Airline competition finally taking off
For the first time in years, competition in the Canadian airline industry is heating up. In June, WestJet Airlines Ltd. launched its ultra low-cost carrier (ULCC) Swoop, offering cheaper flights for the more pricesensitive traveller. Flair Airlines Ltd., another discount carrier, is already in the air, and two additional ULCCs — Enerjet’s FlyToo and Canada Jetlines Ltd. — are eagerly eyeing entries into the market.
International carriers are also looking to fly to and from Canada. Norwegian Air Shuttle ASA, one of the world’s fastest-growing lowcost carriers, in June announced it will begin flying daily between Hamilton and Dublin, as well as offer service between Montreal and Guadeloupe and Martinique.
But even though competition may be increasing in what has largely been a twoplayer market, some experts say the airline industry is still one of the most protected in the country, limiting consumer options particularly when it comes to domestic travel.
Bill C-49, the Transportation Modernization Act, may have lifted foreign ownership limits to 49 per cent from 25 per cent, but a single international investor or carrier cannot hold more than 25 per cent of the voting interests of a Canadian airline.
The lifted restriction has not really boosted competition — Jetlines and Enerjet received the exemption in 2016, but have yet to formally launch — and the ability for foreign carriers to operate domestically — called cabotage — is still restricted in Canada, as it is in most countries.
Passengers shouldn’t expect these restrictions to dramatically change anytime soon, said Fred Lazar, a professor at York University’s Schulich School of Business in Toronto.
“Every country protects certain industries, either for cultural reasons or supposedly national security reasons, and Canada is no different,” he said. “While there have been attempts to limit foreign ownership rules in the airline industry, it hasn’t progressed that far. As long as you have bilateral treaties and control provisions, that’s going to limit the extent of liberalization in the industry.”
Canada first began deregulating the airline industry in the 1980s, when it decided to privatize Air Canada. The airline became privatized in 1989 and still dominates the Canadian market.
According to data from the CAPA Centre for Aviation, an Australia-based industry researcher, Air Canada and WestJet controlled roughly 82 per cent of the domestic seats, and 66 per cent of the system-wide seats in September. Air Canada alone accounted for 44.5 per cent of the system-wide seat capacity.
Lazar said airline industry protectionism works in two key ways. First, there are foreign ownership limitations, which have gradually been liberalized around the world, but rarely to the extent of allowing complete foreign ownership of an airline.
Australia is one rare exception, allowing full foreign ownership of carriers operating domestically, but maintaining limitations on international carriers. The move, made in the 1990s, was supposed to increase competition, but Lazar said it did little to accomplish that.
“All it did was knock out one of the domestic players (Ansett Australia) and replace it with Virgin Australia,” he said. “At the end of the day, it didn’t increase competition.”
Ashley Nunes, a transportation regulatory analyst at the Massachusetts Institute of Technology (MIT) in Cambridge, Mass., said the historical impetus to restrict foreign ownership has been national security concerns and, to some extent, national pride.
The second form of protectionism, according to Lazar and Nunes, are air service — or Open Skies — agreements.
Since the Second World War, countries have negotiated bilateral air service agreements that specify which carriers can operate between them. Canada has more than 100 agreements and many of those have been increasingly liberalized over the past couple of decades, beginning in 1995 with the Canada-U.S. air service agreement, allowing more international airlines to fly in and out of the country.
Robert Kokonis, president of Toronto-based aviation consulting firm AirTrav Inc., said the open skies agreements have worked well to expand the options Canadian consumers have.
“Over the last 10 years, Canada has been very busy signing new bilateral agreements and enhancing existing agreements. Overall, it’s been pretty good,” he said, although he added that some countries can use the agreements to protect their own domestic carriers. “Sometimes it’s a bit of a fine line between what is fair (and ensures a level playing field) and what is protectionism.”
Indeed, some carriers have faced difficulties when trying to expand services in Canada.
For example, United Arab Emirates in 2010 urged the Canadian government to allow its major carriers, Emirates and Etihad Airways, daily flight access to and from Canada. At the time, Air Canada did not fly to Dubai, and chief executive Calin Rovinescu argued changes to the Canada-UAE bilateral agreement were not necessary because expanding capacity was not warranted.
In the end, the Canadian government opted not to expand the bilateral agreement, and Emirates currently operates three weekly flights between Dubai and Toronto.
Michael Tretheway, chief economist at Ottawa-based InterVistas Consulting Group, which works with the aviation industry, said in a report published at the time of the Emirates debate that Canada was “foregoing economic and social benefits” by engaging in “selective protectionism which benefits one set of foreign air carriers by denying opportunity to other foreign carriers.”
Nunes said the spirit of Open Skies agreements has historically been to relinquish government control of the airline industry, but domestic airlines still pressure governments to maintain control and their advantage.
“Everyone loves competition, as long as they don’t have to face any,” he said.
The 2016 Emerson report, an in-depth review of the Canadian Transportation Act, said it was time to reconsider policies that served the nation well when the domestic airline industry needed protection to thrive, but now impair competitiveness.
“Protectionism comes at a cost that is largely borne by Canadian consumers, who pay relatively high airfares, and by the Canadian travel and tourism sector that also, due to higher costs, has been losing market share over a decade,” the report’s author David Emerson said, recommending the government open more international air service agreements that allow a minimum of seven daily flights a week between countries.
“The world is moving towards an open market for air services. Canada’s approach has outlived its usefulness and now renders our air services less competitive, less trade-friendly, and more costly than those of our global competitors”
However, Kokonis said lifting foreign ownership rules further would do little to change the Canadian industry, in part because of the country’s widespread geography and low population density.
Foreign investment, he said, would just provide Canada’s carriers with an additional source of capital, and not necessarily translate to more flights around the world.
But Nunes said lifting barriers in various bilateral air service deals will benefit consumers and potentially improve the product offered by Canadian carriers.
“As long as the status quo is preserved, Canadians end up paying the price for it,” he said.
Lazar said the best approach would be to include the aviation industry within broader trade agreements, with rules regarding subsidies and dumping, and let the best players win.
“If the domestic players are more innovative, more creative, they’ll succeed,” he said. “It doesn’t matter to me what name is on the plane.”
For the most, Lazar said other countries employ the same tactics as Canada when it comes to protecting their own industries.
“Canada’s no worse than most other countries in the world. It’s not really on the protectionist end of the spectrum, but it’s nowhere near the other end of the scale,” he said. “Nobody really is.”