After a decade of limited deregulation on services between Canada and USA, it now appears that a fully open market could finally be within sight.

After a decade of "open skies Lite", Canada and the USA are moving toward a fully liberalised aviation regime in an ambitious drive to end limits on cargo operations, expand local traffic rights and set the stage for a larger open aviation area that could create a North American open aviation market.

The 1995 pact opened a market that had strictly constrained both international and domestic competition. Obsolete restrictions, such as the quaintly termed "division of the world" rules on international flying, were removed, but the 1995 agreement retained many limits leading to the accord being dubbed open skies lite. Debra Ward, the former observer to the government's airline restructuring who is now a Trope Communications consultant, says it was "not so much open skies as slightly ajar skies".

Now, in a push aligned with the 10th anniversary of that accord, Canadian transport minister Jean Lapierre is personally committed to a full open skies deal despite thorny protests from the Canadian air cargo industry, as well as political opposition and doubts from the travelling public. Lapierre says he has invested considerable political capital in the move.

In parallel his US counterpart, transport secretary Norm Mineta, demonstrated his belief in liberalisation by taking a delegation to Ottawa to make a brief announcement of support and a suggestion that the two consider a version of "NAFTA in aviation, creating a North American regional trading bloc for air services", that would let the two nations "work together to achieve regional liberalisation across the Atlantic, in the western hemisphere and in Asia". Both nations would promote an end to ownership restrictions, the ministers said at the Open Skies Forum sponsored by the Canadian Airports Council in Ottawa in late February.

The nation's dominant carrier, Air Canada, has proposed moving beyond a fully liberalised pact to "open skies plus". The carrier's president, Robert Milton, says that just as European Union member states started by liberalising aviation within Europe, Canadian and US carriers must first enjoy complete reciprocal freedoms in their home market of North America to compete effectively on the global scene.

Milton's international strategist, Yves Dufresne, sees Canada, and Toronto in particular, becoming a major international hub for passengers entering North America from Europe and Asia, and also sees Toronto as becoming a transfer hub for journeys ending and starting within the USA. "Toronto is better situated geographically than say Detroit or other major US connecting hubs," he says. "Why not let it be a choice for passengers travelling between Hartford, Connecticut and Milwaukee?" Dufresne admits that the price would have to be right and that customs and security would be a barrier.

Network advantage

Dufresne also sees liberalisation as removing some of the "unilateral" advantage that US carriers now have on international traffic either headed for or starting in Canada. For example, US carriers enjoy a market share of almost 50% in the Canada/South America market, a mark of their network advantages. Such routings, if allowed, would not be cabotage he insists as they do not entail direct flights but would "merely lift the restrictions on the marketing of existing connecting opportunities".

"Modified sixths", as such rights are called, would also benefit US airlines and airports. For example, Montreal to Vancouver passengers could easily choose to travel via Minneapolis/St Paul rather than via a Canadian point.

It is Air Canada's financial recovery that makes the timing for open skies right, Lapierre says. Against the move stand the specific concerns of the cargo sector, smaller cities and airports, and above all, says Ward, Canada's long standing "slow-but-steady philosophy". Ward says larger integration may "sound an alarm bell for those worried about sovereignty and Canada's ability to distance itself from the USA". These are always sensitive issues in a nation so dependent on international trade and yet so aware of the vulnerability of its domestic industries to US companies.

Cargo objections

The 1995 USA-Canada pact also restricts cargo carriers of either nation from carrying transborder traffic to or from multiple points using the same aircraft, the so-called "co-terminalistion" right that limits air cargo, courier and express transborder operations. It is this proposal that will meet the strongest objections within Canada, says William Henderson, operations vice-president of Purolator Courier, a Canadian express package carrier. FedEx and UPS are each now limited to a single route authority within each region, but if and when restrictions are lifted, Henderson says of UPS and FedEx: "Brown and purple would just take over."

Jamie Porteous, executive vice-president sales of CargoJet, a Canadian freight carrier, says: "We've looked at this closely for a long time. There is no reason for us to support this; it would kill the Canadian cargo industry."

Julien DeSchutter, vice-president marketing at Calgary airport, a major hub in western Canada, counters: "In cargo, above all you will see growth that will create new jobs and new opportunities. That may not always be with the same companies but they are good jobs." He says that growth in cargo spurred by international liberalisation would also likely encourage the replacement of the Canadian air cargo fleet, which is almost exclusively older Boeing 727s. Air Canada believes a phase in or transitional agreement for cargo services is an option to be considered.

Canada's leisure charter sector, considerably larger than that of the USA, also has questions. George Petsika, director of government and regulatory affairs at Air Transat, says no to open skies. "Not after what they did to us last time. It was clear that charter operators just were not going to get equal or even fair treatment on the same footing as the scheduled guys."

Small communities are also concerned about the impact of fully open skies, says Rob Robichaud, president of the Greater Moncton International airport, a smaller New Brunswick city that depends heavily on tourism. Other airport officials have similar concerns, although Patricia Lyall, chief executive of tourism agency Destination Halifax, says that "with increasingly affluent and sophisticated vacationers seeking short getaway holidays, Canadian resort areas like Halifax would have a natural marketing advantage on both sides of the border".

No open skies initiative would be complete without a strong reaction from organised labour, and Canadian labour has some strong arguments based on its experience with open skies so far and on domestic deregulation and the impact of trade liberalisation throughout Canada. Buzz Hargrove of the Canadian Auto Workers, considered the nation's most powerful labour leader, says that "the first version of open skies was an unmitigated disaster. Why did we end up with Air Canada in bankruptcy if open skies was such a great success story?"

Hargrove adds: "What was a very sensible and reliable airline industry turned out to be an absolute shambles and it is not clear that it is any better today." Like many in Canada he is suspicious that US carriers would just ­cherry-pick the most lucrative routes and with their marketing power overwhelm the Canadian industry. Kent Wilson, president of the Air Canada Pilots Association, says: "Clearly the union is concerned with job losses but also quality of life issues – issues taken seriously by society and government here."

Above all, though, any opening of the skies would form a test of the willingness of authorities on both sides to lower customs immigration and other facilitation barriers. Graham Edwards, director of international marketing for Travel Alberta, says the actual process of getting people through customs, immigration and above all security processes at the border is the key issue.

This leads Leo Schefer, the chair of an airport group that pushed for the 1995 pact, US Airports for Better International Air Service, to suggest an even greater goal: "The USA and Canada share what has long been the world's longest open border, or at least it was before 11 September. This could be the opportunity to make the 49th parallel into a virtual border."

These are all ambitious goals and perhaps too much so. John Byerly, US assistant secretary of state for transportation affairs and the chief negotiator for the open skies talks, hopes that a wide-ranging deal can be reached but cautions that anything smacking of domestic intrusion is a real deal killer. "I won't even mention the ‘C Word', cabotage, at risk of my job," he quips.

Others are even more guarded than the upbeat Byerly. Independent airline consultant Rick Erickson of RP Erickson Associates says that open skies with the USA "just is not going to happen. It would set a precedent with the Europeans for the USA to grant anything resembling domestic cabotage. And there is a lack of appetite on the part of the US carriers for further liberalisation. Air Canada would eat US carriers alive with its superior business class product. They have nothing that even resembles it."

World deals

Lapierre is blunt though about his ambitions. He wants US open skies, and he wants deals around the world. "We're looking at having open skies agreements not only with the USA, but also with the European Union and possibly with India," he says. "The USA is the main market, but you cannot put all your eggs in the same basket."

Canada would also benefit if there were fewer restrictions on air travel between Canada and China, he says. "I'm going to China to try to enlarge our deal because the potential there is great. You'll never have open skies with China, but I'd like to see restrictions relaxed." However, Lapierre insists that the USA deal will happen. The market he says is "too big to stay under the old regime".


Source: Airline Business