On October 24, 2012, the Competition Bureau announced that it had reached a consent agreement with Air Canada and United Continental Holdings Inc. that would govern the airlines’ joint-ventures relating to 14 high-demand air passenger routes between Canada and the U.S.

In June 2011, pursuant to sections 90.1 and 92 of the Competition Act, the Commissioner of Competition initiated an application before the Tribunal to challenge a proposed joint venture and three pre-existing ‘coordination agreements’ between the parties. The proposed joint venture would, in effect, merge all of the parties’ operations on passenger flights between Canada and the U.S. The coordination agreements consisted of (i) a Marketing Cooperation Agreement; (ii) an Alliance Expansion Agreement; and (iii) an Air Canada/Continental Alliance Agreement that provided for pricing, inventory and yield management coordination, the pooling of revenues and coordinated route and schedule planning. The Bureau determined that on 14 particular routes the airlines’ coordinated conduct would likely result in a substantial lessening and/or prevention of competition.

Under the terms of the consent agreement, the airlines agreed not to implement the proposed joint venture or to coordinate through their existing ‘coordination agreements’ on 14 key passenger routes between Canada and the U.S. As a result, on the subject routes the airlines are precluded from:

  1. coordinating their prices;
  2. coordinating the number of seats available at each price;
  3. pooling revenue or costs; and
  4. sharing commercially sensitive information.

The consent agreement will remain in force for as long as any of the coordination agreements or the proposed joint venture remain operative.

The consent agreement contains detailed provisions ensuring that following a “substantial change” to competition on any of the 14 subject routes, certain of the agreement’s prohibitions can be “Suspended” or “Reinstated” as required. A Suspension or Reinstatement requires that certain confidential share thresholds be met and proven by the parties. The agreement explicitly describes threshold calculation methods, extensive formal notice and supplemental information request procedures, and timing requirements. It also provides that an “Expert” may be appointed by the Commissioner to evaluate the parties’ threshold analyses; specifically with respect to their submissions on inventory, passenger shares and seat capacities on the subject routes. Additionally, a “Monitor” may be appointed by the Commissioner to supervise and ensure the airlines’ compliance. The fees of both the Expert and Monitor shall be borne by the airlines and the airlines shall indemnify each for any losses or expenses incurred in the course of their duties. As part of their compliance obligations, the airlines are also required to provide:

  1. in the case of a Suspension, written reports detailing their aggregate share of total seat capacity and local passengers, with all supporting information and data, every six months;
  2. annual (or as may otherwise be required by the Commissioner) detailed affidavits or certificates certifying their compliance with the agreement; and
  3. for five years following registration of the consent agreement, 30 days’ advance written notice to the Commissioner of any arrangement, agreement or proposed merger as defined in section 91 of the Act, relating to the subject prohibited activities.

Even if such a merger, agreement or arrangement is one that does not require giving notice under section 114 of the Act, according to the consent agreement, the relevant airline is nonetheless required to provide the Commissioner with the information described in section 16 of the Notifiable Transactions Regulations at least 30 days prior to completing the transaction. Along with these already arduous concessions, for as long as the consent agreement is in force the airlines are also required to, upon having received a written request from the Commissioner, permit the Commissioner or any of his authorized representatives to search their premises, inspect and copy all relevant records (at their expense) and interview their officers, directors or employees as necessary.

The consent agreement explicitly contemplates that its parties may bring an application for variance or rescission under section 106 of the Act, it also sets out a number of agreed statements upon which the airlines my not contest the Commissioner’s present conclusions for such applications. What is remarkable however, is that the airlines also agreed to surrender their rights to pursue recourse on a basis of section 106 “changed circumstances” with respect to Suspension and Reinstatement thresholds on the 14 routes in question. The Act states that the Tribunal may rescind or vary a consent agreement when a party can demonstrate that the circumstances that led to the making of a consent agreement have changed such that in the circumstances that exist at the time an application is made the agreement would not have been made or would have been ineffective in achieving its intended purpose. At least to a limited extent, the present consent agreement appears to fetter the Tribunal’s jurisdiction and replace it with the contractual intentions of the parties. It is not clear to us that, as a matter of law, the parties have the ability to contract out of section 106.

In its original notice of application, the Commissioner sought orders prohibiting both the proposed joint venture and the application of the coordination agreements to certain subject routes as primary remedies. It appears as though the parties have, in essence, adopted the alternative remedies sought by the Commissioner in its notice of application. We note that the consent agreement addresses only 14 of the 19 routes originally targeted by the Commissioner. A Bureau Backgrounder explains that “following a thorough review of further information and analysis regarding impact...” it was determined that the proposed joint venture would not likely prevent and/or lessen competition on the remaining five routes.1  We also note that the parties’ combined market shares on these five routes were the smallest of the 19 (all were less than 68% on a combined basis). The move may suggest that both the airlines and the Commissioner compromised their positions to achieve a resolution of the dispute. If this is the case, it is a welcome development that has been largely absent in the recent past.