MEGA AMBITIONS

Pearson airport’s landing charges alone are twice that at Boston Logan and a third more than at Chicago O’Hare. executive, said the airport has the largest catchment area — defined as the population within a 90-minute flight — of any airport in North America, bigger than even JFK or Los Angeles International Airport (LAX).

Pearson also has an enthusiastic partner in Air Canada, which accounts for 57.6 per cent of the airport’s seat capacity, according to the Centre for Aviation, and has been pursuing an aggressive international growth strategy using its new fleet of Boeing 787s.

To support Air Canada, the GTAA has agreed to fix the airline’s fees for 10 years in exchange for agreed-upon passenger growth targets, and will offer rebates if it exceeds those targets.

“They want to be a megacarrier and, as a result of that, they need a mega-hub to work out of,” Eng said in an interview. “We’re both aligned on the concept.”

One of Air Canada’s main growth pillars is expanding so-called sixth-freedom traffic, or traffic from a second country to a third country via an airline’s home market.

In Air Canada’s case, that primarily means Americans travelling from their home cities via Toronto to destinations in Europe or Asia. The airline’s stated goal is to attract a 1.5-per-cent “fair share” of the U.S. sixth-freedom market, which would add $600 million to $700 million in incremental revenue, but chief executive Calin Rovinescu said it can probably do “much better” than that.

“We’ve been basically increasing our sixth-freedom flying by mid-to high-teen (percentages) in each of the last two years,” Rovinescu said in a recent interview.

He hopes to turn Pearson into a “world-class hub” comparable to Amsterdam, Singapore or Dubai.

“Those countries don’t have a large population base, but they have built very powerful hubs,” Rovinescu said. “Toronto is still relatively speaking underserved in terms of the catchment area and the market potential for it.”

But in order to become a truly successful mega-hub, Pearson will need to overcome two major limitations. The first is those exceedingly high costs that drive so many Canadians to U.S. border airports — the equivalent of 64 Boeing 737s every day, according to a 2012 report by the standing Senate committee on transport and communications.

The World Economic Forum’s 2015 Travel and Tourism Competitiveness Report ranked Canada 124th out of 141 countries on price competitiveness.

This is a function of Canada’s “antiquated” national airport model, according to a recent review of the Canada Transportation Act (CTA) by former federal cabinet minister David Emerson.

In 1994, Ottawa transferred the management, operation and development of 26 major airports to nonprofit airport authorities while retaining ownership of their land and fixed assets and charging them rent.

The GTAA pays Ottawa $130 million a year in ground rents for Pearson. Add in government security charges and, in Ontario, a jet-fuel tax that will hit 6.7 cents a litre by April 2017, and the airport is at a real cost disadvantage compared to its competitors.

Pearson’s landing charges alone are “twice that at Boston Logan, a third more than at Chicago O’Hare,” said David Bentley, chief airport analyst at the Australiabased Centre for Aviation. “You know why that is? It’s because of the ridiculous rents that they have to pay.”

Emerson’s review of the CTA concluded that the solution is to move towards a fully privatized, for-profit structure with equity-based financing from large institutional investors.

“Will privatization make a difference to Canada? I think it probably would,” Bentley said. “Toronto would become more efficient in terms of its costs to airlines and, therefore, could compete better with the likes of Chicago and other airports in the region.”

Eng at the GTAA will not say whether he’d prefer a share-capital structure to the current non-profit system. But he’s quick to emphasize that Pearson is already run like a private entity, paying down $500 million in debt over the past four years and investing $700 million of capital in airport infrastructure and amenities since 2010.

Pearson has also frozen or reduced the airlines’ average aeronautical fees per passenger for eight consecutive years, for a total reduction of 30 per cent since 2007.

“We run it like a private corporation,” Eng said. “My focus is on how we can generate the revenue in order to pay down the debt, reinvest in the airport and create the facility that’s needed to process the passengers.”

The second limitation at Pearson is congestion. The airport’s passenger traffic has grown so rapidly that the airport’s infrastructure — its security and customs checkpoints, runways, de-icing stations and even the surrounding roads — are having trouble keeping up.

“A lot of people say there’s no competition for airports because every city has one large airport,” Eng said. “But once you’re into the global hub status, in Pearson’s case almost 35 to 40 per cent of our traffic is what we call transfer traffic, they have a choice.”

Passengers who are connecting to another destination are generally looking for the shortest connection time, he said. To that end, Pearson is working to improve the flow of passengers and luggage by offering things such as self-serve baggage drops, automated border kiosks and automatic luggage transfers for passengers travelling from certain global cities to other Canadian destinations.

However, Eng stressed that Pearson also needs the government’s help to speed up security and border processing times, which are notoriously slow. Most passengers at Pearson wait 20 minutes for preboard screening compared to five minutes for 95 per cent of passengers at London’s Heathrow Airport and Hong Kong International Airport.

“We’re not asking for a special favour, (just) that they provide their processes in a manner that is equivalent to what the best airports are doing around the world,” he said.

The GTAA is also working with other airports in southern Ontario, including those in Hamilton, London and Kitchener-Waterloo, to encourage them to take some of the burden off Pearson by providing more short-haul, private-jet, cargo and charter flights.

Another key part of Pearson’s mega-hub strategy is to improve the notoriously bad road traffic around the airport region. According to the GTAA, only 10 per cent of Pearson’s passengers arrive on public transit compared to 39 per cent in Amsterdam and 63 per cent in Hong Kong.

A recent study by the Neptis Foundation found that there are a million car trips per day in and out of the Pearson region by employees and travellers. The recent launch of the Union Pearson Express rail line to downtown Toronto has helped, but “not enough,” Eng said.

“We probably need various domestic lines, special lines, high-speed rail lines,” he said, adding that the GTAA is prepared to help fund the development of a ground-transportation hub at the airport, but it will need government support as well.

If Pearson isn’t able to lower its costs and improve its infrastructure, it could miss out on a huge potential economic opportunity. According to Frontier Economics, becoming a mega-hub will increase the airport economic zone’s GDP by 75 per cent to $62.1 billion and create more than 200,000 jobs by 2030.

“Airports are changing from city airports to airport cities,” said John Kasarda, director of the Center for Air Commerce at the University of North Carolina.

Kasarda devised the concept of the “aerotropolis,” a notion that airports are far more than just transportation infrastructure, but rather anchors of regional business development.

“The 21st-century airport is quite different than the 20th-century airport,” he said. “They’re multi-modal, multi-functional enterprises that attract a substantial amount of commercial development.”

This can create a virtuous circle of expansion, Kasarda added. “Not only does the better airline connectivity, the route structure, serve as this magnet for business, but as business grows it generates greater volumes of passengers and cargo, which supports more airline connectivity,” he said. “It’s mutually reinforcing.”

Smoother connections can also help keep airlines’ costs down by generating more non-aeronautical revenue from retail, restaurants and other services.

“It’s a necessity, not an option,” Kasarda said.