Canada’s approach to air agreement negotiations involves a search for a careful balancing of the quest for liberalization and a prudential concern for its domestic industry. The airline business is recognized globally for a kind of inherent fragility. The Canadian industry has been no exception with over 100 Canadian carriers, small and large, having gone bankrupt, closed or otherwise merged and consolidated since the dawn of Canada’s air transport industry in the 1920s.
Since its creation as a state-owned enterprise in 1936 and following its privatization in 1988 the viability of Air Canada in particular has been an on-going concern of the Canadian government. This concern partially stems from Canada’s wide territory, relatively small and scattered population, and critical reliance on air transport for its own domestic economy and the integration and mutual support of the carrier’s domestic and international networks.
Since the integration of Air Canada and Canadian Airlines International in 2001 following the latter’s economic difficulties, the former has been in the unique position in Canada of offering scheduled services on integrated domestic and international networks of significance. While WestJet has grown significantly since its launch in 2006, it might still take many more years and a fleet diversification before it can, like Air Canada, offer integrated networks of comparable size, extent and diversity.
From the Government’s viewpoint, exposing Canada’s carriers to full global competition risks undermining Canada’s domestic services and a key part of its own domestic economic infrastructure. In contrast, this is not a concern of major global airlines based in small territories, some without even domestic services, such as Singapore, Qatar or the United Arab Emirates, all known to have pressured Canada to open up its market. It must be noted that many global carriers, such as those operating from the three countries referred to above can benefit from state-ownership status. .
This search for balance with a focus on preserving domestic service has had had an effect on policy. For example, when the Canadian industry was dominated by both Air Canada and Canadian Pacific, the Canadian government went as far as adopting a “division of the world” policy, allocating exclusivity of Canadian carrier service to different continents in order to prevent them competing head-on internationally.
The United States adopted of an Open Skies policy in 1979 on the heels of its own airline industry deregulation. This called for seeking to negotiate the abolition of market access restrictions on services (but not on airline foreign ownership). Many of the bilateral ATAs the USA has negotiated since were not necessarily “balanced” with respect to the traditional approach to national interest as they often called for the trading the access to small foreign markets by granting access to its own very large one. This oddity, seemingly based on ideology, however can be understood when considering that open skies agreements, without market access restrictions, no longer requires US government authorities to discriminate against some of its own carriers in favour of others. For instance, ATAs that include limited frequencies or access to a limited number of cities can force government authorities to make difficult decisions in the allocation of those limited traffic rights to some interested carriers against others. This often results in the US authorities being taken to court by frustrated American carriers.
In 1995, Canada and the United States agreed on the main terms of an “open skies” air agreement. In just over two years, the number of city-pair routes served by direct scheduled services reached 79[1]. This agreement was completed in 2005. Before the conclusion of the 1995 agreement, direct routes between Canadian and U.S. cities were very limited in number and well below their economic potential. Carriers went around the limits by offering chartered services, an awkward way to operate, especially in the context of such large integrated economies.
In 2006, Canada adopted its “Blue Sky” international air policy seeking “… to negotiate reciprocal Open Skies-type agreements when it is in Canada’s overall interest to do”1. While providing an air of market liberalism, this policy essentially allowed the Canadian government to continue doing what it has long done, i.e. being responsive first to its domestic air transport industry. While the U.S. air negotiator has a permanent mandate to negotiate open skies agreements, the Canadian counterpart receives a separate tailored ministerial mandate for each and every negotiation.
While domestic stakeholders to international air agreements include airlines, airports and the different components of the domestic tourism industry, the “Blue-Sky” policy has been criticised by some as being driven by the airline industry for its own, if not, exclusive benefit. This criticism particularly applied to ATAs concluded in the case of in less mature bilateral markets. These ATAs typically include market access restrictions aimed at preventing airline capacity by foreign carriers undermining Canadian carriers’ third country markets. In short, the aim has been to prevent excessive carriage of 6th freedom traffic by establishing capacity based on the size of the short term bilateral market with a slight margin for market expansion. Even the logic of a fully open air agreement support of a bilateral free trade agreement with the same country has not been universally accepted with government circles.
At the same time, pressure for greater global economic liberalization has pushed Canada to open up traffic rights generally. This especially applied to the European Union which centralized the responsibility for air services away from its Member States.
One key factor that encourages Canada’s easing up on market access has been the creation and quick expansion of airline alliances in the late 1990s. At the time of their creation, Air Canada became a founding member of the Star Alliance and Canadian Airlines International joining the Oneworld alliance. In addition to providing marketing advantages, airline alliances are also useful to circumvent the prohibition met in virtually every country against majority foreign ownership of its airlines 2 and the business rationalisation that would normally follow.
Alliances have resulted in some operational and even revenue integration arrangements requiring governments’ anti-trust immunity. In the case of close alliance-partner airlines, this resulted in significant market access liberalization between Canada and the countries involved as it was seen of commercial interest to the Canadian airline industry.
Canada’s approach to air negotiations has been to open slowly to carriers’ demands rather than permitting broad market access ahead of market expansion. Canada never believed in the argument that liberal traffic rights will rapidly and inevitably lead to traffic. The focus of many Canadian air agreements has been to allow sufficient capacity to support the size of the bilateral market only in the short to mid-term and to expand traffic rights as the market expands. Some of these agreements require expanding through successive rounds of negotiations when the market does expand. This approach was aimed at preventing foreign carriers from being in position to exercise excessive 6th freedom operation, the Canadian government’s undeclared policy. This right allows scheduled carriers to carry traffic between two foreign countries, provided the aircraft touches down in the airline’s home country. Large 6th freedom capacity is the right that all carriers want to benefit from while seeing their competitors being denied it. Sixth freedom operation prevention, notably between Canada and Asian countries via Middle-East hubs, has been at the crux of many inconclusive negotiations with foreign countries.
However, results of such a careful approach favourable to Canada cannot be guaranteed forever. Some foreign carriers can gain strength over time and become dominant. For instance, Cathay Pacific operates roughly twice the number of flights as Air Canada does at Hong Kong plus all-freighter scheduled services at three Canadian cities. Air Canada was clearly dominant in the early days of direct services to and from China. It is still the only Canadian carrier to China, operating about 35 weekly frequencies depending on the season while three Chinese carriers are closing in with approximately 30 frequencies.
While Canada has often been a difficult partner with some countries, it is important to note that it has also faced significant resistance from other countries in its efforts to open up these markets. Reasons vary, ranging from limited airport landing and take-off capacity at peak times to protection of third country markets. Some of these countries consider Canadian carriers as a threat to their industry, similarly to Canadian authorities considering Middle-East carriers.
So far, Canada appears to have achieved its aim of carefully generally liberalising markets while maintaining the protection of its air transport industry. To mid-2014, open skies agreements have been concluded with only 16 countries, key ones being with the USA and the European Union. However, these open skies-type ATAs are said by officials to cover 99% of the existing bilateral passenger markets to and from Canada. Not agreeing to certain countries’ calls for open skies-type agreements essentially prevents airlines from trying out new routes or offering capacity currently not permitted by existing ATAs or yet to be negotiated ATAs in the hope of building up passenger traffic. Many other less than open skies-type agreements have been concluded with countries representing fairly small or seasonal tourism markets. In some of these cases, Canadian carriers are often dominant.
Many of the more recently concluded air agreements have been with countries with markets so small that direct services might not appear for years to come.
Author
Daniel de Bellefeuille
References
[1] The US-Canada Open Skies Agreement: Three years Later: Statistic Canada, Summer 1999; Catalogue number 87-003-XPB.
1 Transport Canada : The 2006 Blue Sky Policy : Objectives, Principles, and Approach, November 27, 2006
2Dymond, Willam A, de Mestral, Armand; The Regulation and Deregulation of International Air Travel; Institute for Research in Public Policy; 27 October, 2003
