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Why Competition Bureau took on Air Canada

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The Competition Bureau felt compelled to move against Air Canada’s partnership with United Continental because the two airlines would monopolize air traffic to major American destinations, according to its notice of application, driving up costs for consumers and preventing other airlines from competing.

The bureau moved to quash the partnership Monday, calling it a merger because the two airlines would operate as one when it comes to a handful of routes as they share information on pricing and schedules. The airlines insist the partnership would actually lower costs, as schedules are co-ordinated and fliers have an opportunity to amass frequent flier points on a greater number of flights.

Documents obtained Tuesday outline the bureau’s case. The bureau lists three reasons that the deal is anti-competitive in its eyes, as it seeks to kill the arrangement. The two sides tried to negotiate a settlement, but when it seemed a resolution was unlikely, the Competition Commissioner pushed the case to the Competition Tribunal, which can impose a settlement.

The Competition Bureau listed 10 “monopoly” routes: Calgary-Houston, Montreal-Houston, Montreal-Washington, Ottawa-Washington, Ottawa-New York, Toronto-Cleveland, Toronto-Denver, Toronto-Houston, Toronto-San Francisco and Toronto-Washington.

The obstacles standing in the way of other airlines offering service on those routes were listed in the application:
  • “The inability [for competitors] to gain access to sufficient volumes of passenger traffic on Transborder Routes involving a “hub” airport operated by one of the Respondents. To operate on a viable scale, a potential entrant requires an ability to attract feeder traffic at both ends of a route. The Respondents have highly developed flight networks that centralize large volumes of passenger traffic into hubs that impede or foreclose a potential competitor’s access to the volume of feeder traffic necessary to effectively compete on a Transborder Route.”
  • “Frequent flyer programs and incentives towards exclusivity in corporate customer contracts, which create significant switching costs.”
  • “The fact that certain airports on the Transborder Routes have insufficient capacity to allow for sufficient access to take-off and landing slots, and/or may have other constraints based on the capacity of their existing facilities that increase barriers to effective entry or expansion.”
The arrangement would also “independently remove all incentives” for Air Canada (AC.B-T) and United Airlines to compete with one another, which Aitken said could push fares up by as much as 15 percent on some routes.

The carriers said Monday that they suspended their proposed joint venture, “pending further developments relating to the outcome of the commissioner’s application.”

The planned revenue-sharing and cost-sharing partnership follows last October’s merger of United Airlines Inc. and Continental Airlines Corp.

The federal agency also opposes other, more informal co-ordination agreements between Air Canada and United Continental. “These agreements allow Air Canada and United Continental to co-ordinate key aspects of competition including, but not limited to, joint pricing and scheduling, as well as revenue sharing,” the bureau said. “Through these existing agreements, the companies currently have the power to charge passengers inflated fares.”

While the two sides could still negotiate a settlement, the case would ultimately end up at before the Competition Tribunal, which has the power to impose a settlement following hearings.
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