Proceedings of the Standing Senate Committee on
Transport and Communications
Issue 6 - Evidence, February 28, 2012
OTTAWA, Tuesday, February 28, 2012
The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to continue its study on emerging issues related to the Canadian airline industry.
Senator Dennis Dawson (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I call this meeting of the Standing Senate Committee on Transport and Communications to order.
[English]
This morning, we continue our study on the Canadian airline industry. Appearing before us are Mr. Garth Atkinson, President and Chief Executive Officer of the Calgary Airport Authority; and Mr. Larry Berg, President and Chief Executive Officer of the Vancouver Airport Authority.
Mr. Atkinson, I understand you will be speaking first. Following your presentation, we will hear from Mr. Berg and then proceed with questions. Mr. Atkinson, you have the floor.
Garth Atkinson, President and Chief Executive Officer, Calgary Airport Authority: Thank you, Mr. Chair, and good morning, honourable senators. As the chair indicated, I am the President and CEO of the Calgary Airport Authority. Very briefly, I have been involved in airports for 35 years. I moved from Pearson Airport to Calgary in 1981. I started with the Calgary Airport Authority at transfer in 1992 as Vice President and Chief Financial Officer, and I became the Chief Executive Officer in January 2001.
We have been in business in Calgary as the airport authority for almost 20 years. We are a mature business. Our traffic has grown 165 per cent to 12.8 million passengers. We have invested $1.5 billion in airport facilities to date, and we are currently engaged in one of Canada's largest construction projects: our $2 billion Airport Development Project comprised of a new runway and international terminal.
The CAA also operates Springbank Airport to the west of Calgary. We have invested over $34 million at Springbank, which we consider to be Canada's finest general aviation airport and an important light aircraft reliever airport for Calgary.
We have a highly engaged board of directors appointed by four different organizations. Collectively, the board has a wide distribution of skills and backgrounds, and individual directors owe their fiduciary responsibility to the corporation and to meeting our corporate purposes as defined under the Regional Airports Authorities Act of Alberta.
Broadly speaking, the policy movements over a period of decades in Canada to separate the role of government aviation regulation from that of government operation of airlines, airports and air navigation have been absolutely the right moves. In the case of airports, the creation of local, non-share capital, non-taxable corporations has been an outstanding success story. Quite simply, the Government of Canada got it right when it came to creating a highly effective model for the governance, operation and development of Canadian airports. I have examined carefully the arguments put forward by some that Canada, in the future, should attempt to move toward a fully private share- capital structure for airports. I find these arguments totally without merit and not in the best interests of either airport stakeholders or the broader community.
In general, Canada has a safe, vibrant aviation system that is well suited to meeting the needs of our relatively small but very geographically dispersed population. My first suggestion, therefore, if the government is considering changes to the existing policy framework, is based on the central idea behind the Hippocratic oath; quite simply, "do no harm. " Within that overarching context, I have observed on some of the comments and questions to date in these hearings, and I will therefore focus my further comments today on seven specific issues and, in some cases, suggestions.
The first issue is international air access. In past years, this has been a significant disadvantage for Canada and for Calgary. We acknowledge, however, that Canada has made significant progress in this area over the past few years and current air access agreements are providing good opportunities for further growth. We do support the continued development of "open skies " over time, while acknowledging that these agreements do need to provide reasonable reciprocal opportunities for Canadian companies and Canadian economic interests. To put this issue another way, economic practicality should trump abstract ideology. Most importantly, when new agreements are being negotiated, the related opportunities must be open to all Canadian cities without restriction.
The second issue is that we are very concerned with the service level provided by U.S. Customs and Border Protection under the Canada-U.S. Air Transport Preclearance Agreement. Canadian airports have made huge investments in preclearance facilities — huge investments that did not have to be made at corresponding airports in the United States. Under article 5 of the agreement, the United States is required to provide a high level of service to the traveling public. It is our clear view that this standard is not being met at Calgary and that this deficiency is an impediment to the efficient and effective movement of people between our countries.
Third is a specific suggestion I have with regard to the Canadian Air Transport Security Authority, CATSA. There is a clear opportunity for the government to further separate the roles of regulator and operator when it comes to security screening services. Following the successful models of airports NAV CANADA should be reconstituted as a non-share capital, not-for-profit corporation with a similar ability to control its own finances and be fully accountable for service delivery. These are attributes that will never be achieved with the current model.
The fourth issue is airport-airline relationships. Airports and airlines need each other, and airports and airlines do business together. These are business relationships. Airports as infrastructure-intensive businesses have 30-plus-year business plans, whereas airlines have much shorter plans and options. Airlines are accountable to their individual shareholders, whereas airports must act to balance the interests in support of the broader community. These structural differences will always produce some friction, but this is a positive friction that leads to effective negotiated solutions.
The fifth issue is foreign investment restrictions in the airline sector. Although I have heard many industry pundits opine that this is a significant issue and changes are needed, it is not apparent what compelling problems such changes would be addressing at this time. Canada has two great airlines in WestJet and Air Canada and a rapidly growing independent carrier in Porter Airlines. The benefits of retaining head offices and the related decision making in Canada for this unique and essential Canadian industry should be clear to anyone.
The sixth issue is cost recovery and cross-border competitiveness. There are a few countries in the world that use their airlines or airports to leverage broader economic opportunities. Canada does not do this and has what I describe as an intense user-pay "plus " model for the aviation sector. I will get to the "plus " in a moment.
The United States has, at least currently, a less intense user-pay model and, therefore, Canadian airports and aviation interests do have some systemic disadvantages. I note that many products often cost less in the United States, whether that product is real estate, cars, food or consumer goods. Aviation is, therefore, somewhat handicapped, but it is by no means alone. I am not suggesting at all that the disparity in costs is a good thing but simply that the disparity needs to be viewed in the wider economic context. As the United States begins the process of closing its large budget deficit, it is possible that there may be less systemic disadvantage in the future.
The "plus " in our intense user-pay system is, of course, federal airport rent. By the end of 2011, Canadian airport authorities had invested over $16 billion in facilities and equipment, but they had also paid over $4 billion in federal airport rent. At Calgary alone, we have paid $384 million in federal rent since 1992.
At these levels, it is clear to any informed observer that federal airport rent is a tax, not a return on investment or even a commission. The differentiating factor about rent is that it does not buy steel and concrete or pay wages; it is simply a tax that flows into general federal revenues. The most disturbing aspect of the federal rent formula is that rent is assessed on revenues that are derived 100 per cent from airport users to pay for new infrastructure that the government played no role in creating.
There are solutions to the airport rent problem, given a certain amount of political will and vision. Rent could be capped, gradually scaled back and eliminated over a 20-year period. Twenty years may seem like a long time, but in hindsight it may look like a miracle solution.
The rent discussion brings me to the final point I will make this morning, which is with regard to the term structure of airport leases. There is no policy reason for the government to continue with a perpetual leasehold interest in airports, and airport authorities are quite capable of taking on full property ownership under the current corporate model. Among other aspects, the current structure imposes significant additional and unnecessary costs on both the authority and the government. Very importantly, when the outstanding terms reach 40 years and less, the authority's business will become at first dysfunctional and then impossible.
These dual problems of airport rent and leasehold term limits create an ideal opportunity to develop a win-win scenario whereby airport rents could be redefined under a new lease-to-own policy scenario. These interrelated issues should be the top priority of government with respect to airport policy, and addressing them in a proactive manner will create a more viable future for Canadian airports and the aviation industry.
Mr. Chair, thank you for the opportunity to appear before the committee. That concludes my remarks.
Larry Berg, President and Chief Executive Officer, Vancouver Airport Authority: Thank you for the opportunity to speak with you this morning. I will echo some but not all of my colleague's sentiments around the aviation industry.
I will focus on three areas principally here: I have a few thoughts on the unique governance model that Canadian airports have; I would like to chat about the opportunity for Canada to serve the Asia-Pacific gateway to the Americas, as I think it is a significant opportunity; and I will also touch on the changing competitive environment of airports and what we are doing in Vancouver to remain competitive, which is not an end in itself but in the best interests of British Columbia and Canada as well.
As a quick introduction, Vancouver is Canada's second largest airport, with about 17 million passengers, about 65 carriers and serving 120 destinations. We are pleased to say it has the most direct flights to China of any airport in North America, so we are pretty focused on that business relationship. Like Calgary, it will be our 20th anniversary this July 21. I believe Calgary and Vancouver devolved on the same day, although Calgary just slightly sooner than Vancouver. It was not a race, but we do note that.
You heard from my colleague that the government's model for airports — locally controlled, not-for-profit, private sector — is unique, but I also think it is a model that has served Canada very well. It has been very successful. Vancouver is involved in the management of 13 other airports, several of them internationally. We are in for-profit airports. We understand those models, and I can chat about some of that as we go along, if you wish.
Speaking for YVR, the airport has met the objective set by the federal government when it privatized airports. We are commercially viable, and in fact I would say we are commercially quite successful. We have a prudent financial management process that has allowed us to invest in the infrastructure needed for the community and the country. We have enhanced local economic development. There are 26,000 jobs on Sea Island where the airport is, working in the aviation industry. It contributes some $2 billion to Canada's GDP annually. We are accountable not to shareholders but to stakeholders, our business partners and most of all to our community.
We have a local board that brings the perspective of British Columbians to the discussions. It is a board with a vast array of experience, but notably our chair was formerly the executive vice-president of Air Canada for many years, formerly the president of American Eagle. We have another director who was the vice-president of Canadian Airlines. We had the former CEO of Canadian Airlines on our board. There is a lot of airline perspective brought to the deliberations.
We have invested, since 1992, some $2 billion in the airport and new runway and terminal facilities. When we do that, we work closely with the airlines. We discuss costs and financing with them. It is good business collaboration. We make sure we are contributing to their needs. The airlines vote on significant capital at YVR. They approve it, actually, and we take that approval to our board. It is not a question that there is not heavy consultation; there is.
I will now turn to our vision of Canada being the Asia-Pacific Gateway to the Americas, which is very important today. The need to have closer ties with Asia, particularly China, is recognized by all Canadians. That is the role the airport plays, ensuring we have those relationships. I would argue it is the role of government to ensure that policy keeps pace with the rate of change.
You have heard from others and from my colleague, Mr. Atkinson, that we need changes to Canada's aviation regime. We are not keeping pace and are behind the curve in terms of our bilateral agreements with Asian countries. For example, we do have some open skies agreements, and I am pleased with those. We have Korea, and we have had additional route rights negotiated with China. For example, Thailand, Vietnam, Singapore and Malaysia are all very restrictive agreements. These airlines would but cannot fly to Vancouver. Europe and U.S. have moved very quickly to have agreements that are more open than ours.
We recently announced a 10-year strategy to keep Vancouver airport competitive. The first thing we did was put in a new aeronautical fee structure that gives carriers an incentive to add new services, and we froze their fees at the 2010 levels for five years up to 2015 if the carriers would agree to add service. Twenty-two of the airlines did agree, so that is a good news story for all of us, and certainly for the airlines. The province of B.C. agreed to support this initiative. It eliminated the fuel tax on international flights of about 2 cents a litre. That was a tax that neither Washington State, California nor Alberta had, and that means about $1 million a year to a carrier flying between Vancouver and Asia, so it was a significant move.
However, keeping fees low is not enough. We have to decrease connecting time for passengers who are connecting through Vancouver from about 90 minutes to under 60, and we are doing a number of things towards that. We have an investment program over the next 10 years of about $1.8 billion. It has a lot to do with moving passengers and bags quicker but also has to do with runways and sewers, dykes, power, roads, et cetera.
I will say a few words about competition. There has been much in the paper lately, and you have been deliberating on it. Our competitive position as a gateway airport has changed dramatically over the last 10 years. Our geographic position as the closest airport to Asia used to be all you needed for a competitive advantage, and the competition was L.A. and San Francisco. Today, that has all changed with new, long-range aircraft. People can now fly over polar routes. Our competition today is Toronto, Chicago and New York because the carriers fly direct.
You have heard much about diversion to U.S. border airports as well. Certainly that is true in Vancouver. Bellingham is just 84 kilometres away. The carriers there market their services directly into the Lower Mainland of British Columbia. They have a lower cost structure, as my colleague mentioned, and there is not a lot we can do about that currently. Many things are cheaper — gas, food and real estate. There are a number of issues, so it is not just airports.
I would point out that this is a two-way street.
Many people from Washington State and Oregon come to YVR and fly to Asia. The traffic flow is both ways across the border; so it is not just a one-way street. I would not want to see us attempt anything that would shut that down at all. With Nexus and other programs, it is easier for people to cross the border, and they naturally do.
I will close by offering examples of the value of the unique Canadian airport governance structure. There are no shareholders, so the airport board at Vancouver can take a pretty long-term view, and they invested in the public good of a mass transit line out to the airport. The airport made a $300-million investment in that. There is no revenue associated with it for the airport, and I would suggest that a shareholder-owned company would not make that investment. On the other hand, we have used our private sector skills to become commercially quite successful in retail and duty free, which has enabled us to put a five-year freeze on airline charges. I would submit that a shareholder-owned company would not do that either. There are pluses to the model that we have. Certainly, in Vancouver we believe that the right choice was made 20 years ago in setting this model up.
The Chair: Thank you, Mr. Berg. I will ask one brief question that was not addressed as far as Vancouver is concerned on the competitive nature of the gateway strategy as it pertains to visa issues and the fact that sometimes people in transit, instead of going through Canada, decide to go somewhere else. We were told that there were some constraints. How can we address those constraints?
Mr. Berg: People connecting through Vancouver and elsewhere into the U.S. are often required to have a Canadian visa as well as the U.S. visa. The problem of getting two visas is just too off-putting, so they will fly direct into L.A. or San Francisco or elsewhere if they can. We are working with the government on transit without visa for a number of countries. We are doing a China transit trial now. Passengers from China can transit through into the U.S. if they have a U.S. visa and are not required to have a Canadian visa. We are doing that trial for 12 months to see what the experience is with it. We applaud the government for that; it was a good move.
Senator Eaton: You both make good cases for leaving airport governance the way it is. You are the first to make that case, so I thank you for that.
Mr. Atkinson, for the record, can you tell me what you would do if you did not have to pay airport rent? What would you do with the money?
Mr. Atkinson: What you have to look to is the structure of the model itself, which is the main point that the Government of Canada got right. We are a closed box. We have three main sources of revenue: aeronautical fees, which is about a third; commercial revenues, such as doughnut shops and leasing land, which is about a third; and our airport transportation fee, which is about a third, but that is used exclusively to pay for new infrastructure. We simply set our overall fee levels looking out at a 30-year business plan to recover our operating and capital costs; that is it. If something changes either on the cost side, the capital investment side or the revenue side, we simply readjust our plan. If our cost base goes down significantly, we are simply able to look at our 30-year plan and make consequential adjustments.
Generally speaking, we maximize our commercial revenue. That is just what airports do these days. Our air transportation fee is set specifically to recover long-term infrastructure, so we would normally adjust our aviation fees. We would simply counterbalance those down because we do not need them. As those airline fees go down, those go to reduced fees for the airlines. You have to assume that if we operate a reasonably competitive system, the trickledown theory takes that down to the consumer level. You have to fundamentally believe in the model. If you do not believe or accept the nature of the model, then I do not think there is any satisfactory answer to that question. If we had shareholders, it would be a very different answer.
Senator Eaton: You make the point that hopefully it would trickle down to the airline.
Mr. Atkinson: I cannot think it would go anywhere else.
Senator Eaton: No, you cannot, but you would hope. Can you elaborate a bit about what you meant about CATSA and making it more accountable or more service friendly?
Mr. Atkinson: There is a specific fee in Canada that we all pay when we travel: the air security fee. This fee is designed primarily to cover security screening. My observation, particularly over the last 12 months, is that when the government institutes across-the-board spending reductions, every department usually gets hit. I have observed that even though there is a specific fee for security screening, CATSA gets cut like everyone else. In other words, there is something wrong here with the model.
CATSA is not in control of their funding — of course not because the government sets their funding — and they are not in control of their service levels. It is a very dysfunctional environment and then everyone criticizes CATSA, which I think is fundamentally unfair because the model is so wrong. If you would simply create them, like in NAV CANADA, and give them the ability to set their fees, run their business, deliver an accountable level of service and get on with it, that would be perfect. The government can step back and do what the government should do. The government should be a regulator. I believe there is a legitimate role for government in the area of aviation regulation, but that is where it should stop — regulation. CATSA should be basically set free and held accountable, and we can all get on and enjoy security screening instead of waiting too long in lines and paying the same fee. That is my point.
Senator Eaton: Mr. Berg, on international air access, why do you think we are not more open to international carriers? Is it to protect WestJet and Air Canada?
Mr. Berg: I think there is some tendency to put the interests of Air Canada first. In many cases, I am not opposed to that. Whatever bilateral agreements we enter into must be reciprocal. In other words, Air Canada, or any other Canadian carrier, must get the same rights that the foreign carrier is getting. It also gets tied up in other trade issues, such as autos on the table at the same time as air policy is on the table. Sometimes it gets caught up in that. I believe that was the case for a number of years with South Korea. There can be automobiles and Canadian beef and other issues on the table; and it gets caught up in that. A better policy is to look at it independently because air travel is such a tremendous economic generator in terms of tourism and trade. For example, for an international flight that comes into Vancouver daily, we will hire almost 200 people at the airport and many more off-airport to service the aircraft, and so forth. It is a real economic generator, so I think it should stand alone and be seen more as a trade issue. The benefit of bilateral agreements should be examined closely.
Our policy now, as Mr. Atkinson mentioned, is often restricted. For example, for many years, Air France could not fly to Canada and still cannot without a Canada-France bilateral, so they set up shop in Seattle, Washington. Once someone has done that, it is hard to attract them across the border to change venues. We need to liberalize it, and we have made steps to do that. We have not been that proactive in Asia, and I think that is where the opportunity lies.
Senator Eaton: On that score, do you lobby the Minister of Transport? Are you persistent about that issue?
Mr. Berg: Yes.
Senator Eaton: Thank you.
Senator Eggleton: I am interested in this issue of bleeding off to U.S. airports' customers because of the lower cost structure that they have. Perhaps, Mr. Atkinson, you have come up with one possible way of dealing with ground rents, which might help in that regard — at least to own or maybe some other kind of proposition that involves airports taking over ownership as opposed to just leasing land from the federal government. Is that just a long-term kind of proposition or could you see short-term advantages? I am trying to figure out how to deal with this question of bleeding. It may not be so much of a case for you in Calgary as it is in Vancouver and some other port locations by the border. How can we deal with this cost factor and reduce it to stop the bleeding? Can I have your further comments on ground rents and all of that?
Mr. Atkinson: As I said, I think there are systemic issues that go far beyond air travel. I am not very knowledgeable in the area of international trade agreements, but one area Canada could look at is whether there is any unfair subsidization going on of U.S. airports. I have observed other disagreements in other industries, and I think the question may be not so much on the Canadian side as on the American side.
We have already talked about rent, so let us just put rent over here. Apart from rent, Canada has this very robust user pay system. You can agree or disagree, but that is the system we have. On the American side, it is quite clear that you can make an argument that airports, air transportation, to a degree, is not fully user pay and is somewhat subsidized, so the answer may lie on the other side of the equation, perhaps. Again, at least it is something to be looked at.
I would just make the case again that I think these are very systemic issues. I do not think, on the Canadian side, whether you like it or not, you will find any quick fix at all because these issues of cost differences go far beyond air transportation.
Mr. Berg: I would agree with that. The models are very different between Canada and the U.S. Sea-Tac, or Seattle airport, for instance, is a taxing authority, and they collect over $100 million a year from the residents of King County on property tax. We pay, as Mr. Atkinson mentioned, at Vancouver airport, $1 billion in federal ground rent over 20 years. Those are big structural differences. They would get federal funds in the U.S. for construction of airport facilities. We, of course, have to raise that ourselves through the airport improvement fees.
Senator Eggleton: If we cannot get a more level playing field in terms of the Americans cost reflecting what the user pay cost would be like you do here, what is the answer from our standpoint? How do we reduce this barrier? It is a competitive disadvantage we have.
Mr. Berg: It is indeed. I would join my colleague in talking about airport rent, because $1 billion is an awful lot of money. In Vancouver's case, I do not know what the board's decision would be but, if we did not pay rent, it would be a combination of reducing the airport improvement fee and reducing airline charges. That is where the money would be spent. The consumer would be the beneficiary of that.
Senator Eggleton: Would you want to buy your airport property from the federal government?
Mr. Berg: Yes, we would be very open to that, or pre-paying the lease, negotiate an appropriate prepayment and discount it. We could finance that on the capital markets. At least the cost would be fixed. Airlines would know what the costs were, and airport authorities would know what the costs were.
Senator Eggleton: Do you see any short-term advantage for passengers? All these costs get passed on to the customers.
Mr. Berg: Our costs would be lower, and we would pass it on to the passenger.
Senator Eggleton: May I ask you also about the question of the Asia-Pacific? Senator Eaton has started you down that path in terms of the barriers to doing it. You said we should separate it off from other trade negotiations so it is not lumped in with everything else that is being negotiated with South Korea or whoever. That makes a lot of sense. Is there still not a barrier, though, in terms of Air Canada? If Air Canada does not see some advantage to them in terms of a certain route, then they will not cooperate and get an arrangement with another airline to allow them in. In the mind of Transport Canada, there has to be some quid pro quo here.
Mr. Berg: There is certainly a protectionist approach to it, in part. For example, they are careful to not allow third countries to bring in carriers from other countries and passengers over hubs like Seoul, Korea, for example.
Mr. Atkinson: I would point out again that Air Canada, whatever its challenges may be, is a Canadian company with a Canadian head office that employ thousands of Canadians. In Canada, frankly, we have a tendency to beat up on our Canadian companies and our Canadian champions, and we have to be careful. It is a complicated world. If you treat the world as a simplistic place, Canada will get burned. I have to say again that we have to be careful and sophisticated when we approach these international trade agreements.
Senator Greene: I am also very interested in the lease-to-own model that you have come up with as a way of reducing airport rents. Could you tell us an ideal way that model could work from an airport point of view? Perhaps if you need some time, I am wondering if you would like to submit something as to how that might work.
Mr. Atkinson: I am delighted to talk about it. Really, the simplicity of it is that it is such a simple model. I was involved in it deeply back in the 1980s, and the government came very close to simply selling the dirt, as I call it, back at that time. It could have gone either way and, in the end, they did not. Today, we have an 80-year lease. I would submit to you that an 80-year lease is, in some sense, simply a lease in perpetuity.
Here is the thing: I am going to roughly judge, but not too much, that with all of the appendixes and schedules, this is about a 10,000-page document. Over 20 years, we have gotten used to it, but you can imagine that imposes a huge amount of extra cost and extra administration on the government, which comes out every year and checks the pavements and checks that the concrete is okay. This is not a negative commitment on the public service. It is simply an unnecessary cost on both sides of the equation. Very simply, we could create an arrangement to simply transfer title of the dirt, as I call it. We would go on just as we are, as the Calgary Airport Authority, doing exactly what we do today. The only difference is we would not be a leasehold operation.
I could go on at some length, but being a leasehold entity imposes incredible complexity when you get into something as simple as leasing land to a subtenant. It is quite discouraging. The amount of cost and legal work we have to go through to lease one acre of land is a mountain of legal work on our side and the federal government side and the subtenant side. This is all completely unnecessary. I think we should get over this idea that the government needs to retain this de facto ownership in the dirt. These are Canadian-governed, non-share capital, not-for-profit corporations. We are a mature business now. This is 20 years on. It is a very simple exit strategy.
Rent is not good, but it is a big cheque to Minister Flaherty. We understand that. At the time when the federal government has a big deficit, you cannot eliminate it in one day, so have a 20-year strategy. Just cap it, start to reduce it, and then tie that to an ownership model so that we could know that, in 20 years, we will get the title, we are out of the lease and away we go. Then there is a future.
Senator Greene: That is a wonderful idea. It is an idea that we have been looking for at this committee.
My next question is on the make-up of your boards. I notice that the Calgary Chamber of Commerce, according to our research, which may not be right, has the authority to appoint eight people to the Calgary airport authority board, and the Vancouver board of trade, which is the equivalent in Vancouver, can appoint just one. I wonder how that came about and if you could comment on that.
Mr. Atkinson: Absolutely. Calgary has a board appointment structure that is admittedly a little bit different than some other airport authorities. It has a history, and it goes back to the original founders of the airport authority concept in Calgary. The chamber of commerce, the long-range planning board, appoints eight, the City of Calgary appoints three, the federal government two, and Rocky View County one. Keep in mind that this is a fiduciary board, not a stakeholder board, and I make that point because these are entirely different concepts of governance and responsibility.
I have been at every board meeting for 20 years except two — I was either sick or on vacation — and when those doors close, I can honestly tell you I cannot say who appointed whom. In other words, this is a fiduciary board, and no matter who appointed those members, they act in the best interests of the corporation, period.
Beyond that, we have, in our constituting documents, a requirement that the board must contain collectively a wide range of business skills. Every time there is a vacancy, the board must look to that skill set and must act to ensure that if there are any gaps or holes, that those gaps must be filled by the next available vacancy. Through those mechanisms the board ends up being a very capable one with a broad range of business skills.
The other thing I would point out also, and you might not be aware, is that board members cannot be active politicians, government employees and they cannot be current employees of major customers such as an airline. Those issues are protected, and that has worked very positively.
I would point out that airports today are large, complex business organizations and what we need at the board level is a good diversity of broad business skills as opposed to representatives who might simply provide what I would call stakeholder input. We have an extensive array of mechanisms to consult closely with all of our stakeholder groups. I could go on for hours to tell you about all of them. This is just normal business.
Mr. Berg mentioned his big projects. We have a $2 billion Airport Development Project going on. Both the runway, independently, and the terminal were approved by the Airline Consultative Committee. Specifically, WestJet and Air Canada approved both of those major builds independently. We do not take a step without the involvement of our stakeholders.
On our board today we have both the former president and vice-president of a major Canadian airline, and this current representation is similar to what we have had in the past. Our board makes a point of reaching out to major stakeholders. We have had the presidents of both Air Canada and WestJet speak directly to our board. Clive Beddoe, who I am sure some of you know, the principal founder of WestJet, sits on a business advisory committee. I can assure you, Mr. Beddoe is not shy about sharing his views with us.
Back in the 1990s when NAV CANADA was established, we were asked whether we would like to appoint a member to the NAV CANADA board, and we said no. The reason we did that is we wanted a business relationship with NAV CANADA and we did not want that business relationship to be compromised or confused by having one member on their board.
To explain, many years ago, when this matter was first brought up, our board chair at that time wrote to the Air Transport Association of Canada and asked if they would be interested in appointing a member to our board. The answer was no. I phoned them and I said, "Why did you say that? " The answer they gave me was just what I told you, they said they did not want their business relationship to be compromised by having one member on our board. They just wanted to do business with us.
In summary, I believe that suggestions that fundamental changes are needed in airport board governance presents, in my view, a very dated perspective, and is basically a solution looking for a problem. Airport authority governance systems are very strong, and our stakeholder consultation processes are also highly developed and very successful.
Mr. Berg: I would concur with that. I would say the airlines have no interest in serving on the board of the Vancouver airport. They are comfortable with the business relationship we have and the level of consultation and negotiation. We, like Calgary, seek their approval of major capital. We have a weekly relationship, in many cases daily, on issues of operations. I think, if they were here, they would endorse that the level of consultation is adequate and they are comfortable with it.
To be a member of the board would complicate the relationship and, in any event, the fiduciary responsibility of the director would be to the airport authority, not to the airline that nominated them.
Our board structure is different, of course, than Calgary's. It has a wider array of nominating entities: professional associations, engineers, law society, accountants. They always send us among the best of their members.
Senator Greene: How did the difference in the two structures come about?
Mr. Berg: It was just the wishes of the local community at the time. Vancouver was different, with the two cities represented, Richmond and Vancouver, and the association. Then they have a number of directors at large that this group picks to broaden the skill sets and to meet diversity issues.
Mr. Atkinson: In the case of Calgary, the Calgary transportation authority was one of the founding organizations of the Calgary Airport Authority and did the early negotiating. The Calgary transportation authority itself was a creature of the city and the chamber of commerce, so the roots of the original negotiations for the transfer process went back very directly in Calgary to the chamber of commerce. That is the reason for the historical involvement of the chamber as a significant appointer to the organization.
Having said that, the chamber appoints a wide range of individuals, engineers, architects and accountants, so it does not really matter in that sense.
Senator Mercer: One of my questions relates to a response to a question from one of my colleagues about what would happen if we could remove the rent and whether that would go to the passengers. One of you responded that hopefully it would trickle down to the airlines. I think, when we get to the recommendation stage here, one question I will ask myself about every recommendation is what it does for the passenger, not what it does for the profit line of the airport authorities.
That is why people are going to Bellingham and to Plattsburgh, et cetera. They are going because of the price, so we need to address that.
You have talked about the infrastructure inside the gate as I drive on to the airport property. As I get to the airport property in Vancouver, I may come by the new Skytrain that comes out from downtown, or in Calgary I may come out on the nice new highway that comes to the airport. If you go airport to airport across the country, there is infrastructure outside the gate that does not get counted as infrastructure that is yours. The federal, provincial and municipal governments all have money in those highways, bridges, tunnels, subways, Skytrain, et cetera. Is there any recognition at all by the airport authorities that that is part of the infrastructure of the airport that is provided to you, the passengers and the airlines by the governments involved?
Mr. Atkinson: It may interest you that our main road to the airport, which since we closed our other access is now very much the main road, was actually majority funded by the Calgary Airport Authority, not the federal, provincial or municipal government. It was a partnership arrangement which involved some levels of government and the Calgary Airport Authority, and it actually remains a public road, so it is not an exclusive-use road. It was a fair arrangement at that time.
I would point out to you, having been in this business for 35 years, that anywhere around the world the issue of connecting infrastructure between airports and their surrounding municipalities, whether that is road infrastructure, rail or tunnel infrastructure, is always a significant point of friction. It simply is. There is friction as to who pays, they are usually negotiated, complex solutions, and it will vary from jurisdiction to jurisdiction. There is no one formula that solves all of those issues. That issue is not unique to any city or country. I have been watching those issues for decades now, certainly in North America, but also around the world. That is the situation in Calgary and in many airports.
Mr. Berg: I share my colleague's views on it a bit. With respect to the Canada Line that goes to the airport, the airport authority contributed $300 million to the $2 billion, roughly, project to build the airport leg of that line. That was a complicated negotiation that went on for a number of years with the federal government, local government and local transit authority, and a P3 proponent at the time. It was a real good move in the community and for the airport to see the need for that.
Other than that, we have invested in infrastructure. We built a bridge between Richmond and the airport to ease traffic. The Richmond community was the beneficiary of that, as well as airport passengers. There is a good collaborative effort, but these are big costly projects, so it is difficult for cities to undertake as well. There is good consultation around it, and of course there are different views.
Senator Mercer: Mr. Berg, in your opening statement you talked about 17 million passengers, but you also said that you are involved in 13 other airports. You did not expand on that, so perhaps you could give us a little background. We are used to seeing airports that may have two airports, such as Calgary which has two airports in its control, and Toronto, which would have three, et cetera. Tell us about those other 13 airports.
Mr. Berg: We saw an opportunity in the mid-1990s, and we were asked by the Chilean government and the Bermuda government if we could help them to set up an airport authority and look at their capital programs to expand their airports. Therefore, we started to consult in that field a bit and we set up a separate company. It quickly became evident to us that the real opportunity was to operate airports, and so we set up a company and started operating airports. The first one we built was the airport in Santiago, Chile. It is a very nice airport and has been voted one of the best airports in South America. We did not do that uniquely ourselves in that we had local partners, local pension funds and local construction companies; and we formed a partnership. That model grew to the point that we sold half that company to Citibank, who put up the money. We have since bought partnerships in part and in some cases wholly, in other airports. We operate them on a for-profit basis, and the airport authority takes dividends from that company.
Senator Mercer: The profit goes into YVR.
Mr. Berg: Correct.
Senator Mercer: That helps to maintain the cost level for the activities at the Vancouver airport.
Mr. Berg: Yes, it does.
Senator Mercer: Therefore, you should have lower fees because of that.
Mr. Berg: I believe that we have, in part. We have one of the lowest landing fees in Canada in part because of our commercial revenues; and this is part of our commercial revenue base.
Senator Doyle: I was reading through some of the testimony and what you have to do when you are a new member. The Minister of Transport was here along with some of his officials, and he mentioned that maybe the committee should be examining whether we need 26 international airports in Canada and that maybe it should be reduced to a handful of hubs. You mentioned about international air access. I was wondering what your thoughts were on that.
Mr. Berg: In some cases, I suppose, in the country, there might be a little excess or surplus airport capacity. In some provinces the airports are quite close together and sort of compete with each other. I know that some of the airlines perhaps do not want to serve both equally, but I think it would be a difficult proposition to go to communities and have them agree to close an airport. I think that would be a very tough political decision. Really, an airport is the life blood of many communities and their ability to access the broader world or the rest of Canada. I think that it would be a difficult proposition.
Senator Doyle: It would affect your access to international air travel if the numbers were reduced.
Mr. Berg: I do not think it would do that. Many of the airports one might look at in that category are not served by the international carriers. The international carriers are going to the big five or six airports in Canada primarily. Secondary airports do not attract international traffic.
Senator Doyle: It would not have any real effect at all on you.
Mr. Berg: Not internationally, but it would certainly have an effect on the communities involved.
Senator Doyle: How competitive is the Canadian airline industry? What can we do to be more competitive? Are we competing well now?
Mr. Berg: We have high quality carriers with WestJet and Air Canada. Certainly, WestJet's fleet is effectively new and Air Canada is moving towards that with the acquisition of 787s in the next number of years to a very modern new fleet as well. We have excellent service levels on both carriers. When you fly other international carriers, you realize how good we have it in that sense, but the costs are an issue. We are a thin market here and it is a huge country. I am reminded of that when I go to China and talk to the Chinese carriers. In the early days, they asked about how many people lived in Vancouver, and I would tell them. They have cities of 30 million people. We get service from Chengdu where they have 14 million people. We are a small market. We do not have the size of business community to buy the front end of the airplane — the business seats, and that is where the margins are for the airlines. The government should take into consideration the nature of this industry in Canada and how tough it is to compete when looking at the costs.
Senator Doyle: The fee structure has a direct bearing on the competitiveness of the airline, of course.
Mr. Berg: Sure it does, yes.
Mr. Atkinson: I would say, as I said before, that governments are retrenching pretty much all over the world in providing customs services, and in the U.S. case, U.S. preclearance services, which they are finding very expensive. The more ports you have, the more expensive it is. This goes beyond air because you may find a land border where two cars go through a day, and we have a port.
You may go to Atlantic Canada, where within an hour's drive or two hour's drive you have many international ports. The question asked is: Does this make sense? Can we still do this, in today's world? I think that is a valid question that needs to be looked at.
One of the reasons I believe the U.S. is struggling with preclearance is simply that it is a big cost. I concur with Mr. Berg that this will be a struggle for a smaller community that currently has inbound customs service. This would be a significant loss in their view, if they were to lose it. That is a political reality.
You asked whether the airline industry in Canada is competitive. My answer is, yes, it is competitive. I would also say that the airline business is a very tough business. I compare it to the electricity business. You cannot store electricity, and you cannot store an airline seat. You either sell it or you lose it. Things are pretty stable today, but I am sure, as I look around the table, that all of you will remember the years when every year in Canada, an airline went bankrupt. In fact, it was a regular thing. We have a modest amount of stability in a very tough industry. We should appreciate that. I would say to you that yes, the industry is competitive, and it is something that needs to be recognized and appreciated.
The Chair: If there are no other questions, I would like to thank Mr. Atkinson and Mr. Berg for their presentations. I am sure you will be seeing some of your remarks in our report.
Honourable senators will notice that we have delayed our Buffalo-Toronto trip. The steering committee we will meet after this committee to try to find other dates. We will get back to you next week. Next Tuesday, we will hear from Professor Ambarish Chandra, from the Rotman School of Management. The steering committee will make a report on a budget preparation for next year because we have to submit our budget by March 26. Since the activity will most likely occur, the replacement activity for Buffalo-Toronto will occur in the next budget year. We have to adapt our budget.
[Translation]
We will see each other again next Tuesday. Thank you very much.
I wish to thank the witnesses very much.
(The committee adjourned.)