An Airport on Autopilot; A Veil of Secrecy has Shrouded this Canadian Airport

The City of Hamilton, Ontario, has poured millions of dollars into its airport over the past 10 years without once having looked at the financial health of the airport or the private operator that runs it.

A Spectator investigation shows the city has never verified the airport's revenues, obtained key financial information about TradePort International Corp. or exercised its right to look at that company's books.

The city also plans to spend tens of millions more to help TradePort develop business at John C. Munro Hamilton International Airport. When Hamilton signed its 40-year deal with TradePort in 1996, it was supposed to shut off the flow of money from the city to the airport and put an end to an annual operating deficit that reached about C$400,000 a year.

But The Spectator's investigation shows that:

* The city has spent C$12 million on airport projects since 1996, even though there was no requirement for it to do so.

* The city plans to buy another C$15 million in land for airport use by 2009.

* The city may be getting as little as $35,000 in revenue sharing from TradePort this year, a fraction of the C$300,000 that was expected.

That meagre payment after 10 years of tax-free operation of the airport by TradePort has sparked outrage among some members of city council.

Next year marks the first opportunity that the city has to break the agreement it has with TradePort.

There are now signs that the city is prepared to reconsider the entire airport arrangement. It is an arrangement that raises important questions concerning public accountability around one of the city's most significant assets.

The Hamilton airport injects C$400 million a year in the local economy and is responsible for 1,700 direct jobs, according to the city. TradePort officials say the airport is healthy and heading toward fulfilling its promise as a leading cargo hub and a major passenger centre.

But for the past 10 years, this important economic engine has been operating with virtually no direct supervision from the city.

The Spectator has learned that:

* It's mandatory for the city to review TradePort's performance once a year, but not one such review has taken place.

* Council ordered its first review of TradePort last June. But the review hasn't started yet and it's already expected to cost about twice what was forecast.

* The city doesn't know if it receives all of the financial information that TradePort is obliged to deliver under the contract.

It's a sign of the city's lack of oversight over the past 10 years.

Unlike most Canadian airports, there's no independent board that watches over the Hamilton airport.

Until last year, there wasn't a single city staff member whose sole responsibility was supervising the airport deal.

A thick veil of secrecy shrouds the TradePort deal.

Key parts of the airport contract have been kept from public view since the beginning.

TradePort made it a condition of the lease that important financial, shareholder and management information would not be disclosed to the general public.

There is a growing desire to reduce the level of secrecy around the deal.

"This is an emerging theme," said Hamilton Mayor Larry Di Ianni. "It is an area we think we would need to explore."

On Day 2 of this series, you'll learn more about the secret clauses of the TradePort lease and the confidential projections about the airport's performance that have been kept from the public for a decade.

Councillors are allowed to see the full lease, but not reveal certain parts publicly.

On Day 3, you'll learn about airport land issues and why a piece of land key to the airport's development remains vacant 10 years later.

You'll also learn about a piece of land the city bought, but refuses to explain how it paid for it.

On Day 4, you'll learn how the airport deal is an example of Hamilton's turbulent history with private-public partnerships.

Councillors appear disturbed by the realization that the city's grip on the airport may not be as secure or productive as they assumed.

Guy Paparella, the city's recently appointed director of airport development, was grilled about the status of certain lease provisions with TradePort at a recent special committee meeting, and there has been grumbling about the overall direction of the airport's development.

The spark that ignited some councillors' discontent was the revelation that the city's first cut from airport revenue sharing was going to be dramatically less than forecast.

This year marks the first point in the lease that requires TradePort to begin sharing airport revenue with the city.

The payment was due on Feb. 15. It has not yet been received by the city.

Councillors were warned earlier this year that the amount was expected to be around $50,000 -- a far cry from the C$300,000 that TradePort first projected to hand over when it was bidding for the airport contract.

But some councillors are now saying the city's share may be as low as C$35,000.

That's about how much it costs to fill an A310 Airbus with fuel -- once.

On top of that, the city is required to give half of that first payment back to TradePort because of a clause in the deal.

In fact, the city will spend about $100,000 on staff and legal fees this year just to manage the contract with TradePort.

"So I'm in the hole right now," an incredulous Chad Collins said at the recent special committee meeting.

"That's apart from the C$19,000 that we're paying for the review," added Collins, Ward 5 councillor in Hamilton.

"I'm C$120,000 short."

The city had originally budgeted C$10,000 for the TradePort financial review, but then learned it would cost C$19,000 because the auditors would have to plow through 10 years of accounting that has never been examined.

There are also serious questions about how much information the city will learn when the auditors do start.

A clause in the TradePort contract stipulates that any auditors hired by the city to examine the company's books would only be allowed to provide the city with general conclusions about TradePort's finances.

No one at the city knows how much TradePort collects in landing fees, airport improvement fees, terminal fees or parking.

No one at the city knows what TradePort pays its executives and board members.

No one at the city knows how much debt TradePort is carrying or whether any of its shareholders have significant loans.

No one at the city knows how much TradePort makes in profits.

The city hasn't done itsperformance review yet and all the company has said to date is that it has reinvested all of its earnings back into the airport.

Stripped down to its basic elements, the central question is this: what type of relationship exists between the city and the operator of its airport?

To TradePort, the answer is clear.

"We are in a partnership with the city and we both have obligations," said Richard Koroscil, president and CEO of TradePort.

That's not the way some councillors see it.

"It is not a partnership," said Collins. "It clearly states in the document that this is a lease."

In fact, one clause specifically states, "The Landlord and the Tenant expressly disclaim any intention to create a partnership, joint venture or joint enterprise."

One former politician who was on city council when the deal was approved said he's skeptical of private-public partnerships, based on Hamilton's past history.

"The guys in business are in business to put money in their jeans, the guys in the city aren't," said former Ward 6 councillor Bob Charters.

"If there is a reason for the city to be involved in it, they shouldn't be doing it with a partner, they should do it themselves.

"If the argument's real strong that they should have a partner then they shouldn't be in it," he added. "We should have sold it."

Rather than sell it, the city turned over operation of the airport to TradePort in exchange for $1 a year for the first 10 years.

TradePort would collect all the revenue from operations and take on the cost of all capital improvements at the airport, with the exception of runway expansions.

In exchange, the city gave TradePort a 10-year grace period before a revenue-sharing formula would kick in.

There have been a number of successes at the airport since 1996.

The year before TradePort took over, passenger volumes at Hamilton's airport were just 13,000 a year.

WestJet's decision in 2000 to make Hamilton its eastern hub sent passenger levels soaring.

In 2003, just over a million passengers passed through the Hamilton airport, although that number declined to about 438,000 last year after WestJet cut more than half of its Hamilton flights.

Some of those flights have been restored and new flights have been added with the arrival of low-cost Air Canada Jazz.

In 1995, Hamilton's direct flight destinations were Pittsburgh and Ottawa.

Today, flights from Hamilton go as far west as Vancouver, as far east as St. John's, N.L., and south to Cancun and the Dominican Republic.

TradePort anticipates that passenger levels will rebound to reach close to 600,000 this year and 670,000 next year.

But it's on the cargo side where Hamilton's airport has seen the steadiest improvement.

The airport is now among the top 10 cargo facilities in Canada, with volumes that nearly doubled between 1995 and 2003, according to TradePort's figures.

Six new cargo hangars have been built at the airport, attracting such tenants as UPS, Cargojet and Jetport.

Critics argue, however, that Hamilton's cargo success has only been achieved because the airport has no restrictions on night flights. It's one of the few Canadian airports that allows flying 24 hours a day, seven days a week.

Additional tax revenue to the city from new business at the airport has reached $600,000 a year.

Last year, TradePort told city council that it had invested C$45 million in the airport since it took over operation, and that tenants had invested an additional C$62 million.

The company says the airport's main competitive advantage is that its fees and tariffs are lower than major airports such as Toronto, and that it has managed to upgrade airport facilities to make them comparable to larger airports.

For example, Hamilton now has a CAT-II instrument landing system, which provides a high-tech computerized display that makes runway approaches easier during poor weather.

"Putting that ... system in really helped with landings, because there were some fog issues before," said Paparella. "Now, it's like playing a Nintendo game."

From 1995 to 2005, the city says that jobs directly tied to the airport rose from less than 300 to about 1,700.

"Take a look at where the airport is today and where it was," said Koroscil. "It had been struggling to go anywhere.

"Today, it's now operating not at a loss, but, in fact, the city is gaining from that ... plus the property tax, plus the jobs, the businesses that are here today and the investment," Koroscil added. "There's been $120 million invested in the facility."

But by February 2005, there were cracks forming in the airport's foundation.

Koroscil told the city's planning and economic development committee that Hamilton's hopes for a bonanza of airport jobs and investment are being threatened by increased competition.

"Our competitors all around us are being very aggressive and they won't hesitate to steal what we have today," said Koroscil. "We're already losing business to Kitchener and Brantford, companies that want to be here, but can't stay because we don't have the facilities they need."

He unveiled an airport development master plan for committee members.

It calls on the city to help in purchasing land around the airport, helping to finance the extension of a secondary runway and a new passenger terminal, to push water and sewer services to that land.

TradePort's wish list would cost the city almost $15 million in land purchases alone by 2009.

Koroscil said these points were all raised in the airport master plan and, while some action has been taken, things aren't moving fast enough.

TradePort also raised the fearful "P" word -- Pickering.

Supporters of Hamilton's airport have used the spectre of a planned Pickering airport as the bogeyman under the bed.

A Pickering airport could hurt business by siphoning some of Toronto's overflow away from Hamilton.

That infuriates critics of Hamilton's airport development policy.

They say that success for the Hamilton airport has long been portrayed as being just one more step away.

Michael Desnoyers calls it a strategy of "hopeful survival."

"Get that one more thing and things will turn around," said Desnoyers, chair of a group called Hamiltonians for Progressive Development.

"I don't believe that this airport can economically survive in this geographic area," Desnoyers said. "I could be dead nuts wrong, I'm no visionary.

"But historically, since the '60s, that airport has struggled. What's been any different about its location in the past 40 years?"

Even one of the airport's major longtime tenants has raised doubts about the direction of the facility.

"I don't want to take a slap at TradePort but before (TradePort), the Hamilton airport was run very efficiently," said Barry Lapointe, founder and president of Kelowna Flightcraft, one of the largest and longest-serving cargo operations at the airport.

"They really went a little crazy on the administration," said Lapointe. "They were going to make Hamilton into another Toronto.

"We kept saying, 'Slow down and focus on developing traffic and revenue and things will come.'"

Lapointe also started Greyhound Air in 1996, one of the first low-cost airlines to try to make Hamilton a major passenger hub.

Lapointe said he learned his lesson.

"I don't ever see Hamilton being a major scheduled passenger hub," said Lapointe. "We opened up Hamilton to the passenger market. I lived it."

Lapointe said Hamilton airport would be better off concentrating on cargo operations than passengers.

"Hamilton has turned into one of the great cargo centres of Canada," said Lapointe. "It's an affordable-to-build place."

But it's becoming less affordable as a place for his planes to land.

Since 1996, when TradePort took over, Lapointe said Hamilton has had the largest percentage increase in landing fees of all the Canadian airports he uses.

Over those 10 years, Lapointe said his landing fees in Hamilton have increased 150 per cent. The next highest increase is 95 per cent over 10 years at the Moncton airport, which has the same parent company as Hamilton.

What bothers Lapointe is that there is no independent agency that oversees the Hamilton airport.

"If TradePort wants to increase my landing fees, they can," said Lapointe. "I don't have any mechanism of appealing it, short of pulling my business and we don't want to do it.

"The problem is you can't land airplanes in the middle of Highway 91," Lapointe added. "We are a captive group of people."

The structure of the contract between TradePort and the city is unique in Canada.

When the federal government transferred ownership of regional airports to municipalities in the mid-'90s, most municipalities chose to own and operate them as well.

A small number, including Hamilton, turned over operation of their airports to private companies, such as TradePort, and each of those municipalities negotiated their own distinct deals.

But Hamilton's contract with TradePort is the only one that built in such a high level of secrecy in combination with the lack of an independent agency to oversee operation of the airport.

"It doesn't sound like Hamilton made a very good deal, but maybe it made sense at the time," said Douglas Reid, a Queen's University business professor who specializes in the airport industry.

Next year marks one of two chances for Hamilton to break the contract with TradePort. The only other opportunity will come in 2012.

If the city wants out, however, it will have to show that TradePort has failed to meet at least half of certain projections made back in 1996.

But the city could have a tough time getting out of the deal because of safeguards to TradePort that were built into the contract.

The agreement states that TradePort can't be pushed out if the Red Hill Creek Expressway wasn't completed by Dec. 31, 2005.

The deal also says that TradePort can't be held accountable for projections that don't meet the mark because of "business trends generally in the airport and aviation industries."

Rather than trying to break the contract, the city is more likely to attempt to gain more control over how the airport is operated.

"My biggest concern would be that if we're at odds with the private operator 10 years into the lease, then what's in store for us over the next 30 years?" asked Collins.

What is TradePort International Corp.?

A company formed a decade ago when the Region of Hamilton-Wentworth asked for bids from private firms interested in operating the airport.

TradePort won the competition and on July 1, 1996, took over managing, financing and running the airport under a 40-year lease with the city.

Its three shareholders are -- in order of size of ownership -- YVR Airport Services of Vancouver, Westpark Developments Inc., owned by Hamilton businessman Tony Battaglia, and Labourers' International Union of North America, Local 837, headed by Joe Mancinelli.

Key dates

1940: Mount Hope airport is built as a wartime air force training station.

1963: Department of National Defence no longer needs the airport. Department of Transportation assumes ownership and operation.

1994: Transport Canada announces it will divest itself of local and regional airports.

The region issues a request for proposals from private firms to run the airport.

1996: TradePort, winner of the bid to take over the airport, assumes responsibility to manage, finance and operate it under a 40-year lease.

2003: The airport hits a peak of 1,041,000 passengers, but FedEx, a linchpin of the airport's cargo business, moves to Toronto.

2004: WestJet moves 60 per cent of its flights from Hamilton, plunging the annual passenger count to 614,000.

2004: CanJet arrives with daily flights to Ottawa and Montreal, adding Florida later in the year.

2005: Air Canada announces it will fly regional Jazz brand planes out of Hamilton to Ottawa and Montreal. CanJet removes flights from Hamilton citing too few passengers.

2005: Passenger totals drop to less than 500,000.

2006: TradePort's first revenue share to the city -- originally anticipated at $300,000 -- now estimated at $50,000 or less.

Cargo volumes:

1995 50,000 tonnes

2003 91,000 tonnes

Passengers:

Prior to 1996 13,000

2005 438,000

2007 670,000 (estimate)

Investment in airport:

Since 1996

TradePort $45 million

Tenants $62 million

Source: TradePort International Corp.

The principal players

Guy Paparella: As director of industrial parks and airport development, Paparella, who declined to have his photograph taken, has been officially responsible for overseeing the city's airport lease with TradePort for about a year. A former director of strategic initiatives, the longtime city employee also served as chief of staff to former mayor Bob Wade. Paparella is in the hot seat as city liaison with a group of councillors who are dissatisfied with Hamilton's relationship with TradePort.

Tony Battaglia: A founder of TradePort, Battaglia was the original face of TradePort and head of the airport company from the time the lease was awarded in 1996 until he moved to a position as chair of the board in January 2004. His Westpark Developments Inc. -- a shareholder in TradePort -- was part of a consortium that bought the bankrupt Royal Connaught Hotel last year. Battaglia is a part-owner of the Hamilton Bulldogs hockey team.

Joe Mancinelli: Originally chair of the TradePort board, Mancinelli reduced his role to a director of the company in January 2004. His Labourers' International Union of North America, Local 837 has made equity investments not just in TradePort but also a portfolio of 600 affordable housing units in Hamilton, two nursing homes, a chunk of downtown property holding the decaying Lister Block building and two successful banquet houses, including LIUNA Station.

Richard Koroscil: Now the president and CEO of TradePort, Koroscil joined as a vice-president to Battaglia in June 2003. He came from YVR Airport Services Ltd. of Vancouver, a member of the consortium that formed TradePort. He became president and CEO when Battaglia moved to chair of the board in 2004. Koroscil supervised more than a dozen airports for YVRAS, a private company that manages airports in Canada and internationally.

Ron Foxcroft : A Hamilton business institution, he is a member of TradePort's board of directors. The owner of Fluke Transportation Group, acclaimed basketball referee, inventor of the pea-less Fox 40 whistle and motivational speaker, he has been a tireless supporter of the airport's prospects. Foxcroft is part-owner of the Hamilton Bulldogs and is heavily involved in community and charitable fundraising.

Michael Desnoyers: A critic of the airport. Chair of a group called Hamiltonians for Progressive Development as well as president and CEO of Etratech, a Burlington-based electronics manufacturer. One of a number of people who has launched an appeal to the Ontario Municipal Board against the City of Hamilton's so-called Aerotropolis plan for lands around the airport.



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