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Cablegate: Ottawa Studies Further International Aviation

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R 241635Z NOV 06
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 4492
INFO RULSDMK/USDOT WASHDC
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RUEAHLC/DEPT OF HOMELAND SECURITY WASHDC
RUEANHA/FAA WASHDC
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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

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