The Next Step: Rent Relief

Historically, airports in Canada were owned by the federal government. Beginning in 1992, the federal government, through Transport Canada, began to transfer either oversight or direct ownership of the nation’s airports to local entities. That transfer included all assets and liabilities and revenue opportunities; for the largest airports, it also included federal rent responsibilities which, in time, airports came to see as a major liability to long-term growth. In their efforts to lobby Ottawa for relief and to have an ongoing impact on future aviation system policies, many of the airports joined the Canadian Airports Council (CAC), which has played a central role in obtaining rent relief, which was announced on May 9th to mixed reviews. Many challenges remain, particularly for small airports. Here’s an update, primarily from the CAC’s perspective, on the state of the Canadian airport industry.

According to David Plavin, outgoing president of the Airports Council International - North America, the process which Canadian airports have gone through since 1992 is an example of the impact private capital can have on airports and on a country’s aviation system. Since 1992, private capital and local oversight have transformed the major airports in Canada, from Toronto to Vancouver to Calgary and even in the nation’s capital, Ottawa, which opened a state of the art terminal in late 2003. An ongoing point of contention in the debate is that the capital stands to benefit disproportionately from the investments made by local groups.

At the same time, local communities were forced to assess the value of their airports as they assumed ownership either directly by assuming full control or through quasi-private authorities with long-term leases with Ottawa.

Unlike the U.S., Canadian airports do not have access to a federal Airport Improvement Program and, in general, generate much of their improvement funds from an airport improvement fee collected from passengers upon departure. For most small airports, this fee can be the primary generator of development. For many of these airports, this is still a work in progress, according to Jim Facette, president of the Canadian Airports Council.

“The very small airports have a viability concern,” he says.

For the larger airports, which ultimately remain under federal ownership, the greatest challenge, according to Facette, has been the rent charged by Ottawa under the terms of the long-term lease agreement. It has been the primary cause which the CAC has undertaken since its inception.

On May 9, the federal government announced a new rent policy which was its attempt to alleviate the concerns of the major airports.

Lobbying for Change

Canada’s National Airports System, similar to the National Plan of Integrated Airport Systems (NPIAS), encompasses the 25 airports deemed to be essential to the nation’s airport system. These remain under federal ownership and handle some 92 percent of national commercial airline traffic, according to Transport Canada. Of these, nine pay Ottawa annual rent, based on a formula put together when the transfer was initiated and not modified since, until May. They include: Calgary, Edmonton, Halifax, Montreal, Ottawa, Toronto, Vancouver, Victoria, and Winnipeg. At least four others were scheduled to begin paying rents in 2006.

Comments CAC’s Facette, “Independent airport authorities operate federally owned airports in Canada and for that privilege they pay Ottawa rent. Since 1994, when they began to pay rent, Ottawa has collected about $2 billion [CAN] in rent.

“The Canadian Airports Council has for years now called to fix this situation. Our position has been that the airports in Canada with less than two million enplaned passengers should not pay rent. That would leave 8 percent of them paying rent.

“The total amount of rent collected by Ottawa needs to be drastically reduced by 50 percent, if it collects rent at all.”

Facette says that the members of the CAC have maintained that a fairer method would be to implement a per passenger formula. “Transport Canada heard the message but came out with a different solution,” he asserts.

Ottawa’s New Policy

The May announcement by Transport Minister Jean C. Lapierre calls for the top 21 airports to pay annual rents, based on a sliding scale [see box]. One of the more significant aspects of the new policy, according to Facette, is relief for all airports from chattel payments — that is, ongoing payments which airports have had to make for equipment and facilities that were in place when the airports were transferred to local entities.

Lapierre, in his announcement, projected that the new policy is expected to result in nearly $8 billion in rent relief for the authorities over the course of the existing lease agreements. The new policy evolved from an extensive study conducted by the Office of the Auditor General in February.

“The new rent formula is based on modern commercial leasing principles and is in line with other rent formulas within the Government of Canada and the private sector,” explains Lapierre.

“For airports currently paying rent, there will be a transition period leading to full implementation of the formula in January 2010. Approximately $350 million of the estimated $8 billion in rent reductions will be realized during this transition period.”

The CAC’s Facette, however, calls the new policy “a mixed bag of nuts.” He maintains that the federal government has pre-determined that it wanted to collect some $5 billion from the nation’s airports through 2047. “The formula gets them to that quantum,” he says. “It does more closely reflect the airport operating environment today and gets on the right path and will make a difference as airports try to compete.”

Facette concedes that the new policy does offer significant relief for the nine airports currently paying rent. The most glaring exception to that rule, he explains, is at Toronto Pearson International, which to date has paid about half of all rents collected.

Comments Facette, “For Toronto, the quantum to be paid will stay the same, about $140 million a year. So, Toronto cannot offer relief to airlines. In 2010, Toronto was scheduled to pay up to two times what it will pay.

“One can argue that Toronto has 35 percent of the passenger traffic, so they should pay the most. But Toronto has paid the better part of $1 billion to date, and you have to ask what they’ve gotten in return. Meanwhile, the airport is investing heavily in a new terminal and other capacity infrastructure.”

According to Facette, since the divestiture program began, local authorities have invested some $8 billion in their airports.

Future Challenges

Canada’s smallest communities may face the greatest challenge in the coming years, explains Facette, as they wrestle with ways to fund airport needs while also trying to maintain and grow passenger airline service, without having to charge extreme rates and charges to the carriers.

“The political speech is that the airports are the lifeblood of these communities,” says Facette, “yet the regulatory burden being placed on them doesn’t seem to stop.” A capital assistance program is available, but Facette says that demand far exceeds the funding levels which Ottawa appropriates each year.

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