Implications of Construction Cost Escalation 2007 ACI-NA Economics and Finance Conference James Gill, CPA Deputy Airport Director Finance, Business & Administration Raleigh-Durham Airport Authority
Presentation Contents Overview of Raleigh-Durham International Terminal C Renovation and Expansion Project Financing Strategy Development Cost Estimates vs. Reality Project Update & Future Plans Considerations to Reduce Cost Escalation Risks 2
About RDU 36 th largest O&D airport in U.S. 41 st largest in total passenger traffic 9.42 million total passengers in 2006 95% O&D 3 active runways 10,000 ft., 7,500 ft. and 3,550 ft. 2 terminals (A & C) with current total square footage of 519,600 sf. and 35 contact gates Prior to Terminal C project 48 gates and 626,000 sf. 20,350 public parking spaces 3
Major carriers More RDU Facts Southwest is largest single carrier of majors AA/American Eagle combined carry the most passengers Effective June 11 th, RDU will have 247 daily departures to 46 domestic and international destinations AA began hubbing operations at RDU in 1987, dehubbed in Jun 1995. Midway became major carrier until dissolution in 2002 Good carrier diversification No carrier accounts for more than 7% of RDU revenues 4
FY2007 2015 CIP $897 million CIP $217 mil expended through FY2007 Terminal C project is only major CIP item that has funds already committed. No reliance upon grant funds CFC s not currently assessed Terminal A Project 10.7% Rental Car Facility 11.5% Other Projects 14.0% PFC Pay-Go 5.2% Uses of Funds Grants 1.9% AIP Funds 0.5% Terminal C Project 63.7% CFCs 11.5% Existing Bonds 37.8% 2007 Bonds 17.3% Authority Funds 25.8% Sources of Funds 5
Terminal C Project Prior to 9/11, originally planned expansion via replacement of Terminal A due to continued passenger traffic Would have required carriers to relocate to temporary facility then back to new terminal Estimated cost - $1 billion RDUAA purchased a majority of AA s leasehold interests at RDU and focused planning on Terminal C. Terminal C had excess gate capacity but was constructed by AA to accommodate a hub operation. Renovation/expansion of entire terminal was estimated to cost $500 million in 2003 dollars. One-half of the Terminal A project estimate No need for interim terminal facility 6
Terminal A Terminal Facilities Terminal C 7
Financial Feasibility Financial modeling Input of all revenues, expenses and capital improvements into rate structure of the Authority Estimated traffic and space demands Looked at ability to maintain extremely competitive cost structure Cost per epax % of average one-way fares Reviewed dynamic results with staff and Authority board at various project cost levels Recommendation in 2003 was to set project at $350 million level with ability to adjust upward if necessary based upon cost and financial ability Estimate to complete entire project was $500 million. 8
Project Impact from Financial Study Evaluated how the project could meet financial target Staff decided to modularize project rather than reduce individual aspects of the entire building replacement Reconstruct the north part of the terminal and replacement of the landside facility Leave the south concourse in place and renovate with a direct connection to the new concourse Can add south concourse and rest of landside building later 2 phases Demolition & reconstruction of northern portion Relocation of carriers to north, development of remaining project area and renovation of south concourse 9
Project Scope (revised - $350 million) Phase 2 Phase 1 10
Phase I Completion Relocate from South to New North Concourse Non-operational Operational New Terminal 11
Terminal C New North with Renovated South Concourse Operational Terminal Renovated New 12
Cost Estimates vs. Reality Estimate for original scope was $350 million (in January 2003) At time of general construction bids in late 2005, pricing was 22.9% higher, or $80 million, than the construction estimate Why? Scope changes almost $10 million was added to the project for additional loading bridges, the utilization of new, instead of refurbished, bridges, blast wall construction, FIS fit out, etc. Construction cost escalation Rose 13.9% between Oct. 2003 Oct. 2005 according to Engineering News-Record, about twice the historical rate Average annual increase between 1990-2005 was only 3% Materials Steel Reached new highs in 2004 (more than doubled average price) due to Chinese demand and weak dollar 13
Cost Estimates vs. Reality Cement high demand post-katrina, general construction demand and limited import availability Less competitive bidding environment Summary RDU had 6 firms submit general construction prequalification responses Only 2 firms placed bids Estimated to account for 6% premium in pricing $60 million construction cost inflation $10 million scope changes $10 million bidding environment 14
Project Timeline 2001 2003 2005 2006 2007 Proposed plan to replace Terminal A; Cost - $1 billion Deferred as a result of 9/11 and airline financial troubles Plans to reconstruct Terminal C developed (cost - $500 mil) Modified to reconstruct approximately 60% and renovate remainder (cost - $350 million) per financial analysis Sought bids for general construction contract (project cost $430 million) Executed $300 million BMA-based interest rate swap Began financial feasibility of South Concourse replacement Sold $300 million of variable rate bonds Received authorization to move forward with South Concourse replacement Awarded South Concourse contract Completed sale of $151.605 million of fixed rate GARB s as final financing of Terminal C Project Final project budget of $570 million 2008-2010 Phase I and Phase II of new terminal facility opens August 4th 15
Further Redevelopment Plans Legacy carriers will operate from the new terminal and LCC s will operate from Terminal A New terminal will be common use capable Per CIP, modification of Terminal A is planned to enhance passenger and baggage (in-line) screening and processing. Estimated cost - $96.4 million 16
Terminal C Renderings 17
Project DBO s Phase 2-2010 Phase 1-2008 18
COST PER ENPLANEMENT AS PERCENTAGE OF FARE REVENUE Historical and Forecast by Fiscal Year - $350 million project (original) $14.00 $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 $6.00 7% 6% 5% 4% $5.00 $4.00 $3.00 $2.00 CPE $1.00 $0.00 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $3 16 $2 70 $2 67 $3 02 $5 18 $5 15 $4 76 $5 32 $6 05 $7 42 $7 35 $7 44 19
COST PER ENPLANEMENT AS PERCENTAGE OF FARE REVENUE Historical and Forecast by Fiscal Year - $570 million project (current) $10.00 $9.00 $8.00 6% fare $7.00 5% fare $6.00 $5.00 4% fare $4.00 3% fare $3.00 CPE $2.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 20
Terminal C Site Today 21
Terminal C Site Today 22
23
Considerations to Reduce Cost Escalation Risk Create a partnership between planning/construction and finance staffs Neither group, alone, will likely meet project objectives Analyze alternatives to achieve the same objective $350 million project vs. $1 billion Phase or modularize major projects, if possible Avoids over commitment of funds Can stop project at the end of a particular point if environment changes Manage the risks you can control Interest rate risk Plan financings to take advantage of attractive interest rates Investigate opportunities to lock in rates Construction cost risk Investigate references of major contractors to determine if they are change order or claims happy Review ability to pursue future phases of a project through negotiations with the existing contractor (assuming you re happy) 24
Considerations to Reduce Cost Escalation Risk Evaluate timing Bids can the award wait until market conditions favor competition on your project? Bidder availability When construction markets are at their worst, we tend to get the best bidders. Financings underwriters and FA s can help Do you want to go to market the same day as another, more noteworthy airport credit or project? Communication Between finance staff and planning and construction staff With carriers, when appropriate, to explain project and potential rate impact With board on objectives and financial expectations 25
Thank you. 26