Air Canada cut a $600 fare to $89 to push out new rivals

For years, traveling between Canada's major central cities and Newfoundland meant flying with a single airline. Only the national carrier served those paths, and tickets were pricey. A single ticket from Montreal in 1999 ran more than $600.

Around the year 2000, that changed. Two low cost carriers, WestJet and CanJet, a company that has since shut down, began service on those eastern routes. Fares fell sharply.

To understand what happened next, it helps to look at a route where rivals watch each other closely. On New York to Los Angeles, one of the most competitive paths in the world, five major airlines connect the country's two largest cities. When American prices its early morning flight at $144, Delta, Virgin America, JetBlue, and United offer morning flights at the same price. They match because price is the top factor for travelers, and matching lets travelers choose on reputation instead.

In this kind of price matched market, a fare cut does not win more travelers for long. If one airline drops to $119, the others quickly drop as well, leaving each with about the same share while earning less. In that setting, selling seats at a loss can pay off only if it drives out a rival.

Air Canada appears to have done just that. Under threat from the newcomers, it cut its fares further. Tickets that had gone for $600 were offered at $89.

At the same price, few travelers would pick a small budget airline over the established national carrier. The two newcomers nearly collapsed on those routes.

Then Canada's Competition Bureau stepped in. It found that Air Canada had engaged in predatory pricing, meaning selling seats for less than the expense of running the flight, and forced the airline to stop.