Launching an airport food fight

Competition commissioner John Pecman has interesting regulatory culinary tastes. Since being appointed Canada’s top competition cop in September 2012, the Competition Bureau’s public merger reviews and investigations have looked into everything from hamburger and donuts to chicken, groceries, beer and chocolate.

Now the Bureau has the “haute cuisine” of airline food in its crosshairs. Yes, you read that correctly, airline food, those chunks of chow that airlines pass off as meals. It’s a multi-million-dollar business.

In late September, the Bureau accused the Vancouver Airport Authority of engaging in anticompetitive behaviour by denying new in-flight catering suppliers access to the airport. It claims the airlines operating at the VAA want greater choice and new suppliers are willing to meet this demand.

The VAA, a not-for-profit corporation, is Canada’s second largest airport, serving more than 20 million passengers in 2015. It was one of the handful of large airports that was privatized in the early 1990s. It’s interesting to see the Bureau tackle a former state player.

The Bureau says Canada’s in-flight food market comprises two categories: catering, which includes meal preparation, and galley handling, which includes loading the meals and providing non-perishables, liquor and other supplies needed for flights.

Historically in Canada, in-flight catering and galley handling has been provided by two firms, Gate Gourmet Canada Inc., which operates at most airports nationally, and CLS Catering Services Ltd., which operates in Toronto and Vancouver. In 2009, Newrest Servair Holding Canada Inc. began operating and now services Montreal, Calgary and Toronto.

However, as airlines sought to reduce costs, in-flight catering changed. Freshly prepared meals, once served to all passengers, are now the preserve of business and first-class flyers.
Economy passengers are fed lower-cost frozen meals.

Catering and galley handling functions have largely been separated, which the Bureau says provides efficiencies that can save airlines and passengers money.

Now, a variety of firms specialize in catering, with some manufacturing large volumes of frozen meals, and others sourcing freshly prepared meals from restaurants near the airport. Airlines might also self-supply, and some “double cater,” loading meals up at one airport for service during a flight from a second airport. Generally, airlines select a caterer based on price and service.

However, these services need “airside access” and authorization from the airport authorities to operate. Under such agreements, firms are normally charged a fee based on a percentage of gross revenue generated from servicing a specific airport.

However, the Bureau singles out the VAA, which requires that firms lease land from it to operate kitchen facilities as a condition of access. Other airports do not.

Currently, Gate Gourmet and CLS are the only firms authorized to provide in-flight catering at the VAA. The Bureau argues that the VAA has refused to grant access to new-entrant firms for the supply of galley-handling services, and that by tying galley handling to a land lease for kitchen facilities, the VAA is having a negative effect on competition.

The VAA disagrees. First, it argues that it is operating in accordance with its statutory mandate to operate the airport in the public’s interest; as such, the Competition Act doesn’t apply to its actions.

Second, it disputes the Bureau’s framing of the facts and argues that on-site catering is necessary to ensure quality and service and the efficiency of the airport. The VAA says market demand would not support another entrant. It says that it actually fosters competition between the two existing in-flight caterers, and the ability of airlines to self supply from other airports helps keep prices in check.

This food fight comes at an interesting time. The federal government is studying whether or not it will privatize smaller airports, so this decision could impact how new airport authorities move forward on revenue generation.

There is also the interesting argument that the VAA is immune from competition oversight. If true, that would be an interesting development and who knows where that fire could burn.
Does it mean that ports and harbours are exempt? What about municipalities that lease public lands to private-sector firms for services? Are businesses about to get gouged?

Then there are the ancillary services at airports, for example, exclusive contracts for taxi and bus services. Will those be next to fall and will we be able to grab an Uber home from Pearson Airport without fearing the wrath of the taxi police? Interestingly, competition regulators in Mexico and the United Kingdom have successfully attacked such restrictions.

If the Competition Tribunal sides with the Bureau, then Pecman’s food fight might get a whole lot bigger.

Jim Middlemiss is a principal at WebNewsManagement.com.