The Senate’s recent recommendation that airport rents be phased out and ownership of Canada’s public airports be transferred to the non-profit corporations that now run them without duly compensating the Canadian public is wrongheaded.
The recommendation came in response to its finding that the high costs associated with the aviation sector deter its growth. It uses as evidence the five million Canadians who travel to U.S. border airports each year as a way to reduce their travel costs.
While there is no doubt that Ottawa treats the aviation sector as a cash cow, let’s remember that airports are both publically owned and worth billions of dollars. They should not be transferred without fairly compensating Canadians, especially since there is a less drastic way of dealing with the aviation sector’s high costs.
In a report released in October 2012, the Conference Board claimed that almost half of the passenger drain to U.S. border airports could be curtailed through a change in air policy. It pointed out that Canadian fees and surcharges are grossly out of line with those of their U.S. counterparts.
Specifically, it called for new policy in three areas:
- the Canadian jet fuel tax, which is almost four times that of the U.S.;
- the Canadian security tax, which is the highest in the world, and;
- NAV CANADA surcharges, which include recovery for assets already fully paid.
There is no doubt that airport rents remain a significant cost. In fact, they have been problematic since their onset because a valuation of the airports was never done. Lacking a value on which to base rents, Ottawa has resorted to two successive, but faulty, methods to arrive at charge for rent.
The first was based on the number of passengers who passed through an airport. This led to rents at wildly high levels of about 40 per cent of an airport’s operating expense. To offset this high cost, airports simply passed the rents on to airlines through high landing fees. For example, landing fees at Pearson International Airport increased by about 45 per cent per year, and by 2003 Pearson had the unenviable reputation of being one of the most expensive airports in the world.
In May 2005, then-Transport Minister Jean Lapierre announced a new rent formula, based on an airport’s gross revenue with incremental rates of 8, 10 and 12 per cent depending on airport size. The larger airports of Toronto Pearson, Vancouver and Montreal were in the 12 per cent bracket.
This second formula was equally flawed.
First, under the new formula, ground rents are calculated as a percentage of revenue requiring airport pricing for overall services such as parking to be marked up by at least the amount of the rent charged. This formula increases airport charges and the break-even point. A 12 per cent levy actually causes a price mark-up of 13.6 per cent in order to break even. It is ultimately a self-defeating model.
Second, the rent formula has no efficiency incentive. On the contrary, airports that have expanded in order to meet increased passenger flows have received the highest rent bill. Further, there is no incentive for airports to generate revenue for land services. In the U.K., airport landside revenue such as shops and restaurants has helped reduce airside charges, encouraging increased airline traffic. Ottawa’s rent formula provides no such innovation.
Third, the rent formula deters capital investment, affecting airports’ ability to borrow for capital improvements. Lacking the ability to borrow, an airport is left raising capital through the airport improvement fee, in turn hindering an airport’s flexibility for expansion to meet global competitive concerns.
Although aviation related taxes and surcharges, including airport rents, require attention, there is no pressing need to transfer ownership of Canadian airports without a means to compensate its rightful owners, Canadian taxpayers.