`Open Skies' Policy Troubles Canadian Airline Industry

FEAR of competition from the United States, high fuel costs, and a recession are creating deep uncertainty in the Canadian airline industry. Canada's two big airlines are losing big money and, analysts expect, they may take drastic steps to survive. That could mean a merger of the two. Or they might form monopolies, with one airline getting all the foreign business and the other the domestic traffic.

Air Canada is the largest airline in the country, carrying 56 percent of domestic air travel. Once government-owned, it was sold to the public in 1988. It has 20,000 employees - sharply cut back from 25,000 in the days when it was owned by Ottawa - and routes across Canada, the North Atlantic, and into the US.

Canadian Airlines International has about 40 percent of the domestic market. Most of this airline was once called Canadian Pacific. Through a series of mergers and takeovers - including the charter carrier Wardair - it has grown to 16,000 employees with routes across Canada, and over the North Atlantic, the Pacific, and into South America.

Both have been canceling routes, laying off people, and cutting expenses to reduce losses.

``Next year we're going to see what kind of shakeout there is from the recession,'' says Michael Tretheway, associate professor of commerce at the University of British Columbia, who specializes in the airline industry.

Last year was bad enough. For the first seven months of 1990, air traffic in Canada dropped by 5.7 percent. That combined with higher fuel prices means both airlines will report losses this year. Canadian Airlines estimates that for every 1 cent jump in fuel prices, its costs jump by $17 million (Canadian: US$14.6 million).

Higher fuel prices and fewer passengers forced Air Canada to mothball its fleet of Lockheed L-1011 jets; it is now looking for buyers. Air Canada is expected to announce a loss of about C$75 million for 1990, compared with a profit of C$149 million for the previous year.

PWA Corporation, the holding company which owns Canadian Airlines International, is expected to lose C$30 million. That's on top of a C$56 million loss in 1989.

The Canadian carriers are large on a world scale. Air Canada is the 20th largest airlines in the world. Canadian is the 24th. But they are dwarfed by US carriers. Last year the Canadian government announced an ``Open Skies'' policy which would allow US air carriers to compete in Canada. That would mean airlines such as American and Delta which now fly into Canada could also fly routes within Canada.

CANADIAN airline executives at first welcomed the ``Open Skies'' policy, but now they are more cautious.

``The pursuit of these objectives must place in jeopardy Canada's need for a strong, Canadian-controlled aviation system,'' said Air Canada chairman, Claude Taylor, in a submission to a Parliamentary committee in Ottawa. ``It is imperative that any new bilateral agreement be based on a level playing field which provides fair and equal opportunity for both parties.''

An Air Canada spokesman, who asked not be identified, was more frank: ``There is a fear with open skies that the Canadian government is going to give away the store.'' He added that US carriers could swamp the smaller Canadian firms. ``A carrier like American Airlines could put on so much capacity on the Toronto to Vancouver route that they would push Canadian and ourselves right out of the market.''

Some analysts have suggested that Air Canada might take over all foreign routes and leave Canadian Airlines with the domestic traffic, allowing both airlines to survive. ``It would be tough. The government would have to change the rules and I don't think the people who run the airlines would be willing to give up the competition,'' says Ted Larkin, an airline analyst with Bunting Warburg, a brokerage firm in Toronto.

He also says a merger into one big airline might happen. But again, he doubts it: ``For one thing, it could be a case of the bad airline contaminating the healthy airline.''

But other analysts - and some airline executives - feel that some agreement between the two carriers may be necessary. And both fear increased competition from the big carriers in the US.