No. H113/99
For release December 21, 1999

OTTAWA — Transport Minister David Collenette today announced that the Government of Canada is prepared to approve the Air Canada offer to acquire Canadian Airlines. The government has secured commitments on its key principles from Air Canada. The Competition Bureau has ensured that Air Canada will take action on domestic competition issues. In addition, the government will take steps to enhance international competition in the airline industry.

"Since the airline restructuring exercise began in August, the Government of Canada has insisted on protecting the public interest on key issues like price gouging, competition, Canadian ownership and control, service to small communities and the fair treatment of employees," said Mr. Collenette. "Today, we are satisfied that the legally enforceable commitments and actions brought forward by Air Canada — together with the legislation that will be tabled early in the new year — will ensure effective protection for consumers and the public interest, should the Air Canada transaction to acquire Canadian Airlines proceed."

In a letter sent to the Minister by Air Canada, the company agreed to the following commitments:

• to continue to provide domestic service to communities being served by Air Canada, Canadian Airlines, and their wholly owned subsidiaries for a three-year period; and
• to ensure that there will be no involuntary layoffs or relocation of unionized employees of Air Canada, Canadian Airlines, or their wholly owned subsidiaries for a two-year period.

"As I’ve said repeatedly, the Government of Canada will not tolerate price gouging," said Mr. Collenette. "Clearly, the best guarantee for reasonable air fares is viable competition. However, the government also believes that measures for dealing with pricing and predatory behaviour can be effectively enshrined in the legislation that I first announced in August, and that I described in further detail in the October Policy Framework for Airline Restructuring in Canada.

"In developing this legislation, we will take into consideration the views on pricing that were provided by the House and Senate Standing Transport Committees. The Government of Canada will consider a full range of options to ensure that it has the power to deal effectively with any potential price gouging, including effective monitoring powers and sanctions, as necessary."

In undertakings to the Commissioner of Competition, Air Canada also agreed to take action deemed necessary by the Bureau on a number of issues relating to domestic competition. This includes the divestiture of Canadian Regional, the surrender of a number of airport slots at Pearson International Airport, and adherence to a provision that, if another Canadian carrier starts discount carrier service in Eastern Canada prior to September 30, 2000, Air Canada cannot offer discount carrier operations in Eastern Canada prior to September 30, 2001.

The government has developed a new competitive framework for Canada’s international air services, under which current and future markets exceeding 300,000 annual scheduled passengers become immediately available to any Canadian carriers interested in operating scheduled services, subject to the availability of bilateral rights. Canada’s international air charter policy will be reviewed and liberalized beginning early in the new year, and a review of Canada’s international air policy will commence in one year.

"Today we’ve taken significant steps towards our ongoing goal to protect the public interest," said Mr. Collenette. "This is good news for consumers, airline employees, small communities, and the airline industry in Canada. We will continue to make the protection of the public interest our first concern."

A backgrounder on these recent developments is attached, along with a letter indicating that the Government of Canada is prepared to approve the proposed airline transaction.

- 30 -

Contact:
Peter Gregg, Office of the Minister of Transport, Ottawa (613) 991-0700

Transport Canada is online at www.tc.gc.ca.
Subscribe to news releases and speeches at  apps.tc.gc.ca/listserv/ and keep up-to-date on the latest from Transport Canada.

This news release may be made available in alternative formats for persons with visual disabilities.

The Government of Canada’s willingness to approve the proposed Air Canada offer to acquire Canadian Airlines results from a full review of the transaction by the Competition Bureau and from the productive discussions held recently on this matter by the government and Air Canada.

Air Canada has reached an agreement with the Commissioner of Competition. In undertakings to the Commissioner of Competition, Air Canada agreed to take action deemed necessary by the Bureau on a number of issues relating to domestic competition. Air Canada has also made commitments to the Minister of Transport on key public concerns. These commitments and the actions it will take to deal with the Commissioner’s competition concerns will be legally binding and enforceable by mechanisms contained in the legislation being introduced in February.

To complement these competitive measures in the domestic market, the Government of Canada has developed a new competitive framework for Canada’s international air services and bilateral relations.

Throughout the discussions with Air Canada, the Government of Canada’s paramount concern was to protect the public interest on the five key issues that the Minister has outlined since the restructuring exercise began:

The Government of Canada will not tolerate price gouging. Clearly, the best guarantee for reasonable air fares is viable competition. However, the government also believes that measures for dealing with pricing and predatory behaviour can be effectively enshrined in the legislation that will be introduced in February.

In developing this legislation, the government will take into consideration the views on pricing that were provided by the House and Senate Standing Transport Committees. The Government of Canada will consider a full range of options to ensure that it has the power to deal effectively with any potential price gouging, including effective monitoring powers and sanctions, as necessary.

The Government of Canada is committed to ensuring that the necessary conditions are in place for attracting competition from new and existing carriers.

Domestically, the Competition Bureau has ensured that Air Canada will take action on a number of competition issues directly related to the proposed transaction. This includes:

• a provision that Air Canada not offer discount carrier operations in Eastern Canada prior to September 30, 2000; if another Canadian carrier (other than WestJet) starts discount carrier service in Eastern Canada prior to September 30, 2000, then Air Canada cannot offer discount carrier operations in Eastern Canada prior to September 30, 2001;
• a requirement to put Canadian Regional on the market for a period of 60 days within 45 days of the closure of the transaction; and
• a requirement to surrender four slots per hour at Pearson International Airport between the peak hours of 7 a.m. to 9 a.m. and 3 p.m to 8 p.m. should the sale of Canadian Regional occur, and six slots per hour in these peak hours if the sale does not occur.

More information on these and other competition issues can be obtained from the Competition Bureau.

Internationally, the Government of Canada has developed a new competitive framework for Canada’s international air services and bilateral relations. This includes:

• the immediate availability of all current and future markets exceeding 300,000 annual scheduled passengers to any Canadian carriers interested in operating scheduled services; this market currently includes the United Kingdom, France, Germany, Japan, Hong Kong, Taiwan (Republic of China) and Mexico, which the government has just determined to have reached this threshold;
• a review and liberalization of Canada’s international air charter policy, beginning in early 2000;
• a review of Canada’s international air policy beginning in one year, with the expected liberalization to take effect in the 2001/2002 winter season;
• the retention of the current bilateral air negotiation process for any countries not allocated; and
• the retention of the current country allocations and related route rights awarded to Air Canada and Canadian Airlines should the transaction proceed, and the lifting of the "Use it or Lose it" provision until the beginning of the 2001/2002 winter season, in order to allow the two airlines the time required to reorganize international services.

3. Canadian Ownership and Control

The Government of Canada is committed to ensuring that the Canadian airline industry is owned and controlled by Canadians for Canadians.

Although there is no intention to change the current 25 per cent limit on foreign ownership in the industry at this time, the Government of Canada intends to amend the Air Canada Public Participation Act to ensure that it allows the Governor in Council to increase this limit by regulation, as can be done under the Canada Transportation Act.

With respect to the 10 per cent limit on individual ownership of share holdings in Air Canada, the Government of Canada will introduce legislation to raise the limit to 15 per cent.

The Government of Canada wants to ensure access to air service across the country and has secured from Air Canada a three-year commitment to continue to provide domestic service to communities being served by Air Canada, Canadian Airlines, and their wholly owned subsidiaries.

The Government of Canada is also reviewing the notice of exit provisions of the Canada Transportation Act to see if these provisions should be strengthened in the legislation to be introduced in February.

The Government of Canada has insisted that employees be treated fairly and has secured from Air Canada a two-year commitment to ensure that there will be no involuntary layoffs or relocation of unionized employees of Air Canada, Canadian Airlines or their wholly owned subsidiaries.

Mr. Robert A. Milton
President and CEO
Air Canada
Air Canada Centre 271
P.O. Box 14000
Dorval, Quebec
H4Y 1H4

Dear Mr. Milton:

I am writing to confirm that the Government of Canada is prepared to allow the Proposed Acquisition by Air Canada, directly or indirectly, of Canadian Airlines Corporation "Canadian Airlines") and/or Canadian Airlines International Limited ("CAIL"), to proceed, on the basis of the transportation commitments and competition undertakings and the proposed legislation referred to hereinafter.

To satisfy the concerns which the Government had with respect to the Proposed Acquisition, your company has agreed to make in writing certain transportation commitments and competition undertakings. We acknowledge receipt of your letter to the Minister of Transport dated December 21, 1999 which sets out the transportation commitments and a copy of your undertakings to the Commissioner of Competition dated December 20, 1999 which are to be attached as Annex A to the no-action letter which will be issued by the Commissioner of Competition.

The Government of Canada has reviewed the transportation commitments and the competition undertakings given by Air Canada and 853350 Alberta Limited and hereby agrees that these commitments and undertakings satisfy those specific concerns of the Government which are capable of being addressed by way of commitments and undertakings.

In the new year, the Government of Canada intends to introduce legislation which would deem the above-mentioned Proposed Acquisition to have been approved under the new merger review provision of the proposed legislation and incorporate your transportation commitments and competition undertakings so as to make them enforceable.

The proposed legislation would also give effect to a number of other elements covered in the policy framework on airline restructuring issued on October 26, 1999, including the following: merger and acquisition review process for air transportation undertakings, pricing and predatory behaviour, and notice of exit provisions which complement your commitments on service to small communities.

With respect to restrictions on foreign ownership, amendments will be proposed to the Air Canada Public Participation Act to allow the Governor in Council, by regulation, to increase the percentage limit of non-resident shareholdings as it can under the Canada Transportation Act. Amendments to the Air Canada Public Participation Act would also be proposed with respect to the limit on individual share holdings to increase the percentage limit from 10% to 15%.

As with other legislation that is developed, the Government of Canada intends to consult with persons that may be affected including in this case Air Canada and other carriers and stakeholders.

The Government of Canada acknowledges that the Commissioner of Competition has reviewed the availability of existing slots at airports in Canada and has obtained from Air Canada satisfactory undertakings (the "Slots Undertakings") to deal with the reassignment of certain slots at Pearson International Airport. The Government of Canada further acknowledges that, subject to the Slots Undertakings and without pre-empting the government’s ability to regulate the allocation of slots at airports, the current number of slots held in respective winter and summer seasons at all airports in Canada by Air Canada, CAIL and their respective subsidiaries shall continue to be the base allotment for ongoing slot allocation in accordance with normal allocation practices.

With respect to Canada’s international air policy and bilateral relations, the following framework will be established:

1. Effective immediately, existing and future large international country markets (those exceeding the 300,000 annual scheduled passenger threshold - currently the United Kingdom, France, Germany, Japan, Hong Kong, Taiwan, and Mexico) will become open for designation to any Canadian airlines who wish to operate a scheduled international service subject to the necessary rights (including designation and capacity rights) being available or attainable under the bilateral agreements.
2. The international air charter policy will be reviewed and liberalized beginning early in year 2000.
3. A review of the current international air policy will commence one year from the date of the taking up of Canadian Airlines’ shares with implementation of any changes to the policy to take effect with the IATA 2001/2002 Winter season. The intention is to liberalize the international air policy.
4. All country designations and assignments awarded to Air Canada and CAIL by the Government of Canada and all related route, capacity and associated rights will remain allocated to the two companies following the taking up of Canadian Airlines’ shares. From the date of the taking up of Canadian Airlines’ shares to the beginning of the 2001/2002 IATA winter season, the "Use It or Lose It" provision of the current policy will not apply in order to allow Air Canada and CAIL to reorganize their international services. However, the following designations that are currently contestable will remain contestable: Bulgaria, Dominican Republic, India (for transatlantic services), Indonesia, Ivory Coast, Malaysia, Pakistan, Peru, Philippines, Saint Lucia, St. Kitts and Nevis.
5. For any country markets not allocated, the Government will, upon request, conduct a carrier selection in accordance with the current practice.
6. The current bilateral air negotiation process will continue. The Government will seek dual designation and cross code-share rights for Air Canada and CAIL in all country markets to which they are designated or assigned, as well as additional rights to meet the needs of all Canadian stakeholders and carriers.
7. All slots at New York LaGuardia and Chicago O’Hare airports obtained by the Government of Canada during the 1995 air negotiations with the United States and allocated to Air Canada and CAIL by the Minister of Transport on March 10, 1995 will remain allocated to the two companies, or to Air Canada if CAIL becomes fully integrated into Air Canada, following the taking up of Canadian Airlines’ shares and subject to the terms and conditions set out in the Minister’s letter of March 10, 1995.

In this letter, the expression Proposed Acquisition has the meaning ascribed thereto in your letter to the Minister of Transport referred to above.

The statements made by the Government in this letter shall take effect only if 853350 Alberta Limited takes up the shares of Canadian Airlines and shall cease to have effect in the event that the undertakings given by Air Canada and 853350 Alberta Limited in their letter to the Minister of Transport referred to above cease to apply, subject to any revival thereof.

In conclusion, I want to thank you and your officials for the expeditious and efficient manner in which these discussions were conducted.

Yours sincerely,

[original signed by]

Hon. David M. Collenette, P.C., M.P.

Competition Bureau Announces It Will Not Oppose Acquisition of Canadian Airlines