Financing Airport Development Prof. Amedeo Odoni

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1 Financing Airport Development Prof. Amedeo Odoni Istanbul Technical University Air Transportation Management M.Sc. Program Airport Planning and Management Module 21 January 2016

2 Financing Airport Development q Objective: Review the financing needs and sources of financing for infrastructure development at large airports, as well as the main sources of revenue q Outline Sources of financing Recent financial performance of large airports Principal sources of revenue Risks in airport financing and airport defenses Page 2

3 Financing Needs Airport infrastructure development requires large amounts of financing Airport construction and expansion projects with cost of more than $1 billion are becoming increasingly common even at secondary airports Several projects around the world (e.g., London s additional runway, Hong Kong, New Istanbul, Singapore, Dubai, etc.) will cost well beyond $10 billion Airports or governmental entities undertaking such projects must raise sufficient capital from public or private sources (or a combination of both) Page 3

4 SIN 2-runway configuration 5750 ft (1750 m) between runway centerlines 2014: 54.1 mio pax, 341K mvts Page 4

5 Singapore Changi Airport with Third Runway Source: Wikipedia (2011) Page 5

6 Hong Kong: 2 independent parallel Page 6

7 Hong Kong: Third Runway Project (March 2012) Page 7

8 New Istanbul Airport (Feb 2015)

9 High Variability Availability of alternative sources of funding and the best combinations of funding vary widely depending on several factors National policies and practices Legal requirements and restrictions Size of airport and of project Creditworthiness of the airport operator Access to financial markets Page 9

10 Financing Needs [2] Most of the costs in question are capital costs but, in some cases, airports may seek financing to support operations, as well Another important consideration in less developed economies is that debt may often have to be repaid in foreign currency because it may involve advanced technology equipment or facilities Competes with the country s other internal needs for foreign currency Is exposed to the uncertainties of the currency exchange markets Page 10

11 Financing Airport Capital Investments [1] 1. Outright Government Grants Direct funding (e.g., Airport Improvement Program -- $3.5 billion per year in US favoring medium-size and small airports) Provision of resources other than funding (e.g., land, materials, access to utilities) 2. Special-Purpose Taxes Passengers pay a fee that goes to a fund that supports eligible airport-related development projects (e.g., Passenger Facility Charge (PFC) in US, $4.50 per ticket) Airlines are strongly opposed to pre-funding of projects These special-purpose taxes are sometimes used inappropriately Page 11

12 Financing Airport Capital Investments [2] 3. Government or Development Bank Loans Typically issued on very favorable terms (low interest, long payback periods) Several international development banks (e.g., World Bank, Inter-American Bank, European Investment Bank) provide these, mostly for developing countries, but also for some developed economies 4. Self-generated Operating Surpluses Increasingly popular and feasible, as airports become more self-supporting financially, generating healthy surpluses Now very common for medium-size and small-size projects Page 12

13 Financing Airport Capital Investments [3] 5. Commercial Bank Loans A number of commercial banks provide loans for airport capital development Typically have the highest interest rates; the rates may be reduced through governmental loan guarantees 6. Tax-exempt, General Obligation Bonds Raised from commercial capital equity markets, including private investors, banks, investment houses, or fund pools Backed by the "full faith and credit" of a governmental unit and secured by taxes collected by it (from the taxpayers) In developed economies, these are now largely replaced by tax-exempt revenue bonds (see next) Page 13

14 Financing Airport Capital Investments [4] 7. Tax-exempt Revenue Bond In some countries, this is now the most common type of financing for infrastructure development at large airports; can be divided into several categories: General airport revenue bonds (GARBS) are secured by the revenues of the airport as a whole Revenue bonds secured by long-term airline leases Revenue bonds secured by approved airport development taxes (e.g., PFCs) or by future expected government grants Revenue bonds backed solely by revenues from a facility constructed with the proceeds of these bonds Page 14

Capital Project Financing, USA (2001-2004) Source: ACRP Synthesis 1

15 Capital Project Financing, USA ( ) Source: ACRP Synthesis 1 (2007) Innovative Finance and Alternative Sources of Funding Page 15

16 Financing Airport Capital Investments [5] 8. Private financing against specified rights to airport revenues May involve the construction of a single facility (e.g., a parking facility) or of an entire airport BOT agreements typically include such financing q There are many variations of the eight types of financing outlined above. q For large airport infrastructure development projects, several of these types of financing are often used concurrently. Page 16

Financing of New Athens International Airport (1996-2001) European Investment Bank $1,128 47% Consortium of commercial banks $ 360 15% Airport development fund (Greece) $ 288 12% European Union

17 Financing of New Athens International Airport ( ) European Investment Bank $1,128 47% Consortium of commercial banks $ % Airport development fund (Greece) $ % European Union grants $ % Greek State grants $ 168 7% Share capital $ 144 6% (55% Greek State, 45% German group) Secondary debt (commercial rates) $ 48 2% (taken on by shareholders) Total $ 2,400 million Page 17

18 A Financially Sound Industry Large airports, as an industry, have generally performed well financially despite the economic volatility associated with the air transportation sector Major credit rating agencies (e.g., Moody s, Fitch, Standard & Poor s) consider airports, overall, as financially sound and highly creditworthy Credit ratings of airports naturally fluctuate in response to economic and political events (e.g., downgrading of ratings of many US airports in 2001) In the United States there has never been a default on GARBS However, there have been several instances of airline special facility debt defaults Page 18

19 2013 Airport Industry Revenues and Costs Total Revenue Aeronautical Revenue* Non-Aeron al Revenue** % Aeron al Total Costs (Operating + Capital) Africa % 2.1 Asia-Pacific % 25.8 Europe % 42.1 Latin America Caribbean % 5.1 Middle East % 7.4 North America % 22.7 Total % Amounts shown are in Billions of US$ (1900 airports, 150 countries) * Includes ground-handling income Source: Airport World, ** Includes non-operating income February March 2015 Page 19

20 Distribution of Non-Aeronautical Income (2013) Retail Concessions Car Parking Real Estate Rental Cars Food + Beverage Advert ng Africa Asia-Pacific Europe Latin America -- Caribbean Other Middle East North America Total All figures shown in the Table are percentages (%) Source: Airport World, February March 2015 Page 20

21 Financial Performance: 100 Largest Airport Operators (2012) Total revenue $ 77 billion Net operating result $ 16.4 billion Operating margin 21.2% Average operating margin ( ) 17.9% Net result $ 8.2 billion Net margin 10.6% Average net margin ( ) 8.9% Source: FlightGlobal/ Airline Business, October Page 21

22 Financial Results: Airports vs. Airlines ( ) AIRLINE-AIRPORT PROFITABILITY GAP Top 100/50 airport group financial results Operating margin % Net margin % Top 150 airline group financial results Operating margin % Net margin % Profitability Gap (airport vs airline group) Operating margin Net margin Source: FlightGlobal/ Airline Business, October Page 22

23 30 Airport Operators with Highest Revenue (2012) Source: FlightGlobal/ Airline Business, October Page 23

24 More Airport vs. Airline Comparisons (2012) Top 4 airport operators with respect to revenue (AENA, Heathrow Holdings, AdP, Fraport) averaged about $3.5 billion in revenue Top 4 airlines (Lufthansa, United Continental, Delta and Air France-KLM) averaged about $35 million in revenue or Roughly 10 times more! But profit margin has been much higher for airport operators than for airlines throughout the 21 st century Page 24

25 Financial Statistics for 30 Busiest US Airports (2009) Revenues of 30 busiest airports ($14.3 billion) equal 61% of total revenues ($23.4 billion) of 519 airports with commercial service Expenditures: Operating: $6.6 billion ($2.7 billion for personnel, $2.0 billion for contractual services) Non-operating: $2.5 billion for interest Depreciation: $3.1 billion Expenditures for projects: $6.8 billion ($3.1 billion for terminals, $1.3 billion for airfields) Bond proceeds: $3.8 billion Bond indebtedness: $49 billion Page 25

26 Risks in Airport Financing Overly Optimistic Forecasts The forecast is always wrong Forecasting for airports has historically proved to be very difficult and often very wrong Tendency to be over-optimistic (several reasons) Numerous examples internationally Geopolitical events with disruptive impacts Economic recessions, wars, epidemics (e.g., SARS, Ebola), terrorism Page 26

27 Forecasts of Total U.S. Airport Operations Source: FAA, Terminal Area Forecasts, Prepared by Joakim Karlsson and Amon Tarakemeh

28 Tower Operations by Aviation Segment

29 Rio de Janeiro/Galeão Antonio Carlos Jobim (GIG) 2013: 25-year concession to consortium of Oderbrecht (Br, 60%) and Changi Airport (Sin, 40%); ~$8 billion for 51% share; forecast: 175% growth in 15 yrs (~7.5/year); ~17.5 mio pax in 2012

31 ATH: Main and Satellite Terminal Buildings

32 Risks in Airport Financing [2] Airline-related changes Bankruptcies (Eastern Miami, Sabena Brussels, Swissair Zurich, Malev Budapest) Mergers (Delta Northwest Minneapolis, American TWA St. Louis and Kansas City) Network reconfigurations (Alitalia Rome vs. Milan, USAir Philadelphia vs. Pittsburgh) Limited loyalty to airports, especially by some low-cost carriers Page 32

33 Strong O/D traffic Airport Defenses Airlines come and go, but airport traffic base remains strong Several Compensatory system airports in the US are in this category Presence of strong dominant airline(s) with long-term commitment to the airport Long-term airline leases and commitments (e.g., for exclusive-use terminal facilities) For airports relying on connecting traffic Airline-airport partnerships Residual system of charges, under which airlines benefit from non-aeronautical revenues in exchange for assuming financial risk Page 33

34 References de Neufville, R. and A. Odoni (2013) Airport Systems: Planning, Design and Management, 2 nd Edition, McGraw-Hill Education. [Chapters 7 and 8] Graham, Anne (2014) Managing Airports: An International Perspective, 4 th Edition, Routledge Publishers. [Chapters 2, 3 and 4] ACRP Airport Cooperative Research Program (2007) Innovative Finance and Alternative Sources of Revenue for Airports, Washington, DC. Page 34

35 Questions? Comments? Page 35

Introduction to Airports and Their Characteristics Prof. Amedeo Odoni

Introduction to Airports and Their Characteristics Prof. Amedeo Odoni Istanbul Technical University Air Transportation Management M.Sc. Program Air Transportation Systems and Infrastructure Module 3 May