Submissions of the
AIR LINE PILOTS ASSOCIATION, INTERNATIONAL
June 25, 2002
To
Ms. Debra Ward
Independent Transition Observer on Airline Restructuring
Appointed by the Honourable David Collenette, Minister of Transport

The Air Line Pilots Association, International (ALPA) is a union representing 66,000 airline pilots at forty-three U.S. and Canadian airlines. Founded in 1931, ALPA is affiliated with the Canadian Labour Congress (CLC) and the American Federation of Labor-Congress of Industrial Organizations (AFL-CIO). ALPA Canada is a member of the International Federation of Air Line Pilots Associations (IFALPA), an organization made up of pilot associations from over 90 countries worldwide and the voice of pilots to the International Civil Aviation Organization (ICAO), the United Nations body charged with developing international aviation standards.

In Canada, ALPA represents approximately 2,100 pilots at five airlines: Air Transat, Air Canada Jazz, Kelowna Flightcraft, Bearskin Airlines and Calm Air.

In addition to serving as the bargaining agent for the pilots it represents in collective bargaining, ALPA actively promotes and champions all aspects of aviation safety and security. It is the largest representative of the collective interests of pilots in commercial aviation in North America, and is a forceful advocate for the interests of the entire airline piloting profession.

As a major stakeholder in the industry, ALPA is concerned that the major goals of Canadian airline restructuring, namely the establishment of a viable airline industry that meets the needs of Canadians, have not yet been met. In the wake of the events of September 11, 2001, and the period of economic instability thereafter, the industry remains in a fragile position. The task of restructuring the industry has been made all the more difficult by the imposition of a variety of charges and fees, aviation security requirements and unfunded mandatory requirements that have added significantly to the cost of travelling by air. Canadians expect that communities will be served by the airline industry at a reasonable cost, with reasonable frequency and with adequate capacity. In turn, the many thousands of employees who work in the industry, and who depend upon the continued operation of the entities in which they work, expect a basic level of economic stability. At the present time, these entirely legitimate expectations, however, still remain a goal, not an accomplishment.

In these submissions and as outlined in more detail below, ALPA recommends that the government study, in consultation with all stakeholders, including airline employees, incentives to stimulate competition and to provide adequate service to communities across Canada. Further, ALPA recommends that the government set up a stabilization program to allow airlines to survive the extreme cycles that are characteristic of this industry. Finally, the government must control the costs it is imposing on this sector through ceasing to add charges to air travellers and by reducing the ones that exist, most notably the Air Traveller Security Charge.

At the same time, we do not propose a radical departure from the past policies of the government, which, in our view, are basically sound. Airline restructuring, the imposition of user pay charges, the divestiture of airports and navigational services, coupled with the September 11^th tragedies, have all had a major impact on the airline industry in the last two years. It is simply too early to tell whether the underlying market mechanism is not functioning adequately. In fact, such evidence as is available points to the opposite conclusion. In ALPA’s opinion, this is not the time to make major regulatory changes. Accordingly, ALPA warns against any misadventure into cabotage or the reduction of Canadian control of our industry. We are also opposed to a re-regulation of the industry that would restrict the kinds of operations that Air Canada or Air Canada Jazz could perform.

No Undue Liberalization of International Air Services Agreements

A number of industry observers have suggested that Canada should consider allowing foreign air carriers to carry Canadian cabotage (i.e., domestic) traffic. In addition, the Canada Transportation Act Review Panel has recommended that Canada, the United States and Mexico enter into negotiations to establish a North American common aviation area.

ALPA believes that permitting foreign airlines to conduct cabotage operations in Canada is both impractical and unwise for a number of reasons. Allowing a foreign airline to operate in Canada is quite different from allowing, for example, a foreign automobile maker to establish a manufacturing plant in Canada. That plant would have to operate as a Canadian company, subject to Canadian immigration, tax, language, labour, environmental and other laws. Cabotage operations by foreign airlines, on the other hand, suggest mobile workplaces (the aircraft) subject to foreign, not Canadian laws.

Thus, the notion of providing cabotage rights to foreign airlines is at odds with basic principles of Canadian law such as the notion that businesses that operate in Canada’s domestic market employ Canadians in those operations and apply Canadian labour laws to them. Permitting foreign airlines employing foreign workers subject to foreign labour laws to operate in our domestic market would place Canadian carriers at a competitive disadvantage and displace Canadian workers from high value jobs.

There is also no indication that either the United States or Mexico is considering eliminating their respective prohibitions on cabotage. The United States, in particular, has repeatedly stated that it has no intention of opening its domestic markets to operations by foreign carriers. Thus, the prospects for achieving a North American common aviation area are, as a practical matter, non-existent and we believe that Canada’s resources should be directed to pursuing policies that have a real chance of strengthening our airlines.

Foreign Investment and Domestic Control

One of the five basic principles of Bill C-26 was the maintenance of Canadian ownership and control. ALPA continues to support that principle. Despite the bankruptcy of Canada 3000 last November, and Air Canada’s subsequent domination of the domestic air travel market, there remain other established air carriers, and new ones are again entering the market. Westjet continues to grow and expand, Air Transat remains an active charter carrier, and Canjet and Jetsgo have very recently begun domestic operations. There are also numerous smaller regional carriers providing services to communities all over Canada, both in the passenger service and cargo areas.

In Transport Canada’s paper "Creating a Transportation Blueprint" there was recognition of the fact that in the airline industry, the size of the Canadian market imposes certain constraints. It will thus remain, as the report states, "a challenge to balance a strong and viable Canadian presence in an increasingly global market with service at home that meets Canadians’ expectations". It is difficult to conclude that foreign carriers could contribute meaningfully to that process.

The "Canada Transportation Act Review", which was issued in 2001, recommended that airline ownership restrictions be relaxed, and that the limit on foreign ownership of voting shares of Canadian airlines be raised from 25% to 49%. However, the only rationale presented in the Review in support of this recommendation was that raising the foreign ownership limit may facilitate access to foreign funds. We do not believe that the control over these resources should be relinquished on that basis. The Review noted in passing that airlines that took advantage of the increased foreign ownership limit should still need to demonstrate that effective control of the airline resided in Canada. No suggestions were made as to how that would be accomplished.

ALPA opposes a relinquishing of Canadian control of its airline industry. Canadians have invested heavily to establish the transportation infrastructure of this country, and it would not be appropriate for foreign investors to have control over the direction of airlines, which are a major component of that infrastructure. Furthermore, before any consideration is given to raising the foreign ownership limit, the Canadian government should consider ensuring that Canadian investors may make reciprocal investments and that there would be increased opportunities for Canadian air carriers in the home country of the foreign investors. Once again, however, this is not a likely outcome, since the United States has no interest in relaxing its foreign ownership rules in the aftermath of September 11^th.

ALPA is particularly anxious that there should be strong safeguards in place, before any increase in foreign ownership is permitted, in order that effective operational control of all aspects of an airline remains in the hands of Canadians. Setting the limit on a purely numerical basis at 49% would not likely achieve the purpose of ensuring domestic control. In a publicly-held corporation, possession of a 49% share holding gives a shareholder effective control of the enterprise simply because it is extremely unlikely that the remaining 51% would be held by only one other entity. In particular, ALPA is concerned that were a foreign airline to gain 49% control of Air Canada or any other domestic airline, that airline would seek to create "efficiencies" off-shore. It may do so by requiring that such things as maintenance be done in the home country; or, in the context of a code share arrangement, it may determine that an international route previously operated by both a domestic and a foreign-owned airline would be more profitably served by the foreign one. This would result in the significant loss of Canadian skilled and professional jobs, loss of profitable air routes, and the ultimate loss of control over the airline’s profitability, thus making it simply a shell Canadian company. Hence, it is necessary that there be a clear definition of what genuine Canadian control of an air carrier entails before consideration is given to handing over up to 49% control of the shares of a Canadian airline to foreign ownership.

It is imperative that Canada maintains its national interest in ensuring that it has a domestic airline industry that meets its unique needs and conforms to its national policies. In order to accomplish this goal, it is important that direction and effective operational control remain in Canadian hands. It is ALPA’s recommendation that changes to foreign ownership rules should be considered only if the current Canadian air policy framework has clearly failed to provide for a viable and competitive domestic market, and even then, only with the safeguards that have been outlined above in place and capable of operating effectively to protect the interests of Canadians.

In July 2000, when Bill C-26 was passed to ensure the orderly restructuring of Canada’s airline industry, one of the basic tenets of the Bill was to foster competition and to maintain Canadian ownership and control of the domestic airline industry. The government has made a commitment to having a "Made in Canada" airline industry on the sound bases that we have a relatively small population and a very large land mass, and therefore cannot rely on foreign carriers to serve Canada adequately. However, ALPA is concerned that if the government does not have a plan and policy in place soon to sustain and support the domestic Canadian airline industry, we may be faced with a diminution in services to both large and smaller communities within the next few years.

The demise of Canada 3000 is an example of how the airline industry can be de-stabilized in short order. In the summer of 2001 Canada 3000 was a thriving and growing airline, poised to become the second major carrier in Canada. However, with the launch of Air Canada’s Tango low-fare brand, in the aftermath of the September 11^th terrorist attacks, and with the ensuing economic downturn in the airline industry, Canada 3000 lost momentum quickly and ultimately went bankrupt, putting out of work almost 5,000 employees, and leaving thousands of travellers stranded around the world or with worthless tickets. It is extremely unsettling for Canadian workers and passengers to go through the loss of an airline of any magnitude. The Canada 3000 example is one of only a medium-sized airline going under, and yet the ripples were felt all over the country through the huge loss of jobs, stranded passengers, and worthless tickets.

The federal government had announced in the Fall of 2001 that it would provide financial aid to airlines affected by the events of September 11^th. However, when Canada 3000 was obviously in a financial crisis, the government could not move quickly enough to provide much-needed assistance. ALPA believes that this is an area where considerable improvement is both possible and necessary.

In ALPA’s view it is shortsighted to believe that such "market corrections" are good for the airline industry. Quite to the contrary, such airline failures make the traveling public nervous and less willing to commit their hard-earned money to the purchase of tickets on airlines other than Air Canada. For workers, the effects are devastating, as huge numbers of workers lose their livelihoods, and thousands of families are financially blindsided without any notice.

ALPA does not support the idea of re-regulation of the airline industry generally, and, as will be discussed in more detail below, does not believe that making Air Canada’s market share smaller through regulating it would be helpful in creating a semblance of stability in the Canadian airline industry. However, ALPA is of the view that if incentives were put in place to assist smaller air carriers to grow and expand their services, that would ultimately serve the same goal of creating domestic competition for air services.

Airlines operate on a slim margin in the best of economic conditions. In order to smooth out the cycles in the industry, and in order to sustain a vibrant Canadian airline industry, it may be necessary for the government to put in place a stabilization fund that could be drawn upon by Canadian airlines in emergency or exigent circumstances.

Access to such a fund should be through clearly articulated eligibility guidelines, which themselves cannot be so onerous that the fund is in fact inaccessible. In particular, performance conditions attached to the receipt of financial assistance cannot require that the applicant airline’s employees bear the bulk of the economic burden through wage and benefit concessions. It would be simply unfair for workers to be forced to pay the price for their employer’s survival and growth.

Further, when an application for monies from such a stabilization fund is made, there would need to be a quick government response mechanism, and preferably, an ongoing consultation process with the participants in the industry. The very nature of an emergency or exigent circumstance is that there is a great urgency to the need. If it takes the government weeks or months to respond, a precarious situation can spiral out of control and go beyond redemption before any meaningful measures can be taken. The Canada 3000 example is a case in point.

An area of related concern is the imminent loss of air transportation services to some remote communities. As of January 2003 Air Canada, including AC Jazz, will be permitted to stop providing air services to unprofitable locations in Canada. It will begin to give notice of the cessation of services by the Fall of 2002. Thereafter, it remains to be seen if there will be smaller regional carriers that will step in to provide air services. If smaller carriers also find that it is economically unfeasible to serve some destinations, it may become necessary for the Canadian government to consider providing subsidies to carriers to ensure that there is transportation available to link remote communities to larger centres from which further connections may be made to a hub.

The U.S. model for ensuring the provision of air travel services to remote or rural communities is the Essential Air Service program. It was established in 1978 when the airline industry was de-regulated. The program was a response to the very real concern that in a de-regulated environment air carriers would cease offering scheduled air service to communities with low traffic levels. Through it, and with the help of federal subsidies, smaller communities are able to retain a link to the national air transportation system. In 1999 eighty-nine communities all over the United States were receiving subsidized services on smaller regional carriers.

A final area in which an industry stabilization fund may assist in ensuring the growth of smaller carriers is access to loans or loan guarantees to smaller, undercapitalized airlines. It is often difficult for smaller carriers to upgrade their infrastructure because they are not seen as sufficiently strong financial risks for lending institutions. Yet, upgrading aircraft or equipment in this industry is an expensive endeavor. ALPA recommends that the government consider this as an area of study in the very near future as it may also be a part of the solution to the problem of serving remote or rural communities in Canada once Air Canada pulls its services out. There are precedents for transportation funding initiatives including the significant subsidization of Via Rail, the funding of highway improvements and railway crossing improvements and, in the specific context of the aviation sector, the Airport Capital Assistance Program. The purpose of the latter program is to assist eligible applicants in financing capital projects related to safety, asset protection and operating cost reduction. Similarly, We recommend that similar funding mechanisms for the airline industry deserve be given serious government consideration.

We suggest that in order for the Canadian airline industry to be more stable, and to ensure that there is airline competition, it is necessary that there to be some level of government stabilization assistance available. Without such assistance we can envisage further losses of consumer choice in air travel, and the growing dominance of just one airline in this country. However, we do not suggest that such a program be considered a substitute for the operation of the market, which even in this context, remains as the preferred method of allocation of resources. We therefore recommend that the government begin to study the idea of an on-going airline industry stabilization fund which could meet the objectives of ensuring air transportation services to underserved communities and of creating a more competitive and stable domestic airline industry.

Proposed Divestment of Air Canada Jazz

As indicated, ALPA does not support the re-introduction of a regulated supply of air services in Canada, and continues to believe that, as an underlying principle, the market mechanism is the most reliable instrument for directing the allocation of airline resources. In this regard, absent concerns about predatory pricing and other unfair anti-competitive practices, we cannot understand how placing additional restrictions upon Air Canada’s ability to operate in various markets, or restricting the kind of services it can provide, can assist in the goal of providing Canadians with reliable air services at a reasonable cost. As the past year has demonstrated, Air Canada is at best marginally successful in financial terms, and its long-term prospects are far from certain. Regulating its operational activities and restricting its capacity could significantly jeopardize the very entity that provides the vast bulk of the country’s air services. Any such proposal should be approached with extreme caution.

In this regard, we are deeply concerned about the proposal noted in your interim report that, in the interests of increasing competition, seeks to carve AC Jazz out of the Air Canada system. We believe that such a proposal is based on a serious misconception of the role of AC Jazz within the Air Canada system. Air Canada owns, and significantly controls, virtually all aspects of the AC Jazz operations. It provides infrastructure, marketing expertise and makes most of the significant decisions concerning its operations. Most importantly, AC Jazz utilizes Air Canada’s code, with the result that AC Jazz provides to Air Canada the critical feed to its hubs, so that passengers throughout the country will be able to have immediate access to Air Canada’s highly lucrative long-haul and international service. In turn, AC Jazz benefits from its association with Air Canada’s "branding", as well as its access to traffic that is destined to elsewhere in the Star Alliance system. The two nominally separate airlines operate as one integrated airline system, and in all practical respects, a single economic entity.

One simply cannot isolate a single aspect of an integrated airline system’s operations and present it to the public as a potential competitor to Air Canada. At a practical level, Air Canada Jazz does not currently possess the material or managerial infrastructure to permit it to operate as an independent airline. The purchase price of the company would only cover a portion of the acquisition of an operating airline; as the unsuccessful sale of Canadian Regional Airlines suggests, the considerable additional cost that would be required makes it a dubious investment. Moreover, AC Jazz’s current position in the Air Canada network provides for internal efficiencies that would be lost were the operational divestment proposal to be implemented. Unless Air Canada were to develop another regional carrier system (something that would be essential to its survival as an airline), the crucial benefits of this system would be lost to consumers. From AC Jazz’s perspective, the result would be an even higher cost structure, which would be reflected in a diminished capacity to provide air services at a competitive price.

Moreover, it is far from clear as to what market would be serviced by the proposed new carrier and what competitive purpose would be served were Air Canada to be required to divest itself of AC Jazz. Certainly in its present form, AC Jazz would make an unlikely competitor to Air Canada. Conversely, the likely effect of providing Air Canada Jazz access to additional alliance codes would be to diminish, rather than enhance, competition in the short-haul domestic market, since this would only serve to provide additional competitive advantages in a market it already dominates.

We do not believe that there is a competitive case for the disengagement of Air Canada Jazz from the Air Canada system. Further, ALPA strongly rejects the suggestion that the participants in the airline system, and notably, the employees, should be directly burdened with the goal of enhancing regional development. Airlines, whether they are mainline or regional, will provide service to locations where there is consumer demand. The costs entailed in providing levels of socially necessary or desirable service beyond that point should not be borne by airlines. Such additional levels of service most certainly should not be extracted from the collective agreement rights of airline employees, as would be the case were union job security ("scope) provisions to be legislatively curtailed. ALPA believes that the issues of job security, which in the airline industry concerns the allocation of flying work, is best left to the collective bargaining system, and should not be the subject of regulation to promote the goals of regional development or other social goals, however valuable they may be.

ALPA supports the goals set forward in Bill C-26 regarding airline restructuring. Therefore, in order to promote a healthy, competitive airline industry that operates both in the best interests of the workers in the industry and the Canadian traveling public, and for the reasons outlined in this submission, ALPA’s positions and recommendations are as follows:

· ALPA believes that it would be impractical and unwise for the Canadian government to permit foreign airlines to conduct cabotage operations in Canada.

· ALPA maintains that it is important that direction and effective control of airlines remain in Canadian hands.

· ALPA recommends that changes to foreign ownership rules be considered only if the current Canadian air policy framework has clearly failed to provide for a viable and competitive domestic market, and even then, changes should only be made with the safeguards that have been outlined here in place and capable of operating effectively to protect the interests of Canadians.

· ALPA is opposed to the idea of re-regulating the airline industry and does not believe that it is necessary to regulate Air Canada’s market share in order to create domestic competition for air services.

· ALPA recommends that the government study, in consultation with all stakeholders, including airline employees, incentives to stimulate competition and to provide adequate service to communities across Canada.

· ALPA recommends that the government set up a stabilization program to allow smaller airlines to survive the extreme cycles that are characteristic of this industry, to assist smaller air carriers to grow and to expand their services through loans or loan guarantees, and to ensure a healthy competitive environment that is not dominated by one carrier.

· ALPA does not believe that there is a competitive case to be made for the disengagement of Air Canada Jazz from the Air Canada system.

· ALPA believes that issues of job security, which in the airline industry concern the allocation of flying work, are best left to the collective bargaining system, and should not be subject of regulation to promote the goals of regional development or other social goals.

· ALPA recommends that the government control the costs it is imposing on this sector through ceasing to add charges to air travellers and by reducing the ones that exist, most notably the Air Traveller Security Charge.

ALPA thanks you for your efforts to date and for the opportunity to make these submissions, and wishes you the best of success in your extremely important work. If you have any questions regarding our submissions, please do not hesitate to contact us.

Contact information for the Air Line Pilots Association, International:

Air Line Pilots Association, International
155 Queen Street
Suite 1301
Ottawa, ON
K1P 6L1
Attention: Art LaFlamme, Senior Representative
Telephone: (613) 569-5668
Fax: (613) 569-5681
Email: laflammea@alpa.org