PROCEEDINGS- Twenty-second Annual Meeting Theme: • "Opportunities and Challenges in the New Environment of Transportation" November 4-5-6, 1981 Golden Gateway Holiday Inn San Francisco, California Volume XXII • Number 1 1981 TRANSPORTATION RESEARCH FORUM 542 Regulatory Moves in Canadian Air Transport Pragmatists at Work by J. J. Smith* 1. INTRODUCTION membered the duplications of the rail- way expansion and the Depression was HE LAST YEAR has seen the a recent memory. (a) T publication of a number of It is also apparent that extensive ef- papers on the subject of the economic forts were made to avoid outright gov- regulation of air transport. In particu- ernment ownership if at all possible. The lar: McGill paperl lists three proposals aim- Economic Regulation and Competition ed at accommodating public and private in the Domestic Air Carrier Industry: A interests in a consortium. In the end, discussion paper prepared by Transport the CPR withdrew from the last at- Canada - Air, Canadian Transport Com- tempt, unwilling to accept a proposal of mission and the Department of Consum- a nine-director Board in which it would er and Corporate Affairs (February have only three seats in the face of the 1981). CNR's three and the Minister of Trans- The Administrative and Regulatory port's three. Environment of Air Carriers in Canada: Having CNR as sole owner was, in a Problems and Prospects: University of real sense, the last choice. Given the Calgary, Institute for Transportation United States development of an airway Studies (December 1980). system, the Canadians were running out Legal, Economic and Socio-political of time and they knew it. Even then, implications of Canadian Air Transport: Mr. Howe appeared to leave the door McGill University, Centre for Research open during the debate on the Trans- of Air and Space Law: sponsored by Canada Airlines Act saying that "the Transport Canada, Canadian Transport Canadian National Railways will under- Commission and the Transportation De- write. in the first instance, the stock of partment Agency (Spring 1980). this company and distribute it among Air Policy in the 80's: Guy Roberge, firms at present engaged in aviation in Q.C., Canadian Transport Commission: Canada which wish to participate."2 Notes for a panel discussion at the Air The use of the CNR as a channel for Transport Association of Canada Annual financing the infant airline avoided at- Meeting in Calgary (November 2, tracting too much Parliamentary atten- 1980). tion. The passage of the Annual Financ- Airline Deregulation: A Review after ing and Guarantee Acts provided a tra- two years: Melvin A. Brenner Associ- ditional session of CNR-bashing which ates Inc. (January 1981). left little time for TCA-bashing. That (b) The nature of this paper— came much later. The capital expendi- The papers listed above provide a tures for the little airline were, in any wealth of historical data. This paper case, insignificant compared with the tries to illumine that history with some sums being requested for the railway. personal flashes of recollection. This The use of the CNR channel had an- method is not always dependable, but it other effect. The Railway had enough fi- is quick and provides amusement, if not nancial troubles of its own without ac- instruction. cepting the risk of airline losses as well- This paper asserts the presence of a. This problem was met by an arrange- strong pragmatism in the economic regu- ment by which capital advances passing lation of air carriers in Canada. It sets through the CNR to the airline, what- out to demonstrate such a presence, and ever the form of obligation, were al- in general, approves of it. ways rewarded as if a fixed interest ob- ligation was in place. Eventually, the 2. 1937 TRANS-CANADA AIR LINES tradition arose of taking all capital ad- vances in debt form. This was an awk- It is clear from the record that the ward habit which the young airline was Mackenzie King government were con- not able to kick until it was 40 years old, vinced of the need for a single strong in 1977.3 The airline tried hard, but its transcontinental air carrier. They re- parent was not easily persuaded. There was another reason for the air- *Vice President, Economics & Airport line's low profile in Parliament in those Affairs, Air Transport Association of early days. It was remarkably successful Canada. at breaking even after paying its inter- REGULATORY MOVES IN CANADIAN AIR TRANSPORT 543 est charges. Mr. Howe's political um- these curves of operating cost versus brella allowed the management to get stage length that Clayton Glenn draws? on with the job. Go and construct a set of fares which will follow the cost curve." The fares 3. came into effect on January 1, 1961. 1944 THE AIR TRANSPORT The Interdepartmental study4 gives an. BOARD excellent account of the ensuing devel- The creation of the Air Transport opment (since 1970) of cost formula Board in 1944 provided Canadians with fares derived from a fixed Terminal the form, if not the substance, of eco- Charge and a Line Haul charge per mile. no.mic regulation by a quasi-autonomous The study is careful to point out that tribunal. However, the Board had two such a method does not eliminate cross- major constraints: its obligation to ap- subsidy. The Terminal and Line Haul prove route licence applications, filed by charges are derived from Domestic Sys- TCA under the terms of the Trans-Can- tem data, and therefore do not fit per- ada Qontract, and the overriding powers fectly the circumstances of individual of the Minister of Transport. routes and stations. It is possible to rep- resent flying costs for selected stage 4- lengths reasonably well so long as the 1948 CROSS SUBSIDY IS BORN mix of aircraft types does not change In reading recent literature, one can too much. However, it is unlikely that get the impression that cross-subsidy the Terminal Charge would correctly re- wasas some of inspired policy prac- flect the ground handling costs at both kind utili- tised by benign government planners. Toronto and Charlottetown. The The truth is otherwise. zation of personnel and equipment at In 1947 a new aircraft arrived, the Charlottetown is constrained by the low- Canadair North Star. By 1948 it was er traffic density and schedule frequency. serving much of the trans-continental So there is a kind of residual cross- traffic. Fares within Canada in those subsidy, evolved by airline and not by daYs were constructed on a constant rate government. A Dale shadow. Not like the Per mile basis, about six cents per mile. old days. In spite of the talk of market Any departure from such a scheme would forces, the cost of production ideas of have been considered sharp practice. The St. Thomas Aquinas have come a long North Star's direct flying costs were way in domestic fare setting since 1958. ;bout two cents per seat mile; the DC- Not bad for him, considering his age. Were three cents per seat mile. North A final footnote on pragmatic cross- Stars were deployed on the longer haul subsidy in the early days. It decided routes where the incidence of ground which Canadian carrier would serve the handling costs is also lower. It followed Pacific in 1949. My recollection is that .11at with a constant six cents per mile Mr. Howe asked Mr. McGregor first to 1°ng haul routes with North Stars could do• it, and that Mr. McGregor declined 1ake profits, and short haul routes with on the ground that it would drive TCA -uC-3's generally made losses. into the red during the developmental Cross-subsidy arrived with a new air- years. raft and not with a policy. The age of pinocence ended in 1948. The support of 5. 1958 WAS THE YEAR OF THE !small-town" Canada by Transcontinen- FIRST ATTACK ON THE TCA tal and was substan- tial Atlantic passengers TRANS-CONTINENTAL in those days. Its extent was known MONOPOLY o the regulators and sensed with pleas- riure by many in public life. The great The Board was unimpressed by any 'aYsL of cross-subsidy lasted from 1948 notion that competition for competition's tio 1961. You may ask if 1961 saw a sake was a desirable policy.5,6 The Board change in regulatory policy. No. 1960 found that additional transcontinental air w,as the year that the late Gordon Mc- services could not be introduced at that -Iregor got hooked on St. Thomas Aqui- time without major detrimental effects nas and He was hooked in- dir Just Price. to existing operations (meaning TCA). eetlY• It all started with Stephen They also found, however, that the posi- Arheatcroft who asserted in 1958 that tion of CPA• as an international carrier °ss-subsidy was bad social accounting. needed strengthening, and that they 111r. McGregor dismissed this idea, pre- should be licenced to operate a daily sumably since "social accounting" was transcontinental service to connect ,1-'3t language consonant with his own CPA's existing international operations llabits of thought and speech. at Vancouver and Montreal. The monop- Some time in 1960, Mr. McGregor ad- oly was cracked. The slogan "regulated uressed a man named Norman Taylor in competition" was used to cover a sys- Words roughly as follows: 'You know tem of administered market shares. 544 TRANSPORTATION 11SEARCH FORUM 6. 1958 HEES AND EARLY tion arises." No decision on U.S. routes DEREGULATION was to be made pending a new bilateral treaty. The mainline carriers were to The then Minister of Transport, help each other and stop quarreling.