PRO CEE J IN S- Twenty-fourth Annual Meeting Theme: "Transportation Management, Policy and Technology" November 2-5, 1983 Marriott Crystal City Hotel Marriott Crystal Gateway Hotel Arlington, VA Volume XXIV • Number 1 1983 gc <rR TRANSPORTATION RESEARCH FORUM 675 Co-operation: A Pragmatic Response by Canadian Airlines to "Deregulation" • by Robert A. Ellison,* Gerald E. Sinzi3§on** and EtTold D. Smith*" INTRODUCTION The major purpok of this paper is to examine the facets of co-operation ..be- HOW DIFFERENT are the regulation tween and among carriers that are mi.- . philosophies of Canada and the rently being discussed and implemen4a. United States regarding air transpor- An overview of the history and current tation? An illustration of the difference structure of the Canadian airline indus- between the philosophies of the two was try will be presented. The advantages shown earlier this year through Air Can- and disadvantages of co-operation will wila's proposed seat sale on transborder be examined from several perspectivesi flights. That sale developed into a con- the, air carriers, ,tho employees and troversy affecting other carriers in Aus- unions, the travelling public, and agen- tralia, Canada, and the United States. cies and governments. Recently pub- The process of change in the United lished reports calling for deregulation States, based on the Airline Deregula- the Canadian airline ,industry are sum- tion Act of 1978, has been revolutionary marized and implications for policyl and whe.-cae, that in Canada, based on the Canadian domestic and transborder car- National Transportation Act of 1967, riage will be drawn... Such co-operation has been evolutionary. This difference in may be a short term pragmatic respcni=e philosophies may lead to still regulatory to the economic environment and not:a, other conflicts and disputes not only on long term approach. the transborder operations of U.S. and Canadian carriers but also on opera- Cons to other countries. It would result HISTORICAL OVERVIEW in at least three countries being involved The history of the Canadian airline in- in the hi-lateral agreements between the dustry set the stage for the introduction other country and Canada and the other of co-operative services by CP Air and country and the United States. Eastern Provincial Airways in 1983. The regulatory philosophy in Canada Harris (1) in 1978 and Smith (2) i hasevolved from maintaining the mo- 1981 made detailed presentations on air- nopoly position of Trans-Canada Air- line development in Canada and identi- lines, the predecessor of Air Canada, on fied several events which have directed domestic trunk line routes from 197 present developments: through the advent of limited trunk line competition to the development in the 1930's Development of U.S. trunklines 1970's of more extensive national and • regional competition. This evolutionary Potential diversion of• - process from monopoly to regulated. cross-Canada traffic to competition could be completed by mov- U.S. routes ing toward deregulation. The deregula- 1937 Establishment of Trans-Canada tion revolution in the United States in- Airlines by Canadian Govern- dustry, in part, has influenced the "Eco- ment nomic Council of Canada, the Ministry of Consumer and Corporate Affairs and TCA given monopoly on the House of Commons Standing Com- international and trans-- mittee on Transportation to call for the continental routes deregulation of the Canadian airline in- After Canadian Pacific allowed to dustry. Yet, instead of moving toward 1945 operate on international greater competition under deregulation, routes the Canadian air carriers are responding to the current recessionary environment 1958 TCA's transcontinental by pursuing co-operation, a pragmatic monopoly broken rationalization of their services. CPA allowed one flight daily on Vancouver- *Dalhousie University, Halifax, Nova Montreal route to con- Scotia nect international routes **Air Canada, Halifax, Nova Scotia Carrier Policy ***Eastern Provincial Airways, Hali- 1966 Regional Air fax, Nova Scotia One carrier in each TRANSPORTATION RESEARCH FORUM region designated as lines under deregulation. As the Cana- preferred carrier dian economy entered a recessionary pe- riod in the 1980's the air carriers stim- 1966 Bilateral agreement between ulated travel and met competition by in- United States and Canada creasing the number of seats per flight More routes to 'U.S. sold on a discount basis. By mid-1982, opened; majority granted after Air Canada and CP Air reported to Air Canada large first half operating losses as the recession deepened, the CTC restricted 1967 National Transportation Act price competition by imposing restric- Recognized strong tions on deep discount fares. In 1978 the competitive nature of number of competitors was reduced transportation when the CTC allowed Air Canada to acquire Nordair, a large regional carrier. 1970 CP Air allowed 25 percent of Therefore, given the current economic transcontinental traffic climate, it might be questioned whether or not the CTC in the near future will 1974 Bilateral agreement between allow the Canadian airline industry to U.S. and Canada amended follow the recent U.S. deregulation ex- Significant price competition market perience. 1978 CP Air's permitted will probably not be allowed through share increased deep discount fares nor will additional Competition was both encouraged and competitors, either by new or existing discouraged by the Canadian Transport carriers, be allowed entry on most Commission during the period from 1978 routes. to 1982. The Canadian carriers emulated The Canadian air carriers, in response their U.S. counterparts by introducing to the recession, are conducting a ra- deep discount fares in 1978 and 1979 tionalization of their services, through that cultivated a more price elastic mar- either retrenchment or the introduction ket which grew 11 percent and 12 per- of co-operative services. The route po- cent respectively (3). However the num- sition, ownership, and status of the ma- ber of seats made available was sub- jor airlines in Canada are shown in Ta- stantially less than that by U.S. air- ble 1. Many airlines would like routes to TABLE 1 ROUTE POSITION, OWNERSHIP, AND STATUS OF THE MAJOR AIRLINES IN CANADA Ownership Status Airline Routes Federal Government - Some retrenchment ar Canada Trunk International Private (Canadian Pacific - Retrenchment CP Air Trunk Co-operative services with International Limited) but a Province of - Quebec pension agency Eastern Provincial Airways ewes 9.32 of CP Ltd. (Spring 1983) Government of Alberta (1974) - Available for sale Western Regional (Western • Pacific - Seeking more routes.to U.S. to Toronto; Canada Co-operation discussions northern services; - with CP Air route to Seattle) - Federal Transport Minister Regional (Ontario, Controlled by Air Canada Vordair has ordered Air Canada to Quebec; northern (86.45 of shares purchased sell Noriair to the services; route to in 1978) private sector Pittsburgh) difficulties Privately owned but - Severe financial Quebecair Regional (Quebec, Government) effectively controlled (Propped up by Quebec Ontario) Minister by Quebec Government - Federal Transport rejected mer,;:r with rordair in 1932 - Would like routes to U.S. - May be nationalised by Quebec Government - retrenchment Regional (Atlantic Privately owned (Newfoundland Some Eastern Provincial Seeking routes to U.S. Canada to Toronto) Capital Corporation) - - Co-operative services with CP Air (Spring 1983) A PRAGMATIC RESPONSE TO "DEREGULATION" 677 the United States, yet differences in the national operations make a modest regulatory philosophies of Canada and profit but expanded transcontinental the United States may preclude a new flights are sustaining substantial losses or amended bilateral agreement. and northern services are suffering dev- astating losses. This is why CP Air is CO-OPERATION concerned about the recent Air Canada seat sale dispute with the U.S. and the The connotation of the term co-oper- settlement which allowed Continental ation or co-operative services as used in Airlines to fly up to 8,000 Canadians to this paper means an arrangement for Australia on the same terms as offered Joint services by different carriers in by CP Air; why it has entered into co- the same mode without common owner- operation with EPA on transcontinental ship. flights; and why it has discussed co- In September 19S2 CP Air, a national operation on northern flights with Pa- carrier, and Eastern Provincial Airways, cific Western. Co-operation should mean a regional carrier, announced a co-oper- an increase in EPA's presence in the ation plan to be introduced in April Montreal and Toronto markets. CP Air 1983. It had been studied for a year by should also benefit from increased inter- the two rival airlines in eastern Canada line business routed through EPA be- under the code name "Operation Kip- cause of interconnected scheduling and ling—East meets West." Joint sched- the intention of EPA to switch its res- uling of equipment, interconnection of ervation system from Air Canada to CP flights, joint general handling at air- Air (0). ports, joint promotion of the two air- There are also disadvantages with co- lines' services and destination are in- operation. EPA could suffer some ero- cluded in this co-operative venture. Sim- sion of interline business with Air Can- ilar links are expected in charter oper- ada, which is five times greater than ations, crew training, and maintenance. that involving