Decision No. 127-A-2004

March 17, 2004

File No. M4212/M22-3-1

APPLICATION

[1] 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 December 19, 2003 and specifics were provided on December 22, 2003.

[2] 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).

[3] Condition No. 1 of Licence No. 975115 states:

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

[4] 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.

[5] Note 6 of the Route Schedule Annex 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.

[6] Pursuant to the Agreement, Martinair, as the second designated airline for the Netherlands, is permitted to operate to/from only up to two of the Canadian points named in the Route Schedule annexed to the Agreement. Currently, the points in Canada named in the Route Schedule that may be served by airlines designated by the Government of the Netherlands are Halifax, Montréal, Ottawa, Toronto, Calgary and Vancouver. Edmonton is therefore not a point that may be served by Martinair.

[7] Due to the extra-bilateral nature of Martinair's requested authorities, the Agency, by Decision No. LET-A-4-2004 dated January 9, 2004, gave notice of the application to parties thought to have an interest, namely Air Canada, Air Transat A.T. Inc. carrying on business as Air Transat (hereinafter Air Transat) and the Edmonton Regional Airports Authority (hereinafter Edmonton Airports). Each of these parties, as well as the Calgary Airport Authority (hereinafter the CAA) filed an intervention in respect of the application.

ISSUE

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

PRELIMINARY MATTERS

[9] The Agency received an intervention from the CAA on February 3, 2004. Decision No. LET-A-4-2004 dated January 9, 2004 required receipt of comments on or before January 27, 2004. The Agency, pursuant to section 8 of the National Transportation Agency General Rules, SOR/88-23, hereby accepts the comments submitted by the CAA as being relevant and necessary to its consideration of this matter.

POSITIONS OF THE PARTIES

[10] Martinair indicates that it submitted the application to allow it to operate scheduled services to Edmonton and Calgary during the summer of 2004. Operations would comprise an Amsterdam-Edmonton-Calgary-Amsterdam routing on Mondays and an Amsterdam-Calgary-Edmonton-Amsterdam routing on Thursdays. Martinair submits that it wants to continue its seasonal operations to Canada involving the western Canada points, as was permitted by the Agency in previous years except for the summer of 2003. Martinair states that it would be the only air carrier providing direct air services between Amsterdam and Edmonton. It advises that it will also operate Amsterdam-Toronto scheduled services.

[11] Edmonton Airports intervened in support of Martinair's application. It notes that Edmonton remains without regular service to/from Europe despite evidence of a viable market. Since Air Canada withdrew service in 2001, Edmonton has had to rely on summer charter programs to European destinations. According to Edmonton Airports, Martinair's service, although limited to the IATA summer season, has provided a valuable and ongoing link for the business and tourism community. Edmonton Airports notes, however, that a charter program cannot fully replace a scheduled service which can more easily serve the market at both ends of the route. It adds that the proposed service is important because it would provide Edmonton and northern Alberta with excellent access to a portion of the European market which contributes significant inbound tourism benefits during the relatively short season. With a wide array of connections at Amsterdam to/from other parts of western and eastern Europe, excellent exposure for the region is gained in those areas as well. Edmonton Airports submits that Greater Edmonton, which has a population of one million people, and the airport's northern catchment area, which has a population of approximately 800,000 people, should not be deprived of the Amsterdam service when the designated Canadian air carriers are unwilling or unable to supply it. Edmonton Airports maintains that the Agency is charged with recognition of the shortcomings of a 13 year old agreement and to allow the proposed service as being in the greater public interest. It submits that although Canadian air carriers claim that there is a significant imbalance of traffic and benefit from the existing agreement in favour of Dutch air carriers, there is no evidence of Canadian requests to amend its terms.

[12] The CAA also intervened in support of the application. It notes that both Air Canada and Koninklijke Luchtvaart Maatschappij, N.V. (hereinafter KLM), chose not to serve either Calgary or Edmonton, and Air Transat will operate only once weekly and only from Calgary. According to the CAA, the only real issue is whether the service will operate as a charter or scheduled service. The CAA supports Martinair's opinion that the advantage of a scheduled service is to the Canadian traveller, in this case the residents of Alberta and the Northwest Territories. The CAA indicates that a scheduled service offers greater visibility in the market, wider distribution and easier booking than a charter service. The CAA submits that overall transatlantic scheduled service from Alberta cities, especially Edmonton, is limited and that another choice of destination and air carrier for travellers is needed.

[13] The CAA argues that there is insufficient capacity, particularly in the summer, to satisfy market demand from Alberta. The CAA submits that during the third quarter of 2003 scheduled transatlantic flights from Calgary operated at an 85 percent load factor and only 66 percent of scheduled transatlantic passengers departing Calgary travelled on these direct flights, leaving 34 percent having to connect over Canadian or United States gateways. With the support of 2001 Statistics Canada data, the CAA argues that the relatively low percentage of "other international", i.e., non domestic and transborder, passengers using Calgary and Edmonton Airports compared to Toronto, Vancouver and Montréal airports is a reflection of the small number of scheduled international air carriers at Calgary and Edmonton Airports and of Canadian international air policy in restricting access for foreign carriers to smaller cities. According to the CAA, its own surveys show that a higher percentage of Calgary and Edmonton origin and destination passengers are actually on "other international" journeys than the Statistics Canada data suggest. The CAA notes that both Air Canada and KLM have declined requests to add services to Europe and therefore argues that when another air carrier wants to serve Calgary and link it with another underserved market, it is necessary to grant the required rights.

[14] The CAA is of the opinion that ideally, the issue should be addressed through a revision of the Air Services Agreement; however, it is not possible to achieve this in time for the summer 2004 season. The CAA requests that the application be approved for the summer 2004 season and until negotiations with the Netherlands can be completed.

[15] Air Transat filed an intervention that opposed part of the application. Air Transat notes that an identical application for extra-bilateral authority was filed last year and ultimately denied with respect to the request to serve more than two points in Canada. Notwithstanding this denial, Air Transat indicates that it has learned that Martinair has made no effort in the interim to have its government resolve the matter through bilateral air negotiations. Rather, Martinair seeks the same unilateral concessions from Canadian authorities and stakeholders. According to Air Transat, extra-bilateral authorities should be exceptional in nature and only considered where consensus to this end exists among Canadian stakeholders or, in the absence of such consensus, where there clearly is an incremental benefit to the public interest and travelling public which outweighs any negative impact on stakeholders. Air Transat submits that Martinair has indicated that it will serve all of the Canadian points that it wants to serve on either a scheduled or charter basis and that the objective of the application is to ensure that all of its services are operated as scheduled services.

[16] Air Transat notes that in addition to services offered between Canada and the Netherlands by Air Canada, KLM and sixth freedom air carriers, it will be operating scheduled services from Toronto, Vancouver and Calgary to Amsterdam. Air Transat therefore argues that approval of the requested authority would not result in any new services for the consumer, except at Edmonton, and is not required on a competitive level. According to Air Transat, approval of the request would give Martinair valuable rights to distribute its product through GDS (Global Distribution Systems) without any offset for Canadian stakeholders, thereby further aggravating the enormous imbalance in market share and commercial opportunities under the bilateral relationship.

[17] Air Transat submits that for the reasons outlined in its intervention, it objects to the requested deletion of Note 6 of the Route Schedule annexed to the Agreement that limits the second designated airline of the Netherlands to operating to a maximum of two of the named points. Air Transat adds, however, that it has no objection to the operation of scheduled services to/from Edmonton as one of the two authorized points.

[18] In its submission, Air Canada notes that the proposed service is inconsistent with the Agreement in two respects because Edmonton is not a Canadian point that may be served by any airline designated by the Netherlands and more than the two permitted Canadian points would be served by the second designated airline of the Netherlands. Air Canada submits that the year 2003 was another difficult year for the vast majority of the airline industry, including Air Canada. It identifies the war in Iraq, SARS and continued sluggish economic conditions as a few of the reasons. Air Canada notes that its financial hardships resulted in the filing for protection under the Companies Creditors Arrangement Act (CCAA). Air Canada indicates that it is concentrating on routes of a higher value to its revised network, and cutting its routes of lesser value, due to limited resources. On this basis, it advises that it has decided to reintroduce its seasonal service between Toronto and Amsterdam, which is scheduled to operate between June 1 and October 30, 2004.

[19] Air Canada notes that the application is the same as Martinair's 2003 application which the Agency denied. It submits that, as was the case last year, the extent to which designated airlines of the Netherlands offer seat capacity and frequency far exceeding those offered by Canadian air carriers is striking. Air Canada provided frequency and seat capacity summaries for July 2004 operations of itself, Air Transat, Martinair and KLM in support of its claim that Dutch designated airlines will be offering 75 percent of the total passenger seats in the marketplace. Air Canada maintains that the Canada-Netherlands market is well served and that Dutch air carriers already enjoy very liberal rights and benefits under the Agreement. It submits that it trusts that the Agency can appreciate the importance to Air Canada of traffic feed to/from its network to increase the viability of its Toronto-Amsterdam service. Air Canada indicates that the capacity imbalance it identified will undoubtedly stifle its attempt to operate successfully between Canada and the Netherlands.

[20] Air Canada maintains that there is nothing to be gained by Canadian air carriers from granting extra-bilateral authority to Martinair and that the proposed service would negatively impact Air Canada's Toronto-Amsterdam service. Air Canada, therefore, recommends that the Agency deny the application.

[21] Air Canada also observes that Martinair took the liberty of displaying its proposed Edmonton-Amsterdam service through GDS without a disclaimer that the service is subject to government approval.

[22] In its reply to Air Transat and Air Canada, Martinair notes that it operated up to the summer of 2003 pursuant to extra-bilateral authorities that are again being requested. Due to interventions filed by Air Canada and Air Transat regarding Martinair's 2003 application, the Agency, by Decision No. 121-A-2003 dated March 6, 2003, denied a similar request. Martinair notes that, in view of the denial, it provided an identical service in 2003 on a charter basis. It submits that should the Agency deny this application, it will apply for identical charter authority again to provide the same uplift for the summer of 2004.

[23] Martinair submits that the Agency must be guided by the objectives of the national transportation policy which the Agency is mandated to administer. In this context, Martinair maintains that the Agency must be guided by the following provisions of the CTA:

"5. It is hereby declared that a safe, economic, efficient and adequate network of viable and effective transportation services [...] that makes the best use of all of available modes of transportation at the lowest total cost is essential to serve the transportation needs of [...] travellers [...] and to maintain the economic well being and growth of Canada and its regions and that those objectives are most likely to be achieved when all carriers are able to compete [...] under conditions ensuring that [...]

[...]

(b) competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services,

[...]

(g) each carrier or mode of transportation, as far as is practicable, carries traffic to or from any point in Canada under fares, rates and conditions that do not constitute

(i) an unfair disadvantage in respect of any such traffic beyond the disadvantage inherent in the location or volume of the traffic, the scale of operation connected with the traffic or the type of traffic or service involved,

and this Act is enacted in accordance with and for the attainment of those objectives [...]"

[24] Martinair adds that forcing it to operate to Edmonton and Calgary, as it did during the summer of 2003, would be a further Agency decision that would be contrary to the objectives of the CTA.

[25] In response to Air Transat's proposition that all extra-bilateral requirements should be addressed through renegotiations, Martinair notes that there have been no requests for renegotiations since the Agreement came into existence in 1989. While acknowledging Air Canada's statistics showing that the capacity between Canada and the Netherlands is imbalanced, Martinair submits that this imbalance reflects a traffic imbalance. Martinair indicates that it is dedicated to the European originating and primarily "VFR" (Visiting friends and relatives) market, with over 80 percent of its capacity sold to that market. It maintains that this is not a major market for either Air Transat or Air Canada.

[26] Martinair submits that neither Air Canada nor Air Transat have ever requested renegotiations as a result of the long standing imbalance of capacity between the Netherlands and Canada. It indicates that this lack of action is due to the possible recognition by Canadian air carriers that the imbalance is due to the differentiation between the European and Canadian air carriers in the markets served over Amsterdam.

[27] 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 round trips as frequencies.

[28] Martinair submits that very little of the market from Canada to Amsterdam is a true origin and destination market. It maintains that few Canadians would select Air Canada's service to Amsterdam for onward travel, with Air Canada operating only a seasonal service and operating in opposition to the direct transatlantic services of its own alliance air carriers whose services would also connect with Air Canada's services at Amsterdam.

[29] With respect to Air Canada's comments on Martinair's loading of its IATA summer 2004 schedule, including the proposed Edmonton flights prior to Agency authorization, Martinair submits that Air Canada's proposed Toronto-Amsterdam service has been available for booking in GDS since prior to year end, while Air Canada's service schedule for these proposed operations was filed with the Agency on the date of its intervention. Moreover, Martinair submits that the display in GDS is a display only listing, for information purposes, and is not open to a finalized booking.

[30] Martinair notes that it has been serving the Canadian market for over 30 years and is the only air carrier that has served the Edmonton market for the past decade. It maintains that it and KLM are serving the market with their normal patterns and that it is Air Canada that has brought uncertainty to the market with its late decisions to add capacity to the market. According to Martinair, it has been only Canadian air carriers that have been increasing capacity on Canada-Amsterdam routes the past few years. Martinair also questions the purpose of Air Transat and Air Canada in requiring western Canadian consumers, especially those in Edmonton, who desire Martinair's services to be provided with charter service. This, according to Martinair, is contrary to the national transportation policy.

[31] Martinair submits that permitting the proposed flights would not exacerbate the difficult environment that Air Canada alleges it is dealing with.

ANALYSIS AND FINDINGS

[32] 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 interventions filed by Edmonton Airports and the CAA in support of the application.

[33] The Agency may grant temporary authority pursuant to subsection 78(2) of the CTA for a service that is not permitted under a bilateral air transport agreement.

[34] As noted in the pleadings, Martinair's request for extra-bilateral authority is two-fold. First, Martinair proposes to operate scheduled international services to/from Edmonton as a point in Canada that may be served under route A.3) of the Route Schedule Annex of the Agreement, a point which is not permitted under the Agreement. Second, Martinair requests that the requirement of Note 6 of the Route Schedule, which limits the second designated airline of the Netherlands to operating to only two points in Canada named on the Route Schedule, be removed.

[35] In its reply to Air Canada and Air Transat, Martinair, citing several provisions of section 5 of the CTA, maintained that "forcing" Martinair to operate to Edmonton and Calgary, "...as it was forced to operate for the summer of 2003" would be a decision by the Agency that would be contrary to the objectives of the CTA. The Agency notes that it did not force Martinair to operate charter services to Edmonton and Calgary last summer. The Agency's Decision No. 121-A-2003 dated March 6, 2003 allowed Martinair to provide a scheduled international service to/from Edmonton as one of two Canadian points that could be served. Martinair could have provided a scheduled service to both Edmonton and Calgary had it chosen not to serve any other Canadian point. Moreover, to indicate that the Agency must approve the application or otherwise be contrary to the objectives of the national transportation policy suggests that Canada's adherence to many bilateral air agreements, including the Canada-Netherlands Agreement, is contrary to this policy. It is noted that section 5 of the CTA indicates that the policy objectives are best achieved under conditions ensuring that there is, inter alia, due regard to national policy. In its discretionary decisions under subsection 78(2) of the CTA, the Agency has been guided by Canada's national policy and practices regarding scheduled international air services.

[36] Both the Edmonton Airports and Martinair consider that it is the responsibility of Canadian interests to request negotiations with the Netherlands to address the imbalance in the capacity offered by Dutch air carriers compared to that offered by Canadian air carriers in the Canada-Netherlands market. The Agency notes that the subject application represents the fourth consecutive annual request by Martinair for extra-bilateral authority to operate scheduled services to/from Edmonton. Canadian carriers have not indicated in the pleadings a desire to obtain more rights under the current agreement. Rather, it is Martinair that would appear to have such an interest. Pursuant to subsection 78(1) of the CTA, the Agency is required to exercise its powers in accordance with any international agreement, convention or arrangement to which Canada is a party. Notwithstanding this, the Agency, pursuant to subsection 78(2) of the CTA, may, inter alia, vary the terms and conditions of a licence, on a temporary basis, for international air services that are not permitted in an agreement, convention or arrangement to which Canada is a party. As noted by Air Transat, action by the Agency to permit air services under subsection 78(2) of the CTA is therefore an exception that goes beyond the rights that countries have negotiated between themselves. As pointed out by the Agency in its Decision No. 121-A-2003 dated March 6, 2003, extra-bilateral authorities have the potential to disrupt the balance of benefits agreed to in the Agreement. It follows that Martinair should not rely on repeated extra-bilateral authorities from the Agency to operate extra-bilateral air services.

[37] Martinair proposes to serve Edmonton twice weekly. One flight would be non-stop to Edmonton, with the return portion via Calgary. The other flight would be via Calgary to Edmonton and then non-stop from Edmonton to Amsterdam. Edmonton Airports, the CAA and Martinair pointed out several benefits of scheduled versus charter services. Among these are easier connections at Amsterdam to/from other parts of western and eastern Europe, greater visibility in the market, wider distribution and easier booking. Martinair's submission that the Canada-Amsterdam market is not an origin and destination market also suggests that a scheduled service may be appropriate. The Agency understands why the Edmonton Airports and the CAA would want to encourage direct scheduled international services to/from Europe, particularly in view of the fact that few such services are currently provided. The Agency notes, however, that Martinair indicated that it is dedicated to the European originating and primarily visiting friends and relatives market, with over 80 percent of capacity sold to that market. Moreover, the proposed service to Edmonton and Calgary is seasonal. These attributes are not inconsistent with the characteristics of many charter operations. The number of Calgary and Edmonton originating passengers that could derive benefits from a scheduled service by conveniently connecting at Amsterdam to points beyond may be limited due to Martinair's acknowledged concentration on the European originating market. At the same time, it is not clear to the Agency that the tourism benefits that Edmonton Airports stated would be derived from the proposed service would be significantly diminished if the service were operated as a charter service. In this context, the Agency notes that Martinair clearly stated that if the application were denied, it would apply to the Agency to operate services to Calgary and Edmonton on a charter basis. Whether Martinair operates the service on a scheduled basis or on a charter basis, the capacity would probably be the same.

[38] In its reply, Martinair maintained that few Canadians would select Air Canada's service to Amsterdam for onward travel and that the proposed flights would not exacerbate the difficult environment that Air Canada alleges it is dealing with. Even if few Canadians were to use Air Canada's Amsterdam service for onward travel, Air Canada's significant network of air services between Canada and Europe operated with its own direct flights or via European points other than Amsterdam in co-operation with its Star Alliance partners could be impacted by the proposed service. Moreover, the Agency considers that the difficulties that Air Canada maintained it is facing are real and substantial. The Agency notes that many international carriers, including Air Canada, continue to face difficult conditions as they attempt to recover from the aftermath of several factors that have negatively affected international air travel in recent years. In the absence of significant benefits to the travelling public and/or affected communities, it is difficult for the Agency to find sufficient merit in approving extra-bilateral air services that could negatively affect the attempts by Canadian air carriers to recover.

[39] Although the proposed service could have an impact on Air Transat's planned service between Calgary and Amsterdam, the Agency notes that Air Transat does not object to Martinair serving Edmonton provided the limitation to serving no more than two Canadian points is maintained. Martinair could then operate its proposed scheduled international service between Calgary and Edmonton, and Amsterdam, should it not serve any other Canadian points.

[40] In view of the arguments presented by the two Canadian air carriers that provide scheduled international air services between Canada and the Netherlands, the Agency is not prepared to approve the application in its entirety, i.e., the Agency is not prepared to allow Martinair to serve more than two Canadian points. The Agency, however, is prepared to allow Martinair to serve Edmonton as one of the two Canadian points, thereby providing the opportunity to Martinair to operate a scheduled international service to and from Edmonton.

CONCLUSION

[41] Accordingly, the Agency hereby denies Martinair's request for authority to operate scheduled international air services to/from more than two points in Canada.

[42] 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 permit Martinair to include Edmonton as a point that may be served on route A.3) of the Route Schedule Annex to the Agreement, from May 10 to September 23, 2004, subject to the following condition:

[43] No local traffic may be carried between points in Canada.

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

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

[46] This Decision takes effect on February 20, 2004, the date on which it was communicated by Decision No. LET-A-2004.