Order No. 2005-A-705

December 30, 2005

File No. M4110/B67-1

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BACKGROUND

[1] In its Decision No. LET-A-239-2005 dated August 25, 2005, the Canadian Transportation Agency (hereinafter the Agency) advised British Airways Plc carrying on business as British Airways (hereinafter British Airways) that:

• review of the Government Filing System (hereinafter GFS) operated by Airline Tariff Publishing Company, Agent (hereinafter ATPCo) has revealed that, contrary to the Air Transportation Regulations, SOR/88-58, as amended (hereinafter the ATR), several fare revisions submitted on behalf of British Airways have apparently been filed with incorrect notice, without receiving prior permission from the Agency.
• despite the rejection of these filings, British Airways has apparently failed to remove these revisions from its tariffs and to discontinue sale of the applicable fares.
• British Airways may have applied an increased fuel surcharge on passenger traffic between Canada and the United Kingdom prior to the effective date of this surcharge.

[2] Accordingly, the Agency provided British Airways with an opportunity to show cause, within ten (10) days of Decision No. LET-A-239-2005, why the Agency should not:

1. find that British Airways contravened paragraphs 4 and 10 of Article 13 of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Canada concerning air services signed on June 22, 1988 (hereinafter the Air Transport Agreement) by filing certain tariff revisions on less than statutory notice, without receiving prior permission from the Agency, and, accordingly, order the carrier, pursuant to section 26 of the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA), to cease and desist from filing fares on less than statutory notice unless the Agency has previously agreed to it;
2. find that British Airways contravened paragraph 110(3)(a) of the ATR, by offering or charging tolls that were rejected by the Agency, and, accordingly, order the carrier, pursuant to section 26 of the CTA, to cease and desist from offering or charging tolls that have been rejected by the Agency;
3. find that British Airways contravened subsection 110(4) of the ATR, by charging a fuel surcharge prior to the effective date appearing in the carrier's tariff for such surcharge, and, accordingly, find that the carrier improperly collected a fuel surcharge prior to the effective date of August 12, 2005; and
4. order the carrier to remove all tariff revisions that have been rejected by the Agency, in accordance with subsections 9.1 and 10.5 of the Schedule to the National Transportation Agency's letter dated August 30, 1991 letter to ATPCo respecting the electronic filing of tariffs (hereinafter the NTA letter).

[3] On September 6, 2005, British Airways requested an extension until October 4, 2005 to respond to Decision No. LET-A-239-2005. In its Decision No. LET-A-253-2005 dated September 14, 2005, the Agency granted this request. On October 4, 2005, British Airways submitted its response.

ISSUE

[4] The issue to be addressed is whether British Airways contravened paragraphs 4 and 10 of Article 13 of the Air Transport Agreement, paragraph 110(3)(a) of the ATR, subsection 110(4) of the ATR and subsections 9.1 and 10.5 of the Schedule to the NTA letter.

POSITION OF BRITISH AIRWAYS

[5] British Airways submits that the manner in which the Agency has applied the CTA and the ATR with respect to British Airways' tariff filings has been:

• anti-consumer in that such application results in higher prices and less choice, thereby depriving the travelling public of important benefits;
• anti-competitive, given the onerous cost of tariff filings, the unfair protection afforded Air Canada, and discrimination against British Airways; and
• anti-free trade because of the application of regulatory barriers to the fair pricing of fares, without justification.

[6] In addition, in its submission, British Airways addressed Decision No. LET-A-239-2005 under the following topics:

Tariff filing requirements

[7] British Airways alleges that the Agency's actions related to British Airways' tariff filings are inconsistent with the Air Transport Agreement.

[8] British Airways submits that the Agency is attempting to compel the carrier to comply with an advance tariff filing requirement of 45 days, even though the Air Transport Agreement requires tariffs to be filed 30 days in advance of their implementation.

[9] British Airways also submits that the Agency does not permit the carrier to adapt to changing market conditions on a timely basis, and that the "CTA requires BA to file for fare changes effective after 45 days with an application for Special Permission to implement the change after 3 clear days notice. The CTA then decides whether or not to grant Special Permission or require BA to wait a full 45 days prior to implementing any change to its fares". The carrier argues that the requirement to file a proposed tariff so far in advance significantly restricts British Airways' ability to compete effectively with other carriers as they can determine whether they wish to align their fares and surcharges with those of British Airways, while this requirement deprives British Airways of the ability to amend its fare filings in a timely manner.

Fuel surcharges

[10] British Airways contends that the Agency has decided that filing a fuel surcharge on short notice is not justified unless there is a pre-existing fuel surcharge applied by another carrier on the same route. British Airways submits that when there has been a significant increase in fuel costs, it is fully justified in assessing the surcharge immediately.

Pricing

[11] British Airways asserts that the Agency only permits lower fares for "sixth freedom" services in exceptional circumstances, and requires compelling reasons to justify fares that are lower than the fares of third and fourth freedom service carriers. Furthermore, British Airways submits that the Agency generally disallows these fares as unjust, unreasonable and unduly discriminatory. British Airways argues that the indirect routing inherent in "sixth freedom" services should be sufficient to justify lower fares.

Bilateral negotiations

[12] British Airways maintains that the restrictive and anti-competitive nature of the Canadian tariff system has long been a matter of discord, and that the United Kingdom authorities have made repeated requests to renegotiate further liberalization of tariff filing requirements with Canadian authorities, which have been repeatedly rejected.

Implementation of tariff regime

[13] British Airways asserts that aspects of the current tariff regime impair effective competition, including the complexity of fare filing rules, which British Airways alleges result in high transaction costs. The carrier expresses its concern that the Agency does not always require competitors to file fares on the requisite notice. In this regard, British Airways notes that some of Canada's bilateral agreements have a one (1) day filing requirement, and that the bilateral agreement with Germany does not require fares to be filed at all. With respect to Article 7 of the Air Transport Agreement, British Airways contends that the ATR is not implemented in a manner that provides the carrier with a "fair and equal opportunity".

Tariff rejections

[14] British Airways submits that the burden imposed by the Agency's tariff regulations is markedly different from the minimal obligations that must be met by Canadian carriers with respect to tariff filings submitted to the United Kingdom aeronautical authorities. British Airways contends that the United Kingdom authorities do not rigidly enforce filing requirements or routinely disapprove fares.

[15] British Airways notes that the Air Transport Agreement does not include a double disapproval tariff regime, which requires that both Canada and the United Kingdom disapprove a tariff to prevent such tariff from taking effect. As such, British Airways asserts that it is at a disadvantage. British Airways notes that even though the United Kingdom is Canada's largest volume bilateral partner after the United States of America, the United Kingdom does not have the same advantages as France, Austria, Belgium, Switzerland, Spain, Poland and Finland, which have double disapproval provisions in their respective bilateral air transport agreements with Canada.

[16] British Airways states that with respect to tariff filings that are not filed in conformity with minimum filing periods, the Agency has rejected such filings rather than sending a written notice of dissatisfaction to the United Kingdom aeronautical authorities, thereby depriving the United Kingdom authorities of the opportunity to consult with the Canadian authorities.

Request to stay proceedings

[17] British Airways requests that the Agency stay its show cause proceedings pending the resolution of informal and formal discussions between Canadian and United Kingdom authorities on the revision of the tariff provisions of the Air Transport Agreement.

ANALYSIS AND FINDINGS

[18] The Agency notes that, in its submission, British Airways has not specifically addressed the elements of Decision No. LET-A-239-2005, but generally provided comments on the manner in which the Agency handles the carrier's tariff filings.

[19] In making its findings, the Agency has carefully considered the submission filed by British Airways, as well as the relevant provisions of the Air Transport Agreement, the ATR and the NTA letter.

[20] Paragraphs 4 and 10 of Article 13 of the Air Transport Agreement provide that:

4. Each proposed tariff for carriage between the territories of the Contracting Parties shall be filed by or on behalf of the designated airline seeking approval for it with the aeronautical authorities of both Contracting Parties in such form and in such a manner as the aeronautical authorities may each require to disclose the particulars referred to in paragraph (1) of this Article. It shall be filed not less than 30 days (or such shorter period as the aeronautical authorities of both Contracting Parties may agree) before the proposed effective date. The proposed tariff shall be treated as having been filed with a Contracting Party on the date on which it is received by the aeronautical authorities of that Contracting Party.

10. (a) The tariffs to be charged by a designated airline of one Contracting Party for carriage between the territory of the other Contracting Party and the territory of a third State via any route shall be subject to the approval of the aeronautical authorities of the other Contracting Party and, where appropriate, of the third State.

(b) No tariff shall be approved for such carriage unless it has been filed by the designated airline seeking that approval with the aeronautical authorities of the other Contracting Party, in such form as those aeronautical authorities may require to disclose the particulars referred to in paragraph (1) of this Article, not less than 30 days (or such shorter period as those aeronautical authorities may in a particular case agree) prior to the proposed effective date.

[21] Paragraph 110(3)(a) and subsection 110(4) of the ATR provide that:

110(3) No air carrier shall advertise, offer or charge any toll where

(a) the toll is in a tariff that has been rejected by the Agency

110(4) Where a tariff is filed containing the date of publication and the effective date and is consistent with these Regulations and any orders of the Agency, the tolls and terms and conditions of carriage in the tariff shall, unless they are rejected, disallowed or suspended by the Agency or unless they are replaced by a new tariff, take effect on the date stated in the tariff, and the air carrier shall on and after that date charge the tolls and apply the terms and conditions of carriage specified in the tariff.

[22] Subsections 9.1 and 10.5 of the Schedule to the NTA letter provide that:

9. 1 When rules, fares, charges or other tariff provision(s) are disallowed or rejected, such action shall be indicated by the carrier with appropriate revisions to the tariff.

10. 5 When the Agency disallows in whole or in part, or otherwise takes an action against any page filed under this section, the filer must revise and re-file a revised page within three business days following the disallowance or notice of other action.

Tariff filing requirements

[23] With reference to paragraph 4 of Article 13 of the Air Transport Agreement, British Airways submitted that the Agency is attempting to compel the carrier to comply with an advance tariff filing requirement of 45 days. The Agency notes that paragraph 4 of Article 13 of the Air Transport Agreement applies to tariffs for carriage between Canada and the United Kingdom, and that the Agency requires that British Airways' tariff filings for such carriage, as well as those of other designated carriers, including Air Canada, be submitted on not less than 30 days' notice, in accordance with the aforementioned paragraph.

[24] British Airways submitted that the Agency impedes the carrier's ability to compete effectively with other carriers given the requirement to file a proposed tariff so far in advance of its effective date, which alerts other carriers to British Airways' initiatives. The Agency notes that the option is available to British Airways, and to any other carrier, to file an application with the Agency, requesting special permission to file fare revisions on less than statutory notice. As noted by British Airways, this application must be submitted on not less than three clear working days' notice. The Agency does not require carriers to file proposed tariff revisions on statutory notice before submitting an application asking for special permission to implement these revisions on less than statutory notice. Special permission applications are processed as expeditiously as possible, often within one or two days of receipt, as the Agency is fully aware of the highly competitive nature of the air transport industry. Furthermore, based on an arrangement with the industry, applications that have not been dealt with by the Agency within three clear working days will be deemed to have been approved.

[25] With respect to British Airways' comment that the Agency requires the carrier to file fare revisions for effect after 45 days, the Agency notes that filing requirements vary from country to country depending on the terms of the applicable air transport agreement. The filing period for the designated airlines of the United Kingdom in third country markets is 30 days.

Fuel surcharges

[26] With respect to the matter of fuel surcharges, British Airways submitted that significant increases in fuel costs justify the immediate assessment of surcharges, irrespective of the levels applied by other carriers.

[27] The Agency has issued several decisions (most recently Decision No. 489-A-2005 dated August 1, 2005) concerning the application of fuel surcharges, wherein the Agency expresses the opinion that air carriers should make every effort to incorporate surcharges into air fares and avoid such surcharges. If used, however, these surcharges should be a temporary measure, which air carriers use to respond to unforeseen and unavoidable increases in their costs. In particular, the Agency expects that carriers will take the opportunity to include the fuel surcharge in their base air fares when there are general fare revisions, for example, at the beginning of the International Air Transport Association's fare seasons. The Agency has determined that, for ticketing after March 31, 2006, carriers who do not take action to include a significant portion of the fuel surcharge into their base fares may expect to have to provide a detailed justification to the Agency for any new application or filing for, or extension of fuel surcharges. The Agency would be prepared to accept a tariff filing for fuel surcharges on statutory notice with an expiry date of no later than March 31, 2006. Fuel surcharge amounts that match or are lower than those on file in tariffs with the Agency may be accepted on less than statutory notice. A carrier may propose a fuel surcharge that is beyond the stated parameters, by providing a detailed justification to the Agency for consideration, explaining the unforeseen and unavoidable increases to costs. This regime applies to all carriers filing tariffs.

Pricing

[28] British Airways maintained that the Agency only permits lower fares for "sixth freedom" services in exceptional circumstances, requires compelling reasons to justify fares that are lower than the fares of third and fourth freedom service carriers, and generally disallows these fares as unjust, unreasonable and unduly discriminatory. The Agency notes that a number of air transport agreements expressly prohibit the undercutting of third and fourth freedom service prices by carriers offering "sixth freedom" services. The purpose is to allow price leadership by carriers which have the greatest economic stake in providing these direct services. The Agency is aware of the moderating affect on prices that indirect "sixth freedom" services may have on a market, but in cases of complaint from third and fourth freedom carriers, the Agency is obligated to enforce the provisions of the applicable air transport agreement. This being said, since 2002, the Agency has not disallowed any fares applicable to "sixth freedom" services which undercut fares offered by carriers operating third and fourth freedom services.

Bilateral negotiations

[29] In its submission, British Airways made several comments regarding the adequacy of the tariff regime under the current Air Transport Agreement. The Agency finds that this matter should be more appropriately addressed during the course of negotiations that may be undertaken by Canada and the United Kingdom respecting the Air Transport Agreement.

Implementation of tariff regime

[30] British Airways asserted that the Agency may not be enforcing tariff filings in a uniform fashion, and that, generally, the Agency's routine disapprovals of tariff filings is markedly different from the minimal obligations required to be met by Canadian carriers when submitting tariff filings to the United Kingdom. The Agency, in a consistent fashion, reviews all tariff filings involving travel to and from Canada, to ensure that they are consistent with Canadian law and regulations, government policy and the applicable air transport agreement(s).

Tariff rejections

[31] With respect to British Airways' contention that the Agency has rejected certain tariff filings because of the failure to satisfy minimum filing periods, rather than filing a notice of dissatisfaction with United Kingdom authorities, the filing of a notice of dissatisfaction is not required in such instances. The Agency routinely deals with technically deficient tariff filings which are contrary to the requirements established in the ATR (e.g. insufficient notice provided) through the mechanism of rejection. Rejection allows the carrier to immediately correct the filing and to resubmit it for consideration. The Agency finds that notices of dissatisfaction are only appropriate when the substance of a particular tariff filing is at issue. Canadian authorities have previously explained to their United Kingdom counterparts the various processes in place including the use of rejections. Agency staff has also met and discussed the Agency's tariff filing requirements with British Airways' personnel.

[32] The Agency has carefully considered British Airways' submission in response to the show cause, but finds that British Airways has contravened the following:

• paragraphs 4 and 10 of Article 13 of the Air Transport Agreement by filing certain tariff provisions on less than the notice required by these paragraphs, without receiving prior permission from the Agency;
• paragraph 110(3)(a) of the ATR by offering tolls that have been rejected by the Agency;
• subsection 110(4) of the ATR by improperly collecting an increased fuel surcharge before its effective date of August 12, 2005; and
• subsections 9.1 and 10.5 of the Schedule to the NTA letter by not removing rejected fares or other tariff provisions.

Request to stay proceedings

[33] With respect to British Airways' request to stay the current proceedings, the Agency finds that British Airways has failed to provide any significant arguments in support of this request. Particularly, British Airways has not satisfied the Agency as to why the carrier should be allowed to continue to operate outside the bounds of the Air Transport Agreement and the applicable regulations administered by the Agency. British Airways' contraventions of the ATR disrespect the rules agreed upon in various bilateral agreements with respect to the filing of tariffs, thereby undermining the competitive forces in place for all carriers, giving British Airways a competitive advantage.

CONCLUSION

[34] In light of the foregoing, the Agency hereby orders British Airways to:

• pursuant to section 26 of the CTA, cease and desist immediately from filing fares on less than statutory notice unless the Agency has previously agreed to it.
• pursuant to section 26 of the CTA, cease and desist immediately from offering or charging tolls that have been rejected by the Agency.
• remove, within five (5) working days of the date of this Order, all tariff revisions that have been rejected by the Agency, in accordance with subsections 9.1 and 10.5 of the Schedule to the NTA letter.

[35] With respect to British Airways' improper collection of a fuel surcharge before its effective date of August 12, 2005, the Agency reminds British Airways to respect subsection 110(4) of the ATR.

[36] The Agency dismisses British Airways' request to stay proceedings with respect to this matter.