Air Canada Proposes Unrestricted Open Skies With U.S. to Foster Competitive Environment

Air Canada today proposed a full Open Skies Agreement between Canada and the U.S. creating an unrestricted, single aviation market with the United States as the preferred option to fostering a competitive airline environment in Canada. The airline outlined its proposal in a letter today to Transport Minister Collenette and U.S. Transportation Secretary Mineta.

Air Canada's proposal follows on Minister Collenette's statement earlier this week that the government would look at options such as "more foreign competition, modified sixth freedoms or cabotage" as an alternative to re- regulation to increase competition in the Canadian domestic market. The proposal takes those suggestions further in advocating a single aviation market for Canada and the U.S.

"We need a market solution as a means to foster a competitive environment in the Canadian domestic market," said Robert Milton, President and Chief Executive Officer. "While we had previously indicated to the Minister of Transport that we might be open to a domestic re-regulation of all carriers operating in the country if that was government policy, that is clearly not the preferred option for ensuring a competitive, efficient industry. Furthermore, we would not support re-regulation if it involved any expropriation or indirect transfer of our market share, routes or assets. We do not believe a truly competitive environment can be developed in Canada by resorting to outmoded regulatory remedies such as limiting the number of carriers allowed to serve a market or a particular route, imposing frequency, capacity or pricing restrictions or nationalizing the flag carrier.

"For this reason, in a letter to the Minister and U.S. Transportation Secretary Mineta today, I have urged the two governments to build on the success story of the 1995 Canada-US Open Skies Agreement by progressively removing all restrictions in order to arrive at a fully integrated, common air transport market with the United States," said Mr. Milton.

Unlike the open skies agreements the United States has concluded with over 50 other countries, the Canada-U.S. Open Skies Agreement maintains restrictions in the following areas:

-Fifth freedom rights for passengers and all-cargo operations;

-The right for all-cargo carriers to serve points in the other country on a co-terminal basis; and

-Full routing and pricing flexibility on all air service operations, especially to third countries.

"The restrictions to the 1995 Open Skies Agreement were put in place due to Canadian concerns on the impact open skies with the U.S. could have on the airline industry in this country," said Mr. Milton. "The landscape has changed dramatically since then. As the past six years have proven, the liberalization of air policy between the two countries has been overwhelmingly positive for consumers and carriers on both sides of the border. U.S. carriers have long sought greater liberalization in many of these areas and as North America's 7th largest carrier, Air Canada joins them in seeking these changes.

Furthermore, a fully liberalized Open Skies Agreement including the exchange of "modified sixth freedom opportunities" leading to full continental cabotage rights will fully respond to the concerns of all stakeholders concerned with Air Canada's dominance of the Canadian industry," he added.

A number of academics and industry analysts have advocated allowing Canadian and U.S. carriers the rights to carry local domestic traffic through their own hubs - often referred to as "home-country cabotage" or "modified sixth freedom" as a means to increase competition in the Canadian market. Air Canada strongly supports this initiative as a transitional step towards the establishment of a fully integrated and common air transport market with the U.S. Granting both Canadian and U.S. carriers the right to carry domestic traffic from each other's country over their respective hubs will bring immediate benefits to consumers and airlines on both sides of the border. As a result, Canadian consumers would have access to travel between Canadian points on United Airlines and American Airlines via Chicago, Northwest Airlines over Detroit and Minneapolis and Delta Air Lines over Cincinnati. American consumers would have access to travel between U.S. points on Air Canada via Toronto, Montreal and Vancouver. At the same time, the flow of U.S. traffic over Canadian airport hubs would be attractive to both airlines and passengers as a means to avoid the congestion at major U.S. hubs.

Consistent with the sentiments expressed by the Canadian and U.S. governments in concluding the recent Joint Statement of Cooperation on Border Security and Regional Migration Issues, a new "Canada-U.S. Open Skies Plus" agreement as outlined above would further strengthen the already close economic relationship between the two countries. It would also be consistent with existing air transportation regimes in the EU and in Australia-New Zealand.

"In the post-September 11 environment, air carriers worldwide are seeking opportunities to enhance revenues," said Mr. Milton. "Moreover, the industry is expected to see significant consolidation, especially in the U.S. Liberalization of the 1995 Agreement will provide U.S. and Canadian carriers access to more markets while at the same time increase efficiencies and provide for a more competitive environment through enhanced domestic service options for consumers. Re-regulation of the Canadian industry will therefore become moot.

"Air Canada has proven time and time again that it can compete successfully and effectively with the very best. Our success in the transborder market is a case in point. We believe that creating a single aviation market is a win-win solution. It will boost both business and tourism. It will provide the ultimate solution to fostering a competitive airline industry for the benefit of Canadian consumers and the industry," concluded Mr. Milton.

A copy of the letter forwarded to Transport Minister Collenette and U.S. Transportation Secretary Mineta and a backgrounder entitled 'A Canadian Air Policy for the 21st Century' are below.

December 6, 2001


VIA FACSIMILE: (613) XXX-XXXX
______________________________
The Honourable David M. Collenette, PC, MP
Minister of Transport
Place de Ville, Tower C
29th Floor, 330 Sparks Street
Ottawa, Ontario
K1A 0N5

VIA FACSIMILE: (202) XXX-XXXX
______________________________
The Honourable Norman Y. Mineta

Secretary
United States Department of Transportation
400 - 7th Street, S.W.
Washington, D.C. 20590


Gentlemen:

I am writing you with regard to the need to update and fully liberalize the Canada-U.S. "Open Skies" Agreement of February 24, 1995 (the "1995 Agreement").

The 1995 Agreement significantly liberalized rules governing air services between both countries by fully opening third and fourth freedom rights and allowing any number of carriers from both countries to operate as many flights as they want between Canadian and US cities.

Since the implementation of this agreement, carriers, consumers and businesses on both sides of the border have greatly benefited from much increased and more convenient transborder air services and transborder passenger traffic has grown to almost 20 million passengers per year. Coupled with the success of the North American Free Trade Agreement, "Open Skies" has contributed greatly to the trading relationship between our two countries.

Building on this "success story", the time has now come for the remaining restrictions under the 1995 Agreement to be removed and to move towards a more fully integrated air transport market between Canada and the US. This would be consistent with liberalization measures taken in other jurisdictions such as the European Union (EU) internal aviation market comprising 15 countries and the Single Aviation Market between Australia and New Zealand.

Unlike "open skies" agreements the US has negotiated with over 50 countries, the 1995 Agreement maintains certain restrictions limiting:

- fifth freedom rights for passenger and all-cargo operations;

- the right for all-cargo carriers to serve points in the other country on a coterminal basis;

- full routing and pricing flexibility on all air services operations, especially to third-countries.

Many of these restrictions were put in place due to Canadian concerns with the impact "open skies" could have at the time on the Canadian airline industry. As the six years of the 1995 Agreement have proven, the liberalization of rules governing transborder air services has been an overwhelmingly positive experience for carriers in both countries. U.S. carriers have long sought greater liberalization in many of these areas and as North America's seventh largest carrier, Air Canada joins them in seeking these changes.

Furthermore, public policy concerns have recently been expressed in Canada due to Air Canada's dominance in the domestic marketplace as a result of Air Canada's acquisition of Canadian Airlines and the recent failure of Canada 3000. A fully liberalized Canada-U.S. Open Skies Agreement, including the exchange of "modified sixth freedom opportunities", leading to full continental cabotage rights would respond to these concerns and would allow the full use of all hubs for continental traffic consistent with existing air transportation regimes in the EU and in Australia-New Zealand.

Specifically, both Canadian and US carriers would be allowed to carry domestic traffic from each other's country over their respective hubs, as they now do in respect of transborder and international traffic from either country. As a result, United and American, for example, would be able to access Canadian traffic over Chicago, Northwest over Detroit and Minneapolis, Delta over Cincinnati, Continental over Newark, US Airways over Pittsburgh and Philadelphia whereas Canadian carriers would be able to compete for US domestic traffic over Canadian airports such as Toronto, Montreal and Vancouver and others as they are developed.

Consistent with the sentiments expressed by the Canadian and U.S. governments in concluding the recent Joint Statement of Cooperation on Border Security and Regional Migration Issues, a new "Canada-U.S. Open Skies Plus" agreement as outlined above would further strengthen the already close relationship between the two countries.

In the post-September 11 environment, air carriers worldwide are seeking increased opportunities to enhance revenues. Liberalization of the 1995 Agreement will provide U.S. and Canadian carriers with such an opportunity while at the same time increasing domestic service options for consumers at a time when greater industry consolidation is expected. I have every confidence that with open minds a more closely integrated air transportation system can be achieved to the mutual benefit of stakeholders in both countries.

Air Canada urges you to initiate negotiations as soon as possible with the objective of fully liberalizing the 1995 Agreement.

Sincerely,

cc: His Excellency Paul Celucci, United States Ambassador to Canada

A CANADIAN AIR POLICY FOR THE 21st CENTURY -

EXTENSION OF THE "PLAYING FIELD" TO A COMMON AIR TRANSPORT MARKET BETWEEN CANADA AND THE U.S. WOULD FOSTER COMPETITION

- To date, the 1995 Canada-U.S. Open Skies Agreement has been a major success. Since the implementation of the agreement, transborder passenger traffic has risen from approximately 13.6 million to an estimated 20 million passengers annually. The total direct value of the combined Canada and U.S. air transport markets is now more than CAD $220 billion annually based on year 2000 operating revenues of home carriers in the U.S. and Canada: USD $130 billion and CAD $13 billion, respectively.

- There exists opportunities to further liberalize the Canada-U.S. agreement and move progressively towards an unrestricted, single air transport market with the U.S.

- The extension of the current agreement would be consistent with liberalization measures taken by other regional trading blocks such as the European Union (EU) that established in 1993 a common air transport market including unrestricted cabotage beginning in 1997.

- Likewise, two close trading partners, Australia and New Zealand, adopted a "Single Aviation Market" agreement in1996.

- An unrestricted Open Skies Agreement with the U.S. would be consistent with the government's policy of facilitating trade across the Canada-U.S. border, as supported by business leaders and provincial government officials.

- Home-country cabotage or "modified sixth freedom" would create more service options in both the Canadian and U.S. domestic markets by allowing U.S. and Canadian carriers to carry the local domestic traffic of either country through their own hubs. A number of Canadian scholars and economists made the same suggestion during the Canadian transportation Act Review Panel process in 2001.

"HOME-COUNTRY CABOTAGE" OR "MODIFIED SIXTH FREEDOM" WOULD BRING IMMEDIATE BENEFITS TO CONSUMERS AND CARRIERS ON BOTH SIDES OF THE BORDER

- Home-country cabotage would allow all hub airports and carriers on both sides of the border to fully compete for all traffic flow, including domestic, as they now do in respect of transborder and international traffic. This would create additional service options for both Canadian and U.S. consumers as well as allow carriers and airports in both countries to take further advantage of their hub infrastructure and network synergies.

- For example, a U.S. carrier now has the right to sell transportation to consumers in Ottawa to any point in the U.S. or in the world by routing them over a U.S. hub. For example, American Airlines may sell transportation from Ottawa via Chicago to: Seattle, Los Angeles, Tokyo, Hong Kong and Mexico City. These routings are currently allowed and attract good volumes of traffic.

- However, due to old restrictions precluding cabotage, the U.S. carrier cannot sell transportation between two Canadian cities even if routed over its Chicago hub. For example, Ottawa via Chicago to Vancouver or Calgary are prohibited routings due to cabotage restrictions.

- Several U.S. carriers have hubs located near the Canadian border. United Airlines and American Airlines, for example, would be able to access Canadian domestic traffic over Chicago, Northwest has hubs at Detroit and Minneapolis, and Delta has a hub at Cincinnati.

- Likewise, Air Canada currently cannot sell transportation to a consumer in Boston en route to Milwaukee, via its Toronto hub, whereas Northwest can do so via its Detroit hub (close by Toronto) as it lies on the U.S. side of the border.

- The exchange of "home-country cabotage" or "modified sixth freedom" rights would occur in the context of a broader negotiation of bilateral rights - a full "open skies" agreement between Canada and the U.S. An expanded agreement would include unlimited Fifth Freedom rights for passenger and all-cargo operations; in other words, the right of an airline to carry passengers between foreign countries (eg. American Airlines carrying passengers between Toronto and London, or Air Canada carrying passengers between Los Angeles and Sydney.) The expanded agreement would also include the right for all-cargo carriers to serve points in the other country on a co-terminal basis, and full routing and pricing flexibility on all service operations including to third-countries. The U.S. has sought this broader aviation deal since 1995.

- Trade between the U.S. and Canada is largely deregulated under NAFTA, except for commercial aviation. Agreeing to a full, unrestricted Open Skies Agreement would eliminate this anachronism.