Free Trade in Airline Services: Assessing the Proposals to Liberalize the Canada – U.S. Air Transport Bilateral

In this paper we examine the consequences of changes to the bilateral agreement which regulates air transport between Canada and the United States. A hubbing competition model based on an n-player non-cooperative game is used to simulate six alternative bilateral scenarios including the current positions of Canada and the U.S.. We find that changes to the bilateral does not have a significant effect on the total amount of traffic but it does effect the distribution of traffic between countries and among carriers and airports. For all scenarios up to cabotage both countries gain from the change in the bilateral. Two key results of the modelling effort are the pronounced asymmetry with respect to market shares attained by U.S. and Canadian airlines in each others country under cabotage. Canada can generally be expected to hub in smaller U.S. cities and therefore obtain less than 1% of the U.S. domestic market while U°S. carriers would gain 40% of the Canadian domestic market as major airports in Canada are relatively more accessible. Different bilateral policies have considerable and varying effects for different airports. Major capacity investments are planned for both Pearson and Vancouver International and an assessment of these investments should not be divorced from a decision regarding future bilateral policy. Canada may wish to reevaluate their open skies position contained in the ’new ’bilateral’ proposal. The current U.S. proposal provides more benefits for Canada than the current Canadian proposal. Alternatively, Canada may wish to modify their open skies proposal with ’fences’ established restricting access to major Canadian hubs at Toronto and Vancouver just as Canadian airlines are restricted at major American hubs.