Decision No. 105-A-2009

March 20, 2009

File No. M4212/P159-4
M4820-P5

APPLICATION

[1] This application, filed on January 27, 2009, is for a renewal of the authority granted by Decision No. 552-A-2008.

[2] Under Licence No. 961031, Philippine Airlines, Inc. (Philippine Airlines) is authorized to operate a scheduled international service in accordance with the Agreement between the Government of Canada and the Government of the Republic of the Philippines on Air Transport signed in Manila on January 14, 1997 (1997 Agreement).

[3] Condition No. 2 of Licence No. 961031 states:

The operation of the scheduled international service authorized herein shall be conducted subject to the provisions of the Agreement and to any applicable arrangements as may be agreed to between Canada and the Republic of the Philippines.

[4] Although Licence No. 961031 refers to the 1997 Agreement currently in force, at bilateral air transport negotiations held May 13-15, 2008, delegations for the Government of Canada and the Government of the Republic of the Philippines initialled ad referendum a new Air Transport Agreement (2008 Agreement) and agreed to immediately apply the provisions of the 2008 Agreement to the fullest extent possible.

[5] Under the terms of the 2008 Agreement, Philippine Airlines is entitled to seven (7) flights per week between Manila and Vancouver and may exercise fifth freedom rights between Vancouver and Las Vegas to a maximum of four (4) flights per week in each direction.

[6] Due to the extra-bilateral nature of Philippine Airlines' requested authority, the Canadian Transportation Agency (Agency) gave notice of the application to parties that may have an interest, namely Air Canada, Sunwing Airlines, WestJet and the Vancouver Airport Authority. Air Canada and the Vancouver Airport Authority each filed an intervention in respect of the application.

POSITIONS OF THE PARTIES

[7] In its application, Philippine Airlines advises that as of March 23, 2009, it will be increasing flights on the Manila-Vancouver sector from five (5) flights a week to a total of seven (7) flights per week as permitted by the 2008 Agreement. Philippine Airlines submits that its "planned increase of flights between Manila and Vancouver and the additional fifth frequency flight will promote trade, tourism and commercial linkages between Canada and the Philippines, provide benefits to the Canadian economy without adversely affecting Canadian carriers and is in the public interest."

[8] Philippine Airlines also refers to the 2008 Agreement as having contemplated another round of discussions within six months to discuss the issue of third country code sharing by Canadian carriers. Philippine Airlines indicates having been "advised that on December 4, 2008 the Philippine CAB [Civil Aeronautics Board] wrote to its counterpart in Canada requesting the resumption of the discussions." It was also advised that "the Canadian negotiators indicated that they did not wish to resume such discussions until certain preconditions had been met."

[9] Air Canada, the Canadian air carrier designated to serve the Philippines, recounts in its intervention the concerns it has with the outcome of the last round of negotiations between Canada and the Philippines: "Canada had sought a modernized ATA [Air Transport Agreement] that included, among other important elements, a fully liberalized codeshare regime. Unfortunately, this desired liberalization was not achieved, due to an ongoing policy review in the Philippines." Air Canada states that it has written to the Philippine authorities to request approval to implement codeshare services between Canada and the Philippines via intermediate points with its Star Alliance partners. Air Canada advises that "[d]espite several follow-up messages to the Philippine authorities we, to-date, have not had a response to our requests."

[10] Air Canada notes the Agency's concerns with Philippine Airlines' previous application, as expressed in Decision No. 552-A-2008, and advises that Air Canada shares these concerns, noting that "nothing in the period since the last CTA [Agency] decision has changed" and that, to the best of its knowledge, "there has been no further development of Philippine air policy that would permit the introduction of third country codeshare services." In view of this, together with what it characterizes as the Philippine authorities' refusal to grant Air Canada a similar extra-bilateral request for third country codesharing, Air Canada requests that the Agency deny Philippine Airlines' application, concluding that "providing a renewal of the extra-bilateral authority for Philippine Airlines will undermine Canada's interest to further liberalize the ATA for the benefit of all stakeholders."

[11] Responding to Air Canada's statements concerning its request for an approval from Philippine authorities to codeshare with airlines from third countries, Philippine Airlines provides what it believes to be a copy of Air Canada's application to the Philippine authorities, and suggests that Air Canada has never received a reply because of the lack of particulars in its request. Philippine Airlines further argues that Air Canada's request for third country codesharing approval is quite broad and would not constitute a proportional benefit to its own request for one additional fifth freedom flight. Philippine Airlines suggests that had Air Canada sought a similar, proportional, time limited approval from the Philippine authorities, it might have received a favourable response. Finally, the applicant notes that it has made an offer to Air Canada that they enter into a codeshare agreement whereby Air Canada could place its code on Philippine Airlines flights. Philippine Airlines argues that Air Canada's decision not to pursue this option does not mean that the balance of benefits favours the Philippine carriers, as Air Canada contends.

[12] With respect to the potential impact of its requested authority, Philippine Airlines observes that WestJet has not opposed the application and that Air Canada has not suggested that its proposed service will cause Canadian carriers economic harm. Philippine Airlines reminds the Agency that it has made significant investments in the Manila-Vancouver market, and notes that it is increasing its service to Vancouver at a time when other carriers are cutting back. In addition, Philippine Airlines argues that "a time limited authorization to add a single flight by PAL with an average capacity of a maximum of 132 seats would not undermine future negotiations." Philippine Airlines concludes that the benefits of its service "to the travelling public, the Vancouver Airport, the Vancouver, British Columbia and Canadian economies among others, outweigh the alleged undermining of Canada's future negotiating position" and asks that the Agency grant it the requested authority.

[13] For its part, the Vancouver Airport Authority strongly supports Philippine Airlines' request for an extension of its existing extra-bilateral fifth freedom authority. The Vancouver Airport Authority argues that the requested authority "has significantly assisted Philippine Airlines in maintaining its frequency level on the Vancouver-Manila sector," and credits the additional fifth freedom frequency with enabling Philippine Airlines to introduce two additional frequencies on this sector in March 2009. The Vancouver Airport Authority also notes the current uncertain economic environment, and suggests that disallowing the requested weekly extra-bilateral frequency would further exacerbate the situation.

[14] In its reply, Philippine Airlines states that the Vancouver Airport Authority's submission provides evidence that it is in the public interest that the application be granted, and that allowing the authority for the additional frequency with fifth freedom rights will provide economic benefits. Philippine Airlines also notes the Vancouver Airport Authority's statement that overall frequencies on the Vancouver-Las Vegas route will remain unchanged over last year, and that this reinforces its position that granting the application will not adversely impact the economic interests of Canadian carriers on that route.

ANALYSIS AND FINDINGS

[15] The Agency may grant temporary authority pursuant to subsection 78(2) of the Canada Transportation Act (CTA) for a service which is not permitted in a bilateral air transport agreement. Action by the Agency to permit an air service under subsection 78(2) of the CTA is therefore an exception that goes beyond the rights that countries have negotiated between themselves.

[16] In Decision No. 552-A-2008, the Agency shared the concern of Air Canada that the right for Canadian air carriers to serve the Philippines by codesharing with airlines from third countries had not been agreed to by the Philippines at negotiations in May 2008. The Agency indicated its hesitancy to authorize the exercise of a right by Philippine Airlines that Canada and the Philippines were unable to incorporate into the Agreement at the last round of negotiations, and which was not offset by any benefits to Canadian air carriers. It was noted, however, that there was a review of policies governing bilateral air relations underway in the Philippines, and that "Canada and the Philippines committed at the close of the negotiations in May to remain in close contact for a period of six months in order to explore further changes to the 2008 Agreement, including the outstanding issue of third country codesharing." At the time of the Agency's Decision No. 552-A-2008, the period of six months had not yet expired.

[17] The six month period referred to in Decision No. 552-A-2008 has now expired. Air Canada states in its submission that to the best of its knowledge, "there has been no further development of Philippine air policy that would permit the introduction of third country codeshare services." While Philippine Airlines has raised the sufficiency of Air Canada's application for codeshare as an issue, and has indicated having reached out to Air Canada for codeshare purposes, it has not challenged Air Canada's submission with respect to the status of Philippine air policy. It would appear there has been no development in this regard and that the issue remains unresolved.

[18] Air Canada and Philippine Airlines both make arguments concerning the impact that Philippine Airlines' proposed service will have on the balance of benefits available to the designated airlines of Canada and the Philippines. Air Canada states that with the requested extra-bilateral authority, the balance of benefits favours Philippine Airlines, especially in view of the lack of response from the Philippine authorities concerning its own request to codeshare with its Star Alliance partners. Meanwhile, Philippine Airlines suggests that Air Canada could have agreed to enter into a codeshare agreement with Philippine Airlines in order to gain access to the market. What is clear is that through previous extra-bilateral authorities, Philippine Airlines has benefited from the exercise of an additional fifth freedom frequency that is not permitted under the 2008 Agreement.

[19] The Vancouver Airport Authority, in support of Philippine Airlines' request, raises the issue of the uncertain economic climate and suggests that disallowing the one weekly extra-bilateral frequency will exacerbate the situation. The Agency is not convinced that a denial of the application will have a significant impact on the situation. Furthermore, in this context, the Agency observes that Philippine Airlines plans to increase the frequency of its service from Manila to Vancouver from five (5) flights per week to seven (7) flights per week. Although the Vancouver Airport Authority credits the additional fifth freedom flight for the introduction of these two additional frequencies between Manila and Vancouver, there is no indication from Philippine Airlines that its two new frequencies are dependent upon the additional flight between Vancouver and Las Vegas with fifth freedom rights.

[20] Philippine Airlines states that the additional frequency with fifth freedom rights will benefit the travelling public, the Vancouver airport and the Vancouver, British Columbia and Canadian economies, among others. While the Agency recognizes that there may be benefits stemming from the exercise of fifth freedom rights on an extra flight between Vancouver and Las Vegas, the travelling public appears to have a good selection of services in the Vancouver-Las Vegas market, as not only does Philippine Airlines have the right to operate four (4) flights per week on this route, but there are also numerous other services being offered on a daily basis by Canadian and American air carriers.

[21] The Agency has considered that there has been no change since Decision No. 552-A-2008 was issued with respect to the concerns that the Agency raised in that Decision. In addition, the Agency notes Air Canada's opposition to Philippine Airlines' request for extra-bilateral authority, as well as Air Canada's continued interest to operate codeshare services that are not currently provided for under the 2008 Agreement.

[22] Given all of the above, the Agency finds that Philippine Airlines has not demonstrated to the satisfaction of the Agency that the application for an extra-bilateral authority should be granted.

CONCLUSION

[23] Accordingly, the Agency denies the application by Philippine Airlines to exercise fifth freedom traffic rights on one additional return flight per week on the route sector Vancouver-Las Vegas, from March 29 to October 31, 2009.

Members

• J. Mark MacKeigan
• John Scott