Canada: Canada's New Airline Joint Venture Immunization Process Ready For Take-Off

As discussed further in our recent article, Canada's new Commissioner of Competition (the "Commissioner"), Matthew Boswell, has made it clear that his administration will not be afraid to take enforcement action where appropriate. Considering this commitment to active enforcement and the Competition Bureau's (the "Bureau") historical focus on the airline industry, including its recent criticism of a proposed merger between First Air and Canadian North, it seems safe to surmise that the Bureau will be closely watching the airline industry and will carefully scrutinize airline transactions.

Within this context, a recent legislative change is particularly noteworthy for airlines – in April, the Honourable Marc Garneau, the Minister of Transport (the "Minister"), formally made effective a new process granting him the ability to authorize proposed airline joint ventures recognized to be in the public interest (the "Antitrust Immunization Process").1 As discussed further below, such an authorization would have the effect of exempting a joint venture that otherwise results in anti-competitive effects from the application of key provisions of the Competition Act (the "Act").

This announcement coincides with the entry into force of section 53.7 of the Canadian Transportation Act (the "CTA") and the publishing of Transport Canada's Guidelines for the assessment of air carrier joint venture (the "Guidelines"),2 which jointly govern the Antitrust Immunization Process. Notably, this legislative change brings Canada in line with other jurisdictions with similar airline antitrust immunization regimes, including the United States. These developments come nearly one year after Bill C-49, the Transportation Modernization Act, received royal assent. Bill C-49, discussed in greater detail here, was part of a broader set of legislative measures designed to support the implementation of Transportation 2030, the Federal Government's strategic plan for the future of Canadian transportation. Beyond introducing the Antitrust Immunization Process, Bill C-49 sought to enhance air passenger rights and relax airline foreign ownership restrictions from 25% to 49%, among other things.

Following a brief discussion of the significance of this legislative change, this article will describe the Antitrust Immunization Process, including its relevant timelines, costs, and information requirements. With the introduction of this regulatory mechanism, airlines wishing to implement an eligible joint venture in Canada now need to consider whether to engage in the Antitrust Immunization Process, which will be time consuming and onerous for applicant airline partners, as discussed further below. Airlines should also be aware that seeking immunization involves a certain level of risk, as doing so will bar the parties from implementing their joint venture without obtaining the Minister's authorization, which may be accompanied by "any terms and conditions relating to the public interest and competition the Minister considers appropriate"3 – and importantly, the penalty for closing without the Minister's authorization, or for failing to abide by the Minister's terms and conditions, could include a fine of up to C$10 million and imprisonment for a term of up to five years. Additionally, in either of these scenarios, the Minister can make an application to a superior court to "order the person to cease the contravention or do any thing that is required to be done, and may make any other order that it considers appropriate, including an order requiring the divestiture of assets"4.

Legislative Background

The new Antitrust Immunization Process is not available for acquisitions and mergers that are subject to pre-closing clearance under s. 53.1 of the CTA and Part IX of the Act. It rather offers airlines the possibility of obtaining antitrust immunity for an "arrangement", which includes a wide range of joint ventures or alliances,5 a possibility that did not previously exist in Canada.

Previously, airlines seeking to enter into a (non-notifiable) joint venture agreement that satisfied the definition of "merger"6 under the Act had two options. First, the airlines could voluntarily seek clearance from the Bureau by applying for an advance ruling certificate or no action letter. Obtaining such clearance indicates that the Bureau will not challenge the joint venture before the Competition Tribunal on the basis of the information provided. However, if the Bureau has concerns, it may refuse to issue clearance, in which case the parties would need to work with the Bureau to resolve any concerns or decide to close without this comfort and risk a Bureau challenge.

As the joint venture would be non-notifiable and therefore not subject to the Act's mandatory merger notification regime, the airlines' second option would be to simply implement the joint venture with the hope that the Bureau would not challenge it under the mergers or civil agreements provisions of the Act. Experienced counsel can assist with assessing the risk associated with this alternative, keeping in mind the Bureau's previous enforcement action against airlines, including its 2011-2012 challenge of the Air Canada and United Continental cross-border alliance.7 For joint ventures that cannot be considered "mergers"8 under the Act, this was the only available option, as it is not possible to seek an advance ruling certificate or no action letter for such transactions.

Under this new regime, where the Minister is satisfied that the joint venture is in the public interest, an authorization would have the effect of allowing parties to coordinate their activities and exempt an airline joint venture that would otherwise result in a significant lessening or prevention of competition from the application of key provisions of the Act, namely, sections 45 (criminal conspiracies, agreements or arrangements between competitors), 47 (criminal bid-rigging), 90.1 (civil agreements between competitors that lessen competition substantially), and 91 (mergers). However, as will be seen, the authorization process is time consuming and onerous.

Antitrust Immunization Process

Seeking approval may take up to 285 days and cost upwards of $300,000

According to the Guidelines, seeking antitrust immunity may take up to 285 days. This timeline can be broken down as follows:

Within this timeframe, the parties have two opportunities to respond in writing – following the Minister's Report and following the Preliminary Decision.

Notably, this timeline may be extended where parties elect to take advantage of the availability of "pre-notice meetings", in which the Minister encourages potential applicants to openly discuss their proposal with Transport Canada officials, without prejudice.

Seeking approval is also costly. For a two-party joint venture, unless exempt,9 the parties must pay $28,000 in application fees and $252,000 in assessment fees, the latter amount of which is returned if the Minister decides that a public interest review is unwarranted - in which case, the review is terminated and the joint venture remains subject to the Act. These amounts increase to $36,000 and $304,000, respectively, for joint ventures with three or more parties.

The Bureau informs the Minister's analysis; the Minister makes the final decision

As the above timeline suggests, the Commissioner's role in the approval process is to (i) provide the Minister with a report regarding any potential prevention or lessening of competition that may occur as a result of the joint venture; and (ii) consult with the Minister before a preliminary decision is made, before an authorization is rescinded or varied, and at any other time throughout the process that the Minister seeks such consultation.

Taking the Commissioner's input into account, the Minister makes the preliminary and final decisions, and in doing so, may "specify any terms and conditions relating to the public interest and competition that the Minister considers appropriate"10.

Although the CTA permits any party subject to the terms and conditions of an authorization to apply to the Minister to vary or rescind such terms, parties are essentially forced to comply until the time at which such terms are varied or rescinded, or face steep penalties for failing to do so, as discussed above. Notably, the CTA is silent on how long the Minister has to review a party's request to vary or rescind terms and conditions, as well as the circumstances in which the Minister will exercise his discretion to do so. Considering the breadth of the terms and conditions that the Minister may impose, this represents an important risk requiring careful assessment.

The application requirements are onerous, requiring parties to provide detailed market information, data, and analysis pertaining to efficiencies and public benefits

As the Guidelines make clear, this regime's information requirements are onerous, but not unlike the information requests typically associated with "supplementary information requests"11 under the Act. Among other things, the parties to the proposed joint venture must provide all of the information required by the Act's notification provisions, as well as extensive market information, transaction-level data, and detailed descriptions of each efficiency and public interest benefit asserted to be likely to result from the proposed joint venture. For each efficiency and public interest benefit, the parties must provide "all records and data supporting the claim"12.

A myriad of public interest factors may be considered

When assessing whether a joint venture raises positive or negative public interest considerations, the Guidelines state that the following factors may be considered:

  • Network connectivity and other consumer benefits;
  • Economic impacts on Canada, the aviation industry and other modes of transportation, communities, and on the undertakings involved in the joint venture;
  • Environmental impacts;
  • Aviation safety or security impacts; and
  • Social impacts, including impacts on middle-class Canadians and families, impacts on access to transportation for people with disabilities, and cultural impacts.

Antitrust immunity is indefinite but subject to review after merely two years

Although authorizations do not technically expire, two years after authorizing a joint venture capable of generating sufficient public interest benefits, the Minister may notify the parties of public interest or competition-related concerns. After notifying a party of concerns, the Minister may, after consulting with the parties and the Commissioner, issue new terms and conditions to address the identified concerns. Once again, the parties are obligated to comply with these new terms and conditions until they are varied or rescinded, or face the penalties described above.

The Minister may also revoke an authorization if the parties have failed to comply with any associated terms and conditions, or if the authorization was granted on the basis of false or misleading information.

If no concerns are identified, an authorization continues in perpetuity, but the joint venture will be monitored on an annual basis. This monitoring process requires the parties to submit an annual report, which must include a description of the status of implementation of the joint venture, a list and description of all non-material changes to the joint venture, and must also report on public benefits achieved.

Time will tell in which circumstances airlines will use this new regulatory mechanism

As noted above, the Antitrust Immunization Process is time-consuming, costly, and onerous. It will also be conducted at least in part within the public domain, as both the Commissioner's report and a summary of the Minister's final decision will be made public, excluding confidential information.

The Guidelines also indicate that the Minister and the Commissioner will generally consult stakeholders as part of the review process, and that the Minister may seek consent from parties to communicate relevant confidential information to facilitate the consultation. In addition, the Minister may publish a summary of a preliminary decision including in order to obtain the views of stakeholders on terms and conditions relating to the public interest and competition under which an authorization could be given. It however remains to be seen how competitors and other interested stakeholders will intervene in the review process.

Nevertheless, the new Antitrust Immunization Process now aligns Canada with the United States and certain other countries, and allows more flexibility to airline carriers to develop joint ventures and alliances that generate efficiencies and other public interest benefits.

Footnotes

1 Transport Canada, "New process for review and authorization of air carrier joint ventures now in place" (April 3, 2019), online: https://www.canada.ca/en/transport-canada/news/2019/04/new-process-for-review-and-authorization-of-air-carrier-joint-ventures-now-in-place.html.

2 The Guidelines are not available online, but a copy may be requested on Transport Canada's website.

3 Canada Transportation Act, S.C., 1996, c. 10, s. 53.73(8).

4 Ibid. at s. 53.82.

5 "Arrangement" is defined in s. 53.7 of the CTA to mean "an agreement or arrangement, other than a transaction referred to in subsection 53.1(1), involving two or more transportation undertakings providing air services, as defined in subsection 55(1), to, from or within Canada, to coordinate on any aspect of the operation or marketing of such services, including prices, routes, schedules, capacity or ancillary services and to share costs or revenues or other resources or benefits".

6 "Merger" is defined in section 91 of the Act to mean "the acquisition or establishment, direct or indirect, by one or more persons, whether by purchase or lease of shares or assets, by amalgamation or by combination or otherwise, of control over or significant interest in the whole or a part of a business of a competitor, supplier, customer or other person".

7 Examples of the Bureau's enforcement activity are described at para. 1.3 of the Competition Bureau's "Submission to the OECD Competition Committee Roundtable on Competition" (June 16, 2014), online: https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03746.html#intro. See also the Bureau's "Report to the Minister of Transport and the Parties to the Transaction Pursuant to Subsection 53.2(2) of the Canada Transportation Act: Proposed Merger of Bradley Air Services Limited, d.b.a. First Air, and Canadian North Inc." (February 25, 2019), online: https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04419.html.

8 See note 6 for the definition of "merger".

9 According to the Guidelines, non-"level-one air carriers", defined as air carriers that, in the preceding calendar year, transported at least 2,000,000 revenue passengers or at least 400,000 tonnes of cargo, are exempt from paying these fees.

10 Guidelines, p. 9.

11 Competition Act, R.S.C., 1985, c. C-34, s. 114(2).

12 Transport Canada, supra note 10, p. 19.

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