Question

OPEN SKY

Mr. Jean-C. Lapierre and Mr. Jim Peterson, respectively Minister of Transport and Minister

for International Trade, announced today that the governments of 410 Part Four Businesses

and markets Canada and the United States have reached a transport agreement said to be

"open-air", which widens the scope of the agreement from 1995 and has promising

benefits. So, Canadian passenger and air cargo carriers will have better access to the large

American market, from where they may reach destinations in other countries; the pricing

rules will be relaxed for carriers Canadian and American; Canadian airports will have more

freedom to adopt measures to attract American carriers and offer better prices to

consumers.

"Certainly further liberalization of the Canada-US air transportation relationship will allow

the airlines of both countries to better meet the needs of travelers and freight forwarders,"

said Mr. Lapierre, "I am confident that "This agreement will help create new markets and

new services, lower prices and stimulate competition."

For Peterson, "the movement of people, goods and between Canada and the United States

plays a role crucial to the smooth running of our daily activities [...] The flexibility adopted

here, which goes far beyond eyes of 1995, will improve the functioning of NAFTA and

make North America more competitive. "

Transports Canada, 11 novembre 2005

a. Prior to the entry into force of the open skies agreement, Air Canada was the only

Canadian carrier that operated flights to the United States. What interests did the

company serve: its own or those of society?

b. Describe how price discrimination evolved in the air travel market after the

adoption of the open skies agreement and the entry of airlines offering discount

flights.

c. Explain what consequences the evolution of price discrimination - question (b} -

has had on the price and quantity of air travel.

Answer 1

a. Air Canada served its own interests as it turned private after government released its control in 1988. It was going financially bankrupt and its finances were severely impacted because of the Gulf war, plus more number of U.S airlines were being preferred by the Canadian public because of cheap rates and improved efficiency.

b. After the adoption of the open skies agreement and entry of airlines offering discount flights, competition increased in order for companies to gain a larger market share. Companies started to promote loyalty programs and third degree price discrimination wherein customers were charged higher rates at specific times. Flight frequencies increased, which led to reduction in fares and more companies started to match the prices with those of the market leader, so as to keep a uniform price range. This sort of price discrimination led to increase in passenger volume on aircrafts as companies followed various strategies to increase profitability of the business, by charging a higher rate to nonloyalty members, so that they would be induced to opt for loyalty programs. By forming alliances in order to increase profitability.

c. The prices have reduced, as companies have found innovative ways of price discrimination and sought revenue from other sources. Whereas the quantity of air travel has increased because companies have increased seat capacity, load capacity and fuel efficiency.