Liberalization of air traffic – Open skies pacts good for Canada: Opening up to more airline competition would lower fares

Various agreements have been reached, or are presently under negotiation, between Europe, the United States and emerging markets such as India, China and Russia. On April 19, Canada and China announced a major broadening of their bilateral agreement. Negotiations are expected to begin shortly with India.

The federal Ministry of Transport appears prepared to take advantage of this current international trend to move ahead with the liberalization of the Canadian market. In particular, it is considering the possibility of allowing foreign airlines to fly between Canadian cities – known as “cabotage” – and of raising the limit on foreign ownership of airlines in Canada, currently set at 25%. Both would be excellent news for consumers and for the Canadian economy generally.

The bilateral “Open Skies” agreement with the United States in 1995 had greatly facilitated business and leisure travel. It authorized any Canadian or U.S. airline to offer transborder services without restriction in terms of fares, flight frequencies or aircraft types. The capacity of scheduled airline services between the two countries experienced strong growth starting in 1995 – with a sharp increase of 25% in the first year alone.

The number of trips by air taken by Canadian and U.S. residents between the two countries rose 41% in the five years following the signing of that agreement.

Eliminating restrictions on cabotage and foreign ownership could produce major additional benefits to the Canadian airline industry and to travellers. Raising the foreign ownership limit would give Canadian carriers access to a broader capital market, which would have a major stabilizing effect given the industry’s rather volatile nature.

It would make it easier for new competitors to enter the sector, and also help smaller carriers seeking to expand or improve their fleets to attract the capital they require to finance their growth. At the same time, Canadian investors could increase their stake in foreign airlines and Canadian carriers could extend their operations to other markets.

As in any sector of the economy, increased competition would exert downward pressure on prices. It would also lead to a greater number of flights and a more varied choice of destinations. New direct links and greater frequencies would be of particular benefit to time-pressed business travellers, who would no longer have to make intermediate stops before reaching their destination.

The best example of international liberalization is the integration of the airline market within the European Union. Since 1997, any carrier from an EU member country can operate domestic flights within any other EU country as though it possessed the nationality of the country in question.

The reduction in obstacles to entry by new air carriers has led to the emergence of “low-cost” airlines such as RyanAir and EasyJet. Most of these companies specialize in routes linking regional centres, and about 50% of their traffic is new growth.

For Canada, the next stage could be to seek total integration of aviation markets in North America as part of NAFTA. Under this scenario, Canada’s efforts would essentially be channelled towards integration of North American markets similar to that which presently exists within the European Union.

The result would be that carriers in the three countries would have the same rights in each of these countries, giving them total freedom of “domestic” operation. There would no longer be restrictions on foreign ownership as long as the air carrier was registered in a NAFTA country.

The Canadian government could also take the initiative and propose to the European Union the start of negotiations similar to the talks proposed by the EU to the U.S. dealing with the transatlantic air travel market. In negotiating such an agreement with the European Union, Canada would enjoy a head-start advantage in the entire liberalization process.

The U.S. may well prefer this path which, by entering in the first instance into a bilateral arrangement with Canada, would provide an opportunity to “test” an eventual integrated Europe–North America aviation market.

Canada should also take every opportunity that comes up to negotiate “Open Skies” agreements with any country that already has a comparable agreement with the United States. It should also offer similar reciprocity agreements to other “liberalized” parts of the world at an opportune time.

By showing leadership in this area, Canada would position itself strategically to take maximum advantage of the social and economic benefits arising from the current trends toward globalization of aviation markets.

Pierre Jeanniot is former President and CEO of Air Canada and author of the Economic Note entitled Towards open skies for airlines in Canada.

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