Canadian Competition Bureau concludes extensive investigations of three northern Canadian airlines, determines no further action warranted

26 September 2017

In late August, Canada’s Competition Bureau announced that it had concluded extensive investigations of three matters involving three of the largest providers of air transportation services for passengers and cargo in Northern Canada:

  • a merger between First Air and Calm Air;
  • a codeshare agreement between First Air and Canadian North; and
  • allegations of predatory pricing against First Air and Canadian North.

As part of its investigations, the Bureau obtained evidence and information from the targeted companies, competitors, customers and various levels of government, and retained financial and economic experts.

First Air and Calm Air terminated their codeshare agreement during the Bureau’s investigation, which  resolved that concern.  The Bureau did not find sufficient evidence to challenge the merger or the alleged predatory pricing.

In announcing the conclusion of its investigations, the Bureau acknowledged both the challenges faced by airlines operating in Northern Canada[1] and the essential importance of air service to the region.  The Commissioner stated that “competition plays a key role,” highlighted the importance of compliance with the Competition Act and cautioned the industry that while it is closing its investigations “the Bureau will continue to be vigilant in this arena.”

The Merger

The Bureau’s investigation found that prior to June 2015 First Air and Calm Air were the only providers of scheduled passenger and cargo air services in the central area of Nunavut known as the Kivalliq. In June 2015, First Air terminated its operations in the Kivalliq region. It then entered into agreements with Calm Air that included the following:

  • the sale of First Air’s passenger and cargo contracts and other assets, including the transfer of certain employees, to Calm Air;
  • a lease agreement pursuant to which Calm Air operates 13 flights per week between Winnipeg and Rankin Inlet using aircraft owned by First Air; and
  • a codeshare arrangement whereby First Air could sell seats on Calm Air’s flights within the Kivalliq region.

The Bureau considered these transactions to be a merger. The Bureau may challenge a merger either before its completion or within one year after if it determines that the merger is likely to prevent or lessen competition substantially. This test is subject to an efficiency gains exception, essentially a trade-off in which a merger’s likely efficiency gains are compared to its anti-competitive effects. Efficiency gains include things like savings related to administration and streamlined operations. The Bureau determined that the merger would likely result in significant efficiency gains, and that these gains are likely to significantly outweigh its anticompetitive effects.

The Codeshare Agreement

In May 2015, First Air and Canadian North Announced that they would enter into a codeshare agreement. A codeshare agreement allows for a flight operated by one airline to also be marketed by another airline under the second airline’s code and flight number, and essentially allows one airline to sell seats on a flight operated by another airline. The codeshare agreement was implemented in July 2015.  It covered 16 routes operated by the two airlines.  The Bureau reviewed the codeshare agreement under the Competition Act’s civil competitor collaboration provision.[2]  Under the civil competitor collaboration provision, if the Competition Tribunal finds that an agreement between competitors is likely to result in a substantial lessening or prevention of competition, it may require them to cease and desist from continuing the agreement. As part of its investigation, the Bureau obtained s. 11 orders[3] against First Air and Canadian North in October 2016.  Shortly thereafter, First Air informed the Bureau that it would be terminating the codeshare agreement as of May 16, 2017. This resolved the Bureau’s concerns.

It is important to note that codeshare agreements are not uncommon in the airline industry and may result in obvious efficiencies. Not all codeshare agreements will be considered problematic from a competition law perspective. However, an airline that is considering entering into a codeshare agreement should first consult competition law counsel and consider the likely competitive effects.

The Alleged Predatory Pricing

In April 2016, the Bureau received information alleging that First Air and Canadian North were actively trying to prevent a new entrant, GoSarvaq, from operating flights linking Ottawa and Iqaluit.  First Air and Canadian North allegedly offered significantly lower prices for passengers on their competing flights between May and August 2016. On May 6, 2016, GoSarvaq announced that it would terminate its operations.

The Bureau considered the allegations under the Competition Act’s abuse of dominance provision.  Predatory pricing occurs when an individually dominant company or two or more jointly dominant companies, deliberately sell below cost for long enough to eliminate, discipline or deter entry by a competitor, with the expectation that they will be able to subsequently increase prices and recoup losses.

While the Bureau concluded that First Air and Canadian North were dominant on the Iqaluit-Ottawa route, it also concluded that another critical element of the test for abuse of dominance in the predatory pricing context was not met. Predatory pricing involves selling below an appropriate measure of cost.  In the case of airlines, the appropriate measure is avoidable costs. Avoidable costs are the costs an airline would not incur if it did not fly an aircraft.  The Bureau did not find that revenues generated by First Air and Canadian North on the Iqaluit-Ottawa route were consistently below their respective average avoidable costs associated with the operation of the relevant flights during the period in question. The Bureau also noted that that it found no evidence that First Air and Canadian North coordinated prices during or outside of that period.  As a result, the Bureau closed its investigation of this matter without further action.

It is worth noting that predatory pricing is a somewhat controversial topic among competition law scholars.  Some believe that predatory pricing should not be challengeable the Competition Act or equivalent laws in other jurisdictions, and that the free market can be left to regulate itself in this area.  It can be difficult to distinguish fierce but legitimate competition from predation.  In addition, it is difficult to succeed at predatory pricing and attempted predatory pricing can benefit consumers.  Even if the dominant firm succeeds in eliminating a competitor, it may find that another new entrant emerges when it tries to raise prices to recoup its losses.  Accordingly, consumers may enjoy lower prices when the new entrant is being driven out without subsequently paying higher than competitive prices later. 

Notwithstanding divergent views on the topic, the fact is that alleged predatory pricing can be challenged under the Competition Act and has been challenged in the context of airlines.  Accordingly, airlines are well advised to ensure that their pricing practices are compliant. This includes not just large national or regional airlines, but smaller airlines that may be dominant on only a single route.   

[1] For example weather, a large but not densely populated area, fewer paved runways that may necessitate the use of specialized equipment, higher fuel costs and finding and retaining staff.

[2] The Act contains a civil provision and a criminal provision to address agreements between competitors.  The most egregious forms of cartel agreement (e.g. price fixing, output restriction, customer or market allocation) are prosecuted under the criminal provision.  Other forms of competitor collaboration are assessed under the civil provision.

[3] A s. 11 Order is effectively a form of subpoena that typically requires the respondent to produce substantial amounts of information.

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