Soaring airport rents could eventually ground the aviation industry, sector officials warn.

Outraged by the fact that the recent federal budget didn't include any provisions for rent relief, Ottawa is being advised that its inaction could prove devastating to a part of the economy that is just regaining its wings.

The rents, negotiated with the airports when Ottawa transferred responsibility for running and operating the facilities to local authorities, are part of a deal in which the federal government retains ownership - through long-term leases - to guarantee the integrity and long-term viability of the national airport system.

Airports across Canada are scheduled to pay $305 million in rent in 2005. This increases by 20 per cent in 2006 to $367 million, according to the Air Transport Association of Canada (ATAC).

"One can say that a contract is a contract, you're big boys and you should abide by the contract," says Canadian Airports Council (CAC) chairman Reg Milley.

"But when we signed the contract we didn't have an industry that was in the state it is in today. The industry in North America has lost $35 billion US since January 2001. We've had companies go bankrupt, there was 9/11, we've had SARS and it has become a very fragile industry. None of these things were in place then, so the environment has changed so dramatically - for the federal government to hold us to these contracts is not acceptable."

The industry is also angered that the federal government provides nothing in return for the rent it takes out of the airport system.

Milley, who is also CEO of Edmonton Airports, emphasizes that when all the airports were transferred over to local authorities, they had a total book value of $1.5 billion. "To date in rent, these same airports have paid back the government over $2 billion, plus they (Ottawa) continue to own these assets, so when our leases are up, all these improvements (the local authorities have done) revert back to the Crown," says Milley.

For Toronto, where the Greater Toronto Airport Authority (GTAA) is spending more than $4.4 billion to upgrade Pearson International, ATAC figures show that $145 million goes to Ottawa for rent.

Pearson is one of the costliest airports in North America in terms of airport fees and charges, second only to John F. Kennedy airport in New York, says Milley. But if Toronto didn't have to pay rent, it would drop to the middle of the pack, he says.

"There's no question we are an expensive airport, but we have upgraded our facilities substantially," says GTAA spokesperson Connie Turner.

Rent, however, wasn't as much of an issue when the model to modernize the airport was put on the table in the pre-9/11, pre-SARS era.

The CAC, which had expected action from the federal Liberals in last month's budget - based on previous talks with Finance Minister Ralph Goodale and Transport Minister Jean Lapierre - wants an immediate 50-per-cent reduction in rents, and to have those rents frozen at that level and only be escalated if passenger growth or hikes in the consumer price index warrant it. Further, airports with less than two million passengers a year would be exempt from rent under the CAC plan. A second step would be the full elimination of airport rents.

Milley says this is essential if the air industry is going to be able to grow and thrive.

Other hard-hit airports are in Alberta, where rents the local airport authorities pay the federal government are going to rise by triple-digit percentages in 2006.

Edmonton Airports, which will pay $4.2 million in rent in 2005, will see that figure soar by $18 million to reach $22.2 million next year, or a 447-per-cent increase, according to ATAC. In Calgary, where the Calgary Airport Authority will pay just under $25 million in rent this year, that figure increases by more than 100 per cent to $53 million next year.

"It's probably the biggest crisis we've faced since we took over the airport in 1992," says Garth Atkinson, president and CEO of the Calgary Airport Authority. "It's incomprehensible that we've come this far and the federal government has not addressed this.

"The reason they get away with this federal airport rent tax - and make no mistake about it, it's a tax paid by airport travellers - is because it's hidden in the price of the ticket. That's the only way they're able to perpetuate this unauthorized tax on air travel," adds Atkinson.

There was little choice when Calgary was offered the chance to take control of its airport, says Atkinson.

"I can't stress that strongly enough, it was not a negotiation. The federal government just said they were not spending any more money at the airport," he says, pointing to future needs that were left hanging. As for the terms of the lease, he notes that "the fact is neither we nor the government knew what we were going into. Those were very complex leases."

Tony Gugliotta, senior vice-president of finance and CFO for the Vancouver International Airport Authority, says there is apprehension that rising rents will make his airport less competitive, especially with San Francisco and Los Angeles - markets that are his rivals.

"Rent is our biggest cost. It consumes about 25 per cent of our revenues and in most cases it is passed onto the carriers and reflected in the ticket prices," says Gugliotta.

While Gugliotta says it's difficult to pinpoint a specific costs in terms of how the increase may directly affect air service, he stresses that it does factor into the overall equation.

"When an airline makes a decision to come or not to come to Vancouver, they look at a whole number of issues. If we're trying to attract gateway traffic, traffic that can come through Vancouver (rather than San Francisco or L.A.), it just makes it that much more difficult to attract airlines," says Gugliotta.

"If the rent continues to be charged and increases at the rate it's increasing, and our costs continue to go up, airlines may make decisions to go elsewhere."

Transport Canada spokesman Brian McGregor says Lapierre remains sympathetic to the airports' concerns. He adds while rent relief is still under consideration, he could not say when any rent breaks are expected.

(Laura Severs can be reached at laura@businessedge.ca)