Air Carriers Operations To, From And Within Canada

Air Carriers Operations To, From And Within Canada

In order to commence domestic, charter (non-scheduled) or scheduled operations to, from and within Canada, companies must comply with certain Canadian regulatory processes. These processes are implemented in order to verify and ensure Canada’s priorities in maintaining a safe, secure, and commercially compliant air travel industry.

In this section

Foreign Air Operator Certificate Application Process

The Foreign Air Operator Certificate issuance process (technical competency authorization), (FAOC), is the most time-consuming factor before a foreign air carrier can commence services to Canada – in our experience taking upwards of two to six months from the time all required application materials have been submitted.

The initial FAOC application process involves a foreign air carrier submitting technical documentation concerning its operations and authorities from its National Aviation Administration (NAA) to Transport Canada’s Foreign Operations Division for review. This information includes items such as an air carrier’s operating certificate and operational specifications, certificates of airworthiness and maintenance schedules for aircraft types to be operated to Canada. Depending on the risk factors associated with a specific operator, and the level of comfort Transport Canada (TC) has with the air carrier’s NAA, the level of assessment may vary including, and up to, the need for a base visit. Major delays result when air carriers submit information and documents that are either incorrect or incomplete. YYZlaw assists air carriers with streamlining these FAOC applications.

Foreign air carriers are also required to amend their FAOCs in several instances, including changes of corporate name or the addition or removal of aircraft types that the air carrier may need to operate to and from Canada.

While a foreign air carrier can conduct these processes independently of expert assistance, it can be cumbersome and uncertain at times. As dedicated Canadian aviation lawyers, YYZlaw assists air carriers in reviewing the contents of technical documents to ensure applications are as complete as possible at the time of initial document submission. This allows us to submit documents on behalf of a foreign air carrier in one package to TC’s Foreign Operations Division, and greatly reduces the administrative resources needed to be devoted by both a foreign air carrier and TC.

Canadian Transportation Agency Domestic & Foreign Air Carrier Licences

The Canadian Transportation Agency’s process for the issuance of economic authority (licence) can only be concluded once a Canadian Aviation Document (CAD) has been issued by Transport Canada. In other words, an air operator certificate or foreign air operator certificate must be issued by Transport Canada before the Canadian Transportation Agency can issue an economic licence for commercial operations by an air carrier. Economic licences issued by the Canadian Transportation Agency to foreign air carriers can be for any combination of scheduled and non-scheduled passenger and/or all-cargo flight operations to and from Canada. Additionally, in order to be licensed by the Canadian Transportation Agency, there are certain other requirements that must be met. These requirements include the existence of a bilateral agreement between Canada and the home state (country) of the foreign air carrier. Such bilateral agreement sets out the operating rights and frequencies which are available to both Canadian and foreign air carriers. Foreign air carriers are also required to comply and file insurance certificates in the appropriate Canadian Transportation Agency format for the initial issuance and continued validity of economic licences. The process for issuance of a foreign air carrier economic licence by the agency is a very timely process from the date of an air carrier’s complete submission. While this process is not as involved as the FAOC process with Transport Canada, we generally assist air carriers in completing the process for expedience sake.

Before an air carrier can operate air travel to the public, an air carrier is required to have a tariff in place. For transborder (between Canada and the United States of America) and international flight operations, air carriers must have their tariffs filed with the Canadian Transportation Agency (CTA). For domestic operations, air carriers are not required to file such tariffs with the CTA but, in both instances, air carriers are obligated to make their applicable tariff readily available to passengers during the Canadian booking processes. Tariffs are complex documents highlighting the detailed obligations and rights of air carriers and passengers, including limitations of liability in cases of delays and damage to, or loss of baggage.

In the case of a foreign air carrier requiring operating authority to conduct a flight not generally permitted under its CTA economic licence, including fifth freedom and seventh freedom operations, the foreign air carrier must obtain either the appropriate charter permit or a temporary licence condition permitting the intended operation. Foreign air carriers are well advised to ensure compliance with such obligations, and the timely application to the CTA for such charter permits or temporary licence conditions. While the CTA no longer maintains an after-hours service for notifications and applications, staff do their best to accommodate after-hours requests.

Mergers & Acquisitions

Purchasing or financing an aviation business in Canada, whether it be an air carrier, flight school, MRO (maintenance and repair organization) or otherwise, careful analysis of the regulatory requirements of such business is required. In addition to the standard considerations which would apply to any potential merger or acquisition transaction, items such as licence transferability and security against the airframe and engines requires unique attention in the aviation field. In fact, while a target company may be small, there is always the possibility of the transaction either running afoul of the applicable legislation, such as the Canada Transportation Act, or the purchaser or lender not enjoying priority in the assets being purchased or financed, that they may otherwise have.

Canadian Ownership Requirements
For a commercial air service to be licensed by the Canadian Transportation Agency, it must provide evidence that it is Canadian-controlled. The Canada Transportation Act defines what it means to be a Canadian, insofar as an air carrier is concerned. This definition sets out a legal control test (colloquially referred to as the de jure test) as well as a control-in-fact requirement (the de facto test).

For an air carrier to be considered Canadian by the Canadian Transportation Agency (as well as Transport Canada for the purposes of aircraft registration and AOC issuance) at least 51% of the applicant must be either owned by a Canadian citizen or permanent resident or, if a corporation, be a corporation created in Canada that has 51% of its voting interest owned or controlled by Canadians. This leaves 49% of the voting interest which may be held by non-Canadian interests. However, the allowed 49% foreign interest is restricted in two ways. Firstly, no more than 25% of an interest in an air carrier may be held by any one foreign entity. Secondly, no more than 25% of the foreign interests can be held by entities that have any affiliation to a commercial air service in any foreign jurisdiction. Clearly the intent is to avoid undue influence from a foreign air carrier on the operations of a Canadian air carrier in the conduct of its business.

Large commercial air services licensed by the Canadian Transportation Agency (CTA) which are publicly held, of which there are only a handful, can limit the foreign ownership participation through the use of variable voting shares, which prorates the foreign vote to the 49% level. However, that allowance is only available if it is a publicly traded corporation, which is rare among the approximately 1,000 air carriers licensed by the CTA.

In addition to the above legal (de jure) control test, the CTA is also obligated to make determinations as to the control in fact (de facto) test. This term is not defined by any legislation – but based on CTA Decisions. A determination is made whether any entity has the on-going power or ability, whether exercised or not, to decide the strategic decisions of the commercial air service – the ability to manage and run the day-to-day operations of the air carrier.

Primary considerations of the CTA in reviewing for the control in fact test are corporate governance factors, such as citizenship of the board of directors, officers and shareholders, rights such as vetoes, risk and reward between foreign and Canadian shareholders, and control over the business affairs such as authorizing debt, guarantees and leasing of aircraft from foreign entities among others.

In YYZlaw’s view, it is highly unlikely that any commercial air service, utilizing the allowed 49% foreign legal participation, is then capable of satisfying the CTA in regard to the control in fact test, due to usual investor requirements. However, there are structures which, by necessity, exclude certain investors from the day-to-day operations of an air carrier, and these structures have been successful in obtaining clearance from the CTA.

Financial Fitness
Air carriers applying to the Canadian Transportation Agency for authority to utilize aircraft certificated for more than 40 passengers may be required to meet a financial fitness test prior to licensing. Exemptions are granted to carriers moving from one licensed service to another (charter to schedule), and for all cargo services.

The Canadian Transportation Agency (CTA) requires the filing of a business plan by a prospective air carrier or an existing applicant air carrier, setting out financial information for three periods of time. The first is for all expenses incurred up to the date of the application, the second is for the anticipated expenses between the date of application and start-up. The third, and most important hurdle, is the financial plan for the 90-day period subsequent to start-up.

The 90-day start-up operating plan must identify all costs anticipated to be incurred during the first 90 days of operation by all aircraft in the service. This includes not only air carrier operating costs, but also corporate costs such as office lease payments, insurance, depreciation, and reserves. The applicant must provide evidence that they are either already in possession of the required funds to meet such 90-day expenses, without any contribution from revenue in operating the service during the initial 90-day period or have availability of those funds.

One-half of the required 90-day funding must be equity funding, with certain restrictions on such equity holdings. Should the prospective air carrier, or an existing applicant air carrier, be in a deficit equity position at the time of the application for additional authority, the CTA requires that deficit be eliminated in advance of such capitalization.

Estimates used by a prospective upstart airline, or an existing applicant air carrier, must rely on different information depending on the existence and nature of any past operational or financial history. If an existing air operator seeks to upgrade or modify its licences with the CTA, the application shall rely on audited financial statements. The majority of commercial air operators, being closely held corporations, do not require audited statements in their operation. This often results in significant extra expense and delay.

Another consideration in the process of preparing the materials to demonstrate financial fitness to the CTA, is a prospective upstart airline or an existing applicant air carrier must consider the process for forecasting 90 days of operational expenses. Of course, these operational expenses will be based on block hours and the associated operating costs per aircraft, without the benefit of any revenues netted from these expenses. The estimated block hours to be achieved in the 90-day period must be based on aircraft utilization under conditions of “optimum demand”. Unfortunately, the CTA has determined that aircraft utilization, under this definition, is based on flights being operated seven days a week, with a reasonable number of block hours being flown each day. This aircraft utilization concept of the CTA is based on their experience, many decades ago with large new aircraft, charter passenger air carriers dedicated to the tourism market, a few of whom achieved 2,400 block hours per year. Thus, negotiations with the CTA for utilization in the 90-day period commence at 600 revenue hours, notwithstanding the applicant’s evidence of significantly lesser actual demand. This is often a point of contention, and negotiation, as we continue to pursue realistic market indications for determining the financial resources an applicant needs to demonstrate before a licence is granted by the CTA.