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Why the feds should open the airline industry to competition

Why the feds should open the airline industry to competition

If the government thinks its new passenger bill of rights will make flying less hellish, it's dreaming. But there is a solution

When David Dao was dragged off an overbooked United Airlines flight in Chicago last April, his ordeal sparked outrage around the world. The 69-year-old doctor had his nose broken, lost two teeth and suffered a concussion. That infamous incident, captured on cellphone video, should have been a turning point for the industry. Instead, it proved that Dr. Dao is far from alone.

The following month, a California family was yanked from a Delta Air Lines flight and threatened with arrest after refusing to give up their toddler's seat. Here at home, a 10-year-old boy from Prince Edward Island was kicked off an oversold Air Canada flight this past spring.

The public has had enough, and the federal government is proposing a new passenger bill of rights as part of an overhaul of the Canada Transportation Act. The new rules, which will take effect next year, will include compensation for passengers inconvenienced by overbooked flights or lost luggage. It will also ensure that parents won't have to pay extra to sit beside their kids.

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The details still need to be ironed out, but there's already concern that penalties will be lax. Instead of more ham-fisted regulation, Ottawa should force carriers to truly compete for customers—on service, convenience and price—by allowing foreign companies into the domestic market.

Right now, foreign airlines can fly Canadians to destinations like Mexico or Europe, but they are prohibited from servicing routes within Canada. They are also barred from wholly owning Canadian carriers that only fly domestic routes. Removing those barriers is a no-brainer for promoting more competition. But that logic seems to have escaped the federal government—even though the Competition Bureau has previously recommended both moves.

As part of the reforms unveiled in May, Ottawa is proposing to lift the foreign ownership limit on domestic airlines from 25% to 49% to increase competition. But 100% ownership is not allowed. And there's a catch: The fine print states that no single foreign investor will be allowed to own more than a 25% stake in a Canadian airline (nor can any combination of foreign airlines).

Such provisos will only deter foreign investors because there's no path to control—the same issue that tripped up Ottawa's efforts to promote more competition in the telecom sector. With no new competition, Canadians will continue to be held captive by lousy service and high prices on domestic routes. Right now it's actually cheaper to fly to London or Paris than to some parts of Canada.

It doesn't have to be this way. Australia and New Zealand have been doing it differently for years. Both countries have a 49% foreign ownership limit for domestic airlines that fly internationally, but foreign investors are allowed to own up to 100% of carriers that only operate on domestic routes.

Thanks to that policy, carriers such as Virgin Blue, now known as Virgin Australia, decided to enter the market. That's created more competition and lowered prices for consumers. Citing Australia's success, the Competition Bureau has previously advocated replicating that model in Canada for domestic air service.

And why shouldn't we? Australians not only enjoy cheaper flights, but better service too. A recent ranking by Skytrax, which annually grades the world's top 100 airlines based on customer feedback, put Virgin Australia and Qantas at 13 and 15, respectively. Meanwhile, Air Canada was ranked at number 29, WestJet at 58, and Air Canada Rouge landed at a sad number 99.

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Some say we need Canadian carriers to ensure that our vast country stays connected, but it turns out our existing carriers are only serving the more profitable routes anyway. The 2008 Competition Policy Review Panel said there's "no evidence that foreign-controlled airlines would be any more or less inclined than Canadian firms in servicing Canadian routes."

Prime Minister Justin Trudeau positions himself as a big supporter of globalization, but if he's really interested in creating more competition, shouldn't he be doing more to dismantle the protectionist walls around our airlines? Attracting more foreign investment is the only way to fix this. The existing protectionism will only fuel high prices and poor customer service for years to come.

Rita Trichur is the financial services editor with The Globe and Mail.

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