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03/31/2010: "Emirates pushes for greater access in Canada"

Emirates Airline has recently applied to Transport Canada to increase service on its Toronto-Dubai route and introduce service from both Vancouver and Calgary to Dubai. A study commissioned by Emirates suggested significant economic benefits to Canada from the increased service.

Air Canada, the larger of our two dominant airlines, has challenged the findings of the study and opposed the Emirates application. Air Canada does not currently offer direct flights from anywhere in Canada to Dubai. Air Canada's position is supported by the Air Canada Pilots Association, the union that represents Air Canada's pilots.

Air Canada and a spokesman for Transport Canada argue that current capacity on the Toronto-Dubai route exceeds travel demand. Emirates argues that Canadian consumers are the losers under the current program that prevents competition.

The plan is supported by the premiers of both Alberta and British Columbia. There has been no comment from WestJet, Canadas other major airline.

To review some articles about this topic, see the "Sources" section below.

Relevant Learning Objectives

Chapter 10
LO#2 How entry barriers can allow monopolists to maintain positive profits in the long run

Chapter 12
LO#4 Some details about Canadian competition policy

Chapter 16
LO#6 The direct and indirect costs of government intervention, and some of the important causes of government failure

Sources

Emirates pushes for greater access in Canada, Brent Jang, Globe and Mail, Wednesday, Feb. 24, 2010. Accessed Mar. 12, 2010

Rovinescu labels Emirates Air proposal as 'subterfuge', David Ebner, Globe and Mail, Tuesday, Mar. 09, 2010. Accessed Mar 12, 2010

Emirates fires back at Air Canada, Brent Jang, Globe and Mail, Wednesday, Mar. 10, 2010. Accessed Mar. 12, 2010

Questions:

1. Given what you know about long run adjustments in market equilibrium, why would Emirates Airline want to enter the Canadian market?

ANS : If Emirates is a profit maximizing airline, then they must believe that there are economic profits to be had by servicing the Canadian market. Air Canada currently has a near monopoly on international flights from Canada and enjoys monopoly profits.

2. In terms of pricing and the supply-demand model, why would there be excess capacity on current flights from Toronto to Dubai?

ANS: Two possible answers. First, if the price is set above the market equilibrium, then there would be a surplus. A more thoughtful answer would be that Emirates is a price setter on that particular route and as such would maximize profits by setting output where marginal cost equals marginal revenue, then setting price according to demand. This output level, in most textbooks, is less than the point of minimum average cost which is the point that we consider to be full capacity.

3. If Air Canada is currently making monopoly profits, why would they oppose the bid by Emirates Airlines?

ANS: Air Canada would lose its monopoly profits if there were any competition on overseas routes. The firm's demand curve would shift left and become more elastic as consumers realized that substitutes were now available. In the absence of barriers to entry, new firms enter until no economic profits exist.

4. Air Canada is a profit maximizer, yet they appear to be expending resources in an attempt to block Emirates entry into the Canadian market. Can you explain this behaviour using your understanding of monopolist behaviour?

ANS: Air Canada's monopoly is due to government policy. One effect of policy that leads to economic profit is 'rent seeking' activity. This may include such things as expending real resources in an attempt to maintain the current barrier to entry. Without the barrier, new entrants would reduce the profits of the existing firm(s) in the industry.

5. Thinking about the supply-demand model and the monopoly pricing model, what benefits might Canadian consumers realize from increased service from Emirates Airlines?

ANS: Increased competition reduces prices and monopoly profits. A reduction in prices leads to an increase in consumers' surplus. There would be non-monetary benefits as well. While Air Canada offers flights from Toronto to Dubai, they require connections in Frankfurt. Emirates Airlines direct flight is approximately 7 hours faster. The opportunity cost of time must be factored into the cost of flights, making the direct flight cheaper and providing more consumer surplus.


Michael S. Leonard
Kwantlen Polytechnic University
Surrey, BC