Decision No. 297-A-1993
May 27, 1993
IN THE MATTER OF the review by the National Transportation Agency of the proposed acquisition of an interest in Canadian Airlines International Ltd. carrying on business under the firm name and style of Canadian Airlines International or Canadi*n by Aurora Investments, Inc., a wholly-owned subsidiary of AMR Corporation; and
IN THE MATTER OF the review by the National Transportation Agency of the proposed acquisition of an interest in Air Atlantic Ltd., Calm Air International Ltd. and Inter-Canadien (1991) Inc. by Canadian Airlines International Ltd. carrying on business under the firm name and style of Canadian Airlines International or Canadi*n.
File Nos. D 2715-1
D 2715-2
BEFORE:
Mrs. Micheline Beaudry Chairman of the Panel, National Transportation Agency
Mr. George Minaker Member, National Transportation Agency
Mr. Edmund J. O'Brien Member, National Transportation Agency
Mr. Keith Penner Member, National Transportation Agency
Mr. Kenneth Ritter Member, National Transportation Agency
Counsel, National Transportation Agency:
Mr. R. Ashley
Ms. M. Hurteau
Ms. M.-P. Scott, Q.C.
LIST OF PARTICIPANTS:
Mr. L.P. Salzman Counsel for Aurora Investments, Inc. and AMR Corporation
Mr. W.I.C. Binnie, Q.C.
Ms. E. Clarke
Mr. H.M. Kay Counsel for Canadian Airlines International Ltd. and PWA Corporation
Mr. R.B. Low
Ms. J. Strekaf
Mr. C. Jensen
Mr. J.E. Foran, Q.C. Counsel for Air Canada, Air Alliance Inc., Air BC Limited carrying on business
Mr. Marc Monnin as AirBC, Air Ontario Inc., Air Nova Inc., Northwest Territorial Airways
Mr. W. Rowley, Q.C. Limited carrying on business as NWT Air
Ms. B. Hochman
Mr. M.L. Phelan Counsel for The Gemini Group Automated Distribution Systems Inc. and
Ms. M. Healey The Gemini Group Limited Partnership
Mr. J.W. McFadzen Counsel for the Department of Transportation and Utilities of the Province of Alberta
Mr. I. Angus Member of Parliament, Thunder Bay - Atikokan Constituency
Ms. G. Braak Canadian Council of the Blind
Ms. T. Rutledge
Mr. D.B. Houston Counsel for the Director of Investigation and Research
Mr. M. Cyr International Association of Machinists and Aerospace Workers, District
Mr. D.J. Varnes Lodge No. 148
Ms. K. Latreille
Ms. M. Barlow The Council of Canadians
Mr. P. Bleyer
Mr. A.H. Turnbull Counsel for Air Canada Master Executive Council
Mr. S.O. Fattedad Chairman, Council of the Canadian Airlines Employees
Mr. J.D. Richard Counsel for Bradley Air Services Limited carrying on business as First Air
Mr. N. Parisien Transport 2000 Québec
Honourable R. Klein Premier, Province of Alberta
Mayor A. Duerr City of Calgary, Alberta
Mayor G.C. Halsey-Brandt City of Richmond, British Columbia
Mr. L. Siracusa
Dr. S.C. Wirasinghe Professor, University of Calgary
Mayor G.C. Boutilier City of Fort McMurray, Alberta
Mr. D. Crozier Counsel for Alliance of Canadian Travel Associations
Mr. L. Martineau Counsel for City of Montréal, City of Mirabel, City of Laval, Conférence des
Ms. S. Jobin maires de la banlieue de Montréal, Conférence des maires de la Rive Nord, Conférence des maires de la Rive Sud, Urban Community of Montréal, Chamber of Commerce of Greater Montréal, Société de promotion des Aéroports de Montréal, Société de développement économique de la Rive-Sud
Mayor J. Doré City of Montréal, Quebec
Mr. B. Roy President, Chamber of Commerce of Greater Montréal
Mr. J.P. Dupré Counsel for the Ministère des transports of the Province of Quebec
Mr. D.G.A. McLean Vancouver Board of Trade
Mr. D.M. Brownie Executive Director, Calgary Transportation Authority
Mr. E.T. Nobbs, Q.C. Counsel for Canada 3000 Airlines Limited
Mr. O.N. Clarke, Q.C. Counsel for Air Atlantic Ltd.
Mr. R.T. Gabor, Q.C. Counsel for Calm Air International Ltd. carrying on business as Calm Air
Ms. S.M. Amendt Canadian Airlines International Ltd. Employees
Mr. F.D. Hodge
Mr. P. Janovcik
Mr. R. MacQuarrie
Ms. D. Thuotte
Ms. J. Gauthier
Mr. R. McTavish
Ms. L. Stiles
Mr. G.C. Boardman Time Air Employee
Ms. J.M. Parker Council of Travel Agents, Alliance of Canadian Travel Associations, Alberta
Mr. H.W. Campbell
Ms. J. Romanchuk Senior Vice-President and Branch Manager, BBN James Capel Inc.
Mr. J.K. Gray President and Chief Executive Officer, Canadian Hunter Exploration Ltd.
Mr. P.M. Maher Dean, Faculty of Management, University of Calgary
Mr. S.A. Milner Chieftain International, Inc.
Mayor G. Campbell City of Vancouver, British Columbia
Captain F.D. Butler Air Canada Employee
Ms. P. D'Andreis Air Canada Employee
Mr. R.R. Evans National President, Transport 2000 Canada
Mr. J. Bunge Department of Transportation of the Northwest Territories
Mr. A.B. Johnson
Captain J.R. Dunlop Master Executive Council of Canadian Airlines International Ltd.
Mr. B.W. Beaton International Association of Machinists & Aerospace Workers, District Lodge 721
Mayor P.A. McMahon City of Yellowknife, Northwest Territories
Ms. R. Daly Todd Consumers Association of Canada
Mr. K. Doucette
Mr. R. Bergeron La corporation de developpement economique de Chicoutimi
Mr. M.E. Nadeau Municipalité régionale du Comté des Îles-de-la-Madeleine
Mr. B. Arseneau
Mrs. D.L. Laws Canadian Holidays
Mr. T.T. Orlando
Ms. S. Boivin Voyages Paradis, Jonquière, Quebec
Mr. B. Lavoie Director General, Association Touristique du Saguenay Lac-St-Jean
Mr. J.P. Veilleux President, Château D'Amos, Abitibi-Témiscamingue
Mr. G. Parent Corporation touristique de Tours Chicoutimi F.A.S.
Ms. J. Hannah Canadian Auto Workers
Ms. C. Kryzaniwsky
Mr. R. Chernecki
Mr. T. Kilpatrick
Mr. A. Monast Association québécoise des transporteurs aériens
Mr. B. Jenner
Mrs. E. Fournier
Mr. V.D. Popow Air Canada Employees Political Action Committee
Mr. P.J. McDonald
Ms. V. Roach
Mr. J. Cowan
Mr. M. Barclay
Mr. P. Frappier
Mr. S. Helms
Mr. T. Murphy
Mr. J. Connors
Mr. M. Goneau
Mr. D. Joyce
Ms. C. Brisson
Mr. H. Visser
Mr. V. Lloyd
Mr. L. Lieschner
Ms. S. McKenzie
Ms. L. McLean
Ms. J. Stienert
Mr. R. Rutherford
Mr. E. Frid
Mr. G. Vaughan
Mrs. M. Garrett
Mayor V.M. Power City of Timmins, Chairman, Northeastern Ontario Municipalities Action Group
Mr. R. Belair Member of Parliament, Cochrane-Superior
Ms. M.F. Delisle President, Federation of Canadian Municipalities
Captain R. Hall Air Canada Master Executive Council
Mr. P. Gauthier Public interest
Mr. S. Simpson Ram Head Outfitters Ltd.
Mr. A.L. White, P. Eng. Deputy Minister, Department of Works, Services and Transportation of the Province of Newfoundland and Labrador
Mr. J. Ronson Canadian Cancer Society
Mr. G.E. Meinzer The Board of Trade of Metropolitan Toronto
Honourable S. Lee Minister of Transportation, Province of New Brunswick
Mr. H. Hugg Department of Highways and Transportation of the Province of Saskatchewan
Ms. F. Arseneault Chairperson, Coalition of Provincial Organizations of the Handicapped
Mayor T. Gosnell The Corporation of the City of London
Mr. R.E. Savoie Department of Highways and Transportation of the Province of Manitoba
Ms. A. Salehabadi Counsel for Nationair
Mr. D.J. MacDougall Department of Transportation and Communications of the Province of Nova Scotia
Mr. H. Barrie National President, Canadian Paraplegic Association
Professor B.G. Bisson University of New Brunswick
Mayor H. McCallion City of Mississauga, Ontario
Mr. B. Henderson Station Attendant, Air Canada
Mr. J.G. Matkin Business Council of British Columbia
Mayor Y. Sugimoto The Corporation of the City of Grand Forks, British Columbia
Mayor D.L. Kandal The Corporation of the District of Matsqui, British Columbia
Mr. A. Charbonneau Department of Transportation and Highways of the Province of British Columbia
Mr. M. Levy President and Chief Operating Officer, Uniglobe Travel (International) Inc.
Mr. G. Ross Continental Consulting Inc.
Mr. R.S. Busol CAE Electronics Ltd.
Mr. R.D. Wilson City of Langley, British Columbia
Mr. R. Edwards The Corporation of the Township of Langley, British Columbia
Mr. B.D. Thorpe President and Chief Executive Officer, Albchem Industries Ltd.
Mayor A. Burns Town of Comox, British Columbia
Mr. R. Gilbertson President, Edmonton Regional Airports Authority
Mr. P.J. Byrne, Ph.D. Mohawk College
Mayor S.A. Thompson City of Winnipeg
Mr. J.C. deBelle Hoechst Celanese
Capt. R.J. McInnis President, Canadian Air Line Pilots Association
Mr. G. Davies Deputy Minister, Ministry of Transportation of the Province of Ontario
Honourable A.S. Santori Mayor, City of Trail, British Columbia
Colonel P.G. Tulk Director General, Transportation, Department of National Defence
Mr. R.G. Brawn Co-Chairman, Calgary Economic Development Authority
Mr. B.A. McDonald Calgary Economic Development Authority
Mr. D.B. MacLellan Sales and Corporate Communications Air Nova Inc.
Mr. A.R. Smith Chairman, S.N.C. Lavalin
Ms. B. Sparrow Member of Parliament, Calgary South West
Mr. S.M. Hodgson Public Interest
Mr. E. Salciccioli Public Interest
Mrs. J. Salciccioli Public Interest
Dr. S. Nandy Public Interest
Mr. K. Dekker Public Interest
Ms. S. Crampton Public Interest
Mr. G.A. Reed Public Interest
Mr. T. L. Tiernay Public Interest
Mrs. T. L. Tiernay Public Interest
Mrs. G. Andrews Public Interest
Mr. G. Harrison Public Interest
Mrs. C.J. Harrison Public Interest
Mr. D. Maguire Public Interest
Mr. J.F. Heathe Public Interest
Professor A.N. McLeod York University
Captain J. Palmer Public Interest
L.E. Cummings Public Interest
Mr. W.P. Sansom Public Interest
Mr. S.R. Harrim Public Interest
Mr. H. Sonnenberg Public Interest
Mr. E.H. Labonde Public Interest
Mr. E.R. Copeman Public Interest
BACKGROUND
The National Transportation Act, 1987, R.S.C., 1985, c. 28 (3rd Supp.) (hereinafter the NTA, 1987) requires that persons wishing to acquire, directly or indirectly, an interest or an increased interest in any business or undertaking principally engaged in any transportation activity under the legislative authority of Parliament must, prior to making the acquisition, give notice of the proposed acquisition to the National Transportation Agency (hereinafter the Agency).
A notice must be filed with the Agency in accordance with the requirements of Part VII of the NTA, 1987. This Part of the legislation, entitled "Acquisitions of Canadian Transportation Undertakings", provides the framework for a public interest review of proposed acquisitions of an interest in transportation undertakings which exceed certain minimum size thresholds.
Part VII requires, in part, that the person proposing to make the acquisition notify the Agency of the proposal and that the Agency give public notice of the proposed acquisition.
If, following public notice and within the prescribed time period, no objection is received by the Agency from a person who is of the opinion that the proposed acquisition is against the public interest, the proposed acquisition is not subject to review. However, where an objection is received, the Agency shall review the proposal. The Agency's review must be completed in no more than 120 days after the day that the Agency sends a receipt acknowledging that the particular notice filed is complete. The statutory deadline can be extended with the agreement of the person proposing to make the acquisition.
In the review, the Agency must decide whether, in its opinion, the proposed acquisition is against or not against the public interest. The Agency shall disallow the proposed acquisition if it determines that the proposal is against the public interest.
Public interest is not defined in Part VII of the NTA, 1987. However, this term is defined in section 4 of the NTA, 1987 and it is this definition which is applied in Part VII proceedings.
Under section 4 of the NTA, 1987, "public interest" is defined, in part, as the public interest that is consistent with the national transportation policy set out in subsection 3(1).
The national transportation policy set out in subsection 3(1) is the cornerstone of the NTA, 1987. Subsection 3(1) states that the national transportation policy includes the "...safe, economic, efficient and adequate network of viable and effective transportation services...". Subsection 3(1) details a comprehensive list of matters to be considered by the Agency in regard to this policy. When considering these public interest policy goals, the Agency must also have "...due regard to national policy and to legal and constitutional requirements,...".
One such "legal requirement", which appears in Part II of the NTA, 1987, is that persons holding domestic and certain international air licences must be Canadian. The Canadian requirement is a critical market entry and ongoing requirement which must be complied with at all times. "Canadian" is defined in subsection 67(1) of the NTA, 1987 as a "...Canadian citizen or a permanent resident within the meaning of the Immigration Act, a government in Canada or an agent thereof or any other person or entity that is controlled in fact by Canadians and of which at least seventy-five per cent, or such lesser percentage as the Governor in Council may by regulation specify, of the voting interests are owned and controlled by Canadians;...".
It is the view of the Agency that a legal requirement, such as the requirement to be Canadian as set out in Part II of the NTA, 1987, is, within the meaning of subsection 3(1), a major public interest consideration. More specifically, the Agency is of the view that when it undertakes a review under Part VII and when the transportation undertaking which is proposed to be acquired must be Canadian under Part II, then the review may need to include an examination and determination of the impact or likely impact of the proposal on the Canadian status of the entity being acquired. Thus, the consideration by the Agency of the public interest as defined, shall not be undertaken in isolation. One overriding consideration in any public interest determination is whether any "legal requirement" adds to or modifies the expression of the public interest enunciated in subsection 3(1).
If, as a result of its review under Part VII, the Agency finds that the transportation undertaking which is proposed to be acquired is an air carrier subject to Part II of the NTA, 1987 and the Canadian ownership requirement, and that it would lose its Canadian status if the proposed acquisition is implemented, the Agency must conclude that the proposal is against the public interest and it shall be disallowed.
The Proposed Acquisitions
On September 30, 1992, the Agency received a notice of proposed acquisition pursuant to section 252 of the NTA, 1987, wherein Canadian Airlines International Ltd. carrying on business under the firm name and style of Canadian Airlines International or Canadi*n (hereinafter Canadi*n) indicated that it proposed to acquire the 45 per cent interest in Air Atlantic Ltd. held by PWA Corporation (hereinafter PWA), and also the 45 per cent interest in Calm Air International Ltd. carrying on business as Calm Air (hereinafter Calm Air) and the 70 per cent interest in Inter-Canadien (1991) Inc., presently held by PWA through its wholly-owned subsidiary, Canadian Regional Airlines Ltd.
This proposal was described by Canadi*n as a corporate reorganization that was directly related to a further proposed acquisition, notice for which was concurrently filed with the Agency. This second proposal related to the intention of Air Canada and Canadi*n to put themselves under the common equity ownership of a new holding company, identified as "Airline Holdco".
* The Company's symbol appears between the "i" and the "n" in the trade name.
Given the direct relationship between the two proposed acquisitions, both notices were joined and a joint notice was published in the Canada Gazette on October 10, 1992.
Under this joint notice, the Agency directed that any person who was of the opinion that any or all of the identified proposed acquisitions were against the public interest could file an objection with the Agency on or before October 26, 1992.
The joint notice appearing in the Canada Gazette also stated that, in the event that an objection were received by the Agency, it was the intention of the Agency to hold a public hearing as part of its review as provided for in subsection 256(2) of the NTA, 1987. The public hearing was to commence on November 9, 1992. Pursuant to this notice, 13 objections were filed with the Agency thereby requiring the Agency to review these proposed acquisitions in accordance with subsection 256(1) of the NTA, 1987.
Prior to the commencement of the public hearing, Air Canada and PWA applied to the Agency for an adjournment sine die of the public hearing.
Following an oral hearing held by the Agency on November 3, 1992 to hear the application for adjournment sine die of the public hearing, PWA and Air Canada filed their withdrawals of the notice of proposed acquisition involving Airline Holdco, PWA and Air Canada. Accordingly, the review jurisdiction of the Agency over the proposed acquisition involving Airline Holdco was terminated.
By Order No. 1992-A-395 dated November 10, 1992, the Agency directed PWA to disclose why proceedings relating to the proposed corporate reorganization involving Canadi*n and the three associated feeder air carriers should also not be terminated. On December 3, 1992, PWA responded to this direction and requested an adjournment of the Agency's review of the proposed acquisitions and consented to an extension of the 120 day statutory deadline for the review of the proposed reorganization. On December 11, 1992, the Agency granted the request for adjournment and agreed to an extension of the statutory deadline.
On December 29, 1992, the Agency received notice of the proposed acquisition of an interest in Canadi*n by Aurora Investments, Inc. (hereinafter Aurora), a wholly-owned subsidiary of AMR Corporation (hereinafter AMR). Concurrent with this filing, PWA requested that the Agency proceed jointly with this notice of proposed acquisition and the notice involving Canadi*n and the three associated feeder air carriers.
By letter dated January 27, 1993, Investment Canada advised the Agency that the transaction relating to the proposed investment by Aurora in Canadi*n would neither be subject to review nor notification under the Investment Canada Act. This opinion was stated by Investment Canada to be "conditional upon the fact and commitment that [Aurora], in no circumstances, will acquire, hold or control more than the percentage of voting interests referred to in section 67 of the National Transportation Act [sic] (at the present time 25%) with each vote being considered a voting interest."
In light of this ruling from Investment Canada and in accordance with subsection 253(4) of the NTA, 1987, the Agency advised counsel for PWA, Canadi*n, Aurora and AMR on January 28, 1993 that the filed notice was complete in accordance with subsection 254(1) of the NTA, 1987.
On January 28, 1993, the Agency granted the request to proceed jointly with both notices of proposed acquisitions. The Agency advised that the 120 day statutory deadline for review of the proposed acquisition involving Canadi*n and its three associated feeders was extended to comply with the deadline set for the review of the proposed acquisition involving Aurora.
The Agency published the notice of proposed acquisition of an interest in Canadi*n in a Special Edition of the Canada Gazette on February 1, 1993 setting the deadline for receipt of objections at February 17, 1993. The Agency received 17 objections within the specified time from the following parties:
. Air Canada
. Iain Angus, Member of Parliament, Thunder Bay-Atikokan
. Canada 3000 Airlines Limited (hereinafter Canada 3000)
. Canadian Council of the Blind (hereinafter the CCB)
. International Association of Machinist and Aerospace Workers, District Lodge No. 148 (hereinafter IAMAW)
. The Gemini Group Automated Distribution Systems Inc. and The Gemini Group Limited Partnership (hereinafter Gemini)
. Air Canada Master Executive Council (hereinafter AC MEC)
. Bradley Air Services Limited carrying on business as First Air
. Air Alliance Inc.
. Air BC Limited carrying on business as AirBC (hereinafter AirBC)
. Air Nova Inc.
. Air Ontario Inc.
. Northwest Territorial Airways Limited carrying on business as NWT Air (hereinafter NWT Air)
. Council of Canadians
. Transport 2000 Québec
. Air Atlantic Ltd.
. Calm Air
Subsequently, Calm Air and Canada 3000 withdrew their objections to the proposed acquisitions. Air Atlantic Ltd., in a Supplementary Statement of Intervention dated April 2, 1993, indicated its support for the proposed acquisition by Aurora.
Upon receipt of the first objection on February 2, 1993, filed by Air Canada, the Agency gained jurisdiction to review the proposed acquisition by Aurora. Accordingly, and pursuant to subsection 257(1) of the NTA, 1987, the deadline for the Agency decision on its review of both the Aurora proposal and that involving the proposed reorganization of Canadi*n and the three associated feeder air carriers was set at May 28, 1993, being 120 days from the issuance of the receipt by the Agency advising that the notice was complete. It is the inter-relationship between these proposed acquisitions that enabled their joint review by the Agency and which enables this joint decision.
The Agency decided to hold a public hearing as part of its review of the proposed acquisition by Aurora and the proposed acquisitions involved in the Canadi*n corporate reorganization. Thus, on February 11, 1993, the Agency issued a Notice of Public Hearing. The hearing commenced on March 22, 1993 in Calgary, Alberta and concluded on April 21, 1993 in Hull, Quebec.
As part of their notice of proposed acquisition, Aurora and PWA filed a number of documents with the Agency which formed part of the proposed transactions and which they claimed were confidential. It was asserted that these documents should not be part of the public record. Aurora and PWA filed a set of abridged documents pertaining to the proposed transactions. The Agency admitted these abridged documents as part of the public record.
Air Canada, Canada 3000 and Gemini filed separate Requests for Disclosure of the material which Aurora and PWA claimed was confidential. In addition, AC MEC, Air Alliance Inc., AirBC, Air Ontario Inc., Air Nova Inc. and NWT Air supported Air Canada's Request for Disclosure. Air Atlantic Ltd. indicated its support for the Request for Disclosure filed by Canada 3000. The Government of Newfoundland and Labrador also supported the motions for full disclosure.
Indeed during the proceedings, the parties filed several claims for public disclosure of material filed by Aurora and PWA which was claimed to be confidential.
The National Transportation Agency General Rules, SOR/88-23 require the Agency to examine, in respect of each document filed on a confidential basis, the reasons for the claim of confidentiality and the details provided as to the nature and extent of the specific direct harm that would likely result if the document were made public. The Agency must also examine the reasons and any material in support of public disclosure, including the relevance of the document to the proceeding and the public interest in its disclosure in the context of the Agency's regulatory responsibilities.
The Agency followed the procedures set out under the National Transportation Agency General Rules in respect of each document subject to a claim of confidentiality and decided whether the document should be released, not released or released in an abridged version. Rulings on motions for disclosure of documents claimed to be confidential were issued by the Agency on March 2, 5, 11 and 17, 1993.
THE PROPOSED CANADI*N REORGANIZATION AND THE PROPOSED ACQUISITION BY AURORA
PWA and Canadi*n propose to effect a corporate reorganization and intend to enter into a series of transactions with several parties including employees, creditors and shareholders as well as with Aurora, AMR and related companies. All of these matters are interrelated and all must, in substantial part, succeed and be consummated for the reorganization to be successful and for the proposed acquisition by Aurora to occur.
The proposed relationship between AMR and Canadi*n and their related companies is reflected in several agreements. The Stock Purchase Agreement, the Shareholder Agreement, the Services Agreement, the AAdvantage Participating Carrier Agreement and the Canadian Plus Participating Carrier Agreement are the major agreements that the parties intend to enter into or have already entered into.
Prior to summarizing these Agreements, the Agency will briefly describe the PWA and the AMR group of companies.
PWA is a public corporation, incorporated in Alberta, whose common shares trade on the Toronto, Alberta and Vancouver Stock Exchanges. It is a holding company and its subsidiary and affiliated companies are principally involved in airline or airline related activities. PWA wholly owns or partially owns, directly or indirectly, several air carriers with Agency licences, including Canadi*n, Time Air Inc., Ontario Express Ltd. carrying on business as Canadian Partner or Canadian Regional (hereinafter Ontario Express), Inter-Canadien (1991) Inc., Calm Air, and Air Atlantic Ltd. PWA also owns a one-third interest in Gemini which operates the largest airline passenger reservation system in Canada.
Canadi*n provides scheduled services to approximately 40 domestic destinations. It provides scheduled international services to destinations in the United States, Mexico, Europe, Asia and South America. As well, Canadi*n offers charter services to several foreign destinations. Its wholly-owned and partially-owned regional air carriers provide turboprop and jet scheduled services to many communities in Canada and to some in the United States, as well as charter services.
AMR is a public United States corporation whose shares trade on several stock exchanges including the New York Stock Exchange. AMR is a holding company whose principal subsidiary is American Airlines, Inc. (hereinafter American Airlines). Other subsidiaries include American Airlines Decision Technologies, Inc., AMR Consulting Group, Inc., AMR Eagle, Inc. and AMR Information Services, Inc.
American Airlines is one of the largest air carriers in the world. At the end of 1992, it provided scheduled jet services to 118 destinations in the United States. It provided scheduled services to Canada, Europe, Latin America and a number of other destinations worldwide. In addition, American Airlines encompasses three divisions called SABRE Travel Information Network, SABRE Computer Services and Cargo. SABRE Travel Information Network markets the computerized reservation services of SABRE to travel agents and other vendors. Certain of the AMR subsidiary companies provide decision-support systems and consulting and information management services to transportation companies and other clients.
Aurora is incorporated under the laws of the province of New Brunswick and is a wholly-owned subsidiary of AMR. It was created to hold the investment in Canadi*n.
The following is a brief summary of the proposed reorganization of Canadi*n and the agreements to be entered into.
Internal Corporate Reorganization
PWA intends to simplify its corporate structure by transferring its operating assets and its investment in most of its subsidiary and affiliated companies to its wholly-owned subsidiary, Canadi*n. Aurora proposes to purchase a one-third economic interest in Canadi*n thereby acquiring an indirect interest in all of the subsidiary and affiliated companies being transferred.
Canadian Regional Airlines Ltd. presently owns 100 per cent of Time Air Inc. and Ontario Express, 70 per cent of Inter-Canadien (1991) Inc. and 45 per cent of Calm Air. PWA, itself, owns 45 per cent of Air Atlantic Ltd. It is proposed that PWA's interest in Air Atlantic Ltd. will be transferred to Canadi*n. With respect to acquisitions under review, the interest in Inter-Canadien (1991) Inc. and Calm Air, held by Canadian Regional Airlines Ltd., is to be transferred to Canadi*n as part of the PWA corporate reorganization.
PWA will initially retain its investment in Gemini and GPA Airbus Limited. It will be a holding company whose shares will continue to trade on certain Canadian stock exchanges. Its major asset will be a two-thirds economic interest in Canadi*n.
Stock Purchase Agreement
The Stock Purchase Agreement is between Canadi*n, PWA and Aurora and it sets out the terms and conditions under which Aurora agrees to purchase an economic interest in Canadi*n.
For a cash consideration of $246,000,044, Aurora agrees to purchase 827,016 Class A Preferred Shares and Class B Preferred Shares of Canadi*n. As an alternative, Aurora can purchase Common Shares and Non-Voting Shares in Canadi*n which would represent a 33 1/3 per cent interest in the company.
The proposed Restated Articles of Incorporation of Canadi*n disclose, among other matters, that the Class A Preferred Shares and the Common Shares are voting shares while the Class B Preferred Shares and the Non-Voting Shares are non-voting shares. The Class A Preferred Shares and the Class B Preferred Shares are convertible, at an escalating conversion rate, to Common Shares and Non-Voting Shares at any time at the option of the shareholder. Canadi*n can force conversion at the end of five years if the market value of the Common Shares exceeds a specified price which is estimated to be approximately 76 cents per share. If not previously converted, the Class A Preferred Shares and the Class B Preferred Shares must be redeemed by Canadi*n after 20 years at a price of $1,000 per share. This price reflects the issuance price plus a compounding annual premium of 6.25 per cent.
If Aurora purchases Class A Preferred Shares and Class B Preferred Shares, its economic interest in Canadi*n would total 33.90 per cent after four and one-half years and reach 56.01 per cent after 19 1/2 years assuming no conversion takes place. At no time can Aurora hold more than the maximum percentage of voting shares permitted by applicable law in order for Canadi*n to be Canadian as defined in subsection 67(1) of the NTA, 1987.
Closing of the Stock Purchase Agreement (hereinafter the Closing Date) shall take place on June 30, 1993 or as soon as practicable thereafter, but no later than 30 days following the satisfaction of a number of closing conditions. The obligations of each party to consummate the transaction is subject, among other matters, to having obtained the appropriate government approvals and having executed the Services Agreement and the Shareholder Agreement by the Closing Date. The obligation of Aurora to consummate the Agreement is subject, among other matters, to confirmation that the Debt Restructuring Plan and the Employee Restructuring Plan have been or can be executed.
Aurora's obligation to consummate the Agreement is also subject to it being satisfied that none of Canadi*n, Aurora or any of their affiliates are or will become liable or responsible to Gemini or the partners and related entities for any material loss as a result of entering into the Services Agreement.
Shareholder Agreement
The Shareholder Agreement is between PWA, Canadi*n and Aurora and it must be executed by the Closing Date under the Stock Purchase Agreement. The object of the agreement is to establish certain terms and conditions concerning the corporate governance of Canadi*n and concerning the acquisition and disposition of securities of Canadi*n by PWA and Aurora.
The Agreement stipulates that Canadi*n is to have eight directors on its Board of Directors. Six directors are to be designated by PWA (one of whom shall be the designated representative of the Council of Canadian Airlines Employees) and two by Aurora.
The Agreement describes what Canadi*n corporate actions require Board Approval and what actions require Board Consensus. Board Approval requires the affirmative vote of the majority of the Board of Directors whereas Board Consensus, in addition, requires the affirmative vote of at least one of the Aurora designated directors. Board Consensus is required, among other matters, for the approval of the annual Capital and Financing Plan, for consummation of certain transactions over threshold amounts such as the declaration and payment of dividends, commitments to capital spending, asset sales and mergers, equity investments and acquisitions. Board Consensus provisions are discussed in greater detail later in this Decision.
The Agreement contains detailed provisions concerning the transfer of the Canadi*n shares. Unless otherwise specifically allowed for or approved by either one of the two shareholders, PWA and Aurora shall retain their shareholdings in Canadi*n for a period of 20 years. Specific provisions allow Aurora to sell its shares in Canadi*n if the Capital and Financing Plan is not approved by Board Consensus. Although approval of the Business Plan does not require Board Consensus, Aurora can sell its shares if Board Consensus is not obtained when losses are projected in any particular year. Additional provisions allow one or both shareholders to sell their shares or purchase the shares of the other if, among other matters, the Services Agreement is terminated, expires or is cancelled. Finally, PWA or Canadi*n may purchase the shares held by Aurora in Canadi*n at any time, at a price which is the higher of market value of the shares or the share purchase price plus 15 per cent annual compounded imputed interest.
If Canadi*n decides to issue additional shares or convertible securities, it is obligated to give PWA and Aurora the right of first refusal to purchase such new issuances. If one of the two Canadi*n shareholders decides to sell its shares in Canadi*n, it again is obligated to give the other shareholder the right of first refusal. Share purchase rights are assignable to financially sound entities which do not compete with Canadi*n. Aurora cannot own voting interests in excess of the amount required for Canadi*n to remain Canadian as described in subsection 67(1) of the NTA, 1987 and Aurora undertakes to take such actions as are necessary to effect compliance, including the conversion of voting shares to non-voting shares.
Services Agreement
The Services Agreement is between Canadi*n and AMR and it must also be executed by the Closing Date under the Stock Purchase Agreement. The Agreement and its attachments describe the nature of the services that will be provided by AMR to Canadi*n. It also describes the terms and conditions under which the services are to be provided.
The Agreement covers a 20-year period with the potential for five-year extension periods beyond that date. AMR is to provide services in the areas of Pricing and Yield Management, Operations Planning, International Base Operations, Food and Beverage Support Services, Reservations, Ground Operations, Capacity Planning, Technical Services and Accounting as described in nine annexes to the agreement. Among other matters, Canadi*n will have access to a wide range of sophisticated technology, including computer-based information and management support systems, which have been developed by AMR and American Airlines.
A transition plan for the implementation of each of the nine services described in the annexes, including applicable starting dates, will be developed by both parties prior to the Closing Date. The services fee is to be calculated at cost plus a percentage of costs for profits.
The Agreement contains lengthy provisions as to how it can be terminated by AMR and Canadi*n. Of special interest are the provisions which would allow Canadi*n to terminate the Services Agreement without cause during the 20-year term. These provisions are discussed later in this Decision.
Marketing Agreements
Canadi*n and American Airlines have entered into reciprocal marketing agreements (the AAdvantage Participating Carrier Agreement and the Canadian Plus Participating Carrier Agreement) for an initial period of two years. The Agreements are to be implemented in stages. A member of one program will be able to earn points under that program by utilizing the air services of the other air carrier. Similarly, a member of one program will be able to claim awards by utilizing the other air carrier.
Employee Restructuring Plan
Substantially all of the employees of PWA and associated companies have agreed to an employee investment plan whereby employees will receive a portion of their wages, to a maximum of approximately $207,000,000 over a four-year period, in the form of rights to acquire PWA common shares. Collective bargaining agreements are to be extended for a three-year period ending December 31, 1995. Among other matters, wage increases are to be limited to amounts which can be offset by productivity gains.
Employees represented by the Council of Canadian Airlines Employees will be entitled to designate or appoint two representatives to the Board of Directors of PWA and one representative to the Board of Directors of Canadi*n.
Debt Restructuring Plan
Based on the latest information available to the Agency, the Debt Restructuring Plan dated February 26, 1993, has yet to be finally approved by creditors. Similarly, PWA has not yet finalized the Plan of Arrangement to achieve the conversion of convertible debentures and preferred shares into PWA common shares.
All principal, lease and interest payments to creditors, except certain unaffected creditors such as trade creditors, were suspended on a temporary basis on November 30, 1992. Payments were scheduled to resume on April 30, 1993 to those creditors approving the Plan. Repayment terms will vary depending on the category of debt held by the creditors.
In general, undersecured creditors are to receive a prepayment of the undersecured portion of their claims or debt in the form of rights to acquire PWA common shares or, in certain instances at the option of the creditor, non-interest bearing notes due in ten years. Unsecured debt, subordinated perpetual debt, convertible subordinated debentures and preferred shares are to be entirely converted to or repaid in the form of rights to PWA common shares. Subordinated lenders, preferred shareholders and common shareholders of PWA are to be issued warrants as an inducement to approve the Plan.
If completed as proposed, and assuming no non-interest bearing notes are issued, the Plan will result in the reduction of long term debt, capital lease obligations and operating lease commitments by approximately $315,000,000 and the elimination of subordinated perpetual debt, convertible subordinated debentures, preferred shares and other obligations totalling $407,000,000. In total, approximately $722,000,000 of rights to acquire PWA common shares would be issued.
On completion of the Plan and after the employee investment, assuming that no non-interest bearing notes are issued to creditors, 42.5 per cent of PWA would be owned by creditors, 28.5 per cent by employees and 29.0 per cent by junior stakeholders which include common and preferred shareholders and the holders of convertible subordinated debentures and subordinated perpetual debt.
Creditors entitled to receive common shares of PWA would be required to provide an ownership declaration stating whether or not they are Canadian as defined in subsection 67(1) of the NTA, 1987. Non-Canadian creditors would be issued convertible non-voting shares of PWA under the Plan.
Closing and implementation of the Plan will be coincident with the closing of the Stock Purchase Agreement.
Government Assistance
The Government of Canada has provided PWA with a guarantee of a $50,000,000 credit facility to finance certain working capital and other operating expenses. In addition, commitments have been received from the Government of Alberta for $50,000,000 and from the Government of British Columbia for $20,000,000 of temporary assistance through loan guarantees.
ISSUES PRESENTED BY PARTICIPANTS
In assessing the public interest, the Agency carefully examined the proposed transactions and considered all objections and interventions filed with the Agency in the course of the review.
In addition to the objections, approximately 100 individuals, groups, corporations, provincial and municipal governments and elected representatives intervened before the Agency. These submissions were either in the form of written submissions or presentations at the public hearing to express their support or opposition to the proposed acquisition. The Agency also received approximately 500 cards from interested members of the public who support the proposed acquisition by Aurora.
The interveners in this matter raised a number of common issues in their submissions. These included Canadian control of Canadi*n; employment losses/opportunities; domestic, transborder and international competition in the Canadian airline industry; service levels including service to remote communities; a "Made in Canada" solution; the effects on the tax system in the event of a failure of Canadi*n; regional economic development; impact on the fostering of a strong Canadian aerospace industry and safety.
Generally, interveners in support of the proposed acquisition expressed the opinion that the proposed acquisition of an interest in Canadi*n by Aurora would result in fewer job losses than any alternative and is the best available solution for the maintenance of competition in the Canadian airline industry. Other comments related to how particular communities benefit from competition, the role Canadi*n plays as a good corporate citizen within certain communities and the impact of a failure of Canadi*n on its affiliated regional air carriers.
Interveners in opposition were generally concerned about the impact of the proposed transaction on the Canadian status of Canadi*n, about employment being diverted to the United States, the loss of high technology and management jobs in Canada and the loss of a Canadian-controlled airline industry.
Some interveners neither supported nor opposed the proposed acquisition but, instead, wished to apprise the Agency of certain concerns or issues they thought were relevant to the Agency review mandate. For example, some expressed views on the requirement that the Canadian airline industry be Canadian-controlled, that competition be maintained and that communities not lose any of the services gained since liberalization.
AGENCY ANALYSIS OF ISSUES
The Agency must carry out its responsibilities within the parameters of the existing legislation from which it draws its jurisdiction. In a review such as the present review, the Agency cannot address arguments on the efficacy of the current legislation or arguments on current policy governing air transportation nor can it recommend changes in policy.
The mandate of the Agency under Part VII of the NTA, 1987 is clearly set out in subsection 257(1) which states, in part, that the Agency must form an opinion on whether a proposed acquisition is against or not against the public interest. Thus, where the Agency is of the opinion that, on balance, the evidence establishes that a proposed acquisition is against the public interest, as this term is set out in the NTA, 1987, the Agency must disallow it. Conversely, where the evidence convinces the Agency that the proposal is not against the public interest, the Agency shall not disallow it.
In forming an opinion on whether these proposed acquisitions are against or not against the public interest, the Agency has examined the following areas of the public interest for the current review:
The Canadian Ownership Requirement under Part II of the NTA, 1987
Competition
Impact on International Air Services
Impact on Gemini
Employment Impacts
Regional Economic Impacts
Accessible Transportation Services
Safety and Health Concerns
The Canadian Ownership Requirement under Part II of the NTA, 1987
As described earlier in this Decision, the national transportation policy set out in section 3 of the NTA, 1987 states, in part, that in achieving national transportation policy objectives, due regard needs to be given to legal and constitutional requirements. The NTA, 1987 requires that air carriers, such as Canadi*n and its feeder air carriers holding Agency licences, be Canadian as defined in subsection 67(1). This is an ongoing requirement that needs to be complied with at all times. Accordingly, the Agency has determined that the proposed Canadian status of Canadi*n and its feeder air carriers is a public interest issue which must be examined as part of the review in these Part VII proceedings.
The Agency concludes that if Canadi*n and its feeder air carriers would no longer be Canadian, if the contemplated proposed acquisition by Aurora were consummated, the proposed acquisition would be against the public interest.
In order to be Canadian as defined in subsection 67(1) of the NTA, 1987, an air carrier must meet two basic requirements. Firstly, if the air carrier is a corporation, at least 75 per cent, or such lesser percentage as the Governor in Council may by regulation specify, of its voting interests need to be owned and controlled by Canadians. Within the meaning of this provision, "voting interests" mean voting shares and the votes assigned thereto. Secondly, the air carrier needs to be controlled in fact by Canadians.
Numerous representations were made to the Agency and a substantial amount of testimony was given at the public hearing as to what constitutes control in fact and what factors should and should not be considered to determine where control in fact lies. The Agency has given careful consideration to all the evidence on this subject.
In reviewing the Canadian ownership status of an air carrier, the Agency considers various factors in making a control in fact determination. There is no one standard definition of control in fact but generally, it can be viewed as the ongoing power or ability, whether exercised or not, to determine or decide the strategic decision-making activities of an enterprise. It also can be viewed as the ability to manage and run the day-to-day operations of an enterprise. Minority shareholders and their designated directors normally have the ability to influence a company as do others such as bankers and employees. The influence, which can be exercised either positively or negatively by way of veto rights, needs to be dominant or determining, however, for it to translate into control in fact.
Every control in fact review is unique because circumstances invariably are unique. For this reason, the Agency, like many others who are charged with making control in fact rulings, does not have standard and specified criteria which are used when making such determinations. When determining where control in fact lies, the Agency carefully examines all actual and proposed business and other relationships between the various shareholders and between the shareholders and the company whose ownership is under review. All actual and proposed operational, managerial and financial relationships are considered. The intent and ability of individual shareholders to influence and control are considered. Agreements, such as shareholder agreements and commercial contracts between the shareholders and the company are of special importance. Substance as opposed to form is emphasized and nothing is excluded from review.
The Agency has considered all of the Canadian ownership evidence available to it in these review proceedings, including all documentary evidence filed with it before, during and after the public hearing. It has given careful attention to all of the public hearing testimony. The following are the Agency findings on whether or not Canadi*n would continue to be Canadian, as defined in subsection 67(1) of the NTA, 1987, should the proposed Aurora acquisition be consummated.
Would at least 75 per cent of the voting interests of Canadi*n be owned and controlled by Canadians should the Aurora acquisition proceed?
The Stock Purchase Agreement discloses that Aurora can either purchase Class A Preferred Shares and Class B Preferred Shares or Common and Non-Voting Shares of Canadi*n in return for its $246,000,044 investment. Under both options, the Agreement specifies that Aurora, at all times, can own no more than 25 per cent of the voting shares of Canadi*n. The balance of Aurora's economic interest is to be owned by way of non-voting shares in Canadi*n. PWA would own the remaining 75 per cent of Canadi*n's voting shares.
In order for Canadi*n to be Canadian as defined in subsection 67(1) of the NTA, 1987, it is also necessary for PWA, itself, to be Canadian.
The Agency monitors the Canadian status of air carriers on an ongoing basis and concludes that PWA is controlled in fact by Canadians.
At the public hearing, Mr. Donald J. Carty, Executive Vice-President of Finance and Planning of AMR and American Airlines, was asked whether AMR or related companies intend to purchase PWA shares. Mr. Carty responded by stating that no such plans exist and that such action would be highly unlikely.
The latest revised Debt Restructuring Plan that has been filed with the Agency discloses that creditors entitled to receive common voting shares of PWA will be required to provide evidence as to whether or not they are Canadians as defined in subsection 67(1) of the NTA, 1987. If it is determined that they are non-Canadians, they will receive convertible non-voting shares in the public corporation.
The Agency notes that a substantial ownership dilution of the present non-Canadian shareholdings in PWA will occur as a result of the conversions contemplated in the Debt Restructuring Plan. With the dilution, it is clear that such non-Canadian share ownership will not be a material factor in determining if PWA remains Canadian. The Agency also notes that PWA proposes to shortly institute a far more comprehensive share ownership constraint system to ensure ongoing Canadian ownership compliance. The new constraint system will be carefully reviewed by the Agency prior to its implementation.
Having considered the above matters, the Agency has concluded that PWA will remain Canadian as defined in subsection 67(1) of the NTA, 1987 should the proposed Aurora acquisition and other proposals proceed. Accordingly, at least 75 per cent of the voting interests of Canadi*n will continue to be owned and controlled by Canadians.
Would Canadi*n be controlled in fact by PWA or would such control be transferred to Aurora and AMR should the Aurora acquisition proceed?
The Agency finds that as the economic interest of a shareholder, as reflected in ownership of voting and non-voting shares, increases above 25 per cent, such shareholdings become of increased importance in determining where control in fact lies. The greater the economic interest, the greater the likelihood that the owner of that economic interest will be able to exercise control in fact. This matter becomes of major importance as the economic interest reaches and exceeds 50 per cent.
The Agency has carefully examined the economic interest that Aurora would own in Canadi*n as a result of its proposed investment. It is clear that if Common and Non-Voting Shares are purchased, Aurora would own a 25 per cent voting interest and a 33 1/3 per cent economic interest in Canadi*n.
Based on the testimony of Mr. Carty, however, it is the current intention and expectation of Aurora to purchase Class A Preferred Shares and Class B Preferred Shares of Canadi*n. This option is more likely to be chosen since it allows AMR to account for the investment in a favourable manner. If this option is exercised, there is an accretion to Aurora's investment of 6.25 per cent per year. The initial economic interest would total 27.47 per cent, increase in value to 33.90 per cent after four and one-half years and reach 56.01 per cent after 19 1/2 years. Such increases assume that no conversion to Common and Non-Voting Shares will have taken place.
In his testimony, Mr. Carty disclosed that he expects conversion to Common and Non-Voting Shares to take place at the end of five years and that this is in keeping with the intent of Aurora to purchase a one-third interest in Canadi*n. When asked why there was no forced conversion at the end of the five-year period, Mr. Carty responded by advising that such a right could result in an unfavourable opinion as to the nature of the investment with the result that the favourable accounting treatment for AMR could be lost.
The restated Articles of Incorporation of Canadi*n give the airline the right to convert the Class A Preferred Shares and the Class B Preferred Shares to Common Shares and Non-Voting Shares any time after the fifth anniversary of Closing of the Stock Purchase Agreement. Canadi*n can only force conversion, however, if the market price of the Common Shares is greater than the conversion price which has been established at $0.76 per share (the conversion price could change slightly depending on the provisions of the final Debt Restructuring Plan). PWA witnesses advised the Agency that Canadi*n intends to force conversion at the earliest possible time. The Agency finds this intent to be credible since such action does not require Board Consensus approval and it is clearly in the best interest of PWA and its shareholders to have Canadi*n force conversion as soon as possible.
On the issue of whether or not it is likely that the market value of the Common Shares in question would be greater than $0.76 per share in five years time, Mr. Kevin J. Jenkins, President of Canadi*n, gave testimony that if the shares were to be valued below $1.00 in five years time, Canadi*n would most likely have fallen into bankruptcy. The Agency concludes that it is probable that Canadi*n would be able to force a conversion at the end of five years and that this is clearly the intent.
The Agency concludes that it is clearly the intent of all parties that Aurora purchase a 25 per cent voting interest and an approximate one-third economic interest in Canadi*n. The various agreements have been structured to achieve such a result. Having reached this conclusion, the Agency finds that Aurora's proposed approximate one-third economic interest in Canadi*n, in and of itself, raises no concerns that control in fact of Canadi*n would accrue to Aurora.
Section 3.1 of the Shareholder Agreement states that Canadi*n will have eight directors, six of whom are to be designated by PWA (one of whom shall be the designated representative of the Council of Canadian Airlines Employees who shall have been approved by PWA and Aurora) and two of whom are to be designated by Aurora. Mr. Carty testified that he is expected to be one of the Aurora-designated directors with the other yet to be determined. He advised that AMR and Aurora are not expected to be represented on any of Canadi*n's Management or Executive Committees.
It is noted that Aurora's right to designate directors is in direct proportion to its proposed voting interest in the airline. The Agency finds nothing unusual or untoward about such a designation provision. Neither does the Agency find it unusual that Aurora and PWA have the right to approve the Council of Canadian Airlines Employees' designee nor that Aurora has greater Canadi*n director designation rights than does the Council. Aurora proposes to be a direct owner of Canadi*n shares. Canadi*n employees will own PWA shares as a result of the Employee Restructuring Plan. Mr. Sidney O. Fattedad, Chairman of the Council of Canadian Airlines Employees, testified that the Council has the right to designate two PWA directors.
Although Aurora proposes to designate two Canadi*n directors to protect its $246,000,044 investment, the Agency notes that PWA would have the right to designate the majority of Canadi*n's directors. The Agency finds that the director designation provisions contained in the Shareholder Agreement are normal and reasonable and do not raise concerns that control of Canadi*n could transfer to Aurora.
The Agency now turns to the Board Consensus provisions contained in the Shareholder Agreement. Board Consensus is defined as the affirmative vote of at least a majority of the Canadi*n directors voting at a meeting at which at least four directors are present, provided that at least one of such affirmative votes is cast by an Aurora designee. The Agency has been told that these provisions are designed to protect Aurora's investment. The question that needs to be asked is whether the provisions go beyond investment protection and whether they would result in Aurora controlling Canadi*n.
The Agency notes that Amendment No. 1 to the Stock Purchase Agreement dated March 17, 1993 removes the provision from that Agreement which required that Canadi*n, PWA and Aurora agree to, and that Canadi*n's Board of Directors approve, Canadi*n's Business Plan and Capital and Financing Plan for 1993, including the senior management structure of Canadi*n and the identity of the Chief Executive Officer. With the elimination of this provision, the Agency notes that Aurora would have no control over the selection, retention and compensation of the Canadi*n officers and executives.
Board Consensus provisions have been modified by Amendment No. 2 dated March 22, 1993 to the Stock Purchase Agreement. This Amendment removes from the Shareholder Agreement the provision that required Board Consensus for the approval of Canadi*n's Business Plan for any year for which a loss is projected. If such a Business Plan is not approved by Board Consensus, however, Aurora has the right to sell its shares in Canadi*n.
Matters requiring Board Consensus are specified in section 3.3 of the Shareholder Agreement.
Under this section, Canadi*n's annual Capital and Financing Plan must be approved by Board Consensus. The Plan, among other matters, must include a monthly schedule of all capital expenditures, a monthly cash forecast and a monthly schedule of planned indebtedness.
Board Consensus is required for the declaration and payment of dividends of more than $5,000,000 per annum. It is also required for the sale or transfer of assets valued at $20,000,000 or more in any one transaction or series of transactions with an aggregate annual limit of $20,000,000.
Board Consensus is required for airline-related capital expenditures or the incurrence of airline-related indebtedness of $30,000,000 or more in any one transaction or series of transactions outside of the Capital and Financing Plan. Board Consensus is required for "...the entry into any agreement (other than labour agreements), contract, real property lease, arrangement or commitment which obligates..." Canadi*n in or involves an aggregate amount of $30,000,000 or more in any one transaction or series of related transactions.
Board Consensus is also required when the aggregate annual amount for such capital expenditures, indebtedness, agreements, contracts, real property leases, arrangements and commitments, on a combined basis, exceeds $50,000,000.
Arguments were advanced at the public hearing that the above provisions would result in the need to have Board Consensus whenever Canadi*n makes normal airline operating expenditures where the aggregate annual $50,000,000 limit has been exceeded.
The Agency has carefully examined the testimony of Canadi*n and AMR officials to determine the intent of this Board Consensus provision. Mr. Kevin E. Grayston, Senior Vice-President and Controller of Canadi*n, testified that the provision has no application to day-to-day purchases or operating expenses. Mr. Carty testified that the intended scope of the provision was outside ordinary day-to-day operations. Based on this testimony, the Agency concludes that it is the intent of the parties who entered into the Shareholder Agreement not to have this provision apply to normal airline operating expenditures.
The Agency has carefully reviewed all matters that require Board Consensus and the importance of the relationship between the Business Plan and the Capital and Financing Plan, to determine the impact that these provisions would have on the control of Canadi*n.
The Agency notes that Canadi*n's Business Plan, even when a loss is projected, would not now require Board Consensus. Canadi*n, without the need to use the Board Consensus provisions, is free to make the vast majority of the operational, marketing and financial decisions that airlines need to make on an ongoing basis. The Agency refers to such decisions as when, where and how airline operations are to be conducted and for what price. Similarly, the selection, compensation and retention of Canadi*n officers and executives is not a Board Consensus matter. The Agency is also aware that it is the officers, executives and other employees of Canadi*n that run and manage the company on a day-to-day basis. The Agency acknowledges that the Board Consensus provisions, which primarily relate to corporate actions that could negatively impact on Aurora's investment, would act as a constraint on the airline. The Agency determines that the constraint is not sufficiently great, however, so as to result in Aurora controlling Canadi*n.
In examining the amount of influence that Aurora designated directors might have on Canadi*n or the amount of constraint that they could exercise, the Agency has given due weight to the fiduciary responsibilities of the Canadi*n directors and to conflicts of interest that directors must be careful to avoid. There is no evidence before the Agency that would sustain a conclusion that the Aurora nominees on Canadi*n's Board of Directors would not observe either their fiduciary duties to Canadi*n or their conflict of interest obligations.
Section 5.1 of the Shareholder Agreement discloses that if Canadi*n decides to issue additional shares or convertible securities, it must give PWA and Aurora the right of first refusal to purchase such new issuances. New security offerings would be made to the two corporate shareholders in proportion to present shareholdings. If one shareholder rejects or partially rejects the offer, the other shareholder may purchase the securities in question. Section 5.2 states that if one of the two Canadi*n shareholders decides to sell its shares in Canadi*n, it needs to give the other shareholder the right of first refusal to purchase such shares. Share purchase rights are assignable to financially sound third parties which do not compete with Canadi*n. Section 5.3 states that Aurora, notwithstanding anything to the contrary, will not own voting shares in excess of the amount required for Canadi*n to remain Canadian as defined in subsection 67(1) of the NTA, 1987.
The Agency finds that such reciprocal rights of first refusal provisions are standard and are intended to protect the shareholders from share dilutions and from undesirable takeovers. It appears unlikely that shares or securities of Canadi*n will issue or be transferred in the foreseeable future. In any event, Aurora could only exercise the first refusal rights if Canadi*n remained Canadian as defined in subsection 67(1) of the NTA, 1987. It should also be noted that compliance with the Canadian ownership requirement is carefully monitored by the Agency on an ongoing basis. The Agency determines that the right of first refusal provisions would not constitute an undue or determining influence by Aurora over Canadi*n or PWA.
Paragraph 4.2(f) of the Shareholder Agreement allows PWA or Canadi*n, at any time, to purchase the Canadi*n shares owned by Aurora. The price would be the greater of market value or the cost of the shares to Aurora plus 15 per cent annual compounded imputed interest. Certain concerns have been raised about this provision. The Agency finds that this provision does not demonstrate that Aurora would be exerting undue influence over Canadi*n through the use of an inflated interest rate to calculate the selling price of its shares. The 15 per cent annual growth that Aurora would expect from its investment is in keeping with the risky nature of the investment. It could be argued that the buy-out provision demonstrates that the prime motive of AMR for its arrangements with Canadi*n is not to hold a long-term equity investment in the Canadian airline.
Section 11.9 of the Shareholder Agreement prohibits Aurora, PWA and their affiliates from making any future equity investment in any domestic air carrier competitor of the other or to enter into future code share and frequent flyer arrangements with such competitors. The section also stipulates that Aurora, PWA and their affiliates cannot increase frequencies of air services over certain routes where Canadi*n and American Airlines compete at the Closing Date (non-stop routes between Canada and the United States, among others, are excluded). Paragraph 5.1(f) of the Services Agreement discloses that AMR cannot provide the same or a similar package of services to Canadi*n's domestic competitors although services of lesser scope can be sold. Mr. Carty testified that this provision was inserted at the request of Canadi*n. The Agency finds that these two provisions are not unusual between alliance partners. They have little or no bearing on the issue of control in fact of Canadi*n.
Paragraph 6.1(c) of the Stock Purchase Agreement discloses that each party to the agreement does not need to complete the transaction unless all of Canadi*n's current foreign route authorities continue to be in full force and effect at the Closing Date. The Agency finds that this is a normal protection provision which has no bearing on control in fact. It is similar to the provision contained in paragraph 6.2(g) of the Stock Purchase Agreement which states that Aurora does not need to consummate the agreement if there were a denial or restriction of American Airlines' foreign route authorities.
Section 11.13 of the Shareholder Agreement discloses that PWA can enter into agreements as are necessary to carry out the provisions of the Employee Restructuring Plan or the Debt Restructuring Plan as long as such agreements "...are reasonably satisfactory in form and substance..." to Aurora. The Agency finds that this provision has little or no control in fact implications. This is an investor protection provision for Aurora to ensure that the proposed Canadi*n reorganization is carried out as anticipated.
Canadi*n and American Airlines have entered into two frequent flyer agreements each of two years duration. Each air carrier will participate in the other's frequent flyer program. A member of one program will be able to earn credits under that program by utilizing the air services of the other air carrier. Similarly, a member of one program will be able to utilize credits or claim awards by utilizing the services of the other air carrier. The interchanges will be appropriately tabulated and inter-company charges will occur to adequately distribute costs. The Agency concludes that the frequent flyer agreements that have been entered into by the two air carriers are normal business transactions that occur regularly between various airlines. No Canadian ownership compliance concerns arise as a result of these agreements.
Canadi*n and AMR propose to enter into a comprehensive Services Agreement for the provision of services described in nine annexes attached to the Agreement. These services mainly consist of computer-based information and management support systems and services which have been developed by American Airlines and related companies. The Agency finds that these services are intended to enable Canadi*n to manage and plan its operations and business in a more efficient and effective manner. Mr. Grayston testified that the Services Agreement, including the Yield Management functions to be performed by American Airlines, would represent an annual benefit to Canadi*n of $55,000,000 to $80,000,000.
The Agency has been advised that the services to be performed for Canadi*n are unprecedented in terms of magnitude, scope and the degree of integration. With respect to the services to be performed on an individual basis, Mr. Richard B. Low, counsel for PWA and Canadi*n, argued that most of the services to be performed by AMR have previously been outsourced with the possible exception of yield management. The Agency agrees.
Of special concern to the Air Canada witness, Mr. Donald S. Garvett, Vice-President of Simat, Helliesen & Eichner, was the Pricing and Yield Management services to be performed by AMR and related companies. Mr. Garvett expressed concern that Canadi*n would lose control of certain important functions. With respect to the Capacity Planning services to be performed by AMR, Mr. Garvett advised that Canadi*n would need to rely on the data and information to be provided by AMR for decision-making purposes. He testified that the information might not be compatible with Canadi*n's needs or that it might be incomplete or not fairly presented. The clear implication was that control of Canadi*n might accrue to AMR.
Several witnesses, including Mr. Daniel M. Kasper, Vice-President, Corporate Director and Head of the Transportation Practice of Harbridge House, Inc., testified that outsourcing of these types of services is not unusual in the airline industry or in other industries. He testified that outsourcing is becoming more and more prevalent to achieve economies of scale and thereby improve profitability. The purchaser can buy access to sophisticated systems that it could not afford to develop itself. These systems can decrease airline operating costs and increase revenues. The Agency was also advised that it can be desirable to contract with a single source for a number of services since information gathered for one purpose can be used for many purposes, thereby improving efficiencies.
Testimony was given that it is a prime objective of AMR and related companies to provide integrated outsourcing services to air carriers worldwide, including those that compete with American Airlines. AMR intends to use the Canadi*n outsourcing agreement as a model of what can be achieved as more work is solicited.
Section 6.1 of the Services Agreement discloses that the Agreement would be of 20 years duration with the potential for five-year extension periods beyond that date. Both Mr. Jenkins and Mr. Carty testified that the service fees to be charged are based on AMR costs plus a percentage of costs for profits. Paragraph 6.4(e) of the Services Agreement discloses that Canadi*n, upon not less than 180 days prior written notice, can terminate the agreement without cause if, among other matters, Canadi*n pays AMR all unrecovered start-up costs, all reduction of capacity costs resulting from the loss of the contract and the net present value of anticipated future profits AMR would have earned during the remaining life of the contract. Additionally, Canadi*n or PWA would be required to purchase Aurora's shares in Canadi*n.
The Agency has carefully examined all the provisions contained in the Services Agreement and related documents, including the Pricing and Yield Management and Capacity Planning provisions, to determine what impact the agreement would have on Canadi*n in terms of influence and control.
The Agency finds that pricing and yield management decisions would, in large part, remain with the Canadi*n managers based in Canada. It is conceivable that the American Airlines employees, in some cases, would need to make certain decisions and have some discretion concerning Canadi*n's pricing and yield management.
Such discretion and functional decision-making power on the part of the American Airlines employees, however, would be far removed from the ability to control the corporate entity, Canadi*n. Additionally, the Agency finds that AMR would not gain control of Canadi*n on the basis that it would be the sole source provider of data and information which the Canadian air carrier would use to make operational decisions. Canadi*n's management is capable of noticing and taking corrective action should AMR supply incomplete or unsatisfactory information.
Mr. Carty testified that the proposed outsourcing agreement is longer in duration than many. He stated that AMR originally proposed a 15-year term and that it was Canadi*n which requested that it be for 20 years. Mr. Kasper expressed little concern about the length of the Services Agreement and stated that he saw little difference between a 15-year agreement and a 20-year agreement. Outsourcing agreements tend to be of long-term duration given the very large capital costs and resource commitments made by both parties. The Agency agrees with Mr. Kasper on this subject and finds that the 20-year term is not unusual given the scope and size of the services to be outsourced. The Agency concludes that the 20-year length of the agreement would not result in control accruing to AMR.
In respect of the pricing mechanism for the services to be provided, Mr. Kasper testified that a cost plus a percentage of costs for profit pricing mechanism is not unusual for an agreement of 20-year duration. The Agency shares this view and concludes that such a mechanism may be one of the only ways to arrive at an equitable pricing scheme for such long periods of time.
The Agency has carefully examined the provisions contained in the Services Agreement which would allow Canadi*n to terminate the Agreement without cause during its 20-year life. Mr. Carty, in his testimony, acknowledged that in the early years, the termination provisions are onerous. Mr. Kasper referred to the termination provisions as a liquidated damages clause and expressed the view that such provisions are relatively common in the United States in agreements of this type. The Agency concludes that the termination provisions would be so costly to comply with that it is probable that Canadi*n could not or would not invoke the provisions during the life of the contract. However, the Agency finds that such provisions are not unusual for a contract of this type. The Agency concludes that these provisions would not result in control accruing to AMR.
Paragraph 2.4(b) of the Services Agreement states that if Canadi*n wishes to seek additional services from a third party vendor, it is required to give AMR the opportunity to bid on the provision of the services. This provision would not obligate Canadi*n to give any additional outsourcing work to AMR and the Agency finds that the provision has no control in fact implications.
In summary, the Agency finds nothing unusual about the pricing, term or cancellation provisions contained in the Services Agreement which are standard to the outsourcing industry. The Agency finds that it is not unusual that an air carrier is the provider of airline outsourcing services. Canadi*n is in financial difficulty and the air carrier has the right, and some would argue the obligation, to minimize losses and ultimately improve profitability wherever possible.
There is no doubt that an outsourcing agreement of this type would have a long-term influence on Canadi*n. That is what is intended. It is clear that the outsourcing proposal would result in Canadi*n becoming to some extent dependent on AMR. It could not be otherwise. Such is the nature of outsourcing and the dependency is a question of degree irrespective of whether the provider is an air carrier or not. When examining influence and dependency, it must be remembered that Canadi*n appears to be paying market value prices for the services, and that AMR is obligated to provide the services to the best of its ability pursuant to a detailed and comprehensive contract.
The Agency concludes that under this proposed agreement, the AMR influence and Canadi*n dependency is not of sufficient magnitude so as to result in Canadi*n falling under the control of AMR. Accordingly, the Agency concludes that the services to be provided under the Services Agreement, including the Pricing and Yield Management and Capacity Planning services, would not result in control of Canadi*n transferring to AMR.
The Agency has examined the motives of AMR in pursuing the various transactions with PWA and Canadi*n which form part of this proposed acquisition. The Agency has also examined the other proposed arrangements relating to Canadi*n, as well as the financial strength and size of AMR and PWA since these matters could have a bearing on who would ultimately control Canadi*n.
Testimony was given at the public hearing that the primary AMR motive was to enter into an outsourcing services agreement with Canadi*n. It was stated that Aurora entered into the equity investment at the insistence of Canadi*n and because the investment is necessary to ensure the survival of the Canadian air carrier. The Agency concludes that the primary AMR motive is to enter into the Services Agreement. This is in keeping with AMR's corporate strategy and its wish to use the agreement as a model for promotional purposes with other airlines. It would make little sense for AMR to enter into such a complex outsourcing agreement solely to gain control of Canadi*n.
The Agency has reviewed detailed comparative financial and operational statistics of AMR and PWA. The difference, in terms of size and financial strength, between the two groups of companies is substantial. AMR is approximately six times the size of PWA in terms of revenues earned for the year 1992. AMR is a financially strong and powerful corporation whereas PWA is in financial difficulty.
The various proposed relationships between these two groups of companies are defined clearly in several detailed agreements that are to be entered into. The Agency concludes that it is these agreements which would primarily determine the relationship that would exist between the two groups of companies and ultimately the influence that may be exerted by AMR over Canadi*n. A larger and financially strong company would not necessarily gain control of a smaller and weak company merely because of a business or equity alliance relationship.
In all previous Canadian ownership reviews and enquiries, the Agency has not only looked at individual arrangements between the shareholders and the air carrier to determine where control in fact lies but has also examined all arrangements taken together to make the determination. Individual arrangements between the minority shareholder and the airline can each result in the minority shareholder exerting a degree of influence over the company. Such influence, considered on an individual arrangement basis, may not be determining and may not result in the minority shareholder being able to exert control over the airline. All such influence taken together, however, may result in the minority shareholder being able to exert a degree of influence which translates into control.
After careful consideration, and having examined all of the Canadian ownership and control in fact evidence, both individually and collectively, the Agency concludes that, if the proposed Aurora acquisition with all the identified related transactions were consummated and the reorganization of Canadi*n proceeds as proposed, Canadi*n would continue to be controlled in fact by PWA. Additionally, 75 per cent of Canadi*n's voting interests would continue to be owned and controlled by PWA. Accordingly, the Agency concludes that Canadi*n, and its family of affiliated feeder air carriers would remain Canadian as defined in subsection 67(1) of the NTA, 1987, if the proposed Aurora acquisition, the related agreements and the Canadi*n reorganization proceed as proposed.
Competition
The national transportation policy, as specified in section 3 of the NTA, 1987, asserts, in part, that a safe, economic, efficient and adequate network of viable and effective transportation services is essential to serve the needs of shippers and travellers and to maintain the economic well-being and growth of Canada and its regions. The policy goes on to state that these objectives are most likely to be achieved when all carriers are able to compete, both within and among the various modes of transportation, under a number of conditions. Of particular relevance to competition is paragraph 3(1)(b) which states that "...competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services,...".
The national transportation policy is specific and clear on the relevance and importance of competition. The Agency was guided by this policy as it examined the proposed Aurora acquisition and other related transactions in the context of competition.
During the public hearing, reference was made to the Agency 1991 Annual Review made pursuant to section 267 of the NTA, 1987. In reaching its conclusions on competition and other matters, the Agency has given due weight to findings contained in that review. The Agency adds that it has also considered all the new evidence brought forward in these proceedings.
Numerous submissions were provided to the Agency during these proceedings, including testimony given at the public hearing, on the impact that the proposed Aurora acquisition and other related transactions would have on competition.
Mr. Hollis L. Harris, President, Chief Executive Officer and Chairman of the Board of Directors of Air Canada, gave extensive testimony at the public hearing. Mr. Harris testified that the Canadian airline industry is in trouble as evidenced by both Air Canada and Canadi*n losing money. He advised that the market is not improving and that the proposed transactions between AMR and Canadi*n would not solve outstanding industry problems such as excess capacity and the fact that Canada can only sustain one international airline.
Mr. Harris stated that Air Canada would be severely damaged if the AMR and Canadi*n proposed transactions were to go ahead. The Agency was advised that Air Canada fears that Canadi*n, with the help of AMR, would mount a strong and aggressive marketing policy, initiate fare wars and discount seat sales and attempt to drive Air Canada out of the marketplace. If the transactions were to be consummated, Mr. Harris indicated that Air Canada would possibly also need to enter into similar arrangements with a foreign air carrier. Mr. Harris made reference to the fact that Air Canada would have to further reduce employment, consider outsourcing functions and institute other severe measures such as the closure of pilot bases. Mr. Harris suggested that Canadi*n and Air Canada pursue a merger as a viable alternative to the AMR and Canadi*n proposals.
Dr. Jerry A. Hausman, Professor at the Department of Economics at the Massachusetts Institute of Technology, testified that he was of the view that Canada cannot support two national network carriers. Dr. Hausman indicated that the Canadian airline industry is suffering from a serious excess capacity problem which has resulted in fare wars to the detriment of both Air Canada and Canadi*n. With little growth in demand for air services foreseen in Canada over the next few years and continued excess capacity, Dr. Hausman concluded that if the proposed acquisition were consummated, Air Canada and Canadi*n would continue to incur losses. He projected that within a couple of years, one of the airlines would likely fail, or alternatively, Air Canada would also have to form an alliance with a United States air carrier similar to the proposed AMR and Canadi*n alliance.
Mr. Robert L. Fay, a transportation analyst at Deacon Barclays de Zoete Wedd, testified as an Air Canada witness that only one network carrier could survive in Canada and that an industry restructuring was necessary. He expressed the opinion that the proposed acquisition would negatively affect the transborder revenue of Air Canada, increase its cost of capital in financial markets and reduce its attractiveness to foreign alliance partners. Mr. Fay concluded that Air Canada may need to seek a similar arrangement should the AMR and Canadi*n alliance go ahead.
Another Air Canada witness, Mr. Harold Shenton, Vice-President - Studies and Analysis, Avmark, Inc., compared niche markets in Canada with those in the United States and commented on the success of Southwest Airlines and other smaller United States air carriers. He expressed the view that over a period of time there would arise a network of regional carriers and charter carriers combining to offer scheduled services should Canadi*n fail.
Several witnesses at the public hearing argued that Canada has a sufficiently large domestic airline market to support two network carriers. These witnesses include Dr. William T. Stanbury and Dr. Michael W. Tretheway, both professors at the University of British Columbia, and Mr. Tony Hine, a Vice-President and Director of Scotia McLeod Inc. Dr. Tretheway expressed the view that Canada can support domestic duopoly air services. He advised that Canada would eventually return to a duopoly should Canadi*n fail. Dr. Tretheway and Mr. Hine both expressed the view that the proposed AMR and Canadi*n transactions would result in a reduction in capacity. The view was expressed that the transactions would improve competition by allowing Canadi*n to reduce costs, increase revenue and participate in alliances with other air carriers. Dr. Tretheway expressed the view that Air Canada would be quite capable of responding from a competitive standpoint should the transactions be consummated. Dr. Stanbury, Dr. Tretheway and Mr. Hine indicated that competition over a broad network of points is possible on a sustained basis and that such competition is preferable in terms of industry efficiency and consumer benefits.
Certain parties at the public hearing argued that the present duopoly does not offer adequate competition in respect of domestic air services in Canada. Mr. Michael Phelan, counsel for Gemini, expressed the view that the current duopoly does not allow other air carriers to offer effective competition and that, in many communities, Air Canada and Canadi*n provide the same services, at the same time, and at the same fare.
Mr. Philippe Sureau, Executive Vice-President of Marketing and Sales of Air Transat A.T. Inc. (hereinafter Air Transat), testified that the current duopoly is restricting competition in Canada which, in turn, has resulted in high domestic fares. He indicated that Air Transat would consider expanding its services should Canadi*n fail. However, this expansion would not extend to all of the routes presently benefitting from competition between Air Canada and Canadi*n and their feeder air carriers. Mr. Sureau indicated that Air Transat would contemplate competing with Air Canada on no more than 10 to 12 of the largest city pairs in Canada. Mr. Sureau advised that Air Canada would be able to control the level of competition in a market which it dominates.
Mr. George Curley, a former President and Chief Operating Officer of Wardair Inc., testified on behalf of the Director of Investigation and Research under the Competition Act, R.S.C., 1985, c. C-34 as to the difficulty encountered by Wardair Inc. in attempting to provide scheduled services in competition with Air Canada and Canadi*n. He stressed that the existence of a duopoly makes it difficult for a new carrier to enter the market. Mr. Curley also disclosed that he disagreed with the proposition that there should only be one national airline in Canada.
The Agency heard much evidence on the financial condition of PWA and its subsidiary companies including Canadi*n. It is clear that PWA is in financial difficulty, having had to suspend payments to most of its major creditors and having incurred a loss of $543,000,000 in 1992 (this includes restructuring costs totalling $333,000,000). Its equity base has eroded to $25,000,000 as of December 31, 1992, and it appears likely that substantial losses will continue to be incurred unless a major reorganization takes place.
Canadi*n attempted to effect a merger with Air Canada in the latter part of 1992. When the proposed merger failed to materialize, PWA and Canadi*n commenced negotiations with employees, creditors and stakeholders and with AMR in order to complete a comprehensive restructuring, and to form a long-term alliance with a global air carrier, American Airlines.
Mr. Jenkins and others have testified that if the proposed AMR transactions do not proceed, it is likely that Canadi*n and its feeder air carriers will fail. Mr. Harris indicated that Canadi*n does not need to fail but could enter into a merger or other transactions with Air Canada.
The Agency will not comment on potential transactions with Air Canada since such transactions have not been entered into nor are they before the Agency for review. The Agency, however, has carefully examined all the evidence available in the present proceedings regarding the financial health of Canadi*n and its relationship with creditors. The Agency concludes that it is probable that Canadi*n will fail if the proposed Aurora acquisition and other related transactions are not consummated. The Agency has examined the financial position of the subsidiary air carriers that operate as feeders for Canadi*n. Their financial, operational and marketing relationship with Canadi*n has also been examined. The competitive environment in which they operate has been given due weight. The Agency is of the view that if Canadi*n were to fail, the majority of its subsidiary feeder air carriers would also likely fail.
Under the proposed reorganization of Canadi*n and as described elsewhere in this Decision, Canadi*n proposes to seek comprehensive agreements with its employees, creditors and stakeholders. The airline also proposes to obtain an equity investment from Aurora, and enter into a comprehensive 20-year outsourcing agreement with AMR. Marketing agreements with American Airlines have already been entered into. As disclosed by Mr. Grayston, these proposals will result in substantial and critical cost savings and revenue increases over a broad spectrum of operations. It was reported that areas of improvement include additional transborder revenues, improved efficiencies as reflected in increased revenues and lower costs from outsourcing services and reduced interest and wage costs. Mr. Jenkins indicated that if the proposed reorganization of Canadi*n proceeds, Canadi*n would become marginally profitable in 1994 and profitable in 1995.
The Agency has carefully examined the proposed reorganization of Canadi*n from a cost saving, revenue generating and profitability perspective. Without minimizing the present problems facing the Canadian aviation industry or the problems facing Canadi*n, the Agency is of the view that there is a strong possibility that Canadi*n will be able to sustain operations, overcome present adversity and return to profitability should the reorganization proceed.
Several witnesses opposed to the proposed AMR and Canadi*n arrangements pointed out that they do not resolve the major problems prevalent in the Canadian airline industry. Mr. Harris indicated, for example, that the transactions do not solve the problem of overcapacity in the Canadian marketplace. The Agency is of the view that the proposed arrangements between Canadi*n and AMR cannot and should not be expected to solve all the problems in the Canadian aviation industry. No one transaction or set of transactions can. The arrangements are intended to save Canadi*n and its subsidiary companies from collapse and return them to profitability. This, in itself, is a worthwhile objective. The Agency examined the proposed Aurora acquisition and other related transactions from this perspective when determining their impact on competition and whether or not they are against the public interest.
The Agency has carefully examined the impact that the proposed AMR and Canadi*n transactions would have on Air Canada since this is also relevant and important from a competition perspective. The Agency does not agree that Air Canada will be damaged by the proposed AMR and Canadi*n transactions. Air Canada needs to solve its own problems and appears to be attempting to do so. Air Canada has recently entered into an equity alliance with Continental Airlines, Inc. Mr. Harris acknowledged, in his testimony, that Air Canada is examining the possibility of sharing systems and technologies with the United States air carrier. It was disclosed that Air Canada also intends to outsource services if cost savings can be achieved. Mr. Harris indicated that Air Canada is doing all that it can to reduce costs and return to profitability; however, further job losses were projected. The Agency was advised by Mr. Harris that the 1993 Air Canada business plan projects a small operating profit and a net loss of $200,000,000.
Canadi*n and Air Canada are initiating major revenue producing and cost saving actions in an attempt to return to profitability. In keeping with worldwide trends in the industry, major alliances have been or are proposed to be entered into by both carriers. These initiatives should generate additional revenues and reduce costs by achieving greater economies of scale. Such actions are desirable and necessary if the Canadian aviation industry is to return to financial health and profitability and if competition is to be maintained. The Agency concludes that Canadi*n has every right to take such action as it deems necessary to survive and to return to profitability provided that such action does not violate existing policies and legislation. That is the nature of a competitive marketplace and Air Canada has the same right. Under this scenario, competition and market forces will determine the future of the Canadian aviation industry. This is in keeping with the objectives of the national transportation policy specified in section 3 of the NTA, 1987.
In taking such actions, air carriers such as Canadi*n and Air Canada need to be Canadian as defined in subsection 67(1) of the NTA, 1987. This requirement must be complied with on an ongoing basis and equity and other alliances can only be entered into with foreign air carriers to the extent that the ownership provisions are not violated. In this Decision, the Agency has concluded that Canadi*n will remain Canadian if the proposed Aurora acquisition and other related transactions are consummated. Should a foreign air carrier wish to purchase an interest in Air Canada and form an equity alliance with that air carrier, the Agency would also ensure continued Canadian ownership compliance.
The Agency has carefully examined the issue of what competition would arise, in the Canadian domestic airline market, should Canadi*n disappear from the marketplace. As previously stated, the Agency is of the view that it is likely that the majority of Canadi*n's subsidiary feeder air carriers would not survive. Under this scenario, Air Canada and its feeder air carriers would be the only remaining broad-based network air carrier in Canada.
New competition would no doubt arise. New entrants, or possibly some of Canadi*n's feeder air carriers, if they survived, could provide a certain degree of regional and local air service competition to Air Canada and its feeders. Such new competition might expand over time. New and existing Canadian charter air carriers may attempt to initiate competitive services. Such services, as reflected in the evidence of Mr. Sureau, would most likely be restricted to major markets and major city pairs in Canada. These air carriers may ultimately form domestic alliances and offer new network competition to Air Canada. Unless controlled and restricted, however, Air Canada would likely have the ability to itself control, restrict and ultimately eliminate this competition, if it so desired. The Agency is of the view that any new competition would not be broad-based. A second integrated Canada-wide airline network would not be established in the near future.
The Agency concludes that the demise of Canadi*n would most likely result in the disappearance of broad-based network competition in Canada for some time. The Agency is of the view that many of the smaller and more isolated communities and regions in Canada would lose presently available competitive air services that are being provided by Canadi*n, Air Canada and their feeders.
Evidence was given at the public hearing that Canada cannot sustain two domestic network air carriers. Similarly, evidence was given that Canada can only sustain one international air carrier. Others disagreed. These matters must be resolved by market forces coupled with existing and future government policies and not under the narrow confines of proceedings under Part VII of the NTA, 1987. The Agency does not propose to rule or comment on these matters since it has concluded that such is not necessary to make a public interest ruling on the proposed acquisition and other related transactions under review. The Agency is solely required to determine if the proposed acquisition and other related transactions are consistent with the national transportation policy and whether they are against or not against the public interest.
Evidence was presented at the hearing that Air Canada and Canadi*n, operating domestically in Canada in large part as a duopoly, do not offer effective or optimum competition. It was argued that the domestic duopoly is preventing competition thus resulting in higher fares. The Agency acknowledges that a duopoly may not always provide optimum competition. Market and competitive forces, however, have determined that this is, in fact, the form of competition in Canada at the present time. Many representatives of communities and regions of Canada appeared at the public hearing and argued that this type of competition between the two network air carriers was of major importance in terms of their economic well-being.
Mr. Fay expressed concern that Air Canada could be adversely affected on transborder routes between Canada and the United States should the AMR and Canadi*n transactions be consummated. The Agency finds that the proposed transactions would not put Air Canada at an unfair competitive disadvantage in transborder markets. Under the current Air Services Agreements between Canada and the United States, Air Canada has access to many more United States cities than does Canadi*n. Furthermore, Air Canada presently has an interlining agreement with United Airlines, Inc. Perhaps more importantly, Air Canada has recently declared its intention to feed traffic into Continental Airlines, Inc.'s system. Such is the nature of alliances and marketing agreements. They stimulate and generate traffic and increase revenues and profitability to the ultimate benefit of users.
The Agency finds that the proposed Aurora acquisition and other related transactions will result in the creation of greater efficiencies and financial improvements for Canadi*n. Its ability to survive will be substantially enhanced. The survival of Canadi*n will be of major benefit to competition in Canada. The Agency finds that this is in keeping with the national transportation policy which states that competition and market forces should be the prime agents in providing effective and viable transportation services.
For all of the aforementioned reasons, the Agency concludes that the proposed Aurora acquisition and other related transactions are not against the public interest from a competition standpoint.
Impact on International Air Services
In its objection dated February 16, 1993, counsel for AC MEC stated that through the proposed transactions, a foreign air carrier would gain control of the international route authorities of Canada which would be to the detriment of the airline industry and related aviation activity in Canada. At the public hearing, Mr. Michel Cyr, President and Directing General Chairman of the IAMAW, indicated that American Airlines has a relatively weak presence in the Pacific Rim. He advised that one of the reasons for the proposed acquisition is to strengthen the routes of American Airlines and for it to gain access to the Pacific Rim. Mr. Cyr added that it would not be in the public interest to allow American Airlines access to the Pacific Rim through routes that belong to the Government of Canada and to the Canadian public. Other objectors have also raised similar concerns regarding the control of Canadi*n's international routes.
Under current Canadian legislation and regulations issued pursuant thereto, it is not possible for American Airlines to gain control of the international and domestic routes of Canadi*n. Provisions of the NTA, 1987 clearly state that licences are not transferable. Furthermore, indirect operations through code-sharing and blocked space arrangements are regulated by the requirements set out in the Air Transportation Regulations, SOR/88-58. It is clear that no air carrier may hold itself out as operating, even indirectly, a service for which it is not licensed.
Mr. James E. Foran, counsel for Air Canada, in closing argument, concluded that the Agency ruling on the proposed AMR and Canadi*n transactions will likely determine whether or not Canada is able to take its place as a significant participant in the development of the emerging global alliances throughout the world. It was Air Canada's view that to be a significant participant on the international scene, Canada had to be represented by one carrier internationally.
The responsibility of the Agency is to focus its attention on the proposed acquisitions presently under review. The Agency will not speculate on other specific mergers and alliances that are not proposed or have not come to fruition. The Agency adds, however, that it is of the view that having Air Canada and Canadi*n form separate alliances with different global partners is not necessarily contrary to the national transportation policy since such alliances could encourage greater domestic and international competition.
The Agency concludes that the proposed Aurora acquisition and other related transactions are not against the public interest when examined from an international air services perspective.
Impact on Gemini
Section 9.1 of the Stock Purchase Agreement describes as an event of termination under the agreement the failure of PWA to terminate the Gemini hosting contract or to dissolve The Gemini Group Limited Partnership.
Part of the case put to the Agency by counsel for Gemini was that the existence of this provision in the Stock Purchase Agreement and, ultimately, the failure of the Agency to disallow the proposed acquisition by Aurora, would be highly prejudicial to Gemini. He argued that the likely result of the Agency not disallowing the proposed acquisition, would be the failure of Gemini. This failure, he then argued, would be contrary to the public interest in that at least 700 skilled jobs at Gemini would be lost. Arguments were also presented to the effect that the proposed AMR and Canadi*n transactions would stifle regional economic development in terms of telecommunications and information services business and it would neither foster competition in the Canadian Computer Reservation Systems (hereinafter CRS) business, nor would it encourage the natural growth and development of the airline business. Counsel for Gemini also argued that the proposed AMR and Canadi*n transactions should not be approved by the Agency because Aurora has imposed upon Canadi*n the condition of extricating itself from the Gemini hosting contract. He claimed that transactions with conditions requiring the cancellation of valid contracts are not, by definition in the public interest.
Mr. Paul W. Nelson, President and Chief Executive Officer of Gemini, testified that Gemini's revenues are derived from its hosting operations and consist of hosting service fees paid by its partners and other airlines pursuant to a hosting contract. As well, revenues are derived from its CRS operations represented largely by booking fees from airlines and subscriber fees from travel agents. Booking fees account for $60,000,000 to $61,000,000 of revenue per year and $9,000,000 to $10,000,000 comes from subscriber fees for the use of telecommunication lines and terminals. He indicated that Gemini receives approximately $80,000,000 per year in hosting revenues of which a little less than $25,000,000 is attributable to Canadi*n.
Mr. Nelson specified several results that would occur in the event that the hosting contract between Canadi*n and Gemini is terminated as a condition of the proposed Aurora transactions. He stated that Gemini would lose hosting revenues, lose a considerable amount of CRS revenues from travel agencies, lose its functionality and lose its reputation as a stable company in the marketplace.
Based upon the evidence in these proceedings, the Agency cannot conclude that the implementation of the Aurora proposal will cause the failure of Gemini. Certainly, the operations of Gemini will be impacted, but the Agency cannot conclude that this impact will be so serious as to effectively spell the end of Gemini. Without such a finding by the Agency, it cannot go on to next conclude that on this ground, the Aurora acquisition is against the public interest.
The Agency is also mindful of the April 22, 1993 decision of the Competition Tribunal and the findings of fact therein, relating to Gemini in the proceedings brought by the Director of Investigation and Research under section 106 of the Competition Act to vary the Consent Order of the Tribunal dated July 7, 1989. The Agency is also aware that this decision is presently under appeal.
In light of the evidence before the Agency in these proceedings on the impact of the proposed AMR and Canadi*n transactions on Gemini, and in light of the on-going appeal of the Competition Tribunal decision, the Agency does not conclude that the Aurora acquisition is against the public interest because of its likely impact on Gemini.
Regarding the argument raised by counsel for Gemini on the termination provision under the Stock Purchase Agreement relating to Gemini, the Agency finds that such matters of private contract and provisions for termination of private contracts are best left to the parties themselves and whatever remedies or recourse they may seek.
Employment Impacts
In evidence and testimony given to the Agency during these proceedings, Canadi*n officials acknowledged that the Services Agreement to be entered into between Canadi*n and AMR would result in the direct loss of 1,271 jobs. Mr. Carty testified that the AMR workforce would be increased by approximately 500 persons to perform various functions arising from the services to be performed under the Agreement for Canadi*n.
Several parties appearing at the public hearing, including the Canadian Auto Workers Union, CAW - Canada and the IAMAW, expressed strong concerns about the loss of permanent jobs arising from the Services Agreement. Of particular concern was the fact that Canadian jobs would be transferred outside of Canada.
The Agency is aware that Canadian jobs would be lost to the United States should the Services Agreement proceed. Every job is very important not only to the individual employee but also to the community where the job is located. The Agency adds that this is true irrespective of whether one is referring to a Canadi*n job, an Air Canada job or a Gemini job. The Agency, however, must examine the job loss issue in the context of why Canadi*n feels that it is in its best interest to enter into the Services Agreement and why the majority of Canadi*n employees support the proposal.
The Agency has already noted that it is a trend in the airline and other industries to outsource services to achieve efficiencies, reduce costs and increase revenues. The company providing the services may be able to do so more efficiently given its expertise and given that greater economies of scale may be achieved.
Canadi*n is in financial difficulty and the company must effect a comprehensive restructuring or reorganization to survive. After attempting to effect an alliance with Air Canada, the company now proposes to enter into a strategic and equity alliance with AMR and its subsidiary companies. This restructuring is multifaceted but the proposed outsourcing of services is of critical importance. Given the financial condition of Canadi*n and anticipated future losses, the company has no alternative but to drastically reduce costs and generate new revenues. The company intends to do this, in part, by outsourcing services to AMR. It is anticipated that the Services Agreement will result in savings of $55,000,000 to $80,000,000 annually.
Canadi*n employees have been asked to agree to wage freezes. Jobs will be lost if the reorganization is to succeed. These are hard facts which Canadi*n employees have accepted. The Agency notes that the alternatives are worse from a job loss perspective. The Agency concludes that if the proposed Aurora acquisition and other related transactions are not consummated, Canadi*n will likely fail. A collapse of Canadi*n would have a devastating effect on its employees and very negative consequences for numerous regions of Canada.
With the demise of Canadi*n alone, approximately 15,000 jobs would be lost. Certain employees would be able to find airline employment elsewhere given that other airlines would expand to fill at least part of the vacuum created by the collapse. However, the negative impact on the Canadi*n employees, in terms of job losses and dislocations, cannot be underestimated. Mr. Jenkins of Canadi*n and Mr. Robert Brawn, Co-Chairman of the Calgary Economic Development Authority, presented testimony on the indirect job losses emanating from the collapse of Canadi*n. The multiplier effect of the failure of Canadi*n would result in as many indirect job losses in airline related industries and in other sectors of the economy and regions of Canada than the direct job losses caused by the demise of Canadi*n. The Agency concludes that the negative employment consequences of a Canadi*n failure would be far worse than the projected direct job losses which would be caused by the proposed outsourcing agreement.
Certain parties appearing at the public hearing expressed the view that over time many more jobs would be lost to the United States if the arrangements with AMR are allowed to proceed.
Mr. Cyr of the IAMAW, persons representing the Air Canada Employees Political Action Committee and others who appeared at the public hearing expressed the view that over time the outsourcing of services by Canadi*n to AMR would significantly expand with the result that further jobs would be lost in Canada. Reference was made to aircraft maintenance and employee training as primary areas where jobs could be lost.
Mr. Harris testified that should the proposed AMR and Canadi*n transactions proceed, Air Canada may also need to enter into an alliance with a United States air carrier similar to the proposed Canadi*n and American Airlines alliance. Additionally, he indicated that Air Canada would also need to outsource substantial additional services in order to remain competitive and survive. Mr. Harris anticipates that such actions would result in the loss of many Air Canada jobs.
In a written submission to the Agency, Canadi*n advised that it does not now propose to enter into further outsourcing arrangements with AMR over and above those detailed in the Services Agreement.
The Agency understands the concerns raised by the employees of Air Canada. These employees are no less dedicated than the employees of Canadi*n and they too have legitimate employment concerns.
The Agency acknowledges that the possibility exists that further Canadi*n functions could be outsourced to AMR and that this could result in the loss of additional jobs. The Services Agreement specifically contemplates the possibility of further outsourcing. The Agency finds that market forces should determine whether or not additional Canadi*n functions would be outsourced to AMR. If Canadi*n can itself perform functions as efficiently and as cost-effectively as the providers of outsourcing services, it is unlikely that further outsourcing will arise. If that is not the case, the real possibility exists that further outsourcing will occur. This market principle not only applies to Canadi*n but to all other air carriers and enterprises that wish to remain competitive in the marketplace. It is for this reason that airlines themselves must become as efficient as possible.
The Agency concludes that the proposed Aurora acquisition and other related transactions are not against the public interest simply because the possibility exists that Canadi*n may outsource further functions to AMR. Such possibilities always exist. The Agency adds, however, that it proposes to closely monitor the Canadian status of Canadi*n if the transactions with AMR and Aurora are consummated. Further outsourcing would not be allowed should such result in the transfer of control of Canadi*n to AMR.
Air Canada is also incurring financial losses which must be stemmed. Mr. Harris indicated that Air Canada would continue to take all necessary actions to reduce costs, increase revenues and return the company to profitability. Unfortunately, such actions will likely result in the loss of employment for Air Canada employees.
Mr. Harris clearly indicated that Air Canada would also outsource functions if such action resulted in greater efficiencies and cost savings. Air Canada has already entered into a comprehensive alliance with Continental Airlines, Inc. The Agency notes that Air Canada may enter into further alliances and outsource functions if it is in its interest to do so. This is irrespective of whether the Canadi*n and American Airlines alliance proceeds or not. Air Canada has every right to take such action provided that Canadian ownership and control legislation continues to be respected. Canadi*n has the same right. The Agency concludes that outsourcing is a necessary competitive response by air carriers to maximize efficiency and lower costs and that job dislocations resulting from outsourcing are a regrettable but necessary by-product of a competitive marketplace.
Ms. Barlow, of the Council of Canadians, Mr. Nelson of Gemini, Professor Hausman and others, testified at the public hearing that Canada could lose high-technology jobs, due, in part, to the potential demise of Gemini, should the proposed Canadi*n and AMR transactions proceed. The Agency was advised by certain participants that these jobs, once gone, would never return to Canada. It was argued that if such jobs remained in Canada, employment opportunities would increase as economic conditions improved.
Mr. Crozier, Counsel for the Alliance of Canadian Travel Associations, suggested that a significant number of the jobs now performed by Gemini would remain in Canada, irrespective of the Agency decision.
As discussed elsewhere in this Decision, from the evidence in these proceedings, the Agency cannot conclude that the implementation of the proposed Aurora acquisition and other related transactions would cause the failure of Gemini. High-technology jobs could be lost at Canadi*n as a result of the proposed transactions. These negative consequences must again be compared with what would happen if Canadi*n failed. The Agency concludes that a Canadi*n failure would negatively affect more employees holding high-technology jobs.
Mr. Harris noted that both Air Canada and Canadi*n have already substantially reduced their employment levels in an effort to improve their financial positions. He indicated that more reductions are contemplated. Mr. Harris expressed the view that there would be fewer job losses arising from a merger between Air Canada and Canadi*n than from the proposed transactions between Canadi*n and AMR and the events that would flow from that restructuring.
The Agency reiterates that a proposed Air Canada and Canadi*n merger transaction has not been filed with the Agency and is not subject to a Part VII review. The Agency is charged with determining whether the proposed Aurora acquisition of an interest in Canadi*n is or is not against the public interest. The Agency concludes that Canadi*n is likely to fail if the proposed Aurora acquisition and other related transactions under review are not consummated, with very negative consequences for employees. Only 1,271 job losses can be directly attributed to the transactions before the Agency.
It is imperative that the two major airlines continue with their efforts to rationalize and return to profitability. Costs must be further reduced and greater efficiencies achieved through measures such as outsourcing. Such action will unfortunately result in further job losses.
Based on the foregoing, the Agency concludes that from a job impact perspective, the proposed Aurora acquisition and other related transactions are not against the public interest.
Regional Economic Impacts
One of the stated purposes of the national transportation policy is to "...maintain the economic well-being and growth of Canada and its regions...". The Agency is of the view that the potential impact of the proposed Canadi*n and AMR transactions on the regions of Canada is a matter of great importance which must be carefully examined in the context of the national transportation policy as stated in the NTA, 1987.
A great deal of testimony was given at the public hearing and numerous submissions were filed with the Agency on this subject. The Agency has carefully reviewed all the evidence.
Testimony was given at the public hearing by certain participants to the effect that the economies of specific regions of the country would be adversely affected if the proposals before the Agency were to proceed. It was argued by several participants that the proposed transactions would prompt Air Canada to seek a similar foreign alliance resulting in increased outsourcing of services and the loss of Canadian jobs.
Participants opposed to the proposed Canadi*n and AMR transactions, including the Ministère des Transports of the Province of Quebec, claimed that these transactions would result in a rationalization of the routes of Canadi*n and its feeder carriers, mostly to the detriment of Canadians residing in small communities. Officials of the Ministère des Transports of the Province of Quebec argued that Canadi*n would fall under the control of AMR and that as a result of an airline rationalization, smaller communities would suffer a reduction or disappearance of service.
Witnesses representing the Montréal region including the Urban Community of Montréal, expressed concerns about the consequences that approval of the proposed Canadi*n and AMR transactions would have on the viability and the economic development of the Montréal region. Professor Fernand Martin, a Professor of Economics at the University of Montréal, testified that Air Canada is very important to employment in the Montréal region. He advised that if Air Canada were forced to form an alliance with a large United States air carrier in response to the proposed alliance between Canadi*n and American Airlines, 3,463 Air Canada jobs would migrate from the Montréal region and other regions of the province of Quebec to Toronto or to the United States. Professor Martin advised that the major losses would occur in management and maintenance positions. Additionally, the witnesses representing the Montréal region expressed the view that the proposed transactions would be prejudicial to the development of a viable aerospace industry located in the Montréal area.
Air Canada, in a written submission to the Agency, argued that the proposed Canadi*n and AMR transactions would result in reduced activity at Canadian airports thereby adversely affecting economic activity at those airports. AC MEC, in a written submission, expressed the view that the proposed transactions would result in the under-utilization of Canada's transportation infrastructure.
Several parties who made written representations or appeared at the public hearing strongly supported the proposed transactions between Canadi*n and AMR. These parties included the Municipalité régionale du comté des Îles-de-la-Madeleine; Air Atlantic Ltd.; the Department of Transportation, Government of the Northwest Territories; the Mayor of Yellowknife and President of the Northwest Territories Association of Municipalities; the Vice-President of the Corporation de développement économique de Chicoutimi; and the Mayor of Fort McMurray. Many of these parties expressed the view that a restructured Canadi*n, as proposed, would maintain the current level of services available to Canadians who reside in peripheral markets. It was stressed that this was of great importance to the communities and regions of Canada.
Witnesses such as those representing the cities of Vancouver, Richmond and Calgary, as well as those from the Province of Alberta, argued that the contribution of Canadi*n to their respective regional economies was of critical importance. Major significance was assigned to Canadi*n in terms of employment, competition, economic activity generally and service to the community.
Many of the parties who support the proposed transactions strongly maintained that the competition offered by Air Canada and Canadi*n was of central importance to their regions.
In closing argument, Mr. Low claimed that the evidence shows that 17,700 employees would lose their jobs should Canadi*n fail. With the application of the multiplier effect, an estimated total of 40,000 persons would be adversely affected by the failure. Further, Mr. Low argued that Canadi*n directly spends $2,600,000,000 in Canada per year and, again using the multiplier effect, the likely economic consequences of the failure of the company would be the loss of more than $4,000,000,000 per year to the Canadian economy.
The Agency finds that all the evidence clearly establishes the major importance of the continued survival of Canadi*n. A failure would have a negative impact on all regions of Canada. The Agency recognizes that not all job losses would be permanent if Canadi*n were to fail. Nevertheless, significant and permanent job losses would occur in many regions. Numerous regions that now have competitive air services would probably be deprived of significant airline competition for an extended period of time. The Agency finds that the failure of Canadi*n would lead to the under-utilization of Canadian airports with resulting negative economic consequences for the regions of Canada.
The Agency concludes that Canadi*n and the majority of its subsidiary feeder air carriers would likely fail if the proposed Aurora acquisition and other related transactions are not consummated. The Agency has also concluded that these companies have a strong possibility of surviving if the proposed Aurora acquisition and other related transactions under review proceed. The Agency finds, therefore, that the proposed Aurora acquisition and other related transactions are not against the interests of the regions of Canada.
The Agency cannot conclude that the implementation of the proposed Canadi*n and AMR transactions will prejudice the development of the Canadian aerospace industry. Additionally, the Agency finds that the proposed transactions would not cause economic harm to specific regions of Canada. Airline industry rationalization will need to continue and this could have a negative economic impact on such matters as employment in many regions of Canada. The Agency finds, however, that this rationalization needs to proceed regardless of whether the proposed transactions with AMR are consummated or not.
Certain parties argued that passengers flying between points in Canada could or may be forced to utilize United States hubs or interim points to go to their destination should the proposed Canadi*n and AMR arrangements proceed. The Agency concludes that this is not a major issue in terms of the proposed Aurora acquisition and other related transactions under review; it is unlikely to occur. Passengers prefer to fly non-stop if possible and going through customs clearance is not an attractive option for most passengers.
For all of these reasons, the Agency concludes that the proposed Aurora acquisition and other related transactions are not against the public interest from a regional economic impact perspective.
Accessible Transportation Services
The CCB, the Canadian Paraplegic Association (hereinafter the CPA) and the Coalition of Provincial Organizations of the Handicapped (hereinafter the COPOH) expressed concerns to the Agency that the proposed acquisition could have a negative impact on the level of service currently provided by Canadi*n to persons with disabilities.
In its written submission to the Agency dated February 15, 1993, the CCB alleged that the proposed acquisition would result in an increased number of Canadi*n's flights being routed through United States hubs and a reduction in the number of non-stop and direct flights within Canada, thereby resulting in further difficulty for its members. The CPA, in its letter to the Agency dated February 19, 1993, indicated that this could result in longer travel times and a potential increase in health problems. Concerns were also expressed by the CCB and the CPA that the proposed AMR and Canadi*n transactions could lead to a rationalization of Canadi*n's services which would result in the use of smaller commuter aircraft.
COPOH expressed concern, in its written submission to the Agency dated February 17, 1993, that the proposed transactions might create new barriers to persons with disabilities. COPOH advised the Agency that it and others have worked consistently to ensure that persons with disabilities experience equal opportunities within the transportation systems and that barriers, which prevent the full and equal use of transportation services, are eliminated. The CCB also expressed concerns at the public hearing regarding barriers to the mobility of disabled persons. On the basis that the majority of the barrier removals have been achieved by consensus and not by regulations, the CCB sought assurances that Canadi*n would continue to honour commitments in this area and work toward further enhancement and improvement in achieving barrier-free transportation.
Mr. Jenkins testified that he was of the view that Canadian transcontinental passengers would not fly via United States hubs or interim points. He indicated that passengers prefer to fly non-stop and that flying via the United States means clearing customs twice.
With respect to these issues, the national transportation policy indicates that viable and effective transportation services must be accessible to persons with disabilities to serve their transportation needs and those of others.
The Agency has considered the possible detrimental effects of the transactions in this area. The Agency concludes that the proposed Aurora acquisition and other related transactions would not create obstacles or adversely affect the transportation needs of persons with disabilities.
Safety and Health Concerns
Certain persons who appeared at the public hearing expressed concerns that the transactions between AMR and Canadi*n could create adverse safety effects. Others expressed health concerns.
Mr. Michael Cyr discussed the maintenance requirements associated with a mixture of newer and older aircraft in the fleet. He expressed the opinion that American Airlines has the capability to perform aircraft maintenance work for Canadi*n and that maintenance outsourcing is likely to occur in the foreseeable future. Mr. Cyr indicated that training standards for mechanics in the United States are generally lower than in Canada. The implication is that safety standards for Canadi*n aircraft could suffer. Mr. Cyr expressed the opinion that Canada has a responsibility to maintain the highest possible standard for aviation safety.
The Agency is extremely sensitive to safety issues in Canadian aviation. This concern is supported by the declaration in the national transportation policy to the effect that a safe network of viable and effective transportation services is in the public interest.
The Canadian aviation safety requirements are specified in the Aeronautics Act, R.S.C., 1985, c. A-2, and the provisions contained therein are administered by Transport Canada. Air carriers such as Canada Airlines and its feeders need to comply with these provisions on an ongoing basis irrespective of whether or not maintenance work on aircraft is outsourced to other air carriers located outside of Canada.
No evidence was provided to the Agency which indicates that Canadi*n proposes to outsource major aircraft maintenance work to American Airlines. Additionally, no evidence was presented which would in any way indicate that such outsourcing, if it occurred, would jeopardize aviation safety standards in Canada.
By letter dated February 10, 1993, the Canadian Cancer Society requested assurances, if Canadi*n were acquired by a United States company, the corporation would adhere to the Non-Smokers Health Regulations, SOR/90-21 as amended.
Canadi*n, as well as all other Canadian air carriers, will continue to need to comply with the legislation and regulations which regulate smoking aboard aircraft. This is irrespective of whether or not the proposed AMR and Canadi*n transactions are consummated.
The Agency concludes that the proposed Aurora acquisition and other related transactions are not against the public interest from a health and safety perspective.
DECISION
After reviewing the proposed acquisition of an interest in Canadi*n by Aurora and the proposed acquisition of an interest in Air Atlantic Ltd., Calm Air and Inter-Canadien (1991) Inc. by Canadi*n, the Agency concludes that these proposed acquisitions are not against the public interest. Consequently, the proposed acquisitions are not disallowed.
In order to satisfy itself that, upon Closing, the nature of the proposed acquisitions has not changed in any material or substantial way from that described in the evidence presently on file with the Agency, the Agency hereby orders PWA and Aurora to file all the final closing documents including final and signed agreements implementing the proposed acquisitions. If the Agency determines that the acquisitions implemented by the final agreements are materially or substantially different from the proposed acquisitions reviewed herein, the Agency may, pursuant to subsection 261(3) of the NTA, 1987, send a demand requiring notice of the implemented acquisitions.
The Agency has reviewed in great detail the issue of Canadian ownership compliance on the part of Canadi*n should the proposed transactions between AMR and Canadi*n proceed. In accordance with Part II of the NTA, 1987 and as indicated above, the Agency must have due regard for this continuing licensing requirement when assessing the public interest, as it is defined in section 4 of the NTA, 1987 and applied in Part VII. Based on the current review, the Agency is satisfied that if the proposed acquisition by Aurora and other related transactions were implemented, Canadi*n and its family of affiliated feeder air carriers would continue to be Canadian as defined in subsection 67(1) of the NTA, 1987.
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