Fixing an old mistake
To save Toronto’s Pearson airport, it may have to be privatized,
Whatever you might think about the privatization of public infrastructure, it’s now abundantly clear former prime minister Jean Chrétien’s impulsive stance against private sector investment at Toronto’s Lester B. Pearson International Airport is to blame for the grave financial peril currently facing the entire airport sector.
Keeping Canada’s airports open for business will likely require correcting Chrétien’s decades-old policy mistake.
Recall that during the 1993 federal election, then-prime minister Kim Campbell’s Progressive Conservative government announced a controversial plan to turn over operation of Pearson’s Terminals 1 and 2 to a private consortium. This group, which included several well-connected Tories, promised to spend $700 million renovating the airport in exchange for a share of the profits for 37 years. Calling it an “indecent” patronage deal, the Liberal leader vowed to kill it.
After winning the election — and stung by complaints he’d reneged on promises to renegotiate NAFTA and scrap the GST — Chrétien dug in his heels on Pearson. While airports around the world were then embracing full or partial privatization schemes, the Liberal government declared the entire sector off-limits to the private sector.
The country’s most important federally owned airports were thus handed over to local, non-profit, non-share capital airport authorities — such as the Greater Toronto Airport Authority (GTAA) that runs Pearson — on 60-year leases. At the end of these leases, all land and buildings are to be handed back to Ottawa. We are the only country operating airports in this manner.
There’s good reason why no one has copied us.
Among the many problems unleashed by Chrétien’s dogmatic political pledge, Canadian airports are required to make costly annual ground lease payments to Ottawa and have virtually unlimited powers to levy fees on travellers and airlines — factors that make them markedly less competitive than their international peers. This is why, back when air travel was still a thing, GTA residents would drive to Buffalo for cheap flights to Florida or Europe.
And because they’re not motivated by profits or constrained in the fees they can charge, Canadian airport authorities developed a peculiar preference for grandiose “gold-plated” renovations. In 2005, when the GTAA finally rebuilt Pearson’s terminals, the price tag was a stunning $4.4 billion — a far cry from that cancelled $700-million private sector plan. As non-profit corporations, Canada’s airports also have no choice but to finance all their expensive renovations and expansions with debt. The country’s airports owe a collective $15.2 billion; that’s more than the combined provincial debts of Saskatchewan, New Brunswick, Prince Edward Island, and Newfoundland and Labrador.
When air travel was still growing by seven per cent a year, such a huge debt load didn’t seem like a problem. Today, however, with non-essential flying at a standstill, Canadian airports are facing an existential crisis. Their passengers have disappeared, but those debt expenses haven’t.
Last month Pearson, which owes a total $6.4 billion, felt it necessary to ask bondholders to relax certain conditions attached to its debt for the next two years “in light of the significant decline in passenger and flight activity.” (Pearson declined to comment on this issue.)
The outlook is even grimmer elsewhere. Calgary’s International Airport — the fourth busiest in the country — owes more, on a per-passenger basis, than Pearson, and will need another $250 million just to keep the lights on for the next couple of years. Regina’s airport is facing similarly grave prospects. The possibility of a Canadian airport going bankrupt is now openly discussed.
In countries that allowed full or partial privatization of their airports, the situation is nowhere near as dire. In Britain, for example, the government told its privately owned airports to seek help from investors rather than look to taxpayers for a bailout; Amsterdam’s public-private Schiphol Airport has suspended dividend payments. But Canada’s airports have no investors to lean on, and Ottawa has so far resisted direct aid. The federal government has instead forgiven ground lease payments for the rest of 2020, but that’s small comfort since those payments are based on revenue.
As the ultimate owner of all the major airports in the country, however, Ottawa could soon find itself on the hook for that mountain of debt if Canadian airports start defaulting on their bonds. And with federal finances already seriously constrained by the COVID-19 recession, the once-heretical notion of private sector investors coming to the rescue of Canadian airports might start to look appealing, if not inevitable.
While the Trudeau government briefly dallied with airport privatization four years ago, the Liberals may soon find they no longer have a choice in the matter. Even partial privatization would dramatically improve the financial resiliency of our airports, lift the burden on taxpayers and make life easier for Canadian air travellers, if and when we start flying again.