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Federal regulators have ruled that Air Canada engaged in anti-competitive behaviour by operating flights on two routes at fares that did not cover "avoidable costs," but say they have yet to determine whether the carrier broke competition law by abusing its "dominant position" in the market.

The Competition Tribunal's decision sets a precedent by helping to determine what constitutes anti-competitive behaviour, the Competition Bureau said.

"By clarifying things it will go a long way to protecting future competition in this industry," said Gaston Jorré, senior deputy commissioner at the bureau. The ruling sets out "clear guidelines for such cases and in particular for telling us when someone is selling below cost -- which is very relevant to determining whether you have an offence under . . . the Competition Act."

The tribunal's decision revolves around a very technical matter: the definition of "avoidable costs," that is, costs that could be avoided if an airline were not to operate certain flights.

Competition law prevents a dominant airline from pricing below its avoidable costs, but the Competition Bureau, which brought the case forward, and Air Canada had disagreed as to how those costs should be measured.

After deciding what constitutes avoidable costs, the tribunal found that the Montreal-based carrier had "operated or increased capacity at fares that did not cover the avoidable costs of providing the service" on the Toronto-Moncton and Moncton-Toronto route between April 1, 2000 and March 5, 2001. It found the same for the Halifax-Montreal and Montreal-Halifax route between July 1, 2000, and March 5, 2001.

"These reasons and findings constitute a preliminary decision wherein the Tribunal concluded that Air Canada engaged in anti-competitive acts," tribunal registry staff said in an "information note" accompanying the decision.

The tribunal said it still must determine in future hearings whether Air Canada abused its position in contravention of the Competition Act. "It is important to note again that, even if the Tribunal concluded that Air Canada failed the avoidable cost test, it does not lead to a conclusion that Air Canada has engaged in an abuse of dominant position."

WestJet Airlines Ltd. chief executive officer Clive Beddoe cheered the ruling, saying the decision "establishes ground rules for the competitive environment" in Canada. "Clearly Air Canada was significantly off-side of what the tribunal now considers to be the basis for competitive or anti-competitive behaviour."

Air Canada pointed out in a news release that it has not been found in breach of Canada's competition law and said it would study the decision further.

"The Tribunal made it repeatedly clear in its reasons and findings that this decision is in no way a determination that Air Canada breached the Competition Act and that there are many elements remaining to be addressed in any future phase of the case," said John Baker, senior vice-president and general counsel for Air Canada.

The carrier said it had expected the decision would provide guidance on "acceptable pricing behaviour" in Canada.

Air Canada spent more than two years fighting allegations brought by the watchdog bureau that it abused its dominant position by slashing prices to hurt smaller competitors.

The bureau had alleged that Air Canada engaged in anti-competitive behaviour when it introduced cut-rate fares in Eastern Canada, where it faced competition from Calgary-based WestJet and CanJet Airlines, which was acquired in 2001 by Canada 3000.

The tribunal's findings are stayed in light of the fact that Air Canada is under court protection from creditors while it restructures. This provides the carrier more time to decide if it will appeal the decision in court.

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