Government and market roles in Canadian airlines

¶ … roles of government and the market be in Airlines in Canada?

Canada Airlines

Introduction a) the issue:

The airline industry is very important for the economic and social welfare of several communities throughout Canada. The liberal government's determination to allow corporate shareholders who are mainly concerned about the profitability of such a crucial industry symbolizes an appalling rejection of leadership qualities. It is important that Govt. consider several proposals while shaping the new Canadian Airline policy and does way with the archaic regulatory system that was in place before 1987. The people of Canada supposed the launching of new and special service operators in the market would augment competition and provide better and services at comparatively lower cost. Till the year 1993, the Canadian airline was controlled by two leading airlines vying for market share on every important route. This keen competition damaged the financial equilibrium of both the airlines. The world over, it has been observed that deregulation has been the main reason of the crisis of the airline industry. The answer has to be found in efficient, modern regulation targeted at safeguarding public interest and making sure that Canadian airlines are able to coexist and compete efficiently in the international market. (Desjarlais, n. d.)

Modern regulation implies taking recourse to a flexible approach and using governmental powers selectively to make sure that an atmosphere of fair competition within the airline industry is present and they are able to deliver according to the public trust. Crowded and profitable routes such as the Toronto-Montreal-Ottawa will draw competition among the airlines. It is important to note that governmental regulation is not necessary to ensure adequacy of service. Therefore governmental role should be one of an adjudicator in order to guarantee justifiable competition and check damaging anti-competitive behavior like predatory pricing policies and excessive capacity. As against this, routes having low-traffic between smaller communities are not assured to draw service. In these situations, proficient regulation is needed since providing levelheaded and service that is affordable is a social and economic need. The Canadian government is equipped with a lot of tools at its disposal to guarantee service to such types of communities, inclusive of incentives, calling tenders and cross-subsidizing. (Desjarlais, n. d.)

The urgent need of the hour is (i) American Airlines have since been controlling Canadian Airlines in spite of the present 25% foreign ownership restriction. The Majority suggestion is to increase the restriction to 49% would give a free hand for more foreign control of the Canadian airlines. The current 25% restriction must be made into a regulation (ii) the Majority Report suggests making the Air Canada ownership restriction to double in case of individuals or groups to 20% so as to draw large investors which is not justifiable. Increasing the limit to 20% would facilitate the control of Air Canada by investors keen on rapid financial returns. Since the interests of the big shareholders and other stakeholders hardly ever correspond, Air Canada's ownership should remain broad-based to guarantee that is answerable in case of all stakeholders and not merely to big shareholders. The Majority Report suggests for permitting sabotage and modified sixth freedom. These techniques would allow foreign airlines take way the best from the Canadian domestic market. The Report also suggests permitting 100% foreign-owned exclusive Canadian aircrafts into the market. The New Democratic Party of Canada is against such suggestions, since these would worsen the already destructive influence and weaken the already damaging influence of deregulation and weaken the entire Canadian airline industry. Akin to other nations, Canada must reserve its domestic market for Canadian airlines, lending them a secure ground to contest on the international front. (Desjarlais, n. d.) b) Background information / history of the Issue:

On the international front, air carriers throughout the world have encountered several challenges: the downslide of the high technology sector that had a significant impact on air transportation, an economic slowdown in the aftermath of the 9/11 incident, the surfacing and growth of new and emerging competitors, spiraling fuel costs, the Iraq war and the SARS epidemic outbreak. With the deterioration of the financial health of Air Canada, Air Canada laid importance on the urgency to lower labor costs by $650 million every year. A range of probable solutions for assisting the Canadian Airline industry has been suggested in the hour of crisis. Whereas the crisis might be especially be severe in case of Air Canada, it is vital to remember that other Canadian airlines are suffering from lower financial stability. Especially, revelation was put forth regarding (i) government subsidy to help the airline industry, and especially Air Canada. (ii) fee moratoria, lowering or the removal of a number of areas, inclusive of the NavCanada fees and the Air Travelers Security Charge, and the payment of some fees, like the airport security, out of the general tax revenues (iii) a rent cessation, reduction or removal for Canada's airports. (iv) Payment holiday, reduction of removal on the payment of the federal aviation fuel excise tax. In the view of several Committees, the transportation security is an important national question which must get federal investment. It is considered that transportation security in this manner, instead of through user charges, would lead to increased airline passengers, thus enhancing the chances of profitability for the Canadian airlines. ("An industry in crisis: safeguarding the viability of the Canadian Airline Industry," n. d.)

Thesis Statement:

Complete deregulation and reduction of the monopoly-like situation from the Canadian airline industry will increase competition and ensure fair play bringing an overall improvement in service level and growth within the industry."

Discussion/Body of the paper

The domestic airline industry in Canada has progressed from the state of being an Air Canada monopoly to been almost deregulated. This transformation emerged for two causes. The first emerged from the rising demand from the air carriers during the middle part of 1970s for less government regulation and increased competition. The second cause was the deregulation of the U.S. domestic airline industry. The Canadian airlines started operations in the 1990s as a national competitor to Air Canada. The two companies consolidated their domestic business and affiliated themselves with the international alliances. Notwithstanding this, the two companies experienced financial problems, and by 1999, Canadian Airlines was at the threshold of bankruptcy. Finally, Air Canada made an acquisition of the Canadian Airlines and surfaced as the controlling - rather unregulated national airline. From that period, both the policy makers and the traveling public have been worried with the questions such as adequacy of competition and protection or the lack of it for Air Canada. In case competition is insufficient, the steps need to be taken to make conditions which would produce adequate competition. (Christopher; Dion, 2002)

Whereas the years 1987 to 1989 was a period of high profitability, the airline industry was faced with the worst crisis in the period from 1990-93. The problem began during the early part of 1990 with the rise in fuel prices in real terms whereas a deterioration of economic climate in several nations, especially the U.S.A. And Britain started to discourage demand in some markets. Several airlines needed huge capital infusion in order to enable them to sail through the initial stages of 1990s. Developments in Information Technology and the Internet led to electronic ticketing containing the details of the flyer's boarding pass and details of his itinerary and other reservations inclusive of his room number at hotels. This is presently the easiest part. However, e-commerce is transcends reservations, or automatic ticketing or monitoring expenses and travel policies. It is all regarding the gamut of relationship among suppliers, in this situation the airlines, and their customers but also the relationship among the airlines themselves and their own suppliers of goods and services. (Doganis, 2001)

During the 1950s & the 1960s, the air traffic of the world, measured by ton kilometers ferried, went up on aggregate at around 14-15% every year. During the decadal period from 1970-79, the annual growth rate was around 10%. This indicates that the air traffic and the airlines doubled in size following every seven years or the like. In the forthcoming decade till 1989 growth came down to nearly 6% on a yearly basis and during the decade till 1999 the growth rate came down somewhat at 5.2%. Considering absolute figures, due to the higher base, a 5% spurt in recent years shows a much rush in demand compared to 10% annual growth thirty years back. (Doganis, 2002)

Considering the business terms, Canadian airlines will start on using the U.S. no-fly list after the federal government expands its own schedule of barred passengers during June, 2007. A spokesman for the group representing Canadian airlines disclosed that carriers will go on using an extensive diversity of sources in order to decide who is permitted to board flights. The Canadian no-fly list will set off existing security tools according to Fred Gaspar, Vice President of planning with the Air Transport Association of Canada. ("Canadian Airlines won't abandon U.S. no-fly list," n. d.)

Deregulation of Canadian airline industry has resulted in speedy consolidation, lack of consistent service, and high prices which is just the reverse of what the policy makers assured in 1987. Following the emergence of Air Canada as the sole national airline, Canadian travelers will possibly suffer more from excess booking. As against the primary markets, the regional markets encounter the double problem of falling quality of service standards and higher prices. For instance the analysis of costs, prices and profits recommend Air Canada's regular return air tickets from Thunder Bay, Ontario to Toronto could be lowered reduced by 75% in case they showed considerably efficient operating expenses. The fares for travel to far-off areas can be kept on the higher side as the operating airline usually enjoys a monopoly status. Apart from that, these higher than competitive prices subsidize the bigger regions and pose a threat to the long-term opportunities for business, employment and tourism in smaller centers such as Thunder Bay or St. John's. The issues for bigger markets can be solved with the help of conventional procedures. (Dadgostar; Poulin, 2001)

Air travel to remote markets requires a different procedure, since it is near to a natural monopoly, most efficiently catered by a sole operator. Monopolistic impacts can be alleviated through adhering to the auctioning the sole right to the service smaller markets. Higher stability of revenue gives the wining operator with the incentive to provide secured, quick, efficient and service that is reasonably priced. The huge distances between the various cities of Canada renders airplanes the most appealing option for personal and business travel. Even with single national airlines, competition in the important centers such as Vancouver. Toronto< Calgary, Edmonton, Winnipeg and Montreal can be encouraged through way of granting licenses to the companies to vie against Air Canada, or through bilateral agreements which permit foreign competition in exchange for giving Air Canada access to overseas destinations. (Dadgostar; Poulin, 2001)

In the aftermath of the Air Canada's acquisition of Canadian Airlines International, the capability of the domestic airline industry to render Canadian consumer superior quality service at a reasonable price emerged as an important focus of attention and trepidation. (i) Following amendment to the Canada Transportation Act, it gave Canadian Transportation Agency vehement authority to monitor prices on monopoly routes and supervise the terms and conditions of carriage. (ii) Amendments to the Competition Act rendered the Competition Bureau more powers to deal with the airline-specific anti-competitive acts and to guarantee potential entrants have the reach to essential facilities. It has been stipulated that airline must at present give longer notice in case they plan to stop extending service to small communities. Apart from that, the government built an Independent Transition observer on Airline Restructuring and Air Travel Complaints Commissioner at the Agency level. With the latest law aimed at controlling Air Canada's market power, Canadian policy has turned the opposite from the earlier years, at the time when Air Canada remained an instrument of government policy and the attention remained on safeguarding the country's national airline from excessive competition. Since the entire period of 1980s, government removed the majority of the limitation restricting the capability of the Canadian carriers to react to the market forces, making the route for developing of a competitive industry offering more and more frequent flights, fares which better showed airline cost and a considerable range of prices and service offering. ("Chapter 7: The Airline Industry," n. d.)