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Part 3 of 3 (click for part 1 and part 2) A Projected Slow Recovery in Canada As potential passengers get more comfortable with travelling and public health advisories are in support of travel the demand will be largely restored. Business travel will take some time to recover, however there is likely a pent up demand for travel to visit friends and family, for vacations and various other reasons people might have. Airtravel has become a staple for many and there is no reason to assume this will fundamentally change in the longer term. Since many of the routes not currently serviced are officially ”temporarily suspended” one may think that these can be re-instated by (metaphorically) ”flipping a switch”. This is unlikely as a ramp-up will depend on multiple factors and could take quite some time to be implemented. Key areas would include:
Some airlines have used the oportunity to right size the fleet and retire older or aircraft, which means a re-allocation of equipment across the network. This may again result in a lack of suitable aircraft in specific markets. Finally, some airlines may use this process to permanently reduce services on routes that were marginally profitable or loss making even before the pandemic. In addition to Air Canada and Westjet, air services to Canadian communities are provided by a number of regional carriers flying independantly or under various types of contracts with the ”big two”. These will also require direct support to re-ignite networks that are currently somewhat dormant. Daniel-Robert Gooch (President of the Canadian Airports Council) provided some views on the FES and the Regional Air Transportation Initiative, which can be summarized as follows:
Mr Gooch also states these funds fall well short of what is required with aggregate numbers showing Canada’s airports will need $1.8 billion for safety, security and transit projects that are in the works or planned.
The 21 NAS Airport Authority airports have been extremely profitable for the taxpayer. As they are ultimately owned by the Federal Government one can only wonder why Government is neglecting its own assets. Although airports have deferred capital programs and sadly laid off many staff, they continue to have high fixed costs related to regulatory requirements and long-term debt obligations. The dramatic drop in revenue from COVID-19 has to be replaced one way or another. So far, additional debt has been the main avenue to do this, potentially accumulating over $2.5 billion in additional airport debt across the country. One year of rent relief is not going to make a big dent in this. Some of the less busy airports would not even meet the minimum revenue treshold of $5 million where rent begins, hence there is no or limited rent to defer. The current rent formulae results in some unfortunate results due to its structure based on a percentage of revenue calculation. If airports raise more debt, they need to generate more revenues to service the same debt. That extra revenue will result in higher rent to the Government. At $2.5 billion and 3-5% interest, this could result in $7.5 to $12.5 million in extra rent in the early years. If bonds are used with the principal paid at maturity, such amounts would be payable for many years – that is of course if the airports recover sufficiantly to service the debt. Eventually, Canadian air travellers will shoulder the burden through higher costs. The answer lies of course in a rebuild of the industry. While the announced initiatives are helpful, they may only fill the void from the damage already done. What the industry ultimately needs is a well funded, coordinated effort to rebuild the demand. This may include a long term ”COVID safety protocol” as the vaccines and other efforts may take several years to build sufficient confidence and a trusted travel experience. In the U.S., the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748, Public Law 116-136), was signed into law on March 27, 2020, and included US$10 billion in funds awarded as economic relief to eligible U.S. airports affected by the prevention of, preparation for, and response to the COVID-19 pandemic. An estimate is that airports in the U.S. have received additional funds for a total equivalent of $15 billion in direct grants. The current trajectory in Canada sees heavily indebted airports and air traffic control, indebted airlines with smaller fleets, and the majority of of hotels, restaurants and other tourism businesses struggling or gone. Generating increasing demand will at one point stretch capacity, hence result in higher prices and therefore less competitive tourist products. Canada faces a long and slow path to recovery unless a comprehensive, fully funded plan, co-lead by the industry and Federal Government is implemented simoutaneously with the continous re-opening of the travel industry.