Last week the United Arab Emirates upped the ante in a battle over market access to Canada for its national airlines, Emirates and Etihad. By introducing the issue of Canada’s military bases into the aviation bilateral argument, the UAE hardly used a new tactic in this age old and archaic industry. Aviation is so close to national economic interests that it raises all sorts of sensitivities which seem bizarre to outsiders – perhaps because they are exactly that.
Canada and its flag carrier, Air Canada predictably responded with shock and horror, insisting that a restrictive aviation policy was in the national interest. Moreover, it said, admitting these government-owned airlines would be unfair and disastrous for Air Canada. Meanwhile consultants, Intervistas, had produced a report suggesting that Canada was missing out on a potential CAD480 million in economic benefits if Emirates Airline were prevented from expanding. This review examines some of the arguments raised in favour of the status quo, suggesting that the Canadian government is, like King Canute, seeking to hold back the tide of consumer-driven air travel policy. It questions if this approach is in Canada’s – or even Air Canada’s – best interests.
Some parallels between Canada and Australia
Australia offers a useful comparison with Canada as an aviation (and tourism) market. The two countries have a roughly comparable airline system, equally widely spread across a large land mass, albeit Australia has a considerably smaller population.
There are other parallels. Like Canada, one of the country’s two major legacy airlines collapsed about a decade ago (Ansett Airlines, which was bankrupted shortly after the failing Canadian Airlines was folded into Air Canada).
Today Australia enjoys service from Qantas, a successful full service airline with an equally successful low cost subsidiary, Jetstar; at home it competes mainly with the evolving LCC/”new world carrier”, Virgin Blue.
Canada now has a similar major airline profile, with Air Canada, its Jazz subsidiary and a gradually evolving WestJet, which, like Virgin Blue, moved in to fill part of the gap left by the failed legacy airline.
Another LCC also operates in the Australian domestic market: foreign-owned Tiger Airways, allowed in, as foreign-owned Virgin Blue had been, under Australia’s relaxed ownership rules. All are profitable, although recently arrived Tiger is still establishing.
There are however some major differences: Qantas’ low cost subsidiary also operates internationally, as does Virgin Blue, under the Pacific Blue and V Australia brands.
Also, unlike Canada, Australia’s liberal entry regime means it enjoys a very high level of competing international service – not only to the main gateway, Sydney, but also to several other smaller cities.
And again, by contrast with Canada, Australia has not needed to bail out a failing national airline. Although Qantas went close to privatisation (ie delisting and purchase by private equity) in 2008 – which could have led to a potentially fatal debt burden and divestment of its best assets, as happened with Air Canada – it remains intact as a single group entity.
This has proved vital to its continued profitability, as the full service international airline part of the group has stumbled since premium traffic dried up in 2009. But Qantas’ frequent flyer programme is generating hundreds of millions of dollars in profits, as is Jetstar.
Another big difference is the role of Gulf airlines in Australia’s international market. Not only Emirates Airline, but also Etihad and Qatar Airways operate there. And the UAE carriers don’t just operate to one Australian port.
Emirates flies to Sydney (three times daily), to Melbourne (three times daily), to Brisbane (twice daily) and to Perth (twice daily). Several of these services also extend across to New Zealand and return, where, apart from passengers, the carrier uplifts good loads of freight which had been stranded since all other airlines on the very busy three hour sector market went narrow-body.
Then there is Etihad. The other large UAE airline also operates to Sydney (twice daily), to Melbourne (daily) and to Brisbane (daily). Additionally, Qatar Airways operates a daily service to Melbourne.
Between them, they operate almost 40,000 seats weekly into Australia. The bulk of these seats do not carry end-to-end Australia-Gulf passengers (although inbound tourism from the Middle East to Australia is consequently the country’s fastest growing market). Most travel to and from European, other Middle East and African points, as well as carrying New Zealand origin and destination passengers.
Canada’s Transport Minister would be shocked with this level of foreign seats invading his country. And this is only a small part of the total “sixth freedom’ airline activity into Australia. Singapore Airlines for one does nearly a quarter of its business carrying Australia-Europe and Asia traffic. Very little of that originates in, or is destined for Singapore. Numerous others also participate in what today is recognised as a legitimate – and valuable – aviation service.
Transport Canada spokesman Patrick Charette last week affirmed that, "officials continuously monitor the Canada-UAE market to ensure it is not underserved, as this would not be in the commercial interest of either country….The rights under the current Canada-UAE air transport agreement meet the market demands of travellers whose origin or final destination is either Canada or the UAE."
And Air Canada’s pilot union head, Captain Paul Strachan, also adheres to the old aviation trade mantra, maintaining Emirates "has a tactic to break into markets and expand aggressively, but free trade in aviation has to be fair trade. In this instance, it's a lopsided proposal by Emirates." (There is actually nothing in the definition of free trade to require that it be “fair”, if that simply means protecting a weaker competitor against a supplier providing a commercially viable service.)
Transport Canada too says there is no seat shortage (on the end-to-end route), and has resorted to use of the ugly old cornerstone of aviation protectionism, saying that the UAE does not offer “reciprocity” – that is, airline reciprocity, meaning basically that each country’s airlines must have the ability to make equal money on the specific route. Reciprocity does not account for consumers, but is a throwback to the bad old days of regulation, which IATA’s CEO and Director General, Giovanni Bisignani, has been fighting so hard to overcome.
Then of course, Air Canada itself is categorical about the need to protect it from the new world of air travel. In a lengthy diatribe directed at Emirates last week, Air Canada CEO, Calin Rovinescu further elaborated this reactionary theme: “Competition for international traffic flows must exist on a level playing field that provides equal opportunities for all. Any trade agreement – and that is what an air bilateral agreement is – must be fair, balanced and mutually beneficial.” What he meant was mutually beneficial for the airlines – not for consumers.
Mr Rovinescu argued that access restrictions “remain for good reasons. The bilateral agreement between Canada and the United Arab Emirates is a case in point. Simply put, the market between Canada and the UAE has not developed to the point where more capacity is warranted. Period. Full stop. There are already more airline seats being flown between Dubai and Canada than there are people to fill them. No adjustments to the Canada-UAE bilateral are warranted at this time and in our view it would be short-sighted on the Canadian Government’s part to yield to the massive lobby effort underway by Emirates and the UAE.”
These are attitudes that fitted comfortably in the 1960s, but they become sadly out of place in the 21st century.
Even if this were an appropriate stance in a world where everyone else is going in the opposite direction, it is intriguing to examine precisely where the vaguely defined threat to Air Canada exists. What exactly is the flag carrier being protected from?
Mr Rovinescu argues, “What Emirates wants to do is flood the Canadian market with capacity. Its strategy is to scoop up travelers going elsewhere in the world and funnel them through Dubai, further strengthening Dubai as a global flow hub. This would have the effect of severely damaging our hubs in Canada and our network in Europe and elsewhere.”
But there is surely not a lot for the foreign carriers to “scoop up” on Europe services; few passengers will be prepared to backtrack all the way from Dubai to western Europe en route from Canada, so there is hardly any threat of diversion away from Air Canada’s UK and continental European services. More relevant, there are carriers like British Airways, Air France and Lufthansa who all use their hubs to beef up their end-to-end traffic flows (in what Mr Rovinescu might call unfair ways), consolidating traffic and distributing it to and from Canada.
And, beyond the key European gateways, the simple fact is that Air Canada’s network is skeletal at best (and almost all virtual). This helps make Canada one of the more inaccessible (and higher priced) destinations for most travellers. Even more challenging for Canadians and would-be visitors is that there is currently only one global alliance – Star – effectively serving the Canadian market. WestJet is working with Air France and its partners to enhance the SkyTeam presence, but this is still elemental. So most of Air Canada’s European travellers must rely on the Lufthansa network to access European, Indian and Middle East destinations. This is enormously valuable to Lufthansa and its own subsidiaries.
Further east, India might arguably be a market “at risk” from competition from Emirates (and others). But despite Canada’s large Indian expatriate population, there is not even a through service on Air Canada. From Toronto, Air Canada only operates a one-stop daily service to Delhi, relying entirely on Lufthansa and Jet Airways to provide connections (and codeshares), over London, Zurich and Frankfurt. From Montreal, Calgary and Vancouver, service is so limited that Air Canada’s own schedule does not bother even to list connections.
Yet, in 2008 there were around 350,000 passengers flying roundtrip between India and Canada – some 2,000 pax daily on average, meaning that in peak periods this could be a lucrative trade for airlines, given the limited capacity. But Air Canada’s own metal only flies across the Atlantic to primary European gateways. So, much of the benefit of all this flow would be to the Canadian carrier’s codeshare partners, as it is on all of the European connections, as well as to other European competitors.
Beyond a handful of gateways, Air Canada is essentially a virtual airline, codesharing widely. Canada’s Indian-origin inhabitants might see some reason to support additional service to the subcontinent – not to mention the potential for enhanced inbound tourism.
When Canadian Airlines folded, it hurt Vancouver badly. For decades a “spheres of influence” strategy had applied, where the Vancouver-based airline was awarded the bulk of (the then less valuable) Asia Pacific routes and Air Canada dominated Europe and the rest of the world. So, predictably when Air Canada took the smaller airline over, the gravitas shifted back east. Toronto is still today the centre of the world for the Canadian flag.
This was cause for western Canada’s dissatisfaction with Ottawa and Air Canada, also opening the way for WestJet to establish and flourish locally, eventually spreading across the country. But today, even for Asian points, Toronto remains very much Canada’s hub. Vancouver is therefore a delicate issue for Air Canada. It needs to humour the airport and the local commercial interests, while recognising that its clear economic priority has to be to bed down in Toronto.
From Vancouver too, as with the eastbound routes, it is hard to see exactly how Emirates and others directly threaten Air Canada, or even its partners, heading west into Asia. The carrier has chosen to consolidate its operations on Toronto, reflecting the economics of a lower yielding Vancouver gateway and the value of focussing on a single hub. Air Canada simply doesn’t have the scale to manage two major airport hubs at this stage. So the argument against Emirates had to be more carefully constructed for Vancouver consumption.
The result was intriguing, Mr Rovinescu’s combination of a vision for a joyous future under threat, combining - without a hint of irony - a suggestion that Air Canada could “scoop up (US) travellers going elsewhere in the world and funnel them through (Vancouver)” – to adopt the CEO’s own words, used so disapprovingly against the UAE airlines.
(i) Vancouver’s endangered future: According to the Air Canada CEO, “the longer term impact (of open entry) is devastating and could have the effect of restricting or even marginalizing Vancouver as a hub. When an international carrier dumps seats into a market like Canada, it becomes harder for Canadian airlines to operate internationally. Ultimately, this translates into less economic activity, fewer jobs and fewer routes served. While its argument may be seductive, what Emirates’ strategy will do is constrain the growth of Canadian airports by turning them from hubs into stubs at the end of a spoke that leads only to Emirates’ hub in Dubai.”
This led into the next step, Vancouver’s imminent role as a transfer hub for US traffic.
(ii) “Scooping up” some US traffic: After an imaginative comparison with Vancouver’s potential to emulate Atlanta and Dallas-Fort Worth’s hub roles, Mr Rovinescu pointed out the great opportunity which might exist: “the fact remains, Vancouver has an opportunity to attract substantially more global flow traffic….I believe we can connect a lot more U.S.-Asia traffic through Vancouver. At present, we have about 34 per cent of the Canada-Asia market, so we are getting our share domestically. But of course, in North America the far, far larger market is between the U.S. and Asia, where our share is only one per cent. By winning only a couple of extra percentage points of market share on these routes we could connect a million more passengers through Vancouver’s airport, ensuring Vancouver’s hub status.”
That “only a couple of extra percentage points” is drawing a long bow, given that Air Canada currently only operates three times weekly to Beijing and four times weekly to Shanghai from Vancouver. These are to increase to daily later this year, as Air Canada is “betting significantly on the rebound of business and leisure traffic to and from Vancouver.”
There are also dailies to Hong Kong, Seoul and Tokyo.
A lot more movement will be needed to make Vancouver a compelling hub for the US – meanwhile without undermining Air Canada’s Toronto hub. What Mr Rovinescu didn’t say was that the “34 per cent of the Canada-Asia market” was heavily biased towards Toronto travel, with no clear intent to expand Vancouver’s ex-Canada share.
Last year, faced with the quandary of an airline that was “too-big-to-fail”, the government stepped in to prevent a second bankruptcy in five years for Air Canada. The political fallout of large job losses, at the depths of the 2009 recession and with the Vancouver Olympic Games just around the corner, was clearly too big a risk for a fragile government to confront.
The effect of the bailout, involving substantial taxpayer-funded loans (considered even then as high risk), was to save Air Canada. This has left the company with a large debt overhang - although it was able to raise CAD260 million in an equity issue later in the year. Part of the mid-year deal required a reconciliation with unions, who were pushed to agree significant cuts, narrowly and skillfully achieved by Mr Rovinescu.
But as he said with passion last week, Air Canada is far from being out of the woods. The carrier is still burdened with the baggage that comes with 72 years of existence: “the transformation will require overcoming what I consider our greatest challenge: changing the culture at Air Canada. This must happen both in terms of how customers see us and how we behave as a company. This is the most important aspect of our transformation because a corporate culture provides the foundation and sets the tone for everything that you do.
“Given the shackles of age and legacy, some think this transformation is not achievable. However, with the right drivers – both in terms of people and tools - Air Canada will absolutely become a more entrepreneurial and nimble company, a place where employees act as if they are owners. A place with a "Just Do It" culture, where things happen much more quickly without countless committees and white papers.”
The world is replete with examples of how protectionism creates precisely the wrong atmosphere for achieving such an ambitious turnaround. Unless an airline is able independently to achieve a sustainable platform amid the rigours of today’s brutally competitive marketplace, protecting it merely prolongs the suffering.
Meanwhile, like a moose caught in the headlights, the Canadian government is steadfastly hanging onto the old supportive philosophy that entails underwriting almost anything that is good for Air Canada.
It is always hard to prove what economic value is being lost in this type of regime. But examples like the parallel one of Australia suggest that, whatever the economic cost of protecting Air Canada might be for points like Vancouver (and there must inevitably be a certain loss), the danger of opening the floodgates to competition is nowhere as threatening as is being made out.
In Australia’s case, despite a 50% increase in Gulf airline capacity since 2005, Qantas’ international market share is almost identical to its level back then – just under 30%.
The big change, because Qantas has to be competitive in its own right, is that Jetstar, with its lower cost base, has replaced Qantas on several marginally economic routes, maintaining the group’s place in the market. In other words, unable to rely on government protection, Qantas has successfully adapted to a more competitive international environment. This will stand it in good stead for the long term.
Meanwhile, airline capacity to Australia’s smaller airports has blossomed.
Indeed, fresh competition in the marketplace is usually the best way to encourage innovation and – perhaps – even to instill a new culture into an airline that is now so used to being propped up that change is instinctively opposed, not embraced.
As for inbound tourism, Canada has the blessing and the curse of a readily available market to the south; it proved to be a curse last year, as the heavy reliance on the US inbound market turned stale when the US recession and more stringent entry requirements saw visitor numbers almost halved. Half of Canada’s tourists by air originate in the US.
This over-reliance may partly explain why Canada languishes near the bottom of the list for inbound travel from other countries, yet it is hard to conceive that is the only reason. The Australia comparison again. Despite Canada’s having a population nearly 60% greater, with a vastly superior range of tourism attractions, remote Australia welcomed just over 5 million inbound tourists by air last year. If American travellers are extracted from Canada’s inbound numbers, a mere 3.5 million foreign tourists visited the country by air in 2009.
This suggests a country boxing well below its weight in terms of international tourism by air.
So, for the time being, as the government focuses on supporting the national flag carrier, Canada’s airports, consumers and tourism industry are going to have to continue to digest the dated rhetoric of an aviation system that should have been consigned to the pages of history last century. At least it is low calorie.
 Including New Zealand services
 Quotes from the Globe and Mail
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