| This research paper was commissioned by the Canada Transportation Act Review. It contains the findings and opinions of the author(s) and does not necessarily represent the views of the Review Panel or its members. |
Airport Financing, Costing, Pricing and Performance
Research conducted for the Canada Transportation Act Review
Report prepared by
David Gillen
Len Henriksson
Bill Morrison
April 2001
Airport Financing, Costing, Pricing and Performance
Final Report to the Canadian Transportation Act Review Committee
Report prepared by:
Professor David Gillen
School of Business & Economics
Wilfrid Laurier University
Waterloo, Ontario
&
Institute for Transportation Studies
University of California
Berkeley, California
Dr. Len Henriksson
Faculty of Commerce & Business Administration
University of British Columbia
Vancouver, BC
Professor William Morrison
School of Business & Economics
Wilfrid Laurier University
Waterloo, Ontario
April 2001
Acknowledgements
Over the course of the study we have benefited from the assistance of numerous people. Our first debt of gratitude is to the many individuals at the airports in Canada who were so generous with their time and information. The interviews we conducted at airports across the country, with Transport Canada officials and with representatives of Canadian Airports Council. They all helped in our understanding the issues and concerns of the different parties. Second, John Lawson, Co-director of Research for the Review Committee has been a strong supporter and provided assistance and encouragement along with many comments and suggestions. Finally we acknowledge the excellent research assistance of Elena Catoiu, Simon Chan, Elaine Cheung, Natalia Larocque and Carol Seely-Morrison over the course of the study. The views expressed in this report are those of the authors and not those of the Canadian Transportation Act Review Committee.
David Gillen
Len Henriksson
William Morrison
April 2001
Executive Summary
This report examines the eight major airports in Canada's National Airport System, as well as a number of regional and local airports. Our investigation sought to better understand the activities of airport investment, service delivery, pricing and financing under the 1995 National Airports Policy.
The 1995 policy represented a radical change in direction from the past, one in which the government had been owner, builder and manager of airport infrastructure. It had standardized policy for all airports, ranging from Toronto's Pearson to Yarmouth, Nova Scotia.
The new policy moved airport ownership and management in a direction more consistent with the regulatory conditions in other sectors of the aviation industry. Regulatory controls for the airlines had been fading since the mid-1980s; formal deregulation occurred in 1988. Air traffic control had been privatized when responsibility for the country's ANS network and facilities was transferred from the federal government to NAV CANADA on November 1, 1996, for $1.5 billion (Cdn).
The National Airports Policy (hereafter referred to as NAP) sought to devolve airports to local communities and provide an opportunity and set of incentives for greater entrepreneurship. It was also hoped that airports would respond to user service demands in a more competitive environment. This represented a deregulation of infrastructure that was similar to that being undertaken in the United Kingdom, Australia and New Zealand. Finally, NAP recognized that airports in various regions served diverse purposes, and were subject to different demands and competitive pressures.
The mandate of this research was to provide the Review Committee with an assessment of how well the airport programs (and the airports operating within them) are meeting the needs of Canada and Canadians. In the course of our work, we pondered several questions. What were the "stumbling blocks"? How might the Canadian Transportation Act be amended to move the use and affects of aviation infrastructure in a direction consistent with its intent?
We examined the variety of pricing practices at the different airports. We also examined costs and investment, and how this varied with increases in traffic level. Finally, we addressed issues related to financing, in particular, the fiscal capacity and fiscal effort of different airports.
During the course of the study, we interviewed managers and senior executives at more than thirty airports. They varied from the busiest Toronto and Vancouver International airports, to smaller ones such as Sault Ste. Marie, ON, Saint John, NB and Fort St. John, BC. The feedback we received suggests that the design of the NAP, how NAP has been implemented and how safety standards are being enforced by Transport Canada all exert an important influence on the fiscal viability of airports.
Figure 1 (below) illustrates an general picture of the governance system for airports in Canada as envisaged by our recommendations. The Government should aim to provide a transparent operating environment for airports in terms of their business practices, relations with various levels of government and the technical aspects of airport operations. Part of this will come from the institutional changes of a three-tier airport system that more closely matches the fiscal capacity and fiscal effort of airports. In addition, clarification of the roles of Transport Canada and other departments (Environment and Bureau of Competition Policy) will smooth the relationships between airports and Government, free up resources and will create the necessary incentives for good business practices.
Recommendations
This report makes seven key recommendations that we believe the Review Committee should consider.
National Airports Policy: The National Airports Policy [NAP] was implemented with variable degrees of consultation with airports, airlines and the broader community. As a result of this uneven approach and the combined use of arbitrary market and political criteria, the airports classified as "included in the National Aviation System" [NAS] as well as those declared "regional airports" have been inappropriately grouped in terms of fiscal capacity and their role in the aviation network in Canada. This now threatens the future of some airports.
We recommend that the classification system be changed to a three-tier system, which places proper emphasis on fiscal capacity and market position.
The Tier I classification should be limited to the eight major airports (Vancouver, Calgary, Edmonton, Winnipeg, Toronto Pearson, Ottawa, Montreal Dorval, Halifax). Tier II should consist of the remaining airports currently included in the National Airport System (NAS) and with the exception of the eight Tier I airports, we recommend an evolution to full privatization of all Tier II airports. We also recommend that the classification system be flexible to have airports move from one tier to another as market conditions change.
Ground Lease Conditions and Arrangements: The current lease arrangements negotiated between Transport Canada and airports in the NAS have placed a number of the airports in weak financial condition. The amount of the lease payments is a combination of fixed and variable cost to the airport. The current formula works like an indirect price cap regulation, by limiting the revenues an airport can retain through efficient pricing and entrepreneurial drive. The formula also benchmarks costs for the net revenue which biases cost minimization strategies and creates efficiency and welfare losses.
We take some issue with the payment of any lease at all. If the airport land has been designated as airport and not for other purposes, the lease payment is a pure rent transfer. It places an undue burden on airports, it has no real efficiency affects and should be abandon. The fact that many lease payments have been given a lengthily grace period adds to our argument. If the lease payment is to reflect the opportunity cost of the land, this structure should be reflected in each lease rather than the variety which is currently in place.
If the lease payments are to continue, the lease contracts should be a payment of rent generated by both location-based market power and private enterprise. These rents should be collected via a per-passenger fee, reflecting both incentive compatibility and externally changing market conditions. Such a basis for lease payments would be fiscally sound and fairer than the current arrangement. Additionally, it would encourage good business practices and reduce the possibility of placing airports at risk during economic downturns. The rent payments should be earmarked for capital infrastructure spending and a new capital fund should be created. Non-leasing Tier II and Tier III airports should be allowed access to this fund if they choose to contribute to it. The notion of voluntary participation is important because it speaks to the tradeoff faced by smaller airports in raising private capital based on their revenue generating ability (including AIF revenues). Broad access to capital also recognizes the role of smaller airports in adding value to the airport network. Under these recommendations the ACAP program would be terminated.
We recommend that current ground lease arrangements be renegotiated solely on a charge-per-passenger basis. These rents should be placed in a capital market fund to fund infrastructure projects and non-lease airports should be allowed to participate in the fund based on a per-passenger contribution. The funds should be allocated to infrastructure projects across the entire airport system at all contributing airports.
Role of Transport Canada: Transport Canada has evolved from being a builder, operator, and regulator of airports to one of being a regulator. However, its role has not been carefully defined in the NAP. Since the devolution of airports, Transport Canada has moved to enforce rules that were not enforced when it operated airport facilities. New regulations (often reflecting higher standards than existed prior to divestiture) have been promulgated for airports to follow.
In addition, we found that Transport Canada and other government departments have been heavy-handed in their enforcement of rules, and in their dealings with airports. This behaviour has created an environment of uncertainty for airports and has imposed direct costs that were not anticipated in the original transfer negotiations.
We recommend that the new Canada Transportation Act clearly identify Transport Canada's role, along with the roles of other relevant government departments with regard to regulation of airports. The airports should have an embedded right to appeal Federal decisions. Any new regulations brought forward by Transport Canada or other government department should be subject to a benefit-cost test before implementation. Regulations and standards that meet the test of a benefit/cost ratio > 1, would be considered for implementation with any capital requirements fundable from Federal capital.
Rates and Charges and Airline Competition: The prices charged for airport services vary widely, even across the major eight airports in the NAS. This variation reflects market conditions and the differing fiscal capacities and fiscal efforts. Fiscal capacity is a measure of the revenue generating potential of an airport while fiscal effort is a measure of the extent to which the fiscal capacity is exploited.
While many think of airports as monopolies, we disagree. We believe that only a limited portion of an airport's revenue arises from monopoly markets, with a good portion of airport revenue sources being subject to competition. In many cases airports are competing either with one another or with other modes of transportation, notably rail and automobile. Finally, as part of a hub and spoke system, spoke airports are subject to pricing conditions at the hubs. These competitive forces reduce the ability of any airport to exploit (or abuse) monopoly power.
The net welfare effects of market-based pricing at airports and the absence of any generic anti-competitive problems across all airports suggests that airports should not be subject to direct (price) regulation, despite a potential for golden plating at some airports. Rather airports should be subject to the same scrutiny by the Bureau of Competition Policy as any other business.
Airports have a clear, demonstrated role to play in their effect on airline competition. The airport passage that passengers must follow requires slots, gates and counter space, all of which create the potential for an anti-competitive environment when congestion occurs. Airports should control these facilities and should be encouraged to price them (with the exception of slots) according to peak-load principles. An independent agent of the Federal government should auction peak-demand slots at LBPIA (and other slots constrained airports in the future). The proceeds from slot auctions should be earmarked for capital spending across the entire airport system.
We recommend the following:
All gates should be owned and allocated by the airport and that Air Canada be required to sell the gates it owns back to airports. Gate lease contracts should be transparent and reflect true common use principles.
Airports should be allowed and encouraged to practice peak-load pricing with respect to gates and counter space, with the proviso that the extra revenues accruing are earmarked for infrastructure maintenance.
A portion of Air Canada's domestic slots at Lester B. Pearson International Airport for peak-demand periods should be surrendered to a pool to be auctioned to the highest bidder. An independent agent of the Federal government should conduct the auction and the revenues accruing should be earmarked for capital spending across the entire airport system. These slot rights should be of fixed duration and should be tradable between airlines.
Airports should not be subject to direct price regulation. The Bureau of Competition Policy should be given a direct mandate to extend its current guidelines regarding anti-competitive behaviour in the airline industry to include a more detailed analysis of airport business practices and the role of airport operators in airline competition.
In cases of cooperatives for airside services (e.g. fuel facilities), entrants should have equal access to services on a non-discriminatory basis not unlike access to CRS s and Frequent Flyer programs.
Airports should move to passenger-based airside charges. This is important especially for smaller airports serviced by a single carrier (usually AC), in terms of limiting the damage caused by cuts to the number of scheduled flights
Access to Capital: Airports within the NAS have access to capital from private capital markets and banks, PFC and AIF revenues and any retained earnings. Airports classified as regional airports have access to funds in the Airport Capital Assistance Program (ACAP). This program is funded from ground lease payments from, in principle, all the airports in the NAS - currently, Vancouver, Calgary and Toronto fund over 90 percent of the fund. However, under the current arrangements it is unclear how the division of revenues from the ground lease payments is to be allocated to ACAP and to the general treasury is determined. It is also unclear how decisions regarding the allocation of funds are made across projects and airports and how the airport contribution, up to a maximum of 15 percent, is determined.
We recommend first, that the ACAP program be terminated and replaced with a capital fund that has a clear revenue sharing rule for the division of lease payments (see recommendation 2). Second, any allocation of capital funds to Tier II or Tier III airports contributing (participating in) to the new capital fund program be limited to grants for current infrastructure upgrading and replacement or to meet the safety requirements of Transport Canada. Third, funding should be given to meet any capital costs incurred as a result of new regulations or standards imposed by Transport Canada or other government departments. Finally, requests for capital expansion projects that go beyond current airside and groundside capacities, even if they are safety related, should not be funded from the new capital fund program.
Airport Ownership and Local/Provincial Charges: Airports are currently subject to different obligations, such a payment of property taxes, as a function of ownership status. We have found, for example, that in some cases, airports operating as not-for-profit organizations are subject to commercial tax rates by municipalities. On the other hand airports transferred to cities for a nominal amount ($1) and treated as departments of the city, even if operated under management contract, are not subject to the same tax. Such differences not only create distortions and inequities among airports but also place some airports under significant financial pressure. These differences also create a disincentive for certain ownership arrangements.
We recommend that airports be treated in a similar manner with regard to business taxes, property taxes and corporate taxes. Further we recommend that airports be uniformly exempt from any property taxes relating to areas of land required for runways and aprons.
Integrating Airline and Airport Policy Changes
We have made the point that it is no one thing that is important in terms of the recommendation we have made or that are being proposed for the rules governing access and participation in the Canadian aviation market. Rather it is the cumulative affect that will generate the results. Implementing one or two changes will likely yield little change from the current situation. Among the changes being proposed for the rules affecting airlines is allowing cabotage.
Cabotage (as contained in the Chicago Convention) is the right of an airline of one country to be able to fly and carry traffic between two points within the territory of another country. Under the Chicago Convention, any exclusive bilateral cabotage agreement between two signatory states is prohibited, but any state may offer unilateral cabotage rights. Interestingly though, the EU has successfully introduced de facto cabotage between its members, such that airlines licensed by member states fly unrestricted numbers of stops within the EU borders.
Further there is an ongoing debate as to whether North American airline fifth freedom rights with EU states are the same as cabotage rights. For this reason, we should not exclude from consideration, the possibility that Canada and the US (or Canada, Mexico and the US) could successfully formulate an agreement for exchange of cabotage rights under the auspices of a trade-area agreement similar to that of the EU.
Another possible liberalization that has been considered would be for Canada to offer consecutive cabotage rights either unilaterally or bilaterally with other countries. Under such an agreement, international flights would be able to land at a primary destination in Canada and then continue to a second destination. For example a flight from Tokyo could land in Vancouver and continue (with some domestic passengers) on to Calgary.
Our concern is that any or all of these changes will have some impact on the recommendations we have made concerning airports. What effect would such liberalization measures have on our airport suggestions? The table below provides a sense of whether they would enhance or hinder our recommendations.
Recommendation |
Impact of unilateral consecutive cabotage |
Impact of unilateral full cabotage with the US |
Changing the classification system to a three-tier system. All but the "big eight" airports to be privatized in short term. Consider full privatization of large airports in near term. |
Improves position of non-gateway & non-hub airports. Enhances benefits of recommendation |
Large potential benefit for airports since likely new entry. |
Renegotiated ground leases with charge-per-passenger basis. Plus creation of system-wide capital market fund that allows for participation from all airports. |
Benefits enhanced |
Benefits enhanced |
Clearly identifying Transport Canada's role, along with the roles of other relevant government departments with regard to regulation of airports. |
More important since implied increased presence of TC personnel |
More important since implied increased presence of TC personnel |
Air Canada divestiture of gates and counter space at all airports, transparent common use contracts, peak-load pricing by airports, and slot auctions. No direct price regulation for airports. Explicit guidelines for airports from the Bureau of Competition Policy. Open access to cooperatives for airside services. |
More important that entry barriers at airports removed, particularly at tag-end airports |
More important that entry barriers removed to allow broad entry even by US regional airlines |
Access to capital for all airports for maintenance and meeting new government standards. |
Increases demand for capital. Privatization more important |
Increases demand for capital. Privatization more important |
Airports be treated in a similar manner with regard to business taxes, property taxes and corporate taxes. |
Important to the extent municipalities engage in rent seeking behavior |
Important to the extent municipalities engage in rent seeking behavior |
A GOVERNANCE SYSTEM FOR AIRPORTS UNDER A REVISED TRANSPORTATION ACT
Table of Contents
1.3 The Airport-Airline Interface
2.0 Airport GOVERNANCE in Canada, UK, australia AND us
2.3 Airport Activity in Canada
2.4 Performance evaluations: The Auditor General of Canada
3.0 Airport Pricing and Costing
3.4 Airport Improvement Fees and Passenger Facility Charges
3.5 Costs and Airport Market Structure
3.6 Airport Revenue: Airside vs Groundside
4.3 Range of Performance Measures
4.6 Financial Analysis of Canadian airports
4.6.1 VANCOUVER INTERNATIONAL AIRPORT
4.6.2 Calgary international airport
4.6.4 TORONTO INTERNATIONAL AIRPORT
4.7 Financial Ratio Definitions and Explanations
5.0 Airport Infrastructure, Market power and Infrastructure in Canada
5.2 Airport Infrastructure and Airline Competition
5.3 Take-off and Landing Slots
5.5 Control of counter space and baggage facilities
5.6 Cumulative effects of a dominant carrier in control of airport infrastructure
5.7 The role of Air Canada in financing capital investment
5.8 The Domination of hubs and spokes
5.10 Anti-trust law and airports in Canada the US
5.12 Present and projected infrastructure shortages
5.13 Summary of Recommendations
6.0 A survey of Management at Canada's Airports
6.2.2 Transfer Agreements and the devolution process
6.2.3 Organizational details 135135
6.2.4 Government relations and funding
6.2.5 Safety and Environmental Issues
This chapter sets the stage for the more detailed review of the Canada Transportation Act and the policies it prescribes for airports. We begin with a brief background and history, along with a description of the National Airports Program. Next, we present the broad parameters of the airport-airline interface, because it is the "partnership" between these two agencies that make air transportation possible. An overview of the research that follows completes the chapter.
Transportation "policy" sets up boundaries around decisions, including those that can be made and eliminating those that cannot. In this way, it channels thinking and behaviour so that both are consistent with the government's overall objectives (e.g. Stoner & Freeman, 1989). Further, by establishing specific goals, it increases the likelihood that these will be achieved.
Canada's national transportation policy is set out in Section 5 of the Canada Transportation Act. As often occurs in policy statements of this nature (both historically and internationally), a plethora of goals are put forward. This policy statement has "something for everyone". But a more careful examination reveals innumerable trade-offs (or overt conflicts) between goals, with no indication on the ticklish matter of which goal is to be given primacy. Those responsible for implementation issues are in a difficult, confusing position indeed.
Lack of superordinate goals has been a characteristic of transportation policy in many countries, and it has long been present in the case of Canadian aviation. Municipalities, cash-strapped from the Great Depression coupled with the constraints posed by World War II left the Federal Government with a role became overwhelming by default. It was the only agency financially able to manage the growing needs of Canadian aviation and airports
Canadian aviation policy has evolved from one in which government played a dominant role as owner, operator and investor in airports, airlines and air traffic control systems to one in which it is essentially a regulator of safety. From the 1960's through to the mid-1980s airports were the responsibility of the Canadian Air Transportation Administration (CATA), a division of Transport Canada. Investments in runways, terminals and other buildings were funded out of a capital fund provided by Treasury Board. Revenues were raised through landing fees, terminal charges and a ticket tax and were placed in Consolidated Revenue Fund.1 However, airports were not required to break even; nor was the system to be self-financing. Only at Toronto (Pearson), and in some years Vancouver, did revenues cover operating and maintenance costs. In all other cases, costs exceeded revenues.
As long as Treasury Board was willing and able to provide subsidies from general revenues, there were no pressures on CATA to plan investments optimally. In fact, there were clear incentives to overbuild capacity. The airlines did not complain because they were being implicitly subsidized. Nor did politicians who had a strong incentive to hasten construction. As demand grew, decisions on where to place capacity were governed by politics and national pressures rather than by local airport demands. Despite capacity and infrastructure problems at Toronto and Vancouver, Transport Canada had to consider the entire system and demands from other airports even though the latter were not under the same capacity constraints. Yet it is important to understand that the airport system in Canada was 'as a system'. There were uniform standards, uniform codes of construction, training and conduct. Revenues were pooled to fund the system not anyone airport. This approach had its benefits bit also its costs.
NATIONAL TRANSPORTATION POLICY
Declaration
5. It is hereby declared that a safe, economic, efficient and adequate network of viable and effective transportation services accessible to persons with disabilities and that makes the best use of all available modes of transportation at the lowest total cost is essential to serve the transportation needs of shippers and travellers, including persons with disabilities, and to maintain the economic well-being and growth of Canada and its regions and that those objectives are most likely to be achieved when all carriers are able to compete, both within and among the various modes of transportation, under conditions ensuring that, having due regard to national policy, to the advantages of harmonized federal and provincial regulatory approaches and to legal and constitutional requirements,
(a) the national transportation system meets the highest practicable safety standards,
(b) competition and market forces are, whenever possible, the prime agents in providing viable and effective transportation services,
(c) economic regulation of carriers and modes of transportation occurs only in respect of those services and regions where regulation is necessary to serve the transportation needs of shippers and travellers and that such regulation will not unfairly limit the ability of any carrier or mode of transportation to compete freely with any other carrier or mode of transportation,
(d) transportation is recognized as a key to regional economic development and that commercial viability of transportation links is balanced with regional economic development objectives so that the potential economic strengths of each region may be realized,
(e) each carrier or mode of transportation, as far as is practicable, bears a fair proportion of the real costs of the resources, facilities and services provided to that carrier or mode of transportation at public expense,
(f) each carrier or mode of transportation, as far as is practicable, receives fair and reasonable compensation for the resources, facilities and services that it is required to provide as an imposed public duty,
(g) each carrier or mode of transportation, as far as is practicable, carries traffic to or from any point in Canada under fares, rates and conditions that do not constitute
(i) an unfair disadvantage in respect of any such traffic beyond the disadvantage inherent in the location or volume of the traffic, the scale of operation connected with the traffic or the type of traffic or service involved,
(ii) an undue obstacle to the mobility of persons, including persons with disabilities,
(iii) an undue obstacle to the interchange of commodities between points in Canada, or
(iv) an unreasonable discouragement to the development of primary or secondary industries, to export trade in or from any region of Canada or to the movement of commodities through Canadian ports, and
(h) each mode of transportation is economically viable,
and this Act is enacted in accordance with and for the attainment of those objectives to the extent that they fall within the purview of subject-matters under the legislative authority of Parliament relating to transportation.
This situation changed in the mid-1970s. Large increases in government expenditures in the 1960s coupled with an economic slowdown meant that funds that CATA competed for from Treasury Board were less easily available. Therefore, greater fiscal prudence was introduced by CATA. Airports came to be seen as a revenue source. Financial self-sufficiency for the system was the target. in 1975 fees and charges were raised and the Canadian Air Transportation Tax (CATT) was introduced.2
Even with the increase in revenues, CATA could not keep up with the demand for airport services. The introduction of larger passenger aircraft along with increased operations and passenger traffic both placed increased pressure on major airports and the system generally. CATA responded by implementing three strategies. First, incremental investments were made to increase capacity. These included high-speed taxiways and added parallel taxiways, for example. Second, operational procedures such as 'flow control' were introduced to allocate scarce capacity at peak periods.3 Third, steps were taken to operate airports on a more "commercial" basis not only in order to generate added revenue, but also to improve efficiency.
While appropriate, these strategies were not workable because there were no incentives in place to either achieve more revenue or to improve cost efficiency. The personnel in CATA were primarily engineers or technicians who were operationally oriented and functionally driven. They sought relief from demand pressures by expanding supply but did not consider using the price system to manage demand or to obtain some sense of the value of added capacity.
The 1980s were the period of privatization and airline deregulation. A shift away from active government participation in the economy but particularly in transportation occurred. In 1986 the Airport Authorities Group (AAG) replaced CATA and were tasked with introducing financial self-sufficiency through greater commercialization of airports. The move to financial self-sufficiency and ultimately to devolution moved forward as traffic levels stabilized. In a few cases, traffic declined and with this, attendant revenues.4
The devolution of airports was spurred by five key factors. First, the government did not have the necessary capital to invest in the system, particularly since it had invested relatively little in the previous few years. Second, deregulation was leading to increased demands on the system by airlines and passengers. Third, the government wanted to have airports funded out from airport resources, because general revenues were under pressure from many other government services including health care. Fourth, airport expansion was becoming more difficult due to increased public sensitivity to environmental issues. The environmental review process lengthened the airport planning process. It also provided local constituents with a federal political power point. Finally, devolution can be seen as a response to the growing worldwide interest in alternative airport governance mechanisms. Some within the AAG recognized that market based incentives and demand management had a very low likelihood of being introduced under continued Federal ownership and management.
Historically, planning and managing Canada's airports was one of the most important responsibilities of the Ministry of Transport (later renamed Transport Canada). Airports, when owned by the federal government in the late 1980s, had a value in excess of $10 B.5 In 1988-89 fiscal year the Airports Authority Group spent approximately $247 million for expansion, restoration and rehabilitation of the aviation system. Yet total airport transportation and engineering construction remained at about 4 percent of total transportation construction from 1978 through 1991 (see Table 1-1)
The genesis of the NAP really began with the AAG in 1985, when it took over 200 airports with an estimated replacement value of some $8 billion ($1985). The AAG had a capital budget of $200 M, an operating budget of about $400 M, and about 4500 employees. It was a large department charged with creating a 'business-like commercially minded organization. 6 The policy directive Future Framework for the Management of Airports in Canada contained two primary thrusts; transfer a subset of airports to local airport authorities (LAA) and transfer the remaining designated airports to be transferred to local municipalities, for a nominal fee, under the airports authority model. In both cases, the presence of scheduled passenger traffic was the key criteria to be included in either designation.7 This policy made a great deal of sense in that service levels for the airports would better reflect community needs and desires and would not be subject to national political pressures.
The National Airport Program moved the airport business away from a government ministry model in which airports were viewed as public utility, to one of a private sector management regime of 'airports as a business' In its preamble to the NAP, the government argued that its role in airports had been evolutionary. As noted earlier in this chapter, it had done things largely in the absence of a well defined regulatory or policy framework. Over 70 years, it had become owner, operator, investor and financially responsible for 150 of the 726 certified airports in the country. The evolutionary process was by definition, ad hoc and led to conflicts because of its different roles. Frequently, national policies conflicted with local needs: the policy process was always subject to the "national test" when it might have been more appropriate to apply a local test.8 Finally, only a small subset of airports (about 8 percent) actually served the majority of passengers in the country.
Four distinct groups of airports were created under NAP. First, a National Airports System of 26 airports was identified. These larger airports accounted for over 90% of all scheduled and air-cargo traffic. Included in this category were all national, provincial and territorial capitals, as well as airports with annual traffic of 200,000 passengers or more.9 Regional or local airports constituted a second group. While these airports were served by scheduled passenger carriers, they did not reach the 200,000 threshold required for "NAS" status. Under the NAP, these were to be offered to Provincial governments, airport commissions or other interests on an ownership basis. Smaller airports (used mainly for recreational flying) would be transferred to local interests or closed within two years. Finally, remote and Arctic airports would continue to be operated and supported by the Federal Government.
The NAP changed the role of the federal Government from one of owner, operator and regulator to one of owner, landlord and regulator. However, this was to be true for only the top 26 airports in the country, measured by aggregate enplaned and deplaned passengers.10 As noted, airports designated as regional or local were to be sold to local communities for a nominal fee; generally $1. In cases where communities had no interest in owning the airport, other groups (such as not-for-profit enterprises) were encouraged to take over the airport.11
With pending devolution came the need to devise new ways for airports to meet their capital requirements. The federal government assumed the 26 airports in the NAS would have the fiscal capacity to attract capital necessary for infrastructure investment and that they would have strong enough markets to generate revenues from airside and groundside activities. Fiscal capacity refers to the ability of an airport to achieve a particular level of revenue and/or capital access (bonds) because of the markets it serves and traffic level it attracts.
Regional/local airports were to be provided with assistance from an internal capital market: the Airports Capital Assistance Program (ACAP). These funds were designated for safety related airside investment projects - the funds were project specific - and the monies were derived from the lease payments from the NAS airports. Local operators were required to contribute to a maximum of 15 percent of project costs. One justification for this internal capital market was the role the regional/local airports played in the country's aviation network. In a hub-and-spoke system, hub airports derive benefit from spoke airports and the more spokes the greater the value of the network. Private markets would tend to under invest in spoke airports unless there was some means of internalizing this network externality.
Under the NAP the federal government was to continue to set safety and security standards for all airports in Canada, presumably following ICAO guidelines.12 Under the "NAS" designation, these standards would, in some cases, be written into the transfer agreement and in all cases would be part of the airport certification process. At regional/local airports, the standards for emergency response were regulated to ensure compliance, while a `federally mandated' level of service was maintained. In some cases the emergency response service plans was to be determined through the airport certification process.
1.3 The Airport-Airline Interface
It has long been recognized that airports and airlines are reciprocally dependent on one another. For the airline, the airport is viewed as a major cost center in the movement of passengers and cargo. In general, it is where many "moments of truth" occur - that is, points at which the customer evaluates the quality of the service. Airport facilities play an instrumental role to many outcomes valued by the customer - such as timely delivery of baggage, attractive terminal facilities, and low cargo damage rates. The potential impact of the airport upon airline cost figures and customer satisfaction - and the subsequent profit stream - is not difficult to see.
Airports rely on two primary revenue sources, which may be distinguished as "airside" (such as landing fees) and "non-airside" (such as retail concession rentals). The airport depends on airlines (directly or indirectly) for both of these revenue categories. Larger aircraft, more flights, and more passengers all translate into greater revenues for the airport facility. With the recent changes in Canada's airline industry structure, some special management challenges for airports have become apparent.
Most notably, airports in Canada that handle scheduled passenger traffic now face the same problems that most hub airports face: a single dominant client. Minneapolis/St. Paul has Northwest Airlines, Atlanta has Delta, Frankfurt has Lufthansa, Heathrow British Airways, Dallas-Fort Worth American Airlines, Houston Continental and St. Louis TWA to name a few. But in Canada, almost every airport now faces this problem not just the hubs.13 A limitation on the number of carriers serving an airport increases the risk to the airport both in terms of revenue received as well as return on investments.
A reduction in the number of carriers and/or flights will have a significant impact on airside revenue. Non-airside revenue is complementary with airside activity: any reduction in the latter leads to a reduction in the former. While reductions in flights will likely lead to remaining flights having higher load factors, landing fee revenues will decline, because these are independent of load factor. In most cases airports receive greater revenue from fees for aircraft operations than from terminal fees or passenger-based fees. Air Canada's takeover of Canadian Airlines International and the demise of Canadian Regional meant a reduction in carriers and flights as well as a consolidation to fewer hubs. Furthermore, the dominance of Air Canada resulted in some rent transfers from airports to the carrier as the carrier exerted their dominance.
Currently, Air Canada has 80 percent of the domestic market, and about the same share of the transborder market. It also dominates international travel (particularly through the Star Alliance). With this degree of market power, the company is in a position to extract concessions from the airports.14 This might be considered a normal consequence of business negotiation when one party has greater power but the greater power is plainly a result of government policy. Clearly a more liberal international aviation policy and eased entry restrictions on foreign carriers would reduce the risk exposure of Canadian airports and the dominance of Air Canada.
There might be an argument that an airport is better off with a dominant carrier since this carrier could increase rents due to its monopoly position and certainly could obtain some amount of hub premium. The airport might garner a larger share of this rent. However, rent is created only once and the ability of the airport to garner a larger share is limited since there are fewer substitute uses for airport assets. The airline, on the other hand, does have alternative choices, and this elasticity creates the opportunity to extract the greater proportion of the rent. In an environment in which the downstream firm has variable production technology, the airline can vary the number of flights and gauge of aircraft, the upstream input supplier has no or limited ability to extract much rent.
Airports can increase their relative market power in two ways. First, by having more carriers participating in their market, there is greater demand for the assets and second, by moving into non-aviation activities. In effect, both strategies create an opportunity cost for airport resources whereas in a single carrier environment, hold up is possible (and probable) since the airport has dedicated and specific assets which are, in effect, sunk.15 This can be changed by both management strategy (e.g. shifting to more non-carrier-based activities at the airport) and by Federal aviation policy liberalization.
This report contains five additional chapters. Chapter 2 provides a detailed description of the three tiers of airports in Canada with a focus on the top 25. Included is an account of the trends in passenger and freight traffic over the past three years and the revenue and expenses for these airports. We include in this chapter an examination of airport governance in the US, Australia and the UK and compare them with Canada. The chapter finishes with an assessment of the recent Auditor General's report is also provided.
In Chapter 3 we present a detailed examination of pricing and costing. The emphasis is on the sources of revenue and how they differ among airports and differences in the proportion of airside revues in total revenues. The detail on revenue and cost is limited to data access and availability. The relative performance of airports in Canada and between Canada and the US are described in Chapter 4. These include a range of revenue, cost, operations, productivity and financial indicators. The differing performance measures are used to assess the fiscal capacity and fiscal effort of airports. This plays a vital role in the recommendations we make concerning institutional and governance changes.
Chapter 5 provides a description of the underlying economics of slot allocation and other allocation methods with their strengths and weaknesses. We discuss the issue of market power at airports and how this might be curbed. The chapter finishes with a discussion of the recent changes under Bill C-26 and the applicability of the anti-trust laws to airports in Canada to airports and to airline-airport relations. A summary of the interviews and the anecdotes they generated are provided in Chapter 6. The chapter also describes our survey approach, the airports we contacted and the stories we heard. These anecdotes coupled with the data and underlying economics were important in formulating the recommendations listed in the Executive Summary.
Figure 1-1
2.0 AIRPORT GOVERNANCE IN CANADA, UK, AUSTRALIA AND US
The performance of the Canadian airport system has been affected by its history and restructuring under the current NAP. The system and airports within the system have also been affected by the changes in the aviation system as we have moved from deregulation in late 1980s, to Open Skies with the US to restructuring of the Canadian airline industry. All of these factors will influence the revenue, productivity and operational performance. These outcomes are examined in detail in Chapter 3 but in this chapter we examine three sets of issues. First, what has happened to the airports over time, how have the grown, where has this growth been concentrated and are there clear differences among airports based on size or some other discriminator? Second how well has the reorganization of the airport system under the NAP evolved? The Auditor General issued a report in October 2000 that provided a comprehensive assessment of the program and we summarize his main findings and comments. Finally, we examine the airport system in the UK, US and Australia to provide a comparison with the Canadian system. The UK and Australia have significantly restructured their airport systems while the US has done relatively little. Are there lessons we can learn and identify factors that make lead to differences in performance?
The NAP divided airports in Canada into essentially three categories; those in the NAS, the Regional or local airports and the remote and social airports. The evolution of this system has been through a devolution process begun in 1992 and continuing today. The top eight airports in Canada handle 86 percent of total scheduled passenger traffic, the remaining 18 in the NAS handle an additional 6 percent and the remaining airports handle the remaining scheduled traffic. This does not count charter, general aviation or cargo activity. The status of the airports regarding their position in the NAP is listed in Table 2-1.
Save for the NAS airports, the purpose of the federal government 's devolution process is to shift responsibility and control to the local level.16 In most cases these non-NAS airports can be sold off to municipalities for a nominal fee. This is effective privatization but without the benefit of access to private share capital and to information. In most cases when airports have been sold off they are operated under contact by specialty airport management firms. Despite being legally a part of a municipal government or a Department within the municipality, the airports are operated in a businesslike manner and provide revenue and development benefits to the city or region. However, they do not have to provide information in a form of annual report. It becomes very difficult to develop public policy with regard to the broader aviation system when information on infrastructure is not accessible. Under private ownership, an annual report, however sanitized, would (or should) be available.
Airports provide service in the form of aircraft operations, passengers enplaned and deplaned and cargo enplaned and deplaned. Both are measures of airport output or airport activity. They also serve different market segments divided by along two dimensions; geographic - domestic, transborder and international and market - scheduled and charter. With deregulation of the Canadian domestic aviation market and to a lesser degree the transborder market and a liberalization of the international market overall growth in both passengers carried and aircraft movements has been noticeable. But the restructuring to hub-and-spoke networks and the restructuring of the industry itself will result in a greater concentration of this growth at major and minor hubs.
2.3 Airport Activity in Canada
Airport activity has paralleled the growth in air travel as one might expect but it is not always a 1:1 correlation. After deregulation for several years much of the growth in passenger traffic was met with higher load factors rather than increased airport movements. For example, between 1971 and 1982, a period in which the average annual increase in the number of passengers was 5.2 per cent, all of the growth was accommodated by higher load factors (33%) and increased aircraft size (67%) with the number of departures remaining unchanged. Between 1982 and 1986, however, when the annual average growth rate rose to 8.8%, the increase in demand was met almost entirely (97%) by increasing the number of departures. There has also been growth in the average size of aircraft. However, the shift to the hub-and-spoke system does generate higher frequencies at hubs as airlines use feeder carriers with smaller turboprops to bring passengers to and from the hub; good examples are Toronto, San Francisco and Los Angeles.
In Figure 2-1 aggregate aircraft movements for Canada are illustrated for the past 40 years. These values include all levels of commercial service as well as GA and military. It is remarkable how much variability one observes over time. Recessions are clearly evident in the early 80s and 92 through 96. What is more notable is how a steady growth from 1964 to 1980 to a level of 7 million aircraft movements has diminished to a steady level of about 5 million movements. A comparison with passenger growth and passenger-km growth is provided in Figure 2-2. The growth in passengers and passenger-km yet the relative small variation in aircraft movements support the notion of growth in average aircraft size and a growth in average stage length. Airports will therefore be subjected to an increased variance in aircraft sizes. Large aircraft for longer haul routes and smaller commuters for feed at hubs will require airports to meet a variety of demands and have flexible resources to meet these demands. If resources become too specialized, costs increase and productivity declines.
The aggregate data does not adequately portray the impact across airports. In Figure 2-3 through Figure 2-8 different output measures, passengers, cargo and movements are illustrated for the largest 8 airports (that account for 86 percent of passenger traffic in Canada) and for a number of local and regional airports some of which are included in the NAS. What is clearly evident in every
AIRPORT TRANSFERS (Actual and Forecast)
CATEGORY OF AIRPORTS |
1994/95 |
1995/96 |
1996/97 |
1997/98 |
1998/99 |
1999/2000 |
2000/2001 |
2001/2002 |
NAS (19) (excludes: Vancouver, Edmonton, Calgary, Mirabel, Dorval, Whitehorse and Yellowknife) |
Ottawa Pearson Winnipeg |
Moncton Thunder Bay Victoria |
Charlottetown Kelowna London Saskatoon |
Halifax |
Gander |
Fredericton Prince George | ||
Québec | ||||||||
Sub-Total/Sous-total |
3 |
3 |
5 |
3 |
2 |
2 | ||
REGIONAL/LOCALS (70) (Excludes Pickering Lands) |
Brandon Campbell River Dawson Creek Dryden Gillam Kenora Prince Albert Rainbow Lake |
Abbotsford Alma Chatham Churchill Falls Comox Grande Prairie Hamilton Lethbridge Nanaimo Rouyn Williams Lake |
Earlton Gaspé Kamloops Kapuskasing La Rong Prince Rupert Quesnel Uranium City Yarmouth |
Deer Lake Goose Bay Smithers Terrace Windsor |
Powell River |
Bagotville |
Baie Comeau | |
Sub-Total |
13 |
20 |
14 |
8 |
4 |
1 |
11 |
SMALL (31) |
Trois-Rivières |
Emsdale Lytton Midway Princeton Swift Current Vanderhoof Yorkton |
Bonnechere Carp Gananoque Innisfail Muskoka |
Boundary Bay* Salmo Sherbrooke Springbank* |
St. Andrews* |
Red Deer |
Charlevoix | |
Sub-Total/Sous total |
1 |
7 |
9 |
5 |
1 |
3 |
0 |
5 |
ARCTIC (11) (Includes Whitehorse and Yellowknife, also NAS) |
Cambridge Bay Hay River Inuvik |
Watson Lake Whitehorse |
||||||
Sub-Total |
9 |
2 |
0 |
0 |
0 |
0 |
0 | |
TOTAL (131) |
1 |
29 |
34 |
22 |
14 |
10 |
3 |
18 |
Source: Transport Canada (2001) see Transport Canada website under 'National Airports Policy'
graph is the dominance of these eight airports by every measure of activity and output. However even among these airports there is a high variance. For domestic flights, Figure 2-3, Toronto, Vancouver and Calgary dominate reflecting their hub status.17 But there is a significant amount of traffic at the other 5 major airports as well. Victoria and Quebec City are the larger of the regional/local airports included but even they are only 50 percent of the smaller of the top eight.
The inequity among top airports becomes evident for transborder flights, Figure 2-4 and international flights, Figure 2-5. In both cases Toronto traffic is more than double the next largest airport but Toronto, Vancouver and Montreal clearly dominate with Calgary having some portion of traffic. What is also clear in each of the illustrations is the differential growth over time. Toronto, Vancouver and Calgary exhibit strong and steady growth for domestic flights but only Toronto and Vancouver display the same pattern for transborder and international flights.
Passengers enplaned and deplaned, Figure 2-7 and cargo activity, Figure 2-8 reinforces the patterns described above. In the case of cargo it appears only four airports have any real cargo presence, Toronto, Vancouver, Calgary and Montreal (Dorval), however, reported cargo data are biased downward since integrators (FedEx, UPS, Purolator) do not report their load data. Thus, airports such as Hamilton that has significant integrator activity will not appear in official statistics.
The level, pattern, distribution and growth of the levels of activity across airports will affect their costs, revenues and performance. Passenger and aircraft movements and airline activity are a result of a number of forces. Federal aviation policy will determine the rules of foreign entry and domestic service. Airline decisions on hubs, routes and levels of service will affect both airside and non-airside revenue as well as airport productivity. Airports themselves have lots of autonomy in developing retail plans and non-airside business strategies that can their economic growth and performance.18 Airport performance, efficiency and finance will be dependent on both what an airport does as well as the policies of the government. Government policy will affect airline strategy and certainly the abandonment of the duopoly policy in the late 1990s has put airports at risk.
The evolution of the airport business in Canada has been one in which airports were governed as a system to one in which there is greater local autonomy. But the way they have been devolved (under CAAs not LAAs) has left them as creatures of government, as public utilities rather than as businesses where there is accountability to shareholders. They have been placed in position seemingly at odds with current transportation policy, which emphasizes efficiency rather than treating transportation as a tool of government. Airports have a mandate to be commercial but not profitable, to promote the local/regional economy yet they have limited accountability and transparency.19 Perhaps the most vexing problem is the airports have a contract with Transport Canada which provides certain requirements, that sets out lease payments (which Transport Canada then forgives for certain airports for a certain length of time), that results in an incentive structure that is counter to the commercialization and entrepreneurship intent of the devolution process. To assess our degree of success in Canada it is useful to examine the evolution of the airport business in other jurisdictions such as the US, UK, Australia and New Zealand.
Figure 2-3
Figure 2-6
Top 8 Airports
Figure 2-8
2.4 Performance evaluations: The Auditor General of Canada
The Office of the Auditor General of Canada (hereafter referred to as the Auditor General) conducts independent audits and examinations that provide objective information, advice and assurance to Parliament. Its stated purpose is to promote accountability and best practices in government operations (www.oag-bvc.ca). The Auditor General has commented on airport issues on several occasions throughout its history.
Predictably, the scope and content of audits issued during the airport devolution process have been heavily influenced by the principles which have been set by Cabinet and/or articulated by legislation. These are instrumental in identifying the types of issues that should be of interest because a "principle" essentially states a policy goal. It thus engages the control function which, as readers may recall, essentially asks whether the goal is being achieved.
In 1987, eight guiding principles were established to guide the transfer process. These included items such as no increase in federal long-term funding requirements, an equitable package for transferred employees, and federal retention of all taxes, including the Air Transportation Tax. Cabinet approved thirty-six additional principles in 1989. These included items such as the initiation of the transfers on the basis of a long-term lease with consideration of other options, the valuation of each airport at "fair market value" with appropriate consideration of the airport's future earning potential, and the financing of operating and capital requirements by Local Airport Authorities without recourse to the Federal Government.
2.4.1 The 1990, 1992 and 1993 reports
As airport devolution proceeded, the Auditor General issued two reports of particular interest, in 1990 and 1992. In essence, both concluded that the Department of Transport had "failed to define its role in regard to airports", and that funding criteria and a formalized plan for asset rationalization were needed. Also, it was reported that a significant "gap" existed between capital expenditures that were required at airports and those that were being made. It was hoped that the new local airport authorities would provide a new way to address these capital requirements.
The next significant audit was issued in 1993. It focused on the financial aspects of the airport transfer process in relation to the principles which had been approved by Cabinet. While the report did not criticize the transfers, it did attract some media attention to revenue shortfalls and perceived financial losses to the Federal treasury. A major recommendation related to the need to develop appropriate capital funding mechanisms, and ensure that revenue forecasts be kept current during negotiations (since this information was critical to determining the appropriate amount of lease payments and local capital-generating ability). A second recommendation was that the Department review lease provisions and determine whether changes would be required to facilitate the development of airport lands.20 Finally, the report recommended that lease provisions be reviewed to see if the leases for future transfers could be simplified.
Interestingly, the 1993 report included a discussion which centered on the accountability of local airport authorities.21 The report appeared to convey a concern by the Auditor General that "under the terms of the lease, the Department does not hold the Authorities accountable for many aspects of airport operations. For example, there is no requirement for them to report information on the levels of service provided, rates for user fees, environmental matters or, as discussed earlier, capital expenditures" (p. 6).
Most recently, the Auditor-General released a report in October, 2000 which included a review of the airport transfer process between 1992 and 1999.22 The report's concerns about management practices revolve around four basic themes:
(i) Failure to determine a fair market value for airport assets prior to transfer.
The report noted that Transport Canada had not determined the fair market value of assets being transferred prior to entering lease negotiations. On the face of it, such a determination would seem to be essential in order to determine the appropriate amount for the lease payment itself; without it, it does not seem likely that management could make good decisions. In 1989, Transport Canada had engaged a financial advisor to determine the fair market value of the four airports to be transferred in the first round (Vancouver, Calgary, Edmonton and Montreal). However, these valuations became irrelevant because as one might guess, they were very sensitive to the terms of the transfer agreement - terms which were very much in "development stage" at the time of the valuation itself. While the Auditor General's report implied a degree of sympathy for these first-round cases, it was not persuaded with the same argument when it was presented for the second round of transfers (and concurrent renegotiations). By that time, it was reasoned, "the unique elements of the entity to be transferred. . . were sufficiently defined" (p. 10-24).
(ii) Failure to adhere to prescribed government policy.
The report noted that four of the airport leases had been "renegotiated", and further, that these renegotiated leases had come at great cost to the Federal Government (some $474 million in foregone rent). It concluded that these leases no longer conformed to stated policy goals, notably the need to handle airport transfers in a consistent, fair and equitable manner.
(iii) Inadequate data and reporting.
Besides emphasizing the loss of revenue to the Crown, the report also noted that information presented by Transport Canada to Parliament on the amount of foregone rent (and also the funding of capital projects) was "fragmented, incomplete, and in some years, non-existent" (p. 10-5). Concerns were also expressed about the quality and quantity of information provided to Cabinet and Treasury Board on emerging policy issues.
(iv) Failure of Transport Canada to adequately define its role.
As in 1990 and 1992, the report found that "Transport Canada has yet to clearly define its role as landlord and overseer of the National Airports system". In particular, it criticized Transport's failure to develop adequate policies for issues such as airport improvement fees, subsidiaries, and sole-source contracting. More generally, the report pointed to what the Auditor General perceived as an insufficient degree of formalization in Transport Canada: that is, the degree to which policies and procedures are made explicit (and normally, in writing):
We wanted to track. . . how Transport Canada had applied the 1987, 1989 and 1994 transfer principles. . . . But we were unable to do so. . . . We expected that Transport Canada would have a mechanism - a "codified framework" - to provide such a documented record . . . . We are concerned that the Department does not have such a framework of fundamental information that it ought to have (page 10-14).
The discussion of the authors suggests that in their view, this insufficient degree of formalization (and record keeping) contributed to the risk of suboptimal results, and frustrated the control function.
2.4.3 Recommendations of the 2000 report
The auditors recommended that a formalized transfer application framework (complete with exceptions and refinements) be developed and used in future negotiations. Transport Canada accepted this recommendation. Additionally, the auditors recommended that a five-year review be completed and reported. Transport Canada responded that the review had been completed in May, 2000 (p. 10-16), additional review efforts were underway at the time that the present study was being conducted.23
To deal with the "valuation" issue, the auditors recommended that a formal valuation be obtained from a qualified independent professional so that this information can be used to arrive at a "fair" rental charge. This recommendation was essentially rejected by Transport Canada because it claimed that it had already determined market value using its own methodology, and further, that it had "exercised due diligence and followed sound management practices throughout the transfer process" (p. 10-37).
The report made several recommendations to deal with information and documentation concerns. It recommended that information on "fair market value" be gathered in order to determine the appropriateness of rents and conduct "benchmarking" efforts, and that a minimum amount be established "for assessing whether authorities' offers will leave the government no worse off" (p. 10-29). More vigorous, methodical record keeping practices were strongly endorsed. These recommendations were resisted by Transport Canada. As noted earlier, it claimed that it had exercised due diligence and followed sound management practices, including establishing floor positions prior to negotiating transfers. Although it was unable to demonstrate it to the Auditor General's satisfaction, Transport Canada vigorously defended its adherence to the principles that had been established by the government (p. 10-37), notably the notion that airport should be treated in a fair and equitable fashion and that public accountability should be enshrined (Ibid.).
Other recommendations in the report addressed perceived shortfalls in Transport Canada's performance. These addressed matters such as the need to monitor subsidiary companies of local airport authorities, review contracting matters in transfer agreements, and ensure that the Transport Canada's own staff continue to develop their skills in lease management. We found that one of the last recommendations struck a sympathetic tone given the concerns we express elsewhere in our report:
(Transport Canada) should collect the necessary quantitative and qualitative data to perform timely analyses. To the extent that it relies on airport authorities or other sources for underlying data, the Department should clearly specify the type and format of the data it requires from them and should establish procedures to verify that the data are reliable (p. 10-43, 44) .
2.4.4 Response to the 2000 report
Although the report's commentary on the airport devolution experiment was seemingly scathing, it was eclipsed in the public eye by its concurrent findings at Human Resources Development Canada, and, more importantly, the Federal election that was called not long after the report was released.24
We noted that a few airport authorities commented on the report's contents and recommendations. For example, a newspaper article reported that the President of Calgary Airport Authority was incensed by the suggestion in the report that his airport had received a "break" from the Federal government. "The government is earning far more in rent from a privately-run airport than it ever collected when it operated the airport itself," he said. At Winnipeg, management issued a 20-page response entitled Returning to the Goals of the National Airports Policy and observed:
. . . the Auditor General's recommendation pertaining to TC's role as landlord (should) be carefully reconsidered. An increased management role for TC is not required. . . implementing proper monitoring processes should not be confused with an increased presence of TC at the airports. If TC takes steps that effectively result in its greater involvement in the management and operation of the airports, it will effectively usurp the WAA. . . (page 20)25
One industry observer criticized the Auditor General's complaint about the lack of market-value assessments and the fact that privatization may have represented a loss to the taxpayer. Warren Everson, Vice-President of Policy for the Air Transport Association of Canada argued, "It would have been more appropriate for the auditor to say that since we didn't know what they were worth, the rent they did arrange may have been outrageously high".26
The overwhelming (and difficult) global theme that emerges from all of the Auditor-General reports is that of accountability. Accountability can be defined as "the obligation of giving (or of being prepared, if called upon to give) an account of our actions. The account should explain the reasonableness, appropriateness, correctness, legality of morality of the action".27
The accountability process takes place within a principal-agent relationship. That is, the principal determines the requirements, policies, or goals - and the agent takes the appropriate steps to meet these and report the results. In the present case, the Minister of Transport is accountable to Cabinet for his/her actions. In the same vein, the public service management within Transport Canada is accountable according to the discipline imposed on it by the Minister. Ministry staff are obligated to account to ministry management based on management's requirements, and so on. 28 A key factor in evaluating accountability "performance" is thus the discipline that the principal has imposed on the agent. This discipline may be determined structurally; at the minimum, it must important principles or standards of good practice in many areas, such as fiscal management and financial reporting.
In the case of the devolved airports, the accountability discipline for any given airport was influenced whether the airport was a "local airport authority" (LAA) or a "Canadian airport authority" (CAA).29 For LAAs, a primary instrument used to impose accountability discipline appears to be the ground lease. By rights granted by that document, Transport Canada had the right to audit the LAAs' financial and other business records and procedures to ensure its compliance with the ground lease, as well as the LAAs' (and other tenants') compliance with other applicable laws. Additionally, LAAs were required to submit to performance reviews every five years. The results of these reviews would be provided to Transport Canada and other nominating entities.
For CAAs, the accountability requirements imposed by the ground lease were somewhat more stringent. Here, the lease gave Transport Canada the right to audit practices and procedures as they relate to the lease, demised premises and the authority's business affairs. Transport Canada had the right to access any information or document in order to evaluate compliance with the lease and applicable laws. CAAs were also to be subject to independent five-year reviews of their management, operation and financial performance.30 Findings were to be made available to Transport Canada, nominating entities and the public (on request).31
The 2000 Auditor General report voiced concern that some of the renegotiated deals excluded key aspects of the "Public Accountability Principles", such as equitable access by all carriers, reasonable user charges, activities consistent with the airport authority purpose, the general practice of tendering contracts and declarations of business activities to avoid real or perceived conflicts of interest (Page 10-32). Transport Canada responded to this concern by noting the need to recognize other mechanisms besides the lease that met the "essence" of the Public Accountability Principles.
The findings of the Auditor General's report and our research would appear to converge in two ways. First, the airport devolution experience demonstrates that accountability disciplines work best when they are planned before the fact. It seems apparent that a key reason why shortcomings emerged was failure to specify the goals, determine how to measure goal achievement and monitor performance at a reasonable cost - all this before moving ahead to implementation.
What is also clear is that accountability disciplines influence the initiative and motivation of decision-makers - both principals and agents. This was the crux of the difficulty: the need to arrive at a balance between the goal of accountability and the goal of encouraging the kind of initiative, management efficiencies, and community responsiveness that it was hoped the new airport authorities would achieve.
Performance evaluation is a difficult exercise in the public sector at the best of times. The Auditor General reports highlight several important issues. Many of the recommendations imply a greater degree of formalization - with the intent of enhancing accountability and performance. Indeed, one area in which the findings converge with the present research lies in the need for better-quality data. That said, our recommendations (contained elsewhere in this report) are at some variance with those of the Auditor General because they imply a move toward an accountability relationship that is predominantly with the marketplace and the community.
Airport ownership and governance methods have changed in many countries. In general, there has been a tendency to refine these in recent years to provide a greater role for the private sector and market-oriented decision making. A recent study by the U.S. General Accounting office identified privatization efforts under way in 47 countries around the world. These varied from selling minority shares in individual airports (or inviting developers to construct runways or terminals) to leasing or selling out the country's major airports.32 We review here the essential organizational parameters and recent experience of three countries: the United Kingdom (UK), Australia and the United States.
Prior to 1987, British airports were publicly-owned facilities operated by the British Airports Authority. In that year, the United Kingdom sold its national airports and opted for full privatization; that is, pure private-sector airport profit and operation for the three major London airports (Heathrow, Gatwick and Stansted) and four other airports in the country. In the United Kingdom (as in other countries), a general rationale underlying the sale was the rapidly growing demand for air travel, which was outstripping the supply of infrastructure. It was well-known that adding infrastructure would be costly.33
According to Doganis, the BAA is an excellent example of the potential benefits and risks of privatization:
Easier access to investment funds is clearly a major potential benefit. Prior to 1987, the BAA's capital expenditure was controlled by government fiscal policy and was constrained by limits on public-sector borrowing. . . . As a state-owned authority, the old BAA was limited to operating airports. . . Apart from greater freedom of action, a further advantage of privatization. . . is improved efficiency. . ..
Privatization also entails some risks. Most large airports enjoy a substantial degree of monopoly, which may well increase as traffic growth outstrips the provision of new facilities. Given this, many government will be loath fully to (sic) privatize airports without maintaining powers to prevent abuse of dominant positions. Such abuse may occur in a variety of ways. Airport managers may reduce space for passenger and cargo shippers in order to maximize revenues from a variety of commercial activities. . . . Airports might also enter into cozy monopolistic arrangements with particular suppliers of services such as passenger or baggage handling, duty-free shops, freight handling or car hire by granting only one concession so that the concessionaires can extract monopoly profits from airport users.34
The statutory authority for the transfer was the 1986 Airports Act. It imposed tight controls on BAA plc and the other new airport companies. Airport companies were required to produce much more detailed accounts than was normally required: revenues and expenditures must be presented in some detail.35 The government also has a "golden share" which enables it to veto new airport investment or divestiture.
The Civil Aviation Authority (CAA) now has powers for the economic regulation of airports in the UK. An airport with an annual turnover of at least £1 million requires a "permission to levy airport charges " from the CAA. The exceptions are airports managed by the Secretary of State or owned or managed by the CAA. The CAA can investigate the conduct of such airports and if it finds that the airport operator is unreasonably discriminating between users, unfairly exploiting its bargaining position or engaging in predatory pricing it can impose conditions to remedy the situation. Four airports (Heathrow, Gatwick, Manchester and Stansted) are subject to detailed price control: the CAA sets a RPI-x price cap36 to limit the amount that can be levied by way of airport charges for a five year period. Airport charges include runway charges, charges per passenger for the use of a terminal and aircraft parking charges. The utility of the price cap mechanism is described by Parker:
The price cap thus covers about 35% of BAA's total revenues. Commercial activities including duty-free sales and airport facilities are not governed by the cap; but when setting X (the efficiency gain), account is taken of all revenues under what is called the "single-till principle". This principle derives from international agreements that establish the rule of a reasonable rate of return on airport investment, irrespective of the precise source of the revenues. By linking X explicitly to the rate of return, a cursory appraisal might suggest that the price cap is a form of profit regulation with associated efficiency disincentives. In the case of the UK airports, however, X is set ex ante, therefore efficiency incentives remain for the airport management to exceed the expected profit.37
The CAA also has the ability to refer the airports to the Competition Commission, which recommends a price cap and decides whether they have been acting against the public interest over the previous five years. The CAA has to impose conditions if the Commission finds that an airport has been acting against the public interest but it takes the final decision on the price cap.38
Recently, BAA plc has vigorously pursued profitability goals. This effort has attracted opposition from groups such as taxi drivers, airlines and motorists. Occasionally the cry has been shrill enough to attract attention from other government agencies such as the Monopoly and Mergers Commission and the Office of Fair Trading. In summing up the experience, Doganis points out that it highlights a challenge facing any airport management: "how to pursue a profit objective more vigorously without worsening its relationships with customers, passengers or freight shippers" (p. 31). Tretheway (2000, unpublished) has pointed out that although airlines benefit from this single-till system, it is difficult to administer and may induce undesirable behaviour from the airport operator when congestion occurs.
The CAA also exercises the power of operational and safety regulation over airports in the United Kingdom. A recent consultation paper indicates that a host of regulatory changes are currently being contemplated. These include areas such as slot management, improving capacity, and determining the optimal balance between competition and cooperation at the nation's airports.39
Prior to the 1980s, all of Australia's major airports were owned and operated by the Commonwealth government. That agency also bore more of the financial responsibility for smaller "aerodromes" providing regular air passenger services, although it had been attempting to devolve these to local authorities for some time. The main policy objective was to improve cost recovery from users, and the need for this became more pressing by the mid-1980s. As a consequence, the local ownership programme was accelerated and the major airports were placed under the control of the Federal Airports Corporation (FAC), a Government business enterprise.40 Policy thinking in Australia then shifted in favour of privatization, and the FAC was disbanded. During 1997 and 1998, seventeen airports were sold to the private sector; the remaining five were set up as wholly-owned Government enterprises pending sale.
With one exception, the distinguishing feature of the five "hold back" airports was their location in the Sydney area. Governments elected to defer privatization for Sydney-area airports because of the particular environmental, planning and regulatory problems associated with airports in this region.41 In July 1998, two wholly Australian-Government owned companies were formed in order to acquire leases over the four Sydney basin airports, as well as Essendon airport. All of these leased airports are regulated under the Airports Act 1996. Twelve of the airports are also subject to price regulation under the Prices Surveillance Act 1983.
Like the United Kingdom, Australia uses full private sector (for profit) operation of its major national airports. However, in Australia, airports are leased long-term (50 years with an option to renew for another 49) to the private-sector operators by the Commonwealth Government.42 A competitive tendering process was used to initiate the leases: this distinguishes the Australian "leasing" arrangement from its Canadian counterpart. It should also be noted that when the United Kingdom privatized its airports, it sold them as one integrated operation.43 In Australia, the Commonwealth government decided to sell the airports separately.44
As Hooper and his colleagues point out, airports in Australia have a significant degree of monopoly power. Previously, airport charges were subject to surveillance and monitoring; nowadays, price caps are applied. Except for Sydney Airport, the price regulation of the airports comprises a CPI-X price cap on declared aeronautical services, price monitoring of aeronautical-related services and special provisions for necessary new investment at airports.45,46 These arrangements are administered by the Australian Competition and Consumer Commission.
The Australian approach to price regulation is called dual-till in that aeronautical areas of airport operation are not subsidized by non-aeronautical sources.47 As one might expect, airlines generally do not favour the dual-till approach because it generally results in higher charges for them. The Australian Prices Surveillance Authority, however, has expressed support for it so long as airport operators are required to "focus charges on specific services as far as is possible, and that these charges should at least recover incremental costs".48
Airports in Australia are subject to environmental and operational regulation by the Airports Division of the Australian Department of Transport and Regional Services. The Division seeks to support the Minister in ensuring that Australia's major airport infrastructure is developed and operated in a way which is cost effective, which recognizes the needs of users, and which minimizes the adverse environmental impacts of airport operations on neighbouring communities.
A final comment is that interestingly, the airport valuation question that attracted the concern of Canada's Auditor General was also present in the Australian situation:
. . . (t)he Government made an allowance of US $1.4 billion (1998/99 values) in its budget estimates for the sale of the FAC but its advisers, ANZ McCaughan and Salomon Brothers, proposed a higher net value in 1994 of US $ 1.8 billion (1998/99 values). In proceeding with the sale, it was clear that an important objective was the maximization of the proceeds from the sale, but the Government announced that it had set a number of sales and ongoing objectives to be met by the winning bidder. Apart from net proceeds on a risk-adjusted basis to the Commonwealth, financial strength, airport development plans and commitment to the effective development of airport services, environmental credentials and equitable treatment of FAC employees were to be included in the selection criteria (Hooper et al., 2000: 189).
In the United States, governance is generally a local or regional entity. Four states have set up their own airport authorities (Alaska, Connecticut, Hawaii and Pennsylvania), but most large airports are operated by local and county governments. For example, municipal departments of aviation run Baltimore, Chicago and Houston. Some communities set up "port authorities" to manage infrastructure for a variety of modes (such as the Port of Seattle, WA, MASSPORT in Massachusetts and the Port Authority of New York and New Jersey); others have airport commissions, such as Los Angeles or New Orleans. At Atlanta, the city council operates the airport directly with the help of an advisory Board.49 A unique feature that is found occasionally is the private ownership of terminals within an otherwise publicly owned and operated airport. This is usually done by airlines at major terminals such as New York's John F. Kennedy International Airport and O'Hare in Chicago.
The private sector plays a significant role in operating and financing U.S. commercial airports, forming a close association with the airports' public owners. Beginning in about 1980, airport authorities became a more common form of airport management in the United States, as for example in Indianapolis, IN, Cincinnati, OH and Tampa, FL. What has been particularly interesting at many of these facilities has been the increasing use of contract management to involve the private sector in airport management and operations:
A private firm will typically be unencumbered by the government's personnel and procurement practices. It can make staffing decisions that might be more difficult for government to make. It can also take advantage of economies of scale, spreading such overhead costs as personnel and purchasing over a number of airports rather than a single one, and buying supplies in bulk for its entire system of airports.50
In 1996, six U.S. commercial airline-service airports were managed under contract by private firms, including three of the top 100 U.S. airports. The most dramatic example of contract management has been the 1995 selection of BAA USA to manage the Indianapolis airport system (consisting of the Indianapolis airport and four general aviation airports). The ten-year contract provides incentives for cost savings that are expected to reduce the airlines' cost per enplaned passenger from the pre-contract $7.78 to $5.19 by the end of the tenth year. This will be done through a combination of increased commercial revenues and operating cost savings.51
While airport governance is largely a local or regional entity in the United States, the same is not true for airport capital funding. While local authorities can (and do) finance capital improvements with long term (and often tax-exempt) bond issues, the Federal government is also a significant source of capital funds. The Program Implementation Branch of the Federal Aviation Administration (FAA) is responsible for the preparation and implementation of the National Airports Capital Improvement Plan (ACIP). The ACIP serves as a planning tool for identifying critical development and associated capital needs for the U.S. National Airport System (NAS). The ACIP also serves as the basis for the distribution of grant funds under the Airport Improvement Program (AIP), which is also a program administered by this office. By identifying and investing in airport development and capital needs, the FAA can ensure the American public that the NAS is a safe, secure and efficient environment for air travel nationwide. During the 2000 fiscal year, 1,150 capital grants were awarded to airports scattered throughout the United States. The total value of these grants was about $1.8 billion (USD)52
Under the Aviation Investment and Reform Act for the Twenty-First Century, aviation spending by the U.S. federal government will increase from US $10 billion in 1999 to US $20 billion per year by 2005. Predictably, the FAA has engaged in some efforts aimed at airport privatization in recent years, beginning with an "Airport Privatization Pilot Program" in 1996. However, the number of airports interested in privatization has been small because the current funding process (through tax-exempt bonds and federal grants) has worked well; moreover, airline tenants are wary of privatization and have contractual rights enabling them to prevent the sale of airports.53 Also, despite the existence of the pilot project, the FAA has expressed concern about selling or leasing an entire airport to the private sector because that could violate obligations undertaken by the municipal owner as a condition of its federal grants.54
3.0 AIRPORT PRICING AND COSTING
Traditionally airports have raised revenue through rates and charges for aircraft operations - landing fees and terminal fees for gates, loading bridges and terminal use. Fees for aircraft parking and other airside services might also be included. Non-airside revenue formed a smaller proportion of total revenue and was garnered from concessions and rentals, car-parking fees, access charges, leases for hangers and land development. This division reflected, in part, the view that airports were public utilities or infrastructure put in place to serve the carriers.
Rates and charges were to be cost based. Under ICAO guidelines airports were to base their rates and charges on the cost of providing each of the services.55 Airlines took (and continue) the view that airports were cost centers and that services were to be provided with the minimum cost and at a minimum level possible to satisfy airline needs. Broadly, airport charges fall into two categories. Aeronautical charges are levied for the use of an airport's runway, apron and terminal facilities. Ground handling charges cover the servicing of an aircraft and its payload. Within these categories, a multitude of services and facilities are charged for. The basis of the charge is generally weight of aircraft, passengers carried or square feet of terminal used. Under this approach airports had no incentive to develop their non-aeronautical revenues since as non-profit organizations they could not keep net revenues and any attempt to use extra revenues for investment were carefully scrutinized by the airlines. This approach also meant airlines took much of the risk of revenue shortfalls and captured most of the rents.56
The modern view of airports is that they represent a business. Like other sectors of the economy airports can exploit market opportunities to provide services to customers and in turn charge for the value added. Non-airside revenues from terminal concessions, parking and land rentals and development provide these types of opportunities. These can be treated as ancillary to the principle purpose of moving aircraft and passengers, or as complementary services that can be strategically partnered with airside activities. One significant benefit to this view of airports is they absorb the risk of balancing revenues and costs and have incentives to develop facilities and services on a value adding basis rather than providing the minimum possible.
Revenues from rates and charges are primarily obtained from aircraft landing fees, terminal fees and aircraft parking and handling fees. Some airports charge separately for services such as police and security and US Customs pre-clearance. In general, many argue airports are `natural monopolies' and because carriers need their services, the fees for landing and terminal services should be controlled. This is an issue discussed at length in Chapter 4. In any case, we disagree that airports have `overall' market power. Even in situations where they do have market power, they have little incentive to abuse it, a theme we will elaborate on later in this chapter.
Four general observations regarding airside fees can be made. First, in situations where airport costs and markets are similar, we should observe similar fees. Where differences are found, these reflect differences in market power. Second, airports may exploit differences airports may exploit differences in market power by setting fees for different aircraft to reflect the market position of the carrier.57 This can have consequences for the overall competitiveness of carriers. Third, airside fees are complementary with non-airside revenues. Airports which combine the landing of aircraft with retailing (and has spare airside capacity), will have, without the intervention of a regulator, an incentive to reduce charges to airlines and to expand output. The special factor in this favourable situation is the union of strong demand complementarities (the demand for the use of the runway and the demand for retailing and property facilities) with location rents (from retailing and property). Therefore, lower airside fees may reflect these strong demand complementarities.
Differences in airside rates and charges reflect a number of influences and provide a measure of an airport's fiscal capacity. We define fiscal capacity as the revenue generation potential of an airport. This is a function of traffic levels, number of carriers serving the airport, mix of passengers between domestic and international and business and leisure, whether the airport is a hub and the amount of cargo activity and ancillary development on the airport., among other things58 One could estimate fiscal capacity using information from a number of airports and relate operational, capital and market features to revenue generation potential. We define fiscal effort as an indicator of the extent to which an airport exploits its fiscal capacity. Thus, low revenues at an airport may be a result of either low fiscal capacity or lack of fiscal effort. We would also expect these measures to play some role in the designation of an airport as a member of the NAS and a regional or local airport. One expects an airport in the NAS would have sufficient fiscal capacity to attract investment capital.
There are three questions in airside pricing that are of interest. First, how do rates, landing fees and terminal fees, differ between domestic and international traffic? Second, what is the basis for the charge and how will this differ by aircraft type? Third, what is the composition of the charges; do landing fees dominate terminal fees? All three of these questions raise issues that affect the fiscal capacity of an airport. For example, an airport - which is a gateway - will have a greater proportion of larger aircraft (wide body) and those aircraft are likely to have higher load factors. It will have a higher level of revenue if fees are passenger-based than purely weight based. Therefore, revenue generation depends on the rate base and the level of rates. If an airport relies purely on aircraft to generate revenues they could be at risk when an airline abandons a particular airport, when an airline reduces frequency or changes gauge. Charges will also reflect the nature of the traffic the airport has. Rates and charges (including AIFs) are added to ticket prices and the lower the proportion of the charge in the ticket price the more ability to raise prices the airport has. For example, an airport that has a greater proportion of long haul or business traffic might expect to [be bale to] have higher charges than an airport that services short haul domestic traffic.
Figure 3-1 illustrates the total fees (domestic only) paid by different aircraft types and by airport. The total fees are, in effect, the cost of landing an aircraft at the airport, unloading passengers and paying any added airport fees such as security and safety charges. The table is designed to illustrate several points. First, we expect the largest airports to have higher average changes than smaller airports. This is evident from the imbedded chart in the lower right corner, which shows the average fee across the two different sets of airports by a selective type of aircraft. Note the larger airports do charge higher fees but the fee differential decreases as the aircraft size decreases. Second, as expected larger aircraft have higher total fees but the fee per passenger tends to be quite similar up to the size of an A320. Once larger aircraft are considered not only do total fees rise but per passenger amounts do as well. For example, the B767 with 225 seats has per passenger fees that are 16 percent higher (on average) than the 175 seat A 320. This is not unsurprising since larger aircraft fly longer distances and the total flight costs would be higher. Airport charges would be a smaller proportion of total flight costs. This allows the airports to exploit this component of inelasticity.
The per-passenger comparisons are contained in Table 3-1 and Table 3-2 for domestic and transborder services respectively. A third feature that is evident is regional and local airports have rate structures that work against large aircraft. Charlottetown, for example, has charges comparable to Toronto for larger aircraft. Fourth, airports that have been sold off to municipalities or are not part of the NAS in many cases have higher rates and charges that are equal to or higher many of the NAS airports. But even in the case, in which the top eight airports are separated from a subset of other NAS, and Regional/Local airports, for every aircraft type we find that both landing fees and terminal fees are higher for the smaller airports than for the top eight airports. Airports that charge high landing fees also charge high terminal fees, with terminal fees for larger aircraft being proportionately larger than those for landing fees. These airports, with the exception of Toronto, are small passenger market airports.59 They have smaller aircraft but relatively higher frequency. It would seem they have selected flights as the basis upon which to generate revenue. While the short-term rationale seems sound it does expose the airport to significant risk as the aviation industry adjusts to market forces and macroeconomic activity levels. A passenger based fee would seem to provide as much revenue and at much less risk.60
The comparison for domestic services is illustrated in Figure 3-2 and Figure 3-3. However, we have also seen that total charges for turning around the selected aircraft types are higher at larger than smaller airports. The explanation is provided in Figure 3-6 where 'other' charges are illustrated.61 The approach used by the smaller airport s is to bundle the charges for services. Bundling is an effective method of raising revenues when there are large differences in demand sensitivity across services. If they were to charge separately they would yield lower total revenue.
The breakdown in terms of landing fees, terminal fees and other fees, for domestic and international flights, are shown in Figure 3-1 through Figure 3-5. What we see is variability by aircraft type but more importantly the focus of different airports on flights versus passengers; using landing fees rather than terminal fees for the bulk of airside revenue. One would expect small airports with relatively fewer passengers would focus on aircraft based fees since the fee is payable regardless of the number of passengers. On the other hand this strategy increases the risk to the airport since if one airline stops serving the airport or the carriers reduce the number of flights (but increase load factors on remaining flights) the airport will suffer a potential sizable reduction in revenue. The second dimension to all of this is the proportion of airside revenue in total revenue. If there are large numbers of passengers, it may pay airports to underprice on the airside in order to raise revenues on the non-airside through concessions and rentals and the like. It appears the larger airports that have or have the potential for developing their non-airside revenue sources recognize the complementarity between aircraft movements and concession revenue. The distinction between the two types of airports is evident in Figure 3-8. The differences are very important in another sense and that is risk absorption and rent capture. With revenue dependent on aircraft activity the airline absorbs the risk and receives a larger portion of any rent arising from market power but if revenues are based on passenger activity, the risk is with the airport and the rent will be shared between carriers and the airport. The larger the fee the greater the share going to the airport.
3.4 Airport Improvement Fees and Passenger Facility Charges
A large number of airport s in Canada have introduced airport improvement fees (AIF) or passenger facility charges (PFC). These fees are very much a creature of the way in which the government devolved the airports in the LAA and under the NAP. The airports are not-for-profit entities, they are required to make lease payments to the federal government on a basis negotiated at the time of devolution and they cannot issue equity. In most cases it is not possible to finance the capacity investment with debt. Therefore, in order to undertake the needed investments, to refurbish airport facilities and to expand to meet the needed increases in capacity, airports must collect funds from their users prior to or in conjunction with the use. Under ICAO convention, airlines will not provide the financing and therefore airports levied AIFs or PFC on the passengers.62
The AIF is a fixed tax. It is levied on top of the ticket price. If the tax is collected by the airlines as part of their ticket sale, the airport determines how the funds will be invested but if the airline collects the AIF on behalf of the airport, the carriers have a say in how the funds are spent on capital projects.63 When an airport levies an AIF charge it will affect the fare the airline can charge to some degree. It is a tax and the incidence of the tax between passengers and carriers will be determined by the relative values of supply and demand elasticities. If demand is highly elastic, such as with discount tickets, the incidence of the tax will fall more on the carrier while with long haul and full fare tickets, the incidence will fall more heavily on the passenger. Therefore, an airport's ability to charge an AIF and the level of the AIF will be influenced by the mix of traffic at the airport.
In the case of a hub airport there are additional factors to consider. For example, Pearson airport recently agreed to an AIF of $10 per departing passenger and $7.50 for a transferring passenger. Most airports generally ignore the transfer fee but with a hub it represents a significant amount of forgone revenue. But it is a two way street, as the transfer fee may produce incentives for carriers to start new service. For example, a party of two traveling from London to Ottawa through Pearson will now pay an additional $30 on the round trip. This may provide an incentive for a carrier to start service and overfly the Toronto hub. The transfer fee also affects the extent to which London, or any other non-hub airport, can raise their AIF since it a problem of 'double-markup'.64 The hub airport takes a portion of the revenue that would (or could) have gone to the non-hub airport because it limits the degrees of freedom of an airport like London to raise its AIF. As the hub airport raises its fees it captures more of the rent available from the non-hub airport.65 This clearly places the Regional/local airports at a disadvantage in terms of financing facilities through an AIF. These airports provide traffic feed and improve the efficiency of the hub airport yet the hub airport captures the rent. If this rent is not shared, the non-hub airport may have too little traffic or too little investment in capacity. Access to an alternative capital market may improve social efficiency.
The current list is below66:
What is clear from these tables and the composition of charges is the significant difference in fiscal capacity between the top eight airports in Canada, which handle 86 percent of the traffic versus the remaining airports. The other 16 airports included in the current NAS along with the other top eight, account for only 6 percent of the traffic.
Figure 3-7 shows the total airside charges for the Airbus 320 and Boeing 737-600 series aircraft and the RJ. These represent the dominant aircraft used in domestic markets (served by jet). Air Canada uses the A320 while Westjet, Canjet and other low cost carriers favour the B737.67 The A320 is somewhat larger than the 737 and we would therefore expect the total charges would be somewhat higher to reflect this size difference. One would also expect that higher fees would, given other factors, discourage jet aircraft use and cause the airline to move to larger aircraft, and reduce frequency, or to move to turboprop (or perhaps RJ-50) aircraft in small markets. The figure also shows some regularity among the airports with the A320 being larger than the B7373, but there are some significant anomalies as well. First, Charlottetown has fees, which are comparable to Toronto, yet these are such different markets, they would not be sustainable in Charlottetown. The shift from jet to turboprop is not unsurprising for this market. In 1998, for example, 80 percent of the air services to this market were regional/local. A second feature that is evident is the relative differences among airports in total fees for the three aircraft. The RJ varies less than the other two aircraft. From Charlottetown to Ottawa, the fees are double those of the remaining airports included in the analysis. The average differences between the two groups of airports are also indicated in Figure 3-7. As with AIFs, the regional/local airports have a lower average fee for each aircraft type and again illustrate a difference in fiscal capacity (or effort) between the two groups of airports. One interesting difference to observe among the regional/local airports is the airports that are operated by specialized management firms for cities or municipalities are higher than for other airports (e.g. Windsor, North Bay, Hamilton, and Sault Ste. Marie)
It is instructive to examine the relative differences in fees among the top eight airports in Canada. Toronto, which handles 50 percent of passengers in Canada but only 10 percent of the flights, has a substantially higher fee structure than Vancouver, about double for an A320, Canada's second busiest airport. The fees are more than three times that charged in Calgary and Halifax. The relative differences reflect market diversity and the ability to raise revenue. It also reflects a strategic decision by the airport to exploit the complementarities between concession revenue and aircraft traffic.
3.5 Costs and Airport Market Structure
The pricing of airport services will be influenced by the underlying cost and market structure. If there are high fixed costs the airport, required to break-even, will have an incentive to price at unit cost. If marginal costs are low, the competitive firm has an incentive to lower its prices but total revenues may not cover total costs. This can lead to firm (or capacity) exit with a result that firms will have sufficient market power that they can differential price so total revenues at least cover total costs.68 Note this case is one in which there is imperfect competition for revenue streams among airports. If the market structure is monopolistic, they can exploit this market power to the extent they are not-for-profit.69 As revenues rise airports can increase expenditures and in the limit these expenditures will increase by the amount of the rent available. Thus, any assessment of airport pricing and financing and the setting of rates and charges requires that we understand both the underlying cost structure and the market structure.
Economies of scale provide an argument for having a single large airport serving a large number of markets. However, there can also be advantages conferred by size for the demand side. This distinction is important since even if there are few cost advantages to size there may be significant demand side advantages.70 Furthermore, this distinction between the source of size in market structure gives rise to a different rationale for whether and how airports might be regulated. If cost economies are the basis for one airport per region, there may be a rationale for regulation since higher rates and charges lead to social inefficiency as price exceeds marginal cost. There may also not be demand side advantages to not abusing any monopoly power the airport might have. However, if the basis for having larger airports is due to demand side pressures, there is less rationale for regulations for three reasons. First, demand side pressure means there is higher value associated with larger airports, thus higher rates and charges reflect higher value. Second, demand side complementarities may lead to airports not exploiting their market power. Third, there may be a natural limit on size due to rising costs.
The majority of the airport economic and regulatory literature takes the position that airports are monopolies. In some cases they are termed natural monopolies. We argue that airport revenues are subject to a competitive environment for a significant portion of total revenues, that even where they do have some market power they have little incentive to abuse it and that they do not have the cost characteristics of natural monopolies.
3.5.1 Costs and Natural Monopoly
Natural monopolies have traditionally been defined as a market that is best served by one firm because of the size of the market and the cost characteristics of the production technology. The cost structure is such that economies of scale lead to continuously falling average and marginal cost over a wide size distribution of firms (or plants). The source of cost economies is generally highly capital (or land) intensive with a very low marginal cost of serving an additional customer. The modern economics literature requires both economies of scale and economies of scope to yield a natural monopoly.71
Figure 3-9 illustrates the average cost per aircraft operation over a range of operations. Two types of operations are shown; commercial and all operations.72 It is clear that the data exhibit to advantages to size in terms of aircraft operations and hence capacity for landings and takeoffs. Estimation of the cost function leads to a conclusion of relatively constant returns to scale. There is consistent with the evidence of Morrison and Gillen who have estimated airport cost functions and could not reject constant returns.73 This indicates that large capacity airports cannot provide lower cost operations than smaller airports. We point out this conclusion is not inconsistent with low marginal costs. Falling average or marginal costs can arise from a number of sources including capacity utilization, learning curve effects, productivity improvements and technological change.74 For airports low marginal cost per aircraft operation are cost economies that arise from lumpy investment in capacity and are the result of utilization economies not scale economies. In fact with excess capacity airports have every incentive to expand output through lower fees.
Figure 3-10 shows the behaviour of costs when the number of passengers served increases. What is clearly evident is a falling unit or average cost function. This we refer to as an economy of density; given airside capacity, the more passengers served by terminal facilities the lower the costs.75 Economies of density would mean airports with larger numbers of passengers would have lower costs. It also implies that demand side forces may be the motivation for larger airports but regardless of size, it suggests airports have an incentive to attract passengers. Features that will attract passengers include prices, accessibility and choice, so even small airports have more reason to attract more carriers, work at increasing service levels and have prices reflect value-added services. But does this convey market power? We think not. It will provide the terminal owner with an incentive to maximize rent and to also extract as much rent as possible from the concessionaires. The creation of the rent can be due to location and/or due to market power. The transfer of rent from concessionaires to terminal owner is a pecuniary economy or transfer issue.
Thus airports appear to have a cost structure that is not consistent with a natural monopoly. However, density economies on the cost side and network economies on the demand side would lead to an incentive to create larger firms (airports).76 Hub airports have substantially more fiscal capacity because they utilize airside capacity well (little excess capacity), they achieve density economies with large numbers of passengers and they provide connectivity to many destinations and with many flights. It is the network economy that is the source of the rents. These rents will likely be shared (or dominated) by the hub carrier.77
There is yet another factor associated with the economic characteristics of the industry that moves one away from the natural monopoly argument. As Starkie (2000) points out, compared with the more traditional `natural' monopoly examples, supply in the airport industry is probably characterized by increasing, rather than decreasing, long-run costs at quite moderate levels of output. That is to say, if we double the potential output of a sizable airport by doubling the capacity available for use, total costs will more than double. Airports are congestable and this leads to rising average cost functions. The source of the airport monopoly is not the usual economies of scale in the long-run production function, but the fixity of `locational' inputs (i.e. good sites) and economies of scope associated with established air service networks The significance of this increasing cost argument is two-fold. First, even in the absence of congestion, prices in excess of average costs are not necessarily inappropriate. And second, in increasing-cost industries, regulation of prices based on allowances for normal or reasonable rates of return on capital may lead to inefficiently low prices. Thus, even with inefficiently high prices, the outcome is not necessarily worse than the regulatory outcome.
It is incorrect to view airports as monopolies since this aggregate view does not consider that different revenue streams are under different levels of competitive pressure. For example, in some locations airports compete for passengers and cargo (e.g. Vancouver and Abbottsford, Toronto and Hamilton). Gateways and hubs compete for international connecting passengers (e.g. Toronto competes with J.F. Kennedy, Dulles, Chicago and Pittsburgh). They compete with off airport concessionaires for revenue from food and beverage as well as specialty shops. Regional/local airports compete with other modes of transportation (e.g. London has rail and highway service to Pearson or Detroit). Toronto also competes with road and rail service to Montreal and Ottawa).
Cargo is much more price sensitive and airports developing cargo service must consider competition from airports within trucking distance as well those that have fewer restrictions such as night curfews.78 In our interviews with airports, particularly regional and local, management reported a highly competitive environment to obtain tenants (London and Hamilton competed for Westjet, for example) and therefore view themselves as operating in a competitive environment..
Is there an incentive for airports to use (or abuse) their monopoly powers where they might have some? If there are complementarities between airside and groundside revenues there will be less incentive to exploit any monopoly power on the supply of airside services. Figure 3-11 illustrates precisely why an airport would have an incentive to lower airside charges. If there are complementarities between airside activity and terminal activity (retailing, car rentals, concessions etc.) increasing airside activity shifts the demand for terminal activity. A high airside charge leads to less traffic and hence less opportunity to develop non-airside revenues. The marginal cost of serving the passenger is low, due to density economies, and the value added will be high; particularly at a hub airport where network access provides significant value to business travellers. If airports do not have this complementarity, one would expect landing fees and terminal fees to be higher. This is precisely what we see in airports in the earlier figures where there is little non-airside opportunity. If airports are inhibited from developing non-aviation activity or have no incentive to do so, these constraints may lead to some exercise of monopoly power.
3.6 Airport Revenue: Airside vs Groundside
As airports have moved to LAAs and CAAs there has been a greater amount of entrepreneurial spirit shown as airport managers have an incentive to satisfy local and regional demands. They also have an incentive to develop the airport and use it as a tool of economic development. For reasons discussed in the previous section, one phenomenon we do observe is a greater exploitation of groundside demand and service provision in increasing revenues. There are a number of reasons for this. First, it makes economic sense (see discussion in previous section). Second, airside revenue is more risky as carriers adjust capacity and enter and exit markets. Third, because it represents an untapped market.
Figure 3-8 illustrates the proportion of airside revenue in total revenue for a subset of Canadian and US airports, respectively. What we see is the major 8 airports have relatively low percentages of revenue coming from airside. This is a result of both the use of AIFs or PFCs and developing the groundside revenue sources. Smaller airports and a number of those included in the current NAS have a large proportion of revenues from airside. In the U.S,, for the airports included in the sample, 28 percent of total revenues come from airside and this is comparable to the large airports in Canada. What must be determined is whether the differences we observe are due to low fiscal capacity or fiscal effort. What is clear is the top 8 airports in the country are significantly larger than the remaining 16 in the NAS and more importantly, behave in a different manner.
As we can see in Figure 3-12 the percent of aeronautical revenue in total revenue at US airports is 30 percent. However there is a significant amount of variation; with a low of 8 percent and a high of 60 percent. A t Canada's major airports the average is 41 percent but this is affected by Toronto and Ottawa. The average for the others about 30 percent. The distinguishing feature for Canadian airports is the development of a retail plan and an emphasis on non-aviation revenue. It should also be noted that the airports that were devolved early have been most successful in shifting their major source of revenue; providing some evidence that airports have an incentive not to abuse any monopoly power they might have.
In this chapter we provide a set of statistics which provide a basis of comparison of the fiscal capacity and fiscal efforts of the range of airports included in the NAS as well as with a subset of select airports in the US.79 We also provide a financial analysis of the major airports. This analysis was limited to those airports that provided a full set of data generally contained in annual reports. The other limitation is the length of time some of the CAAs have been transferred. In a number of cases it is little more than a year and this is not sufficient time to put in place a new management team and have results from changes in strategic initiatives.
A modern view of airports is they have evolved from being a public utility to one of a modern business. This is a new view of airports and differs markedly from what has been the operating perspective in the past. It is also somewhat different from that in the US where cities, counties or Port Authorities own airports.80 In other areas of the world such as Europe, UK, Australia, New Zealand and Asia we find that a commercial orientation is the trend with full or semi-privatization a growing occurrence. As this market orientation proceeds, there is the question of whether and how airports should be regulated. While we do not debate the range of options in this report, there is an emerging view that benchmarking may be a method of regulating, in some cases in conjunction with price caps, to judge how well an airport has performed relative to others. Performance measurement is an integral part of the benchmarking process.
Performance measurement is important for a number of additional reasons. First, airports are increasingly required to go to external capital markets (bond markets in Canada) and the financial markets require some means of judging their performance and assigning a risk factor for investors. Second, carriers view airports either as a cost center or as a strategic business partner and want value for money. They need some means of judging cost efficiency or service delivery across airports. Third, governments, as they implement policies, need to see whether the intent of the policy has been realized and what changes might be needed. Measures of fiscal effort and fiscal capacity provide a means of assessing whether airport management is being efficient and being rigorous in raising revenue. If government is going to provide an internal capital market to a subset of airports it is important these airports pursue every effort to raise the money through their own efforts and not rely entirely on the internal capital market. Fourth, as airports move toward privatization, both investors and managers want to understand the underlying drivers of both costs and revenues. Finally, the concepts of fiscal capacity and fiscal effort, which we introduced earlier, can be measured using information from a subset of performance measures.
The competitive environment of the aviation industry in most domestic markets means greater market mobility for carriers and freedom to establish linkages and alliances. Carriers enter and exit markets and change frequency of service and gauge of aircraft. They form partnerships, alliances and take equity positions in other national and global carriers. All of these factors have an impact upon airport demands and utilization. With all of the turmoil brought about by consolidation and restructuring of the air carrier industry and the desire to have an efficient aviation system (air carriers and airports) it seems reasonable that the impact of the domestic policy decisions or policies on efficient use of resources should be investigated.81
4.3 Range of Performance Measures
4.3.1 Influences on Performance
As providers of space and services to facilitate the interchange between air and surface transportation, airports can range from spartan, with little in the way of comfort or amenities, to plush, with restaurants, hotels, shops, and entertainment. Unlike European airports, where staffing levels can range from very low at "broker" airports such as Geneva to very high at full service airports, such as Frankfurt and Milan, US airports have traditionally been relatively homogeneous in their provision of physical plant and maintenance. Canadian airports were similar in design and management as US airports but this has been changing. In Canada a 'commercial' airport has an incentive to add value for customers and as not-for-profit enterprises will develop services to a point where average cost equals average revenue.82 An airport's objective also extends to providing accessibility and mobility to the community and as has been mandated in the devolution of Canadian airports to serve as a 'generator of economic growth'. In these cases efficiency is not the sole criteria of a well-run airport.
Airports are also subject to peak demands. To have perfectly satisfied customers (the airlines and their passengers) airports would need to supply sufficient runway and terminal capacity to avoid delays at even the busiest periods, allowing the airlines to maximize fleet utilization and improve load factors by providing service when their customers, the passengers, most desire. Airports, conversely, would like the airlines to spread their flight over the entire day so as to minimize runway and terminal requirements. The advent of hubbing has exacerbated this dichotomy with its concentration of arrivals and departures in narrow time bands. Even at those airports that are not used as hubs by any airline, aircraft movements are not evenly distributed. Among the other factors that affect an airport's peaking characteristics is the domestic/international traffic mix as well as the long haul/short haul mix.
While all business enterprises, whether in the public or private sector, need to continuously monitor their performance, it is especially important in the airport industry due to the specific characteristics of airports. Doganis (1992) points out that in a competitive environment, market forces will ensure that optimal performance is equated with profitability. However, the conditions under which airports operate are far from competitive. Regulatory, geographical, economic, social and political constraints can hinder direct competition between airports for a subset of passengers. Such inelasticity will sometimes lead to a lack of productive efficiency. However, if one couples the inelasticity with a public ownership, there may be higher costs than in a more market-oriented environment. The natural selection argument for efficiency in private enterprise is usually not operative in the public sector. To be brief, public enterprises are not usually allowed to die.
At the same time airports must also be judged in the context of their overall goals which can be "diverse, often not clearly articulated, and frequently specified (or influenced) less by professional managers than by public policy and political considerations within various sponsoring governments". Public transportation, for example, must often maintain higher levels of service than would be chosen under private industry standards, often shifting the costs of service from riders to the general taxpayer. In the case of airports, it has been argued, federal support has resulted in facilities that are not so much what is needed as what the government is willing to pay.
Another reason why airports need special consideration is that they differ from most businesses in a very fundamental way. For a manufacturing firm at a constant level of production, a slowdown in sales would be reflected as an increase in inventory and not a decrease in efficiency. If the slowdown were to be anticipated and production reduced, the amount of inputs consumed would likewise be reduced leaving the output/input ratio (i.e., productivity) unchanged (ignoring possible economies of scale). With most airports, however, the factors of production (inputs) usually do not change year to year and there can be no inventory of production. Efficiency, therefore, will suffer anytime there is a slowdown in the economy or by the airlines utilizing the airport, regardless of airport management ability or efforts.83 Since such exogenous factors do exist, how does one account internally for a change in output? If output is down, does this mean anything under the airport's control has become less productive? The answer, obviously, is `no'. This exogenous slowdown needs to be accounted for in order to provide an accurate measure of managerial performance. In essence we want to determine how much variation in airport performance can be attributed to managerial decision-making and initiatives and what are the important decisions or strategies within that portion of airport performance an airport manager can affect.
Unlike revenues, operating costs often vary a great deal between airports depending on their geographical location, organizational setup, and financial structure. Weather related expenses, for example, such as snow removal and de-icing facilities will not exist for warm weather airports. At some airports, certain staff functions and/or emergency services may be provided on a shared basis with local governments or port authority thus reducing costs for both. While these differences complicate direct comparisons between airports, the problems they create are not insurmountable.
Traditionally, airports have measured performance using simple ratios of output per employee, revenue per passenger and total operations and total passengers. These are partial measures in that they do not consider other factors that may be of influence and they do not cover the full range of activities that an airport would devote resources to. A more comprehensive approach is to consider performance measures for revenues, costs, operations and efficiency. In each of these broad categories of measures it is possible to develop a range of indicators that provide a comprehensive basis of judging the relative performance of airports in Canada and elsewhere in the world.84 In Table 4-1 below the range of measures cover revenue, cost and operational performance. The one area that is not adequately considered is efficiency.85
Range of Performance Indicators
We present performance measures in two ways. First a comparison across Canadian airports and in particular the top eight with the other subset of regional/local airports. Second, we compare the top eight Canadian airports with the top fifty (measured by passenger enplanements) airports in the US. In the latter case, measures are expressed in terms of US $s.86 Figure 4-1 through Figure 4-8 contain a set of performance measures for Canadian Airports.87 The comparable set for US airports in which the top eight Canadian airports are also included in Figure 4-10 through Figure 4-16 inclusive.
There is a much greater variation in revenue per aircraft operation (ATM) than per passenger. In the case of Vancouver, Toronto and Montreal the higher values reflect a greater proportion of larger aircraft as well as somewhat higher rates and charges. Interestingly, Charlottetown, despite having comparable prices to Toronto, the revenues per aircraft are substantially smaller. However, the variance among airports is much smaller when revenue per passenger is considered, Figure 4-2. In this case the regional/local airports do not appear to be at such a disadvantage in terms of fiscal capacity. A better appreciation for the differences between the larger and smaller airports are evident in Figure 4-3 through Figure 4-5 in which revenues from airside and non-airside are reported per ATM and per passenger. The non-airside revenue is divided between non-airside revenue and commercial revenue.
Keeping in mind that smaller airports have, on average, aeronautical fees about 20 percent lower than the major airports. It is the lower fees in combination with traffic mix that yields the lower revenue per ATM. To this extent the larger airports have a much larger fiscal capacity. On the non-aeronautical side, smaller airports appear to be at less of a disadvantage. Non-airside revenues are derived from concessions, airport parking, land leases and other contracts for use of airport facilities. There may also be some cargo revenue included n this. Smaller airports have a lower return per passenger from concessions, Figure 4-5, but have only somewhat smaller revenues from commercial operations. The average revenue per passenger from commercial operations is $3.13 while from concessions it is $2.14. Montreal has a surprising level of revenue per passenger. Vancouver's successful retail program is clearly evident while Pearson's under performance is as well. Calgary has a comparable performance to Pearson, a much larger airport, and its emerging retail program will yield higher future revenues.88 The smaller airports have comparable performance for concession revenue as Winnipeg and Ottawa.
Cost information per ATM and per passenger is contained in Figure 4-6 and Figure 4-7 respectively. The average cost per aircraft movement is $330 (recall the average revenue per ATM was $295) while the average cost per passenger is $10.73 (the average revenue per passenger was $11.45). Airports with a greater proportion of international activity seem to have measurably higher costs; Vancouver, Montreal and Toronto. Unit costs per passenger for smaller airports are comparable and in some cases much larger than for larger airports. This reflects the economies of density we described in Chapter 3, with the larger airports having much larger passenger volumes than the smaller regional airports.
Figure 4-8 provides a measure of operating profit per passenger. The larger airports all show a profit with Vancouver, Calgary, Edmonton and Montreal doing well and Winnipeg, Toronto and Ottawa doing relatively poorly. Smaller airports have a mixed set of results with 50 percent showing a profit (some as high as Toronto's) while the other 50 percent show losses. There are a variety of reasons for the losses but smaller airports did have much lower revenue from the aeronautical side and had not realized the density economies on the passenger side. This evidence shows a lack of fiscal capacity form some regional/local airports but a lack of fiscal effort as well.
Figure 4-9 through Figure 4-16 provide information for the top 50 US airports. The figures are in the same order as those provided only for Canadian airports. In addition, the top eight airport sin Canada have been added to the US illustrations (and values all expressed in US$s). The revenue per ATM and per passenger provide a measure of the size of the market and the extent to which the market is exploited. In some sense it is not unlike a measure of yield used by the airlines to measure average revenue per passenger. The Canadian airports have low revenues relative to the majority of US airports. It is also evident that hub airports with a larger proportion of turboprop feeder movements have lower average revenues but if the airport is a gateway and hub average revenue rises (e.g. SFO and ATL and YYZ). Revenue per passenger provides another 'yield' type measure. A quite different picture emerges as Canadian airports have approximately 68 percent of the average. And exceed nine of the fifty US airports. It should be noted that international connecting hubs, gateways and medium hubs have larger revenues than large hubs. Portland's award winning retail strategy shows clear dividends as well.
Splitting revenue between airside and groundside and applying the corresponding output measures, aircraft operations and passengers provides a better sense of the fiscal effort of the airports. It also reflects fiscal capacity and the characteristics of the market. For example Toronto (YYZ) has a greater proportion of wide body aircraft which weight more and will have higher charges applied. This is also true for Kennedy in New York. Other airports simply have higher landing charges, e.g. Montreal and Newark and Denver. Canadian airports are well below average on the aeronautical side. This is not necessarily a bad thing given airside-groundside complementarities and the more business-like approach of Canadian airports. Commercial revenue, Figure 4-12 and concession revenue Figure 4-13 illustrate the differences among Canadian airports but that Canadian and US airports are quite comparable in their performance for concession revenue. It appears however that non-airside revenue but not concession revenue has not been exploited as well in Canada. This may also be a fiscal capacity effect as the US market is much larger. Vacation destinations are huge winners in concession revenue sources. Vancouver and Montreal also appear to be far superior than their US counterparts in exploiting concession revenues.
Costs on a per aircraft and per passenger basis are contained Figure 4-14 and Figure 4-15. The cost characteristics discussed earlier, lack of scale economies and economies of density, are evident in these figures as well. The average cost per aircraft is significantly lower for all major airports in Canada than any US airport.89 International airports have substantially higher costs while hubs are above average. Costs per passenger show lots of room for realizing density economies. The unit costs for the large airports are significantly larger than for small airports but again we see the added costs for international airports. More analysis is required to determine what the underlying cost drivers would be since there are no other clear indicators by traffic or airport characteristic.
Measures of operating profit are contained in Figure 4-16. This shows that the top eight airports in Canada have an operating profit per passenger only 15 to 20 percent of what US airports earn. On a per passenger basis Canadian airports have comparable performance to their US counterparts; their costs and revenues are about 50 percent (on average) of the US airports. However, US airports make more from airside revenues. Canadian airports have costs about 30 of the US airports but revenues are approximately 26 percent. There are a number of reasons for this outcome including differences in rates and charges, traffic mix, mix of gauge and simply the amount of traffic. Canada's airports can clearly gain from additional passengers since we have only one slot constrained airport. The incremental cost of additional traffic will be relatively low while the incremental revenue would be large. Opening the Canadian market to more foreign access is one possible solution.
This analysis has provided a sketch of performance differences of airports in Canada and a comparison with the US. Much more needs to be done to identify the underlying drivers of costs and revenues. We can currently see the role of international traffic, gateways, hubs and traffic mix on both costs and revenues but these are gross indicators. However, the performance measures have been useful in pointing out the major differences in the large NAS airports and other airports. The fiscal weaknesses in the smaller NAS airports indicate they should be treated differently. Perhaps looking at the airports that have not been included in the NAS and have been operated under private contract, almost as if they were privatized, and assess their success. Hamilton is a good example. The airport was sold to the city of Hamilton, as it did not qualify as part of the NAS under any of the criteria. Last year they served 243,000 passengers and are anticipating up to 430,000 this year.
The analysis also provides some basis for assessing the impact of proposed changes to the access to the Canadian market by foreign carriers or expected levels of competition. These changes cannot be ignored and as recommendations go forward for changes to the rules affecting carriers, their impact on airports needs to be considered.
Figure 4-2
Figure 4-3
Figure 4-4
Figure 4-10
Figure 4-11
Figure 4-12
Figure 4-13
Figure 4-14
Figure 4-15
Figure 4-16
4.6 Financial Analysis of Canadian airports
In this section we provide a financial assessment of the airports in the NAS and a subset of Regional and Local airports. The performance measures presented previously were limited to operational, revenue and cost assessments. In this section we use information provided in the Annual Reports and supplied by Transport Canada to undertake a financial analysis. As businesses, how do airports compare in their behavior to other businesses in the economy?
The analysis is carried using standard financial analysis measures. These are described in a section at the end of this chapter. Some detail and the definition of the measure is also provided.
4.6.1 VANCOUVER INTERNATIONAL AIRPORT
On July 1, 1992, the operations and undertakings of the Vancouver International Airport, previously administered by Transport Canada were transferred to the Vancouver International Airport Authority under the terms of a 60-year Lease.
During the 1997-1999 period Vancouver airport has served over 14 million passengers each year, a volume that placed it as the second busiest airport in Canada. This period was characterized by a slowdown in the growth of both passenger and aircraft movements mostly due to the beginnings of a recession in BC starting in 1998, but also due to restructuring of the Canadian Airline industry and the Asian Crisis.
During 1998 the Airport's revenue increased by 10.83% over 1997, and in 1999 they increased by only 3.56% over 1998 values. The airport strives to reduce the landing and terminal charges, and to increase revenue by increasing Concession revenues and Airport Improvement Fee revenue. Consequently, over this period we can observe a reduction in Airside revenue and an increase in Non-Airside revenue.
Operating Margins for the period were 20.67%, 27.3%, and 19.9% in 1997, 1998 and 1999 respectively. Net Income for the period was $44.1 million, $64.6 million and $49.5 million in 1997, 1998 and 1999 respectively. While the Operating Margin decreased significantly the EBITDAR Margin also declined but by a lesser degree, both ratio indicating the increased pressure of Operating Expenses on the company's earnings90.
During the 1997-1999 period we notice that the increase in Operating Expenses was primarily due to higher wages and salary expenses, and to the annualization of costs related to operations on the airport's International Terminal Building ("ITB") started in 1997.
The significant drop in Cash holdings and the increase in company's Account Payable during 1999 had a negative impact on the company's liquidity position. While the Current Ratio of 1.7 in 1997 indicated a strong liquidity position, it further increased during 1998 but fell during 1999. Although the Current ratio dropped during 1999 it is still well above Level I Canadian Airports average of 0.94 indicating the strong liquidity of the company. The company has a positive Working Capital over the entire period, as opposed to most of the other Level I airports, and it displays the second best Working Capital Turnover, after Calgary International Airport.
The company's Days Receivable increased from 19 days in 1997 to 22 days in 1999. This means that the company recovers its Accounts Receivable slower than before. However, the Days Receivable average91 is 35 days, and in this case it means that the company does not extend enough credit to its clients. Days Payable ratio is decreasing from 79 days in 1997 to 67 days in 1999. The Days Payable average is 74 days, and thus the reduction in Days Payable indicates that the company is paying its Accounts Payable much sooner, and thus not fully taking advantage of the credit granted to it by its suppliers.
A company should always try to match its Days Receivable to its Days Payable. The high liquidity enjoyed by the Airport is primarily due to much lower Days Receivable relative to its Days Payables. This fact could be damaging for the company, so attention should be paid to the Airport's credit terms.
An increase in Days Inventory and depletion of Inventory Turnover ratio are evident and together indicate that the company takes longer to sell its Inventory. However, the averages are 4 days, and 106 turnover ratio, respectively, and so the airport has a better position than the rest of the airports. Except for the reduction in Inventory Turnover ratio, the other Asset Turnover ratios are relatively stable over the 1997-1999 period. Improvements to these ratios are evident during 1998 due to higher revenues. However, relative to the other Level I airports the company has a much lower Fixed Asset Turnover ratio indicating that not enough revenues are generated with the current Asset base.
The significant growth in the company's revenue will also have a positive impact on its ability to raise Short Term Debt, as we observe an increase in its Sales to Short Term Debt ratio.
The Capital Structure ratios indicate how the company manages its Assets given its level of Retained Earnings. Not too much weight is given to outside financing relative to the other airports. A decrease in the Total Debt to Total Capital Ratio, and Long Term Debt to Retained Earnings ratio during this period indicates that the company has decreased its reliance on debt. Furthermore, the decrease in Short-Term Debt ratio during 1999 also indicates the company not only decreases its reliance on Long Term Debt but also on its Short Term Debt as well.
Relative to the other Level I airports, except Toronto Airport, the company requires a moderate degree of outside financing.
The Fixed Charges Coverage ratio indicates that the company has the ability to cover its Lease and interest expenses with the earnings it generates during the year. This ratio improved over the 1997 value, but slightly declined in 1999 over its 1998 value. However, although the company is able to cover its Lease expenses with its earnings, this ratio is below the average of 2.2. This could be an indication that either the company does not generates enough revenue relative to its Lease expenses, or that the Lease payments are too big.
According to the Cash Adequacy ratio of 0.98 in 1999 the company generates almost enough Cash Flow from Operation to cover its Capital Expenditures and Net Investments in Inventory. A ratio of 1 would be more appropriate for the level of operations the company has. However, the ratio is above the average of 0.86, and thus the company's Cash Flows cover more of its expenditures than the rest of airports.
The Profitability of the company remains almost steady over the 1997-1999 period, with better levels of Profit Margin ratio ("ROS") and Rate of Return on Assets ratio ("ROA") during 1998. The company has the third best ROS within the Level I airports.
Other indications of airport's performance are the Total Passengers to Revenue ratio, Total Aircraft Movement to Revenue ratio and Cargo Weight to Revenue ratio, which show improvements over the period under analysis.
4.6.2 Calgary international airport
The Calgary Airport Authority (the "CAA") has operated the Calgary International Airport since July 1, 1992 under a Lease from the Government of Canada (the "Canada Lease"). In 1997, the CAA entered into an amendment to the Canada Lease which provides for a revised rent to the Government of Canada for the years 1996 to 2005. Effective October 1, 1997, the CAA entered into a Lease with the Government of Canada for the operation of Springbank Airport.92
Calgary Airport has shown a sustained growth in the passenger volume, which in 1997 increased by 11% over the 1996, in 1998 by 3.2% over 1997, and in 1999 by 1.5% over 199893. Consequently the company's revenues have grown by 30.24% in 1998 over 1997, and by 21.75% in 1999 over 1998. An important factor affecting the revenues was the introduction of the Airport Improvement Fee in 1997. We can also notice a significant improvement of company's Operating Margin over the 1997-1999 period indicating not only a growth in revenues but also mainly a slower growth of companies Operating Expenses relative to its revenues. The slowdown in the growth of company's Operating Expenses generated a 32.49% Operating Margin in 1998 and a 35.59% margin in 1999.
The liquidity position of the company, it's ability to meet it short term obligation, is above average. As indicated by the Current Ratio, Quick ratio and Working Capital ratio the liquidity increased significantly in 1998, and slightly dropped in 1999 mainly due to an increase in company's Accounts Payable. However, all three ratios have maintained over the 1:1 ratio. In 1998 the company had a Current ratio of 1.69 much higher than the average of 0.94. The company's Working Capital position is better than the rest of Level I airports. While all the other Level I Canadian airports (except Vancouver and Victoria airports) display negative Working Capital, Calgary Airport managed a positive Working Capital, with a Turnover ratio of 34 times and 20 times in 1998 and 1999 respectively.
This could be the result of higher Days Payables relative to the rest of the airports, except Toronto. This means that the company takes longer on average to pay its Accounts Payable. The average Days Payable is 74 days, while the company had a ratio of 97 days in 1999. On the other hand, the company has a better position on its Accounts Receivable. Its Days Receivable ratio of 30 days is slightly below the average of 36 days. This means that the company recovers its Account Receivable sooner than the rest of the industry, and thus not extending too much credit to its clients.
The various Asset Turnover ratios are fairly constant over the period under analysis. The company has expanded its Asset base over the years, which in turn provided enough revenues.
The significant growth in company's revenue will also a positive impact on its ability to raise Short Term Debt, as we observe an increase in its Sales to Short Term Debt ratio.
The Capital Structure ratios indicate that not too much weight is given to outside financing relative to the other airports. An increase in the company's Total Asset to Retained Earnings ratio and Total Debt to Total Capital Ratio during 1998 indicates that the company has increased its reliance on debt, but these ratios slightly fell during 1999.
However, the increase in Short term Debt ratio during 1999 indicates that while the company has reduced its reliance on Long Term Debt it has increased its dependence on Short Term Debt.
The Fixed Charges Coverage ratio indicates the ability of the firm to cover its Lease expenses with the earnings from operation. The average ratio is 2.2, while Calgary airport displays a ratio of 2.3 and 2.7 in 1998 and 1999 respectively. The rise of the ratio during 1999 is an indication that the company generates enough earnings to meet its obligations. Furthermore, the Cash Flow Adequacy ratio of 0.45 further indicates that the company generates enough cash from operations to sustain its Capital Expenditures and investments in Inventory. However, the ratio is below the average of 0.8.
During 1997-1999 period the company has known an improvement in its Profitability as the ROS and ROA indicates. A small decline is registered in ROA during 1999 over the 1998 amount, however, its improvement over the 1997 indicates that the company earns a satisfactory return on all its Assets it employs. Furthermore, the improvement in ROS indicates a progress in administering airport's expenses, and thus improving the company's Profitability.
The average ROS is 0.19 while the Calgary airport ROS is over 0.32 in both 1998 and 1999, and actually the company has the best Profit Margin ratio from all Level I Canadian airports.
Moreover, the Total Passengers to Revenue ratio, Total Aircraft Movement to Revenue ratio and Cargo Weight to Revenue ratio show significant improvements over the period under analysis. Total Passengers to Revenue, and Total Aircraft Movement to Revenue ratios are better than the average.
On August 1, 1992 Aeroports de Montreal entered a 60-year Lease agreement with Transport Canada, and it has assumed the expenditure contracts and became the beneficiary of the revenue contracts in effect at that time.
During 1997-1999 the Montreal-Dorval Airport has served over 6.6 million passengers each year. In 1999 the passenger volume reached 7.8 million passengers.
The revenues generated by the airport's operation Totaled $117 million, $155 million and $164 million in 1997, 1998 and 1999 respectively. The Operating Margins are 11.21%, 10.81% and 4.06% in 1997, 1998 and 1999 respectively. While the Operating Margin dropped significantly the EBITDAR Margin rose from 27.7% in 1998 to 31.07% in 1999. These are indications that Ground Rent, and Depreciation and Amortization expenses had an increased impact on company's Operating Profits during 1999. And as indicated by the Expenses to Revenue ratios the Ground Rent and Depreciation and Amortization expense have grown more than the revenues. We also notice an increase in Salaries, and Wages and relative steady Goods and Services expenses relative to Total Revenues.
Although the Cash holdings have increased in 1999 the significant decrease in Accounts Receivable (due to the elimination of Receivables from Transport Canada) have negatively impacted the airport's liquidity position. We notice a reduction in the Current Ratio and Quick Asset Ratio, which were already below the averages of 0.81 and 0.74 respectively. In fact the company displays the highest negative Working Capital of all Level I Canadian airports during this period. The depreciation of its Working Capital is not only due to a reduction in Accounts Receivable but also due to an increase in Airport's Accounts Payable.
We further notice that the company has increased its Days Receivables from 22 days in 1998 to 45 days in 1999. This indicates that now it takes longer for the company to recover its Receivables, and that it extends credit to its client beyond what the average Days Receivable of 36 days indicates as appropriate. We also observe a significant increase in company's Days Payable from 51 days in 1998 to 95 days in 1999. Relative to the average Days Payable of 74 days, the ratio indicates that the company takes longer to repay its Accounts Payable. There might be an implied interest expense associated with the higher Days Payables.
We also note that all the Asset Turnover ratios have fallen during 1999, which might be an indication that the company does not generate enough revenues based on its asset base. A reason why this might have happened is that the company had continued to increase its asset base, so that it will further increase its operations, but the revenues generated failed to reach the expected levels. Accounts Receivable Turnover and Inventory Turnover ratios were above average in 1998 but subsequently decreased significantly. In particular the company should analyze why these two turnover ratios dropped so much from their 1998 levels.
The Capital Structure ratios indicate that the Airport is reducing its reliance on debt to finance its operations. The ratio of Total Debt to Total Capital of 0.66 is slightly above average value, indicating that the company may rely more on debt than some of the other airports.
The Fixed Charges Coverage ratio of 1.7, although below the 2.2 average value reveals that the company's earnings are covering a good part of the company's Lease obligations, and so the Airport should not increase its reliance on outside financing.
Furthermore, the Cash Flow adequacy ratio of 0.9 in 1999 indicates that the company provides sufficient Cash Flow from operations to sustain the Capital Expenditures and Net Investments in Inventory for the year.
The Profitability ratio ROS is fairly stable over the period but the ROA dropped to 0.017 during 1999. As we notice, the Airport has Profitability ratios below average and this is primarily due to the higher Operating Expenses that significantly reduce Airport's Net Income for the year. For 1999 the Airport displays the lowest ROS and ROA of all the Level I airports. The company should revise its expenditures and look for reasons why the expenditures have increased at a higher rate than the company's revenue.
The better than average, Total Passenger to Revenue ratio of 5.08% in 1998 indicates that the level of revenues is more than appropriate relative to the passengers' volume. Also, the Airport displays a Cargo Weight to Revenue ratio of 64% during 1998, slightly poorer than the average.
4.6.4 TORONTO INTERNATIONAL AIRPORT
On December 2, 1996, the Greater Toronto Airports Authority (the "GTAA") assumed the operation, management and control of the Toronto's Lester B. Pearson International Airport (the "Airports") for a period of 60 years, together with one renewal term of 20 years, by virtue of a ground Lease (the "Ground Lease") between the GTAA, as tenant, and Transport Canada, as landlord.
The Airport is the busiest airport in Canada and North America's 4th largest international airport. During the 1997-199 period the Airport has served more than 25 million passengers each year, an impressive volume relative to the other Level I Canadian Airports.
The amount of Revenue generated by the Airport was $274 million, $372 million, and $417 million in 1997, 1998 and 1999 respectively. The revenues thus grew by 30.24% in 1998 over 1997, and by 12.07% in 1999 over the 1998 value.
In 1998 the airlines provided the primary source of revenues through landing and terminal fees, and in January the GTAA implemented a new methodology for establishing airline rates and charges, where the airline fees are set at rates to recover the cost of operations.
The Operating Margin generated was 7.04%, 8.20% and 9.34% in 1997, 1998 and 1999 respectively. However, the Airport displays the lowest Operating Margin among the Level I Canadian Airports.
The lower Operating Margin is primarily due to very large increases in Operating Expenses during this period. Apart from the usual increase in Operating Expenses due to increase operating activity, the higher interest expenses have also added to the increase in Total Expenses.
Although the Airport's Operating Margin is well below average, its EBITDAR Margin is well above the average and is relative constant over the period under analysis. This reflects the increased importance of Interest, Taxes, Depreciation and Amortization, and Ground Rent expenses in negatively affecting the Airport's Operating Profits.
As the Expense to Revenue ratios further indicate, the Interest, and Depreciation and Amortization expense have increased, while the Ground Rent to Revenue ratio has decreased since 1997.
The massive increase in the Airport's Accounting Payables negatively impacted the company's liquidity position. We notice a deterioration of Current Ratio and Working Capital ratio during 1997-1999 period. Moreover, the company operates a negative Working Capital over the entire period under analysis. One way of explaining this is that the company recovers its Accounts Receivable sooner than it pays out its Accounts Payables. This fact is indicated by the lower Days Receivables of 32 days and 41 days and higher Days Payables of 107 days and 136 days in 1998 and 1999 respectively.
The increase in Days Receivable, above average, shows that now it takes longer for the company to recover its Receivables, and thus deteriorating the Airport's Accounts Receivable Turnover ratio.
On the other hand, the Airport takes longer to repay its Accounts Payables, 136 days in 1999 relative to the average of 74 days. An implied Interest Expense is associated to higher Days Payables indicating that the Airport might have a higher interest cost relative to the other Level I airports.
Higher Accounts Payable and much lower Accounts Receivable adversely affect the liquidity position of the Airport. Both Current and Quick ratios are well below average suggesting that attention should be given to the management of the Working Capital.
The company has the highest Inventory Turnover among all the Level I airports, being able to "turn it over" 189 times per year in 1999. An improvement is also observed in the Fixed Asset Turnover ratio but its value is still below the average. The Total Asset Turnover ratio is also below the average but is almost stable over the period under analysis.
The high Sales to Cash ratio is primarily due to the huge revenues during the period and to lower than usual Cash holdings.
The Capital Structure ratios indicate that the Airport relies heavily on debt to finance its operation and thus to generate higher revenues. The Airport has the highest Total Debt to Total Capital ratio indicating its reliance on outside financing. This is expected to happen since the Pearson Airport has by far the highest Capital Expenditure from all of the Canadian Airports. Moreover, during the period under analysis, the Airport started the Airport Development Program ("AID") which was expected to be financed through issuance of high debt.
The Long Term Debt to Retained Earnings ratio of 18.11 in 1999 shows that for each dollar of Retained Earnings used to finance the operations the Airport needs 18.11 dollars more in Long Term Debt.
Furthermore, we observe a slight increase in Short Term Debt ratio indicating that the firm is increasing its reliance on Short Term Debt as well. However, the airport's Short Term Debt ratio is below the average ratio of 0.41 indicating that the company does not rely that much on Short Term Debt as the other Level I airports.
The high reliance on debt is further indicated by the Cash Flow Adequacy ratio of 0.25 in 1999, relative to a 0.86 average. The Capital Expenditures also comprise the expenditures on "construction in progress" due to the AID. As mentioned this development was going to be finance through debt, so if we deduct the "construction in progress" expenditures from the Total Capital Expenditures, then the Cash Flow from operations more is more than enough to cover the company's capital expenditure.
The Fixed Charges Coverage further indicates that the company is more than able to cover its Lease obligations through the earnings it generates from operations. However, the ratio of 1.14, 1.78, and 1.2 in 1997, 1998, and 1999 respectively is below the average of 2.2 indicating that maybe the Lease expenditure are too big, or not enough earnings are being generated with the current Leases.
The Profitability ratio ROA is fairly stable over the period, while the ROS is slightly improving to 0.93 in 1999. As we notice, the Airport has Profitability ratios well below average but this is primarily due to the large Operating Expenses relative to the Total earnings in the case of ROS, and due to a much larger Asset base in the case of ROA. However, knowing that the high expenses that reduce Net Income are due to an increase in Airport's operations, and that the increase in Asset base is due to the development program, the Airport should not be concerned about the lower Profitability ratios.
The company has served over 3.6 million passengers during 1997-1999 period and its revenues have increased significantly in 1997 and 1998. An important contribution to the rise in company's revenue was the introduction of Airport Improvement Fee in 1997.
During 1999 particularly due to changes in the Canadian Airline industry the company did not enjoy the same growth in its revenue as it did during 1997-1998 period. The lower passenger traffic was not the only factor that negatively impacted Concessions and other revenues of the company. During 1999 the company lost part of its revenue due to the withdrawal of Delta Airlines from the Western Canada, and also the firm had to cover the losses incurred by the Edmonton City Centre Airport. Consequently, the revenues have increased only 2.2% during 1999, while the Operating Margin has slowed from 31.0% in 1998 to 23.3% in 1999. However, the EBITDAR has continued to rise, and so the decrease in Operating Margin indicates that the company's expenses grow faster than its revenues. During the 1997-1999 period both Ground Rent and Depreciation and Amortization expenses have increased relative to Total Revenues, while Wages and Salaries fell during 1998 but rose again in 1999.
The significant drop in Cash holdings and continuous increase in company's Accounts Payable during 1998 had a negative impact on company's liquidity position. While the Current ratio of 0.97 in 1997 indicated a good liquidity, it has fallen during 1998 and slightly improved during 1999. However, the 1999 Current Ratio of 0.66 is still below the Level I airports' average of 0.94. The almost identical Quick ratio indicates that the decrease in liquidity is due to the drop in Cash holdings and not too high Inventory holdings.
The company operates with negative Working Capital over the entire period but it also displays a depletion of its Working Capital over the 1997 amounts.
During 1998-1999 the company has recovered its Accounts Receivable well before it has paid its Accounts Payable and this was also one of the causes of the depletion in Working Capital. A significant improvement is noticed in the reduction of Days Receivable from 96 days in 1997 to the average level of 35 days in 1999. However, the Days Payable have increased from 71 days to 133 days, indicating an imbalance between Days Receivables and Days Payables. The Airport might be paying a higher interest cost associated with the higher Days Payables.
The faster collection of company's Accounts Receivable is also shown in the significant improvement of its Turnover ratio to almost average level. Deterioration of Inventory Turnover and Fixed Asset Turnover ratios, after 1998, put downward pressure on Total Asset Turnover ratio as well. All three Turnover ratios are below average.
The depreciation of the Asset Turnover ratios during 1999 was due to lower than expected revenues while the expenditure for Capital and Inventory was already done.
Over the 1998-1999 period, as the Capital Structure ratios indicate the company has increased its reliance on Long Term Debt since 1997. This was a necessary step due to the significant development and improvement projects undertaken by the firm, which requires large Capital Expenditures. The increase in Total Debt to Total Capital ratio (0.59 in 1999 versus 0.46 in 1997) and in Long Term Debt to Retained Earnings ratio (1.13 in 1999) indicate that more funds are being supplied by outside financing. Thus, although the higher Retained Earnings provided for more inside financing the company had bigger expenditure that required outside funds as well. Although the Airport seems to rely more on debt during 1999 relative to the other airports (except Toronto), in the previous years it depended less heavily on debt relative to the other airports.
The improved Fixed Charges Coverage Ratio of 3.83 and 2.87 in 1998 and 1999 respectively shows the increased ability of the Airport to meet is short term and long term obligations with the earnings it generates. The reduction in ratio during 1999 is mainly due to an increase in Lease expenditures but also to lower than expected earnings as a consequence of lower passenger traffic.
The Profitability ratios have maintained relative stable over the 1997-1999 period. While the ROS still maintains over the industry average, its ROA although above the average during 1997-1998 slightly fall in 1999.
As the Cash Flow Adequacy ratio indicates, the company is able to provide enough Cash Flow from operations to cover some of its Capital Expenditures and Net Investments in Inventory. Similarly, the Cash Flow from Operations to Total Liabilities ratio shows the Airport's ability to meet its debt obligations with the cash it provides from operations. This ratio has improved a great deal in 1998 mainly due to the rise in passenger traffic and to some Cash receipts from the Government of Canada.
The decrease in Cash Flow from Operations to Total Liabilities ratio during 1999 is due to a reduction in Cash Flow as a result of lower passenger traffic, higher interest expenses, and to a significant increase in Total Liabilities due to some unpaid Capital Expenditures94.
We can also notice improvements in Total Passenger to Revenue ratio to 6.9% in 1999 relative to the average of 9.5%. The Cargo Weight to Revenue ratio shows improvements better than average only in 1997 and 1998.
Winnipeg Airports Authority Inc. (WAA) assumed operations of Winnipeg International Airport January 1, 1997 under a 60-year Government of Canada Lease.
The period 1997-1999 brought significant increases in company's revenue and its Operating Margins. The company served almost 3 million passengers over this period and it generated Operating Profits of $7.7 million in 1999. The company revenues grew in 1998 by 15.7% over 1997, and in 1999 by 22.1% over 1998. The Operating Margin rose by 14.9% in 1998 over 1997, and by 24.45 in 1999 over the 1998 value. The company also had an increase EBITDAR Margin over this period indicating that the company not only generated high revenues but was also able to control its Operating Expenses, and so their growth rate did not outweigh the revenue growth rate. As the Expenses to Revenue ratios indicate, only Ground Rent, and Depreciation and Amortization expenses have increased relative to Total Revenues since 1997.
Although in 1997 the company has experienced a reduction in the Canadian Airlines operations during the summer, and in September 1998 two overlapping airline strikes, its Net Income was not affected significantly by these events. The Net Income generated during 1997 was of $3.8 million.
The fall in liquidity ratios indicate both a reduction in the Company's short term Assets and an increase in its short-term Liabilities. The Cash holdings in 1999 were very low relative to the company's Short Term Debt. Furthermore, the company's Current Ratio (0.48 in 1999) and Quick ratio (0.42 in 1999) are well below average of 0.94 and 0.85 respectively.
For the entire period the company operated a negative Working Capital, as most of the Level I airports, except Vancouver, Calgary and Victoria. During 1999 its Working Capital continued to deteriorate mainly due to increased Accounts Payable. Although the company's Days Payable fell to 44 days in 1999, well below the average of 74 days, the company has increased its reliance on Short Term Debt. The very low Days Payable ratio indicates that the company pays its Accounts Receivable much faster than the other airports, and thus not fully taking advantage of the credit granted by its suppliers. The improvement of this ratio should go hand in hand with the reduction of reliance on Short Term Debt.
The Days Receivable and Days Inventory are close to the average of 35 days and 4 days respectively. The Days Receivables ratio indicates that the company does not extent too much credit to its clients. The Airport is trying to match its Days Receivables to its Days Payables but its liquidity is still deteriorating due to higher dependence on Short Term Debt.
Improvements to Inventory Turnover ratio and Accounts Receivable ratio are also noticed during this period. The fall in Total Assets Turnover ratio is due to a fall in company's Fixed Asset Turnover ratio, which in particular indicates that the revenue generated is not enough relative to the company's Fixed Asset base. However, the Airport has the second best Asset Turnover ratios in the industry.
The huge increase in Sales to Cash ratio is only an indication of the fall in the Cash holdings of the company.
The Capital Structure ratios further indicate an increase in reliance on Short Term Debt and a decrease in the company's dependence on Long Term Debt. Consequently it seems that the company is financing part of its long-term Assets with Short Term Debt. However, relative to the other Level I airport the company does not rely so heavily on outside financing.
As the Fixed Charges Coverage ratio indicates the company's earnings are more than covering its Lease and interest expenses. The company displays a ratio of 4.9 in 1999 while the average is only 2.2.
Improvements are also noted in the Cash Adequacy ratio and Cash Flow from Operations to Total Liabilities ratio indicating that the company generates enough Cash Flow from operations to meet its debt obligations.
Relative to the other Level I airports the 0.8 Cash Adequacy ratio is exactly the average. Although for 1999 the company was expecting higher cash inflows and accordingly it invested heavily in Capital Assets and Inventory, the Cash Flow from Operations was adequate to industry average to cover these expenditure.
The high ROS and ROA ratios, above the averages, are indications of a high Profitability for the firm. This is further supported by improved Total Passenger to Revenue, Total Aircraft Movements to Revenue, and Cargo Weight to Revenue ratios. However, an improvement of the first two ratios is expected in the future in order to reach the Level I airports averages.
Ottawa Macdonld-Cartier International Airport Authority signed on January 31, 1997 a 60-year ground Lease with Transport Canada and assumed responsibility for the management, operation and development of the Ottawa International Airport.
During 1997-1999 period the Ottawa airport served over 2.9 million passengers each year. The level of revenue generated by the operations is $26 million, $34 million and $38 million in 1997, 1998 and 1999 respectively. The revenues increase by 25.23% in 1998 over 1997, and by 14.72% in 1999 over the 1998 value.
An important factor to increase revenue during 1999 was the introduction of Airport Improvement Fee of $10.
The Operating Margin generated by these revenues were 10.93%, 12.98% and 20.59% in 1997, 1998 and 1999 respectively. The increase in Operating Margin is an indication that the increase in revenues was higher than the associated increase in expenses. The significant increase in EBITDAR Margin further indicates that the Goods and Services and Wages and Salaries expenses did not increased significantly and so they did not adversely impact company's earnings.
As the Expenditures to Revenue ratios indicate the Ground Rent has slightly increased since 1997 to 15%, and so did the Depreciation and Amortization expense which rose to 6.8% in 1999. The Goods and Services, Wages and Salaries, and Interest expenses slightly fell during this period relative to revenue.
The Cash holding of the Airport increased significantly during the 1997-1998 period adding to the increasing liquidity position of the company. The increase in liquidity ratios indicates a strong position. The Current Ratio has reached 1.15 in 1999, much higher than the average of 0.94. While during 1997-1998 period the company operated a negative Working Capital in 1999 it managed a positive Working Capital mainly due to the increase in the Cash holdings during this period.
On the other hand we notice a decrease in both Days Receivable and Days Payable. The decrease in Days Receivable (25 days in 1999 from 39 days in 1997) indicates that the Airport recovers its Accounts Receivable much sooner then the other airports. It can be argued that the Airport does not extend enough credit to its clients relative to the other Level I airports with average Days Receivables of 35 days.
The Airport has lower Days Payables than the average Days Payable of 74 days. The decrease in Days Payable (52 days in 1997 and 45 days in 1999) indicates that the Airport pays relative too soon its Payables, and thus not fully taking advantage of the credit granted by its suppliers. There is an opportunity cost associated with paying company's Accounts Payables too early.
A definite improvement is observed in the Inventory Turnover ratio and Accounts Receivable Turnover ratio. A decrease in Fixed Asset Turnover is observed from 3.6 in 1998 to 3.2 in 1999. However, the Airport has the best Fixed-Asset Turnover and Total Asset Turnover ratios of all Level I airports.
The Capital Structure ratios indicates that the Airport has decreased its reliance on Long Term Debt over the period but maintained its dependence on Short Term Debt. At the 1999 values of Total Liability to Total Capital ratio, Long Term Debt to Retained Earnings ratio, and Short Term Debt ratio we notice that the company relies more on Short Term Debt than on Long Term Debt relative to the other Level I airports.
With respect to the ROS and ROA, both ratios show improvements since 1997 indicating that the Airport provides enough return with its Asset base and relative to its Operating Expenses. The airport has the best ROA (0.31 and 0.39) of all Level I airports during 1998-1999 period.
Furthermore, the rising Fixed Charges Coverage ratio of 2.2 in 1999 indicates that the airport generates enough earnings to cover its Lease obligations. Moreover, the Cash Adequacy ratio of 1.7 (the average is 0.86) indicates that the Airport's operations have generated enough Cash Flow from operations that more than covers the Capital Expenditures and Net Investments in Inventory during 1999.
Relative to the other Level I airports the company has better than average Total Passenger to Revenue and Total Aircraft Movements to Revenue ratios.
The Victoria Airport Authority ("VAA") has operated the Victoria International Airport since April 1, 1997 under a Lease from the Government of Canada (the "Canada Lease").1
Since 199795 the Passenger Volume at Victoria Airport has exceed the 1 million threshold. This increase in passenger traffic, particularly during 1997 and 1998, was mainly due to the higher discount airfares. During the 1999 the passenger volume failed to increase as much as the previous years mostly due to restructuring in the Canadian Airline Industry.
During the 1998 the increase in passenger traffic had a positive impact on the company's revenue. While the 1998 Total revenue has increased 14.44% over the 1997 amount, the 1999 Total revenue has increased only 5.40%. The slowdown in the company's revenue was due to the low passenger traffic. However, the 1999 revenues were increased by the introduction of the Airport Improvement Fee of $5, otherwise the revenues would have been even lower.
It is also noticeable the reduction in the company's Operating Margin from 24.9% in 1999 to 23.87% in 1998 and 20.67% in 1999. On the other hand though the EBITDAR Margin has increased from 28.40% in 1997 to 37.66% in 1998 and to 38.13% in 1999. The decrease in Operating Margin and the increase in EBITDAR Margin indicate not only that the Total Revenues fell in 1999 but mostly show that the Operating Expenses rose significantly more than the Revenues. In fact during 1998 VAA started the Lease payments under the Canada Lease which significantly increased the company's Operating Expenses. Moreover the Depreciation and Amortization expenses started to rise, and so further depleting the company's Operating Income.
The liquidity position of the Airport is excellent as indicated by the Current Asset ratio and Working Capital ratios. A Current Ratio of 1.83 in 1997 and 2.5 in 1999 versus the average of 0.94 indicates a very strong liquidity position. This is further sustained by above than average Quick Ratio, Working Capital Turnover and Working Capital to Total Assets ratios.
The slight decrease in these ratios (increase in the case of Working Capital Turnover) that is noticed during 1998 is mainly due to the higher Accounts Payable to the Government96. On the other hand the significant higher Current Ratio and Quick Ratio during 1999 are primarily due to the elimination of Accounts Payable to the Government.
During the 1997-1999 period it is noticeable a reduction in the company's Days Payable, Days Receivable and Days Inventory (more prominent in the case of former). Days Payable are well below the average of 74 days indicating that the Airport pays its Accounts Payables much sooner than the rest of the airports, and thus not fully taking advantage of the credit facilities. Another reason could be that the terms of credit do not allow the company to increase its Days Payable to the average.
Airport's Days Receivable are slightly below average of 35 days, and the decrease in the ratio shows that it takes on average less days to recover Airport's Accounts Receivable.
The Airport's Total Asset Turnover ratio slightly decrease since 1997 but the Airports still has the third best Turnover ratio of all Level I airports. The fall of Fixed Asset ratio during this period is mainly due to lower Revenues and higher Capital Assets. The Airports has the best Fixed Asset Turnover ratio of all Level I airports. Accounts Receivable Turnover and Inventory Turnover ratio have improved since 1997, although the high 1999 Accounts Receivable Turnover is mainly due to a significant reduction in the Accounts Receivable from the Government.
The Capital Structure ratios indicate that the Airport has reduced its reliance on Long and Short Term Debt over the period under analysis. At the 1999 values of Total Liability to Total Capital ratio, Long Term Debt to Retained Earnings ratio, and Short Term Debt ratio we notice that the company relies more on Short Term Debt than on Long Term Debt relative to the other Level I airports. However, the Airport has the lowest Long Term Debt to Retained Earnings ratio off all Level I airports.
With respect to the ROS and ROA, both ratios are above average but while the ROS is slightly improving the ROA slightly fell in 1999. Both ratios show improvements since 1997 indicating that the Airport provides enough return with its Asset base and relative to its Operating Expenses.
Moreover, the Fixed Charges Coverage ratio of 3.5 in 1998 and 2.6 in 1999 indicates that the Airport generates enough earnings to cover its Lease obligations. The value of its ratio is above average indicating the good standing of the company relative to the other airports. In addition, the Cash Adequacy ratio of 1.2 (the average is 0.86) indicates that the Airport's operations have generated enough Cash Flows from operations that more than cover the Capital Expenditures and Net Investments in Inventory during 1999.
Relative to the other Level I airports the company has a higher Total Passenger to Revenue ratio indicating that the current level of revenue is lower than it should be given its passenger volume.
On May 1, 1999, the Regina Airport Authority signed a 60-year ground Lease with Transport Canada and assumed responsibility for the management, operations and development of the Regina Airport. The ground Lease provides for a rent-free period until January 1, 2006.97
Effective October 1st, 1999 the airport introduced an Airport Improvement Fee of $10 per departing passenger. The AIF is to be used for airport infrastructure development. AIF is part of Deferred Contributions98, which will be recognized as Income as related Assets are amortized. However, in order to be consistent in this analysis we have included the AIF as part of the Total Revenue.
Over the 1997-1999 period Regina Airport has served over 750,000 passengers each year. The Airport generated $4.4 million in Total Revenues in 1999. Operating Profits for 1999 were $ 1.01 million, and the Net Income was $ 1.3 million. The Total Operating expenditures for the year did not include Ground Rent expense since it does not come into effect until 2006. The Operating Margin for the year was 23.24%, and the EBITDAR Margin was 29.27%.
As Expenses to Revenue ratios indicate the Goods and Services expenses make up the most of the Operating Expenses, 42.5% of revenues. They are followed by Wages and Salaries (28.3% of revenues), Depreciation and Amortization (5.5% of revenues) and Interest expenses (0.5% of revenues).
For the first year of operations under local Airport Authorities the Airport has a strong liquidity position as indicated by the Current Ratio (2.47), and Quick Asset ratio (2.27). Furthermore, the company employs a positive Working Capital with a Turnover ratio of 6.35, and a ratio to Total Assets of 19.8%.
Relative to other airports that have a similar level of Total Assets the company's liquidity position is somewhere in between, and relative to the Level II Canadian Airports average (thereafter called "the average") value is below but very close to it. However, the company will have no problems in meeting its short-term obligations since ratio of Current Assets to Current Liabilities is more than 1:1.
However, we notice higher values for Days Receivable and lower values for Days Payables and Days Inventory relative to the average of 41 days, 13 days, and 50 days respectively. The company needs on average 69 days to recover its Accounts Receivable, and pays its Accounts Payables in only 30 days.
On one hand, relative to the other Level II airports the company does not recover its Accounts Receivable soon enough and it may be argued that is extending too much credit to its clients. On the other hand the Airport pays its Accounts Payables relative sooner than the rest of the Level II airports, and thus not fully taking advantage of the credit extended to it by its suppliers. Thus the company should look at what are the its credit terms relative to the industry.
As the Capital Structure ratio indicate the company relies heavily on outside financing to finance its operations. The Long Term Debt to Retained Earnings ratio of 1.3 indicates that for each dollar of Retained Earnings reinvested back in the company, 1.3 dollars are invested using debt. Relative to other airports that have similar levels of assets, the company relies more heavily on Long Term Debt.
The company has a Fixed Charges Coverage ratio of 48.03 but that includes only charges for the interest expense since the Lease payments are not in effect until 2006.
The Cash Flow Adequacy ratio of 0.53 indicates that the Cash Flow from operations is not enough relative to the Airport's Capital Expenditures. As we noticed the airport relies on outside financing to finance its capital expenditure.
The Profitability ratios indicate a ROS of 0.29 and a ROA of 0.2. Relative to other airports that have similar levels of activity the Airport's profitability is slightly below average. The high Total Passengers to Revenue ratio shows that not enough revenues are generate given its passenger volume and level of operations.
On January 1, 1999 the managing, operating and maintaining of Saskatoon International Airport was transferred from Transport Canada to the Saskatoon Airport Authority. The Ground Lease is a 60-year lease with an option to renew for an additional 20 years. The Authority will begin to pay base rent on January 1, 2006.
The Airport Improvement Fee of $5 per departing passenger, introduced in September 1999, is recognized as revenue when passengers depart the terminal building.
During the 1997-1999 period the Saskatoon Airport has served over 760,000 passengers each year. In 1999 the Airport generated $7.1 million in revenue, and $2.4 million in Operating Profits. For the year the Operating Margin was 34.04% and EBITDAR Margin 36.84%. As the Operating Expenses to Revenue ratios indicate the Goods and Services expenses have the highest weight (36% of revenues) followed by Salaries and Wages (21%), property taxes (6%) and Depreciation and Amortization (0.3%).
During 1999 the Airport has enjoyed high level of Cash holdings which have positively influenced the liquidity position of the company. The Airport has the highest Current ratio and Quick Asset ratio of all Level I and Level II Canadian airports. This indicates a very strong financial position. However, it might be possible that the company holds too much cash, and thus incurring an opportunity cost by not investing this cash in return-generating assets. This opportunity cost is also part of the very low Working Capital Turnover, which shows that the company might not generate enough revenue given its level of Working Capital.
The Assets Turnover ratios indicate the ability of the Airport to generate revenue given its Asset base. All of the Airport's Turnover ratios, except Inventory Turnover ratio, are slightly below average.
As indicated by the Days Receivables ratio the company recovers its Accounts Receivable in 45 days, and pays its Accounts Payables in 85 days. Relative to the average ratios of 41 Days Receivables the company is recovering its Accounts Receivable later. And according to the average ratio of 50 Days Payables the company takes longer to pay its Accounts Payables. An implied interest cost is associated with higher Days Payables than average and the company might incurs some losses by implicitly paying higher interest on its Accounts Payables.
According to the Capital Structure ratios the Airport does not rely as heavily on outside as the other Level II airports. In fact most of its ratios are below average. The Total Debt to Total Capital ratio indicates that 81% of Airport's Capital is financed through debt. Relative to Regina Airport the company does not rely so heavily on Long Term Debt, and for each dollar of Retained Earnings used to finance the operations only 0.4 dollars of Long Term Debt is required.
As further indicated by the Cash Flow Adequacy ratio of 0.92, and relative to its level of Capital Expenditures, the Airport generates more Cash Flows to cover its Capital Expenditures than the rest of Level II airports.
The Airport has the second best ROS, of 42%, off all Level II airports and a ROA very close to the average.
The Thunder Bay International Airports Authority Inc. entered into an Agreement to Transfer with Transport Canada for the transfer of the Thunder Bay Airport pursuant to a long term Ground Lease effective September 1, 1997. The Authority will begin to pay Airport base rent on January 1, 2006.
On March 21, 1999 the airport introduced an AIF of $10 per departing passenger.
During the 1997-1999 period Thunder Bay airport has served over 475,000 passengers each year. The Operating Margins generated by the Airport were (39.22)%, 29.87% and 34.56% for Total revenues of $3.6 million99, $5.2 million and 5.9 million for the 1997, 1998, and 1999 respectively. The company believes that its revenues will increase in 2000 due to the fact that WestJet Airlines has extended its services to the Airport at the beginning of the year. However concerns are rising due to the merger of the two main Canadian airlines.
According to decreasing Operating Expenses to Revenue ratios the Airport was able to control its expenses so that they grew at a slower rate than the revenues.
Since 1997 the Cash holdings have increased significantly in 1998 and dropped back in 1999. However, they still provided for the positive Working Capital over the entire period and an initial improvement in Airport's liquidity position but then a decrease in 1999. Nonetheless, both Current ratio and Quick ratio were above average in 1998 and above a 1:1 ratio in 1999. As mentioned the airport operated a positive Working Capital and had a steady Turnover over 1998-1999 period.
We also notice a steady improvement in all Asset Turnover ratios over the 1997-1999 period indicating significant revenues relative to the assets employed. Although the company improved its Inventory Turnover to a value of 28 in 1999 the ratio is still below the average of 36.9. The slight drop in Total Asset Turnover ratio during 1999 is mainly due to higher than average Prepaid Expenses.
The increase in Sales to Cash ratio is primarily due to the decrease in Cash holdings. The increase in Sales to Short Term Debt indicates that the company has improved its earnings relative to the Short Term Debt employed and that also has a superior position now in obtaining Short Term Debt in the future.
On one hand we notice a significant decrease in Airport's Days Receivables from 31 days in 1997 to 23 days in 1999. Relative to the average of 41 days the company recovers its Accounts Receivable much sooner. It may be argued that it does not extend sufficient credit to its clients.
On the other hand the Airport's Days Payables initially increasing from 41 days in 1997 to 53 days in 1998 to finally falling to 50 days in 1999. This behavior could mean an improvement in company's Days Payables since the average is 50 days. Now the Airport pays its Accounts Payables later than it did in 1997.
According to the Capital Structure ratios the Airport has improved its standing, reducing its reliance on outside financing. When initially in 1997 it had negative Retained Earnings and relied only on debt to finance its operations, in 1999 for each dollar of Retained Earnings invested back in the company it is needed only 0.6 dollars of debt to finance the Capital Expenditures. Relative to the other Level II airports the company has the lowest dependence on outside financing. This could be the case that the company has lower Capital Expenditures than the rest of the airports. Thus, although the company generates enough revenues on its Asset base it did not increase its Capital Assets as much as the other airports.
At the same time the Airport has the second best Cash Flow Adequacy ratio of 7.1 during 1999. During 1998 the Airport has the best ratio, and thus although the Cash Flows from operations still cover company's Capital Expenditures and Net Investments in Inventory, they have fallen during 1999.
As ROS and ROA ratios indicate the company's Profitability has improved significantly over this period. That was due primarily to positive Operating Income over 1998-1999 period and then to the big Transport Canada's subsidy amounts. The slight fall in both ratios in 1999 is due to lower subsidy in 1999 relative to 1998. However, even without the subsidy the Airport still reports the highest ROS and ROA in 1999 of all Level II airports.
Moreover the company exhibits improvements and better than average Total Passengers to Revenue, and Cargo Weight to Revenue ratios indicating higher revenues for the levels of passengers served and cargo loaded over the period under analysis.
4.6.12 FREDERICTON AIRPORT 100
The airport serves on average 200,000 passengers every year. During 1998 we observe a reduction in passenger traffic but an increase in both Airside and Non-airside revenues. This could only be the result of increasing landing and terminal fees, and increasing in rental and Concessions charges.
However, during 1998 increasing Operating Expenses still overweight the revenues, and so the company generates another loss for the year.
Year 1999 is still characterized by increasing revenues. However, the increase in revenues is this time accompanied by a decrease in Operating Expenses, which lead to positive Operating Profits for the year 1999. Consequently the ROS becomes positive for 1999 and is an indication that the company generates enough revenues relative to its expenses.
We notice that Wages and Salaries expenses have drastically fallen relative to revenues indicating layoffs or temporary reduction in wages.
We should further investigate how much the fees were increased and how expenses dropped in 1999.
On June 1, 1999 the Saint John Airport Inc. signed an agreement with the Government of Canada to transfer managerial, operational and developmental control on the Saint John Airport to the Corporation. The ground lease is a 60-year Lease with a 20-year renewal option, and provides for a rent-free period until 2016.
On September 1, 1999 the company introduced a $10 Airport Improvement Fee.
The Saint John airport has served on average over 180,000 passengers each year. For 1999 the Airport has generated $1.7 million in revenue and an Operating Profit of $7,365.
The company enjoys high levels of Cash holdings and since the majority of its Liabilities are long term, the company enjoys positive Working Capital and high liquidity. Current ratio is 4.1 while Quick ratio is 3.7, both well above average.
The Airport's Days Receivables are 27 days and its Days Payables are 78 days.
Relative to the average of 41 days, the company recovers its Accounts Receivable sooner than the other airports, and accordingly its Accounts Receivable Turnover is better.
Relative to the average of 50 Days Payables the Airport takes longer to repay its Accounts Payables than the other Level II airports.
The company did not expand to much its Capital Assets and the level of Fixed Asset it employed generates enough revenues to yield a Fixed Assets Turnover of 1.3 but it is still below the average.
The Total Asset Turnover is also pulled down by the low Inventory Turnover. The very low Inventory Turnover and extremely high Days Inventory are indications that the Airport requires much more time to sell its inventory. It may be the case that the company is holding too much Inventory relative to its operations and to the level of inventory of the other Level II airports.
As the Capital Structure ratios indicate the company relies heavily on outside financing. The level of AIF was too small to finance the Airport's Long Term Expenditures. Airport's Capital Expenditures are financed by its Retained Earnings and issuance of debt. According to the Long Term Debt to Retained Earnings ratio for every dollar of Retained Earnings the company requires 10 dollars more in outside financing to cover its Capital Expenditures.
We notice that the company has one of the highest ROS, 47%, of all Level II airports during 1999. This is due to the inclusion in Net Income of Extraordinary Items such as subsidies that increased airport's Net Income. Below the average ROA indicates that more revenues should be generated with Airport's Asset base.
On September 1, 1997 the Greater Moncton Airport Authority Inc. signed a ground lease agreement with the Government of Canada to transfer control of the Moncton Airport to the Authority for an initial term of 60 years with a 20-year renewal option. The lease provides rent-free period until the year 2016.
On October 1, 1998 the Airport implemented the Airport Improvement Fee of $10 per departing passenger.
The Moncton Airport serves on average 250,000 passenger each year. The revenues generated from operation were $3.6 million and $5.2 million in 1998 and 1999 respectively. However, the high level of Operating Expenses overweighed the revenues in 1998 and the Airport incurred Operating Losses of $717,819. In 1999 de to higher AIF the Airport was able to generate Operating Profits of $877,443.
The company tried to reduce its Operating Expenses but while Goods and Services expenses and other Operating Expenses have reduced their proportion relative to the revenues, the interest expense has actually increased its significance relative to revenues.
During the 1998-1999 period the company increased its Accounts Receivable and had no cash holdings. However, the increased in Accounts Receivable was matched and exceeded by increases in Accounts Payables and short term financing, so that the liquidity position of the company has deteriorated in 1999. Current ratio of 0.8 and Quick ratio of 0.7 in 1999 are well below average indicating the lower liquidity position of the company relative to the other airports. Moreover, the company employs a negative Working Capital over the entire period under analysis.
We notice a reduction in both Days Receivables and Days Payables ratios. According to 1999 Days Receivables ratio the company recovers its Accounts Receivable in 36 days, sooner than before and relative sooner than the others airports. According to its 1999 Days Payables ratio the company takes 57 days to pay its Accounts Payables. Relative to the 1998 ratio the company pays its Accounts Payables sooner. However, relative to the average Days Payables the company pays its Accounts Payables later than the rest of airports.
We notice an improvement in Airport's Inventory Turnover from 17 to 27, and a depreciation of the other Assets Turnover ratios. However, while the Accounts Receivable Turnover and Fixed Asset Turnover ratios are very close to the averages the Inventory Turnover ratio is well below average. The lower Fixed Assets Turnover and Inventory Turnover ratios during 1999 indicate that the Capital Expenditures and Net Investments in Inventory failed to produce the expected revenues. This could be the result of the loss of several routes from various airlines as the Canadian Airline industry restructures.
Since during the 1998 the company incurred significant Operating Losses the Airport had negative Retained Earnings in 1998 and also in 1999. Accordingly, it relied solely on outside financing to finance its Capital and Inventory Expenditures. Consequently, the Airport is heavily dependent on issuing debt as the high Capital Structure ratios indicate.
Moreover, the Cash Outflows from operations are higher than the Cash Inflows, so the Cash flows from operations are not enough to cover its expenditures.
Relative to other Level II airports with similar level of passengers, the Airport generates better Total Passengers to Revenue and Cargo Weight to Revenue ratios.
4.6.15 ST. JOHN'S AIRPORT101
On December 1, 1998 the operations and undertakings of the St. John's International Airport, previously administered by Transport Canada, were transferred to the St. John's International Airport Authority and pursuant to the Agreement of Transfer the Authority entered into a long term lease (the "ground lease") with the Government of Canada. The lease provides for a rent-free period until December 31, 2005.
Effective October 1, 1999 the St. John's Airport introduced an Airport Improvement Fee of $10 per departing passenger.
St. John's Airport serves on average over 750,000 passenger each year. For the 9-month period of 1999 the Airport generated an Operating Margin of 24% for a level of $6.4 million revenues.
According to Operating Expenses to Revenue ratios the Depreciation and Amortization expense represents an important cost in Total Operating expenditures (6% of Total revenues).
The Airport has included in its Accounts Payable the huge Payables associated with the construction in progress and consequently it employs a negative Working Capital for the year. The high Accounts Payable also reduces the liquidity position of the company, which displays a Current Ratio of only 0.6, well below the average of 3.
The Airport has very high Days Receivables and Days Payables ratios, well above the average. On one hand it takes 88 days for the company to recover its Accounts Receivable. Relative to the average of only 41 Days Receivables the Airport recovers its Accounts Receivable much later generating a low Accounts Receivable Turnover. On the other hand it takes 284 days for the company to repay its Accounts Payables. Relative to the average of 50 Days Payables the Airport takes much longer to pay back its Accounts Payables. In principle the company should try to match its Days Receivables to its Days Payables, or at least to match them with the industry average.
The Airport employs higher Capital Assets than the rest of Level II airports so its Fixed Asset Turnover ratio is much lower than the rest of the airports. On the other hand the high Inventory Turnover is mainly due to the lower level of Inventory relative to the other Level II airports.
The company also has very high Capital Expenditure comparable to Level I airports but it does not generate the same level of Cash flows from operations, and so the Cash Flow Adequacy ratio is extremely low in 1999.
Being the first year of operations under the local authorities the Airport has very high Liabilities. The Total Liabilities includes items such as Account Payables for construction in progress, Canada Loan, and Deferred Charges.
As the Capital Structure ratios indicate the Airport relies heavily on outside financing. For the moment the AIF does not generate enough revenue to really make a contribution to the capital financing. However, its dependence on outside financing it is comparable with the other Level II airports in their first years of operation.
However, the Airport has a better than average ROS but a lower than average ROA.
On August 1, 1998 the Greater London International Airport Authority signed a 60-year ground lease together with a renewal term of 20 years, with Transport Canada and assumed responsibility for the management, operation and development of the Greater London International Airport. The lease provides for a rent-free period to December 31, 2010.
The London International Airport serves on average 300,000 passengers each year. The Airport generated revenues of $4.6 million and $4.7 million in 1998 and 1999. During 1999 the Wages and Salaries expenses have increased more than the other Operating revenues. The higher Operating Expenses associated with the low growth rate of revenues affected the Operating Margin in 1999, which dropped from 16% to 13%.
During 1998-1999 period, particularly in 1999, the company had high levels of Cash and very small levels of Accounts Payables relative to the other Level II airports. Consequently the Airport exhibits very high liquidity ratios. The Current ratio in 1999 was 6.2 relative to the average of 3. It may be the case that the company holds too much Cash and that it could incur an opportunity cost if it does not invest this Cash into return-generating assets.
We notice an increase in Days Receivables from 28 to 36 days in 1999. This means that the Airport recovers its Accounts Receivable later now relative to 1998. Consequently we also notice a depreciation of the Accounts Receivable Turnover during 1999. However, relative to the average Days Receivables the company has a lower ratio, and it may be argued that it does not extent enough credit to its customers relative to the industry.
We also notice an increase in Days Payables from 18 to 26 days but this ratio is way below the average value and so the Airport pays its Accounts Payables sooner than the rest of the airports, and thus not fully taking advantage of the credit granted to it.
The company displays high Assets Turnover ratios relative to the other Level II airports and this is primarily due to higher revenues and lower level of Assets for both years.
According to Capital Structure ratios the company does not rely heavily on debt. As the Long Term Debt to Retained Earnings ratio indicate for each dollar of Retained Earnings reinvested in the company the Airport requires 0.7 (1998) and 0.4 (1999) dollars of Long Term Debt to finance its Capital Expenditure. Since 1998 we observe a slight increase in reliance on Short Term Debt as the ratio of 0.2 to Retained Earnings indicates.
However, the company does not have intense Capital Expenditures relative to the other Level II airports, and so the level of debt required to finance these is much lower. This fact is also evident in the high level of Cash Flow Adequacy ratio of 3.8 in 1999.
The Airport generates the second best ROS and ROA ratios for the period under analysis. However, the high ROS (52% in 1998 and 42% in 1999) is mainly due to the Transport Canada subsidy, which increased Airport's Net Income. Without the subsidy to increase the airport's Net Income the ROS is only 16% and 13% respectively. Similarly the high ROA is also due in part to the subsidy. However, the company generates high levels of revenues given its passengers' volume, and so the high ROA indicates that the company is able to generate high revenues with a smaller Asset base than the rest of Level II airports.
Given its Passengers' volume the Airport generates Total Passengers to Revenue ratio of 6.75%. The high Cargo Weight to Revenue ratio show that the revenue is mainly earned by the passengers' operations and not by the Cargo operations.
A review of the landing and terminal fees should be performed to analyze whether the high revenues are primarily due to efficient employment of company's resources or due to higher fees.
4.6.17 LABRADOR CITY (WABUSH) AIRPORT 102
The Wabush Airport serves on average over 50,000 passengers each year. Since 1997 the passenger traffic has increase bringing higher revenues for the Airport. While in 1997 the Airport generated $0.6 million in revenues, these have increased in 1998 by 10.8% and in 1999 they increased by 22.5 % over the 1998 value.
However, the company has very high Operating Expenses, particularly Property Taxes make up almost 9% of Total revenues in 1997 and 1998. The company has also very high Goods and Services expenses. However, we do not know if the high Operating expenses are due to fixed costs, which cannot be reduced, or due to higher variable expenses.
The Operating Expenses have outweighed the Airport's revenues and so the Airport has incurred Operating Losses during the entire 1997-1999 period. Despite this, we notice a significant improvement in 1999 during which all Operating expenses were reduced, and in particularly the Property Taxes.
Consequently, for the year 1999 the company incurred only $151,300 in Operating Losses.
4.6.18 FORT ST. JOHN AIRPORT 103
In 1999 we observe a reduction in both Cargo activities, and Passenger volume. The number of passengers served during 1999 has decreased from 87,619 in 1998 to 84,175.
Consequently we observe a drastic reduction in revenues from Concessions and Ground Transportation. Moreover, the Airside revenues have also decreased due to lower passenger traffic and thus the Total revenues for 1999 have dropped to $1 million. However, the Operating Expenses did not decrease at the same rate since there is a number of expenses that is fixed and cannot decrease with decreasing passenger traffic. Moreover, the Property Taxes have increased and so did the Wages and Salaries expenses relative to revenues (32%) while Interest expense and Goods and Services expenses have fallen but not as much.
All of these generated an Operating Loss of $4,200 for the Airport in 1999.
The Ground Rent is not disclosed (they may not have Lease payments) but the Fixed Charges Coverage ratio indicates that the earnings in 1998 were sufficient to cover the interest expense. However, due to losses during 1999 the company will have difficulties in meeting its short and long term obligations.
4.6.19 PRINCE ALBERT AIRPORT 104
Prince Albert Airport serves on average over 15,000 passengers each year. During the 1997-1999 period the Airport generated $296,965, $237,279, and $300,014 respectively in revenues. However, the Airport enjoyed small Operating Profits only in 1997, and incurred Losses in 1998 ($117,411) and 1999 ($59,828).
Based on the level of Passengers the Airport generated enough revenues, as the better than average Total Passengers to Revenue ratio indicates.
4.6.20 CHARLOTTETOWN AIRPORT105
The airport serves on average over 150,000 passengers each year, and during the 1997-1999 period they have generated $1.06 million, $1.57 million and $1.76 million in revenues respectively. However, higher Operating Expenses, particularly Property Taxes (15% of revenue in 1997, and 9% in 1999) have outweighed the increasing revenues and generated Operating Losses for the entire period. The Losses incurred were $1.03 million, $0.39 million and $0.11 million in 1997, 1998 and 1999 respectively.
The falling Total Passengers to Revenue ratio (from 16% to 10%) indicates that the Airports is improving its revenue relative to its Expenses and Asset base.
4.7 Financial Ratio Definitions and Explanations
4.7.1 Definition of Financial Measures
Since most of the ratios employed are static or "stock' concepts, a better analysis is done by looking at trends in ratios over time.
Operating Statistics: Operating Profit measures the earnings of the firm after all expenses except
interest and taxes and before any adjustments. Liquidity ratios indicate the firm's ability to meet its short-run obligations.
Current Ratio measures the ability of the firm to meet obligations due within one year with short-term assets
in the form of cash, marketable securities, accounts receivable and inventory.
The Current ratio assumes a regular cash flow and that both accounts receivables and inventory can be readily converted into cash. It measures the reserve of liquid funds in excess against uncertainty and the random shocks to which the flows of funds in a firm are subject.
By subtracting out Inventory, which often is not highly liquid, we can calculate the quick ratio, which measures the firm's ability to meet its short-term obligations with cash, marketable securities, and accounts receivables.
Working Capital is the excess of current assets over current liabilities, and is a measure of liquidity and solvency. The absolute amount of working capital has significance only when related to other variables such as sales, total assets.
The Days Receivables ratio estimates how many days it takes on average to collect the receivables of the firms. A high ratio indicates that the company extends more credit to its clients. This financing has an implied interest associated with it, and so higher Days Receivables implies higher interest incomes.
The Days Payables ratio estimates how many days it takes on average to pay the accounts payables of the firms. A high ratio indicates that the company takes longer to pay its Accounts Payables, and so it receives financing from its clients. This financing has also an implied interest associated with it, and so higher Days Payables implies higher interest costs for the company.
Asset Management Ratios indicate how efficiently the firm is using its assets.
Total Assets turnover ratio provides an indication of the firm's ability to generate sales in relation to its total asset base. The higher the inventory turnover ratio, the more times a year the firm is
moving, or turning over, its inventory. Assuming that the sales are progressing smoothly, a higher inventory turnover ratio suggests efficient inventory management. The quality of inventory is a measure of the firm's ability to use it and dispose of it without loss.
Accounts receivable turnover indicates how many times, on average, the receivables revolve, that is, are generated and collected during the year.
The Fixed Assets turnover ratio indicates the ability of the firm to generate sales based on its long-term asset base.
Sales to Cash Too high rate of Sales to Cash turnover may be due to a cash shortage than can ultimately result in a liquidity crisis if the firm has no other ready sources of funds available to it.
Sales to Short Term Debt The amount of short term that a firm is able to obtain from suppliers depends on its need for goods and services, that is, on the level of activity. Thus, the degree to which it can obtain short-term credit depends also on the level of sales.
Administrative Expenses to Revenues (salaries and wages; fuel; other) indicates the proportion of these costs in total revenues of a firm.
Debt Management Ratios deal with the amount of debt in the firm's capital structure and its ability to service (or meet) its legal obligations. The basic risk involved in a leveraged capital structure is the risk of running out of cash under conditions of adversity.
The ratio measures the relationship between total assets and the Retained Earnings that finances them. The more assets are financed on a given Retained Earnings the higher the reliance on outside financing.
The Total Debt to Total Capital attempts to measure how much of the total funds are being supplied by creditors. High ratio indicates that the company relies heavily on debt to finance its operations. A ratio more than 1 indicates that the company has negative Retained Earnings.
Long term Debt/Equity ratio measures the relationship of long term debt to equity capital.
The ratio of debt that matures over the short term to total debt is an indicator of the short run cash and financing needs of a firm. The ratio is an indicator of the firm reliance on short term financing.
Fixed Charges Coverage Ratio measures directly the relationship between debt-related fixed charges (lease and interest expenses) and the earnings available to meet these charges.
Profitability Ratios relate net income to sales, assets, or shareholders' equity.
A low Profit Margin Ratio indicates that 1) the firm is not generating enough sales relative to its expenses, 2) expenses are out of control, or 3) both. It its an important measure of efficiency of management.
Return on assets indicates the ability of the firm to earn a satisfactory return on all the assets it employs. It tells us how effective the firm is in terms of generating income, given its asset base. It its an important measure of efficiency of management. The tax adjustment of the interest expense recognizes that interest is a tax-deductible expense and that if interest cost is excluded, the related tax benefit must also be excluded from income.
EBITDAR = Earnings (Operating Income) Before Interest, Depreciation, Ground Rent
Ebitdar is a measure of the earnings without taking into account how these expenses affect the business.
Cash flow adequacy ratio determines the degree to which a company generates sufficient cash from operations to cover capital expenditures and net investment in inventories;
A ratio of 1 indicates that a firm has covered its needs based on attained levels of growth without the need for external financing.
5.0 Airport Infrastructure, Market power and Infrastructure in Canada
In this chapter we explore the relationships between airport infrastructure and competition in the airline industry against the backdrop of evolving competition policy in Canada and the US. We also consider the market power of airports and assess the impact of current and planned infrastructure projects at Canadian airports.
Of the approximately 726 airports in Canada, the 24 airports that hold "national" status account for more than 90 percent of all scheduled passenger and air cargo traffic in the country. To a large extent much of the focus in this chapter is on these airports, which are independently operated as part II corporations (without share capital or diffused profits) under the Canada Corporations Act (or similar provincial legislation)106.
We begin by considering the relationship between airport infrastructure and airline competition and the environment created by current and proposed competition policy in Canada and the US.
5.2 Airport Infrastructure and Airline Competition
All of the airport-related opportunities for airlines to engage in exclusionary practices arise from two airside capacity problems (take-off and landing slots and enplaning/deplaning gates) and one groundside capacity problem (counter spaces). Theoretically then, an airport can always minimize the chances of exclusionary behaviour by expanding its infrastructure in these areas, however the amount of capacity required to achieve zero congestion could require a socially inefficient level of investment that would create excess capacity in all but peak demand times. The simpler, economically efficient way of alleviating anti-competitive pressures is to ensure that airports have sufficient control of infrastructure (with the exception of take-off and landing slots) and are allowed to price them according to peak-load principles.
5.3 Take-off and Landing Slots
The number and size of runways and aprons determine the take-off and landing slot capacity of an airport. Airlines that control a large percentage of slots hold a dominant position over rivals to the extent that other airlines are prevented from offering routes and schedules land during peak demand hours. It is typically during peak demand times that airports are likely to be slot constrained, corresponds to the high-value, price-inelastic demand for business travel. By controlling these slots, particularly at hub airports, airlines can effectively exclude rivals from this segment of the market.
In 1998 at Toronto's Lester B. Pearson International Airport (LBPIA), the only slot-constrained airport in Canada, Air Canada controlled approximately 74 percent of the available slots, with 15 percent controlled by US-based airlines; 7 percent controlled by Canadian Charter Airlines and the remainder by Foreign-owned airlines.107 In discussions with the Competition Bureau, we ascertained that Air Canada did comply with a request to surrender of 42 slots at LBPIA, following Air Canada's take-over of CAI. The surrendered slots were spread more or less evenly over the peak periods (7:00am - 9: 00am and 3pm-8: 00pm) and there have been two rounds of slot allocations thus far. All the slots have been allocated to domestic carriers.108
If an airport can alleviate slot capacity constraints, then the potential for exclusionary practices is lessened. The obvious way this might be accomplished is through infrastructure investments in additional runway and air-traffic control facilities. In the case of Lester B. Pearson International Airport (LBPIA) the airport authority has planned the construction of two new runways along with new dual taxiways bordering the terminal apron area, a satellite deicing facility, and an infield access tunnel.109
The current capacity at LBPIA is 70 aircraft movements per hour (VFR) on the North/South runways and 104 aircraft movements per hour (VFR) on the East/West runway. The first runway expansion (parallel to the East /West runway) has a planned completion date of August 2002, and is expected to increase the East/West aircraft movements to 122 per hour (VFR) - an increase of about 17%. When the second stage of runway expansions is complete, LBPIA will operate a quad system with four East/West runways that will increase the capacity to 140 aircraft movements per hour (VFR). However there are two factors to consider when evaluating the effectiveness of this investment in capacity in reducing congestion during peak-demand periods. First, air traffic movements may increase in the future as a result of an increased demand for business and discretionary travel. Secondly, air traffic movements may increase as a result of strategic adjustments by airlines and by Air Canada in particular. In the latter case, the dominant carrier may increase its flight frequencies on business routes even if passenger volumes remain roughly constant. The use of smaller aircraft (if merited by passenger volumes) with more frequent service would be a way of maintaining its current dominant market share in the business travel market. Thus it is possible that LBPIA will remain slot-constrained during peak-demand periods, despite the expansion in capacity.
The preferred alternative (at least for economists) to the expansion of infrastructure and capacity is market pricing. That is, we know that peak-demand slots will command a higher market price than other slots, reflecting their higher value to airlines and their customers. Market pricing mechanisms will generate an efficient allocation of scarce airport facilities during peak-demand hours because those who would purchase the slots will be the users who value them most. Importantly, the issue is not that Air Canada would necessarily relinquish its current control of airport facilities but that it would pay market prices for them. As will be evident below, this increases the costs of anti-competitive behaviour.
The implementation of market-based mechanisms for slot allocation would be a significant departure from the current system for allocating slots at LBPIA, which is based on IATA guidelines. There are three main allocation principles of the system:
T Airlines retain property rights over the use of slots they have used historically (the grandfather principle).
T Airlines offering scheduled service over a longer duration are given priority over those who fly less frequently (airlines that fly throughout the year rank higher than those who do not).
T Commercial traffic is given priority over non-commercial or military traffic.
The system is widely recognized as favouring incumbents over new entrants by preventing access to those airports in high demand (hubs) at peak-demand periods. In particular the current system creates a significant barrier to entry in the business travel market segment. A "use it or lose it" rule for allocating slots helps to guard against overt hoarding of slots by a dominant carrier, but does not prevent exclusionary scheduling practices (maintaining flights at or below avoidable cost).
There are two possibilities for the use of market-based pricing of peak-demand slots. One would be to transfer property rights of usage to the airport and allow the airport authority to set peak-load prices. However, there need not be a direct transfer of control from airlines to airports. The alternative is an auctioning of peak-demand slots by an independent third party as a representative of the Federal government (as the ultimate owner of all slots).
A slot auction would elicit the same efficiency properties as peak-load pricing by the airport, but would limit airport market power, while redirecting revenues directly to the Federal government (where they could be earmarked for capital projects throughout the airport system). We favour the latter alternative for two reasons. First, airport control would imply a significant increase in revenue generation that would either result in capital investment or higher employee salaries and wages. Second, at a major hub airport the value of peak-demand slots reflects the broader value of the hub-and-spoke network such that revenues from the slot auction should benefit the infrastructure of the entire system. One might argue that under airport control of slot sales, a portion of airport revenues could be redirected to a system-wide capital fund. However if LBPIA is made anything less than full residual claimant, its pricing incentives change. Specifically, LBPIA would have an incentive to negotiate capital spending transfers from airlines (Air Canada in particular) in return for lower slot prices.
The auction system would also need to consider the optimal duration of the rights to slots. In other words, the auctioned rights would expire after a given period of time to be returned to the pool of slots available at auction. Ewers et al (2001) suggest between five and eight years.110
A potential implementation strategy for an auction mechanism would be as follows. Air Canada would be required to surrender a percentage of domestic slots at LBPIA, during the peak-demand periods, to an auction pool. The Federal government would be required to negotiate compensation for these surrendered, rights. Air Canada could then bid along with all other airlines in the auction. The proceeds from the auction would be earmarked for Capital spending in the overall airport system. While the possibility exists that Air Canada would retain a dominant control of auctioned slots, the competitive effect of the auction would be to raise the cost of predatory scheduling by an amount equal to the market value of the slot.111 Further Air Canada's domination of gates, counter space and other elements of airport infrastructure represent an equal or possibly greater barrier to entry than scarcity of slots. Consequently, availability of gates and counter spaces to accompany slots will encourage slot bids from competing airlines in the auction.
In summary we favour moving to a market-based pricing solution to slot congestion, but given the potential for incentive problems that would be created by the relationship between Air Canada and LBPIA as its hub, we recommend an auction mechanism implemented by an independent authority. This organization would channel the funds from slot auctions into a system-wide capital fund. This having been said, it is important to understand that the more pressing and widespread capacity problems in Canadian airports do not relate to slots but to airside gates and ticketing counter space.
The most important aspect of airside infrastructure in Canada that affords incumbents the opportunity for exclusionary practices, is the number, type, ownership and control of enplaning/deplaning gates. Gates can be further divided into "bridges" (meaning a covered platform from the terminal that docks with the aircraft door) and ground-level gates (that require passengers to deplane onto the tarmac and walk at ground level to the terminal). Even when an airport is unconstrained in its take-off and landing slots, congestion can and frequently does occur due to excess demand for gates relative to the number and/or size of aircraft enplaning or deplaning passengers in the same general time period.
If an incumbent airline owns and operates a gates, it can exclude rivals by making sure that its own flights are serviced first and at the most preferred terminal location (to facilitate connections for example). If these gates are equipped with loading bridges, an airline owner can set high prices to either discourage use by rivals by raising their relative costs, while at the same time generating revenue for itself. Interestingly, many airports although not slot constrained, have reported bridge constraints during peak demand periods. For example, in a 1999 speech, the Ottawa Airport CEO noted that a peak demand for early morning US-bound flights at Ottawa was pushing the passenger pre-clearance facility to full capacity and that the existing shortage of gates was generating delays of 15 to 20 minutes. He stated:
" The root of our capacity problem is that to handle current traffic we need 23 gates and we only have 19". 112
A dominant airline is less likely to overtly hoard gates times and is more likely to schedule the usage of gates in a way that preserves and enhances its dominant position at the airport. In particular by owning gates Air Canada can and does practice exclusive use (right of first refusal) with respect to gate allocations. If flights are delayed, a dominant carrier can provide preferential treatment for its own aircraft, regardless of the source of the delay, thus enhancing its reliability at the expense of rival airlines. Put another way, it can raise its rival's cost of providing a comparable level of reliability.
5.5 Control of counter space and baggage facilities
In the same way that a dominant airline can create barriers through control of slots or gates, it can also create barriers to entry or discourage expansion by competitors through controlling a majority of counter spaces in terminal buildings. By utilizing a majority of the counter spaces, the dominant airline can force longer waiting times on passengers travelling with competitors and increase their potential for delays.
In this environment it could be difficult to show anti-competitive practices, since the airline can argue that its use of counter spaces is part of a strategy to compete on service quality as well as price. Unless the dominant airline matches the prices of low-cost "no-frills" competitors it can argue that it is charging higher prices in return for increased service. If the price differential between its own fares and those of discount price competitors do not match the cost differential defined by the level of service quality, the airline could argue its product is an "experience good".113 The argument could then be made that "competitive" pricing is necessary to attract consumers to experience the service quality difference. The issue is further complicated by the uncertainty of proper yield management principles and the degree to which aircraft capacity over and above business fare seats can be used to match or almost match competing fares of competitors.
5.6 Cumulative effects of a dominant carrier in control of airport infrastructure.
There is a danger that if a dominant carrier is scrutinized with respect to anti-competitive practices in relation to only one form of infrastructure, that the tests for exclusionary behaviour might not produce a correct result. For example, an airline might be judged to operate above avoidable costs on routes connected to its peak demand slots at an airport. However the airline's real dominance may lie more with its control of gates and counter spaces. If an airline owns and operates a gate that it retains for its own use in conjunction with particular slots, then the avoidable costs of operation should include all relevant opportunity costs including the revenues it might earn from renting its gate to the highest valued user. The point is that the cumulative effects arising from control of slots, gates, counter spaces and baggage facilities make it impossible for rival airlines to offer comparable service (frequency, reliability or passenger time costs). Meanwhile, Air Canada has enough degrees of freedom to lower prices and abrogate its quality levels to satisfy avoidable cost tests while preserving a service quality advantage over its rivals
5.7 The role of Air Canada in financing capital investment
In the current environment, Air Canada plays a prominent role in the financing of capital infrastructure projects of airports. In one respect this might seem desirable given the economics of strategic investment and the role of co-investment in specific assets in strengthening long-term contracts by preventing hold-up problems. It is well accepted that an over-investment in dedicated capacity generates hold-up problems, so from an airport's perspective, current Air Canada business represents a portion of the overall capacity that places the airport in a strategically vulnerable position. By ensuring that Air Canada co-invests in the airport's infrastructure, the airport can help to mitigate hold-up problems.
From Air Canada's perspective, it can recognize that co-investment in airport infrastructure is strategically important, however the airline is placed in difficult position if it is the only airline to co-invest in capacity (while new competitors do not have similar requirements). There is no easy solution to this problem, given the large capital requirements facing new domestic carriers. If a per-passenger airside charge was applied, the effect would be disproportionate between Air Canada and its domestic competitors, given the different price-elasticities represented by the business travel market (dominated by Air Canada) and the discretionary travel market served by discount carriers. However to the extent that new competitors may successfully obtain some market share in business travel, they would be more able to absorb an airside AIF charge by passing the fee along to business travelers.
It is perhaps worth considering the effects of a more liberalized air travel market. For example, if foreign carriers were granted rights of establishment (setting up Canadian owned domestic carriers) or consecutive cabotage rights (cabotage rights for international flights), then financially stable and established foreign competitors would likely be more able to absorb infrastructure investment requirements at the top eight Canadian airports.
5.8 The Domination of hubs and spokes
Like all firms, airlines create value for their customers, airlines use their hubs in creating this value (consumer surplus). Despite hubs being expensive mechanisms to do this, it allows the firm to exploit economies of density AND economies of scope on the demand side with high frequency and large numbers of destinations. The premium [business] traveler will pay a premium for this service. The `fortress or dominated' hub is the means by which airlines survive to be able to price discriminate.
The empirical research on hub fare premiums in the US are surveyed in a recent report by Pickrell, (2000). Table 5-1 and Table 5-2 summarize the US evidence on Hub premiums using both GOA and alternative measures. The research to date support several broad conclusions:
On average, fare revenue per passenger is higher on average for trips to and from major hub airports where one or two carriers operate a large fraction of flights (75 % or so) than for trips to and from other airports. Hub premiums have existed since the early 1980s, if not before, at some major airports.
The difference between average fares at individual concentrated hubs and those at less concentrated airports varies widely, ranging from -15% to nearly 70% depending on the airport considered. A few concentrated hub airports have shown large fare premiums for more than a decade.
Higher average fares for travel to and from concentrated hub airports are realized mainly by the carriers operating major hubs there, and do not appear to spill over to other carriers serving those same airports. This suggests that travelers pay higher fares only for travel on flights offered by carriers that dominate service at concentrated hub airports. Fares charged by other carriers serving those hubs are similar to those for travel to and from less concentrated airports.
Adjusting for differences between concentrated hubs and other airports in flight characteristics that would be expected to make carriers' costs for serving them differ - principally flight distance and average passenger volumes on routes - reduces differences in average revenue per passenger.
Average Fare Premiums at "Concentrated" Hub Airports Using GAO Measure
Author |
Hub Fare Data |
Comparison Fare Data |
Adjustments |
Data |
Estimate |
GAO (1990) |
All carriers serving 15 airports where one carrier accounts for 60% or two carriers for 75% of enplanements |
All carriers serving remaining 38 busiest domestic airports |
None |
1985-89 |
27% |
USDOT (1990) |
All carriers serving 8 largest airports where one carrier accounts for 75% of enplanements |
All carriers serving remaining domestic airports |
Distance, density |
1984 |
23% |
1988 |
19% | ||||
Morrison and Winston (1995) |
All carriers serving 15 airports where one carrier accounts for 60% of enplanements |
All carriers serving remaining 38 busiest domestic airports |
None |
1993 |
33% |
Distance, density, frequent flyer tickets, plane changes |
1993 |
5% | |||
USDOT (1996) |
All carriers serving 11 largest airports where one carrier accounts for 75% of enplanements |
All carriers serving remaining domestic airports |
Distance, density |
1988 |
17% |
1995 |
22% | ||||
USDOT (1999) |
All carriers serving each of 10 "concentrated" route hubs |
All carriers serving remaining domestic airports |
Distance, density |
1988 |
24% (1) |
1997 |
31% (1) | ||||
Borenstein (1999) |
All carriers serving each of 10 "concentrated" route hubs |
All carriers serving remaining airports |
Distance |
1984 |
15% (1) |
1997 |
23% (1) | ||||
Morrison (1998) |
All carriers serving 11 airports meeting GAO definition |
All carriers serving remaining 64 busiest domestic airports |
Distance, carrier, no. of flight segments |
1996 |
21% |
Same, excluding airports served by Southwest |
Distance, carrier, no. of flight segments |
1996 |
-7% (1) | ||
Morrison and Winston (1999) |
All carriers serving 12 airports meeting GAO definition |
All carriers serving remaining 63 busiest domestic airports |
Distance, frequent flyer tickets |
1998 |
23% |
All carriers serving 12 airports meeting GAO definition |
Same, excluding those served by Southwest |
Distance, frequent flyer tickets |
1998 |
-6% | |
Same, excluding 3 concentrated airports served by Southwest |
Same, excluding those served by Southwest |
Distance, frequent flyer tickets |
1998 |
-1% |
(1) Unweighted average of premiums at individual airports reported by study.
Average Fare Premiums at "Concentrated" Hub Airports Using Alternative Definitions
Author |
Hub Fare Data |
Comparison Fare Data |
Adjustments |
Data |
Estimate |
Borenstein (1989) |
Largest carrier serving each of six major route hubs |
Same carrier's flights to and from other airports |
None |
1987 |
41% (1) |
Other carriers' flights at same six major route hubs |
None |
1987 |
22% (1) | ||
Kahn (1993) |
Largest carrier serving Chicago-O'Hare airport (United) |
Second-largest carrier serving same airport (American) |
None |
1990 |
2% |
Evans and Kessides (1993) |
"Dominant" carrier serving each of 10 largest airports with highest single-carrier share |
All other carriers serving each of same 10 airports |
Distance |
1988 |
11% (1) |
Berry, Carnall, and Spiller (1996) |
Average fares paid by business travelers on largest airline serving major hubs |
Average fares paid by business travelers on other airlines serving same hubs |
Distance, density, airport congestion levels, vacation destinations |
1985 |
19% |
Average fares paid by leisure travelers on largest airline serving major hubs |
Average fares paid by leisure travelers on other airlines serving same hubs |
Distance, density, airport congestion levels, vacation destinations |
1985 |
5% | |
Berardino and Spitz (1997) |
Largest carrier serving Chicago-O'Hare airport (United) |
Largest carriers serving 7 other "concentrated" airports |
Distance, density, business/leisure destination mix |
1997 |
1% |
Borenstein (1999) |
Largest carrier serving each of 17 "concentrated" hubs |
All carriers serving remaining airports |
Distance |
1984 |
15% (1) |
1997 |
25% (1) | ||||
Gordon and Jenkins (1999) |
Northwest passengers originating at or destined for Minneapolis, Detroit, and Memphis |
Northwest passengers connecting between flights at same airports |
Distance, frequent flyer tickets |
1996-98 |
8% |
Distance, ticket class mix, frequent flyer tickets |
1996-98 |
- 4% |
(1) Unweighted average of premiums at individual airports included in study..
Table 5-3
Capital Projects at Selected Airports
Selected NAS Airports |
Capital Projects Completed Since Transfer |
Capital Projects Underway |
Capital projects planned/considered |
AIF/PFC |
Vancouver |
Terminal building, new runway, additional gates, Hotel, retail expansion, apron expansion |
International and transborder terminal expansion and upgrade |
Domestic terminal Expansion, replace internal systems, upgrade South Terminal |
$5(BC and Yukon), $10 (Domestic & Transborder), $15 (International) |
Calgary |
Terminal Expansion (Concourse A), Customs Enlargement, Apron Increase, roadway improvements, Parking developments |
Terminal renovations, $79 Million in projects for 2000 |
Projects for terminal, airfield and roadway systems |
$10 (collected by airlines) |
Montreal Dorval |
Terminal Renovation, runway repair and rehabilitation, parking facility expansion |
Roadway access improvements, |
Environmental systems, systems expansion and upgrades, new terminal, new baggage claim area, gate expansion, cargo facilities |
$10 Collected by the LAA |
Toronto LBP |
N-S Runway expansion, de-icing facility, taxiway expansion |
New Runway, Aprons New Terminal Building, Cargo expansion, road access changes, parking garage expansion, infield development projects |
New Runway, public transit access, |
$10 and $7.50 for transfer pax, collected by airlines |
Edmonton |
Terminal redevelopment, parkade, system improvements, roadway access redevelopment |
Terminal development for domestic and international pax, apron expansion |
New terminal building, system upgrade |
$10 |
Winnipeg |
$10 | |||
Ottawa |
Upgrade of terminal facilities, onfield development |
Gate expansion, parking lot development |
New terminal, gate expansion, facilities for international and expanded transborder pax, road access development |
$10 collected by airlines |
Selected NAS Airports |
Capital Projects Completed Since Transfer |
Capital Projects Underway |
Capital projects planned/considered |
AIF/PFC |
Halifax |
Terminal Building Expansion Total cost = NA Federal contribution = $4.2m (2000) + $6.0m (2001) Bank financing secured |
Water drainage and treatment plant (Pyritic slate problem) Estimated cost = $6m To be financed by bank and AIF revenues |
$10 Started 01/2001 Airlines collect | |
Regina |
Apron construction (completed by Transport Canada) |
Terminal upgrades and redesign |
$10 | |
Saskatoon JGD |
Terminal apron reconstruction, |
Terminal upgrades and redevelopment |
Terminal redevelopment, |
$5 |
Thunder Bay |
Terminal interior redesign and upgrade |
Terminal redevelopment |
$10 | |
Saint John |
Terminal Building Expansion |
$10 (PFC) LAA collects | ||
Moncton |
Runway Renovation + Apron Extension Total Cost = $6.0m Federal contribution = $2.0m Completed in 1999 |
New Terminal Building At the design stage |
$10 | |
St. Johns |
Runway Renovation Total cost = $4.7m Federal contribution = $8.2m Remaining Funds retained for future capital projects ($3.5m) Completed in 1999(?) |
New Terminal Building Total (estimated) cost = $42.6m Federal contribution = $6.6m Bank financing secured (15 year plan) |
Tower Lighting De-icing pad Glycol recovery |
$10 Started ? Airlines collect |
London |
Terminal redevelopment and upgrade |
Terminal expansion and redesign, service land development |
$10 | |
Adjusting the measure further for differences in the fraction of travelers using frequent-flyer award tickets reduces the apparent premium, but still does not eliminate it.
Travelers' willingness to pay higher fares for the more frequent departures and non-stop connections to more destinations that characterize large hub airports appears to explain some of the fare premium for travel to and from these airports, but it is not clear exactly how much.
Adjusting for differences in variables other than route distance and passenger volumes that might cause carriers' costs for serving concentrated hub airports to be higher - such as the mix of business and leisure travel -- reduces estimated hub premiums to modest levels. However these variables may be correlated with demand characteristics that allow hubbing carriers to identify price-insensitive travelers and to charge them higher fares.
Adjusting for differences in the presence of low-cost carriers - Southwest Airlines in particular - between routes to and from concentrated hub airports and markets between other airports eliminates apparent hub premiums at all but a few concentrated hub airports. These premiums can be due to barriers to entry, lack of competition from low fare carriers and/or due to higher quality service.
Thus the weight of the collective evidence points toward the existence of hub premiums, although they may be relatively modest. This is also consistent with the fact that the carriers that appear to charge premiums also report operating margins - fare and other revenues in excess of operating expenses - significantly above industry norms. Finally, the fact that substantial entry has been extremely slow to occur at several of the airports where hub fare premiums appear to have existed for long periods provides some evidence that they are a consequence of barriers to entry at airports.
What does this mean for Canada? First, having a defensible hub is an essential ingredient (success factor) for a full service airline. Air Canada had one at Toronto (much of it with the implicit help of the federal government) while CAI never had one at Vancouver and with the granting of Asian routes to Air Canada they lost what they did have. Second, the Southwest airline effect is not a necessary condition to achieve the benefits of deregulation. The niche airlines, which service a particular market or geographic segment, are important to be sure but it is competition and not competitors that needs to be protected. That is, the Government should not undertake to ensure the financial future of any particular competitor to Air Canada, but rather seek to create a competitive environment through the monitoring and guidelines of the Competition Bureau. Third, we should not conclude that airport access is not a problem. Hub premiums are to some extent a symptom of a lack of airport access but also of premium and valued service offered by hub carriers. Increased airport access will ensure competition but it will not completely eliminate premium fares. What keeps these premiums from becoming `too large' is inter hub competition and competition at the hub. In a sense the hub premium is an index of the fraction of the spokes served by low cost carriers. If the hub premium is zero, low cost carriers serve all spokes. The policy implication is clear - ensure airport access and prosecute predation.
5.10 Anti-trust law and airports in Canada the US
In the recent merger of Canadian Airlines International (CAI) and Air Canada (AC), the Federal Competition Bureau made recommendations concerning the access to infrastructure at LBPIA: Canada's only slot-constrained airport. In particular, a requirement of the merger was that Air Canada surrender (upon demand) up to 28 departure/arrival slots per day during peak hours to other Canadian carriers at Lester B. Pearson International, Canada's busiest airport. Eight slots were to be surrendered between 7:00 a.m. and 9:00 a.m., 20 slots between 3:00 p.m. and 8:00 p.m. - and of these, at least two were to be made available in each hour. Additional slots (bringing the total up to 42 per day) were to be surrendered if Air Canada failed to sell its regional carrier Canadian Regional Airlines Limited.
The bureau also recommended the allocation of shared costs (de-icing and security for example) not follow the Chicago formula, in which the first 20% of these costs is divided equally between all carriers. Finally, the bureau recommended that slots, gates and counter spaces be surrendered at two slot-constrained US airports. This is because 24 new slots were allocated at LaGuardia and O'Hare airports to AC and CAI (at no cost to the airlines) under the Canada-US Bilateral Air Agreement (1995). The bureau also recommended the surrender of slots at other international airports (Heathrow and Narita for example).
More recently the Competition Bureau has drafted new enforcement guidelines on the abuse of dominance in the airline industry (February 2001). Chapter 4 of this document catalogues various forms of anti-competitive behavior in the airline industry and in section 4.2 (which focuses on exclusionary practices) the draft guidelines specify the pre-emption of take-off and landing slots separate from other forms of pre-emption relating to airport facilities. The reason for this is that slots can be regulated. Specifically, the draft guidelines state the following:
A dominant carrier's pre-emption of slots would entail acquiring control of slots that it had no immediate use for, but that it wished to hold in order to keep entrants out of the market. If the carrier had to use the slots in order to maintain control of them, it might be able to schedule some service in the slots just to occupy them (even if the service operates at a loss). Pre-emption of the latter type could be referred to as pre-emptive scheduling. It involves the expansion of capacity in the market at a time before it can generate at least a competitive rate of return on a flow basis. In the absence of potential entry by a new carrier into the market, the incumbent carrier would have no incentive to expand capacity prematurely because its overall profits would be higher by delaying the increase in service until market growth justified it. It is the threat of new entry that drives the incumbent to expand its capacity, and the capacity expansion acts as an entry barrier.
In the presence of a "use it or lose it" slot allocation policy, the Bureau determines whether a dominant carrier has preempted take-off and landing slots on the basis of whether the carrier is covering the avoidable cost of offering the service in the slots for which pre-emption is alleged. It should be noted that for pre-emption of take-off or landing slots to be an anti-competitive act, it must be done with the objective of withholding the take-off or landing slots from a market. Pre-emption of slots could adversely affect competition at airports where the preempted slots are arrivals or departures during the peak travel periods, or at airports that are slot constrained. Currently, Toronto's Pearson Airport is the only Canadian airport that faces slot constraints. However, slot constraints could develop at Vancouver or Dorval airports in the future. 114
The draft guidelines therefore make the important distinction between overt hoarding of slots (slots held but not used) and the more likely case of pre-emptive scheduling. The question then arises as to the correct measure of avoidable costs for provision of passenger air travel for a given landing or take-off slot.
The Competition Bureau (Feb, 2001) has also outlined anti-competitive acts by airlines in relation to airport facilities. In particular, pre-emptive use of airport facilities is defined to occur when:
"...a dominant carrier obtains access to and control of certain airport facilities or services (e.g., gate space, counter space, baggage handling facilities) before a competing carrier has an opportunity to enter into or expand in the market. " (p18).
The Bureau's guidelines do not make the same distinction between overt hoarding and preemptive scheduling of facilities as it does with pre-emptive control of slots. However, pre-emptive scheduling is the more likely action of an incumbent trying to discourage entry or expansion by a rival. An incumbent airline in possession of desk slots will use them to reduce the wait time for its passengers and could argue that such behaviour reflects a valid strategic move to compete on service quality.
In its guidelines, the Bureau failed to note current practices at airports with respect to cooperatives for airside services and fuel facilities in particular. Current practices provide lower fueling costs for the incumbent members of the cooperative and impose entry costs on new members. Entrants should be guaranteed equal access to services on a non-discriminatory basis not unlike access to CRS's and Frequent Flyer programs.
In the US, Federal law requires that airport operators provide access to all qualified air carriers on reasonable terms and without discrimination or the granting of exclusive rights to the airport. Further, as a condition of receiving Federal government monies for capital improvements, airports must undertake to operate the airport in an economically non-discriminatory manner. However, a 1999 report by the Transportation Research Board concluded that access to airport gates could create barriers to entry in the airline industry and recommended close monitoring by the Department of Transportation.115 Similarly, the US GAO has indicated that attention should be focused on the role of exclusive use contracts in gate leases and majority-in-interest clauses that invest airlines with significant amounts of control over airport capital projects.
Complaints by airlines trying to establish and maintain a market presence have included the following:
T A lack of access to gates and other facilities
T An inability to have new facilities constructed due to the veto power of dominant airlines over capital projects
T Restrictions on the allocation of gates and other facilities to low-demand time slots
T Fee differentials for gates
T Bundling of facilities.
In response to these reports and complaints, a joint task force was established by the Office of the Secretary (OST) and the Federal Aviation Administration (FAA). The Task Force investigated two central lines of inquiry:
T Identifying and assessing the links between airport business practices and the inhibition of competition in the airline industry, and
T The impact of passenger facility charges on airport capacity and airline competition.
T The report included a questionnaire sent to airports, on-site visits to some of the larger airports in the system and industry and public consultations. The Task Force made several recommendations for immediate implementation including the following:
T A direct mandate that FAA offices should seek to monitor and enforce the law regarding reasonable access.
T Airports applying for terminal projects with funding from passenger facility charges (PFC's) to be required to disclose anti-competitive aspects of the airports' operations as a prerequisite for approval.
T Airport Improvement funding to be conditional on an assessment of competitive effects of the proposed projects.
T Implementation of a database to track infrastructure changes resulting from PFC projects, such as number of gates, ticket counters and baggage carousels.
T Active encouragement of terminal use monitoring by airport operators (details of sub-leasing of counter spaces for example).
T A requirement of transparency on the part of airport operators to state the requirements for acquisition of gates and other facilities by a new entrant.
An airport has two obvious sides to its business: the airside (passenger airlines and cargo companies as direct customers and fixed base operators as tenants) and non-airside customers (enplaning and deplaning passengers as direct customers and retail businesses as tenants). Figure 5-1 illustrates the revenue sources and flows for an airport. In judging the sources and degree of an airport's market power, we need to look separately at airside and non-airside markets.
On the airside, the number of passengers an airport can attract determines the airport's market power (ability to set airside prices). In this regard, regional airports and tier II national airports compete to some degree with road and rail transportation. For example, the demand for flights to and from
Charlottetown was significantly reduced with the completion of the bridge connecting the island with mainland New Brunswick.
In the case of larger airports, the number of flights an airport can attract depends on both the airport's attractiveness as a point of departure/arrival and on its usefulness as a hub for connecting passengers. In the former case, an airport's bargaining power with airlines is derived from its geographic proximity to "non-connecting" passengers and the degree to which it competes with other airports for those passengers.
In the limiting case, airlines are faced with the choice of using the airport or ignoring that segment of the passenger market. However even in this case, the airport is constrained in its pricing to the extent that non-hub airports prefer to be servicing several rival airlines than one airline with deep pockets. The self-interested desire to have competing sources of airside business thus provides a natural ceiling on airside prices particularly in Canada, where the domestic carriers in competition with Air Canada are discount or charter airlines with low margins. More generally, to the extent that Air Canada has outside options in its dealings with many airports, an inability to attract other carriers leaves the balance of bargaining power most definitely with AC.116
Larger airports clearly have location-based market power, both with the services they sell to passengers directly and with the leasing contracts they write with airside and groundside tenants. We can expect rent-seeking behaviour from airports in this aspect of the business, where the bargaining power lies squarely with the airport authority in its lease negotiations. However this seems less of a competition issue because it simply involves a reallocation of the surplus generated by the location. However from a regulatory perspective, the problem of "gold plating" arises. Airports possess a high degree of revenue generating ability through negotiated rent payments and through AIF or PFC charges. However, since National airports cannot retain profits and are not disciplined by shareholder monitoring, these revenues will either be invested in capital or captured in wage or salary increases.
Nevertheless, the amounts of market power held by airports do not merit direct price regulation. Direct price cap regulation would simply create distortions that would create more problems than it would solve, both in terms of creating the right incentives (to promote economic efficiency) and in terms of allowing prices to alleviate infrastructure-related congestion. If airports are allowed and able to charge high prices for services with an associated price-inelastic demand, then the welfare (deadweight) losses are likely to be relatively small. This must be compared to the efficiency losses provided via the incentive structure established by direct price regulation plus the welfare losses resulting from the effects of regulated airport prices on airline competition.
5.12 Present and projected infrastructure shortages.
For National airports in Canada, currently there is no source of Federal funds for capital projects (regional airports still have access to Federal funds through ACAP). However many of these airports have received and continue to draw on capital funds that were part of their transfer agreements with Transport Canada. In many instances major capital expansion projects have been recently completed since devolution, are underway or planned. These projects range from runway and apron refurbishment to terminal building expansions or renovations and in some cases there are plans for new terminal buildings. In addition, changes in environmental and safety standards since devolution have resulted in necessary capital projects ranging from the containment and processing of glycol and other environmental hazards to new investment in tower and or runway lighting.
Typically, Federal funds represent a fraction of the costs of capital projects undertaken by LAA's. Consequently, the airports have sought bank financing along with the implementation of Airport Improvement Fees. In the latter case, these fees are important both as a source of enplaned passenger-based revenues and as a means of obtaining more reasonable terms for bank loans.
Current and projected infrastructure shortages in the airport system exist mainly in the area of gates on the airside and passenger facilities (counter spaces, holding areas for example) on the non-airside. These shortages have primarily arisen from a lack of maintenance and infrastructure investment by Transport Canada prior to the airport transfers.
Selected details of capital projects recently completed, underway or planned are summarized in table 5.1 below.
An overall implication of current and expected capital investments at Canada's major airports is that the additions to capacity will provide the necessary scope for the role that airport operators must play in promoting competition in the airline industry. That is, the increases in capacity along with greater control and market pricing of gates and counter space by airport authorities and market pricing of peak-demand slots should increase competition and increase access to the hub-and-spoke network and reduce hub premiums charged by Air Canada.
5.13 Summary of Recommendations
In general, our position can be summarized as follows. Airports have a clear, demonstrated role to play in their effect on airline competition. The "passenger corridor" at airports requires slots, gates and counter space, all of which create the potential for an anti-competitive environment when congestion occurs. Airports must control these facilities and should be encouraged to price them (with the exception of slots) according to peak-load principles. An independent agent of the Federal government should auction peak-demand slots at LBPIA (and other slots constrained airports in the future). The proceeds from slot auctions should be earmarked for capital spending across the entire airport system. Finally, airports should not be subject to price regulation, despite a potential for gold-plating at some airports.
We recommend that all gates be owned and allocated by the airport and that Air Canada be required to sell the gates it owns back to airports. Gate lease contracts should be transparent and reflect true common use principles.
Airports should be allowed and encouraged to practice peak-load pricing with respect to gates and counter space, with the proviso that the extra revenues accruing are earmarked for infrastructure maintenance.
A portion of Air Canada's domestic slots at Lester B. Pearson International Airport for peak-demand periods should be surrendered to a pool to be auctioned to the highest bidder. An independent agent of the Federal government should conduct the auction and the revenues accruing should be earmarked for capital spending across the entire airport system. These slot rights should be of fixed duration and should be tradable between airlines.
Airports should not be subject to direct price regulation. The Bureau of Competition Policy should be given a direct mandate to extend its current guidelines regarding anti-competitive behaviour in the airline industry to include a more detailed analysis of airport business practices and the role of airport operators in airline competition.
In cases of cooperatives for airside services (e.g. fuel facilities), entrants should have equal access to services on a non-discriminatory basis not unlike access to CRS s and Frequent Flyer programs.
Airports should move to passenger-based airside charges. This is important especially for smaller airports serviced by a single carrier (usually AC), in terms of limiting the damage caused by cuts to the number of scheduled flights.
6.0 A survey of Management at Canada's Airports117
In January and February 2001, we conducted numerous on-site interviews with members of top management at airports across the country. The objectives of these interviews were:
To collect less easily quantifiable information on the operational and business issues faced by Canada's airports, both currently and since devolution.
To assess the historic and current state of relations between airports and various key institutions, with specific focus on all levels of government and Canada's dominant domestic carrier, Air Canada.
To garner feedback from airport management concerning any issues relating to current Federal airport policy and suggestions relevant to the embedding of airport policy in a revised Transportation Act.
We contacted a sub-sample of approximately 35 airports across Canada, representing both tier I and tier II National airports and Regional airports. Initial contact was by telephone and email. In addition to requesting financial data from published annual reports, we sent out a questionnaire to collect operational data not usually contained in annual reports. Our third request was to conduct an on-site interview with the understanding that no public attribution would be made either to individual airports or persons.
Typically, the interviews were conducted with the airport's CEO. In many cases the CFO and Director of operations also attended. Questions were structured using a common question sheet, which posed questions in key areas of airport activities, however the subject matter of these questions was deliberately kept general in order to elicit responses that reflect the realities and issues specific to each airport. The interview was structured into the following areas:
T Management backgrounds
T Transfer Agreements and the devolution process.
T Organization details.
T Government relations and funding
T Safety and Environmental Issues
T Finance and investment
T Infrastructure (Gates, Slots and Counter space), and relations with Air Canada
T Feedback
A general picture emerged from the backgrounds of top airport management at independent airport authorities. Typically, the Director of Operations for the airport is a former employee of Transport Canada with many years' experience. By contrast, other executive positions (CEO, CFO etc.) have been filled from a variety of private sector backgrounds. The private (for profit) backgrounds of key managers in airport authorities has given rise to some feelings of frustration with the incentive structures under the part II corporation set up and (for National airports) the terms of lease agreements. However several members of management with TC backgrounds expressed a positive reaction to the ease flexibility and speed with which operational and business decisions could be made.
6.2.2 Transfer Agreements and the devolution process
All national airports have a standard 60-year lease of the airport property and facilities with a 20-year option to renew. All national airports are "Part II corporations" under the Canada Corporations Act. In most cases they are incorporated under federal law. In a small number of cases, the local airport authority (LAA) has been incorporated under provincial law. As Part II corporations they have no share capital and can only reinvest net earnings (no profits). The distinction is important since in most cases LAA's do not aim to cover costs, rather they possess something close to a private business profit orientation with the added constraint that all surpluses are earmarked for capital maintenance or expansion projects. There are however some transfer agreement terms that differ between airports.
Virtually all managers endorsed the notion of devolution and were eager to point out specific accomplishments that had occurred since that time. Examples typically pointed to include new construction; new personnel arrangements, and improved performance in areas such as customer satisfaction). Many managers also noted that the new Boards of Directors are working effectively. Sometimes, Boards went through a "growth process" as they came to understand their broad policymaking role and their relationship with management.
At smaller airports, managers generally reported that securing adequate capital funding was an ongoing challenge.
6.2.2.1 Stylized Comments by interviewees118
There were very difficult negotiations with TC (Transport Canada) prior to transfer in February 2000. There were many frustrations and delays such that there were significant hard feelings at the time of transfer. The Minister did not attend the transfer ceremony. The main reason for the hard feelings, was that TC insisted that the LAA assume all future and prior responsibility for a pre-existing environmental condition. The feeling was that the transfer agreement was signed because the LAA was tired of waiting and TC had adopted a "take it or leave it" approach.
The passenger volumes at the LAA were on the margin at around 200,000 at the time of transfer. So the board of directors could have elected to be either a National or a Regional airport under NAP. They elected National Airport status, as it was felt at the time that the Federal Government would act as insurer of last resort in the event that the airport ran into difficulties (i.e. the government would not let the airport fail). It remains an issue as to whether the LAA would have benefited more from regional classification (access to ACAP etc...).
There is definitely a problem at our airport in attracting some private businesses, particularly those that would sink capital investments and could locate off the airport property (cargo, courier). The problem is the lease agreement - a future move to full ownership would be desirable in this regard.
We don't belong in the National Airports system. We have far more in common with the other (smaller) airports in our province than we do with the others in the class we're in now.
The Federal government seems unwilling to recognize that some negotiated terms of the transfer agreement were unreasonable and not evenly imposed across airports.
Main financial challenge has been securing financing for the runway renovation. The Federal Government only offered to pay a contribution to the project after private financing had been obtained and on completion. This forced the airport into debt right from the word go.
Chattels were overvalued at the time of transfer - these were very old assets. The repayment time period for chattels has not been standardized for all airports - we have less time than most to repay the amounts owing.
Major challenges came about directly as a result of AC's take-over of CAI. After the takeover by AC, regional flights were consolidated and we lost about 40% of our flights overnight. Since then AC has reduced flights even further and airside revenue has fallen to under 45% of its value prior to the takeover.
The main issue now facing the airport is to try and attract a low fare carrier.
Our main success since transfer has been due to changing the airport's business practices. The first thing we did was to change our billing practices to private business standards (TC's current billing in Dec was for the previous June). Airside fees were also increased. On the cost side, we ended the TC practice of maintaining vehicles at an annual cost that far exceeded the cost of new vehicles - we bought new vehicles and saved money!
Things have improved substantially now that our airport is locally managed. We work more effectively with community organizations, and have partnered with them in developing new amenities for our users.
Our strategic planning process has improved substantially from Transport Canada days.
Our employee productivity has jumped immensely. It took a lot of negotiating. Cross training and multi-tasking have helped us achieve significant cost savings.
In many cases the organizational structure of airports has not changed drastically since transfer, in part due to the short time frame since devolution. In several cases, layoffs and attrition were implemented under TC prior to transfer. Some airports expressed frustration with an apparent lack of business experience on the Board of Directors. Meanwhile, airports are becoming organized in terms of inter-port cooperation. In particular the Canadian Airports Council is evolving into an institution that can coordinate the efforts of National airports. In the Maritimes, the Atlantic Airports Council is providing a similar regional role. Finally there are several informal means by which cooperation and coordination is facilitated, including regular meetings between airport CFO's.
6.2.4 Stylized Comments by interviewees
The intent of the NAP was that airport authorities would have a board of directors (BOD) that would inject business experience and acumen into the airport authorities, however this has not been the case. The process of electing a BOD is too political and needs to be tightened to give airports access to the business skills and resources it requires.
Discussions have taken place about the possibility of consolidating the management of airports in our region, although there do not appear to be large cost savings in our case.
Cooperation is common and encouraged between airports. This is facilitated by the "TC connection". Many authorities are made up of former TC employees who know each other well. Both formal and informal meetings and phone calls are used to facilitate cooperation.
The Canadian Airports Council (CAC) is the main organization that formally promotes cooperation between the National airports. The CAC is coordinating a common approach to bargaining with TC over rent.
The airports also combine to negotiate with the airlines over collection of AIF fees. However one interesting aspect of AIF fees is that the coordination procedure requires a committee of the airlines to vote on accepting terms. The vote is weighted by majority interest so the only vote that matters is AC's vote.
Belonging to a family of airports under the umbrella of a single management company provides our management teams a depth of experience to draw on (from other airports in the family). Our parent company has helped the airport break away from the TC paradigm, which was not oriented towards a business approach.
The Canadian Airports Council can help us meet the personnel development "network" that we used to have at Transport Canada. We have manager accreditation systems; I'd also say that there's a need for more formalized degree programs. Right now, Embry-Riddle and the University of North Dakota are the big players. We could use that kind of "academy" here in Canada.
Staffing challenges currently include specialized training issues (electrical, mechanical, avionics etc...) This is currently being debated by airports - the issue is whether a private company could provide these services and the location of a training center.
In terms of co-investment with other airports, there have been some informal discussions with the Minister concerning the possibility of a central airport authority in our province. The management of our airport is lobbying to promote our organization in this role, should such a policy be implemented.
6.2.5 Government relations and funding
Most transfer agreements with National Airports included some arrangements for injections of government funds for capital projects, however the details of these transfers varied significantly in each case. In some cases, there were significant transfers of capital funds with full control retained by the airport authority. In other cases the capital funds were provided with conditions and in some cases no capital fund allocations were included in the transfer agreement. Several airports are very frustrated with the terms and incentives in their lease agreements. In some cases it was pointed out that the lease terms meant that the airport's incentives went directly against the decisions a private (profit-seeking) business would make. Another issue on the minds of many airport managers is their tax liability. While many National airports are not yet required to pay Federal rent, there are significant differences between the tax treatment of airports by municipalities.
6.2.6 Stylized Comments by interviewees
There were very difficult negotiations with TC prior to transfer. There were many frustrations and delays such that there were significant hard feelings at the time of transfer.
The airport authority has received a property tax subsidy from the municipality, which has kept contributions in line with Federal contributions prior to the transfer. However this subsidy is scheduled to end by 2003.
We pay property taxes assessed at commercial (market) rates by the municipality - these amounts are billed back to tenants where appropriate.
Our airport pays municipal taxes but no provincial tax - only the value of the land is assessed. About half of the bill is charged back to tenants.
Currently we pay a "guilt" payment to the Municipalities on par with TC payments prior to the transfer. However the Municipalities want to assess commercial property tax rates in the future. We have proposed a payment scheme based on the current guilt payment per passenger (based on current passenger volumes) so that payments will increase if/when the airport business grows.
T There are many examples of encroaching regulations; these include:
T New approach ban limits
T Security regulations that were overlooked when TC ran airports are now being enforced
T Upgrading of EDS explosive deterrent systems
T A recent Federal study to regulate snow removal at airports
We had some red tape difficulties with the ACAP program, but in the end we got the truck we needed.
We are looking forward to participating in the ACAP program, because without it, we don't have as much capital as we need.
Before devolution, RCMP service was provided. Afterwards, we found that we had to pay for local policing ourselves.
Airports that have a significant amount of military traffic are being penalized because they must provide all military airside services at no charge (NATO agreement signed during TC `s tenure).
Canada Customs and Revenue Agency requirements for international airports are the same for all airports regardless of their size or operations. For smaller airports, this means that terminals must dedicate capacity to holding areas and rooms that will never be used. The requirements should be customized to the characteristics of the airport in question.
I really worry about who is providing advice to the Minister - who's in the "inner circle". In the old days, there was a healthier balance between "regulators" and "operators". Now, the "operators" are all gone (because we run the airports now), and who's left with the Minister are the regulators.
6.2.7 Safety and Environmental Issues
Several airports expressed specific concerns about pre-existing environmental problems where TC has insisted on transferring responsibility. However we also heard of cases where TC had agreed to assume responsibility for environmental clean-ups. This again points to the uneven approach of the Federal government with respect to transfer agreements. Otherwise we also heard that some visits by environment Canada were not conducted in good faith (unannounced visits, raising standards beyond those employed under TC operations) and did not live up to the spirit of the "quiet enjoyment" terms of transfer agreement
6.2.8 Stylized Comments by interviewees
The main environmental challenge is a pre-existing (prior to transfer) environmental condition that is specific to our airport, for which the Federal Government has refused to accept responsibility. We are embarking upon a capital project to address this problem. The project will cost approximately $6million and will be funded by AIF revenues and bank financing.
Our major environmental concern is the possibility of chemical dumps existing underground in an area we had earmarked for capital expansion. TC has taken the position that if we break ground to build in that area and come into contact with a dump, then we will be responsible for cleanup. That is, TC are arguing that any dumps are a pre-existing condition that we must take responsibility for if a problem occurs, even though the we were under the impression at the time of transfer that TC would assume such responsibilities.
There are Federal departments getting involved in the airport operations that were never involved during the TC days. The quiet enjoyment provisions in the lease contract are not being respected. TC is upping (environmental and safety) standards beyond what they were when TC operated the airports. In addition the methods being used are creating friction - unannounced visits, aggressive approach etc.
There are some environmental problems relating to containment around our facilities that relate back to TC days - however TC have agreed to assume responsibility for the cleanup.
The main environmental issue is glycol run-off and collection. TC never collected the glycol run-off but now they want it collected. This will cost us about $1m.
The Federal government is spending an excessive amount of time regulating and micro-managing the airports, in most cases with respect to standards that were never attained under TC's tenure. Examples include:
T Glycol collection
T Tower lighting
We are concerned that Transport Canada hasn't taken responsibilities for pre-existing conditions.
We are very concerned about the fire protection issue. Before devolution, we were led to believe that on-site protection wouldn't be required. Then Transport Canada changes the rules after the fact. We don't think they negotiated in good faith.
We're not happy about the way Ottawa reneged on the firefighting issue. The original suspension of this requirement was a real boon. There are other safety issues that should be considered too, like adequate fencing around the airport.
Since devolution, the "culture" of our airport when it comes to noise has really improved. It's now appreciated that extended hours of operation are an important business advantage. We're working well with local governments and our neighbours to resolve problems.
6.2.9 6. Finance and investment
In the case of "young" airport authorities, the task of developing a financial reporting system has been the first financial challenge. Beyond this many of the reported financial challenges and efforts have revolved around the issue of financing capital spending. In most cases, airports have implemented an AIF or PFC charge of $10.00 (taxes included), and in most cases these fees are collected by the airlines. However in a number of cases, the airport authorities are collecting the fees. By doing so, they are not required to earmark the funds for capital projects.
6.2.9.1 Stylized Comments by interviewees
Financial challenges have resulted from our characteristics as an airport with a disproportionate amount of hub activity compared to other airports. This significantly affects revenue generation from passenger traffic.
We are considering bond issues to finance debt in the future, but for now we are monitoring and predicting other forms of revenue generation - in particular AIF revenue.
There has been some talk of the government regulating AIF charges and this is a big concern as we view the AIF as a major way of generating revenue for capital investment. The AIF revenue is also important for positioning the airport in obtaining a good rating in the bond market (lowering the cost of future debt). The US is cited as an example where FAA controls and regulations have severely constrained the use and benefits of AIF revenues.
The main financial challenge has been securing financing for runway renovations. The Federal government agreed to pay a $2m contribution but only after private financing had been secured. This forced the airport into debt right from the word go.
We implemented an AIF ($10) which we collect - however, the board has earmarked all AIF revenues for capital investment projects.
We are embarking on an infrastructure renovation project at the terminal building at a budgeted cost of $2.5m. This has been factored into an 18-20 year cash flow plan that takes into account projected passenger flows and PFC revenues. We have a $10 PFC charge that we collect.
The main financial challenge has been the securing of capital financing for a major infrastructure project. Bank financing has been secured and we have been successful in fixing 85% of the debt over 15 years with the remainder (15%) floating to take advantage of any opportunities to make lump-sum payments against the principal.
We are now evaluating our capital replenishment needs as a separate capital funding issue. An example is tower lighting, which is required after TC increased the standard beyond the lighting standards they followed when operating the airport.
In our case, the time lag associated with getting "non-disturbance agreements" approved by Transport Canada has been a serious obstacle to attracting private-sector investments to our airport. Understandably, banks don't care to finance major developments without an "NDA". Sadly, the lengthy delays (as long as 24 months) associated with the approval process have left would-be investors (and us) very frustrated.
We've had no trouble getting non-disturbance agreements approved in a timely way. Some others have. Getting NDA's approved fast happens when everybody does their part.
6.2.10 Infrastructure and Relations with Air Canada
It was clear from our interviews that in general airports feel that Air Canada has in the past and continues to exert an undue influence at airports. Several airports were explicit in expressing a desire to see a policy change in the airline industry to allow more competition and the entry of international carriers. The interest in opening up the Canadian market was not restricted to the "big eight" National airports. Rather, some smaller airports saw consecutive cabotage or similar liberalization as their best chance of attracting another carrier. Feedback on the degree of control exerted by Air Canada over gates, counter space and other airport infrastructure confirmed our views about the cumulative effects of AC's dominant position in the domestic air travel market.
6.2.11 Stylized Comments by interviewees
Air Canada owns 80% of our bridges. All gates are classified as common use but the reality is that Air Canada controls their use and it is common practice for the airline to use the same bridges at the same times (status quo).
At the time of transfer, Air Canada was to surrender one gate (that belonged to CAI), but AC decided to keep the gate and only "surrender" it to common use.
Bridged gates are big revenue centers for Air Canada. At our airport, AC charges more than we do, with a 180-day cancellation clause, which is higher than our price.
All of our gates are common use. It's that simple. The airline managers know I won't go along with anything else.
There is a problem in dealing with Air Canada, in that the airline does not like to deal with independent airport authorities (and still approaches interactions in a fashion reminiscent of when it used to get its own way under TC's operation of airports.
Air Canada has about 75% of the passenger traffic and controls about 50% of the desk space however there is some contention that AC exerts too much control (small flight versus large flight requirements).
All bridged gates are owned and controlled by the airport authority. There is no immediate plan to increase the number of bridges or gates. Air Canada does not like the fact that they are dealing with us and not Transport Canada.
Air Canada controls 50-65% or the counter slots, which they use to capacity, and we control the rest. Air Canada certainly exerts undue influence in the control of gates.
We have coped well with airline restructuring, but it will be a continuing challenge to us to see it through the "transition phase".
The Airline Consultative Committee is a vehicle that Air Canada uses to exert undue influence on airports - AC has the mentality that it can still influence and control capital projects at airports. Under the MOU, AC can force arbitration for up to 14 months (say, with respect to AIFs). The prior relationship between AC and Transport Canada is too close.
Atlantic Canada should be considered for a relaxation of cabotage even if this is not made a national policy. A majority of trade (freight) is conducted by trucking because US airlines cannot access the market (e.g. lobsters to Boston by truck). The big geographic connection between the Atlantic Provinces and the US means that this has a big impact in lost airside business opportunities.
Once capital expansion is completed, there will be 3 bridged gates, of which we will own one and Air Canada will own the other two. Of their gates, AC will have exclusive use (first right of refusal) on one while the other will be common use.
Competition: Airline policy should be changed because smaller airports are at the mercy of AC. There is a need for a modified 6th freedom or cabotage. Foreign airlines need links to the rest of the network to make a run of several locations on many routes.
The airline policy should distinguish between regular scheduled carriers and discount carriers (i.e. there should be two licenses). Under the current system AC is allowed to be too aggressive. AC has been given too much sway over regulators - currently lobbying to review the process of investigating airport pricing - they want control.
I'm concerned about the "dominant carrier" problem. I have two routes in the top ** (figure deleted for anonymity) that do not have non-stop service. We have never been able to persuade Air Canada to improve on this situation.
This chapter has reported on the interviews carried out by the three principle authors of this study. While one is always careful to consider anecdotal information, we have a sense of confidence of the 'lessons' learned from our interviews. First, the interviews were undertaken with a structured survey instrument. Second, each of us completed the interviews in separate regions of the country. We found common themes. Third, the views of the stakeholders were also evident in other documents and seem to be borne out by the analysis we carried out in Chapters 3 and 4.
In some cases the views reflect an emerging firm that is learning how to participate in a new way and with new roles, responsibilities and pressures. This is a competitive environment and the downside risk stops with the airport. Because of being new at the game and because the method of devolution places some limits on behavior, there will be less latitude in structuring some strategies and more risk associated with others. Certainly the restructuring of the airline industry has nor made the task easier for newly devolved airports.
The comments we received were also consistent with the findings and comments of the Auditor General, contained in his report in 2000 (reviewed in Chapter 2 of this study). The issue of equity of treatment was a principle theme. This included by Transport Canada and other government officials who enforced the rules and standards, by the rules governing the capital assistance program, by the municipalities in their tax code and by the lease agreements with the Government of Canada.
1 Revenues went to the consolidated revenue fund and expenditures were paid out of it but the two were no linked.
2 Fees and charges were set in Ottawa so all airports charged the same amount regardless of the level of demand, or supply of services and capacity.
3 Flow control is the arbitrary decision criteria to hold aircraft destined for the congested airport on the ground at origin airports that were within a given distance or flying time. This strategy was and is not limited to Transport Canada but is used in the US and elsewhere.
4 During the late 1980s when Treasury Board limited funds for airport maintenance and operations, the system was funded primarily from net revenues generated at Toronto and by limiting expenditures at Toronto. Some have argued that Toronto was simply allowed to depreciate and funds used elsewhere in the system.
5 This excludes the value of the land.
6 In 1985 the AAG had revenues of $330 m, which was augmented by $280 m, a portion of the air transportation tax.
7 As we note below, such an approach completely ignores the dynamics of the industry and in particular the approach of discount carriers such as Westjet and Canjet in Canada and Southwest Airlines in the US to enter new markets and develop them.
8 A good example is the national rates and charges levied by Transport Canada regardless of airport size, investment, traffic levels or services rendered.
9 This traffic level was to have been sustained over a three-year period. No reason was ever provided for the figure of 200,000 nor was there any consideration that a new NAP would lead to a more entrepreneurial approach to airport management.
10 The government noted the top 26 airports handle 94 % of passenger traffic in Canada. Actually the top 8 airports handle 86 % and the 18 remaining airports account for only 8 percent. Clearly, such diversity creates problems in having one set of policies for capital access and emergency services.
11 Sault Ste. Marie is a good example of this type of group.
12 ICAO - International Civil Aviation Organization.
13 Calgary and Halifax serve Westjet and Canjet home bases respectively.
14 In our interviews with airports, all said that Air Canada had exerted increased pressure for better deals for services (`had thrown their weight around'). Even the GTAA engaged in a protracted and quite public negotiation with Air Canada over payments at Pearson.
15 The hold-up problem refers to the ability of one party to extract rent from another party who has invested in a dedicated and specific asset since the asset has no alternative uses.
16 Social and remote airports are handled differently. A better approach to ensuring service provision would be to auction off the right to subsidy an annual or fixed period basis. This was the method used for remote area air service in the transition to deregulation in the US.
17 The most recent data are for 1998 prior to the amalgamation of Air Canada and Canadian Airlines.
18 For example, Calgary Airport has been very successful in its retail and business plan. In April of 2001 the airport won the yearly Richard A. Griesbach Excellence in Airport Concessions contest. Calgary also took first place awards in the Best Food and Beverage Program and also Best Retail/Specialty Program in its class size category. The airport showed that extraordinary passenger counts are not required to launch a highly successful concession program.
19 See Michael Tretheway, Airport Ownership, Management and Price Regulation, Report to the Canadian Transportation Act review Committee (April 2001) for an excellent discussion of the evolution and differences between LAA and CAA type airports..
20 The Department responded to this recommendation by indicating that it had invited local airport authorities to submit proposed changes "that would facilitate land development but that (would) not leave the government worse off" (p. 10).
21 It is somewhat prescient because it hints at the "data problems" that became apparent during our research.
22 The audit focused on Transport Canada's responsibilities related to the National Airports System. Several topics were excluded from the scope of the audit, notably the Airport Capital Assistance Program (ACAP), the performance of individual airport authorities; safety and security aspects; the decision to cancel the transfer of Toronto's Lester B. Pearson International Airport (LBPIA); and the transfer of non-NAS airports (p. 10-47).
23 In the five-year review, the Department identified a lack of information on how local airport authorities manage revenue from airport improvement fees. It also found that in some cases, costing studies had not been conducted to determine whether fees were reasonable. The Auditor General recommended that Transport Canada clarify its own role in monitoring AIF's.
24 See Toronto Star, October 18, 2000, p. A01.
25 Winnipeg Airports Authority, Inc. (2001, January 31), Returning to the Goals of National Airports Policy
26 As quoted in the Edmonton Journal, October 19, 2000, p. B4.
27 DeGorge, RT (1995) Business Ethics (Englewood Cliffs, NJ: Prentice-Hall), p. 118
28 See Auditor General of British Columbia (1999) A Review of the Estimates Process in British Columbia. Victoria, BC: Author, page 42.
29 The latter concept was first introduced in 1994, following the National Airports Policy. As will be discussed later, renegotiated deals sometimes raised accountability standards.
30 As summarized by Tretheway (March 2001, unpublished).
31 Calgary and Edmonton adopted the broader audit provisions and agreed to make performance evaluation results available to the public .
32 U.S. General Accounting Office (1996). Airport Privatization: Issues Related to the Sale or Lease of U.S. Commercial Airports [GAO/T-RCED-96-82]. Washington, DC: Author
33 Doganis, R (1992). The airport business. London: Routledge, page 32.
36 RPI is defined as the Retail Price Index, representing changes in retail prices over time. X is defined as "efficiency gains".
37 Parker, D. (1999). The Performance of BAA Before and After Privatisation. Journal of Transport Economics and Policy, 33(2), 133-45.
38 From UK Civil Aviation Authority website (Retrieved 25 March 2001 from http://www.caa.co.gov.uk).
39 See UK Department of Environment, Transport and the Regions website [Retrieved April 1, 2001 from http://www.aviation.detr.gov.uk/consult/future/08.htm#9].
40 Hooper, P., Cain, R. & White, S. (2000) The privatization of Australia's airports. Transportation Research (Part E) 36, 181-204.
41 Forsyth, P. (2001, February 14-16). Privatisation and Regulation of Australian and New Zealand Airports. Paper presented at the Fourth Hamburg Aviation Conference: Hamburg, Germany.
43 This move was not without its critics. Some economists noted that by selling BAA's seven airports together in stead of separately, the United Kingdom government "did not maximize its sale price or instill a greater competition. Rather, these critics charged that a government converted a public asset into a regulated private monopoly (U.S. General Accounting Office, 1998, op. cit.).
44 King, S & Pitchford, R. (1998) Privatisation in Australia: Understanding the Incentives in Public and Private Firms. Australian Economic Review, 31(4), 313-28. As the authors note, privatised airports may lower their own costs by not properly scheduling aircraft movements or by downgrading maintenance. This behaviour raises costs not only to passengers but also to other airports. The authors suggest that joint ownership may be a good way to avoid these spillovers.
45 Australia Productivity Commission (2000). Review of Prices Regulation of Airports [terms of reference].
46 At Sydney Airport, aeronautical services are subject to price surveillance and aeronautical related surveys are subject to price monitoring.
47 Forsyth, op. cit., p. 7. In his paper, the author points out two important problems associated with dual-till systems. The first arises when airports use their market power to levy additional charges in order to circumvent the price cap. A second is the problem of cost allocation between aeronautical and non-aeronautical activities (p. 7-8),
50 Poole, Jr., RW. (1997). Privatization: a new transportation paradigm. Annals of the American Academy of Political and Social Science, 533, p. 5
51 Poole Jr., RW. (1997). Privatization: a new transportation paradigm. Annals of the American Academy of Political and Social Science, 533, 94-106.
52 The Federal government allocates funds to airports from the airport trust fund. The distribution of funds is established under law by formula. The current formula favors the larger more fiscally capable airports. Funding is also provided for projects submitted airports and a subset are funded on the basis of some criteria established by the FAA personnel. There does not appear to be any formal benefit-cost analysis. It is therefore not possible for the FAA to determine among projects which one would provide the greatest net benefits to an airport and rank ordering the projects on this basis. Nor does the FAA have a method of discriminating between airports on the basis of fiscal need. The FAA receives requests from several airports for funds for different projects. Ignoring any type of benefit-cost measures, the FAA must decide how these funds should be allocated if at all.
53 Butterworth-Hayes, P. (2000, March 1) Private Deals at US Airports. Jane's Airport Review, 5(4), 41-7.
54 U.S. General Accounting Office, Airport Privatization, op. cit.
55 International Civil Aviation Organization (ICAO)
56 The absorption of risk by the carriers also explains why they viewed airports as cost centres.
57 It could be argued that differences reflect economies of scale in providing services. We agree that differences in terminal fess might reflect economies of density but a lack of scale economies would not explain differences in landing fees; unless airports are pricing at short run marginal cost. This is discussed at greater length in Chapter 4.
58 Windsor airport for example has a 70:30 mix of revenues from airport activities versus other activities. Their goal is to take this to 50:50.
59 Hamilton airport with Westjet is growing its passenger market and the actual fees may be less than advertised fees.
60 What is notable is six of the top 8 airports in Canada are among the lowest in the level of landing and terminal fees. Winnipeg is in this group but has quite high 'other' fees (see Figure 3-6). These are all relatively high passenger market airports with domestic, transborder and international traffic. The complementarity between airside and non-aviation revenues leads these airports to not price too high.
61 These include things such as policing, security, pre-clearance and loading bridge fees.
62 For an excellent discussion of this issue see M. Tretheway (2001)
63 AIF are not considered to be aeronautical fees.
64 The double markup problem occurs when upstream firms profit maximize and a downstream firm takes the profit maximizing price as their input price and subsequently mark their prices up to maximize profits.
65 Rents in the sense of money consumers' are willing to pay but are not included in the current set of fees and charges.
66 Vancouver also charges $15 for an International destined passenger.
67 Canada 3000 acquired Canjet in March 2001.
68 This is similar to the Ramsey pricing solution.
69 Not-for-profit means revenues must equal costs. Airports with market power can still exploit it and any added revenues can be offset with higher costs. This 'gold plating' is a real concern but it reflects a combination of governance structure and exploitation of market power.
70 This is the same set of forces that have led to consolidation in the airline industry, it is not scale economies by network economies that have driven a number of mergers.
71 Scope economies refer to lower costs for multiple product production and distribution; a single plant multi-product technology is lower cost than a single product multi-firm technology.
72 The difference would be commuter, military and GA operations.
73 See David Gillen and Ashish Lall, Airport Performance Measurement: Data Envelope Analysis and Frontier Production Functions" Transportation Research E, December 1997 and Steven Morrison, Estimating the Long Run Prices and Investment Levels for Runways, in T. Keeler, ed. Research in Transportation Economics, Greenwick, CT: JAI Press, 1983 103-131
74 In some cases these cost decreases represent movements along the cost function while in others it represents a shifting of the cost function.
75 This is also sometimes referred to in the economics literature as economies of scale due to density.
76 These are the same pressures to create large carriers and to form alliances.
77 There is no evidence one way or the other whether multiple terminal airports (like Los Angeles and Atlanta, which are also hub airports, have lower density economies than other airports.
78 Cargo regularly moves between Toronto and Chicago, and New York airports.
79 We selected the top 50 airports in the US based on passenger movements.
80 There is only one private airport and it is minor however, as Chapter 2 indicates there is a growing amount of private management contracts.
81 Even as "mere" landlords, however, the business of airport planning and management is extremely challenging. As Doganis (1992) points out: "Airport authorities must invest substantial capital sums in large and immovable assets that have no alternative use, to satisfy a demand over which they have little control except indirectly. It is the airlines and not the airports that decide where and how the demand for air travel or air freight will be met. Airports merely provide a facility for bring together airlines and their potential customers. Thus, matching the provision of airport capacity with the demand while achieving and maintaining airport profitability and an adequate level of customer satisfaction is a difficult task. It is made particularly difficult because investments to expand airport capacity are lumpy, increasing effective capacity by much more than is needed in the short term, and because they must be planned long in advance."
82 A profit maximizing airport would set marginal cost equal to marginal revenue.
83 A graphic example, though atypical in magnitude, is Anchorage International which has seen its concession revenue shrink from $19.5 million in 1990 to $5.4 million in 1993 due to the cessation of layovers of aircraft flying between the U.S. and Japan. Another example is Dayton International, where passenger traffic has been cut in half between the time of the USAir merger with Piedmont Aviation on August 5, 1989 and the final closure of their Dayton hub in January of 1992. In Canada the amalgamation of Canadian Airlines and Air Canada has had similar impacts on a number of Canadian airports.
84 A note of caution is that airports may categorize their information in different ways. Aggregation may differ, for example, for concession revenue or how labour is counted. Some airports may have a significant proportion of contract labour while others may have all employees.
85 The correct way to deal with efficiency is to use a Total Factor Productivity or Data Envelope measure but there was insufficient time to construct either of these measures.
86 The exchange rate was 0.65 $ Can per $1 US.
87 It was not possible to construct the entire set of measures due to missing data. Note that none of the airports run by private management contractors is included (e.g. Hamilton, North Bay, and Windsor).
88 Calgary has won awards for its retail program. These events are not shown in the data since the measures are based on 1999 information
89 This may reflect differences in treating some cost categories between the two countries.
90 EBITDAR is a measure of the earnings (Earnings Before Interest, Depreciation and Amortization, and Ground Rent) without taking into account how these expenses affect the business.
91 Average means average of all Level I Airports
92 Insert from company's Annual Report
93 numbers taken from CAA's 1997, 1998 and 1999 Annual Reports
94 see note 4(b) in 1999 Annual Report
95 Year 1997's Income Statement was annualized to make the comparison to the other full years better. The Balance Sheet accounts were not annualized since they are not flow items but represent the Asset base of the company at a point in time, so we cannot expect that these accounts to proportionately increase over the years.
96 see note 3 in company's 1998 Annual Report
97 For Regina Airport, 1999 was the first year of operation under the local Airport Authority. The Annual Report includes only the 8-month period.
98 see note 6 in 1999 Annual Report
99 Year 1997's Income Statement was annualized to make the comparison to the other full years better. The Balance Sheet accounts were not annualized since they are not flow items but represent the Asset base of the company at a point in time, so we cannot expect that these accounts to proportionately increase over the years.
100 Only information was an Income Statement data and passenger volumes.
101 (analyzed only the 9-month period of 1999)
102 (Assessment based on 3 years of income statements and passengers volume)
103 Only Income Statement data and Passengers and Cargo volume for 1998 and 1999.
104 Only Income Statement data and Passengers and Cargo volume for 1997-1999.
105 Only Income Statement data and Passengers and total aircraft Movements for 1997-1999.
106 For example St. John Airport NB is incorporated as a non-profit corporation under the Corporation Act of New Brunswick.
107 DAFFE Competition Policy Roundtable, "Competition Policy and International Airport Services", #16, p4, OECD, 1998.
108 In the first round allocations (for winter 2001), our understanding is that Royal and CanJet took the majority of surrendered slots. In the second round (this summer's allocation) some slots have been allocated to the newly launched Roots airline, and since the allocation took place, WestJet has shown some interest in future allocations.
109 Other Canadian airport candidates for future slot capacity constraints during peak -demand times are Montreal-Dorval and Vancouver.
110 Ewers et al. "Possibilities for Better use of Airport Slots in Germany and the EU", WIP Infrastructure Economics and Economic Policy Study, Berlin, January 2001.
111 We envisage that the currently proposed competition guidelines regarding abuse of dominant position would be enforced with respect to auctioned slots.
112 "Set Course for Airport Redevelopment to 2020", http://www.ottawa-airport.ca/index-e.html.
113 An "experience good" is a good for which consumers cannot easily estimate the utility associated with the good without actually consuming it.
114 Competition Bureau. "Enforcement Guidelines on the Abuse of Dominance in the Airline Industry", pp19-20, February 2001
115 National Research Council: Transportation Research Board: "Entry Conditions in the US Airline Industry: Issues and Opportunities", August 1999.
116 For example, a serious issue currently facing St. John airport is their exclusive reliance on Air Canada's regional carrier for passenger airside revenues. Since the merger with CAI, Air Canada has cut the number of flights approximately 40%. The airport would like to attract a second carrier, but recognizes that to do so will require a lowering of airside charges.
117 The quotes included in this chapter are not attributed to anyone. We made a commitment to the interviewees that this would be the case.
118 The stylized comments are not direct quotations, but are intended to reflect the comments, suggestions and arguments made by one or more interviewees.