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.

May 2005

*These amounts represent the net present value, which is the value of the future rent stream returned to present value.