CRPY F &) N CANADIAN TRANSPORTATION RESEARCH LE GROUPE DE REDIERCHES SUR LES TRANSPORTS AU Canadi
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.„_ CRPY F &) n CANADIAN TRANSPORTATION RESEARCH LE GROUPE DE REDIERCHES SUR LES TRANSPORTS AU CANADi 21st ANNUAL MEETINL PROCEEDINGS VANCOUVER, B.C. MAY 1986 A 200 CANADIAN AIR TRANSPORT INDUSTRY: RECENT TRENDS by Roger Royl Canadian Transport Commission 1. INTRODUCTION On May 10, 1984, a new Domestic Air Policy was unveiled. Some associated this new policy to deregulation, others saw in it a regulatory reform allowing a staged liberalization of regulation. The gradual elimination of pricing controls and the allowed free and open competition proposed in the policy, created public expectations. New trends emerging from the relaxation of airline economic regulation are distinguishable and this paper identifies them in relation to the expectations created by the new policy. The most telling expectations have to do with the anticipation of an increase in the level of competition. Increased competition promises to impact on costs (and, by the same token, on fares), on services and on efficiency. It is important to examine the recent trends in relation to foreseeing changes. To do so, a standard economic approach consisting of analyzing the industry's structure, conduct and performance, is used to review the domestic air passenger transport industry. 2. STRUCTURE AND PERFORMANCE By allowing free and open competition between the so-called National, Regional and Local carriers, and by permitting new or existing carriers to apply to the Canadian Transport Commission (CTC) to serve any domestic route with any equipment it wants, the new policy promised a more competitive market structure. But the word "market", in the context of air services, can mean, at one extreme, the entire industry or, at the other, an individual city-pair. The first point to emphasize is that the actual number of airlines in the industry is not the best indicator of market structure competitiveness. Level I airlines2 dominate the industry in terms of number of passengers carried and of revenue passenger kilometres3 (RPK) (Table 1). Level I carriers' market share (percentage of the industry's output) has decreased slightly from 1981 to 1984. In 1981, Level I airlines 1 ROGER ROY 201 were responsible for 93.8% of the total number of passengers carried (27,188,609) compared to 91.7% in 1984 (from a total of 27,700,754). It is important to note that in 1984 the passenger traffic level was back to its pre-recession level. Level I airline Passenger traffic was still inferior in 1984 to its 1981 level while both Level II and Level III airlines were observing, over the same years, a net increase in their actual number of passengers carried. Traffic gains of smaller carriers appear to have resulted from losses by the Level I carriers. However, because of the recession, the evidence is far from being conclusive. When looking at the RPK's figures for unit toll operations, the market share gain achieved by smaller airlines are negligible. Two sources of explanations for the recent traffic trend can be found and have to be presented in the Context of the new competitive pressures prevailing in the industry. One has to do with the moving structure of the industry while the other stands on the activities ?ccurring at market level, the latter being addressed in the next section. Changes in the structure which preceded and followed the new policy, have created opportunities for some moves which, under the new freedom, result in competitive situations. For instance, between March 1979 and November 1980, Jim Pattison assembled Air West, West Coast Air Services, Gulf Air, Pacific Coastal Airways, Island Airways, Trans-Provincial Airways, six flying enterprises into a single commuter airline, Air BC. in July of 1983, an interline agreement between Air BC and Canadian Pacific Air Lines (CPAL), allowed the commuter carrier to inaugurate in October 1983 a Victoria-Vancouver airport feeder schedule linked to CPAL's domestic and international route patterns, a market where a competitive situation now prevails. Changes of control and amalgamations Between January 1, 1984 and September 30, 1985, the Air Transport Committee issued twenty-one decisions concerning changes of control and amalgamations of airlines.4 Concerning changes of control of air carriers, Eastern Provincial Airways Limited (EPA), Quebecair, Pacific Western Airlines Ltd. (PWA) and Nordair were Level I carriers who had their control modified. For Level II carriers, only Time Air and Norcanair experienced a change of control although a somewhat similar development has since involved Air Ontario. The acquisition of EPA by CPAL could have been perceived as an indication that the airline industry was heading towards a period of consolidation in which stronger carriers would try to absorb weaker lines. In fact, EPA's acquisition has meant, for the travelling 2 ROGER ROY 202 public, a coast to coast competitive service. CPAL's move to acquire Nordair should also give the carrier a stronger presence in Quebec and Ontario, complementing already existing routes in both Western Canada and throughout Atlantic Canada. (A large block of Nordair's shares have been bought by CPAL. It is noted that Quebecair also has a substantial investment interest in Nordair and has expressed a desire to acquire the company.) Prior to the publicly announced intention of CPAL with respect to Nordair, a change in Nordair's control from Air Canada to Innocan Ltd. was allowed by the ATC on November 28, 1984. Earlier that year, PWA had acquired minority interest in Time Air while in November of 1984 PWA's change of control from the Government of the Province of Alberta to the general public was approved. • Commercial agreements An efficient competitive tool in a deregulated environment which impacts indirectly on the structure of the industry has to do with commercial agreements between airlines. Alliances of large airlines with small commuter carriers complement the network with traffic flows from smaller communities. In some cases, the alliance model follows an equity investment in the partner carrier. If PWA's interest in Time Air is an example of such an arrangement, it is not the only one. PWA and Air Canada have each acquired a 24.5% share of Air Ontario, despite criticisms of such intention on the part of Air Canada. As a result of this move, Air Canada dropped some short haul markets in Ontario. In other cases, a pure commercial arrangement is behind two carriers' collaboration. A commercial agreement allows, among other things, passengers to transfer with ease from one carrier's operation to another for connecting flights. Such an agreement exists between CPAL, Air BC as well as Pem-Air. As a result, CPAL and Air BC are competing with PWA and its local service partner, Time Air in British Columbia. The trends of local carriers linking up with larger carriers is not new to Canada. As a matter of fact, Air Ontario has been operating under a commercial agreement with Air Canada for the past ten years, Air Ontario reservations being handled by Air Canada and the local carrier being a member of the national airline's frequent flyer program. The agreement also allows the offering of combined fares. If commercial agreements are not new to the airline industry, the new challenge facing airlines force them to look more and more at such agreements as a way to maintain or expand their position in the marketplace. This tendency can be illustrated by recent cases. A new carrier in Quebec called Nordair Metro, jointly 3 ROGER ROY 203 formed by Nordair and Toronto Airways (Torontair) is to provide a feeder service to CPAL in Quebec and to compete with Quebec Aviation; in this case, many of the cities to which it intends to fly are already served by the other local carrier. Nordair Metro's creation is interesting because it illustrates the new emphasis prevailing in the industry toward cooperation between scheduled jet and turboprop services. In Atlantic Canada, as a result of the demise of Air Maritime, a subsidiary of the now defunct EPA, Air Atlantic, backed by CPAL, and Air Nova, a potential Air Canada Protege, are to succeed to Air Maritime. Air Atlantic has an agreement with CPAL to act as the large carrier's commuter airline in Atlantic Canada, using its reservation system and its passenger checking facilities. The 10 year agreement with CPAL allows Air Atlantic to operate Air Maritime's routes once the airline is set to fly. Air Atlantic flights will connect with CPAL jet flights in major Maritime locations as part of a hub and spoke schedule. Air Nova is trying to strike a similar deal with Air Canada to have a streamlined feeder system to larger destinations. These two new commuter airlines will fly Dash 8 turboprop aircraft. Early in 1986, Nordair announced that it has reached a commercial agreement with CPAL. Since then, the two airlines honour each other's tickets and share some fares. Joint fares are a less expensive method of purchasing tickets than if each airline sells them separately. Because of EPA's acquisition by CPAL, Nordair is able to offer many connecting flights from the east coast to Sudbury. Nordair is also part of CPAL's travel bonus plan. Although the evidence presently available is not as extensive as could be desired, a preliminary appraisal of the economic implications of agreements between air carriers indicate that they have so far allowed 11 replacement of the big carriers' cumbersome and infrequent jet service in short haul low density markets by turboprop feeder service, providing an improved service for the customer with the resulting increased frequency; 2) benefits for local carriers resulting from the access to a major carrier's interline marketing, advertising and reservation facilities; 3) and, finally, With the assistance in passenger handling from major carriers, an offset to financial handicap of short haul operators.