Canada injects politics into joint venture approvals

Canada’s Transport Minister has given himself the power to approve joint ventures between International airlines, injecting politics into a process that was once the domain of independent bureaucrats at the Competition Bureau.

As of Wednesday, Marc Garneau has the final say on any joint venture application between a Canadian airline and a foreign partner that comes across his desk.

Westjet is in the process of advancing a joint venture with Delta Air Lines and plans to open discussions in the coming months with KLM-Air France. The proposal comes on the heels of a joint venture announced this year between Air Canada and Air China, the first between a Chinese and North American airline.

Joint ventures allow airlines to coordinate schedules, fares, and sales in a seamless operation from the passenger’s point of view.

The federal government argues that, “joint ventures can open up new routes and markets for Canadian travellers and allow access to more destinations, including more international markets, without needing to book separate tickets on different carriers.”

Under the previous rules, a joint venture application by Air Canada and United Airlines was rejected in 2011 by the Competition Bureau because it would limit or eliminate competition on 14 routes between Canada and the United States. The proposal has remained dormant since then, although the airlines cooperate on marketing and code sharing, and have antitrust immunity in the U.S. through their membership in the Star Alliance.

Under the new rules, a review by the Competition Bureau may not even be called for, unless the minister decides one is needed in the “public interest.” However, there is no precise definition of what the public interest might, and guidance given to airlines suggests, “Public interest is a broad concept, and the nature and type of public interest issue depends on the unique facts and context of the joint venture—not upon any pre-defined set of criteria.”

In the United States, joint venture submissions are public documents. This has allowed the public to weigh in on Delta’s application with Westjet. They promise, for example, a joint venture would increase transborder capacity by 20%, with new or expanded service on 20 routes. Since signing the agreement, Westjet launched service between its hub in Calgary, and Delta’s hub in Atlanta.

Regulations in Canada promise no transparency, and only require the minister to publish a summary of his final decision. The new rules are subject to strict timelines, including a 41-week deadline to publish a final decision, though this can be extended.

“With higher international ownership limits in effect and now a new review process for air carrier joint ventures,” said Transport Minister Marc Garneau in a statement. “we are once again delivering on our promise to make the Canadian air sector more competitive and to provide access to more destinations for Canadian travellers. A joint venture is a possible option for air carriers to consider to expand their global networks while maximizing efficiency gains that may lead to lower air fares.”

A study by the U.S. Department of Justice and cited by the Competition Bureau, however, suggests fares could rise as much as 15% when air carriers are allowed to cooperate instead of compete. If the Delta-Westjet joint venture is approved, they would control 27% of the traffic between Canada and the U.S., while just two airline alliances will fly 84% of the seats between the two countries.

Transport Canada already has the power to review mergers between airlines in Canada, such as the one proposed between Canadian North and First Air. The Competition Bureau has said that merger would dramatically increase fares and hurt services over vast swaths of the North, though the minister has yet to rule.

Mergers are rare, however, due largely to rules that restrict foreign ownership of Canadian airlines to 49%.

The ministry expects to receive eight joint venture applications from airlines over the next five years.