As Air Canada merger takes off, prices could soar

The mayor of a small town in Manitoba has a dream: He'd like the folks from Thompson to occasionally hop on a plane to the provincial capital, Winnipeg, to sample the cultural delights of the big city.

The 500-mile flight would take 55 minutes, compared with a seven- or eight-hour drive.

The trouble is, the standard round-trip airfare is more than $600. And it's likely to get worse.

Air Canada recently acquired its long-ailing rival, Canadian Airlines International, and analysts say in approving the deal, the Canadian government sacrificed public interest (i.e. lower ticket prices) for the sake of shareholder value. The merger may also have the unintended effect of strengthening air links across the border to the south at the expense of ties between Canadian cities.

"The airline industry is of great concern," Mayor Bill Comaskey says. "We're the highest-airfare space in North America - it's a detriment to the quality of life and the economy here."

In announcing Ottawa's approval of the deal Dec. 21, Transport Minister David Collenette said, " the legislation that will be [introduced] early in the new year - will ensure effective protection for consumers and the public interest." He identified "price gouging, competition, Canadian ownership and control, service to small communities and the fair treatment of employees" as "key issues."

But most economic analysts find all this unpersuasive. "It was a grave, grave, grave error - a disaster for the consumer," says Douglas Reid, professor at the Queen's University School of Business in Kingston, Ontario. "It was like the Titanic - only in this case, when the pilot saw the iceberg, he steered right toward it."

Professor Reid and others say the focus was on keeping Canadian Airlines from going bankrupt and leaving its 16,000 employees jobless. And over the long months that this airline saga has played out, ensuring "Canadian control" of whatever entity emerged from the restructuring was quite literally the No. 1 priority.

With foreign investors prohibited from owning more than a 25 percent stake in a Canadian airline, Air Canada was in a powerful bargaining position.

"Air Canada has won lock, stock, and barrel," says Reid. Already the country's dominant domestic carrier, Air Canada will now have 80 percent of Canada's air passengers and nearly 90 percent of its airlines revenues. "I don't quarrel with Air Canada shareholders getting double-digit returns on their investment, but it's not David Collenette's job to ensure shareholder profits; it's to ensure creation of a climate where consumers benefit."

And even from a nationalist perspective, the merger will prove counterproductive, says Fred McMahon, policy director of the Consumer Policy Institute in Toronto.

International travel is much more price-competitive than domestic travel in Canada. "What happens when it becomes easier and cheaper to fly from Vancouver to Los Angeles ... than to fly from Vancouver to Edmonton?" Mr. McMahon asks. "You reinforce north-south links while eroding east-west links."

The problem, in his view, lies in what he calls Canada's "faux deregulation." To have been effective, Ottawa should have eased restrictions on foreign ownership of airlines to create competition as in the US.

The Competition Bureau in Ottawa sees increased foreign participation in the domestic airline market as a way to hold the new "air monopoly" in check. "We certainly think this is a good thing," says Raymond Pierce, assistant deputy commissioner in the mergers branch of the bureau.

One proposal: letting US carriers who serve two Canadian cities via a US hub to market that service - for example, Calgary to Montreal via Minneapolis. Such a move, analysts say, would create competition for domestic markets.

Another idea: allowing a foreign company to run a "Canada-only" service under special license. "All the inputs would be Canadian: Canadian fuel, Canadian catering, Canadian crews, Canadian taxes," Mr. Pierce explains. "If there's a silver bullet" among the proposals for improved competition, "this is probably it."

Bonnie Pritchett, city councilor and chairwoman of the economic development committee in Gander, Newfoundland, says she sees "no reason to press the panic button yet, although we are concerned.... At the moment we're adequately served by Air Nova," a feeder line owned by Air Canada, although recently Gander has lost service by Inter-Canadian, a feeder line owned by Canadian.

Mike Kuriychuk, chairman of Development Thunder Bay in Ontario, says, "I think there is a sense of unease about the merger" in his community, "but we're not expecting serious problems."

That may be because, as in Manitoba, competition is already pretty limited. "Fares to Thunder Bay have traditionally been quite high," says Mr. Kuriychuk. Both Air Canada and Canadian serve Thunder Bay, but "there hasn't been much price competition."

(c) Copyright 2000. The Christian Science Publishing Society