BUSINESS

NEW GROUND RULES

PROFITS FROM CANADA’S MAJOR AIRPORTS ARE THE PRIZE IN A TAKEOVER BATTLE WAGED IN OTTAWA

PATRICIA CHISHOLM April 16 1990
BUSINESS

NEW GROUND RULES

PROFITS FROM CANADA’S MAJOR AIRPORTS ARE THE PRIZE IN A TAKEOVER BATTLE WAGED IN OTTAWA

PATRICIA CHISHOLM April 16 1990

NEW GROUND RULES

PROFITS FROM CANADA’S MAJOR AIRPORTS ARE THE PRIZE IN A TAKEOVER BATTLE WAGED IN OTTAWA

BUSINESS

It is a high-stakes battle waged by some of Canada’s most powerful companies, lobbyists and politically connected businessmen. Municipal authorities are also engaged in the struggle. The primary prizes: control of passenger terminals at the nation’s two busiest airports, Vancouver International and Toronto’s massive Pearson International. Among the leading bidders to take over the terminals and lucrative associated businesses is Toronto property developer Donald Matthews, a former president of the federal Conservative party and the father-in-law of Ontario Premier David Peterson. His competition includes the privatized British Airports Authority and Toronto developers Michael Huang and Bela Danczkay, who are building a third terminal at Pearson and who have already won the right to operate it. Ottawa lobbyists working to convince the government to privatize airport terminals include William Neville, who represents the Matthews consortium, Paxport Management Inc. Said Neville, a former aide in the Prime Minister’s Office under both Brian Mulroney and Joe Clark: “It makes a hell of a lot of sense to invite private-sector participation.”

Late last month, newly appointed Transport Minister Douglas Lewis told the Commons transport committee that the government is considering proposals to not only lease major airport terminals to private operators, but also to sell smaller airport terminals and adjacent development land to local community authorities or to the private sector. Transport Canada and other federal departments and agencies will retain the management of such functions as air traffic control and runway maintenance, as well as airport security. The proposals call for the government to transfer to private hands or municipal authorities the operation of passenger terminals, along with the revenue from leasing out such facilities as restaurants, shops and connected hotels. Initial policy decisions on the future of Canada’s airports are expected to be announced by midsummer.

Lewis’s statement provoked prompt criticism. Parliamentary opposition critics and airline spokesmen attacked any government move to expand on the precedent established by leasing Pearson’s new Terminal 3 to Huang & Danczkay Developments Ltd. Although the government says that it would share in the revenues under leasing arrangements with private operators, the critics argued that privatization will cost the government millions of dollars in potential revenues. They said that, as the operators recover costs and ensure profits, travellers will be forced to pay the extra price. As well, some critics protested that turning over airports to private enterprise may undercut the government proposal to transfer management to new local airport authorities, in-

cluding community groups already being formed in Vancouver, Calgary and Montreal.

The proposal to transfer the management of almost all commercial operations at Canada’s major airports to community-based groups was introduced in 1987 by John Crosbie, then the transport minister. Under Crosbie’s plan, the local airport authorities would exclude private developers as investors. But, in the same year, Crosbie made an exception in a contract to construct the new terminal at Toronto’s Pearson: the government granted Huang & Danczkay, through that company’s Airport Development Corp., a contract to operate as well as build Terminal 3. According to the company’s operating plan, the $520-million facility, which will be known as the Trillium Terminal when it opens this fall, will be run by the developers when it is completed. As a result, Huang &

Danczkay—represented in Ottawa by two of the capital’s largest lobby firms, Government Consultants International and Public Affairs International—is already well-positioned to capitalize on any government decision to lease Toronto’s two existing terminals or Vancouver’s terminal operations to commercial managers.

According to Neville, the 1987 decision to allow a private-sector company to operate the new Terminal 3 has “opened up a window of opportunity” for private developers to obtain leases for the renovation and management of other terminals. Neville said that the privatesector operation of airport passenger facilities makes financial sense. He said that it fits in with the Mulroney government’s campaign to reduce federal spending and it could save the government future investment outlays for upgrading and expanding passenger facilities in Canada’s major airports. Such a policy also meshes with the Tory government’s program of privatization, which has already been applied

to or announced for more than 15 Crown corporations and agencies, including Air Canada, Teleglobe Canada Ltd. and Canada Development Corp., as well as Petro-Canada of Calgary. Said Neville: “What Paxport and the others are trying to do is get the government to make a decision in principle to put one or more of these airports out for proposals.”

In advance of a government announcement on the future control of airport facilities, the private-sector bidders appear to be interested in operating the terminals and linked developments only at the Toronto and Vancouver airports—two that regularly generate operating profits. In fiscal 1988-1989, Pearson generated a profit of $65.2 million on revenues of $148 million, and Vancouver earned $20.4 million on receipts of $63 million. Calgary International’s accounts were also in the black that year, earning $382,000 on overall income of $35 million. Those total profits of almost $86 million at the three profitable airports offset by a wide margin a combined 1988-1989 loss of $40 million, on total annual revenues of $394 million, at Canada’s six other major international airports—Montreal’s Dorval and Mirabel, Ottawa,

Edmonton, Winnipeg and Halifax.

The developers say that they are attracted to the airports in Toronto and Vancouver because those two operations, which rank firstand second-busiest respectively in Canada, have the potential to generate even larger profits. Spokesmen for the firms involved say that they can improve earnings by expanding lucrative industrial and service facilities in the surrounding areas, including hotels, office space and convention facilities. As well, the increasing popularity and complexity of air' travel means that more passengers spend time in airport terminals and, while there, they spend heavily on meals, gifts and duty-free goods.

Led by Huang & Danczkay’s spectacular Terminal 3 development, the design and construction of airports in Canada appear to be following an international trend in which terminals are being transformed into luxury waiting rooms and shopping meccas for the world’s wealthy individual and business travellers. In contrast to the modest stores and services in Toronto’s two existing terminals, said Huang &

Danczkay spokesman Jack Fleischman, Terminal 3 will include exhibits and displays in waiting areas for the entertainment of travellers, a food court and a retail shopping mall anchored by a 3,000-square-foot emporium that he called “a Harrods signature store,” a retailing enterprise that bears the imprimatur of the luxury department store in London’s Knightsbridge.

That emphasis on passenger comfort and convenience by the designers also aims to lure major airlines to use Terminal 3. In addition to such innovations as computerized baggage handling, whereby bar-coded stickers read by computers are used to route bags to the correct flight, the building’s physical features were designed to reduce passenger stress and anxiety. A main departure hall, which is 1,000 feet long and towers 45 feet high, is a striking crescent of green glass filled with natural light and supported by rows of steel arches. As well,

a luxury 500-room hotel will be connected to Terminal 3 by a climate-controlled walkway. John Simke, Ottawa-based aviation consultant with the accounting and management consulting firm Price Waterhouse, said that providing such luxurious facilities is a new way of financ-

ing airports—“a nice terminal does draw more passengers.”

Despite Huang & Danczkay’s strong foothold in airport management, they face stiff competition from two other firms in their bid to take over the improvement and operation of the Toronto airport’s overcrowded Terminal 1 and Terminal 2 facilities. Matthews’s Paxport group has an ambitious proposal to combine and upgrade the two terminals into one huge, horseshoe-shaped building at a cost of $800 million. Paxport estimates that the project, which would include a hotel, a business centre, a new parking garage and a $20-million moving walkway, will eam a handsome rate of return on its investment. Some analysts have estimated that, after paying the government its leasing fees and a percentage of gross revenues, the

commercial operators would earn about 15 per cent of the total take in profit.

Another interested party in that project is a consortium that includes the British Airports Authority, which is already the world’s largest private operator of terminals. That consortium, Canadian Airports Ltd., is competing for management rights at Pearson’s two older terminals. The Londonbased British member of the group, renamed BAA PLC when it was privatized by Prime Minister Margaret Thatcher in 1988, now owns seven airport operations in Britain, including two of the world’s busiest—London’s Heathrow and Gatwick airports. BAA also manages four other airports in Scotland. In Ottawa, the consortium’s interests are represented by lobbyist Fred Doucet, Mulroney’s former chief of staff.

Such lobbying efforts have been countered by opposing campaigns. Gordon Sinclair, president of the Ottawabased Air Transport Association of Canada, which represents Canada’s 122 airlines and aviation operators, says that many carriers are opposed to any further involvement of private developers in airport operations, contending that they “will be charging carriers more to make up their costs, and those increases will be passed on to consumers.” If the government itself cannot provide enough terminal capacity, g Sinclair added, the airline industry would be interested in 2 providing the necessary fiu nancing. For his part, MP BriÍ an Tobin, the Liberal party’s “ transportation critic, says that there should be a mix of federal and community control, with preference for local airport authorities over private developers. Local groups, known as LAAs, are already in various stages of formation in Vancouver, Calgary and Montreal. The Calgary group’s Donald Brownie, a special adviser to that city’s fledgling LAA, described airports as “a driving force of local economic activity” and said that “there are unexplored opportunities to do even more.” Whoever benefits from those opportunities— private developers, local investors, the public purse, or all three—may well depend on whether Ottawa expands its Toronto Terminal 3 solution or takes off in a different direction.

community control, with preference for local airport authorities over private developers. Local groups, known as LAAs, are already in various stages of formation in Vancouver, Calgary and Montreal. The Calgary group’s Donald Brownie, a special adviser to that city’s fledgling LAA, described airports as “a driving force of local economic activity” and said that “there are unexplored opportunities to do even more.” Whoever benefits from those opportunities— private developers, local investors, the public purse, or all three—may well depend on whether Ottawa expands its Toronto Terminal 3 solution or takes off in a different direction.

PATRICIA CHISHOLM

DAVID HATTER