Decision No. 552-A-2008

October 28, 2008

File Nos. M4212/P159-4
M4820-P5

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APPLICATION

[1] This application, filed on September 30, 2008, is for a renewal, in part, of the authority granted by Decision No. 99-A-2008 dated March 6, 2008. While Philippine Airlines, Inc. (Philippine Airlines) requests the authority starting on October 26, 2008, the Canadian Transportation Agency (the Agency) notes that the operation of the weekly flight in question commences on October 31, 2008.

[2] Under Licence No. 961031, Philippine Airlines is authorized to operate a scheduled international service in accordance with the Agreement between the Government of Canada and the Government of the Republic of the Philippines on Air Transport signed in Manila on January 14, 1997 (the 1997 Agreement).

[3] Condition No. 2 of Licence No. 961031 states:

The operation of the scheduled international service authorized herein shall be conducted subject to the provisions of the Agreement and to any applicable arrangements as may be agreed to between Canada and the Republic of the Philippines.

[4] Although Licence No. 961031 refers to the 1997 Agreement currently in force, at bilateral air transport negotiations held May 13-15, 2008, delegations for the Government of Canada and the Government of the Republic of the Philippines initialled ad referendum a new Air Transport Agreement (the 2008 Agreement) and agreed to immediately apply the provisions of the 2008 Agreement to the fullest extent possible. Under the terms of the 2008 Agreement, the exercise of fifth freedom rights by Philippine Airlines between Vancouver and Las Vegas is restricted to a maximum of four (4) flights per week in each direction.

[5] Due to the extra-bilateral nature of Philippine Airlines' requested authority, the Agency gave notice of the application to parties that may have an interest, namely Air Canada, Sunwing Airlines, WestJet and the Vancouver Airport Authority. Air Canada, WestJet and the Vancouver Airport Authority each filed an intervention in respect of the application.

POSITIONS OF THE PARTIES

Air Canada's argument

[6] In support of its application, Philippine Airlines quotes a paragraph from the Record of Discussion of the negotiations held May 13-15, 2008 (the Record of Discussion) which states that:

The Canadian delegation confirmed that Philippine Airlines shall continue to benefit from its extra-bilateral authority consistent with the parameters of the Canadian Transportation Agency Decision No. 99-A-2008 dated March 6, 2008.

[7] Air Canada states in its submission that the intent of this paragraph was simply to provide Philippine Airlines with assurances that the Agency's approval would not be withdrawn prior to its expiry, despite the fact that the newly negotiated 2008 Agreement only allows for the exercise of fifth freedom rights on four flights per week. Air Canada argues that the phrase "consistent with the parameters" clearly includes the expiration date of the decision, noting that it is highly unlikely that Canada would commit to an open-ended extra-bilateral authority when Canada could not secure the commercial rights that it was seeking. Philippine Airlines maintains that both it and the Government of the Philippines had understood that Philippine Airlines would continue to benefit from an additional fifth freedom frequency, subject to filing for authorization and approval by the Agency based on applicable standards of public interest.

[8] Air Canada argues that it is necessary to consider the context of the recently held negotiations between Canada and the Philippines in relation to the present application. Air Canada notes that "Canada had sought a modernized ATA that included, among other important elements, a fully liberalized codeshare regime. This desired outcome was not achieved, due to an ongoing policy review in the Philippines." Air Canada is displeased that Philippine Airlines is now requesting an extra-bilateral authority "for valuable commercial rights" while Canadian airlines "are still not permitted to operate to and from the Philippines in a commercially viable manner, namely via a codeshare agreement with a third country carrier." Air Canada therefore requests that the Agency deny Philippine Airlines' application, concluding that "[p]roviding extra-bilateral approval to Philippine Airlines, so soon after negotiations in which the Philippines were not prepared to provide desired commercial rights to Canadian carriers, would only serve to undermine Canada's interest to further liberalize the ATA for the benefit of all stakeholders."

[9] Philippine Airlines replies that although the Record of Discussion refers to "the outstanding issue of third country code sharing," it further states that the Parties agreed with the aim of holding further meetings to progress this and other issues. Philippine Airlines contends that in asking the Agency to deny the application based on considerations for future negotiations, Air Canada is confusing the roles of the Government of Canada "in negotiating air services agreements" and of the Agency "in evaluating such requests based on the public interest."

WestJet's argument

[10] For its part, WestJet opposes Philippine Airlines' request and argues that the public interest is not well served by Philippine Airlines' application. WestJet states that its review of market data reveals that the Vancouver-Las Vegas market has stabilized at the capacity currently offered by the carriers in the market. WestJet argues that an additional flight would create excess capacity in the market, and could reduce competition "as carriers pull out of markets where margins are severely depressed by irrational pricing practices leaving consumers ultimately with less choice." WestJet also maintains that services offered under the 2008 Agreement should be first and foremost supported by and built on traffic between Canada and the Philippines, and not on traffic to and from a third party, in this case the United States of America.

[11] Philippine Airlines disputes WestJet's position and characterizes it to be an inaccurate portrayal of the Vancouver-Las Vegas market. Philippine Airlines notes that, by virtue of previous Agency approvals, its fifth frequency on the Vancouver-Las Vegas sector is included in the current market figures and in the current balanced market. Philippine Airlines also points out that due to the limit set out in the 2008 Agreement that fifth freedom traffic carried on each route be no more than fifty percent of the aircraft used on that sector, the impact of its additional flight is much less than WestJet claims and would create no disturbance in the market.

Vancouver Airport Authority's argument

[12] Philippine Airlines argues that its application is in the public interest because its ability to exercise fifth freedom rights on a fifth frequency between Vancouver and Las Vegas ensures the viability of its flight between Manila and Vancouver. This position is shared by the Vancouver Airport Authority, which states in support of the application that the "extra-bilateral authority that has been in place since 2007 has significantly assisted Philippine Airlines in maintaining its frequency level on the Vancouver-Manila sector and thereby growing the trade, tourism and cultural linkages between Canada and the Philippines."

Notice

[13] Finally, Air Canada submits that the Agency notice of October 1, 2008 was the first time it was made aware of the application and that the failure of Philippine Airlines to contact Air Canada was a breach of Article 15, paragraph 5 of the 2008 Agreement, which requires, in part, that capacity to be operated in excess of the entitlements set out in the 2008 Agreement be agreed by the designated airlines of the Contracting Parties, subject to the approval of the aeronautical authorities of both Contracting Parties. Philippine Airlines notes that while attempts were made to contact Air Canada with respect to its application in the days preceding the filing of its application with the Agency, the more substantive point is that Philippine Airlines did not believe Article 15, paragraph 5 applied unless it requested additional capacity beyond the seven (7) flights per week permitted under the Agreement.

ANALYSIS AND FINDINGS

Preliminary matters

[14] Among the issues discussed in the pleadings is the interpretation of a paragraph in the Record of Discussions referring to the Agency's Decision No. 99-A-2008. The Agency has carefully examined the quoted paragraph and finds that a plain language interpretation of the phrase "consistent with the parameters of the Canadian Transportation Agency Decision No. 99-A-2008" reasonably means the time period of the authority granted in that Decision, i.e. from March 30 to October 25, 2008. The Agency also finds that the phrase does not have any other meaning implying a continuing grant of authority for the additional weekly fifth freedom flight, and the application for the continuation of the additional fifth freedom flight is to be considered on its merits.

[15] Air Canada argues that Philippine Airlines breached Article 15, paragraph 5 of the Agreement by not securing Air Canada's prior agreement with the proposed additional fifth freedom service. The Agency gave notice of the application as an extra-bilateral request, affording the opportunity to comment, and did receive the comments of Air Canada. Moreover, Philippine Airlines submits that attempts were made to contact Air Canada on September 26 and 29, 2008. The Agency regrets that there was an apparent lack of direct communication between Philippine Airlines and Air Canada before the application was submitted, and is also concerned that the application was not submitted sooner, but finds that Philippine Airlines appears to have acted with proper intent. The Agency does not consider there to have been a breach of Article 15, paragraph 5 of the Agreement in this particular case and therefore will deal with the substantive issues raised in the course of the pleadings.

[16] The Agency notes that Philippine Airlines submitted its application pursuant to section 77 and subsection 78(2) of the Canada Transportation Act (the CTA). The Agency, in Decision No. 99-A-2008, granted the additional fifth freedom flight pursuant to subsection 78(2) of the CTA and this application will therefore be considered pursuant to that subsection.

The case at hand

[17] The Agency may grant temporary authority pursuant to subsection 78(2) of the CTA for a service which is not permitted in a bilateral air transport agreement. Action by the Agency to permit an air service under subsection 78(2) of the CTA is therefore an exception that goes beyond the rights that countries have negotiated between themselves.

[18] Philippine Airlines submits that the Agency, in assessing the application, should only consider the public interest and should not concern itself with the status of negotiations between Canada and the Philippines. The Agency cannot ignore Canada's international air relations, and has therefore taken this into account together with the interests of the Canadian travelling public, air carriers and airports.

[19] WestJet states that Philippine Airlines' services should be supported or built primarily on traffic between Canada and the Philippines. The Vancouver Airport Authority submits that the extra-bilateral fifth freedom flights assist in the maintenance of Philippine Airlines' frequency of service between Canada and the Philippines.

[20] Philippine Airlines also argues that the exercise of fifth freedom rights on the additional weekly flight represents a small portion of the capacity offered in the Vancouver-Las Vegas market. The Agency recognizes, however, that this does not negate the potential for the requested flights to have a negative impact on the ability of Canadian carriers to fully participate in this market.

[21] The Agency shares Air Canada's concern that the right for Canadian air carriers to serve the Philippines by code sharing with airlines from third countries has not been agreed to by the Philippines. The Agency recognizes the importance of a balance of benefits available to the designated airlines. Of additional concern is the fact that Philippine Airlines has had the benefit since November 2006 of extra-bilateral authorizations granted by the Agency for the exercise of fifth freedom rights on an additional weekly Vancouver-Las Vegas flight, yet Canada and the Philippines were unable at negotiations in May 2008 to incorporate these flights as a right provided for under the Agreement. In this context, the Agency is hesitant to approve a further authority for the exercise of rights that the parties so recently could not agree to, particularly as this authority is not offset by any benefits to Canadian air carriers.

[22] However, Air Canada refers to a review of policies governing bilateral air relations that is ongoing in the Philippines. The Agency has also considered the fact that Canada and the Philippines committed at the close of the negotiations in May to remain in close contact for a period of six months in order to explore further changes to the 2008 Agreement, including the outstanding issue of third country code sharing. The Agency recognizes that this period has not yet expired.

[23] Accordingly, although the Agency has concerns with approving another extra-bilateral authority allowing Philippine Airlines to exercise fifth freedom rights on an additional flight between Vancouver and Las Vegas, the Agency is prepared to approve the application for the time period ending March 28, 2009.

CONCLUSION

Authority

[24] In light of the above, the Agency, pursuant to subsection 78(2) of the CTA, varies Condition No. 2 of Licence No. 961031 to permit Philippine Airlines to exercise fifth freedom traffic rights on one additional return flight per week, for a total of five (5) flights per week, on the route sector Vancouver-Las Vegas of its Manila-Vancouver-Las Vegas service, from the date of this Decision to March 28, 2009.

[25] In all other respects, the service shall be operated in accordance with the 2008 Agreement. Philippine Airlines is reminded that the 2008 Agreement requires that "Fifth freedom traffic carried on each route sector shall be restricted to no more than fifty percent (50 percent) of the aircraft capacity used on that route sector, calculated on an annual basis."

Future applications

[26] The Agency assesses each application on a case-by-case basis and therefore the authority granted in this Decision should not be relied upon as justification for similar applications in the future. Philippine Airlines is reminded of the importance of ensuring that requests for authorities are sought in sufficient time. Any request for renewal of this authority shall be submitted to the Agency by no later than January 27, 2009.

[27] Should Philippines Airlines intend to sell, cause to be sold or publicly offer for sale in Canada a scheduled international service for transportation between Vancouver and Las Vegas on any fifth weekly flight to take place after March 28, 2009, and if Canada and the Philippines have not agreed to this right, all service schedules, timetables, electronic displays and other public advertising must indicate that the flight is subject to the approval of the Agency. Moreover, travellers must be notified that the flight is subject to the approval of the Agency before reservations are made.

[28] This authority does not exempt Philippine Airlines from the requirements of other legislative acts or regulations, including those of Transport Canada.

Members

• J. Mark MacKeigan
• John Scott