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Canada Pledges Airport Rent Review

Sun Oct 26, 2003 4:57 am

Could this be the news we've all been waiting for!?!?

Ottawa pledges airport rent review

OTTAWA AND TORONTO — Transport Minister David Collenette pledged yesterday to overhaul and perhaps reduce the rents that Ottawa charges airports across the country, even as the largest of those airports told airlines to expect another round of double-digit increases in landing and terminal fees.

"I think we really should make some adjustments, so whether it's capping or reductions of rents, you know, all of those issues I think we have to examine," Mr. Collenette said, adding that the current federal airport rents policy is "flawed."

He said he will also ask the cabinet to revamp the policy so different airports don't have different deals on rent.

The federal government has been reviewing the rent policy for more than 18 months.

It is expected to reap $214-million this year in rents charged to Canadian airport authorities.

Airports cover much of the rent bill through landing fees they charge to carriers.

The total airport rent remitted to Ottawa is increasing every year and is projected to hit $500-million a year by 2010.

Mr. Collenette made his remarks in an interview with The Globe and Mail as, behind the scenes, the Greater Toronto Airports Authority (GTAA) began informing airlines that it plans to increase landing fees at the Lester B. Pearson International Airport by 27.7 per cent next year and terminal fees by 19.6 per cent.

These increases come on top of hikes of 29 per cent and 10 per cent, respectively, for 2003.

"This is unprecedented -- we don't see these kinds of increases at airports anywhere in the world," said Eugene Hoeven, assistant director of the Geneva-based International Air Transportation Association (IATA), which has been waging an increasingly bitter and public battle with the GTAA over fees. "This is a double-digit increase that the industry simply can't afford at this point in time."

Mr. Hoeven called the GTAA's figures "preliminary" and noted that the airlines are still reviewing all the data. "I sense that GTAA has certainly, in light of the public uproar, that they must have taken some note of that and done what they could have, but we're talking about significant increases here."

Landing fees are charges levied to airlines to land their planes, and terminal fees are those charged to carriers for things such as boarding gates and check-in counters.

One source close to the GTAA said that the terminal and landing fee hikes for 2004 will translate to an overall increase of 25 per cent.

However, the source also said that although the airport had originally forecast that it would need to generate $557-million in fee revenue from the airlines next year, the budget it sent to them yesterday actually calls for only $487-million.

As well, the so-called "per emplanement" fee the GTAA is now budgeting for next year is $37.25 per passenger, down from the forecast of $37.47. This figure is calculated by dividing the airport's revenue from the airlines by the number of passengers.

Ottawa considers airport rents as royalties to help cover the cost of building the airports in the first place.

Carriers probably would be beneficiaries of any rent moratorium because it's widely expected that much, if not all, of the break in rent would be passed on to them in lower landing fees.

"There are some adjustments that are required and I am not unsympathetic to what the airports council is saying," Mr. Collenette told The Globe. He said that ultimately the Department of Finance will have to decide whether it can forgo future revenue collected through airport rents.

"It's really a Minister of Finance decision for a budget because there's $214-million paid this year and the question is if you reduce it or cap it, what does that do to your [government] revenue flow?"

He said it would make sense that airports pass along any benefits from an adjustment to rent policies. "If the airlines are concerned about fees that are being charged for the new airports -- these airports have to be paid for -- then one way they could receive assistance is by adjustment in the rents, which is then passed on to the airlines."

GTAA president Louis Turpen told The Globe on Thursday that if Ottawa reduces or eliminates the federal rents Pearson pays -- $133-million last year -- it would lead to savings for the airlines. "I have said that if the government takes that away, I'll pass it on to the airlines." Mr. Collenette also said he's wondering if smaller airports should be on the hook for rent at all.

"Should smaller airports in smaller cities like the Reginas and the Thunder Bays and the Londons and the Prince Georges . . . really be required to pay rent? I am not sure."

The GTAA has maintained that it needs to boost airline fees to pay for the massive $4.4-billion, 10-year overhaul under way at the airport.

Pearson's Airport Development Plan includes construction of a new terminal for $3.6-billion. The first phase of the terminal will open early next year. Eventually, the new complex will replace aging Terminals 1 and 2, which will be torn down once construction is complete.

The carriers -- both domestic and international -- have been crying foul over the increases, saying they come when airlines across the globe have been crippled by a series of setbacks such as the Sept. 11, 2001, terrorist attacks, geo-political uncertainty, a sluggish U.S. economy and the recent SARS epidemic.

Earlier this week, the IATA held a news conference at which it lashed out at Pearson, after months of letters between the association and the airport.

For its part, Pearson accused Air Canada of masterminding the battle. It says the airport's major carriers, including Air Canada, fully endorsed the expansion plan when it was proposed in the late 1990s.

Mr. Turpen defended the airport's aggressive expansion, saying it will prove to be ideal when "everybody is scrambling for infrastructure and passenger numbers are bouncing back up" in two or three years.

Mr. Turpen issued a statement yesterday challenging many of the IATA's claims, saying: "We cannot and will not mortgage the future of Pearson for short-term solutions, and we invite all those who share our vision to work with us and make it a reality."

When complete in 2006, the new terminal will be able to handle 50 million passengers a year, almost double the 26 million who moved through Pearson in 2002, according to data provided in its annual report.

"It is expected that passenger activity in all sectors will continue to improve slowly subject to the potential impact of the financial stability of the airlines, further terrorist activities or ongoing geopolitical unrest," the GTAA said in the annual report.

Indeed, industry observers also expect traffic to improve, but by then it may already be too late, argued Fred Lazar, a professor at York University's Shulich School of Business in Toronto.

"Traffic is going to pick up, but they're [Pearson] pricing themselves out of the market," Mr. Lazar said in an interview.

He said that if Ottawa stopped charging the airports rent, "that would go a long way to smooth out current problems."

If something doesn't happen quickly to resolve the problem, the airport's financial status could change dramatically, Mr. Lazar maintained. All it would take is one major client -- such as a cargo operator or domestic airline -- to scale back its usage of Pearson, and the GTAA could be thrown into a financial crisis.

"You're in sort of a death spiral," he said. "The less traffic you have, the more you have to increase rates to satisfy your bondholders. The more you do that, the more you put at risk the business you have. So, you have a difficult situation."

He said the airport is in danger of losing a smaller domestic carrier or cargo operator to the Hamilton and Toronto Island airports. What's more, there is a definite threat that some international airlines may shift to Montreal as their gateway to Canada.

This week, WestJet Airlines Ltd., Canada's second-largest carrier, warned it could cut back on flights through Pearson if fees continue to rise, although it conceded it might have little room to manoeuvre. Air Canada has issued a similar warning, as have various carriers represented by the IATA.

Paul Calder, a credit analyst at Standard & Poor's, disagrees with Mr. Lazar's argument, saying that although connection traffic through Pearson may decline, the so-called origin and destination traffic -- the people that live in Toronto, conduct business in the city and visit it -- make up 80 per cent of the airport's usage.

"I'm not saying it can't happen, I'm just saying the probability of that is quite low."

Mr. Calder, who covers $5.2-billion worth of GTAA bonds, recently reiterated his A-minus rating on the debt, saying in a report that the business profile of the GTAA is among the strongest of non-government guaranteed utility-style credits rated [by the agency]."

He added: "The GTAA benefits from the near monopoly delivery of an essential transportation service in Canada's largest metropolitan region -- the Greater Toronto Area, which has a service area population of about 5.5 million.

"Most importantly, the ratings on the GTAA benefit from the authority's unencumbered ability to adjust aeronautical rates, subject to defined stakeholder notice periods, without senior government or regulatory approval," he said.

That near-monopoly status has been at the heart of the current uproar, which took a nasty turn last month when Pearson banned the IATA from the airport, reacting to the way the trade group had publicly criticized the GTAA at a conference in Montreal. There, IATA head Giovanni Bisignani lashed out at Pearson for its rising fees and unveiled data showing Toronto is among the 10 most expensive airports in the world to land a plane.

In a letter to Mr. Bisignani last month, Mr. Turpen said the IATA no longer had status at the airport and would not be invited to attend GTAA meetings or other activities. He wrote that the IATA's comments were "misleading, unhelpful and further evidence of your confrontational approach to the airline/airports relationship."

But the IATA fought back, replying with curtly worded missives to both Mr. Turpen and federal Transportation Minister David Collenette a month later, saying this country's air policy "needs a dramatic rethink."

Pearson revenue sources

Landing fees need to rise significantly for Pearson International to cover its expansion costs.

Cash flows, projection


Landing fees: $284, $447, $463, $506, $576

General terminal charges: $123, $205, $213, $239, $255

Car parking and ground transportation: $78, $100, $107, $115, $138

Airport improvement fee, net: $111, $114, $123, $128, $133

Concessions, rental and other: $114, $131, $138, $148, $161

Revenue: $710, $997, $1,044, $1,136, $1,263

Expenses: $648, $838, $906, $990, $1,105


Capital expenditures, projection

Per budget, $million

'03: $890

'04: $738

'05: $660

'06: $397

'07: $258

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