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U.S. unlikely to rush in if open skies expands

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U.S. unlikely to rush in if open skies expands

Shaky industry health could delay dog fight over Canadian routes, observers say



Tuesday, November 9, 2004 - Page B7

U.S. airlines won't be in a rush to do battle with Canadian carriers over domestic routes within Canada if a so-called open skies pact between the two countries is expanded, industry observers say.

As a parliamentary committee begins examining free trade in aviation, U.S. and Canadian carriers are watching for signs that Ottawa and Washington will find a way to forge a bilateral deal.

But how realistic is it to expect that a full-fledged North American dogfight in the skies will break out within two years? Based on the shaky financial health of the airline industry, the short-term prospects for comprehensive free trade don't look good.

"Right now, the airline industry is sick. Even the relatively healthy low-cost carriers have seen their profit margins fall because of competitive air fares and high fuel costs," said analyst Ted Larkin of Orion Securities Inc.

Canadian and U.S. airlines already have their hands full staving off existing rivals, so jumping into the thick of another country's air wars isn't high on their agenda. But longer term, air skirmishes on a handful of routes could be possible once the industry regains its footing, aviation experts say.

Canada's Transport Minister, Jean Lapierre, recently raised the prospect of expanding the 1995 open skies pact between Canada and the United States. He provided details of his legislative agenda last Thursday to the transport committee in Ottawa, just five weeks after he first floated the idea of further liberalization of air policy. The transport committee is expected to report on its findings next spring.

The Canada-U.S. open skies agreement cleared the way for what are now common transborder flights between the two countries. However, major restrictions remain that bar U.S. carriers from operating flights within Canada, and also prevent Canadian airlines from flying passengers from one U.S. city to another U.S. city.

Allowing foreign carriers to run domestic flights, known as "cabotage" in industry parlance, would put competitive pressure on airlines to keep consumer fares as low as possible -- in theory, at least.

When Air Canada took over Canadian Airlines International Ltd. in early 2000, it gained a stranglehold on the Canadian market.

However, competition within Canada has sharply increased over the past four years. Air Canada and its units held 54.9 per cent of domestic capacity last month, compared with WestJet Airlines Ltd.'s 28-per-cent share, Transport Canada reported last week. In October, 2000, Air Canada and its units had a 79.5-per-cent share, well ahead of WestJet's 6.5-per-cent share.

Some industry experts say the argument for encouraging U.S. entrants into Canada has been weakened with WestJet's larger market share. If any U.S. carriers show up on intra-Canada routes, they would likely be discount airlines not scared off by a market that already has sufficient capacity provided by the likes of Air Canada, WestJet, Jetsgo Corp. and CanJet Airlines.

Within Canada, the busiest routes would likely attract the most U.S. attention, led by Toronto-Montreal, Toronto-Vancouver and Toronto-Ottawa flights.

Assuming cabotage cuts both ways, Canadian airlines would have access to potentially lucrative routes within the United States, such as New York-Los Angeles or New York-Chicago.

But on the U.S. side, there's the sticky issue of other foreigners such as European airlines clamouring for access if Canadian carriers are let in, said Rick Erickson, managing director of RP Erickson & Associates, an independent aviation consulting firm.

Still, the United States is leaving the door open to cabotage. A U.S. Department of Transportation spokesman said Mr. Lapierre met with U.S. Transportation Secretary Norman Mineta recently in Montreal. "We strongly support open skies, as well as market liberalization," the spokesman said.

Louis Gialloreto, a professor at McGill University's faculty of management in Montreal, said Ottawa appears to be trying to score political points with the United States by being open to amending air policy.

But there are high hurdles to clear, Prof. Gialloreto said.

"If you have a single aviation zone between Canada and the U.S., does that mean we eliminate security, immigration and customs? I don't think the U.S. guys are going to say yes to that," he said. "Given the post-9/11 world, these are not small items."

Triant Flouris, director of Concordia University's international aviation MBA program in Montreal, said cabotage would stimulate traffic and competition.

Canada would gain more than the United States because Canadian carriers would enter the huge American market while U.S. airlines are left to mull their options in the relatively small Canadian market, he said.

Broadening the 1995 open skies deal is the key topic in the transport committee's wide-ranging review.

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