Competition in the Canadian Airline Industry, Part 1: The 2001 Air Canada Predation Case
The first part in a series on how competitiveness in the Canadian airline industry, as well as the related competition law and policy, have evolved during the 21st century.
Last week, your Ride On writers focused on transportation by sidewalk. This week, we want to change focus to what is above us rather than below us: air travel. Specifically, we want to study the evolution of competition in the Canadian airline industry during the 21st century, as well as the evolution of the related competition laws and policies.
Since the Canadian airline industry was deregulated in 1988, a plethora of airlines have gone out of business, including Canadian Airlines International, Royal Airlines, Jetsgo, CanJet (twice!), Canada 3000, Roots Air (yes, the clothing company created an airline), Wardair, Greyhound Airlines (yes, the bus company had an airline, too), and so on and so forth. Throughout it all, Air Canada was often branded responsible for many of these failures due to alleged anti-competitive practices.
If we are honest, many (if not most) of these accusations against Air Canada were unsubstantiated and opportunistic, but there have been cases where it indeed seemed to price “too low to be legal” — the most exciting one started on March 5, 2001 when the Competition Bureau’s Commissioner of Competition, Konrad von Finckenstein filed a Notice of Application with the Competition Tribunal, alleging Air Canada violated the Canadian Competition Act. The Bureau’s application was motivated by the alleged anti-competitive responses of Air Canada to entry of two “low-cost carriers”:
WestJet: Air Canada allegedly responded to its entry on the Hamilton/Moncton route in early 2000 by increasing capacity on this route (as well as three other eastern Canadian routes) at substantially lower fares than WestJet charged, which did not cover Air Canada’s avoidable costs (to be defined later in this post).
CanJet: Air Canada allegedly responded to its entry on three Halifax routes by substantially lowering its fares on these routes to ones below its avoidable costs.
Note that Air Canada’s alleged predatory practices did not just involve lower prices, but also excess capacity. When the allegations against Air Canada were made in 2001, the following had to be shown to make a case under Section 79 of the Competition Act:
One or more persons substantially or completely controlled, throughout Canada or any area thereof, a class or species of business. In other words, the defendent must have market power.
That person or those persons had engaged in, or were engaging in a practice of anti-competitive acts.
The practice has had, was having, or was likely to have the effect of preventing or lessening competition substantially in a market, taking into account any superior competitive performance.
If all elements were proved, then the Competition Tribunal could make an order prohibiting all or any of those persons from engaging in that practice.
The hearing was divided into two phases, where the first phase began in September 2001. It addressed the following issues:
What is the appropriate unit(s) of capacity to study (e.g., flight, route, network)?
What categories of costs are avoidable and when do they become avoidable?
What is the appropriate time period or time periods to examine?
What, if any recognition should be given to “beyond contribution”?
These questions were answered by applying the test to two sample routes, and using data for April 1, 2000 to March 5, 2001. After these questions were answered, the purpose of the second phase of the hearing was to deal with the balance of the Commissioner’s application. Specifically, do the answers to these questions suggest Air Canada was in violation of of the Competition Act?
However, after a series of unfortunate events that delayed the hearing more than once — the tragedy of September 11, 2001, Air Canada’s subsequent filing for bankruptcy protection under the Companies’ Creditors Arrangement Act (CCAA), and the need to consitute a new Tribunal panel in 2002 — Phase II ended before it even began: on October 29, 2004, the new Commissioner of Competition (Sheridan Scott) announced the litigation between the Bureau and Air Canada had been resolved.
The Competition Tribunal’s decision in the Air Canada case was the first in Canada to provide an interpretation of the Avoidable Cost Test in terms of alleged predation. It had implications for how the test should be carried out in subsequent airline cases in Canada, as well as how it might be carried out in other jurisdictions. It also had more general implications for how an Avoidable Cost Test should be carried out in other possible cases of predation brought under the abuse of dominance provisions. Thus, this case provided guidance regarding what kind of competition is healthy and what kind of competition is too aggressive — both economically and legally.
The Air Canada case was a landmark competition case in several ways, one of which is it gave businesses clarity regarding how the competition authority would approach measuring avoidable costs, and thus understand how to compete strategically without being too aggressive.
In general, it provided a nice backdrop for analyzing why businesses do what they do, which can be summarized with the following key questions answered in Principles of Microeconomics courses under different scenarios:
How much will they produce (if anything at all)?
How much labour and capital will they use?
What prices will they set?
What are the welfare implications of a firm’s decisions?
Why do firms engage in forms of non-price (strategic) competition?
In the interest of transparency, one of your Ride On writers (the economist) worked on the Air Canada case for the Competition Bureau. In fact, it is hard to get him to shut up about it, even though it happened a generation ago! Therefore, we want to make it clear that everything written in this post is public information, and our key sources can be found on the Competition Tribunal website, as well the following:
Eckert, Andrew and Douglas S. West (2006), “Predation in Airline Markets: A Review of Recent Cases,” in Advances in Airline Economics 1: Competition Policy and Antitrust, Edited by Darin Lee (Amsterdam: Elsevier), 25-52.
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