BUSINESS

THE COSTLY SKIES

DOMESTIC AND INTERNATIONAL AIRFARES ARE RISING AFTER FIVE YEARS OF DISCOUNT WARS BETWEEN AIRLINES

JOHN DALY June 26 1989
BUSINESS

THE COSTLY SKIES

DOMESTIC AND INTERNATIONAL AIRFARES ARE RISING AFTER FIVE YEARS OF DISCOUNT WARS BETWEEN AIRLINES

JOHN DALY June 26 1989

THE COSTLY SKIES

BUSINESS

DOMESTIC AND INTERNATIONAL AIRFARES ARE RISING AFTER FIVE YEARS OF DISCOUNT WARS BETWEEN AIRLINES

For the past five years, Canadian air travellers have been cashing in on the phenomenon. Even before Ottawa deregulated Canada’s airline industry in January, 1988, the nation’s three major airlines began showering passengers with deep discounts, more flights to more destinations and frequent-flyer plans that earn them free trips and lower prices for hotel rooms, meals and rental cars. When deregulation took effect, giving the airlines total freedom to change their fares and routes, the battle between Air Canada, Canadian Airlines International Ltd. and aggressive, thirdranked Wardair Inc. became an all-out price war. At the same time, travellers have continued to benefit from deregulation in the United States and from fare wars on transatlantic routes. But now there are increasing indications that the discounts are about to end and that both domestic and international fares will increase sharply.

Last month, Air Canada and Canadian Airlines— which bought money-losing Wardair in January—raised their domestic airfares by four per cent. For Air Canada, it was the second increase in five months, and further raises seem inevitable as a result of the two huge carriers’ broad market control.

Indeed, spokesmen for Air Canada and Canadian acknowledged last week that fares will likely climb. But they added that last year’s discount war had forced them to slash some of their fares below cost. In fact, that was the main reason why Wardair

was almost forced into bankruptcy. Canadians travelling abroad, as well, will probably face higher fares. On July 1, the world’s major airlines will impose a complex set of new international fare rules that will raise prices on many foreign routes by 50 per cent or even more.

Developed by the Montreal-based International Air Transport Association (IATA)—which represents 186 airlines around the world—the new rules are designed to improve the carriers' method of setting international fares, which was based on 1973 exchange rates. The new method will be based on current market rates and is designed to ensure that one fare applies to tickets booked outside the countries of origin of any international flights. But by doing that, the new rules force up the price of tickets on some international flights. For one thing, one-way fares between two foreign cities differ depending on where the ticket is bought. In the case of London to Zurich, a one-way coachclass ticket booked from London will cost $330, but one booked to London from Zurich will cost $423. Under the new rules, anyone buying a LondonZürich ticket in Canada, or elsewhere, will have to pay the higher fare. Other rule changes will eliminate any possible savings from another commonly used loophole— boarding North-America-bound flights in Western Europe that originate in countries

with traditionally weak currencies, including Poland and Nigeria.

Last week, William Maguire, aviation committee chairman of the Alliance of Canadian Travel Associations, sent a letter to IATA protesting the changes. Maguire, a Cobourg, Ont.based agent, argued that both customers and their agents will suffer if Canadians are forced to take their business abroad to obtain cheaper fares. He added that passengers who buy tickets in Canada “should not have to pay more for services than they would legally have to pay elsewhere.” But alliance national education committee chairman and Saskatoon travel agent Cindy Le François says that most Canadian travel agents are still unaware of the rules. Said Le François: “I don’t think people are totally familiar with what will be happening.”

The impact of last month’s domestic fare increases is much more apparent, and they have rekindled a debate about the benefits of airline deregulation. Two weeks ago, the National Transportation Agency presented a review of deregulation to Parlia-

ment, noting that fare wars continued in 1988 while service expanded. But Amelita Armit, director-general of market entry and analysis for the agency, said that the report covered only the period up to Dec. 31, and it did not take account of Canadian Airlines’ Wardair takeover.

At the same time, Andrew Roman, a Toronto regulatory lawyer, released a highly critical study—conducted for the nonprofit Public Interest Advocacy Centre. Roman concluded that airline deregulation, which was

supposed to promote competition and lower fares, has been a failure. He claimed that as a result of Canadian Airlines' takeover of Wardair, the country’s two largest carriers and their allied regional airlines now control 98 per cent of the domestic air-travel market. Roman added that there is now no incentive for them to compete, keep costs and fares low and offer more discount fares. Added David McKendry, director of the regulated industries program at the Consumers Association of Canada: “Instead of vigorous competition, we have vigorous co-operation.” McKendry also said that the Canadian-Wardair merger was consummated before passengers had a chance to realize all the benefits of deregulation.

Spokesmen for Air Canada and Canadian Airlines, as well as some industry analysts, vigorously dispute the consumer activists’ conclusions. Air Canada spokesman Brock Stewart said that the competition is just as keen be-

tween the two carriers as it was among three. And Canadian Airlines spokesman Michael Dukelow said that, despite the latest increases, both carriers are still losing money on some domestic routes. Steven Garmaise, an airline analyst with Toronto-based brokerage firm First Marathon Securities, said that profits for both Air Canada and Canadian Airlines—which amount to less than four per cent of their revenues in each of the last two years—are far below those in other industries. He added that Wardair’s aggressive behavior actually drove domestic prices below cost last year. Said Garmaise: “The consumer has been the beneficiary of falsely low fares.”

Roman and McKendry, as well as many travel agents, predicted that airfares would decline substantially if the federal government allowed foreign airlines to compete with Air Canada and Canadian on domestic routes. Roman said that if Donald Trump, the Manhattan developer who recently bought Eastern Air Lines’ New York City-Boston-Washington shuttle service, “wants to create Trump Airlines Canada Inc. and can fly people between Halifax and Vancouver cheaper than the two majors, I say let him do it.” Roman also said that Ottawa should eliminate a rule that prevents forg eigners from owning more í than 25 per cent of a Canadi| an airline. He said that any æ foreign carrier would still $ have to use Canadian pilots and ground crews on domestic routes.

Two of the world’s biggest air carriers have already expressed interest in jumping into the Canadian market. Speaking to analysts in Toronto earlier this month, British Airways PLC chief executive officer Sir Colin Marshall said that he would like his airline to be allowed to fly between major cities in Canada in exchange for allowing Canadian carriers free access to Europe following the creation of a completely free European common market in 1992. American Airlines Inc. senior vice-president Donald Carty said that his airline would also like to fly between more Canadian destinations. He added that— even under the existing rules — American would be willing to purchase a 25 per cent stake in a new Canadian carrier.

But for the short term, at least, Air Canada and Canadian will continue to dominate the domestic market. And it seems likely that Canadian air travellers will be flying in increasingly costly skies—both at home and abroad.

JOHN DALY