Vol. 134, No. 18 — August 30, 2000

Registration
SOR/2000-324 23 August, 2000

COMPETITION ACT

Regulations Respecting Anti-Competitive Acts of Persons Operating a Domestic Service

P.C. 2000-1320 23 August, 2000

Her Excellency the Governor General in Council, on the recommendation of the Minister of Industry and the Minister of Transport, pursuant to subsection 78(2)(see footnote a) of the Competition Act(see footnote b), hereby makes the annexed Regulations Respecting Anti-Competitive Acts of Persons Operating a Domestic Service.

REGULATIONS RESPECTING ANTI-COMPETITIVE ACTS OF PERSONS OPERATING A DOMESTIC SERVICE

ANTI-COMPETITIVE ACTS

1. For the purposes of paragraph 78(1)(j) of the Competition Act, the following acts or conduct of a person operating a domestic service, as defined in subsection 55(1) of the Canada Transportation Act, are anti-competitive acts:

(a) operating capacity on a route or routes at fares that do not cover the avoidable cost of providing the service;

(b) increasing capacity on a route or routes at fares that do not cover the avoidable cost of providing the service;

(c) using a low-cost second-brand carrier in a manner that is described in paragraph (a) or (b);

(d) pre-empting airport facilities or services that are required by another air carrier for the operation of its business, with the object of withholding the airport facilities or services from a market;

(e) to the extent not governed by regulations respecting take-off and landing slots made under any other Act, pre-empting take-off or landing slots that are required by another air carrier for the operation of its business, with the object of withholding the take-off or landing slots from a market;

(f) using commissions, incentives or other inducements to sell or purchase its flights for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market;

(g) using a loyalty marketing program for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market; and

(h) altering its schedules, networks, or infrastructure for the purpose of disciplining or eliminating a competitor or impeding or preventing a competitor's entry into, or expansion in, a market.

ESSENTIAL FACILITIES AND SERVICES

2. (1) For the purposes of paragraph 78(1)(k) of the Competition Act, facilities and services that are essential to the operation in a market of an air service, as defined in subsection 55(1) of the Canada Transportation Act, are those

(a) that are required in order to provide a competitive air service;

(b) that cannot reasonably or practicably be purchased, acquired, provided or replicated by another air carrier on its own behalf;

(c) that are effectively controlled by the air carrier who denies access to them or refuses supply of them; and

(d) that can be feasibly provided to another air carrier, having regard to operational or safety considerations, or legitimate business justifications of the air carrier referred to in paragraph (c).

(2) For the purpose of subsection (1), facilities and services may include, but are not limited to, take-off and landing slots, interline arrangements, airport gates, loading bridges, counters and related airport facilities, maintenance services, and baggage handling infrastructure, equipment and services.

COMING INTO FORCE

3. These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Description

These Regulations (hereinafter "the Regulations") are made pursuant to amendments to the Competition Act which provide that the Governor in Council may make regulations:

1. specifying acts or conduct of a person operating a domestic air service which may be considered anti-competitive acts for the purpose of paragraph 78(1)(j) and section 79 of the Competition Act which deal with abuse of a dominant market position and;

2. specifying facilities or services that are essential to the operation in a market of an air service for the purpose of paragraph 78(1)(k) which provides that denial of access or refusal to supply essential facilities or services on reasonable commercial terms constitutes an anti-competitive act for the purpose of section 79.

The Government's response to the restructuring of the Canadian airline industry brought about by the acquisition of Canadian Airlines International by Air Canada includes amendments to the Competition Act which provide the Commissioner of Competition and the Competition Tribunal with additional enforcement powers to deal with potential abuse by a dominant air carrier of its market position. The Regulations respond to concerns that Air Canada may act in an anti-competitive manner to preserve its dominant market position by attempting to eliminate competitors or to deter entry by new competitors in the airline industry.

The legislation adding these amendments to the Competition Act stipulates that the Governor in Council may make these Regulations on the recommendation of the Minister of Industry and the Minister of Transport.

These Regulations supplement the general provisions of the Competition Act relating to abuse of a dominant market position by defining what would constitute anti-competitive conduct on the part of a dominant air carrier. Market dominance arises where a firm has a high share of a market in which there are high barriers to entry. In other words, the firm does not face effective competition and has sufficient market power to maintain prices which are higher or quality or service levels which are lower than would otherwise exist in a competitive market. The abuse of dominance provisions of the Competition Act seek to prohibit conduct which would preserve, entrench or enhance a firm's market power by eliminating or disciplining a competitor or by deterring entry into the industry.

The specified anti-competitive acts capture predatory conduct, including predatory or below cost selling to eliminate competitors or to deter competitors from entering into a market, or adding capacity or using a low cost so-called fighting brand carrier to achieve the same anti-competitive effect. The Regulations also address exclusionary conduct intended to foreclose the market from competition, such as pre-empting airport services or facilities required by competing carriers or refusing to supply essential services or access to facilities on reasonable commercial terms in circumstances where competitors have no viable alternatives. Finally, the Regulations address the strategic use of frequent flyer programs or other marketing practices for the purpose of eliminating or disciplining competitors or deterring entry into a market.

Alternatives

The Government chose the alternative of relying on a strengthened Competition Act as opposed to a full industry regulatory regime to address concerns about the potential for Air Canada to abuse its dominant market position. This approach is consistent with the Government's policy of relying on competition and market forces to protect the interests of consumers. These Regulations provide clarity to industry participants by identifying anti-competitive acts which would be reviewable by the Bureau and the Competition Tribunal. In light of Air Canada's overwhelmingly dominant position in the industry (accounting for 90% of domestic passenger revenues) and the ease with which a dominant airline can deploy its fleet of aircraft to target competitors with predatory prices or engage in other anti-competitive practices, the existing provisions of the Competition Act would not be fully adequate to address potential concerns. In this regard, a related amendment to the Competition Act provides the Commissioner of Competition with the authority to make temporary cease and desist orders which will permit the Bureau to intervene very quickly in the airline industry to prevent injury or irreparable harm to competition.

Benefits and Costs

These Regulations extend the existing abuse of dominance provisions of the Competition Act and could be viewed as a code of conduct in as much as they specify the type of behaviour which is likely to be challenged by the Competition Bureau. The Regulations under the Competition Act do not impose any direct cost on Air Canada, or require it to seek prior approval to implement marketing or other business plans. This approach is much less intrusive and less costly to both Air Canada and the Government than a full industry specific regulatory regime.

Consultation

On April 12, 2000 the Commissioner of Competition tabled, for discussion purposes, a draft of the Regulations before the House of Commons Standing Committee on Transport. The Commissioner invited interested parties to make their views known to the Bureau and, at the same time, the draft Regulations were posted on the Bureau's Web site. These draft Regulations were the subject of discussion during the hearings on Bill C-26 held by the House of Commons Standing Committee on Transport and concerns were raised by a number of market participants that they may not be adequate to deal with all identified potential problems, particularly refusal to deal situations. In response to these concerns, the House of Commons Standing Committee on Transport proposed the adoption of further amendments to section 78 of the Competition Act. These amendments dealt specifically with issues raised by industry stakeholders, including access to and supply of essential facilities and services by competitors. On June 6, 2000 the Competition Bureau tabled a revised draft of the Regulations before the Senate Standing Committee on Transport and Communications.

On June 21, 2000, consultation letters and a draft of the proposed Regulations were sent by the Competition Bureau to major market participants and other stakeholders inviting written comments by July 14th. These consultations included nine air carriers, in addition to Air Canada and Canadian Airlines. Letters were also sent to the Air Transport Association of Canada, the Association of Canadian Travel Agents (ACTA) as well as the Consumer's Association of Canada. Five carriers as well as the ACTA provided comments supporting the substance of the Regulations. The majority of the comments received dealt with matters which are outside the scope of the Regulations or focused on the Bureau's interpretation and application of the Regulations. These issues of interpretation and application will be addressed in enforcement guidelines which the Bureau will release for consultations once the Regulations are in force.

On July 8, 2000 the Regulations were pre-published in the Canada Gazette, Part I. This process established a fifteen-day period for comments, which ended on July 23. As part of the pre-publication process, all stakeholders had an additional opportunity to provide comments to the Bureau. The pre-publication of the Regulations in the Canada Gazette attracted the attention of the media which continues to have a high level of interest in issues related to the airline industry. Media stories have focussed on the application of the Regulations to Air Canada under the Competition Act and timing issues.

Air Canada provided comments in response to pre-publication in the Canada Gazette. Air Canada wished to obtain assurances from the Commissioner of Competition that the Regulations do not alter the basic test for abuse of dominance under section 79 of the Competition Act and that the general provisions of section 79 will be enforced against the activities of foreign air carriers where circumstances warrant. Air Canada also sought clarification with respect to the relationship of the regulations to undertakings which it provided to the Competition Bureau as part of the Bureau's review of the merger between Air Canada and Canadian Airlines. The Commissioner has indicated his position on these matters to Air Canada and further indicated that a number of issues raised by it as to the application and interpretation of the Regulations will be dealt with in the Bureau's enforcement guidelines. The undertakings provided by Air Canada, in regard to the merger, are pro-competitive, legally binding obligations of Air Canada. Any actions taken by Air Canada and its affiliates which are required by the undertakings will not be considered as "anti-competitive acts" within the meaning of section 79 or the Regulations. However, compliance with the undertakings regarding the merger will not otherwise shield Air Canada from the application of section 79 and the Regulations thereto.

On the basis of a careful review of all of the comments received by the Bureau and following consultations with the Departments of Transport and Justice, clarifying changes were made to the final Regulations. However, the essential substance of the Regulations is unchanged from those published in the Canada Gazette of July 8.

Compliance and Enforcement

The Competition Bureau and the Competition Tribunal will be responsible for the enforcement and administration of these Regulations. Where the Commissioner of Competition believes that Air Canada has engaged in conduct which is contrary to the Regulations, the Bureau can carry out a formal inquiry and, where grounds warrant, file an application for an order of the Tribunal prohibiting the conduct or imposing other sanctions necessary to overcome the impacts on competition.

In most instances, the Commissioner will be acting on a complaint. The Competition Act provides formal powers of investigation, including search and seizure and subpoena powers to obtain written and oral evidence.

To succeed in an application under the abuse of dominance provisions, the Bureau must satisfy the Tribunal that (a) the firm in question is, by virtue of a high market share and barriers to entry into the industry, dominant to a degree that it can influence prices in a relevant market, (b) this firm has engaged in a "practice of anti-competitive acts" and (c) the result is "substantial prevention or lessening of competition". The Regulations relate directly to part (b) above by defining the type of conduct which would constitute a "practice of anti-competitive acts" in the context of the airline industry. The Regulations do not, however, alter the test of market dominance or a substantial impact on competition which the Tribunal must find before it can make an order.

Contact

André Lafond
Deputy Commissioner
Civil Matters Branch
Competition Bureau
50 Victoria Street
Hull, Quebec
K1A 0C9
Tel.: (819) 997-1209

Footnote a

S.C. 2000, c. 15, s. 13(3)

Footnote b

R.S., c. 19 (2nd Supp.), s. 19

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