TRAN Committee Report

THE CANADIAN AIRPORTS SYSTEM

Airport Rents

The Committee heard extensive, testimony regarding excessive airport rent – from airport authorities, airlines, communities and associations. Airport Authorities told the Committee that at the time that airport divestiture was negotiated that “real” negotiation did not take place. In Fact, they were told that if there was no transfer there would be no reinvestment in the airports on the part of the federal government. The Authorities and communities agreed to the concept that Transport Canada would be “no worse off” than prior to the transfer. As the Authorities point out, that goal has been achieved with airports paying more than $2 billion in rent to the federal government on assets that had an initial book value of $1.5 billion. The present rent regime is capricious and is seen as nothing more than a “tax grab”. This is still true with the new rent formula announced on May 9, 2005.

The airports also point out that, as not-for-profit authorities, they must pass these costs on to tenants and users and ultimately the airline passengers. They stress that Transport Canada is not reinvesting in airport infrastructure or operations. In addition, they maintain that the rent formulae are not applied equally across the airports system – a point that was made by the Auditor General in her review of this issue. As a result, the airports want the rents frozen and eventually eliminated. This view was also echoed by stakeholders from the airlines and community associations. Finally, it was pointed out that if rent was still going to be paid to Transport Canada that only the top tier airports should pay rent as the smaller authorities could not afford this and still remain economically viable.

The Committee is well aware of the rent issue and had made an earlier recommendation to freeze them (Tuesday, November 30, 2004). We are also aware that Transport Canada has been studying this issue for a number of years and considering options to deal with the “rent problem”. Transport Canada’s announcement on May 9th, adopting a new rent policy calls for a lowering of airport rent by approximately 60% resulting in close to $8 Billion in rent relief for the airport authorities over the course of existing leases. For airports currently paying rent, there will be a transition period leading to full implementation of the formula in January 2010. The rent formula is based on airport gross revenues and is applied evenly throughout the system.

The Committee appreciates the fact that the government has finally acted on the rent issue and that the rent formula has been standardized. However, we believe that this falls far short of what is required to bring airport and airline costs down. The new policy brings no immediate relief to the airports since the policy will not be implemented until January 2006. In addition, the rent reductions are phased in over too long a period – the term of the lease – with full impact of the new policy not being seen for approximately 40 years. In fact, under the new rent formula, the federal government is still expected to collect $5.1 billion in rent by 2020. Finally, there is no mention in the policy of where the rental revenue will go.

We believe that this is unacceptable. The federal government has a major influence on the competitiveness of Canada’s air industry through the fees it charges, especially rent. The rent policy should address the immediate needs of the industry and not be phased in over a long period of time. Additionally it should clearly state that rental revenues should be reinvested into the airports system.

While the Committee is not prepared to recommend total elimination of airport rents, we believe that rents must immediately be reduced by at least 75%, that the rent received by Transport Canada must be reinvested into the airports system and for airports with less than 2 million passengers no rent should be paid.

Therefore, the Committee recommends that:

1. The Federal Government immediately reduce airport rents by at least 75%, that rent received by Transport Canada be reinvested in the Canadian airports system and for airports with less than 2 million passengers no rent should be paid.

Chattel Payments

As part of the lease agreements with airports, we were told that airports had to assume chattels (e.g. IT systems, snowplows, etc.) at the time of the transfers, and pay Transport Canada for them over a specified period of time. This equipment was worn out at the time of the transfer and of marginal value and has all been replaced by the airports. The airports believe that they should not have to make payments for these outdated chattels as they have gotten little or no use out of them and such payments place a heavy financial burden on smaller airports and can threaten their viability. The Committee agrees and believes that these payments do place an unsustainable burden on airports, especially when these chattels had to be replaced. We are pleased with the fact that in its recent policy announcement on rents the government is forgiving the repayments on airport chattels.

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Airport Governance and Fees

Governance

With regard to airport governance the Committee heard some conflicting opinions. On the one hand, the airport authorities believe that their governance and accountability regimes are working well and that they do not need to be re-regulated with airport legislation. They pointed out that that they follow a rigorous process for appointing board members of varying backgrounds as well as putting in place oversight controls to monitor the boards’ activities to follow best governance practices. In addition, they have established consultative committees to confer with airlines and other airport users on airport plans and activities. Airports also subject themselves to outside audits of their activities as well as being audited by Transport Canada under the terms of the ground leases. Stakeholders also told the Committee that airports with fewer than 2 million passengers should not be subject to legislation as it would likely place too high a cost burden on them. If there is still a concern regarding governance many of the airport authorities told the Committee they believe that this could be best addressed by Bill C-21, the Canada Not For Profit Corporations Act, which will replace the legislation under which they are currently incorporated.

In contrast to this, some airport users told the Committee that airports do not fully consult with users on their activities (e.g., construction projects) and that users are merely told of what is going to happen rather than being part of the planning process.

The Committee notes the concerns on both sides of this issue but requires more study of various governance models in other jurisdictions before making recommendations in this area. However, Committee members are very concerned with Transport Canada’s propensity to continue to regulate airports when the department has no involvement or limited knowledge of business operations.

Airport Fees and Regulations

With regard to airport fees (e.g., landing fees) users, especially the airlines, believe they have little say in negotiating these charges. They stated that airports are monopolies and are free to set fees for users at their own discretion.

To deal with these concerns they would like to see an airline representative on airport boards (some airports do have members with airline experience but who are no longer active in the airline industry) and an appeal process put in place to deal with disputed fees ( e.g., the Canadian Transportation Agency could be the arbitrator).

The Committee was struck by the fact that there appeared to be a “patchwork” approach to the way airport authorities operate and no two are exactly alike. While we recognize that this was in part due to the fact that divestiture was negotiated at different times and that both parties to the negotiations were “new to the game.” We are also acutely aware that some airports seem to do better when it comes to communicating with stakeholders and surrounding communities than others. The question therefore arises, do we bring down regulation so that all airports are governed identically or do we allow for flexibility in airport management to allow them to deal with their local needs. At a bare minimum the Committee believes that the government should develop a template containing a set of governance policies and accountability objectives that airport authorities can adhere to.

In addition to the issue of fees, airports told the Committee that Transport Canada has been steadily placing more and more regulations onto the day to day operation of airports. This “regulatory creep” has placed a heavy burden on the airports in terms of additional costs to comply with and analyze the new regulatory requirements. Here again, the Committee intends to further examine this issue. However, we would caution Transport Canada in being over zealous in placing additional and perhaps unnecessary regulations on airport authorities.

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Regional and Local Airports Viability

The committee heard a great deal of testimony from regional and local airports. This centered on the fact that many of them were not financially viable and were unable to meet the financial requirements necessary to upgrade infrastructure, or comply with the regulatory burdens placed upon them. In addition, they also stated that the cost recovery policies of the Canada Border Services Agency (CBSA) creates inequitable fee structures and high service costs to some airports to pay for what CBSA considers non-traditional service (e.g., providing late plane arrival customs service). We were also told that security charges by the Canadian Air Transport Security Authority (CATSA) stretches the elasticity of consumer demand and makes it difficult for many of these airports to maintain airline services.

With regard to the Airports Capital Assistance Program (ACAP) established by the government to assist regional airports in funding capital projects we were told that it is limited in scope, oversubscribed and underfunded. In addition, we were told that the process for applying for ACAP funding is complicated, time consuming and too costly.

As stated previously by the Committee, we believe that reduced rent monies received by Transport Canada should be put back into the airports system and not into Transport Canada. This could be accomplished by Transport Canada using airport rental revenues to increase funding for the ACAP. This funding must be long term and stable in order to provide the airports with the certainty they require for future economic planning and viability. In addition, Transport Canada must ensure that the process for applying for this program is simplified, less time consuming and less costly.

With regard to CATSA fees, we believe that security is a national issue and should be paid through General Revenue not a special security fee levied on passengers as is now the case. No other mode of transport is singled out for such fees – it is arbitrary and wrong to do so for the air mode.

On the issue of CBSA charges, we noted from our hearings that these charges were not uniform throughout the airports system. For example, some airports have extended hours for customs services and do not have to pay additional costs for this, while others must pay for this. This creates inequity in the system and does not allow all airports to be fully competitive. It is our view that this blatant inequity should be corrected by the government immediately. CBSA services must be paid for by the government for all airports that can demonstrate that they have regular transborder and/or international services.

Finally, the Committee was told that Transport Canada’s practice of downloading regulations (e.g., increased firefighting capability) onto airports can result in significant expenditures for small airports – expenditures which many of these airports cannot afford. The Committee strongly believes that if Transport Canada must place additional regulations onto these airports the department must bear the cost of their implementation.

Therefore, the Committee recommends that:

2. The government ensure that airport rental revenues received by Transport Canada be used to increase funding for the ACAP, that the funding is long term and stable and that the process for applying for this program is simplified and less costly;
   
   
3. The government eliminate the Air Transport Security passenger fee and pay for this service through the Consolidated Revenue Fund;
   
   
4. The government pay for CBSA services at airports that can demonstrate that they have regular transborder and/or international services; and
   
   
5. The government ensure that if the downloading of regulations onto small and regional airports result in a significant increase in costs to these airports that such costs will be borne by the government.

Unfunded Federal Mandates

Airports raised the issue of unfunded federal mandates with the Committee. They believe that their capacity to deliver services efficiently would be enhanced if they were not required to provide many services free to government departments in addition to paying rent. Departments such as Citizenship and Immigration and agencies such as CATSA and CBSA are making unreasonable demands on the airports. For example, airports provide rent free accommodations to Citizen and Immigration and CATSA on demand. The airports believe that this policy vests unreasonable and inordinate power in these entities especially when agencies such as CATSA are funded from government appropriations. They believe that this policy, at the very least, should be reviewed by the government in order to achieve some fairness in the provision of these services. The Committee agrees and believes that this policy must be phased out.

Therefore, the Committee recommends that:

6. The government, within five years, end its policy and repeal the necessary statutory powers, whereby certain government departments and agencies receive free services from airport authorities.