Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 8 - Evidence, February 8, 2011
OTTAWA, Tuesday, February 8, 2011
The Standing Senate Committee on Transport and Communications met this day at 9.30 a.m. in the course of its study on emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I declare this meeting of the Standing Senate Committee on Transport and Communications in session, and I thank you for being here today.
[English]
This morning we continue our study on emerging issues related to the Canadian airline industry. I welcome to the committee Senator Meredith, who is the newest member of the Senate of Canada.
Appearing on behalf of five of Canada's small international airports are David Innes, President and Chief Executive Officer of the Fredericton International Airport Authority; and Doug Newson, Chief Executive Officer of the Charlottetown Airport Authority.
Mr. Innes, you have the floor. Following presentations, we will proceed with questions.
David Innes, President and Chief Executive Officer, Fredericton International Airport Authority Inc.: Thank you for inviting our group of airports to address the specific issue that exists within the National Airports System, NAS. I am here with Doug Newson to further explore the issue affecting some of Canada's small NAS airports that was raised during the presentation of the Atlantic Canada Airports Association in November 2010. That issue affects five of Canada's smaller NAS airports: the Charlottetown Airport in Prince Edward Island, the Fredericton International Airport in New Brunswick, the Gander International Airport in Newfoundland and Labrador, the Saint John Airport in New Brunswick, and the Prince George Airport in British Columbia.
I will begin with a brief outline of the background of our National Airports System. Canada has chosen a model of airport administration with a system of national, regional, local and remote airports. The National Airports System includes airports located in the national, provincial and territorial capitals and strategic locations, and airports that handle at least 200,000 passengers per year. By 2003, all 26 NAS airports were transferred from federal to local responsibility.
The NAS airports, with the exception of those in the territories, remain on federal land. They are leased to airport authorities, which are financially responsible not only for operating the airport but also for capital improvements required for maintaining and expanding airport infrastructure.
It is agreed generally that the transfer of the airports from Transport Canada to Canadian airport authorities has led to many positive results for both the airports and the communities they serve. We five smaller NAS airports also have experienced significant growth under airport authority leadership. We have greatly improved our bottom line. Since 1999, passenger traffic at our five airports has grown by 20 per cent to as high as 50 per cent. Combined, our five airports have managed to invest over $52 million in capital projects over the last five years.
While we believe that the transfer of the airports was the right decision, there have been difficulties and lessons learned. One of these lessons is the high cost of capital infrastructure required to maintain an airport. The struggle that smaller airports have is raising this capital.
Our five small National Airports System airports have ongoing requirements for significant capital expenditures. The revenue collected from traffic is not sufficient to sustain our capital-intensive assets. In business terms, the airport business has a high component of fixed costs; and our revenue, which is based on traffic, is linear. The National Airports System airports also operate within a ground lease from the Government of Canada that contains a significant ongoing obligation to the Government of Canada.
It is fair to say that at the time of transfer of the airports, the cost of these obligations and the required revenues to operate and maintain airports were not fully realized. Clearly the challenges that our smaller NAS airports would face financially were not understood well. Over time, our airports have developed a better understanding of our business framework. A review of our annual reports will show that we are largely self-sufficient. At Fredericton, for instance, the approximate $6.5 million in annual revenue generated is sufficient to cover our operating costs and to invest approximately $1 million per year in our airport infrastructure. It has become clear, however, that we are not able to fund fully all of our capital requirements and that eventually we will run into major capital expenditures that we will not be able to make.
Our five smaller NAS airports have been working with Transport Canada over the past 18 months to find a solution to this ongoing problem. We have concentrated our discussion on the ongoing need for support for air-side and safety- related infrastructure, as such support is available in Canada to local and regional airports of the same size through the Airports Capital Assistance Program. ACAP will be mentioned again later.
We think it is fair to say that there is concurrence that there is a financial problem for airports that are located on federal lands and that have fewer than 500,000 passengers annually. Our group of five contains all of the NAS airports that have fewer than 500,000 passengers annually. All other NAS airports in Canada have volumes over 500,000 passengers and do not struggle to fund safety- and security-related infrastructure assets. The number of 500,000 passengers is the point at which the full long-term costs and revenue curves come together. Beyond that traffic level, an airport is able to generate the revenue required to be financially viable.
There are many other small regional and local airports in Canada with fewer than 500,000 passengers. In fact, 200 such aerodromes across the country have various governance models and are upgraded often by community groups and municipalities. The difference between these community airports and the five small NAS airports we are discussing today is that community airports have access to infrastructure programs for safety and security funding through the Airports Capital Assistance Program. They also enjoy access to funds through the Building Canada Fund under the Communities Component and under the Infrastructure Stimulus Fund. In short, support for capital projects is available to small, regional and community airports but not to NAS airports on federal land.
The oxymoron is that because we are owned by the Government of Canada, we are excluded from Government of Canada support. It is significant that these exclusions are within the programs and not specifically within the National Airports Policy that established the National Airports System. While being part of Canada's National Highway System or Canada's National Ports System is a cornerstone in obtaining federal funds, being part of the National Airports System excludes federal support.
Our request to Transport Canada has been that it create a funding program with similar eligibility parameters to the Airports Capital Assistance Program that would permit NAS airports that are owned by the Government of Canada and have fewer than 500,000 passengers per year to have access to funds for safety- and security-related infrastructure.
It is important to note that we are not saying that our five small NAS airports should be turned back to the federal government or that the model is not working. Rather, the model needs to be fine tuned. Our five airports are on the verge of being self-sufficient, but we are not quite there. Without access to capital infrastructure funding support in the past, a number of these capital projects have had to be deferred, which has led to amplifying the capital infrastructure improvement needs over the next five-year period.
Within the next five years, most of our airports will need complete runway rehabilitation and to purchase new equipment. The total cost of these safety- and security-related infrastructure needs from 2011 to 2015 is approximately $75 million. Our five airports are not able to finance these safety- and security-related infrastructure requirements entirely on their own.
Please allow me to speak a bit about the relationship of the Fredericton International Airport to its community. The story of the Fredericton airport is that of a community recognizing the airport as a fundamental element in its own vitality. At the time of transfer there was great reluctance to get involved with the airport, but businesses and people in Fredericton quickly came to recognize their increasing dependence on the ability to move and trade nationally and internationally. Today, the airport is recognized as being critical to the important economic drivers of our community. This includes governments and universities as well as the consulting engineering industries that have grown out of the universities to become an important part of the local economy. It also includes our military at CFB Gagetown.
Our successful businesses have become so by increasingly concentrating on a global marketplace. Fredericton is no different than any other successful community in Canada. Our community's businesses are dependent on quick access to that marketplace, and a reduction in the level of access becomes a competitive disadvantage. In fact, while the airport property is home to approximately 250 jobs, many more jobs in our community are dependent upon the airport. Although the airport is nominally self-sufficient, in the long term it will not be. Major capital expenditures and regulations brought on by Transport Canada guidelines will arise faster the airport can cope with them. That is precisely why access to an ACAP-type funding program is so important to our viability.
I would now like to pass the floor to Mr. Doug Newson to tell you about the Charlottetown airport.
Doug Newson, Chief Executive Officer, Charlottetown Airport Authority Inc.: Thank you for having me here today to join in the discussion regarding the five NAS airports.
As the only commercial airport in Prince Edward Island, our airport provides an important link to many key industries in the province and is essential for the growth and development of our provincial economy. Without an airport, Prince Edward Island would lose millions of dollars in tourism revenues annually and would not be able to sustain or grow its new emerging business sectors, such as bio-science and information technology.
As you know, we are also home to federal government offices, including Veterans Affairs Canada, which I believe is the only federal department that has a head office outside Ottawa. Our local economy depends on using air transportation to do business. Having to drive two to three hours to neighbouring provinces' airports would mean fewer businesses would decide to locate in our province. Our airport generates over $90 million in economic activity to the City of Charlottetown. We are a significant economic engine and one that needs to be supported to further enhance the economic benefit for our community.
We operate with an aggressive approach to business growth. By growing our concession fees and creating and expanding the business park located on airport land, we have been able to grow our non-aeronautical revenue by over 25 per cent in the last 10 years. Unfortunately, we have some of the highest landing and terminal fees in Canada, and as a result we have not been able to increase them since transfer. At the end of the day, the best way to increase the stream of aeronautical revenues to our airport was to grow the number of carriers and flights at the airport. There is no doubt we have been successful over the past five years in doing this, but the cost of business has risen substantially. Operating and maintenance costs in 2000 were $2.8 million, and today they have risen to over $5 million. Prior to transfer, when the airport was operated by Transport Canada, we had 38 full-time staff. Today we employ a complement of 21 full- time staff.
Our airport has been fortunate to be able to build upon a solid balance sheet. We have dollars set aside for capital improvements and projects for our airport. However, it will not be sufficient in the long term. Slowly maintaining and rehabilitating our runways would exhaust the capital fund that we have managed to accumulate over the past 10 years. If you were to examine our projected 10-year cash flow, you would see a deficit of over $10 million, assuming no funding of any kind were received for any of these projects.
The reality is that all five of our national airports are now facing increasing operational costs and monetary inefficiencies that have accumulated over a number of years. These airports have been operating in an underfunded manner in terms of infrastructure. As a result, infrastructure and supporting equipment is being worn and aged. We simply cannot keep up with the rising capital costs while meeting new regulatory requirements; these costs are quickly outpacing our airport revenues.
In conclusion, it is imperative that our airports have access to a funding program. We are not asking to reinvent the wheel. The ACAP funding program exists, and we envision having something similar that is accessible for small NAS airports under 500,000 passengers in order to assist in funding our safety- and security-related infrastructure requirements. Thank you for the opportunity to present our views on behalf of Canada's small NAS airports. We would be happy to take your questions.
Senator Mercer: Thank you for being here, gentlemen. It is good to see you here today.
You may have answered this in the last few paragraphs of your presentation, but is the simple answer that we say that any airport that is part of the NAS system with fewer than 500,000 passengers should have access to ACAP or the Building Canada Fund or any future infrastructure stimulus funds? If that were to happen, would that be the answer to the problem?
Mr. Newson: Just to back up a bit, this group of five airports came together, but we are not an association. We are a group within a group that has identified that level of traffic as the magic number where some sort of program like ACAP is required. We do not want to be part of ACAP. The ACAP airports would probably come in and say that ACAP is underfunded. We do not want to dig into their pile of money. Basically, our deficit over the next 10 years for capital projects is probably $1 million to $2 million on average, if you look at the big picture. It is not a big problem. That is per airport per year.
I believe with ACAP the airport gets a percentage of funding depending on its traffic level, so as traffic grows, the percentage of funding for a specific project would go down. That is basically what we are looking for. We are asking for access to an ACAP-type program or other infrastructure programs.
Mr. Innes: Certainly eligibility or access to other federal programs or federal-provincial programs would be a welcome change as well, because we are excluded at the present time from them.
Senator Mercer: A number of people have alluded to the cost of equipment, not just capital projects. When we visited the Ottawa airport a few days ago, we were told about the amount of equipment it had replaced. My memory may fail me, but I thought it was $10-million worth of equipment that it replaced last year, including snow removal, et cetera.
What happens to the old equipment when an airport like Ottawa, a much larger, much more financially viable airport, buys new equipment? I should perhaps have asked that question when we were at the airport in Ottawa, but the thought has only come up now. Is there any thought to recycling this equipment to the smaller airports to help keep your costs of equipment down so that you can better adjust your expenditures to capital projects?
Mr. Innes: Certainly the cost of equipment is high. A simple snowplough truck and sweeper combination will set you back $300,000 to $400,000. We have purchased used equipment, and we will test the marketplace. We keep equipment for quite a long period of time. I think the oldest truck in our fleet at the Fredericton airport is a 1985 unit. We nurse these things along, long after other people would. We will test every market. We buy new equipment and sometimes used equipment. It is the same as a used car. It all depends on the deal, senator.
Senator Plett: Gentlemen, I apologize for being a little late this morning. If you have already answered this in your earlier comments, I apologize. In 2005, there was a ground rent formula set out. Is that formula still in place?
Mr. Newson: As far as I know, some of the smaller NAS airports have not begun to pay rent yet. The formula has changed. In Charlottetown, we are not scheduled to pay rent until 2016. I think Fredericton is in the same boat. The formula that was brought in in 2005 is, as far as I know, still the same today.
Senator Plett: Is the fact that you are not paying rent because your gross revenues are that low, or is it because you have a grace period?
Mr. Newson: I believe there was a grace period when the National Airports Policy was set up for the smaller airports.
Mr. Innes: We have a grace period now, but our revenue is not sufficient to generate rent under the formula.
Senator Plett: Meaning that you are getting less than $5 million a year gross?
Mr. Innes: It is in that magnitude.
Senator Plett: Mr. Newson, you said that the landing fees at Charlottetown were the highest in Canada. Is that correct?
Mr. Newson: Among the highest.
Senator Plett: What is the reason for that?
Mr. Newson: In Charlottetown, we have not raised our landing and terminal fees since 1999. Over a two- to three- year period prior to transfer, Transport Canada had raised the landing fees in Charlottetown to a point where only one other airport in the region was higher. We are at somewhat of a disadvantage in terms of our fees and our ability to raise them, so we will have to look at other ways to generate revenue. We have been fortunate to grow traffic, resulting in increased revenues, but we have not raised our landing and terminal fees since 1999.
Senator Plett: Has the traffic in those five NAS airports increased or decreased over the last number of years?
Mr. Innes: It has increased substantially since the transfer. The number in our presentation material is 20 per cent to 50 per cent over the last five years.
Senator Plett: Things should be looking up for you.
Mr. Innes: It is getting better every day.
Senator Downe: I would like to follow up a question asked by my colleague about the landing fees in Charlottetown. Prior to your inheriting the airport, Transport Canada had increased the fees dramatically. Why did they increase them so much? Why were they increased more in Charlottetown than in other places?
Mr. Newson: I cannot comment on the other airports. Mr. Innes might be able to shed some light on that. I was not around at the time. My only comment is that they likely saw it as an opportunity to generate increased revenue prior to the airport authority taking over the airports. At the end of the day, landing and terminal fees constitute a small percentage of an airline's operating costs. Certainly they look at that when they determine which markets to operate in. Margins are very tight in the airline business, so they look at every potential for a penny to be gained. As a result, we have become more aggressive in offering incentives and reduced fees for airlines starting up. Given that our fees are so high, the board has been reluctant to look at an increase in fees over the past 10 years.
Mr. Innes: Transport Canada increased the fees at airports by 25 per cent every year, while they honed them in the last few years before transfer. We transferred after the Charlottetown airport transfer. We had to roll our landing and terminal fees back to the level of fees at Charlottetown when we transferred. We had the dubious distinction of being one of the last airports to transfer, and we were getting the 25 per cent increase in January in landing and terminal fees. The later an airport transferred, the higher its fees were. Most airports were late to transfer. We have rolled those fees back about as far as we can take them back.
Senator Downe: It would seem to be a competitive disadvantage as you try to recruit more companies to land in Charlottetown. You have done a very good job, as we now have flights to Boston, New York and Detroit as well as Ottawa and Halifax, et cetera. It is a booming airport and growing dramatically. As you indicated in your presentation, it has helped the economy tremendously. Your recruitment would be hindered by these high fees, which means fewer airlines landing and fewer passengers.
Mr. Newson: Since the transfer to airport authorities from the federal government, airports have become more aggressive in recruiting airlines. As a result, the incentives to airlines have grown, which we will continue to see. Some small regional airports have begun to subsidize airlines to ensure that they have service. Our challenge is to get them to Charlottetown in the first place; and if they can be successful, they will continue to add capacity. There is no question that because our fees are higher, we have been hesitant to pass on additional costs to the airlines. That is why we see such things as facility fees and airport improvement fees, which continue to grow as we move forward.
Senator Downe: If you pass the fees on to the airlines, they will pass them on to the customers, increasing travel costs in Canada. Sometimes it costs more to travel to and from the regions in Canada than to travel overseas, which is totally unacceptable.
Has your group looked at the advantages that Americans provide to their regional and small airlines? In your views, are any of those models transferrable to Canada?
Mr. Innes: We have looked at the issue of the relative position of the U.S. airports versus Canadian airports and airlines. Certainly, much more money is put into the airports and airlines in the United States. Small communities like ours in the United States would be eligible for some assistance from the federal government. Such programs do not exist in Canada. In relative terms, an airport like the Fredericton airport loses a fair amount of traffic to the United States because user prices are cheaper, and customers go for a better ticket price.
Senator Downe: Have you looked at that? The United States subsidizes small local airports at a very high level. Would that seem to solve your problems?
Mr. Newson: There is no question that the model in the U.S. is different from Canada's. If we were to receive similar assistance for infrastructure, it would go a long way. American airports are limited in what they can charge for airport improvement fees, but in Canada we are pretty much free to set our airport improvement fees. There are pros and cons to the U.S. model. We are not asking to reinvent the wheel, but we are looking at the various options. We are asking for a program similar to ACAP for our small airports.
The Chair: Who are your competing airports, American or Canadian?
Mr. Newson: At Charlottetown, Moncton and Halifax are our main competitors.
The Chair: Do you not have an American competitor?
Mr. Newson: It would be rare for people to travel instead to Bangor, Maine, for example.
Mr. Innes: We compete with many U.S. airports. Domestically we compete with Moncton and Saint John, to a limited extent. We lose an unbelievable amount of traffic to Bangor and Portland, Maine; and to Manchester, New Hampshire, and others. There are as many people from Fredericton flying out of U.S. airports to the United States as there are out of Canadian airports to the U.S. There is significant traffic loss resulting in revenue loss.
Senator MacDonald: Mr. Newson, I have had the opportunity to fly many times into the Sydney and Charlottetown airports. They are similarly sized airports and communities. However, the Sydney airport is not part of the NAS. Would it be an advantage to you if the Charlottetown airport transferred from the NAS to the same system as that of the Sydney airport?
Mr. Newson: There is no question. We have had a number of discussions around our board table about that, and Transport Canada will reveal the policy as we move forward. Certainly, there are pros and cons to doing that. If it is a simple matter of transferring out of the NAS to have access to ACAP funding, then yes it would be great. However, being part of the National Airports System provides some protection. We would be interested in discussing such a transfer with Transport Canada if it were an option.
Senator MacDonald: You said that there is some advantage to staying in the NAS.
Mr. Newson: The NAS gives us some credibility and importance as part of a larger transportation network across the country. At the end of the day, if we got into major financial issues it would be the responsibility of the Government of Canada to ensure that there is an airport in Charlottetown. It is an interesting discussion, and we are interested in looking at it further.
Senator MacDonald: In terms of capacity, I cannot help but notice that Nova Scotia has one airport under the NAS — Halifax, which is a substantial airport. Yet New Brunswick has three airports, and Prince Edward Island has one airport. They are in close proximity. Is there a problem of overcapacity?
Mr. Newson: Whether we were part of the NAS or other would not affect our number of travellers. The issue of overcapacity of airports in the region is another question. The NAS was set up either in capital cities or where the traffic was over a certain level over 15 years ago. At that time, it was a good model. Should it be looked at again? Absolutely. If you took three or four airports out of NAS, I do not think you would see a major difference in air travel in the Maritimes.
Senator MacDonald: I do not want to say there is an overcapacity of airports in Atlantic Canada. I do not want people to think I want to shut down airports in Atlantic Canada. However, I was curious about how having all those airports in close proximity affects the way you operate, but you say it does not.
Mr. Newson: I do not think it does.
Senator Cochrane: Mr. Newson, you mentioned that when the transfer of the airports occurred, the financial challenges that the smaller NAS airports would face were not well understood. I think you both said that. Would you elaborate on that? What do you know now in this regard that you would like to have known then?
Mr. Newson: I was not around when the airports were transferred, but people really underestimated the long-term capital requirements required to operate the airports. That is probably the single biggest challenge moving forward. Every airport was in a different shape when it was transferred. In our instance, we had a runway that was rehabilitated not long prior to transfer, so as we looked forward, we underestimated the cost and time frame to rehabilitate that runway again. Some airports across the country got brand new terminals when they transferred, and they are benefiting from that today. Over time, that will catch up. When other airports across the country were transferred, they were given old airports with runways that required a lot of work. I think the long-term capital infrastructure requirement that it takes to maintain an airport is the single biggest thing that was underestimated at that time.
Mr. Innes: I was around at the time of transfer. In fact, when we started to operate airports, we did not really understand the business. There are certain things we did understand. We understood what the payroll cost was and the cost of materials and that sort of thing. We could predict how much equipment would cost. We did not know much about the legal, accounting and general administration — the business of operating a business. Airports before were simply operated on the site. There was never any overhead or management, so we did not know how much it would cost to manage the airports. As Mr. Newson said, we underestimated the long-term capital costs of the facility because these had been handled in the past from different accounts. As time went on, we started to understand how much business development really costs and how much it takes to transfer and what the legal costs are and insurance and things like that. These were new costs, and now we have 10 years of experience and a pretty good sense of what they are.
Senator Meredith: Thank you so much, panellists, for coming here this morning and enlightening us about the difficulties you are facing with respect to transport across this country. My colleagues have already asked about landing fees and the phased-in formula that was instituted in 2005. My colleagues also asked about overcapacity.
Partnerships can be formed to reduce your costs. What steps have you taken to reduce costs internally? What partnerships have you formed externally to help to control those costs? What have you done to attract partners within the business community? In the Greater Toronto Area, GTA, they have contracted most of their hubs in terms of the passenger gateways to HSBC, which has been a major corporate sponsor in the GTA. What have you done to attract that type of partner?
Mr. Newson: I mentioned in my presentation that in Charlottetown we had 38 employees when we transferred from the federal government, and we are down to 21. In terms of cost savings at the time of transfer, the airport authority was very smart in implementing certain measures from the staffing perspective to save some costs. We also have a business park at the airport that we are trying to grow, and that is one way to look at spreading the risk, if you will, in terms of the aviation industry and trying to grow non-aeronautical revenues. We have invested money there and have worked closely with different partners, either the municipality or the provincial government, to try to build that side of the business.
The single biggest benefit we have of being the only airport in the province of Prince Edward Island is a great working relationship with our provincial government, which sees the airport as a key driver for economic growth and for tourism in the province. There is no question that the provincial government played a huge role in our growth, especially over the last five years, working with us to try to secure new air service or other types of projects. We are very involved in the communities through different tourism groups and chambers of commerce and that sort of thing. As we are the only airport in the province, it is much easier for our provincial government to come on board and help us grow that side of the business.
Mr. Innes: The situation is a little different in New Brunswick. We have four airports providing passenger service throughout the province. There is a certain fluidity in the marketplace. The air transportation system in New Brunswick works rather well, but there is no exclusive ownership of any part of the marketplace, so the customers get a little choice in their service. The service in New Brunswick is reasonably good for the size of the province, looking at the number of departures per day and that sort of thing.
There is a need to work closely with all of our partners. Certainly the province is starting to step up to the plate as an important partner, and it has been in the past. Our local community has been the city and the municipalities in the Fredericton area, chambers of commerce, Enterprise Fredericton, economic development groups and others. That is fundamentally where we get strong partnerships.
Regarding where we have gone with our own efficiencies, the big one is payroll. Probably half the number of people operate the airport today than did in the good old days when Transport Canada operated it. We do the same function with a limited number of staff. We are a very lean organization, and we depend upon good partnerships, mostly from our community and less from the province.
Senator Meredith: You also talk about $75 million over the period 2010 to 2015; that is what you would be looking at for infrastructure costs or what it would cost you to upgrade your infrastructure. How do you see the government implementing an ACAP-type program that you can tap into? How do you see that rolling out? How would you advise us regarding putting forward recommendations to the government?
You talked about landing fees and the fact you have not raised your landing fees. Is that is correct?
Mr. Newson: Right.
Senator Meredith: Therefore, there is an opportunity to be as competitive as the other airports and maybe to start increasing those fees gradually. If your competition is doing it, there might be some suggestion that you might need to look at that.
Talk about how you see ACAP working specifically in this scenario with the airports.
Mr. Newson: Obviously every airport is at a different stage in terms of its business model and balance sheet. In Charlottetown, for example, we have what many would consider and we consider a very healthy balance sheet at the moment. Our concerns are more long-term. If we had to fund a runway tomorrow and a couple of other projects, we do have dollars set aside for that sort of thing. We are looking more for long-term sustainability and viability for our airport. The fee side of things is an interesting discussion because, as I mentioned, we are amongst the highest. Our main competitors are Halifax and Moncton, and although they continue to raise their fees, we are still way above them in landing and terminal fees. The passenger facility fee is another good example where we get about 30 per cent of our revenue. Many airports have started to increase their passenger facility fees. We have been somewhat hesitant to do that because Moncton, one of our main competitors, has not done it yet. Every dollar you add in landing and terminal fees or passenger facility fees gets passed back to the consumer and can have a de-stimulating effect on air travel. Instead of growing your airport, you could be decreasing your airport.
With respect to rolling out a new program, anytime we look to set up a new program, that is a challenge. How do you qualify? How do you roll it out? We see the ACAP program as it exists today as a very good model of something that could be developed for our airports. As I mentioned earlier, you qualify for a certain percentage of funding, depending on your air travel, so if you lose traffic, the percentage that you could qualify for would grow, and vice versa.
We are really just talking here about air-side safety and related projects. We are not looking for a program to be set up so that we can add a new wing onto our airport or grow our business parks or build new parking lots. We are looking strictly at the air-side safety things that are essential for airports to be maintained, grow and operate.
One challenge, as you can imagine, is that if Halifax or Moncton, with whom we compete, has two runways and we have two, we still need the same number of sweepers, still must maintain those runways, and still must ensure that airlines can operate there safely. However, we do not have sufficient volume of traffic coming in to these airports. That is our big challenge.
Senator Merchant: Please help me understand a little bit. My questions are general, but I think they apply to your airports as well.
You are couching your request for help with the words "safety" and "security." These words raise emotions in people, but everything we do, be it employing more people in hospitals or increasing the number of lanes on our highways, is for security and safety of life.
I am trying to understand your business. In this country, we really have no airline competition; most cities have only one airport. I do not know whether there is any competition in the security side of it, but that is a very expensive part of what you do.
You said that part of the problem is that when you took over the airports you did not have much understanding of the problems that would arise. In the banking business or other businesses, people work their way up, doing all the little jobs so that they understand the demands of the business.
Do you have people in your governance who understand all aspects of the business? The rest of us do not understand your operations. We do not vote at the end on whether you are doing a good job. I am not saying that you are not; I am just trying to understand the industry.
Mr. Innes: On the issue of governance, at the beginning of the airport authority process I do not think the boards understood their role, and our board was no exception. Both the board and the management were feeling their way to find out where they were going.
The governance system that is laid out within the policy seems to work quite well. Representation of the community is good and sound, and the people at the table are nominated by the various interest groups in our community. Over the years, our board has evolved to a good, strong corporate governance model with which the members are extremely comfortable and competent. Five and ten years ago, it could have been a different story, but the corporate governance model has evolved, as I think it has in most airports. I think we are quite well governed. I work for a board that is very much dedicated to the issue of the airport. They are an important part of the decision making process, and in our case it works extremely well.
Senator Merchant: Is having the government pick up the shortfall the only solution you see? You are asking the wealthy people of Canada who travel to subsidize your operation. There are so many other areas where funds have to be dedicated, so I am asking whether this is the only solution to your problem. Maybe there are other ways that you can manage your business.
Mr. Innes: I would debate whether it is the wealthy part of the population that is traveling. As I said in my presentation, our airport is a very important part of the economy. Many jobs at all levels of our economy depend on the people who get on our aircraft with their briefcases. It is an important public asset. The real reason the airport exists is that it is an economic need of our community, and the economy of our community is our passion. The taxi driver may not be traveling, but he is very much dependent upon the business at the airport, as is the parcel deliverer, and so on. Our airports have a big impact on the economy.
We are asking to be treated reasonably similarly to other modes of transportation and, within the airports community, to be treated similarly to those parts of the airport system that are below the 500,000 passengers level. In fact, we are looking for a bit of parity. As a group of airports within the National Airports System, and as NAS airports, we are excluded from certain support, and we would like to be included in that support.
Senator Martin: I am interested in growth in traffic at the airports in the region. Your airports are serving the residents of the region to enable them to access other parts of Canada and other parts of the world. In terms of increasing volume, tourism comes to mind, and my questions are related to that.
I have watched with great interest some of the advertisements for Newfoundland and Labrador. Those commercials intrigue me, as someone who lives on West Coast. There are many parts of Canada to which I have not traveled. That has been a very effective campaign to encourage tourism to the region from within Canada.
I was speaking with a service provider who works largely in Asia who said that New Brunswick has been able to attract many foreign investors and immigrants and that there has been an increased interest in settling in New Brunswick. These are other potential ways to attract more visitors to the region.
Has there been strategic planning for increasing tourism? What kinds of marketing you have done? As Senator Meredith said, this is a viable way of increasing volume in your airports.
Mr. Newson: As Senator Downe knows, tourism in Prince Edward Island is about 7 per cent of GDP. Some would argue it is the largest industry in the province. It is certainly among the top three with farming and fisheries.
Our airport, especially within the National Airports System, is probably the most seasonal airport in the country. About 50 per cent of our traffic is from June to September, with the number of daily flights doubling from wintertime. Our airport is very dependent on the tourism industry. That is part of the reason that the Province of Prince Edward Island has been so good to the airport authority in trying to grow new airline service in our airport. The province is always looking to explore new markets, be it Asia or the U.S., and it needs convenient, direct, efficient air service to do that.
We know that the Japanese market likes to visit Prince Edward Island because of Anne of Green Gables, and we benefit as an airport because of that as well.
I sit on a couple of tourism boards. I am actually the president of Tourism Charlottetown and the P.E.I. Convention Partnership, which is responsible for growing meetings and conventions in Prince Edward Island. I also sit on the province's Tourism Advisory Council of P.E.I. We have done quite a bit and we have a great working relationship with the province and the Department of Tourism and Culture because it is really a win-win situation, and at the end of the day the better off and healthier the tourism industry is, the more we benefit as an airport.
We have grown over the last number of years partly because of that and because of the new service, but that growth comes at a cost, obviously. We have had to add an extension onto our terminal to handle international flights and flights from the U.S. that we did not have before, and we are now looking at a second terminal expansion, which is really a two- to three-month problem at our airport because we are growing and have to accommodate traffic that peaks in the summertime.
It is a good problem to have, but at the same time, to your comment, the tourism industry is very important to us and that is why we stay actively engaged with our industry partners in Prince Edward Island.
Mr. Innes: Regarding tourism and growth, at the time of transfer we were handling about 200,000 passengers a year, and this year we will have 274,000 passengers; a nice growth has taken place at our airport. It is due to a lot of initiative. One initiative was to implement services between New Brunswick and the United Kingdom. It was an initiative to bring U.K. tourists directly into New Brunswick. That was an initiative of the airport authority, the city and the province working together.
Unfortunately, the meltdown in the U.K. associated with the recession has caused that service to be stalled, but we are always out there looking for possible initiatives that we can start to grow our traffic.
Senator Martin: Even though it is further way, Asia is definitely a growing market, and that interest seems to be there.
Regarding some previous questions about coordinating activity among your airport authorities, I am mindful that you each have responsibilities to your own airport and that with downsizing of staff you are maximizing the work you do with smaller numbers of people. However, some coordination could be done. I am curious about how much you have done together to look at possible overlaps and how you could be more efficient with your money, which you spend perhaps on marketing or other areas. Working together collectively, could you reduce your costs and strategic planning and so on?
Mr. Newson: Through our Atlantic Canada Airports Association, over the past few years we have done a good job of working together on that sort of thing. We partner with the Atlantic Canada Opportunities Agency, ACOA, on attending trade shows and route development conferences, that sort of thing, and we go as a group. Although we all compete in one form or another, by partnering with organizations such as ACOA we have benefited from that.
As you may know, Transport Canada is in the process of implementing a safety management system across the country at airports. Five or six airports within Atlantic Canada partnered together in the RFP process, and together we solicited one company to help us implement that program. Although there is a lot of competition, there is also a lot of working together, and more and more of that is happening as time goes by. It is something we can do.
On the marketing side, we often work with the Halifax airport. As the biggest airport in the region, it has a lot of staff in marketing and air service development. To give an example, if the Halifax staff purchase software for their airport, they will share it with us at a reduced cost. Since transfer, it has done better over the past three or four years, and we will see it continue to evolve in the future.
Senator Martin: Coordination is a lot easier said than done. It sounds like a logical step, but what are the challenges in moving towards that? Who would coordinate? Who would be best positioned to coordinate? Is it Transport Canada? Is there anything Transport Canada could do to help facilitate that process?
As I said, I know how busy everything must be, and as a westerner I do not want to impose my judgment or ideas. However, I wonder what the challenges are of trying to coordinate because we can say it and request it, but the reality could be challenging in itself.
Mr. Innes: To pursue the efficiencies will force us to coordinate and cooperate as time goes on. I agree with Mr. Newson that in the last three years in particular there has been a lot more cooperation and coordination between our airports, our cluster in Atlantic Canada. I believe the evidence in the future will be that even more cooperation is taking place and that the imperative should come from the business necessities themselves and not from the imposition of new rules or regulations saying, "You shall coordinate."
Mr. Newson: The biggest challenge is that we are competitors at the end of the day, and the number one way to grow revenue and your airport is to grow your air service, and we are all competing. The airlines have a limited number of airplanes, and they want to fly them where they can fly them profitably. We are all competing for that airplane, but there have been examples where airports within the region have worked together to go after a particular airline or to grow air service. We are all friends on the surface, but in the end we are still competing for aircraft, and we all want to grow our air service to our airport.
The Chair: I would like to remind the audience that the committee is currently studying the emerging issues related to the Canadian airline industry. Appearing today are Mr. David Innes from the Fredericton International Airport Authority and Mr. Doug Newson from the Charlottetown Airport Authority.
Senator Zimmer: If my question has been answered, cut me off, gentlemen.
The Canadian air sector pays a large amount of fees. Getting down to raw numbers, some estimates put this at approximately $1.2 billion annually for such things as fuel excise, grants in lieu of taxes, airport rent, security, improvement fees and environmental fees. First, how much did you earn last year respectively from these fees? Second, how much did you spend on improving the airport, the runways and the infrastructure? Third, who makes that decision? Do you have a board that does that?
Mr. Newson: A large majority of those fees you talk about are not necessarily collected by the airport authority. For example, the single biggest fee you would see on your ticket in Charlottetown would be the passenger facility fee, $15 per passenger. We collected over $2 million just from that fee alone last year. It makes up about 30 per cent of our revenue every year.
In terms of capital projects, 2010 was a slower year for us. We spent about $600,000 in capital projects. In 2011, our capital budget is closer to $4 million because we have a couple of big projects we have been deferring that we will move forward with this year. In the end, the board of directors of my airport will decide what we spend year to year. During our annual budgeting process we will show them what the plan is for the next 10 years in capital projects and also a shorter-term plan on what we see as priorities going forward.
As I said earlier, if you look at our long-term cash flow, there are many assumptions to be made about traffic and expenses. There is an imbalance in what we see as our capital requirements over the next 10 years and what we can generate in cash flow to support those.
Mr. Innes: I have a similar answer. Our total revenue can be considered to be accumulated in thirds. Landing and terminal fees and fees to airlines covers about one third of what we get. The second third is from our airport improvement fee or our passenger facility fee, which is a fee that we charge to the users of the airport for the use of the airport; it is $20 per emplaned passenger. The other third is everything else — revenue from car rental companies, from food service providers, from parking lots and all of those other things. That is pretty much how it grows. We try to keep all of those revenues in some balance.
As Mr. Newson mentioned, we watch our landing and terminal fees. We are watching everyone else's landing and terminal fees and making sure our airport is competitive with everyone else. Also, we are limited in what we will charge for our passenger facility fee. We are charging $20, which is the normal ceiling in Canada for those fees at this time.
We go through an annual budgeting and programming process. Our board is very involved and approves the budget in the final analysis. The board also approves individually any expenditure over $50,000.
Senator Zimmer: Do you also have hard numbers for the total amount you earned and spent last year?
Mr. Innes: Last year our revenue was $6.5 million and we spent $5.4 million. The rest of the money was put into a capital account, which is restricted. We have to spend more than that this year on a runway that needs to be replaced.
Senator Frum: For clarification, if you did decide that it was in your interest to drop out of the NAS system, could you do that unilaterally? If you made that decision, how would that happen?
Mr. Innes: I am not sure that there is a process to be in or out of NAS. There were criteria at the time of the National Airports Policy. Some airports were designated to be in NAS, and some were designated to be out of it. There has been no adjustment in criteria, although there are airports outside of the criteria all over Canada. I do not think that a process exists for being a NAS airport or being reconsidered as a NAS airport.
Senator Frum: As I understood your presentation, it seems that many of your problems would be solved if you had access to the ACAP program, which you cannot with your current status. Senator MacDonald asked why you are deciding to stay in the system. That might be an instant solution to your situation.
Mr. Newson: One challenge with ACAP, which you would hear from ACAP-eligible airports, is that getting out of the NAS system does not mean that you will automatically get your projects approved through ACAP. I think the ACAP fund has been between $37 million and $40 million a year since it was introduced in 1985. I believe the approximately 200 airports that have access to that program would say that the program is underfunded. If other airports are brought in, the funds would be spread even thinner.
As Mr. Innes said, I do not think there is a process in place. We are bound by a 250-page ground lease that lays out our requirements as an airport authority. It is not as simple as calling Transport Canada and saying that we do not want to be part of NAS anymore. I do not think that has ever happened, but we would be interested in looking at that.
Senator Frum: It would be an interesting leverage point.
Mr. Newson: There are airports that meet the criteria of a NAS airport that are not in the system. I do not know whether they choose not to be part of it or whether Transport Canada has not reviewed their size. However, there are airports that have grown over that level and, under the program, if they sustained that level for a number of years they were supposed to become part of the National Airports System. It would create a whole new dynamic if the lands were not owned by the federal government. I assume there are reasons that they have not joined.
Senator Frum: How many airports do you think would fit the criteria?
Mr. Newson: I do not know the exact number, but I can give you three or four examples. Deer Lake, Hamilton and Abbotsford have reached the traffic level set out in the National Airports Policy, but for some reason they have stayed out of that program.
Senator Frum: Do they get ACAP funds?
Mr. Newson: They do.
Senator Frum: You are missing the boat on two fronts then.
Mr. Newson: Yes.
Senator Plett: I know that I am going onto thin ice with this question. Fortunately, there are no New Brunswick senators in the room now, but I am sure they will be told about my question by the time I get to the chamber. Some may be listening right now. I have never been supportive of a few my colleagues who are promoting two international airports in Canada, nor will I ever be supportive of that.
The population of Manitoba is about the same as that of New Brunswick. Manitoba has one airport. If the fine folks of Brandon want to fly to Regina, they must first drive three hours east in order to fly one hour west.
Am I correct that New Brunswick has four airports in NAS?
Mr. Newson: We have three.
Senator Plett: Senator MacDonald said he is not promoting cutting airports in Atlantic Canada, and neither am I. This is merely an observation. If you were to have only one centrally located airport, to which some people had to drive two and a half or three hours, what would that do to the profitability of that one airport?
We have many of the same challenges. We live close to the border and many people drive to Grand Forks and Fargo to fly. Maybe this is envy on my part, and maybe we in Manitoba need to promote a more active airport in Brandon. However, could you speak to that?
Mr. Innes: The geography and the demography in Canada are different from place to place. On the surface, Mr. Newson's and my business are exactly the same, but in fact they are quite different. The economy in Prince Edward Island is quite different from the economy in Fredericton, and the economic needs of the people who fly to and from Charlottetown are different from those of the people who fly to and from Fredericton. We have an airport that meets the needs of our economy.
Your question is with respect to New Brunswick. The notion of one central airport for New Brunswick is not new. There are both benefits and detriments to that idea. The benefit would be in the cost of operating a facility, but in my view you would not get much better air service. The detriment would be that a million people would be travelling an extra hour to the airport each year, which would amount to 50 million vehicle miles on New Brunswick highways. If you do the math, it comes out to pretty much the same thing.
The fact is that with the New Brunswick geography, the existing air transportation system does not work that badly. There would be savings in airport operating costs, but everything else is up for grabs, in my view.
Senator Plett: The profitability of the airport would probably be better. People would be spending more money on gas and there would be more emissions from the vehicles, but the profitability of the airport would increase.
Mr. Innes: The real cost would be the impact on the economy of New Brunswick. In Fredericton, for instance, we have the IT and engineering sector. Fredericton has the fifth largest number of consulting engineers of any city in Canada, and those people do not make a living serving clientele in Fredericton; they serve clientele all over Canada and North America. Those people would not travel two hours to an airport to get a flight. The offices would move, and probably not within New Brunswick but rather out of the region.
The airports are small and relatively efficient. The air service is not bad. The proximity of the airport to the community is good. The real measure of the impact has to be in terms of cost. For instance, if the Fredericton airport were shut down, the 250 people who work at that airport would be out of a job. There is a flight school that employs 50 people, and the airport would not be open for that activity. There is an economic cost associated with shutting down the airport, and I suggest that that is a bigger cost than the airport operating cost.
Senator Plett: I appreciate that all of those things could be applied to our province. Rather than promote or shut you down, I will work on Manitoba getting better service.
Senator Downe: I want to speak to Mr. Newson for a moment about the importance of the Charlottetown airport to Prince Edward Island. In a province of fewer than 150,000 people, people depend on the tourism season with 700,000 to a million visitors every year during a condensed period of time. P.E.I. does not have many visitors this time of year because they come during the summer months. It is important for tourism and the fisheries business that airport services continue throughout the year. Although we have a condensed tourism season, we have demands throughout the year. On an island, transportation is key. Canadians currently pay a fee of $47.50 or more to travel across the Confederation Bridge to leave the province. The cost of an airline ticket is a continuing concern in Prince Edward Island because the airline is so essential to the economy.
Given the importance, what if anything is the municipality doing to assist the airport? Are there concessions on your property taxes to reduce your costs?
Mr. Newson: The municipality obviously realizes, as does the province, the importance of the airport to our community. When the airport transferred in 1999, the management in charge of the airport at the time approached the City of Charlottetown to ask whether it could assist in the transfer stage and in increasing the viability of the airport. The City of Charlottetown provides a grant in lieu of taxes each year, as does the province. I believe it amounts to about $260,000 to $270,000 per year between the two levels of government. The city's portion is larger. It helps with operating costs. The city realizes that if our bottom line is healthy, we can grow the Charlottetown Airport Business Park. New tenants increase municipal tax revenues. If we did not have that healthy bottom line, we would not be able to do that. The City of Charlottetown sees that as vital role for the city to grow the economy and population of Charlottetown; and we certainly appreciate the support we receive.
Senator Downe: It is important that committee members realize that the Charlottetown airport does not serve a business community that flies in and out on expensive business class seats. Rather, it is very much a bus service out of the province. In fact, there are no business class seats available on any airline out of the Charlottetown Airport. Air is an essential mode of transportation for the average Islander and visitors to the province.
My concern is the high cost of flight tickets. We heard earlier about the competition from the United States. I continue to encounter people every summer in Prince Edward Island who come from Vancouver. They drive to Seattle, Washington, and fly to Boston, Massachusetts, and Bangor, Maine, where they rent a car to drive to Prince Edward Island for a week. They are able to save thousands of dollars travelling that way. How can the Canadian airline transportation business continue when we face this tremendous competition from the United States? At what point do we tip the scale when everybody in Montreal flies to Plattsburgh, New York, to catch their flights?
Mr. Newson: That is a unique situation. Across the country, every city has its opinion on that. In our situation, the airport has done a good job of growing air service to provide more options. We have direct service to Ottawa, which we did not have before. Bringing in West Jest as a second carrier has enabled our prices to be reflective of competition. We are all competing for aircraft, and the airlines will put the aircraft where they think it is profitable to do so. You would not hear one city say here that it is not underserved or that it does not want better pricing. There has been a lot of discussion at your meetings about competition across the country and whether we can sustain more competition. There are opportunities for niche markets of regional carriers in the Maritimes, for example, to increase the competition because that is the only true way to decrease airfares. The last thing we want to see is a new national carrier. It would be great for the consumer in the short term, but we have seen many airlines come and go in this country over the last 10 years. The economies of the day will dictate the type of air service we have.
Senator Meredith: To Senator Martin's comments on tourism and attracting more visitors to the Atlantic provinces, what specifically can you identify that the provincial government has done and at what cost? Senator Downe has asked the question with respect to tax relief. What hard dollars has the province committed to assisting your growth and infrastructure development? On equipment, are you sourcing the procurement of scanners, blowers and snow removal equipment, et cetera, in Canada to reduce costs, given the tariffs that are placed on some equipment?
Mr. Newson: From Charlottetown's perspective, the provincial government has been aggressive in growing air service, as I mentioned earlier. Many communities and airports have become more aggressive with the incentives they offer airlines. When we launched new service to Boston, the province committed $200,000 to a marketing program in the Boston area. It also supplied revenue-guarantee risk, which means that if the airline does not reach a certain threshold of revenue per flight, the province will backstop it on behalf of the airport authority, which the government has done with a few carriers in the past. There are other ways in terms of marketing dollars such as working with a carrier on promotions. The government has put money on the table and has realized a return as we continue to grow air service.
I believe the matter of sourcing of equipment was addressed earlier. We try to find the best price, and most of it is done domestically. Where possible, we try to keep the money in P.E.I.
Mr. Innes: My answer is exactly the same. The communities have been important players in the airports in New Brunswick, and the province has provided money for construction of facilities and support through tourism development advertising and new market advertising where we have a new flight destination. The province has participated in revenue guarantees, as has the municipality that I serve.
Other levels of government are doing what they can do to support airports and air transportation. The difference between the provinces and the municipalities 10 years ago and today is remarkable; they are certainly players in our futures.
Senator Meredith: Has the Open Skies agreement that Canada negotiated with the U.S. and with the EU impacted positively the airline industry and its travellers? What are some of the challenges going forward?
Mr. Innes: In general, anything that opens up air transportation to more competition and possibility is good. It is especially good for smaller communities as opposed to larger communities. Regulation of structure tends to favour larger centres over smaller centres. Generally, these things are good, and we look for more opportunities in the future.
Senator MacDonald: There are 26 airports in the NAS. You have identified five with specific structural funding problems when they have no access the ACAP funding. About 200 airports have access to the ACAP funding. We know without being too hard on them that a certain percentage would find it convenient to freeload off the ACAP because it is easier to manage the facility than transferring to the NAS. If you were to ask for special funding, other members of the NAS would ask for funding too. Has the time arrived for a third level of classification so that airports under the NAS can drop down to it as required and airports in the non-NAS system who have access to ACAP funding can be reviewed periodically so that when they reach certain criteria they would automatically go up to this system? Is that a solution?
Mr. Innes: It is a possibility, but the result would be the same but with a different definition. Some flexibility within the NAS would accomplish the same end. That is one approach, but I am not sure that the language of the existing classification system is bad language. We simply find ourselves excluded from certain support and an assumption that if you met these criteria, then you would be self-sufficient. In fact, that assumption after 10 years in the business does not appear to be valid. Doing something about that assumption is what we are inclined to request.
The Chair: Mr. Innes and Mr. Newson, thank you for your presence today.
The next meeting of the committee will take place tomorrow at 6:45 p.m. when we will hear from the Québec Airport Council.
(The committee adjourned.)