Ottawa’s formula discourages airports from pursuing new revenues to offset passenger charges.
News broke last week that the federal government is considering privatizing its major airports to raise money for infrastructure projects. That would be good news for Canadians, and in more ways than one. Private airports, which are becoming commonplace around the world, tend to be less costly and more innovative, often looking like shopping malls. The federal government should follow international practice and sell its major airports.
Many Canadians know first-hand that air travel in Canada is expensive. According to the World Economic Forum, Canada has the ninth-highest ticket taxes and airport charges in the world. We rank between the tourism hotspots of Sri Lanka and Ghana.
As a report last week in the Toronto Star suggests, the government is paying attention to what Canadians have long complained about. The government’s recent, major review pointed to many reasons for the high cost of air travel. The federal government is now mulling over which of the review’s recommended reforms it should take up.
The federal government still owns the major airports. It signed decades-long operating leases with not-for-profit airport authorities who pay the federal government an annual rent. Twenty years ago, Canada was a global leader in moving airports from government to private operation. Not so any longer. There are many problems with the current arrangement that selling the airports can resolve.
First, the federal government’s rent formula discourages airports from pursuing new revenues that could reduce the amount they need to collect through passenger charges. Canadian airports earn less revenue from creative sources like in-airport shopping than do privatized airports around the world.
Second, the governance of airports under authorities that are non-profit and have no shareholders makes ultimate responsibility and accountability unclear. Corporate accountability is best served when shareholders who bear the financial consequences of corporate decisions have the power to elect the board of directors.
Third, although there are many decades left in the airport authorities’ leases, their expiries will soon be a headache. All airport authority assets, obligations and contracts go back to the federal government when leases end. Airport authorities may soon face difficulty with long-term contracts and issuing bonds that go beyond the end of their lease.
For-profit airports are not unusual elsewhere. All major airports in Australia and the U.K. are private. Indeed, many of Canada’s pension plans own stakes in airports there. All three airports in Paris and airports in Copenhagen, Zurich, and Vienna are jointly owned by government and private investors.
What should Ottawa do? It should start with a voluntary program in which airport authorities that wish to be privatized can do so. The airport authority in Montreal asked the federal review for such a sale. Later sales could draw on the lessons of the first sale. The federal government could then take the revenues from such sales and re-invest them in critical infrastructure elsewhere.
The federal government should also think about what regulations will ensure sales are a success for passengers and airlines too. It should look to the Australian model. There, airports are free to set prices as they like. However, they must provide financial information to a regulator, which can intervene if it finds that an airport is abusing its market power.
If the federal government sells its ownership stake in major airports, it can make the travelling public better off and find new ways to fund needed infrastructure. Cheaper domestic air travel might just mean that more Canadians will choose to enjoy their summer vacations in Canada instead of seeking lower-cost relaxation abroad.
Benjamin Dachis is associate director of research at the C.D. Howe Institute and author of the report “Full Throttle: Reforming Canada’s Aviation Policy.”
Published in the Financial Post
