Increased foreign ownership limits may not lead to cheaper airfares, experts say, but its worthwhile anyway

The increase of foreign ownership limits in Canadians airlines may not lead to more competition for commercial airliners and cheaper airfares for consumers, experts say, but added that there is no reason for the federal government not to increase the limit. Under the broad-reaching Bill C-49, formally called the Transportation Modernization Act, which received royal assent last May, limits on foreign ownership in Canadian airlines increased to 49 per cent from 25 per cent. A sole foreign investor can make up a maximum of 25 per cent of the ownership stake. “I don't see the change ... having any substantive impact in the short run and possibly medium run,” said David Gillen, director of the centre for transportation studies at the University of British Columbia. “Perhaps over the longer run will , but the evidence to date is it's just not going to work very well.” When Bill C-49 was in front of the House Transport, Infrastructure, and Communities Committee in 2017, Transport Minister Marc Garneau (Notre-Dame-de-Grâce-Westmount, Que.) told members that increased foreign ownership would create additional capital for Canadian air carriers and those wanting to enter the industry. He added it would lead to increased choices for Canadian air travellers and lower airfares. Prof. Gillen said the poor performance of the Canadian economy will hamper foreign investment, as it will decrease the pool of flying Canadians. The low Canadian dollar also hurts investment, he said, as companies pay their bills in U.S. dollars, but receive revenues in Canadian dollars, which is currently valued around 75 cents per U.S. dollar. He added that the only foreign investors that would be interested in a Canadian airline would be an international carrier, such as Emirates, which he said would likely be blocked by Transport Canada. Entry to the Canadian commercial airliner market has become very difficult, created through low limits of forcing ownership as well as certain Transport Canada policies which have bolstered the domestic position of Air Canada, Prof. Gillen said. Transport Minister Marc Garneau told the House Transport Committee in 2017 that the increased foreign ownership limits will lead to lower airfares for Canadian consumers. The Hill Times photograph by Andrew Meade Both Air Canada and West Jet have applied for shareholder approval to raise their potential foreign ownership limits to 49 per cent. David Timothy Duval, a business and economic professor at the University of Winnipeg and an associate at the University of Manitoba Transport Institute, said the increase in foreign ownership is just one lever that the government can use to increase competition. “I don't think it was necessarily the wrong lever to pull given the fact that what the federal government is of course interested in doing is ensuring there's a high degree of conductivity and accessibility throughout the country,” Prof. Duval said. He added that there is evidence to suggest that the increase won't lead to increased competitiveness. Prof. Duval has conducted research on deregulation and increases to foreign ownership limits in New Zealand, he found that as New Zealand allowed for greater foreign investment, there was not a great influx of new airlines entering its commercial aviation industry. “I think it speaks to the fact that quite frankly ... it's a low margin business, and until those margins look reasonable for most carriers they're just not going to operate almost regardless of what the ownership cap is,” he said. If there is increased competition, Prof. Duval said, it will have the effect of creating downward pressure on ticket prices, but that can result in some competitors leaving the market as they can no longer afford to offer such low airfares. The increase in foreign ownership has to be paired with other reforms to increase competitiveness, as it is a whole systems approach that needs to change, Prof. Duval said, citing the Senate Transportation and Communications Committee's long-held call for a national aviation strategy. He did give credit to the Liberal government for being proactive and reviewing the Transportation Act. William G. Morrison, a business and economic professor at Wilfrid Laurier University and a co-editor of the Journal of Air Transport Management, said in an email that there is “no guarantee” that the limit change will be beneficial in the short term. “However, there is at least an increased probability of more airline competition as potential start-ups have more access to capital and management expertise than before,” he said, adding that over time he expects there to be more start-ups entering the commercial aviation industry, which will lead to the chance of increased competition and cheaper airfare. "There really is no compelling reason why the air transport sector should have a restriction of 25 per cent foreign ownership," Prof. Morrison said. Increased competition will lead to more flights in under served areas: Garneau Speaking at the Transport Committee in 2017, Mr. Garneau said under served airline routes could be addressed with increased competition and greater foreign ownership. “Our decision to increase foreign ownership from 25 per cent to 49 per cent will, I hope, actually benefit competition and lead to the establishment of new airlines that will offer flights in areas that are not as well served. That benefits competition,” Mr. Garneau told the committee. One potential strategy for a start-up airline to avoid competition-rich routes that are being filled by larger, already established airlines, Prof. Morrison said, will be to focus on smaller, less competitive routes. “In the earlier days of LCCs emerging in Europe, some argued that public service to more remote areas would suffer, but the opposite occurred as LCCs looked to fly into inexpensive airports in less densely populated areas as a way of lowering costs and avoiding direct competition with legacy carriers,” he said. Prof. Gillen said if the market can't support some important routes that are decided to be of social value, the government should subsidize them directly. He said the government could have an auction-style process where airlines would bid to service those routes and receive a government subsidy. The increased competition would be in the form of bidding versus competing against airlines in the same market. “Otherwise let the market work,” Prof. Gillen said. “If the market is not strong enough to support an air carrier service, then it shouldn't.” Flight attendant union, pilots associations raise concerns over safety The Canadian Union of Public Employees (CUPE) and the Air Canada Pilots Association (ACPA) raised concerns that increased foreign ownership would lead to a reduction in safety. “It's a question of making money over concentrating on the safety of your passengers, and your crew being well trained,” said Julie Roberts of CUPE's airline division, which represents Canadian flight attendants. “The more and more we change things, the worse we are making things.” Ms. Roberts said the Liberal government hasn't shown much concern for aviation safety. The primary concern over the foreign ownership increase for the association representing Air Canada pilots is also safety. “New low cost entrants into the Canadian market could compete on safety by reducing expenditure on aircraft safety features and relying on regional airports that have not made significant investments in airside safety infrastructure. Broadly speaking, we are concerned about the general state of Canada’s air travel infrastructure, especially in some of the smaller, regional airports that these new, low cost carriers may intend to use,” Chris Praught said, an ACPA spokesperson, in an email. He added that competing on safety should not be allowed, as all airlines should meet the high safety standards that Canadians travellers are used to. Prof. Gillen said there's no evidence that safety would be compromised with the foreign ownership increase, adding that since the airlines still would be based in Canada they would have to comply with the same safety regulations as they did in the past. Prof. Morrison said that those concerns fall in line with foreign takeover opposed to minority foreign ownership. nmoss@hilltimes.com The Hill Times

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Increased foreign ownership limits may not lead to cheaper airfares, experts say, but its worthwhile anyway

Foreign ownership limit increases are just one 'lever' to be used for greater commercial airline competition in Canada, says David Timothy Duval.

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