Urban Renaissance Institute

Fred McMahon
Financial Post
December 22, 1999

Most Canadian air travellers would be shocked by how badly they’ve been gouged by Canada’s officially sanctioned air duopoly. Domestic ticket prices have soared while international fares and U.S. fares have plummeted in real terms. Things are likely to get worse, with the federal government happily promoting a brand new Canadian monopoly.

Yesterday, the Competition Bureau proposed new conditions and regulations for Air Canada’s emerging monopoly. But regulations themselves tend to increase costs, and “consumer protection” rules usually end up protecting the monopolist from the consumer. Even worse, Canada’s political masters are willing to kick the competition watchdog into the basement at the drop of the political hat. That’s happened before in airlines, as well as in other key sectors.

In international flights from either the U.S. or Canada, and in U.S. domestic flights, air fares have glided downward over the past two decades in response to deregulation and increased competition. But not in domestic Canadian flights; not since the faux deregulation of 1988 cleared ticket prices for take-off. From 1987 to 1997, the most recently available data, domestic air fares in Canada climbed an astonishing 17% in after-inflation dollars (50% in before-inflation dollars). These numbers are based on Statistics Canada’s basket of ticket prices, including economy and discount fares.

But competition is alive and well on Canada’s international routes, where fares, which consistently rose less than inflation, are now lower in real terms than in 1987. In the United States, where competition is more intense, fares have fallen more than 15% since the mid-1980s. That’s the sort of competition Canada needs to stitch together our country’s long, thin ribbon of people. Instead, Canada’s airline policy has, if anything, frayed unity and reinforced north-south connections. The number of people flying between Canadian centres remained flat between 1987 and 1997.

Over the same period, the number flying to U.S. destinations rose by 80% while the number flying to other international destinations rose by 85%.

Today more people board planes for U.S. centres than for Canadian ones, and almost as many head off to other international destinations. The reasons for this are complex, but it sure doesn’t help that international air travel is often cheaper for Canadian consumers than travel within Canada.

Things would have been tougher for Canadian consumers had it not been for the entrepreneurs who got WestJet flying the Western skies in 1995. While ticket prices kept right on climbing in Eastern Canada, they plummeted between most Western cities, sticking travellers east of Manitoba with the bill for Canada’s duopoly.

Air travel is more heavily tilted to personal travel in Western than in Eastern Canada. Because personal travellers are more price-sensitive than business travellers, prices have generally risen more slowly in the West. Then competition from WestJet put the duopoly’s price thruster into reverse.

Canada is a big place with few people, too few to permit the multiple airlines — and their steep overheads — needed to bring competition. Canada’s 1988 deregulation only sped up a process already underway at the time: the gobbling up of regional airlines by Air Canada and Canadian Airlines International, formed by the combination of Pacific Western Airlines and Canadian Pacific. Canadian further reduced competition by absorbing the last major independent player, Wardair, in 1989.

Under the Air Canada-Canadian Air duopoly, competition never materialized. Canadian quickly found itself in financial difficulty, weakening its ability to compete with Air Canada and opening the door to the long-sustained price increases in domestic fares suffered by Canadian consumers.

Yet, the Canadian government continues to insist that Canadians fly between points in Canada only on Canadian-owned airplanes. Today, that means Air Canada and no one else on a regularly scheduled basis. It’s as if, in a fit of nation-building, Ottawa decided Canadians could use only Canadian-built communications equipment, and that only one Canadian company could build that equipment. Imagine how that would devastate Canada as a nation, particularly the economy. But, that’s exactly what’s happening in the airline industry. Our government’s only rationale seems to be that other nations have similar restrictions on domestic travel.

We need a “made for Canada” solution, not an aping of other nations’ restrictions. That means opening up Canadian skies for competition. Maybe we can negotiate reciprocal agreements with other nations; maybe not. But that’s hardly the key question. Government’s main concern should be enabling Canadians to get around the country efficiently.

Australia’s government had the foresight to come up with a “made in Australia” solution. The government allows foreign-owned carriers to provide service between domestic destinations, but not to foreign destinations. In a report earlier this year, Canada’s Competition Bureau recommended this rather half-baked solution, but Ottawa quickly rejected the idea. Instead, Ottawa and the bureau now seem intent on launching a new welter of regulations and rules, a messy and dangerous quarter-baked solution likely to leave the consumer with a severe case of regulation-poisoning.

A fact seemingly lost on the Canadian government is that a monopoly naturally seeks monopoly profits. Regulations themselves tend to push up prices, and a clever monopoly usually finds ways to circumvent elements that try to control prices. The airline justifies rising prices by pointing to rising costs. But there’s nothing natural about these costs. Without competition, neither management nor unions can be held in check. With their eye on monopoly profits, the unions have a hammer. In a monopoly, they can shut down national air travel. To avoid a strike, management agrees to increase wages. Labour costs rise. The monopolist tells the regulator it needs a big price increase to cover its costs.

The airline industry’s recent history — including the Liberal government’s failed attempt to hand over the Canadian airline industry to Liberal bagman Gerry Schwartz — highlights the need for real competition and a powerful competition watchdog that cannot be kicked aside by political whim.

Although it was his friend, Mr. Schwartz, who planned to bid for Air Canada and Canadian, Transportation Minister David Collenette suspended the Competition Act to allow the merger to proceed. Mr. Collenette then moved to pacify any political constituency he could think of, at whatever cost to the traveller. It’s no surprise Buzz Hargrove, the Canadian Auto Workers president, showed up to embrace Mr. Schwartz. The unions were already looking forward to their monopoly power in what would become a highly politicized sector.

Part of the deal was no layoffs, no new efficiencies in the Schwartz-Hargrove-Air Canada monopoly. Consumers would end up paying for soaring wages, monopoly profits, the massive cost of the takeover, and the management bloat that typifies monopolies, and all this without any major offsetting efficiencies.

The deal collapsed in a mess of political mismanagement, befitting Ottawa’s overall mishandling of the airline industry. But the key point to understand is that Ottawa had no care for Canadian consumers, and was intent only on politicizing the industry and buying off powerful interest groups.

And, that’s why Canada needs true competition — an opening of the domestic market to foreign airlines — not the mess of regulations and conditions proposed yesterday. Regulations have never worked as well as competition — but even worse, our political leaders are willing to muzzle the Competition Bureau, and competition, whenever they see a political edge.

If politicization of the air industry for “nationalist” reasons continues, Canada will only become less and less viable as a nation, as travel within Canada becomes ever more difficult and costly, and travel to centres outside Canada becomes ever more efficient.