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.

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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.

May 2005

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