Predation in the airline industry: the Canadian antitrust approach.

I. Introduction

On October 19, 1999, Air Canada announced its plan to restructure Canada's airline industry. That plan included making an offer to acquire all or substantially all of the outstanding shares of Canadian Airlines International Ltd. and repurchase up to 36.4% of Air Canada's outstanding common shares. (1) The acquisition of Canadian Airlines by Air Canada would result in a carrier with close to 90% of domestic passenger revenues and in excess of 80% of domestic passengers carried. (2) Notwithstanding this fact, the Commissioner of Competition, who enforces the merger provisions of the Competition Act, did not find grounds to oppose the merger. This decision was based on the imminent insolvency of Canadian Airlines, the lack of a preferable competitive alternative, and the undertakings that Air Canada provided to the Competition Bureau on December 20, 1999.

On October 22, 1999, the Commissioner wrote a letter to the Minister of Transport giving his views regarding aspects of potential restructuring of the airline industry that relate to competition. (3) In that letter, the Commissioner indicated a concern about possible predation by a dominant air carrier. It was noted that predatory conduct could take the form of predatory pricing: temporarily setting low fares to inflict losses on one or more rival airlines, or matching fares while adding capacity. Other predatory conduct mentioned in the letter included adding flights to directly target a rival's flights or scheduling new flights to bracket a rival's scheduled flights, increasing frequent flyer points, targeting commission overrides to travel agents for a new entrant's routes, and restricting access by competitors to airport facilities.

In light of the Commissioner's concerns regarding possible anticompetitive conduct by a dominant air carrier, on February 17, 2000, the Minister of Transport introduced in the House of Commons bill C-26. The bill, which came into force on July 5, 2000, authorized the Governor in Council to define by regulation what constitutes anticompetitive acts in the airline industry for the purpose of the abuse of dominance section of the Competition Act, section 79. The anticompetitive acts listed in the airline regulations signal a revised approach to assessing predatory conduct, an approach that is consistent with the recent emphasis on avoidable cost as the appropriate cost measure for a cost-based predation rule. (4) This list of anticompetitive acts also signals a rejection of the approach to evaluating exclusionary conduct in the airline industry proposed by the United States Department of Transportation (DOT) and later withdrawn. (5)

Given the difficulties encountered by the DOT in promoting what was criticized as being a nonantitrust approach to dealing with exclusionary and predatory conduct in the airline industry, it is useful to have a clear understanding of the Canadian alternative competition policy approach. The purpose of this article is to describe the Canadian approach to addressing possible anticompetitive conduct by a dominant air carrier in the Canadian airline industry, and to discuss its linkages to the economics of predatory and exclusionary behavior.

The next section of the article sets the stage for the discussion of the Canadian approach by describing the DOT's proposed strategy for dealing with unfair exclusionary conduct in the air transportation industry. It also summarizes the enforcement strategy that the U.S. Department of Justice has articulated publicly and appears to be using in its case against AMR Corporation, American Airlines, Inc., and AMR Eagle Holding Corporation. Both of the American policy approaches were being advanced well before the merger of Air Canada and Canadian Airlines. Section III then describes the existing provisions of the Canadian Competition Act just prior to the merger of the two airlines that could have been used to deal with predatory and exclusionary conduct by a dominant air carrier. Section IV examines the Canadian airline regulations that were enacted to supplement the existing provisions of the Competition Act. Section V contains a summary and some concluding remarks.

II. Current and proposed U.S. approaches