TRAN Committee Meeting

STANDING COMMITTEE ON TRANSPORT

LE COMITÉ PERMANENT DES TRANSPORTS

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, October 21, 1999

• 0936

[English]

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

Pursuant to Standing Order 108(2), this is a study on the future of the airline industry in Canada. We welcome this morning to our committee Professor Marc Gaudry from the University of Montreal. He is with the economics department, research centre on transportation.

Welcome, Mr. Gaudry, to our committee. We welcome your presentation. We've asked our witnesses to present within the timeframe of 10 to 12 minutes so that there's plenty of time for my colleagues to ask you questions.

When you're ready, Mr. Gaudry, please begin.

[Translation]

Prof. Marc Gaudry (Economic Sciences, Research Centre on Transport, University of Montreal): Thank you, Mr. Chairman. I will be speaking briefly in French, then I will be happy to take questions in either French or English.

I'll start by making a few introductory remarks and then discuss briefly the importance of a merger or a well-conceived integration process. Finally, I will discuss how this merger, which I support, should unfold.

Firstly, by way of introduction, I contend that if Canada did not exist, our air routes would be nothing more than feeder lines for the large American airlines, with a few regional hubs. What's preventing this from happening right now? Clearly, it's our national structure, with the various safeguards in place to prevent our air routes from becoming mere feeders of U.S. hubs.

At the same time, the structure of our airline industry with its national restrictions provides us with an appropriate mechanism with which to oversee or manage a merger of our airlines. I think we have a window of opportunity and if we do not take advantage of it to encourage this merger, the opportunity will be lost. Therefore, the need for action is rather urgent.

• 0940

Secondly, what issues must be considered when we look at engineering a merger between the two major national airlines, Air Canada and Canadian? In my view, we must examine issues related to Canadian control or ownership as well as weigh various economic considerations.

In terms of economic considerations, first of all, there are explicit as well as implicit problems associated with government subsidies. Secondly, we need to look at the economic efficiency gains to be derived from a merger. And thirdly, we need to consider the issue of competition which arises every time there is talk of a potential merger.

Summing up, what approach needs to be taken in the next few years to ensure that we take full advantage of this narrow window of opportunity? If necessary, I'll delve into this further during the question and answer session.

In my view, we need to develop a mechanism with which to respond rapidly to any proposals put forward. I'm not simply saying that the situation is urgent because Canadian's financial health is tenuous. I'm saying that the situation has grown urgent because the window of opportunity available to us to acquire a viable national carrier that can withstand international competition during the next fifteen years is slowly narrowing.

We also need to consider whether the current legislative provisions enable us to address urgent issues as they arise in an adequate fashion. I believe something needs to be done to ensure that the offers, both current and future, put forward by various consortiums are evaluated and processed quickly. I also suspect that the Competition Bureau and even the National Transportation Agency find themselves in a difficult position when it comes to making decisions that involve, either implicitly or explicitly, treaties to which Canada is a party.

Theoretically, these institutions enjoy considerable latitude when it comes to conveying their wishes to the government, but in practice, when treaties to which Canada is a party come into play in their decisions, these bodies are not necessarily able to make the recommendations that are needed and that could be put forward if Canadian treaties with other countries were not involved.

That's about does it for my presentation. I'd be happy to elaborate on any of these points for you.

[English]

The Chair: Thank you very much, Mr. Gaudry, for your presentation.

We begin with Ms. Meredith, please.

Ms. Val Meredith (South Surrey—White Rock—Langley, Ref.): Thank you, Mr. Gaudry, for outlining for us some of the issues that have to be taken into consideration.

I'd like to hit the very last point you made. I heard you challenge that the Competition Bureau and the air transportation agency are in a position to deal effectively and properly with something like the merger we're talking about, the two proposals. Is that correct?

• 0945

Prof. Marc Gaudry: Yes, apart from a word change. It's the Bureau of Competition and the Canadian Transportation Agency.

Ms. Val Meredith: Yes.

Prof. Marc Gaudry: It deals with all modes, not only with air. They can deal with other modes. But on the substance, yes, you got me right.

Let's take the Bureau of Competition now. As I understand it, the commissioner formally has the autonomy, when a problem comes up, when a merger comes up, to say anything to the government. For instance, the commissioner could say “I think this merger is okay if this condition and this condition and this condition are accepted”—for instance, if this company gets rid of this sub-feeder and so forth.

In theory, the commissioner can also say “Well, it will be okay if you allow foreign planes unilaterally to come in and serve these and those points.” In theory, the commissioner can say that. However, in effect, the commissioner is saying the government should change the structure of treaties regulating air transport with these other countries, and it's a very uncomfortable position.

Think, for instance, of another quarrel that could arise. The commissioner is faced with a proposal to merge two firms in chemistry or some other area. Could the commissioner say “Well, the NAFTA is not really good enough for me. Just make it better. If you make NAFTA better, I'll accept the merger”? It's very uncomfortable. The commissioner could say “If NAFTA were different, I might conclude differently,” but the commissioner is not very likely to say “Well, modify NAFTA, subparagraph (c) and (d)—that is, renegotiate it—and then I'll recommend the merger.”

So I don't think it's a problem of principle. The commissioner and the Canadian Transportation Agency have lots of freedoms to say what they want. But if you have to deal very quickly, you need a guaranteed fast-track authority of the kind you have in trade negotiations, where you say, well, I won't go through all the mechanics now; I'll go quickly, and we'll see at the end if we accept it.

Secondly, in this fast track process, when there are issues related to treaties, you won't be able to deal with them without feeling uncomfortable about it. You won't be able to say, as an example, “I think this merger is okay, but allow Air France, SAS, and Thai Airways unlimited access to the following points in Canada. Then I think it will be okay; there will be enough competition.” That's getting into the nitty-gritty of the trade agreements, in this case the air trade agreements, of the bilateral treaties that Canada has with many, many countries.

Ms. Val Meredith: Then my supplementary question is, if not the Competition Bureau and the Canadian Transportation Agency, then who?

Prof. Marc Gaudry: There are many ways to deal with that. It's a problem of legislative design. That is, you could say the recommendations of these people would be subject to approval by the government, and government will give approval or disapproval within three weeks or something, because you want to be able to deal with things such as unilateral cabotage, for instance. If you want to deal with that, you're putting into question things that are really broader than the intended mandate of the commissioner. Is that a fair enough answer?

Ms. Val Meredith: Yes, because I think what you're telling me is there could be other vehicles for dealing with this sort of thing as we do with other agreements and deals: you do the deal and then you get an approval.

• 0950

Prof. Marc Gaudry: Yes, exactly. For instance, a very close examination of the Canadian Transportation Agency powers—which might involve their ability to get money fast, to study something very fast—may reveal that the powers have to be tightened up so that they can guarantee that people won't challenge the merger and it won't take two years to answer the questions asked.

Ms. Val Meredith: So then what you're saying is you can use those bodies, but you would have to give them new legislative authority to work in a much quicker manner and come to a conclusion much more quickly within their parameters.

Prof. Marc Gaudry: I'm saying I think a specialist should look at this as a problem of design and ask whether they have all these authorities to deal quickly with issues that involve Canadian treaties and how one should deal with this. It's a problem of the design of legislation, and it needs examination on its own due to urgency. If there is no urgency, things can go on forever.

Ms. Val Meredith: Thank you.

The Chair: Thanks, Ms. Meredith.

Mr. Fontana, please.

Mr. Joe Fontana (London North Centre, Lib.): Thank you, Mr. Chair.

I'm sorry, I had to leave the room for a moment or so. If perhaps Val asked the same question I wanted to ask, I'll have to apologize in advance.

This is a pretty significant document you've given us, so I haven't had an opportunity, obviously, to read it. Your summary didn't touch at all on these things, except for two things.

I won't deal with the process issue, but I want to ask you, what exactly do you mean when you say there's an urgency with regard to this niche market that's available? Why do you believe it's urgent that we move quickly to capture that niche market, and in the event that we don't move quickly enough, why do you believe it's going to be lost? I'd like you to deal with that first, if you could, please.

Secondly, you talked a little bit about Canadian control, and from glancing at this document, I know that somewhere in it you do talk a little bit about foreign ownership and effective Canadian control. I'm wondering whether or not you could talk just briefly about what kind of framework you think we need for foreign ownership.

Lastly, you talk about the economic questions, such as public subsidies, and the efficiencies to be gained by a merger and competition. I wonder if you could briefly tell us whether or not, in your opinion, a merger is positive for competition and the consumer, and whether or not those efficiency gains, if a merger occurs, will benefit the consumer.

I know I've put a few questions on the table, but if you could...

Prof. Marc Gaudry: Okay. Let me start with the first one, the urgency. What kind of urgency do I mean? I do not mean the financial urgency that Canadian is in trouble. That's part of it, and it's been around for a while. I mean the following.

Essentially, transportation as an area of activity has been progressively, slowly, over time, moving from being a very government-protected thing under the government's wings towards becoming a thing like everything else. If it became completely a thing like everything else, it would end up fully included in things like NAFTA or World Trade Organization rules. If it were like glasses—

Mr. Joe Fontana: It's a service as opposed to—

• 0955

Prof. Marc Gaudry: Yes, it's a service and it would go in there.

I think the trend line is that we're moving transportation out from the government's apron and slowly bringing it over towards being like everything else. I'll set the framework and then I'll try to be a little more precise.

Apparently the first part that's moving is the discussion on carriers. Various countries are saying we should open up the skies. They don't mean that simultaneously they want to do special things about air traffic control, say, in this case, or about airports; they mean, specifically, let's have a discussion on free trade in carrier services. So they deal only with this top layer of the three-layer cake of these transportation systems.

So there's a big discussion going on about free trade in carrier services. Now, the leaders of this are the United States, and they have decided that because their carriers are so efficient, they will try to force everybody around the world into an open skies or free trade agreement. You might find in the paper there some results produces by Professor Oum of UBC on the efficiency of carriers, and you can really see that there are huge differences between some of them. If you opened up the market, some would just go under. Unless they adapted immediately, they would just go under. So some countries don't want this, because it's clear that the top American airlines are extremely efficient and competitive.

The United States has been trying to pry open the lid on all these controls. Take Europe, for instance, the 15 countries of the European Union. The United States' position is, I'm going to take this screwdriver and I'm going to make a free open-skies deal with this one here, so I'll turn it here, and then I'll make another free open-skies deal with the second one. They've done a number of these deals since 1992. At some point, after turning a few and finding a way for the air for the passengers to leak in freely, even the big guys in the middle are going to be lost. The cover will just open, and then they'll have free access.

When they have free access, the value of our bilateral treaties will change a lot, because these bilateral treaties are little monopolies given by government, and they're worth a lot because they are few. If our neighbour, who has competitive paths between us and Europe or between us and the Orient, suddenly dramatically improves service and lowers prices because they're opening it up on both sides, people will more easily flow through these paths and the value of our doors will go down.

Mr. Joe Fontana: Essentially what you're saying is that Canada had better move quickly—

Prof. Marc Gaudry: Yes.

Mr. Joe Fontana: —with regards to freer air carrier agreements with a number of international countries, or else we could be lost or left in the dust if we don't move at least parallel or—

Prof. Marc Gaudry: I think the Americans will be successful. It will take them some two to three years, or maybe five. At the end of this process, if our special permits aren't worth very much, what's the point of getting a Canadian firm? The point of having a Canadian firm is to be able to exploit these permits now and build a firm that can survive precisely when the lid is open in all these markets, so that then it can stand on its own.

The urgency, in my view, arises from the fact that if we do nothing we'll have zero chance, because—and that is going to be my last point on your first question—even the foreign ownership restrictions of 25%... There is a 25% restriction in the United States, but already they are saying let's get rid of it. So in the increasingly free trade mood in air, eventually the national restrictions will go and everybody will end up under the World Trade Organization.

Maybe that's a slightly long answer to your first question, but I wanted to be fair.

The Chair: Thank you, Mr. Gaudry. Thank you, Mr. Fontana.

[Translation]

Mr. Guimond.

Mr. Michel Guimond (Beauport—Montmorency—Côte-de- Beaupré—Ile d'Orléans, BQ): Professor Gaudry, thank you for your excellent presentation and for your written submission. It contains some very important information which will prove useful to us when we draft our final report, because this committee will be making recommendations once it wraps us its hearings.

Professor Gaudry, I won't ask you to discuss the details of the offers currently on the table, but I know you're quite familiar with the Competition Bureau regulations. In your opinion, could the Competition Bureau readily accept a structure where a national carrier would be the standard bearer on international routes, as is the case in England, France, Germany, Italy and Greece, and where two carriers would compete on domestic and transborder routes with the Americans? Do you think a structure like this would withstand the various tests applied by the Competition Bureau?

• 1000

Prof. Marc Gaudry: I see that to your mind, there would be a dual structure in place: on the one hand, one carrier would cover international routes, whereas the other would operate local or domestic routes. Am I correct? Have I understood your question clearly?

Mr. Michel Guimond: Yes, you have.

Prof. Marc Gaudry: The Competition Bureau is in a difficult position because by definition, we have monopolies operating international routes and the Government of Canada has signed agreements opposing competition. That's what a bilateral treaty entails. It's an agreement opposing competition. It provides for the establishment of state-run monopolies which will make exorbitant profits. By definition, a monopoly is the complete opposite of a competitive environment. The entire global structure is based on these principles. I think it would be extremely difficult for a competition bureau, whether Canadian or foreign, to directly challenge the structure of its country's treaties. As far as I'm concerned, the question is somewhat hypothetical. It might be able to accept the second part of the equation for the sake of competition, but at the same time, it would have to go along with the idea of a state-run monopoly. Therefore, to my mind, the question is somewhat hypothetical.

There is a second, broader consideration. In the order to challenge this structure, something dramatic would have to happen. The minister would have to say: "your international treaties belong to all Canadians. I'm taking these routes back, because I have the right to do that, and I'm reassigning them to a new international corporation, maybe even selling them to this corporation". That's more or less what would have to happen, because it isn't obvious that the ongoing merger talks or other discussions of a similar nature would lead to the dual structure you alluded to. In order for that to happen, the minister would have to take rather drastic action.

Mr. Michel Guimond: You say that most countries establish limits on foreign ownership. You agree that foreign ownership rules prevent a foreign takeover or foreign control of the Canadian transportation industry and that such rules should be maintained and protected.

Prof. Marc Gaudry: That's the way the global industry is presently structured, but this is changing. We may need to wait 15 years before this structure disappears altogether, because we're dealing with 1,600 treaties of this kind in the world. It will take time before everyone adapts to the new reality. The United States are beginning to challenge the status quo. I think that... I'm sorry, but I've forgotten the gist of your question. Could you repeat it for me?

Mr. Michel Guimond: Is the 25 percent rule...

Prof. Marc Gaudry: Right. In my view, the biggest, most pressing problem is the issue of who has control. We need to define this term and in order to do so, there are things that need to be done and that are not being done right now.

• 1005

Let me give you three examples. A foreign shareholder cannot exercise a veto right on the board of directors of a carrier. Why is that? Because a veto right gives that person the right to define the routes operated, the services and all decisions of the Corporation. A veto right effectively gives control to a foreign partner.

Here's another example for you. When a Canadian corporation enters into a five, ten, fifteen or twenty-year agreement with other corporations, in my view, these agreements should be made public. Let me explain why. Imagine the following scenario. At present, any one individual, whether a foreigner or a national, is limited to 10 per cent ownership of a company. Supposing you want to enter into an agreement with a foreign partner. You need capital. The foreign partner is prepared to put up a certain amount of money and says: "give me 12 percent ownership in exchange for my capital outlay". You counter: "I can't give you 12 per cent ownership, just 10 per cent, but in exchange for your investment, I can give you a very good deal on international routes and on code sharing and you will reap the majority of the hidden profits in this venture because I will use your aircraft, not mine, on these routes. I'll give you the equivalent of the two per cent shortfall in the form of benefits and this arrangement will be consigned to our 30-year binding agreement."

The problem here is one of transparency. This is a very important consideration because ultimately, as an ordinary Canadian citizen, I'd like to know for certain that all of these agreements between Canadian and foreign partners include an explicit provision stating that operating rights in respect of international routes belong to the Government of Canada and can be recalled at any time. The parties seem to be aware of this. I would assume that in all of Air Canada's and Canadian's agreements, there is a provision stating that if tomorrow, the minister recalls the licenses to operate the Hong Kong or Paris or some other route, then the agreement between the parties will be null and void.

In short, we need to define clearly who is the controlling party. I don't care whether the limit on foreign ownership is 10 per cent or 11 per cent, but we need a definition of some kind, for example, 25 per cent overall. In the field of telecommunications, the rule is 33 per cent ownership. This is primarily a legislative drafting problem and that's not my area of expertise.

I think certain elements should be included in the definition of Canadian ownership and control.

[English]

The Chair: Thank you very much, Mr. Gaudry. It may seem that questioners get only one question, but unfortunately sometimes the answers are—and need to be—a little longer than usual. As long as the committee is satisfied, I won't interrupt.

Thanks, Mr. Guimond.

Mr. Dromisky, please.

Mr. Stan Dromisky (Thunder Bay—Atikokan, Lib.): Thank you, Mr. Chairman. I have three questions, two of which have already been more or less answered, but I would like to get into another area.

I know you have definite opinions in light of all the expertise and the knowledge that you possess in the studying of international treaties, the system that we have, and the situation that we find ourselves in regarding our aviation industry at the present time. I know you have very distinct impressions.

Prof. Marc Gaudry: Impressions.

Mr. Stan Dromisky: Yes, especially regarding the process. I would like your opinion regarding this process insofar as the Competition Bureau is concerned, as well as the Canadian Transportation Agency, the Minister of Transport, and the government. I would like your opinion as to what changes could take place in the process as far as these players are concerned in order to come up with a more positive situation for the future as far as our aviation industry is concerned.

Prof. Marc Gaudry: I'll answer it very quickly and briefly. There has to be a clear, defined fast track procedure that is not open to forever being challenged in court, because if that takes too long—and it can take a very long time—we're going to be losing our window of opportunity.

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My suspicion is—and maybe a good lawyer might tell me there is one but it's hidden—that I don't see a fast track. Where's the fast track procedure?

Mr. Stan Dromisky: Could you please define “fast track”? I know how slow government processes are and how much time is involved, and I know the number of people involved—especially lawyers. What do you mean by fast track? Are you talking about two years, three years, or one year?

Prof. Marc Gaudry: No. You know, I think, that a fast track in trade negotiations is a very short thing, in the order of two to three months. It cannot go to 24 months like some of the challenges in front of the Canadian Transportation Agency or the Competition Bureau. It has to be defined, with a guaranteed closure. That's a fast track. Then people can make proposals that make sense, and you don't have to invoke section 47 every time.

I had the feeling, without having any privileged information, that it was very uncomfortable for the minister of this thing. How do you deal “fast” with it? I mean, do you invoke the War Measures Act? It is an economic war. In trade negotiations, the American President says he wants a fast track and he gets it. It's clean. I think we need something clean, and with a defined and timed deadline on it, written out. What is it? Somebody has to write it.

Mr. Stan Dromisky: I'm assuming from what you're saying that we would find in that a clear definition or description of the role of each of the major players.

Prof. Marc Gaudry: You would find things like that. You would find three things. You would find the definition of Canadian control to which the offers would be subjected. Secondly, you would find a clear view as to what process would be used to challenge competitiveness. Thirdly, you would find the extent to which the process can deal with foreign treaties, because we need that.

On competition, the biggest problem is if you're afraid of monopoly here. Monopoly has never been a problem. You can always open up the border and say to people to come in and sell on our market, as we've done with the United States over the last few years; we have an open skies deal. You can say at any time to other people that they can serve the markets here. It might not be a nice thing to do without some gain in exchange, but if you think there's too much competition locally, do it unilaterally. Don't wait for the foreigners to negotiate with you. If there's a benefit to you, do it. Somebody has to have the ability to do that.

I think these components are part of a fast track: a clear definition of control; a clear definition of the time to be spent to obtain a judgment on competition, and its conditions; and very clear definitions of what's left over, in this case of what has to be dealt with in terms of Canadian treaties.

Mr. Stan Dromisky: Very good. Thank you very much.

The Chair: Thank you, Mr. Dromisky.

Colleagues, we have a half-hour bell calling us to a vote, so to be on the safe side, we can go as long as 10:25, which would still give you 15 minutes to get to the vote. That gives us 10 minutes yet.

Ms. Desjarlais, please.

Ms. Bev Desjarlais (Churchill, NDP): I have a few questions. I'll try to make them fairly brief.

In paragraph 2 on page 2, you comment on the subsidies that carriers are still getting or have gotten. Yesterday we had the airline association suggesting that carriers are paying too much for the services they're getting, that the government devolved itself of the responsibility and it's costing the carriers too much now. So I'm caught in your statement that there are still too many subsidies, yet the airline association is telling us it's costing them too much, they're being charged too much.

• 1015

Prof. Marc Gaudry: There are very few carrier subsidies now left over. Probably there's no subsidy for air traffic control, because it's under cost recovery. There are huge subsidies for airports. The royal commission established beyond doubt that the airport system at that time, combined with the air traffic control system, benefited from massive hidden subsidies, primarily in the form of tax expenditures, and we're no different from many of the other countries in this. So one has to be very careful which level one is talking about.

Secondly, in the current context we're talking about now—the proposals on the table—there's an implicit hidden subsidy. One of the Air Canada vice-presidents, I think, or spokespersons, said yesterday they were betting the Canadian government would not let Canadian go bankrupt if that came to pass under their proposal. What's that? To me, sitting in my office, it sounds like a threat. It sounds like they're saying “We know the creditors of Canadian might not get full dollar per dollar on their debt, but we don't think the Canadian government will allow this, so we can make an offer that assumes either that they won't get dollar for dollar or that the government will step in to make sure they do get dollar for dollar.”

Ms. Bev Desjarlais: Okay, but you're commenting there on a statement Air Canada made yesterday about what they think might happen.

Prof. Marc Gaudry: Yes, right.

Ms. Bev Desjarlais: I'm asking you what subsidy is in place now, if that subsidy is there now, because the airline association was giving a different story yesterday.

Prof. Marc Gaudry: The current subsidy to the Canadian air system, measured by the royal commission in 1992—and the numbers haven't changed very much—is 20% on the average, and on the big links such as Montreal-Toronto it's 30%.

Ms. Bev Desjarlais: Specifically in what manner? I want the exact specifics of where, because we're hearing from the airline association that the airports are charging them too much.

Prof. Marc Gaudry: In the appendix to my paper, there's a table extracted from the royal commission report. You can see that the government—that's “Others” in this column—paid most of the cost of infrastructure, essentially airports. The users don't pay that. The reason is that the rents paid by airports to the Canadian taxpayer are trivial. They do not pay rent. They don't pay back the capital. I'm sure that if I bought a house, didn't have to pay back the capital, and paid trivial rent, I'd find that I'd live very well.

Ms. Bev Desjarlais: So the airline association's statement is not valid.

Prof. Marc Gaudry: It is untenable, indefensible, and contrary to the formal computations of the Canadian royal commission, and it would not stand examination for five minutes by five economists taken at random from across the country.

Ms. Bev Desjarlais: Can I fit one more question in there?

As all our discussions go on, we tend to hear what's going to happen with the international routes and from the major centres. There's a whole lot of Canada out there that doesn't fall into that category, and that's been one of my concerns certainly. The service in all the rest of Canada, other than those major centres, has really not been up to snuff. So how is one airline, or no Canadian airline, going to improve service for all the rest of Canada?

Prof. Marc Gaudry: You cannot solve all problems at the same time. The problems of occupancy of land and maintaining basic services in areas where they are not naturally profitable are separate from the problem of what happens in the core part of the country, where the networks can be profitable. You cannot treat the necessary subsidies to small communities you want to maintain there in the same way as you treat the flows on mature networks in the central part of the country.

That problem has always been with us and will be with us forever, as long as we want to show the flag in places where the roads, the trains, and the airways are not profitable. To my mind, that's really an independent discussion that has to be dealt with correctly but separately. Otherwise we'll confuse everything, because we'll try to solve all problems.

• 1020

Ms. Bev Desjarlais: As this committee, we're dealing with the airline industry, and in my mind, that includes all of Canada, not just this merger.

Prof. Marc Gaudry: Yes, but you're perfectly allowed to say things such as the problems of small communities should be served with a subsidy program, because they're not soluble. If the market says it can't serve this or it's fragile, there's only one answer. It is to have a subsidy program for small communities or people who are far from the dense networks.

Ms. Bev Desjarlais: So it wouldn't be acceptable to say to a carrier—

The Chair: Bev, I have to cut you off. You've had—

Ms. Bev Desjarlais: Okay.

The Chair: Of course we mean a subsidy by the airline, not a subsidy by the taxpayer.

Voices: Oh, oh!

Prof. Marc Gaudry: I mean a subsidy by the taxpayer.

The Chair: All right. Well, we'll stop you there.

Mr. Comuzzi, you're next. We'd like to leave here by 10:25, so giving you five minutes will make it 10:27.

Mr. Joe Comuzzi (Thunder Bay—Superior North, Lib.): Will we be coming back, Mr. Chairman?

The Chair: We'll be coming back.

Mr. Joe Comuzzi: Okay, I'll do it when we come back.

The Chair: Well, we have five minutes here. You have five minutes, Mr. Comuzzi. If you could ask one of your questions, I'd appreciate it.

Mr. Joe Comuzzi: I want to talk to Marc about this.

The Chair: Well, do it now or you'll be down at the bottom of the list.

Mr. Joe Comuzzi: I'll do it after.

Mr. Ovid L. Jackson (Bruce—Grey, Lib.): I have one quick question, and then maybe he could tack on.

The Chair: Sure, Mr. Jackson, go ahead.

Mr. Ovid Jackson: Mr. Gaudry, you mentioned that we need control and we need a control mechanism. You spoke first about the fact that we can't give a veto to foreigners. That's for the Canadian government to decide. Then you said the second component was that this 10% could be wishy-washy and they could maybe work out a backdoor deal. What was the third feature we should have in this control mechanism thing you're advocating?

Prof. Marc Gaudry: It was transparency on the long-term deals people get into, because there can be an indirect way of going around the laws, around the intent of control. Transparency will solve that, because people will say “How come you're giving this route for $20 million? It's worth $150 million to whoever.” People will say “It's not credible. There's a backroom deal on capital, and you're trading capital against money flows.”

Mr. Ovid Jackson: That's it.

The Chair: Thanks, Mr. Jackson.

Colleagues, we'll now head to the House of Commons for a vote.

Mr. Gaudry, if you could be patient enough to wait for our return, we still have a number of questions for you.

Thank you very much, colleagues. We're suspended until right after the vote. Thank you.

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• 1110

The Chair: Thank you, colleagues.

Pursuant to Standing Order 108(2), a study on the future of the airline industry in Canada, we resume our hearings.

For the benefit of our viewing audience, we had to break due to a vote in the House of Commons. We've had a presentation from Mr. Marc Gaudry, who is a University of Montreal professor in the economics department and the research centre on transport.

Excuse the interruption, Mr. Gaudry. We'll resume our questioning, beginning with Mr. Casey.

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

There are so many things. I would like to know your thoughts on the New Zealand-Australia move to create a single aviation market. Is that a possibility in North America? What would be the impact on the Canadian industry? They've completely amalgamated their two aviation regulatory bodies.

Prof. Marc Gaudry: They've defined what they call the SAM, the single air market. Their tough problem was that there's a big guy, Australia, and a small guy, New Zealand, and that almost 90% of the traffic between Australia and New Zealand comes from New Zealand, that is, essentially New Zealanders are going to Australia and coming back home. So if they liberalize, the prices go down, and the service gets better, and the consumers who get the benefits are all in New Zealand. Their problem was, what's in it for the Australians? They went through various computations on this and came up with their agreement on a single air market.

I understand that everybody is happy, but I do not know the extent to which the firms on both sides are happy. I know the New Zealanders are happy, but I don't know whether the airlines are as happy as the New Zealand consumers are.

Mr. Bill Casey: The small country got the benefit. Is that right?

Prof. Marc Gaudry: The consumers did. Yes. The benefits and costs were split between the different national airlines—Ansett and the others—but I couldn't say that 90% of the benefits went to New Zealand and 10% to Australia or that it was 50-50. That was their toughest problem in negotiating their deal. Between Canada and the United States it's more complicated, I think, because it's not the case that 90% of the flows originate here. It's probably much more balanced.

Mr. Bill Casey: To go back to the beginning of this debate, when you made a presentation to our other committee in September you said that the ideal approach would be to develop an aviation policy that included airports, NAV CANADA, the airlines, and the entire industry, to develop an overall policy and then allow the industry to adapt to those policies. Would you elaborate on that?

Prof. Marc Gaudry: For the last 20 years, people have talked about air deregulation. That's a catchword phrase that is not adequate for the problem, because the transport system consists of carriers, traffic control systems, and infrastructure, and the expression focuses on carrier deregulation, where the old subsidies were. It is the belief of many, including me, that as this issue is cleared up, which is happening progressively now, the focus of the discussion will move to the hidden subsidies in air traffic control and in the airports, depending on the country.

In Canada, when the royal commission made its computations for the year 1991, the big subsidies for air traffic control and airports were calculated jointly at the time; they are not distinguished in the accounts. Clearly they are very large. We believe that as transport moves into the trade world and gets integrated into trade discussions, it would be unbearable to say “stop subsidizing your national carrier by 2%” but allow a 30% subsidy on your landing fees. Slowly, the infrastructure component of the service will be brought into the discussion. The same thing will happen with roads, that is, right now you could not have a free trade discussion where you forget the value of plants, where you say you can't subsidize the plants, but the products, that's fine.

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Progressively, transportation will move into the domain of trade and then the large infrastructure subsidies that are pervasive worldwide, not just in air transport but also on the road side, will become untenable, in part because they're increasing and are pumping money from the national governments everywhere and people are asking how much money they are paying to this transport system, money that they could use in hospitals.

People have no good way to answer the question now, but progressively they'll have to answer the question. Instead of quarrelling about stumpage fees on wood, which are a very small percentage of the delivered price, people will start fighting about the 15% or 20% subsidy hidden in the road trucking subsidy. It's a matter of time before all these things come to the fore.

In order to stop flying blind, many governments worldwide are demanding from the people who work with them that accounts be produced. If you don't have accounts, you don't know how much you're spending and you don't know how much things cost, so you're flying blind. Many more governments are worried about this. They're asking, “Are we losing money on roads? Are we making money on roads? Which of the road users are profitable? Which are not?” These are questions that matter, because the subsidies involved are huge and the public is demanding to know how much subsidy is given to transport in order to be able to compare with other worlds in which subsidies might be more appropriate.

The Chair: Thank you, Mr. Casey.

Mr. Jackson, please.

Mr. Ovid Jackson: Thank you very much, Mr. Chairman.

Mr. Gaudry, I have a couple of things. You mentioned that the Canadian Transportation Agency and the Competition Bureau, both of these agencies, can't react quickly. My question to you is, what should their role be and how could we change the regulations to make sure that in this window of opportunity they're refined to the process you think they should be?

Prof. Marc Gaudry: When you look at the responsibilities of the Canadian Transportation Agency, you see that some of them are of the regulatory kind. You look at the detail under which, say, railroads have to operate. It's clearly a regulatory framework. They also have responsibilities to define Canadian ownership and control. There are some sections of their responsibilities that pertain to that.

I do not see what the critical path is now between the CTA and the Competition Bureau in order to get an answer to an important question within a short time. There may be people around who see this critical path, and I may just not have come across somebody who could tell me.

Suppose my firm is about to go under and I am working out a deal. What process could give me a fast-track, clean answer? I don't know the answer to that question. That's why I think it needs clarification.

I don't think I can go further than that, because then you get into the legalities of the true process under the Canadian Transportation Agency and the real limit of the role of the commissioner of the Competition Bureau, and I think that really requires being looked at carefully under a fast track proposition.

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Mr. Ovid Jackson: But you said that the Competition Bureau is in conflict because the government, by definition, is not competitive. If they own the rights, which they transfer to other people—

Prof. Marc Gaudry: No, I didn't say the Competition Bureau was in conflict. I said that I suspect it's uncomfortable for the Competition Bureau to say things... The commissioner is not the government, so it cannot be a comfortable situation to give judgment on deals and simultaneously request that government policy be changed, that Canadian treaties be changed. It's not a comfortable position. Maybe some people can live with it, and there's a whole grey area there. All I'm saying is that if we have a discussion on the merger of two firms in any domain outside of transport, for instance, could the commissioner say we should rewrite NAFTA? Maintaining international competition means rewriting bilaterals. That's what it means. Can the commissioner just say that?

You're more competent to answer this question than I am, or maybe you ask questions only if you don't know the answer to them. I don't know.

The Chair: Unlike a good lawyer.

Thanks, Mr. Jackson.

Mr. Bailey, please.

Mr. Roy Bailey (Souris—Moose Mountain, Ref.): Thank you, Mr. Gaudry. This is an excellent presentation that you have before this committee, and I might say that I am enjoying your response very much. It's like doing a refresher course in Canadian history. Here we are sitting just as we are about to turn the new century, and what do you think we were doing 100 years ago? We were discussing fast-tracking, if you wish, the Canadian Pacific Railway and so on.

I can remember a statement once made by a professor. He said that the existence of Canada was a sin against nature, and indeed that's part of our problem here as well.

Prof. Marc Gaudry: Yes.

Mr. Roy Bailey: It's the location of people, the topography and so on.

Prof. Marc Gaudry: Right.

Mr. Roy Bailey: But for the committee's sake, I really like this terminology of “managing the merger”. That's the situation we have as a committee. To go beyond that point of managing... And this is where we're at. It's not just a regional play, it's not just national, but it's international as well.

Prof. Marc Gaudry: Yes.

Mr. Roy Bailey: So we have all of these bodies, as you have mentioned, the CTA, the Competition Bureau, and all of these things, but now before me I have a note that says the minister will introduce federal legislation giving him broad new powers to review airline mergers.

The Chair: Now, just a reminder to the witness that that is only speculation.

Mr. Roy Bailey: Okay.

But I hear you saying, Mr. Gaudry, that you feel that is a necessary measure, simply because on page 6 you say there's an urgency to this matter—and that's speculative, as the chairman said—and that it's a necessary piece of legislation at this time. Would you agree with that?

Prof. Marc Gaudry: Well, there might be a way to define a fast track within current legislation, and I think that's a question that, in a sense, you have to answer by asking the proper people whether they think it's technically feasible. I'd do it from the ground up. I'd say, if I wanted it to be fast-tracked, demonstrate to me that the current situation provides a clean fast track; show me the critical path that gives me an answer in two to three months. If you can do that, and do it credibly, then the substance of my concern is met. However, if you cannot show me a critical path to deal with situations that are urgent, then, by default, you have asked that this critical path be defined by new legislation. That's how I view it. It's a sort of default position.

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Mr. Roy Bailey: I have one other question, Mr. Chairman.

Mr. Gaudry, there seems to be a stigma attached to this word “subsidy”. If you see it, it's evil; if you don't see it, it's business. I'm giving a Canadian definition to that. I don't know if that's the same internationally. This committee studied passenger rail, and we were surprised to learn that among even what we considered the most up-to-date, modern, and fast-moving large carriers, there isn't a passenger rail company operating in any country that is not free from subsidies.

Here we use the term “deregulation”, and in that terminology Canadians get the picture that, aha, at last there are no subsidies. Do you understand what I'm saying?

Prof. Marc Gaudry: Yes.

Mr. Roy Bailey: Yet we find out that there are subsidies.

The point I want to make is that we must understand that when you deregulate, that doesn't mean you throw all the regulations out the window and that in certain cases there isn't government support, and maybe increased support, in order to render a service to a given area. So I don't think we're ever going to rid ourselves of subsidies in that context. Would you agree with that?

Prof. Marc Gaudry: I think there are two issues, or maybe three, that are intermingled. The first one is one of transparency in the following sense. People are now discovering that there are subsidies they had not cared about and that they might wish to care about. That's one issue. There are reasons transparency requirements are increasing, of course.

Secondly, to the extent that governments are having trouble supporting everything in the old ways, over time they have to reshuffle the areas and the subsidies to each area. In the reshuffling they are all doing, transportation is a prime candidate for having its ears pulled because transportation is a very large consumer of subsidies. So it is natural that in the reshuffling people might ask, what are the amounts and do I really want that?

The third element that's intermingled there is the following: as world competition increases and more and more things go under trade regulations, it becomes necessary to work out common rules with others, and this necessarily involves working out the regulations.

I was in Chile a few months ago. They were defining accounting systems for their own network. They sell lots of wood. They said, you Canadians sell a lot of wood too. I said yes. They said, do you know the subsidies your woodcutters and producers are receiving through their own network? Suppose this comes up in discussions, could you beat the Canadians? Somebody is going to bring it up at some time.

There's a subliminal story to that. In many places we are forced to give foreigners access to local networks. In Europe in 1991 they said that everybody can ride a vehicle on everybody else's network, basically, fairly and without discrimination—trucks, planes, trains, and so forth. If you want to do that without discrimination, you start developing accounts, because you have to be able to demonstrate that you're not discriminating between the French and Germans, for example. As soon as you do that, you have a problem because you start measuring things, and you start realizing that lots of your subsidies are going to foreigners, and you may not be happy.

So the three strands are intermingled, and they interact. The thing that's linking it is that governments are slowly moving the whole transportation thing from under their own apron and moving it out into the big world, piece by piece—carriers, traffic navigation, and the airports in our case. So we're going through these discussions gradually, and we're going through them on air, and there's a section on trucking in NAFTA. Well, it's on the carrier; it's not yet on the road.

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The Chair: Thank you, Mr. Gaudry.

Mr. Comuzzi, please.

Mr. Joe Comuzzi: Good morning.

You mentioned stumpage, Professor, a few moments ago. We're witnessing in Canada the almost complete sale of our natural resource base either to companies in the United States or to international companies, which is really sad. But if we apply that principle to what we're discussing here at this committee, I guess one common denominator that goes through both threads of the Canadian takeover bid and the reply recently from Air Canada is that both bids do not allow for competition. We know that the Canada-U.S. agreement and the NAFTA stayed away from any transportation issues. We also, I think, have an understanding that free trade really means managed trade, given those...

Do you agree with me that we let the United States carriers and international carriers come in and affect our airline industry at the corporate level and at the directorship level, but on the other hand, we won't allow those carriers or other carriers to come in at the consumer level, where there may be added competition for consumers in the country? We allow them at the corporate level, but we're not going to let them at the front gate to allow some increased competition.

I want your opinion on this managed trade issue. Should we not take the lead on the managed trade? We've learned from experience. Should we not be taking the lead in the management of our trade in the airline industry rather than just following and reacting to outside pressures as they're affecting us now?

That's the first part of the question. The other one is kind of philosophical, but I'm very interested in your argument.

When a government grants largesse, when a government grants a right, when a government grants a privilege, which sometimes has a very high monetary value, should that privilege be allowed to be sold on the open market? Or if it's going to be sold, whoever is the recipient of that privilege, and they no longer want to use it or they want to dispose of it, should that privilege not then revert to the taxpayers of this country? I'm interested in your comments.

Those are my questions, Mr. Chairman.

Prof. Mark Gaudry: On the first one, yes, it is my view that we should risk leading. Otherwise, this window of opportunity will just slowly vanish under our eyes and we will lose the chance of having a national champion. So it's better to frame this and allow it under clear rules than to do nothing, because the window is slowly vanishing. So yes, I think we should do it; we should do it clearly and make clear the sense in which we allow foreigners in, control issues and so forth.

On the second one, recently it's been the view of many that privileges of the kind you mention—rights to pollute, for instance—should be sold, because when you do that, you can demonstrate that you can achieve your ends much more cheaply than by regulation, for instance. In the case of the airline industry, the right to serve origin-destination pairs markets between countries has traditionally been given as a gift. Although technically the right itself still belongs to the government, people have been allowed to use this right without making payment.

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I would propose that over time, certainly, these rights, to the extent that they're still worth something, be open to bidders. There's no reason... It's very hard to differentiate between the companies. Should WestJet get it? Should Canada 3000 get it? Should Air Canada get it? Lots of people might be interested in getting these routes, and they should be allowed to bid on them. And the Canadian taxpayer should collect for this right.

There's a hidden subsidy element in giving away a monopoly right for nothing. So yes, on your second question, this privilege should be sold.

Secondly, it's part of the inner border of the state moving. The government is slowly making things cleaner and saying what's government to this side and what's not government to that side. That selling of privileges is part of this clarification, where the inner border of the state is moving slowly and being redefined over time under the pressures all countries face.

The Chair: Thank you, Mr. Comuzzi.

If I might, colleagues, I just want to slip a question in here myself. It has to do with the number one air carrier and the number two air carrier.

I was thinking this morning over coffee. Say the number two air carrier has its international and its domestic portfolios and finds it's quite successful on its internationals but not so successful on its domestics, because it's flying wingtip to wingtip with the number one air carrier across this country. Could the number two airline drop its domestic services altogether and only operate an international air service, where it is successful? I think the answer is yes, because of the way we're set up in this country.

Mr. Gaudry, what would be the impact on the domestic industry if this number two carrier said “Let's not worry about offers. Let's not worry about all we've been going through for the last three to six months. We have just decided we are going to operate internationally”? Can it operate without the domestics in the number two airline providing and feeding it the passengers?

Is there enough opportunity out there for me to fly the number one airline from Toronto to Vancouver and then get on the number two airline to fly internationally, because it will be a lot cheaper? Is there an appetite for that? Is it possible for the airline to achieve that? What would be the impact?

Prof. Marc Gaudry: I presume there are reasons they maintain their alliances now, and that if they thought it was not a good idea and it was not profitable to them, they would get rid of or modify their alliances now.

Alliances change frequently. I can remember days when Air Canada was in with Continental. People have forgotten that, but they used to own a very important share of Continental. I remember days when they were in with—

The Chair: But they could still use the alliances to provide them with the passengers in order to fly the internationals.

Prof. Marc Gaudry: Okay, but then what would be the reason they don't get rid of them immediately? I think it's because they find that working together with their feeders is more profitable than getting rid of them.

The Chair: No, I'm talking about them specifically—the number two airline and its own domestic fleet.

Prof. Marc Gaudry: But the number two airline's problem is not very different from the number one airline's problem. Right now the number two airline finds that having deals with its feeders is more profitable than not having deals. In fact it might even fear that by getting rid of these feeders, competition would increase and it would be still less profitable. So indeed, if the merger occurs, one would expect the commissioner to look at whether some of these feeders should not be disconnected from the trunks.

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So my answer is that I suspect it's profitable to keep them, and that's why they are kept, and I suspect competition would increase a lot if they were forced to disband their feeder network and keep only the trunks, and that's why the number two and the number one don't do it now—and the next networks that will form. Some networks are forming. A network is forming in Quebec now.

The Chair: Because the discount airlines, such as WestJet, etc., could become the feeders for the internationals.

Mr. Marc Gaudry: Oh, sure.

The Chair: So you'd have a new alliance network formed domestically.

Mr. Marc Gaudry: That's possible, yes.

The Chair: Is there an appetite for regulation to ensure that a single airline operating in Canada cannot subsidize, say, its domestic discount?

Sometimes we have to make these assumptions. Let's say we go to a one-airline policy in Canada, so we'd have one airline operating. Do you think there's an appetite to say to that airline, to encourage domestic competition, whether discount airline or charter, etc., we want to make sure the chief one airline doesn't subsidize its domestic discount carrier or routes, etc., with the profits of its internationals? Do you think there's an appetite to regulate to ensure that?

It's bordering on getting into the business of running business, but at the same time we want to make sure we have healthy domestic carriers, healthy discounts, competition, etc. So the government would step in and say the new, say, Air Canada cannot take its profits from its internationals and subsidize its domestic or discount carrier with the profits, so that domestic would have to go it on its own, competing head to head with whatever is out there today.

Prof. Marc Gaudry: The way this appetite is satisfied is through the request that there be competition, because it is too complicated from outside to get into the nuts and bolts of the computations of detailed profitability of lines, and I don't think any wise government would want to do that. So the way it's done is indirectly. If we have a good competitive system, they will take the right decisions and remove these cross-subsidies.

Take, for instance, a similar example in the busing industry. Right now it's regulated and we know explicitly that some fares are too high. For instance, the Montreal-Toronto fare subsidizes some of the other routes. We know very well that if we deregulate this, these fares will go down and the cross-subsidies will cease. That is, we assume that the competition will remove the cross-subsidies from that line to the other line.

The Chair: Yes, that's my point. It's a huge assumption to assume that.

The fear out there, I think, is that if there is a new Air Canada and they have the profits of their international routes to pump into money-losing domestic routes or discount airlines, they can force a, say, WestJet, who wants to compete with them on the route out west, into difficulty. They are going to make sure that domestic thing is working, because they want the corner on that market, and they're going make sure they'll take the profits to make it work. So an airline with an international carrier that makes money has a big edge on just a domestic carrier who's in the business of discount flights.

Prof. Marc Gaudry: Yes, you're talking about predatory behaviour, either through prices or through excess capacity, supply, and so forth. That's also handled either by the competition mechanism or by a watchdog.

The Chair: Okay, a watchdog.

Prof. Marc Gaudry: Yes.

The Chair: Thank you.

Mr. Roy Bailey: A government watchdog.

Prof. Marc Gaudry: Yes, a government watchdog.

[Translation]

The Chairman: Mr. Asselin.

Mr. Gérard Asselin (Charlevoix, BQ): Mr. Gaudry, I hope you can assuage some of my concerns about regional air transportation services. People often say that in order to understand the future, one need only look to the past.

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The regions have been hard hit by NAV CANADA cuts, by the elimination of a number of air traffic controller positions, by the closure of control towers, by the elimination of fire fighting services and by the privatization of airports which were already operating at a loss. A merger between Air Canada and Canadian could reduce passenger traffic at airports by 50 per cent, which would only mean higher deficits. Air fares for regional travelers are already very high.

In your opinion, if the merger were to go ahead, what kind of future would there be for regional air carriers, considering that service to the regions has already been cut, that the quality of the services has been compromised, that carriers are already free to decide how often to provide service to the regions and that regional travelers already pay exorbitant air fares? Flying is the only way for business people who need to access professional services or for those in need of health care services to get quickly to major urban centers. Otherwise, they must spend anywhere from 10 to 12 hours behind the wheel driving. There is no train service to the regions, notably to the North Shore and to Baie- Comeau.

Therefore, in your opinion, what does the future hold for regional air services if Air Canada and Canadian merge? If that happens, we would be left with only one carrier.

Prof. Marc Gaudry: My instinct is to say that not much will change in terms of existing service problems in the regions. The particular problems that the regions are experiencing have nothing to do with the possibility or not of a merger between Air Canada and Canadian. How is that? At some point, it becomes difficult to maintain services or airports in certain parts of the country and to ensure that they turn a profit. It boils down to a land occupancy issue and to a decision on the part of the government to operate a service. If we want people to live in the regions and if these people cannot cover transportation costs, then we must deal with this issue directly.

Consider this example. I haven't done the calculations for the Iqaluit airport, but I would be very surprised if this facility operated in the black. The question is this: do you want to keep the Iqaluit airport open, yes or no? If the answer is yes, then accept the fact that the government will award a subsidy to remote regions so that they can survive and suggest a reasonable mechanism for providing that subsidy at a reasonable cost. One way would be to call for tenders. The Government of Canada adopts this approach to ensure the transportation of its armed forces. The government says to potential bidders: "If you want to transport my troops, make me an offer, one that meets certain conditions". Therefore, in this particular instance, the government could say: "Make me an offer to provide service in a particular region at a reasonable cost." The terms of the arrangement must be clear. We're not about to resolve the issue of the subsidies required to operate infrastructures - subsidies far greater than those required to keep carriers in business - without dealing with the issue separately and directly. We can't view this as an issue connected with a possible merger, as we are discussing today, or with some other problem that might arise the next time around.

We can't go about dealing with every single problem all at once. Let's say I have a small garden. I don't expect it to turn a profit. I'm happy to pay for the pleasure of admiring the foliage. If we want the country's vast remote areas to be populated, rather than be mere empty tracts of land, then we need to make the required investment of capital to turn a losing situation around. A landowner should be able to tour his various land holdings without having to expect that all of his holdings are operating at a profit.

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Mr. Gérard Asselin: If that's the case, couldn't we do what the government did in the case of bus transportation. Everyone knows that bus companies do not turn a profit. For example, the Havre-Saint-Pierre—Sept-Iles, Sept-Iles—Baie-Comeau and Baie- Comeau-Québec routes are not profitable. However, a bus company by the name of Intercar which operates routes to major urban centres was awarded rights to a profitable route, the Québec—Montreal route. Air Canada and Canadian could be ordered to provide service to the regions at a reasonable cost. This might increase passenger traffic volume and the carriers would be compensated, not necessarily with subsidies, but with profitable routes.

Prof. Marc Gaudry: I think the outcome would be better and fairer for all carriers, and there are dozens of them, if the government were to invite tenders and ask: "Whose prepared to make me an offer for the rights to the Montreal—Havre-Saint-Pierre or Québec—Baie-Comeau—well not that route, because it is a profitable one"—in any case for the rights to provide service on a route that does not turn a profit"? I don't see why we should automatically assume that the bidders would be Air Canada or Canadian. There may be a number of local carriers interested in this market, that is category 3 or 4 companies that would be perfectly willing to make a firm offer detailing frequency of service, prices and contract length. I don't think we should discriminate by excluding these companies from the market and preventing them from expanding their business or by favouring existing companies. If large existing carriers were singled out, then fairness would be a problem.

Mr. Gérard Asselin: Thank you.

[English]

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

I have four names left on the list: Mr. Fontana, Ms. Desjarlais, Mr. Dromisky, and Mr. Casey.

Mr. Fontana.

Mr. Joe Fontana: I want to explore a little more... I think you said that perhaps in being given this opportunity to design a new airline policy for this country, perhaps on a regulatory basis, especially internationally, we move forward much more aggressively towards a freer movement between countries with respect to routes and so on. You also said that foreign ownership shouldn't necessarily be restricted to 25%, that in fact even the Americans are talking a little higher than that. What do we lose if in fact it goes higher than that?

I want to talk a little bit about cabotage—and maybe you've addressed it and I missed it—especially as it relates to transborder...between ourselves and the United States. Obviously, cabotage is a very protectionist sort of mechanism, to protect domestic air carriers, and therefore it flies in the face of what you have been talking about, freer whatever. More and more in this country it's not only east-west travel, it's north-south, in commodities and so on.

I'm just wondering whether the notion of cabotage has had its day, and that perhaps with the new alliances...and if we were to truly look at what was good for the consumer, if that's who we want, so we have competition, lower prices, and our airports perhaps would then be able to seek new alliances with other airports and other airlines, north-south...and that gets to the issue of the viability of some of those regional airports. If we really truly created a freer sort of system and thought about the consumer and what was good for the consumer in terms of prices and competition, is it worth pursuing...

Cabotage or a new transborder regime might not be the answer to ensuring that there's always competition and that prices and infrastructure... What would be wrong with people who were travelling to Thunder Bay going via an American route, on an American plane, or if they were coming from London, Ontario, they could take advantage of an American plane, or vice-versa? If there were Americans who wanted to get from point A to point B, what would be wrong with them taking a Canadian airline to get to Dallas, to Florida, or something like that? Wouldn't there be a benefit? We would be opening up our air services and our airlines to 250 million people. Are there some advantages in perhaps looking at whether this new policy should include some arrangements in terms of allowing cabotage? Maybe that's a bad word. Maybe we ought to think of something better than cabotage.

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Prof. Marc Gaudry: Yes.

Mr. Joe Fontana: Open skies in the Polish context.

Prof. Marc Gaudry: I'll try to be precise on the definition, to give a correct answer. Cabotage is the right, once you've moved into the other country at one point, to go to a second point and carry passengers beyond the first point. It's one of the tools of competition that the chairman was worried about: that is, to increase competition you can't allow cabotage.

However, when you open the door to cabotage, what will happen will depend a lot on what you've done before. Let me give you the example of the 15 countries of the European Union. In phase one of their deregulation they deregulated nationally, so new low-cost carriers came up and the big firms had to readjust and so forth. Once this adjustment had been made locally, they allowed cabotage, and they found that because they had deregulated within each country before, not that many companies in fact wanted to go to a second point in the other, because the service was already good and, secondly, often because they were making alliances with the guys across the border and it was simpler just to feed the passengers in the network of their colleagues across the border.

Cabotage is a big thing when there are big differences in the quality and competitiveness of the firms on both sides, but when they have adjusted and they're all quite efficient and you free it, you're already pretty close to a competitive solution, which worries the chairman, and then it's just another thing that favours competition, but you might not see that much of it in terms of numbers.

Mr. Joe Fontana: Are we at that point? Obviously you're going to tell me that no one ever wants to talk about cabotage because everybody is worried that the American airlines will swallow up all of the passengers because we're not ready. You said it probably would only work where there was an equilibrium, and perhaps in Europe it has. I just heard, for instance, that KLM was buying Alitalia. It didn't matter that there was a national air carrier named Alitalia or another one. In Europe it didn't matter, as long as people were able to transverse in the most efficient way.

I'm just wondering, though, if cabotage—or call it what you will—has enhanced even more bilateral open skies, more so because we've already accomplished part of the answer to some of our competitive and pricing problems.

Prof. Marc Gaudry: I think we've moved closer to that. You can see it in the deal we made with the United States. We had what they call an open sky that is a point-to-point agreement, where anybody can fly from one point in one country to one point in the other country. It was brought in in a staggered way, over three years, and now it's fully on. People felt that over three years they could handle this. So we must be reaching the point where we're very close to being—

Mr. Joe Fontana: So would you recommend such a policy?

Prof. Marc Gaudry: I recommend it as an answer to the chairman's problem. That is, if we allow a merger, which I think is necessary, and we're worried about competition, then allow it immediately and you won't have any competition problem.

The Chair: Of course, the key word here, when we're dealing with the United States, is reciprocity.

Mr. Joe Fontana: Of course, we're talking both ways.

Prof. Marc Gaudry: Oh yes.

The Chair: It can only be negotiated both ways.

Mr. Joe Fontana: We should go to the United States and talk to our American counterparts, if we're talking about developing a good policy. This committee may have to do some travelling and find out exactly what the Americans—

The Chair: In fact, that's exactly what I'd like to deal with in camera right after our guest leaves.

We have three people left. If we could do this quickly, colleagues, there is a brief discussion we have to have in camera after the witness has concluded.

Ms. Bev Desjarlais: If we're going to go in camera, because the meeting was going to end at 12, some of us have scheduled other meetings. So it makes it a little tough.

The Chair: It will take about two minutes, but it's something for you to chew on over the weekend. If we can keep our questions short, Bev, Stan, and Bill Casey...

Ms. Bev Desjarlais: I'm glad you mentioned the cabotage, and Mr. Keyes then mentioned the fact that it's reciprocity. I think what we've seen in the past is that the U.S. has absolutely the most to gain from getting into other countries, because they have a fair share of everything already. But they also have the most to lose. They also have a lot to lose in the sense of allowing someone else in on their turf in their densely populated areas. Quite frankly, I would be shocked if we were ever to see that change, because the general thing you see is that it's okay for the U.S. to move in somewhere else, but when they start to lose their turf—

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The Chair: Bev, this sounds more like what we would discuss in a draft proposal.

Ms. Bev Desjarlais: No.

The Chair: Do you have a question for the witness?

Ms. Bev Desjarlais: I do have a question, but I want to get this out first. The witness is suggesting that all these things are happening so quickly and we have to get on with this, because you need a system that allows for quick changes because of the economic consequences. I guess from an economist's point of view it's okay to just look at the economic consequences, but what are the ultimate social consequences by only reacting to the economic consequences of a business not making money? What about the country and what happens to all the rest of the areas of the country? You commented about the roads and the trucking industry and that they're going to have to start charging for every little piece of acre. It's fine if you're only around Montreal or Toronto. All you have to do is look at that little bit, and there's lots to deal with. But the country doesn't just revolve around those areas.

If we're going to do some travelling, maybe we should be travelling to the rest of the areas of Canada and see what those people think, and to hell with what the U.S. thinks. Quite frankly, I think it's more important that we find out what Canadians think about this issue and not what Americans think, because they have a lot more to lose.

The Chair: Bev, I'm going to have to ask you to put your question. Do you have a question?

Ms. Bev Desjarlais: Actually, that's a comment.

The Chair: That's a statement. Okay.

Ms. Bev Desjarlais: Yes.

The Chair: We'll consider that in our draft report.

Mr. Dromisky, followed by Mr. Casey. Be quick, please.

Mr. Stan Dromisky: Thank you very much. I'll be very fast.

It's this whole area of subsidies. I don't want to go into all the details because of the time factor. I don't want a response pertaining to when, how, or where, but to why.

We are a great country. We have 28 airports, which carry 95% of the cargo and passengers. We have over 700 landing strips in this country. Should we be considering an all-encompassing, substantial, comprehensive policy pertaining to subsidization in light of the fact that if we carry on with the user fee to its ultimate position where the user pays, there would be very few people flying or very few planes servicing this country because it would be only for the wealthy? Should we have an all-encompassing policy regarding subsidization because everybody in this country benefits from a very comprehensive, effective aviation industry? Shouldn't we all be paying?

Prof. Marc Gaudry: I think there are two different things here. One is finding out where the subsidies are now. The other one is what do you do about them? We could not proceed unilaterally with our southern neighbours continuing with their policies, so there's a problem of coordination there. You cannot have one guy saying, I'm going to do this without looking at what happens in the United States. They also heavily subsidize their system. We have to maintain a competitive position against somebody who provides massive subsidies to its airports.

The second thing is that if we all agreed to remove these subsidies, what would happen? The prices would not go up that much. Remember what it used to cost in 1950 to cross the Atlantic in a Super Constellation? It cost $800 U.S. Now it's about $80 in constant money. So even if you jacked up the prices a bit for a while, they're on a downward trend, and they'll continue falling. So people will pay their way, but the situation would keep on improving.

In practice it's a long way to convincing everybody to do this, stop subsidies for heavy trucks, airplanes, and other areas. But as a minimum we should have some view of how many billions of dollars per year we put in there and don't put elsewhere, such as in potholes or whatever. So we should at least not fly blind. We should say, we're trying to go there, and it will take us 15 years. Let us at least know where we are now. We don't know where we are now.

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Mr. Stan Dromisky: No, I know.

The Chair: Thank you, gentlemen.

Mr. Casey.

Mr. Bill Casey: I have just a couple of quick thoughts here.

I agree with Mr. Fontana. I think we should look at cabotage thoroughly, and I think this is the first step we've taken towards progress.

We had the Air Transport Association of Canada here yesterday, and the spokesperson said that the number one issue facing aviation today is the unviability of regional airports. You have said that there is oversubsidy. How do we reconcile this difference? They're saying they're not viable because they have no revenue. I don't believe charges to airlines can increase. You're saying they're already oversubsidized. What's the answer?

Prof. Marc Gaudry: I'll give the royal commission's computations.

In the Canadian air system, the top 98 airports have a subsidy of about 20%. As you move to the biggest airports—Montreal, say, or Toronto or Vancouver—the rate of subsidy goes up. Proportionately, then, those who get the most subsidy are the people who fly between the biggest airports. They get a much higher subsidy rate than those who fly in the average system of the principal airports.

In absolute terms, in numbers of dollars, the amounts are not the same, clearly. The subsidy of Dorval or Pearson in dollars is both huge and proportionately high. The subsidies to the small airports are lower in proportion and they are smaller in absolute amounts. So a policy to maintain regional presence will not be that expensive, because it doesn't involve huge amounts.

The big money is in the big places that are receiving the big subsidies now from Canadian taxpayers. When I fly Montreal-Toronto, I get a 30% subsidy. My ticket would be about 30% more if I were to pay my way. If I fly on average in Canada, in the top airports, I get a 20% subsidy. So the relative price would go up more between Montreal and Toronto, say, than it would on the average link between the system of 100 big Canadian airports.

The Chair: Thanks very much, Mr. Casey.

Mr. Gaudry, thank you very much for your presentation to our committee today and for answering all our questions. You've been most helpful and inspiring.

Some hon. members: Hear, hear!

Prof. Marc Gaudry: It was a pleasure, sir.

The Chair: You are the first enthusiastic, exciting witness since we've started.

Prof. Marc Gaudry: It's an important problem, and we have a window. That's why I'm delighted to have had the chance to be here today.

The Chair: Thank you very much.

Before we adjourn, colleagues, I'd like to go in camera to adopt our terms of reference. We need 30 seconds right now to say thank you very much to our witness and to close this meeting. We'll reopen in camera.

[Editor's Note: Proceedings continue in camera]