Regulations Respecting Fees for the Review of Arrangements Involving Transportation Undertakings Providing Air Services: SOR/2019-81

Canada Gazette, Part II, Volume 153, Number 7

Registration
SOR/2019-81 March 26, 2019

CANADA TRANSPORTATION ACT

P.C. 2019-220 March 25, 2019

Her Excellency the Governor General in Council, on the recommendation of the Minister of Transport, pursuant to section 53.84 footnote a of the Canada Transportation Act footnote b, makes the annexed Regulations Respecting Fees for the Review of Arrangements Involving Transportation Undertakings Providing Air Services.

Regulations Respecting Fees for the Review of Arrangements Involving Transportation Undertakings Providing Air Services

Interpretation

Definitions

1 The following definitions apply in these Regulations.

Act means the Canada Transportation Act. (Loi)

level I air carrier has the same meaning as in subsection 3(1) of the Transportation Information Regulations. (transporteur aérien de niveau I)

Fees

Fees — notice

2 If a notice is given to the Minister under subsection 53.71(1) of the Act in respect of a proposed arrangement involving at least one level I air carrier, the following fee must be paid by one of the parties to the proposed arrangement:

Fees — review process

3 If a proposed arrangement involving at least one level I air carrier is subject to the review process set out in section 53.73 of the Act, the following fee must be paid by one of the parties to the proposed arrangement:

Payment of fees

4 All fees are to be paid in full by certified cheque to the Receiver General for Canada as follows:

Coming into Force

S.C. 1996, c. 10

5 These Regulations come into force on the day on which section 53.84 of the Canada Transportation Act comes into force, but, if they are registered after that day, they come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

Air carrier joint ventures are arrangements between two or more air carriers whereby airlines collaborate on aspects of operations (e.g. scheduling) for routes between given geographic regions. Air carrier joint ventures may enable the realization of efficiencies in an industry where foreign ownership restrictions prevent full mergers and acquisitions, with benefits for participants and consumers.

The Transportation Modernization Act, which received royal assent on May 23, 2018, amended the Canada Transportation Act (the Act) to enable the consideration of competition and other public interest factors when air carrier joint ventures are reviewed. Given that air carrier joint ventures result primarily in private benefits for participants, the amendments to the Act also enabled the recovery of costs, from participating air carriers, for activities undertaken by Transport Canada (TC) in relation to the assessment of the proposals for joint ventures. In the absence of any regulations establishing the associated fees for service, the full cost of joint venture assessments and authorizations will be borne by the Government of Canada and, ultimately, taxpayers.

Background

Air carrier joint ventures

Joint ventures are an increasingly common practice in the global air transport sector. They allow two or more air carriers to coordinate functions on specific routes, including scheduling, pricing, revenue management, marketing and sales. Air carrier joint ventures can yield significant long-term private benefits for participating air carriers, including increased profits over time by way of cost reductions through greater traffic density and the sharing of facilities. Consumers can also benefit by having access to more destinations without having to book separate tickets on different air carriers. Joint ventures can also allow air carriers to realize efficiencies, which may keep some less popular routes operating. Many countries formally recognize that joint ventures can have public benefits to air carriers, travellers and the economy that offset any reduction of competition, and thus have processes that examine these arrangements from the perspectives of both competition and the public interest; Australia, the European Union, Korea, Japan, Malaysia, New Zealand, Singapore and the United States are examples. Other jurisdictions look at issues such as impact on consumers, communities, and the air sector; the environmental impacts; safety and security; and social benefits that may be achieved as a result of the joint venture.

In the current context of Canadian air carrier collaborative arrangements, joint ventures are reviewable under section 90.1 or 92 of the Competition Act footnote 1 and are investigated by the Commissioner of Competition (the Commissioner). These reviews are carried out as part of the Commissioner’s independent mandate, as head of the Competition Bureau (the Bureau), to administer and enforce the Competition Act and to seek to determine whether an air carrier joint venture will substantially lessen or prevent competition. The Bureau’s analysis typically takes into consideration concentration on city route pairs, effective remaining competition, barriers to entry and any efficiencies claimed by the parties. The Commissioner does not consider factors beyond those related to competition, such as impact on employment. Furthermore, since most air carrier joint ventures are not currently notifiable mergers under the Competition Act, the Commissioner is not obligated to examine any joint venture arrangements in advance of their implementation. Moreover, joint venture assessments that would currently be carried out by the Bureau are not subject to any statutory timelines. This implies that at present, while air carriers may enter into a joint venture, there is the possibility that the joint venture could be challenged by the Commissioner at any time throughout the lifetime of the agreement. If the Commissioner challenges an air carrier joint venture, it would be based upon evidence that the joint venture is likely to result in a substantial lessening or prevention of competition in a given market as opposed to any other public interest considerations.

Since an arrangement between two or more air carriers that constitutes a joint venture requires a significant financial investment on the part of the parties to the arrangement, the potential uncertainty of the current process poses a significant disadvantage to Canadian air carriers in comparison to their international counterparts.

The Transportation Modernization Act amended the Act to set out a new process by which air carriers will be able to seek authorization for joint ventures from the Minister of Transport (the Minister), and to enable the Minister to consider competition impacts (assessed by the Commissioner) and the public interest when assessing joint venture proposals.

Under the amended Act, applicants will have the option to notify the Minister of their intent to have a proposed joint venture reviewed by the Minister. The Minister will then be required to inform applicants, within 45 days of a joint venture application submission, whether their application contains significant public interest considerations and warrants a full review.

If a full review is triggered, the Act stipulates that the Minister receive a report from the Commissioner within 120 days of the applicant’s notice, and render a preliminary decision within 150 days after the Minister receives the original notice, including all required information, and a final decision with conditions, if needed, within 285 days after receiving the original notice. If authorization is granted, TC will carry out ongoing monitoring to ensure the joint venture is on track to deliver the anticipated benefits. Following an initial two-year grace period after a joint venture authorization, the Minister could reconsider its authorization or adjust its terms and conditions if informed by TC’s ongoing monitoring and other sources of evidence that the benefits as stated may not be realized in the future.

Competition and the public interest

The assessment of potential joint ventures carried out by TC will focus on operational and network efficiencies, and public interest benefits, and will take into consideration a report submitted by the Commissioner that may identify any concerns about the potential lessening or prevention of competition in any relevant market.

In particular, as is done currently, the Bureau will assess whether a proposed joint venture is likely to result in a substantial lessening or prevention of competition, and may quantify it by forecasting price effects and estimated reductions in consumer welfare for markets at issue.

However, an assessment of a potential air carrier joint venture will no longer be limited to an assessment of the impact on competition.

Elements of the public interest benefits that will be examined by the Minister include the impact on consumers, communities, and the air sector (e.g. improvement in quality service, scheduling synergies and greater choice of connection and stopover options, pricing benefits, benefits to tourism, cost savings); the environmental impacts; safety and security; and social benefits that may be achieved as a result of the joint venture.

Joint venture assessment costing

TC undertook a comprehensive costing exercise to estimate the cost of assessment of joint venture applications. The exercise adhered to the Treasury Board of Canada Secretariat (TBS) Guidelines on Costing and followed TC’s internal Cost Recovery Costing Policy in order to arrive at a defensible and transparent cost estimate.

Costing for cost recovery purposes requires that the “full cost” of providing an activity be calculated. Under the Transportation Modernization Act, and in accordance with the TBS Guide to Establishing the Level of a Cost-Based User Fee or Regulatory Charge, full cost is the allowable upper limit of a service fee and represents the departure point for determining pricing options. A full cost estimate comprises all relevant resource costs incurred to deliver an activity or provide a service, including direct and indirect costs.

As joint venture assessments are a new process for TC, no historical cost information exists for the activity. Thus, TC employed a cost breakdown structure methodology to develop the cost estimate. This approach relies on analysis to build up the cost estimate from the individual tasks or processes that are required to provide the service.

The Transportation Modernization Act explicitly specifies deadlines and deliverables for the six distinct steps that are to be followed during the 285 calendar days of the joint venture review process. TC assessed the work and resources required to meet these targets for the analysis of both standard and complex two-partner joint ventures, as well as the analysis of inherently complex joint ventures between three or more partners that involve multiple routes, city pairs, and carriers. In all scenarios, direct personnel costs represent the largest cost element. Additional items that make up the full cost estimate include travel to meet with other jurisdictions when there is a dual assessment requirement; professional services to engage the expertise of specialized contractors; data licensing fees; and legal services. The estimate also includes program support costs, such as the prorated salary of administrative staff who will support the joint venture review process, and other indirect costs and associated costs (e.g. information technology, employment benefit plans).

At the conclusion of the costing exercise, the full cost estimate for two-partner joint venture assessments was calculated to be $436,000, comprising $300,000 in personnel costs and $136,000 in other operating costs. This cost estimate reflects the mid-point between the cost of performing a standard and a complex two-partner review. This approach is considered appropriate because upon receipt of an application, there would not be enough information available to make a determination on whether a particular joint venture assessment will be standard or complex. For reviews of joint ventures between three or more partners, the full cost estimate was $528,000, comprising $387,000 in personnel costs and $141,000 in other operating costs. To mitigate the long-term risk of undercharging or overcharging, a renewed costing exercise will be completed after a number of representative joint venture assessments have been completed. By analyzing actual financial and time-spent data, a more accurate cost estimate can be obtained, and pricing approaches adjusted in the future if necessary.

Public-private benefit assessment and fee-setting exercise

Determining what constitutes public vs. private benefits is fundamental to decisions regarding what services should be subject to fees and what cost recovery rate (the percentage of the costs paid by the user) should be for these services. TC provides many services that are neither purely for public nor private benefit, and must therefore set cost recovery rates that reflect where the activity falls along the public-private benefit continuum. While services that convey purely public or private benefit have obvious cost recovery rates (0% and 100%, respectively), setting the cost recovery rate for a service that is a mix of private and public good requires complex considerations.

A public-private benefit assessment was conducted using the public-private benefit (PPB) tool developed by TBS. The PPB tool estimates the degree to which a service provides a private benefit, if any, above and beyond benefits enjoyed by the general public. The PPB tool estimated that an air carrier joint venture authorization is a private good, footnote 2 wherein a significant proportion of the benefits derived from such an authorization accrue to private companies or individuals. The PPB tool focuses mainly on the direct benefits resulting from an activity. TC therefore broadened its analysis to also consider the indirect public benefits of ministerial authorized joint ventures when determining the appropriate cost recovery rate and fee level for joint venture assessments. Indirect benefits of airline joint ventures include enhanced flight options, increased connectivity for travellers, and potential price reductions once air carriers realize cost efficiencies.

In addition to using the PPB tool, TC also undertook several other analyses before setting the proposed fee levels, including examining the economic context in which the Canadian airline industry operates, and comparing fees charged in other jurisdictions for similar assessment work. Consideration was also given to downstream and indirect benefits arising from airline joint ventures, which the PPB assessment, which focuses on direct and immediate benefits of an activity, fails to capture.

The outcome of these other analyses led Transport Canada to initially seek recovery of 80% of the costs of performing these assessments.

However, in response to concerns raised during the Canada Gazette, Part I, consultation period, TC re-examined the fee-setting exercise to consider the cumulative impact of all government fees and taxes on the air sector, and thus proposes to recover 65% of the cost of joint venture assessments. This would allow for slightly lower assessment fees for those air carriers interested in having their joint ventures authorized by the Minister of Transport and lessen somewhat the overall financial impact felt by the air sector.

Objectives

The objective of the proposed Regulations Respecting Fees for the Review of Arrangements Involving Transportation Undertakings Providing Air Services (referred to as the “Cost Recovery Regulations”) is to enable the Minister of Transport to recover a portion of the costs associated with private benefits that a Transport Canada’s assessment of air carrier joint ventures may lead to. The Bureau will not be recovering costs for the work it will undertake in the joint venture assessment process.

Description

The Cost Recovery Regulations will require that a party to a joint venture that has at least one level I air carrier footnote 3 pay the specified proposed initial application fee (see table) when a notice in respect of the proposed arrangement is submitted to the Minister. The initial application fee will enable Transport Canada’s assessment of whether there are significant public interest considerations that warrant further review. If further review is warranted, and the parties do not withdraw their notice, the Cost Recovery Regulations will require that one of the applicants pays the specified proposed assessment fee (see table) within five days of being informed by the Minister that the proposed joint venture raises significant considerations with respect to the public interest.

Table: Proposed initial application and assessment fee structure
Partners to the joint venture Proposed initial application fee Proposed assessment fee
Two-partner joint ventures $28,000 $252,000
Joint ventures between three or more partners $36,000 $304,000

If the Minister deems, following the assessment of the initial notice, that the proposed joint venture will not raise significant public interest considerations, further assessment will not be undertaken and applicants will not be required to pay the proposed assessment fee.

The Cost Recovery Regulations will apply only to level I air carriers. Proposed arrangements that only involve non-level I air carriers will be exempt from the aforementioned fees.

“One-for-One” Rule

The “One-for-One” Rule will not apply to the Regulations, as there will be no change in administrative costs incurred by businesses.

Small business lens

The small business lens will not apply to the Regulations, given that the fees for joint venture assessments would only apply to large, level I air carriers. Accordingly, there will be no costs incurred by small businesses.

Consultation

The authority for the Minister to recover costs and set fees for the assessment and authorization of air carrier joint ventures was part of the Transportation Modernization Act. The associated bill (C-49) was considered by the House of Commons and Senate in fall 2017 and winter 2017–2018. The issue of cost recovery for the assessment of air carrier joint ventures was not raised during committee hearings.

Following royal assent of the Transportation Modernization Act (formerly known as Bill C-49), consultations on the joint venture cost recovery fee proposal were undertaken during the month of June 2018 with all major Canadian airlines, Canadian air transport associations, such as the Air Transport Association of Canada, the National Airlines Council of Canada, the Northern Air Transport Association, and the Canadian Business Aviation Association, as well as the International Air Transport Association. TC had initially proposed a cost recovery rate of 80% for performing joint venture assessments.

While the initial application fees were the same as those listed above, the assessment fees would have been $320,000 for a two-partner joint venture and $387,000 for a three or more partner joint venture. Some stakeholders consulted raised concerns about the level of the fees and the exemption of non-level I carriers from paying such fees.

During the 30-day comment period following publication of the proposed Regulations in the Canada Gazette, Part I, arguments were made that the proposed assessment fees fail to adequately account for the cumulative impact of current and proposed Government of Canada initiatives affecting the air sector. It was noted that the cumulative impact of four significant recent Government of Canada initiatives footnote 4 will have a significant financial impact on the Canadian air sector. It was also stressed that no other jurisdiction charges for public interest assessments of air carrier joint venture proposals and noted that the proposed Canadian fees created a risk of dissuading international carriers from wanting to partner with Canadian carriers. The amendments to the Canada Transportation Act that introduced the joint venture assessment process were intended to enhance the competitive position of the Canadian airline industry and encourage economic growth more generally. As a result, the argument that the proposed fees could inadvertently undermine the intent of the legislative amendments was persuasive.

The revised fee levels aim to recover a portion of the cost associated with performing joint venture assessments. TC applied a rigorous costing methodology, performed a subsequent analysis consistent with the TBS Guidelines on Costing, and followed Transport Canada’s Cost Recovery Costing Policy to arrive at an appropriate and transparent cost estimate that accurately captures the full cost of performing joint venture assessments.

Applicants availing themselves of this voluntary process, wishing to engage in joint ventures and seeking the advantages offered by a potential authorization derived by the assessment process, do so because they recognize the economic advantage offered by a joint venture. The proposed fee levels reflect the value of these benefits to airlines and the travelling public.

With respect to the exemption of non-level I air carriers from paying fees for the joint venture assessment, the fees should not discourage smaller air carriers from establishing joint ventures. That said, the current maturity level of cooperation between Canadian non-level I air carriers and international air carriers means that they are unlikely to be in a position to avail themselves of this process at the present time due to their much smaller networks and limited revenues. Nevertheless, fees that would prohibit smaller air carriers from pursuing joint venture opportunities were deemed contrary to the intended purpose of the program which is to encourage air carriers to seek ministerial authorization of joint ventures based on a broader public interest analysis. This proposal strikes an appropriate balance between fostering increased services and connectivity and cost recovery. Accordingly, Transport Canada is proposing an approach in which service fees do not result in an undue barrier to the expansion of smaller networks, which could increase service and connectivity for the Canadian public, especially in smaller and more remote communities.

Rationale

Air carrier joint ventures are expected to yield increasing profits over time to joint venture partners by way of cost reductions through greater traffic density, sharing of facilities and coordination of pricing. In addition, for those air carriers that request to have their joint venture arrangements assessed and potentially authorized by the Minister, such authorization will provide them with a legal certainty, which will allow them to enter into joint venture arrangements and attain the aforementioned benefits that are realized by these agreements. Moreover, the authorization will continue as long as the parties abide by the terms and conditions attached to the ministerial decision and as long as the Minister is of the opinion that the arrangement continues to be in the public interest. As a result of these significant benefits, a regulatory cost recovery regime will be implemented to recover a portion of the costs associated with a thorough assessment of joint venture proposals by Transport Canada.

Given that there will be public benefits as a result of authorized joint ventures, such as Canadian travellers having access to more destinations without having to book separate tickets on different carriers and potential price reductions once air carriers realize cost efficiencies, the cumulative impact of other aforementioned current and upcoming government regulatory fees and taxes on the air sector, and the fact that other jurisdictions do not charge for similar assessments, TC will not recover the full costs of assessing joint venture applications, but rather 65%. Private companies, which will benefit the most from the assessment, will cover the greatest share of the cost, rather than Canadian taxpayers. The cost recovery regime, however, will apply only to level I air carriers, in order to make joint venture arrangements affordable for smaller carriers.

Transport Canada anticipates that up to two joint venture applications will be received in each of the first three years after the new joint venture assessment process comes into effect, and that applications will likely decrease to one per year for the fourth and fifth years, down to zero applications annually after the fifth year, unless significant economic changes occur in the air sector. Transport Canada therefore anticipates a total of eight joint venture proposals in the first 10-year period, at a cost between $2.2 and $2.7 million to industry, footnote 5 depending on the type of arrangements being assessed. These costs are expected to have a negligible or minimal economic impact on industry, given that

Implementation, enforcement and service standards

Service standards

The amendments to the Canada Transportation Act allow the Minister 285 days to complete an assessment, whether it is from a level I air carrier subject to the assessment fees or a non-level I air carrier who will not be subject to the assessment fees. Section 53.81 of the Act gives the Minister the power to extend the assessment period at his own initiative or at the request of the parties. Where there is an applicable service fee for the assessment of a joint venture proposal, the Service Fees Act gives the Minister the discretion to remit a portion of fees that have been collected if the applicable service standard is not met. However, if the Minister uses his authority to extend the assessment, remissions will not necessarily be granted. In all other cases, the remission will be granted according to TC’s remission policy, which is currently under development. The policy will apply to all TC fees.

Contact

Director
National Air Services Policy (ACEB)
Air Policy Group
Transport Canada
Place de Ville, Tower C
Ottawa, Ontario
K1A 0N5
Telephone: 613‑993‑7284 or 1-800‑305‑2059
Fax: 613‑991‑6445
Website: www.tc.gc.ca