THE IMPACT OF AIRLINE RESTRUCTURING IN CANADA

FIRST INTERIM REPORT

PREPARED BY DEBRA WARD

Independent Transition Observer on Airline Restructuring

February 5, 2001

TABLE OF CONTENTS

PREFACE

INTRODUCTION

STAKEHOLDERS VIEWS AND NEW DEVELOPMENTS

Urban, rural and remote communities

Business

Consumers

Airlines

COMPETITIVE OPTIONS AND OTHER STAKEHOLDER RECOMMENDATIONS

THE CURRENT ROLE OF GOVERNMENT

CONCLUSION AND APPENDICES

PREFACE

The consolidation of Air Canada¹ and Canadian Airlines is complete. At this writing, we have one national, internationally-linked carrier and a number of new or emerging carriers which are growing into new roles and expanding their service. Some of these will continue to grow, establish new markets, expand their fleet and enhance frequency. Others are forming their own merged airlines. Some regions have enjoyed expanded services and more price options. Others are seeing their air access reduced. The only certainty seems to be that we are still in a period of flux.

This interim report offers a "video" (events have been changing too quickly to call it a "snapshot") of what has happened in Canada over the last six months as a result of the acquisition of Canadian Airlines by Air Canada. This has been one of the largest corporate mergers ever in this country, challenging everyone involved: the airlines, consumers, communities and businesses.

Concerns about the future of Canada's skies have been played out in the media, and in forums as diverse as the House of Commons Standing Committee on Transportation and around our kitchen tables. The marketplace is likely to resolve some, but probably not all, of the issues under discussion. Some people have expressed, with great urgency, the need to "fix the airline industry now", through a rapid response from either new forms of competition or government intervention. Unfortunately, there seems to be little agreement on what those fixes should be.

This report tries to capture the main topics and "flavour" of some of what has been said. It relies primarily on anecdotal reports and perceptions, rather a quantifiable analysis of hard data for two reasons: one is the lag time (and some gaps) in the data that is currently available. The second is the importance of letting people be heard for themselves in a time when perception, anecdotes and intuition are key tools.

As well, this report, while fairly extensive, is not exhaustive. Further interim reports will expand some of the concerns expressed here, and review the merger impacts on airline employees and regional airlines, as well as examine the option of a "Passengers Bill of Rights" and review Air Canada's progress in fulfilling its linguistic obligations under the "Official Languages Act".

The report has three main parts. The first conveys stakeholders' views expressed to the Independent Observer over the last six months as well as new developments that may have modified these concerns. Many of the issues are complex and raise further questions, which are identified at the end of each section. The second part examines competitive options and other recommendations and options raised by stakeholders. The third section is an overview of the current policies and role of government; especially the provisions in Bill C-26 intended to mitigate the effects of monopoly/dominant carriage and encourage the emergence of competition

Finally, this is an interim report, and does not prescribe "solutions". Rather, it codifies the comments that have been heard. It is hoped that by setting out the views of consumers, communities, airlines, airports, travel agents and others, this report may be a focus for continued discussion. If there are no answers yet, perhaps we can begin to ask better questions.

Debra Ward

Independent Transition Observer on Airline Restructuring.

INTRODUCTION

In February 2000 the government of Canada introduced Bill C-26, legislation to protect the public interest during the period of airline restructuring. In August of that year, the Minister of Transport, David Collenette, appointed three individuals, one of whom the Independent Transition Observer on Airline Restructuring, to monitor the effects of the merger of Canadian Airlines and Air Canada on Canadians.

The Observer's specific mandate is to examine the overall impact of airline restructuring on consumers, on urban, rural and remote communities, on travel agents and airports, and on airlines and their employees. She was also tasked with reviewing how the federal government continues to implement Bill C-26 and with monitoring its associated undertakings and commitments, and will examine the need for a travellers' bill of rights.

The six months leading up to this report can best be characterized by change. In the early days of the Observer's activities, communities were dealing with serious impacts from reductions in capacity; passengers were enraged by a lack of information, lost luggage, and delayed and overbooked flights. There was little optimism that other Canadian carriers could grow quickly enough to provide new types of competition. The situation seemed bleak.

The picture has changed since then. Some issues have been resolved, or are in the process of being resolved. Others still have to be addressed. New challenges have emerged.

The areas that have been mitigated, to a large degree, deal specifically with Air Canada's handling of certain aspects of the merger. These include:

_ Customer service

_ Capacity cuts

_ Availability of low-fare seats

_ Conditions of carriage: e.g. lost luggage, delays, etc.

_ Working relationship with communities

To respond to these issues, Air Canada has taken a two-pronged approach. One part was its "180 day promise", which encompassed the merger of the two airline systems and increasing staff and improving customer service. The second was the creation of a group within Air Canada which works with communities to understand and resolve issues. As well, Air Canada has modified some capacity cuts and introduced lower-fares for smaller and remote communities. While the airline's actions have not answered all the concerns that have been expressed, there is little doubt that the situation has improved.

There also has been an increase in competitive services, particularly in the low-fare category. While Air Canada still dominates the system overall, competitive carriers already have significantly expanded their service, with more routes, frequencies and capacity planned.

Despite these positive steps, questions still remain. These include:

_ Pricing/capacity, especially on remote and rural routes

_ Existing competition not (yet) able to match AC in fleet, routes, international "connectability"

_ Shakeout of new entrants and expanded services

_ Little data available to understand and deal with air service changes or to use for planning

_ Disconnect between expectations of communities and airline industry realities

_ The relationship between independent regional carriers and Air Canada

_ Routes and frequency will be based on demand: what happens to marginal regions?

_ The impact of the economic downturn on demand and service

_ The appropriate role and responses of the government to changes in the airline industry

These outstanding issues will be monitored by the Observer over the next stage of her mandate and will be reported in the next interim report, scheduled for August 2001.

SECTION ONE

STAKEHOLDERS VIEWS AND NEW DEVELOPMENTS

URBAN, RURAL AND REMOTE COMMUNITIES

OVERVIEW

Communities are trading and competing globally. Most have economic development plans, which include a range of strategies to promote business creation and growth, as well as tactics to attract and retain a strong population base. Considerable amounts of both private and public sector dollars are spent to fulfill these objectives.

A key element in the success of these strategies is the quality of transportation access, including air. However, airlines function in a deregulated environment. Whether they fulfill or stimulate demand, their decisions, as for all businesses, are dictated by the marketplace. Communities, therefore, are not only competing for businesses, they are also increasingly competing with one another for air service and capacity. This has led to one of the greatest challenges arising from airline restructuring: the gap between what communities might require for economic growth, and what airlines can reasonably be expected to deliver, based on demand.

In general terms, communities noted price, capacity, connectivity, competition and data gaps as key concerns. Even though some communities are served by a number of airlines, the majority of the discussion by far focussed on the quality and level of service provided by Air Canada and its regional carriers.

Geography appears to drive a significant number of issues. Urban, smaller/rural and remote regions differ in a number of their concerns, and to an extent, opinions about solutions. There are also differences within these groups, depending on the level and diversity of business activity, proximity to other centres and the size, and relative wealth, of the population base.

Very broadly, larger urban centres, or those with a diverse economic base, tend towards solutions that include increased opportunities for competition and the development of a strong working relationship with Air Canada and other carriers. By contrast, smaller, more remote regions or those with dependence on one or two key industries often see air service as a part of their infrastructure, which implies a larger role for government in ensuring adequate access and service.

A number of issues around air service existed prior to the acquisition of Canadian by Air Canada. However, the merger has seemed to exacerbate some long-standing concerns and brought others to new prominence.

It is worth noting that communities which had already faced air access challenges prior to the merger seem somewhat better equipped to deal with today's environment. Many of these centres are experienced in dealing with airlines on key issues, and have developed a core of expertise and a variety of tools, such as air transportation committees, access studies, etc. These skills have proven very useful in the current climate.

COMMENTS FROM COMMUNITIES

NEW DEVELOPMENTS

COMMUNITY QUESTIONS FOR FURTHER CONSIDERATION

BUSINESS

OVERVIEW

Virtually all business is affected to some degree by the quality of air access. Air service can be a major factor in determining where a business is located, if skilled workers can be attracted and retained, and how effectively an enterprise can expand its market.

There is some overlap in the concerns expressed by communities and business groups, although business tends to focus more on "bottom line" and specific impacts, rather than on long-term developmental issues. As well, business concerns vary somewhat depending on their location (urban, rural or remote) or size. Nonetheless, business tends to favour marketplace outcomes.

The businesses most affected by the restructuring are those, which directly serve travellers: tourism/ hospitality, travel agents and airport authorities. These sectors' comments are detailed below, as are more generalized issues arising from the business community. Concerns expressed by business travellers are recounted in the section "Consumers".

TOURISM/HOSPITALITY

Tourism is a highly lucrative, globally competitive sector, which encompasses not only leisure, but also business travel. In 1999, Canadian travel generated $50.1 billion² on airline tickets, hotels, meals, conventions/meetings, and recreational activities. $15.3 billion³ of that was spent in Canada by international travellers.

Tourism is seen as an "opportunity industry" which creates new jobs and businesses and supports economic wealth and diversification. Communities in all regions and businesses of all sizes have invested considerably in tourism infrastructure: hotels, convention centres, recreational activities, etc.

Unlike other industries, which move their commodities to market, tourism must transport the consumers: no matter how attractive the destination or the quality of its tourism activities and infrastructure, the ease and cost of "getting there" are essential elements. The price of airline tickets, seat availability and connectivity are crucial.

An example of the impact of air access on tourism comes from Québec City, which has the infrastructure and the level of quality to host major cruise lines. The only element it lacked is airlift (capacity):

"Quebec is an incredible city which comes close to a fairly tale. The two-day Quebec visits of our ships are really worth it. As discussed, please let us know as soon as possible when the increase of scheduled airlift capacity will become reality. Our first opportunity to consider turnarounds in Quebec would be for 2002. Itinerary planning is due by early October 2000". HOLLAND AMERICALINE WESTOURS INC.

This kind of issue has fairly wide implications for tourism and affects Canada's ability to compete globally. Many countries have policies and programs in place designed to capture highly desirable tourism revenues. If there are more choice and price options to travel to the Unites States, to Europe, to Asia, travellers are likely follow those easier paths, to the detriment of Canada and its international balance of trade.

Tourism businesses in urban centres are generally better equipped to deal with changes in the airline industry than their remote or rural counterparts.

TRAVEL AGENTS

Travel agents facilitate transactions between travel providers (airlines, tour operators, hotels & resorts, etc.) and consumers. Traditionally, their revenues have been generated by sales in the form of commissions paid by travel providers.

The travel agency community has been facing a number of challenges not related to the merger. Airlines have been reducing the caps on commissions on tickets sold by agents, significantly reducing incomes for some. E-commerce sales may be eroding some agents' customer bases. Some smaller agencies are responding by merging, or are being acquired by larger national agencies.

Therefore, prior to the merger, some agencies already felt that they were being dictated to by the airlines and that they had few avenues of recourse or the "clout" to negotiate as equals. To some agents therefore, the loss of Canadian Airlines and the increased importance and dominance of Air Canada in their daily business appears to have made an already difficult situation worse.

This concern was recognized in part by a provision in Bill C-26, which allows agencies to negotiate collectively with Air Canada on base-commission rates. However, the bill does not include an adjudication process, nor does it require Air Canada to negotiate with only one group representing agents. This has led to the concern that the "power of numbers", originally intended as a negotiating tool, would be blunted.

The issues described by travel agents are fairly uniform, and do not vary regionally. However, the situation seems to be most acute for small agencies, which are locally-based and run, rather than the large, national corporations.

AIRPORT AUTHORITIES

The airport business sector is relatively new. In 1994 the government initiated a process to transfer the management of airports to private sector led authorities, responsible not only for operations, but for capital improvement as well.

This has led to a number of significant changes in how airports are run. Many have already improved their services: ranging from expanded terminals and new runways to "street pricing" policies in their retail shops. Capital improvements are generally financed through "Airport Improvement Fees" which are charged to passengers on site, or on airline tickets.

In the past six years, a great deal of experience has been gained, and airport authorities are now working through a number of important issues not related to the merger, including the level of airport rents in larger centres and the long-term viability of smaller airports, etc. The merger appears to have led to new challenges, particularly for small airports, as schedules and capacity were reduced.

Airports are competing for passenger traffic and flights, not only within Canada, but with airports in the United States as well. This is a key issue as airports in the United States have current data to assess the marketplace, unlike the case in Canada. This has led to a concern that Canadian airports are uncompetitive with their U.S. counterparts, as they do not have access to the same level of timely information to use as a marketing and planning tool.

The importance of viable airports to communities, and the breadth of issues have been recognized through the formation of the "Coalition of Concerned Airport Users" a multi-partied organization made up of businesses and communities from across Canada that aims to involve all airport stakeholders and users in key upcoming decisions which will impact upon the future financial health and integrity of Canada's national airport infrastructure and the competitive integrity of Canada's civil air transport sector.

COMMENTS FROM BUSINESS

NEW DEVELOPMENTS

BUSINESS QUESTIONS FOR FURTHER CONSIDERATION

CONSUMERS

Air travel is a lot more prosaic than it once was. For business travellers, it's a commute. For leisure travellers it's a bus on wings. It can also be expensive, with not only the cost of the ticket, but taxes, airport improvement fees and other charges that may be added on. It's a necessity, and some would call it a necessary evil.

It seems that everyone has a "horror story" about bad service, missed connections, and long waits on the phone. In this current environment, consumers are quick to generalize from one bad experience, or blame airlines for factors outside their control. "The airline lost my luggage" becomes "this airline is incompetent". A delay because of bad weather becomes "this airline is incompetent".

Some of the problems we experienced were mirrored in the United States this summer, as thousands of passengers were delayed, inconvenienced or left in the dark. So, although it was a tough summer if you were an airline passenger, not all of the problems were related to the merger.

However, there is no question that the merger and reduction in capacity and frequency exacerbated the situation. In the past, if a flight was delayed or overbooked, there were a large number of other flights, and enough capacity to accommodate most travellers because of Air Canada and Canadian's "wing-tip to wing-tip" competitive policies. Not this summer. The merger was a messy, confused process, and passengers bore the brunt. This may have been exacerbated by the fact that very little information was available to consumers to judge the severity or cause of some of their problems.

Essentially, issues raised by consumers falls into two categories. The first tends to be specific to their air travel experiences and relate primarily to service. The second is systemic, and deals with the impacts of dominant carriage and competitive needs. The former is being dealt with in a number of ways: the creation of a "Air Complaints Commissioner" within the Canadian Transportation Agency and an Air Canada Ombudsman are two new avenues open to consumers. This report, which focuses on the "macro" impacts of the merger, deals with the systemic issues.

As in the case of the other stakeholder constituencies examined in this report, consumers are not a homogenous group. Issues differ depending on the number of airlines servicing a region and if the passenger is a frequent or occasional flyer. Business travellers and leisure travellers also tend to raise different issues.

COMMENTS FROM CONSUMERS

NEW DEVELOPMENTS

CONSUMER QUESTIONS FOR FURTHER CONSIDERATION

AIRLINES

OVERVIEW

We are in the midst of one of the largest corporate mergers in Canadian history, in a global context in which air travel enjoyed explosive growth, nations world-wide are re-assessing their air policies and where airlines themselves are struggling to re-define themselves for a new generation of air travellers and shareholders.

Summer of 2000 was a difficult season for air travel. Passengers were left hanging in airports and on airplanes as flights were delayed and overbooked, there was no information available from ticket agents, bags were lost and tempers flared. Pundits, elected officials and the media swarmed around the issue, which was the top news item almost daily. Consumer complaints doubled (or more) compared with the previous year. Airlines teetered on the brink or fell into bankruptcy. Mergers were seen as a way to rationalize and improve service by some, and control the skies by others. Increased fuel costs raised prices and lowered profits.

None of these problems had any relation to the merger of Air Canada and Canadian. They didn't even have anything to do with Canada - they happened in the United States.

The merger of Canadian and Air Canada added to what was already a challenging time. It was controversial. It was confusing. For some, it was enraging. For others, it was a green field ripe with opportunity. While it took away some choice on one hand, it opened the doors for new carriers, and new types of service, on the other.

New airlines such as Canjet, a low-fare carrier launched in the Fall of 2000, and RootsAir, a business oriented carrier scheduled to begin in March 2001,and will serve business travellers, are adding to the growing mix and choice available. Combine all of these changes with the recently announced purchase of Royal Air by Canada 3000, and it is likely that the airline industry in 2001 will be as interesting as 2000.

Despite these positive steps, there are losses that have not been recouped, and competitive niches that have yet to be filled. The current level of competition does not provide Canada-wide access to frequent flyer points or business class services. Air Canada far outweighs the competition in terms of its fleet and the number of domestic and international destinations it serves.

Moreover, the measures airlines use to retain and grow market share and protect customer bases are designed to minimize competition. Techniques such as retaining customer loyalty by offering frequent flyer points, price-matching, and so forth are standard tools. However, in a dominant/monopoly environment, there are some who question if these strategies are too successful, able not only to minimize, but also to block, new competition.

The challenges for regional carriers have also been very significant. Some of these were allied with Canadian, requiring them to re-align themselves with Air Canada following the merger to ensure connectivity. This has been relatively smooth for some, but not for others. This matter will be explored in greater detail in the next interim report.

NEW DEVELOPMENTS IN THE AIRLINE INDUSTRY

AIRLINE QUESTIONS FOR FURTHER CONSIDERATION

SECTION TWO

COMPETITIVE OPTIONS

AND OTHER STAKEHOLDER RECOMMENDATIONS

COMPETITIVE OPTIONS

OVERVIEW

Concerns about the creation of competition in Canada's skies have become the major preoccupation of stakeholders from all groups. Air Canada's dominance of what is seen by many as an essential service has caused unease in the market. Without competition, how can consumers be confident they are getting fair value? In a deregulated environment, how can smaller communities, which may not produce profits for airlines, hope to get service?

There are also differences in the definition of "competition" as used by stakeholders. For some it is the creation of another full-service, internationally-networked carrier. Others view it as having a choice of carriers on a certain percentage of Canada's domestic system. For others it is as simple as removing all of the barriers to international carriers, and letting the marketplace drive the process. Finally, there is a group that does not believe that a competitive airline industry will ever meet their needs - and that government has a role in ensuring adequate access.

Many people have views on how achieve a "competitive" airline industry. As with many other opinions about the impact of the merger of Air Canada and Canadian, these recommendations vary widely.

Since each has both advantages and disadvantages, the options are reviewed in some detail below.

GOVERNMENT INTERVENTION IN MARKETPLACE

FOREIGN CARRIERS (cabotage)

FOREIGN OWNERSHIP/CONTROL OF DOMESTIC CARRIERS

CANADIAN CARRIERS

COMPETITION QUESTIONS FOR FURTHER CONSIDERATION

OTHER STAKEHOLDER RECOMMENDATIONS

OVERVIEW

While stakeholders primarily focused on recommendations for competitive options (see above), other suggestions emerged during discussion and are detailed below. Recommendations concerning government policy are detailed in Section Three.

DATA

Data collection requirements were reduced in 1987, in part to reduce the paper burden on airlines. When Canada's skies were dominated by the competitors Air Canada and Canadian, confidentiality served an important purpose, as release of data would reveal too much of each airline's proprietary information.

The merger was the most recent in a series of changes that have led to a reassessment of data collection requirements. Other factors influencing data needs are:

_ The privatization of airports, which do not have access to the same level of information that they did when managed by Transport Canada;

_ Liberalization of charter services, which are now offering scheduled flights

_ The expansion and emergence of competitive alternatives on a growing number of routes

_ Competition among communities and airports for air service

_ The increased importance of international trade to Canadian enterprises

_ The fluidity of the airline industry, both domestically and internationally, making data that is one or two years old (as is the current situation) virtually useless

Expanded and more timely data serves three important purposes. First they provide essential tools that would be used to create business and development strategies that incorporate air access plans. Second, they provide the map to track trends, identify new market opportunities and react, in a timely fashion, to marketplace changes. Third, they provide the information necessary to assess changes in the competitive/dominant climate.

In contrast to Canada, the United States collects and disseminates detailed data quarterly and makes raw data available publicly. American communities and airports have far better information to attract new air services than their Canadian counterparts. Given the highly competitive nature of global commerce, this inequality, if not resolved, can lead to Canada's uncompetitiveness, not only for air access, but also the economic growth that air access engenders.

OVERSIGHT

Some stakeholders identified the need for some form of "oversight" of the airline industry. There were a number of concepts that were proposed, including the creation of a business/consumer "users" group, which would provide input into government policy and disseminate information to stakeholders. Others suggested an expanded role for the Complaints Commissioner and/or the CTA.

DATA COLLECTION QUESTIONS FOR FURTHER CONSIDERATION

OVERSIGHT QUESTIONS FOR FURTHER CONSIDERATION

SECTION THREE

THE CURRENT ROLE OF GOVERNMENT

THE ROLE OF GOVERNMENT

BILL C-26 AND UNDERTAKINGS

Bill C-26 is intended to deal with airline restructuring in two main areas: to ensure effective protection for consumers and to foster competition. It does not affect safety standards, which fall under the Aeronautics Act, and are untouched.

This section of the report outlines the highlights of Bill C-26, and notes whatever impacts it has had to date. However, it is premature to measure its effectiveness and whether it should be altered to better meet its intentions or to reflect a changing business environment although some concerns have been expressed, including the lack of an adjudication process for travel agency negotiations and sufficiency of the anti-predation components.

KEY MEASURES

_ Increased powers for the Canadian Transportation Agency (CTA) to prevent price gouging on monopoly routes

_ Restored powers for the CTA to deal with conditions of carriage for domestic service (examples: lost baggage and bumping)

_ Improved notice of exit provisions to minimize or prevent service disruptions, and ensure dialogue between airlines and communities

_ A requirement that services provided to customers by Air Canada and its air service affiliates comply with the Official Languages Act, where there is significant demand

_ New powers for the Competition Bureau to regulate anti-competitive behaviour in the airline industry

_ New powers for the Bureau to issue temporary orders to stop predatory behaviour

_ A prohibition of exclusive use clauses in confidential contracts for domestic service to encourage competition for corporate travel and

_ More freedom for travel agents to negotiate more effectively with a dominant carrier on domestic commissions.

_ The creation of the position of Air Travel Complaints Commission at the CTA

These measures are complemented by a series of undertakings made by Air Canada to ensure market access by competitors. Air Canada must, among other undertakings

_ Surrender slots and facilities at airports

_ Sell surplus aircraft to Canadian operators

_ Provide frequent flyer points for resale to new entrants or (smaller) existing Carriers

Some impacts of these measures are already being felt.

_ The Air Travel Complaints Commissioner has been appointed in the Canadian Transportation Agency. This position does not carry an adjudication role, and relies on "moral suasion" to resolve specific issues between consumers and airlines.

_ The Competition Bureau has invoked the temporary "cease and desist" order while reviewing alleged predatory practices. It is still undetermined if the Bureau can now act in a more timely fashion.

_ Aeroplan frequent flyer points are being offered by Royal Air and are available to other carriers.

OTHER GOVERNMENT POLICY

Since 1988, with the deregulation of the domestic airline industry, there has been a steady trend to liberalization of both domestic and international services. Initiatives have included:

_ Deregulation of domestic prices and routes

_ Liberalization of international carriage, including "Open Skies" with the United States

_ Privatization of air traffic control to Navigation Canada

_ Transfer of airports to private sector

_ Liberalization of international charter regulations for cargo and passenger services

Liberalization has led to profound changes in what the government can and cannot do. For example, since it does not control domestic routes or prices, it cannot use air service as a tool of economic or social policy.

However, there are a number of areas where the government is still very much involved. Chief among these is in areas of safety. The second is in negotiating the rules around international carriage, which is governed by Canadian policy within a complex set of agreements between nations. Government also regulates the framework in which Computer Reservations Systems (CRS) operate.

The oversight and assessment of current policy is continuing with three significant reviews currently underway. These are

_ International air policy

_ Airport Policy

_ CRS Regulation (to come)

As well, an independent panel is reviewing the Canada Transportation Act and will address issues regarding the competitive state of the domestic airline industry to be reported in July 2001.

Despite both prior and current actions, there has been a great deal of discussion by stakeholders on the subject of the role and direction of government policy. Recommendations have ranged from a call for government to use air service as a tool of "nation building" and insert itself into the marketplace to the opposite end of the spectrum: marketplace driven, fully-liberalized air access for foreign carriers. Concerns have also been expressed that the government's two-year window to allow Canadian competition to emerge may be too long to deal with the issues that are being faced today.

GOVERNMENT POLICY QUESTIONS FOR FURTHER CONSIDERATION

CONCLUSION AND APPENDICES

CONCLUSION

The airline industry, both globally and in Canada, is in a state of flux. To borrow a weather cliché, if you don't like the airline industry today, wait a few minutes: it will change. The issues around Canadian air service are complex and interconnected. There are no simple answers, no magic bullet. There is not even agreement on the issues.

The merger of Air Canada and Canadian is only part, albeit a large part, of much more profound changes in the industry. What will emerge at the end of this process is still unknown.

In the final analysis, solutions will emerge not from government, nor from the marketplace, but from a combined and informed effort by all. Consumers, communities and businesses all have a role to determine what will happen in Canada's skies.

APPENDIX ONE: THE OBSERVER'S MANDATE

Beginning in August 2000 and continuing for 18-24 months, the Independent Transition Observer will review the impacts of airline restructuring on stakeholders and will assess whether the airline industry is healthy, competitive and meets the needs of Canadians.

In particular, the Observer will:

· Consider the views of consumers, urban, rural and remote communities, travel agents, airports, airlines and airline employees;

· Assess whether Transport Canada, the Canadian Transportation Agency and the Competition Bureau responsibilities relating to airline restructuring are clear and being carried out appropriately;

· Consider whether the government's monitoring measures are adequate;

· Assess industry support to the measures introduced in Bill C-26, including the commitments and undertakings of Air Canada to the Federal government;

· Assess Air Canada's linguistic obligations; and

· Assess the need for a Travellers' Bill of Rights.

Interim reports will be produced every six months with one final comprehensive report to the Minister. The final report will include recommendations on monitoring and related airline restructuring matters.

Meetings were held across Canada with numbers of individuals representing communities, business, consumers and economic development. These meetings help define the issues as reported and provided an ability to track, over time, the concerns that were being mitigated and those that continued to be defined as critical.

The report consolidates the comments heard to date. Other aspects of the merger, such as the desirability of a Passenger Bill of Rights or the impact on airline employees, will be detailed in upcoming reports.

Any errors or omissions are those of the author.

MEETINGS HELD

The Transition Observer met with representatives of the following communities and groups, from August 2000 to January 2001, inclusive.

COMMUNITIES (meetings generally included representatives of economic development, the airport authority, local tourism association and chamber of commerce)

Calgary, AB

Charlesbourg, QC

Charlottetown, PE

Edmonton, AB

Fredericton, NB

Halifax, NS

Iles de la Madeleine, QC

Kitimat, BC

Labrador City, NF

Montréal, QC

Ottawa, ON

Prince Rupert, BC

Quebec City, QC

Regina. SK

Saskatoon, SK

St. John's, NF

Toronto, ON

Vancouver, BC

Wabush, NF

Whitehorse, YK

Winnipeg MB

ORGANIZATIONS

Air Transport Association of Canada

Alliance of Canadian Travel Agents

Canadian Airports Council

Canadian Chamber of Commerce

Canadian Federation of Independent Business

Canadian Tourism Commission

Chartered Institute of Transport in North America, Ottawa Chapter

Council of Concerned Airport Users

Federation of Canadian Municipalities

Hospitality Newfoundland and Labrador

Hotel Association of Canada

Public Interest Advocacy Centre

Tourism British Columbia

Tourism Industry Association of Canada

Tourism Industry Association of New Brunswick

Tourism Industry Association of Nova Scotia

Tourism Industry Association of PEI

Tourism Saskatchewan

Transport 2000

Travel Alberta

AIRLINES

Air Canada

Air Canada Regional

Canada 3000

Canjet

Royal Air

Skyservice (RootsAir)

Westjet

GOVERNMENT AGENCIES/DEPARTMENTS

Canadian Transportation Act Review Panel

Canadian Transportation Agency

Competition Bureau

Rural Secretariat

Statistic Canada

Transport Canada

PROVINCIAL/TERRITORIAL REPRESENTATIVES

Manitoba

New Brunswick

Newfoundland and Labrador

Nova Scotia

Prince Edward Island

Québec

Yukon

1 For the sake of brevity, the term "Air Canada" is used to encompass "Air Canada and its regional carriers".

2 STATISTICS CANADA, National Tourism Indicators, Quarterly Estimates, Fourth Quarter 1999

3 Ibid.