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Turbulent times

Industry Spotlight
|Written By Mark Cardwell
Turbulent times

Rob Donald was in private practice as a corporate litigator and partner in a Montreal law firm when he was hired by a British company in 1992 to help it retrieve a big Boeing jet it had leased to a Canadian firm in a deal gone south. “It was the first time I’d ever dealt with aviation law,” he recalls. “But the complexity of the case was extraordinary — trying to seize an aircraft that was flying around the world. It really hooked me.”

After getting himself hired as general counsel of the International Air Transport Association, an industry organization that represents more than 200 airlines that account for 93 per cent of scheduled international air traffic, Donald spent the next decade running the legal affairs of the Montreal- and Geneva-based organization as well as its subsidiaries in more than 80 countries. He also acted as IATA’s legal adviser to international aviation conferences and industry task forces that recommended practices and/or provided legal frameworks on everything from electronic ticketing and the use of GPS and satellite technology in commercial aircraft to international competition laws.

“This is a large and fascinating area of law that is truly global in scope,” says Donald, now counsel in the Calgary office of Fraser Milner Casgrain LLP, where, among other things, he acts for a consortium of cargo carriers in respect of competition law issues and advises airlines, freight forwarders, and national and international corporations and associations. “I get quite passionate about my files. I come into work every day very excited to see what’s going on. And that’s been the case for most of the lawyers I’ve met over the years who practise in this field.”

So you can imagine how exciting things are for them these days as the airline industry in Canada and elsewhere slog through the most turbulent times in the brief history of commercial aviation. Forced to operate under decades-old regulatory and safety regimes that hamper their ability to meet myriad modern-day business challenges, virtually every big-name carrier here and abroad has been forced into bankruptcy or creditor protection in recent years. Now that fight to survive is driving highly complex mergers and consolidations and sparking unseemly wars of words between national rivals over access to each other’s air space.

“It’s not a healthy economic model,” says Laura Safran, one-time vice president, law and corporate secretary of now-defunct Canadian Airlines International Ltd., who now represents clients from air carriers and leasing companies to charterers and aviation underwriters since returning. “The industry is struggling to find a new one.”

The roots of the industry’s woes, legal experts in the field say, lie in the laws that govern competition and restrict foreign ownership in countries around the world. And though they vary in degree and scope, those laws invariably respect and reflect the international ground rules on airspace, safety, and aircraft registration that were set in 1947 with the signing of the Convention on International Civil Aviation. Also known as the Chicago Convention, it established the International Civil Aviation Organization, the Montreal-based United Nations agency that is charged with co-ordinating and regulating international air travel. Supported by 18 regularly updated annexes that contain standards and recommended practices for everything from air traffic control and airport design to navigational aids and aircraft accident investigation, the convention also grants every state “complete and exclusive sovereignty over the airspace above its territory.”

At the same time, countries around the world put laws in place to block foreigners from owning and controlling aviation companies and, ultimately, their aircraft, which were deemed essential for dealing with national military and civil emergencies. In Canada and the United States, for example, foreign ownership in airline companies — from national carriers like Air Canada to regional one-plane operations — is capped at 25 per cent of voting equity (although under Canada’s Open Skies policy, which the Conservatives have re-baptized Blue Sky, the rate is in the process of being raised to 49 per cent but only for investors from European Union-based countries, where the rate is also 49 per cent). Canadian aviation companies must also be, and be seen to be, under the factual operational control of Canadians.

According to Safran, who recently left FMC to join Davis LLP, those rules make it difficult, in some cases impossible, to either enter into life-saving mergers or find international financing to survive in a highly competitive industry that has too much capacity and is notoriously vulnerable to increases in everything from the price of oil to currency exchange. “Flag carriers are always left to flounder in the marketplace,” she says. “They are literally handcuffed by the rules.”

Expanding into other markets is equally difficult. In Canada, for example, Transport Canada is responsible for the many rigorous technical rules and regulations that are required for aviation safety. But foreign access to Canadian routes, airports, and passengers — and reciprocal access — is granted and regulated according to bilateral agreements that are negotiated between national governments. Once those bilateral agreements are reached, carriers that get into new foreign markets naturally try to better compete with indigenous or international rivals by exercising their rights. “They may seek a code-share agreement [a partnership with other carriers to provide service over a greater number of routes and fill in their schedules] or wish to conduct their business on a wet-lease basis [partnerships between carriers to carry passengers between overlapping routes to establish insured service without having to buy new aircraft],” explains Gerard Chouest.

A partner at the Toronto firm of Bersenas Jacobsen Chouest Thomson Blackburn LLP and a longtime adviser and advocate for domestic and international airlines, accounting firms, and insurers in regards to aviation licensing and regulatory affairs, Chouest says these agreements were both the impetus for the many alliances — notably SkyTeam, Oneworld, and Star Alliance — that have changed the face of the airline industry over the past decade. According to Chouest, the ultimate objective of these alliances is to achieve “full metal neutrality,” an airline industry buzzword for combining and sharing schedules and pricing to the point where the partners don’t care who owns the planes (or metal). “Huge amounts of ingenuity and legal work have gone into making these complicated structures and all of it because of the restrictions that are imposed on this industry,” he says.

Despite antitrust concerns, the arguments put forward by alliance proponents — better service, lower costs, more choice, and more flights — “have won the day” in the U.S., which dominates the industry. “But the armies have not left the field,” warns Chouest. “Some powerful people [such as Minnesota Congressman James Oberstar] are skeptical of the value of allowing these alliances, which they feel will lead to the erosion of services and competition.”

Though too small a market to influence the outcome of these consolidation wars, Canada is nonetheless being caught up in the firefights flaring up as a result of increased global competition between network carriers. The most notable example was in March when Air Canada president Calvin Rovinescu accused Dubai-based Emirates airline of predatory tactics for lobbying aggressively — to the point of tying in Canadian access to military air bases in the Middle East — in an effort to expand its services to Calgary and Vancouver.

“Simply put, the market between Canada and the UAE has not developed to the point where more capacity is warranted. Period. Full stop,” Rovinescu said in a speech to the Vancouver Board of Trade. “There are already more airline seats being flown between Dubai and Canada than there are people to fill them.” Air Canada’s boss also accused the United Arab Emirates airline of telling “fairy tales” about the potential for 2,800 jobs and $500 million in revenues for Western Canada as a result of increased access — a request that is being supported by the mayor of Calgary, among others.

A Transport Canada e-mail reply to an interview request from InHouse on this issue said, “[T]he Government of Canada greatly values the near-daily flights to Canada [to Toronto] from the two airlines of the [UAE]. [However] there is currently no shortage of seats to meet the demand.” The e-mail also said the government “is committed to its Blue Sky policy, which is promoting choice for consumers and providing new growth opportunities for Canadian airlines, airports, the tourism sector, and the economy.”

Like lawyers who do consultative and representative work for major airlines and other national and international groups, legal practitioners who represent small- and medium-sized companies say their clients are chafing under the aviation industry’s rigid rules. “There is no flexibility in the level of scrutiny applied between a big airline and a small outfit that has one or two helicopters that are doing heli-skiing,” says Aaron Singer, a partner in the business law group at Clark Wilson LLP in Vancouver.

Singer offers regulatory advice to aviation operators, many of them rugged individualists and entrepreneurial former pilots who fly bush and float planes into and around British Columbia’s rugged interior and picturesque islands. He says the rules that inhibit their ability to find financing from friends, customers, and acquaintances in the U.S. or elsewhere undermine their ability to survive in a risky business that costs many times more than other businesses — and puts a proud Canadian tradition in jeopardy. “The rules need to be revisited [and] not applied blindly,” he says. “Underlying circumstances need to be considered.”


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