Ottawa Studies Further International Aviation

UNCLAS SECTION 01 OF 03 OTTAWA 003455 SIPDIS STATE FOR WHA/CAN AND EB/TRA (JEFF HORWITZ) STATE PASS USTR (MARY SULLIVAN) TRANSPORTATION FOR OST/IA COMMERCE FOR 4320/MAC/WH/ONIA FAA FOR INTERNATIONAL AFFAIRS TSA FOR SUSAN WILLIAMS SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAIR ECON EINV CA SUBJECT: Ottawa Studies Further International Aviation Liberalization...again REF: 05 Ottawa 1374 ¶1. (U) Summary: The Conservative government is set to announce a new international air policy in early 2007 that aims to open Canada's skies to more foreign competition and will focus on an "Open Skies" model. Some observers think the move promises to benefit consumers, but not necessarily the country's airlines. Others argue that Canada's domestic market is mature and that Canadian carriers are increasingly turning to the international marketplace for additional growth. Moreover, Canadian airports have invested in modern infrastructure and additional capacity and are aggressively seeking new and expanded service and revenue opportunities. ¶2. (U) The new policy comes in the wake of the November 2005 Canada - United States Open Skies agreement which removed the final, vestigial, restrictions on transborder operations between the two countries (the Agreement has yet to come into force due to the continuing USDOJ Antitrust review). The full liberalization of the Canada-U.S. market was more contentious and had a higher political and economic profile than does liberalization with any other country, factors which suggests that this proposed policy will indeed fly, unless delayed by a possible spring 2007 Parliamentary election. End Summary. ¶3. (U) While domestic air services in Canada have been significantly deregulated since 1988, the international aviation market is still largely governed by restrictive bilateral agreements. Canada currently has air transport agreements or arrangements with over 70 bilateral partners, the majority of which specify, for example, the number of airlines of each side that may operate the possible routings, and the frequency of services. The proposed new policy would formalize "a more progressive approach to air liberalization" similar to the liberal U.S. "Open Skies" model and seek to replicate the Canada-US (November 2005) and Canada-UK (April 2006) agreements. A consultation document that outlined the scope of the proposed policy was given to industry stakeholders in late October for a two-week consultation process. According to Transport Canada officials, the government is set to make an announcement in early 2007 once it has reviewed submissions from the industry. The consultation document is available at the Transport Canada website: www.tc.gc.ca ¶4. (SBU) Paul Fitzgerald, Policy Advisor to Transport Minister Cannon, told Embassy officers that the intent of the new policy is to create a framework for negotiating future bilateral agreements that stresses the importance of allowing "market forces" to determine the quality, frequency and range of air service options available to Canadians. In practice, new accords will focus on the removal of restrictions on pricing, frequency and destinations that can be served by airlines. They can also include so-called fifth freedom rights, which allow carriers to fly to another country, stop and pick up more passengers, and then continue on to a third country. Cabotage, which would allow foreign airlines to carry passengers between Canadian cities, would remain off-limits. ¶5. (SBU) Fred Gaspar, Vice-President of Policy and Strategic Planning for the Air Transport Association of Canada (ATAC), expressed concern to the Embassy that Canada may be moving too fast; Qexpressed concern to the Embassy that Canada may be moving too fast; he said accords make sense with some countries, but added that the wrong agreement would threaten to make Canada a "spoke in somebody else's aviation hub" with little or no benefit for Canadian carriers. Sam Barone, President and CEO of ATAC told embassy that in the event of increased foreign competition a significant issue for airline survival is the Canadian tax and fee structure which makes Canadian carriers less competitive than their counterparts elsewhere, for example in Canada the jet fuel excise tax is 4 cents a liter (or 15 cents a gallon) whereas in the U.S. the aviation fuel tax rate is about 4 cents a gallon. Both Barone and Gaspar emphasized that they have told the GoC that aviation negotiations are "trade" negotiations and fair benefits need to be extracted for Canadian carriers in any future air policy regime. ¶6. (SBU) The Canadian Airports Council, by contrast, would benefit from any and all carriers who operate from their sites and fully OTTAWA 00003455 002 OF 003 supports any moves by the government to increase the number of aircraft landing and taking off from Canada's airports, whether or not they are Canadian or foreign-registered. ¶7. (U) In addition to pursuing additional liberalized agreements, Transport Canada is also seeking stakeholder input on ideas that could form future policy options, including exploration of a comprehensive Canada-European Union air transport agreement (Canada has air transport agreements with 17 of the 25 EU Member States); evolution of ownership and control regimes of foreign air carriers; movement towards a North American aviation market; and the adoption of a multilateral approach to some negotiations. Issue has already been exhaustively studied -------------- ¶8. (U) This is not the first time that civair liberalization issues have been raised in Canada. 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. The Ward report recommendations actually encompassed a wide array of subjects, such as the need for a Passenger Bill of Rights, provision of air service to small communities, and Travel Agency regulation. Liberalization was identified as a long-term policy goal with four specific recommendations for action: ¶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." ¶9. (U) In her 2002 report, Ward identified the United States as the country that Canada should target first for enhanced liberalization negotiations. ¶10. (U) Moreover, over the past 14 years the Canadian Competition Bureau has consistently advised the GoC to liberalize domestic and international air transport, unilaterally if necessary, in order to enhance competition. In May 2004 Competition Commissioner Sheridan Scott noted that the Competition Bureau since 1999 has supported "the U.S.-style open skies agreement including cargo co-terminalization" for Canada. The Canadian Transportation Act Review panel, in their June 2001 report, also recommended that the government further liberalize, beginning with 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. ¶11. (SBU) Comment: The 2005 "Open Skies" Agreement with the United Q11. (SBU) Comment: The 2005 "Open Skies" Agreement with the United States was much more contentious and had a much higher political and economic profile than does liberalization with any other country, factors which suggests that this new proposed policy will indeed fly, especially since objective observers have consistently recommended further liberalization. On the other hand, a loss by the Tories in the next election (anticipated by many for late spring 2007) may derail the implementation of the new policy. End comment. OTTAWA 00003455 003 OF 003 Dickson