06/27/2011 04:47 EDT | Updated 08/27/2011 05:12 EDT

Air Canada, United Airlines Deal Stopped After Competition Bureau Complaint


MONTREAL - Air Canada and United Continental Airlines are suspending their proposed transborder venture after Canada's competition watchdog said it will attempt to block the relationship over concerns it would hurt consumers.

The airlines said Monday they took the action "pending further commissioner developments" relating to the outcome of the commissioner's application with the Competition Tribunal to stop the joint venture.

Air Canada (TSX:AC.B) said its transborder services are unaffected by the decision and its passengers will continue to receive benefits of the airlines' reciprocal frequent flyer programs, check-in facilities and airport lounges.

The Montreal-based company said it strongly disagrees with the commissioner's position that the joint venture would be bad for consumers. It argued customers would benefit from lower fares, better co-ordinated flight schedules and connection times, more route choices, and improved frequent flyer benefits through the joint venture.

"Air Canada and United Continental Holdings believe in the merits and consumer benefits of the proposed transborder joint venture and enhanced co-operation between the parties that builds on the existing relationship between Air Canada and United," Canada's largest airline said in a news release.

The airlines said their position is consistent with the findings of regulatory agencies around the world, and supported by leading international economists.

They said it is also consistent with a July 2009 decision of the United States Department of Transportation granting Air Canada, United and Continental, among other parties, antitrust immunity to pursue more integrated commercial co-operation, including joint ventures.

Competition commissioner Melanie Aitken moved to block the alliance over concerns that a monopoly on some cross-border routes would hurt consumers.

She said the agreement between Air Canada and U.S.-based United Continental (NYSE:UAL) would mean higher prices and less choice for consumers on high-demand routes.

"The proposed joint venture would allow Air Canada and United Continental to operate and set prices as one airline," she said in a statement Monday.

The Competition Bureau said prices could increase by up to 15 per cent, as they did in similar cases reviewed by American studies.

The Competition Bureau filed an application with the Competition Tribunal to stop the joint venture, saying it would monopolize 10 important Canada-U.S.. routes and reduce competition on nine others in violation of the Competition Act.

It said the airlines would have 100 per cent market share on 10 routes from various Canadian cities to Houston, Washington, New York, Cleveland, Denver and San Francisco.

Canadian airlines are unable to formally merge with non-Canadian airlines because of foreign ownership restrictions. But Aitken said the proposed joint venture would achieve that very same result for Air Canada and United Continental.

The Competition Bureau is also seeking to undo three current co-ordination agreements between the two airlines over concerns it gives them power to charge inflated fares.

This is the bureau's first challenge under a new provision of the Competition Act that came into force in March. Under Section 90.1, the commissioner can apply for the Competition Tribunal to alter or block an existing agreement.

These agreements allow Air Canada and United Continental to co-ordinate key aspects of competition including, pricing, scheduling and revenue sharing.

But the bureau said Canadians would have less choice and face higher fares if these "anti-competitive" provisions are implemented whether there is a joint venture or not.

When it announced the joint venture last fall, Air Canada said its closer ties with United would provide travellers with better service and pricing as scheduling changes helped reduce or eliminate duplicate flights.

Chris Murray of PI Financial Corp. said the commissioner's report is negative for the airline but isn't likely the final word on Air Canada's efforts to trim costs and better utilize its aircraft.

"There may be mitigation on the part of the parties, there may be other options on the table so this isn't done yet," he said in an interview.

Murray also wouldn't rule out the federal government intervening in some way.

He said the commissioner's decision could also raise some concerns for Calgary-based rival WestJet (TSX:WJA) which is moving towards more cross-border code-share and other agreements.

Murray added that many of the routes highlighted by the commissioner aren't so solid.

"If these routes were wildly profitable do you think they'd have 100 per cent market share? I'm sure WestJet could figure out how to point a 737 from Calgary to Houston."

United and Continental merged on Oct. 1 but continue to operate separately until they receive of a single operating certificate from the U.S. Federal Aviation Administration, likely by the end of 2011.

Air Canada's shares gained two cents at $2.31 in afternoon trading on the Toronto Stock Exchange.