Why shouldn’t Air Canada and United share?

The application by the federal Competition Bureau to void agreements between Air Canada and United Continental provides good examples of many things that are wrong in the economic reasoning that guides too many of our public policies.

The Competition Bureau is asking the Competition Tribunal to block a planned joint venture whereby Air Canada and United Continental (an American airline recently formed by the merger of United and Continental) would have shared airplanes on 19 routes between Canada and the United States. Not content to do this, the bureau also wants to void three existing co-ordination agreements whereby the three airlines have been co-ordinating their scheduling and other aspects of their activities. Air Canada, United and Continental were already members of Star Alliance, a partnership between several international airlines. This model of co-operation was adopted by other international airlines, which have formed SkyTeam and Oneworld Alliance. Airlines have been unprofitable for a decade, and think that these alliances will help them control costs, a requirement made even more imperative by the high and volatile price of oil. Indeed, these alliances and their agreements have been approved in Europe and in the United States. Why is it different in Canada?

The bureau claims that the agreements between Air Canada and Continental United are a way for the two companies to merge through the back door. What’s wrong with this, the reader might ask? The problem is that the two airlines would be forbidden to merge by foreign ownership restrictions in the airline industry. In brief, the Competition bureau is trying to prevent two companies from partly compensating for the fact that they are forbidden to do something by another set of regulations.

Airlines, whether domestic or foreign, are tightly regulated, either under the name of safety, security, or (often) disguised protectionism.

These are the sort of problems one hopes federal bureaucrats would try to resolve. But as public choice analysis has taught us, bureaucrats are just ordinary individuals who, rationally, defend their own interests. These interests lead them to expand their turf and power.

The action against Air Canada and Continental United, the bureau boasts, is its “first challenge under Section 90.1 of the Act, a new civil provision that came into force on March 12, 2010, allowing the commissioner to challenge anti-competitive agreements between competitors.” On March 12, 2010, when the new provision came into force, a bureau press release trumpeted: “Changes to the conspiracy provision of the Competition Act will allow the Competition Bureau to enforce Canada’s anti-cartel law more effectively against serious offenders.” The story is not new: Politicians give bureaucrats an inch against “serious offenders,” and they take a mile against airlines trying to survive and strive by sharing planes for their customers.

Institutions created with taxpayers’ money and armed with state power naturally exceed what most (naive) people thought was their mission.

The Competition Bureau claims that its zeal is justified by enforcing competition and protecting consumers. A two-page Concise Statement of Economic Theory annexed to the bureau’s Notice of Application to the Competition Tribunal argues this point – quite poorly. It is the same old and sketchy argument those academic economists have been challenging more and more: i. e. that by counting the number of competitors, bureaucrats can create competition. This illusion neglects the fact that competition is a discovery process that has little to do with the number of competitors or by the nature of co-operative alliances at any given point of time.

Frederich Hayek, the 1974 Nobel Prize laureate in economic sciences, wrote: “The advantages of competition do not depend on it being ‘perfect’.… Sometimes, however, the appearance of a monopoly (or of an oligopoly) may even be a desirable result of competition.… The chief point to remember, which is often obscured by the current talk about monopoly, it that it is not monopoly as such but only the prevention of competition which is harmful.”

I would similarly argue that public policy should concentrate in removing obstacles to entry in the airlines industry (aside from legitimate safety regulations), instead of piling up obstacles on top of existing barriers. Every grand scheme of government interventionism is most of the time justified by problems that have been caused by the previous government intervention.

Michel Kelly-Gagnon est président et directeur général de l’Institut économique de Montréal.