Canadian monopoly airline experience less than happy

By NZPA

Wednesday 27th November 2002

Nearly three years after Air Canada (AC) took over Canadian Air, the airline still has a virtual monopoly in Canada.

Despite extensive government regulation and the threat of huge fines against predatory pricing, AC retains 73 percent of the Canadian domestic market against 77 percent before takeover.

"The most significant story is that despite everything we have been through, how little the `big picture' has changed," Debra Ward, a government-appointed, independent observer on airline restructuring wrote in her fourth and final report published in September.

"If our goal is the growth of competition, we are not there yet."

She said the "costly, messy process" of merging the two airlines had done little for Canadian consumers and she recommended Canada's air industry be opened to foreign competition.

The Canadian Competition Bureau wanted this as a condition of allowing the merger, but the government opposed that and still does even after Ms Ward's report.

Because of its tiny domestic market, New Zealand is one of the few countries that allows foreign-owned domestic airlines.

The bureau allowed the merger following a series of AC undertakings and restrictions that stopped short of price control.

These included selling its frequent flier programmes to other carriers, providing interline (baggage handling and ticketing) and joint fares domestically with regional carriers and not cutting any route for three years that either merger airline had previously flown.

Canada abandoned price regulation in 1988 and "there was absolutely no appetite to get back to that", Ms Ward told NZPA.

Canada has experienced a big growth in low airfare, point-to-point carriers such as WestJet, which models itself on Ireland's Ryanair, and Ms Ward believed price regulation would have inhibited these airlines starting up.

But last year, following an outcry from small airlines and the public, the government had to put through a second series of regulations aimed as stopping AC's predatory tactics. These included $C15 million ($NZ20 million) fines.

"They got a lot of complaints from smaller carriers that AC was killing them on pricing and dumping," Ms Ward said.

She said dumping was very difficult to determine because AC was mostly simply selling more seats at low cost.

AC started a discount subsidiary, Tango, while two discounters, Roots Air and C3000 went under last year. Ms Ward was not convinced the discounters were pushed under by AC. September 11 was a big factor.

While the issue of AC hiking prices has not been significant because of the prevalence of discounters, Ms Ward said it was not good enough to simply accept the assurances of the monopoly airlines.

Air NZ argues that unless it kept its fare low a new entrant such as Virgin Blue would enter the market and or its new Express class service, dependant on high volume traffic, would fail.

"I would agree with the sceptics on the face of it. It's very hard to establish yourself without an allied carrier," she said.

The idea that competition watchdogs force Qantas to sell its New Zealand operations and Air NZ be forced to sell Freedom appeared attractive options.

She disputes claims that because AC was virtually the only major North American airline to increase profits in the wake of the September 11 terrorist attacks, it was price gouging. Much of the profit increase came from asset sales.

Any attempt to hike prices would result in demand tumbling, she said.

"A few people paying a high fare is not enough to pay the cost of the plane. There is nobody here they can price gouge to because nobody will pay the prices."

One painful fallout from the merger was that Canada lost its access to the global oneworld alliance.

"There is a profound loss when you lose one of the global alliances, because they are so strong and dominant, especially Star, it's like losing a global carrier," Ms Ward said.

She said travellers found it infinitely easier to stay in one pipeline than change to a rival alliance carrier midstream.

The ideal solution here would be for Air NZ to stay in the Star Alliance and Qantas to stick with oneworld while travellers get credited for flying on either airline, she said.

"We lost a lot of inbound tourism when we lost oneworld because we lost our main connection to the Pacific in Qantas. It was a big loss to Canada and we have not recovered."

"If you lose an alliance you better look at your inbound tourism and traffic because there will be a cost in having only one global alliance.

"If consumers have no choice, they have no power. If you have no power you may as well regulate," she said.

"The alliances are extremely powerful. They almost fly under the radar because they don't affect national policies so governments don't really look at their marketing arrangements."

Air NZ and Qantas said they had made no decision on their alliances and will first attempt to get government and anti-trust clearances that may take up to a year.

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