Competition in the Canadian Airline Industry, Part 2: Foreign Competition Should be Allowed in the Canadian Airline Industry
It is called "cabotage", and the federal government is both economically and morally obligated to allow it
Recall from last week’s issue of Ride On that many Canadian airlines have come and gone since deregulation in 1988, including Canadian Airlines (acquired by Air Canada in January 2000), Royal Airlines (acquired by Canada 3000 in January 2001), CanJet (acquired by Canada 3000 in April 2001), Roots Air (acquired by Air Canada in May 2001 after less than six weeks in business), Canada 3000 (bankrupt in November 2001, leaving thousands of passengers stranded with no warning), and JetsGo (entered bankruptcy protection in March 2005, leaving thousands of passengers stranded without warning at the beginning of March break).
There was no shortage of blame given to Air Canada for alleged predatory practices, but these failures were often due to bad business decisions, such as JetsGo’s weekly (and perfectly predictable) “Toonie Tuesday” sale where it would charge $2 for one direction of a round-trip flight every Tuesday; naturally, customers would wait until Tuesday to book their flights so the airline had some problems remaining profitable.
Today, Canada has only two major airlines which have survived over the long run: Air Canada and WestJet, the latter being successful because it wisely grew both slowly and carefully. Porter Airlines has also been successful since its launch in 2006, and it has also done so by wisely growing slowly and carefully, while also largely avoiding direct competition with Air Canada — only in recent years has Porter gone beyond offering short-haul flights out of the Toronto Island airport.
One might ask if there will be more entry to compete with these three airlines. While that possibility cannot be absolutely dismissed, history indicates the probability of success is low for a new entrant.
Should we then conclude Canada can only support two or three airlines? This might be the case if we assume the industry’s market structure will remain unchanged, and there are indeed no signs it will change in the near future. However, your Ride On writers will argue this lack of competition is largely due to entry barriers created by federal government regulations, specifically its prohibition against cabotage: the right to offer transport services between two Canadian locations by foreign entities.
We will argue that if these restrictions are lifted and foreign air carriers are allowed to transport passengers on domestic Canadian routes, then air passenger services will improve for Canadian consumers and for the economy as a whole, even if it does harm certain Canadian airlines. Even employees of Canadian airlines could emerge better off from cabotage if foreign airlines hire them — after all, if a foreign airline replaces a Canadian one, the victor still needs employees to service these routes.
In other words, as we will argue again and again throughout this post, governments should be protecting competition, not individual competitors. And to be clear, the sins of political protectionism must be borne by Liberal and Conservative governments — including former-Prime Minister Stephen Harper’s governments, of which current CPC leader Pierre Poilievre was a member, so their hands are dirty, too.
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