Air Canada is a different case entirely. Despite having a 40 % share of Canada’s large domestic market over 80 % of Canadian carriage on international routes, and being highly protected by its government, the airline went through the Canadian equivalent of Chapter 11 in 2003/4 (and flirted with this again in 2009, before being given a helping hand by the government) but it still carries legacy baggage and continues to struggle. Canadians may welcome a more competitive air transport environment but severe retrenchment by or collapse of such a dominant carrier would pose particular challenges, ways of overcoming which are worth exploring. Would the Canadian government be prepared to accept another visit to bankruptcy protection or should it look at other options?
Is Canada the last bastion of economic regulation?
Before looking into this question, some background. Air Canada has continually been protected by the federal government. On the domestic front, the flag carrier now incorporates a merger of a series of former competitor airlines: Wardair, Canadian Pacific Airlines, Eastern Provincial Airways, Nordair, Pacific Western Airlines, Canadian Airlines…….. Canada’s regulatory policy restricted competition and allowed Air Canada to become a monopoly Canada-wide until the no-frills, single class, single aircraft type (B737NG) Westjet was founded in Calgary in 1996 with oil business funding and later expanded towards eastern Canada and into the US.
Another independent startup, from 2006, Porter Airlines, based at downtown Billy Bishop Toronto City Airport, using turboprop aircraft (Bombardier Q400) domestically and transborder into the US, is now also nibbling at Air Canada’s edges. Despite competition from these dynamic innovators, AC continues to demonstrate many of the negative characteristics of a legacy carrier in terms of both price and quality of service. Air Canada’s revenue yields and unit costs are significantly higher than those of almost every other North American carrier (United being a notable, if temporary, exception), with unit costs substantially higher than Westjet. The airline has an ageing short-haul fleet and is cash strapped.
Internationally, Canada’s international regulatory policy is amongst the most conservative (and hence restrictive) in the world, founded not only on third and fourth freedom traffic rights but also reciprocity within this limited scope. In 1988 Canada even withdrew from the multilateral International Air Services Transit Agreement regarding overflight and technical stop rights during a bilateral dispute with the UK. By withdrawing from the multilateral treaty (which has 129 parties) Canada could thus use authorisation of overflights between the UK and the US (notably Chicago, San Francisco and Los Angeles) as a lever for restricting UK-Canada operations.
This protective policy has been even more clearly illustrated over the past couple of years following requests for increased access by Emirates and Etihad to Canada. Air Canada does not fly to the Gulf. And yet it opposes addition to the limited access by Gulf carriers to Canada, primarily on the grounds that the traffic would be sixth freedom, notably from India, a large end-to-end market for Canada.
Air Canada, paradoxically, itself has an avowed policy of exploiting sixth freedom by developing Toronto and Vancouver as hubs for traffic between the US and Asia. Air Canada also has a Star Alliance partner in Lufthansa, whose hub is Frankfurt (and Air India’s application to join the Star Alliance has recently been suspended).....And yet Air Canada stridently opposes a requested increase in the thrice weekly (and regularly full) services of each of Emirates and Etihad to Toronto, or any service by these carriers to Vancouver. Both Toronto and Vancouver have large South Asian populations, with substantial potential traffic which proposed service by the Gulf carriers would tap into. As shown by various economic studies, this would both generate new traffic and provide net national economic and social benefits to Canada (taking into account the – essentially minimal – impact on Air Canada). Air Canada has tried and failed more than once to provide a viable service of its own to India.
The position taken by Air Canada, concerned with increased competition, is perhaps understandable. But that of Canada’s regulators in not accommodating the larger picture begs belief.
Not content with being unable to make a financial go of its clout, Air Canada’s latest venture is aimed at squeezing out the much smaller Canadian leisure carriers which carry tourist traffic to Europe and sunspots in the US, Central America and the Caribbean, by establishing a discount carrier. The approach seems to be modelled on Qantas’ highly successful establishment of Jetstar in Australia in 2004, which has however generated considerable union unrest.
The sheer scale and resources of AC would undoubtedly impact Canadian leisure carriers such as Air Transat (which is itself in trouble), Sunquest and Sunwing, as well as AC’s main rival, Westjet. Canada’s Competition Bureau appears to have been asleep at the joystick on this (although they do follow events, a Commissioner intervening recently when AC proposed to strengthen its joint venture with Unied Airlines). In contrast, the Federal government has been so alert that when AC’s cabin crew recently threatened a legal strike at concerns regarding the pay and conditions of service at the discount carrier, it immediately intervened. The second time around the government took the step of referring the issue to the Canada Industrial Relations Board, requesting the Board to determine whether there were any “health and safety” (sic) reasons why a strike should be denied (thus legally disallowing a strike while the Board deliberates). This doubtful action, if probably directed more at union bashing than at protecting the travelling public, is a symbol of just how far the government will go in support of Air Canada.
And yet despite - or perhaps because of - being cosseted, Air Canada remains in trouble. Perhaps it should simply be allowed to fail this time around. There would undoubtedly be a major negative impact on the Canadian economy in the short term, and there is no doubt that transitional measures would be required, particularly as other Canadian carriers have not reached the critical mass necessary to fill the gaps in an all-inclusive way. It is ironic that the regulatory policy which has allowed Air Canada to have a dominant position creates a bigger problem when the lumbering behemoth can’t seem to hang in.
The impact on business and trade of the sudden disappearance of Air Canada would of course be huge in the absence of transitional measures. Tourism provides a more interesting scenario from a purely economic perspective. In 2010 Canada received 16.1 million international tourist arrivals, with expenditure of US$15.7 billion. However, Canadian residents spent almost double this amount abroad, US$29.6 billion. Thus a reduction in air service might actually reduce the imbalance in tourism trade (a feature exploited last year by Germany’s eco-tax, if no doubt protectionist).
Full article here from CAPA
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