Risk Factors in Airport FinancingRisk Factors in Airport Financingin in

Challenging TimesChallenging Timesoror

If You Build It and They Don’t Come,If You Build It and They Don’t Come,Who Will Pay?Who Will Pay?

3030thth Annual FAA Aviation Forecast Annual FAA Aviation Forecast Conference Conference

District of ColumbiaDistrict of Columbia

Presented by:Presented by:Karen M. GeorgeKaren M. George

John F. Brown CompanyJohn F. Brown Company

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The Industry in this Time of ChangeThe Industry in this Time of Change For airlines, the world has changed. There is a For airlines, the world has changed. There is a

new reality. Airlines that fail to squarely and new reality. Airlines that fail to squarely and honestly face and adapt to their new operating honestly face and adapt to their new operating environment will fail – and the same might be environment will fail – and the same might be said for airports.said for airports.

Legacy airlines have no choice but to cut costs Legacy airlines have no choice but to cut costs that will not add value that customers are willing that will not add value that customers are willing to pay for.to pay for.

LCC’s have always been reluctant to assume any LCC’s have always been reluctant to assume any such costs.such costs.

Message to airports is clear: plan, design, Message to airports is clear: plan, design, construct and operate facilities to insure that construct and operate facilities to insure that airlines and other customers receive value airlines and other customers receive value commensurate with costs.commensurate with costs.

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The Industry (cont.)The Industry (cont.)

In this new operating environment, high costs and In this new operating environment, high costs and excess capacity have the potential to overstress excess capacity have the potential to overstress the long-term financial integrity of an airport. the long-term financial integrity of an airport.

High airport costs reduce the margin for error in High airport costs reduce the margin for error in investment and operating decisions. investment and operating decisions.

Errors in estimates of airline demand, airline Errors in estimates of airline demand, airline facility requirements, cost, funding, and other facility requirements, cost, funding, and other decision factors can compound to create decision factors can compound to create substantial financial challenges for an airport.substantial financial challenges for an airport.

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The Industry (cont.)The Industry (cont.) Excess capacity exposes current users to higher Excess capacity exposes current users to higher

unit costs, which suggests that, in some cases, unit costs, which suggests that, in some cases, being behind the demand curve may be the being behind the demand curve may be the better course under present circumstances, better course under present circumstances, notwithstanding the risk of congestion and notwithstanding the risk of congestion and possible delay. possible delay.

In residual agreement airports, non-airline In residual agreement airports, non-airline revenues, if less than their potential, also exposes revenues, if less than their potential, also exposes airlines to higher unit costs than necessary. airlines to higher unit costs than necessary.

Overall, there is reason to be especially cautious Overall, there is reason to be especially cautious in airport spending decisions. Insuring that airside in airport spending decisions. Insuring that airside and terminal capacity is appropriately sized to and terminal capacity is appropriately sized to airline demand, and reviewing the cost-value of airline demand, and reviewing the cost-value of spending decisions will help an airport insure its spending decisions will help an airport insure its long-term financial integrity.long-term financial integrity.

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Critical Tools for Successful Airport Critical Tools for Successful Airport Financial PlanningFinancial Planning

Knowledge, Knowledge, KnowledgeKnowledge, Knowledge, Knowledge– Airline IndustryAirline Industry

Strengths and OpportunitiesStrengths and OpportunitiesVulnerabilities and ThreatsVulnerabilities and Threats

– Airport Passenger MarketAirport Passenger MarketStrengths and OpportunitiesStrengths and OpportunitiesVulnerabilities and ThreatsVulnerabilities and Threats

– Risk Tolerance /Risk Allocation Risk Tolerance /Risk Allocation Minor DownturnsMinor DownturnsCatastrophic DownturnsCatastrophic Downturns

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Finance Plan: Airport GoalsFinance Plan: Airport Goals

Financial goals:Financial goals:– Comply with bond covenantsComply with bond covenants– Meet debt affordability and other financial targetsMeet debt affordability and other financial targets– Maintain financial flexibilityMaintain financial flexibility

Operational goals:Operational goals:– Provide modern, efficient, safe, secure facilitiesProvide modern, efficient, safe, secure facilities– Accommodate changing needs of airlines (RJs, Accommodate changing needs of airlines (RJs,

affiliations)affiliations)– Manage capacity to:Manage capacity to:

Insure competitive access for all airlinesInsure competitive access for all airlines Avoid premature investment in expansionAvoid premature investment in expansion Mitigate bankruptcy riskMitigate bankruptcy risk

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Potential Market RisksPotential Market Risks Weak local (O&D) traffic trendsWeak local (O&D) traffic trends High levels of connecting trafficHigh levels of connecting traffic Secondary hub status in a connecting hub networkSecondary hub status in a connecting hub network Market concentration in 1 or 2 airlinesMarket concentration in 1 or 2 airlines Weak financial condition of hub or dominant airlineWeak financial condition of hub or dominant airline Exceptional volatility in passenger trendsExceptional volatility in passenger trends Competition from alternative airportsCompetition from alternative airports Competition from ground modesCompetition from ground modes Exceptionally high or low fares and yieldsExceptionally high or low fares and yields Weak catchment area economicsWeak catchment area economics Strong imbalance in visitor-resident mixStrong imbalance in visitor-resident mix

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Potential Financial RisksPotential Financial Risks High costHigh cost High debtHigh debt Leveraged capital structureLeveraged capital structure Excess capacityExcess capacity Obsolete designObsolete design Weak price-valueWeak price-value High levels of airline rates and chargesHigh levels of airline rates and charges Inability or unwillingness to payInability or unwillingness to pay Weak cash flow, inadequate liquidityWeak cash flow, inadequate liquidity Thin debt service coverage marginsThin debt service coverage margins Little or no headroom in non-airline ratesLittle or no headroom in non-airline rates Significant future borrowing requirementsSignificant future borrowing requirements

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Business Model:Business Model:Risk Exposure and ToleranceRisk Exposure and Tolerance

Very HighVery High

HighHigh

MediumMedium

LowLow

Very LowVery Low

Very Very LowLow LowLow MediumMedium HighHigh Very Very

HighHigh

Risk tolerance line (varies by organization)

Example of a Risk Profile (Probability Impact) Matrix

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Karen M. GeorgeJohn F. Brown Company

(612) 385-4642kgeorge@johnfbrown.com