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NDP Minority Report on the Restructuring of Canada's Airline Industry
Modern Regulation in the National Interest
by Bev Desjarlais, MP Churchill, NDP Transportation Critic

Canada's airline industry is vital to the economic and social well-being of hundreds of communities across our country. This reality transcends the concerns of airline shareholders who focus mainly on bottom line financial results. The Liberal government's determination to let corporate shareholders decide the fate of such an important industry represents a deplorable abdication of leadership.

Our Minority Report sets out a number of proposals that the government should consider as it develops a new Canadian air industry policy. It does not advocate a return to the old regulatory system that existed prior to 1987. Rather, it proposes a new and innovative philosophy of smart regulation to deal fairly and sensibly with all stakeholders in the industry.

How We Got Here - The Failure of Deregulation

The NDP agrees with numerous witnesses who underlined the failure of deregulation to live up to its promise:

When the air transportation system was deregulated in 1987, Canadians expected the introduction of new and special service operators to the marketplace would increase competition and bring better and less expensive services ... by 1993, the industry was dominated by two major airlines competing for market share on every major route. This cutthroat competition undermined the financial stability of both airlines.

Federation of Canadian Municipalities

The unregulated market has hurt Canada's two airlines without delivering efficiency or higher quality service.

Canadian Labour Congress

Free competition since 1987 is not free, and is not competition.

Canadian Auto Workers

Deregulation has been a public policy failure for consumers, shareholders and workers. The consequences of deregulation have been crises in 1992-93, 1996 and now in 1999, layoffs, job insecurity, poorer working conditions, wage freezes and cuts, chronic over-capacity in the domestic market, massive cost increases (the overall cost of flying is up 76% since 1992), ticket prices outpacing increases in the Consumer Price Index (even with seat sales factored in), declining levels of service, particularly to small communities, and poor investment returns (Air Canada and Canadian Airlines have consistently underperformed on the Toronto Stock Exchange).

Modern Regulation

Deregulation is the root cause of the crisis in the airline industry. The solution is to be found in effective, modern regulation aimed at protecting the public interest and ensuring that Canada's airlines can coexist and compete effectively in the global market.

Modern regulation means taking a flexible approach and using government powers selectively to ensure that airlines compete fairly and live up to their public trust. Profitable high-traffic routes, like Toronto-Montreal-Ottawa, will naturally attract competition among carriers. These routes do not need government regulation to ensure adequate service. The role the government needs to play is that of a referee, to ensure fair competition and prevent damaging anti-competitive behaviour such as predatory pricing and excessive capacity.

On the other hand, low-traffic routes between smaller communities are not guaranteed to attract service. In these cases, effective regulation is essential because reasonable and affordable service is a social and economic necessity. The government has many tools at its disposal to ensure service to such communities, including incentives, tendering and cross-subsidy. The Canadian government is far from impotent; many creative options are available to ensure long-term service to such communities.

Monopoly Scenario

A private airline monopoly exposes the public interest to serious risks. In the event that the Liberal government allows the crisis to evolve into a monopoly situation, several avenues aimed at protecting the public interest and limiting harmful market distortion could be explored.

• Public representation - through legislation, a governance structure could be established that gives stakeholders representation within the dominant carrier.
• Limited government veto - the government could confer on itself well-defined veto powers over decisions affecting predatory behaviour, fares and service to small communities.
• Equity position - the government could obtain a 15% equity position to secure itself a role on the dominant carrier's board of directors.

It should be noted that these recommendations apply only to a monopoly situation. The government should not accept a monopoly outcome as permanent. It should treat a monopoly scenario as a temporary crisis to be managed until it can achieve a return to a viable competitive environment under modern regulation.

The Majority Report - Making the Situation Worse

By focusing narrowly on a monopoly, the Majority Report fails to address the real concerns of citizens in key areas such as Canadian control, jobs, safety and service to small communities.

• Canadian control - American Airlines already effectively controls Canadian Airlines despite the current 25% foreign ownership limit. The Majority recommendation to raise the limit to 49% would open the door to even greater foreign control of Canada's airlines. The present 25% limit should be entrenched in legislation, rather than allowing the Minister of Transport to alter it for reasons of political expediency.
• The 10% rule - The Majority Report recommends doubling the Air Canada ownership limit for individuals or groups to 20% in order to attract large investors. We reject this recommendation. Raising the limit to 20% would allow domination of Air Canada by investors interested in quick financial payoffs. As the interests of large shareholders and other stakeholders rarely match, Air Canada's ownership must remain broadly based to ensure that it is accountable to all stakeholders, not just to large shareholders.
• Protecting Workers - The recommendation to prohibit layoffs that result from restructuring is a positive step but does not protect workers adequately. A no-layoff pledge should be backed up by a government worker assistance package. Full protection of workers' collective bargaining rights should be guaranteed. In any merger, seniority lists must be combined fairly to prevent the advent of a two-tier wage system.
• Remote service - The Majority Report recommends guaranteeing service to remote communities for only three years in the event of a monopoly. This would open the door to outright abandonment of communities. The government must ensure long-term service to communities through modern regulation.
• Safety - The Majority Report completely ignores safety other than to recommend that government "communicate" the intent to make it a top priority. Witnesses told the Committee that air safety is most jeopardized when the industry is unstable. The Majority recommendations would cause unprecedented instability and put safety at grave risk. The government should do more than pay lip service to safety; it must make safety its priority.
• Passengers' Bill of Rights - The government should adopt a Passengers' Bill of Rights similar to the one proposed by the Canadian Association of Airline Passengers. The U.S. has such legislation, thus making its airline industry more accountable to passengers.
• Predatory Behaviour - The Majority Report pays lip service to prevention of predatory competition but its recommendations are convoluted and ultimately would be ineffective. Modern regulation is necessary to moderate self-destructive competition.
• Foreign Competitors - The Majority Report recommends allowing cabotage and modified sixth freedom. These mechanisms would permit foreign airlines to skim the cream from the Canadian domestic market. It also recommends allowing 100% foreign-owned "Canada-only" carriers into the market. The New Democratic Party opposes these recommendations, as they would aggravate the already destructive impact of deregulation and undermine all of Canada's airlines. Like other countries, Canada should reserve its domestic market for Canadian carriers, giving them a stable base to compete internationally.

Conclusion

The great shame in this crisis is the unrealized potential of Canada's airline industry. Both Canadian Airlines and Air Canada have strong brand names, outstanding professional employees, loyal customers and profitable global alliances. All the ingredients existed for each airline to succeed and prosper in the global market but the Liberal government, with its do nothing philosophy, allowed destructive competition to bring us to the verge of an unregulated monopoly. The government must now enact regulations so the industry can achieve stability, serve the public interest, protect jobs and enable Canada's airlines to expand globally and provide more jobs and opportunities for Canadians in the future.