Cover

Solutions in the air

October 11 1999
Cover

Solutions in the air

October 11 1999

Solutions in the air

Maclean's Roundtable

Plans to merge the country’s two largest airlines, Air Canada and Canadian, are moving forward without much in the way of national debate. Maclean’s convened a roundtable of Canadians with a special interest in the subject, inviting them to step back from the fray and explore the options— and pi falls—on the road ahead. The participants:

Tae Oum, professor of aviation policy at the University of British Columbia; Alberta’s Don Mazankowski, the senior minister in Brian Mulroney’s Conservative government who privatized Air Canada in 1988, the capstone of a four-year policy of airline deregulation; and Robert Dexter, the CEO of Maritime Marlin Travel, the largest travel company in Atlantic Canada. They spoke with Senior Writer Robert Sheppard.

Maclean's: Is this country big enough for two national airlines? Oum: There is no question we can support two international airlines. Australia, which has a slightly smaller population and has many of the same geographical problems, has two good-sized national and international carriers in Quantas and Ansett Australia. Both are profitable. Mazankowski: I agree. Competition is fundamental. The problem is that both of our airlines fail to demonstrate sound leadership. Both fail to be hard-nosed in dealing with the challenges that a global competitive market presents. If you look at the state of our two major railways, five

to eight years ago, they were in a pretty rough state. In the case of CN, it was privatized and restructured, and was turned from a $ 100-million loss to a $600-million profit in five years. That should be the example we look to here. Dexter: There’s one thing we don’t always focus on: I don’t think size makes all that much difference for an airline. Smaller airlines are successful and larger ones are not. Everyone says Canadian Airlines is dead, and if you look at its balance sheet there is no question it doesn’t have any equity and it has a lot of debt. But Continental Airlines in the U.S. went bankrupt twice in the early 1990s, restructured itself and has now become a pretty profitable airline. In 1998, Canadian Airlines lost about $138 million. But it carried 12.5 million passengers. So the loss is only about $11 a passenger. If you let the markets prevail, this may all work itself out. Macleans: But with Canadian teetering on the brink of bankruptcy and Air Canada making only a small profit, how do you fix that?

Mazankowski: Well, suppose you let Canadian go down. A few people would take some haircuts. But that is not to suggest the airline wouldn’t re-emerge as a viable—perhaps a formidable—carrier.

Oum: I have done a lot of productivity studies. Canadian outperforms Air Canada slightly. They have lower unit costs and higher productivity than Air Canada. However, when it comes to pricing their services and managing their prod-

uct, they fail miserably. This is the golden age of air transportation. Everybody is making a lot of money. Even TWA is turning around. So why is Canadian losing money? Air Canadas yield per passenger is almost 28-per-cent higher. I think it is clear that Canadian has ■ been very mismanaged.

Dexter: One thing the government has to do is say, ‘Look, were not going to have a monopoly in this country. So why don’t the two of you grow up and start competing.’ There’s no point if there are two competitors in a market—and you’re not allowed a monopoly—to keep cutting each other’s throat by predatory pricing. But Air Canada I still hasn’t got it clear in its I head that it is not going to J? be allowed to have a mo! nopoly if Canadian fails.

I Attitudes have to change.

Macleans: Is the proposal by Toronto-based Onex Corp. to take over Air Canada and merge it with Canadian a viable solutioni Mazankowski: First of all, there is an element of suspicion that surrounds this whole proposal. There is a clear perception that due process has not been followed. What are the rules here? Is this proposal driving government policy or does the government have a policy of moving towards a monopoly or duopoly or open competition? Nobody seems to know. Remember, both the Liberal and Conservative governments supported Canadian to allow it to buy some time, to get its house in order—and hopefully for government to deal with some fundamental policy issues. And that has not been done.

Oum: If a merger is allowed to go ahead without any other regulatory measures, I would estimate that fares would go up by 30 per cent in the next two years. There is evidence for this in the United States if you look at the markets where there is limited competition. I think this would be a very bad deal for Canadian consumers and for economic efficiency within Canada.

Dexter: Regardless of who puts these two airlines together—whether it is Onex or whether Air Canada and its partners come up with a counterbid—the result will have upwards, on a revenue basis, of 90 per cent of the flying in Canada and 75 per cent across the border. So you’re creating a real monopoly and nobody can compete with it because, under our current laws, the other large international carriers aren’t allowed to come in and fly against it. If you want to start a small regional carrier, a

monopoly carrier can immediately send airplanes against you, use predatory pricing or subtle contract rules to knock you out.

Macleans: The Air Canada Privatization Act sets out a 10-per-cent ownership limit while the Onex proposal calls for American Airlines, the silent partner, to hold 14.9 per cent in a merged airline, and Onex 31 per cent.

If Air Canada shareholders accept the offer, should Ottawa accede to these changes1

Dexter: Ottawa should not get focused on the deal. It needs to let the Competition Bureau bring forth a report, to let Parliament’s transportation committee do its work and let others come forward with ideas, the same way it did in the banking situation. Onex wants a monopoly that

would be exempt from competition rules. If you say ‘no monopoly,’ I think you will find the parties backing off.

Oum: If you allow this merger to happen, you will have to allow foreign carriers to pick up and drop off passengers in Canada to create competition and even the playing field.

Mazankowski: Also, would it not be unfair to other potential buyers if this deal were to go through as is? The ownership restrictions for Air Canada would have to be legislated out of existence—and that would be done after the fact. You would really be treating other competitive entities in an unfair manner because they wouldn’t have had the chance to bid the same way.

Macleans: Is the 10-per-cent ownership limit in Air Canada reasonable, especially given that American Airlines owns 25 per cent of the voting stock in Canadian1 Mazankowski: Well, you have the same thing for banks and other financial institutions. I look at the CN privatization, which has been one of the most successful. It has a limit of 15 per cent on individual ownership, but no limit on foreign ownership. The upshot is that roughly 65 per cent is in U.S. hands, but the company is controlled and managed from Canada.

Dexter: The key question here is: why are we treating air

‘The problem is that both of our airlines fail to demonstrate sound leadership'

—Mazankowski

‘Before we leap onto Air Monopoly, we should be looking at all the alternatives’

—Dexter

travel differently from any other service? We need competition and we can’t treat Canada as an island anymore. Wal-Mart has come in. Eaton’s, unfortunately, has gone. But lots of Canadian companies, like Canadian Tire, are competing successfully. If you open up the ownership rules, maybe someone else would buy Canadian.

Oum: That is my preferred solution. I think the government should reject the Onex deal and then remove the foreign ownership limitations on Canadian carriers completely. That clears the way for American Airlines to take over Canadian entirely—and run it somewhat independently, and more efficiently. That could also happen with Air Canada.

Mazankowski: Mind you, the limitation of 15 per cent for anyone in CN removes the control issue. No one entity is able to run the show. And it has worked very well. Dexter: I’m not sure why we are afraid of opening the markets to foreign carriers. We could still say if you are

Canadian-controlled you will get your share of the international routes that Ottawa negotiates governmentto-government. We have to start thinking about consumers. When there is free trade in any industry, consumers win. When you start creating monopolies, consumers lose. What is more important here? That we have competitive air travel for consumers, or that we happen to have two airlines that are Canadian-controlled? Macleans: What can be done to guard against rising fares and reduced service?

Dexter: The best way is competition. I’m living here in Atlantic Canada, and when the government deregulated the market, that’s when we saw all those small planes flying around. All of a sudden, you had five flights to Fredericton.

Mazankowski: And it made good sense from another public policy point of view because they were flying Canadian-built aircraft on those routes.

Dexter: Another alternative would be to take the regional carriers, like Air Nova, that feed into the bigger airlines and spin them off. But do it fairly. One of the problems today is that these regional carriers enter into restrictive agreements with the major parent. Right now, if I was a small carrier and flew to Toronto, I couldn’t get access to the major carrier, to frequent flyer points and so on.

The model here should be the telecommunications industry. How we got competition in the telephone business was to allow everyone to have access to Bell lines on an equal basis. I would argue right now that Air Canada is already too big. It has about 60 per cent of the market in Canada and there are lots of barriers to setting up regional carriers. Before we leap onto Air Monopoly, we should be looking at all the alternatives to see if we could be creating more competition, not less.

Mazankowski: I couldn’t agree more.

Maclean’s: What should Ottawa be doing that it hasn’t done?

Oum: The government made a major mistake at the outset by making the competition policy inactive. They should be ashamed of themselves. Consumer input is very important. Both Canadian Airlines and Air Canada would like to have a monopoly. But I still think the key option is for Canada to reject any merger proposal and lift the foreign ownership restrictions so domestic airlines can be taken over by whomever. Who owns the airline doesn’t matter. Jobs are created by demand.

Dexter: I spent two hours on a conference call with the Competition Bureau people the other day and I can tell you they have lots of ideas about this and they’re pretty frustrated. Let them report, let Parliament’s transportation committee put out a report. So far, everything has been done in secret. If people start to understand the alternatives, then we can move forward.

Mazankowski: The government’s got to clear the air. A number of issues must be clarified: foreign ownership limits; individual ownership limits; the secrecy surrounding the competition law. Is the government in favour of a monopoly? There have been some interesting concepts advanced by this group today. Some may have validity, some may not. But it certainly suggests that we are not short of solutions here. EZ3

—Oum