The regulator said Air Canada, the country's largest carrier, must pay passengers between $200 and $800 cash, or three times that in travel vouchers, if they are involuntarily bumped because of oversold flights.
In a separate decision also issued Thursday, the agency ordered Porter to refund fares paid for cancelled domestic flights and provide compensation for reasonable expenses when flights are delayed. It called the Toronto-based airline's current policies unclear, and said Porter should make "reasonable" efforts to inform passengers of schedule changes and the reasons for them.
"Passengers have a fundamental right to be informed about schedule changes that affect their itinerary and ability to travel and to be compensated or refunded in a reasonable fashion," said agency chairman Geoff Hare.
"These decisions help ensure that consumers are protected when experiencing schedule changes while travelling with Air Canada and Porter."
In its rulings, the transportation agency sided with passenger rights activist Gabor Lukacs, who had filed complaints against both airlines.
"They really give passengers far stronger tools to enforce their rights," he said in an interview from Halifax.
The agency endorsed Lukacs' compensation proposal for Air Canada that would vary by length of delay regardless of the airfare. Delays of less than two hours would prompt the minimum compensation. Bumped passengers who are delayed two to six hours would get $400 and the maximum would be given for longer delays.
Passengers can opt to accept vouchers but the airline must fully inform passengers about the rules. Passengers also have a month to exchange the vouchers for cash.
It said Lukacs' compensation suggestion "strikes a balance between the consumers' interests and Air Canada's commercial obligations."
In July, the agency ruled Air Canada's 12-year-old bumping payout rate of $100 cash or a $200 travel voucher is outdated and doesn't reflect the current price of airline tickets, accommodation and other incidental expenses. It gave the carrier a month to choose between Lukacs' proposal or a policy already in place in the United States.
Instead, Air Canada suggested its own scheme, which the agency rejected, that would compensate based on one-way air transportation charges excluding taxes and fees. Payouts would range between $100 and $800 cash depending on the length of delay. Compensation would be $100 for delays up to one hour, cap at $400 for delays between one and six hours and range between $100 and $800 for delays of more than six hours. Vouchers would range between $150 and $800.
Air Canada had successfully argued that it can overbook and deny compensation in limited cases when it has to switch to smaller aircraft for operational and security reasons that are beyond its control. However, the agency said the Montreal-based airline must pay compensation if it can't prove that it took all reasonable steps to avoid the substitution.
The airline said Thursday that it will comply by the Sept. 18 deadline.
"We will be fully compliant with the CTA's decision and are revising our tariff policy according to the terms of the decision," said spokeswoman Isabelle Arthur.
Lukacs described the agency's decision as a "total, complete victory."
The activist, who last week won another complaint against Air Transat, said Air Canada fought the changes hard but filed no evidence to support its claim that compensating passengers would create a significant financial burden or create an unlevel playing field with its competitors which don't oversell flights. The airline says only 0.09 per cent of domestic passengers are affected by denied boarding.
Analyst Walter Spracklin of RBC Capital Markets said the financial impact of the changes will be minimal for Air Canada.
He said denied boarding and delays are generally the result of poor weather and mechanical problems, rather than overbooking.
Porter said it too would comply with the decision by its Sept. 30 deadline. The ruling on domestic flights mirrors an earlier decision on its international tariffs.
Lukacs successfully argued that Porter's policy is unclear and inconsistent with the legal principles of the Montreal Convention, a multilateral treaty adopted in 1999 that attempts to have uniform and predictable rules about air travel for passengers, baggage and cargo.