AIR TRANSPORT ASSOCIATION OF CANADA

 

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AIRPORT ISSUES IN CANADA

AN ATAC PERSPECTIVE

MAY 1999

 

 

 

 

 

 

 

 

 

 

 

255 Albert Street, Suite 1100

Ottawa ON K1P 6A9

Tel: 613-233-7727

Fax: 613-230-8648

Email: atac@atac.ca

 

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TABLE OF CONTENTS

 

Page

Introduction i

Executive Summary ii

 

Stakeholder Representation

Airline Representation on Airport Authority Boards 1

Airport Authority Mandates 2

Public Accountability 4

 

Balancing the "Local Monopoly"

Airport Charging Principles 5

Rate and Charges Appeal Mechanism 8

 

The Integrity of the National Airports System

Airport Financial Viability 9

Land Leases 12

 

 

 

 

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Introduction

 

 

The Air Transport Association of Canada (ATAC) was established in 1934 to support air carriers in their pursuit of a safe, world-leading and competitive air transport industry.

Representing approximately 190 operator members, ATAC participated in a mandated five year review of the Local Airport Authorities leases conducted by Transport Canada. Arising from those discussions ATAC prepared a number of position papers laying out the air transport industry’s view on a number of important issues. This paper provides a summary of these positions for your information.

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Executive Summary

Airport Issues in Canada

An ATAC Perspective

The National Airports Policy for Canada was announced in July 1994 and implementation began in April 1995. At the heart of the policy are two fundamental propositions:

  1. Airports in Canada should be operated on the principle of user pay rather than on the principle of public subsidy, and

  2. The transfer of airports to special purpose organizations will improve management practices and lead to more market responsive and efficient operations.

ATAC supported these fundamental policy directions at that time and continues to support them today.

However, in implementing the policy, the government made three serious errors:

  1. It did not directly involve the most important user group, the air carriers.

  2. It failed to recognize that airports are essentially local monopolies and did not put in place an appropriate framework to ensure that key practices such as setting prices were balanced, cost-based, transparent and in the broader public interest; and

  3. It failed to put in place a framework designed to ensure that a viable, safe and efficient national airports system continued to develop in Canada.

These shortcomings in implementation have led to numerous disputes and difficulties between the parties involved and have resulted in higher costs for air carriers and the travelling public and the loss of opportunities to gain many efficiencies in the system. If these concerns are not addressed quickly, the whole policy could be put at risk.

ATAC believes that the government can rapidly resolve these problems and put the National Airports Policy back on track by taking a number of steps to ensure that these shortcomings are addressed. ATAC has developed a series of seven position papers that, taken collectively, will solve these problems. The detailed papers are attached for further reference. The positions address the critical areas as follows:

 

  1. Stakeholder Representation

    2. ATAC believes the positions with regard to air carrier representation on airport boards, airport authority mandates and greater efforts to ensure public accountability would substantially address this shortcoming.

  2. Checks and Balances for the "Local Monopoly"

    3. ATAC believes that its proposals to entrench the principles of open, cost-based and transparent practices for setting charges, combined with an effective conflict resolution mechanism is an effective response to these problems.

  3. The Viability and Integrity of Canada’s Airport System

ATAC believes that its positions with regard to ensuring the viability of medium and small airports in Canada and the capping and gradual reduction of federal government land leases, would significantly improve the validity and effectiveness of Canada’s airports.

The implementation of this package of measures will result in a much improved National Airports Policy. ATAC urges all the parties, government, airports and other stakeholders to move quickly in this direction. We are at a crossroad. The fundamental principles of this policy continue to be sound but if we do not move to address these key shortcomings in the implementation of the policy, problems will escalate and public confidence will erode leading to the inevitable failure of the policy.

 

 

 

 

 

 

 

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NATIONAL AIRPORTS POLICY

ATAC POSITION

STAKEHOLDER REPRESENTATION

 

Re: Airline Representation on Airport Authority Boards

Issue: Airport Authorities are not required to ensure that airline expertise is represented on their Boards. The argument has been that airlines are in a contractual tenant relationship and therefore are in a position of conflict. The rebuttal to this position is that, in many respects, airlines are more like "partners" than tenants in that they not only receive services from Airport Authorities but also provide services critical to the overall operation of the facilities such as security and gate operations. In addition, it is possible to appoint people with substantial knowledge of airline operations who are not in a direct conflict situation. Procedures to do this are well established at NAV CANADA.

ATAC Position: Airport Authorities should ensure that their Boards have an adequate level of expertise on airline operations. Each Board should have a minimum of two representatives nominated by the air transport industry.

The following process is suggested to ensure adequate representation. The Authority would request ATAC to nominate a minimum of three candidates for the two positions. ATAC would be obligated to ensure that nominees were from the local area, clearly had airline expertise and were not in a position of conflict of interest. The final decision on appointment would be made by the Authority. Appointments would be for a maximum of three years. Airport Authority leases or letters patent would be amended to give legal effect to this procedure.

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NATIONAL AIRPORTS POLICY

ATAC POSITION

STAKEHOLDER REPRESENTATION

 

Re: Airport Authority Mandates

Issue: Some Airport Authorities appear to be engaging in activities which could be interpreted to be beyond the primary purpose of the authority. These activities include investing in foreign airport development projects, providing management and other services to other airports, and engaging in a wide range of international marketing activities which do not directly contribute to airport operations at home. In most cases these activities have been justified as contributing to the authorities’ objective of enhancing local and regional economic development. ATAC believes that authority mandates need to be clarified to focus clearly on the key objective of the provision of safe, cost effective and efficient airport services to users and the broader community.

ATAC Position: The mandates of CAA/LAA and private Airport Authorities should be clarified as follows:

    1. The primary purpose of the Authority is to provide safe, cost effective and efficient airport services to users and the broader community.

    2. The secondary purpose of Airport Authorities is to contribute to the development of a vibrant local and regional economy. In undertaking this purpose, Authorities may not enter into activities that will:

    1. impose financial obligations on the Authority which may put at risk its primary purpose

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    2. require the diversion of key management and/or operational personnel away from the Authorities’ primary purpose

In addition, the Authorities should ensure that the costs and benefits of these activities are transparent to stakeholders and that any profits or excess revenues are to the benefit of fulfilling the Authorities’ primary purpose. It is suggested that a presentation of the financial business case for activities external to the airport’s core business to the airlines would be a good vehicle for ensuring open consultation.

Given that many authorities are in the early stages of operation, it is suggested that a moratorium on activities associated with the secondary purpose be imposed for a period of five years from the transfer date.

This would allow authorities to concentrate on key activities associated with their primary purpose in the early years. If a circumstance arose that, in the opinion of the authority, required action in support of the authority’s secondary purpose during the timeframe of the moratorium, then it is recommended that this activity would proceed if the ACC were in agreement.

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NATIONAL AIRPORTS POLICY

ATAC POSITION

STAKEHOLDER REPRESENTATION

 

Re: Public Accountability

Issue: The transfer of airports to not-for-profit authorities and municipal governments has led to confusion in the general public as to who is responsible for the provision of safe and effective airport services. In addition, it is not clear how and to whom the public should address complaints and concerns about airport operations. This uncertainty has not only increased public concern about airport services, but also led to a number of situations where air carriers have been wrongly criticized by the media and the public.

ATAC Position: ATAC proposes the following actions to clarify this situation:

    1. Transport Canada should establish a communications plan to advise the general public on who is responsible for airport services.

    2. Transport Canada should amend the existing leases to ensure that airports provide semi-annual public meetings to report on their activities and publish the minutes of their Board Meetings. In addition, as part of their meetings, airport authorities should outline their plans for the coming year and beyond.

    3. Transport Canada should publish an annual review of airport activities which would report on activity levels, revenues, costs and other relevant data and highlight major initiatives undertaken during that year. The review should provide airport performance data which would allow for benchmarking and comparisons of airport cost and operational effectiveness.

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NATIONAL AIRPORTS POLICY

ATAC POSITION

BALANCING THE "LOCAL MONOPOLY"

 

Re: Airport Charging Principles

Issue: There are no clear agreed and enforceable principles which Airport Authorities use in setting charges and fees. The industry has developed a number of principles over the years for determining charges for common services. These principles have been adopted by ICAO and other international bodies and have been recognized in legislation in a wide range of jurisdictions, including Canada and the United States. Unfortunately there is no legislative or regulatory provision for the application of these principles to airport user charges and fees. As a result there have been numerous examples of the imposition of service charges and fees which are not consistent with those principles in the last few years.

ATAC Position: The following mandatory charging principles for landing fees and terminal charges should be implemented for Canadian airport services:

    1. Principles

    1. Charges must be in accordance with an agreed methodology established and published by the Airport Authority that is explicit and that includes the terms and conditions affecting charges.

    2. Charges must not be structured in such a way that a user would be encouraged to engage in practices that diminish safety for the purpose of avoiding a charge.

    3. Charges must be based upon the reasonable cost of providing the services.

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    4. Charges must differentiate between the provision of services for landing and take-off operations and the provision of services for terminal services and utilization, and must reflect a reasonable allocation of the costs of providing services in those circumstances.

    5. Charges must be consistent with international obligations of the Government of Canada.

    6. Charges must not be set at a level that, based on reasonable and prudent projections, would generate revenues exceeding the Authorities’ current and future operating requirements for the provision of airport services.

    7. The costs of service provision which is the basis for charges must be derived in accordance with Generally Acceptable Accounting Practices (GAAP) and must be made transparent to users.

    1. Implementation

    1. Airport Authorities must give a minimum of 180 days notice to users when proposing rate changes.

    2. The notice of rate change must be accompanied by a rate change proposal outlining the following minimum information:

    1. current rates for services

    2. proposed changes and timeframes for changes

    3. detailed cost information justifying the changes

    4. other relevant information such as the annual balance sheet income and cash flow statements of the authority and any subsidiaries which contribute revenue to the authority

    5. an explanation of the reasons for the rate changes

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    1. The purpose of the notice period is to allow all parties to assess and consult on the need for the changes and to allow an adequate period of time for users to adjust to the changes before implementation.

4. Should a dispute arise with regard to the changes then the user has the right to appeal the changes, but must give notice of appeal before the end of the notice period. Rate changes will not be postponed due to appeals and appeals must be based on infractions of either the procedures or the charging principles. Rebates to carriers of charges or fees which result from an award arising from the appeal process shall be made within 30 days of the award.

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NATIONAL AIRPORTS POLICY

ATAC POSITION

BALANCING THE "LOCAL MONOPOLY"

 

Re: Rates and Charges Appeal Mechanism

Issue: There is no mechanism short of litigation which can assist parties to resolve disputes which arise during the normal course of negotiation of rates and charges for airport services. This has led to protracted and at times, very acrimonious, relations between stakeholders. In addition, while we have not yet seen jurisprudence on these matters in Canada, the experience in the United States indicates that this means of conflict resolution does not adequately recognize the broader need to ensure safety and system integrity but have been based on narrowly defined contractual issues.

ATAC Position: A binding appeals mechanism which allows parties involved in airport rates and charges disputes to submit appeals based upon clearly defined charging principles and practices to a knowledgeable and competent body for resolution.

It is recommended that the use of the services of arbitration tribunals within the relevant jurisdiction be the primary means of conflict resolution.

The rulings of the arbitration body would be binding on the parties.

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NATIONAL AIRPORTS POLICY

ATAC POSITION

THE INTEGRITY OF THE NATIONAL AIRPORTS SYSTEM

 

Re: Airport Financial Viability

Issue: There is increasing evidence that many airports in Canada are facing significant financial challenges since they were transferred from Transport Canada management. The exact nature of these challenges varies from airport to airport but, in general, there appears to be two problems emerging:

    1. an inability to generate sufficient revenue to meet current and future capital requirements and;

    2. an inability to generate sufficient revenue to meet current and future operating requirements.

Most of these airports are either categorized as NAS airports or are in the regional/local category as defined in the National Airports Policy.

In an attempt to address these issues, some airports have dramatically increased fees and engaged in other non-core activities which have a negative cost impact on air carriers’ operations. The uncertainty and market disruptions created by these conditions have the potential to seriously damage the integrity of Canada’s airport system and, by implication, the provision of quality air services to a large number of communities in Canada.

ATAC Position: ATAC recognizes the public interest in, and strongly endorses the principle of a Canadian airport system capable of providing safe and effective service throughout the country. In pursuing this goal, the market should fundamentally determine the level of air service. However, it is clear that the market may not

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always be able to support a level of service necessary to maintain the integrity of the national system and meet the needs of a region. In these circumstances, the federal government should be prepared to provide financial assistance for capital at certain designated airports where the public interest requires access to air transportation. More specifically, ATAC proposes:

    1. the ACAP should be redesigned and expanded to provide financial assistance to airports designated to be part of the national system. The revised program should be directed by a Board comprised of representatives from the federal government, airports and the air transport industry. At the local airport level, the ACC or representative user group should be an integral part of the review and approval process.

    2. Transport Canada, in consultation with ATAC, should develop a set of criteria for designation of Canadian airports eligible for ACAP. Key elements of the designation should be the airport’s inability to raise capital internally for future requirements; the airport’s contribution to the national network, the importance of this airport to the provision of regional transportation services and the airport’s contribution to local economic development.

In addition to the circumstances outlined above, there are a number of airports in Canada which would be in the new revised ACAP designation which provide key local economic development and transportation service but cannot meet operating costs through market based fees. In these cases, provincial and municipal authorities should be responsible for any operating deficits. However, in cases where there is a clear air carrier interest, ATAC proposes

    1. An agreement between airports and user carriers for the collection of a "Regional Airport Fee" (RAF) to offset the operating deficit. The fee would be collected from originating passengers

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from these participating airports and would be subject to the following conditions.

    1. an annual airport operating plan approved by the users;

    2. agreement by the provincial or local authority to fund at least one third of the operating deficit;

    3. recourse to the airport owners in the event that the plan was not achieved; and

    4. full and open consultation on a regular basis throughout the plan year between the airport and the users.

    5. the RAF must be completely transparent to the travelling public.

It is essential to note that in implementing any of the above measures, two key principles will guide ATAC in future discussions:

 

    1. ATAC will strive to attain consistency in its approach across airports, and

    2. Any charge imposed on passengers must be fully transparent in terms of its amount and purpose.

For small and remote airports not included in the revised ACAP designation, ATAC proposes that:

    1. Transport Canada, in consultation with the provinces and territories, continue and if necessary, enhance a program to ensure that these airports are funded and maintained to a level necessary to ensure public safety and security.

ATAC would welcome an opportunity to work with Transport Canada and other stakeholders to further develop the approach outlined above with a view to implementing the new system by April, 2000.

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NATIONAL AIRPORTS POLICY

ATAC POSITION PAPER

THE INTEGRITY OF THE NATIONAL AIRPORTS SYSTEM

 

Re: Land Leases

Issue: The government has negotiated a series of land leases to give effect to the transfer of assets and responsibilities to airport authorities. These leases usually include provision for payment of rent on the assets transferred and the future payment of participation rent on revenues derived from future investments on these lands. The government indicated that their primary financial goal in this process was to ensure that taxpayers were "no worse off" as a result of the transaction. Federal officials later indicated that they also believed that taxpayers should be entitled to a fair return on their past investments. The current leases do not obligate the government to make any investments in the future and are for a duration of sixty years. This lease structure will result in the government receiving $250 million annually in lease payments for the next fifty-five years and potentially much greater revenues from participation rent while not investing anything in maintaining or developing the airport system in the future. This is essentially a needless hidden tax on the airlines and the travelling public and it should be phased out.

ATAC Position: ATAC requests the following:

    1. An immediate commitment from the government to cap revenues from these leases at the 1999 level of approximately $250 million.

    2. A commitment to enter into negotiations to reduce these rents over time to reflect the value of a fair return on the assets in which the government invested.

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    3. A commitment to amend these leases to bring them into line with the agreement reached in item (b),

    4. A commitment to work with airlines to ensure that these reductions are passed on to users by airport authorities.

    5. In return, airlines will commit to ensure that any charges or fees levied on the travelling public to recover airport costs will take into account the reduction of rent payments to the government.

It is envisioned that the process could proceed as follows:

    1. Agreement on the total book value of government financed airport assets. It is understood that the net book value of these assets, inclusive of land, was $1,517,314.00 as of March 31, 1996.

    2. Agreement on the ongoing value of airport lands in their current use.

    3. Agreement on a reasonable rate of return for past government investments. It was suggested that the approach adopted by ICAO concerning "Charges for Airports and Air Navigation Services" at the 14th meeting of the 136th Session and amended on 22 November 1996, at the 8th meeting of its 14th Session be used as the basis for establishing a reasonable rate.

    4. Using 1996 as the base and an agreed rate of depreciation for the assets other than land, and an agreed rate of return to the taxpayer, calculate the schedule of payments due to the government to fully depreciate these assets. Thereafter, payments would reflect returns associated with the ongoing value of the land.