Competition Bureau clarifies enforcement approach in the airline industry

OTTAWA, September 23, 2004 — The Competition Bureau has been actively monitoring the state of competition in the Canadian airline industry since the 1999 merger between Air Canada and Canadian Airlines and, in particular, the significant changes which have taken place in the industry. The following text is from a letter sent to major Canadian airlines by the Commissioner of Competition:

"The purpose of my writing is to set out the approach the Bureau will be taking in its future enforcement of the Competition Act (the Act) in the airline sector.

From the Bureau's perspective, the changes to the airline industry can be summarized as follows:

• Entry and growth of low-cost carriers, including competitive entry in the 'Eastern Triangle' of Toronto, Montreal and Ottawa;
• A shift in consumer demand placing greater emphasis on price, increased fare competition and a trend toward reducing non-price restrictions (fences) on airfares such as requiring Saturday night stay-overs and advance purchase requirements;
• The growth of the Internet as an effective means of ticket distribution;
• The changing role of travel agents in the marketplace with more emphasis on serving consumers in return for service fees as opposed to acting as agents for the airlines in return for commissions;
• Increased availability of take-off and landing slots and access to airport facilities at Canadian airports;
• Development of competing loyalty plans by WestJet, Jetsgo and CanJet;
• Major restructuring of Air Canada following its filing for bankruptcy protection under the CCAA in April 2003;
• Significant decline in Air Canada's domestic market share to approximately 57% based on capacity.

In light of these developments and the information obtained from various industry stakeholders, I will be adopting the following policy in enforcing the predatory pricing and abuse of dominance provisions of the Act:

1. The Bureau has and will continue to act responsibly in enforcing the Competition Act in regard to any air carrier including Air Canada;
   
   
2. The Commissioner has an obligation to examine any complaint that may be filed. The Bureau is aware that circumstances in the airline industry in Canada, and around the world, have changed since the 2000-2001 time frame and any future complaint will be considered in the context of the circumstances which exist at the time of the complaint.
   
   
3. In regard to the Competition Tribunal's "Reasons and Findings" in Phase I, dated July 22, 2003 (the "Phase I Decision"), the Bureau believes that the principles established by the Tribunal regarding application of the avoidable cost test will be relevant for future cases which may arise in similar circumstances.
   
   
4. As the Tribunal made very clear in its Phase I decision, the avoidable cost test is only one part of an abuse of dominance analysis under section 79 of the Competition Act. In considering enforcement action, the Bureau will assess whether the person complained about has the necessary dominant position, whether in its response to competition it has operated capacity below its avoidable costs, whether such operation is part of a 'practice of anti-competitive acts', and whether the conduct is likely to result in a substantial lessening or prevention of competition. In regard to the question of a practice of anti-competitive acts, the Commissioner has recognized, and the Tribunal has accepted in its Phase I decision, that there could be certain circumstances where there can be legitimate business reasons for operating a flight below avoidable cost.
   
   
5. The purpose of the Airline Regulations made under the Competition Act is to distinguish certain predatory actions from vigorous competition. The purpose of the avoidable cost test set out in the Regulations is to focus on actions taken by a dominant domestic carrier against competitors, not to focus on the carrier's usual seasonal or operational practices. In the Bureau's view, the application of the avoidable cost test is only triggered by a significant response by a dominant carrier to competition or new entry.
   
   
6. In general, actions taken by a dominant carrier against competitors which could attract enforcement action include reducing fares to undercut competitors, adding significant capacity, failing to remove capacity in accordance with its seasonal or other usual practices, or substantially increasing the number of tickets offered at fares which match the lowest fares of a competitor.
   
   
7. The Commissioner recognizes the benefits of price competition for consumers. As a general principle, where a dominant carrier's response to competition consists only of reducing fares to levels which match, but do not undercut those of a competitor ("fare matching"), the Bureau will not take enforcement action.
   
   
8. However, if such fare reductions were accompanied by a significant increase in capacity or a significant increase in the number of seats offered at the lowest price, this "safe harbour" would not apply. In such cases, the Bureau would then consider all of the elements of abuse of dominance as noted in paragraph four.
   
   
9. Where a dominant carrier responds to entry or competition by doing something more than fare matching, the Bureau will then consider all of the elements of abuse of dominance, not just the avoidable cost test, in deciding whether to take enforcement action, and in deciding what action to take.

As you know, the case before the Competition Tribunal involving Air Canada was stayed by the Tribunal pending Air Canada's emergence from CCAA. The Tribunal also stayed the appeal period. Accordingly, the Bureau will await further developments, including whether Air Canada chooses to pursue an appeal, before determining appropriate next steps.

Finally, I wish to advise you that in early August Air Canada made an application to the Minister of Transport pursuant to section 56.2(7) of the Canada Transportation Act to have the Undertakings it provided to the Commissioner of Competition in December 1999 rescinded on the basis that the Undertakings were no longer necessary or appropriate given the changes in the industry. As provided under that section, the Minister of Transport requested my views to which I responded. The Undertakings were rescinded on August 17th by an Order in Council."

The Competition Bureau is an independent law enforcement agency. We contribute to the prosperity of Canadians by protecting and promoting competitive markets and enabling informed consumer choice.

---

For media enquiries, please contact:

Tim Weil
Director of Strategic Communications
Communications Branch
819-953-9271

For general enquiries, please contact:

Information Centre
Competition Bureau
819-997-4282
1-800-348-5358