INST Committee Meeting

STANDING COMMITTEE ON INDUSTRY, SCIENCE AND TECHNOLOGY

COMITÉ PERMANENT DE L'INDUSTRIE, DES SCIENCES ET DE LA TECHNOLOGIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 27, 2001

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[English]

The Chair (Ms. Susan Whelan (Essex, Lib.)): I call the meeting to order on Bill C-23, an act to amend the Competition Act and the Competition Tribunal Act.

We're very pleased to welcome here this afternoon, from Air Canada, Mr. John Baker, the senior vice-president and general counsel; Mr. Stephen Markey, the vice-president of government relations and regulatory affairs; and Mr. Lawson Hunter, legal counsel.

I'm going to turn it over to you for an opening comment.

Mr. Stephen Markey (Vice-President, Government Relations and Regulatory Affairs, Air Canada): Thank you, Madam Chair.

We were going to start by introducing ourselves, so you saved us all the boredom of doing that. We'll just move straight into a short presentation and then turn it over to you after that for questions. And we're pleased to stay as long as your time permits today.

I turn it over to John Baker at this point.

Mr. John Baker (Senior Vice-President and General Counsel, Air Canada): Thank you, Madam Chair. It's a pleasure to be with you today.

Air Canada appears before this committee today on very short notice and with little appreciation of any legislative proposals that may be considered by this committee or by the government. We appreciate the opportunity to address you regarding industry issues.

That Air Canada is facing legislation that would apply only to it is a very dangerous legal proposition. It is widely accepted that laws should not condemn persons for what they are; it is what they do that the law should address.

Given the fact that the Competition Act currently has special provisions that apply almost solely to Air Canada, and in a more extreme way than they apply to other sectors of the economy, any attempt to further target Air Canada in the legislation would come perilously close to condemning Air Canada simply for being the largest airline in the country.

Of course, you understand that the mere fact of being dominant has never been illegal under competition law in Canada, or for that matter anywhere else where sophisticated competition laws exist. It is the abuse of dominance that is challenged by the legislation.

Air Canada understands that concerns may be raised about the speed with which the law can be applied, but the rules for Air Canada should be no different from those for anyone else affected by the Competition Act. Furthermore, as Madam Justice Simpson said at the time of her review of the commissioner's first use of the extraordinary interim injunction or temporary order power currently affecting the airline industry, everyone is entitled to the protection of the law.

We would also remind the committee that in this one instance where the commissioner used this extraordinary power the reviewing judicial member of the tribunal found that the commissioner had not had the facts to initiate the order when he did so.

Air Canada is currently being challenged by the commissioner for engaging in an abuse of market position with respect to routes in Atlantic Canada, but as you know, that proceeding has not concluded and has been adjourned on the decision of the Competition Tribunal because of the extraordinary events taking place in this industry after September 11.

Our point is that there has been no determination that Air Canada has acted in an anti-competitive way by any independent judge or tribunal in this country. The commissioner and Air Canada are agreed that the line between vigorous acceptable competition and conduct that abuses a dominant position is a difficult line to draw. The commissioner is an investigator and a prosecutor. He is not a judge, except in the unique injunction provision dealing essentially with Air Canada.

From a policy, institutional, and fairness point of view, to convert the commissioner to the de facto regulator of Air Canada, let alone any other industry in this country, creates a situation where there is in effect no accountability over his powers and puts Air Canada at the whim of one individual.

Air Canada does not know what precisely the amendments are that are being contemplated, but amendments that would have the practical and legal effect of enhancing the commissioner's powers to make determinations without appropriate independent judicial determination are very concerning to us. As we have mentioned a number of times, the extraordinary powers the commissioner already has to issue injunctions are highly unusual. To only enhance these powers further exacerbates these concerns.

We have mentioned briefly the situation in the airline industry worldwide as a result of the attacks of September 11. All airlines, including Air Canada, are facing a markedly changed business and grave financial consequences. To restrict our ability to respond to these changes through interventionist legislation could have profound effects and consequences for us, let alone for the travelling public in Canada. Needless to say, the government itself could be faced with a seriously crippled airline.

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By way of background, we would like to discuss some of the business and competitive realities of the airline industry, not only in Canada but throughout most of the world. We want to take the opportunity to do this because of our concern that there are factual and theoretical misconceptions about the nature of this business and what constitutes vigorous competition.

We further want to raise these issues because of Air Canada's concern that policy may be enacted here not on sound legal, economic, and commercial bases but because it is the politically expedient thing to do. Of course politics is a very relevant consideration for government, but surely there's an obligation to understand the consequences of these legislative initiatives and to ensure that they reflect sensible policy for the country and the industries affected.

We would also remind committee members that Air Canada is currently engaged in constructive discussions with government about the future of this industry.

Turning to some of the underlying realities of competition in the industry, we wanted to start by indicating that competition in the industry does not mean having at least two carriers on every route. We've had historically very serious evidence of the results of that policy in which both Air Canada and Canadian Airlines could not survive even during the most robust economic times in our memory. To now advocate a policy that would duplicate this result, particularly in the extremely difficult times we face now, does not seem to make much sense.

There's also a misconception that competition does not exist if there are not two carriers on the same route. In industries that have a demonstrated ease of entry, as the airline industry does, incumbent air carriers must always behave and price in anticipation of entry at any time. Furthermore, frequent entry and exit in the airline business is to be expected, and it does not mean a lack of competition. In fact it means the opposite; i.e., the market is very competitive and contestable. It is also noteworthy that exit takes place not only by small firms in this industry but also by large ones.

There seems to be also an undercurrent of view that Air Canada should not respond to competition from new entrants on its routes. The responses of Air Canada to new entrants have been measured and legitimate from a competition policy perspective. Air Canada has not undercut the prices of new entrants. In some instances it has matched those prices, but more often it has offered prices slightly above the lowest price available in the market.

Remember as well that the prices in the market were not being set by Air Canada, they were being set by new entrants. Air Canada was merely following the downward price movement in the market, surely something that is to the benefit of consumers and to competition. When an air carrier selects a price in the market, they have to be presumed to be astute enough to recognize that there will be a response from other competitors in that market. They must develop their business plans taking this into account and ensuring that they have adequate capital in order to respond to that response.

Furthermore, it is they who are determining the price in the market in the first instance, and if they felt it was not sustainable at that selected level, one must question that business plan. The business plan must also include sufficient capitalization to deal with competitive pressures.

An additional very important reason that Air Canada must respond is the fact that worldwide product markets in the airline industry are becoming more distinct and in many ways commoditized. This is particularly true of non-business-class travel. The importance of the fact that a huge proportion of the airline industry is becoming a commodity is that price is the only distinguishing characteristic in consumers' minds. And if price is the overwhelming basis on which consumers make choices, then if you do not meet the price in the market you will inevitably lose all of your market share in that business. As prices tend to be relatively uniform in a commodity market, for that very reason the consumers do not make distinctions on a basis other than price.

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What this means for Air Canada is that it must respond to this new change in its business. It recognizes that it has a higher-cost operation than some new players specializing in this commodity part of the market, such As WestJet, but Air Canada's trying to respond to that by lowering costs and taking initiatives that will make it more efficient and able to compete in this segment of the market. In fact, there is a very strong likelihood that Air Canada cannot and will not survive in the face of WestJet-type competition without lowering its costs so that it can make an adequate return on capital when it competes with such carriers.

Initiatives like Tango by Air Canada are one example of Air Canada attempting to respond to the market and make itself more cost-effective. The notion that Tango is targeting Canada 3000, regardless of the commissioner's ex post facto statements as a judge, is completely without factual basis. As one illustration of this, we would point out that the Tango routes selected initially were the seven largest origin destination routes in the country. Those coincidentally happen to be some of the routes that Canada 3000 was operating on, presumably for the very same reason—i.e., that they were the largest routes.

But as we have pointed out, the Tango routes did not completely overlap the Canada 3000 routes, and furthermore were on the most dense routes, at least by Canadian standards, where competition is likely to be more vigorous than on less dense routes.

One other fact that has become all too painfully obvious after September 11 is that both large and small airlines are extremely vulnerable to adverse external factors, which can quickly jeopardize their financial liability. Astounding as it may seem, we have had discussions about, and you have all read about, the failure of major airlines like Sabena and Swissair in Europe, and contemplation that there will be much consolidation in the U.S. among the largest carriers. There has even been discussion about the ongoing viability of American Airlines. It is a very telling comment that we could be sitting around this table discussing in realistic terms that potential.

The point we're making is that it is the large airlines who are just as vulnerable, and, in most commentators' minds, must take prompt and effective steps to respond to the new reality and new environment. Adding further constraints and costs to Air Canada at this most vulnerable time could be a serious contributing factor to damaging the viability of the company going forward. Preventing competition is never a pro-competitive result.

I thank you for hearing our comments. We would welcome your questions and your comments.

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

We will now turn to questions. Mr. Penson, please.

Mr. Charlie Penson (Peace River, Canadian Alliance): Thank you, Madam Chair.

I'd like to welcome Air Canada here today.

I'd like to start in the area where you've suggested you may be targeted. Are you concerned that there may be extended power to the commissioner on a cease and desist section?

Mr. John Baker: Mr. Penson, we can only go with what we hear and what we read, as recently as this morning's paper, about that very possibility of an extended power being offered to the commissioner in that respect. We're very concerned that this extraordinary and unusual power, which, by the way, we have objected to from its very beginning and in fact, as you may very well be aware, have challenged in court, may in fact be further extended. We're very concerned about that.

Mr. Charlie Penson: I see. I wonder, though, Mr. Baker, if you could think in terms of maybe being on the other side of this issue: if your airline happened to be a small airline and some large player was in the business of trying to drive you out of business and it didn't seem like there was a timely solution at the Competition Tribunal, where sometimes these decisions, even to hear them, are delayed several months.

You've told us about how this business is a business that can lose money very quickly under certain circumstances, external shocks and so on. But it also means that a small airline, if you were on that side, as I made this proposition to you, could be out of business in a short period of time. You're telling us you'd rather not have the commissioner having extended power, and yet the Competition Tribunal is not willing to hear these kinds of cases. How would you see that if you were on the other side of this issue?

Mr. John Baker: I suppose, Mr. Penson, the difficulties we have are with the unfettered nature of the commissioner's power. What we have argued is that his intervention, while laudable, should be one that is justified on a review of the facts and is taken to a third party like the tribunal for their decision. That can be done, we assert, in a very expeditious way.

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In fact, the commissioner's recommendations with respect to other Competition Act amendments that have been before you contemplate a cease or temporary order power going before the tribunal. It is only the specific legislation that is directed at Air Canada that leaves with him the power in his investigation to issue a cease and desist order by himself.

The difficulty we have—and we all find ourselves in this situation—is that there is not yet clarity in the legislation or in its enforcement on what anti-competitive behaviour in the airline industry should be perceived to be. That is why, as I think you are all aware, we are before the tribunal on this initial issue of defining with clarity what the test for avoidable costs should be. If you're a small airline, or if you're a large airline, none of us have sufficient precision and clarity to assist us in our operations and to know what rules should govern our pricing and our capacity allocation.

Mr. Charlie Penson: In the interests of time, because I have a short period of time, I want to talk about that. You seem to suggest that the pricing issue is the main issue that may lead to anti-competitive behaviour, or driving somebody else out of business. I suggest that capacity may be just as big a problem.

If a company like yours wanted to meet the competition in terms of price and decided to put on a tremendous amount of capacity, a flight every hour out of Calgary to Vancouver and so on, wouldn't that have a big effect on a competitor that wouldn't be able to meet the capacity, even though they were setting the price? It may have been a discounted price, as you've suggested, but wouldn't that have the equivalent effect?

Mr. John Baker: Capacity can certainly be one of the factors that go toward competitive or anti-competitive behaviour, but we at Air Canada have been very careful in how we have allocated capacity in response to a competitive market.

Mr. Charlie Penson: Do you have any suggestions that might move this along? Do you feel your company has been harnessed with regulations that have driven your costs higher? Do you have any suggestions on how government can resolve this issue?

Mr. John Baker: As I indicated, we are in discussions with Transport Canada on what the industry outlook currently is and what our role within that should be. Those are constructive discussions, which will take some time. We recognize where the industry currently is and we want to be partners in creating a new environment that works.

Mr. Charlie Penson: You have the opportunity, Mr. Baker, to tell us... You tell us here today that you're fairly high cost compared with some of your competitors. Are some of those costs imposed on you because of regulation by government that you would like to see removed in order to get your costs down?

Mr. John Baker: We have said that we would like to have a uniform playing field in all areas, but that has not been our prime focus of concern in terms of the subject matter before this committee. We are, in our view, quite highly regulated both by Competition Bureau scrutiny and by the CTA, and we have addressed those concerns.

Our response, simplistically, is that we would like an even playing field going forward. We recognize how that regulatory framework has developed through the events of the last number of years, and we're working with government to create an efficient, optimal marketplace.

Mr. Charlie Penson: Maybe in the discussions we'll have a chance—

The Chair: Mr. Penson, Mr. Hunter wants to respond as well.

Mr. Charlie Penson: Maybe, Mr. Baker, in another question you'll have a chance to expand on that. I'd like to hear what some of those are.

Mr. Lawson A.W. Hunter (Legal Counsel, Air Canada): On your last question, about what might be done, as John says, there's been a tremendous amount of uncertainty at Air Canada about what it could and couldn't do. Lawyers are expensive—some more expensive than others—and there's certainly been that sort of cost.

As a rule, it strikes me that what Air Canada has tried to do, as John said, is that if some new entrant enters the market and they select the price... That's what's happened; new entrants have come in, and any of them who have entered either a new route or a new carrier can set the price they want to charge. Air Canada has never undercut those prices. As John said, typically they were slightly above that.

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So if the rule were... By the way, I think this would be the rule in the United States under predatory behaviour. There's nothing wrong. In fact, there is a case in the Ontario courts as well that says matching a competitor's price can never be predatory.

On the capacity question, you're right that capacity could be a factor. But again, with one possible exception, Air Canada has never increased capacity when new entrants have come on any new markets. Of course, as you know, they have decreased capacity significantly over the past year. You have to understand as well that in this time, when demand for air travel is declining so precipitously, Air Canada is sitting there with—

Mr. Charlie Penson: Two Air Canada flights to Vancouver from Calgary, one at 10:53 a.m. and one at 11 a.m., both a third full on a route that WestJet has established, seems like quite a bit of capacity to me.

Mr. Lawson Hunter: My understanding is that there has been no instance where Air Canada has increased capacity over the previous year on any route in this country. Never.

I don't deny your proposition that from an anti-trust point of view, increasing capacity could be an issue, but I would also remind you—and this is also true in the United States—that when new low-cost entrants come into a market like this, they typically are stimulating demand. If they're stimulating demand, and there's a proper amount of capacity in that market, maybe there is room for the incumbent carrier to also have some additional demand. It shouldn't all be just handed over to the new entrant.

The Chair: Before I move on to our next questioner, I just want to clarify something. There were some statements made in your statement, Mr. Baker. I'm not sure what's happening here, and I just want to clarify this for the record. We have evidence before the committee from WestJet, and members of the committee are all entitled to bring forward amendments, aside from government amendments. I think their evidence has been on the record for about three weeks now, so I think you're pretty much aware of what it is.

Mr. McTeague, please.

Mr. Dan McTeague (Pickering—Ajax—Uxbridge, Lib.): It would be nice to have the proof of where WestJet is offering prices that are below your routes, Mr. Hunter.

I'd like to talk to Mr. Baker for a moment about Tango and its new partner, Low Cost Co.

On November 23, your company, Air Canada, announced that one-way fares to Toronto from St. John's would be $129. Air Canada's lowest one-way fare prior to the announcement was about $1,009, give or take a penny or two. That fare represents an 87% reduction. Mr. Penson has talked a little bit about the west. I'd like to concentrate a little bit on the east. Halifax to Ottawa will go for as low as $79 in the same announcement. Air Canada's lowest one-way fare on that route was $641, representing an 85% reduction. There are a number of others here that I'd like to put on the record, but I may not have the time to do that.

In addition to increasing the seating capacity on your A-320s by 20% and cutting the meal and movies, I guess the question we have is what else Air Canada can do, given that its planes are operated, handled, maintained, marketed, and sold by the same personnel that pay the same rates as Air Canada. How is it possible for you to meet competition without engaging in what looks a whole lot like predatory pricing, or cross-subsidization at the very least?

Mr. John Baker: The Tango product, as you know, Mr. McTeague, is a new brand within Air Canada that has some of the attributes that you've mentioned: densing up the aircraft to some 159 seats; payment for essentially all services that are provided, whether it's food, beverage, or otherwise. It's an O and D service. There are reduced reservation costs because you book online. The whole product base and product attributes are very different from the main line, and we are trying to address all those costs and reduce them as dramatically as possible.

As Lawson said, we are trying to stimulate the market. In this post-September 11 climate, we are trying to address the capacity reductions that have come into the market. Recognize that Tango was announced and is operating in an environment where we have reduced our domestic capacity by up to 20%. Within that 80% remaining capacity, we have put some Tango flights at the expense of Air Canada's main line flights.

Mr. Dan McTeague: I don't think your numbers make sense in light of what has occurred as of November 23. Now you have a proposition to obviously target Calgary and Hamilton, which are the mainstays of WestJet.

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I guess you may find it hard to believe, but most people looking at this issue would probably prefer that the Competition Bureau in fact take Tango and Low Cost Co., as two dancing partners, off the ballroom floor and maybe deal with a more strenuous version of the Competition Act to ensure that with 80% domination—unlike the American examples you've cited, where the largest player may only have 15% or 16%... You would not find any circumstance where the Competition Act should not apply evenly to other industries—as it should to yours, but most specifically.

I have constituents, and a number of individuals, who have raised questions—and they're not necessarily involved with the industry—and will go to great lengths to tell us that what they have seen here looks a whole lot like an example—the finest example, in fact—that your organization may very well be poster boys for the need to change the Competition Act as it currently stands; and that in the time we wait for the Competition Tribunal to make a decision, as we see with CanJet, or with WestJet in the application with respect to Canada 3000, your competitors are dead and gone; and that because of your position within the industry over a longer period of time, you're able to sustain these applications before the various tribunals.

So the question I have for you is how is it possible, having such a dominant position, for you now to announce that you're going to again find some wit and wisdom in providing a new low-cost discount alternative—strictly to Hamilton and Calgary—without using finances you currently have to meet and challenge the existing competition? Is 80% not good enough? Do we have to wait for 100%, Mr. Baker?

Mr. John Baker: I don't think the percentage, Mr. McTeague, is relevant here. What is relevant is Air Canada responding to what it sees are the market demands for more of the commodity product I mentioned. The market worldwide in Europe and in the States is going to a low-cost variant, and we feel it is incumbent on us to be able to address that variant and compete in that variant, and we intend to do so.

Mr. Dan McTeague: But, Mr. Baker, where you have those routes where there is no competition, the price is 30% to 70% higher. Why aren't you cutting the prices on routes where there is no competition, if that is the case?

Mr. John Baker: We have been applying the Tango product increasingly throughout the country on the major routes, and we intend to see an expansion of it.

Mr. Dan McTeague: But only where you have competition, Mr. Baker, which begs the point. You're complaining the Competition Bureau shouldn't have the power to order you to stop, and yet every example where you have lower prices is where you have competition.

One would suggest you're not just meeting competition, you're undercutting competition, and you can only do it because you have a large presence in the marketplace. If the Competition Bureau doesn't have the power to stop you, then I presume you're going to be able to raise the prices to 30% and 70% above those you see in areas where you don't have competition. Is this the case, Mr. Baker?

Mr. John Baker: No, it clearly isn't the case, Mr. McTeague. As we said in our opening comments, we have done nothing but match competition initiated by competitors. We have not undercut.

Mr. Lawson Hunter: Could I also just add, Mr. McTeague, that, as you probably know, the CTA has the ability to review prices—and on its own motion, at the moment—on routes where there is no competition. And I think certainly with Tango it is not correct to say that Air Canada hasn't offered consumers low prices—through Tango—on routes where, after Bill C-3, there was no competition.

This industry is a very complex industry, and it is true that a price discrimination goes on between routes, depending on the amount of competition—but of course, that is the nature of competition.

I remember, to give you an example, when I was the director, the Great Canadian Superstore went to Saskatoon; it didn't go to Regina. I had all kinds of complaints from consumers in Regina saying “Well, now Safeway”—the dominant supermarket at that time in western Canada—“is offering low prices in Saskatoon, but they're not offering them in Regina”. I said, “Well, that's not my problem to fix. That is due to the nature of competition in that business.”

One last point concerns this 80% number that is bandied around. As you know, this committee has become very specialized in competition law—and that's a good thing, as it's time we had people who have a better understanding of it—but as you know, you define competition in markets; you don't look at the country.

If you looked at Northwest out of Detroit or Minneapolis, you would find a degree of dominance in those markets—which are probably in revenue terms almost as large as Air Canada—that is greater than Air Canada's. One of the misconceptions that troubles me is that you don't assess competition by looking at a huge country like this. You look at it local market by local market.

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Mr. Dan McTeague: You're trying to have a monopoly, Mr. Baker.

The Chair: Thank you very much, Mr. McTeague. We'll come back to you.

[Translation]

Mr. Laframboise, please.

Mr. Mario Laframboise (Argenteuil—Papineau—Mirabel, BQ): Thank you, Madam Chair.

You just announced a deficit of about $600 million for the last quarter. When we discussed with the Minister the possibility to grant some help to Air Canada and other airlines, he told us that your financial situation was quite good, that you had $1 billion of liquidity and that you could borrow about $3 billion on your assets, meaning the planes that you could sell and rent. He gave us a picture of Air Canada which showed that the company was in fairly good health and would be able to keep going through this crisis.

What can you do about the $600 million deficit? Can you absorb it with your billion dollars of liquidity? I noticed that you had written off $400 million of assets. What can be the effect of the losses incurred during the last quarter on your short-term liquidity?

[English]

Mr. John Baker: I'm sorry, Mr. Laframboise, I'm not sure I understand the question. We have indicated as recently as yesterday, in our third quarter results, liquidity in the amount of some $900 million and that we seem to be holding steady at that, for which we're grateful. We are, however, still in the early stages of the post-September 11 environment in which the market continues to be extremely soft.

As you know, more than half of our revenue comes from transborder and international traffic. With respect to the transborder traffic into the States, our load factors and our revenue are extremely soft—as is reflected in all U.S. carriers. Other Canadian domestic carriers don't have that issue before them; we do. We have therefore made the link, as a carrier heavily dependent on transborder and international traffic, that some of the benefits and support the American government has given its carriers gives them a leg up—in terms of financing ability, in terms of sustainability—that, without similar “all things being equal and adjustments being made” assistance, puts us in a prejudiced position relative to those American carriers with whom we are competing.

[Translation]

Mr. Mario Laframboise: You are then saying that your liquidity will keep going down because you don't foresee a quick recovery. That's what you are saying, isn't it?

[English]

Mr. John Baker: It is very difficult at this time to be forecasting. We're not ones who, like many others, are forecasting these days where the market is going. We are somewhat comforted by last month's traffic numbers that the recovery is somewhat better than our worst fears. We hope it will recover. But it is no secret that we are also in what most people would call a recession and that the exit from that recession, in terms of time, is very unclear at this moment.

It is also clear that even before September 11 there was a substantial reduction in the level of business traffic, and we at Air Canada, of course, are a carrier that is highly dependent on business traffic. There has been a fall-off in that traffic, so it is an area of concern to us. It goes to the earlier comment about the increasing commoditization of travel based on price. That is something we are struggling to adjust to going forward.

[Translation]

Mr. Mario Laframboise: Here's why I am asking you those questions. I agree somewhat with the government who says that before September 11, Air Canada could have survived without being so aggressive on the market. But given the fact that you have incurred enormous losses since September 11 and that the government has not helped you, they want you to do it in a free market. I understand why you are announcing new products so you won't die slowly, as the government would like you to. It has been announced that you had liquidity and they give the impression that you have enough to go through this crisis, that as good managers, you want to be sure that you're going to survive this crisis. You're in competition with all the other airlines on your routes and you are competing with international companies as well. That's what I understand. It's a policy choice. That's what you just told us.

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The Americans, your competitors, have decided to help businesses. The Government of Canada has not done it, with the approval of the Canadian Alliance, and you are being asked today to compete against everybody even though you don't have the same weapons as your competitors have. We are therefore asking to be allowed to offer the same services or the same prices as the other airlines give. Is that about right?

[English]

Mr. John Baker: I don't take issue with your summary. We do wish to be able to compete in a free marketplace; we do wish to be able to vary our products to meet the changing market; and we do want everyone to be conscious of the market in which we compete—which is not just the Canadian domestic market, but the international market—so that everyone is aware of the forces that pertain to those other markets and allows us to compete fairly and freely within that market. Yes, I agree with some of your statements.

The Vice-Chair (Mr. Walt Lastewka (St. Catharines, Lib.)): You may have one more short question.

[Translation]

Mr. Mario Laframboise: Thank you.

If your response to competition was restricted, if you were forced to use your liquidity and if Air Canada went bankrupt, do you think another Canadian company could take your place or would the whole market fall down?

[English]

Mr. John Baker: This is not a consequence we are planning on or developing plans B, C, or D for. We think we have had a historically prominent role to provide air transport in this country. We wish to continue to be a prime supplier of those services as they evolve and change. We want to be responsive to the needs of consumers—and to the needs of government—in doing that.

The Vice-Chair (Mr. Walt Lastewka): Thank you very much.

We'll now ask Mr. Keyes.

Mr. Stan Keyes (Hamilton West, Lib.): Thank you, Mr. Chairman.

Hello, gentlemen. It's nice to see you again. I remember you all before us at transport committee on different occasions.

Mr. Baker, you just said Air Canada is reacting to the changing market. You can see our concern—I say some of us, but I think a lot of us—when by next February, if you can believe it, in a nutshell you'll have in this country Air Canada, which is going to be doing your domestic, wide-body, and international stuff; Air Canada Regional, which is going to be bringing together all the regional airlines—Air Ontario, and all the rest of them, and all their contracts with the unions, and they're all going to be signed shortly—and there would be Air Canada Regional, or whatever announcement you make to call it whatever you're going to call it; Tango, which is, of course, the perpetual seat-sale airline; and Lowco, which is Steve Smith's low-priced carrier. It's going to try to compete against WestJet through Hamilton and anywhere else they can compete.

Yes, sure, reacting to a changing market is important. I too have nothing against competition. I think it's marvellous that you can go out there into the Canadian marketplace and work hard to establish Air Canada as the carrier of choice for anybody who wants to fly in this country from coast to coast to coast or abroad. Congratulations.

I have a fear, personally, of the dominance that you are now going to have as a result of your creativity, of your formulation of the different carriers, all under your control under one board.

First, I think personally there's a great, urgent need to redefine “predatory” in this particular legislation, vis-à-vis price and capacity. My question for you is would you have any difficulty with an amendment to the Competition Act that would give the Competition Bureau the power to level a fine against any airline found to be predatory?

Mr. Lawson Hunter: I would absolutely be opposed to giving the Competition Bureau that power.

Mr. Stan Keyes: And why would that be, sir?

Mr. Lawson Hunter: Because, as John said in his opening remarks, the commissioner... If you're talking about the Competition Tribunal, we have to make a distinction here about the enforcement mechanism.

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I assume we're still talking about people's rights under the law—as Madam Justice Simpson said in the challenge of the commissioner's first interim order—but to give one individual the right to levy fines without an independent judicial determination of the facts I think would be an extremely dangerous precedent.

In fact, as you know, it doesn't exist anywhere under our law except in the misleading advertising area today, and it's certainly not the commissioner. It's not the commissioner. It's the tribunal. Of course, we know the courts, under the criminal parts of the law, are able to levy fines if they find people guilty.

Mr. Stan Keyes: So we have the Competition Bureau having the ability to step in and order an airline to cease and desist from any kind of activity it sees to be predatory activity in Canada. Why not give the bureau, upon revelation of the facts, verifiable... I don't even know if there's a problem with moving it over to a tribunal. Let them do the review, if that's what it takes to understand that Air Canada, or any other airline, has acted in a predatory fashion against a smaller airline that's trying to do its job out of small-town Canada and is found guilty. Boy, a $250,000 fine. Case closed.

Mr. Lawson Hunter: As I said, I think the question is that the facts are not always so obvious. As you know, I think when the commissioner appeared before you after Mr. Beddoe, and when he talked about Bill C-23, it wasn't that he couldn't get the facts from Air Canada. He didn't have the facts from somebody else. But the facts are not always so obvious. So to give one individual the right to impose that level of fine without a fair hearing is just, in my view, not—

Mr. Stan Keyes: Right, but a fair hearing was available.

Mr. Lawson Hunter: But the question, I think, is—

Mr. Stan Keyes: Would you be opposed to a—

Mr. Lawson Hunter: I'll stand back now and talk more from the concept of this legislation. You're suggesting something that so far... I think you debated it in part in this committee on the private access provisions, about whether there should be damages available, and my understanding was that the conclusion was no. You're proposing to change that, and that could have repercussions on the whole institutional framework of this law. From Air Canada's point of view, to single them out, which has already been done with this extraordinary injunction power that... It doesn't exist, by the way, anywhere else in the world. It certainly doesn't exist in Europe. It doesn't exist in the United States. It doesn't exist in Australia, where the investigator and the prosecutor have the power—

Mr. Stan Keyes: I don't mean to cut you off, but my time is short.

Mr. Chairman, when we were before this committee doing the Competition Act, and then before the transport committee on the Competition Act, it was decided that this rule that gave the competition commissioner the power to order an airline to cease and desist was necessary because of the fear—and sometimes not provable actions yet—of the predatory nature of one airline like an Air Canada against a smaller airline. The fear that we have, of course, is that it can be taken into the courts, dragged out for two years, and the airline that was competing with you in the first place is shut down. They can't outlast you. They don't have the monetary guts or the staying power in order to meet all the requirements that would be necessary to prove you out. So there has to be another way.

Short of re-regulating pricing in the airline industry... I know Stephen laughs at that, but people's tempers are getting very thin on the airline file. Short of that, maybe the government ought to bring back a crown corporation that would take over regional airline services in this country. We'll supply the big guys and we'll fly them in from the regions and if there's a good, small competitor or person already operating a well-priced airline out there and the government crown corporation won't go into that particular community, we'll let that one operate on its own. Then we'll let the Americans fly in here and compete against you, because quite frankly, people no longer have an attitude or a stomach for what's going on at Air Canada today.

Mr. Lawson Hunter: Can I just add one comment about WestJet Airlines Inc.? You talk about the small carriers, but as you know, WestJet is now the largest carrier of passengers in western Canada. WestJet has a market capitalization that is greater than Air Canada's.

• 1650

WestJet has said, after September 11, that it did not need any assistance from the government. It has remained profitable. It has been very, very careful and astute in its business plan.

It is not unlike Southwest Airlines in the United States. As you know, Southwest, with less than 10% of the market in the United States or business in the United States, has a market capitalization that is greater than all other airlines in the United States combined. It continues to be profitable after September 11.

So the notion that you can't survive as an astute operator in this business is certainly not true for WestJet. I don't know if you asked Mr. Beddoe whether on his route, where we're being attacked, he's profitable.

Mr. Stan Keyes: Then how do you explain that Clive Beddoe, the owner of WestJet, says “If you want to fine the big guys, go right ahead”?

The Vice-Chair (Mr. Walt Lastewka): Thank you, Mr. Keyes. I appreciate your questioning.

Mr. Strahl.

Mr. Chuck Strahl (Fraser Valley, PC/DR): Isn't this fun?

I'm not sure I agree with the government's idea that what we need is a crown corporation to take over. I'm a little nervous of that.

An hon. member: You may get one, anyway.

Mr. Chuck Strahl: We may.

The question a lot of us are trying to come to grips with is whether it is possible for Air Canada or Tango or Low Cost Co. to make money on these routes. Do you actually make money going head to head against... WestJet is making money, obviously, maybe not on one route there, but generally speaking somehow they continue to make money. Does Air Canada make money when they go head to head with WestJet?

Mr. Lawson Hunter: Again, a lot of these things are going to come out of the tribunal hearing, once that gets under way. But the answer to that, according to Air Canada, is absolutely yes, they do.

On the new Tango routes, for example—this is a start-up, and it will take time to see what demand is there—the whole purpose of Tango was to select routes that were very dense, at least by Canadian standards. As you know, there aren't very many, but the purpose was to offer that low-cost service in a manner that would reduce Air Canada's costs of operation by 20% to 30% and still enable it to provide the higher-class of service, because if Air Canada couldn't provide business-class service then everyone would be screaming about that. So the routes were selected where there was enough frequency. So I think the answer is basically absolutely yes, they have to.

Mr. Chuck Strahl: I don't know. The confusing part to us who are just looking on—and none of us are maybe experts in the airline industry—is if you're making money at those cut-rate prices, you must be making a lot of money on the other routes, because the other routes are priced...

My round-trip business-class ticket from here to Vancouver is $3,500. So if you're making money on a similar low-budget thing at $319, you must be making a mess of money. Yet you don't. You're losing hundreds of millions of dollars. So how are you losing all the money?

Mr. Lawson Hunter: With demand off 30%—

Mr. Chuck Strahl: You were losing money well before September 11.

Mr. Lawson Hunter: Yes, but as John said, one of the other factors... The front end of the bus, the high-yield passengers, has always been, for airlines like Air Canada that have at least two classes of services, where you made your money. If you look historically, you made your money in one or two quarters of the year.

Mr. Chuck Strahl: Yes, but if you're making money there on the expensive tickets, and you're making money on the low-cost tickets, you must be raking it in at all quarters.

Mr. Lawson Hunter: We should be careful what we say when we say making money, though. The question is whether if you have fixed costs, if you have revenue that covers your variable cost and makes some contribution to overhead, then it makes sense to do it. Otherwise, you're caught with no revenue and you have this fixed cost that you have no revenue toward.

Mr. Chuck Strahl: Obviously, some of your costs continue whether you park the plane or fly it.

Mr. Lawson Hunter: Absolutely.

Mr. Chuck Strahl: One of the things I would suggest... Part of my riding is Abbotsford. WestJet started up there, endeared itself mightily to the city of Abbotsford and all flying citizens in the whole upper valley of the Fraser Valley, because there was no service there before. It flew unchallenged—it had a monopoly really—out of Abbotsford for three or four years. Canadian Regional or Air Canada is now in there and offers competitive service at a competitive price.

But what endears WestJet to its fairly loyal travelling public is that when it's a monopoly the price is cheap, when there's competition the price is cheap. Air Canada has a reverse psychology thing that has not endeared them, which is that when there's a monopoly the price is high, and when there's competition the price is low. WestJet keeps the same price. They've had the same price when they had a monopoly, and then when there was competition they kept the same price. Nothing changed.

• 1655

We have scads of examples where when competition leaves a marketplace Air Canada immediately bumps the price up—I mean like next week, and it doubles. People are wondering what factors go into the price structure at Air Canada. I believe competition is good, but what are the factors that drive the price that you put on a particular market? It seems to be strictly monopoly that does it. On anything else, there doesn't seem to be any rationale to it.

WestJet is a corporate philosophy, I realize: low budget, one type of plane, all that kind of stuff. But Air Canada doesn't seem to have a guiding philosophy that I can figure out.

It has caused some real friction, as Stan and others have pointed out. People are yelling at us to do something with you. I'm not sure what it should be, but they're an unhappy bunch. They can't figure out the pricing structure.

Mr. Lawson Hunter: I would like to make one point about the powers of the CTA, and I referred to it before.

The CTA can look at Air Canada's prices and the level of service it is offering on routes where there is no competition, on complaint and on its own notion. They have received a number of complaints about that, and we have received only a couple of decisions out of that. They have had to compare it to routes where there was competition. So far, in every instance they have found that Air Canada's prices were not unreasonable when they were compared to comparable routes.

At the same time, pricing in the airline business, as you may know, changes minute by minute, and there are thousands of changes a day. It's a very complex business.

I would go back to my example about supermarkets. You price in part because you are worried about the threat of entry; that's the whole notion of contestability. You can't ignore the potential of new competition, so you take that into account, because presumably you don't want it to happen.

At the same time, if the routes are not very dense, let's say, and no one is going to be able to make money, that's part of the concern that John mentioned initially. People seem to think that we need to have two carriers on every route in his country. Our routes aren't big enough to justify that. So there are going to be routes where there will be no competition and the threat of entry will be less. In there, if you were operating as in a proper free-enterprise, profit-maximizing business, which is what I assume you would say is the right approach, you would charge what the market will bear.

I'm not saying that's what Air Canada does, because we have to worry about the CTA. We have to worry about the fact that the consuming public will object. So there are other factors, but if you were just looking at it strictly from a normal business perspective, that's precisely what you should do. That's what you want them to do.

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

We're going to move to Mr. Savoy, please.

Mr. Andy Savoy (Tobique—Mactaquac, Lib.): Thank you very much, gentlemen. Sorry I was late.

As Mr. Strahl mentioned, we get it all the time with regard to this situation.

I would like to go at this from a little different angle.

You are going to market as a low-cost supplier right now in Tango. In any business plan that I've ever been associated with, including my company previously, any time you're trying to establish that niche in a new market, as a low-cost supplier, you have to be the low-cost producer because you'd lose your competitive advantage. We've established that you're not the low-cost supplier.

Mr. Hunter, you mentioned that WestJet were careful in the suit and their business plan. I agree that the low-cost suppliers have carved out a niche there, because they're the low-cost producers. So it's a competitive advantage for them.

Can you explain to me how you, as a higher-cost producer against the likes of WestJet, can substantiate your business plan to become the low-cost supplier?

Mr. Lawson Hunter: I'll give you two answers on two different parts of the business.

On Tango, as I said before, the effort there through the type of route structure, the lack of service, the better utilization of the aircraft, because it doesn't connect at all, interline, with Air Canada... You don't have to worry about luggage. There are no meals, so it's less time on the ground. It actually better utilizes the aircraft and reduces costs overall by 20% to 30%.

• 1700

Now let's put that in the context, as well, of what happened after September 11. When Air Canada, as many other airlines in Canada and around the world, were sitting there with a hell of a lot of “iron”, as aircraft are called, where there were fixed costs, fixed monthly leases, employees, they couldn't. They had to find the best revenue they could to make a contribution to the overhead. And that was clearly part of what happened here with Tango.

At the same time, we're seeing a move in this business, around the world, toward no frills, low-cost, low-price service. And Air Canada, as all of the American airlines, has to respond to this. If they don't get their cost down, they are not going to survive.

Now, on Low Cost Co., Tango is different from the low-cost model because it is part of Air Canada. So it was an effort to reconfigure aircraft, to find a better way to utilize those aircraft and those employees and to lower the costs and do it within the Air Canada structure and to make a contribution to the overhead.

Low Cost Co. would be a separate operation, which wouldn't have the same high fixed costs as the network carrier does, so it should have even lower costs. As we know, the union is a very major component of the cost in this business, and that's been a struggle for Air Canada and all airlines, because of the power the unions have. And the low-cost people have been able to avoid that better than the network carriers have. So this is an attempt to try to find another way to respond to the changes in the marketplace and to meet the competition, which is inevitable.

I don't want to go on too long here, but we saw Air Canada's overall share of the business in Canada after the acquisition of Canadian Airlines drop almost 15% in a year. That's a fairly dramatic drop in any industry.

Canada 3000 was a good operator. They had grown very rapidly. Largely because of... Well, who knows why, but certainly because of September 11 and perhaps some ill-advised acquisitions, they unfortunately went out of business.

Now Air Canada's percentage has gone up, but we see every day in the press talk of new entrants. This business is a business where, if you look anywhere around the world where it's deregulated, you see a lot of entry. You also see a lot of exit, but you do see entry, and that's competition. And an incumbent carrier always has to anticipate that this is going to happen.

We in Canada have to be very careful that we don't just try to duplicate the old Air Canada and Canadian Airlines scenario, where we try to have two carriers on every route and neither one can make any money.

Mr. Andy Savoy: You haven't convinced me of your competitive advantage, certainly, and the sustainability of your efforts are seriously in question, looking at it from a business perspective. As I said, to be the low-cost supplier in the market you must be the low-cost producer, and you're cutting it by 20% to 30%. And WestJet is cutting it by 40%. You're at a competitive disadvantage, in fact, in that market, and as a business planner I would look at that and say this is not sustainable over the long term.

You may get a share of the market; you may contribute to some overhead in a minimal way, I guess, if that's what your business case says. But to me, sustainability is still an issue. I don't see you staying in that market for long if you aren't the low-cost producer.

Mr. Lawson Hunter: I assume, again, that if it isn't profitable and it doesn't have a return on capital for the shareholders of Air Canada, then something's going to happen. If it can't be sustained, if it can't do what you suggest and improve the bottom line and improve the utilization of the capital that Air Canada has, then the shareholders will speak.

Mr. Andy Savoy: In the interim, we are faced with a decision that it may have negative impacts on the smaller regional lines—WestJet's flow was not small—which could seriously impact air travel in Canada. And we have the responsibility to look at that. That's why I think it's a very irresponsible approach to the market, not only from a business perspective and a business planning perspective, but also from corporate citizenship, let's say.

Mr. Lawson Hunter: I understand the questions people ask about that. Someone over here said to put your foot in the other shoe and see how you think it would be for the small guy. But you also have to put yourself in Air Canada's shoes.

What do you suggest, if they couldn't do this? If it is making a contribution to overhead, what are they supposed to do? Leave these A-320s sitting on the ground and paying the monthly leases? Is that what they should do, and potentially put them into bankruptcy?

Again, I really think John asked a very important question earlier. What is it you think Air Canada should do when someone new comes on one of their routes? Are they just supposed to sit there and say “Too bad; we're too big overall, but we have this new competition and our prices are here and theirs are lower, so I guess we'll have to abandon the market”? You can't do that.

• 1705

They certainly can't do that in an industry where they have two classes of service: the consuming public, and I assume you would want there still to be business class service. As we saw with RootsAir, and even in the United States, nobody has ever sustained an airline based only on high-yield traffic. You need to have some low-yield traffic to fill up the bus, to cover those overhead costs. Then you make your money on the business class travel, on the people who have less discretion. That's the model. If Air Canada can't respond to new competition, that inevitably is what will happen. So you have to ask yourself, what is it you want them to do?

By the way, if Air Canada didn't respond to a new price on markets where they didn't face competition before, the next thing we would know is that they'd be saying obviously you have too much market power, because you don't care about competition; competition is irrelevant to you.

That isn't true in this business, it absolutely isn't, because as we've said—

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

I'm going to have to stop you there, Mr. Savoy.

Mr. Rajotte, please.

Mr. James Rajotte (Edmonton Southwest, Canadian Alliance): Thank you, gentlemen, for coming in today.

I want to ask a fairly broad question. When the competition commissioner appeared before us for the first time he said that what you really have to look at in terms of this specific bill and the Competition Act overall is defining the difference between “healthy competition” and “anti-competitive behaviour”. That's essentially what we're doing, but it's a very difficult question. He also said you must protect competition itself, rather than specific companies.

What I'm finding and other members are finding is that protecting competition depends specifically on which company you are. It often depends on the company the way they define “competition” and “anti-competitive behaviour”. So I think it would be helpful if you would guide us by actually providing your definition. What is the difference between “true competition” or “healthy competition” and “anti-competitive behaviour”?

Mr. Lawson Hunter: A word that is bandied around a lot in the press and elsewhere is this notion of “predation”. In anti-trust law, in most jurisdictions of the world “predation” means if you are offering or selling at a price that is below your variable cost. You have to have a high market share to begin with. If you don't have a high market share, you can charge nothing, if you want, but you probably won't stay in business very long.

So you have to look at your variable costs, and if you are pricing below your variable cost, not your fully allocated cost, as I think Mr. Beddoe suggested to you. You're making a contribution to overhead, if you price below that. It's not a rational decision to make. So that would be one.

Another thing is that we have tried to match the prices of a competitor. Unfortunately, we don't have any clarity from the bureau, as we said before. Perhaps if you could put that in the law, it would certainly help Air Canada. If you are not leading the price down yourself, if you are matching the price, then that's not predatory. So it gives Air Canada a benchmark to say now we know we can't undercut these people, but at least we can respond. So I think you need to look at that as well. How do we know what these rules are, and how do we have tests that are along brighter lines than we have at the moment?

Mr. James Rajotte: Well, one of the charges launched against Air Canada is you do in fact lower your prices and you target specific routes that WestJet has established a reputation in. And as Mr. Strahl outlined, you do go in there and undercut them. For the other routes comparable across Canada, then, the prices are substantially higher. This charge is out there, and I'd like to hear your response to it.

Mr. Lawson Hunter: First of all, on the comment that they undercut, if they did, it's not my understanding of Air Canada's philosophy that they undercut.

Mr. Chuck Strahl: They might have matched it.

Mr. Lawson Hunter: Yes.

By the way, when Tango started I know that WestJet said it was undercutting their prices, but presumably, if you're responding to competition, you're responding to the lowest price on the market. And at that point in time the lowest price in the market was Canada 3000. They never undercut Canada 3000.

• 1710

We found, by the way, that because of a little bonus we gave people, depending on whether or not they bought over the Internet, there was one route we were maybe undercutting by $5. As soon as it was found out, they immediately changed it. So they've never attempted to do that.

What was the rest?

Mr. James Rajotte: You did answer it. Basically, is there a substantial difference in the pricing at Air Canada on those routes where it competes with WestJet?

Mr. Lawson Hunter: The principal discipline there is the CTA. I know there are airline economists who will tell you that price discrimination in transportation markets is common. You can look at the railroads, as well. I don't know whether your committee ever looks at the railroads.

The Chair: We just spoke with them two weeks ago.

Mr. Lawson Hunter: But in these types of markets, price discrimination is common because you are responding to competition. If you tell Air Canada they shouldn't be profit-maximizing, that's what you're saying. That's the implication of it. We're saying, if you're on a route where you have no competition and the market will bear a higher price, we don't want you to be profit-maximizing there. We want you to charge a lower price.

If you're going to do that, then you have to regulate Air Canada. You really do. There are airline economists who will say that the ability to price discriminate this way is the only way airlines can meet their overall costs.

So you really need to be extremely careful in the notion that somehow prices should be uniform across the country. In this business, you will drive people out of business unless you regulate them and ensure their rate of return.

Mr. James Rajotte: I think you mentioned we have to look at competition by looking at markets, looking at local markets. Then you also mentioned that Air Canada competes. You can't just look at it in terms of Canada. You have to look at competing in the international markets. So would you be in favour of relaxing the restrictions on foreign competition?

Mr. Lawson Hunter: I think Air Canada's position has been that it does not oppose reciprocal cabotage. It's willing to do that. There are, as you know, other issues.

By the way, on all of these issues about the nature of competition in this business, we would—and I guess I personally would—certainly be quite interested in having a debate with the commissioner. Invite him here. We'll sit here and talk about these things, so you can understand where he's coming from and where Air Canada's coming from. Then you'll understand how competition really works in this business. If he's willing to come here, we're willing to come too. We can talk with you to him about how competition really exists in the airline business.

Mr. Stephen Markey: If I may add, we are on the record—and have been for some time—as supporting reciprocal cabotage. If American carriers want to fly in Canada, we're saying that's fine, simply give Air Canada the right to fly in the U.S. market.

We're not afraid of that competition. The problem is that it's not easily achieved in this current economic environment, and perhaps even political environment.

Mr. James Rajotte: On my last question, are there any restrictions on Air Canada currently, whether they're regulatory or put on by the government, that are hindering Air Canada from competing?

You appear before this committee and it seems to be very confrontational, which is obviously because many of our constituents are very concerned about Air Canada and traffic service. But I think we all want to see a healthy airline industry.

In that interest, are there current restrictions or regulations you can point to that are hindering you from being competitive today?

Mr. Lawson Hunter: I'd have to go back and check all the conditions and impositions the government imposed on Air Canada at the time of the takeover. There were certainly things there that still apply to Air Canada. When the world changed on us, as you know, there was this commitment about labour, employment. There was also, by the way, the commitment on service to small communities.

Those are things you wouldn't have in a normal market. They still apply to Air Canada. They don't apply to anybody else, of course. So there are things out there.

The most costly thing for Air Canada is the uncertainty. I have never been involved in a situation, as a lawyer, where I had a client who had to constantly, on every business decision they made about pricing, check with their lawyers about whether they could do something or not. It has a tremendous chilling effect on morale, on the people inside Air Canada, because of this tremendous uncertainty about where you cross the line and where you don't cross the line.

• 1715

Mr. Stephen Markey: If I may add one point, as I think John said earlier, we are hoping to have as level a playing field as possible, in order to encourage competition.

There are some commitments we've made, which Lawson has referred to, for example, on service to small communities across the country, and they run for another 14 months, or thereabouts. We have no intention of either abrogating those or changing those at this point. We recognize they are commitments we made and we're trying to honour them, but they obviously include substantial additional cost.

Mr. Lawson Hunter: I've pointed out to you that since September 11—there have been articles in the press in the United States about this—in the United States, carriers have been abandoning routes left, right and centre. The number of single-carrier routes in the United States has jumped dramatically since September 11, but Air Canada can't do that in any community it was servicing before the merger.

Mr. John Baker: If it does, it is told by the CTA to reduce its prices, and by the bureau to raise its prices. So the lack of operational certainty that governs every one of our daily activities is hugely problematic. When competitors—

Mr. Chuck Strahl: Are you all in favour of that?

The Chair: Mr. Strahl, you're done.

We're going to move on to Mr. Volpe, please.

Mr. Joseph Volpe (Eglinton—Lawrence, Lib.): Do you mind my asking, what's the dollar figure on that?

Mr. James Rajotte: We're a very cooperative committee here.

Mr. Stephen Markey: We've never even begun to calculate that value, Mr. Volpe.

Mr. John Baker: So if I just started with the external legal costs alone, it would be a number that would shock you.

Mr. Joseph Volpe: But it would leave a lot of legal counsel salivating.

Mr. John Baker: That is a very different issue.

Mr. Joseph Volpe: It's not the one we're going to be dealing with just yet.

Mr. Baker, I appreciated your brief seminar on the economics of airlines, but as a new member on the committee, I really became part of the committee so I could get a seminar on the way any one of the industries operated.

If you don't mind, Mr. Baker, in your introduction you lamented the fact that your company was being singled out, you thought it was being singled out, or there was an appearance that it was being singled out. If I can paraphrase the example you used, it was a little bit like traditionally we condemn the sin and not the sinner, but this was one of the cases where we were going after the sinner.

Just exactly what were you talking about?

Mr. John Baker: I was talking about the regime that was implemented post-merger with Canadian Airlines two years ago.

Mr. Joseph Volpe: But I mean in reference to the bill that's before us—which we don't have before us. Is there something in that bill that is really problematic for you?

Mr. John Baker: What I was responding to were the press reports in the National Post this morning on what were being considered as potential amendments that have come laterally. If there is no substance to those discussions, I stand corrected. But we were trying to address them here.

Mr. Joseph Volpe: Maybe we should have part of that discussion, because I think you also said you came here on very short notice. I don't know if the staff or the chair summoned you before the committee.

When I was a chair, I never gave anybody short notice. If you were responding to an article that appeared this morning, you're right to lament the fact that it was really short notice. When did you get the notice to appear?

Mr. Stephen Markey: In fairness to the chair, that's not what we're saying. We're saying we have not appeared individually. As I think the members of the committee know, there have been business delegations before the committee who have articulated points of view on the proposed changes.

We're just saying that in the last 72 hours there has been a lot of speculation about what could possibly be considered as additional amendments. Over the course of the last four or five days, we took the opportunity to call and ask for an opportunity to appear before the committee, in that context. It's not at all critical.

Mr. Joseph Volpe: But you don't have any amendments on paper.

Mr. Stephen Markey: Not at this point.

Mr. Joseph Volpe: This is purely hypothetical.

Mr. Stephen Markey: Absolutely.

• 1720

Mr. Joseph Volpe: I asked some of the committee members opposite, and they don't have any amendments they've shared with us. I asked some of my colleagues here on this side of the table, and they don't have any amendments to share with me. The chairman and the clerk don't have any amendments they're sharing with me. I'm beginning to feel like the sinner you were talking about.

Are there any amendments you have access to?

Mr. Lawson Hunter: I think it was anticipatory, because we were reading in the press and we were seeing ministers talking about possible amendments, but the problem was that we had no idea what they were.

The Chair: Well, just to clarify that once again, Mr. Volpe, when WestJet was here, they asked for certain amendments on November 6 or 7—whatever the date of their appearance was. There are amendments before the committee that could be moved by committee members when we go to clause-by-clause. I don't think we have to talk about it as if they're not there, because they've been put on the table. They haven't been moved by committee members, but there is the possibility they could be.

Mr. Joseph Volpe: A lot of things, Madam Chair, with all due respect, get put on the table when witnesses come before a committee. There's a wish list that goes on longer than the litany we used to recite when I was a kid at benediction. I never thought of them as being part of the agenda, that we had to formulate some of the amendments of...

I was a little puzzled, Mr. Hunter, because you were obviously defending a position of your company with some vigour. I was trying not to be a consumer when you were speaking because I wanted to be fair to you. But I wondered where this energy was coming from. You must have access to some amendments I hadn't heard about, yet I thought I was doing my homework.

Mr. Lawson Hunter: All I can say to my knowledge is that there was speculation in the press, and we knew that Mr. Beddoe had proposed amendments to the committee, but we unfortunately didn't know what they were because the transcripts of his appearance weren't out. We were advised by people in the government that there was consideration being given to amendments, but they wouldn't tell us what they were. So Air Canada is left...

Mr. Joseph Volpe: You might as well be a member of Parliament, because we don't know either.

Mr. Lawrence Hunter: But again, you can understand the anxiety, because we also understood—and as you know—the mandate of this committee is a bit unusual, in that the bill was referred to committee after first reading. You can make an amendment whenever you like and are not bound by the rule of relevance or whatever. So when Air Canada...

Mr. Joseph Volpe: This is typical of the usual parliamentary process; that's what you probably wanted to add, Mr. Hunter.

Mr. Lawrence Hunter: Well, not always. If it's after second reading, that's not... Anyway, the anxiety was that there might be amendments coming out of this committee, that Air Canada had not been consulted on them, and that they would directly affect Air Canada. So we thought we'd better come talk about it. The problem was that we didn't know what they were.

Mr. Joseph Volpe: You don't know what you're talking about. Yes.

On that happy note, thank you.

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

Just to clarify, though, all our meetings are posted in advance, and everyone knew WestJet was appearing. You were welcome to come and watch and hear what they had to say. It wasn't as if it was a closed-door meeting by any means. I wasn't aware that you hadn't received the blues transcripts; otherwise I would have been happy to give you a copy.

Mr. Bagnell, please.

Mr. Larry Bagnell (Yukon, Lib.): Thank you.

I apologize for being late; I had to speak in the House.

I don't know if Mr. Volpe was attempting to allay your fears, but I hope to raise them again. I'm sure everyone else said positive things about Air Canada, so I might have to add a little balance.

My major point is that I'm going to support any amendments that will improve competition in the airline industry, and I'll just explain why.

I'm not at this time necessarily in favour of cabotage or the entry of foreign carriers. I'm not in favour of regulation because I think it would dramatically raise fees. I don't mean to shoot the messenger, but just so you can take messages back for my constituency, which is the Yukon... A lot of them are quite furious with Air Canada for a number of reasons, and I'll just quickly list some of them.

One reason was the huge change in fee percentage a few months ago, which I actually brought up in the House of Commons. There was a time last year when a number of people couldn't get out for days at a time. Just so people know, Air Canada is the only jet service to Whitehorse at this time—in the winter, at least.

A voice: From the south?

Mr. Larry Bagnell: No, from anywhere. The hot meals were eliminated. Then people really got riled up when the point requirements were changed just before Christmas from 25,000 to 40,000 to get a flight out—which of course is our only way out, and people are used to getting out.

• 1725

You can imagine how upsetting that was. The result was that a week ago Sunday, I think, there were approximately 200 people who came out when the airline commissioner, Bruce Hood, came. Unfortunately, most of the comments weren't complimentary.

One of the big concerns historically relates to what one of the vice-presidents who came out a year or two ago told us—namely, that we wouldn't be charged any more than for a similar type of flight elsewhere. But we've since been told that this was not correct, that there is a larger profit margin than on a number of other routes, and that Air Canada makes a significant amount of money on that route. That's one thing that really upsets people.

I just want to show you the sense of frustration and why I would be in favour of competition as a way... If Air Canada is not willing to negotiate some of these problems away, why are the people so... I have to tell you, I haven't had complaints about any other company, other than one or two, in my time as MP.

Now, I have a question, and you may be able to remove a rumour that's probably not true. One person said to me, tell them to stop charging us so much on this route to subsidize their international travel. Maybe you could tell us about your profits on international travel as a percentage of revenue. I assume they're somewhat equivalent to the profits you make on domestic travel.

Mr. Stephen Markey: If I may, I'll respond to the first part of your statement, and we'll think about the latter question as we go.

The Yukon is very important to us as a market, and it has been for 35 or 40 years through either Canadian or currently Air Canada. We know that there is and has been a lot of criticism.

Last week the premier was in Ottawa. We met with her personally to try to review all the issues she's raised. We've been in constant contact with other people in the Yukon government, including Sue Edelman. The vice-president you referred to, Doug Port, has been up there in the course of the last year, and I make fairly frequent trips there as well. We have a manager of government relations who is focused very much on the issues that arise out of Whitehorse, Sandy Dexter, who's based in Vancouver.

The issues you talk about, Mr. Bagnell, are not in any way things we try to put entirely onto the Whitehorse trips. If you look at our meal reductions, you'll find them consistent across our network, and again it's in the context of trying to manage the costs John and Lawson talked about earlier. The issue of flights and their frequency to Whitehorse has been a constant issue for us, but the current level of jet service flights is slightly higher than it was in 1999. We're trying to maintain service and service levels to Whitehorse, and we believe that we've done so relatively well. It is of course very troubling when you hear the widespread criticism of the service. We're just going to continue to try to show Yukoners that it's a valuable piece of business, one we're intent on continuing to serve.

As to the profitability, Lawson, do you have...

Mr. Lawson Hunter: That's a difficult question, to be honest with you, and I don't feel well informed enough to give you a precise answer. Obviously, profitability does vary from route to route.

One thing again—and I don't want to lecture you. I don't intend to do that, and I'm afraid I'm being too much like that. But remember that this is a network carrier. Suppose a passenger starts in the Yukon and goes to Vancouver and then on to Hong Kong, Air Canada carrying them the whole way, and they're paying a fare for the whole distance. How do you allocate the profit you make on the route between Whitehorse and Vancouver as opposed to the route between Vancouver and Hong Kong? That is a key element of network airlines.

You could make the argument that all the profit—and in fact, even all the revenue—you get from that onward leg, that international leg, should be attributed to the Whitehorse route. If it weren't for that route, you wouldn't get it in the first place.

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It's not that simple to allocate the profitability between routes. You have to have some way of determining how you split the contribution level that clearly is made on the onward portion of the route. Of course, the longer the route, the chances are the higher the contribution may be. They're economies of scale or whatever. It's not that simple. All it says is the feeder routes are extremely important in the overall profitability of Air Canada.

Mr. Stephen Markey: Madam Chair, may I offer one short additional observation?

The study you refer to, Mr. Bagnell, is one that was done very recently by a consulting group in Vancouver known as InterVISTAS Consulting Inc. The full report has not been shared with us. Last week the premier said she would be doing it, particularly with respect to pricing on certain routes.

We've looked at the pricing on comparable routes from Whitehorse to Vancouver and other cities, in terms of population and stage length. We're fairly comfortable that the rates are relatively consistent.

In the InterVISTAS study, they used the comparison of Winnipeg to Toronto to validate their observation that the prices from Whitehorse to Vancouver are higher than they should be. We don't think it's a fair comparison in the kind of market we're looking at.

We've asked the premier to send us more information. She's agreed to. We're looking forward to reviewing it. We honestly don't believe we're doing anything that we're going to find questionable when we see it in writing.

It's the InterVISTAS report, I suspect, you may be referring to.

Mr. Larry Bagnell: In the two points I brought up, I wasn't talking about the report. It would be a whole new list of things.

To make sure people are aware, there are no complaints about the staff, who were former Canadian staff in the Yukon, Sandy Dexter in Vancouver, or her equivalent in Ottawa. They've been great to us.

I'm astonished that you haven't answered my question at all or even given a suggestion. Even though it's difficult to calculate, every company has cost accounting problems. You can give me a suggestion on at least your international routes. Your international is making money. You're not subsidizing it with your domestic work. You must know it to be able to run the company in major multi-million-dollar operations.

Mr. Lawson Hunter: Again, unfortunately, I don't think any of us here are on the financial side of Air Canada and could answer the question.

I do come back to the point I made about contribution. It isn't possible to be precise on how you allocate or attribute the contribution. It's one of the points, by the way, in the commissioner's case against Air Canada. He said it should be zero. The fact we get contribution on the onward leg is irrelevant to whether we provide the service from the Yukon to Vancouver in the first place. It seems, from a business point of view, not a very sensible proposition. Obviously you're going to take into account that if you didn't have the route, you wouldn't get the onward leg. It has to go into your calculation of the service you provide.

Mr. Larry Bagnell: Madam Chair, can I ask them to answer later?

The Chair: Actually, it's what I was going to suggest.

Could you submit an answer to us in writing? Is it possible?

Mr. Stephen Markey: Yes, absolutely, Madam Chair.

The Chair: Thank you.

Mr. Laframboise.

[Translation]

Mr. Mario Laframboise: Thank you very much, Madam Chair.

I'll come back to something you said in your opening statement. You said that competition did not necessarily mean two carriers on each route. I see that you think a lot about that. But there is a reality. Some collectivities receive a poor service. The act imposed on you some obligations and I have to say you have honoured them. But you have changed the time tables and a lot of things and you have cut your services, for meals and other things.

You can't be against the fact that a collectivity wishes to have two carriers. I think competition means that those who want to enter a market must have the possibility to do so.

You have also stated that as far as you know, you had nothing to do with the bankruptcy of Canada 3000, and I'm inclined to believe you. Tango has arrived quite recently. I don't have the impression that you were behind the bankruptcy of Canada 3000. On the other hand, for competition's sake, given that the government has announced that it might guarantee loans for the five major airlines, including Air Canada, if there was a difficult situation, would you be against the government granting a loan guarantee to the company that would buy Canada 3000, in whole or in part?

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In order to promote competition, if the rules were the same for everybody, and if the new Competition Act did not restrict your activities, would you be in favour of allowing other businesses to buy Canada 3000 and to get a loan guarantee from the government?

[English]

Mr. John Baker: I think, Mr. Laframboise, we would ask for even-handedness in the application of any government direction and assistance. Clearly, earlier we talked about the situation Air Canada, as a much larger carrier, finds itself within this country and internationally. We are asking for even-handedness there. We would apply the same request in principle to a domestic competitor.

[Translation]

Mr. Mario Laframboise: Here is my last question.

I'll first tell you that there will be amendments. This is not the first time. Even today, in the House, there were ministers who weren't aware of the acts being passed. The Minister of Transport has made a number of statements. The Competition Act will be amended. If the amendments were those you have read about, would they hinder the operation of your airline?

[English]

Mr. John Baker: As Mr. Volpe indicated, we do not have precision as to what amendments, if any, might be proposed. The devil is in the detail. It would be premature and hypothetical for me to respond to it.

We will obviously look at all amendments proposed with great interest and in detail. We would love the opportunity to come back, if need be, on that basis.

[Translation]

Mr. Mario Laframboise: Mr. Baker, I want an answer. You have read in the press that some proposals had been made. I tell you that they are certainly serious since they have been made. In your opinion, are the proposals which have been mentioned in the papers a threat to your company?

[English]

Mr. Lawson Hunter: I think the answer is categorically yes. In our view, they are very extreme.

For example, my understanding is one of them was Air Canada could never price a product below its fully allocated cost. It doesn't make any business sense. If Mr. Beddoe operates his airline that way, I would be shocked. To impose it on Air Canada would be, in essence, unbelievably damaging.

On other proposals about penalties and when they could be imposed, absolutely, yes. Air Canada has to survive and raise capital.

By the way, don't underestimate the impact your comments today in the House and what the commissioner says have on Air Canada's ability to raise money in the financial markets.

We know a bit about what Mr. Beddoe said. Unfortunately, we didn't get the full transcript. If they are the ones, the answer is absolutely, yes. They are a major problem.

The Chair: Thank you, Mr. Laframboise.

I have a couple of questions before we close the meeting. I'd be happy to get the comments from the meeting. You could reply to them in writing, if you wish, as well.

Right now, I'm assuming you have Tango operating on the same routes as Air Canada. What happens when the Tango flight at one o'clock doesn't fly, but Air Canada has three flights flying later in the day? Do your Tango passengers stay there until the next day? Do you take their coupons on your other flights?

Mr. Lawson Hunter: I think I can answer. We may have to give you the precise answer, because I might get it a bit wrong.

They are protected. If Air Canada has an operational problem and the flight can't go, the passengers will be protected on an Air Canada flight, a non-Tango flight. I don't think you can interchange between Tango and Air Canada. It's the whole purpose of it.

The Chair: No. It was my question. If something happens and a one o'clock Tango flight doesn't go, do you take their coupons?

Mr. Lawson Hunter: Yes. If it's a mechanical problem with a plane or things like that, they are protected.

Mr. Stephen Markey: Fortunately, as of a couple of days ago, all the Tango flights had gone without any mechanical problems or other difficulties.

The Chair: I'm pleased to hear it.

Mr. Stephen Markey: We haven't faced it.

The Chair: My question is, would you?

My second question is would you do the same for WestJet?

Mr. Lawson Hunter: Would we take their passengers?

The Chair: Would you take their coupons if their plane doesn't go for mechanical reasons? What happens? Do the passengers get stuck there?

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Mr. John Baker: No, not generally. If we enter into a protection agreement with another airline, as we sometimes do, then that would be provided for. No, it's not transferable between arm's-length competitors.

The Chair: So we don't really have a discount airline operating under Tango, because it has the protection of another airline. I'm just trying to clarify this in my mind as to how it operates. I'm trying to clarify what the advantages and the disadvantages are between Tango and WestJet.

Mr. Bagnell raised a number of concerns, and I have very similar concerns. You've raised something that's causing me great concern, namely the fact that you have 14 months more to go before you can abandon routes. I'm really quite concerned by those kinds of comments. It sounds as if there's a clock ticking down, since there are 14 months more to go.

I have to tell you I'm very concerned, as I've already watched service slowly disappear in my own community of Windsor. Although you haven't abandoned routes, Mr. Hunter, you have lessened routes substantially. We used to have direct flights from Windsor to Ottawa to Montreal. We had 16 flights a day to Toronto. We're down to eight flights a day. It takes me six and a half hours to get home on a Thursday night for something that used to take three hours. I used to have four options. I now have two options on a Thursday. I really only have one if we have votes. It's quite disconcerting to me that pretty soon I might as well just drive, as it would be faster.

Mr. Lawson Hunter: I was not intending to say that Air Canada wanted to abandon those. But the question was whether there were things that were imposing costs on Air Canada, and that clearly is one.

The Chair: But let's go back to why it's imposing costs. There were people who wanted to buy those regional airline carriers, and Air Canada insisted that they be part of the package.

Mr. Lawson Hunter: Well, as you probably know, we went through a full arbitration with the commissioner over the sale of Canadian Regional Airlines. It was put up for sale and nobody came forward.

The Chair: No, I'm talking about Air Ontario. Air Canada insisted that it be part of the package that they be allowed to have Air Ontario. That was very clear, because there were people who wanted to purchase those airlines at the time.

Mr. John Baker: I don't know what you're referring to. The four or five companies that now comprise Air Canada Regional were all wholly owned companies of Air Canada. I'm not sure I understand any expressions of interest in acquiring from third parties in the last few years.

Mr. Stephen Markey: And, Madam Chair, the observation we made on service to communities in 14 months was simply to quantify the commitment that we made during the original merger. We recognize the importance of those communities to our network. Lawson made this point earlier. We have absolutely no plans to abandon them. In fact, we're going to be starting to try to work with communities in the coming months to make sure that does not happen.

The Chair: Well, I'm going to leave the conversation on Air Ontario, but I'm very familiar with what happened. I know that there was an offer to purchase Air Ontario—several in fact. Air Canada insisted that it had to be part of the whole package.

Let's go on to the last question I have. The commissioner has told the committee that even where he grants an injunction under subsection 104(1)—and this is very much on the record and very much available—Air Canada does not comply with his requests for information. As a result, he can't complete his investigation within the injunction period, which right now is set at a maximum of 80 days. The injunction lapses, and we then return to the status quo. I believe the commissioner is suggesting that Air Canada is almost thwarting the investigation process by dragging its feet. How do you respond to that, Mr. Hunter?

Mr. Lawson Hunter: First of all, I don't think that's what he is saying. In fact, I had a conversation with him today about this information business. I think I know what he's talking about.

First of all, I think he told me that he said, when he appeared before you, that in the Canada 3000 situation it had nothing to do with Air Canada. I know that he said it in the press—that Air Canada gave him the information he asked for. If you want to know the cost, if you have any idea how many hours have been spent in responding to requests from the commissioner to his subpoenas, Air Canada had to review every single e-mail of every senior executive in the company for three years. Imagine that. So to say Air Canada has not cooperated is just not true.

What I think he's talking about was in the CanJet situation. He was trying to find out what impact Air Canada's pricing was having on Tango and how many seats Air Canada was selling on those routes at the fares it introduced. It was a practical, logistical problem. It wasn't that we weren't giving it to him.

• 1745

Believe it or not, for Air Canada... And remember, in L-class tickets, which were the ones that were used there, there are, I think, five, six, seven, or eight different fare basis codes, so you have to get the actual coupon to see what the fare basis code was. All of those Air Canada coupons are sent to Mexico. They are counted by people in Mexico and then they are sent back to Air Canada. That takes time, needless to say, so we were not able to give him the up-to-date information, because... I've forgotten what the delay was in getting those accurate numbers, because it was a long time ago. It wasn't that we were saying we wouldn't give it to him; we were saying we couldn't tell him until we got it.

The Chair: So 80 days is an inadequate timeframe to do this thing?

Mr. Lawson Hunter: No, I think on Tango he said Air Canada gave him everything he needed.

The Chair: But in this case, you just mentioned 80 days wasn't enough time to reply. It's not that you weren't trying to be cooperative; there wasn't enough time.

I'm just trying to understand if the 80 days is adequate or not. If you're telling me you did everything possible, that Air Canada is doing its best to comply—and I believe that's what you're trying to do—then I misunderstood his conversation. What he was saying is 80 days isn't long enough for you to comply.

Mr. Lawson Hunter: Yes.

But the other thing, by the way, is in that case, at the end of the 80 days, when we weren't able to produce this report because we hadn't had the Mexicans count all the coupons, Air Canada agreed with the commissioner that it would not reintroduce those fares until we'd given them the information.

The Chair: All I know, Mr. Hunter, is that in Windsor, at the end of the 80 days, I no longer had CanJet, and fares went way back up or stayed up for Air Canada. I think the consumer's lost both ways in my market, and I'm just a bit concerned with that.

But I have an understanding now that within 80 days you couldn't provide the information, although you did try. In other cases, you've been able to provide it more rapidly. It depends on the case, the situation. So perhaps the legislation, as it's presently worded with an 80-day maximum, should be worded very differently. That's what I'm looking at. I'm just trying to understand if the 80 days makes a whole lot of sense.

Mr. John Baker: The other thing I would say is that the case we're talking about was the very first case the commissioner and his staff were looking at, and it has been a huge learning curve for all sides on these issues since this commenced two years ago, or whenever.

I would say the bureau and its staff have the ability to be much more precise in their demands in what they're seeking from us, and we are equally better able to respond. I think that has been found to be the case.

As was also mentioned, in the Tango situation we responded in... I don't know, seven or ten days. I think it was on November 8 that we filed everything. I would suggest to you that had that request been made two years prior, it would have been a longer timeframe, in terms of both the precision of the request and in complying with it.

The Chair: Okay, so then things may be working better now within the existing timeframe.

Mr. John Baker: Yes, I think that's fair to say.

The Chair: Well, I appreciate very much your coming here, and I do understand the difficulty under which you're trying to answer our questions.

I have only one last suggestion on behalf of all my constituents. This is very personal, but I think customer service is very important.

I know how much you pay for meals, because I actually know someone who supplies them. It's so minimal, and the fact that they have been taken away to the detriment of your customers... It just boggles my mind as to why you would do that, because I think customer service is so important.

I see the difficulties you're enduring at the airports. We're all enduring them with the security checks. We know some airports are much quicker than others. We know you've had to deal with timeframes, but I think it's important... I think you had a very good commitment to customer service that was announced last summer. I'd ask you to take another look at that. I believe it was a very good thing to do, and I hope Canadians will benefit from air service in this country the way they need to. I don't want to end up like our colleagues in the United States.

Having travelled on both airlines on many occasions, I actually think Air Canada does have a wonderful service, and I hate to see it not stay that way.

We look forward to meeting with you again.

Mr. John Baker: Thank you.

The Chair: Thank you very much.

The meeting is adjourned.