Discussion Paper on Code-sharing and Wet-leasing

Overview

The Canadian Transportation Agency (Agency) is seeking to update the regulations it administers and various guidance material and tools to    ensure that they keep pace with changes in business models, user expectations and best practices in the regulatory field. To that effect, an Air Transportation Consultation Discussion Paper has been developed and is available on the Agency's website.

The purpose of this document is to outline in greater detail options that the Agency is considering with respect to the provisions of the Air Transportation Regulations (ATR) dealing with the provision of aircraft with flight crew; namely, code sharing and wet-leasing. Interested parties have until September 29, 2017, to submit comments at consultations@otc-cta.gc.ca.

Distinguish code-sharing and wet-leasing

Currently, the ATR imposes the same requirements on all arrangements under which a licensed air carrier proposes to provide a service by using all or part of an aircraft with flight crew provided by another company. This broad category captures commercial arrangements such as code-sharing as well as wet-leasing. 

The ATR make no distinction between code-sharing and wet-leasing.  These different arrangements are, however, defined separately in the Agency's application guides, as follows:

Wet leasing is a practice in the aviation industry whereby one carrier (the lessee) obtains aircraft and flight crew from another carrier (the lessor) to operate services offered under the former’s licence. The lessor is in operational control of the flights, while the lessee is in commercial control of the flights.

Code share refers to arrangements where a licensed air carrier provides services by selling transportation in its name (code) on flights operated by another air carrier. Each air carrier has commercial control of capacity sold in its name and each air carrier’s tariffs and terms and conditions of carriage apply to traffic carried under its code.

Given that code-sharing and wet-leasing are distinct activities for which tailored regulatory requirements may be appropriate, an argument could be made in favour of incorporating these definitions into the ATR.

Amend approval requirements for code-sharing and wet-leasing

The ATR currently requires that licensed air carriers seek prior approval from the Agency for code-sharing and wet-leasing arrangements, and submit their applications at least 45 days before the first flight.

These provisions were introduced in 1996 and codified approval requirements that had existed since the 1980s. They reflected an expectation that licenced carriers would normally provide the services, equipment, and facilities necessary for all their transportation services, and operate those services under their own name.  They also introduced the requirement that the lessee disclose the identity of the aircraft operator.  Finally, they provided a means to verify that commercial relationships such as code-sharing were consistent with negotiated bilateral agreements.   

Code-sharing

All but a few bilateral agreements now include code-sharing rights. The industry's use of these arrangements has also evolved to the point where code-sharing has become a standard way of providing air services among licensed air carriers.

Where bilateral agreements allow for such arrangements, it is possible that submission of a notification to the Agency, rather than a request for formal approval, would permit sufficient oversight while reducing administrative burdens. In addition, a filing time of 5 business days prior to the flight rather than the existing 45 days could allow for timelier introduction of new air services, which could benefit both air carriers and the traveling public.

In the few instances where the bilateral agreement does not provide code-sharing rights, the applicant would continue to be required to seek and obtain extra-bilateral authority from the Agency^{Footnote 1} prior to being allowed to initiate services through code-sharing.  These applications would continue to be subject to the filing requirements and the 30-day timeline set out in the Agency's guidelines on extra-bilateral air service application.

Wet-leasing

In 2014, the Minister of Transport, pursuant to subsection 76(1) of the CTA, issued a direction entitled Ministerial Direction for International Service –Canada’s Policy for Wet-Leasing (Wet-Lease Policy). The Wet-Lease Policy applies to the assessment by the Agency of wet-lease applications where Canadian carriers propose to enter into wet-lease arrangements of more than 30 days with foreign air carriers to provide international passenger services.

The Wet-Lease Policy criteria are as follows:

• For wet-leases of more than 30 days, the number of aircraft wet-leased from foreign lessors may not equate to more than 20 percent of the number of Canadian-registered aircraft on the lessee’s Air Operator Certificate (AOC) at the time the wet-lease application is made.
• If Canadian air carriers cannot enjoy reciprocal opportunities to wet lease in a foreign jurisdiction, the Agency should condition or deny an application involving a lessor from that jurisdiction.
• Repeated wet-lease applications may be permitted as long as the 20-percent cap is not exceeded.

The Wet-Lease Policy does not apply to wet-lease applications in the following circumstances:

• for all-cargo services, regardless of the nationality of the carriers;
• for a period of 30 days or less which are not a request for renewal, regardless of the nationality of the carriers;
• for a domestic service;
• between two licensed Canadian carriers;
• between two foreign carriers; or,
• between a foreign lessee and a Canadian lessor.

Given that the Wet-Lease Policy has made it clearer when applications involving longer-term wet-leasing arrangements between a Canadian carrier and foreign company will and will not be approved, and that other wet-leasing arrangements are not subject to the restrictions of the policy, there is less need today than there was in the past to undertake broad consultations on those applications. In addition, the Agency has shifted from paper to electronic submission of applications. As a result of both these factors, it may be possible to reduce the minimum filing time for wet-leasing arrangements from 45 days to 15 business days prior to the first flight which would reduce the administrative burden for stakeholders without affecting passengers.

Remove the requirement for Agency approval of arrangements with US carriers

Section 8.3 of the ATR specifies that two Canadian licensed air carriers who wish to enter into arrangements for either a domestic service or a service between Canada and the United States (US) for the provision of aircraft with flight crew can do so without seeking the approval of the Agency.

An option under consideration would expand section 8.3 to remove the requirement for Agency approval with respect to arrangements for services between Canada and the US when such service is operated by licenced air carriers that are either or both Canadian or US carriers.

Such a change would ensure that the regulatory requirements on US air carriers are no more burdensome than those imposed on Canadian air carriers, consistent with the Canada-United States Air Transport Agreement signed in 2007. Furthermore, this step could facilitate the introduction of more competitive air services for Canadian travellers.

This change would not apply to arrangements captured by the Wet-Lease Policy as long as it remains in effect. 

Liability insurance coverage

The ATR requires a carrier (contracting carrier) who uses aircraft and crew of another air carrier (operating carrier) to hold liability insurance by means of its own insurance policy or by being named as an additional insured under the operating carrier's policy.

Possible changes to these requirements are discussed in a separate discussion paper relating to liability insurance.

Related matters that will be considered in the context of future consultations on air passenger protection

The ATR require licensed air carriers to identify the operator of the aircraft in public advertising for the air service as well as, to individual passengers, at the time reservations are made, after reservations when applicable and at check-in. 

Applicants have noted in a number of complaints filed with the Agency that it is confusing when they do not know with which air carrier they must report for check-in. 

To provide clarity to consumers, it may be reasonable to require that air carriers identify the carrier responsible for flight check-in procedures and to provide passengers with reconfirmation contacts on all travel documents (including itineraries). This would help consumers know which ticket office or check-in kiosk to report to at various points of their itinerary.  

In addition, clearly establishing in the ATR that the marketing carrier must apply its published tariffs to the carriage of its traffic would provide greater certainty regarding which carrier's terms and conditions of carriage apply and would be consistent with past Agency determinations.

These matters will be addressed as part of upcoming consultations on regulatory provisions aimed at protecting air passengers.