US-Canada open skies, tentatively begun just over two and a half years ago, has been a resounding success for all concerned. Report by Karen Walker.

The doom and gloom experts had better find another target. Despite concerns by some that the US-Canada open skies agreement, forged over three years ago, would turn the market in favour of US carriers, airlines on both sides of the border have benefited as passenger traffic has increased by almost a third.

While it may not be possible to duplicate the details of the US-Canada bilateral elsewhere, the agreement highlights some general rules that could serve as helpful guidelines as the US Department of Transportation continues its mission to open the world's skies.

First rule, the tiptoe way in which the agreement has been phased in since February 1995 seems to have paid off. Airlines on both sides of the 49th parallel have been given time to adjust to the new climate and Canada's all-important Toronto market has not been exposed overnight to competition that might have been overwhelming to its Canadian incumbents. Second, individual carriers have gained most where they have identified and pursued a particular role for themselves in the new transborder markets. Third, for Canada's two major carriers at least, partnerships with US carriers go a long way towards maximising the opportunities that an open skies agreement brings. And fourth, the passenger is the overall winner, enjoying an increase of around 35 per cent in non-stop services and a average reduction in fares of almost 10 per cent. According to the DOT, the agreement has also spurred competition. The US-Canada market now has 22 scheduled nonstop markets with bilateral competition compared to just 12 for the US-UK and US-Japan.

Establishing an agreement was no easy task. Attempts to negotiate a new air transport deal began in 1979 but were continually hampered by false starts and bureaucracy. This shuffling in circles might have continued indefinitely but for the willingness in the summer of 1994 by each country's former transport minister to take a political risk. Canada's Doug Young and Federico Peña, the US transportation secretary, decided to try and break through the 20-year quagmire by each appointing a personal representative who might short-circuit the normal diplomatic negotiation process. Those representatives were Steven Kaplan, then general counsel for the US DOT, and Geoffrey Elliot, who at the time was vice president, corporate affairs, at a major Canadian forest products company.

Elliot has fond memories of his first meeting with Kaplan, saying the chemistry was right from the beginning. 'It was obvious from the start that we were on the same wavelength regarding the way we should approach the project,' he says. 'Both of us realised we could only deliver on the mandate given us by the minister and the secretary, to inform them if a new round of air negotiations would succeed, if we pre-negotiated the main elements of the deal.'

That meant creating a framework that would resolve, in unambiguous language, all of the so-called deal-breaker issues that had derailed previous negotiators. Elliot and Kaplan's take it or leave it package also did not leave any room for the airlines or governments to cherry pick.

This straight to the point approach worked. By homing in on the fundamentals, the US and Canadian governments were able to forge in three months what had been seemingly unattainable for 15 years: a pact that removed most carrier access limitations to transborder markets. Importantly, the bilateral protected three key Canadian cities - Montreal, Toronto and Vancouver - with three-year transitional, phase-in access rights. It also lifted most route/capacity restrictions, improved Canadian access to certain slot-controlled US airports, made provision for codesharing, and committed the US to reviewing its customs and immigration procedures at Canadian airports.

Most markets opened up immediately while Montreal and Vancouver became fully open this year and will be joined by Toronto, Canada's key business centre, next year.

Before open skies, air service between the US and Canada had been controlled by one of the world's most restrictive, Bermuda I-type bilaterals. Naturally, such a dramatic change put the sceptics on alert. Most of the concern was reserved for the Canadian carriers, especially Air Canada which enjoyed a 25 per cent share of the transborder market prior to open skies. But guess what? Not only is Air Canada's market share unchanged today, according to research by consultants Global Aviation Associates in Washington D.C., but that 25 per cent share is now a slice of a much larger pie.

According to DOT figures, overall passenger traffic is up by 28 per cent from 12.1 million in 1994 to 15.5 million in 1996. And Global Aviation's study shows that Air Canada is far from alone in maintaining its position in the transborder marketplace. Canadian Airlines, and all the US majors that serve Canada, have retained stable market shares that have deviated by no more than 2 per cent (see chart ).

'A lot of people thought that the US carriers would take an increasingly large market,' says Global Aviation's managing director, Jon Ash. 'But it hasn't happened. Air Canada and Canadian Airlines had about 35 per cent of the market share before the agreement, and they still do. American Airlines is up 1 per cent, so is Northwest Airlines. US Airways is down 1 per cent, Delta Air Lines is down 2 per cent. There are no big shifts. Again, if you look at the market shares of the two countries' flags, the Canadians are holding their own with 43 per cent of the transborder market, which is very much the same as before the agreement. No single carrier has made any inroads.'

Ash believes this is mainly because Air Canada performed better than expected, while Canadian Airlines held its ground mainly through its codeshare with American. 'You would have had a bigger shift in market share had American not bolstered Canadian,' he says. 'Arguably, if they had gone under, at least one US carrier would have stepped in and picked up that business.'

If market share is not the big story of this bilateral, then the regional jet is. According to Global Aviation's figures, 200,000 transborder passengers used regional jets in 1994. By the end of 1996, that number had swelled to over 700,000. 'This has been a real boom for the regional jet,' says Ash. 'It has helped a lot of the smaller routes from small and medium-size cities to hub cities.'

The Bombardier Canadair Regional Jet was a cornerstone of Air Canada's open skies strategy. The airline began taking CRJ deliveries in September 1994 in preparation for new transborder routes and now has 24. 'Once the bilateral agreement was being finalised, we really saw that as an opportunity for us,' says Air Canada's senior director of product management, Danielle Poudrette. 'Our focus has been on building services to and from our main hub, Toronto, and we have done that by using the CRJ. The aircraft is particularly suited to the shorthaul business markets where frequency is important - a minimum of three nonstop services a day. A 50-seater is the right size for those markets.'

A US DOT survey has highlighted other changes that are a result of the bilateral. Seventeen of the current top 50 transborder markets have gained nonstop scheduled services since 1994, including Montreal-Atlanta, Montreal-Washington D.C., Toronto-Orlando, Toronto-Washington D.C., Ottawa-Chicago, Vancouver-Dallas and Vancouver-Las Vegas. Among those 17 new nonstop markets, fares have dropped by an average of 32 per cent, says the DOT. Overall, adds Global Aviation, average fares have fallen by 9 per cent.

But there are exceptions. 'Some of the individual markets vary enormously,' says Ash. Not surprisingly, Toronto, which is still 'a lock-up market with tight capacity and hub control' is among the exceptions. 'That is where all the action is and open skies has not made a difference,' says Ash. Ticket prices in Toronto have increased significantly: fares from Pittsburg, Detroit and Philadelphia are up by 42, 38 and 22 per cent respectively. Ash believes the rise in fares will slow down after Toronto opens fully next year. But Air Canada says it has no intention of giving up its current 52 per cent market share out of that city. 'We anticipate that some US carriers will want to take advantage of new traffic rights into Toronto,' says Air Canada's Poudrette. 'But we don't expect an enormous increase in capacity.'

Geoffrey Elliot, who since helping to draft the bilateral has joined Air Canada as senior vice president, corporate affairs and government relations, concurs. 'We in Air Canada are not overly concerned about Toronto,' he says. 'Our experience is that US carriers remain formidable competitors on routes that connect their main hubs to Canadian cities. But the Americans are less effective competitors when the US end of a transborder city-pair is not a major hub. My expectation is that the major US hub operators will be stealing market share from each other rather than from Air Canada's nonstop, nonhub traffic.'

US cities that have gained nonstop scheduled service into Canada since the bilateral include Fort Lauderdale, Las Vegas, Palm Springs, Phoenix and Reno. But there have also been casualties. In the first year of the agreement, nonstop service between Baltimore /Washington International and Montreal ended, as did Denver to Montreal and seven other city pairs. In the second year, six more services joined the list.

Global Aviation has looked at the top five winner and loser routes in terms of both traffic and yield and found some dramatic fluctuations (see charts). Some leisure routes, such as Miami to Vancouver and Las Vegas to Vancouver, have seen dramatic increases in traffic growth, by as much as 264 per cent, although yields have slipped by almost 40 per cent on some of the same routes. San Francisco to Vancouver traffic, for example, is up by 227 per cent, but yields are down by 39 per cent. Conversely, some of the losers in terms of traffic are winners in terms of yield. Seattle to Vancouver, for instance, is down by 44 per cent in traffic, but up by more than 20 per cent in yields. Overall, says Global Aviation, yields are down by around 9 per cent. The charter market has also dropped dramatically, and predictably, as scheduled services have increased and taken over.

Interestingly, individual airlines have adopted different strategies in the new environment. While Air Canada has leaned on the regional jet, focused on Toronto and forged an alliance with United Airlines, its Calgary-based rival, Canadian Airlines, has found its own open skies tack. 'We had a very limited number of aircraft flying between Canada and the US before the agreement - just three Boeing B737s,' says Canadian's vice president of capacity planning, Don Casey. Now the airline has 21 aircraft assigned to transborder routes - mostly B737s, but also some Airbus A320s and Canadair deHavilland Dash 8s. 'That was a big shift for us, but we also changed significantly the focus of what we were doing,' says Casey. Before open skies, Canadian was flying a lot of charter services to leisure destinations such as Florida. The airline has now pulled out of those markets to concentrate instead on higher-yield business markets such as Chicago, Dallas and New York. 'Open skies made that possible as well as our commercial arrangement with American,' says Casey.

Since striking a codeshare deal with American in June 1995, just a few months after the bilateral was signed, Canadian has built up 1,300 daily codeshare flights with its US partner. Casey says its own cost structure dictated no choice but to pursue the business market and remain a full-service airline. It has not wasted money, however, trying to build up name recognition among business passengers in the US. 'We have no brand name recognition in the US and nobody there has a clue who we are. And we don't have the money to change that,' says Casey. 'But through our codeshare with American, we instantly get their brandname recognition.'

Another key in Canadian's strategy within open skies has been the Vancouver to Asia markets. The airline now serves eight destinations in Asia through Vancouver. The open skies agreement, Casey points out, has permitted passengers travelling between the US and Asia to transfer through Vancouver without going through Canadian customs. Consequently, that has become an increasingly attractive option to US passengers that has also benefited American Airlines through the codeshare arrangement.

Casey says Canadian would have liked Vancouver's two-year phase-in to full open skies shortened, but he understands the reasoning behind that policy. Toronto, which accounts for 44 per cent of all transborder traffic, is '. . . obviously a very attractive market', but Casey believes that dramatic change will not come with full open skies because the competition is hub-based. 'No-one else will fly Toronto to Miami, for instance, because that is an American hub,' he points out.

Canadian's focus on the high-yield passenger is leaving room for low-cost, low-fare carriers to move in along the Canadian west coast and take advantage of their new access rights. Alaska Airlines, for instance, set its sights on Vancouver as soon as open skies made that possible.

Alaska and its regional sister airline, Horizon Air, have been transforming themselves since 1992 from full-service, high-cost airlines to low-cost, low-fare operations. The focus has been on local traffic on the North American west coast. Dick Haferbecker, Alaska's assistant vice president of planning, says: 'One of the things that we had looked at in the past was how to grow our presence on the west coast. We had looked at Vancouver but were unable to go in there because of the old bilateral. We see open skies as offering another north-south opportunity akin to Seattle or Portland.'

Using mainly B737-400s and some McDonnell Douglas MD-80s, Alaska has stepped up its Vancouver services as fast as the phase-in agreement has allowed. Although its initial nonstop Vancouver to San Diego service, begun in 1996, has been dropped in favour of a one-stop via Los Angeles, the airline was due to begin a number of new nonstop services this October and November. These will increase its daily services out of Vancouver from four to nine and mean Alaska will serve seven US cities out of Vancouver, including Las Vegas, Los Angeles, Phoenix and San Francisco. Meanwhile Horizon has stepped up its flights from Vancouver to Seattle from 13 to 16 daily departures in each direction.

Alaska's transborder fares are typically 20 per cent lower. 'Low prices have been the cornerstone to our strategy here,' says Alaska's director of marketing and planning for Alaska, Russia and Canada, Dave Hall. 'That strategy is to be the low-cost carrier from Vancouver along the west coast. Those markets did not have the advantage of that before. We are going to stimulate the market by lowering prices.'

To heighten public awareness, Alaska has begun an advertising campaign in Vancouver. Nonstop competition to the sunbelt destinations that Alaska has earmarked is limited and many Canadians have second homes in these US cities. 'It's going very well,' notes Hall. 'The marketing challenge has been to create some awareness in the Canadian market of who Alaska is, but the advertising campaign should help.'

Hall and Haferbecker feel that the phased-in treaty was '. . . not a bad approach that probably saved the US carriers from their own misery'. But now that Vancouver is fully open, they are confident that this will be a growth market. Currently, the Canadian market represents just 3 per cent of Alaska and Horizon's total capacity.

When Toronto comes fully online next year the treaty will be complete, prompting some to wonder whether cabotage is the next logical step. Although cabotage is undoubtedly a distant prospect, what this particular agreement seems to have shown is that there was little to fear in crossing the threshold of open skies. When the time comes, the next step might not be so daunting after all.

Source: Airline Business