Canada’s airports want to join the big leagues — but are government fees holding them back?
Kristine Owram | September 13, 2014 6:30 AM ET
@KristineOwram
A major international airport like London’s Heathrow has a distinct feel: concourses buzzing with dozens of languages, upscale shops competing for the spending money of the world’s wealthy and bored, runways filled with planes from every corner of the globe. Canada’s busiest airports are like junior versions of this. And while they would like to graduate to the big leagues, it’s generally not a lack of effort that’s holding them back from becoming global hubs. Instead, critics say government policies turn them into “cash cows” and hurt their ability to compete on the world stage.
“Are our airports able to compete? Given the environment that they operate in, it’s difficult for them to do so,” said Marc-André O’Rourke, executive director of the National Airlines Council of Canada, which represents major airlines.
The stark disparity between Canadian airports’ strengths and weaknesses is illustrated by the World Economic Forum’s Travel & Tourism Competitiveness Report. In 2013, Canada ranked first out of 140 countries for its air transport infrastructure, but 136th for its ticket taxes and airport charges.
“We have this great, great infrastructure but it’s really expensive,” said Mr. O’Rourke.
With a ranking that dismal, it’s no wonder that roughly five million Canadians a year choose to save money by flying out of U.S. border airports, according to a recent study by the Conference Board of Canada. That’s the equivalent of 64 Boeing 737s every day that aren’t flying out of Toronto, Vancouver or Montreal.
The reason is cost, pure and simple. While American airports receive subsidies from the government, Canadian airports have to pay governments for a whole host of services — everything from security to air traffic control to the ground they sit on — and these costs are generally passed on to the airlines, which pass them down to passengers.
“While each [fee] is viewed on its own as small and benign, the combined result is anything but benign,” according to a recent report prepared for the National Airlines Council of Canada by Fred Lazar, an economist at York University’s Schulich School of Business.
“The federal government has turned the air transport industry into a cash cow — just the reverse of what is appropriate for an industry that generates large externalities throughout the economy.”
Mr. Lazar’s report found that the total cost of federal taxes and fees in 2011 worked out to $14.18 per passenger, or approximately 5.7% of the average discounted fare.
A 2012 Senate committee examining the global competitiveness of Canada’s airports was told that Toronto’s Pearson International Airport is the most expensive in the world at which to land a plane.
As one witness told the committee, “In the U.S., they see their airports as economic spark plugs, and we see them as toll booths.”
And U.S. border airports are keen to take advantage of this imbalance. The airport in Plattsburgh, NY, for example, advertises itself as “Montreal’s U.S. airport” and it’s not an exaggeration — 85% of Plattsburgh’s passengers come from Canada.
There are three major taxes that are added to airfares in Canada.
The first is known as ground rent, and is a legacy of the two-decade-old National Airports Policy (NAP).
All Canadian airports used to be owned and operated by Ottawa, a system that resulted in aging and inadequate infrastructure because of budget-conscious governments. The NAP changed this, leasing the 26 busiest airports to non-profit airport authorities and charging them rent for the land they sit on.
The eight largest airports paid $266-million in ground rents in 2011, or about 10% of their total revenues. By comparison, the nine largest U.S. airports received US$423-million in capital contributions, grants and land transfers from the federal and state governments in the same year, according to Mr. Lazar’s report.
However, critics of the American system say it’s unsustainable and hurts airports’ ability to invest in infrastructure, much like the old Canadian system did.
“In the U.S., they look at the system we have and they see elements that they would like to emulate in terms of the ability to make improvements to infrastructure,” said Daniel-Robert Gooch, president of the Canadian Airports Council.
The ground rent formula, which used to be based on passenger traffic, was changed in 2005 to be based on revenue.
“It’s called rent but essentially it’s a tax on revenue,” Mr. Gooch said.
Mr. Gooch suggested that the formula be changed so certain types of revenue, such as that generated by retail and hotels on airport property, could be exempted.
“We do see airports in Canada being creative with how they use their land, but when they do that, they do so knowing that they’re going to be paying rent on that revenue,” Mr. Gooch said.
“We should look at the formula to make sure it’s not serving as a disincentive.”
The second major fee is a security charge, which was created in late 2001 after the Sept. 11 terrorist attacks and goes to the Canadian Air Transport Security Authority (CATSA).
This costs $7.48 for domestic flights, $12.71 for transborder and $25.91 for other international flights.
Despite the steady inflow of cash, however, CATSA isn’t keeping up with growth at Canada’s busiest airports, said Craig Richmond, CEO of the Vancouver Airport Authority.
“Just two days ago, I had a one-hour wait at international screening and I have no ability to influence that because it’s a federal agency,” said Mr. Richmond. “This is a real problem.”
The third fee that raises the cost of flying in Canada is a jet fuel tax.
The federal excise tax on jet fuel is four cents per litre. Many provinces — including B.C., Quebec and Alberta — have eliminated their jet fuel taxes, but Ontario is moving in the opposite direction. The province plans to hike its tax to 6.7 cents per litre by 2017, an increase of 148% from current levels and a move Air Canada CEO Calin Rovinescu called “a really bad idea” in an interview with the Financial Post last month.
“It’s those types of policies that are frustrating for the industry, for airlines, for airports, because they stifle the growth potential,” said Mr. O’Rourke.
However, it’s not only costs that hurt the global competitiveness of Canada’s airports. A new system will require all foreign nationals (except U.S. citizens and those who already require a visa) to obtain online authorization when they fly to Canada at a cost of $7 per person beginning in April 2015.
“We’re working with the government to ensure this hurdle is not an impediment to travel, but we’re talking about some of our biggest sources of tourists — countries like the United Kingdom, France, Germany, South Korea and Japan,” said Mr. Gooch.
Howard Eng, CEO of the Greater Toronto Airports Authority, which operates Pearson, said the key will be to make the electronic travel authorization as easy to obtain as possible.
“I understand the concern of the government agency, they are there to protect Canadians from bad people,” Mr. Eng said.
“But I think the key is to make sure it’s hassle-free to come to Canada.”
Critics of Canada’s airport policy will have the opportunity to make their voices heard during a statutory review of the Transportation Act, which was announced earlier this summer.
The arms-length review will examine all aspects of transportation in Canada, including the competitiveness of the aviation sector.
“Our government recognizes the importance of a strong and competitive air travel industry to Canada’s economy,” said Jana Régimbal, press secretary for Transport Minister Lisa Raitt, who declined a request for an interview.
“The CTA review will look at how the viability 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.”
Airports are an important part of Canada’s economy. A study released on Thursday found that Toronto’s Pearson airport, for example, contributed $12.7-billion to Ontario’s GDP and provided 124,000 jobs in 2012.
But the Senate committee found that the air travel industry could be contributing much more to the economy if it’s treated as an “economic enabler,” not a “source for public revenue.”
“We just want the aviation sector to be recognized as an economic engine that drives trade, tourism and jobs, and actually provides revenue for the government,” said Mr. O’Rourke.
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