Decision No. 456-C-A-2009

October 30, 2009

File No. M4120-3/09-01525

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INTRODUCTION AND ISSUES

[1] Peter S. Wyant filed with the Canadian Transportation Agency (Agency) a complaint alleging that Air Canada's fuel surcharge applicable to two tickets he purchased for travel between Regina, Saskatchewan, Canada and Frankfurt, Federal Republic of Germany is unjust and unreasonable and unjustly discriminatory. The Agency must address the following issues:

1. Is Air Canada's fuel surcharge applicable to two tickets purchased by Mr. Wyant for travel between Regina and Frankfurt just and reasonable as per subsection 111(1) of the Air Transportation Regulations, SOR/88-58, as amended (ATR)?
2. Is Air Canada's fuel surcharge applicable to two tickets Mr. Wyant purchased for travel between Regina and Frankfurt unjustly discriminatory as per paragraph 111(2)(a) of the ATR?

[2] As indicated in the reasons that follow, the Agency finds that Mr. Wyant has failed to discharge his burden of proof that Air Canada's fuel surcharge applicable to two tickets he purchased for travel between Regina and Frankfurt is unjust and unreasonable or unjustly discriminatory.

FACTS

[3] On January 20, 2009, Mr. Wyant purchased two tickets for round-trip travel with Air Canada between Regina and Frankfurt, departing on April 14, 2009, and returning on May 15, 2009. A fuel surcharge of $344 was assessed by Air Canada for each ticket, one of which was purchased using Aeroplan reward miles. By contrast, Air Canada does not apply fuel surcharges for carriage within Canada, or between Canada and the United States of America.

JURISDICTION

[4] The fuel surcharge in question was applied to two tickets involving travel between Canada and Europe. The Agency's jurisdiction over complaints concerning terms and conditions of carriage applicable to transportation to and from Canada is set out in sections 111 and 113 of the ATR. In particular, in this case, the Agency must address whether the subject fuel surcharge is just and reasonable and whether there has been any unjust discrimination in the application of the charge.

[5] With respect to the matter of fuel surcharges applying to carriage using Aeroplan reward miles, the Agency notes that, in Decision No. 451-C-A-2009, the Agency ruled that it had no jurisdiction over Aeroplan. Therefore, the Agency will not deal with that part of the complaint. The Agency also determined, in Decision No. 82-C-A-2009, that as Aeroplan is neither a licensee under the CTA nor an air carrier for the purposes of section 110 of the ATR, the Agency has no jurisdiction over Aeroplan.

RELEVANT TARIFF, CONVENTION AND STATUTORY EXTRACTS

[6] The extracts relevant to this Decision are set out in Appendix A.

ANALYSIS AND FINDINGS

1. Are Air Canada's fuel surcharges applicable to European flights just and reasonable?

The balancing test to be applied

[7] When a complaint is filed with the Agency, the complainant has the burden of providing evidence to the Agency that the air carrier has applied a term or condition of carriage that is unreasonable within the meaning of section 111 of the ATR.

[8] The test established by the Agency to determine whether a term or condition of carriage is "unreasonable" within the meaning of section 111 of the ATR is set out in Decision No. 746-C-A-2005 and requires that a balance be struck between the rights of passengers to be subject to reasonable terms and conditions of carriage, and the particular air carrier's statutory, commercial and operational obligations.

[9] When balancing the passenger's rights against the carrier's obligations, the Agency must consider the whole of the evidence and the submissions presented by both parties and make a determination on the reasonableness or unreasonableness of the term or condition of carriage based on which party has presented the more compelling and persuasive case.

[10] It should be noted that the terms and conditions of carriage are set by an air carrier unilaterally without any input from future passengers. The air carrier sets its terms and conditions of carriage on the basis of its own interests, which may have their basis in statutory or purely commercial requirements. There is no presumption that a tariff is reasonable.

[11] The Agency has historically been of the opinion that, generally, air carriers should have the flexibility to establish their own terms and conditions of carriage as they see fit, subject to legislative or regulatory constraints, including that of reasonableness.

Necessity of a fuel charge

Submissions

[12] Air Canada states that fuel surcharges are meant to offset the volatility of the price of fuel in an environment where fuel prices are unpredictable and cannot be entirely absorbed into the fare. Air Canada adds that it employs various means to manage its exposure to the volatility of fuel prices, including hedging. Air Canada indicates that fuel costs constituted the largest percentage of the carrier's total operating costs in 2008, and that Air Canada is particularly sensitive to lowering these costs.

[13] Mr. Wyant submits that given that the price of crude oil has declined to less than $40 per barrel, and will likely remain at that level for some time, fuel surcharges are an unnecessary additional charge required by Air Canada. Mr. Wyant observes that Air Canada and other air carriers have terminated fuel surcharges for flights within North America, and that the principles that prompted this termination also apply to international carriage.

[14] Air Canada submits that Mr. Wyant's argument that the elimination of fuel surcharges for travel within North America suggests that the same can be done for international carriage fails to recognize the "unique competitive landscape on domestic Canada and transborder routes". Air Canada points out that numerous carriers offer services to and from Canada, observing that, as of June 29, 2009, there were 125 foreign carriers licensed to operate scheduled services to and from Canada. Air Canada maintains that it is well known worldwide that there is "ferocious" competition in the air transport industry, resulting in thin and often non-existent profit margins, and many bankruptcies.

[15] Air Canada submits that its jet fuel costs cannot be perfectly synchronized with crude oil prices, and that even if crude oil prices were proportional to the prices paid for jet fuel, Air Canada cannot determine a fuel cost per ticket based on what it pays for fuel that day as tickets are often available for sale one year before the flight. Air Canada also asserts that it is not appropriate to compare current fuel prices with the carrier's fuel surcharges given the regime under which Air Canada, and other carriers, acquire fuel. In this respect, Air Canada submits that it, as well as other air carriers, enter into long-term supply arrangements for fuel, sometimes years in advance, at a price that is determined by a negotiated pricing methodology, or based on the previous week or month's average price of fuel.

[16] Air Canada advises that limits in the supply of fuel become more important in Canada during the winter, as the seaways are closed, transportation is limited, and refineries often have planned shutdowns. As such, fuel purchases and storage must occur well in advance of the usage of fuel in Canada, particularly prior to the winter months. Air Canada asserts that changes in crude oil prices do not have a direct, proportional impact on the carrier's fuel cost, and that fuel surcharges are designed to offset the volatility of this cost, and not the cost itself.

[17] Air Canada asserts that changes in fuel prices have a significant impact on Air Canada's operating costs, and that these prices fluctuate widely depending on many factors, including political unrest in various parts of the world, Organization of Petroleum Exporting Countries (OPEC) policy, the level of demand from emerging economies such as China, the level of inventory carried by the industry, the level of fuel reserves maintained by government, disruptions to production and refining facilities, alternative fuels, the weather, and the Canada/US dollar exchange rate. Air Canada maintains that it is not in a position to accurately predict fuel prices, and that in order to manage its exposure to the volatility in the price of jet fuel, the carrier applies a comprehensive fuel price risk management strategy based on a combination of financial instruments, including hedging, fuel consumption reduction initiatives and fuel surcharges.

[18] Air Canada submits that hedging is often used by air carriers to lessen the impact of volatile jet fuel prices and to protect against sharp increases in these prices, and that Air Canada applies a systematic hedging strategy whereby it adds hedging contracts on a regular basis. Air Canada indicates that this strategy helped to blunt the rising cost of fuel from the end of 2007 to the summer of 2008.

[19] Air Canada indicates that, to reduce its exposure to future oil price reductions, and to limit potential hedging losses and cash collateral requirements, the carrier terminated several hedging contracts at the end of 2008 and in early 2009, thereby crystallizing hedging losses. Air Canada submits that these terminations will increase Air Canada's fuel expenses throughout 2009. Air Canada submits that every effort is made to minimize the impact of fuel price, but for unforeseen fluctuations, the use of surcharges is warranted.

[20] Air Canada states that its international competitors will continue to use fuel surcharges and will therefore be in a position to recoup unforeseen increases in the cost of fuel. Air Canada maintains that if it were unable to apply fuel surcharges, its viability in certain markets would be negatively affected. Air Canada submits that continuing seat sales erode the effectiveness of compensation for high fuel costs, and that fare levels do not offset the current and volatile cost of fuel. Air Canada also indicates that it is committed to monitoring fuel prices, and as a result of market forces, it has adjusted its fuel surcharges on numerous occasions because of lower fuel costs and to match similar reductions by its competitors. Air Canada adds that its fuel surcharges are generally on par with the surcharges applied by competing carriers on the same routes.

[21] Mr. Wyant submits that, with respect to Air Canada's comment that hedging is one of the methods by which the carrier exercises some control over its fuel expenses, Air Canada's passengers "must bear the brunt of the excess expense that arises because Air Canada might not employ a more reasonable or better thought out hedging strategy". Mr. Wyant maintains that, in almost every other industry, losses associated with hedging, caused by financial decisions made by management, would be absorbed by shareholders, but that in the Canadian air transport industry, where there is limited competition on international routes originating in Canada, it is considered acceptable to have customers offset the losses.

[22] Mr. Wyant also submits that a comparison of data relating to the average monthly price of jet fuel for the period January 2008 to March 2009 reveals that there is a remarkable degree of consistency between the monthly fluctuations in the price for domestic operations and the price for international operations. Mr. Wyant points out that the data reveal that the greatest decline in the price of jet fuel occurred three months prior to the purchase of his tickets, and that the failure to adjust fuel surcharges to reflect this decline suggests that there is something "seriously amiss".

[23] Mr. Wyant acknowledges that it makes good business sense for Air Canada to use fuel surcharges to offset the volatility of fuel prices, provided that "the process is performed equitably and results in no undue or unfair costs being passed on to passengers". Mr. Wyant also acknowledges that the price of crude oil generally and the price of jet fuel specifically cannot be tracked exactly over time, and that it would be very difficult, if not technically impossible to adjust ticket prices on the basis of very short-term movements of jet fuel prices. Mr. Wyant submits that the question is: What is a "reasonable" lag time?

[24] With respect to Air Canada's claim that its surcharges are on par with competing carriers, Mr. Wyant argues that, based on an analysis that he conducted of certain markets, Air Canada's fuel surcharges are not on par with other carriers' surcharges. Mr. Wyant also points out that some carriers have already completely eliminated fuel surcharges for international flights.

[25] Air Canada maintains that Mr. Wyant's analysis is irrelevant as it involves the use of the total fares applied by certain carriers in an effort to demonstrate that Air Canada's fuel surcharge is not at par with these carriers. Air Canada points out that Mr. Wyant's complaint alleges that the carrier's fuel surcharges for international carriage, not Air Canada's base fares, are unreasonable or unjustly discriminatory.

[26] Air Canada submits that fuel costs are expected to increase again in the near future, and that after falling dramatically in the fourth quarter of 2008, oil prices have already increased by approximately 70 percent since the beginning of 2009. Air Canada states that, given this rapid increase, some carriers have already increased their fuel surcharges on various routes.

[27] Air Canada submits that, like many other air carriers, it could not have predicted the sudden drop in fuel prices in mid-2008, and that it is not a question of Air Canada's hedging strategies being weak, but rather of the carrier being unable to forecast the future, particularly the dramatic drop in fuel prices.

[28] Air Canada asserts that Mr. Wyant's expectation that, based on his analysis, a decline in jet fuel prices occurring three months prior to the purchase of a ticket should be reflected in the price for such ticket, is unrealistic, based on misunderstanding, and is, simply, incorrect.

[29] Mr. Wyant points out that Air Canada has consistently stated that its fuel surcharges are temporary, and has committed to discontinue these surcharges when the price of jet fuel decreases to less than $40 per barrel for 30 consecutive days. Mr. Wyant submits that the price of hydrocarbon products will likely never fall to levels seen in the early years of this decade, and that using Air Canada's criterion for discontinuing fuel surcharges, these surcharges will probably be permanent.

Analysis and findings

[30] The Agency notes that Air Canada, as well as its competitors, do not apply fuel surcharges for travel within Canada, and between Canada and the United States of America, while the vast majority of air carriers offering international services to and from Canada have retained these surcharges. Air Canada submits that, given that its competitors apply surcharges for international carriage, its competitive position would be negatively affected should it terminate fuel surcharges. The Agency recognizes that there is strong competition amongst carriers in respect of transatlantic carriage and finds that Air Canada's competitive position would be severely compromised should the Agency determine that the carrier should not be allowed to apply fuel surcharges on the routes in question, while Air Canada's competitors continue to do so.

[31] The Agency accepts Air Canada's submission that fuel costs constitute a significant portion of Air Canada's operational costs, and that given this situation, it is important that the carrier recoup these fuel costs to remain financially viable.

[32] The Agency is of the opinion that given the regime under which many carriers purchase fuel, i.e., under long-term supply arrangements involving certain pricing methodologies, it is extremely difficult to immediately reflect in surcharges decreases in fuel prices as they occur, and at the same levels. In this respect, the Agency does not find it unreasonable that the ticket purchased by Mr. Wyant would not have necessarily reflected a decrease in fuel prices that may have occurred three months prior to their purchase.

[33] The Agency has considered the arguments raised by the parties respecting the strategies employed by Air Canada to address fuel costs, including hedging. The Agency is of the opinion that, generally, carriers should have the flexibility to employ strategies as they see fit that meet their operational requirements subject to legislative or regulatory constraints. In this respect, the Agency is of the opinion that there is insufficient evidence for the Agency to conclude that strategies employed by Air Canada to address fuel costs are unreasonable.

[34] The Agency has considered the submissions of both parties and is of the opinion that Mr. Wyant has not provided sufficient evidence to refute Air Canada' s position that fuel prices have not yet achieved a level of stability that would warrant the discontinuation of fuel surcharges for the flights in question.

[35] In conclusion, the Agency finds that the arguments presented by Air Canada regarding the necessity to continue to apply fuel surcharges are more persuasive than those of Mr. Wyant, and that Mr. Wyant has not discharged his burden of proving that these fuel surcharges are unjust and unreasonable. The Agency noted in Decision No. 746-C-A-2005 that "[a] balance must be struck between the rights of the passenger to be subject to reasonable tolls and terms and conditions of carriage, and the particular carrier's statutory, commercial and operational obligations". The Agency is of the opinion that given the fuel price volatility and taking into account competitive considerations, the addition of a fuel surcharge to Mr. Wyant's ticket is not unreasonable.

Incorporating the fuel surcharge into the base fare

Submissions

[36] Air Canada submits that fuel surcharges are used throughout the air transport industry, including on transatlantic routes, and that if it were to include the fuel surcharge in its fares, it would be at a significant competitive disadvantage. Air Canada also submits that its regular and bilateral fares are typically changed on an annual or seasonal basis, which contributes to stability in the market, and that incorporating an amount based on fluctuating fuel costs into base fares through frequent adjustments would disrupt such stability.

[37] With respect to Air Canada's argument that incorporating fuel surcharges into base fares for international carriage would render the carrier uncompetitive, Mr. Wyant submits that such argument is "nonsensical" as the level of the aggregate fare, comprised of the base fare and the surcharge, would be the same as the level resulting from the addition of a separate fuel surcharge to the base fare. Mr. Wyant further submits that there is no difference between North American and international fares in respect of the relative impact on demand irrespective of whether fuel surcharges are or are not incorporated into base fares. Mr. Wyant also indicates that a consumer's decision on whether or not to travel is based on the total fare applied by an air carrier, and not on one component of the fare.

[38] With respect to Air Canada's assertion that incorporating fluctuating fuel costs into base fares through frequent adjustments would disrupt pricing stability, Mr. Wyant argues that such incorporation would create no greater disruption than that currently resulting from fare adjustments because of competitive pressures, seat sales, etc. Mr. Wyant submits that Air Canada has incorporated fuel surcharges into the carrier's North American fares, and questions why this could not be done for international fares.

[39] With respect to the competitive environment in which Air Canada operates, the carrier submits that to completely eliminate fuel surcharges and increase base fares by the same amount on routes where Air Canada's competitors have a surcharge would have a devastating impact on the carrier's financial situation, given the level and intensity of competition on international routes.

[40] With respect to Mr. Wyant's assertion that consumers only compare full fares, Air Canada submits that Mr. Wyant fails to take into account how fare distribution channels work or the realities of consumer behaviour in response to marketing and advertising strategies. Air Canada indicates that the Web sites and print advertisements of most air carriers worldwide do not display full prices at the onset, and only provide a detailed breakdown of components of the total price once the full itinerary is selected. Air Canada maintains that, contrary to Mr. Wyant's view that consumers proceed through the various steps on carriers' Web sites to determine a total fare for comparative purposes, consumers are often sensitive to the initial display of fares, which do not include additional charges, such as a fuel surcharge, and base their comparison of fares on this display.

[41] Mr. Wyant contends that it is nonsensical of Air Canada to assert that incorporating the fuel surcharge into the base fare would render the carrier uncompetitive. Mr. Wyant submits that the price for a ticket would be the same, irrespective of whether such price is comprised of the base fare plus a fuel surcharge, or the fare is inclusive of the fuel surcharge. Mr. Wyant further submits that the decision to purchase a ticket is based on the total fare, and not one component of that fare.

Analysis and findings

[42] The Agency notes that the vast majority of carriers offering international services departing from Canada, including Air Canada's major competitors, currently apply fuel surcharges. The Agency also notes that fare distribution systems of air carriers, such as Web sites and computer reservations systems, do not usually quote the full price for travel in initial fare displays. The Agency accepts Air Canada's submission that these initial fare displays have a significant influence on the consumer's decision-making process. Accordingly, the Agency is of the opinion that if Air Canada were required to incorporate fuel surcharges into base fares, the carrier would be at a competitive disadvantage vis-à-vis other carriers whose initial fare display does not set out a price inclusive of fuel surcharges. The Agency notes that although fuel surcharges are not applied on domestic and transborder markets, this is a process that is followed by all carriers whereas, in contrast, in international markets the vast majority of carriers, in these particular markets, apply a fuel surcharge.

[43] The Agency finds that, with respect to this particular matter, Air Canada's arguments are more persuasive and compelling, and that Mr. Wyant has failed to present sufficient evidence that demonstrates that a balance has not been struck between the rights of passengers to be subject to reasonable terms and conditions of carriage and Air Canada's statutory, commercial and operational obligations.

2. Are Air Canada's fuel charges applicable to European flights unjustly discriminatory?

The test to be applied

[44] The test established by the Agency to determine whether a toll or term and condition of carriage applied by a carrier is "unjustly discriminatory" was established by the Agency in Decision No. 746-C-A-2005. The test is a two-step process.

[45] The Agency must first determine whether the toll or term and condition of carriage applied is "discriminatory". If the Agency finds that the toll or term and condition of carriage applied by the carrier is discriminatory, the Agency must then determine whether such discrimination is "unjust".

[46] In addition, in order for the Agency to determine whether a toll or term and condition of carriage applied by a carrier is "unjustly discriminatory", it must adopt a contextual approach which balances the rights of the travelling public not to be subject to terms and conditions of carriage that are discriminatory, with the statutory, operational and commercial obligations of air carriers. This position is also in harmony with the national transportation policy found in section 5 of the Canada Transportation Act, S.C., 1996, c. 10, as amended (CTA).

[47] The Agency has stated in past decisions that a toll or term and condition of carriage would be discriminatory if it singled out a particular category of passengers for different treatment for reasons that could not be justified.

Submissions

[48] Mr. Wyant submits that Air Canada's fuel surcharges are unjustly discriminatory in that they are applied differently on different routes, specifically North American versus European routes, as in his case. He indicates that, based on his calculations, and comparing the fuel surcharge which was applicable to one-way carriage from Vancouver, British Columbia to Miami, Florida (before Air Canada terminated its fuel surcharge for North American carriage), and his carriage from Calgary to Frankfurt, the fuel surcharge, on a kilometre basis, was roughly twice the amount for his carriage as for that applying to travel from Vancouver to Miami.

[49] Mr. Wyant indicates that fuel surcharges are necessitated essentially by the cost of fuel, and that the unit cost of fuel does not vary significantly by destination, and in this respect, "substantially similar circumstances and conditions" apply.

[50] Mr. Wyant maintains that Air Canada's international fuel surcharges are subsidizing the fuel surcharges applied to North American flights and/or are being used to increase the carrier's earnings unreasonably.

[51] Air Canada submits that the Agency determined, in Decision No. 248-C-A-2002, that a fee is not discriminatory when it is applied in a uniform and consistent manner, and that in view of that Decision, Air Canada's fuel surcharge for European flights cannot be considered discriminatory given that it applies equally to all passengers travelling on the same route. Air Canada adds that the test for determining whether the fuel surcharge paid by Mr. Wyant is unjustly discriminatory is not by comparing all of the routes in the carrier's network, or by comparing fares on a kilometre basis, as Mr. Wyant has done, but rather by determining whether all passengers in the same situation as Mr. Wyant, on the same route, around the same time paid the same fuel surcharge. Air Canada further submits that it is well established in law that discrimination is a distinction that must be based on personal characteristics, such as sex, age and religion, that are fundamentally important, and that these characteristics are usually protected by human rights legislation. In this respect, a person's choice of one route over another is not an individual right of fundamental importance, and therefore imposing a fuel surcharge based on routes cannot constitute discrimination. Air Canada maintains that its fuel surcharges are not unduly discriminatory because these surcharges are the necessary result of the carrier's operational and seasonal obligations.

Analysis and findings

[52] The first question for the Agency to consider in determining if a term or condition of carriage is unjustly discriminatory is whether the term or condition is discriminatory.

[53] Although Air Canada submits that discrimination is a distinction based on personal characteristics and that accordingly, imposing a fuel surcharge based on routes cannot constitute discrimination, the Agency finds that this position is not relevant to a determination of "unjustly discriminatory" within the context of this case and section 111 of the ATR. In the context of the ATR, the Agency must determine whether terms and conditions of carriage are "unjustly discriminatory" and in this respect a term or condition would be discriminatory if, for example, it singled out a particular category of traffic for different treatment.

[54] With respect to Mr. Wyant's contention that, based on his calculations of the fuel surcharges applying, on a kilometre basis, to North American versus international travel, Air Canada's fuel surcharge for international carriage is unjustly discriminatory, the Agency is of the opinion that comparisons of surcharges for travel to and from certain points is not necessarily a valid means to determine whether unjust discrimination exists. In this respect, the Agency is of the opinion that there may not necessarily be a direct relationship between the costs of operation over certain routes and the surcharges or base fares applying to carriage over those routes as the level of surcharges and base fares may be influenced by a number of factors, including levels assessed by competitors, and the period of the year during which travel occurs.

[55] In light of the foregoing, the Agency finds that Mr. Wyant has not discharged his burden of proof to establish that Air Canada's fuel surcharge for travel between Regina and Frankfurt for the dates in question is discriminatory. Given the Agency's finding that Air Canada's terms and conditions governing fuel surcharges are not "discriminatory" within the meaning of section 111 of the ATR, the Agency need not examine the question of whether such provisions are "unjustly discriminatory".

[56] In addition, Mr. Wyant makes reference to paragraph 111(2)(b) of the ATR in asserting that the application of a fuel surcharge for international flights is to the preference or advantage of Air Canada customers within North America.

[57] In this respect, Mr. Wyant, after submitting a number of calculations in respect of the quantum of the fuel surcharge applied on international and North American routes, concludes that the fuel surcharge that was applied to the two tickets that he purchased was approximately twice the amount, on a kilometre basis, of the surcharge applicable to carriage within North America. He submits that the fuel surcharge applied on international flights is subsidizing the fuel surcharge applied to North American flights which is contrary to paragraph 111(2)(b) of the ATR in that the subject fuel surcharge was to the "preference or advantage" of other Air Canada customers travelling on North American routes.

[58] The Agency is of the opinion that Mr. Wyant has not demonstrated to the satisfaction of the Agency that the fuel surcharge was to the "preference or advantage" of other Air Canada customers travelling on North American routes.

CONCLUSION

[59] Based on the above findings, the Agency dismisses the complaint.

Members

• J. Mark MacKeigan
• Jean-Denis Pelletier, P. Eng.

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APPENDIX TO DECISION NO. 456-C-A-2009

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Appendix A

Air Canada's International Passenger Rules and Fares Tariff, NTA(A) No. 458

Rule 27 – INTERNATIONAL FUEL SURCHARGE

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(B) TRANSATLANTIC

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(3) For travel originating Canada to Germany, the charge to be collected is CAD 112.00 on the international sector via eastern Canada (ON/QC/NB/NS/PE/NF) or 112.00 CAD via western Canada (BC/AB/SK/MN).

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(D) GENERAL

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(3) For all other flight segments on an International Itinerary, the charge to be collected is 40.00 CAD per sector. Except within Area 2 charge 35.00 CAD per sector.