The Case for Unilateral Action on Cabotage

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In essence, cabotage involves a foreign air carrier offering service between two or more points within Canada, i.e., a British Airways flight from London to Edmonton (and then to Vancouver) could pick up passengers in Edmonton and take them to Vancouver; and on the return flight it might fly Vancouver-Toronto-London and so compete on the domestic transcon route Vancouver-Toronto.

It should be apparent that Canada can eliminate a government-created barrier to entry by permitting cabotage and thereby increase the likelihood that there will be more competition on some domestic routes.35

The key point is this:  Canadian air travellers stand to benefit via increased competition on domestic routes even if Canada takes the action unilaterally. There is no need to negotiate new bilaterals which permit Canadian carriers to engage in cabotage in other countries (notably the US).36

Indeed, potential exploitable Canadian travellers should not have to wait (possibly decades) for reciprocal cabotage rights to be negotiated. Remember, the problem is market power on domestic routes (the exploitation of Canadian air travellers), not gaining more market opportunities for the dominant carrier in foreign markets!

The case for unilateral cabotage is strong when the domestic market is utterly dominated by one airline. Note, however, unilateral cabotage is not a "silver bullet." It may increase competition on about a dozen city-pairs, notably (a) various combinations of cities along the east-west trancon "corridor," from Vancouver to St. John’s or Halifax, (b) a few cities in north-south alignment with over-the-pole routes to and from Europe (e.g., London or Paris to Edmonton-Calgary-Vancouver), and (c) a few cities between Europe and the East coast and central Canada (e.g., Toronto-Halifax-St. John’s-London/Paris/Amsterdam). Even so, why not use this policy lever to help to constrain the market power of the dominant carrier where it is possible to do so? At least some Canadian air travellers will benefit from competition.

Note that is possible to permit cabotage on a limited basis in terms of cities served, frequency of service and so forth. The danger here is that government will end up regulating - and that it will do so with the objective of protecting the dominant domestic carrier.

If unilateral cabotage cannot be supported, the Committee should endorse the Commissioner of Competition’s (1999, p. 20) proposal for modified sixth freedom rights. This would allow US carriers to offer one-stop service across Canada such as Vancouver to Minneapolis (or Chicago) to Toronto (or Ottawa or Montreal or even Halifax).37

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