Air Canada and American Airlines: former Air Canada CEO on the 1980s UK-Canada bilateral dispute

The following unedited comments are from Pierre J. Jeanniot, O.C., C.Q., former President and CEO of Air Canada between 1984 and 1990.

I have read with interest the views expressed by Chris Lyle of Air Transport Economics (in American Airlines Goes Broke: Can a National Airline be allowed to Fail?), who used the news about American Airlines applying for Chapter 11 to cover the broader subject of whether or not national airlines should be allowed to fail - which gave him an opportunity for some Canada and Air Canada bashing.

While I would not disagree with some of the points made by Chris, whom I have known for a long time - I am not an economist but my experience of having run an international airline has taught me that there is a difference between theory and practice.

The realpolitik aspect is that deregulation in the airline industry has been gradual and progressive, and has had to take care - still today - of a number of political realities.

To give a specific example, Air India is costing the Indian government an absolute fortune; it is using tax payers' money to compete with the privately-owned airlines, causing them to be unprofitable. But the Government cannot yet face up to the political issue of allowing Air India to fail, or at the very least, to restructure - which would likely result in laying off some 50% of the staff.

Back to Chris Lyle's article, I wish specifically to comment on his use of mid 1980's bilateral negotiation between Canada and the U.K. as an example of Canada's "protectionism".

I was a prime actor in that particular dispute and was, in fact, the principal strategist.

You will recall that this period was prior to any thoughts of " Open Sky" and the rule of the game was - for everyone - to exchange market opportunities.

The British government, quite rightly so, decided to re-open negotiations and asked for unrestricted entry to Western Canada.

Canada already had services to London and Prestwick (Glasgow and Edinburgh), and had no other point of interest in the U.K.

We suggested, as a modest compensation, that a number of 5^th freedom rights be granted, which were to enable more services to be developed from Canada to some European and Asian destinations.

This was rejected outright by the U.K.

To apply pressure on Canada and Air Canada, the U.K. authorities decided that Air Canada should move from Heathrow to Gatwick, which would have caused Air Canada to lose approx. 30% of its traffic connecting at Heathrow.

We took the U.K. government to court, and - following a protracted battle - won the right to stay at Heathrow.

The U.K. then decided to abrogate the air bilateral and prevent Air Canada from flying to the U.K. British Airways was planning then to serve Canada from U.S. points close to the border.

I must say that it took a lot of effort to persuade the Canadian government to suspend the air transit agreements - a major precedent - which made operations to the U.S.A. by B.A. very expensive, as it would have had to fly around Canadian airspace.

At this point, the U.K. negotiating team came back to the table, and Canada obtained rights to fly daily Toronto-London-Mumbai, as well as Montreal-London-Geneva/Nice.

The U.K. could have obtained similar rights to some city pairs from Canada, but they were really not interested.

Let me suggest that far from restricting competition, the outcome was a win-win for B.A. and Air Canada - and the consumers of both markets obtained a better choice!

Under the sub-heading "Is Canada the last bastion of Economic Regulation?", I would suggest that Chris Lyle needs to verify his background . He would find that rather than protecting Air Canada from competition from the other Canadian airlines:

• The Mulroney government was encouraging Wardair to expand internationally by giving it access to Air Canada's most lucrative trans-Atlantic routes - namely the U.K. and France.

• The same government refused all Air Canada's attempts to develop routes over the Pacific which had been exclusively reserved for Canadian Pacific, although several points like Korea were not being served.'

• The demise of Canadian has very little to do with Air Canada but resulted from Pacific Western - having purchased Canadian Pacific and Wardair it was simply unable to digest the complexity of the merger and the excessive debt that it acquired.

The merger of Air Canada and Canadian took place after I had left the airline, and appears to have been forced by the Canadian Government. In my view, this was a major factor contributing to the airline entering the Canadian equivalent of Chapter 11 (in 2003).

Had I been there at the time, I would have attempted to resist this merger at all cost.

In closing, I supported and encouraged the deregulation of the Canadian market in the early 1980s and subsequently headed the privatisation of Air Canada - despite some periodic reluctance and, at times, frequent hesitation by the government to proceed.

I am a strong believer in letting market forces shape the industry - but one must also be a realist. Despite economic theory, the countries will decide what they perceive to be in their best interests.

That's realpolitik!