TRAN Committee Report

INTRODUCTION

On May 19, 2005, the Standing Committee on Transport (the Committee) released its fourth report, an interim report titled Air Liberalization and the Canadian Airports System.

In order to respond to the Committee's recommendations presented in the report, it is important to outline the evolution of the Government's air policy framework, and to briefly discuss changes taking place on the air liberalization front internationally.

Over the years, the federal government's policies in the air transportation sector have worked to promote a more dynamic and competitive air transportation industry through a greater reliance on market forces and by recognizing that air transportation is a key contributor to a dynamic Canadian economy.

Canada's domestic air services sector has been largely deregulated since 1988, with the introduction of the National Transportation Act – later replaced by the Canada Transportation Act (1996). Since that time, the commercial decisions of Canadian airlines with respect to the domestic sector (entry/exit, levels of service, routes, operating equipment, passenger fares and cargo rates) have been left to airline management and market forces.

In 1992, Transport Canada began to transfer the major Canadian airports to local authorities to be operated in a more “commercial and cost-efficient manner.” In 1994, a National Airports Policy (NAP) was announced, which called for the commercialization of Canada's 26 largest airports, as well as the divestiture of small and regional airports to local interests. By March 2003, the 26 National Airports System (NAS) airports had been transferred: 22 to airport authorities, three to territorial governments, and one to a municipality. Transport Canada retained ownership of the airports transferred to airport authorities in order to guarantee the long-term viability of the NAS. Leases were negotiated with 21 NAS airports to ensure that Canadian taxpayers receive a fair return from these public assets. In 1996, the Government proceeded with the sale of the Canadian civil air navigation system to NAV CANADA, a not-for-profit private entity.

In the international sector, scheduled air services between Canada and other countries are governed by bilateral air agreements. Canada has over 70 air transport agreements or arrangements with other countries, each of which is separately negotiated. Canada's approach has been to gradually liberalize Canada's bilateral air transport agreements where the greatest benefits are available to Canadian stakeholders and the travelling public.

At the same time, change continues to sweep the sector. The globalization and integration/regionalization of international economies and fundamental changes in the airline industry are challenging the traditional approach to regulation of this area (e.g., move from bilateral agreements between two countries to the creation of regional aviation areas among a group of countries – such as the single European Sky agreement between members of the European Union, consolidation of the air industry, competition from low-cost carriers, escalating external costs – such as fuel prices – to the air sector, and growth of international alliances).

In this evolving global context, the Minister of Transport provided the Committee with a guidance document on November 4, 2004, to engage industry stakeholders and help guide Canada's air liberalization efforts over the next ten years. The document asked the Committee to look at certain broad, long-term questions to determine whether Canada should further liberalize its approach to the economic regulation of the air industry in the domestic, transborder, and international sectors. The guidance document focused on topics such as: foreign ownership of Canadian airlines, cabotage, Canada-United States air transport relations, charter policies, cargo services and Canada's approach to negotiations.

The Committee initiated cross-country hearings in March 2005 on issues related to air liberalization, and another subject of particular interest to the Committee – the Canadian airports system. On May 19, 2005, the Committee released its interim report entitled Air Liberalization and the Canadian Airports System, which made six recommendations related to airport issues.

The Committee heard testimony from stakeholders on air liberalization issues, as well as on consumer protection and official languages. However, the Committee stated that further study of these issues is required before any recommendations can be made. The Government welcomes the work of the Committee on this issue and looks forward to its final report, which will help inform Canada's air liberalization efforts over the coming decade.

The Government's response to the interim recommendations of the Committee is presented below.

RECOMMENDATION 1

The Federal Government immediately reduce airport rents by at least 75 percent, that rent received by Transport Canada be reinvested in the Canadian airports system and for airports with less than 2 million passengers no rent should be paid.

1. The Federal Government immediately reduce airport rents by at least 75 percent. Following a comprehensive Rent Policy Review, the Government announced on May 9, 2005 its decision to significantly reduce Crown rents charged to airports belonging to the NAS, beginning January 1, 2006. This decision will entail a 60 percent reduction in the amount of rent to be paid by NAS airports over the remaining terms of their leases, compared to the status quo rent formulae. The new policy satisfies the objectives of the rent policy review, which were to determine a fair rent and to develop a formula that was equitable, consistent and responsive to market conditions. The decision also balanced the impact of rising rents on the air transportation sector and the need for a fair return to Canadian taxpayers. Of an expected $8 billion reduction in rent over airports' remaining lease terms, airports will experience about $350 million in savings over the next four years, as transition proceeds to full implementation of the new airport rent regime by 2010. All NAS airports stand to benefit financially, in both the short term and the long-term. The Government believes this is a balanced and fiscally responsible approach.
2. Rent received by Transport Canada be reinvested in the Canadian airports system. Rent is the result of satisfying the Government's real property policy, which is to receive a fair return on public assets that are being leased to private companies or commercialized entities. The Rent Policy Review confirmed the right of the Crown to collect rent for the assets and business opportunities transferred to airport authorities on a long-term basis. On the other hand, while the Government retains ownership of lands leased to airports, it transferred the management, operation and financing of airport operations to airport authorities. This also includes airports' revenue-generating capabilities. Earmarking airport rent revenue for the airport system would be inconsistent with this approach and with fiscal policy principles, under which Government revenues flow to the fiscal framework to fund evolving priorities. The Government already provides financial assistance to eligible airports for capital projects (e.g., through its Airports Capital Assistance Program (ACAP)).
3. No rent should be paid by airports with less than 2 million passengers. The Government believes that if airports with fewer than 2 million passengers were not required to pay rent, this would not satisfy the Government's real property policy, which states that where public assets are leased to private or commercialized entities, the Government should receive a fair return. Most of the NAS airports would not be in compliance with this real property policy under this recommendation. The Government's new rent formula will require all airport authorities to pay rent. The new formula contains a progressive rate scale that recognizes the high fixed costs of airport operations and that an airport's ability to pay increases as the total revenues increase. All airports will pay nothing on the first $5 million in revenue, 1 percent on the next $5 million, 5 percent on the next $15 million, and so on. This scale benefits smaller airports in particular. For airports with larger revenue bases, the maximum rate that they will pay will be 12 percent for revenues over $250 million. The new rent formula is intended to be fair and equitable for all airport authorities.

RECOMMENDATION 2

The government ensure that airport rental revenues received by Transport Canada be used to increase funding for the ACAP, that the funding is long term and stable and that the process for applying for this program is simplified and less costly.

The Government believes that the existing funding envelope for the ACAP is adequate to address the airports' safety-related requirements. The Government provides financial assistance to eligible airports for capital projects (e.g., through the ACAP) to assist eligible airports in financing capital projects related to safety, asset protection and operating cost reduction. Since it started in April 1995, the ACAP has assisted 150 airports by financing 436 projects, of which over 99 percent were airside safety-related. To date, projects funded under the ACAP total over $350 million. To be eligible, an airport must receive year-round regularly scheduled passenger service (minimum 1,000 passengers/year), meet airport certification requirements, and not be owned by the federal government.

There have been two program evaluations since the ACAP started, conducted in February 2000 and June 2004. Both evaluations concluded that the ACAP was meeting its objectives and Transport Canada's objectives for a safe and efficient transportation system, and there was a need for it to continue. Transport Canada sought and received approval for the renewal of the ACAP for another five years, until March 31, 2010. Funding available under the program from April 2005 to March 2010 will be $190 million, an average of $38 million per year. There is a cost and workload associated with this or any contribution program – this work is necessary to ensure that the program meets its objectives and applicants meet program criteria, and that the program is consistent with the Treasury Board's Policy on Transfer Payments. It is important to note that the cost associated with an ACAP application may be included in the total contribution requested by the applicant.

RECOMMENDATION 3

The government eliminate the Air Transport Security passenger fee and pay for this service through the Consolidated Revenue fund.

The enhanced air travel security system benefits, principally and directly, air travellers in Canada. In these circumstances, application of the Air Travellers Security Charge (ATSC) is fair and reasonable. The Government is committed to reviewing the charge over time to ensure that revenues remain in line with costs over a five-year period. Each of the last three Budgets has presented a review of the ATSC, including updated information for revenue and costs, and has proposed appropriate rate reductions. As of March 1, 2005, the ATSC is levied at the following rates: $10 for round-trip domestic air travel, $8.50 for transborder air travel and $17 for other international air travel. The Government will continue to review the charge over time to ensure that air travellers pay only what is necessary to fund the enhanced air travel security system.

RECOMMENDATION 4

The government pay for CBSA services at airports that can demonstrate that they have regular transborder and/or international services.

Charging fees for services has been Government policy for decades and respects the Treasury Board charging policy that dates back to 1989. Through its charging policies, the Government of Canada has recognized that the general public should not necessarily bear all the costs of providing a government service in cases where an identifiable recipient derives direct benefit from that service. User fees promote efficient resource allocation and equitable government financing of programs through fair charges to individuals or organizations that receive services or are the focus of these programs.

RECOMMENDATION 5

The government ensure that if downloading of regulations onto small and regional airports result in a significant increase in costs to these airports that such costs will be borne by the government.

The Government of Canada does not, as a matter of practice, provide funding for costs arising from compliance with airport safety and security requirements. The assessment of costs and benefits is discussed with affected stakeholders and is an important part of the regulatory process.

Prior to the NAP of 1994, Transport Canada owned and operated over 100 airports. Safety standards for these airports were determined primarily by departmental policy. Under the NAP, the Department continues to devolve the operation of airports to local authorities and is finalizing the modernization of airport safety regulations for this new operating environment. The Government's policy is aimed at promoting decision-making at the local level and the right-sizing of services and infrastructure to meet local needs.

The reinstatement of subsidies would be contrary to the fundamental objectives of the NAP. In keeping with the Government of Canada's policy to develop smart regulations, performance based regulations are being developed, when it is feasible to do so, to give an airport operator maximum flexibility to determine the method of compliance. The building blocks for this modernization include regulations for safety management systems, airside access and vehicle control, airport wildlife management and planning, winter maintenance and planning, and airport emergency planning, as these are areas of safety risk where improvements need to be made. This regulatory renewal will result in higher levels of safety and a more efficient regulatory environment, while at the same time providing the greatest amount of flexibility for the operator in tailoring airport plans.

Transport Canada develops safety regulations for airports following a comprehensive consultation process – the basis for the development of all transportation safety regulations. The Government of Canada has recognized the Canadian Aviation Regulation Advisory Committee (CARAC) process as a model for other departments.

An important part of the regulatory process is an analysis of costs and benefits, which includes stakeholder input. For example, during consultations in 2000, CARAC members considered financial estimates that were developed by industry consultants for the regulation of firefighting at Canada's airports.

In this particular case, funding available under the ACAP was increased to provide assistance to airports for start-up capital costs in meeting the requirements of this regulation. Ongoing operating costs would remain the responsibility of each affected airport.

It is important to note that Transport Canada, in consultation with stakeholders, is in the process of revising the regulations for aircraft rescue and firefighting to provide adequate emergency services at airports with the highest level of activity, while at the same time removing the financial burden from less busy airports. These regulatory changes are the culmination of a lengthy dialogue with stakeholders over the past six years and represent industry/government consensus.

Preventing accidents remains the primary focus of Transport Canada's safety efforts, and the Department is committed to ensuring that appropriate levels of emergency services are available at airports across the country.

RECOMMENDATION 6

The government, within five years, end its policy and repeal the necessary statutory powers, whereby certain government departments and agencies receive free services from airport authorities.

The Government shares the Committee's interest in ensuring that unreasonable demands are not placed on airport facilities by government departments; however, the Government does not agree with this recommendation. The Government is currently examining options with respect to accommodation of departments and agencies in air terminal buildings required for the delivery of essential federal public services at airports. These essential public services include contributions to the national security of Canada, the protection of Canada from terrorism, organized crime and other border-related criminal and non-criminal issues and public health protection, while allowing for the safe, secure and effective movement of people and goods. The Government enjoys a generally constructive relationship with airport authorities in this regard, and is committed to working with them to address such issues.