Decision No. 676-A-2003

December 9, 2003

File Nos. M4212/F158-3
M4820-F2Docket No. 031241AG

APPLICATION

On October 1, 2003, Finnair OYJ (hereinafter Finnair) applied to the Canadian Transportation Agency (hereinafter the Agency) for the amendment set out in the title. Additional information was provided on October 15, 2003.

Under Licence No. 975122, Finnair is authorized to operate a scheduled international service in accordance with the Agreement between the Government of Canada and the Government of Finland for Air Services between and beyond their respective territories signed on May 28, 1990 (hereinafter the Agreement). Condition Nos. 1 and 2 of Licence No. 975122 read:

1. The Licensee is authorized to operate the route(s) set out in the Agreement.
2. 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 Finland.

The Agreement does not permit airlines designated by the Government of Finland to serve any intermediate point, including Stockholm, on any own aircraft flight serving Toronto and prohibits the exercise of fifth freedom rights by such airlines at any intermediate or beyond points.

By Decision No. LET-A-211-2003 dated October 20, 2003, the Agency gave notice of the application to Air Canada and the Greater Toronto Airports Authority (hereinafter the GTAA) and granted them until November 3, 2003 to file comments on the application. In that same Decision, Finnair was granted until November 10, 2003 to file a reply to the comments.

On November 3, 2003, Air Canada filed comments opposing the granting of the application, and on November 4, 2003, the GTAA filed comments in support of the application. On November 5, 2003, Finnair replied to the comments filed by both Air Canada and the GTAA.

PRELIMINARY MATTERS

In its submission, Air Canada requested that its estimate of the level of financial loss that it would incur as a result of the operation of the proposed service be treated as confidential. By letter received on November 11, 2003, Finnair advised that it would not ask for disclosure of this information.

The Agency has reviewed and considered this matter and, pursuant to subsection 11(13) of the National Transportation Agency General Rules, SOR/88-23 (hereinafter the General Rules), hereby orders that an abridged version of Air Canada's submission, omitting Air Canada's estimate of the level of financial loss, be placed on the public record.

In addition, although the GTAA filed its comments after the prescribed deadline, the Agency, pursuant to section 8 of the General Rules, hereby accepts them as being relevant and necessary to its consideration of this matter.

POSITIONS OF THE PARTIES

In its application, Finnair notes that there is currently no direct flight between Sweden and Canada. It submits that it arranges some group tours of Swedish tourists to Canada and that the use of Stockholm as an intermediate point would facilitate these tours and allow for expanding the group tours program. Finnair anticipates that the proposed direct flights would increase the number of tourists from Sweden visiting Canada, thus providing a net benefit.

Air Canada submits that the proposed service is not permitted under the Agreement and opposes the application on the basis that the proposed service would negatively affect Air Canada's third and fourth freedom services in the Canada-Sweden market, particularly Air Canada's seasonal Toronto-Copenhagen daily flights.

Air Canada indicates that, in accordance with the respective bilateral air agreements between Canada and the countries involved, Air Canada provides a year-round, daily service between Canada and Stockholm by code sharing on flights operated by Star Alliance partners, i.e., on flights operated by Scandinavian Airlines System (hereinafter SAS) between London (United Kingdom) and Stockholm and by Deutsche Lufthansa Aktiengesellschaft (hereinafter Lufthansa) between Frankfurt and Stockholm. These markets were developed to improve the sustainability of Air Canada's services between various Canadian points and Frankfurt and London (Heathrow airport). Air Canada adds that the viability of its seasonal Toronto-Copenhagen service, introduced in the spring of 1999, relies mainly on traffic flow from SAS. This service is provided by code sharing on SAS flights between Copenhagen and various points within Scandinavia and the Baltic States, with Stockholm ranking among Air Canada's top destinations within Scandinavia.

Air Canada also maintains that an estimated financial loss would result from the proposed service, which it calculated using average fares, market share and route performance data for the past year, and adjusted to reflect the peak summer travel months of July and August. Air Canada indicates that it is very concerned with the effect the proposed service would have on the viability of its service between Toronto and Copenhagen.

The GTAA indicates that it supports the establishment of same-plane non-stop air services to and from Toronto, and is of the opinion that fifth freedom rights should be granted on a case-by-case basis with consideration being given to whether third and fourth freedom rights are exercised in the markets concerned and the development potential of the route in question. The GTAA submits that, in the absence of Canadian air carriers serving the route, or any indication that they intend to do so on a scheduled basis in the near future, it supports the approval of the application for the defined time period requested.

In its reply, Finnair submits that, in total, it proposes to operate nine round-trip flights with a capacity of 210 passengers. During the same period, Finnair indicates that Air Canada will operate 57 flights on its Toronto-Copenhagen-Toronto route using an aircraft with about the same capacity as the aircraft Finnair would use. Further, Air Canada will continue to operate daily flights on that route after Finnair ceases to operate the proposed flights. Finnair maintains that, in view of the large difference in capacity, the temporary nature of Finnair's application and the operations conducted by the other air carriers serving the region, it is difficult to conclude that the proposed flights would result in a loss to Air Canada. Any calculations of financial loss assume the loss of actual passengers, whereas Finnair's proposed flights may not substantially decrease the number of passengers using Air Canada's Copenhagen to Toronto flights. Finnair observes that Stockholm is not a gateway for Finnair passengers from outside of Sweden and that Finnair does not have the capability to compete in any way with Air Canada beyond Toronto. Finnair therefore maintains that most passengers on the proposed flights would be Swedish passengers wishing to visit Toronto. It submits that the proposed flights would better serve Swedish passengers currently having to travel through Helsinki and attract Swedish tourists who would not otherwise travel to Canada.

Finnair submits that under the Agreement, airlines designated by Canada can exercise fifth freedom rights at intermediate points but that they do not exercise these rights, nor third and fourth freedom rights with own aircraft in the Canada-Sweden market. Finnair notes that although airlines designated by Finland do not have rights at intermediate points similar to Canada's, Finnair has demonstrated its long-term commitment to the market by operating services to Canada without interruption since 1989. Finnair maintains that the proposed flights would serve a market for tourists to Canada that Finnair knows exists but that is not being adequately served by Finnair or Air Canada. According to Finnair, the full potential of individual Scandinavian country markets cannot be realized without convenient direct flights. Finnair also notes that the proposed flights would allow a temporary increase in the number of Finnish tourists visiting Toronto as the flights would originate in Helsinki and not decrease the number of Finnair's direct Helsinki-Toronto flights.

ANALYSIS AND FINDINGS

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

Pursuant to subsection 78(1) of the Canada Transportation Act, S.C., 1996, c. 10 (hereinafter the CTA), the Agency is required to exercise its powers in accordance with any international agreement, convention or arrangement relating to civil aviation to which Canada is a party. Notwithstanding this, the Agency, pursuant to subsection 78(2) of the CTA, may, inter alia, vary the terms and conditions of a licence, on a temporary basis for international air services that are not permitted in an agreement, convention or arrangement to which Canada is a party. 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.

Finnair argued that the proposed flights would offer the only non-stop Canada-Sweden flights in that market, and attract mostly Swedish passengers who would not otherwise travel to Canada, thereby benefiting Canada. The GTAA is also supportive as the flights represent direct own aircraft flights to and from a market that is not currently being provided with such services. The Agency notes, however, that Air Canada, through code-sharing agreements with its Star Alliance partners, Lufthansa and SAS, provides daily Canada-Sweden services on its Toronto-Frankfurt-Stockholm and Toronto-London (U.K.)-Stockholm routes. Air Canada has also offered for the past few summer seasons a daily own aircraft service between Toronto and Copenhagen, which is a service that undoubtedly has some reliance on traffic travelling under Air Canada's code on SAS flights between Copenhagen and Stockholm. Although Finnair's proposed service could possibly stimulate some traffic that might not otherwise travel to Canada, there is no shortage of air services offered by Air Canada alone to and from Sweden. In its reply to the interveners, Finnair pointed out the numerous services offered by Air Canada during the same period of time as the proposed flights on the Toronto-Copenhagen-Stockholm route. The Agency is of the view that although no non-stop flights are offered between Canada and Sweden, there is a good selection of air travel options available in the market. Given this selection, it is unlikely that Swedes wishing to visit Canada would be discouraged from doing so by a lack of available air services.

Finnair argued that its proposed flights are temporary and would offer little capacity compared to Air Canada and that there are other air carriers serving the region. The Agency notes, however, that the proposed flights would be operated in the peak transatlantic summer travel months and that the sustainability of Air Canada's own aircraft services between Toronto and points in Europe depends to a large extent on travel beyond the European gateways.

The Agency finds that, in this case, there are no substantial reasons to justify approving, even for a limited number of flights over a short period of time, air services which would constitute the exercise of rights that governments have not agreed to, particularly in view of the fact that Air Canada, the airline designated by Canada to serve Finland and Sweden, is serving the market.

CONCLUSION

Based on the above findings, the Agency hereby denies Finnair's application for a temporary amendment of its scheduled international licence from July 5 to August 30, 2004 that would have permitted it to operate, on an extra-bilateral basis, a once weekly round-trip flight on the Helsinki-Stockholm-Toronto route, and to exercise fifth freedom rights at Stockholm on those flights.