you to explain for me, for the committee members, and certainly for the viewing public why you feel these two key areas that you've mentioned, the modified sixth freedom right and the Canada-only carrier, are important to provide the competitive nature, to provide competitive carriers.

Mr. Konrad von Finckenstein: Let's take the first one, the modified sixth freedom. Right now, to my knowledge, Northwest flies specifically from Montreal to Minneapolis, and there's another Northwest flight that you can take from Minneapolis to Calgary. Those flights exist today as we speak. There's nothing preventing you from flying that way to Calgary if you want to. Northwest, however, is not allowed to market those as one single fare and give you a single ticket for it.

• 1540

If we have a dominant carrier situation in which, as I mentioned at the outset, over 90% of the revenues go to that dominant carrier and over 80% of all domestic flights are in the hands of this dominant carrier, I think the situation cries out for some competition. This could be a meaningful competition in terms of price discipline.

It doesn't add anything to the flights that are being flown today. The only thing that we would provide for is that you could market them as one flight. Presumably if you sell those two flights together, they would be cheaper than having two separate tickets. I can't see how it would hurt the dominant carrier. It would certainly provide good competition and would be to the benefit of the general public.

Ms. Val Meredith: So for that particular example, then, you're talking about having the travelling public look at flying to Calgary on Air Canada or Canadian or AirCo or whatever it's going to be at x number of dollars. Northwest could offer the same destination via a different route for x number of dollars and let the consumer decide whether they want to make a stopover in wherever for a lower cost.

Mr. Konrad von Finckenstein: Precisely. Of course, if there's an inconvenience attached—it would probably take longer and you would have to go through customs in the U.S., etc.—the consumer would have to decide whether the price differential is worth taking on that hassle or whether he or she wants to avoid that hassle and fly directly from Montreal to Calgary, as in this example.

Ms. Val Meredith: But I guess what it would give the travelling public is choice.

Mr. Konrad von Finckenstein: Exactly.

Ms. Val Meredith: The Canada-only carrier is an interesting concept. You used Australia as an example. Does the Ansett carrier in Australia not have some international flights as well as domestic?

Mr. Konrad von Finckenstein: It does. My understanding is that there are two Ansett carriers. There's one that actually flies outside of Australia and another that only flies inside Australia.

Richard.

Mr. Richard Annan (Commerce Officer, Competition Bureau, Department of Industry): That's correct. There's Ansett Holding Company, which has a 50% ownership by Air New Zealand and another 50% by NewsCorp. Below the holding company, there are two separate companies. One is Ansett Australia, which flies only within Australia, and the other is Ansett International, which has international routes from Australia to other countries.

Ms. Val Meredith: So what you're recommending here, then, is to have a carrier that can only fly within Canada, within Canadian borders, but would not have the foreign ownership component.

I would assume that means that Canadian jobs would be preserved, that they would hire Canadian employees. You mentioned that they would buy gas and pay the Canadian fuel tax, the airport fees, the whole bit. So they would be on a competitive level, an equal playing field, with WestJet and whomever this other carrier would be.

Mr. Konrad von Finckenstein: Yes. We start from a premise. The whole international traffic is done on the basis of bilateral agreements under which a country designates a carrier. Yesterday the Minister of Transport explained to you—and it has been the long-standing condition of most nations—that they only designate carriers that are controlled by their nationals—a perfectly rational decision.

However, if you're not crossing the boundaries, if you're just staying within Canada, there is no reason to have this ownership. We're suggesting that you could have purely domestic carriers, regardless of who owns them, which would provide competition to the dominant carrier.

The Chair: Thanks, Ms. Meredith.

Mr. Jackson, please.

Mr. Ovid L. Jackson (Bruce—Grey, Lib.): Thank you very much for your presentation, Mr. von Finckenstein. I have a number of questions. I don't know how many you can get through, but I'll go one at a time.

First, there are side deals. We understand that Air Canada, for instance, has a deal with their alliance. If they were to break it, it would cost $250 million. In cases such as these, it makes it very difficult. We can see where the current wrangling and the bidding up of the prices is creating what I think is a lopsided pricing in the two competing airlines. Is there anything within the Competition Bureau that would help us go through that type of stuff and maybe prevent it or give us an escape clause in case we have to change carriers?

Mr. Konrad von Finckenstein: First of all, I have not looked at any specific transaction. As you know, section 47 was invoked by the government for the period ending November 11. My duties regarding review of mergers has been suspended. So what I did was to prepare a report to the Minister of Transport, at his request, dealing with these issues generically. So I have no knowledge at all about contractual relations Air Canada may have entered into, as you suggest.

• 1545

Mr. Ovid Jackson: My question is do you have any control mechanisms that would—

Mr. Konrad von Finckenstein: Those are usually handled by security laws. You are talking now about takeover proceedings and actions that people may take or companies may engage in, in a defensive way. They may be legitimate or not. It doesn't fall into my purview; I have nothing to do with it. I look at a contract. When two parties have agreed to merge and have a tentative agreement, they pre-notify me and say we want to go ahead, and I look on it: what is the competitive impact. I do not look at how they got there and at the issues in terms of shareholder control, in terms of minority, majority, etc.

Mr. Ovid Jackson: One of the problems with the Competition Bureau is that—and I know we're not discussing gas prices—sometimes you're very ineffective. Can you give me one example when your department has intervened in the airline industry that has made the airline industry better and has eradicated that competition conflict or problem?

Mr. Konrad von Finckenstein: I have only been in this job for two and a half years, so I don't have any personal recollection of one in the airline industry. In terms of merger review, last year we stopped the merger between Ultarmar and Petro-Canada, because we thought it would be to the disbenefit of consumers in eastern Canada. So that's an example of where we would not let a merger proceed because we thought the competitive harm would be too great.

Now, in terms of airline industry, my colleague Richard Annan will answer you.

Mr. Richard Annan: There are actually two examples I can think of. The first example involved the merger between the computer reservation systems of Air Canada and Canadian Airlines in 1987. We had some serious concerns with that potential merger, as a result of which there was a consent order filed with the tribunal that laid out a number of terms and conditions that made that merger less anti-competitive, and in fact they became the basis for a permanent form of regulation for the computer reservation services industry.

The second example was at the time of the Canadian Airlines crisis back in 1993. Again, we had a Competition Tribunal hearing, the end result of which allowed American Airlines to proceed with its investment in Canadian Airlines, which of course at that time was in financial difficulty, and allowed Canadian to continue to fly.

So I think there are two concrete examples of action by the bureau that have been pro-competitive.

Mr. Ovid Jackson: How much control do you have over things like the slots? For instance, when we give a carrier, particularly a dominant carrier, the authority to do things—they have the slots, they have the airport, they have all kinds of facilities—and if they were to turn it over, sell it as a good to somebody else, then that creates a problem. You've outlined some ways here. I just wonder what kind of control you have over that.

Mr. Konrad von Finckenstein: Under the law as it stands right now, if this transaction came before us and we looked at it, we would establish in effect conditions of merger, saying yes, you may.... If we find there's a substantial lessening, we might say not at all, as we did in the Ultramar and Petro-Canada case, or we might say yes, but on condition. One of the conditions might be slots, and we would say you have to give up these slots. It would go to the Competition Tribunal, and the court would order yes, you may, provided that within six months you sell this, or they would probably sell them before the closing takes place.

What we try to do in merger review is to come up with remedies that are one-shot remedies. We call them structural remedies. So there's no monitoring and control later on; you have to do this before you go ahead. You would divest yourself of this asset, it goes, and then you can go ahead. Slots is the perfect example. You would determine what are the number of slots that have to be given up, to whom, under what circumstances.

Mr. Ovid Jackson: In the case of the Australian example, we were made to believe—and I just can't remember who told us—that the New Zealanders are the ones that actually fly more regularly to Australia, and as a result it's probably in Australia's favour. The minister answered today as well that we have a giant competitor. How do you see that particular system working in our particular instance?

Mr. Konrad von Finckenstein: In our particular instance—if you're now talking about the Canada-only carriers, my last suggestion, I assume—I would see that you would by legislation create this specific type of carrier. That specific type of carrier would give competition to Air Canada, or the new dominant carrier, whatever it is called. The dominant carrier would start off with a huge advantage, in terms of having 80% of the flights and 90% of the revenues for domestic flights in Canada. So it's really an uphill battle.

• 1550

On the other hand, this new airline could of course interline or code-share with some partners to the south. Let's take a perfect example. Right now, from Sudbury to Toronto you can fly Air Canada or Canadian. After the merger you can only fly the new air carrier. You would have the choice. If you want to go from Sudbury to New York, you can fly Air Canada, Sudbury-Toronto-New York, or you fly this Canada-only carrier Sudbury to Toronto and there you would then go on one of the U.S. carriers out of Toronto.

Effectively, in Canada the competition would be on Canadian terms. There's no cost advantage of being a foreign entity. The airline would have exactly the same cost base, the same conditions, the same crew, the same labour cost as Air Canada. So it would be fair competition. On the other hand, vis-à-vis foreign flights, be they transborder or be they to Europe or to Japan, those would be purely in the hands of Air Canada. Air Canada would have to take on its international competitors, as it does today.

The Chair: Thanks, Mr. Jackson.

Mr. Guimond, please.

[Translation]

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Île-d'Orléans, BQ): Mr. Commissioner, on page 36 of the document you sent to the Minister of Transport on October 22, you state:

    The Competition Bureau recommends that:

      The Canada Transportation Act be amended to allow for the licensing of Canada-only carriers.

So far so good.

      Such carriers should be free of any Canadian ownership or control restrictions.

For the information of the committee, could you explain the logic behind that decision? Why are you making such a suggestion?

Mr. Konrad von Finckenstein: As I mentioned to your colleague, these carriers should be free of any restrictions with respect to Canadian ownership or control. They should, however, be subject to all the other conditions that apply to air carriers in Canada, that is, tax requirements, licensing, fuel costs, etc.

We would like to see here the creation of air carriers that would compete with the dominant carriers, do business on the same basis, assume the same costs, etc. These carriers could operate only in the domestic market and not outside Canada. In that way, there would be no competition from foreign carriers in Canada, carriers having advantages that a dominant carrier in Canada does not have. In the domestic market, though, the new dominant carrier would have competition, which would ensure fair pricing for consumers.

Mr. Michel Guimond: Two offers have been put on the table to buy Air Canada. There are rumours that Onex will present a counter- offer tonight before midnight so that it can be transmitted to Air Canada shareholders. How will all that work in practical terms?

If the Air Canada shareholders, at their November 8 meeting, accepted an Onex offer based on more than 10% foreign ownership, might they be ratifying an offer that is illegal under the present regulations, assuming that the committee recommends maintaining the 10% limit?

Mr. Konrad von Finckenstein: First of all, we have not examined any specific transaction. As I already said, my role for the moment is limited to giving general advice to the Minister, under the order I received from the government pursuant to section 47. I am currently relieved of any duty relating to the study of potential mergers.

Secondly, the question that you asked is currently before the courts. I do not know whether the Onex offer is legal or not. There is some dispute on that and the court will decide.

The only thing I can say is that after November 11, once the order has expired, the provisions of the Competition Act will apply. If a merger transaction is proposed, I will study it.

Mr. Michel Guimond: That brings me to my last question, Mr. Commissioner.

I am not familiar with all the details and provisions of the incorporating act of the Competition Bureau. What is the timetable for Canadians to be informed as to whether the offers are legal or valid under the Competition Act? How long will your study take? How much time does it take to get an answer from the Competition Bureau?

• 1555

Mr. Konrad von Finckenstein: That is a question that is very difficult to answer because we are talking about a hypothetical situation here. I have not examined the merger plans for Air Canada and Canadian. Generally speaking, when we study a very complex transaction where the company has no financial problems, that is, where it is not in bankruptcy or on the brink of bankruptcy, we need about four or five months. When a company is on the brink of bankruptcy—in English, we use the term failing firm—we decide whether that is really the situation and this takes six to eight weeks. But we can keep within these timelines only if we have all the necessary information and can count on the co-operation of the parties involved. Sometimes the parties refuse to cooperate and we have to go to court to obtain the necessary information. Naturally, this slows down the whole process.

Mr. Michel Guimond: Does the financial situation of Canadian put it into the second category, where we can expect an answer in six to eight weeks?

Mr. Konrad von Finckenstein: I have no idea. I have not looked at Canadian's books. If, after November 11, there is a proposed transaction involving Canadian, the first thing I will do will be to look at the carrier's financial situation to see if it does qualify as a failing firm. In that case, the second process would apply.

[English]

The Chair: Thank you.

Mr. Comuzzi, please.

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Thank you, Mr. Chairman.

Mr. von Finckenstein, I want to really compliment you and your associates at the table for being here today. The reason for the compliment is that it says in the letter you received from the minister on August 30, 1999, and I quote:

    Specifically, any restructuring will have to take place within the current framework respecting Canadian ownership and control of air carriers. This will be Canadian-based restructuring so the introduction of foreign carriers on domestic routes, i.e. cabotage, will not be considered.

I very much appreciate your coming here today and saying there are two alternatives you draw to our attention: the first instance is one Canadian-only carrier, and the other is cabotage. We appreciate that a lot. That question was brought up yesterday, and it didn't get any attention at all. So I sincerely thank you for that. That's very helpful.

In your disclaimer letter that accompanied your report, which was given to us yesterday, it says:

    However, given the use of section 47 of the Canada Transportation Act suspending parts of the Competition Act, your terms of reference, and the short deadline, this letter...will merely...identify [certain] issues.

Given that this may be the largest merger in Canada, involving so much public policy, what is the feeling of your bureau about the fact that by the actions of August 13, the Competition Bureau is not allowed to participate at this critical period of time in the discussion of this issue?

• 1600

Mr. Konrad von Finckenstein: Section 47 is part of the Canada Transportation Act. It is there to be invoked, under certain conditions, by the Governor in Council. The Governor in Council invoked it in August, on the basis that the conditions there were met. So my powers regarding merger review and prohibiting parties from discussing prices, routes, fares, etc. were suspended. That suspension comes to an end on November 11.

This is an operation of law. The law provides for such an eventuality. It provides for the minister to be able to go to cabinet and get an Order in Council to that effect, and that has happened.

As you know, the minister at the same time asked me to give him my views in a generic method, because I think the minister recognizes that the Competition Bureau has a dual role: we are both the champion of competition and the guardian of competition. As the guardian of competition, our role was suspended for 90 days, but our champion role was not suspended, so we exercised it here and gave him our best views.

I appreciated that the minister did not restrict it to merger review, but he also said to give him views on policies or conditions the government might put in place so as to ensure the most pro-competitive outcome possible. As you know, my report is in four parts. Only the first part deals with conditions that could be attached to an approval. The next three parts—the policy changes, the regulatory changes, and the legislative changes—are all within the domain of the Minister of Transport.

He asked me to advise him. I gave him the best advice we could come up with. It's now up to him to implement that or not. And he asked you for your advice. So I think the process is working as it should.

Mr. Joe Comuzzi: Thank you, Mr. von Finckenstein. Let me just put it in more perspective. I'll read now from the court case of the Airline Industry Revitalization Company v. Air Canada, paragraph 8. Bear in mind that this order came on August 13. It says here that on August 11, Onex management advised its board:

    Prior to launching the bid, Onex will seek assurances from Ottawa that...[it] would be acceptable to the Canadian government and regulators.

It goes on:

    Specifically, we will seek assurances that the government will support the combination of...invoking section 47....

More important, the aspect I want to talk to you about today is this:

    Such an order, which must be issued by cabinet on the recommendation of the Minister of Transport and Minister of Industry, would provide that the merger...could proceed without a merger review from the Competition Bureau in Canada....

Let me go over that again: “...the merger would proceed without a merger review from the Competition Bureau in Canada...”.

These are the findings of Mr. Justice Blair in this court case.

I would like to know from you, sir, what is the significance of the merger going ahead without a review from the Competition Bureau?

Mr. Konrad von Finckenstein: I'm sorry; what judgment are you reading from?

Mr. Joe Comuzzi: This is the judgment of Mr. Justice Blair on September 28 in the case of the Airline Industry Revitalization Company v. Air Canada.

Mr. Konrad von Finckenstein: Okay. That case was not specifically on point. As you know, on these various—

Mr. Joe Comuzzi: Excuse me, Mr. von Finckenstein. The case dealt with other issues, but what I'm reading from is the finding of fact of the judge and the background of the case submitted by both parties.

Mr. Konrad von Finckenstein: Okay. Let me just say the order itself was challenged by Air Canada. Air Canada fought through legal proceedings to have clarification of what the order meant and what the extent of it was. The crown filed a position in that proceeding. The proceedings then were dropped at the request of Air Canada, so we do not have a definitive judgment on it.

All I can tell you is the position of the federal government. I have it here with me. In the summary of the position, the pleadings filed by the federal government say:

    As to the third question, the Attorney of General of Canada submits that both subsection 47(3) of the Canada Transportation Act and section 4 of the Order in Council limit the effect of the Order to 90 days. It follows that no approval given pursuant to section 3 of the Order can exempt a conditional agreement permanently from the application of the Competition Act.

• 1605

So it was the crown's position that notwithstanding that the order was made under section 47 and notwithstanding that the order allowed for an approval of a conditional agreement by cabinet, such a merger would still have had to have the full review of the Competition Act.

Mr. Joe Comuzzi: Thank you.

The Chair: Thank you very much, Mr. Comuzzi.

Ms. Desjarlais, please.

Ms. Bev Desjarlais (Churchill, NDP): Thank you very much. I actually enjoyed the aspects of your report, recognizing that you based your report on the possibility that we may have one dominant air carrier.

First I want to comment on the recognition of the travel agents being a very important aspect of the industry, and recognize that you've suggested that there should be something in place to ensure that their revenues are not limited too greatly, and also recognize that it wasn't incorporated into the minister's restructuring plan.

My first question is just for clarification. The carrier that would be strictly a Canadian carrier would not necessarily have to be Canadian owned. It could be a 100% foreign-owned carrier as long as it flew strictly within Canada.

Mr. Konrad von Finckenstein: Yes.

Ms. Bev Desjarlais: Would that carrier be allowed to have alliances with other carriers?

Mr. Konrad von Finckenstein: I don't see why not.

Ms. Bev Desjarlais: Okay. On the other aspect, since your report was done on the basis that we would have one dominant carrier and that you have not been involved in the process so far, can we be assured that Canadian is in a position where we have to look at one dominant carrier? Are you satisfied that Canadian's financial position puts us in a position where we should have only one dominant carrier within Canada?

Mr. Konrad von Finckenstein: I can't answer that question because I have not been able to look at the books of either Air Canada or Canadian. Once November 11 rolls around, and if there is a merger proposal before me, the very first thing we will do is look at the books of Canadian to see.... As I mentioned in the answer to the question of the member of Parliament from the Bloc Québécois, one of the key issues will be to determine if Canadian is a failing firm or not. When you look at a failing firm, the considerations are different from when you look at two healthy firms merging.

Ms. Bev Desjarlais: So had section 47 not been invoked as such and had the two groups wanted to suggest a merger, then you would have been in a position to look at the books of Canadian.

Mr. Konrad von Finckenstein: Had section 47 not been invoked and had the Onex offer come forward, they would have, in my terminology, prenotified, saying they intended to purchase Air Canada and Canadian—that's really what their offer amounts to—and we would have looked at the books of all three companies and would have done an in-depth examination.

Ms. Bev Desjarlais: In regard to the 10% rule, do you think the 10% rule should be left in place?

Mr. Konrad von Finckenstein: The 10% rule really has nothing to do with competition. It's a rule to prevent one large group acquiring a dominant sector in the company. All restrictions on ownership are anti-competitive to some extent. The reason we have the 10% rule I'm not aware of, but from a competition point of view, I'm more or less neutral to it. I think it has some slight anti-competitive effects, but they're not overwhelming.

Ms. Bev Desjarlais: Okay. Can I sneak one little bit more in there?

In regard to Canadian's financial position, there was some indication—and I believe from the minister as well—that Canadian and Air Canada had been having some discussions earlier this year that were happening in spite of everything. Bearing that in mind, do you think that might lead us to consider that the Competition Bureau should have been allowed to intervene even before August 13, just based on the fact that they were already having some discussions, but it was only after the Onex proposal that everything else started to happen?

• 1610

Mr. Konrad von Finckenstein: Discussions between companies regarding possible mergers go on all the time. Once you are close to having a deal, once you've decided on the basic terms, there's an obligation under the law to come and prenotify us, etc. But there are lots of discussions going on that lead nowhere, so I think the fact that there were discussions early on here between those two companies is really of no consequence if they did not lead to anything.

Ms. Bev Desjarlais: Is it still reasonable to presume that it didn't lead to anything when we're in a situation where there's been a proposal for one carrier to come out of this?

Mr. Konrad von Finckenstein: I'm not aware that there's an agreement of any kind between Canadian and Air Canada.

The Chair: Thank you, Bev.

Mr. Dromisky, please.

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

Most of our airports at the present time are in the hands of, you might say, private airport authorities operating at arm's length, non-profit organizations considered to be private. Yet on page 3 of your presentation today, in the top paragraph, you're mentioning that the Minister of Transport should outline some conditions that might be imposed upon these airport authorities. For instance, you say “returning airport facilities to the appropriate authority for reallocation”. Another one here that I'm a little bit puzzled about is “change the way airlines pay for airport services”. I see just those two areas alone as responsibilities of the airport authority and not the Minister of Transport.

Are you asking the Minister of Transport to overpower or to, in a sense, reject some portion of the agreements this government has made with airport authorities?

Mr. Konrad von Finckenstein: Not at all. What I'm suggesting here is that if there is a merger, one could impose upon the dominant carrier, as a condition of this merger going ahead, “You must give up up those slots. You own all the ramps, all the gates, etc., in a given airport. You have to sell them.” I mean obviously, as my letter makes out, at a reasonable price, not giving them away. But they have become available.

Take Toronto. You want to see competition in Toronto. You want people to be able to land in Toronto at peak times. Air Canada and Canadian own practically all the slots at peak times in and out of Pearson. A new dominant carrier would have that combined ownership. What we are saying is that those slots would have to be given to the slot coordinator in Toronto, who would then assign them to other airlines who want to fly in. It's a condition that's imposed upon the dominant carrier as a price of merger.

Mr. Stan Dromisky: Yes, I understand the situation pertaining to slots, but I would like a specific response from you regarding “returning airport facilities to the appropriate authority for reallocation” and also “change the way airlines pay for airport services”. Airport services are being provided to the carriers by contractors, or by the airport authorities who hire contractors, or by employees of the airport authorities.

Mr. Konrad von Finckenstein: You can't leave out the beginning, where it says “imposed” upon the dominant carrier. I'm only talking about the dominant carrier. If the dominant carrier owns 50% of all the counter space in that airport—and in some airports that's still the case—that dominant carrier should be asked to sell, for a reasonable price, some of those counters to its competitors or to the airport authority so that the airport authority can then lease them out to competitors.

Basically what we're saying is that right now they have a lock on all the counter space in this airport and they have to give some of that up. The way to do it is to give it to the airport authority, who will then assign it or lease it to new entrants.

Mr. Stan Dromisky: Well, it's going to be interesting to see, if that does happen, where we cross the line, and the Minister of Transport will infringe upon the authority bestowed upon them by acts of the past. When I say “them”, I mean the airport authorities that have been created.

On the bottom of that page, you talk about “the establishment of more effective ways of fighting predatory behaviour by the dominant carrier”. Could you possibly give us some insight regarding what you mean by “more effective ways of fighting predatory behaviour?”

Mr. Konrad von Finckenstein: Yes. The aircraft industry is quite peculiar. You have an industry that is really a network industry. Everybody is connected to each other. You interline; through the reservation system, carriers know how many flights the other ones book, where to, and how, so there's a lot of information. Certainly your assets are all highly mobile. You can shift them from one place to another.

• 1615

So the new entrant opens a new line, let's say, between Thunder Bay and Toronto. There's nothing preventing it, and it's very little effort for the dominant carrier to put on extra capacity, shift extra flights there, and effectively drive that person out of business.

Now, the law makes it quite clear that when you dominate in the market and you try to drive somebody out of business, we can step in and stop that process. However, it takes time. It's a lengthy procedure, a lengthy investigation, and the line is not that clear between what is good competition, honest competition, tough competition, and what is predatory behaviour in trying to drive someone out of business. It is a relatively grey area and is hard to determine.

Therefore, we're saying in this situation where it's a result of the merger, you're going to have a dominant carrier that owns 80% of the air traffic and 90% of the revenue, so you need to have quick-fire response. What we've put forward here is in effect a cease-and-desist method by which we would get 90 days to investigate; in the meantime, they have to stop the behaviour.

Mr. Stan Dromisky: This question just requires a yes or no answer. So what you're really saying is that some agency or the government or the minister or you would tell the major carrier that only so many flights would be allowed from Thunder Bay to Toronto.

Mr. Konrad von Finckenstein: No, that's not what I'm saying.

Mr. Stan Dromisky: That's not what you're saying?

Mr. Konrad von Finckenstein: No. In that example, we'd investigate and we would look at whether the behaviour is there in order to drive this guy out of business or whether you're trying to make a decent—

Mr. Stan Dromisky: After that investigation, could you—

Mr. Konrad von Finckenstein: You go to court.

Mr. Stan Dromisky: Okay.

Mr. Konrad von Finckenstein: You have to make your case, and the court will decide, not me.

The Chair: Thanks, Mr. Dromisky.

Mr. Casey, please.

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

I congratulate you on an extensive paper, but I have a question. I don't know if we've missed another opportunity here. In your letter to the minister, you say, in the second paragraph, “As you requested, I have assumed, first, that a dominant carrier will emerge from this process”.

If the minister hadn't restricted your focus to his view of what's going to happen, that one single dominant carrier would evolve, do you think you could have found other scenarios, other frameworks, that could involve not a single dominant carrier but another restructuring of the business, which could allow competition? Your focus was based on one dominant carrier. It was restricted to that.

Mr. Konrad von Finckenstein: On page 2 of my letter, I do say:

    While the focus of this analysis is on the dominant carrier scenario, it is our view that many of the recommendations contained in this letter could be implemented in a non-dominant carrier environment to benefit Canadian consumers.

The minister is faced with the merger of the two air carriers that dominate the Canadian air industry. Therefore, he asked me to focus specifically on that and I did so in my letter. It's the most logical outcome of a merger of these two airlines: that you will have a dominant carrier.

Mr. Bill Casey: I'm reading your first line in your web page, which says “The basic operating assumption of the Competition Bureau is that competition is good for both business and consumers”.

If we end up with a dominant carrier, with the format we have, information in your papers is that 90% of the volume of business will be done by one dominant carrier. Are you convinced that is the only way we can restructure? If you had the tools available to you to restructure the Canadian industry, other than these one or two options on the table, do you think there would be a better way to do this?

Mr. Konrad von Finckenstein: You're posing the question from the wrong angle. I'm not in the business of restructuring. I'm in the business of looking at mergers put forward by parties that want to merge, usually because they think this will result in greater efficiencies and therefore greater profit for them.

I look at them and say “That's fine, I'm all for the most efficient allocation of resources, but let's make sure that this doesn't result in a situation where you get dominant so that you can abuse your position”.

Mr. Bill Casey: If the dominant carrier ends up with 90% of the business, isn't he in a position to abuse his position?

Mr. Konrad von Finckenstein: That's what I'm saying in my letter. This raises very serious concerns, and that's why I'm going through a whole host of conditions that could be imposed on a merger. Then, I continue to advocate policy changes, regulatory changes, and legislative changes, including, as we just discussed with your colleague, special provisions regarding predatory pricing, because I think the situation would be very grave. It's both important to set the machinery so that new entrants can come into market and to have the tools there to look at the behaviour of the dominant carrier and make sure that he doesn't step over the line.

• 1620

Mr. Bill Casey: We have profitable airlines in Canada. We have Air Canada, WestJet, and several charters. We have one, certainly, that's apparently not profitable. I'm not convinced that there isn't another way to do this and still maintain competition, which is both good for consumers and business.

I know your mandate was to look at only one point of view, but I still think, because of this fire-sale approach, with this short term to deal with it, we're missing opportunities. We're not looking at all the opportunities. Do you not envision any way to do this other than a dominant carrier with 90% of the business?

Mr. Konrad von Finckenstein: I was asked to give the advice without looking at a specific transaction. I have not looked at the books of Canadian; I have not looked at the books of Air Canada. I'm giving generic advice. I see what putting these two companies together would mean in terms of market share, but that's all. So I really can't answer that question at this time. If and when a specific merger proposal comes before the Competition Bureau after November 11, we will look at it. You can be sure that we will look at it very carefully, as we always do, and we will need to be convinced that this is the only way to proceed.

Mr. Bill Casey: Okay.

Moving along to another area, the minister is proposing that legislation be adopted to remove the aviation industry and aviation mergers from the Competition Bureau on a permanent basis. Is that appropriate? Are there other areas, other businesses, that should be removed from the Competition Bureau?

Mr. Konrad von Finckenstein: I don't think that's what he said. I thing he is suggesting a new review structure, which is essentially an analogue to what we do with the Bank Act, which provides that you would put a provision in the Canada Transportation Act to say that a merger of level 1A air carriers needs the approval of the Minister of Transport.

You would then make an amendment to the Competition Act, something along the lines of what's there right now for banks, so that in effect you have a dual approval procedure, or triple, really, where you have the Canadian Transportation Agency looking at ownership and control, the Department of Transport looking at national air policy objectives, such as access to more communities or employment or whatever and making sure these are met, and us looking at competition issues.

They then come together, and the parties, knowing these conditions, restructure their transaction to meet all of them. We determine whether they meet the competitive one, he looks at whether they meet the transportation one, and of course the Canadian Transportation Agency looks at the ownership and control. The deal is approved only if they meet all three. That, grosso modo, is the procedure that he outlined to you here yesterday.

The Chair: Thank you very much, Mr. Casey.

Mr. von Finckenstein's accounting of what the minister said yesterday is correct. Your recollection of his statement was incorrect.

Mr. Calder, please.

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

Commissioner, I want to deal with this 10% rule that we're looking at right now. Should it stay? Should it be changed? How important is it? An article I was reading in The Globe and Mail, dated today, says that there's a possible new offer coming from Onex, with the possibility of increasing by $2 per share what's currently being offered right now at $8.25, which would be an extra $376 million. Now they are even talking about cutting American Airlines' equity position to 10% from the 15% that they were proposing. They're even talking about reducing two directors to one. First of all, in your opinion, how important is this 10% rule?

Mr. Konrad von Finckenstein: As I mentioned before, my purview is competition. I look at the competition aspect. Ownership restrictions clearly have an anti-competitive effect to some extent. As I mentioned in the outset of my letter, foreign ownership or restriction on foreign ownership has a major impact on the competitiveness and the ability to raise capital, etc.

• 1625

The 10% rule, which just says that no single block can have more than 10%, has a slight anti-competitive effect. It's very hard to say how large or small the effect is. The 10% rule is really there for reasons other than competition. It's not driven by any competitive concerns, and in my view does not have major competition implications. So you're asking the wrong person, in terms of the 10% rule.

Mr. Murray Calder: Okay, then I will go to something that definitely does deal with competition, and that is the possibility of price gouging, with one carrier.

Within your extensive brief here—and I've enjoyed reading it—you've come up with the unique idea that instead of a dominant carrier raising the price, they could restrict the possibility of discount fares. They wouldn't raise the price, but instead of being able to get discount fares, people would have less opportunity and would have to go to the first carrier, which would have more expensive fares.

You've also raised the issue of forcing a dominant carrier, on demand from other carriers, into a sufficient number of slots at different airports across the country. You're proposing that both domestically and transborder.

You've also said in your brief that you're anticipating the possibility, if the two carriers are put together, of them selling DC-9s, DC-10s, and B-737 200s internationally. If they did that, they wouldn't be able to bring the aircraft back into Canada because of our safety rules, and therefore you would be restricting another discount carrier.

You're talking about a lot of power here. Do we have the capability, quite frankly, of putting together policy that would wield that much power?

Mr. Konrad von Finckenstein: It would not be a policy; it would be a term and condition of a merger approval. When two companies get together, like Air Canada and Canadian, they do it in order to generate efficiencies. They will, by definition, have surplus airplanes. They will have more slots than they need. They will have more assets than they need at airports, etc.

We are saying that as part of a merger it is possible to say yes, you may do that, subject to getting rid of these surplus planes, these surplus assets, these surplus time slots, etc., but let's make sure that you can't sit on them in order to preclude others from coming in, and that they go out in such a way and on reasonable terms that others who want to enter into this business are able to make use of those planes and use those time slots or airport facilities to start a new service or expand an existing service.

Mr. Murray Calder: Well, I guess anybody who will be in this bidding.... Unfortunately, in this committee we're still swinging at smoke and ghosts right now, because we don't have anything really solid and tangible to deal with. It will be interesting.

Thank you.

The Chair: Thanks, Mr. Calder.

Ms. Meredith, please.

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

I must admit that this conversation has relieved a lot of the concern I had yesterday when I heard the minister talking about what I perceived to be getting our airline industry back into a regulatory framework.

If I understand you correctly, you are suggesting that most of the transition and getting into a pro-competitive situation would be done through contractual arrangements through the merger process. It would be a contract agreement with the merged company, and they would recognize these controls on how they would do business in the future, to make sure competition would be allowed. Would that be correct?

Mr. Konrad von Finckenstein: Yes. Some of them may require accompanying action by the Department of Transport, when we talk about some of the international slots. But in the first instance, you're absolutely correct.

• 1630

Ms. Val Meredith: But even when you talk about some regulatory aspects in what you have outlined here, as I understand it, you are suggesting we remove some of the controls government has on the ability of these carriers to be competitive with each other or to operate in a competitive marketplace, with airport slots and those sorts of things. You are suggesting we open it up rather than have the government control it.

Mr. Konrad von Finckenstein: As you quite rightly point out, some of them are conditions you would impose on the dominant carrier—you have to give up these slots and these airport facilities—and others are policy changes designed to foment competition. In our view, the distinction between charter carrier and scheduled flight carrier right now is overly complicated. We are saying to simplify it so that charter carriers have fewer problems converting to scheduled, or they can do both—some of their charters, etc.—and negotiate internationally to simplify this distinction as much as possible.

They're talking about second-carrier designation. The rule now is that unless there are 300,000 passengers using that flight, you don't designate a second carrier. We're saying to take that down; it doesn't have to be that high. All of this is to foment competition.

Ms. Val Meredith: I appreciate what you're saying. Even your legislative changes to me are deregulation of the industry, which I believe will be a positive thing for the Canadian airline industry in the future.

On page 28 of your letter to the minister, in item 3.4 on access to foreign capital, you recommend that the regulation limit on foreign ownership of voting shares of Canadian air carriers be raised to 49%. I'm not sure whether I agree with that limit or not, but you're stretching the regulatory ability of the government to restrict competition and restrict the marketplace from doing its job, and I appreciate seeing that.

Can you give us some background as to how you reached the 49% figure and defined that it was an issue that had to be addressed?

Mr. Konrad von Finckenstein: The issue is access to capital. There are huge pools of capital outside Canada and not that many within Canada. This is a very capital-intensive industry.

We are not suggesting that you remove the Canadian control element. You may have a situation where you find an airline is foreign-controlled now, even though they are within the 25% limit, because control is not just limited to ownership.

We are suggesting that as long as you're convinced there is control within Canada, why not maximize the amount of capital you can get from all sources. If you raise it to 49%, the various companies or individuals that own that 49% may be divided among hundreds of thousands of people. They don't act as a group. Control will still be in Canada by somebody who owns the 51% or maybe only 10%, with everything being widely held. But let's make sure we go after what's important, and that's Canadian control. The ownership restriction of that 25% or 49% makes no difference. You want to make sure that control stays in Canada for the purpose of designation. But by raising it to 49%, you get access to a much greater pool of capital than you have right now.

Ms. Val Meredith: Does it also meet the bilateral agreement regulations if you keep it under 50%? Would the 49% allow you to meet those obligations we have in our bilateral agreements?

Mr. Konrad von Finckenstein: Absolutely. The legislation right now allows you to raise it by regulation. You don't even need an act of Parliament.

Ms. Val Meredith: Thank you.

Do I have more time?

The Chair: No, I'm sorry.

I have a point of clarification on Ms. Meredith's point—and correct me if I'm wrong—when she asked the witness about about a contractual obligation between the two before they become one, instead of re-regulation or control by government, as you put it, on slots or gates.

Ms. Val Meredith: Well, I think the witness explained—

The Chair: I'm just clearing it up.

Ms. Val Meredith: —it's a contractual arrangement with the merged companies and the company—

The Chair: If that's the case—and I'll ask the commissioner—I guess the logical extension or the next question you have to ask is for how long could you, in the private sector, have a contractual arrangement between two airlines that become one to ensure that the slots and gates would be available for domestic or discount carriers, and thus satisfy the travelling public? In your experience in business, how long do you think you could keep a contractual arrangement like that? Would you make a two-year deal, a five-year deal? Could you make a 25-year deal for that in the private sector?

• 1635

Mr. Konrad von Finckenstein: Perhaps I can answer the question in a slightly different way. What we really do is split it between what we call structural remedies and behavioural ones.

The structural remedy is when you ask that they get rid of something, such as slots, and sell it to their competitors. You insist that they dispose of them, and you would do that prior to closing. You would say, okay, these counters at Pearson, you have to sell. The sale would be consummated before approval is given, so there is nothing to monitor, nothing to control.

Now, there are others things that are not structural but are what we call behavioural remedies. In effect, if you interline with a smaller carrier, and you co-chair something, for example, we would make it subject to a court order in most cases. We would have the court order that during what is a reasonable commercial period, usually.... But I can't say “usually”; it really depends on what the condition is and how important you think it is that it be observed in the long term or in the short term. It could be an indefinite one or it could be one that has a time limit on it from the court order. But even if it is indefinite, it never prevents a party from applying to court and saying they want a variation of the order because circumstances have changed.

The Chair: And therein lies the problem, I think. If it's regulated, if the government is controlling slots or gates, as they do international routes and international route assignments, they have a handle in the interests of the public. For example, they are holding those international routes in trust for the taxpayers of Canada to ensure competition, etc. So you apply that same methodology to ensure that slots and gates at any given airport are available for the competition.

Mr. Konrad von Finckenstein: But there seems to be a misunderstanding here. What we are recommending is that the slots be given to the slot coordinator in Toronto to assign them to available entrants. I'm not suggesting that they go to Transport Canada and I'm in no way suggesting that there should be more regulation, or re-regulation.

So I want to be quite clear on that. I'm suggesting market solutions.

The Chair: Thank you.

Mr. Drouin, please.

[Translation]

Mr. Claude Drouin (Beauce, Lib.): Mr. von Finckenstein, I would like to know whether, in the recommendations that you have made, you share the government's concerns regarding safety, service to the regions and bilingualism. Are you using these criteria or are your recommendations based only on competition considerations?

Mr. Konrad von Finckenstein: Under the Act, my observations are limited to competition considerations.

Mr. Claude Drouin: You talk about a modified sixth freedom and you make two recommendations, the most important being that an American company could pick up Canadian passengers from one place in Canada and fly them to another Canadian destination via the US. In that case, the service would surely be in English only.

Mr. Konrad von Finckenstein: As I mentioned to your colleague, this is already being done today. You can take a Northwest flight from Montreal to Minneapolis and from Minneapolis to Calgary. I do not know whether such flights offer bilingual services or not, but they already exist today.

The only thing that I can add is that the carrier can sell these two flights and market these two combined flights. That is something that is already being done. If you want to, you can take that flight after this meeting. I do not know whether there is bilingual service or not. I believe that the service is probably bilingual because there are a lot of passengers, and it is in Northwest's interest to offer that service.

Mr. Claude Drouin: When my colleague Calder asked you about the 10% rule, you replied that sometimes companies holding 10% still exercised some control. I'm not sure that I understood correctly, but I believe you said that we could even go as high as 49% without running into problems, provided that there is 51% Canadian control. Did I understand you correctly?

• 1640

Mr. Konrad von Finckenstein: We're looking at two things here. Your colleague asked me about the 10%, and I said that, basically, I had no opinion on it. I don't know why the ceiling was set at 10%, but it has only a slight effect on competition. It is there for reasons other than competition, etc..

The other question had to do with foreign ownership and our recommendation that the limit be raised from 25% to 49%. I said that I agreed with that because I would like to see Canadian companies get access to capital. Naturally, however, these companies will always have to be controlled by Canadians. Canadian control is possible even with 49% foreign ownership. Everything depends on how this 49% is divided up. Is it concentrated in the hands of one owner or shared by many owners?

Mr. Claude Drouin: The danger is that 49% on the books might be more—

Mr. Konrad von Finckenstein: [Editor's note: Inaudible]... control. Control must remain in Canada, but if that is possible, why not allow 49% foreign ownership?

Mr. Claude Drouin: Thank you, Mr. Chairman.

[English]

The Chair: Thanks, Mr. Drouin.

Mr. Asselin, please.

[Translation]

Mr. Gérard Asselin (Charlevoix, BQ): Mr. Finckenstein, the Bloc Québécois could be accused of improving Canada's air transportation system through its participation on the Transportation Committee. However, I think you would agree with me that, as long as Quebeckers pay taxes to Ottawa, their elected officials have a duty to help ensure that Canada has one of the best air transportation systems.

Of course, as far as air transportation is concerned, there are foreign carriers and domestic carriers. I feel that, as Bloc Québécois members, we must vigorously defend the interests of Quebeckers. One industry in Quebec and in Canada has expressed concern: the travel agency sector. The Minister alluded to it yesterday in his speech and today, on page 3 of your document, there are a few lines on it. The travel agency sector is terribly concerned because, since 1996, it has been hit repeatedly by cuts in the commissions it gets from airlines.

As you know, in an area like Charlevoix, on the North Shore, a remote region, people tend to use travel agencies. Travel agencies provide a service to clients and have access to these carriers: reservation services, verification, and so on. In short, travel agencies provide excellent services, and I might mention the Baie-Comeau travel agency run by Marie Blais.

We read in your document that you are recommending changes in the way travel agent commissions are calculated. Who has the power to change the method by which a travel agent commission is calculated? What type of changes might be considered? Is this within the authority of the airlines, the Minister of Transport or the Competition Bureau? This might reassure travel agencies, which create jobs and are one of the most important players in providing services to the travelling public both within and outside Canada.

Mr. Konrad von Finckenstein: On page 15 of our brief we deal with travel agent commissions for domestic markets only.

• 1645

If Air Canada and Canadian were to merge, we would have a dominant airline and the system of this dominant airline for paying travel agents... Now we have the matter of overrides. If you are a travel agent, you are asked to book a minimum, depending on the markets, and you have to sell flights on dominant carriers. If you book more flights, you are paid an override. All of this encourages travel agents to book reservations with the dominant carriers.

I think that it would be fairer if agent commissions were based on bookings. If you booked a large number of flights, you would have a higher commission. In Europe, commissions are based on volume alone.

The way things are now, there's a target and, if you don't meet this target, you don't get paid a commission. This gives the dominant airlines a market advantage. It's a way of forcing travel agents to sell their flights exclusively and not those of their competitors. This is why we are saying that one of the merger conditions should be to oblige dominant carriers to change their method of paying travel agents. The method should be fairer, and the commission based on sales volume.

Mr. Gérard Asselin: If I were to purchase a ticket for Baie- Comeau—Montreal, Montreal-Paris or wherever, that might represent an attractive percentage for my travel agent. In the regions, however, travel agencies must do just as much work—in terms of information, reservations and verifications—for someone purchasing a ticket that costs much less. The agency provides the same services and does about the same amount of work for a domestic traveller and foreign traveller, but it is paid less in the case of a domestic traveller.

Travel agencies, which want to be profitable, do not bill long-distance clients anything because they are guaranteed a good override. But in the case of a short-haul trip, they bill the client for the reservation, verification and ticket issuing services they have provided.

[English]

The Chair: Can we have the question, please, Mr. Asselin?

[Translation]

Mr. Gérard Asselin: I don't believe there should be discrimination against people living in the regions, people who have no choice but to travel, because they already experience enough of it. I think this should be checked. Have you recommended to the Minister that he ensure that people in the regions who are obliged to travel do not have to pay more for travel agency services?

Mr. Konrad von Finckenstein: To be frank, this has nothing to do with competition. It perhaps has to do with discrimination, but not competition. I want to make recommendations that will ensure that the dominant air carrier cannot abuse its position vis-à-vis travel agencies and use commissions to get more bookings from the agencies.

You have raised a completely different problem. That's something I deplore, but it's not my field and I don't have an answer.

Mr. Gérard Asselin: Okay.

[English]

The Chair: Merci, Mr. Asselin.

Colleagues, we have ten minutes before the next scheduled witness. I have five names on the list. If we could move to two-minute rounds, that would put us at ten minutes, to finish up at five o'clock. It would give us ten minutes before our next witness starts in order to pick up a plate of food.

So two-minute rounds, starting with Mr. Comuzzi.

• 1650

Mr. Joe Comuzzi: No, I'll pass.

The Chair: Thank you, Mr. Comuzzi.

Bev.

Ms. Bev Desjarlais: I may have mistaken what you said, and I'll look back at the notes, but I just want to clarify this. In responding to someone, I believe you made the statement, “You may find an airline is foreign controlled now in spite of the 25%.”

Mr. Konrad von Finckenstein: Foreign control is not dependent on the percentage of foreign ownership. It's a “control in fact” test. If it's a viably held company and you have 20% and everybody else only has 2%, then it could very well be that you control, notwithstanding that you have less than—

Ms. Bev Desjarlais: But my understanding is that under our rules the Canadian Transportation Agency is supposed to be ensuring that none of these companies is foreign controlled.

Mr. Konrad von Finckenstein: Precisely. I was speaking theoretically; I wasn't suggesting that it's happening. I was trying to—

Ms. Bev Desjarlais: Okay. I took that as an impression that maybe that was happening within this area.

Mr. Konrad von Finckenstein: No.

Ms. Bev Desjarlais: I guess I'll just make this as a comment. I recognize that you said you just came in in the last two and a half years, when the question was asked.... Could you give us some success stories where the Competition Bureau came in? Mr. Annan indicated 1987, the computer reservation system; and 1993, the Canadian Airlines crisis, which allowed American Airlines investment. Today, would you look at that American Airlines investment as a success story for Canadian Airlines?

The Chair: Thank you, Bev.

Mr. Konrad von Finckenstein: I think at that point in time it was a question of ensuring that we had a competitive market. We wanted to ensure that the reservation system was not something that would block Canadian from striking a different—

Ms. Bev Desjarlais: With all due respect, it is indicated as a success story.

Mr. Konrad von Finckenstein: Well, yes, of course it was a success story in the sense that we won the case. Whether the economic decisions or the market decisions that were taken by the participants proved to be wise or not is a different question, which is really what you're implying.

The Chair: Thank you, sir.

Mr. Sekora, please. You have two minutes.

Mr. Lou Sekora (Port Moody—Coquitlam—Port Coquitlam, Lib.): I want to carry on for a minute on the travel agents' commission. The MP across there asked some questions, but I didn't....

As you know, I'm from British Columbia, and the fact is that it doesn't matter whether the travel agent sells a $4,000 ticket, a $10,000 ticket, or a $200 ticket, they get $60, period, for the ticket. Now you've mentioned the fact that on volume they would like to see their commissions a little larger.

Let's say I'm a travel agent across Canada and I have many agencies in every city in Canada, and my competitor has a small travel agency that doesn't sell as many tickets, but on volume, per agent, it would probably sell more. You say that on a volume basis the commissions should be larger, or whatever it is that you mentioned. Could you explain that to me a wee bit?

Mr. Konrad von Finckenstein: Yes. You're talking about the override, and it's based on location. But my colleague Mr. Annan is the expert, so I'll let him explain it to you.

Richard.

Mr. Richard Annan: There's a base-level commission, which both Air Canada and Canadian have set, and I think Air Canada has recently announced they're going to reduce that come December 1. What we've identified, though, is the other level of commission, which is called the commission overrride. This is in addition to the base-level commission, and airlines—not just domestic airlines, but transborder, international airlines—pay these. They're called override commissions in the industry. They can be upwards of 5% or 6% or more—in some international markets much more. So they are an important revenue stream for travel agencies.

In Canada the practice has been, up to today, to base these largely on market share. For example, let's take two examples in Toronto and Moncton. An agency may sell, say, 50% of its sales on Air Canada in Toronto and maybe 50% of its sales in Moncton. Obviously the two volumes are going to be much different. The problem is going to be with the dominant carrier scenario, where you have, say, 85% or 90% market share. That will be a very powerful incentive for the agency to continue to book the dominant carrier regardless of the competitive alternatives, because the commission could be set in such a way that you get the commission override if you book 90% or more and you get zero if you book 89%.

That is the problem we've identified.

The Chair: Thanks, Mr. Sekora.

Mr. Casey, you've got two minutes.

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Mr. Bill Casey: I have a question. You talk about regional airlines and whether divestiture is required. Do you have an opinion on whether, from a competition point of view, it would be better for them to be divested and operate as independents, or would it be less competitive if they were included in the dominant carrier? Do you have a thought on it?

Mr. Konrad von Finckenstein: Strictly, sir, accurately speaking, being independent and separate would be better because of some routes they fly in competition with the dominant carrier. The problem is what's the state of these regional airlines. Are they financial viable? What kind of connection would they need? What's the transition period you would have, etc.? Not having looked at either transaction, I can't answer this.

What we've outlined is that this is something that should be examined and, where feasible, should be demanded. But I say “where feasible” because that depends very much on the traffic situation, the financial health, the relationship that can be struck between the regional and the dominant carriers or with other carriers so as to give them sustainable feed traffic.

Mr. Bill Casey: Divestiture should be demanded if it's feasible. Did I understand you correctly?

Mr. Konrad von Finckenstein: I think that's overstating it. If you're asking if I have a bias between independent regionals and affiliated regionals, then I would say yes, clearly independent regionals would provide better competition.

Mr. Bill Casey: In 1993 the tribunal—I don't know if you can comment on that—found that if Canadian and Air Canada amalgamated there would be less competition, that the charter companies couldn't make up for that competition, and new airlines were unlikely to evolve. Is the situation now about the same or worse or better from a competition point of view?

Mr. Konrad von Finckenstein: Richard, would you respond? You've just looked at this issue very carefully.

Mr. Richard Annan: In fact I was involved with the 1993 situation as well, and since that time there have been some changes. We have had some entries and some exits. Obviously Nationair is gone, VistaJet is gone, Greyhound has come and gone. However, there are two notable exceptions. Number one is obviously WestJet in the west. It entered the market in 1996 and has done very well in the market it serves. Secondly, some of the charter carriers have expanded somewhat on some of the transcontinental routes.

As we said in the letter, there is some reason to be somewhat more optimistic than in 1993, but in addition to that, there have obviously been some alliances entered into—for instance, Air Canada and Canadian, which has expanded their international reach. But overall, as we said in our letter, it appears to us, based on our preliminary analysis, that the conclusions are essentially valid today as well.

The Chair: Thanks, Mr. Casey.

Mr. Jackson, please.

Mr. Ovid Jackson: Just a quick question, through you, Mr. Chair, to Mr. von Finckenstein.

We have some unique cases here in Air Canada and Canadian, and in the case where these two airlines are publicly traded, what would the implications be? Should you have to carry out a review? How do you not have an influence on their pricing, or something to that effect?

Mr. Konrad von Finckenstein: A lot of mergers are made subject to regulatory approval, be it competition or, if it's a regulated industry, a specific regulator. That's taken into account. To some extent, shareholders have to take that into account, and the people bidding for the merger or constructing the merger have to make allowances that they may have to take actions, divest assets, or enter into obligations that will have an impact on the deal. That's standard practice in mergers.

The Chair: Thanks, Mr. Jackson.

Wrapping things up, Mr. Guimond.

[Translation]

Mr. Michel Guimond: In answer to a question from Mr. Drouin a few minutes ago, you said that the Bureau would make observations. That's the term you used. You consider that the Bureau has a power to issue orders, don't you? It's not an advisory bureau.

Mr. Konrad von Finckenstein: We have two roles. First, we make recommendations, which we have done here. We also have a watchdog role. We must make sure that a merger does not result in dominance by one carrier, which would hurt competition.

• 1700

Mr. Michel Guimond: Yesterday, the Minister said that he would implement legislative and regulatory measures to encourage competition. Your role might be weakened. I don't want you to answer that we will see once the regulations are in place. Are you concerned when you read such things? At the time of the Petro- Canada and Ultramar case, you had ruled that the merger was illegal and unacceptable from the point of view of competition, and you had rejected it outright.

Mr. Konrad von Finckenstein: I said that it was not acceptable and that, if they wished to merge, I would take them to court.

I do not have the power to issue orders, but I have the power to challenge a merger. That was the case then, and it's the case now.

Mr. Michel Guimond: Thank you.

[English]

The Chair: Thank you, Mr. Guimond.

Colleagues, we want to thank the commissioner, Mr. Pierce, and Mr. Annan for their presentation to our committee today. We'll adjourn this meeting number 8 and move on to our next witness, Air Canada. While they're taking time to set up at the table, we'll recess for about five to ten minutes. In the corner there is something to eat for members of the committee, translators and staff.

We're adjourned.