Saturday, March 20, 2010

Air Canada Says "No" to Competition

Who is afraid of a little competition?  Air Canada, perhaps.  Earlier this week Calin Rovinescu, CEO of Canada's flagship carrier, issued a series of vitriolic statements against Middle Eastern airline Emirates' call for Canada to provide it with additional traffic rights.  See Nicolas Van Praet, Emirates Aims to Dump Surplus Capacity on Canada, Vancouver Sun, Mar. 15, 2010 (available here).  According to Rovinescu, "Emirates' real aim is to dump its excess capacity resulting from too many wide-body aircraft commitments, including A-380s, into the Canadian market, just as it has elsewhere in the world."  Further, Rovinescu claimed that Emirates, "as a state-owned carrier with access to virtually unlimited capital . . . would siphon passengers from other carriers who are making connections en route and connect them through its Dubai hub instead."

Even if Rovinescu's rhetoric rings with truth, should consumers traveling to, from, or beyond points in Canada care?

First, suppose that Rovinescu is correct and Emirates possesses excess capacity, it does not follow that the carrier is going to "dump" services into the Canadian market in any economically precise sense.  Similar to the concept of predatory pricing in antitrust law, dumping refers to the practice whereby a foreign firm (or firms) sells its goods or services at a price below what it charges for the same goods/services in its home and/or third country markets.  No showing has been made that Emirates plans to do this.

Second, even if Emirates engaged in dumping, any loss sustained by Air Canada would be outweighed by the surplus given to airline consumers.  Passengers flying to or from Canada would have access to more flights to or from more destinations, and with potentially cheaper prices than Air Canada is capable of providing.

Third, dumping is similar to, but not synonymous with predatory pricing, i.e., selling below marginal cost.  Again, there is no evidence that Emirates would sell air services to consumers at a loss.  It would be an irrational tactic anyway.  Were Emirates capable of driving competitors out of certain markets with predatory prices, the carrier would still have to recoup its losses at a later date by resetting its prices to a supracompetitive level.  All that would do, however, is attract other carriers back into those markets to take advantage of the new price structure.  Eventually, rates would be competed down to the competitive level, leaving Emirates to either eat the losses it sustained during the predatory period or forcing it to reengage in predation to again drive out competitors.  All during this time, though, consumers would benefit by having access to cheap airfares.

Fourth, Emirates' ownership profile should be a non-issue.  If Emirates is able to compete down prices on certain routes because of its deep (State) capital reserves, it would again be consumers which reap the benefits.  As Paul Krugman is said to have once quipped, the best policy response to foreign State subsidies is "to send a thank-you note to the embassy."  Quoted in Alan O. Sykes, International Trade: Trade Remedies, in Research Handbook of International Economic Law 62, 106 (Edward Elgar Publishing 2007). 

Given Air Canada's primacy of place in influencing Canadian air transport policy, see, e.g., Michael E. Levine, Why Weren't the Airline Reregulated?, 23 Yale J. on Reg. 269, 294-95 (2006), it seems unlikely that Canada will accede to Emirates' demands.  The "benefit" is that Air Canada will be able to keep itself afloat in markets where it lacks a bona fide competitive advantage; the "cost" will be felt by consumers.

http://lawprofessors.typepad.com/aviation/2010/03/air-canada-says-no-to-competition.html

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