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UNCLAS SECTION 01 OF 03 OTTAWA 003455 
 
SIPDIS 
 
STATE FOR WHA/CAN AND EB/TRA (JEFF HORWITZ) 
 
STATE PASS USTR (MARY SULLIVAN) 
 
TRANSPORTATION FOR OST/IA 
 
COMMERCE FOR 4320/MAC/WH/ONIA 
 
FAA FOR INTERNATIONAL AFFAIRS 
 
TSA FOR SUSAN WILLIAMS 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR ECON EINV CA
SUBJECT: Ottawa Studies Further International Aviation 
Liberalization...again 
 
REF: 05 Ottawa 1374 
 
¶1. (U) Summary: The Conservative government is set to announce a new 
international air policy in early 2007 that aims to open Canada's 
skies to more foreign competition and will focus on an "Open Skies" 
model.  Some observers think the move promises to benefit consumers, 
but not necessarily the country's airlines.  Others argue that 
Canada's domestic market is mature and that Canadian carriers are 
increasingly turning to the international marketplace for additional 
growth.  Moreover, Canadian airports have invested in modern 
infrastructure and additional capacity and are aggressively seeking 
new and expanded service and revenue opportunities. 
 
¶2. (U) The new policy comes in the wake of the November 2005 Canada 
- United States Open Skies agreement which removed the final, 
vestigial, restrictions on transborder operations between the two 
countries (the Agreement has yet to come into force due to the 
continuing USDOJ Antitrust review).  The full liberalization of the 
Canada-U.S. market was more contentious and had a higher political 
and economic profile than does liberalization with any other 
country, factors which suggests that this proposed policy will 
indeed fly, unless delayed by a possible spring 2007 Parliamentary 
election.  End Summary. 
 
¶3. (U) While domestic air services in Canada have been significantly 
deregulated since 1988, the international aviation market is still 
largely governed by restrictive bilateral agreements.  Canada 
currently has air transport agreements or arrangements with over 70 
bilateral partners, the majority of which specify, for example, the 
number of airlines of each side that may operate the possible 
routings, and the frequency of services.  The proposed new policy 
would formalize "a more progressive approach to air liberalization" 
similar to the liberal U.S. "Open Skies" model and seek to replicate 
the Canada-US (November 2005) and Canada-UK (April 2006) agreements. 
  A consultation document that outlined the scope of the proposed 
policy was given to industry stakeholders in late October for a 
two-week consultation process.  According to Transport Canada 
officials, the government is set to make an announcement in early 
2007 once it has reviewed submissions from the industry.   The 
consultation document is available at the Transport Canada website: 
www.tc.gc.ca 
 
¶4. (SBU) Paul Fitzgerald, Policy Advisor to Transport Minister 
Cannon, told Embassy officers that the intent of the new policy is 
to create a framework for negotiating future bilateral agreements 
that stresses the importance of allowing "market forces" to 
determine the quality, frequency and range of air service options 
available to Canadians. In practice, new accords will focus on the 
removal of restrictions on pricing, frequency and destinations that 
can be served by airlines. They can also include so-called fifth 
freedom rights, which allow carriers to fly to another country, stop 
and pick up more passengers, and then continue on to a third 
country. Cabotage, which would allow foreign airlines to carry 
passengers between Canadian cities, would remain off-limits. 
 
¶5. (SBU) Fred Gaspar, Vice-President of Policy and Strategic 
Planning for the Air Transport Association of Canada (ATAC), 
expressed concern to the Embassy that Canada may be moving too fast; 
Qexpressed concern to the Embassy that Canada may be moving too fast; 
he said accords make sense with some countries, but added that the 
wrong agreement would threaten to make Canada a "spoke in somebody 
else's aviation hub" with little or no benefit for Canadian 
carriers.  Sam Barone, President and CEO of ATAC told embassy that 
in the event of increased foreign competition a significant issue 
for airline survival is the Canadian tax and fee structure which 
makes Canadian carriers less competitive than their counterparts 
elsewhere, for example in Canada the jet fuel excise tax is 4 cents 
a liter (or 15 cents a gallon) whereas in the U.S. the aviation fuel 
tax rate is about 4 cents a gallon.  Both Barone and Gaspar 
emphasized that they have told the GoC that aviation negotiations 
are "trade" negotiations and fair benefits need to be extracted for 
Canadian carriers in any future air policy regime. 
 
¶6. (SBU) The Canadian Airports Council, by contrast, would benefit 
from any and all carriers who operate from their sites and fully 
 
OTTAWA 00003455  002 OF 003 
 
 
supports any moves by the government to increase the number of 
aircraft landing and taking off from Canada's airports, whether or 
not they are Canadian or foreign-registered. 
 
¶7. (U) In addition to pursuing additional liberalized agreements, 
Transport Canada is also seeking stakeholder input on ideas that 
could form future policy options, including exploration of a 
comprehensive Canada-European Union air transport agreement (Canada 
has air transport agreements with 17 of the 25 EU Member States); 
evolution of ownership and control regimes of foreign air carriers; 
movement towards a North American aviation market; and the adoption 
of a multilateral approach to some negotiations. 
 
Issue has already been exhaustively studied 
----------------------------------------- 
 
¶8. (U) This is not the first time that civair liberalization issues 
have been raised in Canada.  In September 2002 Debra Ward, the 
"Independent Transition Observer on Airline Restructuring," released 
her final report with long- and short-term policy recommendations on 
how to improve market competition in Canada's airline industry. The 
Ward report recommendations actually encompassed a wide array of 
subjects, such as the need for a Passenger Bill of Rights, provision 
of air service to small communities, and Travel Agency regulation. 
Liberalization was identified as a long-term policy goal with four 
specific recommendations for action: 
 
¶A. "That the government make every effort to reach reciprocal 
agreements, but be prepared to liberalize air service without direct 
or immediate reciprocal benefits for carriers, if there is an 
obvious advantage for Canadians and consumers, and when the 
liberalization has either no impact on the carrier industry, or when 
the carrier interests are clearly subsumed by a greater benefit." 
 
¶B. "That, within the context of a liberalization framework, the 
Government of Canada liberalize the current rules of ownership to 
allow foreign-ownership of domestic Canadian carriers and a 49% 
ownership level of international carriers." 
 
 
¶C. "That the Government of Canada rigorously pursue and accelerate a 
program of liberalization under the bilateral regime." 
 
¶D. "That the Government of Canada work to achieve liberalized air 
agreements with key multinational partners and plan towards the 
establishment of common aviation areas." 
 
¶9. (U) In her 2002 report, Ward identified the United States as the 
country that Canada should target first for enhanced liberalization 
negotiations. 
 
¶10. (U) Moreover, over the past 14 years the Canadian Competition 
Bureau has consistently advised the GoC to liberalize domestic and 
international air transport, unilaterally if necessary, in order to 
enhance competition.  In May 2004 Competition Commissioner Sheridan 
Scott noted that the Competition Bureau since 1999 has supported 
"the U.S.-style open skies agreement including cargo 
co-terminalization" for Canada.  The Canadian Transportation Act 
Review panel, in their June 2001 report, also recommended that the 
government further liberalize, beginning with negotiations with the 
United States and Mexico to create a North American Common Aviation 
Area in which carriers from Canada, the U.S. and Mexico would 
compete freely. 
 
¶11. (SBU) Comment:  The 2005 "Open Skies" Agreement with the United 
Q11. (SBU) Comment:  The 2005 "Open Skies" Agreement with the United 
States was much more contentious and had a much higher political and 
economic profile than does liberalization with any other country, 
factors which suggests that this new proposed policy will indeed 
fly, especially since objective observers have consistently 
recommended further liberalization.  On the other hand, a loss by 
the Tories in the next election (anticipated by many for late spring 
2007) may derail the implementation of the new policy.  End comment. 
 
 
 
OTTAWA 00003455  003 OF 003 
 
 
Dickson