8. Other Observations
8.1 The Air Travellers Security Charge (ATSC)
8.1.1 Federal funding or separate security charge
8.1.2 Transparency in accounting for and use of the ATSC
8.2 Provision of Space at Airports
8. Other Observations
The Panel’s Terms of Reference invited us to draw to the Minister’s attention any important issue that we encountered during the course of our work:
Other issues: The Panel may inform the Minister of other important issues that come to its attention through its research, analysis or consultations.
At the same time, the Terms of Reference specifically excluded from our mandate the making of recommendations concerning the Air Travellers Security Charge (ATSC):
In its December 2001 Budget, the Government introduced the Air Travellers Security Charge (ATSC) to fund aviation security initiatives. Amounts raised by the ATSC are attributed to the Consolidated Revenue Fund and not directly to CATSA or any other government entity with security responsibilities. The work of the Panel will
not extend to the current ATSC structure, level or impact on the aviation industry.
Advice is not being sought from the Panel with respect to funding sources, mechanisms and levels applicable to CATSA.
However, throughout our consultation process, many stakeholders made reference to the ATSC in their submissions and presentations and were very preoccupied with it. We therefore provide some observations on the ATSC, without making specific recommendations.
The Panel also heard from several airports that the requirement to provide facilities free of charge to an increasing number of federal departments and agencies has put undue financial burden on them. This chapter also includes some comments on this issue.
8.1 The Air Travellers Security Charge (ATSC)
Budget 2001 provided $2.2 billion to enhance aviation security over a five-year period ending in 2006-07. To fund this increased level of aviation security, the government introduced the ATSC, to be paid by air travellers effective April 1, 2002. The Air Travellers Security Charge Act was passed to create the ATSC [ 1 ].
Enhanced aviation security initiatives that would be funded by the ATSC included:
- an enhanced regulatory regime;
- additional Transport Canada security inspectors;
- the installation of reinforced cockpit doors on passenger aircraft;
- increased policing presence at airports;
- the establishment of the RCMP’s Canadian Air Carrier Protective Program (CACPP); and
- the creation of CATSA to be responsible for the screening of passengers and their luggage.
Some $1.942 billion, or approximately 88 per cent of the $2.2 billion, was earmarked for CATSA’s budget to cover the last three initiatives.
The ATSC is managed by the Department of Finance. There is no direct mechanism that links the ATSC to the security expenditures. ATSC revenues flow directly to the Consolidated Revenue Fund. Air security expenditures, including CATSA’s appropriations, are determined by parliamentary appropriations. The intention, however, is that revenues from the charge would be equivalent to the level of required expenditure for the enhanced security initiatives over a five-year period. There have been periodic adjustments in the level of the charge since its inception as the financial requirements have changed.
In Budget 2003, following a review that involved consultations with stakeholders, reports by independent consultants [ 2 ] and a significant upward revision of Transport Canada’s forecast of air passenger traffic, the ATSC was reduced. In Budget 2004, the ATSC was reduced a second time, based on “updated revenue and expenditure projections,” a revised forecast by TC of growth in air passenger traffic and CATSA’s 2003 Annual Report that revealed 2002-03 operating funds were not all spent. Again in Budget 2005, after a third review of the charge, the ATSC was reduced again, based on “updated information for revenue and costs;” the Auditor General’s first
Report on the ATSC; and CATSA’s 2004 Annual Report that showed some 2003-04 operating funds would be unspent. Finally, in Budget 2006, ATSC was recalculated to reflect a one-percentage-point reduction in the GST. The ATSC reductions are represented in table 8.1.
During our consultations, stakeholder representatives – the Canadian Airports
Council (CAC), the Air Transport Association of Canada (ATAC), airport
authorities and the air carriers in particular – strongly expressed their
opposition to and concerns with the ATSC. They argued that in principle, all
costs associated with the protection of national security should be borne by the
federal government and not by the civil aviation industry – and ultimately by
the air passengers. The industry also expressed the view that the ATSC is not
transparent, not properly accounted for, and not appropriately invested in the
air transportation industry.
8.1: ATSC rates [3]
(*amounts include the GST or the federal portion of the HST where applicable)
8.1.1 Federal funding or separate security charge
Some of the more compelling arguments presented by the industry stakeholders for having aviation security funded by the federal government include the following:
- The State is the real target of the security threat and acts of terrorism are not committed against the aviation sector, per se. Accordingly, the State has an obligation to protect its sovereignty, its assets and its citizens.
- The ATSC unfairly discriminates between modes of transportation. This discrimination provides a competitive advantage to other modes of transportation, such as marine and rail (where, it is claimed, security costs are borne by the general taxpayer) at the expense of the air transportation industry.
- There are many fees and charges already directly or indirectly paid by the traveller that should cover the cost of aviation security. Airport Authority costs, such as rent and taxes paid to the government, are passed on to the air carriers and subsequently to the air traveller. The airport charges air carriers landing fees, terminal use fees and local airport security fees that are also passed on to the passenger through the price of a ticket. In addition, the air fares are subject to GST, provincial taxes, fuel taxes and airport improvement fees.
The Panel notes that there are good arguments as to why the cost of aviation security should be borne by the air transportation industry:
- The air transport industry requires specific security measures.
- The enhanced security measures are an integral component of the safe and secure transfer of passengers from one point to another. Therefore, the air travellers are the primary beneficiaries.
- If the federal government assumed the cost, it would be borne by the general taxpayer and those who do not fly would be subsidizing those who do.
- The enhanced security measures provide a significant economic benefit to the aviation industry. Without security, customers would fly less and the industry would suffer from these customer choices. It could be argued that without a reasonable level of security, the added liability cost could put some air carriers out of business.
- This ATSC represents very little by comparison to the other indirect costs that the air traveller pays:
for illustrative purposes, a $415 return ticket between Ottawa and Toronto would cost the passenger an extra $70 in fees and charges, including the ATSC. Out of the total price of $485, the $9.90 represents approximately two per cent of the cost and has a marginal impact on the customer’s purchase decision.
Should aviation security initiatives be funded by the federal government or through the ATSC? There are strong arguments in favour of either case. However, the imposition of a separate charge to fund security initiatives is in line with international practice [ 5 ] and the Panel does not find the imposition of an ATSC unreasonable.
8.1.2 Transparency in accounting for and use of the ATSC
Industry stakeholders made the case that if there must be an ATSC, it needs to be transparent, properly accounted for and appropriately invested in the air transportation industry.
How the federal government intended to spend the ATSC revenue seems to be a source of misunderstanding. As was previously noted, funding was to be provided for incremental security-related costs incurred after 9/11 and the ATSC was to cover these costs over a five-year period. CATSA’s five-year budget was to cover approximately 88 per cent of the total amount, with the remainder to be allocated to Transport Canada for additional transportation security inspectors and to the air carriers to help fund the reinforcement of the cockpit doors on passenger aircraft.
Stakeholders claimed that there is currently no transparency or comprehensive accounting for how the ATSC is spent. As a result, the industry has no confidence that the revenues from the charge are entirely invested in transportation security. The Department of Finance is responsible for managing the ATSC and regularly monitors the revenues and expenses, adjusts the rates to ensure revenues match expenses over a five-year period and publishes the results of its reviews. The results of the latest review released in August 2006 are provided in table 8.2.
8.2: ATSC revenues and expenses [6]
As indicated in table 8.2, the Department of Finance forecast a cumulative surplus of $325 million by the end of 2006-2007. However, Budget 2006 provided new funding of $133 million over two years for CATSA to manage increased operating expenses associated with passenger screening and to deploy new equipment for several airport expansion projects. These additional expenditures will reduce the projected surplus to $275 million by the end of 2006-07. As a result of this increase in expenditures and in order to provide some latitude to address cost pressures in the future, the Department of Finance decided not to further reduce the ATSC.
The report from the Department of Finance combines all the aviation security expenses and does not break them out by initiative or by department or agency. The Panel tried to assess CATSA’s appropriations against the ATSC expenses to the end of 2006-07 to determine how they measured against their Budget 2001 target of 88 per cent of the total amount ($1.942B of $2.2B). However, the Department of Finance reports capital expenditures on a depreciation basis and CATSA receives its appropriations on a cash basis, making this comparison impossible to do from publicly available documents.
The Panel supports annual public reporting of the ATSC. Transparency could be improved by showing expenditures by program or by department and agency. It would also be useful if the report would also report capital expenditures as they are appropriated rather than on a depreciation basis. This would be consistent with how the $2.2 billion aviation security budget is allocated and with how CATSA reports capital expenditures.
Stakeholders made the case that if the ATSC continues to be levied, it should be invested only in air transportation security. It was suggested that all or part of the ATSC should be credited directly to CATSA’s appropriations. CATSA’s funding would then be linked directly to passenger growth and related workload increases. It was also argued that the surplus should be used to fund additional screeners and improved equipment and to compensate airports for lost commercial opportunities deriving from the large amount of space required for the PBS screening points.
The Panel notes that security costs are an important issue for airports. The larger airports already pay substantial rent to the government and some are experiencing significant new infrastructure costs to meet traffic demands, whereas the smaller airports lack an adequate revenue base to recoup the additional costs imposed by post 9/11 security requirements.
On the other hand, the Panel observed that CATSA invested millions of dollars to install their HBS equipment within existing airport baggage handling systems. In some cases CATSA funded airport modifications, including the replacement of baggage handling systems and expansions to baggage halls. In order to have sufficient space for expanded PBS screening points, CATSA invested in architectural modifications and/or reallocation of terminal space. CATSA and the Canadian government incurred these expenses to offset some of the burden necessitated by the aggressive schedule for the installation of 100 per cent HBS to meet Canada’s international obligations.
In conclusion, the Panel notes that the government has decided to retain the ATSC to fund aviation security initiatives, is committed to periodically review and report on the ATSC and will use the surplus to fund increased operating costs and some future capital expansions.
8.2 Provision of Space at Airports
The requirement for airport authorities to provide free space to federal government departments and agencies is a federal government policy that has been in place since the airports became local authorities in the mid-1990s. This policy is reflected in Section 30 of the CATSA Act:
“Every operator of an aerodrome designated by the regulations must provide to the Authority, and maintain free of charge, such space at the aerodrome with services reasonably required by the Authority as the Authority and the operator agree on or, in the absence of agreement, such space at the aerodrome with services reasonably required by the Authority as the Minister determines to be necessary to enable the Authority to carry out its mandate.”
CATSA is the most recent federal organization to require free space at airports. There are several other departmental programs (Canadian Border Services, Immigration, Health, Agriculture, the RCMP, etc.) that require an airport presence and for which the airport authorities must provide the space and absorb the related costs for utilities and maintenance.
Airport terminal buildings are designed to provide space to meet operational requirements and provide amenities, including retail facilities, that will meet customer service and financial expectations. Airports generally generate revenues from commercial space and from fees charged to the air carriers. There is continuous pressure on airports to increase commercial revenues and reduce revenues generated from airline fees. Providing free space for federal government operations reduces commercial opportunities.
As the most recent federal organization to put such pressures on the airport financial structure, CATSA has been a target for complaints in regard to this federal government policy. In addition to having to provide free space, the increase in security requirements, and in particular the addition of HBS, has added a significant financial burden to the airport. While CATSA buys and maintains the HBS screening equipment and has paid for the integration of it into the baggage handling systems, the hold baggage system has increased airports costs for utilities and maintenance of the new more complex systems, and for additional personnel to clear baggage jams and handle misdirected baggage. For example, the Panel heard from representatives of Edmonton International Airport who indicated that they have incurred incremental costs in the order of $1.5 million (excluding added utility costs) for a more complicated baggage handling system and Moncton airport authorities advised that their utility costs have increased by $50,000 per year. The Class 2 and Class Other airports are particularly affected by these additional costs, as they have the least ability to generate revenues to offset the added costs.
In our consultations across the country, airports argued for some reimbursement of the costs incurred to provide space free of charge to CATSA and the numerous other federal departments and agencies that require physical facilities at airports. On the other hand, the government agencies provide a service that is an integral component of passenger facilitation and therefore it is in the airport’s best interests to have them on site. Nevertheless, there is clearly a limit to the costs that airports can reasonably be expected to absorb. The Panel has not assessed whether this limit has been reached. We understand that the federal government has previously examined this issue and the implications extend beyond Transport Canada. Nevertheless, we think it important to bring to the Minister’s attention that the airports appear to be increasingly frustrated by the increase in cost pressures.
Chapter Eight: Footnotes
[1] Air Travellers Security Charge Act, 2002, c. 9, s. 5.
[2] Independent Review of the Finance Canada Revenue Model for the Air Travellers Security Charge, Geoffrey D. Gosling, Ph.D. (March 2003).
Air Travel Demand Elasticities: Concepts, Issues and Measurement, David W. Gillen, William G. Morrison, and Christopher Stewart MBA, Wilfrid Laurier University (January 2003).
Air Travellers Security Charge (ATSC) and Low Cost and Regional Air Carriers, Sypher: Mueller International Inc. (January 2003).
[3] Budget documents, Finance Canada.
[4] ATSC rates are structured to include, where applicable, the Goods and Services Tax or the federal portion of the Harmonized Sales Tax (GST/HST). As a result of the GST/HST rate reduction, certain technical adjustments to ATSC rates are required in order to ensure that consumers receive the full benefit of the rate reduction. The ATSC rate for other international air travel is not subject to the GST/HST and remains unchanged.
[5] The U.S. imposes a passenger security fee of $2.50 U.S. per enplanement with a $5 U.S. maximum per one-way trip. They also impose a security infrastructure fee on the carriers. Collectively, these fees recovered approximately 43 per cent of TSA’s security expenses in 2005. In Europe, security activities are paid for by a combination of stakeholders, including airports, air carriers, passengers and the States themselves.
[6] Department of Finance Updated Financial Information on Air Transportation Security, August 25, 2006.
[7] Expenses reflect accrual accounting basis and include operating and depreciation expenses.
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