Region of Waterloo International Airport - YKF

[tomh009]

If a free market situation including ownership were allowed there was great fear that the much larger U.S. airlines would fly from (example) NYC  to Toronto and on to Vancouver or Japan Or to Europe. This would have caused Air Canada and Pacific Western to be priced out of their own markets mostl likely disappearing entirely. No foreign carrier can  pick up passengers in Canada and fly them to another canadian airport.

That's correct, the cabotage rules prevent foreign airlines from flying domestic routes, for better or for worse. 

But those cabotage rules don't actually prevent the NYC-Toronto-Tokyo that you propose, for example -- a routing that actually brings in a fair number of passengers for Air Canada currently.  But in generals airlines will prefer to fly direct routes to maximize the traffic from their home markets, and to minimize costs (fuel and landing fees).

Whether allowing cabotage would render AC and WS uncompetitive -- or whether foreign airlines would even want to fly domestic routes in Canada -- is something that we really don't know.  Within Europe, this is allowed, but in practice it's still quite uncommon: Germany is served primarily by German airlines, France by French ones and so one, and the cabotage rights are primarily used by a handful of low-cost carriers such as RyanAir.