Free markets for air travel

Having won its industry battles, Air Canada should lead a bold push for open competition

1999-12-11 - By Douglas Reid
Douglas Reid is an assistant professor of business strategy at Queen's School of Business, and conducts research into airline alliances

So far, Air Canada CEO Robert Milton hasn't missed a trick. In November, he bested Onex's CEO Gerald Schwartz in one of Canada's most vicious corporate takeover battles. This week, he stared down American Airlines CEO Don Carty over $1-billion in shareholder rights payments associated with the acquisition of Canadian Airlines, emerging victorious by paying out a maximum of only 15¢ on the dollar. So far, his strategy and execution have been flawless.

Except, unfortunately, on the subject of open competition. Mr. Milton has called for greater freedom for charter carriers as part of a generally more liberalized Canadian airline industry. But he has stopped short of embracing all-out competition, a choice that places his legitimate corporate objective of increasing profit against equally legitimate passenger objectives of low fares, frequent departures and high service standards. Surprisingly, he has seemingly embraced the false argument that unless both Canada and the U.S. have the same policy on open competition, we cannot move to a liberal market structure, even though common sense says such a structure would benefit consumers.

This means the final decision about the shape of Canada's airline industry will be left in the hands of the federal government, which seems to fear competition for reasons not grounded in logic nor clearly articulated in public.

The House of Commons Transport Committee report throws a new complication into the mix. While many of its recommendations are routine and predictable, the committee at least acknowledges that competition has some role to play in securing the benefits customers value most. To obtain those benefits, it recommends that the "dominant carrier" be obliged to divest its regional carriers, thereby improving the industry's overall competitive prospects. This recommendation surely will not sit well with Mr. Milton.

Paradoxically, this strange brew of opinions on the relatively straightforward subject of whether competition is good or bad for Canadians gives Mr. Milton an opportunity to change the face of Canada's airline industry again, for the better. And to boot, he'll get to keep the regional carriers, win the hearts of Canadian Airlines' employees, and emerge a hero in the eyes of customers right across the country -- all by adopting a new strategy.

The essence of this strategy is a single, powerful idea: Mr. Milton and Air Canada should become the prime movers for open competition in Canadian aviation. He should advocate allowing carriers of any nationality that are airworthy (read "safe") to offer scheduled service between any two Canadian cities. New entrants would be able to compete with Air Canada in any city-pair market they chose. The federal government's only role would be validating the safety of each new entrant. Consider this strategy's benefits:

1. Air Canada would become a better company. Rather than preparing to harvest a small market that it controls, Air Canada could instead fortify itself to meet the challenges of growth in a larger world market. Academic research on the dynamics of competition consistently shows that companies that face and surmount competitive challenges are far stronger than those that hide behind entry barriers erected by well-intentioned but not well-read governments.

2. Having common competitors would focus the efforts of all employees of the new Air Canada -- especially those from Canadian Airlines -- toward overcoming their common foes and away from dwelling on longstanding differences in corporate culture as reasons not to co-operate. The perpetuation of such differences will make the eventual melding of the two firms an incredibly complex and costly chore.

3. Air Canada would be able to make a strong argument that it needs to retain ownership of its regional carriers to fly passengers from secondary markets to hub cities. Such feeder carriers would provide Air Canada with an advantage that foreign competitors don't have. Better yet, a free market would encourage foreign entrants to partner with Canadian entrepreneurs in secondary markets, to create new networks of regional carriers allied against Air Canada. This would create jobs, giving the government a significant win on the aero-employment front.

4. The example of a vibrant, customer-focused airline industry in Canada may prompt U.S. legislators to follow our lead and open their markets to competition. Air Canada has already shown it can compete and win in cross-border aviation under the Open Skies agreement. Toughened in a new competitive market, Air Canada would very likely become a viable competitor in a more open U.S. market, too.

5. Customers would benefit from low fares, frequent departures and attentive service, all of which flourish in competitive markets but are absent from monopoly markets. And they would have the freedom to choose their carrier. Passengers who preferred to fly on a domestically owned airline could always opt for Air Canada, whereas those passengers who are price-sensitive could choose the lowest-price provider regardless of its nationality. In short, choice means that everybody wins.

In just a few short months, Mr. Milton has transformed Canada's airline industry by dismantling the aviation policy of successive federal governments, which had resulted in an idealized, two-carrier environment. Now, if he is bold enough, he can again change the future of this industry for the better by aiming beyond the horizon of the Canadian market, to where the real opportunities lie.