Alternative Options for Outsourcing Aspects of Airport Operations

PRESENTATIONPRESENTATION

Alternative Options for Outsourcing Aspects Alternative Options for Outsourcing Aspects of Airport Operationsof Airport Operations

Airport Board Member & CommissionersACI-NATucson, Arizona,May 2, 2011

Warren J AdamsWarren J. Adams

OverviewOverview

Conditions in the near-term: unprecedented challenges

R t t d i i t fi i l t i Recent trends in airport financial metrics

Airport capital funding needs

F d l f di d PFC Federal funding and PFCs

Governance at airports – U.S. and Europe

P i ti ti t d d l i h Privatization trends and role in governance changes

LeighFisher has offices in Chicago, Cincinnati, Dallas, London, Ottawa, the San Francisco area, and the Washington, D.C. area. For over 60 years, we have assisted our clients in achieving their vision and goals. We have extensive practical experience in all disciplines necessary for the planning and management of airports, including airfield and airspace analyses, airport management and operation, commercial and concession planning, forecasting and economics, facilities planning and design, federal funding and policy development, financial analysis and planning, financial feasibility and reporting, ground transportation planning, air quality analysis, noise and other environmental analyses, privatization, parking planning and analysis, rental car facility development and business planning, security planning and implementation, and simulation and operational analyses.

San Francisco Area Office:555 Airport Boulevard, Suite 300Burlingame, California 94010Telephone: (650) 579-7722

Washington D.C. Area Office:11730 Plaza America Drive, Suite 310Reston, Virginia 20190Telephone: (703) 961-9000

2 ACI-NA Airport Board Member & CommissionersMay 2, 2011AC

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e ep o e (650) 5 9Fax: (650) 343-5220E-mail: [email protected]

Telephone: (703) 961 9000Fax: (703) 961-9318 www.leighfisher.com

Conditions in the NearConditions in the Near--TermTerm –– Unprecedented ChallengesUnprecedented Challenges

1. Slow national and regional economic growth – it’s about more than economic conditions in your community, but also in the communities that are served from your airport

2. Continued high unemployment and a tight credit market – will continue to make it difficult for passenger growth to take hold in a meaningful way,

i ll i th t t f hi h i li fespecially in the context of higher airline fares3. Higher airline fares (12 material industry attempts to increase fares

since mid-December, 9 of which have stuck) – the airlines have been very clear about their goal of focusing on financial sustainabilityclear about their goal of focusing on financial sustainability

4. Airline network restructuring related to consolidation and airline alliances – it is likely that airlines will use airports very differently in the future, particularly in the context of their alliancesp y

5. Continued oil price volatility – the question isn’t about if we will get back to June 2008 oil prices, but what happens to airline capacity when oil is consistently above current levels


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The Lost Decade?The Lost Decade?

18% fewer domestic seats were available for U S passengers in 2010 than in 200018% fewer domestic seats were available for U.S. passengers in 2010 than in 2000

Percent Change in Scheduled Domestic Departing Seats at U.S. Airports

Several waves of capacity reductions as a result of:

– Fuel crisis– Recession and demand fall-off– Industry consolidation

Th t th f th U S i The strength of the U.S. economic recovery is uncertain Airports should expect, at best,

weak capacity growth in the nearweak capacity growth in the near term

– Fuel prices again volatile due to Middle East crisis and dollar depreciation

– Effects of United-Continental and Southwest-AirTran mergers not yet felt

Source: Official Airline Guides online database,accessed February 21, 2011.


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Core Financial Operations Have Eroded for Many Airports Core Financial Operations Have Eroded for Many Airports

Median debt service coverage and safety margins fell to historical lows in FY 2009Median debt service coverage and safety margins fell to historical lows in FY 2009

2.5030%

1.50

2.00

1 %

20%

25%

Debt servicsa

fety

mar

gin

0.50

1.00

5%

10%

15%

ce coverage D

ebt s

ervi

ce s

0.000%

5%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Fiscal years

“Highly rated airports are expected to maintain consistently positive operating margins ”

Source: Moody’s Investors Service, “U.S. Airport Medians in FY 2009, December 2010. The fiscal year period varies by airport. Standard net revenue debt service coverage calculation shown.

Debt service safety marginDebt service coverage


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consistently positive operating margins.-Rating Criteria for Airports, Fitch Ratings, November 2010

Debt service safety margin is calculated as net revenues less debt service, divided by gross revenues.

The Credit Environment is Getting TougherThe Credit Environment is Getting Tougher

The cost of borrowing could get more expensive

Access to the bond market will be more important in the future

The cost of borrowing could get more expensive

The Butcher’s BillPercent of Airports Receiving Rating or Outlook

Downgrades Since Financial Crisis

Without AIP grants and an increase in the PFC rate, capital costs will be paid with

Downgrades Since Financial Crisis

38% 35%

30%

40%

50%

airport equity and long-term debt

Rule of thumb: Each ratings notch increases borrowing costs by 25 basis

14%

0%

10%

20%

Large Medium Small increases borrowing costs by 25 basis points (0.25%)

A downgrade from AA to A+ (2 notches)

Large hubs

Medium hubs

Small hubs

Number of Airports Receiving Rating or Outlook Downgrades Since Financial Crisis

A downgrade from AA to A+ (2 notches) increases annual interest costs by $50,000 for each $10 million of debt

Hub sizeRatings

downgradesOutlook

downgrades

Large hubs 2 airports 8 airports

Medium hubs 9 airports 6 airports


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Small hubs 8 airports 3 airportsSource: Rating agency reports, October 2008 and 2010.

Capital Planning is Increasingly Focused on Capital Planning is Increasingly Focused on Facility Maintenance and RenewalFacility Maintenance and RenewalThe average age of U S airport terminal facilities is 25 yearsThe average age of U.S. airport terminal facilities is 25 years

Slow growth (if any) means that capacity-enhancing capital projects have been postponed

– Federal funding mechanisms (AIP and PFC) and traditional planning

h f itapproaches favor capacity over maintenance and renewal

Many terminal facilities were t t d 25 i thconstructed 25+ years ago in the

post-deregulation era

– Aging building systems and deferred maintenance increase operating costsmaintenance increase operating costs and complicate budget and financial forecasting

– Some airport operators (TUS) are


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Some airport operators (TUS) are optimizing their facilities

AIP Funding Levels Are Likely to Decrease AIP Funding Levels Are Likely to Decrease (If Not Today, Someday)(If Not Today, Someday)Legislators are focused on decreasing discretionary spendingLegislators are focused on decreasing discretionary spending

$6.00 $8

Uncommitted Balance of AATF (in billions) Average CPE Impact of AIP Grants

$5.20

$4.00

$5.00

$

$5

$6

$7

$8

$1.10 $1 00

$2.00

$3.00

$1

$2

$3

$4

S “Ai t d Ai T t F d D li i B l R i C

$0.40 $0.20 $0.00

$1.00

Nonhub Small Medium Large

$0

$1

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

S L i hFi h ti t A FFY 2009 AIP t fSource: “Airport and Airway Trust Fund: Declining Balance Raises Concerns over Ability to Meet Future Demands,” Government Accountability Office, February 3, 2011. AATF=Airport and Airway Trust Fund.

Source: LeighFisher estimates. Assumes FFY 2009 average AIP grants for each hub size would be bond financed using standard assumptions, with allocable debt service recovered in full from the airlines. CPE=Cost per enplaned passenger.

Lower ticket prices and decreased passenger numbers have led to decreased ticket tax receipts, providing fewer revenues for the FAA’s capital programs and operations account A solution to this structural problem


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fewer revenues for the FAA s capital programs and operations account. A solution to this structural problem will likely involve revenue (i.e., new taxes and user fees) and cost (i.e., reduced AIP grants) components.

PFC WaitPFC Wait--andand--See for Another 4 Years?See for Another 4 Years?

Legislators are focused on limiting taxes and user feesLegislators are focused on limiting taxes and user fees

Airport Improvement Fees (AIFs) at 5 Busiest Canadian Airports

AIF

Share of New Funding Capacity from $1.50 Increase in PFC Rate

AirportAIF per

passenger

Toronto YYZ (originating) $25.00

Toronto YYZ

Small hub7%

Non hub3%

Toronto YYZ (connecting) $8.00

Vancouver (outside province) $15.00

Vancouver $5 00Large hub

71%

Medium hub19%

(within province) $5.00

Montreal $25.00

Calgary $25.00

Edmonton $20.00

71%

$

Source: Air Canada website, accessed February 21, 2011.Source: LeighFisher estimates.

To the extent PFCs provide a local funding solution, policymakerswill revisit the question in the long run. In today’s slow-growth


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q g y genvironment, loosening restrictions on uses is also critical.

Possible Future ResultsPossible Future Results –– A Possible SolutionA Possible Solution

1. Increased financial pressure in the near-term – slower passenger growth in the future will place increased pressure on managing airport finances and margins

2. Continued capital investments are likely – airports are capital intensive, and while the size of capital programs will be revised based on available f d f di ill b d dfunds, funding will be needed

3. Uncertainty in federal funding adds to the pressure – the potential change in federal funding would place increased pressure on airport operators to increase financial performance in order to fund needed capitaloperators to increase financial performance in order to fund needed capital projects

4. More correct perception of airport purposes – airports are semi-commercial entities that are bound by the regulations of the federal y ggovernment and tied to local/municipal rules, which makes it difficult to react quickly to changing conditions

Governance of airports will become increasingly important in the future


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Privatization could be viewed as a form of governance

Overview of Governance at AirportsOverview of Governance at Airports

Context is important

Governance at U.S. airports typically occurs through city and county

Context is important

Top 100 U.S. GovernanceStructures

ownership/governance

In Europe, governance typically occurs through public airport administrations

City and County

Airport Authoity

Port Authorityand “corporatization”, which is a 100% wholly owned public corporation

Privatization should be viewed as

Port Authority

State

another form of governance that could be used to address challenges or other structural issues that are facing U.S. airports

E.U. GovernanceStructures

airportsPublic

Mixed

Private


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Making the ConnectionMaking the Connection

Why Should A City Pay Freeze Apply to my Airport?

Airports are typically governed by local regulations or

Why Should A City Pay Freeze Apply to my Airport?

requirements, such as – Procurement– Human resources

Accounting/financial management

HighDepartment

Commission or Board

– Accounting/financial management– Ordinances that dictate the purview

of Airport management– “Low bid” approach

Polit

ical

leve

rage

C ti ti

Authority

Other factors (such as politics) can make it difficult to realize the full potential of an opportunity HighLow

LowP Corporatization

Privatization

opportunity Traditional governance changes

have been about authority structures, but what about

Government operating cost


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structures, but what about corporatization or privatization?

Privatization Can Take Many FormsPrivatization Can Take Many Forms

Privatization is not an all-or-nothing solutionPrivatization is not an all-or-nothing solution

Most U.S. airports have a high degree of private-sector involvement

PartialPrivatization

LEAST PRIVATIZATION

Contract ServicesPrivatization Management contract

Developer/project financing

Full

Long-term lease or concession agreement(including Privatization Pilot Program)

FullPrivatization

MOST PRIVATIZATION

Private airport development


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PrivatizationPrivatization: History Dating Back to 1987: History Dating Back to 1987

UK Followed by Australia New Zealand Argentina South Africa Costa Rica Mexico EuropeUK Followed by Australia, New Zealand, Argentina, South Africa, Costa Rica, Mexico, Europe

Dublin

Pisa

St. Petersburg

Düsseldorf

Hamburg

F h

ASUR(Mexico)

Adelaide French Regionals

Athens

Ecuador

Chubu

Hong Kong

Adelaide

Argentina

Auckland

AustralianReg

Canberra

Birmingham

Bolivia

Brisbane g g

India

Kolkata

Chennai

NaviMumbai

Firenze

Larnaca

Copenhagen

Brussels

Bangalore

Hyderabad

Narita

FraportGAP

Costa Rica

Eindhoven

Hanover

Hobart

Luton

Bristol

Dusseldorf

Istanbul

Kent

Melbourne

Athens

Belfast

Bournemouth

Cardiff Brisbane

1990-19921987 19971993-1996 19991998 2004-20062000-2003 2007

Prague

Midway

Schiphol

AdP

Bratislava

Budapest

Delhi

Mumbai

Lima

Malta

Sydney

Zurich

(Mexico)

Jakarta

OMA

Stewart

Malaysia

Skavska

South Africa

Wellington

Naples

Perth

Rome

Sanford

Cochin

Copenhagen

E. Midlands

London City

Liverpool

Prestwick

Southampton

ViennaBAA

2008 2009 2010

Mackay

London City

Belfast City

Blackpool

London

Gatwick

Peel Airports

Cairns

Bristol


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But…Privatization Is Not a PanaceaBut…Privatization Is Not a Panacea

Privatization is a significant decision with long-term consequences

Private airports do not necessarily provide the

Privatization is a significant decision with long-term consequences

highest level of service

Many airports serve broader community b oade co u tyinterests. Some private airports lack incentives to serve broader constituenciesconstituencies

Commercial performance is more dependent on factors such as infrastructure, tax rates, percent of international passengers etc


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passengers etc.

The U.S. Experiment The U.S. Experiment –– Airport Privatization Pilot ProgramAirport Privatization Pilot Program

Initial interest in the APPP was limited

1996 AIP legislation allows lease of– No more than one large-hub

Initial interest in the APPP was limited

g– At least one general aviation airport (GA airport can be sold)– Balance available from non-large-hub and general aviation airports

65% of the airlines serving the airport accounting for at least 65% of the 65% of the airlines serving the airport accounting for at least 65% of the landed weight must approve

Limits increase in airline rates

Airport can receive AIP grants and levy a PFC

Recent legislative movement: increase the slots from 5 to 10, remove 65% require (consult instead), expands the type of

airport “slots” that are available


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p

Activity/Inactivity in the U.S. APPPActivity/Inactivity in the U.S. APPP

InactiveActive

Large-Hub:1. Chicago Midway International Airport

(final application submitted October 2008, pending)

Stewart International Airport, Newburgh, New York by National Express Group (approved, no longer in program)

pending)

Medium/Small Hubs:2. Luís Muñoz Marín International Airport

(preliminary approval December 2009)

Brown Field/San Diego Commerce Center (application withdrawn 2001)

Niagara Falls International Airport (application withdrawn 2001)

GA Airports:3. Gwinnett County Briscoe Field Airport, Georgia (preliminary approval May 2010)

( pp ) Aguadilla Airport, Puerto Rico

(application withdrawn 2001) New Orleans Lakefront Airport

(application terminated 2008)4. Hendry County Airglades Airport, Florida

(FAA must approve by October 2010)

(app ca o e a ed 008) Louis Armstrong New Orleans

International Airport (preliminary approval September 2009, application withdrawn November 2010)


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Disincentives to Privatization in U.S.Disincentives to Privatization in U.S.

U S Airport model is unique

Access to cheap tax-exempt debt

Airline agreements and federal policy that limit airline charges

U.S. Airport model is unique

Airline agreements and federal policy that limit airline charges

Restrictions on revenue diversion (reduces attractiveness)

Limited incentive for municipalities to sell unless gain can be realizedp g

High level of debt carried by many airports

Collective bargaining agreements and public sector unions

Desire to retain control – limited interest in partial ownership

Airlines content with status quo, have strong lobby voice, and have influenced Pilot Programg


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What Just Happened and Is Slow Erosion a Risk?What Just Happened and Is Slow Erosion a Risk?

Getting in front of the challenge is key

U.S. airports are going through a structural change with respect to passenger levels, use by airlines, federal funding, and potentially, long-

Getting in front of the challenge is key

term financing capacity

There appears to be increasing acknowledgement that the needs of an airport as a semi-commercial enterprise (as opposed to local municipalities) require an increasing level of autonomy

In addressing local/regional goals and objectives (air service, economic vitality, etc), airport boards/management may need to look beyond traditional Airport authority transitions as a means to deliver results

Privatization—which is typically portrayed or viewed as a mechanism to solve municipal budgetary issues—could be a viewed as another way to change the governance of an airport


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way to change the governance of an airport

Alternative Options for Outsourcing Aspects of Airport Operations

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