Big debts threaten to ground Canada’s once high-flying airports

Believe it or not, long lines and flight delays are not the biggest problems facing Canada’s largest airports these days. Rising debt and a backlog of infrastructure improvements threaten their competitiveness more than the bad publicity from bottlenecks in security and customs screening, which have tested passengers’ patience and have left business leaders fearing for the country’s international reputation.

Canada’s three biggest airports in Toronto, Vancouver and Montreal lost a combined $1.8-billion in 2020 and 2021, as COVID-19-related lockdowns and travel restrictions reduced passenger traffic by 75 per cent from 2019. The Greater Toronto Airports Authority, Vancouver Airport Authority and Aéroports de Montréal took on more than $2-billion in debt and slashed capital spending to survive the pandemic.

They are now scrambling to find new sources of revenue to service that debt and finance postponed infrastructure improvements without sending tapped-out travellers fleeing to U.S. airports with lower user fees. The challenges have many industry observers arguing that Canada’s unique airport model – the country’s largest airport authorities are non-profit entities that operate under long-term leases from the federal government – needs a serious rethink.

“There is no question the model was put under tremendous strain over the past 2 years. A not-for-profit model that relies almost solely on a passenger for revenue meant we had little to no revenue, but we needed to keep Pearson operating to deliver essential goods and travellers, and repatriate Canadians,” GTAA spokesperson Ryan White said in an e-mail.

“Unlike US airports that saw US$40-billion of grants to continue investing in critical infrastructure, we slashed our capital plans to serve regulatory and critical maintenance projects. This means we, along with airlines and ground handling companies, are coming out of this pandemic much weaker financially.”

Before the pandemic, Canada’s airports seemed to be flying high after spending the previous two decades building world-class infrastructure, including gleaming new terminals that doubled as high-end shopping arcades for captive customers waiting to catch a flight. Commercial revenues from retail tenants surged to inflate their bottom lines. Much-hated “airport improvement fees” slapped on to every airline ticket also provided a juicy revenue stream.

It was a good deal for the federal government, too, which collected more than $6-billion in rent payments over a two-decade period, under long-term leases that do not expire until the 2050s or 2070s. With air travel surging, and pension funds hungry to invest in infrastructure assets, analysts at the time argued that Ottawa could have reaped billions more by privatizing the biggest airports.

Prime Minister Justin Trudeau’s government looked into the idea in 2016. But it rejected that option after some airport authorities and unions representing airport workers balked. Public opinion also appeared to be against privatization, as passengers worried about higher fees.

Now, privatization looks like a pipe dream. With airports drowning in red ink and facing rising debt-servicing costs as interest rates spike, their valuations have been cut drastically. Rather than reaping billions by selling them, Ottawa could be forced to bail them out.

The federal government waived lease payments in 2020 when the pandemic struck and deferred airport rent for 2021. The deferred rent has to be repaid over a 10-year period starting in 2024. The GTAA is seeking an outright waiver on the 2021 rent and a new deal with Ottawa that would allow it to divert future lease payments toward infrastructure improvements.

“There is an opportunity to reinvest those monies into strategic infrastructure investments to rebuild our national competitiveness and develop the airport of the future,” Mr. White said. “The GTAA also believes we should look creatively at tapping into private money to deliver key strategic projects.”

The GTAA, which runs Toronto’s Pearson International Airport, paid about $171-million in rent to Ottawa in 2019, and another $38.4-million in payments in lieu of property taxes to the cities of Toronto and Mississauga. Airport rents, which are set at 12 per cent of revenues, are expected to rise as passenger levels return to pre-pandemic numbers. Almost 50 million travellers went through Pearson Airport in 2019; that number fell to 13.3 million in 2020 and 12.7 million last year.

In all, the GTAA lost $734-million in 2020 and 2021, while Vancouver’s airport authority lost $576-million and Montreal’s lost $465-million. The GTAA’s debt rose $800-million during the pandemic to $7.2-billion, Vancouver’s by more than $500-million to almost $1.8-billion and Montreal’s by $800-million to almost $3-billion.

All of them will have to get creative to crawl out of that hole while continuing to upgrade their infrastructure, if they are to keep up with passenger expectations and foreign airports with access to vastly larger pools of investment capital.

The federal government has allocated $571-million for an Airport Critical Infrastructure Program that covers part of the cost of some projects, such as runway rehabilitation underway at Pearson. But it is a drop in the bucket compared to what’s needed.

Ottawa missed the boat (or flight) by not privatizing Canada’s airports before the pandemic. It may have to turn to the private sector to save them now. Otherwise, taxpayers will foot the bill.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.