SHAKING UP THE BUSINESS MODEL

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Pauline Payne
6 years ago
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1 New Strategies for Airport Capital Financing & Development SHAKING UP THE BUSINESS MODEL Susan Warner Dooley, Nat l Dir, Aviation Strategic, Business & Financial Planning

2 Airlines Don t Have Our Backs Anymore NEW TIMES

airport revenue PFC backed bonds Stand-alone PFC PFC backed bonds

3 POTENTIAL CHALLENGES TO TRADITIONAL AIRPORT CAPITAL FUNDING Federal Grants Passenger Facility Charges Bonds General obligation General airport revenue PFC backed bonds Stand-alone PFC PFC backed bonds Double-barrel PFC Special facility bonds State and Local Grants Surplus Airport Funds

4 ONGOING NEEDS

5 TRADITIONAL TOOLBOX Funding Project Delivery Design Bid Build Leasing Structure & Cost Recovery Grants General Airport Tax Exempt Bonds Public Operation Formula Cost Recovery PFCs Financing Operation & Maintenance Exclusive Space

6 NEW OPTIONS Funding Grants Private Equity PFCs Project Delivery General Airport Project Tax Exempt Financing Bonds Financing Design Bid Build Design Build Operate Maintain Public Operation Operation & Maintenance Leasing Structure & Cost Recovery Formula Cost Recovery Airline Consortiums & Direct Cost Recovery Exclusive Space

7 GROWING THE TOOLBOX Financing General Airport Revenue Bonds Project Financing Project Financing with Private Equity Contribution Private Financing Package Project Delivery Design Bid Build Public Design-Build Private Design Build Operations Airport Staff Operates Outsourced Contracts (performance standards) Airline-Airport Operating Consortium Private Company Operations and Commercial Management Lease Structure Terminal Space Leases/Common Use Operating Permits Ground Lease With Residual Net Revenues Waterfall Airline Cost Recovery Formula Cost Recovery Facility Cost Recovery/ Separate Operating Direct Payments Guaranteed Fee Structure during Term of Agreement

8 FINANCING All airport revenues support repayment of debt Lowest interest rate Coverage is king but how much? Debt repaid only through project revenues Somewhat higher rate Focus on security of revenue source Portion paid through private investment May lower project debt interest Equity holders expect long term return at higher rate Higher financing cost Airport not at risk for repayment Recovery of costs in 3 rd party s hands

PROJECT DELIVERY Traditional public approach Full design, separate construction contractor, low bid Largest degree of airport control Planning & preliminary design under control of

9 PROJECT DELIVERY Traditional public approach Full design, separate construction contractor, low bid Largest degree of airport control Planning & preliminary design under control of airport operator Final design performed by construction team Expedites delivery Project cost 3 rd party entity designs and contracts for construction Further accelerated schedule Efficiencies

10 OPERATIONS Airport staffs all terminal operation and maintenance functions Airport control Frequently highest cost Some functions, e.g., janitorial contracted out Cost or expertise advantages Airlines (and possibly airport) form separate legal entity to maintain terminal, equipment and/or services More airline direct control Costs outside rate base Private party controls Service levels by contract Cost recovery by contract or rates to users

11 LEASE STRUCTURE Airline has sole right to use space Airline pays guaranteed rent based on space assigned whether or not used Airline lessee first right to use space Others scheduled during open windows Lessee pays full rent but gets credit for others usage Space shared and assignments adjusted to optimizing scheduling Fees paid based on usage Airline Third Party Residual Net Revenues Waterfall

12 AIRLINE COST RECOVERY Airline rates and charges cover net expenses after credit for non-airline revenue Airlines pay costs directly, to consortium, or to thirdparty operator Airline rates and charges set for the period of the agreement Proposed Midway privatization agreement Athens Greece Airport

13 POTENTIAL VALUE DRIVERS TO PUBLIC PRIVATE PARTNERSHIP Delivery Methods Cost Containment & Schedule Management Access to Capital Attractiveness of Financing Terms Operating Efficiencies Contracting Options Asset Management Expertise Long Term Perspective Stability & Risk Acceptance Commercialization Specialization Cash and Resources Freed to Focus on Core Objectives/ Competencies

14 OPPORTUNITIES FOR ALLOCATION DISTRIBUTION OF RESPONSIBILITIES & RISKS TO PARTIES BEST ABLE TO MANAGE

15 P3 VS AIRLINE CONTROLLED FACILITIES EXPANSION OF CURRENT OUTSOURCING Airline Agreements with MII and cost recovery guarantees Airline built and operated terminal facilities Third parties focused on the success of THIS Airport Publicly Bid Low Cost Contracts Airline consortiums with performance standards, penalties & incentive clauses Airlines focused on system-wide profitability Operators with overall financial success dependent on attracting and satisfying passengers MAYBE JUST A VARIATION ON OLD APPROACH

16 GROWING THE TOOLBOX Control/Accountability Cost

17 EXAMPLES

18 Susan Warner Dooley Nat l Dir, Aviation Strategic, Business & Financial Planning HNTB 5 Penn Plaza, 6 th Flr New York, NY (212) SWarnerDooley@HNTB.com New Strategies for Airport Capital Financing SHAKING UP THE BUSINESS MODEL

ACI Webinar Airport Capital Investment CIP Financial Planning

Manage the Future: Planning CIPs in Times of Accelerated Change and Uncertainty ACI Webinar Airport Capital Investment CIP Financial Planning Don Arthur Principal Unison Consulting, Inc. 0 Agenda Affordability