12-09-i992 16:48 416 865 7943 COMPETITION TRIBUNAL IN THE MATTER OF an application by the Director of Investigation and Research under subsection 64(1) of the Competition Act, R.S.C. 1970, c. C·23, as amended;
AND IN THE MATTER OF a Limited Partnership formed to combine the operations of the Reservec and Pegasus computer reservation
systems~
AND IN THE MATTER OF The Gemini Group Automated Distribution Systems Inc.;
AND IN THE MATTER OF an appllcatlon by the Director of Investigation and Research under section 106 of the Competition Act, R.S. 1985, c. C-34 to vary the Consent Order of the Tribunal dated July 7, 1989.
BETWEEN: r----------~- Director of Investigation and Research COMPETITION TRIBUNAL F TRIBUNAL DE LA CONCURRENCE p I R Applicant L E 0 DEC 9 1992 4aiJ B - and -I RCGtSTRAR·AEGtSTRA!AE T Air Canada OiTt1WA, OMT. I ~ PWA Corporation ------.'··=---....-~"'---...1 Canadian Airlines International Ltd.
Tha Gemini Group Limited Partnership The Gemini Group Automated Distribution Systems Inc.
Covia Canada Corp. Covia Canada Partnership Corp.
- and -
Consumers' Association of Canada American Airlines, 'nc. Attorney General of Manitoba Alliance of Canadian Travel Associations Blos Computing Corporation Intervenor•
MB (416)863-7943 P.02 CT·BB/1 TRIBUNAL DE LA CONCURRENCE
Respondents
12-09-1992 16:48 416 865 7943 MB <416)863-7943 P.03 - 2 -RESPONSE OF AIR CANADA yo THE NOTICE OF APPLICATION A. STATEMENT OF GROUNDS QN ~l::llCH APPLICATION IS OPPOSEp 1 . Air Canada opposea the application made by the Director of Investigation and Research (the .. Dlrector•1 to vary the consent order of the Competition Tribunal (the •Tribunal") dated July 7, 1989 (the "Consent Order") on the following grounds:
(a) The circumstances that led to the Consent Order have not changed; (b) The changes in circumstances pleaded and relied upon by the Director In seeking the variation order do not relate to the grounds upon which the Director's original Application was based;
(c) The Gemini Hosting Contract, dated 30 June 1989, the terms of which the Dlrector seeks to vary, did not exist at the time the Director's original application was launched; nor waa It the subject of consideration in the Consent Order Impact Statement filed bv the Director on 13 April 1989, nor in the Agreed Statement of Facts filed by the parties on 19 April 1989;
(d) The terms of the Gemini Hosting Agreement were not the subject of any terms of the Consent Order. In the absence of the consent of all
12-09-1992 15:49 416 865 7943 MB (416)863-7943 P.04 • 3 -parties, it ia not the proper subject matter of an application under section 108 of the Competition Act to vary the Consent Order. In the alternatives, the Gemini Hosting Agreement is not a merger within the meaning of Section 91 of the Competition Act, and the Tribunal haa no Jurisdiction over it;
(e) The Consent Order has been and continues to be effective to achieve its object of eliminating the substantial lessening of competition which the Director alleged would result from the merger;
(f) The financial positions of PWA Corporation ("PWA") and Canadian Alrllnes International Ltd. ("CAIL., were not considered by the Tribunal In granting tha Consent Order because they were not relevant to the Consent Order and changes In their financial positions are not the proper basis for variation of the Consent Order;
(gl In the event the Tribunal has Jurisdiction to vary the Consent Order under the provisions of Section 106 this Is not an appropriate case for the exercise of the Tribunal's discretion in that the relief sought by the Director would lead to <O the likely demise of Gemini;
12-09-1992 16:48 416 865 7943 MB (416)863-7943 P.05 . 4. (Ill a substantlal lessening of competition in most If not au Canadian CRS markets, creating a virtual monopoly in the hands of Sabre; and (Ill) the ellmlnatlon of Jobs In Canada, and the ellmlnatlon of opportunities for Canadians to participate In the lnternatlonel CRS and alrllne markets.
(h) The changes sought in the Consent Order go fer beyond variation. In addition, the Tribunal has no jurisdiction under Section 106 to dissolve the Gemini Group Partnership. Following the Issue of a Consent Order under Section 105, and absent the consent of all parties, the Tribunal's powers are limited to rescinding or varying the order, and then only If the provisions of subsections 105 (e) or (bl apply; and
(I) The Tribunal has no Jurisdiction under Section 92 to dissolve the Gemini Group Partnership, the merger in question having been substantially completed more than three years before the Director's current Application.
Add!tjooa! Material Fact1 po Which Air Canada 811111 2. The merger dealt with in the Consent Order was the merger of the CRSs of Air Canada and CAIL's predecessor. This merger was effected on 1st June 1987 and substantially completed more than three veers prior to the current Application.
12-09-1992 1s:so 416 865 7943 MB <416)863-7943 P.06 • 6 -3. The Gemini Hosting Contract Is not referred to, dlrectly or Indirectly, In the Consent Order because the terms of thet contract were not relevant to the behavioral restraints Imposed upon the respondents reletlng to the purposes to which the Consent Order were directed.
4. The behavloral restraints Imposed upon the respondents by the Consent Order have been effective tools In fostering competition In Canadian CRS markets, which hes Intensified since the Order. Sabre's market position and share, which was of concern to the Director in his original application, has improved substantially, to the coat of Gemini's.
5. The flnanclal vlablUty of PWA (or Air Canada) was not at Issue before the Tribunal because the Consent Order did not deal with an alrllne merger. As It related to the alrllne Industry, the object of the Consent Order was to prohibit the CRS merger being used by Air Canada and CAIL as a vehicle to disadvantage their air carrier competitors In the manner described In the Consent Order Impact Statement and to foster the competition between Air Canada and CAIL. Rather than preserving or ensuring the future financial viability of PWA and Air Canada, the Consent Order was designed to - and has been effective in achieving Its intended purpose - foster competition between CAIL, Air Canada and others with competition's anticipated result that certain competitors may not succeed. The Consent Order was never intended as a vehicle for the general regulation of the Canadian airline market, but only to address the Director's then concerns therewith.
12-09-1992 16:51 416 865 7943 MB (416)863-7943 P.07 - 6 . 6. As part of the Consent Order, the parties agreed to the Reservation System Rules (the "CRS Rules") annexed thereto. In the purpose clause to the CRS Rules (Rule 2(a)), It Is speciflcally stated that "These Rules shall .a.Qt apply to agreements or arrangements between boated cerclars and system vendors for non-system related services". If the terms of the Gemini Hosting Contract (a contract between Air Canada and CAIL, as hosted carriers, and Gemini, es system vendor) ware relevant to making the Consent Order, the contract would not have been excluded from the ambit of the CRS Rules.
7. In his 1988 Application, the Director alleged that remedial action was required because actual or potential abuse by system vendors of the Canadian CRS industry was not regulated or curtailed through CRS rules such as those devised by the United States Civil Aeronautics Board In 1984. In Its reasons tor judgment, the Trlbunal noted that tha CRS Flulas wara based in part on the United States Clvll Aeronautics Board CRS rules. The United States Clvil Aeronautics Board CRS rules did not than, nor do they now, require that CRS hosting contracts be terminable on short notice.
8. As Impliedly admltted by the Director in this application, Gemini, the Gemini Partnership end Air Canada hava complied In all material respects with the Consent Order and CRS Rules incorporated therein.
12-09-1992 16:52 416 865 7943 MB (416)863-7943 P.08 - 7 -9. As further impliedly admitted by the Director In this application, there has been no substantial lessening of competition in the CAS Industry as the result of the Consent Order.
B. RESPONSE JO THE MATERIAL FACTS BELIEP UPON BY THE p!RECIOB Part!aa
10. Air Canada admits the facts in paragreph 1 of the Statement of Material Facts (the "Statement") with the followlng qualificetlons: (a) the proper name of Time Air Corporation Is Time Air .Inc.,,; (bl the proper nama of Inter-Canadian Inc. Is Inter-Canadian 11991) Inc.; (c) PWA Corporation Indirectly holds a 45% interest In Calm Air International Ltd. through Canadian Reglonal Airlines Ltd.; and (d) Air Canada's knowledge of the corporate structure of PWA Corporation Is limited to facts as they existed on November 3, 1992.
1 1 . Air Canada admits the facts In paragraphs 2, 3 end 4 of the Statement. Con11nt Order pt Jyly 7. 1989 12. While Air Canada accepts generally the accuracy of the summery of the Consent Order as described in paragraphs 5 through 1 1 of the Statement, Air Canada relies upon the actual terms of the Consent Order for its full meaning, true purport and effect.
12-09-1992 1s:s2 416 865 7843 MB (415)863-7943 P.09 • 8 -13. In response to paragraph 6 of the Stetement, the Director did not allege in hie application to the Tribunal on March 3, 1988 (the "1988 Applicetlon") that the Gemini Partnership created a dominant firm that would be able to maintain Its dominant position because it was vertically Integrated with Air Canada and CAIL and because It would have the most complete, timely and accurate Information on these carriers as a result of hosting these carriers. The Director stated, In the context of addressing barriers to market entry, as follows: AC and CAIL dominate th• alrllne pa11enger market In Canada. Thia dpmln1ng1, coupled with the vartlcal Integration of Gemini with AC and CAIL, wlll ensure that Gemini alone wlll be able to provide th• moat complete, accurate and timely information. lncludlng laet 1e1t 1vailablllty, on vlrtually all Can1di1n carrlera of lntereet to Canadian tr1val 1g1nt1 because AC, CAIL and their afflllated and allgned carriers are ho11ad only on Gemini ID.d there are no direct acca11 llnka between the11 carriers and other CR8s.
[1988 Application, paragraph 29 (emphasis added)]
14. Further In response to paragraph 6 of the Statement, the Director did not allege in the 1988 Application that the merger raised competition concerns in airline markets because Air Canada and CAIL had the ability and incentive to exclude, deter or raise the cost of entry for airline competitors of Air Canada and CAIL by operating Gemini In an anti-competitive fashion. In the 1988 Application, the Director alleged in this regard aa follows:
(a) that the merger of Reservec end Pegasus would llkely entrench the dominant position of Air Canada and CAIL In the airllne
12-09-1992 16:53 416 865 7943 MB (416)863-7943 P.10 - 9 • industry at the expense of Wardair and potentlel new entrants (1988 Appllcatlon, paragraph 461;
(b) as a result of the merger, Air Canada and CAIL would be able to disadvantage their competitors by denying or delaying ecce88 to the CRS: loading the participating airlines' information in an Incomplete, Inaccurate or untimely fashion: bias the dlsplay of fllghts so that a competitor's flights would appear lower in the dlsplay or on other screens; or charge competltors vary high booking faas for use of the CRS ( 1988 Appllcatlon, paragraph 47);
(c) that the ability of Gemini to exclude, deter or raise the cost of entry for airline competitors of the partners of Gemini would be Increased as a result of Gemini's greater market power iDJ.b.1 CBS market and that, It that market power were exercised, the result would likely be a reduction In competition In the Canadian alrUne markets and higher prices for air transportation (1988 Appllcatlon, paragraph 49: emphasis added); and
(d, that the merger would eliminate one element of competition (the use of a CRS) between Air Canada and CAIL ( 1988 Application, paragraph 80).
12-09-1982 15:53 416 865 7943 MB <416)863-7943 P. 11 - 10 -Cb•ngad Clrcum1tanca1
15. Air Canada accepts the admission of the Director In paragraph 12 of the Statement that the financial viability of PWA was not relevant to the Issues before the Trlbunal at the time the Consent Order was Issued. It also eccepts the general accuracy of the allegations in paragraph 12 as to PWA'a flnanclel condition.
16. Air Canada admits, as alleged in paragraph 13 of the Statement, that PWA haa been seeking an airline Investor for some time, but is unaware of whether Air Canada end AMR are tha only alrllnes to have expressed an interest.
17. Air Canada admits, as alleged In paragraph 16 of the Statement, that AMR and PWA have had discussions, but denies AMR's Interest was limited to a strategic alliance. It has always been AMR's Intention to achieve de facto control over PWA/CAIL with a view to dominating the Canadian airline and CRS markets.
18. The posslblllty of an objection by Air Canada to a transaction which might have been negotiated between PWA and AMR Corporation (•AMR", which may in turn hava been submitted to the National Transportation Agency is not a changed circumstance that supports an application to vary the Consent Order and Is not the proper subject matter of Inquiry by the Tribunal. Air Canada disputes the Director's reUance upon the material facts set forth in paragraph 16 of the Statement.
12-09-1992 1s:s4 416 865 7943 MB (416)863-7943 P.12 - 11 i 9. The allegations in the Director's Statement at paragraphs 14 et saq concerning discussions which occurred about a possible merger between Air Canada and PWA are Irrelevant. There Is no proposed merger between Air Canada and PWA before tha Tribunal for review. The references to the proposed Air Canada/PWA merger, the Inquiry of the Director under section 10(1 )(a) of the Competition Act, the Director's speculation on the consequences in the event such a marger were to take place, are not changed circumstances which support an application to vary the Consent Order. Air Canada submits that paragraphs 14, the reference to tha Air Canada merger discussions in paragraph 21, 28, 2 7, the reference to tha Air Canada proposal In paragraph 28, 29, 30, 32, 33, 34, 36, 37, 38, 39, 40 and 41 are not the proper subject matter of this appllcatlon.
20. Discussions among the partners of the Gemini Partnership with regard to changes in relation to the ongoing operation of the Gemini Partnership are not evidence of changed circumstances that support a variation of the Consent Order. Air Canada disputes the Director's reliance upon the material facts set forth In paragraph 17 of the Statement.
21. The subject matter of civll ectlons by The Gemini Group Automated Systems Inc. (•Gemini'') against CAIL and PWA relating to breaches by PWA and CAIL of their obligations owing to Gemini and the Gemini Partnership pending before the Ontario Court of Justice (General Division) ere not the proper subject matter of inquiry by the Tribunal. The threat or conduct of a civil action by Gemini against CAIL and/or PWA is not a material fact which supports a variation of the Consent
12-09-1992 16:55 416 865 7943 MB (416)863-7943 P.13 - , 2 -Order and Air Canada disputes the Director's reliance on the material facts In paragraph 18 of the Statement.
22. Air Canada accepts that a complaint to the Director was made by Gemini that Sabre, the CAS owned end operated by American Airlines, Inc. ("AA"), was engaged in predatory pricing behaviour contrary to the provisions of the Competition Act. If trua, the allegations support the likelihood of a substantial lessening of competition In Canadian CRS markets (by Sabre obtaining a virtual monopoly) In the event the Tribunal were to make the order requested by the Director. In any event, the complaint Indicates Gemini's perception of the state of competition In Canadian CRS markets In the post Consent Order environment.
23. Whll1 Air Canada acknowledges that It entered into an alliance agreement with the United Alrllnes on or about August 18, 1992, Air Canada submits that this alliance provides no evidence of changed circumstances that would support a variation of tha Consent Order and Air Canada disputes the Director's rallance upon the material facts sat forth In paragraph 22 of the Statement.
24. Air Canada is unaware of the exact status, in late July 1992, of the proposed AMRIPWA transaction. Air Canada disputes that AMR's proposal was cgnd!tlgnal upon CAIL being hosted on AA•a Sabre CRS. Rather, newspaper reports at that time Indicated that AMR sought a condition that CAIL use "best efforts" to affect such a change In Its CRS hosting relationship.
12-09-1992 16:56 416 865 7943 MB (416)863-7943 P.14 - 13 -25. The legal proceedings brought In Alberta by PWA against Gemini, Air Canada and Covla for a declaration that Gemini Is Insolvent for the purpose of terminating the Gemini Hosting Contract is not the proper subject matter of inQuiry by this Tribunal and Air Canada disputes the Director's reliance thereon In paragraph 25 of the Statement.
26. Further in response to paragraph 25 of the Statement, the Alberta proceedings were stayed by order of Mr. Justice C.G. Virtue of the Court of Queen's Bench of Alberta dated November 10, 1992 and fresh proceedings have been brought by PWA before the Ontario Court of Justice (General Division) on November 26, 1992 and that action Is pending.
27. While Air Canada Is aware that negotiations have taken place between AMR and PWA concerning the formation of a strategic alliance, Air Canada has no apeclflc knowledge of the matters discussed between representatives of AMR and PWA, the terms of any draft stock purchase or shareholder and service agreements for the proposed AMR/PWA transaction, the current relationshlp between AMR and PWA nor the future intentions of AMR and/or PWA as stated in paragraph 15, 20, 23, 36 and the first numbered paragraph 36 of the Statement. From a statement made by Transport Minister Jean Corbell to the House of Commons on 24 November 1992 it is apparent the AMR proposal would give AMR de facto control over PWA and/or CAIL contrary to the provisions of the Natlonal Transportation Act.
12-09-1992 16:56 416 865 7943 MB (416)863-7943 P.15 • 14. 28. Air Canada has no specific knowledge of the position of the Council of Canadian Alrllnes Employees as set forth in paragraphs 24, 28 and 35 of the Statement. However, Air Canada understands the alleged Interest of AMR and the Councll to acquire an interest in PWA ia subject to the resolutlon of many more issues than the Gemini Hosting Agreement.
29. Apart from the first sentence of paragraph 42, which Is admitted, Air Canada denies the Director's allegations contained In paragraphs 42 and 43 of the Statement. In the event PWA and/or CAIL do not survive on their own, new entry, and the expansion of the presence of existing participants can be expected to enhance the competitive environment In the Canadian airline market.
0. RELIEE SOUGHT 30. Air Canada requests that this application be dlsmiesed. E. PLACE OF HEARING 31 . Air Canada requests that the hearing of thia appllcatlon be held In tha City of Ottawa, Ontario.
F. LANGUAGE OF HEARING
12-09-1992 16:57 416 865 7943 MB (416)863-7943 P.16 - 1!5 -32. Air Canada requests that the hearing of this application be conducted In the English language.
G. SERVICE ON AIR CANADA 33. For the purposes of the proceedings contemplated by this application, any documents to be served on Air Canada may be served as follows: McMiiian Binch Barristers and Solicitors Suite 3800
Royal Bank Plaza South Tower Toronto, Ontario M5J 2J7
Counsel to Air Canada J. Wllllam Rowley, Q,C. (416) 86!5-7008 Willlam V. Sasso (416) 866-7154 John F. Clifford (418) 865-7134 Fax: (416) 866-7943
DATED this day of December, 1992 at the City of Toronto, in the Province of Ontario. ~~
J, Wiiiiam Rowley, Q.C. of Counsel to Air Canada
McMiiian Blnch Barristers and Solicltore Suite 3800, Aoyal Bank Plaza South Tower Toronto, Ontario M5J 2J7
12-09-1992 16:57 416 865 7943 MB (416)863-7943 P.17 .. 16 -TO: Director of Investigation and Research c/o L. Yves Fortier, Q.C. Ogllvy, Aenault Barristers II Sollcltors
1981 McGill College Avenue Suite 1100 Montreal, Quebec H3A 3C1
and c/o Donald B. Houston
Department of Justice Legel Branch Consumer and Corporate Affairs SO Victoria Street 22nd Floor Hull, Quebec K1A OC9
AND TO: Gemini Group Automated Systems Inc. et al c/o Osler, Hoskin & Harcourt Suite 1500
50 O'Connor Street Ottawa, Ontario
K1P 6L2
Attention: Mlchael L. Phelan AND TO: PWA Corporation c/o Bennett Jones Verchere 4500 Bankers Hall East
865 - 2nd Street S.W. Calgary, Alberta T2P 4K7
Attention: Robert W, Thompson AND TO: Canadian Airlines International Ltd. c/o Bennett Jones Vercher& 4SOO Bankers Hall East 856 • 2nd Street s.w. Calgary, Alberta T2P 4K7
Attention: Robert W. Thompson
12-09-1992 1s:ss 416 865 7943 MB (416)863-7943 P.18 • 17 -ANO TO: Covia Caneda Corp. c/o Gowllng, Strathy & Handerson Suite 2800 160 Elgin Street Ottawa, Ontario
K1N 8S3
Attention: Robert M. Nelson AND TO: Covla Canada Partnership Corp. c/o GowUng, Strathy & Henderson Suite 2800 160 Elgin Street Ottawa, Ontario
K1N 8S3
Attention: Robert M. Nelson
v:\wv1\pldg\lllrcan.res
12-09-1992 16:58 416 865 7943 MB (416)863-7943 P.19 • 18 -AND TO: Covia Cenada Partnership Corp. c/o Gowllng, Strathy 6 Henderson Suite 2800 160 Elgin Street Ottawa, Ontario K1N 8S3
Attention: Robert M. Nelson v:\wv1\pldg\9lrcan.rea