Parliamentary Research Branch

MR-108E

TABLE OF CONTENTS

INTRODUCTION

BACKGROUND

JURISDICTION OF THE TRIBUNAL TO VARY A CONSENT ORDER

FINDINGS ASSUMING JURISDICTION OF THE TRIBUNAL

   A.   Alternatives to the AMR Deal

   B.  Impact of Canadian's Failure on the Airline Market

   C.  Impact of the Variation on the CRS Market

REMEDY THAT WOULD HAVE BEEN GRANTED

DISSENTING OPINION WITH RESPECT TO THE TRIBUNAL'S JURISDICTION

INTRODUCTION

On 22 April 1993, the Competition Tribunal, in a two to one decision, dismissed an application by the Director of Investigation and Research (the "Director") to vary a 1989 Consent Order allowing Air Canada and Canadian Airlines International Limited ("Canadian") to merge their computer reservations systems ("CRSs") under the merged entity, Gemini. The Tribunal found that it had no jurisdiction to vary the Order to allow Canadian to transfer its internal reservations system from Gemini to Sabre, the CRS owned by American Airlines Inc.

In 1987, Air Canada and Canadian merged their computer reservations systems to form Gemini. Upon the merger, Gemini, Air Canada and Canadian entered into an agreement (the "hosting agreement") giving Gemini the exclusive right to manage Air Canada's and Canadian's internal reservations systems. According to the various agreements between the parties, the first opportunity for Canadian to terminate its management arrangement with Gemini would have arisen in 1999. In 1989, the parties entered into another hosting agreement when a new partner, Covia, joined Gemini.

In 1988, the Director challenged the Gemini merger under the Competition Act and sought to have it dissolved. The following year, the parties came to an agreement that would allow the merger to proceed without creating a substantial lessening of competition, and presented those terms to the Competition Tribunal for approval. The Consent Order issued by the Tribunal dealt with the airline owners of Gemini and their position as the two dominant carriers in the Canadian market and provided a code of conduct for the operators and owning carriers of CRSs in Canada.

Since the Consent Order, the financial position of Canadian has changed; the company is recording losses and payments to secured creditors have been suspended. AMR Corporation, the parent of American Airlines Inc., has proposed a transaction whereby AMR would invest $246 million in Canadian and there would be a frequent flyer exchange program and a 20-year service contract. The service contract would require Canadian to transfer its reservations system from Gemini to Sabre, the CRS owned by American Airlines.

In November 1992, the Director applied to the Tribunal under section 106 of the Competition Act to vary the 1989 Consent Order so as to permit an early termination of the hosting agreement to allow Canadian to transfer its internal reservations system from Gemini to Sabre.

The Tribunal derives its power to vary consent orders from section 106 of the Competition Act which, among other things, provides:

Where, on application by the Director or a person against whom an order has been made under this Part, the Tribunal finds that

(a) the circumstances that led to the making of the order have changed and, in the circumstances that exist at the time the application is made under this section, the order would not have been made or would have been ineffective to achieve its intended purpose, ...

the Tribunal may rescind or vary the order accordingly.

The Tribunal considered as a matter of law the criteria that section 106 imposes for a variation to be made in any order. It found that under paragraph 106(a), "the circumstances whose change would permit adding terms to an earlier order must be those circumstances that demonstrably were taken into account by the Tribunal at the time of, and directly caused, the making of the order in question." The Tribunal went on to note that the existence of such changed circumstances was not enough to achieve a variation of an order; it must also be shown that the order had become "useless or inadequate to its intended purpose of solving the problem as identified in the relevant circumstances that led to the original order being made."

Having established how paragraph 106(a) should be interpreted, the Tribunal went on to answer two questions: whether the circumstances that had led to the 1989 Consent Order had changed and whether the original order would have been made in the present circumstances.

The proponents of the request to vary the Consent Order contended that the Tribunal had made the Order when the airline market in Canada was a duopoly consisting of two major carriers and their regional affiliates. In their view, the rapid deterioration of Canadian's financial position and the threat this poses to maintaining the duopoly constitutes a change in circumstances.

The opponents of the variation argued that the existence of a duopoly and the hosting agreement with Gemini were part of the background facts to the Consent Order, but not its cause.

The Tribunal found that the existence of an airline duopoly had not been the cause of the Consent Order; rather the key concern had been vertical integration by the two dominant air carriers with one CRS and how this might produce anti-competitive consequences for the CRS and airline markets. It concluded that, in the present circumstances, the 1989 Order would continue to be effective and would still have been made.

In finding that it did not have jurisdiction in this case to vary the Consent Order, the majority of the Tribunal held that its powers to vary can be exercised only with respect to the original purpose of an order. It, therefore, cannot vary the original order by adding a release from a contract that was not required by that order merely because one party has entered into another contract that is inconsistent with the first.

Anticipating that its decision on the issue of jurisdiction might be appealed, the Tribunal made other findings of fact that would have been necessary if it had had jurisdiction to vary the Order. It examined the consequences of Canadian's continuing the hosting agreement, the potential impact on the airline industry if Canadian were to fail, and the impact on Gemini and on CRS competition if Canadian were to fail or to be released from the hosting contract.

The Tribunal looked at whether Canadian would be able to find an alternative to the deal with AMR and explored a number of possibilities; these included obtaining an alternative investor or strategic partner, merging with Air Canada, restructuring as a stand-alone carrier, completing the AMR deal without terminating the hosting agreement with Gemini, and the sale of international routes.

The Tribunal was of the view that Canadian's credits would not be likely to give it additional time to find an alternative investor; this would jeopardize the AMR deal, which offers to inject cash into Canadian's ailing business. A merger with Air Canada and restructuring of Canadian as a stand-alone carrier were also seen as unlikely. The Tribunal found that terminating Canadian's hosting agreement with Gemini was critical to the AMR deal and that there were legitimate economic reasons for AMR's requirement for Canadian to transfer its reservations system to Sabre. The sale of Canadian's international routes would, in the Tribunal's view, adversely affect the company's remaining operations.

Thus, the Tribunal concluded that the AMR deal, with its injection of cash, is crucial to Canadian's survival; without it, Canadian is likely to fail.

The principal question for the Tribunal [in connection with the impact of Canadian's failure on the airline market, as a result of not obtaining a variation of the Consent Order] was whether the failure of Canadian would result in a substantial lessening of competition.

Since such a failure would be analogous to a merger with Air Canada, the Tribunal noted that its impact could be analyzed according to the criteria established under the Competition Act for the evaluation of mergers.

The Tribunal concluded that if Canadian could be saved it would continue to be a "vigorous and effective competitor" to Air Canada. It ruled out the possibility of foreign competition in the event of a failure, noting that none of the industry experts felt that relaxed cabotage rules or "open skies" were imminent. The Tribunal concluded that charter carriers would not fill the void left by the failure of Canadian. Although important in large markets, such carriers are niche players who do not compete across the full range of products and services.

The Tribunal also found that the failure of Canadian would result in the failure of the vast majority of the regional airlines affiliated with it. In addition, there would be significant barriers to the entry of new airlines that might compete with Air Canada.

In the end, the Tribunal concluded that the failure of Canadian would result in a substantial lessening of competition in "most if not all airline passenger markets on southern routes in Canada."

The Tribunal concluded that Gemini would not be likely to fail even if Canadian moved to Sabre. The Gemini system is comparable to Sabre with respect to functionality, and Air Canada has a larger share of the domestic market than Canadian. Thus, Gemini could compete with Sabre.

Had the Tribunal found it had jurisdiction to vary the 1989 Consent Order, it would have allowed Canadian to amend the hosting agreement and transfer its reservations system to Sabre. Canadian would have been required to give at least twelve months' notice to Gemini and to reimburse it for certain costs associated with the transfer.

One member of the Tribunal concluded that the Tribunal did have jurisdiction over the matter before it.

The dissenting member found that the circumstances leading to the 1989 Consent Order had changed. He pointed out that the Order contains a provision designed to prevent Air Canada and Canadian from using Gemini to exchange information so as to facilitate collusion between them. This provision resulted from the fear that the two airlines might use Gemini to lessen competition substantially in the airline market. He concluded that the decline in Canadian's financial circumstances now permits Gemini to be used to lessen competition substantially (albeit in a manner not originally contemplated by the Tribunal) because Canadian will fail if it cannot terminate the hosting agreement and conclude a deal with AMR.