CANADIAN MINISTER OF TRANSPORT SUGGESTS THAT THE

UNCLAS SECTION 01 OF 04 OTTAWA 003144 SIPDIS STATE FOR WHA/CAN - ALAN HOLST, EB/TRA - JOHN BYERLY STATE PASS USTR FOR SAGE CHANDLER TRANSPORTATION FOR OST (EDDIE CARAZO) AND INTERNATIONAL AVIATION (SUSAN MCDERMOTT) COMMERCE FOR 4320/MAC/WH/ON/OIA/WORD FAA FOR LEEANN HART TSA FOR SUSAN WILLIAMS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EAIR ECIN EINV CA SUBJECT: CANADIAN MINISTER OF TRANSPORT SUGGESTS THAT THE STATUS QUO HAS GOT TO GO REF: A) Ottawa 2893 B) Ottawa 2766 -------------- Summary -------------- ¶1. (SBU) Canadian Transport Minister Jean Lapierre has signaled his interest in reviewing Canada's civil aviation policy. He has proposed a broad examination of barriers to a more innovative and efficient civair system in Canada, including questioning foreign investment limits and cabotage prohibitions. This is the first time that a Minister of Transport has so enthusiastically questioned the status quo, but not the first time that these questions have been raised. Most recently, in autumn 2002, Canada's Independent Transition Observer on Airline Restructuring called for the Government of Canada (GOC) to vigorously pursue a program of liberalization of the airline market-- unilaterally if necessary. Those recommendations, and others like them from 2001, 1999 and earlier, all fell on deaf ears when David Collenette was Minister of Transport (from June 1997 to December 2003). The new Minister is clearly more amenable to change, but this will depend on USG willingness to engage on this issue as well as Canadian Cabinet interest in dealing with a potentially divisive issue while in a Minority government position. For its part, Air Canada, the national flag carrier, has indicated that it is ready for a more open bilateral aviation agreement with the United States. End summary. -------------- The Minister Talks Liberalization -------------- ¶2. (U) The federal government is mulling a dramatic overhaul of the country's airline industry, including the elimination of limits on foreign ownership in Canadian airlines and even letting U.S. carriers fly passengers between Canadian destinations. Jean Lapierre, the Transport Minister since June 2004 (Tony Valeri was Minister from December 2003 to June 2004),said in early October that he would reopen the question of a more liberal aviation agreement with the United States and initiate public debate on the issue (reftel B). In late October Lapierre said that Canada must open up its airline sector and force Air Canada to survive on its own. In his comments to airline executives on October 29 in Toronto Lapierre noted that: "For nearly a quarter of a century, the federal government's air policies have been built on protecting what we have, rather than building something better, protecting against loss of service, against the loss of our national flag carrier." "The time for this approach is over," the Minister stated. ¶3. (U) At the Toronto meeting Lapierre questioned whether it is time to relax airline ownership restrictions, if it is time for Canada to consider allowing foreign carriers to provide domestic passenger service, and whether cargo cabotage should now be allowed. Lapierre made similar allusions to liberalization in discussions with Ambassador Cellucci during their October 26 meeting (reftel A). ¶4. (U) Minister Lapierre said he intends to task the House of Commons Standing Committee on Transport with addressing these questions and, once he has their views, to "move swiftly" toward implementation. Lapierre presented his proposals to the Commons Transport Committee in early November for its review and recommendations. In a speech before the Air Transport Association of Canada in Vancouver on November 15, Lapierre said that he would ask the Transport Committee to consider not only a "fully open skies agreement with the United States," but also an expanded, integrated market that includes Mexico. -------------- -- The Issue Has Already Been Exhaustively Studied -------------- -- ¶5. (U) This is not the first time that these questions have been raised in Canada, although this is the first time that the Minister of Transport has been so clearly enthusiastic about possibly altering the status quo. ¶6. (U) In September 2002 Debra Ward, the "Independent Transition Observer on Airline Restructuring," released her final report with long- and short-term policy recommendations on how to improve market competition in Canada's airline industry. Ward's position was established in August 2000 (by then-Minister David Collennette) in the wake of the take-over of Canadian Airlines International by Air Canada, and the consequent establishment of Air Canada's monopoly position in the Canadian air travel market. Ward had the mandate to examine the overall impact of airline restructuring on the following: consumers; urban, rural and remote communities; travel agents and airports; and airlines and their employees. (FYI: Ward's 2002 report is available online: www.tc.gc.ca/pol/en/Air/Airline_Restructuring _menu_page.htm. End FYI.) ¶7. (U) In addition to liberalization, Ward's recommendations encompassed a wide array of subjects, such as the need for a "Passenger Bill of Rights," provision of air service to small and isolated communities, and travel agency regulation. Liberalization was identified as a long- term policy goal and four specific recommendations for action were made: ¶A. "That the government make every effort to reach reciprocal agreements, but be prepared to liberalize air service without direct or immediate reciprocal benefits for carriers, if there is an obvious advantage for Canadians and consumers, and when the liberalization has either no impact on the carrier industry, or when the carrier interests are clearly subsumed by a greater benefit." ¶B. "That, within the context of a liberalization framework, the Government of Canada liberalize the current rules of ownership to allow foreign-ownership of domestic Canadian carriers and a 49% ownership level of international carriers." ¶C. "That the Government of Canada rigorously pursue and accelerate a program of liberalization under the bilateral regime." ¶D. "That the Government of Canada work to achieve liberalized air agreements with key multinational partners and plan towards the establishment of common aviation areas." (Comment: Ward identified the United States as the country that Canada should target first for enhanced liberalization negotiations. End comment.) -------------- Ward's Findings Echo Prior Reports -------------- ¶8. (U) Over the past 12 years the Canadian Competition Bureau has consistently advised the GOC to liberalize domestic air transport, unilaterally if necessary, in order to enhance competition. In the more recent past (since 1999),the Competition Bureau has recommended that the GOC permit foreigners to hold up to 49 percent of voting shares in Canadian air carriers. ¶9. (U) The Canadian Transportation Act Review Panel, in its June 2001 report, also recommended that the limit on the voting shares of Canadian airlines that can be held by foreigners be raised to 49%. That panel recommended that the government enter into negotiations with the United States and Mexico to create a North American Common Aviation Area in which carriers from Canada, the U.S., and Mexico would compete freely. And, as a back-up option in the event those negotiations did not succeed, the Panel recommended that the government negotiate with other countries for the granting of reciprocal modified sixth freedom rights and of rights of establishment for foreign-owned domestic carriers. ¶10. (U) In addition, the House of Commons Standing Committee on Transport recommended in late 1999 that the GOC should raise the foreign ownership limit in Canada's airlines from the current 25 percent to 49 per cent; initiate negotiations with the United States on reciprocal cabotage; and examine the viability of licensing foreign- owned carriers to operate solely on Canadian domestic routes. -------------- Will Liberalization Fly? -------------- ¶11. (U) In 2002 then-Minister of Transport David Collenette reacted to Ward's recommendation to open Canada's passenger airline industry to foreign competition by noting the strong counter-argument that has been applied previously; i.e., that unilateral opening of Canadian air markets would lead to only the most passenger-intensive and lucrative routes receiving extra attention, while low-load routes serving smaller communities would be further marginalized. Collenette also declared that homegrown Canadian competition to Air Canada, such as Calgary-based WestJet, is increasingly successful and would only be damaged by unilateral liberalization. Furthermore, Collenette pointed out that the United States had shown little enthusiasm for further reciprocal liberalization, e.g., passenger cabotage. ¶12. (U) Air Canada has recently indicated that it would be interested in liberalizing the aviation relationship. Speaking to reporters November 15 in Toronto, Air Canada Chief Executive Officer Robert Milton urged the USG and GOC to "get on with" expanding the existing bilateral aviation agreement, observing that he thinks that would be good for Air Canada's business. Asked about reports that Minister Lapierre appears to have become the champion of a more liberal bilateral aviation policy, Milton was quoted as saying that he is as happy with that news as Red Sox fans were with the World Series. ¶13. (SBU) Embassy discussions in recent weeks with local Air Canada officials and industry insiders confirm Air Canada's interest in an enhanced aviation agreement, particularly for cargo. There are reports that Air Canada would like to switch its air cargo operation from one which currently only carries cargo in the hold of passenger flights, to a full-service, all-cargo branch. The carrier has reportedly started making inquiries for the acquisition of cargo freighters. Air Canada officials suggest that the carrier's code share partner, United, would be supportive of negotiations for a broader bilateral aviation agreement, but we have not heard that directly from United. ¶14. (SBU) Comment: We expect that many of the familiar protectionist arguments will be made against liberalization as Parliament debates Minister Lapierre's proposals. There are many objective advocates of liberalization, however, such as Debra Ward, the Competition Bureau, and the Transportation Act Review Panel, all arguing in favor of opening up the aviation environment. Now there is a Minister in place who seems to want to act on this body of well-reasoned advice. He is clearly convening a parliamentary group to examine the issue to smoke out in advance any obstructionist views. We will be speaking with Liberal, Conservative, Bloc Quebecois and NDP Members of Parliament to determine what their thinking might be on liberalization. Post would also appreciate learning the views of the USG and U.S. aviation interests regarding reciprocal liberalization with Canada. End comment. Cellucci