The Canadian Airlines Industry—Building a Global Competitor

Today, Pearson International Airport is one of the world's major airports facing capacity constraints. It handles, on a daily basis, about one third of all take-offs and landings by scheduled carriers in Canada. It also handles half of all overseas flights arriving or departing from Canada. So when Pearson has problems, which happens far too often these days, the entire scheduled airline system is also affected. In\ fact, a morning delay at Pearson will, by the end of the day, have caused a domino effect at as many as five or more locations. Unfortunately, no one in government or industry could predict the demands that unprecedented growth would make on the existing infrastructure.

The capacity constraints in the present airport and airways \ systems will make it a challenge to accommodate future growth. That is why we need a planned and comprehensive approach to solving Pearson's problems. And if we want to plan for our future, if we want to create conditions of prosperity for Toronto through the 1990's, then we should address the runway situation now. l say'we' because there are many different stakeholders in this appraisal. Certainly the airlines are part of this; but so are the travelling public, the business community, the neighbourhoods around the airport and the many smaller communities which rely on Pearson as their transportation hub.

For these reasons I want to be on the record as supporting the concept of the environmental assessment process for

Pearson. Our company will participate actively and constructively in this process--not only because we think two runways should be built as Transport Canada proposes, but also because we think these runways can be built without unduly affecting the quality of life for residents near Pearson. We think that the environmental assessment will show that the greater good of Toronto and southwestern Ontario will be served by the planned and managed modernization of Pearson.

There are a number of initiatives that indicate the industry is more sensitive to the community.

- the industry is investing over $11 billion in modern stage three aircraft which are quieter, and impose a much smaller noise footprint.

- Transport Canada is putting in a modern noise monitoring system around the airport--this is a move we support fully.--We also support, without reservation, the imposition of stiff fines for those companies whose pilots break procedures including noise rules around the airport.

I think we all share in the same goals for Pearson: a quality and trouble-free airport and a fair deal for residents of the adjacent communities.

Terminal Three is another initiative that will help ease the people-congestion problem at Pearson. This will be the first /International Air Terminal in Canada to be developed, owned and operated by private enterprise. The 1.4 million square foot complex contains nearly double the space of Pearson's other terminals and will feature three arrival and departure areas that will have 24 gates. Its spacious attractive design is in sharp contrast to the sometimes overcrowded and at times near chaotic conditions at Pearson's other terminals.

Now to turn to another aspect of aviation--probably one of the most important after safety and service--the subject of airfares. In my view, airfares are a bargain when you compare the price of the service to a decade ago and when compared to the many other products essential to our lifestyles. Compare airline fares, if you will, to the record of the consumer price index since 1979, and you will find that airline prices have risen about half as fast as goods and services in the rest of our economy.

A recent Report on Business magazine article featured a chart of "What Things Cost". They illustrated among other things, that a house in Toronto in the Bloor and Bathurst area cost in 1957 $17,900--restated in 1987 dollars it's $83,000, but today costs $350,000, a 322 percent increase. That may be the extreme so I'll give you two other examples. A movie cost 50 cents in 1957; restated in 1987 dollars it's $2.30 , but the cost today is $6.50--a 180 percent increase. Or how about the average income of $3,070 in 1957, which restated in 1987 dollars, is $14,237 but today it's $24,500, a 72 percent increase. Now for our product. In 1957 it cost $534 for the cheapest fare from Montreal to London, England--restated in 1987 dollars it's $2,477. But today the cheapest fare is $439.00, a decrease of 85 percent. The concern about pricing trends in the airline industry generally reflect substantial increases in costs such as fuel, which is the second largest component of airline costs. In fact, it costs more to operate in Canada than in the U.S. where fuel costs about 30 percent less, airport fees at most major airports are less, and items such as communication costs are also substantially lower. I can assure you that our financial results are not indicative of an industry that is charging its customers exorbitant fares.

Airlines are somewhat like what merchant navies used to be for many countries. They help establish economic links and are big generators of foreign currency, as well as being vital in moving people from one country to another. Another way to look at our airline product is as an export--every foreign traveller that we can carry is as much a generator of foreign currency as the shipment of a resource or finished product to a foreign destination. Foreign governments realize this and negotiate their air bi-lateral agreements carefully, recognizing what air services can do for their economies.

Expanding this thinking can make the case of ensuring that Canada builds airlines that can be globally competitive. This means that our larger carriers must have a firm foundation domestically from which international service can be launched and sustained. Foreign traffic alone will not support a large international route structure. While the Canadian Air Transport industry has been undergoing fundamental changes over the past decade, it is probably fair to borrow the expression "we are not alone" to describe the forces that are currently reshaping the international aviation scene. And while the industry prepares for globalization, a term I'm sure most of you are familiar with, Canadian airlines cannot afford to mark time on the international stage.

In the United States, deregulation has resulted in the formation of six mega carriers that transport 35 percent of the world traffic and carry 24 percent of the world's total air cargo. In fact, the U.S. domestic airline industry has become highly concentrated with 90 percent of the industry's domestic traffic moving on eight carriers. The age of the world wide mega carrier is upon us. British Airways currently cover 17

- percent of the world's scheduled air routes while United Airlines cover 31 percent with no overlapping flights. Therefore, if British Airways had purchased a 15 percent equity share in United, they could have been able to offer passengers nearly half of the world's existing air routes, much more than any other single airline or alliance of airlines. Carriers throughout the world are entering into commercial agreements that are designed to flow traffic from their route networks to those of their partners. Airline analysts for some time, have predicted that the same economic forces that have brought global ties in other industries would bring them to the airlines too. It reflects a trend that has been evident throughout the business world for some time. Our world is increasingly a global economy and companies of all kinds understand the importance of establishing a truly global presence.

Much of the impetus for this has come from Europe, where

the airline industry is preparing for a single European market by 1992, and is slowly progressing towards U.S. style deregulation of its airline industry. Looking for ways to survive in a more competitive integrated marketplace, European carriers are beginning to seek alliances based on the knowledge that size gives you access to larger markets along with some economies of scale; a 10 percent investment in Texas Air by SAS, a five percent investment by SwissAir and Delta in each other, just to name two of the more than 15 major airlines that have made equity investments in one another. Canadian Airlines has participated in this alliance trend by entering into commercial agreements with Japan Air Lines, Lufthansa, Alitalia, Air France and most recently with the world's largest carrier, Aeroflot. It seems the trend toward globalization and dominance of the industry by fewer, much larger carriers will continue. The present 18 carriers operating in western Europe could shrink substantially with some evolving into one or more of the dozen or so global carriers that will be operating at the end of this century. Carriers without critical mass or the financial resources needed to become a player in the global arena will need to form alliances or mergers or remain at second-tier levels with diminished global opportunities. They will essentially become feeder carriers to larger global carriers. A global marketplace needs a highly efficient aviation system and the lessons we have learned at home will be the same ones we need to practice in the global arena.

Fortunately, Canada's airline industry enters the era of globalization with an impressive track record. Our ability as a nation with a small, scattered market to support two world class carriers is no small feat. Our industry has been built by entrepreneurial initiatives, the same attributes that will be necessary to be a leader into the next century and globalization. Canada's airlines must take advantage of their favourable geographic position in North America and overcome the disadvantage of a relatively small and widely spread population.

On a closing note, I want to clarify what people think we are doing with Wardair and what is actually being done. The managements of Canadian and Wardair have been combined and the aircraft fleet rationalized while keeping Wardair service levels and product very much alive, by expanding them to the majority of our widebody fleet of aircraft. We believe that the reputation this service level has earned will be a most important factor in competing both domestically and internationally in the future.

I am proud to be a part of a dynamic Canadian industry--one that is critical to our country's economy, and to our major centres like Toronto.

Thank you.

The appreciation of the meeting was expressed by Sam Blyth, President, Blyth and Company and a Director of The Empire Club of Canada.