Decision No. 54-A-2005

February 4, 2005

February 4, 2005

APPLICATION by Excel Airways Limited for the necessary authority to operate series of fifth freedom round-trip charter flights between Canada and various destinations, other than United Kingdom, commencing on December 18, 2004 and terminating on February 9, 2005, using a 189-seat B737-800 aircraft, on behalf of Red Seal Tours Inc. carrying on business as Sunwing Vacations.

File No. M5000/E201


APPLICATION

[1] On November 5, 2004, Excel Airways Limited (hereinafter Excel) applied to the Canadian Transportation Agency (hereinafter the Agency) for the authority set out in the title. The application included letters of support by Red Seal Tours Inc. carrying on business as Sunwing Vacations (hereinafter Sunwing) and Sunwing Airlines Inc. (hereinafter Sunwing Airlines). An amendment to the application was received on November 10, 2004. The requests for program permits in respect of the subject charter flights were not submitted at the time of the application. These requests, along with the signed charter contracts, were filed with the Agency on November 19, 2004.

[2] Excel has requested, pursuant to subsection 74(1) of the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA), that a special condition be added to its non-scheduled international licence authorizing it to operate the following Canadian originating fifth freedom passenger charter flights on behalf of Sunwing:

  1. Toronto/Cancun, Mexico/Toronto - 46 flights from December 18, 2004 to February 8, 2005;
  2. Toronto/Cancun, Mexico/Cozumel, Mexico/Toronto - 8 flights from December 22, 2004 to February 9, 2005;
  3. Toronto/Cayo Coco, Cuba/Toronto - 8 flights from December 21, 2004 to February 8, 2005;
  4. Toronto/Santiago de Cuba, Cuba/Toronto - 7 flights from December 23, 2004 to February 3, 2005;
  5. Toronto/Camaguey, Cuba/Toronto - 7 flights from December 24, 2004 to February 4, 2005;
  6. Toronto/La Romana, Dominican Republic/Toronto - 8 flights from December 18, 2004 to February 5, 2005;
  7. Toronto/Santo Domingo, Dominican Republic/Toronto - 8 flights from December 20, 2004 to February 7, 2005; and
  8. Toronto/Fort Lauderdale, United States of America/Toronto - 8 flights from December 19, 2004 to February 6, 2005.

[3] Under Licence No. 040130, Excel is authorized to operate a non-scheduled international service. Condition No. 1 of Excel's licence limits its operations to the transportation of traffic on a charter basis between points in the United Kingdom and points in Canada. Accordingly, Excel would require the addition of a condition to its non-scheduled international licence to include an authorization that would specifically address the proposed temporary charter services.

[4] On November 10, 2004, the Agency requested comments from Canadian air carriers licensed to operate non-scheduled international services, large aircraft, as well as other parties that may have an interest in such applications. Interventions opposing the granting of the application were filed with the Agency by Air Transat A.T. Inc. carrying on business as Air Transat (hereinafter Air Transat), Air Canada, WestJet, the Air Line Pilots Association, International (hereinafter ALPA), the Canadian Union of Public Employees (hereinafter CUPE) and Kelowna Flightcraft Air Charter Ltd. (hereinafter Kelowna). On December 2, 2004, Excel filed its reply to the interventions.

POSITIONS OF THE PARTIES

Excel

[5] In its application, Excel states that the limited number of the temporary charter flights that it proposes to operate represents approximately 25 percent of the total Sunwing charter program for the period in question. Excel further states that the temporary charter flights will make up less than 10 percent of the total December 13, 2004 to May 15, 2005 winter charter program of Sunwing. Excel points out that Sunwing is using Canadian charter carriers to operate the substantial majority of its charter program during the period in question.

[6] Excel submits that in addition to the fact that the temporary charter flights that are the subject of this application are limited in number, the authority being sought to operate these flights is of a limited duration, that is until Sunwing Airlines obtains an Air Operator Certificate (hereinafter AOC) from Transport Canada and Agency licences.

[7] In support of Excel's application, Sunwing states that the proposed fifth freedom charter flights referred to in Excel's application correctly reflect the limited and temporary requirement by Sunwing of the Excel Boeing 737-800 aircraft. Sunwing indicates that the bulk of its winter program of charter flights to be operated during the period in question will be carried out by Canadian carriers. Sunwing adds that it requires a Boeing 737-800 type aircraft in order to provide the level of service being promoted to its travel agent customers.

[8] Sunwing Airlines submits that it has filed applications with the Agency to obtain licences to operate domestic, scheduled and non-scheduled international services, large aircraft. Sunwing Airlines further submits that it initiated proceedings with Transport Canada to obtain an AOC in support of its proposed services. In this regard, Sunwing Airlines states that it was advised by Transport Canada that it would be impossible for Transport Canada to issue an AOC to Sunwing Airlines in time for the proposed start-up of service on December 18, 2004 and that the most likely date for the issuance of an AOC would be during the first week of February 2005.

[9] Sunwing Airlines submits that the Boeing 737-800 aircraft proposed to be used by Excel to operate its fifth freedom charter flights is the aircraft that Sunwing Airlines intends to lease from Excel in support of the start-up of its air services, upon the issuance of Agency licences. Sunwing Airlines maintains that the granting of Excel's application will ensure that the aircraft is available to Sunwing Airlines immediately upon the issuance of the licences by the Agency.

Interveners

[10] Air Transat objects to the issuance of any authority to Excel to operate the passenger charter flight programs set out in the application. Air Transat points out that Excel is seeking to operate eight charter programs representing a total of 100 flights from Toronto to major package tour destinations in Mexico, Cuba, the Dominican Republic and Florida and that all of these programs are to be operated as regular weekly flights, except for the Toronto/Cancun service which will be operated up to six times per week. Air Transat further submits that the Agency should be guided by the relevant provisions of Canada's Policy for International Passenger Charter Air Services (hereinafter the Passenger Charter Policy) which stipulates that "on occasion" a carrier of a third country may carry charter traffic between Canada and another country. Air Transat adds that the intent of this wording is to establish as a fundamental principle that charter fifth freedom rights are exceptional in nature and are not to be used to support a de facto regularly scheduled service. According to Air Transat, the extended scope and regularity of Excel's service proposal makes it obviously incompatible with this fundamental principle.

[11] Air Transat states that the Passenger Charter Policy directs that a balance be achieved between the interests of Canadian travellers in having access to the proposed services and those of third and fourth freedom operators that may be affected. In this regard, Air Transat submits that it will be serving all of the routes proposed in Excel's application during the same period of the upcoming winter season and that, to the best of its knowledge, it will be competing on most, if not all, of the subject routes with several other Canadian carriers, which include Air Canada, WestJet, Skyservice Airlines Inc. carrying on business as Skyservice (hereinafter Skyservice), Jetsgo Corporation carrying on business as Jetsgo (hereinafter Jetsgo) and Kelowna, not to mention any other potential foreign operators and American air carriers that operate sixth-freedom services. Air Transat maintains that all of the markets in question will be very well served by numerous competitive services and that, as a result, consumers will have access to a variety of services and fare options. Air Transat adds that rather than satisfying any public interest objective, the additional fifth freedom capacity proposed by Excel would only serve to erode legitimate efforts by Canadian carriers to maintain reasonable yield levels.

[12] Air Transat submits that it has taken due note of the reasons and justifications offered by Excel in support of its application, which include that the operating authority being sought is simply a temporary measure until Sunwing Airlines is granted an AOC from Transport Canada and, subsequently, Agency licences. Air Transat maintains that although the eventual issuance of the AOC in question is presented as a practical certainty by Excel, under Canadian law, it is the Minister of Transport who holds sole discretionary authority regarding the issuance of an AOC and that the alleged temporary nature of the requested operating rights is based solely on Excel's presumption and conjecture in this regard.

[13] Air Transat states that it never received any enquiries from Sunwing for capacity availability for the current winter season. Air Transat advises that it is prepared to discuss, on the basis of reasonable commercial terms, any capacity requirements with Sunwing for this winter, which it is confident, based on the airlift needs already outlined, it can substantially cover and satisfy through existing and/or new services.

[14] Air Transat states that the Agency has requested in its notice that "... comments include an indication as to whether replacement capacity can be provided for the flights in question." Air Transat also states that it has difficulty with this approach because "... it is not contemplated by the Policy which outlines other clear parameters against which a fifth freedom service application is to be assessed and judged." Consequently, according to Air Transat, an application cannot be authorized only "... because a Canadian stakeholder was unable to provide a certain type of aircraft or amount of capacity on a particular day and time, since fleet planning is usually finalized months beforehand."

[15] WestJet, in its opposition, states that apart from the flights that it operates on behalf of a tour operator, Excel's application includes flights that WestJet operates on a scheduled basis between Toronto and Fort Lauderdale, Florida. WestJet maintains, therefore, that the markets Excel proposes to serve are already well served by WestJet and other Canadian carriers.

[16] Air Canada requests that the Agency deny Excel's application. Air Canada submits that all of the proposed services are on routes that are highly competitive and effectively served year-round by Canadian and foreign third and fourth freedom operators on a scheduled and charter basis, including Skyservice, Kelowna, Jetsgo, WestJet, Air Transat, Cubana de Aviacion S.A., Compania Mexicana de Aviacion, S.A. de C.V. carrying on business as Mexicana, and Air Canada.

[17] Air Canada states that while the proposed program may appear insignificant to Excel and Sunwing, it represents as much as 100 flights, or a total of 18,300 seats, which traffic could have been carried by Canadian carriers. While Air Canada recognizes that Guideline 9 of the Passenger Charter Policy contemplates this type of operation, it does not find the approval of Excel's application to be warranted under these circumstances. Air Canada is of the view that Excel's proposed services are not contributing to any significant economic benefits except for minor gains by the local airport authorities, and it would be absolutely wrong to pretend that the planned routes are in the interest of consumers and would enhance competition within the industry.

[18] Air Canada refers to a report entitled "Planned Seat Capacity for Selected Destinations for Winter 2004/05" published on November 11, 2004 by The Conference Board of Canada confirming a huge increase of capacity in the Toronto market to various sun destinations next winter. Air Canada points out that on page 6 of the report, The Conference Board of Canada characterized the situation as "Destinations that appear to be in an over capacity position include Mexico, Cuba, Jamaica and [the Dominican Republic]". Accordingly, Air Canada states that Excel and Sunwing's strategy is in fact to dump capacity in markets where there is a real danger of existing capacity exceeding demand this winter thus resulting in obvious economic damage to Canadian carriers.

[19] Air Canada submits that it does not have space to accommodate Sunwing's requests on such a short notice given that all aircraft and capacity for the winter peak season have already been committed months in advance. Air Canada adds that if it would have received the proposal last summer, it possibly could have been in a position to provide capacity.

[20] ALPA objects to Excel's application and maintains that Excel has not met the strong onus required to demonstrate that the application is necessary and in the public interest. ALPA submits that Excel's application provides no convincing information that there is insufficient Canadian air carrier capacity to ensure the operation of these charter flights during the period in question. ALPA further submits that as the certified bargaining agent for pilots at five Canadian commercial air carriers, it understands that Canadian carriers have the willingness and capacity to conduct the flights proposed by Excel in its application.

[21] CUPE opposed the application submitted by Excel and maintains that, in such cases, the Agency must apply a strict public interest test in which the protection and viability of the Canadian airline industry is a priority. CUPE states that there appears to be sufficient unused or underutilized existing capacity within the Canadian industry on a collective basis to meet the needs of the identified holiday travellers without disruption until Sunwing Airlines can begin its own operations. According to CUPE, Excel has not demonstrated to the Agency that such capacity cannot be provided by existing Canadian air operators on a fair and equitable basis. As a result, CUPE submits that it sees no legitimate public purpose for adding new foreign capacity to the Canadian industry when the industry already has the capacity and has even laid off trained employees that could conceivably provide the identified services on very short notice.

[22] CUPE states that it is concerned that this temporary "bridging" measure proposed by Excel may be lengthened to include the entire winter season if Sunwing Airlines' application to obtain its AOC from Transport Canada is delayed further. CUPE adds that this "foot in the door" application could then lead to an expansion of Excel's activities with further damage to the Canadian industry which could be contrary to the public interest.

[23] Kelowna objects to the granting of the program permits to operate any and all of the charter programs proposed in Excel's application. Kelowna states that the ability of the Agency to grant fifth freedom rights in accordance with subsection 74(1) of the CTA and section 22 of the Air Transportation Regulations, SOR/88-58, as amended (hereinafter the ATR) must be governed by Guideline 9 of the Passenger Charter Policy which stipulates that "on occasion" a carrier of a third country may be granted fifth freedom rights to carry charter traffic between Canada and another country. Kelowna submits that there is nothing occasional about the 100 round-trip flight program submitted by Excel.

[24] Kelowna states that the underlying basis of the Passenger Charter Policy is to balance the interests of the Canadian travelling public with the interests of the "third and fourth freedom" (i.e. the Canadian and foreign) scheduled and charter carriers that may be affected. In this regard, Kelowna submits that the destinations proposed in Excel's application are or could be all effectively served by Canadian carriers. Kelowna notes that it has offered its services to Sunwing for the proposed routings, but, to date, its offer has been rebuffed. Kelowna adds that it has operated similar or identical routings in the past for Sunwing and many other Canadian tour operators and is therefore capable of undertaking the charter schedule required by Sunwing.

[25] Kelowna submits that fifth freedom applications are to be granted to support Canadian carriers that encounter operational difficulties over short-time periods. Kelowna further submits that such applications are not to be granted to support tour operators that operate in price sensitive markets, nor are they to be granted in situations that allow foreign carriers to "cherry pick" profitable high season routings and return to their domestic market during Canada's less profitable low seasons. Kelowna adds that this provides the foreign carrier with an unfair competitive advantage over Canadian carriers.

Excel's reply

[26] In its reply to the interveners, Excel states that virtually all of the objectors argued in one way or another that the fifth freedom flights proposed by Excel were not contemplated by the Passenger Charter Policy. Excel adds that a ground put forward by the interveners is that the proposed Excel charter flights would not be operated "on occasion" as set out in Guideline 9 of the Passenger Charter Policy. Excel refers to the definition of the term "on occasion" provided by the Concise Oxford Dictionary 7th edition, which defines it as "wherever need arises", and Excel indicates that the Random House Webster College Dictionary defines "occasional" as intended for supplementary use when needed. Excel adds that the Agency has relied upon the dictionary meaning of "on occasion" as set out in the Concise Oxford Dictionary, 7th edition.

[27] Excels states that the Agency must consider the interest of Canadian travellers in having access to such service balanced with the interests of "third and fourth freedom" carriers that may be affected. Excel further states that no third or fourth freedom non-Canadian charter carriers objected to the application, and that only four of Canada's thirteen large aircraft charter carriers objected to the application. Accordingly, Excel submits that the benefit to Canadian travellers substantially outweighs any possible affect that the granting of this application may have on non-Canadian and Canadian third and fourth freedom carriers.

[28] Excel notes that the Agency specifically requested in its notice of application that intervening carriers indicate whether they could provide capacity for the proposed flights. Excel states that Air Canada acknowledged that it could not provide the required alternative aircraft or capacity, that WestJet failed to address this issue at all and that Air Transat failed to address the issue in any detail, stating gratuitously, that if the Agency saw fit to deny this application, Air Transat was prepared to discuss providing capacity. According to Excel, this vague response by Air Transat clearly fails to address the detailed requirement set out in the application and it would not be too difficult to envisage the nature of any such discussions proposed by Air Transat should Excel's application be denied and considering the fact that Air Transat's parent company, Air Transat A.T. Inc., is a major competitor of Sunwing.

[29] Excel submits that Sunwing and Kelowna had reached an oral agreement pursuant to which Kelowna would supply additional Boeing 737-800 aircraft capacity to Sunwing for its 2004/2005 winter program. Excel further submits that Kelowna subsequently advised Sunwing that it was unable to supply such additional capacity. Excel adds that while Kelowna has offered to charter its Boeing 727-200 aircraft to Sunwing, the Boeing 727-200 aircraft is in no way an acceptable alternative to the Boeing 737-800 aircraft. According to Excel, the Boeing 727-200 aircraft is no longer an aircraft of choice for Canadian tour operators and its charter price per seat was over 25 percent more expensive than that of the Boeing 737-800 aircraft.

[30] Excel states that Air Canada makes reference to a report entitled "Planned Seat Capacity for Selected Destinations for Winter 2004/05" published on November 11, 2004 by The Conference Board of Canada. According to Excel, while apparent capacity prior to the beginning of the 2004/2005 winter season has increased, so has the demand for such capacity as was also referred to in the report.

[31] In response to the allegation made by Air Canada that Sunwing and Excel are planning to "dump capacity" in the Canadian market place leading to damage to Canadian carriers, Excel submits that Sunwing had planned to have its total program operated by Canadian carriers and that it was only as a result of last minute unforeseen circumstances that it turned to Excel for temporary support.

[32] In its reply to Air Transat, Excel states that while Air Transat has noted that other Canadian carriers will be operating charter or scheduled services on the proposed routes, Air Transat has not offered any evidence that there is not a requirement for the Excel fifth freedom flights or that the operation of such flights would affect Air Transat's proposed services. Excel adds that in both media releases and quarterly reports, the parent company of Air Transat, Air Transat A.T. Inc., has indicated that the 2003/2004 winter season was the best season on record and that it expected a record year.

[33] Excel also refers to articles in the Globe and Mail Report on Business where, in the November 1, 2004 edition, it was noted that tour operators and air carriers are seeing a surge in early bookings for winter vacations to sun spot destinations as the strong Canadian dollar inspires confidence in consumers and what is shaping up as a record leisure travel season, and in the November 6, 2004 edition, it was noted that the traffic between Canada and Mexico should increase by 30 percent or 35 percent this coming season.

ANALYSIS AND FINDINGS

[34] In making its findings, the Agency has considered all of the evidence submitted by the parties during the pleadings.

[35] Pursuant to subsection 74(1) of the CTA, the Agency may make a non-scheduled international licence subject, in addition to any terms and conditions prescribed in respect of the licence, to such terms and conditions as the Agency deems appropriate, including terms and conditions respecting points or areas to be served.

[36] Section 22 of the ATR states that:

The issuance or deemed issuance of any category of permit referred to in section 22.1 in respect of an international charter is subject to the following conditions, namely, that the operation of the charter

(a) be in accordance with

(i) the Act and these Regulations,

(ii) any terms and conditions of the licence pursuant to which the international charter is operated,

(iii) where applicable, any conditions of the permit, and

(iv) the terms and conditions of a charter contract that are set out in these Regulations;

(b) be consistent with Canada's national and international transportation policies and Canada's other policies that affect, directly or indirectly, air transportation, as set out in applicable legislation or in other documents of the Government of Canada;

(c) be in accordance with any applicable international agreement, convention or arrangement respecting civil aviation to which Canada is a party; and

(d) on balance, best serve the needs of travellers, shippers and air carriers.

[37] Paragraph 22(b) of the ATR provides that permits issued by the Agency for the operation of international charter flights are subject to the condition that the charters be consistent with, among other things, Canada's international air policies. The Agency has therefore considered the application in the context of the Passenger Charter Policy as announced by the Minister of Transport on April 4, 2000. The Agency notes that Guideline 9 of this Policy specifically addresses the carriage by foreign air carriers of charter traffic between Canada and a third country. Guideline 9 reads as follows:

On occasion, charter traffic moving directly between Canada and another country may be carried by an airline of a third country. This policy envisages the opportunity for foreign carriers to operate such "fifth freedom" charter services, based on the merits of each case, including reciprocity of opportunity for Canadian charter carriers. However, the interests of Canadian travellers in having access to such services will have to be balanced with the interests of the "third and fourth freedom" (i.e. the Canadian and foreign) scheduled and charter carriers that may be affected.

[38] The Agency is sensitive to the impact that operations such as those proposed by a foreign carrier between Canada and third countries pose to the existing services operated by Canadian air carriers, as well as by foreign carriers serving Canada and their home country. The operation by a foreign licensee of charter flights between points in Canada and points in a country other than its home country requires specific authority from the Agency and is considered to be a privilege. It is the Agency's view that, where there are existing third and fourth freedom scheduled or charter services serving a market, the onus is on the fifth freedom charter applicant to establish the merits of its application. The Agency considers each such application on a case by case basis.

[39] As required by Guideline 9 of the Passenger Charter Policy, as part of its consideration, the Agency must balance the interests of Canadian travellers with the interests of Canadian and foreign carriers offering third and fourth freedom flights to the destinations that the applicant proposes to serve. In this regard, the Agency considered the report entitled "Planned Seat Capacity for Selected Destinations for Winter 2004/05" published on November 11, 2004 by The Conference Board of Canada and all other evidence submitted. The Agency, having carefully considered all of the submissions in this case, is of the opinion that the series of flights applied for by Excel could hinder the further development of these routes by the established third and fourth freedom carriers that are currently serving this market. Furthermore, in the Agency's opinion, the series of charter flights proposed by Excel could possibly cause a reduction or withdrawal of existing services offered by the relevant carriers on these routes. In addition, the Agency is of the opinion that, while the charter programs proposed by Excel may to some degree benefit Canadian travellers by improving options and enhancing competition on the relevant routes, the possible detrimental effect of the charter programs on relevant carriers outweighs any such marginal benefit that travellers may enjoy.

[40] As noted above, the onus is on Excel to convince the Agency of the merits of its application. In light of the foregoing, the Agency finds that, in this particular case, Excel has not established the merits of its proposed charter programs. The evidence submitted by Excel does not support a finding that the proposed services are consistent with the Passenger Charter Policy, including Guideline 9 thereof. Excel has failed to establish that the interests of Canadian travellers, in having access to the proposed services, outweigh the interests of the existing third and fourth freedom (i.e., Canadian and foreign) scheduled and charter carriers that may be affected by the proposed services.

CONCLUSION

[41] Based on the above findings, the Agency, consistent with paragraph 22(b) of the ATR, hereby denies Excel's application to operate the proposed series of fifth freedom round-trip charter flights between Toronto, Ontario, Canada and each of Cancun and Cozumel, Mexico; Cayo Coco, Santiago de Cuba and Camaguey, Cuba; La Romana and Santo Domingo, Dominican Republic; and Fort Lauderdale, Florida, United States of America.

[42] This Decision takes effect on December 6, 2004, the date on which the denial of the application was communicated verbally to the parties of record.

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