BUSINESS

REGAINING ALTITUDE

JOHN DALY November 6 1989
BUSINESS

REGAINING ALTITUDE

JOHN DALY November 6 1989

REGAINING ALTITUDE

BUSINESS

Like many Canadian travel agents, Edmonton's Dennis Crawford says that it is becoming increasingly difficult to find airfare bargains for his customers. Crawford, president of Crawford Travel and Accessories Plus Ltd., adds that his company has been hurt by the disappearance of the fierce airline competition that just a year ago led aggressive upstart Wardair Inc. to slash prices as it took on titans Air Canada and Canadian Airlines International Ltd. on Canada's newly deregulated air routes. But the battle was short-lived. In January, Canadian's parent company, Calgary-based PWA Corp., bought money-losing Wardair and last week announced that it was selling off Wardair's entire fleet of 15 jet aircraft. Since the take over, left with only one major competitor, PWA has already increased the price of a one-way full-economy ticket from Edmonton to Toronto by 16 per cent, to $471 from $406 a year ago. Now, as a handful of carriers tighten their control on the skies above Canada and the

FEWER AIRLINES ARE NOW CHARGING HIGHER FARES IN THE DEREGULATED SKIES OVER NORTH AMERICA

United States, Crawford predicts that “prices will continue to go up, up, up, because there’s no more competition.”

PWA made its decision to sell the estimated $760.5 million worth of aircraft less than a month after it announced that it was formally merging all of Wardair’s operations with Cana-

dian’s in an effort to control losses at Wardair. But for consumer activists who maintain that mergers and buy-outs in Canada and the United States over the past four years have reduced competition in the industry and resulted in higher fares, the disappearance of Wardair provides another reason for concern.

Fewer airlines charging higher fares was not the outcome that successive Liberal and Conservative transport ministers planned when they began deregulating Canada’s air industry

in the early 1980s. Even before the National Transportation Act took effect in January, 1988, allowing Canada’s airlines almost total freedom to set their fares and routes, the airlines themselves were already preparing for the same type of cutthroat competition that had begun a decade earlier in the United States.

Since then, Canadian passengers have reaped the same benefits from deregulation as U.S. travellers—deep fare discounts, more flights to most destinations and lucrative frequentflyer bonuses. But in both countries, the frenzied price-slashing—fares between Toronto and Vancouver fell to as little as $379 return, compared with the current regular economy fare of $1,128—pushed numerous airlines, including Wardair, to the brink of bankruptcy. Now, executives with the small group of surviving carriers say that they must grow even larger at I home in order to maintain their standg ing in the increasingly competitive 5 global marketplace.

Last week, however, a new domes-

tic airline geared up to battle PWA and Air Canada in Ontario, Quebec and Atlantic Canada. Montreal-based Intair Inc., a 43-year-old regional carrier affiliated with PWA until it bought out PWA’S 31-per-cent stake last month, more than doubled the number of its daily flights between Toronto and Montreal, to 24 from 10. And this week, it is raising that number to 40 as it seeks to cash in on one of Canada’s most lucrative routes. But Intair president Michel Leblanc says that he will compete with Air Canada and Canadian on service, but not on price. He added, “We are not going to repeat the mistakes of others.”

Still, Leblanc faces a formidable challenge. PWA’S purchase of Wardair in January left Canadian and Air Canada in control of 98 per cent of the domestic passenger market, split roughly evenly between the two airline giants. That situation alarms such consumer activists as Toronto regulatory lawyer Andrew Roman, who released a highly critical study in May entitled Airline Deregulation in CanadaWhy It Failed. Roman says that there is no incentive for the two dominant airlines to keep their domestic fares low. He predicts that Air Canada and Canadian will continue to eliminate many of their deep discounts in an attempt to recover from the two years of punishing fare wars with Wardair.

Air Canada and Canadian also possess other critical advantages over any domestic competitor. The two giants jointly own the computerized reservation system that nine out of every 10 travel agents in Canada use to obtain flight information and to print tickets. They also have

seductive frequent-flyer plans that reward travellers for their continued loyalty with free trips and lower prices for hotels, meals and rental cars. And they have established access to the best landing slots and terminal facilities at Canada’s crowded airports.

But executives with Canadian and Air Canada, as well as some industry analysts, vigorously dispute the consumer activists’ conclusions. PWA president Rhys Eyton, for one, says that “at the moment, there is more intense competition between carriers than there ever was.” He added that, 10 years ago, governmentowned Air Canada controlled two-thirds of the domestic passenger market, and regional carriers dominated most other routes. Now, two carriers compete on most routes—Air Canada and Canadian or their affiliated regional carriers.

Still, Eyton conceded that further domestic fare increases are inevitable as his airline and Air Canada spend billions to replace their older aircraft. He said that for much of 1988, consumers benefited from fares that were driven below costs by Wardair’s unsuccessful bid to compete by slashing prices. Said Eyton: “The fares in place just could not be sustained. They were discounted to the point where even the buses were worried about the competition.” PWA last month reported that profit for the first nine months of this year fell to $217,000 from $38.4 million for the same period last year. Eyton said that for all of 1989 he did not expect the company to earn an overall profit. But, as Air Canada spokesman Brock Stewart says, there are limits to the price increases that travellers will tolerate. In one attempt to regain profitability, Canadian in August tried to initiate its second four-per-cent domestic fare increase in four months, but quickly withdrew the proposed increase after Air Canada failed to follow suit.

The trend is similar in the United States. Airfares, on average, have been climbing since 1986, when price competition there drove many airlines into bankruptcy. Last year, U.S. domestic fares rose by eight per cent while the number of carriers continued to shrink in a four-year wave of mergers and acquisitions. That wave subsided when stock markets plunged on Oct. 13—a crash caused largely by an announcement from UAL Corp., the parent company of United Airlines, that financing for an $8-billion buy-out by its managers and employees had collapsed. The following week, Donald Trump, the flamboyant New York City entrepreneur who owns the Boston-New YorkWashington Trump Shuttle, withdrew an $8.8-

billion bid for the parent company of American Airlines. But some analysts expect takeover bids to resume. James Ryan, a New York-based investment banker with First Boston Corp., said troubled airlines such as Eastern and Pan Am remain tempting targets if the price is right. Meanwhile, a Senate subcommittee in Washing-

ton, D.C., is examining the issue of whether the continuing consolidation of the airline industry is limiting competition, and some senators are calling for re-regulation.

Some groups in Canada are also calling for re-regulation to curb the dominance of Air Canada and Canadian. Carman Baggaley, a researcher with the Consumers’ Association of Canada in Toronto, said that Ottawa should allow the National Transportation Agency to review and potentially disallow fare increases.

But despite the continuing consolidation of the North American airline industry,

analysts say that travellers are still better off under deregulation. Stephen Morrison, an economist with the Washington, D.C.-based Brookings Institute, said that a study he conducted in 1986 showed that U.S. fares were 28 per cent lower than they would have been

without deregulation. And in Canada, Michael Tretheway, a professor with the Centre of Transport Studies at the University of British Columbia, said that 60 per cent of Canadian passengers still travel on some form of discount fares, which were unheard-of before deregulation.

Meanwhile, both Canada and the United States are facing increasing pressure to open up their domestic markets to foreign competition.

European airlines complain that it is unfair that American carriers can serve such profitable European routes as the London-Paris run while such North American routes as

Chicago-New York or Montreal-Toronto are off limits to foreign competition.

Spurred by Europe’s drive to eliminate commercial barriers, including those that limit competition in air travel, U.S. and European

carriers are already forging alliances. In June, KLM Royal Dutch Airlines agreed to buy a 57-per-cent stake in Northwest Airlines through a holding company. But on Oct. 2, U.S. Transportation Secretary Samuel Skinner issued an order restricting the Dutch airline’s stake in the U.S. carrier to 25 per cent. Canadian laws already prohibit foreign

carriers from owning more than 25 per cent of a domestic airline. But Donald Carty, American Airlines’ executive vice-president for finance and planning, and a former president of CP Air, told Maclean ’s that American is now holding talks with Intair president Leblanc about closer ties between the two airlines. Intair is already

using American’s computerized reservation system, and Carty says that American wants to assist Intair in other ways and may invest in the company.

In a reversal of the traditional position of U.S. airlines, Carty called on Ottawa to

liberalize its investment rules and conclude a bilateral aviation agreement with the United States allowing for greater competition on domestic routes in both countries. Declared the Toronto-born Carty: “Canada is naturally part of a North American market. To the extent that it isolates itself, Canadians will pay

a premium in fares and product offerings.” Until now, U.S. trade negotiators have rejected Canadian proposals for just such a bilateral agreement for fear that such a precedent would open up the U.S. market to all foreign competitors. In fact, analysts and airline executives in both countries say that as airline

regulations continue to be liberalized around the world, more intense global competition between increasingly larger carriers is now inevitable. Eyton predicted last month that fewer than a dozen major carriers may survive. If that happens, the small Canadian domestic

market will likely continue to be dominated by, at most, two mega-carriers, and Canadian travellers may realize even fewer benefits from the global battle for the sky.

JOHN DALY

ANN WALMSLEY