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Cablegate: Canadian Minister of Transport Suggests That The

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 OTTAWA 003144

SIPDIS

STATE FOR WHA/CAN - ALAN HOLST, EB/TRA - JOHN BYERLY

STATE PASS USTR FOR SAGE CHANDLER

TRANSPORTATION FOR OST (EDDIE CARAZO) AND INTERNATIONAL
AVIATION (SUSAN MCDERMOTT)

COMMERCE FOR 4320/MAC/WH/ON/OIA/WORD

FAA FOR LEEANN HART

TSA FOR SUSAN WILLIAMS

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EAIR ECIN EINV CA
SUBJECT: CANADIAN MINISTER OF TRANSPORT SUGGESTS THAT THE
STATUS QUO HAS GOT TO GO

REF: A) Ottawa 2893
B) Ottawa 2766

-------
Summary
-------

1. (SBU) Canadian Transport Minister Jean Lapierre has
signaled his interest in reviewing Canada's civil aviation
policy. He has proposed a broad examination of barriers to
a more innovative and efficient civair system in Canada,
including questioning foreign investment limits and cabotage
prohibitions. This is the first time that a Minister of
Transport has so enthusiastically questioned the status quo,
but not the first time that these questions have been
raised. Most recently, in autumn 2002, Canada's Independent
Transition Observer on Airline Restructuring called for the
Government of Canada (GOC) to vigorously pursue a program of
liberalization of the airline market-- unilaterally if
necessary. Those recommendations, and others like them from
2001, 1999 and earlier, all fell on deaf ears when David
Collenette was Minister of Transport (from June 1997 to
December 2003). The new Minister is clearly more amenable
to change, but this will depend on USG willingness to engage
on this issue as well as Canadian Cabinet interest in
dealing with a potentially divisive issue while in a
Minority government position. For its part, Air Canada, the
national flag carrier, has indicated that it is ready for a
more open bilateral aviation agreement with the United
States. End summary.

---------------------------------
The Minister Talks Liberalization
---------------------------------

2. (U) The federal government is mulling a dramatic
overhaul of the country's airline industry, including the
elimination of limits on foreign ownership in Canadian
airlines and even letting U.S. carriers fly passengers
between Canadian destinations. Jean Lapierre, the Transport
Minister since June 2004 (Tony Valeri was Minister from
December 2003 to June 2004), said in early October that he
would reopen the question of a more liberal aviation
agreement with the United States and initiate public debate
on the issue (reftel B). In late October Lapierre said that
Canada must open up its airline sector and force Air Canada
to survive on its own. In his comments to airline
executives on October 29 in Toronto Lapierre noted that:
"For nearly a quarter of a century, the federal government's
air policies have been built on protecting what we have,
rather than building something better, protecting against
loss of service, against the loss of our national flag
carrier." "The time for this approach is over," the
Minister stated.

3. (U) At the Toronto meeting Lapierre questioned whether
it is time to relax airline ownership restrictions, if it is
time for Canada to consider allowing foreign carriers to
provide domestic passenger service, and whether cargo
cabotage should now be allowed. Lapierre made similar
allusions to liberalization in discussions with Ambassador
Cellucci during their October 26 meeting (reftel A).

4. (U) Minister Lapierre said he intends to task the House
of Commons Standing Committee on Transport with addressing
these questions and, once he has their views, to "move
swiftly" toward implementation. Lapierre presented his
proposals to the Commons Transport Committee in early
November for its review and recommendations. In a speech
before the Air Transport Association of Canada in Vancouver
on November 15, Lapierre said that he would ask the
Transport Committee to consider not only a "fully open skies
agreement with the United States," but also an expanded,
integrated market that includes Mexico.

--------------------------------------------- --
The Issue Has Already Been Exhaustively Studied
--------------------------------------------- --
5. (U) This is not the first time that these questions have
been raised in Canada, although this is the first time that
the Minister of Transport has been so clearly enthusiastic
about possibly altering the status quo.

6. (U) 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. Ward's position was established
in August 2000 (by then-Minister David Collennette) in the
wake of the take-over of Canadian Airlines International by
Air Canada, and the consequent establishment of Air Canada's
monopoly position in the Canadian air travel market. Ward
had the mandate to examine the overall impact of airline
restructuring on the following: consumers; urban, rural and
remote communities; travel agents and airports; and airlines
and their employees. (FYI: Ward's 2002 report is available
online:
www.tc.gc.ca/pol/en/Air/Airline_Restructuring _menu_page.htm.
End FYI.)

7. (U) In addition to liberalization, Ward's
recommendations encompassed a wide array of subjects, such
as the need for a "Passenger Bill of Rights," provision of
air service to small and isolated communities, and travel
agency regulation. Liberalization was identified as a long-
term policy goal and four specific recommendations for
action were made:

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."

(Comment: Ward identified the United States as the country
that Canada should target first for enhanced liberalization
negotiations. End comment.)

----------------------------------
Ward's Findings Echo Prior Reports
----------------------------------

8. (U) Over the past 12 years the Canadian Competition
Bureau has consistently advised the GOC to liberalize
domestic air transport, unilaterally if necessary, in order
to enhance competition. In the more recent past (since
1999), the Competition Bureau has recommended that the GOC
permit foreigners to hold up to 49 percent of voting shares
in Canadian air carriers.

9. (U) The Canadian Transportation Act Review Panel, in its
June 2001 report, also recommended that the limit on the
voting shares of Canadian airlines that can be held by
foreigners be raised to 49%. That panel recommended that
the government enter into 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. And, as a back-up option in the event
those negotiations did not succeed, the Panel recommended
that the government negotiate with other countries for the
granting of reciprocal modified sixth freedom rights and of
rights of establishment for foreign-owned domestic carriers.

10. (U) In addition, the House of Commons Standing
Committee on Transport recommended in late 1999 that the GOC
should raise the foreign ownership limit in Canada's
airlines from the current 25 percent to 49 per cent;
initiate negotiations with the United States on reciprocal
cabotage; and examine the viability of licensing foreign-
owned carriers to operate solely on Canadian domestic
routes.

------------------------
Will Liberalization Fly?
------------------------

11. (U) In 2002 then-Minister of Transport David Collenette
reacted to Ward's recommendation to open Canada's passenger
airline industry to foreign competition by noting the strong
counter-argument that has been applied previously; i.e.,
that unilateral opening of Canadian air markets would lead
to only the most passenger-intensive and lucrative routes
receiving extra attention, while low-load routes serving
smaller communities would be further marginalized.
Collenette also declared that homegrown Canadian competition
to Air Canada, such as Calgary-based WestJet, is
increasingly successful and would only be damaged by
unilateral liberalization. Furthermore, Collenette pointed
out that the United States had shown little enthusiasm for
further reciprocal liberalization, e.g., passenger cabotage.

12. (U) Air Canada has recently indicated that it would be
interested in liberalizing the aviation relationship.
Speaking to reporters November 15 in Toronto, Air Canada
Chief Executive Officer Robert Milton urged the USG and GOC
to "get on with" expanding the existing bilateral aviation
agreement, observing that he thinks that would be good for
Air Canada's business. Asked about reports that Minister
Lapierre appears to have become the champion of a more
liberal bilateral aviation policy, Milton was quoted as
saying that he is as happy with that news as Red Sox fans
were with the World Series.

13. (SBU) Embassy discussions in recent weeks with local
Air Canada officials and industry insiders confirm Air
Canada's interest in an enhanced aviation agreement,
particularly for cargo. There are reports that Air Canada
would like to switch its air cargo operation from one which
currently only carries cargo in the hold of passenger
flights, to a full-service, all-cargo branch. The carrier
has reportedly started making inquiries for the acquisition
of cargo freighters. Air Canada officials suggest that the
carrier's code share partner, United, would be supportive of
negotiations for a broader bilateral aviation agreement, but
we have not heard that directly from United.

14. (SBU) Comment: We expect that many of the familiar
protectionist arguments will be made against liberalization
as Parliament debates Minister Lapierre's proposals. There
are many objective advocates of liberalization, however,
such as Debra Ward, the Competition Bureau, and the
Transportation Act Review Panel, all arguing in favor of
opening up the aviation environment. Now there is a
Minister in place who seems to want to act on this body of
well-reasoned advice. He is clearly convening a
parliamentary group to examine the issue to smoke out in
advance any obstructionist views. We will be speaking with
Liberal, Conservative, Bloc Quebecois and NDP Members of
Parliament to determine what their thinking might be on
liberalization. Post would also appreciate learning the
views of the USG and U.S. aviation interests regarding
reciprocal liberalization with Canada. End comment.
Cellucci

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