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Airport Privatisation in Canada: Transport Policy Review

There is a consensus across Canada and beyond that the country’s airports are too expensive, and high charges to airlines trickle down to the passenger. There has been a tendency for several years now that Canadians living close to the US border seek out international flights, in particular, from a string of US airports right across the country, east to west.

One of the main reasons for the high operational cost is that the government demands annual lease payments (ground rent) from the airports as a condition of their devolvement from central government control in 1994.

Now the government has released a weighty review document, one of whose chapters recommends that, in order to escape from the constant undermining of competitiveness that the lease system sustains, small federally owned airports should be divested to local governments, while larger ones should be privatised so that they can tap into financing from institutional investors. The document even goes so far as to provide an appendix of privatisation options.

Background and overview of the recommendations

Until the early 1990s, Canadian airports were managed by the federal government. Taxpayers were directly responsible for all capital investments and operational costs not covered by airport charges, to the tune of CAD135 million a year, and often with minimal investment in facilities.

By 1992, the Canadian Government had begun transferring control and operation of airports to non-share, not-for-profit airport authorities. These were governed by the many stakeholders that the airports had, including the local communities served, airlines, passengers, and local businesses. In accordance with corporate governance best practices, and to provide the appropriate management oversight, Canada’s airports were thenceforth managed by boards of directors with broad skills and experience across a wide range of areas. These areas included not only aviation expertise but also engineering, legal, marketing, and financial accounting.

Top 20 airports (14-Mar-2016 to 20-Mar-2016, in Canada, (system traffic), ranked by seat capacity  

Rank

Airport

Total seats

Percentage Market Share

Ownership*

1

YYZ

Toronto Pearson International Airport

998,349

27.87554%

NAS Airport Authority

2

YVR

Vancouver International Airport

482,942

13.48453%

NAS Airport Authority

3

YUL

Montreal Pierre Elliott Trudeau International Airport

394,374

11.01157%

NAS Airport Authority

4

YYC

Calgary International Airport

366,864

10.24344%

NAS Airport Authority

5

YEG

Edmonton International Airport

171,573

4.7906%

NAS Airport Authority

6

YOW

Ottawa International Airport

137,169

3.82998%

NAS Airport Authority

7

YHZ

Halifax Stanfield International Airport

101,221

2.82626%

NAS Airport Authority

8

YWG

Winnipeg James Armstrong Richardson International Airport

96,282

2.68835%

NAS Airport Authority

9

YTZ

Billy Bishop Toronto City Airport

82,598

2.30627%

Non-NAS

10

YYJ

Victoria International Airport

45,856

1.28037%

NAS Airport Authority

11

YLW

Kelowna International Airport

45,699

1.27599%

NAS – City of Kelowna

12

YQB

Quebec City Jean Lesage International Airport

44,353

1.23841%

NAS Airport Authority

13

YXE

Saskatoon International Airport

39,144

1.09296%

NAS Airport Authority

14

YQR

Regina International Airport

36,027

1.00593%

NAS Airport Authority

15

YYT

St John’s International Airport

34,401

0.96053%

NAS Airport Authority

16

YMM

Fort McMurray International Airport

25,856

0.72194%

Non-NAS

17

YZF

Yellowknife Airport

23,056

0.64376%

NAS Territorial Gov’t

18

YQT

Thunder Bay International Airport

19,830

0.55369%

NAS Airport Authority

19

YQM

Greater Moncton International Airport

17,572

0.49064%

NAS Airport Authority

20

YXU

London International Airport

13,714

0.38292%

NAS Airport Authority

Transfer of airports to the National Airports System – locations, dates and recipient types


A robust and transparent board member evaluation process was set in place at the airports; one that prevented any one particular entity, such as a particular airline or elected leader, from benefiting from a veto.  

The Airport Authorities were mandated to operate as self-sustaining businesses and to facilitate economic development in local communities. They introduced commercially focused management practices, creating a more predictable business environment for airlines and other airport users.

And they invested heavily in improving facilities for passengers. Capital works at Canada’s airports rose from less than CAD50 million in 1992 to over CAD19 billion in 2014. It is rare to hear of congestion issues such as are found at many US airports. Indeed, the main complaint from politicians in cities like Montreal (the second largest) in recent years was one of insufficient usage of airports.

On the face of it the Canadian system has much to recommend it. A sort of halfway house between government control (which remains the case in the US) and privatisation (which accounts for a growing number of European airports).

All participants were encouraged to reach agreements for the common good, which typically resulted in the right investment being made at the right time. But increasingly the bugbear has been the charges issue.  

Lease payments could run to 30% of operating budgets

The Canadian Airports Council (part of Airports Council North America) has long argued that national government policy makes their airports too costly and uncompetitive. Their primary complaint is that when the government devolved the 22 largest airports to newly created local airport authorities it required the airports to make annual lease payments to the federal government, which still owns the airports.

Instead of being at a fixed rate, like most lease payments, they are set at a percentage of airport revenue, in some cases amounting to 30% of airport operating budgets.

Government review targets current policies and proposes major reforms

But change is in the air. In Feb-2016 the government published a Review of the Canada Transportation Act. The report – Pathways: Connecting Canada's Transportation System to the World – has 13 chapters covering all modes of transportation.

Airports and airport security are dealt with in Chapter 9, which recognises the problem created by the lease system. Its recommendations begin with a guiding principle: "A system based on competition, market forces, and the user-pay principle is the best means to deliver a robust air transport sector in most cases."

Accordingly, it takes aim at current policy for “charging onerous rents and taxes that undermine competitiveness,” noting that the government has collected CAD5 billion in airport rent since 1992, "already well in excess of the value of the assets transferred, and is estimated to collect at least CAD12 billion more over the next 40 years”. In addition to the phasing out of airport rent, it calls explicitly for the federal government to: (1) divest the smaller federally owned airports to local governments, with some degree of grant support; and (2) privatise the large airports so that they can tap into equity-based financing from large institutional investors. It includes several privatisation options in Appendix K of Volume 2.

One of the submissions made to the reviewing commission came from Aéroports de Montreal (AdM). After leaving out the problems with the status quo, especially the unsustainability of the current lease payments model, it says frankly that "the time has come to consider the evolution of the Canadian model toward real privatisation, based on corporatisation". The AdM submission includes an appendix outlining several privatisation models for Montreal Pierre Trudeau International Airport, prepared by consulting firm Osler.

The two perceived scenarios are:

  1. The federal government enacts legislation that converts AdM from being a non-share capital, not-for profit corporation – existing under the Canada Not-for-profit Corporations Act – to a share capital, for-profit business corporation governed by the Canada Business Corporations Act (CBCA);
  2. The federal government enacts legislation which causes the assets, liabilities and employees of AdM to be transferred to a share capital, for-profit successor corporation governed by the CBCA. Other structures allowing equity participation could also be considered.

AdM is one of a handful of Canadian airports that have foreign interests and are therefore more au fait with the practicalities. Another is Vancouver Airport through its Vantage Airports division. AdM’s interest was in the consortium that runs Vatry Airport in France, a mainly cargo facility to the east of Paris (it no longer is), while Vantage Airports is involved in the operation of four other Canadian airports and four foreign ones, in the Caribbean and the Mediterranean.

It should be made clear however that AdM’s comments should not be regarded as representative of the wider airport community in Canada. While it may be the case that others feel the same way as AdM, many of Canada’s major airports are understood to see a better arrangement for communities and users from the current non-share capital model.

The Review's Pathway proposals in detail

The Review was launched on 25-Jun-2014 and concluded on 21-Dec-2015 when it was submitted to the Minister of Transport. The Review looked forward 20 to 30 years to identify priorities and potential actions in transportation that will support Canada’s long-term economic well-being. The Government is currently reviewing the Report and anticipates hearing from Canadians on the findings of the Review.

Chapter 9 covers 25 pages but much of it is devoted to airport security matters and to potential improvements in regional airport services, which are not at issue here.

The terms of reference for the CTA Review asked it to address “how the vitality of the Canadian aviation sector, air connectivity, and Canada’s ability to attract visitors and transiting travellers can be maintained and augmented in light of the range of cost factors and competitive global markets.” Accordingly, ownership issues should be considered within these parameters.

Recommendations were targeted to three broad objectives: increasing competition and the discipline of market forces; supporting and improving the health of the air transport sector in Canada; and supporting and strengthening governance in the sector.

The authors go on to say, “Canada’s airports…are frequently ranked among the best in the world... In large part, these successes are the result of decisions made in the 1980s and 1990s from which the current policy framework derives. Between 1986 and 2006, Canada shifted to a commercially based, market-driven system from one based on government ownership and control.”

The review mentions that in the airline sector, while there were bankruptcies and consolidations in response to the new commercial and operating conditions over time, the airlines imported successful business models from the US. They realised significant efficiencies by implementing hub-and-spoke networks and unbundling services. Nevertheless, Canadians continue to pay relatively high airfares “in part due to the lack of competition on many routes” (there is no mention of rental charges at this stage).

The decision to commercialise and divest

Following deregulation and privatisation in the airline sector, the government moved to commercialise larger airports and air navigation services. Under the 1994 National Airports Policy, the federal government transferred the management, operation, and development of 22 large airports. Included were those in the national and provincial capitals, to non-profit airport authorities governed by local boards, retaining, however, ownership of land and fixed assets. These larger airports, along with those in the territorial capitals and Kelowna (26 in total), constitute the National Airports System.

At the same time the government divested itself of the vast majority of smaller, federally-owned airports, in most cases selling them to provincial, territorial, or local authorities for a nominal fee, and providing lump sum funding for near-term safety needs. The same policy also established Nav Canada as the not-for-profit, non-share Capital Corporation that operates Canada’s air navigation system). 

Both the large airport authorities and Nav Canada have successfully fulfilled their mandate to develop or renew infrastructure through capital investment, while remaining self-sufficient. However, the smaller airports within the National Airports System, as well as those in remote markets, have found it difficult to do the same, given limited traffic volumes and business opportunities.

The federal government has provided some funding for smaller airports through the Airports Capital Assistance Program for safety projects, as well as through infrastructure funds such as Building Canada. But the smaller National Airports System airports and the few remaining federally owned and operated airports are ineligible for most of these programmes. They have struggled to maintain their infrastructure based on revenues from low and/or fluctuating traffic volumes, and they have limited opportunities to invest in new business or services.

The review then mentions air service liberalisation, which began in 1995 with the Canada-US ASA, and the Sep-2001 terrorist attacks in the USA leading to major changes in aviation security arrangements.

The upshot was, inter alia, a significant increase in traffic and the development of previously minor airports, such as those at Toronto Island and Fort McMurray, into facilities that annually host more than one million passengers.

While Toronto’s Pearson airport handles approximately half of Canada’s international air cargo trade, with Montréal’s two main airports, Vancouver, and Calgary accounting for most of the rest, air transport is also a key component of Canada’s Northern Strategy, including the reinforcement of Arctic sovereignty. This is because it is the only means of delivering essential provisions, health care, and law enforcement in many remote areas.

So Transport Canada’s roles in the air sector are now largely confined to those of policy maker, regulator, and landlord for the country’s largest airports, and its expertise in these areas is well regarded internationally.

Airports are world class, but have to compete

The review then returns to one of the issues that impede global competitiveness, i.e. federal policies that inhibit growth. It states that Canada has emphasised governmental cost recovery more than many other countries. Demand for air travel is known to be extremely price-elastic, so small price changes can have pronounced impacts on travel decisions. Countries around the world have recognised the importance of aviation to their national interest as a vehicle for trade and investment, and also as a means of projecting political influence by exposing incoming visitors to their values and culture (hinting that Canada has failed to do so).

It does make the claim, though, that Canada has met the test in many respects: major airport and air navigation infrastructure is excellent (the former paid for out of income from ground lease royalties), and Canada’s airlines are profitable as well as internationally recognised for customer satisfaction (at least in North America).

However, the world is changing and moving inevitably towards a liberal open market for air services, so it is time to reconsider policies that may have served the country well when the Canadian airline industry needed protection to flourish, but which now impair competitiveness. Such protectionism comes at a cost that is largely borne by Canadian consumers, who pay relatively high airfares, and by the Canadian travel and tourism sector that has been losing market share for over a decade, also due to higher costs.

The Review therefore recommends a package of measures that address the three major components of competitiveness: cost, access, and user experience. The aim is to reduce the cost burden on the sector and ensure that these savings are passed on to users. Proposals are also included to reform governance structures to allow more competition in domestic and international markets, to strengthen market-based oversight of airports, and to facilitate increased international travel to and through Canada by visitors, investors, and transit travellers.

The 10 Recommendations

There are 10 recommendations in all, “crafted to advance the interests of consumers, increase competition, and support the health of the air transport sector.” A synopsis follows below, insofar as the abridged recommendations concern reform of the lease payment system, the divestiture of small airports to local governments, or the privatisation of the larger ones. The full text of the Chapter 9 extract is appended at the end of the article.

The three main applicable sections in summary:

  • The linking of user (airport) fees to the provision of services and infrastructure;
  • Additional government revenues to be available to supplement fees to develop remote airports;
  • The phasing out of airport rent in the case of smaller airports and an increase in capital funding for them;
  • Payments in lieu of taxes by airport authorities should not be disadvantageous when compared with comparable job-creating industries;
  • Divestiture by the federal government of smaller federally owned airports in consultation with provinces and municipalities;
  • Moving quickly to a share-capital structure for the larger airports, with equity-based financing from large institutional investors, supported by legislation to enshrine the economic development mandate of airports and to protect commercial and national interests by: establishing investment thresholds, foreign ownership limits, and tests of public interest and national security to be administered by Industry Canada and the Competition Bureau, under the Investment Canada Act and the Competition Act. (Regarding foreign ownership limits, the Review proposal is for an increase to at least 49% for commercial airlines);
  • Maintaining protections against insolvency (currently contained in the airport leases), so that, in the event it should occur, all assets belonging to the insolvent airport authority would revert to the Crown without liability;
  • Introduction of a light-touch regulatory system covering fees and charges to protect users and confer oversight on the Canadian Transportation Agency;
  • Establishing a set of principles to guide all airports in Canada when determining fees;
  • Tying airport improvement fees to specific projects;
  • Requiring airline expertise on the boards of directors of airport operators;
  • Improvement in user consultation for major capital projects;
  • Giving appropriate powers to the Minister in the event of extraordinary circumstances;
  • Increased funding for the Capital Assistance Program to support safer, more efficient and reliable services at regional and local airports.

Options for privatising

The Review notes that a number of options are available for privatising the large airports and these are listed in Volume Two, Appendix K. They include working with airport authorities towards their transformation into for-profit entities and selling them the assets of larger airports. Similar processes were followed in the past with the privatisation of Crown corporations like Petro Canada and Air Canada (and, the review points out, also overseas, for example with Aéroports de Paris).

Alternatively, it could be achieved by selling the airports to another private enterprise, as was done with large airports in the United Kingdom in the 1980s (i.e. the British Airports Authority). However, the Review fails to point out what is nowadays accepted as an accurate appraisal of that transaction, i.e. that the BAA should never have been privatised en bloc, and that the individual airports should have been sold off as separate entities, as has now ended up to be case.

Another option is for the government to maintain ownership, while otherwise fully privatising the operation of the airport, as was done with many airports in Australia. There, long term leases were sold, with regulated requirements for investment and performance. Politically the goal was to divest government of commercial enterprises; practically, every effort was made to maximise the return to treasury.

In any case, the Review concludes, rather than placing the emphasis on extracting maximum revenue for government from these public assets, the objective of privatisation should be to encourage their development and operation as critical drivers of competitiveness in the Canadian economy. A share-capital approach would provide clearer and more direct accountability and more market-disciplined oversight by the board of directors (who would be answerable to shareholders) - more than may be the case for the existing community-based boards, which are not distinct from the members of the corporation. With Agency oversight of aeronautical fees and charges there would also be a check against abuse of market power through excessive charges where there is no realistic alternative.

Appendix K can be found here. http://www.tc.gc.ca/eng/ctareview2014/CTAR_Vol2_EN.pdf

The Aéroports de Montreal submission to the Review

A significant submission to the Review was published by Aéroports de Montréal (AdM), which said “we are of the opinion that this review comes at a most appropriate time, particularly in view of the Canadian ownership model for large airports”.

This is a synopsis of that submission:

‘AdM was one of the first four airport authorities to be created in the wake of the Canadian airport divestiture programme launched at the end of the 1980s. It has therefore been a quarter of a century since the Canadian ownership and governance model for major airports was developed. While it is true that the objectives of the Government of Canada have been largely achieved and that the model has so far performed well, some aspects of the model raise questions today.

In fact, as we will demonstrate later, the Canadian model has some fundamental limitations that make it financially unsustainable because of the requirements of the land lease agreements entered into with Transport Canada. Although the option to extend the leases for a further 20 years would postpone the problem, it will inevitably resurface in 20 years’ time. Sooner or later, the Canadian model will have to evolve otherwise the airports are likely to fall back into the same state of under-funding that led to the divestiture in the first place.

This model, in which the government of Canada retains ownership, is unique in the world. The model currently dominant globally is full or partial privatisation, either via an outright sale or via corporatisation followed by the sale of the share capital immediately or in phases. Aéroports de Montréal wishes to demonstrate to the Commission that Canada should also adopt this model, or at least start to consider it.

The evolution of the Canadian model toward complete privatisation based on corporatisation of the existing airport authorities would be advantageous for the Government of Canada and would solve the challenges inherent in the Canadian model:

  • The Government of Canada would have the opportunity to monetise the net value accumulated over the years in the airports (equity), either all at once or in stages.
  • The lease would be cancelled and the rent currently paid to Transport Canada, which is a subject of controversy, would therefore be eliminated. The compensation that the Government of Canada would receive in exchange could take several forms, i.e. dividends on the shares it would retain or some form of monetisation.
  • The method of appointing administrators, which is currently criticised by some, would be simplified by the establishment of a more traditional corporate structure that is more easily understood.
  • Finally, the external financing of corporatised airports would no longer be based only on debt but also on share capital.‘

Again it should be borne in mind that AdM is one of few Canadian airport groups to have had any direct experience of operating a privatised or semi-privatised airport, even when that airport was situated abroad.

The full text of the AdM submission may be found here: http://www.tc.gc.ca/eng/ctareview2014/pdf/Aeroports_de_Montreal_Submission_Engl.pdf 

The main airports in Canada that are privatised, or which have or had non-Canadian interests, are summarised below.

Key Canadian airports by owner/operator; external and foreign interests noted

Airport

Owner/operator

Airports operated/invested in

Montreal

Public stakeholder not-for-profit

S.E.V.E (which operated Vatry Airport in France) (%) (No longer the case)

Vancouver

Public stakeholder not-for-profit

Canada – Fort St John, Kamloops, Hamilton, Moncton; Non-Canadian – Nassau, Montego Bay, Larnaca, Paphos (all via Vantage Airports). Most are either lease concessions (in the case of the Cyprus airports via a consortium) or management contracts. There is one case of equity investment, at Montego Bay.

Billy Bishop Toronto City

Airport/land: Toronto Ports Authority. Terminal: Nieuport Aviation Infrastructure (sold by Porter Airlines Holdings and City Centre Terminal on a sale and lease-back basis in 2015).

 

Comparison with the United States' airport ownership system

It is worthwhile contrasting the existing Canadian airport governance and that of the United States.

Airport governance in Canada falls between the popular European system of privatisation and the US public airport system, which oversees almost all of the commercial airports there. The European system operates either by concession or by equity ownership, sometimes shared with one of more public bodies, such as a national government or municipality (ies).

A US Congressional Research Paper has just been published - Airport Privatisation: Issues and Options for Congress – at much the same time as the Canadian review paper.  

The summary states that in 1996 Congress established the Airport Privatisation Pilot Programme (APPP) to increase access to sources of private capital for airport development. This was to make airports more efficient, competitive, and financially viable. Participation in the programme has been very limited, in part because major stakeholders have different, if not contradictory, objectives and interests.

Only two US commercial service airports have completed the privatisation process established under the APPP.

One of them, Stewart International Airport in New York State, subsequently reverted to public ownership after just seven years of a 99-year lease. Luis Muñoz Marín International Airport in San Juan, Puerto Rico, is now the only airport with a private operator under the provisions of the APPP.  There is one outstanding application to the APPP, the Hendry County Airglades Airport in Florida, where a preliminary application was approved in 2010 and approval of the final application is pending an environmental review).  

Why US airports have not sought to privatise

The most interesting consideration of this paper is why participation in the APPP has been so limited, when Congress has been interested in airport privatisation as a way to save money by making airports less dependent on federal assistance. Apart from the two airports that completed the privatisation process, (out of which one later reverted to public ownership), owners of other airports considered privatisation but eventually chose not to proceed.

Now (since 2013 when Chicago Midway airport withdrew its application) there is not even a single applicant under the ‘large hub’ category (i.e. one of the 29% airports which board 1% or more of system-wide passengers).

It is suggested that the lack of interest in privatisation among US airports could be the result of:  

  • Readily available financing sources for publicly owned airports (such as the FAA’s Airport Improvement Programme and municipal bonds);
  • Barriers to, or lack of, incentives to privatise: applying to privatise an airport under the APPP, as reported by the FAA, makes the transfer from public to private ownership too “time consuming” and presents risks that could cause a potential deal to fail. In the case of Hendry County Airglades Airport, more than five years have elapsed since the application was submitted to the FAA.
  • Moreover, airport privatisation under the APP has a number of regulatory requirements, some of which have been criticised as overly restrictive or vague. These requirements may have lessened airport owners’ and/or investors’ interest in privatisation. They include the need for 65% of airlines serving the airport to approve a lease or sale of the airport; restrictions on increases in airport rates and charges that exceed the rate of increase of the Consumer Price Index (CPI), and a requirement that a private operator comply with grant assurances made by the previous public-sector operator to obtain AIP grants. In addition, after privatisation the airport will be eligible for AIP formula grants to cover only 70% of the cost of improvements, versus the normal 75%-90% federal share for AIP projects at publicly owned airports. This serves as a disincentive to privatise an airport, because it will receive less federal money after privatisation;
  • The potential implications for major stakeholders;
  • Public satisfaction with the status quo and stakeholder inertia.  

The report concludes by suggesting a number of measures to increase interest in airport privatisation. Most of them have been suggested previously by other organisations. They include:  

  • Making privatisation more attractive to public sector owners by facilitating the use of privatisation revenues for non-airport purposes;
  • Providing tax treatment similar to that for bonds issued by public sector and private sector airport operators, since public sector operators now have access to less costly long-term finance than private operators;
  • Easing requirements that private owners comply with assurances previously made by public sector owners to obtain federal Airport Improvement Program (AIP) grants;
  • Accelerating the application and approval procedures for the APPP.  

The report points out that the existing limitations are largely the consequence of US federal laws.

They may explain why airport privatisation has been less attractive in the United States than in Europe.  

Warnings for Canada moving towards privatisation

A number of indirect warnings attract the attention of the Canadian government as it moves in the direction of privatising its airports. The first and probably most important one concerns inertia among stakeholders. While the public may be dissatisfied with high charges incumbent stakeholder management might, for a variety of reasons, take another view and dig in. This is commonplace at county level across the US, prompting allegations of ‘fiefdoms.’  

Secondly, if airports are already tapping existing sources of finance that are satisfactory, and as long as fiscal regulations do not hinder that situation, then the appeal of access to funding through capital markets is diminished.  

Thirdly, restrictive conditions such as the 65% airline approval for a lease deal and the reduction in government support following privatisation can be deal killers.  

The same applies to protracted lengths of time between deal submissions and government authorisations. Such delays have blighted many of the privatisation proposals in the US and they probably helped the collapse of the Chicago Midway lease. They could have done the same with the Puerto Rico lease, which might well have put an end to the APPP.  

Finally, there is another potential lesson from Europe, to which the Congressional report refers. In the case of the privatisation of BAA in the UK (at that time with seven airports) the airports were all sold at the same time, which effectively converted public assets into a regulated private monopoly. This was a situation that lasted 22 years, until it was forcibly split by the Competition Commission in order to maintain even a semblance of competition.

The position in Canada is different. There are no cities other than Toronto where there are even two competing airports; what competition there is, is situated over the US border. But it still doesn’t pay to create any variety of private monopoly all the same. That could potentially happen if the existing not-for-profit airports are transformed into for-profit corporations and existing assets are sold to them, or more so if the airports are sold to another private enterprise.  

One final comment on the BAA example. Initially it retained a Golden Share of equity that entitled it to block a takeover by foreign investors, and that lasted until 2003 when that block was removed by European Union decree. The result was an aggressive takeover by a consortium that, at least at first, was not prepared to spend the sort of money on infrastructure that the government demanded for a global standard airport like Heathrow Airport. Subsequently BAA was split so that its seven airports are today held by four separate groups, and with a variety of investors making up those groups. But it took 30 years, during which time the reputation of some of BAA’s airports was damaged.

Summary and Conclusions

Until the early 1990s, Canadian airports were managed by the federal government through Transport Canada. By 1992 the Canadian Government had begun transferring control and operation of airports to non-share, not-for-profit airport authorities (the 22 largest airports). The same policy also established Nav Canada as the not-for-profit, non-share capital corporation that operates Canada’s air navigation system.

  • The federal government has since provided some funding for smaller airports through the Airports Capital Assistance Program for safety projects, as well as infrastructure funds such as Building Canada.
  • The Airport Authorities were mandated to operate as self-sustaining businesses and to facilitate economic development in local communities. They invested heavily in improving facilities for passengers. The Canadian system therefore has much to recommend it.
  • However, a continuing issue has been the annual lease payments to the federal government, which still owns the airports. Set at a percentage of airport revenue, in some cases they amount to 30% of airport operating budgets;

A government review with 10 broad recommendations, published in Feb-2016 and projecting up to 30 years in the future, seeks to tackle these issues under the principle, “a system based on competition, market forces, and the user-pay principle is the best means to deliver a robust air transport sector in most cases” and it refers to “onerous rents and taxes”.

In addition to phasing out airport rent, it calls explicitly for the federal government to:

  1. divest the smaller federally owned airports to local governments, with some degree of grant support, and
  2. within three years begin to privatise the large airports so that they can tap into equity-based financing. All within caveats that protect the government in the event of the subsequent insolvency of the operator.

A set of principles to guide all airports in Canada when determining fees would be established, but, also a ‘light touch' regulatory regime would apply. In the small airport segment, in particular, airport improvement fees would be tied to specific projects. Airline expertise would be required on the boards of directors of airport operators;

The main options for privatising the large airports are:

  • transformation into for-profit entities and selling them the assets of larger airports;
  • selling the airports to another private enterprise;
  • the government maintaining ownership, while otherwise fully privatising the operation of the airport. No particular recommendation is made but the objective of privatisation should be to encourage their development and operation as critical drivers of the competitiveness of the Canadian economy.

A submission to the Review was published by Aéroports de Montréal (AdM), which was the owner/operator of a foreign airport through equity investment in a consortium. It backed ‘the evolution of the Canadian model toward complete privatisation based on corporatisation of the existing airport authorities.’ Not all airports hold the same view;

Lessons are there and are to be taken: a comparison with the procedure to invite private capital and management into airports in the United States that was instigated in 1996 found that that procedure had not been successful. Only one airport, in Puerto Rico, is being leased under the provisions of the Airport Privatisation Pilot Programme (APPP), although there is one other applicant at present and another private commercial airport that operates outside the remit of the APPP.

There are numerous reasons for this, including the ready availability of alternative finance, barriers to privatisation and lack of incentives, public satisfaction with the status quo, and stakeholder inertia that may be passive or active, such as in the case of ‘self-preservation’ of fiefdoms.

Lessons that might be learned from Europe include the necessity of not selling all the major airports to a private monopoly and the needed retention of a Golden Share by the government in order to block an excessive degree of foreign ownership.

With thanks: The contribution of Robert Poole, Director of Transportation Policy for the Reason Foundation (USA) to this report is acknowledged.

Other CAPA reports that are relevant:

http://centreforaviation.com/insights/analysis/london-city--toronto-billy-bishop-city-airports--functional-valuable-but-not-universally-loved-269449

http://centreforaviation.com/insights/analysis/ppps-could-reinvigorate-us-airport-privatisation-191920

Appendix

Airport Review, Chapter 9: Air Transport

Chapter 9: Air Transport

  1. The Review recommends that the Government of Canada act for the benefit of consumers to reform the user-pay policy for air transport and improve its cost competitiveness in relation to comparable jurisdictions, while ensuring continued and sustainable financing for infrastructure and operations by: a. linking fees predictably and transparently to the actual provision of services and infrastructure; b. drawing on general government revenues, in addition to user fees, to support objectives that advance the national interest in a secure, accessible system that serves northern and remote regions; and c. phasing out airport rent and increasing capital funding available to smaller airports, as one of the airport governance reforms in Chapter 9, Recommendation 3.
  2. The Review recommends that the Government of Canada work with the provinces to further improve cost competitiveness by: a. committing to re-invest fuel tax revenues in safety, security and reliability improvements at smaller regional, remote and northern airports; b. reducing or eliminating aviation fuel taxes on international traffic (where these still exist); c. allowing all passengers arriving from international destinations to purchase duty free merchandise, as is increasingly the case around the world; d. ensuring that payments in lieu of municipal taxes required of individual airport authorities in the National Airports System are no greater than for comparable job-creating industries.
  3. The Review recommends that the Government of Canada strengthen the viability, accountability, and competitiveness of the National Airports System by: a. divesting the federal government of smaller federally owned airports in consultation with provinces, municipalities and First Nations, and provide one-time payments for needed safety investments, where appropriate; b. moving within three years to a share-capital structure for the larger airports, with equity-based financing from large institutional investors, accompanied by legislation to enshrine the economic development mandate of airports and to protect commercial and national interests (including provisions that are currently spelled out in the airports’ leases) by: establishing investment thresholds, foreign ownership limits, and tests of public interest and national security to be administered by Industry Canada and the Competition Bureau, under the Investment Canada Act and the Competition Act, similar to the controls in place for air carriers with passenger service proposed in Recommendation 4, below; ii. maintaining protections against insolvency (currently contained in the airport leases), so that, in the event it should occur, all assets belonging to the insolvent airport authority would revert to the Crown without liability; iii. enacting so-called light-touch regulations covering fees and charges to protect users and confer oversight on the Canadian Transportation Agency. c. To resolve issues applicable to airports regardless of the ownership/governance model, enacting legislation to implement following provisions for all Canadian airports with scheduled services: i. establishing a set of principles to guide all airports in Canada when determining fees, and requiring airport operators to grant reasonable access to any licensed airline who requests it; providing the Canadian Transportation Agency oversight and enforcement in both instances; ii. tying airport improvement fees to specific projects with explicit sunset provisions; iii. requiring airline expertise on the boards of directors of airport operators (current airline employees would not be eligible); iv. ensuring meaningful and timely user consultation for major capital projects; v. strengthening performance reporting and benchmarking; vi. providing appropriate directive powers to the Minister in the event of extraordinary circumstances (legislation is currently silent on this, unlike for other modes). d. Significantly Airports increasing funding for the Capital Assistance Program to support safer, more efficient, reliable services at regional and local airports. This would require expanding the eligible investments to include lengthening and surfacing runways for modern jet service in northern and remote airports, and investing in more advanced navigation, weather, and landing systems.
  4. Not Applicable here.
  5. N/A here.
  6. N/A here.
  7. N/A here.
  8. The Review recommends that the Government of Canada overhaul the regulatory, financing, and delivery models for airport security, to maximize performance and service while delivering the highest standards of security and good value for money, by: a. establishing greater alignment and coordination between the regulatory and operational functions of aviation security. This could be achieved by replacing the Canadian Air Transport Security Authority with the creation of a single integrated aviation security agency with responsibility for both regulatory oversight and operations. (This recommendation is repeated only to emphasise that there is no apparent intention to privatise the aviation security function).
  9. N/A here.
  10. N/A here.

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