Foreign ownership: a new ident for Canadian airlines
Foreign ownership restrictions regarding airlines originate from the Chicago Convention on International Civil Aviation in 1944. Fifty-two countries agreed on the principle that the airspace of a state is the property of this state. The main reasons why states decided to restrict foreign investment for their national air carrier were for national security, economic security and aviation security and employment laws/regulations purposes.
In the 1980s, Canada shifted from a government owned and controlled system to a commercial-based market.
Almost thirty years after privatization, the government is reopening the debate over international liberalization of our aviation market by redefining what is “Canadian” under our aviation law and regulations.
Pursuant to subsection 55(1) of the Canada Transportation Act (the “CTA”), a “Canadian” natural person means:
a Canadian citizen or a permanent resident within the meaning of subsection 2(1) of the Immigration and Refugee Protection Act [basically a person who has acquired permanent resident status and has not subsequently lost that status]
The same provision defines “Canadian” corporation as:
a corporation […] that is incorporated or formed under the laws of Canada or a province, that is controlled in fact by Canadians and of which at least seventy-five per cent […] of the voting interests are owned and controlled by Canadians.
Foreign ownership is therefore limited to 25% of the voting shares of the air carrier. This rule notably applies to Canadian flight schools (CARs 406.04) and airlines performing domestic flights (section 10 of the ATRs).
Subsection 55(1) of the CTA also authorizes the cabinet to allow by regulation greater percentage of foreign ownership to Canadian air carrier.
Why did Parliament limit foreign ownership to 25%?
All this began with the economic deregulation of the domestic market for air services which began in 1986, and, of course, the privatization of Air Canada (ADH2) in 1988. The Mulroney government chose to follow US air transport system as a model which only allows foreigners to control 25% of US air carriers.
A political argument could also be made – such as allowing more than 25% foreign interest would be unprecedented in the North American context. Shifting from a 100% publicly owned and controlled system to full privatization is no small matter – the federal government had to put reasonable barriers.
The new commercial and operation conditions created perverse consequences. Job losses, service cuts, bankruptcies and consolidation were among the negative impacts of the system shift. However, largely inspired by US business models and the implementation of a successful hub-to-spoke networks and unbundling services, Canadian air carriers successfully restructured their profitability over the years.
The Canada Transportation Act Review
In 2015, the previous government mandated former federal minister, The Hon. David Emerson, P.C., to conduct a massive review of Canada’s transportation system.
Tabled at Parliament on February 25th, 2016 by The Hon. Marc Garneau, P.C., the Canada Transportation Act Review (the “Review”) is exposing an important issue:
"It is increasingly difficult for our air transport system to remain globally competitive, due to geography, population density, and federal policies that inhibit growth. Not much can be done about the first two, but policies that, in today’s context, no longer serve national interests should be revisited."
In sum, the Review expresses many concerns over the lack of competiveness within our air transport system. According to the Review, Canada must focus on the three major components of competiveness: cost, access, and user experience.
According to the OECD Service Trade Restrictiveness Index, Canada ranks at the bottom third of major economies as “less trade friendly” for air transport. Policy wise, other countries are far ahead. For example, foreign investors can own up to 49% of a European airline. Australia and New Zealand have liberalized even more their air transport system by allowing 100 per cent foreign ownership of domestic airlines. Chile has no limit on foreign investment in both domestic and international airlines.
The overhaul objective is to decrease the cost burden on air transport by allowing more competiveness and ensure that these savings are passed on to users. But how can we have more competitiveness? The Review responds to this question by recommending the implementation of a more flexible governance structure in domestic and international markets.
Indeed, the Review recommends that the government increases foreign ownership limit to 49% for air carriers operating commercial passenger services.
The government reply to the Review – Bill C-49
After consulting the provinces, the government did not wait long to reply. On May 16th, 2017, The Hon. Marc Garneau, P.C., tabled Bill C-49, An Act to amend the Canada Transportation Act and other Acts respecting transportation and to make related and consequential amendments to other Acts. Section 15 amends significantly the definition of “Canadian” corporation mentioned at subsection 55 (1) of the CTA.
Under C-49, a corporation is identified as “Canadian” when it is controlled in fact by Canadians and of which at least 51% of the voting interests are owned and controlled by Canadians. That means that foreign investors could own at least up to 49 per cent of the corporation. However, the government proposes to keep the 25% limit on the voting shares.
Arguments for reducing foreign ownership restrictions
Any new legislation/policy always creates the same result: some stakeholders benefit while others lose. The proponents defend the idea that liberalizing global aviation markets is the new trend in the aviation industry. The rules based on national and economic security rational in the Chicago Convention are outdated and do not follow this new economic trend. According to some experts, the concept of a flag air carrier is no longer applicable in 2017. Fifteen flag air carriers, including Air Canada (ADH2) , have been privatized over the last two decades. Today, less than 50 airlines are state-owned in the world
Obviously the ultra-low cost carriers (the “ULCC”) are amongst those that encourage the implementation of this policy. The government did not wait long to announce its support to this modal. The Minister of Transport pledged on November 3, 2016 to exempt Enerjet and Canadian Jetlines Ltd from the actual 25% foreign ownership limit while C-49 works its way through Parliament.
Due to lower landing fees, ULCC will take off and land at regional airports such as Hamilton, ON (CYHM), Gatineau QC (CYND), Saint-Hubert QC (CYHU) and Abbotsford, B.C. (CYXX) rather than Toronto (CYTZ), Ottawa (CYOW), Montreal (CYUL) or Vancouver (CYVR). ULCC will support our regional airports and, therefore, contribute to job creation and infrastructure developments within these airports.
Allowing fewer ownership restrictions would allow air carriers to bring more capital, reduce the average cost of this capital, decrease debt, consolidate and consequently avoid filing for bankruptcy.
For example, according to some experts, it would provide to small private air carriers more opportunities to expand or improve their fleets to attract the capital they require to finance their growth.
The OECD provides economic arguments in its 2016 preliminary economic outlook for Canada to the effect that globalizing our air carriers would “sharpen competitive pressures, raise, and productivity and reduce prices for consumers”.
Arguments against reducing foreign ownership restrictions
The two largest air carriers and labour movements are not encouraged by the government intention to relax foreign ownership restrictions.
One of the air carriers believes that the current 25% limit is “adequate” and that the government should follow what the US legislation is implementing. This is without mentioning that US air carriers have a greater purchasing power with the USD, it is therefore easier for them to buy Canadian air carriers. This represents a clear disadvantage for our two biggest airlines.
The lack of competiveness does not explain why Canadians pay more for their airline tickets. The real reason is the high aviation taxation and user-pay principle set by entities operating navigation services and the National Airports System’ Boards of Directors. According to the Air Transport Research Society, landing a Boeing 767-400 at Toronto (CYTZ) cost $6,000 US in 2011. The second most expensive airport was New York’s LaGuardia with $3,000 US.
Canadian air carriers have also expressed concerns about more cabotage rights that would be granted to foreign airlines and, therefore, expatriate the profits in their jurisdiction.
Following this rationale, unions raised the issue that allowing foreign capital in Canada would provoke a risk concerning domestic jobs especially on the well-paid international routes as investors would necessarily not only bring their capital but also their national employees in Canada to work in the industry.
No matter what sector is implicated, market liberalization has never been a dull subject as it involves massive adjustments from the diverse groups including government, employers and labour.
The government has made clear its intentions to liberalize and open the Canadian aviation market. However, after listening to arguments from stakeholders, it will be at the end of the day up to our members of the Senate and House of Commons to make the final test.
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