Decision No. 121-A-2003

March 6, 2003

File No. M4212/M22-3-1Docket No. 030046AG

APPLICATION

Martinair Holland N.V. (hereinafter Martinair) has applied to the Canadian Transportation Agency (hereinafter the Agency) for the authorities set out in the title. The application was received on January 14, 2003.

Under Licence No. 975115, Martinair is authorized to operate a scheduled international service between the Netherlands and Canada in accordance with the Agreement between the Government of the Kingdom of the Netherlands and the Government of Canada relating to Air Transport signed on June 2, 1989, as amended (hereinafter the Agreement).

Condition No. 1 of Licence No. 975115 states:

The Licensee is authorized to operate the route(s) set out in the Agreement.

Condition No. 2 of Licence No. 975115 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 Kingdom of the Netherlands.

Note 6 of the Route Schedule of the Agreement provides that the second designated airline of the Netherlands is limited to operating to/from only two of the Canadian points named in the Route Schedule.

Martinair proposes to operate scheduled international passenger services between Amsterdam and Toronto, Calgary, Edmonton and Vancouver. Pursuant to the Agreement, Martinair, as the second designated airline for the Netherlands, is permitted to operate to/from only two of the Canadian points named in the Route Schedule annexed to the Agreement. Currently, the points in Canada named in the Route Schedule are Halifax, Montréal, Ottawa, Toronto, Calgary and Vancouver. Edmonton is not a point named in that Agreement.

Due to the extra-bilateral nature of Martinair's requested authorities, notice of the application was given to interested parties, namely Air Canada, Air Transat A.T. Inc. carrying on business as Air Transat (hereinafter Air Transat) and the Edmonton Regional Airports Authority (Edmonton Airports), on January 16, 2003. Each of the interested parties filed an intervention in respect of the application.

ISSUE

The issue to be addressed is whether to allow Martinair to operate scheduled international passenger services to/from more than two points in Canada and whether to include Edmonton as a point to be served.

POSITIONS OF THE PARTIES

Martinair states that it was granted similar approval for the summer operating seasons from 2000 to 2002. Martinair once again requests the extra-bilateral authority in order to continue the same seasonal type of operations that it has conducted to and from Canada for numerous years as a charter operator and that the Agency authorized it to conduct as a scheduled carrier for the first year during the summer 2000. Martinair also points out that it is the only carrier providing direct air service between Edmonton and Amsterdam.

On January 31, 2003, Edmonton Airports intervened in support of Martinair's application. It states that the Martinair service provides a valuable link between Edmonton and northern Alberta and a major European gateway for business and tourism purposes. Martinair provides the only direct scheduled service between Edmonton and Europe. Edmonton Airports is also successfully promoting tourism at travel shows in Martinair's European market. The direct service is also important for business travel, particularly the oil and gas field servicing industry.

Air Transat filed comments on February 5, 2003, wherein it stated that it does not object to permitting Martinair to operate a scheduled service to/from Edmonton; however, it does not support the waiving of Note 6 which restricts Martinair to serving only two points in Canada.

Air Transat states that Martinair seems to imply that the granting of its request should be automatic. However, Air Transat's view is that extra-bilateral requests should always be exceptional in nature and considered on a case by case basis.

Air Transat comments that although similar requests from Martinair have been approved in the past, market conditions for the summer of 2003 are not favourable to allowing increased capacity in the market. Air Transat contends that demand is soft and forward bookings on most long-haul international services are down. Air Transat estimates that capacity on the North Atlantic sector will increase by approximately 20 percent over last summer. Given this situation, Air Transat recommends that the Agency require Martinair to demonstrate that the proposed service is genuinely required by the market.

Air Transat indicates that it will be offering direct scheduled service this summer to Amsterdam from each of Toronto, Calgary and Vancouver and that granting the request will have a negative impact on the viability of its services. Air Transat adds that Air Canada will also be operating services between Toronto and Amsterdam this summer and that Koninklijke Luchtvaart Maatschappij, N.V. (K.L.M. Royal Dutch Airlines) [hereinafter KLM] will be operating services from both Vancouver and Toronto to Amsterdam.

Martinair advises that it has been serving western Canada for over three decades, initially on a charter basis, and for the last four years on a scheduled basis. It is requesting authority to continue operating identical scheduled services. Martinair is not requesting any additional capacity.

Martinair states that it could operate the services, for which extra-bilateral authority is requested, on a charter basis, but reverting to the antiquated distribution systems would act as a deterrent to Canadians travelling to the Netherlands. According to Martinair, Air Transat has similarly converted its services from charter to scheduled services.

Martinair maintains that if the Agency were to deny the application as requested by Air Transat, this would result in the elimination of direct service between the Netherlands and Edmonton. Martinair acknowledges that the market is not robust at this time, but this has also been the case in the past. Martinair contends that a high percentage of the bookings are from the European originating market and that Air Transat's comments regarding a soft demand must refer to Canadian originating traffic.

Martinair disagrees with Air Transat's view that extra-bilateral rights should always be exceptional in nature and considered on a case by case basis. Martinair's view is that extra-bilateral authority is available to permit services which meet the requirements resulting from changing market conditions not anticipated in air transport agreements without having to amend such agreements.

In its submission dated February 14, 2003, Air Canada advises that it will be reintroducing its seasonal service between Toronto and Amsterdam to be operated on a basis of four flights per week in May, increasing to daily service from June to October. The service will be operated using a B767-300 aircraft.

Air Canada provides a breakdown of capacity by carrier for services between Canada and the Netherlands. Air Canada indicates that, if the extra-bilateral request were granted, the Dutch carriers, namely KLM and Martinair will operate 80 percent of the capacity between Canada and the Netherlands. Air Canada believes that the Dutch carriers already derive significant benefits under the existing Agreement and additional extra-bilateral capacity should be denied.

Air Canada also indicates that several air carriers are feeling the effects of difficult economic times. As Air Canada relies on traffic feed to/from its network to ensure the economic viability of its Toronto-Amsterdam service, the problem will be exacerbated if Martinair were to obtain authority to operate flights not permitted under the Agreement.

Air Canada also observes that Martinair has taken the liberty of loading the schedule, for which it is requesting extra-bilateral authority, into the computer reservation system without noting that the itinerary is subject to government approval.

In its reply, on February 24, 2003, to Air Canada, Martinair states definitively that the proposed services will be operated on a charter basis if the application is denied. Martinair points out that denying the scheduled service will cause hardship to Canadian originating passengers only. Due to country of origin rules, distribution can continue as it would for a scheduled service in the Netherlands.

Martinair also maintains that the capacity figures provided by Air Canada are inaccurate. The figures show more capacity in the market than there actually is because Air Canada has counted legs rather than rotations. With respect to Air Canada's comment that the Dutch carriers will operate 80 percent of the capacity, Martinair notes that this also reflects the percentage of passengers based on origin of passengers on the Canada/Netherlands services.

Martinair states that it has been committed to the Canada-Netherlands market for decades. According to Martinair, since Air Canada was named first designated carrier to the Netherlands, it has provided unreliable service in terms of summer schedules.

In response to Air Canada's observation that Martinair loaded the schedule prematurely, Martinair notes that it did in fact file its schedule with the Agency prior to providing Global Distribution Service (GDS) access.

Martinair finally notes that it is the Canadian carriers that are adding capacity to the market. KLM and Martinair are maintaining normal patterns. Furthermore, Martinair is not requesting additional capacity but rather to operate, with the same capacity, on a scheduled basis.

ANALYSIS AND FINDINGS

The Agency has reviewed and considered the application, the opposing interventions of Air Transat and Air Canada, Martinair's reply to those interventions and the intervention filed by Edmonton Airports in support of the application.

The Agency may grant temporary authority pursuant to subsection 78(2) of the Canada Transportation Act (hereinafter the CTA) for a service which is not permitted in a bilateral air transport agreement.

Martinair's request for extra-bilateral authority is two-fold. Firstly, Martinair proposes to operate to Edmonton, a point which is not permitted under the Agreement. Secondly, Martinair requests authority to serve four points in Canada where the Agreement permits only two. The Agency notes that, in its reply to Air Transat's intervention, Martinair indicated that it has been providing the proposed service on a scheduled basis for four years while in its reply to Air Canada, it indicated three years. The Agency notes that Martinair has, in fact, only received authorization and operated on a scheduled basis in the summers of 2001 and 2002.

With respect to Martinair's request to serve Edmonton, the Agency notes that Edmonton Airports intervened in support, Air Canada in opposition and Air Transat advised that it is not opposed to this portion of the application.

Martinair proposes to serve Edmonton twice weekly. One flight would be non-stop to Amsterdam, the other would be operated via Calgary. This service would be the only direct air service from Edmonton to Europe. In the absence of Agency approval to operate the service on a scheduled basis, Martinair could still choose to operate the service on a charter basis, as it pointed out in its replies to Air Transat and Air Canada. Martinair operated a similar charter service for many years prior to the 2001 IATA summer season. Without providing any reasons, Martinair stated that reverting back to a charter system would be a deterrent to Canadians travelling to Amsterdam. There are benefits to travelling on a scheduled service, access to other flights beyond Amsterdam being one of them. A charter operation would still provide passengers with a direct flight to Amsterdam, but would be more onerous for passengers travelling beyond Amsterdam. Canadian originating passengers would likely travel to Calgary, Vancouver or Toronto to connect to other European destinations.

In its reply to Air Transat, Martinair suggested that if the Agency were to deny that application and Martinair chose not to operate on a charter basis, the practical effect would be that there would be no direct air service from Edmonton. However, in its subsequent reply to Air Canada, Martinair indicated that it would operate the services on a charter basis. Although it is impossible for the Agency to determine definitively whether Martinair will offer charter services from Edmonton or no service at all, the Agency notes that if the latter were the case, there are alternative means of providing services for travellers between Edmonton and the Netherlands.

Although Air Transat is not opposed to permitting Martinair to operate from Edmonton on a scheduled basis, the Agency notes that Martinair's proposal is to serve both Calgary and Edmonton on the same flights. As Air Transat pointed out, it will be operating from Calgary this summer.

Both Air Transat and Air Canada oppose Martinair's request to waive Note 6 of the route schedule which essentially restricts Martinair to operating to only two points in Canada. Martinair proposes to serve four points in Canada, namely Toronto, Vancouver, Calgary and Edmonton. Air Transat and Air Canada both argued that there is sufficient capacity in the Canada-Netherlands market. Air Canada also contended that if the application were approved, the Dutch carriers would collectively operate 80 percent of the total capacity. The Agency notes that whether Martinair operates the service on a scheduled basis or on a charter basis, the capacity would be the same. However, charter flights, due to the selling procedures are typically not as widely advertised and due to the limitations on interlining may not be as attractive as alternative scheduled services.

The Agency notes that Air Transat and Air Canada did not oppose a similar application last year and that, in the previous year, there were objections but not for reasons of capacity. The Agency notes that all international carriers are extremely sensitive to the current economic climate and difficult conditions are pronounced by the threat of war. One effect, namely fuel prices, is already being felt. Air Transat pointed out that in spite of the difficult economic climate in 2003 there may potentially be 20 percent more capacity in the North Atlantic sector this summer.

According to Air Transat, extra-bilateral authority should be for exceptional circumstances and considered on a case by case basis. Martinair disagreed that it should only be for exceptional circumstances, stating rather that extra-bilateral authority is to permit services which meet the requirements resulting from changing market conditions not anticipated in air transport agreements. The Agency notes that while subsection 78(2) of the CTA specifically provides for conditions to be varied on a temporary basis, it is of the opinion that air transport agreements are negotiated on a balance of benefits to both parties and that extra-bilateral authorities have the potential to disrupt that balance. As Air Canada pointed out, the Dutch carriers already derive significant benefits under the existing Agreement and the provision of additional opportunities may have an adverse impact on Canadian carriers' ability to utilize their rights under the Agreement.

The Agency is of the opinion that given the difficult economic climate that Canadian carriers are facing, its determination on this application should not adversely affect them. The Agency is of the opinion that if Martinair were not permitted to serve more than two points in Canada, but were permitted to select Edmonton as one of those two points, then Martinair could choose to operate a scheduled service to and from Edmonton.

CONCLUSION

Accordingly, the Agency hereby denies Martinair's request for authority to operate to/from Toronto, Ontario, Calgary and Edmonton, Alberta and Vancouver, British Columbia, while providing its scheduled international passenger services between Canada and the Netherlands for the period from April 14 to October 25, 2003. Consequently, the Agency will not grant authority beyond that specified in Note 6 of the Annex to the Agreement which restricts Martinair, as the second designated air carrier for the Netherlands, to operating scheduled services to only two points in Canada.

However, pursuant to subsection 78(2) of the CTA, the Agency hereby varies Conditions Nos. 1 and 2 of Licence No. 975115 in order to authorize Martinair to choose Edmonton as one of the two points in Canada to and from which it can operate scheduled international passenger services between the Netherlands and Canada from April 14 to October 25, 2003, subject to the following condition:

No local traffic may be carried between points in Canada.

In all other respects, the service shall be operated in accordance with the Agreement and any applicable arrangements as may be agreed to between Canada and the Kingdom of the Netherlands.

This Decision shall form part of Licence No. 975115 and shall remain affixed thereto as long as the said Decision is in force.