CTA: Determination No. A-2018-111

Hong Kong Airlines has applied to the Canadian Transportation Agency (Agency) for extra-bilateral authority to permit it to operate four additional weekly flights between Hong Kong and Canada, beginning on October 28, 2018.

Hong Kong Airlines is licensed to operate a scheduled international service in accordance with the Agreement between the Government of Canada and the Government of Hong Kong concerning Air Services, signed on June 24, 1988 (Agreement).

In its application, Hong Kong Airlines states that under the terms of the Agreement, it is permitted to operate up to ten weekly flights, and that this capacity is not adequate. Hong Kong Airlines presently operates seven of its ten allotted flights by operating a daily service to Vancouver. It states that it requires four additional weekly flights in order to initiate a second daily service to Toronto. Hong Kong Airlines asserts that higher frequencies make a newly launched route more commercially viable by virtue of more flight options offered to passengers.

Hong Kong Airlines adds that its route will be beneficial for passengers as it has established "a strong upstream connecting Mainland China and South-East Asia passengers to other destinations". It also submits that it is developing a downstream connection from the Toronto Pearson International Airport via code-share partnerships. It states that a daily service to Toronto will enable more passengers from the areas mentioned above to choose Toronto as their first destination in Canada before taking a connecting code-share flight to their final destination elsewhere in Canada.

Due to the extra-bilateral nature of Hong Kong Airlines' requested authority, the Agency gave notice of the application to air carriers that may have an interest. Air Canada also carrying on business as Air Canada rouge and as Air Canada Cargo (Air Canada) and WestJet both filed an intervention in respect of the application.

POSITIONS OF THE PARTIES

Air Canada alleges that there are restrictive elements of the Agreement that limit commercial opportunities for Canadian carriers that the Government of Canada has been seeking to remove through negotiations. Air Canada states that the Government of Hong Kong has been reticent to address these concerns.

Air Canada adds that Hong Kong Airlines is seeking to circumvent the well-established process of bilateral negotiations by requesting that the Agency approve an increase in its capacity. It is of the view that it is only through bilateral negotiations that a balanced agreement will be reached, which will satisfy the interests of the parties involved. It is also of the opinion that granting such a request would undermine Canada's negotiating position and reduce the future ability for Canada to negotiate a balanced agreement.

Finally, Air Canada claims that Canadian carriers are unable to deploy the capacity that was negotiated in the Agreement because of the unavailability of slots at the Hong Kong International Airport (Hong Kong Airport), which, according to Hong Kong Airport slot coordinators, will not become available for at least five years.

WestJet states that it objects to the application on the grounds that this market is already well served and that there is no compelling argument for consumer benefit by allowing a new entrant carrier above and beyond the capacity entitlements set out in the Agreement.

Hong Kong Airlines responded to the concerns raised by Air Canada and WestJet. It concurs that negotiations between the government of Hong Kong and the government of Canada would be mutually beneficial. It also states that it views its application not as a circumvention but as a means of temporarily increasing the capacity available to them until the respective governments can agree to an expansion via negotiation.

Hong Kong Airlines further states that its planned daily service to Toronto would introduce positive competition with existing carriers, which would eventually lead to a higher standard of service and reduced ticket prices. In addition, Hong Kong Airlines is of the view that the availability of slots is a separate issue that should not be tied with traffic rights consideration.

ANALYSIS AND FINDINGS

The Agency may, pursuant to subsection 78(2) of the CTA, vary the terms and conditions of a licence on a temporary basis for international air services that are not permitted in an agreement. Action by the Agency to permit an air service under subsection 78(2) of the CTA is therefore an exception that goes beyond the rights that countries have negotiated between themselves.

The Agency has considered the potential economic benefits to the Canadian travelling public in its analysis. It notes the potential to which Hong Kong Airlines refers, that the proposed service could be beneficial for consumers by introducing positive competition with existing carriers, leading to an increased standard of service and a downward pressure on ticket prices.

The Hong Kong-Canada bilateral air market is based on robust competition; 35 years ago, the Hong Kong-Vancouver market saw competing daily non-stop flights, nearly a decade before Paris-Montréal saw a similar service. Today, Cathay Pacific Airways Limited has two daily flights to each of Vancouver and Toronto, and Air Canada has similar traffic rights.

The Agency further notes the demand in the Asia-Pacific region and the potential benefits for Toronto and Canada as a whole of increased services between this large and growing market and Canada.

The Agency acknowledges the concerns raised by Air Canada and WestJet. The Agency is mindful of the constraints at the Hong Kong Airport and the inability of Canadian carriers to operate additional flights to the Hong Kong Airport regardless of the amount of capacity offered under the Agreement. The Agency is further mindful of the position of Air Canada that, were the Agency to grant this authority, the Government of Canada's negotiating position with Hong Kong would be undermined.

The Agency is of the opinion that the potential consumer benefits of this request, i.e. increased competition, connectivity, and service, outweigh the concerns raised by Air Canada and WestJet.

The Agency can only grant an extra-bilateral authority on a temporary basis. Therefore, the Agency considers one year to be appropriate.

Accordingly, the Agency, pursuant to subsection 78(2) of the CTA, varies Condition No. 1 of Hong Kong Airlines' licence to the extent necessary to permit it to operate four additional weekly flights to Toronto, beginning on October 28, 2018 to October 27, 2019.

In all other respects, the service shall be operated in accordance with the Agreement.

FUTURE APPLICATIONS

The Agency assesses each application on a case-by-case basis and therefore the authority granted in this Determination should not be relied upon as justification for similar applications in the future.