It’s time to regulate the northern air transport business

The Canadian North–First Air monopoly should be treated like a public utility

The de facto airline monopoly that First Air and Canadian North would create through its proposed merger would use First Air’s livery, shown here, and Canadian North’s name. (File photo)

By Jim Bell

Regardless of whether the planned merger between Canadian North and First Air is or is not necessary or desirable, this much is clear: the public in northern Canada will never accept the existence of an unregulated airline monopoly.

It’s also clear that northern consumers will never be convinced that the private corporations that own these airlines will ever be capable of putting the public interest ahead of private gain.

To that end, the federal government, led likely by Transport Canada, must give urgent consideration to the resumption of price and route regulation for airlines operating in remote, northern regions.

At the same time, they must also look at the creation of regional subsidies—to help customers and not the new monopoly’s corporate owners—aimed at defraying the cost of essential air services in those regions.

As far back as the mid-1980s, many observers predicted that northern Canada’s fragile economy was too small and too weak to handle airline deregulation. But after delaying its implementation for a while, in the 1990s the federal government imposed airline deregulation on northern Canada anyway.

This was a mistake. It’s now time for the current federal government, or whatever new government emerges after the Oct. 21 federal election, to fix that error.

We already know the idea of a monopoly air carrier is deeply unpopular in Nunavut and elsewhere in northern Canada. Nevertheless, there are still strong arguments to support a merger between Canadian North and First Air. That’s because northern Canada’s fragile, high-cost economy may indeed be too small to support two competing airlines.

Unfortunately, the owners of Canadian North and First Air have failed to effectively communicate that case.

Take, for example, their arrogant, tone-deaf reaction last week to the findings of Canada’s national consumer watchdog, the Competition Bureau, which interviewed 60 stakeholders, and engaged an economic expert and a financial expert to analyze the likely impact of the proposed merger.

To absolutely no one’s surprise, the bureau found the merger would likely raise prices and reduce service.

But in their statement of reaction, the two airlines hardly bothered to acknowledge the legitimate fears of consumers, many of whom believe the merger will drive the already brutal cost of living to even higher levels. The concept of consumer rights, apparently, doesn’t exist for them.

This is compounded by multiple dubious claims that are either contradictory or unsupported by evidence.

For example, they complain the Competition Bureau did not consider the purported “efficiencies” they claim a merger would create. That assertion, however, isn’t quite true.

The Competition Bureau did look at the merger’s potential cost savings. Their economic analyst performed a trial simulation and found those cost savings are not enough to offset the monopoly airline’s expected price increases.

“[T]he types of cost savings the parties claimed were likely to result from the proposed transaction would not likely affect the results of the merger simulation analysis and predicted price effects,” the Competition Bureau’s report states.

The two airlines also claim the merger is necessary because they “face the risk of being driven out of business” and that they continue to do business “at the financial expense of our Inuit beneficiaries.”

Is that so? In October 2017, First Air’s corporate owner, Makivik Corp., reported First Air had posted “strong returns” and paid a $3-million dividend. In February 2017, Canadian North’s corporate owner claimed the airline was on “a clear path to growth and continued profitability.”

So which statements are true and which statements are false? We can’t tell and neither can you.

Another source of public distrust can be found in recent history, namely, the failed merger attempt of 2014, followed by the notorious codeshare fiasco, with its delayed air freight shipments and botched medical travel appointments. And the destruction in 2016 of upstart competitor Air Sarvaq did nothing to build public confidence either.

At the same time, neither Makivik Corp. nor the Inuvialuit Development Corp. can claim a strong track record of business management—and the public knows this.

In 2017, a special corporate committee reported that numerous Makivik subsidiaries had been losing money for years, and that the corporation’s beneficiary equity stood about $200 million below where it ought to have been. The Inuvialuit Development Corp., of course, presided over the spectacular demise of Canadian North’s erstwhile sister company, the Northern Transportation Company Ltd.

Yet another dubious claim is that the merger is an “Inuit-led solution” that flows from “hundreds of hours of discussion among Inuit and northern-elected leaders.” Yes, the same people who drove the Inuit-owned Air Sarvaq out of business claim to believe that Inuit “must be meaningful participants in the northern economy.”

The elected Government of Nunavut, now led by an elected all-Inuit cabinet, is not convinced. This is how David Akeeagok, the minister of Economic Development and Transportation, described, on Feb. 28, Nunavut’s current position, which accepts the Competition Bureau’s findings:

“The Competition Bureau highlighted concerns many Nunavummiut have expressed to us as MLAs: that the merger may bring about higher prices and reduced competition.”

And this is how he described Nunavut’s current position on the merger—as an arrangement between two businesses, neither of which has any special connection to the people of Nunavut:

“It is a merger between two non-Nunavut companies, owned by two non-Nunavut entities who receive no special consideration under the Nunavut Agreement.”

Later that day, Akeeagok added that, although the GN does not explicitly oppose the merger, the federal government must create safeguards and impose conditions to protect Nunavummiut.

That’s all valid. But he should have gone further and urged stronger measures to protect Nunavut airline customers from two corporate entities whose credibility cannot be trusted.

That likely means a return to the regulatory regime of the 1970s. First Air and Canadian North should be allowed to merge only if their monopoly airline is treated like a public utility and subjected to credible, transparent price regulation.

That said, the introduction of an essential air transport subsidy similar to those used in Europe, the United States and Australia should be the next item on their to-do list. JB

Share This Story

(8) Comments:

  1. Posted by bingo on

    You hit it right on the nose Jim. It seems as though the airlines are too focused on profits to do the right thing, our MLAs are too powerless to do anything, and the feds are uninterested in regulating a big industry in an area with very few votes.

  2. Posted by Jobie Weetaluktuk on

    The truth is in the bottom line written in $$$. Rhetoric is just that. Baseless but strong for some and totally meaningless for others.
    Tourism the hope for local outfitters, hotels, and adventure operators will not proper under high prices. The world adventures would rather go to the Alps, Yellowstone, or Safari Afrika. Those all being cheaper options vs. Nunavik or Nunavut.

  3. Posted by Polar Bear Joe on

    A new “pilot” project is coming to Iqaluit in September that will feature ground transportation charter service to Kimmirut. It will feature a new vehicle called a “Sherp” that can go over the land, through the water and up onto the ice. Should this “pilot” program be successful, we may see a reduction of travel costs between some communities and new services developed to compete with the feeder services to communities. The hope here is to provide an in-expensive alternative to air travel and cargo services in Nunavut. Cheers

  4. Posted by The Old Trapper on

    Jim, I am glad that you agree with what I have been advocating for the last 5 years (possibly 10), that the airline industry in the north needs to be run more as a public utility than a for profit business. Transport Canada’s deregulation of air transportation in Canada was misguided when it comes to the north as the markets are too small for multiple companies to compete effectively, and the service is an essential one, not optional in most cases.

    I don’t agree with all of your points, such as the “destruction” of Air Sarvaq. This was a paper company which was originally designed to allow Nolinor to cherry pick the Ottawa – Iqaluit route. That First Air and Canadian North both reacted to ensure that an upstart would not grow to be a threat is not surprising. It was only a “Nunavut” company on paper, never in actuality.

    I also disagree with the Competition Bureau that there are not substantial savings available to a merged company. My own analysis conducted many years ago indicated reduced costs of $10 – 20 million per year, and that was just a general analysis. A detailed analysis which I assume has been done by First Air and Canadian North would likely produce more cost reductions. And while both airlines may have reported profits in recent years there are also substantial losses from previous years to be paid off.

    The heart of your editorial is however right on target.

    The federal government policy of deregulation of air transportation in the north is a failure and must be replaced.

    A solution would be an entity that treats air transportation as an essential service.

    I have no faith that the GN or GNWT could operate such an entity themselves, thankfully one (two) exist. Let First Air and Canadian North merge, take an equity position, and transition to a not for profit corporation.

    Consumers will not abide a monopoly unless they are assured that their interests are looked after. Even then they will (and should) be skeptical and demand transparency.

    This would need legislative changes from the federal government, an equity stake by the GN and GNWT, agreement of the board of the merged airline, possible subsidies (think replacing Nutrition North with an essential air service subsidy), and a clear and transparent mandate.

    The governments involved need to take positive action, and now would be a good time before it’s too late.

  5. Posted by You Can Say That Again on

    Jim is bang on! The airline industry needs to be an essential service, public utility. People of the North can not be held hostage to the profit minded companies – dollars will always reign supreme over the needs of Nunavummiut.

  6. Posted by Joann Laserich on

    Well Researched, Well Written. So many will agree with what in fact is… Fact..

  7. Posted by Narten on

    The recent profits of the two airlines were only because the GN’s fuel dept dramatically reduced its Jet fuel prices in early 2017. Since the airlines never passed any savings to customers they made higher profit. None of them want draw attention to this because they’d rather talk about strategic management to pad bonuses

  8. Posted by Tommy on

    Europeans took advantage of Inuit in the 19th Century. Canadians took advantage of Inuit in the 20th Century. Now Inuit are taking advantage of Inuit in 21st Century. Hmmm.

Comments are closed.