August 31, 2012
Heathrow Wins Airport Gold
If airport performance was an Olympic event, Heathrow Airport would win gold in all categories: for its ability to attract development capital, to achieve financial self-sufficiency, to maintain customer satisfaction, and to increase traffic to become one of Europe’s busiest hubs.
Canada, on the other hand, wouldn’t even come close to a bronze.
In 1992, Canada shifted control of the country’s airports from the federal government to a series of not-for-profit corporations in an effort to cut costs. At that time Canada had one of the rich world’s highest debt ratios, and the federal government was seeking to limit the staggering amount it was paying in transportation subsidies.
Unfortunately, the high, and erratic, leasehold rents it charged the non-profit corporations have resulted in competitive turbulence for Canada’s airports ever since.
Despite Canada’s geographic advantage for European and Asian routings, its airports have been unable to capture that traffic. Airports in the United States have taken a competitive lead with policy that reflects the value of airports in attracting global markets.
Canada, on the other hand, sees airports primarily as reliable sources of government revenue.
To meet their high rent payments, Canadian airports have had to increase their airline landing fees; by 2005, Canada had the highest landing fees in the world. For example, a 747 landing in Atlanta Airport paid $300 in landing fees while, in Toronto, it was hit with fees topping $12,000. Is it any surprise that many airlines chose to use American airports?
In 2005, Ottawa recognized that high rents were scaring off access to foreign passengers and cargo and reduced rents by 60 per cent. But recovery from the initial traffic loss has been slow. A new model is required to increase traffic.
If you think Canada’s uncompetitive airports only have an impact on airlines, think again. The reduced airport traffic has led to higher unemployment rates, has affected just-in-time manufacturing, economies of scale, tourism and market expansion across the country. The high fees have also seriously harmed the Canadian cargo industry.
But that’s not all.
In order to pay high landing fees, airlines have had to increase ticket prices. The result? With internet booking increasing consumer options, U.S. airports have become an attractive alternative for Canadian travellers.
In order to take advantage of that opportunity, U.S. airports have increased their capacity. For example, New York State’s Plattsburgh International Airport actually calls itself “Montreal’s U.S. Airport.”
In total, high landing fees have resulted in an estimated passenger loss of five million passengers per year to U.S. airports, which has had a deleterious effect on Canadian airlines, airports and the economy. U.S. airports, which are partially subsidized, are at a clear competitive advantage: they can issue tax-free bonds, are rent-free and are exempt from paying property taxes.
The not-for-profit model is not suited to airports, which are constantly expanding. As access to capital is restricted when it comes to non-profits, airports are forced to resort to Airport Improvement Fees (AIFs) to fund their expansion. But widespread anger, such as over the Vancouver Airport’s 2012 proposal to add a new AIF, suggests passengers may no longer be willing to foot the bill. Under a for-profit model, upgrades would be paid for by shareholder equity.
The U.K. private airport model demonstrates the benefits of privatization. In 1987, British Prime Minister Margaret Thatcher, concluding that airports were businesses and not public utilities, privatized seven key U.K. airports, including London’s Heathrow. Despite legislated caps on airline landing fees, the airports had been reporting large annual profits. In 2006, the airports were purchased by Ferrovial, the Spanish transport infrastructure giant, in a $20 billion bid.
Legislation accompanying UK airport privatization addressed competition, airline access, and landing fees. Pricing tailored landing fees to congestion rather than aircraft weight. Noise-related surcharges addressed environmental concerns. Legislation ensured competition between airports. Landing fees were capped to the rate of inflation. Soon, Heathrow’s landing fees were substantially lower than New York City airports. The British model has been described as privatization’s poster child.
For now, Canada’s airports are in a holding pattern, awaiting government clearance to move to full privatization. Airports are a global business and Canada needs to become a global player. Airlines, airports and the Canadian economy would all benefit with privatized airports.
is a research fellow at the Frontier Centre. She is a lawyer and an established transportation consultant. She began her career with the Ontario Ministry of Justice and has since practised law in Manitoba and British Columbia. In 1997, Bennett received an appointment by the Governor in-Council to the newly formed Canadian Transportation Agency where she was involved in a broad range of transportation issues, including grain freight issues. Mary-Jane Bennett served as a Board Member with the Canadian Transportation Agency from 1998 to 2007. Bennett is author of Grain Freight Regulation in Canada and A New Policy is Required for Airport Transportation published by Frontier.