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Features Procedures Safety & Training
In Need of Some Refinement

Canada has a pay as you go business model for air transport. The merits of the model versus the United States, where aviation infrastructure is subsidized, can be heavily debated, most recently in a 2012 Senate report, The Future of Canadian Air Travel: Toll Booth or Spark Plug, which recommended abolishing airport rent.


February 27, 2015
By David Carr

Topics
Canada has a pay as you go business model for air transport.

Everything, from the $290 million airports paid in rent to the federal government last year, to Ontario’s tripling of the tax imposed on aviation fuel drives up the cost of air transport, sends millions pouring across the border to buy cheaper seats on U.S. airlines and keeps an untold market of potential passengers buried. Another concern should be that in this user pay environment, less and less of the third party costs larded onto the price of a ticket by governments go to benefit the industry or consumer.

“More of the money that is going into the federal revenue stream from the aviation sector should go back to benefit users,” said Daniel-Robert Gooch, president of the Canadian Airports Council (CAC). “But we have a user pay system where users are putting money into the system, but they are not seeing the money back.” Far from it.

A clear example is the Canadian Air Transport Security Authority (CATSA), which is funded through a levy on every ticket purchased. While the number of passengers being screened at Canadian airports has risen considerably over the last five years, putting more money into the treasury, CATSA’s funding has been frozen to 2010 levels.

“We have an air traveller security charge which is among the highest in the world. But the funding model where the corporation is dependent on appropriations from parliament is not working,” Gooch points out. While the security charge also pays for Transport Canada’s aviation security function and a few other security programs, there is still a yawning gap in excess of $100 million on what CATSA collects on the government’s behalf and how the money is spent. “Even if you accept that the air travellers security charges goes to covering those other areas, the cost associated with those areas do not growth with traffic the way service required by passengers grows. Screening is not benefiting from any of the increase in funding.”

Another example is the $38 million Airports Capital Assistance Program (ACAP) which is supposed to assist non-National Airport System (NAS) airports with a specific level of scheduled traffic to receive infrastructure funding for projects related to safety. Except funding for the ACAP has not increased since the NAS was introduced in 1996, and is only 13 per cent of the revenue the government hauled in from airport rents last year. The application is also cumbersome and difficult to understand to the point where some of Canada’s bigger smaller airports help out the smaller ones with the paperwork.

Then there are the approvals. “There is inconsistency in decisions that are being made,” Gooch said. “We are seeing projects being denied that should be eligible under the priority areas being articulated in the program. As a result, some of the money in the program is not being spent every year. We believe that it could be.” In fact, the CAC estimates that if the program worked as it is supposed to, it would also be underfunded by as much as $17 million just for the existing airports.

Also feeling the capital pinch are five NAS airports with traffic volumes below 600,000 passengers a year. These airports are struggling to upgrade infrastructure but are not eligible for funding by the ACAP or, as a NAS airport, cannot participate in Infrastructure Canada’s $8.8 billion Building Canada Fund, introduced in 2011. The CAC estimates a need for up to $7 million in project funding for these smaller NAS airports and is asking for changes to federal infrastructure programs.

The CAC is a division of the Washington-based Airports Council International-North America (ACI-NA). Its 45 members represent more than 100 airports, including all of the local airport authorities that are part of the NAS. Business has been good. Last year, member airports experienced a combined six per cent passenger growth. Airports are adding carriers and new infrastructure, including the $82.5 million pedestrian tunnel linking Toronto’s Billy Bishop Airport with the mainland, and a $300 million, six-gate international extension to Montreal’s Trudeau International. Since Transport Canada offloaded airports to local authorities, the industry has invested more than $17 billion in new facilities while keeping its hand out of the taxpayer’s pocket.

Wings recently sat down with Gooch to discuss future growth, especially in the critical international transit sector which generates more income for airport operators. “If we want to capture a good share of the growth in connecting traffic between Asia and South America, for example, we need a transit without visa program [TWOV)],” he said.

Canada currently has a limited TWOV operated by Citizenship and Immigration and the Canada Border Services Agency, but only for destination flights to the U.S., and only from a handful of Asian countries such as Thailand and the Philippines, and four cities in China: Beijing, Guangzhou, Hong Kong and Shanghai. The CAC estimates that on some TWOV flights from Asia, up to 80 per cent of travellers are continuing on to destinations in the U.S.

The Conference Board of Canada calculates that expanding the existing TWOV program in Asia would result in 3,200 jobs, $270 million in GDP and an extra $110 million to the government. The CAC has been making progress with the government and expects announcements on improvements to the current program soon, including expanding the number of cities in China. Still, Gooch has his sights set higher. “The Middle East is eating our lunch. Ten years ago they had no traffic between Latin America and Asia. Now they have 20 per cent.”

As if to illustrate the point, Dubai International Airport topped London Heathrow as the world’s busiest international airport in 2014. Dubai handled 70.5 million international passengers versus Heathrow’s 68.1. “Heathrow is losing a lot of traffic to Dubai because we’re able to cater for the connections that Heathrow no longer has the capacity to service,” Paul Griffiths, chief executive of Dubai International Airport and a former manager of London Gatwick told the U.K.’s Financial Times.

In the case of Heathrow it comes down to capacity constraints, including only two runways. But it is all part of what Gooch calls “passenger facilitation,” including how you flow passengers efficiently through airports. “That is the way things work in most of the world: Canada and the United States are out of step on this. We need to be a little more like they are in Europe, Asia and the Middle East.”

Another gain that the CAC has won for its members is a seat at the table when Transport Canada is negotiating bilaterals. Gooch generally supports Canada’s current Blue Sky policy introduced in 2006 to open international air routes to Canada, although admits that bilaterals are not always pursued in the spirit of Blue Sky (while diplomatically sidestepping the issue of whether more routes and frequencies should be granted Emirates, Eithad and Qatar Airways, the so-called Persian Gulf super connectors). Despite being cut loose from Transport Canada and operating as businesses on equal footing with the airlines they serve, airports have never had a voice in negotiations.

“Airports will participate at bilateral talks in the future, but we will do so through one representative, which will be a CAC representative,” Gooch said. This is in sharp contrast to airline involvement where there is no limit on the number of air carriers that can participate, including companies that do not operate internationally. “We still need to tip the balance. We still have airports that would like to have a direct stake in the outcome of talks because they have competitive commercial interests as well.”

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It has been 23 years since Transport Canada began commercializing airports, and 21-years since the NAS was introduced, expanding a hybrid model of local commercial management with Ottawa as the absent landlord. The NAS model has come under criticism, most recently after a severe snowstorm ground Toronto’s Pearson International Airport to a halt. A Globe and Mail editorial noted that airport boards of directors are not accountable to Ottawa or the public. So is the current model still serving Canadians?

Gooch agrees. “The model we have in Canada has served the country very well,” he notes. “We have seen that $17 billion in infrastructure investment put into place and we now have the number one aviation infrastructure in the world. There are no shareholders in the Canadian model so any operating surpluses go back to the airport to benefit users.” Still, the Ontario Teachers’ Pension Plan recently more than doubled its stake in the U.K.’s Birmingham Airport to 48.25 per cent. The pension fund also has investments in Bristol Airport in the U.K. as well as airports in Brussels, Belgium and Copenhagen, Denmark. The Caisse de dépôt et placement du Québec has a 12.62 per cent interest in Heathrow. So why shouldn’t Canadians be able to invest in Canadian airports?

“Investors certainly like airports that we know,” Gooch said. “But is it the right move for Canadian consumers and Canadian communities that relay on airports? It depends on what the objective is. A lot of people put out privatization as a panacea for lowering costs for travellers. We are not sure it would be a lower cost option. A feature of the model, for example, is airport rent. If you went to a different model that cost doesn’t necessarily go away. You don’t pay rent to the federal government, but you are paying dividends to shareholders and are subject to taxation at different levels than you are now.”

Gooch maintains one of the challenges is that the airport industry is not very well understood in Canada beyond its core function of getting passengers to their flights. They don’t see, for example, that under the current model, Canadian airports are a $34 billion industry supporting 405,000 jobs. “The public still thinks airports are run by the government. It can be challenging to get support for airports influencing government policy when Canadians think airports are the government,” he said. The Council has embarked on a public awareness campaign that recently included a splashy supplement in the Globe and Mail.

Even so, Gooch is not opposed to changes in the future to the current model. “Things change in the industry. You never want to close doors to what will happen in the years to come.” And keeping an eye on the next thing is always front and centre at the CAC.

“Expect passenger facilitation to be a big theme for airports in the next few years,” he said. In the next few months both the CAC and ACI-NA will be making presentations on the Beyond the Border action plan, a declaration signed between Canada and the U.S. to enhance security while thinning the border to accommodate the flow of people and goods. Gooch also wants to see programs such as NEXUS between Canada and the U.S. expanded to likeminded countries. “It’s about working more closely together with our international partners and doing things so that they are seamless for the traveller or shipper,” he said.

Facilitating business and frequent travellers who represent a lower risk would free up security resources for those who warrant more attention and ensure smoother traffic flow. Gooch would also like to see countries working together to reduce the need for re-screening at transfer airports. “People are getting screened by security around the world. We need to ensure we are all screening to comparable standards and accepting those standards so that we are not rescreening passengers. That’s a few years off, but we are working on it.”

The public perception
Statements and results from a 2014 Nanos research public opinion poll that show what Canadians believe when it comes to airports

  • 82% of respondents agree airports are important as part of Canada’s transportation network
  • 73% of respondents agree airports are important to international trade
  • 70% of respondents agree agree airports are important to the local economy
  • 81%  of respondents support using federal infrastructure funds for safety and security projects at small and medium airports
  • 53%  of respondents agree airports are operated by the government (federal, provincial or municipal)