The turkey has landed: Pearson Airport's Terminal 1

Pearson Airport's Terminal 1 loses money. It's expensive and inefficient. But at least the art is nice.

To call the new Terminal 1 at Toronto's Pearson International Airport the Taj Mahal of the international aviation business would be an understatement–it's much bigger than the Taj. And it cost a great deal more to build. About the only thing those two grandiose buildings share is the fact that no expense was spared in their construction. Everywhere you look in T1, there are soaring, rounded ceilings finished in shades of white. There is a three-storey granite wall that runs for about a kilometre. And throughout this 4.2-million-square-foot monument to modern transportation–enough space to build more than 100 of the original Taj Mahals–there is art. Millions of dollars worth of original art, created by an international coterie of high-priced painters and multimedia sculptors (most of them non-Canadian), has transformed T1 into a slightly bizarre museum of modern expressionism. Near the ticketing hall, there is a floor-to-ceiling fish tank with plastic cubes floating around a wind tunnel. There are suspended, acrylic human figures in a piazza just past security. And a 127.5-metre neon sign that spells out the names of continents dominates the baggage hall.

If this doesn't sound like any airport you have ever seen, it's for good reason. “The perspective of the Greater Toronto Airports Authority [GTAA] is entirely non-commercial in nature,” says Fred Gaspar, vice-president of policy and strategic planning at the Ottawa-based Air Transport Association of Canada (ATAC). “Who wants to pay $3 each time they pass through an airport just so they can look at a statue?” How much the highfalutin art at T1 costs individual passengers is hard to quantify, but it certainly accounts for a portion of the $175.4 million in airport improvement fees collected in 2005.

This figure, however, is the thin end of a Godzilla-sized wedge that experts say is having an adverse economic impact not only on the 138,000 jobs tied to Pearson's $14-billion microeconomy, but also on the Greater Toronto Area and the country as a whole. “It's quite a dreadful situation,” says Joseph D'Cruz, a professor specializing in global competition at the Rotman School of Management in Toronto. “Chicago benefits from O'Hare's efficiency. Toronto suffers from Pearson's inefficiency.” Regional airports, including Hamilton, Waterloo and Buffalo, are profiting from Pearson's ineptitude, he adds.

The problem at Canada's busiest airport is that T1, which opened for business in April 2004, cost $4.4 billion–placing it among the biggest private-sector infrastructure investments in Canadian history. It can't suck up tax dollars: airports were turned into not-for-profit corporations in the early 1990s. So, instead, the GTAA is recouping the cost of its great white elephant from domestic and international carriers and from the travelling public. To meet the exorbitant payments on its bond-financed debt of $6.6 billion, the GTAA has more than tripled Toronto's landing fees–which totalled $405.9 million in 2005–over the past seven years. John Kaldeway, GTAA's president and CEO, is nevertheless unapologetic about the financial pressure being exerted by his shiny new terminal: “You do this kind of thing once, and you do it right so it lasts for decades.”

In the meantime, Pearson has overtaken Kansai International Airport in Osaka, Japan, to become the world's most expensive gateway, giving new meaning to Toronto's claim to “world-class city” status. At US$10,986, Pearson's landing fee for a Boeing 747 is 46% higher than Kansai's (US$7,546), and 118% higher than the fee at its nearest North American cost rival, New York's LaGuardia (US$5,031). Calgary and Vancouver are No. 7 and 8 in North America, each charging about 22% of Pearson's landing fee, according to an Air Transport Research Society (ATRS) study.

Combine Pearson's stratospheric landing fees with a global airline industry bleeding red ink, due, in part, to economic aftershocks of 9/11 and to high oil prices, and you have a recipe for disaster. “No one in the airline industry supported the GTAA's $4.4-billion expansion, but it chose not to listen,” says Gaspar of ATAC, an industry association whose members include Air Canada, WestJet and Air Transat. Adds Jeff Poole, director of industry charges in the Geneva office of the International Air Transport Association (IATA): “The investment proposal was not to anyone's liking, but now the cathedral is there. It's a solid block in Toronto's cost structure.”

The GTAA has reported enormous losses in each of the two years since T1 opened–most recently, in 2005, it lost $118.4 million. It's on track for a shortfall of about $100 million in 2006. Who's to blame? Many point to Lou Turpen. In another life, the GTAA's former president and CEO responsible for T1 would have probably become a curator for an art gallery. In this life, Turpen, an American who has a civil engineering degree from the U.S. Air Force Academy, has become a construction czar who has spent a total of US$7.3 billion of other people's money building grandiose art palaces trapped inside the bodies of airports. “He has a history of autocratic rule going back to San Francisco,” says Gaspar, referring to Turpen's tenure as chief executive of that city's airport from 1981 to 1995. “He didn't have a pretty track record with airlines there, either.” To the airline industry, he is Darth Vader. At the airports he transforms, Turpen is a Svengali-like figure, who has an uncanny ability to get boards of directors to name museums after him. (San Francisco International Airport, where Turpen initiated a controversial US$2.4-billion expansion, has a Louis A. Turpen Aviation Museum, part of North America's first fully accredited museum-in-an-airport.)

Kaldeway, an 18-year Pearson veteran who took over the GTAA's helm when Turpen resigned in 2004, says he plans to retire as soon as a replacement can be found. “It's a good time to walk away after all the heavy lifting is behind us,” says Kaldeway, who is overseeing completion of Phase 2 of T1's construction, (continued on page 41) (continued from page 39) the addition of a $1.2-billion pier. Kaldeway bristles at the suggestion that his former Top Gun boss overbuilt T1 despite vocal protests from the airline industry. “It's not that we didn't consider industry suggestions,” says Kaldeway, whose previous position was chief operating officer. “They just weren't the right thing to do.” T1 will be able to handle as many as 40 million passengers a year when the new pier opens in January 2007. But unlike more modest proposals, it can be expanded further to accommodate as many as 50 million. That may have seemed like a good idea at the planning stage, but since then GTAA's highly optimistic business model has been capsized by events–9/11, the dot-com meltdown, Toronto's SARS epidemic. Pearson won't hit passenger targets it projected for 2005 until 2015, says D'Cruz. “Everything is very seriously behind in terms of traffic volume,” he adds. “What the GTAA needs is very skilful management, but it's not forthcoming.”

To escape its predicament, the GTAA and the airline industry, led by ATAC and IATA, are angling for a rescue package from the federal government. The airport authority can't ask for money, so it's asking for the next best thing–rent relief. This scenario smacks of the parable of the prodigal son: when the feds privatized airports in the 1990s, they did not provide the necessary checks and balances to make them publicly accountable. Instead, they gave the newly created airport authorities carte blanche to run their operations as they saw fit. “The GTAA has a licence to print money,” says Gaspar. “It's like Ontario Hydro without price regulation.” Some rent relief seems reasonable, given that Pearson handles 30 million passengers a year, roughly one-third of the nation's total, but accounts for 40% of Crown rents paid by airport authorities–$147.9 million in 2006. The ministries of transport and finance, says Kaldeway, have “heard us and understand our position.”

Kaldeway is not asking for the elimination of Crown rents. But that's exactly what the airline industry wants–since presumably whatever the GTAA saves on rent will go toward reducing landing fees. “The Canadian government has been paid back for its original investment and now it's getting a free ride,” says IATA's Poole. The book value of Pearson's facilities at the time of privatization, excluding Terminal 3, was $295.2 million, and the GTAA has since paid more than $1 billion in rent. Still, if Pearson and the airline industry were to be exempt from paying rent for use of government land, it would be tantamount to a subsidy. “There's nothing concrete at the moment,” says Natalie Sarafian, press secretary for Transport Minister Lawrence Cannon, referring to the rent-relief issue. “Discussions are in progress, but there is no timeline.” Also there is no indication as to when Bill C-20, which will give stakeholders the right to appeal airport fee increases, will be passed.

Before there is any movement on rent relief, however, it might be a good idea for Pearson to gets its own house in order. According to this year's global airport performance report from ATRS, it's the least-efficient hub (as measured by such criteria as sources of commercial revenue and passenger satisfaction) in North America after Miami. “Pearson relies too much on airlines for its revenue,” says Tae Oum, president of ATRS and professor of transport logistics at the Sauder School of Business at the University of British Columbia. Smart airports, he adds, can cover 50% or more of operating costs with revenue from retail, commercial rent, advertising and parking. A case in point is Atlanta, ranked North America's most efficient airport, with 65% of revenue coming from non-aviation activities. That compares with 25% at Pearson and 50% at Vancouver, this country's most-efficient airport.

Pearson has also failed to seriously examine its outsourcing options, says Oum. In 2004, the airport had 885 people on its payroll handling 28 million passengers. In the same year, Atlanta had just 780 employees processing 83 million passengers, thanks to a strategic outsourcing program. “GTAA needs a major management shakeup to run like a private enterprise,” says Oum.

Back in Toronto, Kaldeway says Pearson has outsourced some of its functions, and that revenue from advertising is up. He adds that when T1's third pier is completed early in 2007, it will showcase the biggest duty-free shop in the country. “I don't think anything has to change for us to operate effectively,” says Kaldeway.

Whoever takes over the GTAA next year will need to be an entrepreneur and diplomat, able to rebuild bridges with the airline industry, not an arty visionary from the George Patton school of management. “Under Lou Turpen, it was open warfare,” says Poole. “Now we're trying to collaborate, but there's still a long way to go.” The big question is, When will the sky-high landing fees start coming down at Pearson? “When we get relief from the government,” says Kaldeway. Meanwhile, Pearson is likely to continue flying through heavy turbulence–its flagship terminal a stinging reminder of the price to be paid when esthetics wins out over economics and common sense.

Toronto the expensive
Landing charges
(US$) 2005
Airport Boeing 747

Toronto Pearson 10,986
Osaka Kansai 7,546
Tokyo Narita 7,041
New York LaGuardia 5,031
Calgary 2,504
Vancouver 2,430
Halifax 2,332
Edmonton 2,267
Ottawa 2,080
Montréal Trudeau 1,962
Chicago O'Hare 1,713
London Heathrow (peak) 1,610
Atlanta 290
source: Air Transport Research society