No. H098/05
For release May 9, 2005
GOVERNMENT OF CANADA CUTS AIRPORT RENTS
OTTAWA — Transport Minister Jean-C. Lapierre today announced that the
Government of Canada will adopt a new rent policy for federally-owned airports.
This new policy is expected to result in close to $8 billion in rent relief for
Canada’s airport authorities over the course of their existing leases and will
address inequities in the system.
"By lowering airport rents by over 60 per cent, the Government of Canada is
radically changing the financial outlook of the air transport sector in
Canada," said Mr. Lapierre. "Through this policy, our major airports
will see a substantial reduction in long-term costs, which should greatly
benefit airlines and the travelling public."
In recent years, airport authorities and air carriers have been concerned that
the amount of rent charged to airport authorities, which form part of the
National Airports System, threatens their competitiveness and long-term financial
viability.
"The new rent policy is a vote of confidence in our airport
authorities," said Mr. Lapierre. "It also recognizes the
critical role that our airlines play in the Canadian economy."
The Government of Canada’s new airport rent policy is the result of extensive
study and analysis over the past few years. The February 2005 report of the
Office of the Auditor General commented positively on the way the review, which
aimed for a balance between a fair return to taxpayers and the financial
viability and competitiveness of the air industry, was conducted.
The new rent formula is based on modern commercial leasing principles and is in
line with other rent formulas within the Government of Canada and the private
sector. The formula uses a progressive scale based on
airport gross revenues to set out a more modern and equitable rent for the 21
rent-paying airports across Canada.
For airports currently paying rent, there will be a transition period leading to
full implementation of the formula in January 2010. Approximately $350 million
of the estimated $8 billion in rent reductions will be realized during this
transition period. Affected airports that are not yet paying rent (Quebec City,
Regina, Saskatoon, St. John’s, and Thunder Bay) will begin to pay rent based
on the new formula immediately as they come on stream.
Every federally-owned airport covered by this announcement, small, medium, or
large, stands to benefit financially in every year that they are to pay rent. It
is anticipated that significant portions of the savings from present and future
rent reductions will translate into lower airfares for passengers.
In addition to the rent reduction, the government is also forgiving the
remaining repayments owed from airport authorities for chattels. Chattels are
assets like runway sweepers, snow blowers, computer equipment, and furniture
that were sold by Transport Canada to the airport authorities at the time of the
airport transfers. This results in an additional saving of $21.9 million and
will particularly benefit smaller airports and their communities.
"With this new airport rent policy, the Government of Canada is responding
clearly and fairly to the concerns of the aviation sector while respecting the
interests of Canadian taxpayers," said Mr. Lapierre. "The government
also intends to come forward with legislation that will enhance Canadian airport
authorities’ transparency and accountability measures."
Fact sheets detailing the benefits of the new airport rent formula to each of
the 21 rent-paying airports are attached, along with backgrounders on the rent
review process and the rent formula itself.
- 30 -
Contacts:
Irène Marcheterre
Director of Communications
Office of the Minister of Transport
(613) 991- 0700
Lucie Vignola
Communications
Transport Canada
(613) 993-0055
Transport Canada is online at www.tc.gc.ca.
Subscribe to news releases and speeches at apps.tc.gc.ca/listserv/
and keep up-to-date on the latest from Transport Canada.
This news release may be made available in alternative formats for persons
with visual disabilities.
BACKGROUNDER
AIRPORT RENT EVOLUTION
National Airports System
The National Airports System is composed of 25 airports deemed to be
essential to Canada’s air transportation system. The NAS airports handle about
92 per cent of all passenger traffic in Canada. These airports have year-round,
regularly scheduled passenger service with a minimum of 200,000 passengers
annually and/or serve in a provincial or territorial capital. The vast majority
have been leased to not-for-profit, locally-based authorities from which rent is
being collected by the federal government.
Beginning in 1992, NAS airports were transferred to airport authorities as
ongoing businesses, including all employees, assets, chattels, consumable
stocks, real estate and existing contracts of the businesses. With the exception
of some environmental liabilities, all costs of airport operations were
transferred to the authorities along with the revenue-generating capabilities of
the federal assets. The authorities are responsible for the operation and
management of NAS airports as not-for-profit businesses, which contribute to
regional economic development.
The Government of Canada transferred NAS airports by way of long-term lease
arrangements, which included negotiation of an agreed-to rent over the life of
the leases (60 years) to 21 of the 25 NAS airports, with the remaining four
airports either transferred outright or under separate arrangement. Negotiations
were conducted on the expectation that the government would receive fair value
for transferred airports, including recognition of their future earning
potential. As a result of the timing of specific airport transfers, the
circumstances at each airport, and the negotiating process, there are five
different formulas that govern rent payments from the 21 airport authorities
with leases.
Review process
In June 2001, Transport Canada began a review of the existing rent policy for
the leased airports in the National Airports System. This review was initiated
in response to demands by the airport and aviation communities and the comments
of the Auditor General in October 2000 with respect to fair value of rent for
Canadian taxpayers. Due to the significant impacts to the air industry resulting
from the September 11, 2001, terrorist attacks, the rent policy review was
delayed while the government worked to address the ensuing security and economic
urgencies.
Focused work on the review began again in 2002, with analysis being completed in
the summer of 2004. The intent of the policy review was to ensure that the
Government of Canada’s airport rent policy balanced the interests of all
stakeholders, including the air industry and the Canadian taxpayer.
Scope of review
The 21 airports with leases that are covered by the rent policy review:
Calgary, Charlottetown, Edmonton, Fredericton, Gander, Halifax, London, Moncton,
Montreal (Trudeau and Mirabel), Ottawa, Prince George, Quebec City, Regina,
Saint John, St. John’s, Saskatoon, Thunder Bay, Toronto (Pearson), Vancouver,
Victoria and Winnipeg.
The four remaining airports not covered by the review are Whitehorse,
Yellowknife, Iqaluit and Kelowna.
Currently nine airport authorities pay rent. These are Calgary, Edmonton,
Halifax, Montreal, Ottawa, Toronto, Vancouver, Victoria, and Winnipeg. Kelowna,
which was transferred prior to 1992, pays $1 per year. In 2006, four more
airport authorities, Regina, Saskatoon, St. John’s, and Thunder Bay are
scheduled to begin paying rent. Quebec City could begin to pay rent in 2005 or
2006 depending on traffic volumes.
May 2005
BACKGROUNDER
NEW AIRPORT RENT POLICY
The key objective of the airport rent policy review was to determine a rent
formula that strikes a balance between the impacts on the air sector of rising
rents, and a fair, ongoing return to taxpayers as the owners of these valuable
assets.
The original process of negotiating lease arrangements with the airport
authorities yielded 21 separate deals, each with its own peculiarities. While
each lease was negotiated in good faith and reflected the local conditions at
the time, in looking at the leases as a whole, numerous anomalies and
inconsistencies were identified.
The results of the review’s studies indicate that the Canadian airport model
is unique. The government retains ownership of the airport lands although it
transferred control of airport management, operation, development and financing
to community-based, non-share, not-for-profit, self-financing corporate
entities. Airports were transferred by way of a long-term lease rather than by
placing them on the open market for bids. At the end of the 60-year leases, all
assets revert back to the government unencumbered.
The review looked at airport rent payments to the government based on the
existing formula and determined that they were excessive. Comparisons with
public utilities, which have similar characteristics, and foreign airport
transactions indicated that returns from the National Airports Systems airports
would be more appropriately set in the order of $5 billion rather than the $13
billion* under current contracts, for the remainder of the 60-year leases. The
review also confirmed that existing formula anomalies distorted fairness among
airports of similar size, and in some cases, created disincentives to normal
commercial practices.
The issue of a fair return to taxpayers was a concern raised by the report of
the Office of the Auditor General released in October 2000, and was a key driver
in the launch of the rent review. A subsequent OAG audit of the review in
2004-2005 looked at the approach taken and concluded that the work underway was
satisfactory and that the department had put in place procedures for reviewing
the rent policy that took into account its complexity.
Today’s announcement brings the findings of the review to a conclusion with
the government’s decision to reduce the overall amount of airport rents
collected over the remainder of the leases from $13 billion to $5 billion.
Furthermore, the new rent formula will address concerns related to fairness and
equity among airports of similar size and activity. The review also confirms the
right of the Crown to collect rent for the assets and business opportunities
transferred to airport authorities.
The government has developed a formula based on gross revenues incorporating a
progressive scale. The new formula is consistent, equitable and fair, as well as
being more in-line with commercial leasing principles. It recognizes the higher
proportion of fixed costs borne by smaller airports and the ability of larger
airports to generate greater non-aeronautical revenues. Furthermore, it is
administratively simple.
The government expects airport authorities to pass on savings through fee reductions. Already, the majority of Canada’s major airport authorities have committed to ensuring that a significant portion of the rent savings will be passed on to air carriers and passengers through adjustments to fees. The government will propose legislation that will enhance Canadian airport authorities’ transparency and accountability measures.
Implementation of the new policy will be phased in over the next four years,
beginning January 2006, with the new formula achieving its full impact in
January 2010. All airports stand to benefit, both in the short term and long
term. In 2006 alone, savings for the National Airports System is forecasted to
exceed $48 million.
Some of the other highlights of the policy can be summarized as follows:
All airports will be treated in an equitable manner.
All airports will benefit financially every year that they are to pay
rent, over the life of the leases.
Total rent to be paid will drop by more than 60 per cent, from about $13
billion to $5 billion over the next 50 years or so of the leases.
Toronto, as Canada’s largest and busiest airport, will see the largest
long-term reduction in rent; the airport will save $5 billion, going from $8
billion to $3 billion.
Halifax, Montreal and Winnipeg will have their rent reduced by half and
Ottawa by two thirds.
Others will realize a substantial drop in the earlier years. Calgary will
avoid a huge increase in rent in 2006 and will save over $100 million in the
next four years. Similarly, Edmonton will see a $40 million drop and
Vancouver will realize a $90 million reduction.
Smaller airports will benefit as well. Most will see a 70 per cent
reduction in rent, or more, over the long term. In the short term, the
reductions are even more significant because of the immediate implementation
of the new rent formula once each of the smaller airports begins paying
rent. For example, in 2006, Regina will pay less than $50,000 instead of
$680,000. Thunder Bay will pay $12,000 instead of $330,000. In 2016, when
Moncton begins paying rent, it will pay less than $200,000 instead of $1.3
million.
New
Airport Rent Formula
Gross Revenues
Rent Paid
On the first $5 million
0%
On the next $5 million
1%
On the next $15 million
5%
On the next $75 million
8%
On the next $150 million
10%
On any amount over $250 million
12%
May 2005
*These amounts represent the net present value, which is the value of the
future rent stream returned to present value.
