Codesharing 'clearly monopolistic' - expert
Sauder School of Business professor believes competition bureau may act
Stewart Burnett
Northern News Services
Monday, April 25, 2016
IQALUIT
Codesharing can be a great thing but not in a market with no competition, says a Canadian air transportation expert.
"Codesharing is very effective in terms of delivering higher-quality services," said David Gillen, professor of transportation and logistics at the University of British Columbia's Sauder School of Business.
"Normally, what you find in codeshare markets is there will be an increase in the number of effective flights but it's only going to work efficiently if there's competition in those markets."
He weighed in on the current price war between First Air, Canadian North and newcomer GoSarvaq.
"I'm not surprised that Transport Canada allowed the codeshare agreement between First Air and Canadian North, because Transport Canada has no understanding of protecting consumers - they only protect producers," said Gillen.
"As a result, I'm also not surprised that the Canadian Competition Bureau is investigating this because from what I saw in the numbers it's very clear that this codeshare arrangement has led to cartel-like behaviour."
One metric the air transportation industry uses to judge costs is revenue per available seat mile, or RASM, which is defined as total operating revenue divided by total available seat miles.
For WestJet in the first quarter of 2015, Gillen said, this figure system-wide was 15.89 cents. For the Ottawa-Iqaluit route he took a 160-seat Boeing 737, flying 1,300 miles, assuming a 60 per cent load factor, for 96 passengers paying a one-way fare of $1,100. Gillen's calculations conclude that the RASM for this route is 51 cents.
For comparison, he said in 2014 the U.S. network carriers were making average system-wide RASM of 15.4 cents and low-cost carriers like Southwest were making 13.8 cents.
"It's very clear that the prices that First Air or Canadian North are charging are excessive, matter of fact they're clearly monopolistic," he said.
Gillen called First Air and Canadian North's offerings of $399 a competitive response but noted the section on predatory behaviour in the Competition Act.
"Predation is when you set the price in the market lower than your avoidable costs with the intent of driving the other firm out of business," he said. "It's very difficult to prove."
Gillen said he has been involved in cases involving Air Canada before.
"The interesting question here is will people in Northern Canada make the decision they're going to support the new entrant, even if they have to pay a little bit more?" he asked.
"The result of that is that firm will be successful and will be an effective competitor in the market. If people respond and simply take the cheapest price possible, then it's likely that the new entrant will not be able to survive in the market, and once that entrant leaves the market then people in the North are going to be paying $1,200 one way again flying between Ottawa and Iqaluit."
He guessed that the two companies are still profitable at $399 on that route.
"It's certainly true that operating in the North is more expensive but not to the extent of what you're seeing in the fares here," said Gillen.
"It would not surprise me that the competition bureau puts an end to the codeshare agreement because I think they're going to find that it is anti-competitive," said Gillen,
But the tough part is to foresee what outcome that could have in the market.
"It may be that that market cannot support three independent players," said Gillen.
In some ways, he said, having Canadian North and First Air operate in a codeshare and competing against GoSarvaq could be the best outcome for lower prices and better service.
"When I say that the competition bureau may step in and prevent this codeshare, it may in fact result in a negative outcome rather than a positive outcome," said Gillen.
"I generally work for the competition bureau on these cases but I was not contacted in this case here so I can't comment on it but certainly my advice to them if they were to ask me for it, is to think very carefully as to whether this market can support three players or not, and my suspicion is that is not the case."
