By Frode Skulbru (Vancouver, Canada)
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:
- Decisions of priorities of re-intruducing services. The most populous and profitable routes will likely come first, in particular international ones once the borders re-open.
- Staff will have to be re-hired to support an increase in activities.
- Grounded aircraft have to be taken out of storage, inspected and readied for service.
- Pilots and flight attendants may require re-certifications.
- Sufficient working capital would need to be in place if a rapid ramp-up is to take place.
- Regional carriers may not have additional capacity to replace services from the larger airlines should they continue to delay or permanetly stop services to smaller markets.
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:
- The FES outlined $686 million for airport infrastructure and $186 million over two years for the Airports Capital Assistance Program (ACAP), which helps maintain runways, purchase emergency/snow equipment and invest in other safety infrastructure. The program requires that airports provide a matching contribution of up to 50 per cent. However, since many of these airports have run through their cash reserves to survive, they have no cash to contribute.
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 federal government is providing $500 million for safety, security and transit at large airports, but one project alone already exceeds that amount. The train station for Montréal-Trudeau International Airport will cost $600 million, as mentioned in the FES. An additional $500 million is needed to extend it less than one kilometre to VIA Rail’s inter-city line.
- Air-sector workers have received $1.4 billion through the Canada Emergency Wage Subsidy (CEWS), but the CAC’s own review suggests much of this went to pay people to stay home in the early days of the pandemic. While an important tool to help individual Canadians, CEWS goes only so far with passenger traffic hovering at zero to 20 per cent of normal levels since March. Municipal airports in Kelowna, Abbotsford and dozens of small communities are ineligible for CEWS and other federal COVID-19 programs simply because they are owned by municipal governments.
- The Highly Affected Sectors Credit Availability Programmay be helpful for very small airports through loans of up to $1 million.
- The Regional Air Transportation Initiative will provide $206 million “to support regional air transportation” through regional development agencies, but details are unavailable and funds will surely be shared with airlines also in need.
- Of the Canadian Airports Council’s 54 member airports, the federal government is deferring or waving ground rent for 21 of the busiest – the airport authority operated airports within the National Airports System (NAS). The government owns these airports while not-for-profit airport authorities operate them under long-term leases. These NAS airports must cover all operating and capital costs. They have invested more than $30 billion since 1992 to maintain and upgrade their infrastructure, providing the ability for Canadian air carriers to improve services. The NAS airports provide a hefty return to their government shareholder through rent (which can be up to 12 per cent of an airport’s gross revenues), totalling $415 million in 2019, and $6.5 billion since 1992. Much of this comes from AIF revenues raised to build and maintain these government assets.
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.