Canada: Competition Bureau Reaches Settlement With Air Canada And United Continental

The Competition Bureau announced on October 24, 2012, that it has entered into a Consent Agreement with Air Canada and United Continental Holdings, Inc. ("United Continental") that settles outstanding litigation between the Bureau and the companies regarding a proposed joint venture and certain existing coordination agreements in respect of Canada-US transborder airline services. The litigation before the Competition Tribunal had been scheduled to begin in November 2012.

Background

Approximately 15 years ago, Air Canada and United Air Lines, Inc. began coordinating various aspects of their airline services, including code sharing, certain joint fare discounts and incentive programs, on many Canada-US transborder routes pursuant to bilateral coordination agreements. Air Canada entered into similar coordination agreements with Continental Airlines, Inc. in 2009. (United and Continental have since merged, with United Continental being the parent holding company.)

In October 2010, Air Canada and United Continental announced a proposed joint venture that would result in further integration and coordination on Canada-US transborder routes.

In June 2011, the Commissioner of Competition (the head of the Bureau) filed an application with the Competition Tribunal alleging that coordination between Air Canada and United Continental, from both the existing agreements as well as the proposed joint venture, would likely result in a substantial lessening of competition on 19 transborder city pair routes.

Of note, the Bureau challenged the proposed joint venture under the merger provisions in section 92 of the Competition Act, while it challenged the existing coordination agreements under section 90.1, a new provision (which came into force in March 2010) dealing with agreements between competitors. Whereas an application under the merger provisions cannot be brought more than one year after completion of the merger, there is no comparable limitation period governing Section 90.1. The substantive test under both sections is the same: whether there is likely to be a substantial lessening or prevention of competition.

In essence, the Bureau alleged that the airlines' combined share of passengers on these 19 routes was high and that studies had shown that fares paid by nonstop passengers increased on similar routes when competitors are allowed to coordinate. The airlines disputed these allegations, contending that the Bureau failed to understand the efficiency and pro-consumer benefits of airline alliances.

Consent Agreement

The Bureau indicated that following a thorough review, it ultimately determined that the airlines' coordination was unlikely to substantially lessen competition on five of the 19 routes originally identified. Those were the five routes with the lowest Air Canada/United Continental combined share of passengers among the original 19 routes.

In the result, the Consent Agreement remedy only covers the 14 remaining city pair routes, which are: Calgary/Chicago, Calgary/Houston, Calgary/San Francisco, Montreal/Chicago, Montreal/Houston, Montreal/Washington, Ottawa/Washington, Ottawa/New York, Toronto/Cleveland, Toronto/Denver, Toronto/Houston, Toronto/San Francisco, Toronto/Washington and Vancouver/San Francisco. According to the Bureau, the airlines' combined market shares on these 14 routes range from 70% to 100%.

The Consent Agreement prohibits Air Canada and United Continental from coordinating on certain aspects of competition on these 14 routes, notably: coordinating their prices, coordinating the number of seats available at each price, pooling revenue or costs, and sharing commercially sensitive information. While the airlines were prepared to agree to these conditions, they did not admit or agree that coordination on such matters would likely result in a substantial lessening or prevention of competition. The Consent Agreement permits, subject to the agreed conditions, the airlines to preserve their existing commercial arrangements and their ability to create a transborder joint venture.

The Consent Agreement remains in effect for as long as the transborder joint venture or any provisions of the coordination agreements relating to prohibited activities remain in place. The Consent Agreement provides that certain prohibitions can be suspended or reinstated in relation to a particular route as appropriate, if there is a substantial change to competition on that route. The Bureau has also stated that it will appoint an independent monitor to ensure that Air Canada and United Continental comply with the terms of the Consent Agreement.

In addition to its relevance to transborder airline services, this settlement is of broader interest to Canadian competition law in that it involves the only application brought to date by the Bureau under the new section 90.1, which provides a means for the Bureau to challenge agreements between competitors that it considers to be anti-competitive. (For example, section 90.1 may be used to challenge competitor agreements outside the scope of the cartel provisions of the Competition Act.) While the full scope of section 90.1 remains to be seen, this application underscores the Bureau's interest in scrutinizing various forms of alliances and joint ventures between competitors.

The full Consent Agreement is available at: http://www.ct-tc.gc.ca/CMFiles/CT-2012-001_Consent%20Agreement_2_45_10-24-2012_7871.pdf.

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