On August 15, 2011 Air Canada filed its response in the contested Air Canada / United Continental merger.
In this case, the Bureau seeks to both unwind existing Air Canada / Continental cooperation agreements and also to prevent a proposed cross-border joint venture between the parties under the merger provision of the Competition Act (section 92) and the recently enacted, and as yet untested, civil agreements provision of the Act (section 90.1).
The Air Canada / Continental agreements have involved coordination in relation to code sharing operations, joint fare discounts and incentive programs on trans-border routes (the “Alliance Agreements”).
The proposed merger, which was to be achieved by way of a joint venture, would, according to Air Canada, “complement” its existing JV agreements with Continental and result in “deeper and more comprehensive integration and coordination” on Air Canada / Continental trans-border routes that had previously been possible under the parties’ existing bilateral agreements.
Proposed integration would include joint pricing, joint route planning and scheduling, coordinated marketing, harmonization of sales processes and revenue sharing. In essence, according to Air Canada, the proposed JV would both add to the number of existing Air Canada / United coordinated activities and further formalize existing contractual arrangements.
The case is significant in that it is the first challenge of agreements by the Bureau under the civil agreements provision of the Act passed in 2009 (and which came into force in 2010) and also represents a relatively rare challenge of a merger structured as a joint venture. “Merger” is defined broadly in the Competition Act to include acquisitions of control by “purchase or lease of shares or assets, by amalgamation or by combination or otherwise” (and while there is a merger exception for joint ventures, it is relatively narrowly defined and difficult to apply in practice).
The case is also significant in that it is one of two currently proceeding contested merger cases before the Tribunal, which are the first contested merger cases in six years.
In an extensively detailed response, Air Canada argues generally that, among other things, the Bureau has failed to consider:
Canada’s “Blue Sky” international air transportation policy – promoting the liberalization of air carrier competition in different countries.
“Open-Skies” agreements between Canada and the United States – that, according to Air Canada, seek to increase competition by eliminating legal or regulatory barriers to entry/expansion.
Competitive realities in the airline market – which includes a “proliferation of competition at the level of [airline] alliances, networks and joint ventures”.
Regulatory approvals in other jurisdictions – including in the U.S. by the U.S. Department of Transportation.
Recent Bureau clearance – for a similar trans-Atlantic JV between Air Canada, United, Continental and Deutsche Lufthansa.
Some of the more interesting specific arguments Air Canada makes in response to the Bureau’s assertions that the Alliance Agreements and proposed merger would prevent or lessen competition substantially (the relevant test under both the merger and civil agreements provisions) include:
Relevant market – Air Canada takes the position that the Bureau’s market definition (“city-pairs”) is unduly narrow, and that connecting passenger air transportation services should be included in the product market. Air Canada also argues that Canadian and U.S. border airports are in the same geographic market – e.g., where Canadian passengers cross into the U.S. to fly to U.S. destinations from U.S. airports.
Market share analysis – Air Canada argues that the Bureau uses “fundamentally flawed” market share data, based on a U.S. Department of Transportation database that includes both local and connecting passenger traffic, which “vastly overstates” the parties’ shares in local passenger traffic.
Existing remaining competition and new entry – According to Air Canada, trans-border passenger service in North America is “highly competitive” and has been characterized by “continuous vigorous competition from legacy carriers and substantial new entry by and exponential growth of non-legacy carriers.” Air Canada describes its actual or potential competitors on trans-border routes to include Alaska Airlines, American, Delta, Frontier, JetBlue, Porter, Southwest, Spirit, US Airways, Virgin America and Westjet.
Air Canada also argues that barriers to entry are low (e.g., that the “ease and frequency of route-specific entry and exit” would operate to constrain pricing by the merged entity).
Efficiency gains. In addition to arguing that there is an absence of any substantial lessening or prevention of competition arising from the Alliance Agreements or proposed JV, Air Canada also argues that there are “very substantial” consumer or producer efficiencies that have resulted from the Alliance Agreements or would result from the proposed JV.
In this regard, both the merger provisions of the Act (under section 92) and the civil agreements provision (section 90.1) provide efficiency defences where a merger (or agreement) would likely result in efficiency gains that would be greater than, and would offset, any substantial prevention or lessening of competition that would result from the merger (or agreement) that would not likely be achieved if a Tribunal order were made.
Some of the efficiency gains Air Canada points to include increased output (e.g., new trans-border routes), increased flight frequencies, greater capacity, increased passenger volume and improved product quality (e.g., a more comprehensive route network and single prices on connecting itineraries). Air Canada also says that efficiency gains are of “critical importance” to effectively compete in the face of “intense competition” it faces in providing domestic, trans-border and international passenger air services.
In this regard, Air Canada points to historic failures in the airline sector, including its own insolvency/corporate reorganization process in 2003-2004. In addition, like arguments sometimes heard in the banking sector, Air Canada makes scale efficiencies arguments that it needs to be bigger to globally compete.
Distinctions from a typical merger. Unlike a typical merger, Air Canada argues that the proposed JV with United would not result in a complete integration of their operations and, as such, they would continue to compete (and continue to have an incentive to compete) in certain key respects – for example, for inputs/supplies, as the proposed JV would not provide for cost sharing between the parties.
Favourable written advisory opinion. According to Air Canada, the Commissioner of Competition is estopped from challenging the Alliance Agreements based on a favourable advisory opinion and the fact that a significant amount of time has elapsed since the opinion was issued (more than 15 years). The Competition Act gives the Bureau the discretionary power to issue written advisory opinions, which remain binding as long as the material facts on which the opinion was based remain substantially unchanged and the proposed conduct is carried out substantially as proposed.
The Bureau cannot bring simultaneous section 90.1 and 92 applications. Air Canada also argues that, based on certain provisions of the Competition Act, the Bureau cannot seek Tribunal orders under both sections 90.1 and 92 based on substantially the same facts.
For Air Canada’s Response see:
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