TRGO Committee Meeting

STANDING COMMITTEE ON TRANSPORT AND GOVERNMENT OPERATIONS

LE COMITÉ PERMANENT DES TRANSPORTS ET DES OPÉRATIONS GOUVERNEMENTALES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 6, 2001

• 0903

[English]

The Chair (Mr. Ovid Jackson (Bruce—Grey—Owen Sound, Lib.)): Good morning, ladies and gentlemen, members of the committee. I would like to start the proceedings.

We're here to discuss Bill C-38, an act to amend the Air Canada Public Participation Act.

This morning we're dealing with witnesses. The first witness we have is Jacques Kavafian of Yorkton Securities, and we also have Duff Conacher from Democracy Watch.

We'd really like to have a short presentation, followed by lots of questions. So I'll listen to your presentation. Thank you.

Jacques.

[Translation]

Mr. Jacques Kavafian (Vice-President and Director, Yorkton Securities): Good morning. Bonjour. My name is Jacques Kavafian and I am vice-president and director of Yorkton Securities. My specialty is air transportation.

[English]

Good morning, and thank you very much for giving me the opportunity to address the Standing Committee on Transportation and Government Operations.

The issues facing Air Canada are very serious not only from a public policy point of view but also for the whole transportation system in Canada.

Bill C-38 comes at an opportune time because the Air Canada Public Participation Act imposes serious obstacles to the smooth functioning of the company in an unregulated environment. While these obstacles may not appear to be serious when times are good, they tend to amplify the problems in bad times.

• 0905

The minister's plan to eliminate the 15% single individual shareholding limit is a step in the right direction and will help Air Canada in its refinancing efforts. But other restrictions that were put in place when the company was privatized hinder its ability to respond quickly to shifts in the economy. This is primarily the condition of keeping its maintenance bases in Winnipeg, Mississauga, and Dorval. Such limitations may force the company to operate maintenance facilities where it is less than optimal to do so. This is especially problematic because its competitors do not have such restrictions.

In addition to eliminating the single shareholding limit, it would be advisable also to increase the foreign ownership limit, which is now at 25%. If the company were to find an attractive and economic refinancing option, it should be able to do so with a minimum of restrictions. Otherwise, Air Canada may have to settle for less attractive, that is, more expensive, capital. With a market capitalization of $360 million, the 15% limit is reached at $54 million, and of the 25% foreign ownership limit, at $90 million. Considering the size of its debt and capital needed, those percentages as they stand are small.

Thank you very much.

The Chair: That was short. Okay, let's have a question. We'll go to Mario.

[Translation]

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

I am having difficulty following you, Mr. Kavafian. You say that having maintenance centres in Dorval, Winnipeg and Mississauga compromises the future of the company. I am having difficulty understanding that. Could you explain what you mean?

Mr. Jacques Kavafian: Yes, of course.

With the merger of Canadian Airlines International Limited and Air Canada, Air Canada inherited maintenance centres in Calgary and Vancouver. Other companies do not have the same constraints as Air Canada. They are able to rationalize their operations. If they decide that it makes no sense to maintain maintenance facilities in Mississauga, that it is more economical for them to set up their maintenance centre in Vancouver, then they are free to transfer their facilities to Vancouver. Air Canada is not allowed to do that.

Mr. Mario Laframboise: I still do not understand. You say that it is harmful to the future of the company. The company must maintain its airplanes. We are talking here of planes and these planes must be able to fly. Whether the work is done in Montreal or elsewhere, these planes must be maintained. Up until now, no one had ever complained. Air Canada did not complain, but you are complaining about this.

Mr. Jacques Kavafian: I am not complaining about it, Sir, and I apologize if that is the impression I have given you. My sole purpose was to underscore the fact that these are constraints that exist within the company and that do not exist within other private companies.

Mr. Mario Laframboise: I hope that you do not consider the fact that Air Canada must respect the Official Languages Act as a constraint.

Mr. Jacques Kavafian: Absolutely not.

Mr. Mario Laframboise: That is a good thing.

That is all, Mr. Chairman. I have nothing further to add.

[English]

The Chair: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): One of your statements, Mr. Kavafian, is that adjusting the 15% rule would help in the refinancing. If that changes—Air Canada has a current capitalization of x dollars—how much will this change in the restriction change the capitalization of Air Canada?

Mr. Jacques Kavafian: It doesn't necessarily change its capitalization. What it does is give the company more opportunities to look for investors. Some investors may be willing to take a 30% stake in the company. Today, if this limit was there, they would not be allowed to take a 30% stake.

Mr. Paul Szabo: The answer to the question is the change is not going to affect the equity capitalization.

Mr. Jacques Kavafian: Well, it would affect it, but it depends on how much and where the company decides to raise capital. Today the capital is not—

Mr. Paul Szabo: You mean if they were to issue treasury shares.

Mr. Jacques Kavafian: Yes.

Mr. Paul Szabo: Okay, but the change in the ownership limit does not affect the current capitalization.

Mr. Jacques Kavafian: Oh, I'm sorry. I don't follow you when you say—

Mr. Paul Szabo: Well, there are so many shares outstanding. They're owned by somebody today. If you change the ownership limit, it doesn't change the amount of share capital outstanding.

Mr. Jacques Kavafian: That's correct.

• 0910

Mr. Paul Szabo: That's correct, yes. But one of your points was that it was going to be a refinancing, and I don't understand where you got the idea that this was a refinancing.

Mr. Jacques Kavafian: No, what would happen is this change—the 15% single shareholding limit—will allow the company more flexibility in looking for its financing.

Mr. Paul Szabo: Okay. The share price of Air Canada has been depressed for some time. It also has a very unhealthy balance sheet, not very attractive to investors generally. There are existing shareholders—many of them are institutional. What you're suggesting is that if we increase the ownership limit, there might be a major investor who would like to relieve people of their existing shares and maybe invest more in the company or make some changes in management or strategic direction or this kind of thing, where they have a control block interest. Is that the idea?

Mr. Jacques Kavafian: Not necessarily. But what could happen is if some of the investors are very large investors and for them a $50-million investment is not a big issue, they may be willing to buy more in a depressed market in the hope of reaping the benefits when the market turns around.

Mr. Paul Szabo: It's interesting. I thought the....

First of all, you're saying there are a lot of people who want to dump the stock, and institutional investors will get an opportunity to snap up cheap stock, etc. If that's the thinking of the large institutional investor, why wouldn't it be the thinking of the ordinary investor?

Mr. Jacques Kavafian: That's not what I said. What I meant to say is that if the company were to recapitalize, were to issue more shares, those large investors could be willing to buy more.

Mr. Paul Szabo: Without this bill, could Air Canada issue more shares?

Mr. Jacques Kavafian: Yes, Air Canada could issue more shares.

Mr. Paul Szabo: Okay. Would there be a market for them?

Mr. Jacques Kavafian: That's a difficult question today.

Mr. Paul Szabo: That's the point. I'm fascinated by all of this. I think everybody is somewhat comfortable about lifting the ownership limit in the event that Air Canada needs not just someone to replace existing equity holders but someone who in fact may come up with a strategic direction or basically a long-term viability plan that's going to improve the confidence in the company itself and in the industry, and hopefully provide a little bit of security to the investors.

My curiosity here was simply that you emphasize refinancing, which this isn't about. It really is about looking down the road and saying, if we had a major shareholder.... I think in investment circles, if you have 30% of the equity interest in a company, for accounting purposes, you would equity account for it, simply because it has a significant influence, and it's deemed to be a control block. But in some companies—I can remember in the history of a company such as Trans-Canada PipeLines—where a 10% interest of, at the time, Canadian Pacific in a widely held company was enough for them to control the board. In fact they appointed all of the board. They controlled the board management. So the ownership levels in a corporation could be as low as 10% and still have significant interest.

I'm really curious why you didn't go further and say that what Air Canada really needs is an opportunity for someone to come in and really start running the company. I don't think you've made that determination.

Mr. Jacques Kavafian: Because that is something I don't believe. I will tell you what I believe. I believe that because there's a shortage of capital now in the airline industry, it's not that easy to go out and raise capital for airlines.

• 0915

Eventually this company will need to capitalize. There's no question about that. That 15% single ownership limit puts restrictions on the company and may prevent it from going to certain investors, who may have a strategic benefit investing in it, to get the money, because there's no other market. There's practically no market now for airlines.

Mr. Paul Szabo: Finally, do you think this is going to happen in terms of strengthening the capitalization of Air Canada without other significant changes in the health of its balance sheet, particularly its debt load? Have you heard on the street, or do you think it would be perhaps an advisable move at some point, if the market does not recover quickly enough and cash becomes an issue, for airlines to go under, let's say, the Companies' Creditors Arrangement Act and clean up their balance sheets in a coordinated way with all vested interests?

Mr. Jacques Kavafian: I think if it can work to go into CCAA, it would be a choice of management or the board to do so, not a necessity. The company has enough assets, in my opinion, that it can monetize over the next while to keep it going. But eventually it may be advisable for them to restructure the debt. Of the company's debt, 75% is held by foreigners, and with the 25% foreign ownership limit on the company, that restructuring would preclude an exchange of debt to equity with foreigners.

Mr. Paul Szabo: Good. Thank you.

The Chair: Mrs. Desjarlais.

Mrs. Bev Desjarlais (Churchill, NDP): Thank you, Mr. Chair.

[Inaudible—Editor]...concern about whether or not would-be investors would want to have more than 15% of shares. Presently, what percentage of shares do the larger investors have in Air Canada?

Mr. Jacques Kavafian: I'm sorry, I don't have that figure.

Mrs. Bev Desjarlais: Since you don't have that figure, how could you make an assessment that having more shares is going to make all the difference in the world?

Mr. Jacques Kavafian: When you say “more shares”, do you mean capitalization for the company?

Mrs. Bev Desjarlais: That's right. You're here before us saying they need to have this opportunity to be able to increase over the 15% of the shares. Yet you're not even aware of where that limit is right now with the investors who are already there. So how can you possibly make the statement that more is better?

Mr. Jacques Kavafian: I'm sorry, I didn't hear you ask me what percentage of the shares the major shareholders own. I thought you meant all the institutions together—a hundred percent of the company.

Mrs. Bev Desjarlais: No, it was the major shareholders.

Mr. Jacques Kavafian: I'm sorry, but those major shareholders are clients of our firm and I'm not at liberty—

Mrs. Bev Desjarlais: It's pretty much common knowledge. It has been discussed in the last couple of days publicly. I'm just surprised that you would suggest.... It's public information.

Mr. Jacques Kavafian: I'm sorry. I'm not at liberty to talk.

Mrs. Bev Desjarlais: All right, without saying who the major shareholders are, what percent...?

Mr. Jacques Kavafian: Two shareholders have between 10% and 15% of the company's ownership each.

Mrs. Bev Desjarlais: Each. To your knowledge, has there been a demand even in the last year, prior to September 11, to increase the number of shares as something that's absolutely necessary to benefit this company?

Mr. Jacques Kavafian: No, there has not been a demand for that.

Mrs. Bev Desjarlais: Why would that be? Why would there have been no push to do that, no push from Air Canada, no push from airline investors that this is an unfair situation? Why would that have been?

Mr. Jacques Kavafian: I'm sorry, may I correct my statement. To my knowledge, there has been no demand for that.

• 0920

Mrs. Bev Desjarlais: Okay. You have also indicated things outside of the scope of what we're dealing with here. All we're dealing with here in terms of the changes within the Air Canada participation act is nullifying the limit on the shares. But you've also indicated other constraints on Air Canada, such as having headquarters in Montreal—you never mentioned the Official Languages Act, which has come up before with other witnesses—and constraints on maintenance services, which Mr. Laframboise has also identified as a constraint.

Those of us who fly—certainly speaking for myself—don't see maintenance facilities located strategically throughout Canada as a constraint but as a necessity to maintaining safe airline service throughout the country. I'm finding it a bit astonishing that someone would see maintenance centres located strategically throughout the country so as to provide service as needed a constraint. We're not talking about one located in Saskatoon, one in Regina, or one in Toronto, one in Ottawa. I'm a bit aghast that you would consider this a constraint on a company.

Mr. Jacques Kavafian: Oh, yes, I do, because there are too many of them and they are in locations that may not be desirable or optimal for the company. They are there now and the company is using them as best it can, in my opinion.

Mrs. Bev Desjarlais: You're indicating there are too many of them.

Again, even through the numerous meetings we had before, I don't recall Air Canada once mentioning it had too many maintenance facilities and this was going to create a problem. Quite frankly, it simply embraced the whole merger agreement and everything it was going to do and continue to do was absolutely necessary to providing good service throughout Canada. I'm surprised that within a period of not even a year somehow this would be seen as unnecessary.

Mr. Jacques Kavafian: Yes, in my opinion it is. It's an obstacle and adds excess cost the company has to bear.

Mrs. Bev Desjarlais: You don't think it needs those maintenance facilities?

Mr. Jacques Kavafian: That's correct. Those facilities could be rationalized in other locations without loss of jobs by transferring them to other locations that would make them more—

Mrs. Bev Desjarlais: Okay, but say your plane goes down. You need to do work, major work, and it's in Winnipeg or B.C. Where's the logic of moving it—B.C., Winnipeg, to Mississauga or Montreal or Halifax?

Mr. Jacques Kavafian: Air Canada has line maintenance at every one of its bases, but the major checks it does are in Winnipeg, Vancouver, and Montreal.

Mrs. Bev Desjarlais: Do any of those centres have any down time where nothing is happening?

Mr. Jacques Kavafian: No, of course not, because now it tries to allocate the work where it is.

Mrs. Bev Desjarlais: And it also has taken on contracts with other companies to do the overall...enriching the income it has coming into the company.

Mr. Jacques Kavafian: Yes, it does that a lot at Dorval.

Mrs. Bev Desjarlais: It does it in Winnipeg as well.

As a transport committee, we toured the facility and it was touted as very important, as well as the fact that it's been able to enrich company finances because it was able to take on other jobs and keep employees working while bringing additional money into the company. Here again I'm surprised you would see this as a constraint.

That's all for now, Mr. Chairman.

The Chair: Thank you very much.

We'll go to Val now, please.

Ms. Val Meredith (South Surrey—White Rock—Langley, PC/DR): Just for clarification, I gather you're not saying that airlines and Air Canada don't need maintenance facilities. You're just saying tying them down to certain locations legislatively puts a constraint on the company that other airlines don't have.

Mr. Jacques Kavafian: That's correct.

Ms. Val Meredith: Okay. You're not saying airlines don't need maintenance facilities.

Mr. Jacques Kavafian: Of course I'm not saying that.

Ms. Val Meredith: Okay, I thought you needed an opportunity to get that on the record.

I want to pick your brains on investment. You've mentioned 75% of the debt of Air Canada is held by foreign vendors. You talk about changing this debt into equity.

How does this happen? Does it happen by the airline issuing more shares or giving the people who have loaned it money shares in return for the debt?

• 0925

Mr. Jacques Kavafian: That 75% is of the long-term debt the company has as of December 31, 2000. If we include the capital leases or the lease obligations the company has, that proportion rises substantially to over 80% held by foreigners.

The way this would happen is, theoretically, if the company wanted to reduce its debt, it could go to those lenders and say that it wants to reduce its debt because it's not able to carry it. It could offer to exchange some part of the debt into equity and ask if they would be willing to do this. In theory, debt holders holding $100 million of bonds on Air Canada may agree to exchanging them into $25 million bonds at a certain interest rate and the other $75 million value could be converted into equity.

Ms. Val Meredith: So this is where your suggestion of raising the foreign limit might be helpful to Air Canada. It would be specifically in changing this debt into equity into the company.

Mr. Jacques Kavafian: That's correct, because at 25%—including the current foreign shareholders the company already has—this figure could be very quickly reached.

Ms. Val Meredith: How important is it to Air Canada to be able to reduce this debt level?

Mr. Jacques Kavafian: It's important.

The company has no plan for reducing it because it lacks the resources to do it for now. But they could carry it.

It's not a question of the view not looking right. It's not death. It could continue this way, but the debt removes flexibility—the company's ability to do certain things—if this debt level is kept where it is, because it's rising right now.

Ms. Val Meredith: It's not make it or break it. The debt level it's carrying isn't a make-it-or-break-it issue.

Mr. Jacques Kavafian: That's correct.

Ms. Val Meredith: I want to ask you a few questions about something that happened with one of the shareholders, though you may not be in a position to tell me.

There's an article in the National Post about Caisse de Dépôt selling short. How does that work? How can a shareholder sell short and make a profit on shares it has in a corporation? Is it making money based on the fact that it's devaluing?

Mr. Jacques Kavafian: Yes.

I may speak generally, not specifically about the Caisse de Dépôt, but some large, institutional money management firms have many departments. Certain departments only invest in private equity, in private companies. Other departments invest in bonds or in debentures, others in equities. But they have others who do hedging strategies, meaning they may deal with long or short stock. They're completely unrelated to or independent from other departments within the larger organization. Some of the larger funds have a lot of money and allocate a certain amount to shorten stocks. I believe that's what happened.

Ms. Val Meredith: Is there a conflict of interest in doing this, for shareholders hoping their stock will devalue so they can hedge their bets?

Mr. Jacques Kavafian: I'm sorry, could you please repeat that?

Ms. Val Meredith: I'm struggling with how a major shareholder—and my understanding is they're the big one in Air Canada.... Is there not a conflict of interest in the major shareholder of a company hoping—and one assumes it has some input on decisions being made—the shares will devalue to the point where it can make money on them?

Mr. Jacques Kavafian: I'm not aware of their internal trust indentures. I presume because they're independent departments there is no conflict.

Ms. Val Meredith: Let's talk about the people for whom taking away the 15% might have an effect. You talk about large investors. Would that be pension funds or union investors? A lot of the big unions have considerable investment dollars. Are these not the kinds of people—union investors—who should be looking at this, if it's a question of maintaining security for employees and whatnot?

• 0930

Mr. Jacques Kavafian: You see, in the case of Transat, their union, FTQ, Fonds de solidarité des travailleurs du Québec, does own approximately 10.5% of the company. They used to own more but they sold it. So that's a possibility.

It could also be that some of the large pension funds or other funds in Canada may be willing to take a major stake in the company in the case of capitalization of an equity share.

Ms. Val Meredith: Okay.

Another thing that's come out is the possibility that the present managers of Air Canada, the people running the company now, might put in place what's referred to as a “poison pill” in order to maintain the ability to manage the company and prevent other people from coming in. How does that work?

Mr. Jacques Kavafian: A lot of companies that are widely held and whose boards think their shares are undervalued put a poison pill mechanism in place. They do this because current takeover laws provide that once a takeover is made on a company, there are 21 days from the date of the takeover to completion of the bid. A lot of companies think that is not enough time to find alternative ways to increase shareholder value, so they put these poison pill mechanisms in place. They call them “permitted” bids in that before someone makes a bid for the company, they discuss it with management and the board. The board of directors then has 60 days. They can give themselves 60 to 90 days to find alternative bids.

Ms. Val Meredith: So a poison pill is really only a delay in a decision. It doesn't prevent somebody from buying equity shares and taking over a company; it just delays their ability to do that.

Mr. Jacques Kavafian: That's correct. It forces you to have discussions with management before you do anything.

Ms. Val Meredith: So it forces the people who potentially are coming in to take over the company to sit down and talk to the management. Does management have control over whether or not they would accept the bids?

Mr. Jacques Kavafian: The board of directors of the company has a fiduciary duty to look after the interests of the shareholders. They would determine what was good value for their shares and present it to shareholders for a vote.

Ms. Val Meredith: Basically, then, that's what happened with Onex and Air Canada taking over Canadian, where there was a battle over how much they would buy the shares for and that type of thing.

Mr. Jacques Kavafian: Exactly. If you take the Onex situation, the Onex group approached Canadian Airlines. They discussed the terms of the merger. All parties, including American Airlines, agreed on the price, and they announced it. Then they went to Air Canada and made a hostile bid without discussing it with Air Canada management. They approached, and they made a bid for the company, a hostile bid. It was not friendly, the way it was with Canadian Airlines.

So what they did with Canadian Airlines is what a poison pill would have allowed Air Canada to achieve. If they'd had a poison pill at that time, the Onex group would have had to sit down with Air Canada management and discuss what fair valuation would be before they made their bid public.

Ms. Val Meredith: So how is lifting the 15% going to affect anybody who may want to be coming in? Let's say somebody wants to invest 30% in Air Canada. Do they have to sit down with the board and discuss terms, or can they just take the share value of the stock right now and pick it up?

Mr. Jacques Kavafian: In this case, if there was no 15% single ownership limit, then in my opinion they very quickly could agree on terms with the company in getting that. There would not be a fight, provided it's new equity. If someone made a hostile bid for the company, at $2, say, then, yes, they may face a fight, but the whole exercise is to allow.... This 15% single ownership limit is a restriction imposed on the company that other companies don't have, and it eliminates flexibility. It eliminates certain market segments that the company or its financial advisers could approach in raising equity in the future, if they needed it.

Ms. Val Meredith: What is it Air Canada needs to approach people? What is it they need to have in their hand when they go out to a large investor? Is it a business plan? Is it rationalizing their maintenance? What is it Air Canada is going to require in order to convince large investors they're a risk well taken?

• 0935

Mr. Jacques Kavafian: Speaking as a person in the financial industry, I would say the company would need to have a convincing business plan, a road map back to sustained profitability. They would have to make a convincing argument to the major potential shareholder that they will make money if they invest in Air Canada.

Ms. Val Meredith: I guess I'm asking my next question because of Bill C-26, which, for very good reasons at the time, wanted to protect small communities from having service withdrawn if Air Canada's monopoly determined it didn't want to provide service. Do you feel there's a place in government regulations for some restriction with regard to employees, some restriction as to how the company operates itself? Do you feel those kinds of government restrictions—actually, I guess it's government holding Air Canada to the promises they made during the Onex takeover bid—would prevent Air Canada from reaching out to get the equity they need?

Mr. Jacques Kavafian: No, I don't think so, but the company is currently paying the price for those restrictions.

Ms. Val Meredith: But you feel they can manage, and should be able to come up with a sound business plan, keeping in mind their obligations as well as, I guess, changing their way of doing business.

Mr. Jacques Kavafian: Yes, especially given that these were conditions that management agreed to when they acquired Canadian Airlines.

Ms. Val Meredith: Finally, for an airline that is having serious financial difficulties, or that would appear to be, do you feel it's sound management to start a new airline—Tango, for example?

Mr. Jacques Kavafian: I would say yes. However, I would add a caveat because of the whole economic environment. The whole idea behind Tango is a good one, because that's what the market wants. The market wants a low-fare, no-frills service. Air Canada is providing that with Tango without depreciating its own brand name, Air Canada. But the company's financial condition doesn't allow it to experiment too much, and the market is weak, so the timing may be a little wrong.

Ms. Val Meredith: Some would argue that they're offering very high-priced no service right now.

Thank you very much.

The Chair: I want to welcome Duff Conacher of Democracy Watch. I'll let him make his presentation, and then you can ask the witness of your choice to answer your questions later on.

I'll go to Duff and then I'll start with James and rotate back and forth.

Go ahead, sir. Take a couple of minutes.

Mr. Duff Conacher (Coordinator, Democratic Watch): Thank you very much. I apologize for being delayed this morning.

Thank you for this opportunity to testify on Bill C-38. I am going to address not the issues and the provisions of the bill directly, but more generally the variety of measures and actions the federal government has taken in the last couple of years in terms of bailing out the airlines, to some extent, and other measure that are helping the airlines.

These measures are not surprising given that airlines and air travel are part of the essential infrastructure in Canada these days for both passengers, whether business or individuals who are travelling, and freight and other needs.

In all of this policy-making and the measures the government has developed to date, you have the workers organized, with unions representing them, doing research on the impact of various policy moves. You have the airlines organized, of course, with their lobbyists and researchers, and others who are trying to influence the government to do certain things to protect the airlines. What we believe is missing in all of this is an airline passengers' organization that would give passengers a strong voice in airline policy making and also help hold the airlines accountable for poor service and other problems they may be causing for passengers.

• 0940

The federal government has helped, and is helping, and I predict in the short and long term will help, the airlines in many ways. We believe the best thing the government can do for passengers in return is to require airlines to facilitate the creation of an air passengers' group.

We have a very simple method for doing that, and that is a method that has been used in some U.S. states to create watchdog groups for utilities. In those states utilities have been required to enclose a one-page pamphlet in their billing envelopes periodically, and that one-page pamphlet describes and invites people to join the utility watchdog group.

For example, in Illinois, about 4% of ratepayers have joined the Illinois Citizens Utility Board. It has 150,000 members, a $1.5 million annual budget, and, with its advocacy, in addition to being involved in policy-making, has saved consumers over $4 billion since 1983 by opposing rate hikes by the utilities.

To set up an air passengers' organization, we propose that the federal government require the airlines to distribute a one-page pamphlet to passengers periodically when they board the plane and also require them to enclose such a pamphlet periodically in frequent flyer mailings. The pamphlet would describe the group and invite passengers to join, at an annual membership fee of $20 to $30. That level of membership fee and the whole idea of the group is supported by a majority of Canadians, according to a national survey we had Environics conduct a few years ago.

The government could either lend or grant the organization the funds needed to print and the costs of distributing the first pamphlet. Again, that could be a loan the group would easily be able to pay back, and after the first pamphlet the group would pay all the costs of the pamphlet, printing and distribution. As a result, such an organization can be set up at little or no cost to the government or the airlines.

We predict that the group would have hundreds of thousands of members and a substantial budget that would then allow passengers to have a place they can call to help them if they have a complaint, to help them approach the complaint tribunal that's been set up, and they would have a representative in policy-making.

I'm not sitting here pretending to represent passengers. I can't. And we do not believe any other consumer group in Canada can. We do not believe that even existing consumer groups that try to do work in this area have the resources to do research and to participate in policy-making in any meaningful way. That is why we believe this is the best thing the government can do for passengers—create such a group that will help customers hold airlines accountable for poor service and ensure passengers have a strong voice in future airline policy-making.

We have a model statute for such a group, and we believe at little or no cost this is something the government should do—at least something the government should do for passengers in return for all the government is doing to help the airlines.

I welcome your questions.

The Chair: Okay. We'll go to James Moore of the CA.

Mr. James Moore (Port Moody—Coquitlam—Port Coquitlam, Canadian Alliance): I don't quite know, frankly, what your presentation has to do with Bill C-38, unless you want us to take that within the context of broader airline restructuring.

Mr. Duff Conacher: Well, the act is called the Air Canada Public Participation Act. We're simply calling for a different form of public participation in Air Canada and the other airlines.

Mr. James Moore: Would you mandate this regulation only against Air Canada or against all carriers?

Mr. Duff Conacher: No, against all carriers.

Mr. James Moore: I have a private member's bill that calls for the creation of a bureau of airline statistics, modelled on American legislation, which would basically ask air carriers to provide the government, Transport Canada or a branch of Statistics Canada, the vital statistics of all the air carriers—numbers of flights cancelled, numbers of bags lost, average cost per route per mile across the country—so that Canadians can see what the cancellation rates are and if the air carriers overbook. Is that the sort of thing that you would...rather than giving pamphlets to individual carriers to, totally unscientifically, at least based on what I've heard, give them back if they happen...? If you give pamphlets to people to gripe about the service they have at Air Canada, it's going to be very unscientific because people will only fill them out if they're upset at the service.

• 0945

Mr. Duff Conacher: No, it's not a pamphlet for them to fill out if they have a complaint. It's a pamphlet inviting them to join a group, to band together the passengers across Canada into an organization that can represent their interests in the marketplace and also in policy-making processes.

I agree with the proposal you're making in your private member's bill. Yes, disclosure and tracking of problems is key, and in many industries the government has not required detailed disclosure enough to ensure that problems are tracked and revealed so that the government can address systemic problems. It's not enough alone.

Mr. James Moore: Obviously this is a philosophical difference. I just don't think it's the role of government to go out of its way to create consumer advocacy groups. Are there other areas of the economy where you think the government should go out of its way to create consumer advocacy groups to get in the face of business?

Mr. Duff Conacher: Yes, actually, in many areas. In the banking area, the House of Commons finance committee and the Senate banking committee and the federal government's MacKay task force all agreed with us that financial institutions should be required to enclose such a flyer periodically in mail-outs—bank statements, credit card bill statements—inviting people to join a financial consumer organization.

Instead, Paul Martin created, which has just started up in the last couple of weeks, the Financial Consumer Agency, a regulatory agency that is coordinated by government and will cost government a lot of money, instead of allowing consumers to band together easily across the country and allow the consumer organization to hold financial institutions accountable.

We believe in many other areas...particularly in utilities, where there is a monopoly. When we look at the airlines, we see a near monopoly with Air Canada, and we believe, in return for that privilege of having essentially a monopolized market, this is a wonderful accountability mechanism that allows consumers to have a voice as well, in the same way that unions organize employees and the industry has its industry associations.

How are those industry associations financed? How are all the lobbyists of Air Canada and the other airlines financed? They're financed by charging customers more and then shifting that extra revenue to their lobbying and advertising efforts. We are simply asking for customers to have the same easy mechanism to band together their resources into an organization.

The Chair: Marcel Proulx of the Liberals.

Mr. Marcel Proulx (Hull—Aylmer, Lib.): I have a quick question for Mr. Kavafian. My colleague mentioned—and I'll do the preliminary in English—short sell on the part of one major shareholder.

[Translation]

Could you explain to me why the shareholder would make such an allegation. What is meant by short sell? What does that mean in this particular case?

Mr. Jacques Kavafian: A person who is anticipating a drop in the share price will borrow shares and sell them for $5, for example. If the price drops to $2 a share, that person will buy them back at the lower price, return them to the owner and pocket the difference, in other words $3 a share. The person sells when the price goes up. “To short” means that the person sells shares that he or she does not own. Thus, this person is “short” in his or her account; the account is short of money.

Mr. Marcel Proulx: The person borrows...

Mr. Jacques Kavafian: The person borrows the certificate.

Mr. Marcel Proulx: He or she purchases the certificate on margin. Is that it?

Mr. Jacques Kavafian: No, he or she purchases the certificate. Any brokerage firm will do this type of loan. Firms have certificates in their accounts. They lend the certificates. The person therefore sells shares he or she does not own and finds him or herself in an overdraft position. When the price drops, the investor buys the shares back at the lower price. The investor then gives the certificate back to its owner and keeps the difference.

Mr. Marcel Proulx: Is this common practice?

Mr. Jacques Kavafian: This is done so often that two or three weeks ago, it was impossible to borrow certificates for shares in Air Canada.

Mr. Marcel Proulx: You mean that there were none left because the practice was so widespread.

• 0950

What does the bill we have before us do to prevent or to promote this type of thing?

Mr. Jacques Kavafian: The bill before you has no impact whatsoever on that.

Mr. Marcel Proulx: The bill has no impact whatsoever on that.

Mr. Jacques Kavafian: That is the case.

Mr. Marcel Proulx: Therefore, talking about it now will change absolutely nothing. What should be done to prevent this from happening? Indeed, should this practice be prevented?

Mr. Jacques Kavafian: No, it is very common. This is also often done with several other securities. It gives one the opportunity...

By short selling, one does not provoke a drop in the price of the security. All one does is overdraw one's account, based upon the belief that the price will drop, and buy back the shares when the price falls.

Mr. Marcel Proulx: This is part of the industry.

Thank you.

The Chair: Mr. Laframboise, it is now your turn.

Mr. Mario Laframboise: Thank you, Mr. Chairman. My first question is for Mr. Kavafian.

We agree in principle with Bill C-38 that we have before us. However, the Americans decided very quickly to help out the industry, and they showed their colours right away by announcing 15 billion dollars worth of assistance, 5 billion in direct assistance and 10 billion in the form of loan guarantees. Canada for its part decided to wait and see how the industry would fare. In order to revive investor interest in Air Canada, would it not have been preferable for the government to immediately make known its intention to help out the airlines?

Mr. Jacques Kavafian: This is a delicate matter. I must think about it for a moment before responding.

There is a difference between Canada and the United States. The American market for domestic flights as well as that of international flights between the United States and England and the United States and Japan all crashed. The other markets held up quite well. In Canada, the domestic market held up quite nicely. As an example, WestJet recorded high earnings in the course of the month of September.

The number of international flights did not drop off as much in Canada as it did in the United States. The impact was much greater and much more direct for American companies than for Canadian ones. As a matter of fact, the Canadian industry received 160 million dollars in government assistance. I believe that the Americans reacted much more quickly because the impact was much greater for American companies. Anyway, the Americans always react more quickly.

Mr. Mario Laframboise: They react much more quickly than Canada does. You are perfectly right: there is a great difference between the two. This is indeed a reality. You too should have gone into politics, because you are managing quite well.

My next question is for Mr. Conacher.

It would probably be interesting to give a voice to users, to passengers, to give them the opportunity to do some lobbying. However, I do not know how we will go about that under the present government, especially given the fact that in security matters, not even the employees themselves sit on any of the security committees.

Every day, I am surprised to see us come through crises. For 20 years now, airlines have been changing ownership and all of the rest, and the employees have never participated in the establishment of security programs. There is no ongoing training program. If the government does not even involve employees in security matters, I fail to see how the same government would involve passengers, users. You are however right in saying that we should help users get involved and have their own forum for lobbying and for defending their interests. Right now, it is difficult for them to make themselves heard.

Transport Canada defends the interests of the airlines and must make decisions. Over the last 15 years, decisions have been made not with a view to increasing security but in the interest of airline company profitability. It has rather been the case that expenditures in the area of security have been cut back.

I wish you luck in your endeavours. You will have our support, but my impression is that my colleagues opposite will continue to do what they have done in the past.

• 0955

[English]

Mr. Duff Conacher: I would hope that first of all they would do what the national survey Environics conducted says Canadians want them to do: they want this for a number of industries, not just airlines. They want it in many industries, namely pamphlets distributed inviting people to join watchdog groups. The majority of Canadians of all political stripes, 64% across the country, support this, according to an Environics poll of 2,000 Canadians.

Also, I would hope they would do as their colleagues in the House finance committee recommended, which was to create one for the banks. They saw the sense of the idea, as did the Senate banking committee and as did the government's own task force examining the banking industry. This is something Canadians want. They want to be represented in the marketplace, to have a place to call their own, one that's directed and funded by them. It's worked very well in the U.S., and we would hope the government would respond to this proposal and set up these organizations so that consumers, in this case air passengers, have a voice in the marketplace and in policy-making.

It's simply needed. I wouldn't agree with you that Transport Canada always acts to protect the airlines, but the airlines are certainly organized to lobby to have their interests protected. Passengers aren't. That's the imbalance that currently exists both in the marketplace and in policy-making. That's the imbalance we feel this proposal will correct, again, at little or no cost to the government or the airlines.

[Translation]

Mr. Mario Laframboise: I agree with you.

Do I still have a bit of time, Mr. Chairman?

[English]

The Chair: Yes.

[Translation]

Mr. Mario Laframboise: I am in agreement with you, Mr. Conacher, but one must understand how the Liberal government works.

We several times over the course of the first session tried to get Mr. Milton to appear before the committee. The members opposite came to the defence of Mr. Milton and his refusal to appear because they did not want to be bothered. Between election campaigns, they are much closer to big business than to the people. They need the people when voting time comes around, but after the election is over, they are more interested in pleasing CEOs. Rather than defending the interests of common folk, they devote themselves to financial matters.

[English]

The Chair: We'll go to Mr. Alcock.

Mr. Reg Alcock (Winnipeg South, Lib.): Well, thank you.

Actually, I've often thought we could solve a lot of this problem with Air Canada—in fact, maybe Mr. Moore's bill is an opportunity—if I could make a friendly amendment that simply required the board of directors and senior management of Air Canada to fly on those ghastly RJs and, every time they hit the Toronto terminal, to have to go to gate U. If we could just get them focused on those two things, we'd probably solve a lot of these consumer complaints.

Duff, I'd be interested to see them if you could give us the references on the American model you talked about. If you could send that material to us, I'd like to have a look at it.

Mr. Duff Conacher: Sure

Mr. Reg Alcock: This is for Mr. Kavafian. I'm interested in this issue of fiduciary responsibilities of directors of organizations. I understand that there is a set of bylaws within organizations that may be unique to each company, but is there not required by the securities exchange a certain framework for the responsibilities shareholders have?

Mr. Jacques Kavafian: Which one are you talking about?

Mr. Reg Alcock: I'm just intrigued by the issue that Val and Bev raised about the actions of the major shareholders.

Mr. Jacques Kavafian: No, there is no global.... For fund managers, their trust indentures guide what they have to do. Their fiduciary duty is to the beneficiaries of their funds.

Mr. Reg Alcock: That's true. That makes sense.

The Chair: We'll go to Bev.

Mrs. Bev Desjarlais: I just have a short question for Mr. Kavafian again, though actually it might be less a question than a comment. As a taxpayer and as a representative of the taxpayers of Canada, I would find it hard to accept that a shareholder can sell off their certificates or loan them to someone who is going to make a profit for them at the same time the very company they're a shareholder in is asking the taxpayers of Canada to help offset the costs. I'd say to that shareholder, it's your responsibility.

• 1000

Mr. Jacques Kavafian: They didn't borrow it from Air Canada.

Mrs. Bev Desjarlais: No, they're not borrowing from Air Canada. What I'm saying, though, is they're utilizing their certificate based on the shares that are over here with the intent of making money on the shares when they go up.

Mr. Jacques Kavafian: No, it's not.... Don't be emotional that way in the financial markets.

Mrs. Bev Desjarlais: Well, listen, I'm not giving it from the financial market viewpoint, I'm giving it from the viewpoint of the taxpayers of Canada. They would get a little emotional.

Mr. Jacques Kavafian: No, it's just a function of the financial markets.

Mrs. Bev Desjarlais: Yes, so someone will make some extra bucks, but at the same time we're asking the taxpayers of Canada to offset the costs of that same company, the one they're kind of making extra bucks from when their shares are down.

Mr. Jacques Kavafian: When the elevator goes down from the 40th floor to the ground floor, you might as well put some boxes in it; it's going down.

Mrs. Bev Desjarlais: Maybe the answer should be that the Government of Canada should have bought them all when they were really cheap and then made the money from it instead of having to give additional money to Air Canada. I know nobody in the financial markets would have made any money from it, and that will probably tear you apart emotionally, but it might have meant less dollars coming out of taxpayers' pockets. It's just a different perspective.

Mr. Conacher, I was really interested in the polls you had, and I'm glad Mr. Alcock requested them.

Those of us who were involved with the committee before knew that the passenger bill of rights had come up and that there had been some suggestions about it. I have to admit I don't recall the utilizing of the pamphlet for mail-outs, having the passengers pay for their own representation, really. Quite frankly, I don't believe all passengers would just get in there with the beefs and bitches kind of thing. For myself as a passenger, if I get really great service, I make a point of saying so. I'll write that down on the thing just as much as I will my beefs.

I also, quite frankly, think it might be an opportunity for passengers to get involved when they see security problems. Passengers more than anybody are coming out now and saying, such-and-such didn't happen at this airport, this security that's supposed to be happening didn't happen, this cockpit door isn't being closed, and so on. For the security issue, I think we should be utilizing the passengers who are on the airplanes throughout the nation. If they want to spend their dollars to have a group put forth suggestions on their behalf and also to give representation to the government on areas where they see a concern, well, there are far more passengers on the planes than even employees. It's certainly something we should look at, so I appreciate your comments.

I know you didn't do your presentation on the 15% share, but do you have any particular comment on whether or not there's a need to maintain the 15% shareholder limit, or is it a non-issue from your perspective?

Mr. Duff Conacher: I can't speak on behalf of passengers, certainly. We're a citizen group, and I've only read, watched, and heard everything you've read, watched, and heard, where people say no one's going to buy them anyway. That's why I predicted the government will be stepping in at some time in the future with another bailout and maybe another one after that. And what do passengers get in return? They should get a group to represent their interests so all these bailouts and things that help the airlines are held in check in the future if they're unnecessary.

Mrs. Bev Desjarlais: Certainly on the security side I see a benefit. On the side of the airlines, they also benefit by getting representation from passengers as a whole rather than this piecemeal kind of approach to providing service.

Mr. Duff Conacher: There's nothing wrong with the complaint agency that was created; that's a great step. We agree in the banking area with the creation of the Financial Consumer Agency and the upcoming creation of an ombudsman's office. But consumers are still on their own when they complain, and we're just saying give them a group to go to for that function—but also for policy-making. There isn't any group you can call on. The fact that I'm here is evidence that there's no group to call on that represents air passengers. There is no group with the necessary expertise, research, or base, and there is certainly none that is representative in any way of airline passengers. It just doesn't exist in Canada, and it should—and it would be at no cost. Why wouldn't the government do this for passengers, given all it has done for airlines?

Mrs. Bev Desjarlais: For sure.

Mr. Duff Conacher: There'd be no cost to the government or to the airlines at all. Just give passengers a way to put together their resources as easily as the airlines can now take money, gouge customers a little more, and shift all that to their lobbying and advertising efforts that influence your policy-making.

• 1005

Mrs. Bev Desjarlais: Thank you.

Mr. Duff Conacher: It's not fair.

[Translation]

The Chair: Mr. Harvey.

Mr. André Harvey (Chicoutimi—Le Fjord, Lib.): Thank you, Mr. Chairman. My questions are for Mr. Kavafian. I would like to stress that my friend, Mr. Laframboise, is not always so pessimistic. The recent municipal elections may reek of pessimism, but that will pass.

Mr. Kavafian, do you truly believe that the elimination of the 15% ceiling and the impact this might have in the short term are essential? Could you also establish a relationship between the elimination of this measure and that of the 25% ceiling on foreign investment? Is the latter a less important measure in terms of impact, given that foreigners have not as of yet shown very much interest in participating?

Mr. Jacques Kavafian: Both measures are very important. They are critical in order to allow the company to refinance itself for the future.

Mr. André Harvey: Is the most important one that of the 15% ceiling, given that we have companies that are close to that level now?

Mr. Jacques Kavafian: No. If you gave me the choice, in my view, the most important one is the 25% limit on foreign investment, because the funds made available to the company will probably come from outside rather than from within Canada.

Mr. André Harvey: You talked among other things about the restrictions imposed upon Air Canada. Two examples come to mind, and I would like to hear your comments in this regard.

First of all, there is the issue of the regional services offered to small communities. I do not like the label "small communities" either; let us rather talk about resource regions. In my mind, this is not a restriction because the services offered to resource regions are largely paid for by the people who live there. Come to our region to catch a plane and you will see who pays for what. It is not Air Canada that pays, but the residents of the resource region who pay exorbitant prices. It costs more to go from Bagotville to Montreal than to go to Paris or to other major European capitals.

I would like to know your opinion on this. I would also like to come back to the official languages question.

Mr. Jacques Kavafian: Unfortunately, the airlines do not earn a profit with regional services. Yes, it costs a lot of money. There is some traffic on Fridays and Sundays, but such is not the case on Tuesdays, Wednesdays and Thursdays. There are very few regional routes that the major companies earn a profit on. It is true that they cost a lot, but it costs a lot more to offer the service.

Mr. André Harvey: Are you certain that the net result for airlines is negative, that they are losing money?

Mr. Jacques Kavafian: Yes.

Mr. André Harvey: My impression is that the residents of the regions cover 100% of the cost of the services they are offered. Are you sure of what you are saying?

Mr. Jacques Kavafian: It depends on the route. You mentioned Bagotville or Rouyn-Noranda. On these routes, especially in Quebec, no profit has ever been made.

Mr. André Harvey: Furthermore, an example given is that of the restrictions regarding official languages. We all know that far from being a liability for a company such as Air Canada, this must be considered an asset, because throughout the world, anywhere in Europe, services are offered in two, three or four languages. How is it that in the case of Air Canada, as we are often told here in Ottawa, this is seen as a restriction?

Mr. Jacques Kavafian: I agree with you, and this is why I did not mention this when I spoke about restrictions. First of all, it is not very costly and, secondly, a good portion of the clientele is francophone. In any event, that service would be offered.

Mr. André Harvey: I believe so. Furthermore, there are in this country some eight million French-speaking Canadians, Mr. Chairman. Go anywhere in the world and you will see that various airlines offer their services in two, three or four languages. Therefore, this is far from being a liability or a restriction. It should be considered as a significant asset.

Thank you, Mr. Chairman.

[English]

The Chair: I agree. Thank you very much.

Now we'll go to Val.

Ms. Val Meredith: I want to get back to this 15% and foreign ownership, to raising the levels. Last night, when we had the minister before us, he was very reluctant to raise the foreign ownership levels. One of his arguments for not doing so was that he felt it would affect the bilateral agreements we have with other countries. Do you share his concern, or do you feel there are controls that could be put in place that determine whether or not the foreign ownership component overtakes the Canadian ownership component to the point where it would affect the bilateral agreement?

• 1010

Mr. Jacques Kavafian: He's the Minister of Transport. He ought to know.

Ms. Val Meredith: Not necessarily all issues.

Mr. Jacques Kavafian: I think that is true. This amendment eliminates the 15% single ownership limit; however, we're not talking about eliminating the full ownership limit but raising it to 49%.

Ms. Val Meredith: So you feel that 49% is a comfort zone for any bilateral agreement; that if the limit is 49%, there can't be an argument that the control is not in Canadian hands.

Mr. Jacques Kavafian: That's correct.

Ms. Val Meredith: Thank you.

I want to get a sense from you as to whether you feel there's any benefit to leaving the foreign ownership component out of this debate, that by getting rid of the 15%, we will accomplish the end gain, as opposed to doing both of them at the same time?

Mr. Jacques Kavafian: No, they both must go at the same time. Eliminating the 15% single shareholder ownership is, frankly, an impediment that practically no other company has. It's just that 99.9% of Canadian companies don't have that, so we're getting Air Canada to where a normal company would be.

The critical part is the foreign ownership limit, which is 25%, and in my opinion it's too low. It should be raised to 49%.

Ms. Val Meredith: So you would suggest that we need to deal with both of them at the same time to maximize Air Canada's potential of getting new equity into their company.

Mr. Jacques Kavafian: That's correct.

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

The Chair: Just one quick point. The minister said that could be done by an order in council. That's the mechanism that's already there for it.

Mr. Szabo.

Mr. Paul Szabo: Thank you, Mr. Chair.

Mr. Kavafian, we've established that eliminating the 15% restriction really isn't going to do anything in itself as far as the capitalization is concerned, but it is a move that would make other things possible and maybe facilitate....

I'd be interested in your comment, but I've often heard Air Canada referred to as “our national airline”. I think it's a throwback from when the government owned the shares, and it's where a lot of these restrictions have their genesis. A national airline was viewed as the way to ensure that there was connectivity across the country, even to unprofitable routes. That makes a lot of sense, but we changed that.

My question for you is, do we need to have a national airline in Canada?

Mr. Jacques Kavafian: Yes, we do. The reason is this. Assume we did not have a national flag carrier in Canada, that in a hypothetical case Air Canada goes bankrupt and there are no major airlines to take its part; foreign airlines come in and go into various markets, but Canadian customers would never be their core product, their core market. If that were to happen, and if American Airlines were to give you bad service between Vancouver and Tokyo, go and complain, complain to your heart's content; they don't care because their market is the U.S.

But in the case of Air Canada, as the national flag carrier, this is their core market. They would care more about you. They would care more about giving the service. People may not like the service they get on Air Canada—I happen to like it—but at least we would be the core market for them and they would take better care of us than foreign owners.

• 1015

Mr. Paul Szabo: Okay, let's carry this a little further. If we said what we really want to do is help the airline industry, do you think it would be possible for any airline to be financially viable and be able to offer reasonable returns to their shareholders with any restrictions on their business decisions?

Mr. Jacques Kavafian: As I said in my opening remarks, in good times, restrictions don't matter. If things are good, it gets lost in the mix, but it's in bad times that....

Mr. Paul Szabo: If I were running an airline, I would want to choose the routes that I thought I could make some money on, and I certainly would ignore the ones where I knew I couldn't make money—which is one of the reasons why you want a national carrier, the connectivity thing.

I certainly wouldn't want any restrictions on who could own my shares. I'd want to be like any other public company. I certainly wouldn't want any restrictions on foreign ownership. I certainly wouldn't want to have the Competition Bureau say I can't gobble up as much of the market as I can earn.

A lot of things happen. The point I'm coming to is, do you think we are asking Air Canada right now to emulate a national carrier, and the quid pro quo is that we will give you a statement—which I think the minister made yesterday—that we will help Air Canada only if we've seen that they've exhausted every other opportunity, but we won't let it go down? It appears we have made that commitment. Is that saying we still want to pretend we have a national airline without in fact having one?

Ms. Jacques Kavafian: Here's the dilemma. You have Air Canada with all these restrictions imposed on the company, and gradually you have new competitors that don't have any restrictions on them. They're cherry-picking the markets where they want to go. They don't have 60 years of unionized history, and so forth. Those competitors are growing now. At last count, there were 85 aircraft in the fleet of the competitors combined. You reach a point where it's time to start freeing up those restrictions on Air Canada.

Mr. Paul Szabo: Okay. Institutional investors generally do not get involved in the management of the company per se; they're there to make a return for their holders, the mutual fund holders, the pension fund, or whoever else they might represent. But there are often players with other control-block owners in terms of providing the leverage they need to work a situation.

Do you think it's possible that lifting this 15% limit could in fact allow the significant market players to depress the price of Air Canada shares even further, therefore setting up an institutional investor to buy even lower than today's market value, with the understanding that there is going to be somebody coming in who wants to buy the control block to run the company, and they'll guarantee a return to the institutional investor who has all the cash, provided they take the first step? Is that something that could happen?

Mr. Jacques Kavafian: If I understand you correctly, you're saying an institutional investor would buy the stock cheap and then make a deal with the company to buy the—

Mr. Paul Szabo: Either in partnership or in fact a full transfer of shares.

Mr. Jacques Kavafian: Some funds are in that business. They're vulture funds. They buy when the company is on its knees, hoping that someone will come and bail them out at a higher price. Some people do that, but not—

Mr. Paul Szabo: Is anybody going to be interested in buying a control block in Air Canada, given its union problems, its balance sheet, the competitive environment you talked about, and so on? Is anybody really going to want to buy that package, or are they really setting themselves up—and this 15% restriction would facilitate this—to allow the thing to bottom out basically to book value and then wait until the government comes out with some sort of a bailout or a restructuring that actually forces the clean-up, and then they take a look. It's “wait until it really hits rock bottom before you strike”, and then all of a sudden I can buy a control block. Could it happen?

• 1020

Mr. Jacques Kavafian: First of all, book value is negative today, so the stocks aren't allowed to go below zero.

Mr. Paul Szabo: Fire sale prices...it's always worth something to somebody.

Mr. Jacques Kavafian: The other thing is I've been in this business for 17 years, and it's not long enough, I realize. I've learned that you never know where a potential buyer comes from. I might think that no one would be interested in buying it today and then I'll be embarrassed on Monday with someone coming and saying, well, we have a different agenda and we are interested.

Mr. Paul Szabo: Perhaps you can amplify on the last point. Do you think there is an investor out there who wants to be the controlling shareholder of Air Canada that's going to have any restrictions on it at all with regard to operating its business and making a return on its investment?

Mr. Jacques Kavafian: Any such potential investor knows the layout of the landscape. They know what the restrictions are, and they would go into it knowing what those restrictions are. They would price the stock accordingly.

[Translation]

The Chair: Mr. Laframboise.

Mr. Mario Laframboise: Mr. Kavafian, in answer to my colleague earlier, you stated that there was no money to be made in the area of regional service. There are buyers interested in purchasing all of Air Canada's regional carriers, without restrictions. There are people who believe that Air Canada's regional performance, before September 11, all things considered, was better than that of Air Canada as a whole. Do you believe that these investors have a good reading of the situation?

Mr. Jacques Kavafian: I would like to meet them. Air Canada Regional makes a profit on several routes, for example between London, in Ontario, and Toronto. There are certain routes that are profitable. Personally, I do not believe that the company itself, Air Canada Regional, is profitable.

Mr. Mario Laframboise: You are therefore telling my businessmen that it would be a bad investment for them.

Mr. Jacques Kavafian: I do not have any numbers in front of me, because the company does not divulge them. I am basing myself on observation and knowledge. Overall, in my view, Air Canada Regional is not profitable. However, it is probably not losing as much money as the parent company. It is perhaps getting away with having neither gains nor losses.

Mr. Mario Laframboise: Now, we are starting to understand things.

I would like to come back to the issue of government assistance. I maintain that Canada should have clearly announced its intention of helping out the airlines and that would have helped the market. We are now asking Air Canada to use up its liquid assets. Mr. Milton stated that he would be able to continue for a time, that he had a billion dollar reserve fund and that he could borrow three or four billion dollars, but what will happen afterwards? I fail to see how washing out a company, even if we amend Bill C-38, will help us to reach our goals.

Why not have stated clearly, which would have reassured investors, that as a government we were prepared to help out the airlines, as the Americans did? I sense that you do not wish to answer.

• 1025

It nevertheless seems to me that what we are going to do is let Air Canada use up all of its liquid assets. It is possible that afterwards, once it has nothing left, it may be easier to help it out, but I do not believe that strategically speaking... I believe that the government should, though this is not what it did, announce that it will help Air Canada, so as to reassure investors. Do you agree with me?

Mr. Jacques Kavafian: I believe that it is not the government's role to reassure investors. You say that Air Canada will be a washout. Why? A company always has the choice of cutting its losses or of reducing them through restructuring.

I am in complete agreement with the minister offering loan guarantees to Canada 3000 on the condition that the company reduce or rationalize its operations. There were four conditions. I would be in agreement if the government applied the same type of funding to Air Canada, on the condition that the company reduce or rationalize its operations and reduce its losses.

Mr. Mario Laframboise: But Air Canada has already made requests. You are saying, in the final analysis, that now is not the right time, that we must let things run on and that we will look at the situation later on. Is that what you are saying?

No loan guarantees have as of yet been offered. Air Canada has made requests for assistance. It is all fine and dandy to play with words, but requests have come from Air Canada. You are however telling us that you support the minister and, therefore, that you are in agreement to let Air Canada go and to wait and see what will happen. Is that the case?

Mr. Jacques Kavafian: No. Air Canada has other possibilities. It has the possibility of reducing its losses by abandoning certain routes, by laying off staff, by leaving aircraft on the ground. These are things that it is doing at the present time.

Mr. Mario Laframboise: You are therefore saying that it is too early to help it out and that we should wait and see. Is that it?

Mr. Jacques Kavafian: If the company loses 700 million dollars a year and you inject a billion dollars into it, all that you are doing, in truth, is buying a year and a half or a year and a third's grace time. This is what must be done: put an end to the losses, make cuts, streamline. We must at least be assured that the company, without necessarily becoming profitable, at least reaches a break-even point in the present economic context. This is what it is doing.

Therefore, if I understood correctly, the minister stated that it seemed there were other things to do, but...

Mr. Mario Laframboise: And you are in agreement with that. That is what you are saying; that you are in agreement.

Mr. Jacques Kavafian: Yes.

[English]

The Chair: Mr. Byrne, from the Liberals.

Mr. Gerry Byrne (Humber—St. Barbe—Baie Verte, Lib.): I want to pick up, Duff, on a couple of your comments.

You were a strong supporter, if I understand you correctly, of the formation of the ombudsman's office. You were a strong supporter of referring complaints to the Competition Bureau. I think what you're getting at is these are regulatory bodies in some respects. There's no one to help organize consumers to file these complaints because it is a very complicated process. To be able to collect mass data or class action sorts of complaints, you need an organizing body.

You said there is no organization currently in Canada that is capable of doing that. In fact, even some of the other consumer organizations that are trying to do it are not very effective at it and probably should not be involved.

I'm aware of one organization that is in existence that's called the Canadian Association of Airline Passengers. This committee received testimony from them earlier. Do you have any comments about the effectiveness of that organization or its mandate? Are you aware of it? Would you be able to provide some commentary.

Mr. Duff Conacher: Sure. It has very few members.

Mr. Gerry Byrne: That's its fatal flaw, is it?

Mr. Duff Conacher: Yes. It's not actually an association. It's a coalition of groups, but—

Mr. Gerry Byrne: Who are those groups?

Mr. Duff Conacher: —none of those groups works on or focuses on airline issues.

• 1030

I'm here in the same capacity, and I have the same capacity as they do. There isn't a full-time staff person at the Canadian Association of Airline Passengers.

Mr. Gerry Byrne: One of the obvious questions that would flow from this is the following. If you're saying the majority of Canadians would support such an organization, and it's backed up by survey data from Environics, why doesn't it exist?

We have freedom of association in Canada. We have very sophisticated marketing capabilities. If this type of organization had a cause, had a purpose, and had a market, why doesn't it exist on its own? Why do we need legislation to actually embody and enact this organization to exist?

Mr. Duff Conacher: There are several barriers to organizing citizens across the country.

You'd have to reach them all. Will Air Canada give you a passenger list so you can mail something directly to people who fly? No. So you would be mailing to a whole bunch of people who may not fly, so they wouldn't be interested in joining...wasting all of that money to reach the 10 million annual airline passengers in Canada. It would cost you about $8 million to do a mailing.

And why is legislation needed? Well, because you're doing all sorts of things to help the airlines, and the airlines can easily, as you know, hire lobbyists. They can come up with the money for advertising campaigns, with everything to make you believe, as a policy-maker that everything is hunky-dory, and all these passenger complaints are just irrelevant anecdotes and statistically insignificant. They can very easily do that by just adding a couple of dollars to every airline ticket and raising that money. All we're saying is balance the marketplace and give the airline customers as easy a way to band together.

Why should they have to overcome all of those barriers of organizing when the airlines don't? The airlines can just gouge customers a little more and shift all that money to lobbying and donations to political parties and all sorts of other means of influencing the policy-making.

Mr. Gerry Byrne: You've said it's very expensive to do it and therefore you've come to the conclusion that it's impossible to do without regulating it, without putting in the form of a statute.

Mr. Duff Conacher: The only other way to do it would be if government gave a huge development grant to allow a group the resources to be able to approach enough Canadians directly, inviting them to join. Why do that, when the airlines already have a point of mass contact with passengers when you board a plane and just have them distribute the pamphlet at no cost to the airline and no cost to the government?

Mr. Gerry Byrne: Have you tested the hypothesis of impossibility by actually trying it yet, without government support? Has there been an attempt to actually organize people without government assistance? Has there been any effort to simply get a website going and see if people want to actually join up with such an organization?

Mr. Duff Conacher: Sure. Transport 2000 is the example.

Mr. Gerry Byrne: And it's just not working.

Mr. Duff Conacher: It's a very small organization.

Mr. Gerry Byrne: So what you're saying is Transport 2000 is not working as a consumer.

Mr. Duff Conacher: No, because it doesn't have a representative base, and no other group does. When they appear before you or send things in or appear before the media, some of them may try to say, we are representative, but their memberships are all less than one thousand, or a couple of thousand at most, and they're simply not a representative organization. Their boards are not elected democratically.

This is what we're proposing for this group. And they're not in touch with enough passengers on a regular basis to really know what is the top-of-mind concern for passengers, what they want addressed, what are problems.

Among all of the other reasons I've given, that's why we think this is the best way to do it—again, at no cost to the government, at no cost to the airlines; just give people the opportunity to band together.

The model we propose and the model that's been used in the U.S. is that if Canadians do not want it, if a certain percentage do not join after the flyer's pamphlet has been distributed, then it would disband. If Canadians don't want the group, then it won't exist. Give them as easy an opportunity as the industry has to band together their resources to be involved in policy-making and to protect themselves in the marketplace. Who pays for all of the airlines' lawyers when they're sued? Customers. Who pays for the lobbyists? Customers. Who pays for their ads? Customers. Who pays for their donations to political parties? Customers. Customers should be given something back—and this, again, at no cost to the government and the airlines. It just gives them the opportunity to band together.

• 1035

Then you have someone to call on besides me. I'm sure some of you are sick of seeing me because we appear on a lot of issues. I wouldn't be here; someone else would be here who'd be an expert on the airlines, who would analyze the big question I think in this whole policy-making exercise with regard to Bill C-38 and the airlines generally, which is whose fault is it that Air Canada has lost all this money? Is it the market? Is it September 11 events? Or is it Air Canada itself? Have they just blown it? We don't know. I don't think you know. I don't think anyone knows.

You certainly don't have a passengers' group analyzing whether that is actually the answer: that Air Canada doesn't deserve any more favours, they've had enough, that it's their own fault they're in the position they're in, and taxpayers shouldn't bail them out; no one should bail them out. But you don't have that passengers' group to call on. You're hearing from the securities industry and the airline industry, but you don't have a group that can do the research to really, from the passengers' perspective, answer the question, whose fault is it that Air Canada is in the position it's in?

Mr. Gerry Byrne: Thanks very much, Duff. I want to move to Jacques for a second.

You're basically here, Jacques, providing testimony as a representative overview of the institutional investors, the institutional investment community. I think that's a fair statement to make, wouldn't it be, that Yorkton Securities is a representative sample?

Mr. Jacques Kavafian: No, I'm speaking for myself, on my own knowledge. I'm not speaking for anyone else.

Mr. Gerry Byrne: In Yorkton Securities then you would basically take the position that you agree with the national airline; you agree with the philosophy of a national airline. You also see that it has business merit to have to maintain Air Canada as a national airline. You've indicated that domestic travel is the core competency of this company, and in essence it should not retreat from its core competency. It wouldn't make a good business case or business sense to do so.

But you've also argued in regard to the impediments you face, as you would phrase them, as a national airline, the restrictions. It would be your position, as an institutional investor, that this security, this equity floating, would be more attractive if those restrictions were not in place, and those restrictions include bilingual services, a requirement for operational headquarters in Montreal, service centres in three locations in the country, plus a requirement for regional services to smaller airports. Would that be correct?

Mr. Jacques Kavafian: No, I'm sorry, it is not. I did not mention official languages as an impediment, nor did I mention the headquarters location as an impediment or restriction, because these are fairly low cost. It's not material in the financial dealings of the company.

If Air Canada wants in the future to look for alternative financing methods that may not be available in Canada, that may be available in the U.K. or in Germany or in the U.S., it is imperative that the foreign ownership limit be raised from the current 25% to maybe 49%. I'm simply mentioning 49% because I think the minister can do it very quickly with an order in council without changing the law. It's also a level at which Canada's bilateral agreements remain intact. Above 50%, I believe those bilateral agreements with other countries come in question. The single-ownership limit of 15% is too low and it's unnecessary.

I'm saying it's imperative that the single ownership of 15% be eliminated and the foreign ownership limit be raised to 49% in order to allow Air Canada to refinance its activities at the lowest cost possible.

• 1040

Mr. Gerry Byrne: So basically those are the tenets within Bill C-38, the ownership, bilingual services, and the headquarters question. Would Yorkton Securities, yourselves, provide further input to change? You say you don't really have an issue with bilingual services or the headquarters. But I think I'm reading you correctly and you really do have an issue in terms of the issue with the business case surrounding the hub service centres and the requirements for regional service. That's outside of the scope of Bill C-38, but certainly it's a restrictive covenant put on Air Canada as a national carrier.

Would you, as an analyst and as a market watcher, be providing a lobbying effort to remove those restrictions from Air Canada to make the security more palatable to institutional investors?

Mr. Jacques Kavafian: No, I would not.

If I may make a correction—Ms. Meredith corrected this earlier for me—the maintenance bases Air Canada has, I want to repeat, are required for maintenance. My issue is forcing the company to have them in a certain location that may not make optimal economic sense.

Mr. Gerry Byrne: To conclude, would it be a fair statement to make that you acknowledge it promotes a strong business case for Air Canada to have restrictions placed on it requiring it to provide service to smaller centres because it plays into the notion of a Canadian, a national, airline?

You've just corrected me. You have no problem with requirements for setting parameters, limits, requirements, for Air Canada to have regionally based service centre hubs. You may have some difference of opinion as to where exactly those hubs are, but, fundamentally, you agree that's not a bad thing to have.

So will you make a clear statement that it's in Air Canada's best business interest, the economic case, the business case, that this airline should be required in future to maintain its services to small and regional airports in fulfilment of its capacity as a national airline? You said it is important, it is a business case, that we have a national airline.

Mr. Jacques Kavafian: It is not, in my opinion, in Air Canada's shareholders' interest to have any sort of restrictions imposed on the company.

Mr. Gerry Byrne: Now you are contradicting yourself, because you just said you have no problem with these restrictions. You've said that you feel as though it is important to have a national airline, but now you're saying you don't agree with any restrictions because it's not in the business case.

Mr. Jacques Kavafian: That's correct.

Mr. Gerry Byrne: Can you give a clear message to this committee? Where should this airline be going?

Mr. Jacques Kavafian: Yes. I will give you a very clear answer. In my opinion, for shareholders of Air Canada it doesn't make any business sense, any economic sense, to have any restrictions on the operations of the company whatsoever. If management decide that certain operations are not profitable, they should be allowed to close or relocate. Putting any kind of restriction on that is a competitive disadvantage that other competitors don't have.

However, in some of those restrictions it's immaterial. For example, whether it's official bilingualism or having their headquarters in Montreal or services to small communities, it's immaterial. I believe they lose money on those routes, but it's small. It's not a big deal. These are things that are impediments that are not as serious as a 25% foreign ownership limit is.

Mr. Gerry Byrne: So if we were to impose further restrictions, force or require greater services to small centres, because the financial cost is inconsequential, Air Canada should not have any problem with that.

It really, in the grand scheme of things, would be very minimal, marginal, to the bottom line; therefore, it would not be the basis of an argument. Air Canada would not be able to come back and say, you're really hurting our ability to float this new equity, because it would be a red herring issue for Air Canada to do so.

Mr. Jacques Kavafian: One thing I believe would be very difficult for you to implement is to force Air Canada to buy aircraft in order to serve those communities. They may reallocate, but I think forcing them to serve more communities.... If they're serving 15 communities and they're losing a little bit of money, that's one thing. If you force them to serve 50 communities, then they start losing big money and that's a serious issue.

• 1045

Mr. Gerry Byrne: So just maintaining the existing services as they were before the restructuring of 2000 would not be a problem.

Mr. Jacques Kavafian: In an ideal world I would like to see Air Canada not be restricted and if they lose money in Bagotville, or wherever they go, to be allowed to pull out. But under this current system, I think it's relatively small and I think we can live with it.

Mr. Gerry Byrne: Mr. Chair, that's where I'll close, and I'd have the record stand that basically according to this institutional investor the problems of service to small regional centres are not really a big issue. However, that seems to be where the major cutbacks in Air Canada have occurred in the last little while.

The Chair: Thank you, Mr. Byrne.

Val.

Ms. Val Meredith: I want to jump into this conversation. Really it's a good segue, because when you talk about small communities being served by the big mega company, it doesn't necessarily mean they're getting good service.

There's one example in British Columbia where Air Canada was flying into Terrace, B.C., and it was high-priced. A small company out of Terrace, B.C., bought an airplane and started two-way service, two trips in and out of Vancouver a day. They've just bought a second airplane and now they're offering services to Smithers, B.C. These are small communities that previously didn't get good service from a major carrier.

When you expect the big carrier to provide inefficient service where they're losing money, are they not keeping small potential airlines out of the business? Where do small potential airlines, like Hawk Air, get the funding so that they can provide good service for small communities, which the large mega airline cannot possibly do?

Mr. Jacques Kavafian: If you're forcing Air Canada to go into a community reluctantly as a public policy, or a service to the public, it crowds out other potential investors or people who may be living in those communities and they may find it attractive to fly smaller airplanes than what Air Canada may be flying in its regional aircraft fleet.

That's a possibility. But I talk to a lot of people and many people are not willing to take a chance on having Air Canada abandon the service and then waiting until someone else jumps in. I think if there's money to be made, someone will come in and provide that service, like the examples you mentioned.

Ms. Val Meredith: My concern is because regional carriers have really come from the small aircraft, the small airlines, that ended up getting bought out and then there was this competition between Canadian Regional and Air Canada regional airlines for market share to feed their big-line carriers. What's happened with the monopoly is that you don't have this competition in the regional carriers any more. You have one regional carrier.

I think for your smaller people, your smaller airlines, their concern is that you still have this mega airline that wants to control the market and wants to keep out any potential competitor, either from a regional aspect or from a national aspect. Yet if we were to stop supporting your larger regional carriers.... Assuming they're the only ones that can provide the service, you're keeping the smaller carriers out of the marketplace. You're not allowing them to come into the marketplace and to grow, and it's they who would give better service to your small regional airports.

You take Elsie Wayne. She has to catch a plane in Saint John and fly into Fredericton, and then she has to fly to Halifax and then back to Ottawa. It's ludicrous. By our protectionist attitude toward Air Canada and regional service, we're preventing somebody from providing a service from Saint John to Halifax, or from Saint John to Ottawa.

Mr. Gerry Byrne: You had better check the federal Competition Bureau records, Val, because that's exactly what Air Canada did. As soon as a small airline like Provincial Airlines came in—

Ms. Val Meredith: They forced them out.

Mr. Gerry Byrne: The federal Competition Bureau ruled them out of order. What's the purpose of Tango?

Ms. Val Meredith: The concern I have is when you start propping up the national carrier as the only one that can provide service into small communities, you're propping up that situation we're faced with.

• 1050

I know the witness believes Tango is a good idea, but I think you'll probably find that around this table we're all very concerned that Air Canada is once again using resources, perhaps that they got from the taxpayer, to put in an airline to go into stiff competition with Canada 3000.

Anyway, my question to you is, where do these small airlines get the money? Where does a Hawk Air go for funding to grow their business?

Mr. Jacques Kavafian: I have seen only one occasion, in my experience. It was very local, from their local community. Some wealthy individuals get together and started an airline. It doesn't cost too much to start a small airline like that.

Ms. Val Meredith: Thank you.

Mr. Duff Conacher: Just to answer that, in part, we'll soon know a lot more about where all industries get their funding from, because Statistics Canada and Industry Canada have initiated one of the proposals we made in the banking area, which is that there should be much more detailed tracking of what all financiers do, what they fund, what they turn away, what they reject in terms of applications. In their first wave of surveys, they've surveyed all suppliers of credit of all sorts, debt and equity. They've also surveyed all 25,000 small and medium-sized businesses in terms of the demand side and what's missing and what the gaps are. Their first wave is slated to come out in the next couple of months, and then it will become only more detailed in terms of its industry and geographical breakdown.

That's not related directly to Bill C-38 at all, but just to let you know that there will be much more information coming out as to where all industries get their money and which industries in which areas of Canada are essentially shut out by those who provide capital. That will hopefully provide direction to the Business Development Bank of Canada in terms of the gaps that are actually there and the gaps that the government's business banks should be filling.

Ms. Val Meredith: Thank you.

The Chair: Bev, did you have another question? Okay, then Mario will be the last intervener.

We're close to 11 o'clock. I want you to keep your questions and answers within the 11 o'clock range so that we can start with the other witnesses on time.

[Translation]

Mr. Mario Laframboise: Mr. Kavafian, I come back once again to the help that was quickly announced by the United States in support of the air industry, and that Canada did not offer. Let us be clear. The industry was offered 160 million dollars. You are a specialist in this field and you maintain that the government should not move too quickly and that help... I am having difficulty with this.

Everyone is in the process of restructuring, Mr. Kavafian. No one wants to give money to companies for them to continue to live beyond their means, except that the Americans intervened quickly. Do you not believe that this is a solution that Canada should have put in place? Do you not believe that Canada should have intervened in a timely fashion? The problem is that we are waiting. For example, Canada 3000 has cash problems and we offer the company loan guarantees. Are we going to wait for Air Canada to run out of cash? That is what you seemed to be saying earlier. You seem to be saying that we will see what we are able to do once Air Canada has run out of money.

It is fine to be upset with the company and to let market forces play themselves out, but no one invented September 11. It is true that the industry already had a problem and we are trying to punish it for that, but one day, we will have to understand that the 11th of September happened, that there is a crisis in the air industry and that we will have to intervene. That is not what I am sensing. You seem to be marching along hand in hand with the minister, saying that we will wait until the cash runs out. Are we going to wait until Air Canada runs out of money before helping it out?

Mr. Jacques Kavafian: I will give you as clear an answer as possible. As an individual, philosophically, I have problems when the government intervenes in any given industry, whether we are talking about Air Canada or any other company. This is money that taxpayers have contributed for certain things. To give money to companies is not to me an efficient way of managing public funds, but it is true...

Mr. Mario Laframboise: But for the rest...

• 1055

Mr. Jacques Kavafian: I am trying to be a little more realistic. It is not because the Americans reacted quickly that we must do the same. Air Canada has other avenues that it is presently pursuing. There are other industries and other companies that are facing problems. Clearly, the government should only involve itself as a last resort. It should not intervene in order to prevent problems. If there are problems, we shall see, but there are no problems.

Mr. Mario Laframboise: Are you saying that we should wait until the company runs our of cash?

Mr. Jacques Kavafian: It should not run out of cash. The company should manage its affairs so as to not run out of cash.

Mr. Mario Laframboise: In the meantime, people are being laid off. They are getting rid of human resources and employees are being told to go and look for work elsewhere. We are letting the industry down. We will wait and see what is left and then we will look at how to prop it up.

Mr. Jacques Kavafian: It is unfortunate, but such is the case.

Mr. Mario Laframboise: Thank you.

[English]

The Chair: Thank you, Mario.

Thank you, witnesses, for being here. I'm sure the committee is a little more enlightened by your interventions. We appreciate you coming here.

I'll suspend for a couple of minutes while we get the other witnesses in place.

• 1056

• 1102

The Chair: I'd like to reconvene the meeting and welcome our witnesses.

We have, from the Canadian Labour Congress, Hassan Yussuff, the executive vice-president, and Kevin Hayes, the senior economist, social and economic policy. From the International Association of Machinists and Aerospace Workers in Canada we have Louis Erlichman. From the Canadian Union of Public Employees we have Richard Balnis. And from the CAW Canada we have Serge Portelance. Welcome, gentlemen.

Usually we start with presentations. I don't know how you have yourselves organized, but just a small statement from each of you...and then we'll have questions. This is a two-hour meeting.

Mr. Hassan Yussuff (Executive Vice-President, Canadian Labour Congress): Thanks, Mr. Chair.

On behalf of my colleagues, I want to say we're pleased to have the opportunity to present before the committee on a very important matter that concerns a large portion of our membership in this particular industry. We do have a formal brief from the Canadian Labour Congress, and my colleagues also have comments and a presentation they're going to make to add to what I'm saying in regard to our joint presentation.

On behalf of our 2.5 million members, we want to thank the House of Commons transport committee for the opportunity to outline our views on Bill C-38. This bill, which removes the 15% limit on common shares that can be owned by one shareholder, is a significant change.

When we were before the committee two years ago we said that ownership by a single shareholder should be limited to 10% of shares. At that time, we said we were also concerned about both foreign ownership of airlines and allowing foreign carriers to operate within Canada. No country allows foreign carriers to compete with its domestic carriers for domestic travel within its own borders. We said we didn't want our domestic market opened up to foreign airlines whose only interests will be picking up the most lucrative routes, with no obligation to serve small centres and remote communities. We said that foreign ownership should not exceed 25%. Who has effective control of Air Canada does matter.

Our position on Air Canada ownership, however, is part of an air transport policy where domestic transport is regulated in the public interest, similar to the way we regulate international and transborder traffic.

Every community in Canada should have access to quality airline service. Airline safety must be to the highest standard and enforced.

• 1105

Air Canada's most recent problem was certainly made worse by the recession we are in and the events of September 11, but its problems are deeply rooted in airline deregulation and destructive competition. The airlines have not been helped with the contracting out of security screening to the lowest bidder, paying the lowest wage.

Competition policies where the only outcomes so far are higher prices, lower service, the wholesale destruction of the national airline, and the permanent insecurity of airline employees can only be described as destructive.

Another outcome of more than a decade of destructive competition is Air Canada's mountain of debt, which this bill anticipates dealing with by removing the ownership limits.

Without reregulating air transport, we are well aware that the limits of share ownership by itself will do little to stop the airline ticket prices from skyrocketing and continue the decline of quality of airline service to smaller centres in this vast country.

The protection of the public interest, consumers, communities, and workers is the job of government. That means reregulating and managed competition in our domestic market. To restore the public confidence in flying, a comprehensive air transport policy is needed now, even more than before September 11 and the current economic downturn. A complete range of regulatory, fiscal, and other policy instruments must be used to create a stable and viable air transport industry to serve all Canadians.

This bill will remove uncertainty in the turbulence of the airline industry. Air Canada and the airline industry is much more than aircraft, managers, and stockholders. The airline industry has 90,000 workers involved in every aspect of ensuring that Canadians have an effective, safe airline sector.

We believe the government must ensure that issues related to the stabilization of the workforce form the concept of all discussion and proposals for the overall stabilization of the airline industry. It is critical that any package of financial assistance provided by government to Air Canada and other airlines address the needs of workers facing job loss, displacement, and career impacts. The impact of failed air transport policy, the current recession, and the events of September 11 on Air Canada employees is enormous.

There are many issues to be addressed as part of a workforce stabilization program: demographics of the workforce in different sectors of the airline; the identified current and future shortage of skilled tradespersons; the need for increased bilingual air and cabin crews; and keeping young people in the industry to ensure a trained workforce for future growth.

The workforce stabilization program that we have proposed to the government is based on the approach of enabling the senior members of the workforce to leave without seriously reduced pensions and eliminating as much as possible the need for permanent layoff for junior and younger employees. It makes sense prior to layoff notices being issued by the company, thereby triggering the seniority bumping and relocation provisions of the collective agreement. A package should be offered to all senior employees to encourage them to permanently leave the industry. Once the process is complete, it would be much easier to develop programs to mitigate the need for future layoffs.

The only aspect of the union proposal that requires new money from the government is the early retirement package. This, however, is partly offset by reduced employment insurance or social assistance payments. The program to address the mitigation of layoffs for junior employees, work-sharing, adjustment committees, and training programs will be financed from the EI program, which has been paid for by employees in the industry already. It does not require any new money from the general revenue of government.

Unions and their members strongly support stabilization of the industry because it is in the interest of Canadians, of Canada itself, local communities, the workforce, families, and the shareholders who invest in these companies. What must be done to have national carriers for all Canadians must go beyond the narrow interests of shareholders and investors. We believe that an effective and safe airline is possible, but it will only be achieved if the workers, through their unions, are full partners in all aspects of the restructuring. The government must ensure that the broad public interest is served.

This document is respectfully submitted on behalf of the Canadian Labour Congress.

I invite my colleagues to make their respective presentations and comments, and then maybe we can get into the questions.

Mr. Louis Erlichman (Canadian Research Director, International Association of Machinists and Aerospace Workers in Canada): I'd like to thank the committee for giving us the opportunity to appear before you on behalf of the International Association of Machinists and Aerospace Workers.

The IAM is the largest union in air transport, representing approximately 18,500 Canadian members working at Air Canada and other carriers as well as a number of airline service companies.

• 1110

We've appeared before this standing committee many time over the years, and we've put forward a consistent view of this industry. Contrary to the conventional wisdom, which has guided government policy over many years, air transport is an industry that moves, in the absence of government direction, towards greater concentration and monopoly. The evidence of history continues to support our view.

The Canadian air transport industry, like the industry worldwide, is currently in crisis. Air carriers everywhere have been affected by the economic slowdown, with the market slowdown exacerbated by the events of September 11. In addition, Air Canada is still dealing with the restructuring arising from its merger with Canadian Airlines.

The government's response to this grave situation has been tentative and weak. The provision of some cash to offset direct losses from September 11, some possible loan guarantees, and Bill C-38 don't add up to an adequate response to the industry's current problems; neither do they provide a basis for the future health of this sector.

That being said, the response is consistent with the government's long-standing passive approach to this sector: waiting for crises to occur and then responding by doing the minimum possible and hoping the magic of the market will somehow make the problems go away. This passive approach has helped to bring the industry to its current state and will certainly not help to turn things around.

When Air Canada was privatized in 1988-89, ownership restrictions were included in the legislation as a recognition of the carrier's central role in this essential public service. It was felt that no single entity should have control of this cornerstone of national development.

Since that time, Air Canada's dominance in the market has increased. If anything, the argument for ownership limits is stronger now than ever. With our current passive public policy, it would seem that the risk of having a single controlling shareholder for our dominant air carrier, with its essential public duties and responsibilities, is greater than ever. It is therefore difficult to understand why the government has introduced Bill C-38 at this time.

Even looking simply at the short term, it's hard to understand how Bill C-38 will do much to deal with Air Canada's problems. The air transport market is going to be weak for some time. It's unlikely that there's much interest in injecting enough new equity capital into the industry at this point to make a significant difference in Air Canada's finances.

While we're not overly impressed with current Air Canada management, putting Air Canada's ownership into play at this time is most likely to be a costly distraction at a time when the airline has not yet recovered from the heavy cost of the last takeover battle.

The air transport industry needs stability, not more disruption at this time. Instead of fiddling with Air Canada ownership legislation, the government needs to be stepping in to provide a clear policy direction for this sector. We need a regulatory framework that lays out service requirements, provides for equitable fare-setting, and provides assistance to workers in this sector.

We also want to reiterate to this committee the importance of resisting proposals for expanded foreign control of Canadian air carriers or cabotage rights for foreign carriers, which would simply undermine our weakened domestic carriers without providing improved service to Canadian communities.

We are concerned about the government's failure to respond to the needs of the workers in this sector. We have jointly put forward a proposal for government assistance to mitigate the impact of structural change in this sector, including early retirement inducements to older workers, a work-sharing adjustment, and training assistance for younger workers. The government has not yet come forward to help the affected workers in this sector.

Finally, we call on this committee to urge the government to admit the failure of its passive policy on air transport. The market will not solve the problems of this industry and meet the needs of Canadians, Canadian communities, and Canadian workers.

The government must take an active role to give a positive direction to this essential industry. Thank you.

Mr. Richard Balnis (Research Officer, Airline and Federal Jurisdiction, Canadian Union of Public Employees): Good morning.

CUPE and its airline division represents about 11,500 flight attendants across Canada on a good day. We represent them at carriers such as Air Canada, Air Transat, Canada 3000—including Royal and CanJet—First Air, Calm Air, and Cathay Pacific in Vancouver.

I represent CUPE today. I do not have anything in writing, but I do pass on the regrets from Francis Bellemare and Rob Limongelli of our airline division, who cannot be with you today. In fact they are at the Canadian Industrial Relations Board today with several hundred of our members who are trying to save their jobs because Canada 3000 has made an emergency application to the CIRB to de-merge itself from Royal and then to terminate Royal flight attendants and pilots only. So Francis and Rob are there with our members. It appears that those members have become the price of federal government financial support.

I also pass on the regrets from our Air Canada leadership, who are meeting today with Air Canada management in Toronto to mitigate about 700 remaining layoffs. I am substituting for them today because they are not able to be here.

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We do support the CLC position and that of the machinists. What is being proposed today is not a long-term solution for the industry. It may be of benefit temporarily to Air Canada to convert debt to equity and try to rebalance its balance sheet, but without any individual share ownership restrictions, in our view, Air Canada will then be a plaything in the hands of future corporate manipulators.

We are also concerned that the policy vacuum continues. The government believes it can continue to rely on private sector solutions. We had one of those solutions in 1992, another one in 1996, another one in 1999, and we are here today looking towards another one in 2001. Our members have been victims too often of such private sector solutions. We also have a concern when the other shoe drops: increased foreign ownership.

All of these issues have been the topic of many submissions to you over the years, and I've brought them here. Regrettably they've been ignored.

I look forward to any questions you may have on my representations this morning.

The Chair: Thank you very much, Richard.

Is there one more intervener?

[Translation]

Mr. Serge Portelance (national representative, Automobile, Aerospace, Transportation and General Workers' Union of Canada): Good morning. My name is Serge Portelance. I will be making my comments in French.

I am the representative of the National Automobile, Aerospace, Transportation and General Workers' Union of Canada, CAW-Canada. I am replacing Gary Fane, who was to be here this morning, but who was unfortunately unable to come because he is held up in Vancouver.

As far as the airline sector is concerned, we represent close to 10 000 employees of Air Canada and 1 000 to 1 200 employees in the regional carrier service.

Since 1985, the CAW has actively participated in the ongoing debate over Canada's air transport policy, and it has done so in all kinds of forums. It has taken position on privatization and on the Open Skies policy, to name but a few examples. Several briefs have also been tabled in the area of concern to us here.

Since then, one thing has clearly come to the fore: all of these policies put in place over that period had little to do with the promotion and development of air transport in this country. I would even say that it is the opposite that happened. Tremendous damage has been done to the sector. For evidence of this, one need only look at the wave of mergers or company streamlining that has occurred.

The tragic events of September 11 grant us the opportunity to review these policies that apply to the airline sector. It is clear to us that the removal of the 15% ceiling on individual ownership of shares is not the solution. But we are not opposed to it. We neither agree nor disagree with it. We are not against the 15% limit nor are we against its elimination, but in our view, that is not the solution.

If ever there were talks about abolishing the other rule, that of the 25% limit on foreign ownership, that would have to be discussed in cooperation with the unions and all of the union players. In that regard, I support my colleagues from the AIMTA, the machinists and CUPE, in their position, as well as that put forward by the CLC in its presentation.

I might add that in our view, the voluntary or forced acquisition of Canadian Airlines International, also called CAIL, was a serious mistake, both on the part of Air Canada and on that of the government. It was carried out in conditions that are to us obscure, because we were not involved.

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I believe that we must ask the government to take this opportunity to involve itself, both financially and administratively, in Air Canada's internal workings so as to control what takes place within this company and ensure that it remains a Canadian company, for the benefit of the public and for that of workers.

Thank you very much.

[English]

The Chair: Thank you very much, Serge.

Since there are so many witnesses, when we ask our questions, perhaps the person asking the question could direct...or if it's a general question, each one of you in turn, by sector, may answer. But try to keep your answers short so that we can have as many questions and answers as possible.

James.

Mr. James Moore: Mr. Yussuff, you said in your presentation to this committee that you didn't believe the cap should be 15% and in fact it should be 10%. I'm curious, do you think that 10% or 15% cap should apply to all carriers, and in fact Mr. Beddoe should be stripped of his share ownership?

Mr. Hassan Yussuff: I think the argument, in terms of lifting the limits right now, is what is that likely to do to put Air Canada in a more viable financial position.

Mr. James Moore: That's not the question, though.

Mr. Hassan Yussuff: I understand that's not the question, but I'm still the one in charge of giving you the answer.

I think it is important to recognize that the limit in terms of one sharehold in this country, especially in Air Canada specifically, we believe has some consequences for how this airline could become more viable. While we recognize that the government's strategy is to try to figure out how to get more cash into Air Canada, we don't see this as a solution.

In terms of other airlines...it's hard to say what is the appropriate policy mechanism for other airlines at this point in time; we're not discussing them. If this was before the committee in terms of a debate, then our position would be different. But this was a once public airline now privatized, and of course the reality since they've been privatized is that there have been a lot of difficulties. We have made presentations to this committee in the past about what we believe is the solution, and of course that has not been listened to. We're here again today arguing some of the same points. We believe we'll be back here again within a year or six months or two years from now still dealing with the same question: how to make Air Canada a viable carrier in the context or absence of regulation in this country.

Mr. James Moore: Mr. Erlichman, you mentioned that the panel and yourself—not that you presume to speak for everybody on the panel, but you said you weren't happy with Air Canada's management, that they hadn't done an adequate job and that you do call for more regulation, but specifically you criticized Air Canada's management. Without lifting the 15% cap, how do you propose Air Canada's management be changed?

Mr. Louis Erlichman: We're not sure that lifting the 15% cap changes Air Canada's management, frankly. The real constraint obviously makes it more difficult for a single person to take the carrier over, though I'm not sure whether Bill C-38 affects things like the poison pill, which might affect whether anybody could take over Air Canada anyway.

Frankly, while we're not enthused about Air Canada's management, which I already said, that's not the key problem. We can sit down...and I guess we heard a previous witness say, well, is it the fault of Air Canada's management, is it this, is it everything else.

There is a whole number of reasons why the air transport business is a mess. At a certain level you're starting off with the fact that this industry was deregulated back in 1984. We expected the market to sort things out and the market hasn't sorted things out.

So simply changing Air Canada management, while it might provide some people some pleasure to replace current management, is not an answer either. On its own, that it's just a matter that there are lousy managers at Air Canada, that's not the key problem, the fundamental problem, in the air transport industry.

As I say, I think we've said that this is on the margins. This is not really a solution. It's kind of a marginal question in terms of the ownership limits in the short run and certainly in the longer run. It's not going to make a heck of a lot of difference in terms of the way Air Canada or the air transport industry work.

Mr. James Moore: I agree. I made that presentation in a different direction last night to the minister himself.

I do want to ask one question of Mr. Yussuff. You made the very broad statement that the free market is not an answer to the air industry problems and that solutions will not be found in the free market. Can you de-rationalize therefore then the reality of WestJet?

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Mr. Hassan Yussuff: WestJet doesn't have all the requirements Air Canada has as a national carrier. It has lucrative routes that it has chosen to fly into. It doesn't have to deal with the whole question of connections in regard to getting from other cities, because that's not a major concern. Another reason is that a non-unionized carrier doesn't pay the same wages and benefits. There are some requirements of Air Canada to service small communities, which we think are essential.

In that requirement you have to deal with an airline to meet these needs. In that regard, if you are required to service small communities, which I think is important, you're required to provide bilingual services as a national carrier. In addition to that, running a national carrier, making connections with people getting from one place to the other—there are some inherent problems as to how that needs to be taken care of. Without the regulatory regime we're not going to see this airline bottom line improve in the short term and the long term.

To go back to your question, the response from the government since we've been dealing with this crisis, whether it's today or in the past, has been, let the marketplace take care of it. We've been watching and waiting and we're still continuing to deal with a crisis. Unless somebody has some magic solution here that we can be wholly accountable for, we don't believe this current proposal is going to solve the crisis in the airline industry. It is not going to provide some stability to the communities and to the workers who are suffering enormously every time we go through one of these restructurings.

Mr. Louis Erlichman: Could I just say something about WestJet? WestJet is the one carrier that has copied the Southwest Airlines formula in the U.S. So far, WestJet has not gone through a market downturn, right? There are a number of carriers that have been relatively successful in the post-deregulation period for a year, two years, a few years. Leaving aside the question and the fact that they're not an international carrier, they do the Southwest model point to point.

Frankly, the Southwest model is not non-union. Some 85% of the Southwest workforce is unionized; we have about 12,000 members at Southwest. So in fact there is no requirement for it to be non-union to be a successful, low-fare carrier.

Something happens to airlines. They keep having to grow. Then their market turns down and they get into trouble. So far, WestJet seems to have survived reasonably well. Come back five years from now when we've gone through a market downturn.

It's the same way that Southwest Airlines in the U.S. is the one post-regulation success story. Even though they were there before deregulation in the U.S., they were the exception that proved the rule. Everybody else went down. Southwest is very successful and they are still the fifth or sixth biggest carrier in the U.S. They are still a relatively small marginal player, as WestJet is here. They are important.

I think you are going to have to wait. Before you say that WestJet is the miracle answer, wait another five years and see where they are then.

Mr. James Moore: I didn't say that.

You list the regulations Air Canada has to comply with because it's a national carrier, and then you say it's failing, but you want more regulations. Then you have WestJet, which doesn't have the regulations and it's succeeding. It's an awfully interesting argument for greater regulation.

Mr. Louis Erlichman: We're not arguing that Air Canada is failing because it has too much regulation. We never suggested that. We certainly took the position that they should never have been privatized.

Mr. James Moore: That's the alternative x factor that Air Canada has that WestJet doesn't. Among them, that is a principal one.

Mr. Louis Erlichman: I rarely agree with Mr. Kavafian, but I think he is probably right in the sense that, for the most part, the regulatory requirements on Air Canada are not what are causing its problem today.

Mr. James Moore: In the Air Canada Public Participation Act, of course, it is mandated that no more than 25% of Air Canada shares can be owned by foreigners.

I'm just curious here. Given that the same prohibition is in section 55 of the Canada Transportation Act, would it not make sense, therefore, just for the clear sense of eliminating legal duplication, to eliminate that limit in the Air Canada Public Participation Act, and even perhaps to go so far as to eliminate it in the Canada Transportation Act?

Given the Convention on International Civil Aviation, the reality is that if a foreigner were ever to come in and buy more than 50% of the shares in Air Canada, if it broke up the company, it would kill the goose that laid the golden egg.

In that sense, the whole value of Air Canada is its domestic routes and the bilateral agreements that have given it its transborder international routes. The whole argument for having a cap on foreign limitations is totally redundant because every single market force that would make one want to buy Air Canada kills the argument for having a cap.

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Mr. Louis Erlichman: Then why take it out if it's not a problem?

Mr. James Moore: It has not been in.

Mr. Louis Erlichman: Why change it if you're making the case that market forces wouldn't increase foreign ownership over that 25% level, in any case?

Mr. James Moore: It's quite the opposite. They would. Why do you have to restrict it? They wouldn't sell off the carrier.

Mr. Louis Erlichman: The issue is foreign control of the dominant Canadian carrier. The carrier has two-thirds or perhaps more of the Canadian market at this point. And the risk that involves is the issue.

[Translation]

The Chair: Mr. Laframboise, from the Bloc Québécois.

Mr. Mario Laframboise: Thank you, Mr. Chairman.

I will begin by going back to something that was mentioned by the previous witness. You heard and listened to Mr. Erlichman. There is at present a whole lobby surrounding the minister of Transport, saying that we should let the forces of the free market prevail. In Bill C-38, the purpose of which is to make overtures to investors, there is a feeling that the free market will be left to its own devices. That is not what is necessarily worrisome. What is worrisome is all of the talk we are hearing today about Bill C-38, as well as the talk we heard yesterday from the minister.

The previous witness stated that we should not be looking just at that, but also at abolishing the limit on foreign ownership and removing restrictions, namely those relating to maintenance. It seems that Air Canada has a milestone round its neck with its requirement to do maintenance in three cities, namely Dorval, Winnipeg and Mississauga.

Obviously, in the end, he told us very candidly that the government should not come to the aid of airline companies, whoever they may be, that the situation must be handled the way it was in the case of Canada 3000, in other words that we must wait until the company runs out of funds before intervening. The minister stated yesterday, in his speech, that he had sensed there were cash flow problems. Here is what he stated:

I immediately announced that a loan guarantee would be granted to Canada 3000 under certain conditions, such as the injection of capital by shareholders, capacity and manpower reductions...

Thus, the aim was to reduce staff. The previous witness stated that that was, indeed, the price to pay. All of those who work in the airline industry must resign themselves to this fact, because as of today, a good many of them will lose their jobs. That is what he said. This is one of the conditions that the minister set out for Canada 3000. That is what he did. Earlier, we were told quite candidly that we were to expect that Air Canada would run out of funds and that it would have to carry out a major restructuring before it would get any help and that, most of all, it would have to have cut its staff. Despite the fact that there are provisions, in Bill C-26 and in the Act of 1987 or 1988, protecting jobs, we are awaiting an unprecedented attack on the rights of workers in the airline industry. The entire system is being attacked and people are bragging about it. My colleagues opposite are bragging in the House of Commons, saying that we have one of the highest performing airline industries in the world, but we are destroying more of it every day.

It is the whole context surrounding this that worries me. It is not the fact that Bill C-38 has been tabled. We can accept the idea of free-flowing capital and of shareholders wishing to exercise some control over the board of directors. You are perfectly right. We will change the director, and it will be all for the best if that can orient things, but there is a reality: the Americans invest and support the airline industry, whereas Canada does not.

This is a social choice we are making, and we are doing so to the detriment of workers. I believe that the human capital of the airline sector should be protected. The government has a duty to bring forward not only Bill C-38, but also assistance measures. The minister and all of those present here are telling us... In the case of the previous witness, it is very clear: we must wait until each one of the airline companies runs out of funds, is on the brink of bankruptcy and, most importantly, has restructured its personnel before intervening.

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There is therefore nothing good in this for us, who represent workers. There is nothing good coming from those who are advising the government and who appear before you here. I believe we will soon witness unprecedented difficulties and destructurings throughout the Canadian airline industry if something is not done quickly and if you do not all speak out loud and clear with one voice. Forgive me, but they are taking you for a ride. What are your views?

[English]

Mr. Hassan Yussuff: Again, dealing specifically with some of the issues in regard to workers, all of my colleagues have made the same arguments to the minister.

We reiterate in our brief that there are workers in this industry who would leave and vacate their jobs if there's a package that would allow them to retire, to leave early. That would provide some stability for the carrier, in terms of Air Canada, as they continue to deal with the downturn in traffic under-capacity, but it would also retain young workers who have the skills necessary to service the industry in the short and long term. That requires some government assistance.

We see from the United States' involvement in dealing with their carriers that the U.S. government is prepared to put some resources to assist.

So, yes, of course, we recognize what we're going through, but we're not going to simply abandon it. And I think these arguments need to be made. We believe the government does have some obligations to deal with what's happening right now in the airline crisis as a result of September 11, because all the carriers are being affected, to a large degree. We believe this would provide some ability for the airline to have some stability in terms of its capacity, but more importantly, it will also position the airline for the future. As traffic and the economy improve, workers will be better there to serve the country.

Again, the government can be a passive player. Throughout the world the entire airline industry is going through some challenges and other governments are grasping to figure out how to solve this crisis.

As a large country, we're unique in this category. We want to ensure all our communities are serviced across this country, and we're not going to continue to have that unless we have a national carrier like Air Canada that is prepared to provide that kind of service, unless we know of some other way for this to happen.

With regard to the issue of maintenance, what do you need to have, three or four centres? These are of course important in terms of recognizing that we live in a very diverse country and in very diverse provinces. The maintaining of centres across this country is a small cost for Air Canada with regard to dealing with their financial problems. So I think it's false to suggest that if you get rid of all these maintenance centres, somehow Air Canada will become a viable carrier overnight. That's completely ridiculous and it's silly to be making those arguments.

The fact is workers are going to be harmed by this restructuring, and we believe the government has a responsibility to address this. Without doing so, we're going to be back here before this committee, in the short term, making some of the same arguments and asking what your policy position is then to deal with the next crisis that's coming.

[Translation]

Mr. Mario Laframboise: Allow me...

[English]

Mr. Richard Balnis: I was wondering if I could just add a comment, because you raised the very important question of the role of government in relationship to protecting workers.

At two of the carriers where we represent members, Canada 3000 and Air Transat, when they were forced to announce layoffs, we went to them and said there was an opportunity under the employment insurance work-sharing legislation to share work. We did that with Air Canada. It took them a little time to get around to that, and we weren't able to mitigate all the layoffs. The clear sense we had from Air Transat, and in particular Canada 3000, was that the federal government was looking for body bags, in other words, workers to suffer before they would provide financial assistance.

So just as Hassan was saying, the government was actively looking to sacrifice workers rather than assisting them.

With some reasonable assistance at Air Canada, we can provide packages for senior flight attendants to leave...we would retain the juniors, the bilingual element, the route language capability. And at other carriers we can work out other schemes.

It looks like those management people are saying, well, we can get more money if we sacrifice you. And that, sir, with respect, is reprehensible.

I was here last night watching the minister talk about his concern over protecting workers and Bill C-26. Then in the hall, while you were in camera, he spoke to the media. When a reporter confronted him and asked him whether he knew what was happening at Canada 3000, at Royal Airlines, whether he knew that the flight attendants and pilots were going to be fired, he said, that's the price of restructuring.

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I think that is not a very positive attitude on behalf of government, because we have solutions in dealing with it and we could humanely deal with this crisis and restructure the industry in the way the minister wants without all this untold suffering. I don't understand why the government seems to have targeted us on this one.

I just wanted to intervene because Canada 3000, in particular...that is a young workforce that we could find solutions for, and the management there is almost coming in and saying, we have the dollars but we have to sacrifice you. I cannot understand why a government would do that.

The Chair: You have ten minutes. Do you have one quick question?

[Translation]

Mr. Mario Laframboise: What is difficult to accept for an industry that was flourishing is that the government is not coming forward with an assistance program, if only to restructure employability. You are even being forced to beg for your work-share programs, and help only comes in dribs and drabs. I cannot get over this.

The message we should give investors is that there is going to be restructuring and that we are going to support part of this restructuring. That would get investment going again. If that had been done, we perhaps would not even need C-38. We must immediately let investors know that we are going to support restructuring in the industry, but that is not what is going to happen. Everything is done in dribs and drabs and especially, as you yourself said, on the backs of employees. It is the minister who said that one of the conditions is staff reduction. I simply cannot get over that.

Mr. Portelance, would you care to comment?

Mr. Serge Portelance: I believe that Mr. Laframboise has really hit on the important points. It is true that it is the workers who are going to get fleeced. I believe that that is what we are witnessing. All the unions are doing is trying to find government programs that will soften the blow, that will alleviate the present crisis.

In all of this, we are forgetting about the quality of jobs. We are forgetting about the type of work these people have been doing for years throughout the country. We have good quality jobs there and we need people with good potential to fill these jobs. We seem to be forgetting that.

We also seem to be forgetting the fact that the policies of the past have always been short-term policies. That has not changed. We always look to the short term and do not try to sit down with the main stakeholders, who are the unions, to try to set up long-term policies in order to resolve the crisis once and for all, so that we are not faced with having to redo the same thing three, four or five years down the road, as my colleagues were saying. I believe that the unions have set their hand to the plough to attempt to resolve this crisis in a way that is satisfactory for their members, but not satisfactory for shareholders or for some company that might want to stake a claim in this.

I believe that the government should jump on this opportunity to regain some control over the situation and to put airline companies back on the right track.

Mr. Mario Laframboise: Thank you.

[English]

The Chair: Bev Desjarlais, NDP.

Mrs. Bev Desjarlais: First, thanks very much for appearing. We know it was on fairly short notice that you all got your presentations together and came before us. We had some concern that there was going to be a bit of an attempt, after the opposition parties agreeing not to hold things up in the House to get this bill before committee, not to have any witnesses appear, so we are truly pleased that you are able to come on such short notice.

Mr. Balnis, on your comment of overhearing the minister last night, I guess that's one of the bad things about in camera: we miss what happens outside. Your comments that the minister took that approach is no surprise. I am disappointed that he's quite so blatant. Those statements have been made in the House as well, that in order to get funding there has to be restructuring and a lowering of the workforce. Quite frankly, I guess we see different ways of going about doing that. Certainly, your comments overhearing the minister I think will be reflected outside of here as well.

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I do want to make a comment, Mr. Portelance. You made that famous statement that quite frankly I have to admit even I'm annoyed when I hear it, that Air Canada was forced to take over Canadian. There was no forcing of Air Canada to take over Canadian. On numerous occasions I listened to Mr. Milton talk about how wonderful it was going to be—how he was going to do all these wonderful things. Air Canada did not have to take over Canadian. They made that choice because they saw an excellent market opportunity. They saw the opportunity to totally control the industry. Quite frankly, there are many of us who believe he just blew it, that he didn't do things properly, and that his efforts to go gung-ho and take over literally everything have blown up in his face. We need to look at a different way of approaching it.

From the perspective of reregulating, there's always that concern of going back to total regulation, and the New Democratic Party and the groups representing labour are often on the same side on that. The others around the table aren't usually, and we recognize that. But I think in our positions that we take ideologically, we sometimes lose sight of not recognizing that we need to have a balance. Total deregulation hasn't worked any more than probably over-reregulation would work. We need to have that balance, and we shouldn't fear the fact that we need to have some regulation. I mean, laws are regulation. Laws related to criminal activity are regulations. We recognize we need those things to have society move along.

I would hope that my colleagues in the House will recognize that there needs to be some reregulation or we will continually be back here. In my short time as a member of Parliament, I'm already amazed at how many times we've rehashed this and the hours we've spent with those arguing that the market is the only answer, that it's going to do the trick. I recognize that hasn't been the case, because if you're in some of the smaller communities in Canada, it takes a long time, if ever, before you get the benefit of lower cost and more service or even continuing service of limited degree. I think we need to recognize that we have to get beyond the fear of the word “regulation”.

From my perspective, the one area we need to look at as far as regulation goes is regulating domestic capacity. By doing so, we wouldn't have those situations that I think we're going to have with Tango and WestJet. I think we're going to see the same story play out with Tango and WestJet as we did with Canadian and Air Canada. We're going to see that dog-eat-dog kind of approach there, and Tango is going to try to put WestJet out of business and WestJet is going to try to survive. They're a smaller company and, as has been indicated, they haven't necessarily seen a market downturn.

But I will say that even Mr. Beddoe has commented that they're foreseeing a bit of a downturn with WestJet in the upcoming months. They're foreseeing they may have some problems. Right now, they are the only profitable airline, from what we can tell.

I would just ask for your comments. Is there one particular change you would like to see that may make a difference, if we couldn't go back to the total regulation of service to all the communities? I should comment that this ends as of the end of December 2002. There will not be that maintained service to all those areas in Canada. We're going to leave it up to the market to fall into place by the end of December next year, and then we'll see whether or not service is maintained. If there was one particular area that you would like to see changed that might make a difference, what would it be?

Mr. Hassan Yussuff: In response to your comments and specifically your question, there's no question that in the context of the Canadian airline industry, as we have seen over the last decade, we've gone from one crisis to the other. As to where some of the origins of this are, I think you can trace it back to the beginning of leaving it to the market to determine.

In answer to your question, it is important to address the question of service to small communities. This is a vast country. We can't simply say to some communities, just as the luck of the draw, you're not going to have the right to have service. I think that's simply unacceptable. Members of Parliament who are here representing those communities would not accept it if we said, sorry, your community is not going to have representatives any more because it's costly and it's ridiculous anyway. Not too many people would accept that.

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So in a country that is so vast, where people rely on some form of transportation to get from one place to the other, I think it's critical for us to recognize that it's not a question of simply saying this is not an element. This is part of what Canada is, and I think we have to bear that in mind. If we really want to be a national country, then we have to ask, are we going to provide service to those small communities, and how is that going to happen without some form of regulation?

Going back to the points you make, certainly in terms of domestic competition among the airlines, they certainly have had a devastating effect. We have seen it with Canadian and Air Canada. Now we're seeing it with WestJet and Air Canada. We'll see it with Tango and WestJet. Who knows what else is coming on stream?

The reality is, as we were discussing this morning, what's the difference between predatory competition and hard competition? Somebody ought to define what that exactly is. The ability of your competitor to put you out of business is maybe a very fine definition, and I think nobody knows what the answer is, including the Competition Board. No one is able to define what this is right now.

At the end of the day there is going to have to be some form of regulation in terms of how much domestic competition we're going to have in the airline industry in this country. It is important to put it in a broader debate. What kind of an airline industry are we going to have if we simply allow the marketplace to determine who will survive and who will ultimately be the champion of air travel in this country? What we have seen so far are workers and communities continue to be at the scrap heap of this debate, and I think that's an unacceptable form of public policy.

The government ought to be very clear and consistent about how they see us getting out of this mess in the short and long term by following some strict guidelines. That is to say, we have some solutions. We recognize it's not going to yield a result overnight, but if we stick to it in the long term, it will yield results.

In this area it's critical for us to address service, of course, in terms of small communities, and of course more importantly to ensure that as a result of September 11 we have learned something from this devastation. Even the most conservative government in office in the United States recognizes that you have to have some degree of regulation back in air traffic, airport security, and most airline industries. I think we can learn something from this.

Hopefully you and your colleagues, in your deliberations and in your final report to Parliament, can reflect that we need to go farther and that this bill is not going to solve the crisis for workers and communities across this country.

Mr. Richard Balnis: If I could, I would just like to add that I detect a contradiction in the members of the governing party, particularly when they're from small regions. On the one hand, as the minister said last night, there are certain regions of this country that have suffered and have seen reduced or poor service.

We made a submission to this committee on May 1, 2000, where we talked about Bill C-26 and about the fears of permanently reduced or no air service in the Yukon, the interior of B.C., Saskatchewan, northern Ontario, the north shore of Quebec, and the Maritimes. We suggested at that point that there is a long-term need for an essential air services legislation based on the U.S. model.

There's a contradiction here. I was listening to Mr. Fontana last night, and even the great city of London seems to have deteriorated air service. Regrettably, he's not here, because I would love to chat with him about that. I think his answer is more market—let the shareholders decide not to fly to your city. This is a contradiction that a number of representatives from those regions of the country that are suffering are wrestling with. How do you get over that? We did make a proposal May 1, 2000. I don't think it even made your final report.

So there are ideas out there, particularly on the issue of small communities and the destructive capacity. That's the way the airline industry is—you do go to war; you do try to waste capacity. Regrettably that is the problem with the industry, given their pricing. If you have 110 seats and the 111th is empty, what's the cost of filling that seat—$20? Then sell the fare for $21 and you're laughing. You're $1 ahead.

For another carrier that's predatory pricing. But that's the nature of the airlines business, when you have high capital investment and a low marginal cost to fill that extra seat. You're not coming to grips with it, and you will see it. We've gone from, what, a ground carrier to two carriers that went to war, to a monopoly, now to two carriers, now perhaps Canada 3000 in dire straits? Where is it going to end? We keep coming back every two years, unfortunately.

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The Chair: Are there any more questions from the committee?

Gerry.

Mr. Gerry Byrne: Richard, you're familiar with this enabling legislation, the essential services legislation, in the U.S.; I'm not. Would you be able to forward to the committee any information you have about that particular piece of legislation and any background material?

Mr. Richard Balnis: I can do that. I'm sure your research staff can access it. I have a feeling we'll both go on the website trying to find it, because it's U.S. legislation.

I am familiar with it; it uses an awful word, “subsidizing” a carrier to provide service to those communities that would lack it under certain criteria. The “r” word is bad. Sometimes the “s” word, “subsidies”, is a bad word, but that's how you do it in the U.S., the home of the free market. You don't want to cut certain communities off the national network, because they just die, particularly if there is no bus or train.

I can endeavour to find that, but I suspect I'll be finding stuff off the website. I can do that and then provide it to the clerk, as you wish. I don't know if your research staff might be quicker than I would be.

Mr. Gerry Byrne: The only thing would be if you could provide, in addition to the actual straight fact of the legislation itself, some analysis as to how it should or could be applied in Canada. Of course, our research staff are not practitioners in the field itself, but you are.

Mr. Richard Balnis: I will endeavour to do that. I think I know a good source that can actually model the impact. A particular professor in the United States whom I've spoken to has made recommendations there. I think I can give him a call and perhaps he'll be able to provide you with the U.S. experience.

In a certain sense, regarding the complaints I've heard before the committee of certain parts of this country, Québec, northern Ontario, Newfoundland, and other parts—Saskatchewan losing direct non-stop service—that's the way deregulation works. You hub and spoke it. If you don't have the traffic, too bad, so sad, we're not going to fly there. What's the answer to that? I don't think it's more market.

Mr. Gerry Byrne: Thank you.

[Translation]

The Chair: Mr. Laframboise.

Mr. Mario Laframboise: Thank you, Mr. Chairman.

I am very pleased to have you before us discussing Bill C-38 and all sorts of interesting things. That is reality. Yesterday, the minister, speaking about Bill C-38, described to us all sorts of positions he has taken with regard to the airline industry. He is therefore the one who, upon discussing Bill C-38, opened up a much broader debate than the simple issue of share ownership limits.

What we must help our colleagues from the government side, from the federal Liberal Party, understand, is that the situation was already becoming intolerable before September 11 and that those events aggravated the situation. I am having difficulty understanding why the government did not take advantage of the opportunity, as did other governments in the world, to draw out for the public the airline industry's problem. For example, it could have used the opportunity to create early retirement and work-share programs. Such programs would have been well received by the workers and especially by the general population in these catastrophic times. No one in Canada knows that the airline industry is in serious difficulty.

My problem is that the minister is trying to have us say that the September 11 events are one element among many, whereas it is these events that triggered the catastrophic situation we know.

Have you done an analysis of what early retirement, job sharing or other programs might have cost? Has there been an evaluation of what it might have cost the government to quickly set up a program? Have you been able to evaluate this situation or is it still too early?

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[English]

Mr. Hassan Yussuff: Actually, I'm glad you asked. We have background information here that we presented to the various departments. We were discussing the package at that time. We believe it would cost $117 million to help workers who are seeking retirement and adjustment, and a number of other things that would basically eliminate the kind of crisis that workers and their families are dealing with at the present moment.

We saw it as a minimal cost. We figured it out and put it on paper. We'll give you a copy again of this document, because it has already been presented to the various departments with regard to the restructuring and the layoffs and the imposition of layoffs that airline companies are seeking from our membership across the country.

[Translation]

Mr. Mario Laframboise: I would appreciate your tabling that with the committee. Would that be possible? Yes, and you are going to get a copy to us.

Does that include the work share program? My hope is that the situation in the transportation industry will only be a temporary one. In the meantime, you are discussing, and all of the companies should in my view be discussing, a work share program that would allow you to get through these difficult times. I am hoping that this will not last longer than a year. Have you done an estimate of how much the work share program might cost overall for the industry? Is that included in these numbers? Or is it separate?

[English]

Mr. Hassan Yussuff: Yes, all that is in here right now.

Similarly, Air Canada, which is one of the major employers, also had the capacity to look at these numbers with regard to what it would provide for them in terms of changes.

Mr. Richard Balnis: I would just like to add that in terms of the work share, credit needs to be given where it is due. Minister Jane Stewart and her staff have expedited the work with our union in trying to do work at Air Canada, Canada 3000, and Air Transat to develop work-share programs.

The way the work-share programs work, you have to go in with a joint application. In other words, the union has to deal with the employer, and in certain cases the employer was unwilling to bring forward the plan, so her staff could not give us access to the work-share.

But I'll tell you, a number of staff worked many weekends for all these unions to make sure we got the work-share programs in place. For that we are grateful, and for that the minister needs to be commended, because her DM and ADMs did a lot of work to expedite the processing.

Unfortunately, as I mentioned, at Canada 3000, the carriers would not talk to us about any mitigation programs unless you took a pay cut; if you don't want to talk about a pay cut, and take a 5% or 10% pay cut, we're not going to mitigate your layoffs. We said no, we want to mitigate the layoffs. It's no cost. It's EI; it actually saves everyone money. No, you have to take a pay cut.

After that discussion, they filed the emergency application to the Canada Industrial Relations Board saying, Royal is no longer merged; we're firing you.

So on the specifics of the work-share program, it can be made to work when all the parties are willing, and I'll tell you, Minister Stewart has been willing to make the program work, and credit has to go to her. Our national president and other ranking officers met with her and she was no-nonsense, straight to the point: here's what I can do for you and here's what I cannot do for you. But what she could do, she did very well.

[Translation]

Mr. Mario Laframboise: Faced with this situation, are you suggesting outright that there should be some legislative process forcing employers to accept work share? If it does not cost any more and if it makes things easier for everyone until the industry rebounds, I believe that the government should somehow make known the reluctance of employers and force them to participate in work share programs, as is the case with employment insurance, which is a compulsory program. If a union asks for such a program, then it should be mandatory.

The government has a responsibility. Instead of giving us Bill C-38, it could force employers, through legislation, to participate in work share programs. What are your views on this?

[English]

Mr. Hassan Yussuff: We would also link loan guarantees to employers actually sitting down with the union and working out the work-share program, because again, we have recognized that should the industry pick up, workers are going to need to be back in the industry. You don't want to lay people off permanently and then have to deal with skill shortages and all the things that are going to be necessary. So if a company is going to get loan guarantees from the government, there ought to be some strings attached in terms of dealing with the workers' concerns in this capacity.

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Once they get the money, as we've seen with Canada 3000, they're saying, wait a minute, we don't necessarily have to conform to any requirements because there's nothing requiring us to do that. So it's either out of goodwill or political pressure, through the negotiations of the union, that they do it, but there's no requirement to do it.

There should be some requirement or strings attached to loan guarantees to companies that if you're going to get money from the government, you have to sit down with the union and work out some resolution. We have gone down this road regarding concessions and we're not doing it any more. We've done it with Canadian, and I think people have learned that all you're going to do is have people come back to the table and ask for more and more. That's not going to solve the crisis of the airline industry.

[Translation]

Mr. Mario Laframboise: You are perfectly right. In his speech, instead of demanding workforce cuts, the minister could have demanded work share programs where applicable. That would have been simple and it would have forced the companies to negotiate with the unions. It may not have required any legislative changes. If the government, before helping out Canada 3000, had forced the company to sit down and look at a work share program, I believe that it would have made things easier for everyone.

I do hope that my colleagues are taking notes and that they will be reporting to the minister what should be reported to him, Mr. Harvey.

Thank you.

[English]

The Chair: Thank you, Mario. I think you've just rounded it off by making that statement.

Are there any further questions of our witnesses?

I would like to thank the witnesses for being here today. Your input is important to the work of the committee, and we appreciate it. Thanks for coming.

I'll suspend for two minutes. We'll have a quick talk about our work plan, and then maybe we can get to the House a little earlier. The meeting is ajourned.