Download Flying on Their Own: A Review of the Canadian Airport

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Flying on Their Own
- A Review of the Canadian Airport Industry
Eric Beauchemin
Geneviève Lavallée, CFA
Greg Nelson
(416) 593-5577
An Industry Study by
Dominion Bond Rating Service Ltd.
January 2001
Table of Contents
Page
Overview:
Executive Summary
Review of 1999
Rating Considerations
1999 Canadian Airport Fact Sheet
Key Characteristics of the Canadian Airport Authorities
1
1
1
3
4
Comparison Tables:
1999 Airport Activity (Passenger Volumes, Aircraft Movements & Cargo Volumes)
1999 Operating Statistics
Capital Structure & Debt
International Comparison
6
7
8
9
Annex A - Rating Criteria for Airports
Annex B - Comparison Table of Canadian Airport Authorities
Annex C - Comparison Table of the Canadian Airport Market with other Airport Markets
Individual Reports:
Vancouver International Airport Authority (“Vancouver”)
Greater Toronto Airport Authority (“Toronto”)
Aéroports de Montréal (“Montréal”)
Edmonton Regional Airports Authority (“Edmonton”)
Calgary Airport Authority (“Calgary”)
Ottawa International Airport Authority (“Ottawa”)
Winnipeg Airports Authority Inc. (“Winnipeg”)
BAA plc
10
12
15
A Review of the Canadian Airport Industry – Executive Summary
Two factors make the Canadian airport industry unique in
the world: (1) the airport authorities’ legislated ability to set
rates and charges on the users of the airport facilities
(airlines and passengers), with no legislated limit on the
level of the rates and charges that may be levied; and
(2) the corporate structure of the airport authorities. By
February 2000, the federal government had completed the
process of transferring responsibility for the major airports
to the private sector. Canada’s largest airports are now
managed, controlled and operated by non-share capital,
independent entities pursuant to 60-year ground lease
agreements with the federal government.
Unlike the
situation in the U.S., Canadian airport authorities are private
corporations and receive no government funding. However,
they have full discretion to set their rates and charges to
cover their operating and capital costs so that their
operations remain commercially viable.
The major Canadian airports possess other favourable
characteristics, which are positive for their ability to meet
financial obligations. They all have a relatively high
origination and destination (O&D) passenger mix, and they
all have a virtual monopoly over air travel within their
economic regions, providing increased stability to their
revenues. The economic fundamentals of the regions served
by the major airports are strong, and the economic outlooks
for these regions remain favourable, despite the projected
slowing of the pace of growth of the U.S. economy.
REVIEW OF 1999
All of the major Canadian airport authorities included in this
study recorded solid performances in 1999, supported by the
strength of the Canadian economy and the resulting
increased demand for air travel. Passenger traffic was up at
all airports except for Edmonton, with the largest increases
recorded at the airports serving the fastest growing
economies: Montréal, Toronto and Ottawa. Cargo volumes,
however, moved in the opposite direction. Cargo volumes
improved significantly at most airports in western Canada,
supported by the recoveries of the Vancouver economy and
the energy sector, while they were little changed at the two
largest airports in eastern Canada, Toronto and Montréal.
All seven Canadian airport authorities included in the study
experienced solid revenue growth in 1999, as a result of the
increased air traffic and the implementation of new sources
of revenue (primarily to fund capital expenditures).
Winnipeg and Calgary posted particularly strong results,
with total revenue up 22.1% and 21.8%, respectively,
mostly due to an increase in their Airport Improvement Fees
(AIF) (from $5 to $10). The introduction of a $10 AIF in
September 1999 was also the primary reason for the solid
RATING CONSIDERATIONS
DBRS ratings provide a relative and absolute indicator of an
issuer’s willingness and ability to meet its debt obligations.
In determining a rating, DBRS takes into consideration
factors that contribute to the financial strength of an issuer,
as well as the challenges that can adversely affect its credit
Canadian Airport Industry
Outlook: Given the favourable outlook for passenger traffic
and the Canadian airport authorities’ ability to set rates and
charges to cover their costs, DBRS expects the operating
results of the Canadian airport industry to remain relatively
stable, and for the airport authorities to continue to generate
sufficient cash flows to meet their maintenance capital
expenditure requirements, as well as cover the debt
servicing costs associated with major infrastructure projects.
However, the sharp increases in debt (and associated
interest costs) related to the major infrastructure projects
that a number of airport authorities are undertaking will
significantly increase these authorities’ fixed costs.
Although they have the flexibility to raise fees to cover
increased costs or to compensate for reduced revenues as a
result of an unexpected adverse event, such as labour
strikes, sustained high fuel prices and the impact on air fares
and travel, or a severe recession, their competitiveness
could be reduced if fees rise too high.
The legislative ability to set rates and charges combined
with the non-share capital form of corporate structure do not
by themselves guarantee efficient operations or competitive
pricing. As the major infrastructure projects are completed,
the airport authorities’ level of operating efficiency relative
to the level of service offered will become an increasingly
important consideration in differentiating between Canadian
airport authorities’ creditworthiness.
revenue growth in Ottawa. On the expense side, however,
total operating expenses (excluding depreciation and
interest costs) grew faster than operating revenue (excluding
AIF revenue) at all the airport authorities except Toronto.
However, the comparison for Toronto is distorted by the
fact that it does not levy an AIF and, therefore, its operating
revenues must be sufficient to cover its operating expenses
plus its interest costs.
Overall, Canadian airports continued to generate high
operating cash flows per enplaned passenger, despite the
reductions reported by the Vancouver, Edmonton and
Calgary airports. However, for the airport authorities that
already have expansion programs underway (Toronto,
Edmonton, Calgary and Montréal), cash flows from
operation clearly did not cover, nor are they meant to cover,
the significant capital expenditures. As a result, debt levels
climbed in 1999 and have continued to increase in 2000. As
a result of the $4.4 billion Airport Development Program,
Toronto’s indebtedness climbed sharply in 1999 and
currently exceeds, on a per-enplaned-passenger basis, the
level of debt of every other Canadian airport authority.
profile in the medium and long term. Some are specific to
an issuer, while others are shared by the entire industry.
Described below are the strengths and challenges that
characterize the Canadian airport industry.
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
The Canadian Airport Industry - Page 2
Strengths:
• Flexibility to set rates and charges to offset costs
• High O&D passenger mix
• Virtual monopoly position
• Strong and diverse economy of service area
Strengths:
(1) As in other countries, airlines are required to pay rates
and charges to use the airport facilities. In Canada,
however, airport authorities have the legislated ability to
fully adjust the rates and charges to generate revenues
sufficient to cover their costs. Furthermore, they have the
legislated ability to levy Airport Improvement Fees, with no
limit on the level, to finance capital expenditures. This
differs from other countries such as Australia and the U.K.,
where changes to airline fees are subject to the approval of a
government airport authority and are often limited to the
inflation rate. It also differs from the U.S. where airports
must receive government approval to levy a Passenger
Facility Charge (similar to an Airport Improvement Fee).
The U.S. fee is fixed at a certain amount depending on the
nature of the project being financed and the level of
government funding for the project.
(2) The O&D passenger mix of Canadian airports is
relatively high, ranging from 70% to 89% of total traffic
volume.
The high O&D nature of Canadian airport
authorities renders them less dependent on any one airline
and, therefore, less exposed to financial failures, route
reorganization or new airline alliances. If an airline reduces
or eliminates services, another airline will likely increase
service to the originating or ultimate destination of the
passenger. This provides Canadian airports with a more
stable activity base than airports dependent on connecting
traffic.
(3) Each airport authority in Canada benefits from a virtual
monopoly over air travel in the region it serves, supported
by provisions of a 60-year ground lease with the
Government of Canada, which usually does not allow an
international airport to be constructed and operated within a
certain distance from the airport. Furthermore, the large
distances that separate most of the major airports reduce the
incentives for residents of a region to use an airport located
in another region, making the clientele of each airport more
captive.
(4) Canada continues to exhibit strong economic growth.
Growth was robust in most regions, unemployment and
inflation remained low, while disposable income continued
to rise as Canada’s high value-added manufacturing sectors
(e.g., aerospace, telecommunication) continued to grow in
importance. Despite a slowdown expected in U.S. economic
growth in 2001, Canada’s outlook remains favourable, with
a solid performance anticipated until at least 2004. This
suggests further growth in the demand for business, leisure
and cargo airline services in the medium term.
Challenges:
• Substantial fixed operating costs
• Rising debt burdens and associated interest costs that
will result in increased fixed costs
• Volatility of the air travel industry
• Increased exposure to a single major airline
• Increased competition between airports
Challenges:
(1) Due to the capital intensity of airport activities, a
substantial portion of airport expenses are fixed in nature,
related either to the financing of expansion projects or the
maintenance of the facilities (including ground lease
payments and property taxes). Therefore, cash flows from
operations are highly sensitive to changes in air traffic and
passenger volumes.
(2) The significant amount of debt issuance projected over
the next two to three years to finance the major
infrastructure projects is expected to increase airport
authorities’ fixed costs (due to the higher interest costs).
While the airport authorities have the flexibility to increase
user fees to cover any increased costs or to compensate for
reduced revenues as a result of an unexpected adverse
event, such as a severe recession and the resulting downturn
in air travel, their competitiveness relative to each other
could be reduced should their fees rise too high.
(3) Air travel is generally more volatile than many other
services. The risks inherent to air travel can significantly
affect air traffic volumes, causing airport charges for a
particular year to be set too low. Air travel is sensitive to
economic conditions and ticket prices. As such, continued
high fuel prices or a sudden slowdown in the domestic
economy could adversely impact airports’ traffic and
operating results.
(4) Canadian airport authorities’ exposure to a single major
carrier has increased as a result of the acquisition of
Canadian Airlines by Air Canada. They are now more
exposed to the impact of adverse events such as labour
strikes by Air Canada employees, and to reduced service as
a result of changes in the airline’s strategy. However, the
risk associated with a high exposure to a single airline is
reduced for airports that are more dependent on O&D
passenger traffic. If an airline fails or reduces service,
another one will likely increase service to the originating or
ultimate destination of the passenger.
(5) By February 2000, the transfer of responsibility for the
major Canadian airports from the federal government to
local authorities had been completed. The management,
operation and development of all of Canada’s major airports
have been transferred to private corporations. This has
resulted in some increased competition between airports to
attract airline partners and to increase revenue. In eastern
Canada, for example, Montréal’s airports face some
competition from Halifax and Toronto’s airports,
particularly for connecting travel business.
The Canadian Airport Industry - Page 3
1999 CANADIAN AIRPORT FACT SHEET
DBRS Coverage
Rating
- Trend
- Debt Rated
Airport Activity
Enplaned passengers (millions)
Air cargo volumes (metric tonnes)
Aircraft movements
Balance Sheet ($ millions)
Total assets
Total debt
- as a % of total capital
Total equity
Income Statement ($ millions)
Total revenue
Revenue mix:
Airline fees (landing & terminal)
Commercial (concessions, parking, etc.)
Other
AIF
Total operating expenses
Depreciation expense
Interest charges
- as % of total expenses
Vancouver
A (high)
Stable
Toronto
A (high)
Stable
Montreal*
Sr debentures
MTNs &
Revenue bonds
Calgary
Ottawa
Winnipeg
Not Rated
Not Rated
Not Rated
7.9
290,310
323,600
13.9
359,900
427,300
4.8
197,170
262,300
1.8
32,720
105,200
3.9
66,700
248,300
1.6
n/a
81,800
1.5
108,000
156,500
687.9
300.0
1,732.8
1,500.8
411.0
173.7
147.5
66.8
208.6
73.1
26.2
5.8
25.9
6.7
46.0%
352.8
94.8%
55.0%
53.0%
39.1%
27.5%
30.7%
81.6
141.9
59.2
111.9
15.2
15.5
234.8
417.2
163.9
51.8
96.0
38.5
31.5
30.5%
34.5%
11.3%
23.7%
62.2%
30.5%
7.3%
0.0%
31.1%
39.8%
9.8%
19.3%
33.8%
27.8%
9.6%
28.8%
32.2%
22.8%
13.7%
31.3%
49.0%
28.1%
12.9%
10.0%
36.2%
21.5%
21.3%
21.0%
139.6
24.7
21.2
293.0
23.7
61.5
110.7
35
11.5
24.2
6.7
0.8
52.3
9.5
0.0
27.7
2.6
0.2
22.1
1.4
0.3
Not Rated
Edmonton
A (high)
Stable
Revenue Bonds
11.4%
16.3%
7.3%
2.0%
0.0%
0.8%
1.2%
Total expenses
185.5
378.2
157.2
31.7
61.8
30.5
23.8
Recurring surplus
49.3
39.0
6.7
13.4
34.2
7.9
7.7
Cash Flow & Others ($ millions)
Cash flow from operations (1)
Free cash flow (after capex)
74.0
(18.3)
62.7
(307.5)
45.3
(3.6)
20.1
(25.9)
13.6
(15.2)
6.7
5.1
7.9
0.8
Capital expenditures
92.7
367.3
60.4
55.0
67.1
7.0
9.1
Interest coverage (EBITDA) (2)
- previous year's
4.5x
5.1x
1.6x
1.5x
4.1x
3.8x
13.8x
56.4x
10.3x
13.2x
46.8x
38.8x
32.6x
29.9x
1.9%
13.7%
(0.4%)
3.7%
0.3%
1.0%
5.4%
(0.6%)
4.9%
(3.0%)
6.3%
(4.4%)
1.6%
7.9%
1.0%
3.2%
n/a
6.0%
0.9%
2.9%
4.5%
Total debt
0.0%
33.6%
0.5%
167.6%
29.1%
43.9%
11.8%
Total revenue
Total operating expenses (excl. depr.)
Interest charges
3.2%
2.9%
0.0%
12.1%
8.1%
9.9%
6.0%
5.7%
4.9%
2.4%
5.7%
n/a
21.8%
8.9%
0.0%
14.7%
3.6%
31.4%
22.1%
6.4%
71.2%
Cash flow from operations (1)
(15.3%)
38.6%
9.6%
(5.0%)
(15.1%)
1.0%
61.2%
Per Passenger Statistics
Total debt
Total revenue
Total expenses (incl. interest)
Recurring surplus
Cash flow from operations (1)
Free cash flow (after capex)
$37.96
$29.70
$23.46
$6.24
$9.36
($2.32)
$107.99
$30.02
$27.21
$2.81
$4.51
($22.13)
$36.40
$34.18
$32.79
$1.39
$9.45
($0.76)
$36.09
$24.39
$17.17
$7.22
$10.87
($14.00)
$18.46
$24.61
$16.94
$8.75
$3.50
($3.89)
$3.59
$23.97
$19.02
$4.94
$4.16
$3.18
$4.69
$21.51
$16.27
$5.24
$5.37
$0.57
1992
1997
1992
1992
1992
1997
1997
Annual Growth Rates
Enplaned passenger
Air cargo
Aircraft movements
Administration
First year of private management
$5 within prov.
No
$10
$10**
$10
$10
AIF in place?
$10 Canada & U.S.
$15 international
(Dorval only)
May 1993
Nov. 1999
April 1997
Oct. 1997
Sept. 1999
Date of introduction
(1) Includes AIF revenue for Vancouver, Edmonton, Montreal and the unrestricted portion of AIF revenue for Winnipeg.
(2) Debt service coverage as per Indenture for Toronto.
* Dorval and Mirabel airports ** Since January 2000. Before, it was $5 for destinations within Alberta and $10 for all other destinations.
$10
July 1998
The Canadian Airport Industry - Page 4
KEY CHARACTERISTICS OF THE CANADIAN AIRPORT AUTHORITIES
Vancouver International Airport Authority (“Vancouver”)
• Has managed and operated Vancouver International
Airport since 1992, the second largest airport in Canada
and 59th busiest in the world with 7.9 million enplaned
passengers in 1999.
•
•
Serves the Greater Vancouver region, with a population
of over 2 million, and is a gateway for trans-Pacific
flights.
Very diversified passenger and revenue base, and one
of the lowest cost structures given the size of the
operations.
Aéroports de Montréal (“Montréal”)
• Manages and operates Mirabel Airport and Dorval
Airport since 1992. Dorval is the third largest airport in
Canada and the 109th busiest airport in the world, with
enplaned passengers of 4.2 million, while Mirabel had
about 650,000 enplaned passengers in 1999.
•
Serves the Montréal region, with a population of
3.4 million, the economic engine of the Province of
Québec and home to a quickly exp anding high-tech
industry.
•
Diversified passenger and revenue bases, with high
O&D traffic and strong commercial revenue
generation. Relatively high cost structure due to
maintaining Mirabel.
•
Capital expenditures expected to total $100 million per
year over the next 4-5 years.
•
AIF implemented in May 1993 and collected by airport
(about 24% of total revenue) – $5 for travel in B.C.,
$10 for travel in North America, and $15 for
international travel.
•
•
Long-term debt of $300 million in Senior Debentures,
DBRS rated at A (high) – additional debt issuance
likely to be required.
$1.3 billion, 20-year master development plan
underway (Perspective 2020), with $650 million to be
invested mostly at the Dorval airport, between 2000
and 2004.
•
•
Outlook for Vancouver’s debt burden per enplaned
passenger relative to the other Canadian airport
authorities is very favourable given the amount of debt
that will be required to finance the infrastructure
projects at the other major airports.
AIF implemented at Dorval in November 1997 and
collected by the airport (about 19% of total revenue) –
$10 per enplaned passenger.
•
No public debt outstanding. $174 million in bank loans
(as at December 31, 1999) expected to be converted
into long-term debt in the near future.
•
Indebtedness has increased rapidly as a result of heavy
capital investments. ADM’s debt level remains
reasonable, but is likely to deteriorate as a result of the
capital investment plan if it does not increase current
revenue sources or implement new ones.
Greater Toronto Airport Authority (“Toronto”)
• Has managed and operated Lester B. Pearson
International Airport since 1997, the largest airport in
Canada and 26th busiest in the world with 13.9 million
enplaned passengers in 1999.
•
Serves the Greater Toronto Area (GTA), the largest
metropolitan area in Canada with a population of
4.7 million, and is primary hub for Air Canada, the
dominant airline in Canada.
•
Diversified passenger base, but relatively undiversified
revenue sources with high dependence on airline
revenue.
•
$4.4 billion capital expenditure project over 10 years
underway.
•
No AIF implemented to date – expected to be
introduced soon.
•
Long-term debt of $2.03 billion (as at October 31,
2000) in revenue bonds and medium-term notes, DBRS
rated at A (high).
•
Toronto’s debt burden (per enplaned passenger) is
currently the highest of all Canadian airport
authorities and is projected to continue to rise over the
next three years. If Toronto does not introduce an AIF
to offset some of the burden on airlines, its financial
position, relative to the other airport authorities, will
be weaker.
Edmonton Regional Airports Authority (“Edmonton”)
• Has managed and operated Edmonton International
Airport since 1992, the fifth largest airport in Canada
and the 177th busiest airport in the world, with enplaned
passengers of 1.8 million in 1999. Also operates the
Edmonton City Centre Airport, and owns and operates
the Cooking Lake Airport and the Villeneuve Airport,
all general aviation facilities.
•
Airports serve the Edmonton CMA, the sixth largest
metropolitan area in Canada with a population of just
under 1 million. Edmonton is the provincial capital and
the service centre for the oil industry in northern
Alberta.
•
Dependence on the domestic travel market higher than
most of the other Canadian airport authorities.
Revenue base is moderately diversified. Relatively
modest concession revenue, but expected to increase in
importance once the new retail space, which is part of
the current expansion program, is constructed.
Favourable cost structure due to the importance of the
capital maintenance contribution received from the
federal government.
The Canadian Airport Industry - Page 5
Edmonton (cont’d…)
•
$236
million,
multi-phased
Air
Terminal
Redevelopment (ATR) project underway at the
Edmonton International Airport since March 1998, with
completion expected by spring 2003.
•
AIF implemented in April 1997 and collected by
airlines (29% of total revenue) – currently $10 per
enplaned passenger.
•
$250 million in amortizing, 30-year Revenue Bonds
issued in October 2000, rated A (high) by DBRS.
•
Edmonton’s debt burden (gross debt per enplaned
passenger) is currently the second highest of all
Canadian airport authorities, but it is projected to
decline over time given the amortizing structure of the
Revenue Bonds and the expectation that little, if any,
additional debt will be required to finance additional
capital projects. DBRS expects Edmonton to be able to
meet its debt servicing payments without having to
increase its AIF. However, the significant increase in
its interest costs has substantially increased its fixed
costs.
Calgary Airport Authority (“Calgary”)
• Has managed and operated Calgary International
Airport since 1992, the fourth largest airport in Canada
and the 112th busiest in the world, with 3.9 million
enplaned passengers in 1999. Also operates Springbank
Airport (a general aviation facility) since 1997.
Ottawa International Airport Authority (“Ottawa”)
• Manages and operates the Ottawa International Airport
since 1997, the sixth largest airport in Canada and the
197th busiest in the world, with enplaned passengers of
1.6 million in 1999.
•
Serves the National Capital Region (the Ottawa-Hull
CMA), the fourth largest metropolitan area in Canada,
with a population of just under 1.1 million and the
political and administrative centre of the federal
government.
•
Passenger base is more diversified than those of
Edmonton and Winnipeg. Revenue base is well
diversified, while the cost structure is less favourable
than other airports of similar size due to the relatively
high property taxes and ground lease payments.
•
$300 million Airport Expansion Program approved in
October 2000, with completion expected by spring
2004.
•
AIF implemented in September 1999 and collected by
airlines – $10 per enplaned passenger.
•
No public debt outstanding. DBRS expects that the
Authority will issue public debt within the next 18
months.
•
The airport expansion program will result in a sharp
increase in the level of debt and in interest costs over
the next 3½ years. This will result in a sharp increase
in Ottawa’s already high level of fixed costs.
•
Serves the Calgary CMA, the fifth largest metropolitan
area in Canada with a population of almost 1 million
and the corporate headquarters of the oil and gas sector.
Serves as a hub for western Canada.
•
Winnipeg Airports Authority (“Winnipeg”)
• Manages and operates Winnipeg International Airport
since 1997, the seventh largest airport in Canada with
1.5 million enplaned passengers in 1999.
Passenger base more diversified than other domesticoriented airports. Low operating cost structure and
diversified revenue base, although parking and
concession revenue somewhat weaker than the larger
Canadian airports.
•
•
$300 million, 10-year facility expansion program
underway since 1997, with about $161 million already
spent at the end of 1999.
Serves the Winnipeg CMA, the eighth largest
metropolitan area in Canada with a population of just
under 678,000 and which includes the provincial
capital. However, given that the airport is the only
major airport between Toronto and Calgary and that
most cities in between are too far to reach by car, the
airport serves a broader population area of over two
million.
•
AIF implemented in October 1997 and collected by
airlines (about 31% of total revenue) – $10 per
enplaned passenger.
•
•
On December 18, 1997, entered into a $200 million,
15-year revolving, reducing Credit Agreement to
finance the expansion program.
No major expansion project underway. Current capital
program (for the next 2 years) limited to maintenance
expenditures, although the reconstruction of runway
13/31 is planned for 2001.
•
AIF implemented in July 1998 – currently $10 per
enplaned passenger - $5 restricted to finance future
major infrastructure projects.
•
No public debt outstanding and no is suance expected in
the near term.
•
Winnipeg’s financial position is expected to remain
relatively stable over the next five years due to the fact
that major capital projects not expected to begin before
2003.
•
Calgary currently has a low debt burden relative to the
other large Canadian airport authorities. The debt
burden is expected to continue to rise as Calgary
continues its expansion program, but well within its
current financial capacity.
The Canadian Airport Industry - Page 6
1999 Airport Activity (Passenger Volumes, Aircraft Movements & Cargo Volumes)
Aircraft movements (000s)
- annual growth
Enplaned Passengers (millions)
Vancouver
323.6
Toronto
427.3
Montreal
262.3
Edmonton
105.2
Calgary
248.3
Ottawa
81.8
Winnipeg
156.5
(0.4%)
1.0%
4.9%
(4.4%)
1.0%
6.0%
4.5%
7.9
13.9
4.8
1.8
3.9
1.6
1.5
- annual growth
1.9%
3.7%
5.4%
(3.0%)
1.6%
3.2%
0.9%
- 1994-99 avg. annual growth
7.9%
5.8%
3.0%
8.0%
9.6%
5.0%
6.4%
Domestic
International
Transborder
Total
53%
21%
26%
100%
44%
23%
33%
99%
44%
30%
26%
100%
85%
2%
13%
100%
72%
9%
19%
100%
75%
5%
20%
100%
85%
2%
13%
100%
O&D
Connecting
Total
72%
28%
100%
70%
30%
100%
88%
12%
100%
89%
11%
100%
77%
23%
100%
89%
11%
100%
79%
21%
100%
Population served by airport (000s)
Regional GDP growth
O&D traffic/population
2,016.6
2.3%
2.8
4,680.0
6.3%
2.1
3,438.5
4.0%
1.2
929.1
2.5%
1.7
933.7
2.0%
3.2
1,065.0
5.6%
1.3
677.6
1.8%
1.7
Air Cargo (metric tonnes)
290,310
359,900
197,170
32,720
66,700
n/a
108,000
13.7%
0.3%
(0.6%)
6.3%
7.9%
n/a
2.9%
- annual growth
Source: Airport Authorities, Conference Board of Canada (GDP growth)
All of the major Canadian airports experienced passenger
traffic growth in 1999, except for Edmonton. The extent of
each airport’s growth varied, however, reflecting, to a large
degree, the differences in the economic performance of the
regions served by the airports. Montréal, Toronto and
Ottawa, which recorded the most significant growth in
passenger traffic in 1999, were also the regions that posted
the strongest GDP expansion that year. Vancouver, Calgary
and Winnipeg, on the other hand, reported relatively weaker
growth, while Edmonton suffered a decline. Vancouver is
still recovering from the Asian crisis, while the Edmonton
and Calgary airports were adversely affected by the
significant uncertainties related to the future of Canadian
Airlines and the slowdown in the energy sector, which
ended in the first quarter of 1999. Despite the recent
decline in passenger traffic, Edmonton remains one of the
fastest growing airports in Canada, with the second highest
average annual growth rate of the group over the 1994-1999
period.
Note that aircraft movements for all airport
authorities did not necessarily move in line with passenger
traffic in 1999 due to the continued improvements in airline
efficiency (airplane load factors) and the increased use of
larger aircraft.
Of the seven airports included in this study, three qualify as
truly international: Toronto, Vancouver and Montréal. In
addition to large passenger volumes, these airports are less
dependent on domestic traffic (between 44% and 53% of
total volumes), providing them with a more diversified
passenger base. In addition, Toronto and Vancouver exhibit
a larger connecting clientele, typical of international
airports. At the Montréal airports, however, connecting
traffic only accounted for 12% of total passenger volumes in
1999. This is partly explained by the location of Montréal’s
airports, between Halifax and Toronto, two important
connecting hubs. Calgary airport also has a high proportion
of connecting traffic, due to its strategic location as the
principal gateway to the Canadian Rockies and the
Northwest Territories, as well as serving as a hub for
western Canada. However, it remains largely a domestic
airport.
The air cargo business is less strongly linked to economic
performance than passenger traffic. The cities that posted
the strongest economic expansions in 1999 are not the ones
whose airports enjoyed the largest increase in cargo
volumes. The best performances in air cargo volumes were
observed in B.C. and Alberta (Vancouver, Calgary and
Edmonton), while cargo volumes at the Montréal and
Toronto airports changed little.
Outlook: According to Transport Canada (Aviation
Forecasts, 2000-2013), airline passenger traffic in the
country is forecast to increase by 2.9% per year on average
until 2003, and by 3.1% for the following five years, with
international and transborder traffic driving the growth in
passenger activity. Air cargo volumes are expected to grow
at an average annual rate of 4.2% until 2013, supported by
the emergence of e-commerce and the removal of
international trade barriers.
As air travel activity is strongly linked to the economic
health of a region, airports serving regions with more
favourable medium-term economic outlooks, such as
Toronto, Montréal and Ottawa, are likely to outperform the
rest of the group and experience passenger growth that
exceeds Transport Canada’s national forecasts. For 2000,
however, growth is expected to have been significantly
weaker than the medium-term outlook due to the Air
Canada/Canadian Airlines merger. The domestic-oriented
airports were likely the most affected by the merger as the
new consolidated carrier has cut the number of domestic
flights, while increasing the number of transborder and
international flights.
The Canadian Airport Industry - Page 7
1999 Operating Statistics
($ per enplaned passenger)
Revenue
Landing fees
Terminal charges
Concessions
Parking
Rentals, fees, other
AIF
Total revenue
Vancouver
4.44
4.60
7.74
2.51
3.39
7.03
29.70
Expenses
Operating and maintenance
Utilities, insurance & taxes
Ground lease paid
Total operating expenses
Interest expense (4)
Depreciation
Total expenses incl. interest
8.30
1.73
7.63
17.66
2.68
3.12
23.46
Recurring surplus
6.24
Cash flow from operations (5)
- annual growth
Free cash flow (after capex)
(1)
(2)
(3)
(4)
(5)
%
15
15
26
8
11
24
100
47
10
43
100
Toronto
11.49
7.16
3.67
5.50
2.19
0
30.02
10.62
1.98
8.48
21.08
4.43
1.70
27.21
2.81
%
38
24
12
18
7
0
100
50
9
40
100
Montreal % Edmonton %
17
4.94 (2) 14
4.12 (1)
17
5.68 (2) 17
4.12 (1)
13
40
13.60 (3)
3.05
15
n/a
3.74
10
9
3.38
2.30
19
29
6.59
7.05
100
100
34.19
24.39
17.53
3.64
1.92
23.09
2.40
7.30
32.80
1.39
76
16
8
100
11.91
1.40
(0.21)
13.10
0.41
3.65
17.16
7.23
91
11
-2
100
Calgary %
18
4.48
14
3.45
14
3.36
9
2.26
14
3.36
31
7.70
100
24.61
7.48
0.85
5.09
13.42
0
2.44
15.86
8.75
56
6
38
100
Ottawa
4.93
6.81
3.44
3.29
3.10
2.40
23.97
10.93
2.62
3.70
17.25
0.14
1.63
19.03
4.94
%
%
21
22
Winnipeg
4.81
28
2.97
14
2.69
14
1.94
13
4.58
10
4.52
100
21.51
63
15
21
100
12.19
1.57
1.32
15.08
0.20
0.99
16.27
14
13
9
21
21
100
81
10
9
100
5.24
9.36
4.51
9.45
10.87
11.19
6.56
6.23
(16.9%)
33.4%
4.1%
(2.7%)
39.5%
54.4%
82.4%
(2.32)
(22.13)
(0.76)
(14.00)
(3.89)
3.18
0.57
Estimated on the basis of a 50/50 weighting between landing fees and general terminal fees.
Weighting between landing fees and terminal charges based on the weighting from Aeroports de Montreal's 2000 budget.
Includes parking revenue.
Excludes capitalized interest.
Includes AIF revenue for Vancouver, Edmonton, Montreal and the unrestricted portion of AIF revenue for Winnipeg.
Supported by strong passenger volumes, the three
international airports (Vancouver, Toronto and Montréal)
continued to post the highest revenue per enplaned
passenger in 1999, with Montréal leading the group. Due to
the size of their operations, however, these three airports
also recorded the highest expenses and capital expenditures
on a per enplaned passenger basis. As a result, the larger
airports did not generate cash flow from operations that
were consistently higher, on a per enplaned passenger basis,
than those of smaller airports.
Canadian airports obtain most of their revenues from three
sources: airline charges (landing fees and terminal charges),
commercial operations (concessions, parking and rentals),
and the AIF (a passenger facility charge). The smaller
airports generally have lower commercial revenues relative
to their passenger base. Due to their higher passenger
traffic volumes, the larger airports can usually cover a
higher proportion of fixed costs directly by the passengers
through their commercial operations, which permits them to
reduce their dependence on airline charges. However,
Toronto is currently an exception. In 1999, Toronto was the
most dependent on airline charges, with 62% of total
revenue coming from this source, compared to 30% to 35%
for most of the other Canadian airport authorities. The
relatively high reliance on airline charges is largely
attributable to the absence of an AIF, which accounts for
about 25% of total revenue at other airports. Montréal and
Vancouver continued to enjoy strong commercial revenues
(concessions and parking), supported by high passenger
volumes and expanded commercial areas. This allowed
them to maintain airline fees per enplaned passenger at
competitive levels.
The larger airports faced higher interest expenses on a per
enplaned passenger basis in 1999, due to the advanced stage
of their major infrastructure projects. They also faced
higher ground lease payments, except for Montréal, which
continues to benefit from lower ground lease payments due
to the structure of its lease agreement that allows for
deductions for capital investments and for its heavier fixed
cost structure. In 1999, ground lease payments accounted
for 37% of both Toronto and Vancouver’s total operating
expenses as opposed to 6% in Montréal. While Montréal
has lower ground lease payments, the advantage is largely
offset by the above-average operating and maintenance
expenses per enplaned passenger. The significantly higher
operating and maintenance expenditures are due to the high
cost of maintaining two large facilities, Dorval and Mirabel.
Montréal also had the highest depreciation expenses on a
per enplaned passenger basis in 1999, a result of the
ongoing aggressive capital investment plan.
Operating cash flow generation remained strong at all
airports in 1999. Winnipeg and Ottawa, the two smallest
airports within the group, posted the largest improvements,
mostly due to the AIF (Winnipeg increased its AIF, while
Ottawa introduced an AIF in 1999). As a result of this
combined with relatively low capital expenditures during
the year, only these two airports reported positive free cash
flow in 1999. Toronto and Edmonton, on the other hand,
recorded particularly high negative free cash flow and, as a
result, a large portion of their capital spending had to be
financed by debt.
The Canadian Airport Industry - Page 8
Capital Structure & Debt (as at December 31, 1999)
Capital Structure
Short-term debt (<1 yr)
Long-term debt
Equity
Debt
Total debt ($million)
- per enplaned passenger ($)
Reported interest charges ($ million)
- per enplaned passenger ($)
- as % of total expenses
plus: Interest capitalized ($ million)
Total interest payments ($ million)
Coverage Ratio
Interest coverage (EBITDA) (1)
Vancouver
0.0%
46.0%
54.0%
Toronto
1.4%
93.4%
5.2%
Montreal
55.0%
0.0%
45.0%
Edmonton
0.0%
53.0%
47.0%
Calgary
0.0%
39.1%
60.9%
Ottawa
0.0%
27.5%
72.5%
Winnipeg
9.6%
21.1%
69.3%
300.0
37.96
1,500.8
107.99
173.7
36.40
66.8
36.09
73.1
18.46
5.8
3.59
6.7
4.69
21.2
2.68
11.4%
0.0
21.2
61.5
4.43
16.3%
0.0
61.5
11.5
2.40
7.3%
1.6
13.1
0.8
0.41
2.4%
1.2
2.0
0.0
0.00
0.0%
4.2
4.2
0.2
0.14
0.7%
0.0
0.2
0.3
0.20
1.3%
0.0
0.3
4.5x
1.6x
4.1x
13.8x
10.3x
46.8x
32.6x
(1) Debt service coverage as per Indenture for Toronto.
The capital structure of Canadian airports differs
significantly, as shown in the above table. It is mostly a
function of the state of the infrastructure at the time the
airports were transferred to the airport authorities, the stage
of advancement of each airport’s expansion project and the
amount of revenue generated by the AIF.
Toronto, Canada’s largest airport, had by far the highest
leverage at the end of 1999, with 94.8% of its capital
structure made up of debt. This was significantly higher
than for the six other major airports, for which the relative
importance of debt in their capital structure ranges from
27.5% to 55.0%. Toronto also had the highest level of debt
and interest payments on a per enplaned passenger basis, as
most of the other airports are still at an early stage in their
capital expansion programs. In 1999, Toronto reported
interest charges of $4.43 per enplaned passenger,
accounting for 16.3% of total expenses, compared to
$2.68 and $2.40, or 11.4% and 7.3% of total expenses,
respectively, for Vancouver and Montréal, the next two
largest airports in Canada.
Although the Toronto airport’s traffic is expected to grow
significantly over the next decade, the heavy debt burden
and the associated fixed charges have weakened its financial
position. While the airport has the ability to increase its
rates and charges to cover its costs, it already has by far the
highest landing fees in the country and could have
difficulties passing on additional increases in the medium
term. Furthermore, should there be a prolonged and severe
recession in North America during the next decade, the
Toronto airport could end up having to maintain excessive
capacity with a reduced budget.
The Ottawa and Winnipeg airports currently have the lowest
debt levels as neither had begun its expansion programs at
the end of 1999. However, this is expected to change for
Ottawa in 2001 as it embarks on its $300 million airport
expansion program.
The Canadian Airport Industry - Page 9
International Comparison
Atlanta
(ATL)
L.A.
(LAX)
London
(LHR)
Toronto
(YYZ)
Sydney
(SYD)
Vancouver
(YVR)
39,047
32,140
30,988
22,935
18,386
13,898
11,629
7,903
93.1%
*
6.9%
75.4%
*
24.6%
11.5%
47.6%
40.9%
18.3%
47.1%
34.6%
0.4%
66.4%
33.2%
44.0%
32.7%
22.8%
65.4%
0.0%
34.6%
52.6%
26.1%
21.3%
Origination & Destination
Connecting
n/a
n/a
68%
32%
66%
34%
51%
49%
57%
43%
70%
30%
n/a
n/a
72%
28%
Cargo volumes (000s tonnes)
883
2,166
1,266
1,428
1,225
360
12,931
290
909,911
779,150
449,370
439,093
409,999
427,300
290,019
323,600
Total revenue (million)
- per enplaned passenger
Revenue mix:
Airline charges (1)
Concessions & parking
Pasenger Charges (AIF or PFC)
Other
$469
$12.01
$639
$19.90
$1,660
$53.58
$1,947
$84.89
$835
$45.44
$417
$30.02
$294
$25.29
$235
$29.71
28.2%
37.7%
29.2%
4.9%
40.8%
41.7%
16.7%
0.9%
69.5%
26.8%
3.7%
68.7%
21.3%
9.9%
62.5%
28.4%
n/a
9.1%
62.2%
30.5%
7.3%
52.2%
47.7%
-
30.5%
34.5%
23.7%
11.3%
Passenger charge (per passenger)
US$3
US$3
no**
no
n/a
no
no
$5 to $15
1.6%
37.9%
60.5%
1.3%
15.7%
83.0%
4.1%
35.9%
60.0%
10.3%
50.8%
38.9%
10.4%
13.2%
76.4%
1.4%
93.4%
5.2%
11.9%
27.0%
61.1%
0.0%
46.0%
54.0%
Airport Activity
Total enplaned passengers (000s)
passenger mix:
Domestic
Transborder
International
Aircraft movements
Frankfurt Amsterdam
(FRA)
(AMS)
Revenue Structure
Capital Structure
S-t debt
L-t debt
Equity
(1) Usually includes runway movement charges, aircraft parking charges, and charges for the rental of airport facility and equipment.
* For U.S. airports, transborder traffic included in international traffic.
** The fee charged to passengers at Heathrow is a tax and is not aimed at financing capital expenditures. The proceeds go directly to the government.
Note: For London Heathrow, consolidated capital structure of BAA plc, which manages other airports in and outside the UK.
Source for exchange rates: Bank of Canada (as at Dec. 31, 1999). Cdn$=US$0.6929; Cdn$=AUS$1.0546; Cdn$=DM1.3464; Cdn$=£0.4289; Cdn$=NLG1.5172.
The above table briefly compares Canada’s two largest
airports, Toronto and Vancouver, with some of the busiest
airports in the U.S. (Atlanta and Los Angeles), U.K.
(London Heathrow), Germany (Frankfurt), the Netherlands
(Amsterdam) and Australia (Sydney). It provides statistics
that highlight the differences between these airports in terms
of traffic composition, revenue sources and capital structure.
Although the largest in Canada, the Toronto and Vancouver
airports are quite small in terms of passenger traffic and
cargo volumes when compared to some of the busiest U.S.
and European airports. They enjoy a well-diversified client
base, however, which provides them with enhanced revenue
stability. The European airports are the most international
of the group, due to the proximity of the densely populated
European countries. As a result, domestic traffic accounts
for less than 20% of total passenger traffic and connecting
traffic is relatively high. The U.S. airports, on the other
hand, are more regional in nature. They exhibit a greater
dependence on the domestic market, as more than three
quarters of their passengers travel within the country.
Total revenue per passenger is the highest at the three
European airports. Heathrow enjoys particularly strong
revenue generation, mostly because it collects a passenger
tax, ranging between £10 and £20 depending on the
passenger’s destination. Similar to Toronto, however,
commercial revenue at the European airports accounts for a
smaller portion of total revenue, which generally results in
higher airline fees (landing fees and terminal charges). The
two U.S. airports generate significantly less revenue per
passenger. Like Vancouver, the U.S. airports obtain a
relatively small portion of their revenue from landing fees
and airport facility charges. The presence of a passenger
facility charge (US$3/passenger), used to finance capital
expenditures, contributes to the reduced importance of
airline charges. In addition, the high passenger, cargo and
aircraft volumes handled by these U.S. airports allow for a
more efficient use of infrastructure and larger commercial
operations (e.g., concessions and parking).
With regards to the capital structure, the two Canadian
airports appear to be using debt financing more extensively
than the other international airports presented in the table.
Although the relative importance of short-term debt is
conservative for all airports, the overall debt burden of the
two Canadian airports is relatively heavier, particularly for
Toronto. The transfer of responsibility for the management
and development of the Canadian airports to independent,
non-share capital corporations, and the resulting significant
investments made since that time to modernize and expand
the infrastructure have contributed to the high leverage.
The Canadian Airport Industry - Page 10
Annex A - Rating Criteria for Airports
In establishing a rating, DBRS looks at various factors that are likely to affect the ability of the issuer to perform its financial
obligations over the term of its debt. Those are usually related to the corporate structure of the entity, the environment in which it
operates (regulation, competition, clients, economy etc.), its financial situation, the project being financed and the financing plan.
Below is a brief description of the key criteria taken into consideration when assessing airports.
1.
Legislative Authority/Regulatory Environment
In most cases, the right of the organization to conduct the service is given through legislation. This determines the
environment in which the industry operates (competition, pricing, service level, etc.). Legislation can be canceled or altered
by governments, and these possibilities pose a risk in every rating. However, in the absence of reasonable doubt, DBRS
assumes that there will not be a change or alteration in the basic legislative structure governing the Canadian airport
authorities.
The pricing regime in place is a particularly important rating consideration, as it determines the issuer’s ability to generate
revenues and to address unexpected events through fee increases. This constitutes an important strength for the Canadian
airport authorities, as they have the legislated ability to set rates and charges levied on the users of the airport facilities
(airlines and passengers) in order to recover their costs. Unlike in the U.K. and Australia, there is no legislative limit on the
level of rates and charges that can be levied on airport users in Canada and no regulatory approval needs to be sought when
airport fees are raised.
2.
Characteristics of the Client Base and the Revenue Base
DBRS looks at the revenue and client bases of an airport to assess the stability of revenue streams and the entity’s ability to
generate sufficient cash flows in the future. The diversification of the business mix is an important consideration. An airport
that has a diversified revenue base, such as strong cargo, concession and parking operations, is better positioned to face
adverse unexpected events while maintaining airport fees at reasonable levels than an entity that is strongly dependent on
landing fees and terminal charges. Furthermore, a diversified revenue base allows airports to maintain low airline fees by
having a larger portion of their costs covered directly by the passengers.
The passenger mix is another important determinant of revenue stability. High percentages of non-domestic traffic and
origination & destination (O&D) traffic result in a more stable client base and enhanced revenue stability. O&D airports are
less sensitive than connecting hubs to the credit quality of a particular airline and to route reorganisation. Should one airline
fail another one will likely increase service to the originating or ultimate destination of the passenger. If an airport is heavily
dependent on one airline that uses the airport as a connecting hub, the airport could be in difficulty if that airline ever failed.
3.
Strength of the Economic Area Served
The economic fundamentals and economic outlook for the region served by the airport are significant determinants of airport
business growth, as airport activity is highly correlated to economic activity. The projected strength of the economic area
served by the airport has an important impact on the outlook for the airport’s revenues and, consequently, its ability to service
its debt. This is especially the case for airports having a high O&D passenger mix. Airports that serve regions that have a
buoyant economy will usually post higher passenger growth than airports located in sluggish economic regions.
4.
Competition
Competition is a key factor in rating an issuer. It determines the entity’s ability to set its price structure and extract the
consumer’s surplus. Airports compete with each other to attract new airlines and to retain existing partners. This is
particularly the case for international travel and connecting business. Competition also exists in the domestic travel business
when two airports are located very close to each other. Hamilton Airport, for example, is located at 70 kilometers from
Lester B. Pearson Airport in Toronto. Because of its lower cost structure, Hamilton Airport can charge lower landing fees
and terminal charges and attract low-cost carriers. Airports also compete with alternative modes of transportation, such as
cars, trains and buses, particularly in regions where major urban centres are located at reasonable distances from each other,
like in Europe. In this regard, the opening of the Eurotunnel has probably created an incentive for airlines to price Paris London flights reasonably, indirectly encouraging airports to maintain lower landing fees. In the airport industry, protection
against competition takes the form of legislation, high start-up costs (capital intensity) and a favourable location. The
Canadian airport authorities have received legislation, through their ground lease with Transport Canada, which restricts
construction of new airports within a certain distance from the existing airport (usually 75 kilometers).
5.
Characteristics of the Project
The nature, size, economics and timing of the project are important rating considerations. DBRS looks at the nature and size
of the project in order to assess its impact on business and passenger growth and, ultimately, on revenue generation. The
relevance of the project is assessed by looking at the capacity of the current facilities, the anticipated growth in demand for
the services, the capacity and flexibility added to the facilities through the project and the timing of the various phases of the
project. In addition, DBRS tries to assess the impact of the project on the various revenue streams as well as its implications
on the airport’s cost structure, including financing, operating and maintenance costs. The impact of the project on the firm’s
capital structure and the level of user fees required to cover the capital costs, including financing costs, are also taken into
consideration.
The Canadian Airport Industry - Page 11
6.
Project Risks
Project risk is also considered when determining the rating. The main risks encountered in a project include: (a) Cost overruns - Are the construction costs fixed or variable rate? (b) Experience of contractors in similar projects and local
relationships. (c) Technical problems complicating construction, such as logistics problems, technology limitations and
climatic problems. In this regard, the presence of insurance acts as a mitigating factor when it provides coverage against
events such as bankruptcy of the contractor, business interruption, or commercial liability.
7.
Structure of Financing and Key Covenants
The structure of the financing plays an important role in determining the rating. The key covenants governing the expected
performance of the project must be examined. A key standard is the number of times debt service costs must be covered.
For the Canadian airport authorities that have issued public debt, the requirement is that debt service costs must be covered is
usually 1.25 times. However, the definition of debt service coverage can vary. In some cases, debt service includes only
interest costs and, in other cases, it includes principal and interest. The definition of coverage can vary as well. For some, it
may be earnings before interest, depreciation & amortization (EBITDA), while for others it may be earnings before interest
(EBIT). Taxes are not included in the calculations as Canadian airport authorities are not subject to income taxes.
The existence of Reserve Funds is also an important consideration, as they mitigate risks. The Reserve Funds serve as: (a) a
source of liquidity as the cash is typically invested in high-grade liquid securities (usually R-1 (middle) and higher) and
(b) an “equity” cushion, which is important because Canadian airport authorities usually do not have an equity base. The
Reserve Funds are usually created at the start of the project, from proceeds of the first bond issue. They typically include:
a)
Interest Reserve: Interest is usually deposited into an account monthly at least, or there may be a requirement that one
year’s interest remain in the reserve at all times. This ensures that there is a minimum amount of cash available to pay
coupon interest as it falls due.
b) Principal Reserve or Sinking Fund Reserve: Many structures require that a Sinking Fund be established to ensure that the
principal can be repaid at maturity, if the bond is a bullet bond. (This eliminates refinancing risk.) Alternatively,
principal may be repaid on an amortization basis, such that the semi-annual payment includes interest and an
amortization of the principal. If a Sinking Fund is required, there is usually a stipulation that any cash accumulated be
invested in investment grade securities (e.g., AA or R-1 (middle) or better).
c) Operating and Maintenance Reserve: To ensure that enough cash is available to pay operating and maintenance costs,
some structures may require 6 months (for example) of O&M expenses be put into a reserve.
d) Capital Expenditure Reserve: Some projects may require periodic expenditure to ensure that plant and equipment is
maintained beyond normal maintenance.
The basic principles and characteristics used in setting reserves are: (i) In mature projects, there is less need for reserves.
(ii) Reserves are usually small (often under 6 months of cash needs). (iii) Reserves should be funded up front, from proceeds
of the first bond issue and not over time from excess cash. (iv) Reserves should be invested in low risk, liquid securities
rated R-1 (low) or better.
8.
Security
Security is usually offered in various forms on Revenue Bonds, which includes a first assignment of revenue, and a first
mortgage on property. If the project is immature or still being built, the value of the security is less valuable. However, a
first call on the construction in process is usually provided. A first call on all reserves and receivables is also usually present,
as well as a blanket claim on all property. In the case of Vancouver airport, a negative pledge restricted issuance of prior
ranking debt.
9.
Stress Testing
Most projects have expert consultants to provide advice on the feasibility of a project. This includes traffic studies, cost
studies, revenue feasibility, analyzing competitive alternatives, worst-case evaluation of economics in a recession,
comparison with alternative projects in other areas of the world, etc. DBRS uses these feasibility studies to stress test worst
and best case economics, using a wide range of assumptions.
10. Characteristics of the Issue
The structure of the issue (term, and bullet vs. amortizing) is a consideration as well. The term to maturity should relate to
the life of a project. Too short a time period leads to significant refinancing risk, while a term too long introduces risk that
the asset being financed will no longer be in sufficient condition to generate the cash flows necessary to service the debt.
Thus, the useful life of the project being financed should coincide with the term of the financing. Many projects need
extensive refurbishing later in the life of the project, so shorter term debt may be issued to take advantage of high short-term
cash flow, which is not needed immediately. An amortizing structure, in the absence of a sinking fund reserve, eliminates
refinancing risk.
Canadian Airport Industry 2000 - Page 12
Annex B - Comparison Table of Canadian Airport Authorities
Authority
Vancouver
Has managed and operated
Vancouver International
Airport since 1992, pursuant
to a 60-year ground lease
(extendable to 80 years) with
Government of Canada.
Toronto
Has managed and operated
Lester B. Pearson
International Airport,
pursuant to a 60-year ground
lease (extendable to 80 years)
with the Government of
Canada.
Montreal
Has managed and operated
Mirabel Airport and Dorval
Airport since 1992, pursuant
to a 60-year ground lease
(extendable to 80 years) with
the Government of Canada.
Economic Area Served
Serves the Greater Vancouver
region, with a population of over
2 million. The region is the
commercial and administrative
hub of British Columbia. Its
geographic location positions it
as a gateway for flights
traversing the Pacific Ocean.
The region’s substantial Asian
population is a significant source
of demand for trans-Pacific
flights.
Serves the Greater Toronto Area
(GTA), which is the largest
metropolitan area in Canada with
a population of 4.7 million. The
GTA represents the largest
concentration of economic
activity in Canada and has the
highest number of head offices
of any Canadian city. It is the
financial centre of Canada and
has the third highest
concentration of financial
services employment in North
America.
Serves the Montreal region, an
area composed of the Montreal
Island and neighboring cities,
with a population of 3.4 million.
Montreal is the economic engine
of the Province of Quebec and
home to a quickly expanding
high-tech industry.
Capital Expenditure Plan
Facilities are modern and
advanced, and all runways and
major construction are in place.
A $114 million, seven-gate
expansion was completed in April
2000. Capital expenditures are
expected to total $100 million per
year over the next 4-5 years. Some
additional debt issuance will likely
be required.
A $4.4 billion capital expenditure
project over 10 years includes
$3.3 billion to be spent on the
construction of a new terminal
building to replace the existing
Terminals 1 and 2, the construction
of new runways and a new cargo
facility.
The Authority is in the second
phase of its 20-year, $1.3 billion
master development plan
(Perspective 2020). Between 2000
and 2004, $650 million is expected
to be invested in multifunctional
infrastructure, mostly at the
international and transborder areas
of the Dorval airport. Major work
to be conducted includes building
a permanent international
concourse and the integration of a
train station facility.
Airport Improvement
Fee (AIF)
An AIF was
implemented in May
1993. It is levied at
$5 for travel in B.C.,
$10 for travel in
North America, and
$15 for international
travel. The AIF is
collected by the
Authority and
accounts for about
24% of its revenue.
No AIF has been
implemented to date.
DBRS expects an
AIF will be
introduced soon.
An AIF was
implemented at
Dorval airport in
November 1997 at
$10 per enplaned
passenger. The AIF is
collected by the
Authority and
accounts for about
19% of its revenues.
Debt Issuance
Issued $300 million in
Senior Debentures in
10- and 30-year tranches.
Debt is unsecured, but is
protected by a negative
pledge. Maintenance of a
minimum 1.25 debt
service coverage
required.
A total of $2.03 billion
(as at October 31, 2000)
of revenue bonds and
medium-term notes has
been issued. The debt is
secured by the net
revenue and fixed assets.
Debt service coverage of
1.25x must be
maintained. Operating
and maintenance, debt
service and construction
fund reserve accounts
have been created.
No public debt has yet
been issued to finance the
expansion program. The
Authority expects to
convert its bank loans
into long-term debt in
2001.
Canadian Airport Industry 2000 - Page 13
Edmonton
Calgary
Ottawa
Authority
Economic Area Served
Capital Expenditure Plan
Has managed and operated
Edmonton International
Airport since 1992, pursuant
to a 60-year ground lease
(extendable to 80 years) with
Government of Canada.
Operates the Edmonton City
Centre Airport since 1996,
pursuant to a 56-year lease
with the City of Edmonton.
Owns and operates the
Cooking Lake Airport and the
Villeneuve Airport, both
general aviation facilities.
Has managed and operated
Calgary International Airport
since 1992, and Springbank
Airport since 1997, pursuant
to a 60-year ground lease
(extendable to 80 years) with
Government of Canada.
Serves the Edmonton CMA,
which is the sixth largest
metropolitan area in Canada with
a population of just under
1 million. Edmonton is the
provincial capital and is the
service centre for the oil industry
in northern Alberta.
In March 1998, the Authority
began the construction related to
the $270 million, multi-phased Air
Terminal Redevelopment (ATR)
project at the Edmonton
International Airport. It is
estimated that total capital
expenditures of $169 million will
have been incurred related to the
ATR project by December 31,
2000.
Serves the Calgary Census
Metropolitan Area (CMA), which
is the fifth largest metropolitan
area in Canada with a population
of almost 1 million, and is also
the closest major airport to Banff
and much of the Canadian
Rockies. Calgary is the
corporate headquarters of the oil
and gas sector, and has become
the main business centre of
western Canada with the second
highest number of head offices in
Canada after Toronto.
A ten-year, $300 million facility
expansion program was begun in
1997. At the end of 1999, about
$161 million in capital
expenditures related to the
expansion program had been
completed. By the end of 2003,
the Authority expects to have
completed the capital projects
necessary to accommodate the
current passenger volumes and
aircraft movements, as well as
those necessary to meet the
projected demand requirements.
Has managed and operated
the Ottawa International
Airport since 1997, pursuant
to a 60-year ground lease
(extendable to 80 years) with
the Government of Canada.
Serves the National Capital
Region (the Ottawa-Hull CMA),
which has a population of just
under 1.1 million, making it the
fourth largest metropolitan area
in Canada. The National Capital
Region is the political and
administrative centre of the
federal government, as well as
being Canada’s centre for
advanced technology.
A $300 million Airport Expansion
Program, to be completed by
spring 2003, was approved in
October 2000. The expansion
program includes the construction
of a new terminal building, a new
parking structure, and groundside
and airside improvements.
Airport Improvement
Fee (AIF)
An AIF was
implemented in April
1997. As at January
2000, the AIF is
levied at $10 per
enplaned passenger
for all destinations.
The AIF is collected
by the airlines and
remitted to the
Authority.
An AIF was
implemented in
October 1997 at $5
per enplaned
passenger. In January
1999, it was increased
to $10 per enplaned
passenger. The AIF
accounts for about
31% of the
Authority’s revenues.
The AIF is collected
by the airlines and
remitted to the
Authority.
An AIF was
implemented in
September 1999 at
$10 per enplaned
passenger. The AIF
is collected by the
airlines and remitted
to the Authority.
Debt Issuance
Issued $250 million in
amortizing, 30-year
Revenue Bonds, with
revenue and airport assets
acting as security. Debt
service coverage of at
least 1.00x must be
maintained.
Operating and
maintenance, and debt
service reserve accounts
have been created.
On December 18, 1997,
entered into a $200
million, 15-year
revolving, reducing Credit
Agreement to finance the
expansion program. The
Credit Agreement is
secured by a Trust
Indenture, including the
Assignment of Rents.
No public debt has yet
been issued to finance the
airport expansion
program. DBRS expects
that the Authority will
issue public debt within
the next
18 months.
Canadian Airport Industry 2000 - Page 14
Authority
Winnipeg
Has managed and operated
Winnipeg International
Airport since 1997, pursuant
to a 60-year ground lease
(extendable to 80 years) with
the Government of Canada.
Economic Area Served
Directly serves the Winnipeg
CMA, which is the eighth largest
metropolitan area in Canada with
a population of just under
678,000 and which includes the
provincial capital. However,
given that the airport is the only
major airport between Toronto
and Calgary and that most cities
in between are too far to reach by
car, the airport serves a broader
population area of over two
million, extending into northern
Ontario and Saskatchewan.
Capital Expenditure Plan
No major expansion project has
been undertaken. The current
capital program (for the next
2 years) consists primarily of
expenditures required to restore
and replace existing facilities.
Airport Improvement
Fee (AIF)
An AIF was
implemented in July
1998 at $5 per
enplaned passenger.
In October 1999, it
was increased to
$10 per enplaned
passenger. The AIF is
collected by the
airlines and remitted
to the Authority.
Debt Issuance
No debt has yet been
issued to finance the
expansion program. The
Authority does not expect
to issue debt in the near
term.
The Canadian Airport Industry - Page 15
Annex C - Comparison Table of Canadian Airport Market with other Airport Markets
Canada
U.S.
U.K.
Ownership Structure
Airports are managed and operated by
Canadian airport authorities pursuant to
60-year ground leases (extendable to
80 years) with the Government of Canada.
The Canadian airport authorities are
independent, non-share capital, not-forprofit corporations.
Authority to Set Rates and Charges
Canadian airport authorities have the legislated ability to set
airline rates and charges based on a cost recovery scheme.
They also have the legislated authority to levy an Airport
Improvement Fee to finance capital projects. There is no
legislated limit on the level of rates and fees that can be levied
by Canadian airport authorities.
Approach to Financing Capital Projects
Canadian airport authorities have the
following tools available to finance
capital projects: (1) cash from operations;
(2) Airport Improvement Fees; (3) bank
financing; and (4) public debt issuance.
They do not receive any direct
government funding for capital projects,
but sometimes benefit from temporary
reductions in their ground lease
payments.
Airports are owned by the Cities within
which they are located. They are usually
managed and operated by the municipal
Departments of Aviation. The Departments
of Aviation are enterprise funds of the
respective Cities.
The Departments of Aviation have the same broad powers as
those of the Canadian airport authorities – they have the ability
to fix, regulate and collect rates and charges for use of the
Airport System. They also have the ability to levy Passenger
Facility Charges (PFCs) of $1, $2, $3, $4 or $4.50 per enplaned
passenger. The proceeds are to be used to Finance Federal
Aviation Administration-approved eligible airport-related
projects that preserve or enhance safety, security or capacity of
the national airport system; reduce noise from an airport that is
part of such system; or furnish opportunities for enhanced
competition between or among air carriers. The Departments of
Aviation must apply for the authority to levy a PFC, and must
apply to change the level of PFC levied.
Departments of Aviation have the
following tools available to finance
capital projects: (1) federal grants
through the Airport Improvement
Program; (2) cash from operations;
(3) PFCs; and (4) debt, including bank
financing and public bonds.
Ownership Structure
Except for Manchester, the major airports in
the U.K. are 100% privately owned by BAA
plc, a publicly traded company. Manchester
airport, the third busiest in the U.K., remains
jointly owned by a group of local
governments.
Authority to Set Rates and Charges
The Civil Aviation Authority (CAA) regulates airports in the
U.K. Airports with an annual turnover of at least £1 million
must obtain a permission from the CAA to levy airport charges.
For four airports designated by the government (Heathrow,
Gatwick, Stansted and Manchester), the CAA also sets a price
cap to limit the amount that can be levied by way of airport
charges (runway, terminal and aircraft parking charges). The
price cap formula is referred to as “RPI – X” (the rate of inflation
minus an efficiency factor) and usually set for a five-year
period.
Approach to Financing Capital Projects
U.K. airport operators usually have
access to the following tools to finance
capital projects: (1) cash from operations;
(2) bank financing;
(3) public debt issuance; and (4) equity,
for privately owned entities.
The Canadian Airport Industry - Page 16
Germany
Airports in Germany are almost exclusively
jointly owned by public entities (federal,
land, district, local governments). They are
set up either as limited liability companies or,
as in the case of Frankfurt Airport, as joint
stock companies. There is no separation of
owners of the infrastructure and airport
operators. Major airports, including
Frankfurt, are expected to be privatized in the
near future.
Aircraft take-off, landing and parking charges, as well as fees
for the use of passenger facilities are subject to the approval of
the competent aviation authority.
Various sources of funds are available to
airport operators to finance their
expansion. According to 1995 statistics
of the German airport association, 12.7%
of capital expenditure financing at
German commercial airports came from
the governments, 83.3% was raised by
the airport (self-generated funds and
loans) and 4% was provided by third
parties.
Australia
All major airports in Australia, except for
those in the Sydney Basin, have been
completely privatized. The four airports in
the Sydney Basin have been transferred to a
government business entity, Sydney
Airports Corp. Ltd. (SACL). All of the major
airports in Australia are managed and
operated by corporations pursuant to 50year leases with the Commonwealth of
Australia, with an option to extend for an
additional 49 years. The corporations that
manage and operate the airports are forprofit corporations. Although SACL
remains government-owned, its debt is not
guaranteed by the Commonwealth of
Australia. The stated policy of the
Commonwealth Government is to privatize
the group, but the timing of the privatization
has not been determined yet.
The regulatory framework applicable to the major Australian
airports governs the monopoly aeronautical services. All
airports, except the airports operated by the SACL are subject
to the same pricing regime for setting the rates and charges
related to aeronautical services. The cost-recovery mechanism
for aeronautical services is currently subject to a price cap
regime based on a CPI - X (the rate of inflation minus an
efficiency factor) formula. There are no regulations governing
non-aeronautical services. Provisions exist to increase the rates
and charges for aeronautical services beyond the price cap for
the recovery of costs related to necessary new aeronautical
investments. These charges (PFCs), however, must be
approved by the regulatory body, the Australian Competition &
Consumer Commission (ACCC).
In the case of SACL, its pricing structure for aeronautical
services must be approved by the ACCC. The different pricing
regime is a result of the government ownership and the
significant capital investment that took place related to the
Olympics.
The operators of Australia’s airports
have the following tools available to
finance capital projects: (1) cash from
operations; (2) PFCs; (3) debt, including
bank financing and public bonds; and
(4) equity.
Bond, Long Term Debt and Preferred Share Ratings
Vancouver International Airport Authority
Current Report:
Previous Report:
June 29, 2000
April 9, 1999
RATING
Geneviève Lavallée, CFA / Greg Nelson
Rating
Trend
Rating Action
Debt Rated
(416) 593-5577 x277/x224
A (high)
Stable
Confirmed
Senior Debentures, Series A & B
e-mail: [email protected]
RATING HISTORY
Current
1999
1998
1997
1996
1995
1994
1993
Senior Debentures
A (high)
A (high)
A (high)
A (high)
A (high)
NR
NR
NR
RATING UPDATE
The rating on the senior debentures of the Vancouver
market; and its well-suited location as a gateway to Asia.
International Airport Authority (“VIAA”) is confirmed at
The VIAA’s 1999 financial results indicate a slowdown in
A (high), with a Stable trend. The VIAA’s 1999 financial
the pace of growth, but earnings and cash flow remain
results indicate a slowdown in the pace of growth, but
strong. Excluding the effects of the one-time downward
earnings and cash flow remain strong. The outlook for the
adjustment to the ground lease expense in 1998, the VIAA’s
long-term remains positive, although the rate of growth is
operating results were relatively stable, despite the decline
expected to be limited in the short-term due to the Air
in transborder traffic and higher wages and salaries as a
Canada/Canadian Airlines merger and the resulting
number of vacancies were filled. Interest coverage for 1999
rationalization of flights. The $500 million expansion
was 3.3 times, within the expected range of 3 to 4 times,
program completed in 1996 provides the VIAA with
representing substantial protection for bondholders.
flexibility to make adjustments to Vancouver International
The VIAA, like other airport authorities, must contend with
Airport premises as future demand grows, without
the competitive aspects and risks associated with the air
disrupting traffic flows. The VIAA has already taken
travel industry. Airport facilities typically have high fixed
advantage of this flexibility with the seven-gate,
operating costs, while aircraft and passenger volumes are
$114 million expansion to the International Terminal
susceptible to economic trends. The competition for AsiaBuilding that was completed in March 2000.
Pacific business is high and represents a volatile source of
Key factors that support the VIAA rating include: the
revenue. However, strong growth in non-aeronautical
economic strength of the service area; its virtual monopoly
revenues has allowed the VIAA to keep its fees and charges
on a substantial origination and destination air travel
to air carriers competitive.
RATING CONSIDERATIONS
Strengths:
Challenges:
• Economic strength of service area
• Inherent risks associated with air travel industry
• Monopoly on air services to Vancouver region
• Competition for Asia-Pacific business
• High origination & destination passenger mix
• Above-average credit risk of airlines
• Flexibility to increase future capacity of premises
• Substantial fixed operating costs
• Strong operating results and outlook
• Longer range airplanes resulting in more direct flights
• Geographic location as gateway to Asia
FINANCIAL INFORMATION
Net interest coverage times (including AIF)
Cash flow/total debt
Debt per enplaned passenger ($)
Revenue per enplaned passenger ($)
Total cost per enplaned passenger ($)
Profit per enplaned passenger ($)
Passenger volume growth
Air cargo growth
Gates
Year ended December 31
1999
1998
1997
3.3
4.1
3.1
24.7%
29.1%
21.5%
37.96
38.69
40.51
29.70
29.33
28.17
23.46
20.97
22.24
6.24
8.36
5.93
1.9%
4.7%
5.6%
13.7%
(2.1%)
4.7%
43
43
43
1996
1.9
17.2%
42.79
26.66
20.81
5.84
16.9%
17.0%
41
1995
5.4
26.7%
38.13
24.22
14.45
9.76
10.9%
17.0%
28
1994
12.3
68.7%
14.88
23.71
13.85
9.86
5.9%
19.3%
28
1993
7.8
103.4%
7.08
20.93
13.88
7.05
(2.2%)
5.6%
27
THE COMPANY
The Vancouver International Airport Authority is an independent, not-for-profit, federally incorporated Canadian Airport
Authority established in 1992. The VIAA operates the Vancouver International Airport (“YVR”) under a 60-year ground lease
(extendable another 20 years to 2072) with the Government of Canada. A 14 member Board of Directors consisting of
community representatives appointed by the local governments, business and professional groups and the federal government
governs the VIAA. YVR, which services the Greater Vancouver region, is Canada’s second busiest airport with volumes in
excess of 7.9 million total enplaned passengers per year.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Vancouver International Airport - Page 2
RATING CONSIDERATIONS
Strengths:
(1) Economic growth in the Greater Vancouver region
(YVR’s service area) slowed as a result of the effects of the
Asian crisis in 1998, but has improved since then and has
remained above that of the rest of the Province. The
region’s primarily service-based economy, as commercial
and administrative hub of British Columbia, continues to
support airport passenger volume growth due to business
travel and strong tourism. Growth in passenger volumes
slowed in 1999 due a drop in transborder traffic (as a result
of reduced aircraft movements), but international passenger
volumes picked up sharply following the slowdown in 1998.
The region’s economy is expected to continue to improve,
and tourism should remain strong given the robust U.S. and
domestic economies and the continued weak Canadian
dollar.
(2) The VIAA has a virtual monopoly on the provision of
aviation services in the Greater Vancouver region. Under
terms of a 60-year ground lease (extendable to 80 years),
Transport Canada will neither construct nor operate another
international airport within 75 kilometers of YVR if it meets
the region’s demand for aviation services.
(3) YVR has an origination and destination (“O&D”)
component of total passenger traffic equal to approximately
70%, which provides it with more stable passenger volumes
than an airport dependent on connecting traffic. The high
O&D traffic is driven by the service area’s economic
makeup, which includes a strong business services sector
and strong tourism industry. The O&D factor also mitigates
some of YVR’s exposure to the state of the airline industry.
If one airline reduces service, another one will increase
service to the originating or ultimate destination of the
passenger. As a result, the Air Canada/Canadian Airlines
merger is expected to have only a short-term (2-3 years)
effect on YVR’s airline revenues.
(4) The completion of the $500 million expansion program
in 1996 provides the VIAA with additional flexibility to
make adjustments to YVR premises as future demand
grows.
The new $250 million International Terminal
Building (ITB), which increased the number of gates at
YVR by 50%, can now be expanded incrementally, thereby
minimizing disruption to passenger flows within the
terminals. Due to strong growth in transborder passenger
traffic, a seven-gate, $114 million expansion to the ITB was
added and was completed in March 2000. The completion
of the North parallel runway in 1996 is expected to meet
traffic volume requirements up to 2015.
(5) The VIAA’s operating results have showed significant
improvement since completion of expansion program in
1996, although the pace of improvement slowed in 1999.
Revenues in 1999 increased only 3.2% due to a decline in
airline revenue from reduced transborder traffic. Passenger
traffic continued to grow, with a sharp rebound in
international passenger growth more than offsetting the
decline in transborder traffic. YVR has benefited from
several factors, including the 1995 Open Skies treaty with
the U.S., the Vancouver region’s strong economic profile,
and a low Canadian dollar, which has helped boost tourism.
Interest coverage, including the Airport Improvement Fee
(AIF), fell to 3.3 times in 1999 from 4.1 times, largely due
to the one-time $13.6 million retroactive adjustment that
lowered the 1998 ground lease expense with the federal
government. The VIAA projects that most future capital
expenditures can be funded by cash flows from operations,
although it is likely that some debt will have to be issued.
Continuing to facilitate the growth of non-airline revenues
is a key strategy of the VIAA, and is a critical factor in
keeping its airline fees competitive.
(6) YVR’s geographic location positions it as a major
gateway for flights traversing the Pacific Ocean.
International passenger traffic growth rebounded strongly in
1999, after slowing significantly in 1998 due to the effects
of the Asian crisis. The substantial Asian market provides
YVR with a geographic diversification of its revenues not
available to most other North American airports. The
Vancouver region’s substantial Asian population is a
significant source of demand for Trans-Pacific flights.
Challenges:
(1) The inherent risks associated with airline industry
include: (a) air travel is highly sensitive to economic
conditions for both business and tourism; (b) energy price
increases can have a substantial impact on airline fares and
adversely affect the traffic volumes; and (c) event risks,
such as labour strikes, terrorism or war also have a
detrimental effect on air travel demand.
(2) The competition for Asia-Pacific business is very
intense, as YVR must directly compete with international
airports in Los Angeles, San Francisco, Seattle and
Portland. YVR has surpassed San Francisco to become the
second largest West Coast airport in terms of international
passenger volume. YVR has managed its fee structure to be
competitive and has also been helped by the weak Canadian
dollar. The VIAA continues to pursue the creation of a
foreign trade zone to improve its competitive position.
(3) The generally weaker credit strength of airlines presents
challenges for the VIAA, as it does for most airports. As
airlines deal with competitive and financial issues, the
VIAA could be affected by financial failures, restructuring
and new alliances. While the exposure from a financial
failure is not very significant (a month of receivables) the
VIAA must cope with the constant change that the airlines
continually undergo. The merger of Air Canada and
Canadian Airlines has already had an impact on the VIAA’s
landing fees and general terminal revenues as a result of the
rationalization of domestic flights. However, this is not
expected to have a long-term effect on the VIAA’s airline
revenues given the high O&D orientation of YVR, the
likelihood of increased service by other airlines to meet the
demand, and Air Canada’s intention to increase transborder
and international services at YVR. The emergence of newworld alliances could provide these blocks of airlines with a
stronger bargaining position with airports and, in turn,
pressure aeronautical fees down.
Vancouver International Airport Authority - Page 3
(4) A substantial portion of the VIAA’s expenses is fixed in
nature. Therefore, cash flows from operations are highly
sensitive to changes in passenger and air traffic volumes.
DEBT ISSUE
• Amount: $300 million senior debentures issued
December 6, 1996, in two equal tranches (10-year and
30-year).
• Interest: Payable semi-annually in arrears in June and
December.
• Rank: Direct, unsecured obligations ranking pari passu
with all other unsubordinated and unsecured
indebtedness.
• Covenants: (1) Negative pledge preventing issuance of
senior ranking debt. (2) Additional indebtedness is
subject to a minimum interest coverage ratio of 1.75x
on a pro forma basis. (3) Maintenance of an interest
OPERATING PERFORMANCE (NON-CONSOLIDATED BASIS)
The financial results for 1999 indicate a slowdown in the
pace of growth, although earnings and cash flow remain
strong. In 1999, net income declined 24% to $49.3 million
with the entire decline due to a $16.8 million increase in the
ground lease charge as it returned to its normal level
following one-time downward adjustments in 1998.
Total revenues were up only 3.2% to $234.8 million in
1999, following a number of high-growth years. The
weaker growth was due to a decline in landing fees and
terminal charges as a result of the reduction in transborder
aircraft movements due to the reduced number of flights
offered by Canadian Airlines, and the complete withdrawal
of service to YVR by Delta Airlines. Airline revenue fell
1.5% as the significant increase in domestic jet movements
was more than offset by declines in transborder and
international jet movements. Total enplaned passenger
volume in 1999 increased 1.9% to 7.9 million, the weakest
growth since 1993 due to the decline in transborder
passenger volumes and weak domestic growth. Air cargo
experienced a sharp rebound in 1999, with volumes up
13.7% due to a recovery in Asian business. The AIF
revenues were up 3.3% in 1999, better than total passenger
volume growth as a result of the larger share of international
9
6
•
passenger volumes, which pay a higher AIF. Non-airline
revenues increased 6.6% largely driven by new concessions
and higher duty free amounts.
As previously mentioned, the ground lease expense to the
federal government increased 39% to $60.3 million due to
one-time downward adjustments in 1998, which artificially
lowered the expense. The 1999 ground lease expense was
in line with expectations.
Operating and maintenance expenses were up 4.7%,
primarily a result of higher wages and salaries as a number
of vacancies were filled in 1999.
Capital spending was $92 million in 1999, with a large
portion dedicated to the international terminal (expansion
and concourse link) and domestic terminal renovation
projects. The capital expenditures were financed through
cash flow from operations and a drawdown in cash assets.
The balance sheet continued to strengthen in 1999, despite
the decline in the VIAA’s cash assets to finance capital
expenditures. Debt per enplaned passenger continued to
decline to $37.96 in 1999, 11.3% lower than its peak level
in 1996. The VIAA has a defined benefit pension plan (for
employees at June 1992, when the VIAA was created)
which was fully funded as at December 31, 1999.
YVR Revenue Sources 1999
(millions)
Total revenue = $235 million
7.4
International
Domestic
7
•
coverage ratio of 1.25x. (4) Limitations on the VIAA’s
creation of encumbrances on assets, maintenance of
guarantees and investments, sale of assets and
acquisitions of corporations.
Redemption: Redeemable at the option of the VIAA at
a price equal to the higher of par or the price of an
equivalent Government of Canada bond plus a
premium (10 bps for 10-year, 15 bps for 30-year).
Guarantees: No government guarantees; the VIAA is
self-supporting.
YVR Enplaned Passenger Volumes
Transborder
8
(5) New airplanes being developed have longer ranges,
which permit more direct flights. This could detrimentally
affect YVR’s connecting passenger growth, which currently
represents 30% of total passenger volume.
7.8
7.9
7.0
Rentals, fees
and other
11%
6.0
5.4
Airport
Improvement Fee
24%
5.1
5
Car parking
8%
4
Landing fees
15%
3
2
Concessions
27%
1
0
1993
1994
1995
1996
1997
1998
1999
Terminal
charges
15%
Vancouver International Airport - Page 4
Airline Revenue Mix 1999
Other
42%
Japan Airlines
2%
United Airlines
3%
Canadian Airlines
26%
Canada 3000
3%
Alaska Airlines
3%
Cathay Pacific
5%
OUTLOOK
Capital Program:
The $114 million seven-gate expansion to the international
terminal was recently completed (April 2000), which has
increased the number of international terminal gates to
23 and the total YVR gates to 50 from 43.
Major capital projects for the rest of 2000 and for 2001
include:
• Renovations to the domestic terminal to increase
capacity and update systems. This includes other
general upgrades to be consistent with the international
terminal. This $50 million project is expected to be
completed by the end of 2001.
• A $10 million project for land improvements related to
the new fixed-span bridge over the Middle Arm of the
Fraser River. The new crossing will be parallel to the
existing Moray Channel swing bridge, and will connect
Bridgeport Road in Richmond to Sea Island.
• The start of construction of the international terminal
building’s West Chevron to further increase capacity.
The timing of this project has not yet been determined
given the Air Canada/Canadian Airlines consolidation.
• Additions of some office space between the domestic
and international terminal buildings, which the VIAA is
looking at, although nothing has been decided at this
time.
The VIAA projects that its capital expenditures over the
next 4-5 years will be about $100 million/year. It is
expected that some debt will be required to finance the
capital expenditures, although certain issues remain to be
resolved before the VIAA can determine its debt
requirements.
Foreign Trade Zone: The VIAA continues to pursue the
establishment of a foreign trade zone, which would
complement activities at YVR and the Port of Vancouver.
This would create a tax free zone for warehousing goods in
Air Canada
16%
transit and allow companies to avoid prepaying duties. This
new feature would greatly enhance the YVR’s
competitiveness and provide incentive for new business
investment.
Investment in Subsidiaries:
YVR Airport Services Ltd. (“YVRAS”) is a subsidiary of
VIAA, which was formed to provide consulting,
management and operation services to other airports based
on YVR operating model. Currently, it operates airports in
Bermuda, Moncton, Hamilton, Santiago (Terminals), Turks
and Caicos, Dominican Republic and several smaller
airports in British Columbia. In 1999, the YVRAS won a
25-year, US$180 million contract to operate Carrasco
International Airport in Montevideo, Uruguay, and oversee
the construction and management of new facilities. More
recently, the YVRAS entered into a 15-year joint venture
agreement with the Government of the Cook Islands for the
management and development of two airports. In addition
to these contracts, the YVRAS has a number of other
contracts to provide management, technical and advisory
services. In 1998, the VIAA board approved a process to
invest up to a total of $10 million in airport opportunities.
Just over $6 million was invested in the Chilean airport
consortium in 1999.
The subsidiaries represent no financial exposure to the
VIAA outside of direct funding, which has been minimal to
date.
Ground Lease with Federal Government: The VIAA
recognizes that the ground lease represents an increasingly
large expense. It is currently in the process of addressing
this issue.
Vancouver International Airport Authority - Page 5
LOCAL ECONOMY
YVR serves the Greater Vancouver region, which is the
commercial and administrative hub of the Province of
British Columbia.
Its heavily service-based economy
provides a relatively stable economic base, which partially
mitigates cyclical swings in the Province’s significant
exposure to natural resources. Despite the region’s strong
and diversified economic base, economic growth remained
weaker than that of other major Canadian metropolitan
areas in 1999 as it continued to recover from the effects of
the Asian crisis in 1998. The region is home to the Port of
Vancouver, the largest port in Canada. The region and
Province are unusual in Canada, as a significant portion of
their economies is dependent on tourism and trade with the
Pacific Rim.
Throughout the 1990s, the region saw its population grow at
a rapid pace due to high levels of immigration, particularly
from Asia. While the region continued to experience
population growth in 1998 and 1999, the pace has slowed
dramatically. The slowdown in 1998 was due to a net interprovincial outflow after registering positive inflows for a
number of years. It is estimated that another interprovincial outflow in 1999 as a result of the sluggish
economic growth relative to the other major metropolitan
centres in Canada accounted for the weak growth.
Despite the weaker than average economic growth in 1999,
tourism was very strong in 1999 due to the robust U.S. and
domestic economies, stronger Asian (excluding Japan)
economic growth and the continued weak Canadian dollar.
The area has a strong tourism industry due to its location,
and also has significant convention facilities and a rapidly
growing cruise ship sector. The total number of visitors
increased 5.4% in 1999 compared to only 1.3% growth in
1998. Other economic indicators such as retail sales
growth, housing starts and non-residential building permits
continued to lag the national average.
The region’s labour market improved in 1999, with
employment increasing 2.7% and the unemployment rate
falling to an average annual rate of 7.6% from 8.1% the
previous year. The unemployment rate remained below the
provincial average of 8.3%, but was the same as the national
average in 1999. So far in 2000, the region’s economy has
remained stronger than the provincial economy, although
both have made substantial improvements over 1999. The
region’s economy is expected to continue to improve as the
Asian economies continue to improve and the North
American economy remains healthy. A number of nonresidential capital projects, including the first phase of the
upgrading of the Lion's Gate Bridge and continued work on
the Light Rapid Transit Line (Sky Train), will also provide
support to the region’s economic growth.
Vancouver International Airport - Page 6
Vancouver International Airport Authority
Statement of Earnings (Non-Consolidated)
($ millions)
Revenue
Landing fees
Terminal charges
Concessions
Car parking
Rentals, fees and other
Airport Improvement Fee
Total revenue
Year ended December 31
1999
1998
35.1
36.3
61.2
19.8
26.8
55.6
234.8
1997
1996
1995
35.3
37.2
56.9
19.1
25.1
53.8
227.4
34.6
36.3
52.5
16.1
17.5
51.7
208.7
33.2
27.9
49.0
13.8
13.6
49.6
187.1
28.5
18.5
33.2
12.3
10.7
42.2
145.4
1994
24.4
15.7
28.3
11.7
10.9
37.4
128.4
1993
22.3
14.7
25.2
9.8
10.2
24.8
107.0
Expenses
Operating and maintenance
Grant in lieu of taxes, insurance & other
Depreciation & amortization
Total expenses
Operating profit
Ground lease paid to Federal Government
Earnings before interest costs
Interest and service charges
Net income
65.6
13.7
24.7
104.0
130.8
60.3
70.5
21.2
49.3
62.7
12.6
22.6
97.9
129.5
43.5
86.0
21.2
64.8
52.6
14.1
20.5
87.2
121.5
56.4
65.1
21.2
43.9
49.2
8.6
10.5
68.3
118.8
51.6
67.2
26.2
41.0
35.5
6.5
2.6
44.6
100.8
41.8
59.0
0.3
58.6
32.2
6.2
1.9
40.3
88.1
34.9
53.2
(0.3)
53.4
Operating expenses/revenue (excluding AIF)
Net income/revenue (excluding AIF)
Airport Improvement Fee/total revenue
Ground lease/total revenue
58.0%
27.5%
23.7%
25.7%
56.4%
37.3%
23.7%
19.1%
55.5%
28.0%
24.8%
27.0%
49.7%
29.8%
26.5%
27.6%
43.2%
56.8%
29.0%
28.8%
44.3%
58.7%
29.1%
27.2%
45.1%
43.9%
23.2%
31.6%
14.9
21.2
32.2
21.2
13.4
21.2
17.6
9.5
35.7
16.8
10.5
10.9
15.8
4.6
4.3
11.4
4.6
4.7
0.7
3.3
1.5
4.1
0.6
3.1
0.5
1.9
1.5
5.4
3.6
12.3
2.4
7.8
11.5%
16.0%
12.7%
4.2%
27.7%
6.9%
9.3%
28.7%
30.0%
35.9%
17.5%
53.1%
38.6%
23.4%
13.2%
17.2%
10.4%
12.8%
10.7%
10.2%
19.7%
20.0%
8.4%
12.6%
50.8%
8.8%
5.2%
3.3%
30.5%
(5.1%)
110.2%
n/m
2.3%
1.3%
9.0%
1997
43.9
20.5
64.4
(6.5)
70.9
50.6
20.3
1996
41.0
10.5
51.5
(16.5)
68.0
115.1
(47.1)
1995
58.6
2.6
61.2
4.3
57.0
210.4
(153.5)
1994
53.4
1.9
55.3
1.9
53.4
98.5
(45.1)
1993
36.0
1.4
37.4
1.9
35.5
58.2
(22.7)
9.57
25%
9.69
(16%)
9.49
11%
9.86
48%
6.95
151%
Interest Costs ($ millions)
Earnings before interest (excluding AIF)
Interest capitalized
Total interest incurred
Interest coverage* (excluding AIF)
Interest coverage* (including AIF)
30.6
5.0
1.4
37.0
70.0
33.8
36.2
0.1
36.0
* depreciation included in calculation
Annual Growth
Total revenue
Airline revenue
Non-airline revenue
Airport Improvement Fee
Total expenses
Operating and maintenance expenses
Ground lease paid to Federal Government
Cash Flow ($ millions)
Net income
Depreciation & amortization
Cash flow from operations
Change in working capital
Operating cash after working capital
Capital expenditure
Free cash flow
Operating cash per enplaned passenger ($)
Cash flow from operations growth
3.2%
(1.5%)
6.6%
3.3%
6.2%
4.7%
38.5%
9.0%
2.3%
17.4%
4.1%
12.3%
19.2%
(22.9%)
Year ended December 31
1999
1998
49.3
64.8
24.7
22.6
74.0
87.4
(0.4)
(0.5)
74.4
87.9
92.7
73.1
(18.3)
14.8
9.41
(15%)
11.34
36%
Vancouver International Airport Authority - Page 7
Vancouver International Airport Authority
Balance Sheet
($ millions)
Year ended December 31
1999
1998
1997
1996
1995
1994
1993
2.1
12.2
0.7
7.3
13.2
0.5
7.8
8.3
1.6
375.4
390.4
167.6
188.6
71.2
88.9
26.3
0.1
300.1
194.7
521.3
7.8
0.2
228.7
153.7
390.4
12.9
0.2
80.4
95.2
188.6
11.0
0.1
36.1
41.7
88.9
0.0%
55.7%
44.3%
100.0%
0.0%
60.6%
39.3%
100.0%
0.1%
59.8%
40.2%
100.0%
0.1%
45.7%
54.2%
100.0%
0.2%
46.3%
53.5%
100.0%
40.51
42.79
38.13
14.88
7.08
Assets
Cash & s-t investments
Amounts receivable
Prepaid expenses & inventory
Deferred financing costs
Investment in subsidiaries
Capital assets
Total assets
34.3
14.5
1.6
2.7
6.3
628.5
687.9
58.8
11.9
2.0
3.0
560.2
636.0
43.5
16.2
1.0
3.2
510.1
574.0
23.1
13.9
1.0
3.5
479.9
521.3
Liabilities
Accounts payable & accrued liabilities
Short-term debt
Long-term debt
Equity
Total
35.1
300.0
352.8
687.9
32.5
300.0
303.5
636.0
35.2
0.1
300.0
238.7
574.0
0.0%
46.0%
54.0%
100.0%
0.0%
49.7%
50.3%
100.0%
37.96
38.69
Capital Structure
Short-term debt
Long-term debt
Equity
Total
Debt per enplaned passenger ($)
Aircraft Movement Statistics
Volume (000s)
Jet movements
-domestic
-international
-transborder
-total
Other movements
Total runway movements
Jet movements as % of total
Annual Growth
Jet movements - domestic
Jet movements - international
Jet movements - transborder
Jet movements - total
Other movements
Total runway movements
Per Aircraft Movement ($)
Revenue (excluding AIF)
Landing Fees
Operating expenses (1)
Net income (2)
100.3
12.2
38.8
151.3
172.3
323.6
91.2
12.5
47.3
151.0
173.9
324.9
87.1
12.0
42.5
141.6
157.7
299.3
85.4
10.6
38.9
134.9
154.3
289.2
74.0
9.0
29.7
112.7
155.5
268.2
68.8
8.3
24.5
101.6
154.5
256.1
65.5
7.4
23.8
96.7
147.5
244.2
47%
46%
47%
47%
42%
40%
40%
10.0%
(2.4%)
(18.0%)
0.2%
(0.9%)
(0.4%)
4.7%
4.2%
11.3%
6.6%
10.3%
8.6%
1.9%
12.8%
9.4%
4.9%
2.2%
3.5%
15.4%
18.3%
30.8%
19.7%
(0.8%)
7.8%
7.6%
8.2%
21.3%
10.9%
0.7%
4.7%
5.0%
12.9%
3.0%
5.1%
4.7%
4.9%
(7.3%)
0.1%
(2.2%)
(5.6%)
(1.5%)
(3.1%)
553.7
108.5
202.8
152.4
534.3
108.6
193.0
199.4
524.6
115.6
175.7
146.7
475.4
114.8
170.1
141.8
384.8
106.3
132.4
218.5
355.4
95.3
125.7
208.6
336.7
91.3
125.3
147.6
1,999
1.6%
960
2.1%
1,968
2.9%
941
0.9%
1,912
3.3%
933
2.5%
1,851
3.2%
910
1.2%
1,793
3.2%
900
3.9%
1,737
2.7%
866
0.6%
(1) Operating expenses exclude grants in lieu of taxes and depreciation.
(2) Includes the AIF
Economic Statistics (Vancouver CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
2,017
0.9%
986
2.7%
Vancouver International Airport - Page 8
Vancouver International Airport Authority
Year ended December 31
1999
1998
1997
1996
1995
1994
1993
Passenger Statistics
Total enplaned passengers (millions)
7.9
7.8
7.4
7.0
6.0
5.4
5.1
Travel Mix
Domestic
International
Transborder
53%
21%
26%
53%
20%
27%
54%
21%
25%
55%
21%
25%
54%
22%
24%
55%
22%
23%
56%
20%
24%
Connecting/Non Connecting Mix
O&D passengers
Connecting passengers
72%
28%
70%
30%
71%
29%
68%
32%
72%
28%
71%
29%
71%
29%
Air cargo (thousands of tonnes)
290
255
261
249
213
182
153
Growth
Domestic
International
Transborder
Total passengers
1.2%
6.4%
(0.1%)
1.9%
3.0%
1.9%
10.4%
4.7%
4.0%
6.4%
8.3%
5.6%
17.9%
12.9%
18.1%
16.9%
8.7%
10.9%
15.9%
10.9%
5.0%
11.8%
3.2%
5.9%
(6.3%)
0.4%
6.1%
(2.2%)
Air Cargo
13.7%
(2.1%)
4.7%
17.0%
17.0%
19.3%
5.6%
43
184
845
43
180
865
43
172
844
41
171
680
28
214
661
28
193
561
27
189
544
Gates
Number
Enplaned passengers per gate (000s)
Terminal fees per gate ($000s)
Per Passenger ($)
Airline revenue
Concessions
Parking
Rentals and other
AIF
Total revenue
9.04
7.74
2.51
3.39
7.03
29.70
9.35
7.34
2.46
3.24
6.94
29.33
9.57
7.09
2.17
2.36
6.98
28.17
8.71
6.98
1.97
1.94
7.07
26.66
7.83
5.53
2.05
1.78
7.03
24.22
7.40
5.23
2.16
2.01
6.91
23.71
7.24
4.93
1.92
2.00
4.85
20.93
Operating and maintenance
Grant in lieu of taxes, insurance & other
Depreciation & amortization
Ground lease paid to Federal Government
Interest and Other
Total Cost
8.30
1.73
3.12
7.63
2.68
23.46
8.09
1.62
2.91
5.61
2.73
20.97
7.10
1.90
2.77
7.61
2.86
22.24
7.01
1.23
1.50
7.35
3.73
20.81
5.91
1.08
0.43
6.97
0.06
14.45
5.95
1.14
0.35
6.45
(0.05)
13.85
5.99
0.98
0.27
6.61
0.02
13.88
6.24
8.36
5.93
5.84
9.76
9.86
7.05
8.92
(0.79)
11.09
1.42
8.79
(1.05)
9.57
(1.22)
9.82
2.73
9.81
2.96
7.07
2.20
Net income
- excluding interest
- excluding AIF
Bond, Long Term Debt and Preferred Share Ratings
Greater Toronto Airports Authority
Current Report:
Previous Report:
July 6, 2000
July 9, 1999
RATING
Geneviève Lavallée, CFA / Greg Nelson
Rating
Trend
Rating Action
Debt Rated
(416) 593-5577 x277/224
A (high)
Stable
Confirmed
Revenue Bonds, All Series
e-mail: [email protected]
A (high)
Stable
New Rating
Medium-term Notes
RATING HISTORY
Current
1999
1998
1997
1996
1995
1994
1993
Revenue Bonds, All Series
A (high)
A (high)
A (high)
A (high)
NR
NR
NR
NR
Medium-term Notes
A (high)
NR
NR
NR
NR
NR
NR
NR
RATING UPDATE
The rating on the Greater Toronto Airports Authority’s
rates and charges for use of the airport based on a cost
(“GTAA”) revenue bonds is confirmed at A (high), with a
recovery system such that the minimum coverage of
Stable trend.
The GTAA’s new Medium-term Notes
operating costs and debt service as required in the Master
program, which ranks pari passu with all other indebtedness
Trust Indenture will be met; and (2) the favourable
issued under the Master Trust Indenture, has been assigned
economic outlook. However, the GTAA must continue to
the same rating. These ratings are supported by the strength
contend with the challenge of rising debt levels and the
and diversity of the economic region served by the Lester B.
impact on its landing fees. The implementation of an
Pearson International Airport (“Airport”), as well as the
Airport Improvement Fee and continued focus on increasing
strategic location of the Airport and the high origination and
its non-airline revenues are options available to the GTAA,
destination passenger mix. These attributes provide the
which would enhance its financial position.
GTAA with significant scope in dealing with the challenges
The GTAA, like other airport authorities, must contend with
and risks associated with the reconstruction and renewal of
the competitive aspects and risks associated with the air
the Airport.
travel industry. Airport facilities have high fixed operating
The GTAA’s 1999 financial results indicate that its
costs, while aircraft and passenger volumes are susceptible
operations continued to produce healthy cash flows,
to economic trends. These characteristics can cause
although its indebtedness increased sharply as it began the
volatility in the GTAA’s earnings. Furthermore, the GTAA
major construction phase of its 10-year, $4.4 billion Airport
faces project risks associated with its development plan, as
Development Program. The earnings and debt service
well as having lawsuits outstanding with its largest client,
coverage outlook for the medium-term remains favourable
Air Canada, which represent some degree of event risk.
given: (1) that the GTAA has the legislated ability to set
RATING CONSIDERATIONS
Strengths:
Challenges:
• Strong and diverse economy of service area
• Airport Development Program project risks
• High origination & destination passenger mix
• Air Canada litigation
• Virtual monopoly position of the GTAA
• High reliance on airport charges
• Flexibility to set revenue structure to offset costs
• Substantial fixed operating costs
• A flexible development plan, which can be staged as future • Air travel industry inherent risks
demand warrants
• Above-average credit risk associated with airlines
FINANCIAL INFORMATION
Net interest coverage (times)
Cash flow/total debt
Debt per enplaned passenger ($)
Revenue per enplaned passenger ($)
Total cost per enplaned passenger ($)
Surplus per enplaned passenger ($)
Passenger volume growth
Air cargo growth
Gates
Year ended December 31
1999
1998
1.6x
1.5x
4.2%
4.0%
107.99
84.02
30.02
27.84
27.21
25.56
2.80
2.28
3.9%
2.5%
0.3%
(2.6%)
84
79
1997
1.9x
2.8%
77.77
21.04
19.56
1.48
7.6%
9.4%
79
1996
n/m
n/m
10.25
n/m
n/m
n/m
8.1%
5.1%
79
1995
n/m
n/m
n/m
n/m
n/m
n/m
7.2%
4.9%
n/a
1994
n/m
n/m
n/m
n/m
n/m
n/m
2.3%
(2.2%)
n/a
Note: The GTAA commenced operations December 2, 1996, no meaningful financial results exist prior to 1997.
Financial results include Terminal 3 operations only from date of acquisition in May 1997.
THE COMPANY The Greater Toronto Airports Authority is a federally incorporated, not-for-profit Canadian Airport Authority
and was created in 1993. The GTAA operates the Lester B. Pearson International Airport, Canada’s busiest airport, pursuant to a
60-year ground lease (extendable for an additional 20-year period) with the Government of Canada signed on December 2, 1996.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Greater Toronto Airports Authority - Page 2
RATING CONSIDERATIONS
Strengths:
(1) The Greater Toronto Area (“GTA”), the Airport’s
service area, is the most densely populated area of Canada
and accounts for 15% of the country’s population. The
GTA represents the largest concentration of economic
activity in Canada and is home to the headquarters of about
50% of the country’s leading industrial companies. The
economic outlook for the GTA and the Province remains
favourable.
(2) The Airport’s origination and destination passenger
traffic comprises about 70% of total traffic volume and
provides a more stable activity base than an airport
dependent on connecting traffic. The GTA’s presence as a
major North American market also significantly mitigates
the likelihood of sustained service reductions due to an
individual airline experiencing financial difficulties. The
Airport is currently serviced by 62 airlines, and this number
is expected to increase based on new requests for space.
(3) The Airport has a virtual monopoly over air travel in the
GTA and is supported by provisions of the 60-year ground
lease with the Government of Canada, which does not allow
an international airport to be constructed and operated
within 75 kilometers of the Airport.
(4) The GTAA has the legislated ability, as a Canadian
Airport Authority, to set rates and charges for the use of the
Airport’s facilities required to operate a commercially
viable operation and to meet its 1.25 times debt service
covenant. The GTAA’s rates and charges methodology
adopts a cost recovery approach that requires airlines to pay
landing fees, general terminal charges and terminal rental
fees for exclusive use areas. An Airport Improvement Fee
(if approved by the Board of Directors), would help fund the
Airport Development Program and, consequently, improve
the GTAA’s liquidity. The GTAA also manages revenue
sources from concessions, property rentals, parking, and
ground transportation operators.
(5) The Airport Development Plan allows for the timing of
its components so they can be implemented based on future
demand levels and the maintenance of acceptable service
levels. The Airport premises have sufficient space to allow
development without disrupting traffic in the facilities that
remain in operation.
Challenges:
(1) The Airport Development Program represents a
substantial renewal of operations and potential project risks.
Project cost overruns must be controlled to ensure the
investment is financially viable. The 10-year development
program is currently estimated at $4.4 billion. The capital
plan was increased by $1 billion from the original 1997
plans due to changes to the terminal design, which included
new airline requirements, increasing the terminal capacity to
2015, enhancements to roadways and refinement of
projected costs.
Service disruptions to airlines and
passengers could adversely affect traffic volumes. The
Airport’s existing facility provides annual capacity for about
28 million passengers, a level expected to be reached this
year.
Therefore, the timing and progress of the
development program is a key factor.
(2) The litigation outstanding between the GTAA and Air
Canada, its largest airline, represents a certain degree of
event risk to the GTAA’s credit profile. However, the
interdependence of the two parties and the flexibility of the
capital plan should allow for a resolution of the issues
involved. The GTAA’s ultimate ability to manage its
relationships with the airlines is an important underlying
factor in the credit rating.
(3) The GTAA’s reliance on airport charges (landing fees
and terminal charges) at 62% of revenues is higher than
other comparable Canadian airport authorities (at about 30%
of revenues), although it should be noted that the GTAA
does not yet have an Airport Improvement Fee (AIF). The
GTAA’s airport charges are projected to continue to
increase in the medium term, although the reliance on this
source of revenue should decline with the implementation
of an AIF. Continued focus on increasing non-aeronautical
revenues would also help offset some of the pressure on
airport charges. The completion of the new terminal
building should provide significant scope to increase nonaeronautical revenues.
(4) A substantial portion of the GTAA’s expenses is fixed in
nature. Therefore, cash flows from operations are highly
sensitive to changes in passenger and air traffic volumes.
The conservative traffic assumptions in the setting of rates
should mitigate this forecasting risk. The trust indenture
requires the establishment of various reserves, including an
operating and maintenance reserve fund, to offset
forecasting inaccuracies, and this provides further
protection.
(5) Inherent risks associated with the airline industry can
significantly affect traffic volumes and may cause the rates
and charges for a particular year to be set too low. Airline
travel is sensitive to: (a) economic conditions for business
and leisure travel; (b) energy price increases, which can
substantially impact air fares; and (c) event risks such as
labour strikes, terrorism or war.
(6) Airlines generally represent above-average credit risk
and potential challenges for airport authorities. As airlines
deal with competitive and financial issues, the GTAA could
be affected by financial failures, restructuring and new
alliances. While exposure from a financial failure is not
significant (a month of receivables), the GTAA mu st cope
with the constant changes in the airline industry. To date,
the merger of Air Canada and Canadian Airlines has had
little impact on the GTAA’s revenues, largely because of
the strategic location of the Airport. The growth in aircraft
movements slowed significantly in 1999, although total
passenger volumes continued to increase at a healthy pace.
Rationalization of flights may have some negative shortterm effects on the GTAA’s revenues. However, the merger
is not expected to have a long-term effect given the high
O&D orientation of the Airport and its strategic location.
Greater Toronto Airports Authority - Page 3
TRUST INDENTURE
The Indenture authorizes the issuance of different series of
bonds, debentures and other forms of indebtedness and
provides for:
• Rank: Direct, secured obligations ranking pari passu
with all other forms of indebtedness issued under the
indenture.
• Security: (a) Assignment of net revenues (after ground
lease, taxes and O&M expenses) including proceeds of
any business interruption insurance; (b) Specific charge
on various separate accounts and funds created for the
financing structure; and (c) An unregistered first
leasehold mortgage on the GTAA’s rights under the
ground lease on the Airport properties.
• Covenants: Net revenues, including any transfers from
the General Fund, equalling 1.25 times the annual debt
service in each fiscal year. If the coverage covenant is
not met, the GTAA has one fiscal year to get the
coverage back on side. Failure to meet the one-year
cure period is an event of default.
• New Issuance Test: Debt service coverage must be
projected to be equal to 1.25 times for the next five
years. Certification from an airport consultant must
attest to the reasonableness and prudence of the
projections. There is no limit on the amount of debt
that may be issued.
•
•
Flow of Funds: All revenues, deposited in a Revenue
Account, and any transfers from the General Fund are
applied in the following order:
(a) Ground lease payments.
(b) Real property taxes and payments in lieu of real
property taxes.
(c) Operating and maintenance expenses.
(d) Debt Service Fund (trustee account) funded
monthly equal to 1/6 of semi-annual interest and
1/12 of annual principal requirements.
(e) Debt Service Reserve Fund (trustee account) as
required by Series Supplements.
(f) Construction Fund established by bond proceeds
and used only to finance a specific project.
(g) Operating and Maintenance Reserve Fund each to
1/6 of the annual budgeted expenses.
(h) Renewal and Replacement Fund as required by
Series Supplements.
(i) General Fund holds any portion of net revenues
and any bond proceeds, which the GTAA elects to
transfer into the fund. The funds may be used for
general corporate purposes and may be transferred
into other Funds at the end of the fiscal year.
Guarantees: The GTAA is self-supporting and its debt
is not supported by guarantees from any level of
government.
Issuance Activity:
YEAR
1997
1999
SERIES
1
2
3
1
AMOUNT (millions)
$200
$375
$375
$500
MATURITY
2002
2007
2027
2029
2000
1
$250
2030
2
$325
2010
Total
OTHER FEATURES
None
Redeemable at greater of face or equivalent Canada +12 bps
Redeemable at greater of face or equivalent Canada +14 bps
Fully amortizing, redeemable at greater of face or equivalent
Canada +22 bps
Domestic medium-term notes; redeemable at greater of face
or equivalent Canada +33 bps
Domestic medium-term notes; redeemable at greater of face
or equivalent Canada +21 bps
$2,025
OPERATING PERFORMANCE
Passenger volumes at the Airport continued to increase at a
healthy pace in 1999 to a record 13.9 million enplaned
passengers, although the rate of growth continued to lag the
growth in the economy. The GTAA recorded a net surplus
of $39.0 million compared to $30.5 million in 1998, partly
due to continued gains in passenger volumes. Cash flow
from operations, however, declined in 1999 to
$59.7 million, entirely due to a sharp drop in the change in
working capital. For the purpose of debt service coverage,
cash flow remained sufficient (at 1.6 times) to maintain the
GTAA’s debt service coverage above its required level of
1.25 times.
Airline revenues increased 16.5% in 1999 as higher landing
fees more than offset the decline in general terminal
charges. The GTAA increased its landing fees to cover the
increase in debt servicing costs. General terminal charges
declined 5% ($5.2 million) despite the GTAA’s higher
overall operating costs. The cost of goods and services
related to the operation of the terminals declined due to a
change in the allocation of the cost of goods and services
among the various revenue-generating operations. Nonaeronautical revenues were up 5.5% in 1999, in excess of
the growth in passenger volumes. Despite the 4.5% growth
in concession revenues, this source of revenue remains low
and has substantial room to grow.
Total enplaned passengers increased 3.9% in 1999, led by a
5.0% increase in transborder passenger traffic. Although
the growth in passenger traffic is above that registered in
1998, it remains below the rate of growth of the provincial
and North American economies. Domestic passenger
Greater Toronto Airports Authority - Page 4
growth increased to 3.6% from 2.7% in 1998, while
international passenger growth made modest gains at 3.0%
compared to 2.0% the previous year. Air cargo volumes
increased a marginal 0.2% after declining 2.6% in 1998.
Capital expenditures of $372 million were incurred in 1999,
with the majority of the expenditures related to the Airport
Development Program.
Project completions in 1999
include the second stage of the fifth runway, the central deicing facility and the new south fire hall. Overall, the
construction projects are progressing on schedule and within
budget.
Enplaned Passenger Volumes
Domestic
10.2
10.5
Revenue Sources 1999
13.9
Total revenue = $417 million
13.0
International
12
13.4
(millions)
Transborder
14
BANK FACILITY: The GTAA maintains a credit facility with a
consortium of Canadian and international banks which
provides a 364-day $150 million revolving operating facility
and a revolving extendible $400 million term facility that is
due December 2, 2000. The term facility may be extended
for an additional 2-year period if the GTAA is not in default
under the credit facility and has a credit rating of BBB or
higher. The credit facility does not contain material
restrictions on the GTAA beyond the bond trust indenture.
12.1
11.2
Landing fees
39%
10
Rentals, fees
and other
7%
8
6
Car parking
18%
4
2
Terminal
charges
24%
Concessions
12%
0
1993
1994
1995
1996
1997
1998
1999
OUTLOOK
AIRPORT DEVELOPMENT PROGRAM: The objective of the
GTAA’s 10-year, $4.4 billion project is to ensure sufficient
airside, terminal and groundside capacity at acceptable
levels of service, and to enhance the Airport’s competitive
position in the North American air travel system. A key
aspect of the development program is GTAA’s ability to
phase construction to ensure the Airport has adequate
capacity to meet demand. The program comprises four
components:
• Airside Development Project: The $321 million project
will increase airfield capacity and improve operational
efficiency. It includes the construction of two new
runways by 2002 (and their associated taxiway
systems), and a third runway expected after the 2010
forecast horizon depending on demand. One northsouth runway has already been built and has been
operational since November 1997. The construction of
the second runway (an east-west parallel runway)
began in 1999 and is expected to be completed in 2001.
The project also includes a central, six-pad, aircraft deicing facility, which has been completed and was fully
operational in late 1999.
• Terminal Development Project: The $3.3 billion project
will replace Terminals 1 and 2, which are experiencing
capacity problems, with a single 56-gate terminal
building and includes a reconfigured roadway system, a
10,000 space central parking garage and connections to
Terminal 3. The new terminal will be constructed on
the site where Terminals 1 and 2 are located. In 1998,
significant refinements to the design and costing were
made which included modifications to highway access,
•
•
increased terminal capacity, airline requirements and
other changes, which increased the project cost by
approximately $1 billion. The construction approach
develops the terminal in stages and should minimize
traffic disruptions by utilizing green field space, and
provides for contingency plans if more gates are
needed. The new terminal’s central processor and
gates, to replace Terminal 1’s capacity, is planned for
completion by 2003. The old Terminal 1 will then be
demolished and construction will migrate toward
Terminal 2. Terminal 2 may remain in partial or
modified operation to provide needed capacity during
construction. In 2006, all major piers of the terminal
are expected to be operational with potential for future
expansion if demand warrants. Although the terminal
project is running slightly behind schedule, it is
projected that the enclosure of the new terminal will be
completed by the end of 2000.
Infield Development Project: The $374 million project
is designed to meet demand for ancillary aviation
facilities such as air cargo, hangars and kitchens. A
new cargo facility is currently being constructed (2001
completion) on an infield site between the north-south
runways and will have a tunnel road access.
Other Development Projects: The $339 million in
projects address all other support service and utility
requirements.
This includes sewer systems, an
expanded electrical network, telecommunications
infrastructure and other maintenance support facilities.
The central utility plant is designed for potential cogeneration capability.
Greater Toronto Airports Authority - Page 5
OPERATING, MAINTENANCE AND RESTORATION CAPITAL
PLAN: The GTAA has developed a $284 million operating,
maintenance and restoration capital plan for 1999-2003 to
maintain, improve and repair airside, terminal and
groundside facilities.
The capital plan includes
improvements and repairs to Terminals 1 and 2 to sustain
and enhance these facilities during the Airport Development
Program.
•
LITIGATION: Three legal proceedings are currently
outstanding:
• The GTAA is seeking a declaration with the Ontario
Superior Court to obtain a legal clarification of the
enforceability of Air Canada’s claim that it is entitled to
a 40-year lease of Terminal 2. Air Canada refers to a
1989 document setting out “Guiding Principles” with
Transport Canada, as the basis for its claim.
• Air Canada filed a statement of claim for over
$200 million citing the purported lease of Terminal 2
(to stop the GTAA application on the Guiding
Principles) and a range of other unrelated issues. It also
includes the assertion that the GTAA has used
intimidation and has no authority to impose fees and
charges on the users of the airport. A recent court
decision dismissed Air Canada’s motion to stay the
GTAA application for clarification of the status of Air
Canada’s occupancy of Terminal 2, affirmed the
GTAA’s rights to set rates and charges and also
dismissed the claims of intimidation.
FINANCIAL FORECAST :
The current GTAA forecast is based on projections of 3.4%
passenger growth to 2010. This forecast appears reasonable
and equals the passenger growth experienced during the
1987 to 1999 time period. Major changes since the original
1997 forecast include the $1 billion increase in the Airport
Development Program and the anticipated implementation
of a $10 Airport Improvement Fee (AIF) fee in 2001. The
AIF generally offsets the increased project costs and is
expected to stabilize airline fees per passenger in the $30 to
$35 range and keep rates well below the $42 peak in the
1997 forecast.
LOCAL ECONOMY
The Lester B. Pearson International Airport serves the
Greater Toronto Area (“GTA”), which has a population of
4.7 million people, represents the largest concentration of
economic activity in Canada and is home to the
headquarters of about 50% of the country’s leading
industrial companies. The GTA is the financial centre of
Canada and has the third highest concentration of financial
services employment in North America. It has a welldiversified service and industrial sectors, and is in close
proximity to large markets in the central and northeastern
United States. The GTA also has a substantial tourism
industry, supported by its geographic location, many
attractions, extensive convention facilities and its welldeveloped transportation infrastructure (airport, highways
and rail). Given its attributes, the GTA economy provides
strong underlying support for the GTAA’s substantial O&D
traffic volumes.
In 1999, the Regional Municipality of Peel and the City
of Mississauga filed an appeal in respect of the court’s
judgement of the applicability of provincial and
municipal by-laws to construction at the Airport and
$47 million in development charges arising from the
Airport Development Project. The appeal was heard in
the fall of 1999. The Decision of the Court of Appeal
has not yet been rendered.
W IDER MANDATE: The GTAA’s mandate potentially
includes responsibility for the Toronto City Centre Airport,
a local regional airport, and the Pickering lands, a possible
future location for an airport.
The GTA economy has performed very well since 1997,
and has been a major contributor to the Province’s
above-4% annual economic growth during that time. The
labour market has made significant improvements since
1997, with the unemployment rate declining one percentage
point per year and employment growing between 2.5% and
4.0% per year. The unemployment rate has continued to
decline in 2000, and registered 5.5% in April (3-month
moving average, not seasonally adjusted). The housing
market and consumer spending registered strong
performances in 1999, and have remained robust during the
first quarter of 2000. The outlook for the GTA remains
positive, with the Conference Board of Canada expecting
Toronto’s rate of economic expansion to be the fastest in the
country between 2000 and 2004.
Greater Toronto Airports Authority - Page 6
Greater Toronto Airports Authority
Year ended December 31
1999
1998
1997*
1996**
Consolidated Statement of Operations ($ millions)
Revenue
Landing fees
Terminal charges
Concessions
Car parking
Rentals, fees and other
Total revenue
159.7
99.6
51.0
76.4
30.4
417.2
117.7
104.8
48.8
72.8
28.1
372.2
73.8
80.3
41.1
56.9
22.4
274.5
4.5
2.4
2.2
2.7
1.7
13.5
Expenses
Operating and maintenance
Grant in lieu of taxes, insurance & other
Depreciation & amortization
Total expenses
Operating profit
Ground lease paid to Federal Government
Earnings before interest costs
Interest and financing charges
Net surplus
147.6
27.5
23.7
198.8
218.4
117.9
100.5
61.5
39.0
129.7
25.4
14.7
169.8
202.4
115.9
86.5
56.0
30.5
92.4
16.0
9.4
117.8
156.7
107.1
49.6
30.3
19.3
5.7
1.0
0.3
7.0
6.5
3.0
3.5
3.5
Operating expenses/Revenue
Surplus/Revenue
Ground Lease/Total Revenue
47.6%
9.3%
28.3%
45.6%
8.2%
31.1%
42.9%
7.0%
39.0%
51.9%
25.9%
22.2%
Debt Service ($ millions)
Surplus before interest and depreciation
Debt Service (1)
124.2
79.6
101.2
69.5
59.0
30.3
3.8
-
1.6
1.5
1.9
n/a
Debt service coverage
Cash Flow ($ millions)
Net surplus
Depreciation & amortization
Cash flow from operations
Change in working capital & other
Operating cash after working capital
Capital expenditure
Free cash flow
Operating cash per enplaned passenger ($)
39.0
23.7
62.7
(2.9)
59.7
367.3
(307.5)
30.5
14.7
45.2
51.7
97.0
130.8
(33.8)
19.3
9.4
28.7
40.1
68.8
905.0
(836.2)
3.5
0.3
3.8
0.2
4.0
118.0
(114.0)
4.30
7.26
5.27
n/m
Balance Sheet ($ millions)
Assets
Cash
Amounts receivable
Prepaid expenses & inventory
Reserve funds
Deferred charges
Capital assets
Total assets
53.9
4.9
159.5
33.5
1,481.0
1,732.8
7.1
38.9
3.8
102.7
30.2
1,131.5
1,314.2
0.5
25.5
3.9
97.0
32.9
1,014.5
1,174.3
14.2
3.3
-
Liabilities
Accounts payable and other
Deferred rent credits
Short-term debt
Long-term debt
Accumulated surplus (deficit)
Total
150.4
22.4
1,478.4
81.6
1,732.8
137.2
10.9
5.2
1,118.2
42.7
1,314.2
71.3
76.2
5.2
1,009.5
12.1
1,174.3
10.1
114.2
(7.2)
135.4
Capital Structure
Short-term debt
Long-term debt
Surplus (deficit)
Total
1.4%
93.4%
5.2%
100.0%
0.4%
95.9%
3.7%
100.0%
0.5%
98.3%
1.2%
100.0%
8.6%
97.5%
-6.1%
100.0%
Debt per enplaned passenger ($)
107.99
84.02
77.77
10.25
*Financial results include Terminal 3 operations only from date of acquisition in May 1997.
**GTAA started operating Pearson International Airport December 2, 1996.
(1) Includes annual allocation to the Notional Principal Fund.
117.9
135.4
18.3
Greater Toronto Airports Authority - Page 7
Greater Toronto Airports Authority
Year ended December 31
1999
1998
1997*
1996
1995
1994
Passenger Statistics
Total enplaned passengers (millions)
13.9
13.4
13.0
12.1
11.2
10.5
Travel Mix
Domestic
International
Transborder
45%
23%
33%
45%
23%
32%
45%
23%
32%
44%
23%
33%
45%
24%
31%
45%
24%
31%
Connecting/Non-connecting Mix
O&D passengers
Connecting passengers
70%
30%
70%
30%
70%
30%
70%
30%
n/a
n/a
n/a
n/a
359.9
358.7
368.3
336.6
320.2
305.3
Growth
Domestic
International
Transborder
Total passengers
3.6%
3.0%
5.0%
3.9%
2.7%
2.0%
2.6%
2.5%
8.0%
8.0%
6.7%
7.6%
7.1%
2.3%
14.1%
8.1%
7.0%
7.3%
7.3%
7.2%
(0.1%)
11.4%
(0.8%)
2.3%
Air Cargo
0.3%
(2.6%)
9.4%
5.1%
4.9%
(2.2%)
79
154
n/m
n/a
n/a
n/m
n/a
n/a
n/m
Air cargo (thousands of tonnes)
Bridged Gates
Number
Enplaned passengers per gate (000s)
Terminal fees per gate ($000s)
84
165
1,185
79
169
1,327
79
165
1,016
Per Enplaned Passenger ($)
Airline revenue
Concessions
Parking, rentals and other
Total revenue
18.66
3.67
7.69
30.02
16.64
3.65
7.55
27.84
11.81
3.15
6.08
21.04
Operating and maintenance
Grant in lieu of taxes, insurance & other
Depreciation & amortization
Ground lease paid to Federal Government
Interest and Other
Total Cost
10.62
1.98
1.70
8.48
4.43
27.21
9.70
1.90
1.10
8.67
4.19
25.56
7.08
1.23
0.72
8.21
2.32
19.56
Net surplus
- excluding interest
- excluding ground lease
2.80
7.23
11.29
2.28
6.47
10.95
1.48
3.80
9.69
Aircraft Movement Statistics
Total runway movements (000s)
427.3
423.2
396.5
375.3
342.6
308.9
Annual Growth
1.0%
6.7%
5.7%
9.5%
10.9%
0.9%
976.2
373.8
345.4
91.2
879.5
278.1
306.5
72.1
692.3
186.1
233.0
48.7
Per Movement ($)
Revenue
Landing Fees
Operating expenses (1)
Net surplus
(1) Operating expenses exclude grants in lieu of taxes and depreciation.
* Financial results include Terminal 3 operations only from date of acquisition in May 1997.
** GTAA started operating Pearson International Airport December 2, 1996.
Economic Statistics (Toronto CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
Unemployment rate
Ontario real GDP growth
1999
1998
1997
1996
1995
1994
4,680
2.1%
2,391
2.6%
6.1%
5.7%
4,586
1.9%
2,330
3.7%
7.0%
4.3%
4,499
2.2%
2,247
4.1%
8.0%
4.4%
4,403
1.9%
2,159
1.7%
9.1%
1.6%
4,320
2.0%
2,123
3.9%
8.5%
3.7%
4,236
2.0%
2,043
(0.5%)
10.3%
5.9%
Benchmark Report
Aéroports de Montréal
Current Report:
RATING
No rating assigned. Reference report only.
January 18, 2001
Eric Beauchemin/Geneviève Lavallée, CFA
(416) 593-5577 x252/x277
e-mail: [email protected]
COMMENTARY
Aéroports de Montréal (“ADM” is a not-for-profit
since ADM took over responsibility. Despite a 12.7%
corporation responsible for the development of Montreal’s
decrease in recurring surplus due to constantly increasing
two international airports, Dorval and Mirabel. Since 1992,
depreciation and operating expenditures, the facilities
the Company has managed the two airports under a 60-year
continued to generate strong cash flows.
ground lease with the Government of Canada, extendable
However, some challenges exist that could have a negative
for an additional 20 years. Dorval and Mirabel serve the
impact on ADM’s financial profile in the future.
Montreal Island and neighboring cities, with a population of
Indebtedness has increased rapidly as a result of heavy
3.4 million.
capital investments. Operating and maintenance expenses
As a result of ADM’s conservative management and
have also grown steadily in recent years, due in part to the
sustained capital investments, the airports benefit today
liberalization of scheduled flights in 1997. Failure to control
from modern and efficient infrastructure, as well as a
indebtedness and expenditure growth could cause problems
competitive landing and terminal fee structure, allowing
in the medium term. Similar to other Canadian airport
them to compete with Toronto and Ottawa in attracting new
authorities, the risk profile of ADM was affected by the
airline business. The airports also enjoy relatively stable
recent merger between Air Canada and Canadian Airlines,
revenues and cash flows due to a diversified revenue base, a
which made airports strongly dependent on a single client.
high origination and destination (O&D) traffic mix (88%)
In addition, competition between airports to attract new
and favorable economic outlook for the region they serve.
business partners has intensified as a result of the
In addition, ADM is free to establish its own fee structure
privatization of airports in Canada, forcing airports to invest
for the users of its facilities (passengers and airlines) with
larger amounts in marketing efforts and modern
no limit or regulatory approval required.
infrastructure.
Passenger traffic was up 5.4% at Montreal’s airports in
1999. This was the strongest growth in passenger traffic
CONSIDERATIONS
Strengths:
Challenges:
• Flexibility to set revenue structure to offset costs
• Managing future increases in debt and interest costs
• Diversified revenues and business mix (cargo)
• Operating expenditures are growing faster than revenues
• High origination and destination (“O&D”) passenger mix
• High reliance on one carrier
• Modern and efficient infrastructure
• Intensified competition between airports
• Relatively low landing and terminal fees
• Favorable economic outlook
FINANCIAL INFORMATION
Year ended December 31
1999
1998
1997
1996
1995
Interest coverage (including AIF)
4.1x
3.8x
5.4x
64.6x
42.1x
Free cash flow ($ millions)
(3.6)
(8.8)
17.7
(12.7)
3.6
Operating cash flow per enplaned passenger ($)
11.83
10.48
38.61
12.50
11.79
Debt per enplaned passenger ($)
36.40
38.24
32.66
2.73
2.31
Revenue per enplaned passenger ($)
34.18
33.97
26.27
25.34
25.64
Total expense per enplaned passenger ($)
32.79
32.29
23.70
21.24
20.76
Passenger volume growth
5.4%
0.0%
1.7%
4.3%
3.6%
Air cargo volumes (metric tonnes)
197,170
198,300
196,865
212,479
213,708
THE COMPANY
Aéroports de Montréal (ADM) is a not-for-profit corporation that is responsible for the management and development of both
Mirabel and Dorval airports. Federally incorporated on November 21, 1989, ADM has managed Montreal’s two international
airports since August 1, 1992 under a 60-year ground lease with the Government of Canada (extendable for another 20 years).
A seven-member Board of Directors oversees all management activities of the Company. In 1999, Dorval was the third busiest
airport in Canada, with 4.3 million enplaned passengers, while Mirabel registered 650,000 enplaned passengers.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Aéroports de Montréal - Page 2
CONSIDERATIONS
Strengths: (1) Airport authorities have the legislated ability
to set their own rates and charges for users of their facilities.
Although they usually consult with the airlines before
increasing their charges, there is no limit on the fees that
may be levied and no approval needs to be sought.
(2) Similar to many other large international airports, ADM
enjoys a well-diversified passenger base, with important
international and transborder traffic. Strong commercial
operations (concessions) and Mirabel’s cargo business add
to the diversification of ADM’s revenue base, although the
latter does not constitute a key revenue source.
(3) ADM's O&D passenger traffic represents 88% of the
total traffic volume, which provides a more stable activity
base than airports dependent on connecting traffic. As a
result, the Company is less exposed to the financial failures,
route reorganization or new alliances of airlines than
airports that rely heavily on connecting traffic because the
O&D business of an airline reducing service is likely to be
picked up by competitors.
(4) Since assuming responsibility in 1992, ADM has
invested close to $470 million in the revamping and
modernization of the infrastructure of the two airports. As a
result, Dorval and Mirabel now have efficient and flexible
facilities, generating high commercial revenues and
providing the airports with the ability to adjust to passenger
and airline needs.
(5) Commercial revenues represent a relatively large portion
of ADM’s total operating revenue (40% in 1999), compared
with other major Canadian airports. As a result, passengers
at Dorval and Mirabel airports contribute directly to a
relatively larger share of ADM’s operating costs than is the
case for other major Canadian airports. This allows ADM to
charge lower terminal and landing fees, making Montreal’s
airports more attractive to airlines and giving ADM more
room for increasing those fees in the future. In 1999,
landing and terminal charges averaged $10.62 per enplaned
passenger at ADM’s airports, compared to its two main
competitors, Toronto and Ottawa, at $18.65 and $11.74,
respectively.
(6) The region continues to exhibit strong fundamentals.
The economy is growing steadily, unemployment and
inflation remain low, while disposable income is rising as
the region’s high value-added manufacturing sectors
(e.g., aerospace, telecommunication) continue to grow in
importance. The outlook also remains favorable for the
medium-term, suggesting further growth in the demand for
business, leisure and cargo airline services.
CAPITAL EXPENDITURES – AIRPORT EXPANSION PROGRAM
ADM’s ground lease with Transport Canada requires that
the company invest at least $30 million every year in airport
infrastructure improvements. This requirement was easily
exceeded during the first eight years of ADM’s mandate as
more than $460 million went to the restoration and
modernization of the two airports’ infrastructure, necessary
to meet the constantly evolving needs of airlines and
travelers. Work conducted to date at the Dorval airport
Challenges: (1) Sustained capital investments at Dorval
and Mirabel airports have led to a significant increase in
debt and interest costs in recent years. Interest coverage
(excluding AIF) was already at a low 1.6x in 1999, down
from 4.7x in 1997. In 2000, ADM entered into the second
phase of its master development plan, which includes
investments of $498 million dollars over the next 5 years
(2000-04) in addition to the $30 million per year required
under the capital lease. ADM’s debt level remains
reasonable, accounting for 55% of its capital structure in
1999. However, it is likely to deteriorate as a result of the
capital investment plan if the Company does not
significantly increase current revenue sources or implement
new ones, as the current revenue streams are unlikely to be
sufficient to fully fund the planned work.
(2) Operating and maintenance expenditures have increased
by 44% since 1996. Items that put pressure on ADM’s
operating costs include the liberalization of scheduled
flights in 1997, sustained marketing efforts to attract new
airline partners and the recent assumption of airport security
costs. Failure to keep future increases in expenditures in line
with revenue growth could lead to a deterioration of ADM’s
financial profile. ADM’s current lease agreement makes it
especially hard to address excessive expenditure pressures
through adjustments in airport charges or concession rent.
According to the Company, unexpected increases in
expenses above levels prescribed in the lease are not
recognized for rent calculation purposes, resulting in most
of the additional revenue from an increase in airport charges
or concession rent being returned to the Government
through higher rent.
(3) As a result of the merger of the two biggest airlines in
Canada, Air Canada and Canadian Airlines, the risk profile
of Canadian airports has increased. Airlines generally
represent above-average credit risk and dependence on a
single airline may pose a potential challenge to ADM in the
future. However, this risk is reduced for airports with a
relatively high O&D traffic mix, like Montreal’s airports,
since the O&D business of an airline is more likely to be
picked up by a competitor than its connecting business.
(4) An acceleration in the transfer of airport management
from the federal government to local authorities has
occurred in recent years. To date, all of Canada’s major
airports have been privatized. This has resulted in increased
competition between airports to attract airline partners.
Montreal airports face competition from Ottawa and
Toronto airports, particularly in the leisure and connecting
travel.
includes the renovation and relocation of the transborder
arrivals lobby, the construction of a new apron and various
initiatives aimed at facilitating access to the airport. At
Mirabel, capital expenditures have been aimed at upgrading
public areas and retail operations, and at enhancing
customer service (e.g. parking).
On February 24, 2000, ADM unveiled the second phase of
its master development plan. Entitled “Perspective 2020 –
Aéroports de Montréal - Page 3
2000-2004”, the five-year plan allows for the injection of an
additional $498 million (in addition to the $30 million per
year required under the ground lease) in multifunctional
infrastructure and equipment, mostly at the international and
transbording areas of the Dorval airport. Major work to be
conducted includes the building of a permanent
international concourse and the addition of gates. ADM
hopes that the enhanced connecting facilities and the
resulting reduction in transfer time and passenger walking
distance will increase connecting traffic.
LOCAL ECONOMY
Dorval and Mirabel airports serve the Montreal region, an
area essentially composed of the Montreal Island and
several neighboring cities with a total population of
3.4 million. Since 1996, the region has enjoyed significant
economic growth, boosted by strong performances of the
manufacturing as well as commercial and non-commercial
services sectors. In 1999 alone, the GDP of the region
increased by 4% and unemployment declined by 1.1% to
8.6%, a level not seen in more than ten years. The leasing
market was also under pressure. Strong absorption of space
in downtown Montreal by new-economy tenants pushed
office and industrial vacancy rates to their lowest level in
over a decade. The apartment vacancy rate stood at 3% at
the end of the year, down 1.7 percentage points.
The technology sector has become a key driver of the
economy as a result of the region’s efforts to diversify its
economic base and to decrease its dependence on sluggish
industries of the old economy. Knowledge-based sectors
like telecommunication, pharmaceutical and aerospace have
expanded drastically, generating a wealth multiplier effect
in the region that positively impacted the construction and
the real estate sectors, and retail sales, up 5.2% in 1999.
DBRS estimates that ADM will need to borrow about
$370 million over the five-year period to finance its
investment plan since operating cash flows will not be
sufficient to fully cover the planned expenditures. The
Company indicated that it is currently exploring options to
increase cash flows.
Perspective 2020 – 2000-2004 is part of a longer-term
development plan that encompasses investments of
$1.3 billion at Dorval and Mirabel over the next 20 years.
Telecommunication equipment is now the largest export of
Montreal, a sign of the changing structure of the economy
toward high value-added manufacturing activities.
Despite strong economic fundamentals, the region continues
to post below-average demographic growth (0.4% in 1999).
Outlook: According to the Conference Board of Canada
(Winter 2000 outlook), the region’s economy will keep
thriving in the medium term. Stimulated by a sustained
expansion of knowledge-based industries and increased
government spending, the GDP of Montreal (CMA) is
forecast to grow by 3.7% in 2000, 3.3% in 2001 and 2.9%
in 2002. Initiatives such as the Multimedia City in Old
Montreal and tax incentives provided to the high-tech sector
by the provincial government should foster further growth
by helping the region to compete against other technological
hubs such as Ottawa. Sustained economic expansion,
declining unemployment, higher disposable income and a
more diversified business core are all factors that should
provide support to an expansion of the demand for airline
services in the coming years.
PASSENGER STATISTICS
Table 1: Total Enplaned Passengers
(millions)
1999
1998
1997
1996
1995
1994
Vancouver
7.9
7.8
7.4
7.0
6.0
5.4
Toronto
13.9
13.4
13.0
12.1
11.2
10.5
Montreal
4.8
4.6
4.5
4.5
4.3
4.1
Edmonton*
1.8
1.9
1.8
1.6
1.3
1.2
Calgary
3.9
3.8
3.7
3.5
2.8
2.5
Ottawa
1.6
1.6
1.5
1.4
1.3
1.3
W innipeg
1.5
1.5
1.6
1.4
1.1
1.1
3.7%
3.1%
7.4%
5.8%
5.4%
.03%
1.7%
3.0%
(3.0%)
3.7%
10.5%
8.0%
1.6%
3.2%
7.6%
9.6%
3.2%
2.1%
6.6%
5.0%
0.9%
(7.3%)
10.6%
6.4%
*For Edmonton marketplace.
Growth
1999
1998
1997
Avg. 1994-1999
1.9%
4.7%
5.6%
7.9%
Although traffic at Montreal’s airports has been rising
consistently since ADM took over, the growth has not been
as fast as at most other Canadian airports. Between 1994
and 1999, Vancouver and Toronto airports have seen
passenger volumes grow on average by 7.9% and 5.8% per
year, respectively, while Montreal’s traffic went up 3.0%.
However, activity has started to pick up in 1999, as
Montreal’s airports posted the strongest growth among the
major Canadian airports. Helped by the solid performance
of the region’s economy, enplaning passenger volumes rose
5.4% to total 4.8 million. Dorval registered 4.2 million
enplaned passengers, making it the third busiest airport in
Canada behind Toronto and Vancouver. Mirabel, which
now specializes in leisure flights and cargo service, had 650
thousand enplaned passengers. Recent data indicate that
traffic continued to rise during the first six months of 2000,
despite the rationalization in flights following the Air
Canada/Canadian Airlines merger. Growth stood at 2.8%,
Aéroports de Montréal - Page 4
with advances in the transborder and leisure sectors
offsetting the loss in the domestic business. However,
passenger volumes remain low relative to Montreal’s
population base.
Mirabel lost more than half of its clientele to Dorval when
its mandate was redefined in 1996. Although passenger
traffic is recovering well, Mirabel has had mixed success in
strengthening its position as a cargo hub for the eastern
Canada. In 1999, 197,170 tons of cargo were handled at the
two airports, 0.6% less than the previous year. Furthermore,
because it is specialized in leisure travel, Mirabel remains
the most exposed to economic downturns.
Table 2: Travel Mix
1999
Domestic
International
Transborder
Total *
Vancouver
53%
21%
26%
100%
Toronto
45%
23%
33%
100%
Montreal
44%
30%
26%
100%
Edmonton
86%
2%
12%
100%
Calgary
72%
9%
19%
100%
Ottawa
76%
5%
20%
100%
W innipeg
85%
2%
13%
100%
70%
30%
88%
12%
89%
11%
77%
23%
90%
10%
79%
21%
* Totals may not add to 100 due to rounding.
O&D
Connecting
72%
28%
The statistics presented in the above table confirm the
international status of Montreal’s airports. In 1999,
domestic passengers accounted for less than half of total
traffic, in line with the other two major international
airports. International passengers represented 30% of the
volume, continuing to gain in importance at the expense of
the transborder share, which accounted for 26% of the total
1999.
REVENUE ANALYSIS
In 1999, total revenue amounted to $163.9 million, 6.0%
higher than the previous year and 60.8% higher than in
1993, ADM’s first full year of management. Operating cash
flows also improved for a third consecutive year, rising a
healthy 9.6% to $45.3 million. Factors that contributed to
the sustained growth over the past years include favorable
economic conditions, which led to increased passenger and
cargo volumes, higher concession revenues due to more
efficient use of commercial areas, and new sources of
revenue such as the airport improvement fee. However,
operating cash flows were not sufficient to fully cover
capital expenditures in 1999.
Commercial airport operations remain ADM’s main source
of revenue, despite a continuous decline in importance in
recent years. In 1999, they generated $65.2 million, or
39.8% of aggregate income. Those revenues, which
essentially come from concessions and parking operations,
were little changed from their 1998 level because of a loss
ADM’s efforts and investments to position Dorval as a
connector hub have started paying off. Connecting
passengers represented 12% of the total traffic in 1999.
Although this is low compared to Toronto (30%) and
Vancouver (28%), it constitutes a marked improvement
over the levels recorded in 1998 (9.5%) and 1997 (6%).
of $4.6 million in revenue resulting from the transfer of
Dorval’s de-icing operations to a third party.
Driven by an overall increase of 4.9% in aircraft movements
and higher airline charges, revenues from landing and
terminal charges increased 6.5% to $50.9 million in 1999.
Most of the higher revenues came from Dorval, which
experienced a 6.2% rise in aircraft traffic. Despite higher
passenger and cargo volumes, aircraft movements at
Mirabel were down 1% due to improved carrier efficiency.
Since November 1997, ADM has been collecting airport
improvement fees from travelers using its Dorval facilities.
Proceeds, which were sufficient to finance about half of the
Company’s capital projects over the past two years, were up
4.3% in 1999. Other revenues, such as income from rental
of facilities and international activities continued to gain in
importance. However, most of the increase was attributable
to the full-year effect of the recovery of security costs from
the airlines ($8.3 million 1999 and $1.8 million in 1998), a
responsibility that ADM has assumed since October 1998.
Aéroports de Montréal - Page 5
Table 3: Revenue Per Enplaned Passenger
($)
Landing fees
Terminal charges
Concessions
Parking
Rentals, fees, other
AIF (net)
Total
% of revenue from airlines
Vancouver
4.44
4.60
7.74
2.51
3.39
7.03
29.70
% Toronto % Montreal % Edmonton
15
11.49
38 4.94 (2) 14 4.12 (1)
15
7.16
24 5.68 (2) 17 4.12 (1)
26
3.67
12 13.60 (3) 40
3.05
8
5.50
18
n/a
3.74
11
2.19
7
3.38
10
2.30
24
0
0
6.59
19
7.05
100 30.02 100
34.19
100 24.39
30
62
32
% Calgary % Ottawa % Winnipeg %
17
4.48
18
4.93
21
4.81
22
17
3.45
14
6.81
28
2.97
14
13
3.36
14
3.44
14
2.69
13
15
2.26
9
3.29
14
1.94
9
9
3.36
14
3.10
13
4.58
21
29
7.70
31
2.40
10
4.52
21
100 24.61 100 23.97 100 21.51
100
34
32
49
36
(1) Estimated on the basis of a 50/50 weighting between landing fees and general terminal fees.
(2) Weighting between landing fees and terminal charges based on the weighting from Aeroports de Montreal's 2000 budget.
(3) Includes revenues from parking and de-icing operations.
Compared with its peers, ADM’s airports generated more
revenue per enplaned passenger in 1999. On average, each
passenger handled by the two airports brought in $34.19,
compared to $30.02 at Toronto airport and $29.70 at
Vancouver airport. The Company’s superior income
generation per enplaned passenger is explained by high
OPERATING EXPENSE ANALYSIS
Growing airport activities and sustained capital investments
led to a 5.7% increase in total operating expenses in 1999.
Operating and maintenance expenditures, ADM’s largest
cost item, totaled $84.1 million, up 4.4%. ADM’s
assumption of all costs related to airport security (since
October 1998) caused most of the growth, but was partly
offset by the transfer of the Dorval de-icing operations to a
third party. According to the Company, a plan was put in
place in 1999 to significantly reduce operating and
maintenance expenditures on a permanent basis by 2001.
Depreciation and amortization expenditures continued to
grow in importance as a result of sustained capital
revenues from commercial operations (concessions) relative
to the client base. This constitutes a competitive advantage
for ADM, allowing it to charge airlines less for landing and
terminal services on a per enplaned passenger basis than its
regional competitors (Ottawa and Toronto).
investments. The 12.1% rise experienced in 1999 brought
depreciation expenditures to $35 million. The rent paid to
Transport Canada also increased because it is linked to
revenues, while interest costs were quite stable after having
almost tripled in 1998. Interest costs on existing debt could
decrease in the near future if ADM follows through on its
intention to refinance its bank loans with long-term debt.
Depreciation and total interest costs should continue to rise,
as ADM enters the second phase of its capital plan and more
debt is incurred over the next five years to finance the
projects ($113.5 million invested in 2000).
Table 4: Expense Per Enplaned Passenger
($)
Vancouver
Operating and maintenance
8.30
Utilities, insurance & taxes
1.73
Ground lease paid
7.63
Total operating expenses
17.66
Interest expense (incl. capitalized)
2.68
Depreciation and amortization
3.12
Total expenses
23.46
% Toronto % Montreal % Edmonton % Calgary % Ottawa % Winnipeg
47
10.62
50
17.53 76
11.91
91
7.48
56 10.93 63
12.19
10
1.98
9
3.64
16
1.40
11
0.85
6
2.62
15
1.57
43
8.48
40
1.92
8
(0.21)
-2
5.09
38
3.70
21
1.32
100 21.08 100 23.09 100 13.10 100 13.42 100 17.25 100 15.08
4.43
2.40
1.10
1.08
0.14
0.20
1.70
7.30
3.65
2.44
1.63
0.99
27.21
32.79
17.85
16.94
19.02
16.27
Although ADM’s airports generate higher revenues per
enplaned passenger, it costs more per passenger to operate
them than to operate any other major airport in Canada. As
shown in the above table, average total expense per
enplaned passenger was $32.80 in 1999, which was much
higher than at all of the other major Canadian airports.
The higher cost structure of ADM is explained by relatively
high operating and depreciation expenditures. The higher
depreciation and amortization costs are the result of the
heavy capital spending that took place over the past five
%
81
10
9
100
years to revamp Dorval and Mirabel facilities. As for
operating and maintenance expenditures, they are higher
because of the fixed costs related to the maintenance of two
airports and sustained marketing efforts to attract new
business to Mirabel. Nevertheless, ADM’s rent payments
per enplaned passenger are among the lowest, similar to
those of smaller airports like Ottawa and Winnipeg, as the
lease agreement with Transport Canada includes deductions
for capital investments and takes into consideration the
necessity for ADM to maintain two airports.
Aéroports de Montréal - Page 6
MEDIUM-TERM OUTLOOK
The Comp any continued to post solid financial results
during the first half of 2000, although expenditures grew at
a faster pace than revenues. Compared to the same period in
1999, passenger traffic was up 2.75% for the first six
months of the year despite a 4.1% decline in aircraft
movements resulting from the Air Canada/Canadian
Airlines merger and improved airline efficiency. Total
revenues increased 5.7%, owing to higher commercial
revenues and proceeds from landing and terminal charges,
while constantly increasing depreciation and financing
charges have led to a 7.6% increase in total expenses.
The outlook for ADM remains positive in the medium term.
Revenues from landing and terminal charges should
continue to improve as airline activity maintains its upward
trend, supported by strong economic fundamentals and
relatively low airfares resulting from intensified competition
between carriers. Increases in landing and terminal fees (in
line with inflation) and the arrival of a new low-fare carrier
in Montreal (CanJet) should also support revenue growth.
Growth in commercial revenues is expected to exceed
passenger traffic growth, as the expansion of the
commercial area at Dorval continues under ADM’s 20002004 capital investment plan.
According to Transport Canada, airline passenger traffic in
the country is forecast to increase on average by 2.9% per
year until 2003, and by 3.1% for the following five years,
with international and transborder traffic driving the growth.
Air cargo volume is expected to grow at an average annual
rate of 4.2% until 2013, helped by factors such as the
emergence of E-commerce and the removal of international
trade barriers. Because of the outstanding strength of the
Montreal economy, the new facilities at both airports and
ADM’s sustained marketing efforts to attract new business
partners, DBRS expects the passenger growth at the
Montreal’s airports to exceed Transport Canada’s national
forecasts.
In addition to favorable economic outlook, two factors are
likely to benefit Montreal’s airports in the medium term:
ADM’s decision to liberalize the traffic assignment rules;
and the Quebec legislation allowing the creation of an
international free-trade zone at Mirabel.
The liberalization of the assignment of scheduled
international flights, which took effect in 1997, has made
Montreal’s airports more competitive by giving airlines
complete freedom to choose between Dorval and Mirabel as
their destination. This has led to Dorval specializing in
international, transborder and domestic flights, and Mirabel
in chartered flights and cargo service, drawing the years of
uncertainty regarding the future of the two airports to an
end. Since the redefinition of the airports’ mandate,
passenger traffic has increased 5.4% whereas cargo volume
has remained constant. According to ADM, most of the
benefits of the new strategy are still to come, as the two
airports progressively position themselves in their
respective niche.
In October 1999, the Québec government passed legislation
allowing the creation of an international free-trade zone
around the Mirabel airport. Companies seeking to locate in
the zone will be offered significant advantages, including
tax holidays and credit facilities. This should help
strengthen the position of Mirabel as an international cargo
hub in Eastern Canada, as Vancouver is the only other
Canadian airport with a free-trade zone.
Despite the positive outlook for revenues, current high fuel
prices may hurt business growth in the short term.
Furthermore, the $500 million investment plan recently
introduced by ADM is likely to put significant pressure on
the finances of the corporation, as operating cash flows will
not suffice to finance the projects. Sensitivity analyses
conducted by DBRS indicate that revenue may have to
increase by as much as 65% through the year 2004 if ADM
wants to move forward with the current investment plan
while maintaining an interest coverage ratio of at least 1.25.
ADM indicated that it is considering options to increase
revenue. In the meantime, however, concession rent,
landing and terminal fees may come under pressure as the
need for additional cash flow intensifies.
Table 5: Outlook (DBRS estimates)
($ millions)
Capital expenditures
Total debt
Interest costs (7% rate)
2000P
113.5
245.4
14.7
2001P
188.7
378.7
21.8
2002P
178.6
506.5
31.0
2003P
97.6
554.6
37.1
2004P
101.4
604.9
40.6
Expenses per enplaned passenger
Revenue per enplaned passenger
Required revenue per enplaned passenger
$33.48
$34.73
$34.73
$36.72
$35.30
$38.59
$40.38
$35.87
$39.17
$42.35
$42.95
$39.75
$43.06
$43.90
$40.35
$48.80
$71.77
$91.51
$95.52
$99.32
(to maintain 1.25 interest coverage)
Debt per enplaned passenger
Aéroports de Montréal - Page 7
Aéroports de Montréal
Statement of Earnings ($ millions)
Year ended December 31
1999
1998
1997
1996
1995
47.8
65.1
11.4
30.3
154.6
47.5
59.7
7.5
4.8
119.5
45.5
60.9
6.9
0.0
113.3
45.7
57.1
7.1
0.0
109.9
84.1
17.4
9.2
110.7
53.2
11.5
35.0
6.7
0.0
2.6
9.3
80.5
20.4
3.8
104.7
49.8
11.0
31.2
7.6
9.1
0.0
16.8
62.2
14.9
4.8
81.9
37.6
4.3
21.6
11.7
1.1
0.0
12.7
58.2
15.8
7.7
81.7
31.6
0.5
12.7
18.4
0.0
0.0
18.4
59.8
13.6
6.7
80.1
29.9
0.7
8.2
20.9
0.0
0.0
20.9
83.7%
7.0%
19.3%
5.6%
84.3%
13.5%
19.6%
2.5%
71.4%
11.1%
4.0%
4.0%
72.1%
16.2%
0.0%
6.8%
72.8%
19.1%
0.0%
6.1%
Interest Costs ($ millions)
Interest capitalized
Total interest incurred
1.6
13.1
2.2
13.2
2.6
6.9
0.0
0.5
0.0
0.7
Interest coverage (excluding AIF)
Interest coverage (including AIF)
1.6
4.1
1.5
3.8
Revenue
Landing fees & terminal charges
Commercial operations (concessions, parking, etc.)
Rentals, fees and other
Airport Improvement Fee (1)
Total revenue
50.9
65.2
16.2
31.6
163.9
Expenses
Operating and maintenance
Grant in lieu of taxes
Ground lease paid to Federal Government
Total operating expenses
Operating surplus
Interest costs (2)
Depreciation & amortization
Recurring surplus
Non-recurring revenues (expenses)
Equity income from affiliates
Surplus
Total operating expenses/Total revenue (excluding AIF)
Surplus/Total revenue (excluding AIF)
Airport Improvement Fee/Total revenue
Ground lease/Total revenue
Annual Growth
Total revenue
Airline revenue
Non-airline revenue
Airport Improvement Fee
Total operating expenses
Operating and maintenance expenses
Ground lease paid to Federal Government
64.6
64.6
42.1
42.1
5.5%
4.4%
(0.9%)
0.3%
6.9%
(37.6%)
3.1%
(0.4%)
5.5%
2.0%
(2.6%)
14.0%
7.4%
6.5%
8.0%
13.1%
10.9%
n/a
Year ended December 31
1999
1998
1997
6.7
7.6
11.7
35.0
31.2
21.6
4.7
3.4
7.7
1.1
0.9
0.8
45.3
41.3
40.1
(11.4)
(6.3)
(135.5)
56.7
47.7
175.6
60.4
56.5
157.9
(3.6)
(8.8)
17.7
1996
18.4
12.7
8.0
1.9
37.2
(18.7)
55.9
68.6
(12.7)
1995
20.9
8.2
8.6
(1.2)
39.0
(11.5)
50.5
47.0
3.6
6.0%
6.5%
6.4%
4.3%
5.7%
4.4%
139.6%
29.4%
0.6%
13.8%
531.3%
27.9%
29.3%
(19.5%)
4.7
5.4
(1) Introduced at Dorval on November 1, 1997.
(2) Includes interest costs on short-term debt, estimated by DBRS for 1997-99 period.
Cash Flow ($ millions)
Recurring surplus
Depreciation & amortization
Change in deferred liability items
Change in deferred asset items
Cash flow from operations
Change in non-cash working capital
Operating cash after working capital
Capital expenditure
Free cash flow
Economic Statistics (Montreal CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
Unemployment rate
3,438.5
0.4%
1,656.2
2.6%
8.6%
3,423.5
0.4%
1,614.5
3.6%
9.7%
3,408.9
0.4%
1,557.7
2.2%
10.9%
3,393.7
0.5%
1,524.3
0.5%
12.0%
3,377.0
0.6%
1,516.4
1.5%
11.5%
Aéroports de Montréal - Page 8
Aéroports de Montréal
B a l a n c e S h e e t ($ millions)
1999
1998
1997
1996
1995
Assets
Cash & s-t investments
Amounts receivable
Prepaid expenses & inventory
Deferred asset items
Investment in affiliates
Long-term investments
Capital assets
Total Assets
3.5
22.5
4.4
7.1
15.7
6.8
351.0
411.0
0.9
29.3
4.4
6.0
14.7
7.6
331.4
394.4
2.9
19.4
3.5
5.1
13.6
4.0
309.5
357.9
0.5
15.6
2.9
4.3
0.0
0.0
176.6
199.9
19.4
13.7
2.9
2.4
0.0
0.0
119.4
157.7
44.1
173.7
0.0
0.9
0.0
50.0
0.0
0.6
141.9
411.0
40.4
172.8
1.2
0.0
0.0
45.3
0.0
0.6
134.2
394.4
50.3
145.7
1.7
0.0
1.2
41.9
0.0
0.6
116.6
357.9
49.0
7.1
2.2
0.0
2.9
34.2
0.0
0.6
103.9
199.9
35.5
0.0
3.5
1.3
5.1
26.2
0.0
0.6
85.5
157.7
55.0%
0.0%
45.0%
100.0%
56.3%
0.0%
43.7%
100.0%
55.3%
0.5%
44.3%
100.0%
$36.40
$38.24
$32.66
Liabilities & Equity
Accounts payable, accrued liabilities & cheques outstanding
Short-term debt
Current portion of long-term debt
Other current liabilities
Long-term debt
Deferred liability items
Other long-term liabilities
Non-participating & non-controlling capital
Equity
Total Liabilities & Equity
Capital Structure
Short-term debt
Long-term debt
Equity
Total
Debt per enplaned passenger
6.2%
2.6%
91.2%
100.0%
$2.73
0.0%
5.6%
94.4%
100.0%
$2.31
Passenger Statistics
Total enplaned passengers (millions)
Travel Mix
Domestic
International
Transborder
4.8
4.6
4.5
4.5
4.3
44%
29%
26%
45%
28%
27%
44%
26%
29%
45%
26%
30%
43%
27%
30%
Connecting/Non-connecting Mix
O&D passengers
Connecting passengers
88%
12%
90%
10%
94%
6%
n/a
n/a
n/a
n/a
197,170
198,300
196,865
A ir cargo (metric tonnes)
212,479
213,708
Growth
Domestic
International
Transborder
Total passengers
3.3%
10.4%
3.7%
5.4%
2.0%
6.4%
(8.6%)
0.0%
0.9%
4.7%
0.4%
1.7%
8.5%
(1.1%)
3.1%
4.3%
2.9%
3.1%
5.0%
3.6%
A ir Cargo
(0.6%)
0.7%
(7.3%)
(0.6%)
(2.0%)
Per Passenger ($)
Terminal and landing fees
Commercial revenue (concessions)
Rentals, fees and other
AIF
Total revenue
Operating and maintenance
Grant in lieu of taxes, insurance & other
Depreciation & amortization
Ground lease paid to Federal Government
Interest
Total expenses
Non-recurring items & equity income
Surplus
- excluding interest
- excluding AIF
- excluding ground lease
10.62
13.60
3.38
6.59
34.18
17.53
3.64
7.30
1.92
2.40
32.79
0.54
1.93
4.33
(4.66)
3.85
10.50
14.31
2.50
6.66
33.97
17.69
4.48
6.86
0.85
2.41
32.29
2.01
3.69
6.10
(2.97)
4.53
10.44
13.12
1.65
1.06
26.27
13.68
3.27
4.75
1.05
0.95
23.70
0.23
2.80
3.74
1.74
3.85
10.18
13.62
1.54
25.34
13.03
3.53
2.85
1.71
0.11
21.24
(0.00)
4.11
4.21
4.11
5.82
10.66
13.32
1.67
25.64
13.94
3.17
1.91
1.57
0.17
20.76
4.89
5.05
4.89
6.45
Bond, Long Term Debt and Preferred Share Ratings
Edmonton Regional Airports Authority
Current Report:
Previous Report:
December 15, 2000
New Rating
RATING
Geneviève Lavallée, CFA / Eric Beauchemin
Rating
Trend
Rating Action
Debt Rated
(416) 593-5577 x277/x252
A (high)
Stable
New Rating
Revenue Bonds, Series A
e-mail: [email protected]
RATING HISTORY
Current
1999
1998
1997
1996
1995
Revenue Bonds, Series A
A (high)
NR
NR
NR
NR
NR
RATING COMMENTARY
DBRS is assigning a rating of A (high) to the Edmonton
includes the construction of retail space, which is positive
Regional Airports Authority’s ("ERAA") $250 million, 30for the ERAA’s future revenue. (5) The capital maintenance
year amortizing Revenue Bonds, Series A. The trend is
contribution from the federal government provides an
Stable. The rating is supported by the following key
important, stable source of funding.
factors: (1) The ERAA has the legislated authority to set
Despite the ERAA’s strong capacity to meet its debt service
rates and charges on the airport users (airlines and
requirements, it faces challenges, which could affect its
passengers) in order to cover its costs. There is no
capacity in the future. The ERAA is dependent upon user
legislated limit on the level of fees that may be levied.
fees (landing fees, terminal charges and the Airport
(2) The ERAA’s origination and destination (“O&D”)
Improvement Fee) to cover costs, but should the fees rise
passenger traffic comprises 89% of total passenger volume,
too high, this dependence could reduce its competitiveness
providing a much more stable activity base than an airport
relative to other airports. Barring any unexpected adverse
dependent on connecting traffic. (3) The economic region
events, DBRS does not expect that the ERAA will have to
served by the ERAA is diverse and is expected to continue
increase its fees in the medium-term in order to meet its
to register favourable economic growth in the medium-term,
debt service payments and rate covenants. Other challenges
which is positive for air travel. (4) The redevelopment
include: (1) high fixed operating costs, which must be
project being financed with this debt issue is already half
covered by a relatively small passenger base; (2) modest
completed, with the last phase (Phase III) being
concession revenue relative to other airports; and (3) the
implemented over the next three years. Given the advanced
volatility of the air travel industry in general, and the risks
stage of the project, project risk is reduced. Furthermore,
associated with increased exposure to a single major airline.
the amount of expenditures that remain is limited and
RATING CONSIDERATIONS
Strengths:
Challenges:
• Flexibility to set rates and charges to offset costs
• Substantial fixed operating costs, including high debt
servicing costs as a result of the bond issue
• High O&D passenger mix
•
Modest concession revenue relative to other airports
• Positive economic outlook for Edmonton region
•
Volatility associated with air travel industry
• Capital maintenance contribution from federal government
important source of funding
• Increased exposure to a single major airline
• Redevelopment project is advanced, limiting project risk
• ERAA enjoys monopoly in its franchise area
FINANCIAL INFORMATION
Interest coverage**
Free cash flow after capex ($ 000s)
Cash flow from operations/enplaned passenger
Gross debt per enplaned passenger
Revenue per enplaned passenger
Total expenses per enplaned passenger
Passenger volume growth
Air cargo volume (metric tonnes)
Year ended December 31
2000P*
1999
4.7X
13.8X
(65,605)
(25,903)
6.97
10.87
133.14
36.09
26.18
24.39
23.00
17.17
1.5%
(1.7%)
33,540
32,724
1998
56.4X
(13,368)
11.25
13.47
23.43
14.83
3.7%
30,793
1997
24.7X
1,061
8.48
7.04
20.53
14.63
10.5%
23,553
1996
14.2X
(14,991)
4.44
10.13
14.87
12.26
27.9%
n/a
1995
13.5X
2,334
5.82
3.66
14.14
9.65
3.6%
n/a
*DBRS projections ** Operating surplus/interest costs
THE COMPANY The ERAA is a non-share capital, provincially incorporated entity. In 1992, the ERAA assumed operation of the
Edmonton International Airport (“YEG”). The ERAA operates the YEG pursuant to a 60-year ground lease (extendable for an
additional 20 years) with the Government of Canada. In addition to the YEG, the ERAA operates the Edmonton City Centre
Airport, pursuant to a 56-year lease (ending in 2052) with the City of Edmonton, and owns and operates the Cooking Lake Airport
(bought from the Province of Alberta in 1995) and the Villeneuve Airport (bought from the Government of Canada in March
2000). These last three airports are local, general aviation facilities.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Edmonton Regional Airports Authority - Page 2
RATING CONSIDERATIONS
Strengths: (1) The ERAA has the legislated ability to set
rates and charges it requires from users of the Airport’s
facilities to operate a commercially viable operation. The
ERAA can adjust landing fees and terminal fees charged to
airlines with 60 days notice. Furthermore, the ERAA levies
an Airport Improvement Fee (“AIF”), which can be raised
unilaterally with 90 days notice. There is no legislated limit
of the level of fees that may be levied on the users of airport
facilities. However, the current AIF collection agreement
with the airlines limits the AIF to $99 per enplaned
passenger. The AIF is an important stable source of
funding, accounting for 25% of the ERAA's total revenues
in 1999. It is the ERAA’s intention to apply the AIF
exclusively to debt service costs associated with the Air
Terminal Redevelopment (“ATR”) project and to eventually
entirely cover its debt servicing costs with the AIF.
(2) The ERAA's O&D passenger traffic composes 89% of
the total traffic volume, which provides a more stable
activity base than airports dependent on connecting traffic.
Consequently, the ERAA’s exposure to the state of the
airline industry is lower than that of airport authorities
highly dependent on connecting traffic. If one airline fails
or reduces service, another one will increase service to the
originating or ultimate destination of the passenger.
Therefore, DBRS expects that the rationalization of flights
by the new Air Canada will have only a short-term effect on
passenger traffic volumes.
(3) The economic outlook for the Edmonton area is positive,
with the Conference Board of Canada expecting Edmonton
to post the strongest economic growth of all the major
Canadian metropolitan areas in 2000. In particular, growth
in heavy oil and oilfield development should spur traffic on
routes to Grande Prairie and Fort McMurray. Given the
ERAA's high dependence on O&D traffic, the state of the
local economy is important for passenger growth. The
positive economic outlook suggests favourable passenger
growth in the medium-term.
(4) As part of its ground lease agreement with the federal
government, the ERAA enjoys the benefits of a capital
maintenance contribution intended to substantially provide
for the annual capital expenditures required to maintain the
existing YEG facilities. In 1999, the contribution more than
offset the ground lease payable to the federal government.
The ERAA is not precluded from using the contribution for
non-capital expenditures. The contribution is fixed at about
$5.6 million in 1990 dollars and is adjusted annually for
inflation.
(5) The ATR project is more than half completed, with the
last phase (Phase III) expected to continue over the next
three years. Given the advanced stage of the redevelopment
project, project risk is reduced.
Furthermore, the
construction that remains is largely related to the addition of
retail space, which is positive for the ERAA’s future
revenues.
(6) The ERAA also operates the Edmonton City Centre
Airport, the Cooking Lake Airport and the Villeneuve
Airport (all general aviation facilities). Given the lack of
another major airport in the vicinity of YEG, and the fact
that the ERAA also has three general aviation facilities
within its purview, the ERAA essentially has a monopoly in
Edmonton and in northern Alberta. It is unlikely to attract
major competition in the form of competing airports.
Challenges: (1) Given that it operates three small airports
in addition to the YEG, which are just self-sustaining, a
higher-than-average proportion of the ERAA’s operating
expenses is fixed in nature. Furthermore, the issuance of
$250 million revenue bonds has further increased the
ERAA’s fixed operating costs. As a result, cash flows from
operations are highly sensitive to changes in passenger and
air traffic volumes.
(2) The ERAA concession revenue is modest relative to
most of the other airport authorities (at $3.05 per enplaned
passenger in 1999 vs. over $3.50 for most other airports).
This is partly due to its small passenger base, but also due to
the limited retail areas within the current airport facilities.
(3) The volatile nature of the air travel industry can
significantly affect traffic volumes and may cause the rates
and charges for a particular year to be set too low. Airline
travel is sensitive to: (a) economic conditions for business
and tourism; (b) energy price increases which can
substantially impact air fares; and (c) event risks such as
labour strikes, terrorism or war. Furthermore, the departure
and entrance of new airlines, primarily low-cost air carriers,
can also affect traffic volumes and create uncertainties for
airports, such as YEG, when setting their fees.
(4) Canadian airport authorities’ exposure to a single major
carrier has increased as a result of the acquisition of
Canadian Airlines by Air Canada. They are now more
exposed to the impact of adverse events such as labour
strikes by Air Canada employees, and reduced service as a
result of changes in the airline’s strategy. However, the risk
associated with a high exposure to a single airline is reduced
for airports that are more dependent on O&D passenger
traffic, like YEG. If an airline fails or reduces service,
another one will likely increase service to the originating or
ultimate destination of the passenger.
Edmonton Regional Airports Authority - Page 3
CAPITAL EXPENDITURES -- AIR TERMINAL REDEVELOPMENT
In March 1998, the ERAA began the construction related to
the ATR project at the YEG. The ATR is a multi-phased
project designed to expand the capacity of the terminal
facilities to accommodate anticipated traffic volumes to
2015 (total traffic volumes estimated at 5.5 million by 2015)
and to renovate and increase the existing terminal facilities.
The ERAA currently estimates the total construction costs
related to the first three phases of the ATR project at
$236 million, which is down from the previous estimate of
$270 million as a result of modifications to the project
stemming from the acquisition of Canadian Airlines by Air
Canada.
The ATR project involves the following phases:
Phase 1 (completed in 1998 -- total cost $42 million):
Included completion of significant architectural and
design work, a new parkade, preliminary road work,
apron expansion and roof repairs. The new parkade has
been designed such that it can accommodate three
additional levels in the future.
Phase 2 (scheduled to be completed in December 2000
-- estimated total cost of $127 million): Includes
expansion of the terminal to the southeast, apron
expansion, access road improvements and renovations
to the existing terminal.
Phase 3 (scheduled to be completed in the spring of
2003 – construction budget is about $67 million):
Includes the demolition of part of the existing terminal
building and construction of a central hall connecting
the existing terminal building and the new southeast
terminal building extension (central hall will contain
84% of the total retail space at YEG), a commuter
concourse, a south island reconstruction and passenger
boarding bridges.
By December 31, 2000, it is estimated that $169 million in
total capital expenditures on the ATR project will have been
FINANCING
ISSUE SUMMARY :
• $250 million amortizing Revenue Bonds, Series A,
interest at 7.214% per annum, maturing on November
1, 2030.
• 30-year fully amortizing structure, semi-annual interest
payments from May 1, 2001 to November 1, 2001, and
with blended interest and principal semi-annual
payments commencing May 1, 2002 until maturity.
• The Bonds are governed by the Master Trust Indenture
and the First Supplemental Indenture relating to the
Bonds.
• Rank: Direct, secured obligations ranking pari passu
with all other forms of indebtedness issued pursuant to
the Capital Markets Platform.
• Redemption: Redeemable at the option of the ERAA at
a price equal to the higher of par or the price which will
provide a yield to maturity equal to the yield to
maturity of a Government of Canada bond having a
incurred. Depending on demand and economic conditions,
the ERAA will consider additional capital projects beyond
the three phases already discussed. Future capital projects
could include the renovation of the existing terminal
building, expansion of the existing holdrooms in the north
end of the existing terminal building and work related to the
administrative tower.
DBRS is estimating that the ATR project, minimum
maintenance capital expenditures and maintenance and
improvement capital expenditures for the ERAA's three
other airports will result in annual capital expenditures as
follows:
Projected capital expenditures:
1998 (actual) $37
1999 (actual) $55
2000 $79
2001 $41
2002 $31
2003 $19
2004 $8
In 1998, the ERAA negotiated a three-year, extendible
$150 million syndicated revolving term credit facility to
refinance Phase I and to finance Phase II of the ATR project.
The term credit facility and the $5 million demand operating
credit facility were secured by a first leasehold mortgage over
the YEG ground lease and security over all of the other assets
and revenues of the ERAA. The $250 million revenue bonds
have been used to pay off the debt outstanding under the term
credit facility (about $112 million) and to finance the
remainder of the ATR project. In addition, the ERAA has
entered into a new operating facility, replacing the ones
mentioned above. Further details on the revenue bonds and
the new operating facilities can be found in the following
section.
•
•
•
similar term to maturity of the Revenue Bonds plus
0.36% per annum
Lead underwriter: RBC Dominion Securities Inc.
Trustee: Montreal Trust Company of Canada
Guarantees: The ERAA is self-supporting and its debt is
not supported by guarantees from any level of
government.
USE OF PROCEEDS : Net proceeds from the issue will be
used to: (1) repay bank indebtedness incurred by ERAA
related to Phase I and II of the ATR project (approximately
$112 million); (2) fund initial deposits to certain reserve
funds required under the Indenture (approximately
$15 million); and (3) finance the remaining portions of
Phase II and finance Phase III of the ATR project.
SECURITY: (a) An unregistered first leasehold mortgage on
the YEG ground lease; (b) A security interest over all assets
held in the Revenue Account and any reserve funds; and
Edmonton Regional Airports Authority - Page 4
(c) a floating charge over all other present and future
property and assets of ERAA not included in (a) or (b).
RATE COVENANTS: Rates, rentals, charges and fees for the
use of the ERAA’s airports and for services rendered by the
airports must be maintained to ensure a Gross Debt Service
Ratio at least equal to 1.25 and the Debt Service Coverage
Ratio projected to be at least equal to 1.00.
The Debt Service Amount is the sum of the net interest
amount and the total principal reduction amount for the
previous 12 months.
The Gross Debt Service Ratio is equal to operating revenues
minus total rent, taxes, and operating and maintenance
expenses plus the Revenue Account Balance divided by the
Debt Service Amount.
The Debt Service Coverage Ratio is equal to operating
revenues minus total rent, taxes, and operating and
maintenance expenses divided by the Debt Service Amount.
If the coverage covenant is not met, the ERAA has one
fiscal year to get the coverage back on side. Failure to meet
the one-year cure period is an event of default.
(5) Any Sinking Fund (trustee account) required by a
Supplemental Indenture.
(6) Debt Service Reserve Fund (trustee account)
established and funded initially by the bond proceeds
by an amount equal to $9,024,004 and thereafter as
required to ensure that the balance is at least equal to
50% of the Debt Service Amount.
(7) Operating and Maintenance Contingency Reserve Fund
established and funded initially by the bond proceeds
by an amount equal to $6,052,053 and thereafter as
required to ensure that the balance is at least equal to
25% of the Operating and Maintenance expenses for
the previous 12 months. Irrevocable letters of credit or
undrawn availability from Committed Credit Facilities
may be substituted for cash in this fund.
(8) Any Capital Expenditure Reserve Fund required by a
Supplemental Indenture.
(9) Any other purpose of ERAA in the absence of an event
of default.
FLOW OF FUNDS : The Indenture requires the ERAA to
establish and maintain separate accounts and reserve funds.
All revenues received will be deposited in the Revenue
Account. All funds in the Revenue Account will be applied
in the following order until each fund is fully funded in
accordance with the requirements:
(1) Ground lease payments.
(2) Real property taxes and payments, in lieu of real
property taxes.
(3) Operating and maintenance expenses.
(4) Amounts due and payable on the outstanding bonds
NEW OPERATING CREDIT FACILITY: In conjunction with the
issuance of the Revenue Bonds, the ERAA has entered into
a new operating credit facility with the Royal Bank of
Canada, which is designed to operate as part of the Capital
Markets Platform. Under this new facility, the ERAA will
be provided with a demand revolving operating facility of
up to $5 million and a three-year committed extendible
revolving term credit facility of up to $40 million.
The new operating facility replaces the existing operating
facility. The new operating facility will be secured by the
pledge to the Royal Bank of Canada of a Series B Bond
issued under a second supplemental indenture. The Series
B bond will be a pledged bond.
LOCAL ECONOMY
Edmonton's economy continued to register healthy gains in
1999, and is forecast (by the Conference Board of Canada)
to post the strongest economic growth of all major Canadian
metropolitan areas in 2000. Edmonton is the service centre
for the oil industry in northern Alberta, but is much less
dependent on the energy sector than Calgary. Edmonton
has a diversified economic base, with the major industries
being government, agriculture, oil and gas, forestry, food
and beverage manufacturing, and tourism.
Emerging
industries include aerospace, biotechnology, electronics and
information technology, all of which contribute to the City's
economic diversification. Edmonton is a city of highly
skilled and educated workers, and is a "business-friendly"
city. The Census Metropolitan Area (CMA) of Edmonton is
the sixth largest metropolitan area in Canada. It is a popular
tourist destination in Canada with the West Edmonton Mall
and proximity to the Canadian Rockies being the main
attractions.
Robust construction activity was a major contributor to
Edmonton's economic growth in 1998 and 1999, and is
expected to continue to be the primary engine of growth in
2000. Construction activity is expected to be up 9% in
2000, the third consecutive year of above-8% growth.
There are 351 major projects (projects costing $2 million or
more) planned for the Edmonton service area having a total
value in excess of $38 billion. Of the 351 major projects,
there are 13 projects valued at $1 billion or more. The
projected construction activity should have a positive
impact on air travel through the Edmonton airports.
The strong economic activity in 1999 had positive effects on
the labour market, with more of the same expected in 2000.
Employment in the CMA increased 1.7% in 1999, while the
average annual unemployment rate fell from 6.1% the
previous year, to 5.9%. While inflationary pressures
remained subdued in 1998, due to the decline in energy
prices, they did pick up in 1999 with the inflation rate rising
to 3.2% in December 1999, compared to 2.3% in December
1998. It is expected that the inflation rate for 2000 will
register above-3% growth due to the sharp increase in
energy prices.
The outlook for 2000 is positive with the Conference Board
of Canada forecasting growth of 4.1%. The economy is
expected to be buoyed by continued growth in the
construction sector, as well as increased tourism activity.
The strong economic growth is expected to continue into
2001 and 2002. Transborder and international travel have
recorded strong growth in 1999 and 2000, in line with
economic growth. Domestic travel, on the other hand,
Edmonton Regional Airports Authority - Page 5
suffered in 1999 and the first quarter of 2000, due to the
impact of higher domestic fares and capacity reductions on
demand. However, since April 2000 when the new Air
Canada changed its flight schedule, domestic travel has
improved. For the first 11 months of 2000, total passenger
Economic Statistics (Edmonton CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
Unemployment rate
PASSENGER STATISTICS
Total Enplaned Passengers
(millions)
Vancouver
1999
7.9
1998
7.8
1997
7.4
1996
7.0
1995
6.0
1994
5.4
Toronto
13.9
13.4
13.0
12.1
11.2
10.5
traffic is up 3.3%, in line with economic growth. In the
medium-term, DBRS expects that passenger traffic will
continue to increase in line with the region’s economic
growth.
1999
1998
1997
1996
1995
1994
1993
929,145
1.6%
483
1.7%
5.9%
914,233
1.9%
475
1.9%
6.1%
897,334
1.4%
466
5.8%
6.7%
885,123
0.7%
441
(0.2%)
8.4%
878,770
0.2%
441
3.0%
8.9%
876,786
0.3%
429
1.5%
10.7%
874,276
0.9%
422
(1.6%)
11.1%
Montreal Edmonton* Calgary
4.8
1.8
3.9
4.6
1.9
3.8
4.5
1.8
3.7
4.5
1.6
3.5
4.3
1.3
2.8
4.1
1.2
2.5
Ottawa
1.6
1.6
1.5
1.4
1.3
1.3
Winnipeg
1.5
1.5
1.6
1.4
1.1
1.1
3.2%
2.1%
6.6%
5.0%
0.9%
(7.3%)
10.6%
6.4%
*For Edmonton marketplace
Growth
1999
1998
1997
Avg. 1994-1999
1.9%
4.7%
5.6%
7.9%
3.7%
3.1%
7.4%
5.8%
5.4%
.03%
1.7%
3.0%
(3.0%)
3.7%
10.5%
8.0%
The ERAA experienced important increases in passenger
traffic in 1996 and 1997, in part due to the introduction of
service by WestJet in June 1996. In 1998, passenger traffic
growth slowed to a rate of growth more consistent with
growth of the local economy. In 1999, however, total
passenger traffic fell as a result of a reduction in domestic
travel. The decline in domestic travel is largely related to
higher domestic fares and the significant uncertainties at the
time over the future of Canadian Airlines, as well as the
Travel Mix
1999
Domestic
International
Transborder
Total *
Vancouver
53%
21%
26%
100%
Toronto
45%
23%
33%
100%
1.6%
3.2%
7.6%
9.6%
slowdown in the energy sector in late 1998, which lasted
into the first part of 1999. Results for the first 11 months of
2000, however, suggest that total passenger traffic has
rebounded, with increased transborder and international
travel accounting for an important part of the improvement.
Since the acquisition of Canadian Airlines by Air Canada
and the resulting change in the flight schedule, domestic
travel has improved.
Montreal Edmonton
44%
86%
30%
2%
26%
12%
100%
100%
Calgary
72%
9%
19%
100%
Ottawa
76%
5%
20%
100%
Winnipeg
85%
2%
13%
100%
77%
23%
90%
10%
79%
21%
* totals may not add to 100 due to rounding
O&D
Connecting
72%
28%
70%
30%
Apart from YEG, the three other airports under the ERAA’s
management are largely local airports. The YEG primarily
serves the domestic market with a high dependence on O&D
traffic, although it and the Edmonton City Centre Airport
are also used as hubs to northern communities such as Fort
McMurray, Grande Prairie, Fort Nelson and Yellowknife.
Thus, the state of the local economy is more important for
88%
12%
89%
11%
ERAA than for the larger airports such as Toronto and
Vancouver in terms of passenger growth and the general
economics of the airport. Given ERAA’s high dependence
on the local economy and the small population base served
by the airport, passenger traffic is likely to grow more in
line with the region's economic growth.
Edmonton Regional Airports Authority - Page 6
REVENUE AND OPERATING EXPENSE ANALYSIS
The ERAA’s revenues have grown rapidly since 1995, with
a significant portion of the growth coming from non-airline
revenue sources, especially in 1997 and 1998 with the
implementation of the AIF. The growth rate of revenues
declined in 1999 to a more sustainable level of 2.4% as no
new sources of revenue were added to the revenue mix.
Revenues are expected to move up sharply in 2000 due to
the increase in the AIF. Previously, the AIF was levied at
$5 per enplaned passenger travelling within Alberta and
$10 per enplaned passenger travelling outside Alberta.
Effective January 1, 2000, the AIF was set at $10 for all
Revenue per Enplaned Passenger
1999
($)
Vancouver
Landing fees
4.44
Terminal charges
4.60
Concessions
7.74
Parking
2.51
Rentals, fees, other
3.39
AIF (net)
7.03
Total
29.70
% of revenue from airlines
enplaned passengers. The AIF is levied to help finance the
ERAA’s capital expenditures related to the ATR project at
the YEG. The AIF represents an important source of
revenue for the ERAA, accounting for 25% of its revenues
in 1999.
The ERAA has a diversified revenue base, but its
concession revenue is more modest relative to the other
major airport authorities. The construction of new retail
space, which is part of Phase III of the ATR project, should
provide a boost to this revenue source.
% Toronto % Montreal % Edmonton % Calgary % Ottawa % Winnipeg %
15
11.49
38 4.94 (2) 14 4.12 (1) 17
4.48
18
4.93
21
4.81
22
15
7.16
24 5.68 (2) 17 4.12 (1) 17
3.45
14
6.81
28
2.97
14
26
3.67
12 13.60 (3) 40
3.05
13
3.36
14
3.44
14
2.69
13
8
5.50
18
n/a
3.74
15
2.26
9
3.29
14
1.94
9
11
2.19
7
3.38
10
2.30
9
3.36
14
3.10
13
4.58
21
24
0
0
6.59
19
7.05
29
7.70
31
2.40
10
4.52
21
100 30.02 100 34.19
100
24.39
100 24.61 100 23.97 100
21.51 100
30
62
32
34
32
49
36
(1) Estimated on the basis of a 50/50 weighting between landing fees and general terminal fees.
(2) Weighting between landing fees and terminal charges based on the weighting from Aeroports de Montreal's 2000 budget.
(3) Includes revenues from parking and de-icing operations.
The ERAA’s operating expenses have grown at a rapid pace
since 1995 as well, although they have generally increased at
a slower pace than revenues. In 1999, however, while the
pace of growth of operating expenses continued to decline,
the growth rate was above that of revenues, resulting in a
decline in cash flow from operations. The sharp increase in
the ground lease payments relative to the capital maintenance
contribution was the main contributor to the increase in
expenses and the resulting decline in cash from operations.
The ERAA maintained tight control over its operating and
maintenance costs, resulting in a modest 0.7% increase in
1999.
The operation of four airports, combined with the small
population base served by the ERAA, results in high fixed
costs per enplaned passenger relative to the other major
Expenses per enplaned passenger
1999
($)
Vancouver
Operating and maintenance
8.30
Utilities, insurance & taxes
1.73
Ground lease paid
7.63
Total operating expenses
17.66
Interest expense (incl. capitalized)
2.68
Depreciation and amortization
3.12
Total expenses
23.46
Canadian airport authorities. This accounts for the ERAA’s
higher level of operating and maintenance expenses per
enplaned passenger. However, part of this is offset by a
capital maintenance contribution that it receives from the
federal government relating to its ground lease. The ERAA
is in the fortunate position of receiving a capital maintenance
contribution, which has up until now, entirely offset the
ERAA’s ground lease payments to the federal government.
DBRS does not expect the capital maintenance contribution
to fully offset the ERAA's ground lease payments in 2000.
However, it will continue to represent an important source of
revenue for the ERAA. The ERAA had relatively low
interest costs in 1999, but these costs will rise sharply in 2000
and 2001 due to the significant increase in the level of debt.
% Toronto % Montreal % Edmonton % Calgary % Ottawa % Winnipeg
47
10.62
50
17.53 76
11.91
91
7.48
56 10.93 63
12.19
10
1.98
9
3.64
16
1.40
11
0.85
6
2.62
15
1.57
43
8.48
40
1.92
8
(0.21)
-2
5.09
38
3.70
21
1.32
100
21.08 100 23.09 100 13.10 100 13.42 100 17.25 100 15.08
4.43
2.40
1.10
1.08
0.14
0.20
1.70
7.30
3.65
2.44
1.63
0.99
27.21
32.79
17.85
16.94
19.02
16.27
%
81
10
9
100
Edmonton Regional Airports Authority - Page 7
MEDIUM-TERM OUTLOOK
The assumptions underlying the DBRS projections for the
next five years are that revenue will average 3.7% growth,
based on 2.5% inflation and 2% passenger growth. DBRS is
assuming that landing fees and general terminal charges will
be increased by the rate of inflation. Operating and
maintenance expenses are expected to grow at 4.5% (based
on 2.5% inflation and 2.0% passenger growth) after having
been essentially flat in 1999. Property taxes are assumed to
rise at a rate of about 2.5% over the next three years as the
amount of annual capital expenditures declines, thus reducing
the rate of growth of the YEG's taxable assessment. Debtservicing costs will also be sharply higher in 2001 as a result
of the sharp increase in the level of debt in late 2000 due to
the $250 million revenue bond issue. The gross ground lease
payments are expected to increase at an accelerating pace in
the medium-term, as the passenger cap in the base rent
formula is scheduled to increase by 70,000 to 80,000
passengers per year until 2005 when the cap will be fixed at
3,960,000 passengers. For the purpose of the base rent
calculation, the airport passenger volume is capped at
3,590,000 for the year 2000. In addition, the ground rent
Outlook (DBRS estimates and ERAA projections for certain items)
($ 000s)
2000P
Capital expenditures
78,700
Net debt (net of cash and reserve funds)
132,364
Gross debt per enplaned passenger ($)
133.14
Debt service costs
3,500
Free cash flow (as per Indenture)/enplaned passenger ($)
Debt service/enplanced passenger
Debt service coverage (times)
Net debt per enplaned passenger ($)
Revenue/enplaned passenger ($)
Total expenses/enplaned passenger ($)
Gross debt per enplaned passenger ($)
8.84
1.86
4.74
70.49
26.18
23.00
133.14
formula includes a participation rent of 10% on the
incremental revenue generated from airside and general
terminal, concession and real estate beyond the airport base
revenue. The participation rent is scheduled to increase to
15% in 2006, to 25% in 2001 and then to 35% in 2021 for the
remainder of lease term. Starting in 2000, the capital subsidy
received from the federal government will no longer fully
offset the gross ground lease payments, which will introduce
some pressure on the ERAA’s other sources of revenue.
The ERAA’s total expenses per enplaned passenger are
projected to increase sharply in the near-term largely due to
the sharply higher interest costs and depreciation charges.
However, the ERAA’s free cash flow (as defined by the Trust
Indenture) is expected to continue to be sufficient to meet its
debt servicing payments and meet the debt service coverage
requirement of 1.00.
Beyond 2003 when the first three phases of ATR project are
expected to be completed, the ERAA will consider additional
capital projects depending on demand requirements and the
affordability of the projects.
2001P
41,000
167,387
130.53
18,035
2002P
30,500
191,497
127.77
18,420
2003P
18,500
203,199
124.84
18,881
2004P
7,500
203,497
121.75
19,353
2005P
7,500
203,399
118.49
19,836
12.54
9.42
1.33
87.39
26.62
28.00
130.53
12.50
9.43
1.33
98.02
27.07
28.98
127.77
12.46
9.47
1.32
101.97
27.53
29.72
124.84
12.42
9.52
1.30
100.12
28.00
30.19
121.75
12.36
9.57
1.29
98.11
28.48
30.68
118.49
Edmonton Regional Airports Authority - Page 8
Edmonton Regional Airports Authority
Statement of Earnings ($ 000s)
Revenue
Airside and general terminal charges
Terminal concessions & car parking
Real estate (rentals)
Police and security
Airport improvement fee (net)
Total revenue
Expenses
Operating and maintenance
Utilities, insurance & property taxes
Ground lease paid to federal government
Less: Canada Lease Capital Credit
Total operating expenses
Operating surplus
Interest charges
Depreciation & amortization
Recurring surplus
Unusual items
Surplus
Total operating expenses/total revenue (excl. AIF)
Recurring surplus/total revenue (excl. AIF)
Airport improvement fee/total revenue
Ground lease/total revenue
Interest Costs ($ 000s)
Interest capitalized
Total interest incurred
Interest coverage* (excluding AIF)
Interest coverage** (including AIF)
Year ended December 31
1999
1998
1997
1996
1995
15,258.2
12,560.6
1,722.4
2,534.7
13,036.3
45,112.3
15,437.9
11,215.6
1,606.8
2,501.4
13,308.9
44,070.6
13,889.2
11,091.2
1,348.7
1,739.2
9,167.5
37,235.8
13,382.0
9,737.5
1,298.4
24,417.9
10,203.8
7,310.0
635.8
18,149.6
22,042.7
2,584.0
6,338.4
(6,729.5)
24,235.6
20,876.7
764.9
6,755.6
13,356.2
(439.3)
12,916.9
21,837.7
2,146.5
5,673.4
(6,729.5)
22,928.0
21,142.6
(26.6)
5,001.5
16,167.7
(1,348.6)
14,819.2
20,292.9
2,414.2
5,122.4
(6,729.5)
21,100.0
16,135.8
758.3
4,672.4
10,705.1
1,627.4
12,332.5
16,497.4
2,407.1
4,167.6
(6,729.5)
16,342.6
8,075.4
782.9
3,003.5
4,289.0
(1,025.0)
3,264.1
13,508.1
1,611.9
1,554.9
(6,729.5)
9,945.4
8,204.2
736.1
1,713.4
5,754.8
5,754.8
75.6%
41.6%
28.9%
n/m
74.5%
52.6%
30.2%
n/m
75.2%
38.1%
24.6%
n/m
66.9%
17.6%
0.0%
n/m
54.8%
31.7%
0.0%
n/m
489.8
463.2
85.2
843.5
782.9
736.1
1,242.5
2,007.4
7.3
13.8
27.7
56.4
13.8
24.7
14.2
14.2
13.5
13.5
52.5%
3.8%
28.5%
n.a.
29.1%
23.0%
n/m
34.5%
31.1%
38.9%
n.a.
64.3%
22.1%
n/m
14.3%
11.3%
18.3%
n.a.
7.2%
3.3%
n/m
10,705.1
4,672.4
15,377.5
747.7
14,629.8
13,568.4
1,061.4
4,289.0
3,003.5
7,292.5
(2,045.9)
9,338.4
24,329.8
(14,991.4)
5,754.8
1,713.4
7,468.1
(586.1)
8,054.3
5,720.8
2,333.5
8.48
110.9%
4.44
(2.4%)
5.82
25.3%
*Operating surplus minus AIF /interest costs. **Operating surplus/interest costs.
Annual Growth
Total revenue
Airline revenue
Non-airline revenue
Airport improvement fee
Total operating expenses
Operating and maintenance expenses
Net ground lease pd to federal government
2.4%
(1.2%)
9.7%
(2.0%)
5.7%
0.9%
n/m
18.4%
11.2%
8.1%
45.2%
8.7%
7.6%
n/m
n/m: not meaningful
Cash Flow ($ 000s)
Recurring surplus
Depreciation & amortization
Cash flow from operations
Change in working capital
Operating cash after working capital
Net capital expenditure
Free cash flow
Cash flow from operations/enplaned passenger ($)
Cash flow from operations growth
13,356.2
16,167.7
6,755.6
5,001.5
20,111.8
21,169.2
(9,008.3) (2,488.4)
29,120.1
23,657.5
55,022.6
37,026.0
(25,902.5) (13,368.5)
10.87
(5.0%)
11.25
37.7%
Edmonton Regional Airports Authority - Page 9
Edmonton Regional Airports Authority
Balance Sheet ($ 000s)
Assets
Cash & restricted cash
Accounts receivable
Prepaid expenses & inventory
Deferred charges
Organization costs
Capital assets
Total assets
Liabilities & Equity
Short-term debt
Accounts payable & accrued liabilities
Deferred rent payable
Current portion of long-term debt
Current portion of capital lease obligations
Tenants security deposits
Long-term debt
Capital lease
Long-term benefit payable
Equity in capital assets
Total liabilities & equity
Capital Structure
Short-term debt
Long-term debt
Equity
Total
Debt per enplaned passenger
Year ended December 31
1999
1998
1997
1996
1995
6,254.4
5,698.2
1,045.4
9.0
134,475.3
147,482.2
4,303.4
843.7
434.4
75,642.0
81,223.6
1,420.7
11,848.7
816.6
552.0
44,796.0
59,434.0
3,101.2
9,418.9
740.7
554.0
35,620.3
49,435.2
986.1
8,303.7
553.7
496.3
3,090.1
14,123.0
27,552.8
19,706.6
39.9
393.8
66,759.5
729.4
608.5
59,244.4
147,482.2
385.8
8,716.1
385.6
376.4
24,560.3
471.9
46,327.6
81,223.5
6,682.5
7,449.3
362.1
530.3
12,400.2
32,009.7
59,434.0
5,523.4
6,850.3
1,489.9
527.2
15,153.2
19,891.2
49,435.2
3,284.1
5,741.6
1,250.0
461.5
3,449.9
13,365.8
27,552.8
0.0%
53.0%
47.0%
100.0%
0.5%
34.8%
64.6%
100.0%
0.0%
28.5%
71.5%
100.0%
0.0%
45.6%
54.4%
100.0%
0.0%
26.0%
74.0%
100.0%
36.09
13.47
7.04
10.13
3.66
Passenger Statistics
Total enplaned passengers (000s)
1,850.0
1,881.2
1,814.0
1,642.3
1,283.8
Travel Mix
Domestic
International
Transborder
86%
2%
12%
89%
2%
9%
89%
1%
10%
88%
1%
11%
87%
2%
11%
Connecting/Non Connecting Mix
O&D passengers
Connecting passengers
89%
11%
87%
13%
32,724
30,793
23,553
P e r e n p l a n e d p a s s e n g e r ($)
Airline revenue
Concessions & parking
Real estate and police & securitiy
AIF (net)
Total revenue
8.25
6.79
2.30
7.05
24.39
8.21
5.96
2.18
7.07
23.43
7.66
6.11
1.70
5.05
20.53
8.15
5.93
0.79
14.87
7.95
5.69
0.50
14.14
Operating and maintenance
Grant in lieu of taxes, insurance & other
Net ground lease pd to federal government
Interest
Depreciation & amortization
Total cost
Recurring surplus
- excluding interest
- excluding AIF
- excluding ground lease
11.91
1.40
(0.21)
0.41
3.65
17.17
7.22
7.63
0.17
7.01
11.61
1.14
(0.56)
(0.01)
2.66
14.83
8.59
8.58
1.52
8.03
11.19
1.33
(0.89)
0.42
2.58
14.63
5.90
6.32
0.85
5.02
10.05
1.47
(1.56)
0.48
1.83
12.26
2.61
3.09
2.61
1.05
10.52
1.26
(4.03)
0.57
1.33
9.65
4.48
5.06
4.48
0.45
105.2
110.1
103.1
86.3
60.9
Air cargo (metric tonnes)
Aircraft Movement Statistics
Total runway movements (000s)
Benchmark Report
Calgary Airport Authority
Current Report:
RATING
No rating assigned. Reference report only.
Geneviève Lavallée, CFA / Eric Beauchemin
(416) 593-5577 x277/x252
e-mail: [email protected]
OVERVIEW
The Calgary Airport Authority (the “Authority”) is a nonshare capital, provincially incorporated airport authority.
The Authority manages and operates the Calgary
International Airport (“YYC”) under a 60-year ground lease
with the Government of Canada, with an option to extend
for an additional 20 years. The YYC serves the Calgary
area, and is currently Canada’s fourth busiest airport, with
volumes in excess of 3.9 million enplaned passengers/year.
Passenger volumes have increased significantly at YYC
since 1994, although the rate of growth slowed dramatically
in 1999 due to a temporary decline in domestic travel.
However, transborder and international travel continued to
grow at a rapid pace. The Authority’s financial results
continued to improve in 1999, due to the increase in the
Airport Improvement Fee (AIF) in January 1999, while its
cash from operations (excludes AIF revenue as the
Authority uses it to finance its costs related to the facility
expansion program) fell somewhat to just under $14 million
from $16 million in 1998.
The Authority’s capital
expenditures totalled $67 million in 1999, with the majority
of the expenditures related to the ongoing facility expansion
program. A significant amount of the capital investments
CONSIDERATIONS
Strengths:
• Flexibility to set revenue structure to offset costs
• Low cost structure allows for reduced airline fees
• Strength of the economic region served by the Authority
• Phased approach of facility expansion program permits
adjustments to timing and scope of project
• Authority enjoys a monopoly in its franchise area
FINANCIAL INFORMATION
Interest coverage*
Free cash flow after capex ($ 000s)
Cash flow from operations + AIF/enplaned pass. ($)
Debt per enplaned passenger ($)
Revenue (incl. AIF) per enplaned passenger ($)
Total expenses per enplaned passenger ($)
Passenger volume growth
Air cargo volume (metric tonnes)
January 18, 2001
were covered by cash from operations and AIF revenue.
However, given the size of the investments related to the
expansion program, additional debt had to be incurred,
increasing the Authority’s level of debt to $72 million
($18.46/enplaned
passenger)
from
$56
million
($14.57/enplaned passenger) in 1998.
The strength of the economic area served by the Authority,
the strategic location of the YYC (including its proximity to
Banff and its status as a hub for WestJet Airlines), the
favourable outlook for the Canadian economy and the low
fuel taxes in Alberta are positive for the Authority’s future
revenues. However, the Authority’s facility expansion
program, to be completed in phases over the next six years,
will result in an increase in the Authority’s fixed costs over
the medium-term as it takes on additional debt to finance
the program. The Authority, like the other Canadian airport
authorities, also faces a number of fundamental challenges,
which could impact its financial position in the future.
These include high fixed operating costs due to the capitalintensive nature of airports, and the inherent risks associated
with the air travel industry and those associated with
increased exposure to a single major airline.
Challenges:
• High fixed operating costs
• Facility expansion program will result in higher fixed costs
due to increased debt and associated interest costs
• Re-negotiation of Canada Lease
• Inherent risk associated with air travel industry
• Increased exposure to a single major airline
Year ended December 31
1999
1998
1997
10.3X
13.2X
395.6X
(15,156)
(35,636)
(6,473)
11.19
8.02
4.53
18.46
14.57
2.66
24.61
20.54
16.28
15.85
13.87
12.87
1.6%
3.2%
7.6%
66,700
61,800
73,800
1996
77.3X
(276)
3.82
n/a
15.38
12.49
22.2%
53,600
1995
43.3X
(1,930)
3.68
n/a
16.59
13.85
14.6%
44,500
*Operating surplus+AIF/interest costs
THE COMPANY The Authority is a not-for-profit, non-share capital, provincially incorporated airport authority. The Authority
manages and operates the YYC under a 60-year ground lease with the Government of Canada, with an option to extend for an
additional 20 years. In addition to the YYC, the Authority operates the Springbank Airport (a general aviation facility) pursuant
to a lease with the Government of Canada having a term concurrent with the initial term of the YYC lease, and which includes the
option to purchase the Airport for $1 at any time during the term of the lease. A 17-member Board of Directors, consisting of
community representatives nominated by the Chamber of Commerce, and the federal and local governments, governs the
Authority. The YYC serves the Calgary area, and is currently Canada’s fourth busiest airport, with volumes in excess of
3.9 million enplaned passengers per year.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Calgary Airport Authority - Page 2
CONSIDERATIONS
Strengths: (1) The Authority has the legislated ability to set
rates and charges it requires from users of the YYC’s
facilities to operate a commercially viable operation. The
Authority operates on a cost-recovery basis and can adjust
landing fees and terminal fees charged to airlines with
60 days notice. Furthermore, the Authority levies an
Airport Improvement Fee (AIF), which it uses exclusively
to cover capital costs (including financing costs) related to
the expansion of its facilities. The AIF is an important
source of capital funding. In 1999, it covered about 45% of
the Authority's capital expenditures.
(2) The Authority maintains low operating costs (excluding
interest charges and depreciation) relative to all other major
Canadian airport authorities at $13.42 per enplaned
passenger in 1999. The low cost structure permits the
Authority to maintain competitive landing fees and terminal
charges.
(3) The YYC serves the Calgary Census Metropolitan Area
(CMA), which is the corporate headquarters of the oil and
gas sector, and has become the main business and banking
centre of western Canada with the second highest number of
head offices in Canada after Toronto. It has strong
economic fundamentals, including strong employment
growth, one of the lowest unemployment rates at 4.5% in
September 2000, and the fastest growing population of the
major urban centres in Canada. The medium-term outlook
for Calgary remains positive, given the strong energy sector
and the continued strength of the North American economy.
The favourable outlook, combined with strategic location of
Calgary as the gateway to the Banff and the key attributes of
the city, suggests favourable passenger growth in the
medium term.
(4) The facility expansion program is expected to continue
over the next six years, through a series of strategically
planned projects. The phased approach to expanding the
YYC facilities allows the Authority to adjust the timing and
scope of the project in response to changing demand factors.
In addition, the original design of the air terminal building
such that it could be expanded in logical phases into a
complete horseshoe configuration ensures that acceptable
service levels can be maintained during construction.
(5) Given the size of the YYC and the distance between it
and closest major airport (in Edmonton), it has a monopoly
in southern Alberta.
It is unlikely to attract major
CAPITAL EXPENDITURES – FACILITY EXPANSION PROGRAM
In April 1996, the Authority formally adopted a Master
Plan, which divides airport development into three phases
dictated by passenger volumes and aircraft movements.
•
Phase 1 of the Master Plan sets out the additional
airport infrastructure necessary to accommodate
passenger volumes of up to 7 million and aircraft
movements of up to 250,000.
•
Phase 2 sets out the additional capital projects
necessary to accommodate passenger volumes of up to
10 million and aircraft movements of up to 300,000.
competition in the form of competing airports. However, it
does face some competition from the other major airports in
western Canada for its connecting flight business.
Challenges: (1) A substantial portion of the Authority’s
expenses is fixed in nature due to the capital-intensive
nature of airports. Therefore, cash flows from operations
are highly sensitive to changes in air traffic volumes.
(2) The remainder of the $300 million facility expansion
program (at December 31, 1999, about $161 million had
been incurred) over the next six years is expected to raise
the Authority’s level of debt and increase its interest costs.
As a result, the Authority’s fixed costs will also increase.
While the Authority has the flexibility to raise its fees to
cover increased costs or to compensate for reduced revenues
as a result of an unexpected adversity, such as a severe
recession and the resulting downturn in air travel, its
competitiveness could be reduced if fees rise too high.
(3) The current fiscal arrangement with the Government of
Canada with respect to the ground lease for the YYC
expires on December 31, 2005. The Authority intends to
negotiate a new long-term fiscal arrangement with federal
government prior to the expiry of the current arrangement in
order to provide long-term certainty with respect to this
cost. Failure to negotiate a new arrangement, particularly a
favourable one, would introduce significant uncertainty to
the Authority’s financial outlook.
(4) The volatile nature of the travel industry can
significantly affect traffic volumes and may cause the rates
and charges for a particular year to be set too low. Air
travel is sensitive to: (a) economic conditions for business
and tourism; (b) energy price increases, which can
substantially impact air fares; and (c) event risks such as
labour strikes, terrorism or war.
(5) Canadian airport authorities’ exposure to a single major
carrier has increased as a result of the acquisition of
Canadian Airlines by Air Canada. They are now more
exposed to the impact of adverse events such as labour
strikes by Air Canada employees, and to reduced service as
a result of changes in the airline’s strategy. However, the
risk associated with a high exposure to a single airline is
reduced for airports that are more dependent on O&D
passenger traffic, like YYC. If an airline fails or reduces
service, another one will likely increase service to the
originating or ultimate destination of the passenger.
•
Phase 3 sets out the capital projects necessary to
accommodate passenger volumes of up to 15 million
and aircraft movements of up to 350,000.
In 1997, the Authority began a ten-year, $300 million
facility expansion program. On December 18, 1997, the
Authority entered into a $200 million, 15-year revolving,
reducing Credit Agreement to finance the expansion
program. Borrowings are through BAs and prime rate
loans, although the Authority has entered into an interest
rate swap agreement, locking in a fixed rate of 5.861% for
borrowings of up to $131.8 million. The Credit Agreement
Calgary Airport Authority- Page 3
is secured by a Trust Indenture, including the Assignment of
Rents.
The first five-year strategic plan and land development
strategy was implemented in 1998 for the 1999-2003 period.
By the end of 1999, the Authority had completed about
$161 million in capital expenditures related to the expansion
program. In light of the acquisition of Canadian Airlines by
Air Canada, the Authority undertook a complete review of
its expansion program in 2000. The Authority received
unanimous approval by the stakeholders, including the
airline consultative committee, for the revised expansion
plan.
Total capital expenditures are projected at $82 million for
2000, including expenditures related to maintenance and
renewal. By the end of 2003, the Authority expects to have
completed the capital projects necessary to accommodate
the current passenger volumes and aircraft movements, as
well as those necessary to meet the projected demand
requirements. The Authority manages its facility expansion
program as a continuing series of capital projects necessary
to meet the demand requirements.
Based on the current capital expenditure schedule for the
next three years and the maximum borrowings permitted
under the existing credit facility, DBRS expects that the
Authority will borrow in the public markets in 2001
(for further information, see the section Medium-Term
Outlook).
Air Terminal Development
The air terminal building was originally constructed such
that it could be expanded in logical phases into a complete
horseshoe configuration. Many of the Phase 1 projects have
been completed, including a four-gate expansion at the end
of Concourse A, the construction of additional parking
facilities, the completion of the Airport Corporate Centre
(a new loading dock, warehousing and office complex) and
the expansion of retail areas (17 new retail, food and
beverage tenants). Future capital projects within the Master
Plan include the construction of new concourses, additional
gate capacity and additional parking facilities, depending on
demand requirements.
Airport Road System Development
The major development occurring with respect to road
development is the construction of a new access road
(Airport Trail) to the airport. It is an alignment along 96th
Avenue with a direct connection to Highway 2/Deerfoot
Trail. The $22 million project is being funded by the City
of Calgary, the Province of Alberta and the Authority. The
new road should be open by the end of 2000, and is
expected to greatly reduce congestion, especially during
peak hours.
The following provides the Authority’s actual capital
spending since 1997 and the Authority’s current projection
of capital expenditures over the 2000-2003 period, including
those related to maintenance and renewal.
The following outlines the various expansion projects.
Airfield Development
Essentially all of the Phase 1 projects have been completed,
with most of the projects consisting of new taxiways, new
aprons and expansions of existing aprons. Future capital
projects within the Master Plan currently include a new
taxiway and a new north/south runway.
1997 (actual) 1998 (actual) 1999 (actual) 2000 2001 2002 2003 -
$31 million
$63 million
$67 million
$82 million
$154 million
$113 million
$66 million
LOCAL ECONOMY
YYC serves the Calgary CMA, the fifth largest metropolitan
area in Canada with a population of almost one million, and
it is the closest major airport to Banff and much of the
Canadian Rockies. Calgary is the corporate headquarters of
the oil and gas sector, and has become the main business
and banking centre of western Canada with the second
highest number of head offices in Canada after Toronto.
While the oil and gas sector continues to be a major
contributor to Calgary’s economy, the economic
diversification that has taken place over the last decade has
reduced Calgary’s sensitivity to the energy sector and
resulted in more stable growth. Other major contributors to
Calgary’s economy include agriculture and tourism, which
are largely a result of the city’s geographical location,
manufacturing, telecommunications, and its well-developed
transportation infrastructure (airport, rail and roads). As a
result of its geographical location, Calgary has also become
an important distribution centre.
Calgary experienced strong economic growth during most
of the 1990s, including 1998, despite the slowdown in the
energy sector. The economy registered strong growth again
in 1999, in part due to the rebound in the energy sector
during the second half of the year. Given the high oil and
gas prices and the continued strong U.S. and domestic
economic growth, Calgary’s economic performance has
remained strong in 2000.
Calgary’s population growth moderated in 1999 to 2.7%,
following robust growth of 3.6% in 1998. Calgary's labour
market remained healthy in 1999 and imp roved further in
2000, with the unemployment rate having remained below
5.0% since February and total employment in September
2000 up 5.7% over the previous year.
The medium-term outlook for Calgary remains positive,
given the strong energy sector and the continued strength of
the North American economy. Strong consumer spending
and investment spending are expected to continue to drive
growth in the near term.
The distribution, energy,
manufacturing and telecommunications sectors are all
expected to be the primary contributors to growth in the
medium term. The city's population is projected to continue
Calgary Airport Authority - Page 4
to increase, but at a slower pace than experienced in recent
years. The inflation rate is projected to rise, largely due to
higher energy prices.
The positive economic outlook for Calgary, the city’s
attribute of having the second highest number of head
offices in Canada after Toronto, and the YYC’s strategic
location as a key hub for western Canada and the principal
gateway to Banff and the Canadian Rockies are favourable
conditions for future passenger growth at the YYC.
Year ended December 31
1999
1998
Economic Statistics (Calgary CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
Unemployment rate
934
3.4%
519
4.0%
5.6%
903
3.5%
499
5.4%
5.2%
1997
1996
1995
1994
1993
873
3.3%
474
4.7%
5.9%
845
2.4%
452
6.0%
7.0%
825
2.2%
427
5.6%
8.1%
807
1.9%
404
2.0%
9.4%
792
1.4%
396
0.6%
10.3%
PASSENGER STATISTICS
Total Enplaned Passengers
(millions)
Vancouver
1999
7.9
1998
7.8
1997
7.4
1996
7.0
1995
6.0
1994
5.4
Toronto
13.9
13.4
13.0
12.1
11.2
10.5
Montreal
4.8
4.6
4.5
4.5
4.3
4.1
Edmonton*
1.8
1.9
1.8
1.6
1.3
1.2
Calgary
3.9
3.8
3.7
3.5
2.8
2.5
Ottawa
1.6
1.6
1.5
1.4
1.3
1.3
Winnipeg
1.5
1.5
1.6
1.4
1.1
1.1
3.7%
3.1%
7.4%
5.8%
5.4%
.03%
1.7%
3.0%
(3.0%)
3.7%
10.5%
8.0%
1.6%
3.2%
7.6%
9.6%
3.2%
2.1%
6.6%
5.0%
0.9%
(7.3%)
10.6%
6.4%
*For Edmonton marketplace.
Growth
1999
1998
1997
Avg. 1994-1999
1.9%
4.7%
5.6%
7.9%
The YYC serves as a hub for western Canada, as WestJet
Airlines’ hub and its corporate and operational
headquarters, and is the principal gateway to the Canadian
Rockies.
Furthermore, Calgary is the corporate
headquarters to the oil and gas sector and is an important
financial centre. As a result, the YYC has much higher
passenger volumes relative to its population base when
compared to the other airports that serve cities of a similar
size like Edmonton, Ottawa and Winnipeg.
The YYC has experienced tremendous passenger traffic
growth since 1994, although the pace of growth slowed
Travel Mix
1999
Domestic
International
Transborder
Total *
Vancouver
53%
21%
26%
100%
Toronto
45%
23%
33%
100%
significantly in 1999. The slowdown in the growth rate is
entirely attributable to a decline in domestic travel in 1999
due to the significant uncertainties at the time over the
future of Canadian Airlines, as well as the slowdown in the
energy sector in late 1998, which lasted into the first part of
1999. Some losses in domestic passenger traffic are
expected to have been erased in 2000, and DBRS expects
the growth rate of total passenger volumes to return to a
more stable rate of 2.5% starting in 2001.
Montreal Edmonton
44%
86%
30%
2%
26%
12%
100%
100%
Calgary
72%
9%
19%
100%
Ottawa
76%
5%
20%
100%
Winnipeg
85%
2%
13%
100%
77%
23%
90%
10%
79%
21%
* Totals may not add to 100 due to rounding.
O&D
Connecting
72%
28%
70%
30%
The YYC’s travel mix and flight schedule indicates that the
YYC is largely a hub for western Canada, much like the
Halifax International Airport is for eastern Canada. While
domestic travel remains dominant at the YYC, transborder
88%
12%
89%
11%
travel has exhibited important growth since the signing of
the Open Skies Agreement in February 1995. Furthermore,
international travel has increased sharply in recent years,
Calgary Airport Authority- Page 5
largely driven by the strong economy and Calgary’s close
proximity to the Rockies.
While the YYC serves as a hub for WestJet Airlines and
more generally, as a hub for western Canada, O&D traffic
remains dominant, providing a more stable activity base.
Given the YYC’s current passenger mix characteristics,
future passenger volumes and aircraft movements are
REVENUE ANALYSIS
The Authority’s total revenues have grown rapidly since
1994, with especially strong growth recorded in 1998 and
1999 due to the implementation of an AIF in October 1997,
and the subsequent increase in the AIF from $5/local
enplaned passenger to $10/local enplaned passenger in
January 1999.
The Authority’s operating revenues
(excluding the AIF) have increased at a healthy pace as
well, with the growth coming from both airline and nonairline revenues. The Authority has a diversified operating
revenue base, which contributes to the maintenance of
competitive landing fees and terminal charges. In 1999, the
Authority obtained 32% of its total revenue from airlines
(landing fees and terminal charges) and 37% from
commercial sources (concessions, parking, rentals and
other).
Non-airline revenue sources are expected to
continue to increase in importance in the near term given
the new concessions and services (17 new retail and food
and beverage tenants) added in 1999, as well as the
improvements made to parking convenience.
Revenue per Enplaned Passenger
1999
($)
Vancouver
Landing fees
4.44
Terminal charges
4.60
Concessions
7.74
Parking
2.51
Rentals, fees, other
3.39
AIF (net)
7.03
Total
29.70
% of revenue from airlines
expected to be a function of the following: (1) the state of
the Canadian economy; (2) the level of fuel prices,
including fuel taxes, in Alberta; (3) the state and efficiency
of the Authority’s facilities, and the cost of these services to
the airlines; and (4) the YYC’s capacity to accommodate
new airline companies and/or additional flights.
The AIF accounted for 31% of total revenue in 1999.
However, the Authority uses its AIF revenue exclusively to
fund capital costs (including financing costs) related to the
expansion of the YYC’s facilities and does not use this
revenue to finance operating expenses. The Authority
operates on a cost-recovery basis and can adjust landing
fees and terminal fees charged to airlines with 60 days
notice. Furthermore, the Authority can adjust the AIF as
well, up to $99/enplaned passenger under the current
collection agreement with the airlines.
The share of revenues obtained from the AIF is higher for
the Authority than for all of the other Canadian airport
authorities, which is positive for financing its expansion
projects. The Authority’s reliance on commercial revenue
is generally in line with other airport authorities, although
its parking revenues are somewhat weaker than at some of
the other airports.
% Toronto % Montreal
15 11.49 38 4.94 (2)
15
7.16
24 5.68 (2)
26
3.67
12 13.60 (3)
8
5.50
18
n/a
11
2.19
7
3.38
24
0
0
6.59
100 30.02 100 34.19
30
62
% Edmonton % Calgary % Ottawa % Winnipeg %
14 4.12 (1) 17
4.48
18
4.93
21
4.81
22
17 4.12 (1) 17
3.45
14
6.81
28
2.97
14
40
3.05
13
3.36
14
3.44
14
2.69
13
3.74
15
2.26
9
3.29
14
1.94
9
10
2.30
9
3.36
14
3.10
13
4.58
21
19
7.05
29
7.70
31
2.40
10
4.52
21
100 24.39 100 24.61 100 23.97 100 21.51 100
32
34
32
49
36
(1) Estimated on the basis of a 50/50 weighting between landing fees and general terminal fees.
(2) Weighting between landing fees and terminal charges based on the weighting from Aeroports de Montreal's 2000 budget.
(3) Includes revenues from parking and de-icing operations.
OPERATING EXPENSE ANALYSIS
The Authority’s operating and maintenance expenses have
increased markedly since 1996, when the Authority began
investing more substantially in the YYC’s infrastructure.
However, the annual rate of growth has come down from its
peak of 16.2% in 1997 to 11.2% in 1999. The Authority is
expecting the rate of growth to fall to below 10% in 2000.
Property taxes increased sharply in 1999 (19.4%) due to the
sharp increase in taxable assessment related to the major
investments in the YYC’s infrastructure, but were relatively
stable from 1994 to 1998. The ground lease payments to
the federal government have grown at a stable rate over the
1997-1999 period (just over 4%) after increasing
significantly during 1994 to 1996. Ground lease payments
are projected to continue to rise at a rate of 4.0% per year
over the medium term.
Interest costs remain relatively low, but will continue to
increase as the Authority takes on additional debt to finance
the expansion program.
Despite the sharp increase in recent years in the Authority’s
operating and maintenance expenses related to the growing
infrastructure that must be maintained, it continues to have
one of the lowest cost structures, putting it at a competitive
advantage in terms of setting its landing fees and terminal
charges. It is also in the fortunate position of having very
low property taxes relative to the other airport authorities.
The current low cost structure and the significant amount of
capital investment already completed to date provide the
Authority with significant flexibility to deal with the
projected increases in debt servicing costs related to the
continuation of the facility expansion program.
Calgary Airport Authority - Page 6
Expenses per enplaned passenger
1999
($)
Vancouver
Operating and maintenance
8.30
Utilities, insurance & taxes
1.73
Ground lease paid
7.63
Total operating expenses
17.66
Interest expense (incl. capitalized) 2.68
Depreciation and amortization
3.12
Total expenses
23.46
% Toronto % Montreal % Edmonton
47
10.62
50
17.53 76
11.91
10
1.98
9
3.64
16
1.40
43
8.48
40
1.92
8
(0.21)
100 21.08 100 23.09 100 13.10
4.43
2.40
1.10
1.70
7.30
3.65
27.21
32.79
17.85
MEDIUM-TERM OUTLOOK
Over the next five years, DBRS expects that the Authority’s
fixed charges will increase due to the rising debt levels and,
consequently, interest costs as the facility expansion
program proceeds.
However, DBRS expects the
Authority’s operating results (operating revenue minus
operating expenses, excluding interest costs and
depreciation) to remain stable, with cash from operations
expected to remain in the range of $13 million to
$16 million. This projection is based on the following
assumptions: (1) revenues will grow at an annual rate of
4.5%, assuming 2.5% passenger growth and 2.0% inflation
(DBRS is assuming that airline fees will be increased by the
rate of inflation); (2) operating and maintenance
expenditures will continue to grow at a sharply higher rate
than revenues over the next three years (8%-13%) due to the
growing facilities; (3) property taxes will continue to
increase significantly (8%-15%) over the next three years,
along with the capital expenditures, as the continued
construction is expected to increase the YYC’s taxable
assessment; and (4) moderate (4%) increases in the ground
lease payments.
As a result, DBRS expects the Authority’s cash from
operations will be sufficient to cover annual maintenance
capital expenditures, while the AIF revenue will continue to
be applied towards the capital costs (including financing
costs) of the facility expansion program.
DBRS is
projecting AIF revenue to increase at an annual rate of 2.5%
in the medium term (the projected passenger growth rate).
Based on the projected capital expenditure program
(including maintenance capital spending) over the next five
years, the projected AIF revenue and cash flow from
operations, DBRS projects that the Authority’s level of
debt/enplaned passenger will reach to reach a peak of
$84.12 in 2003. While this is a significant increase over the
per enplaned passenger debt level of $18.46 at the end of
1999, it remains below the Greater Toronto Airport
Authority and the Edmonton Regional Airports Authority’s
current level of debt per enplaned passenger level, and is
below that expected for many of the other major Canadian
airport authorities currently undertaking expansion
programs.
Based on the projected increase in the level of debt and, the
associated interest costs, DBRS expects the coverage ratio
(AIF revenue/interest costs) to decline in the medium term
to 1.45X in 2004 from 7.09X in 1999. Under the current
agreement with the collecting airlines, the Authority has the
ability to increase the AIF to a maximum of $99/local
enplaned passenger. While this provides the Authority with
significant flexibility, DBRS does not expect that the
Authority will have to increase the AIF in order to maintain
a reasonable interest coverage.
Based on the current capital expenditure schedule for the
next three years and the maximum borrowings permitted
under the existing credit facility ($200 million), DBRS
expects that the Authority will borrow in the public markets
in 2001 to finance its capital expansion program.
The Authority is currently in a reasonably good financial
position, which provides it with sufficient flexibility to deal
with the additional financing costs over the next two to
three years without having to increase its user fees.
Outlook (DBRS estimates and Authority projections for certain items):
($ 000s)
2000P
2001P
Capital expenditures
82,000
154,000
Debt
115,630
235,835
Debt per enplaned passenger ($)
28.92
57.55
Operating expenses/enplaned passenger ($)
Operating revenue/enplaned passenger ($)
AIF/interest costs
13.97
17.24
5.60
% Calgary % Ottawa % Winnipeg %
91
7.48
56 10.93 63
12.19 81
11
0.85
6
2.62 15
1.57
10
-2
5.09
38
3.70 21
1.32
9
100 13.42 100 17.25 100 15.08 100
1.08
0.14
0.20
2.44
1.63
0.99
16.94
19.02
16.27
14.37
17.58
2.90
2002P
113,000
321,044
76.44
2003P
66,000
362,135
84.12
2004P
15,000
351,324
79.62
2005P
15,000
337,684
74.66
14.72
17.92
1.80
14.98
18.27
1.48
15.16
18.63
1.45
15.36
18.99
1.54
Calgary Airport Authority- Page 7
Calgary Airport Authority
Statement of Earnings ($ 000s)
Revenue
Landing fees
Terminal charges
Concessions
Car parking
Real estate (rentals) & security
Other revenue
Total operating revenue
Year ended December 31
1999
1998
1997
1996
1995
17,470
13,447
13,111
8,824
10,440
2,670
65,962
16,798
12,948
14,146
8,281
10,166
1,763
64,102
15,711
12,126
12,865
8,189
8,117
1,066
58,074
16,262
11,272
11,967
6,147
6,225
1,304
53,177
13,926
9,423
11,162
5,096
6,152
1,167
46,926
29,168
3,307
19,854
52,329
13,633
30,026
9,497
34,162
34,162
26,230
2,769
19,046
48,045
16,057
14,736
5,180
25,613
25,613
22,731
2,691
18,255
43,677
14,397
2,460
4,167
12,690
12,690
19,562
2,788
17,456
39,806
13,371
173
3,200
9,998
9,998
19,310
2,789
14,173
36,272
10,654
246
2,666
7,742
7,742
Total operating expenses/total operating revenue
Recurring surplus/total operating revenue
Airport improvement fee/total operating revenue
Ground lease/total operating revenue
79.3%
51.8%
45.5%
30.1%
75.0%
40.0%
23.0%
29.7%
75.2%
21.9%
4.2%
31.4%
74.9%
18.8%
0.0%
32.8%
77.3%
16.5%
0.0%
30.2%
Interest Costs ($ 000s)
Interest capitalized
Total interest incurred
4,230
4,230
2,340
2,340
43
43
173
246
3.22
10.32
6.86
13.16
337.89
395.62
77.29
77.29
43.31
43.31
Expenses
Operating and maintenance
Property taxes
Ground lease paid to federal government
Total operating expenses
Operating surplus
Airport improvement fee (net)
Interest charges
Depreciation
Recurring surplus
Unusual items
Surplus
Interest coverage*
Interest coverage** (including AIF)
* Operating surplus/interest costs. **Operating surplus+AIF/interest costs.
Annual Growth
Total operating revenue
Airline revenue
Non-airline revenue
Airport improvement fee
Total operating expenses
Operating and maintenance expenses
Ground lease paid to federal government
2.9%
3.9%
2.0%
103.8%
8.9%
11.2%
4.2%
10.4%
6.9%
13.6%
499.0%
10.0%
15.4%
4.3%
9.2%
1.1%
17.9%
n.a.
9.7%
16.2%
4.6%
13.3%
17.9%
8.8%
n.a.
9.7%
1.3%
23.2%
14.8%
15.6%
13.9%
n.a.
19.5%
4.7%
56.6%
Cash Flow ($ 000s)
Operating surplus
Interest expense
Cash flow from operations
Cash from (used in) working capital
Operating cash after working capital
Net capital expenditure
Cash from working capital related to capital assets
Airport improvement fee
Free cash flow
13,633
13,633
(4,673)
8,960
(67,092)
12,950
30,026
(15,156)
16,057
16,057
(8,575)
7,482
(63,395)
5,541
14,736
(35,636)
14,397
14,397
7,459
21,856
(30,789)
2,460
(6,473)
13,371
(173)
13,198
2,370
15,568
(15,844)
(276)
10,654
(246)
10,408
(2,695)
7,713
(9,643)
(1,930)
Cash flow from operations + AIF/enplaned pass. ($)
Cash flow from operations growth
11.19
(15.1%)
8.02
11.5%
4.53
9.1%
3.82
26.8%
3.68
(0.3%)
Calgary Airport Authority - Page 8
Calgary Airport Authority
B a l a n c e S h e e t ($ 000s)
Assets
Cash & s-t investments
Accounts receivable
Prepaid expenses & inventory
Capital assets
Organization costs
Other assets
Total assets
Year ended December 31
1999
1998
1997
1996
1995
14,145
9,043
842
183,931
665
208,626
13,499
6,852
853
126,297
677
148,178
3,825
6,275
796
67,782
723
79,401
543
4,091
762
40,914
242
46,552
539
5,591
798
27,799
727
35,454
21,837
1,125
653
72,000
1,064
111,947
208,626
11,803
756
1,002
55,900
932
77,785
148,178
14,467
492
1,327
9,900
1,043
52,172
79,401
4,717
315
1,310
728
39,482
46,552
3,992
206
1,365
407
29,484
35,454
Capital Structure
Short-term debt
Long-term debt
Equity
Total
0.0%
39.1%
60.9%
100.0%
0.0%
41.8%
58.2%
100.0%
0.0%
15.9%
84.1%
100.0%
0.0%
0.0%
100.0%
100.0%
0.0%
0.0%
100.0%
100.0%
Debt per passenger
$18.46
$14.57
$2.66
$0.00
$0.00
Liabilities & Equity
Bank indebtedness
Accounts payable & deferred revenue
Current portion of other long-term liabilities
Tenants security deposits
Long-term debt
Other long-term liabilities
Equity in capital assets
Total liabilities & equity
Passenger Statistics
Total enplaned passengers (000s)
3,900
3,838
3,719
3,457
2,828
Travel Mix
Domestic
Transborder
International
72%
19%
9%
73%
19%
8%
74%
19%
7%
74%
19%
7%
73%
20%
7%
Connecting/Non Connecting Mix
O&D passengers
Connecting passengers
77%
23%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Air cargo (metric tonnes)
66,700
61,800
73,800
53,600
44,500
Growth
Domestic
Transborder
International
Total passengers
(0.6%)
6.8%
10.1%
1.6%
2.6%
0.1%
17.6%
3.2%
8.0%
6.7%
5.8%
7.6%
23.3%
17.7%
24.2%
22.2%
11.0%
19.5%
45.7%
14.6%
7.9%
(16.3%)
37.7%
20.4%
(2.8%)
Air Cargo
P e r e n p l a n e d p a s s e n g e r ($)
Landing fees
Terminal charges
Concessions
Car parking
Real estate (rentals) & security
Other revenue
Airport improvement fee (net)
Total revenue
4.48
3.45
3.36
2.26
2.68
0.68
7.70
24.61
4.38
3.37
3.69
2.16
2.65
0.46
3.84
20.54
4.22
3.26
3.46
2.20
2.18
0.29
0.66
16.28
4.70
3.26
3.46
1.78
1.80
0.38
15.38
4.92
3.33
3.95
1.80
2.18
0.41
16.59
Operating and maintenance
Property taxes
Ground lease paid to Federal Government
Interest
Depreciation & amortization
Total expenses
7.48
0.85
5.09
2.44
15.85
6.84
0.72
4.96
1.35
13.87
6.11
0.72
4.91
1.12
12.87
5.66
0.81
5.05
0.05
0.93
12.49
6.83
0.99
5.01
0.09
0.94
13.85
8.76
6.67
3.41
2.89
2.74
8.76
1.06
13.85
6.67
2.83
11.64
3.41
2.75
8.32
2.94
2.89
7.94
2.82
2.74
7.75
Recurring surplus
- excluding interest
- excluding AIF
- excluding ground lease
Benchmark Report
Ottawa International Airport Authority
Current Report:
RATING
No rating assigned. Reference report only.
January 18, 2001
Geneviève Lavallée, CFA / Eric Beauchemin
(416) 593-5577 x277/x252
e-mail: [email protected]
OVERVIEW
The Ottawa International Airport Authority (“OIAA”) is a
non-share capital, federally incorporated Canadian airport
authority. The OIAA operates the Ottawa International
Airport (“YOW”) under a 60-year ground lease with the
Government of Canada, with an option to extend for an
additional 20 years. YOW serves the National Capital
Region, and currently has volumes in excess of 1.6 million
enplaned passengers per year.
The YOW has experienced significant increases in
passenger traffic since 1994, with the strong growth in
transborder and international travel in recent years
accounting for the bulk of the growth. The OIAA’s
financial results continued to improve in 1999, primarily
due to the implementation in September 1999 of a
$10/enplaned passenger Airport Improvement Fee (AIF)
and the maintenance of tight controls over its operating and
maintenance expenses. Excluding the AIF, which the
OIAA is using exclusively to finance the capital costs
related to major airport infrastructure projects, the OIAA’s
operating results remained healthy as well, with cash flow
from operations more than sufficient to internally finance all
CONSIDERATIONS
Strengths:
• Flexibility to set revenue structure to offset costs
• High origination & destination (O&D) passenger mix
• Positive economic outlook for the Ottawa-Hull region
• Phased approach of Airport Expansion Program permits
adjustments to timing and scope of project and minimizes
service disruptions
FINANCIAL INFORMATION
Interest coverage*
Free cash flow after capex ($ 000s)
Cash flow from operations + AIF/enplaned pass. ($)
Debt per enplaned passenger ($)
Revenue (incl. AIF) per enplaned passenger ($)
Total expenses per enplaned passenger ($)
Passenger volume growth
Air cargo volume (metric tonnes)
of its capital expenditures in 1999. The OIAA’s financial
results for 2000 are expected to have remained strong.
The diversified revenue base and favourable medium-term
outlook for passenger growth, based on the National Capital
Region’s strong economic fundamentals and the high O&D
passenger mix at 90%, are positive for the OIAA’s future
revenues. However, the $300 million airport expansion
program over the next 3½ years will result in a sharp
increase in the level of debt and in interest costs, which will
add to the OIAA’s already high fixed costs. The OIAA
currently faces higher fixed operating costs relative to other
airports of similar size due to the high municipal property
taxes and ground lease rent, putting it at a disadvantage
relative to its peers. Although the OIAA, like the other
Canadian airport authorities, has the flexibility to increase
its user fees to cover any increased costs, its
competitiveness relative to other airports could be reduced
should the fees rise too high. Other challenges facing the
OIAA include its proximity to Montréal and Toronto, which
introduces competition for leisure travel, the inherent risks
associated with the air travel industry and the risks
associated with increased exposure to a single major airline.
Challenges:
• Substantial fixed operating costs, including high municipal
property taxes and ground lease rent
• Airport Expansion Program will result in increased fixed
costs
• Proximity to Montréal and Toronto introduces competition
for leisure travel
• Inherent risk associated with the travel industry
• Increased exposure to a single major airline
Year ended December 31
1999
1998
46.8X
38.8X
5,111
3,258
6.56
4.25
3.59
2.58
23.97
21.57
19.03
18.77
3.2%
2.1%
n/a
n/a
1997
14.0X
(4,245)
2.83
4.68
17.59
15.67
6.6%
n/a
*Operating surplus+AIF/interest costs.
THE COMPANY The Ottawa International Airport Authority is a non-share capital, federally incorporated Canadian airport
authority. The OIAA operates the YOW under a 60-year ground lease with the Government of Canada, with an option to extend
for an additional 20 years. A 15-member Board of Directors, consisting of community representatives nominated by the federal,
provincial and local governments governs the OIAA. YOW serves the National Capital Region, and is currently Canada’s sixth
busiest airport with volumes in excess of 1.6 million enplaned passengers per year.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee t hat it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Ottawa International Airport Authority - Page 2
CONSIDERATIONS
Strengths: (1) The OIAA has the ability to set rates and
charges it requires from users of the Airport’s facilities to
operate on a commercially viable basis. The OIAA can
adjust landing fees and terminal fees charged to airlines with
60 days notice. Furthermore, the OIAA began levying a
$10 Airport Improvement Fee in September 1999 to fund
the capital and related financing costs of major airport
infrastructure development. Under the agreement with
collecting airlines, the OIAA has the authority to increase
the AIF to a maximum of $99/enplaned passenger. It is
expected that the AIF revenue for 2000 will come in at
around $15 million, making it an important source of capital
funding.
(2) The OIAA's O&D passenger traffic comprises
approximately 90% of the total traffic volume, which
provides a much more stable activity base than airports
dependent on connecting traffic. As a result, the OIAA is
less exposed to the financial failures, restructuring or new
alliances of airlines than airports that rely heavily on
connecting traffic. If one airline reduces service, another
one will likely increase service to the originating or ultimate
destination of the passenger.
(3) The economic outlook for the Ottawa-Hull area remains
positive, with the Conference Board of Canada expecting
Ottawa-Hull to post very strong economic growth in 2000.
As was the case in 1999, growth in 2000 will be led by the
high tech industry, although the federal government is also
expected to contribute to the economic expansion with the
pay equity settlements accounting for a large portion of the
boost in 2000. Continued strong growth in the advanced
technology sector should continue to support business and
leisure travel. Given the OIAA's high dependence on O&D
traffic, the state of the local economy is important for
passenger growth.
(4) The Airport Expansion Program will be undertaken in
various strategically planned phases. The phased approach
allows the OIAA to adjust the timing and scope of the
project in response to changing factors, as well as ensuring
the maintenance of acceptable service levels during the
construction.
Challenges: (1) A substantial portion of the OIAA’s
expenses is fixed in nature due to the capital-intensive
nature of airports, and its payments-in-lieu of municipal
taxes and ground lease payments are currently significantly
higher than other airports of comparable size. This places
CAPITAL EXPENDITURES – AIRPORT EXPANSION PROGRAM
An Airport Master Plan was completed by the OIAA in
1998, providing a framework for the development of new
and improved airport facilities and services in order to the
meet the existing and projected capacity requirements to the
year 2020. The Airport Master Plan concludes that the
YOW currently has sufficient runway and taxiway capacity
to meet projected future requirements to the year 2020.
However, the runway reserve beside the main runway will
be preserved to meet capacity requirements beyond 2020.
Based on the existing capacity shortfalls in the terminal
building and apron area, and based on the projected growth
OIAA at a disadvantage relative to other airports of the
same size. Given the high fixed costs, cash flows from
operations are highly sensitive to changes in air traffic
volumes.
(2) The $300 million Airport Expansion Program over the
next three and a half years is expected to result in a sharp
increase in debt per enplaned passenger. As a result, the
OIAA’s interest costs, which are fixed costs, will increase
substantially. While the OIAA has the flexibility to raise its
fees to cover increased costs or to compensate for reduced
revenues as a result of an unexpected adversity, such as a
severe recession and the resulting downturn in air travel, its
competitiveness could be reduced if fees were to rise too
high.
(3) The close proximity of YOW to two large airports,
Montréal (two hours by car) and Toronto (four hours by car)
introduces competition for leisure travel business, especially
compared to other Canadian airports of similar size. This is
likely a contributing factor to the YOW’s lower total
passenger volumes relative to the population base served by
the airport – the Ottawa-Hull area is the fourth largest
metropolitan area in Canada, but YOW is only the sixth
busiest airport.
While the OIAA faces increased
competition as a result of its proximity to Montréal and
Toronto, its current low reliance on leisure travel mitigates
much of the downside risk.
(4) The volatile nature of the air travel industry can
significantly affect traffic volumes and may cause the rates
and charges for a particular year to be set too low. Air
travel is sensitive to: (a) economic conditions for business
and tourism; (b) energy price increases, which can
substantially impact air fares; and (c) event risks such as
labour strikes, terrorism or war. Furthermore, the departure
and entrance of new airlines can also affect traffic volumes
and create uncertainties for airports when setting their fees.
(5) Canadian airport authorities’ exposure to a single major
carrier has increased as a result of the acquisition of
Canadian Airlines by Air Canada. They are now more
exposed to the impact of adverse events such as labour
strikes by Air Canada employees, and to reduced service as
a result of changes in the airline’s strategy. However, the
risk associated with a high exposure to a single airline is
sharply reduced for airports that are dependent on O&D
passenger traffic, like YOW. If an airline fails or reduces
service, another one will likely increase service to the
originating or ultimate destination of the passenger.
in passenger volumes over the next 20 years, the Airport
Master Plan concludes that substantial expansion and
renovation to the terminal building, as well as to the access
roads and parking facilities, is required. The Airport Master
Plan recommends a phased approach to the expansion
program to render it more financially manageable, as well
as allowing the OIAA to introduce service improvements on
a more regular basis. The phased approach also provides
the OIAA with flexibility to adjust the plan to meet any
changes in capacity requirements should the passenger
Ottawa International Airport Authority - Page 3
traffic projections change drastically from the original
projections.
The second step in the expansion program, finalizing the
Program Definition Document (PDD), was completed in
1999. The PDD outlines the requirements, specification and
design principles in order to establish the funding required
and to establish appropriate benchmarks. The third step of
the expansion program, the Board of Directors’ unanimous
decision to proceed with the expansion plan, was approved
and announced on October 26, 2000.
Phase 1 of the Airport Expansion Program, scheduled for
completion by the spring of 2004, includes:
• A new $140 million passenger terminal building
alongside the existing terminal building;
• $60 million on a new parking structure, and groundside
and airside improvements;
• $12 million in miscellaneous projects, including the
$7 million Combined Services Building recently
completed; and
• $89 million in fees, expenses and contingencies.
Phase 2, tentatively scheduled for completion in 2010
depending on demand requirements, includes $40 million in
capital expenditures for:
• Construction and activation of 15 new gates in the new
terminal building;
• Limited expansion of the new terminal building;
• Extension of the dual taxiway; and
• Removal of the existing terminal building.
Phase 3, tentatively scheduled for completion in 2014
depending on demand requirements, includes $48 million in
capital spending for:
• Further expansion of the new terminal building;
LOCAL ECONOMY
YOW serves the National Capital Region (the Ottawa-Hull
area), which is the political and administrative centre of the
federal government. While the government sector continues
to be the foundation of Ottawa-Hull economy, the region’s
economic base has become more diversified over the last
decade with the region developing into Canada’s centre for
advanced technology. There are currently about 1000
companies in the region specializing in this field,
contributing to 15% of the region’s employment compared
to 7% ten years ago. Further evidence of the importance of
this sector is the fact that Nortel Networks is currently the
region’s second largest employer after the federal
government, while JDS Uniphase is the third largest
employer. As a result of the tremendous growth in the
information technology sector in recent years, the region’s
economy has recorded strong gains although its population
has continued to grow at an average annual rate of just
under 1.0%. The Ottawa-Hull Census Metropolitan Area
(CMA) currently has a population of just under 1.1 million,
making it the fourth largest metropolitan area in Canada.
The region’s economy registered robust growth in 1999,
which has continued into 2000. The region’s growth was
led by the booming information technology sector, although
the return to growth in the public sector also made an
•
•
Construction and activation of up to 3 additional gates;
and
Major addition to the new parking structure.
Over the last three years, the OIAA has undertaken a
number of capital projects to improve service levels and
efficiency.
The largest capital project is the recent
completion (May 2000) of the $7 million Combined
Services Building. The Combined Services Building was
constructed to accommodate a Fire Hall and Airport
Maintenance Garage.
The OIAA’s planned capital
expenditures in 2000 include initial work related to the
expansion program, developing detailed architectural and
engineering designs, and starting preliminary site
development.
The following provides the OIAA’s actual capital spending
since 1997 and the projected capital expenditures (excluding
maintenance capital spending) over the 2000-2004 period.
The following projections are based on estimates of the
timing of the expenditures associated with the $300 million,
Phase 1 of the expansion program, scheduled to be
completed by the spring of 2004.
1997 (actual) 1998 (actual) 1999 (actual) 2000 2001 2002 2003 2004 -
$8.3 million
$3.6 million
$6.9 million
$10 million
$60 million
$130 million
$90 million
$10 million
important contribution. Employment in the Ottawa-Hull
CMA increased 5.2% in 1999 and was up a further 12% in
November 2000 relative to the previous year.
The
unemployment rate in the Ottawa-Hull CMA continued to
decline in 2000 and stood at 4.8% in November 2000 (threemonth moving average) compared to the annual average of
6.5% in 1999. The region’s strong economic performance
during the past three years has had a noticeable impact on
passenger volumes at YOW, with passenger traffic
increasing a cumulative 12.3% since 1996.
The medium-term economic outlook for the region remains
positive, with the Conference Board of Canada expecting
the Ottawa-Hull area to register the strongest growth of all
of the Canadian metropolitan centres in 2000. As was the
case in 1999, growth in 2000 will be led by the high tech
industry, although the federal government is also expected
to contribute to the economic expansion with the pay equity
settlements accounting for a large portion of the boost in
2000. Nortel Networks, JDS Uniphase and a number of
other technology companies have already announced major
expansions to their Ottawa-Hull operations. The strong
economic growth, particularly as it relates to the advanced
technology sector, should translate into continued increases
in passenger traffic.
Ottawa International Airport Authority - Page 4
Year ended December 31
1999
1998
Economic Statistics (Ottawa-Hull CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
Unemployment rate
1,065
0.9%
544
5.2%
6.5%
1,056
1.0%
517
2.5%
7.1%
1997
1996
1995
1994
1993
1,046
0.7%
504
2.5%
8.9%
1,038
0.7%
492
0.2%
8.5%
1,031
0.9%
491
(2.6%)
9.6%
1,022
1.2%
504
2.4%
8.2%
1,010
1.9%
492
(0.1%)
8.5%
PASSENGER STATISTICS
Total Enplaned Passengers
(millions)
Vancouver
1999
7.9
1998
7.8
1997
7.4
1996
7.0
1995
6.0
1994
5.4
Toronto
13.9
13.4
13.0
12.1
11.2
10.5
Montreal
4.8
4.6
4.5
4.5
4.3
4.1
Edmonton*
1.8
1.9
1.8
1.6
1.3
1.2
Calgary
3.9
3.8
3.7
3.5
2.8
2.5
Ottawa
1.6
1.6
1.5
1.4
1.3
1.3
Winnipeg
1.5
1.5
1.6
1.4
1.1
1.1
3.7%
3.1%
7.4%
5.8%
5.4%
.03%
1.7%
3.0%
(3.0%)
3.7%
10.5%
8.0%
1.6%
3.2%
7.6%
9.6%
3.2%
2.1%
6.6%
5.0%
0.9%
(7.3%)
10.6%
6.4%
*For Edmonton marketplace.
Growth
1999
1998
1997
Avg. 1994-1999
1.9%
4.7%
5.6%
7.9%
The YOW has experienced significant increases in
passenger traffic since 1994, with the strong growth in
transborder and international travel in recent years
accounting for the bulk of the growth. The strong economic
growth in recent years and the implementation of U.S. preclearance in 1997 have been the driving forces behind the
strong gains in transborder and international travel.
Domestic travel, on the other hand, has exhibited weak
growth in the last two years following a sharp uptick in
Travel Mix
1999
Domestic
International
Transborder
Total *
Vancouver
53%
21%
26%
100%
Toronto
45%
23%
33%
100%
1997, as passengers no longer have to travel through
Toronto or Montréal to reach U.S. destinations.
While traffic volumes have exhibited healthy growth,
passenger volumes relative to the population base remain
lower compared to other cities of similar size such as
Edmonton, Calgary and Winnipeg, partly due to the
proximity of the Montréal and Toronto airports and the
resulting competition for leisure travel.
Montreal Edmonton
44%
86%
30%
2%
26%
12%
100%
100%
Calgary
72%
9%
19%
100%
Ottawa
76%
5%
20%
100%
Winnipeg
85%
2%
13%
100%
77%
23%
90%
10%
79%
21%
* Totals may not add to 100 due to rounding.
O&D
Connecting
72%
28%
70%
30%
88%
12%
89%
11%
The statistics show that YOW serves primarily the domestic
market, although its transborder traffic has increased
significantly since the signing of the Open Skies Agreement
in February 1995 and the implementation of U.S. preclearance in 1997. Given the dominance of domestic travel,
as well as the high percentage of passenger traffic being
O&D (90%), the state of the local economy is more
important for Ottawa than for the airports in Toronto,
Vancouver and Calgary in terms of passenger growth and
the general economics of the airport. DBRS expects
passenger traffic to grow in line with the region's economic
growth.
REVENUE ANALYSIS
Since assuming responsibility for the management and
operations of the YOW on February 1, 1997, the OIAA’s
revenues have grown rapidly, with more than half the
growth coming from non-airline revenue sources. In 1999,
almost all of the growth in the OIAA’s revenues came from
non-airline revenues, with the implementation of an AIF in
Ottawa International Airport Authority - Page 5
September 1999 accounting for a large part of the growth.
However, all commercial revenue sources increased as well,
with concession revenue recording the strongest growth at
11%. The OIAA has a diversified revenue base, with nonairline revenue sources expected to continue to increase in
importance: (1) the AIF revenue in 1999 was for a fourmonth period only (2000 results will include the full year
impact of the $10/enplaned passenger AIF); and (2) the
airport expansion program should provide the OIAA
opportunity to further increase its revenues from
concessions, parking and rentals.
Revenue per Enplaned Passenger
1999
($)
Vancouver
Landing fees
4.44
Terminal charges
4.60
Concessions
7.74
Parking
2.51
Rentals, fees, other
3.39
AIF (net)
7.03
Total
29.70
% of revenue from airlines
% Toronto %
15 11.49 38
15
7.16
24
26
3.67
12
8
5.50
18
11
2.19
7
24
0
0
100 30.02 100
30
62
Montreal
4.94 (2)
5.68 (2)
13.60 (3)
n/a
3.38
6.59
34.19
In 1999, the OIAA obtained just under 50% of its total
revenue from airlines (landing fees and terminal charges).
This share is likely to fall in 2000, as the financial results
will include the full year impact of the AIF.
Compared to Edmonton and Winnipeg (the most
comparable airports in terms of size), Ottawa gets a
significantly higher proportion of its total revenue from
airlines. However, it should be noted that the comparison is
distorted by the fact the 1999 numbers do not include the
full-year impact of the AIF. In terms of commercial
revenue, the OIAA has a stronger and more diversified
revenue base than Edmonton and Winnipeg.
% Edmonton % Calgary % Ottawa % Winnipeg
14 4.12 (1) 17
4.48
18
4.93
21
4.81
17 4.12 (1) 17
3.45
14
6.81
28
2.97
40
3.05
13
3.36
14
3.44
14
2.69
3.74
15
2.26
9
3.29
14
1.94
10
2.30
9
3.36
14
3.10
13
4.58
19
7.05
29
7.70
31
2.40
10
4.52
100 24.39 100 24.61 100 23.97 100 21.51
32
34
32
49
%
22
14
13
9
21
21
100
36
(1) Estimated on the basis of a 50/50 weighting between landing fees and general terminal fees.
(2) Weighting between landing fees and terminal charges based on the weighting from Aeroports de Montreal's 2000 budget.
(3) Includes revenues from parking and de-icing operations.
OPERATING EXPENSE ANALYSIS
In 1999, the OIAA was successful in maintaining tight
control over its operating and maintenance expenses,
tempering the significant growth in payments-in-lieu of
municipal taxes and ground lease payments, which are
beyond the OIAA’s control. Payments-in-lieu of property
taxes increased 5.8% in 1999, while the ground lease
payments to the federal government were up 12.2%. The
OIAA’s interest costs remained low in 1999, as operating
cash flow was more than sufficient to cover capital
expenditures given that it had not yet embarked on it airport
Expenses per enplaned passenger
1999
($)
Vancouver
Operating and maintenance
8.30
Utilities, insurance & taxes
1.73
Ground lease paid
7.63
Total operating expenses
17.66
Interest expense (incl. capitalized)
2.68
Depreciation and amortization
3.12
Total expenses
23.46
expansion program and, consequently, no new debt was
required.
The OIAA is forecasting continued significant increases in
its ground lease payments, which are already substantially
higher (on a per enplaned passenger basis) than other
comparable airport authorities. The OIAA’s payment-inlieu of property taxes are also currently higher than most of
the other major Canadian airport authorities.
Going
forward, however, this cost component should grow in line
with passenger growth due to the recent legislative changes
introduced by the provincial government.
% Toronto % Montreal % Edmonton
47
10.62
50
17.53 76
11.91
10
1.98
9
3.64
16
1.40
43
8.48
40
1.92
8
(0.21)
100
21.08 100 23.09 100 13.10
4.43
2.40
1.10
1.70
7.30
3.65
27.21
32.79
17.85
% Calgary % Ottawa % Winnipeg
91
7.48
56
10.93
63
12.19
11
0.85
6
2.62
15
1.57
-2
5.09
38
3.70
21
1.32
100 13.42 100 17.25 100 15.08
1.08
0.14
0.20
2.44
1.63
0.99
16.94
19.02
16.27
%
81
10
9
100
Ottawa International Airport Authority - Page 6
MEDIUM-TERM OUTLOOK
Over the next five years, DBRS expects the OIAA’s
operating results (revenue excluding AIF minus expenses
excluding interest costs and depreciation) to remain stable in
the $8 million-$11 million range, providing the OIAA with
sufficient cash from operations to cover its maintenancerelated capital spending. This outlook is based on the
following assumptions: (1) commercial revenue will grow at
5% per year (based on 2% inflation and 3% passenger
growth); (2) the OIAA will to continue to maintain control
over its operating and maintenance expenses and limit
growth to 3%; (3) terminal charges will increase 11% in
2001 (3% increase in volumes and an 8% increase in fees)
and then will grow at 5% annually, assuming air traffic
growth of 3% and that the OIAA increases its fees by the
rate of inflation (to cover the inflation portion of increased
operating expenses); and 4) landing fees will increase 11%
in 2001 (3% increase in volumes and an 8% increase in
fees), and then will grow at 3% going forward (3% annual
growth in volumes and no increase in the fees).
While DBRS expects the OIAA to continue to manage its
operations in a cost-effective manner, thus limiting the
increases in user fees, the OIAA’s financial position is
expected to weaken somewhat as a result of the projected
sharp increase in fixed costs due to the debt issuance
associated with the airport expansion program. Based on
estimates of the timing of the capital expenditures related to
the $300 million, Phase 1 of the expansion program and
DBRS’ growth assumptions for AIF revenue, DBRS expects
that the OIAA’s level of debt/enplaned passenger will rise
rapidly and reach just over $140 by the end of 2004. This is
a significant increase over the per enplaned passenger debt
level of $3.59 at the end of 1999, and is slightly above that
expected for the other major Canadian airport authorities
(except for the Greater Toronto Airport Authority) currently
undertaking expansion programs.
DBRS is projecting AIF revenue to increase at an annual
rate of 3.0% in the medium-term (the projected passenger
growth rate). The OIAA has indicated that the capital costs
of the expansion program (including related financing costs)
will be funded entirely by AIF revenue. Based on the
projected AIF revenue (assuming no increase in the level of
the AIF), the projected increase in the level of debt and the
associated interest costs (assuming a 7% interest rate),
DBRS expects the coverage ratio (AIF revenue/interest
costs) to decline in the medium-term and to fall below
1.00X by 2004.
Given the projected capital expenditure schedule for the
next three years and the maximum borrowings permitted
under the existing operating line of credit ($20 million), it is
expected that the OIAA will borrow in the public markets
within the next 18 months to finance its capital expansion
program.
Outlook (based on DBRS assumptions and OIAA forecast for ground lease payments):
($ 000s)
2000E
2001P
2002P
Capital expenditures (excl. maintenance)
10,000
60,000
130,000
Net debt*
(2,255)
43,747
165,144
Net debt* per enplaned passenger ($)
(1.36)
25.68
94.12
Operating expenses/enplaned passenger ($)
Operating revenue/enplaned passenger ($)
AIF/interest costs (times)
17.24
22.76
906.95
* Net of excess cash generated by AIF, but not net of excess operating cash.
18.66
23.94
10.64
19.82
24.29
2.18
2003P
90,000
253,403
140.21
2004P
10,000
264,652
142.17
2005P
10,000
276,192
144.04
19.81
24.65
1.12
19.78
25.02
0.93
19.76
25.39
0.92
Ottawa International Airport Authority - Page 7
Ottawa International Airport Authority
Statement of Earnings ($ 000s)
Revenue
Landing fees
Terminal charges
Concessions
Car parking
Real estate (rentals)
Other revenue
Total operating revenue
Expenses
Operating and maintenance
Payments in lieu of municipal taxes ( 1 )
Ground lease paid to federal government
Total operating expenses
Operating surplus
Airport improvement fee (net)
Interest charges
Depreciation
Recurring surplus
Unusual items
Surplus
Year ended December 31
1999
1998
1997*
7,918
10,930
5,518
5,290
3,221
1,747
34,624
7,871
10,726
4,973
5,176
3,151
1,650
33,547
6,559
6,825
3,757
4,684
2,779
2,185
26,789
17,559
4,205
5,948
27,712
6,912
3,860
230
2,618
7,924
7,924
17,482
3,975
5,301
26,758
6,789
175
2,261
4,353
4,353
14,262
3,910
3,977
22,149
4,640
331
1,382
2,927
2,927
(1) Includes land transfer tax of $1,327 in 1997.
* For 11 months ended Dec. 31, 1997. Authority assumed responsibility for management, operation
and development of airport on February 1, 1997.
Total operating expenses/total operating revenue
Recurring surplus/total operating revenue
Airport improvement fee/total operating revenue
Ground lease/total operating revenue
80.0%
22.9%
11.1%
17.2%
79.8%
13.0%
0.0%
15.8%
82.7%
10.9%
0.0%
14.8%
Interest Costs ($ 000s)
Interest capitalized
Total interest incurred
230
175
331
Interest coverage*
Interest coverage** (including AIF)
30.1
46.8
38.8
38.8
14.0
14.0
* Operating surplus/interest costs. **Operating surplus+AIF/interest cost.
Annual Growth
Total operating revenue
Airline revenue
Non-airline revenue
Airport improvement fee
Total operating expenses
Operating and maintenance expenses
Ground lease paid to federal government
3.2%
1.3%
5.5%
n.a.
3.6%
0.4%
12.2%
25.2%
38.9%
11.5%
n.a.
20.8%
22.6%
33.3%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Cash Flow ($ 000s)
Operating surplus
Interest expense
Cash flow from operations
Cash from (used in) change in working capital
Operating cash after working capital
Net capital expenditure
Airport improvement fee
Free cash flow
6,912
(230)
6,682
1,527
8,209
(6,958)
3,860
5,111
6,789
(175)
6,614
267
6,881
(3,623)
3,258
4,640
(331)
4,309
(195)
4,114
(8,359)
(4,245)
6.56
1.0%
4.25
53.5%
2.83
n.a.
Cash flow from operations + AIF/enplaned pass. ($)
Cash flow from operations growth
Ottawa International Airport Authority - Page 8
Ottawa International Airport Authority
Balance Sheet ($ 000s)
Assets
Cash & restricted cash
Accounts receivable
Prepaid expenses & inventory
Capital assets
Organization costs
Other assets (land)
Total assets
Year ended December 31
1999
1998
1997*
4,064
3,188
500
14,372
1,190
2,930
26,244
123
2,202
606
9,463
1,759
14,153
2,912
1,011
7,523
2,327
13,773
Liabilities & Equity
Bank indebtedness
Accounts payable & accrued liabilities
Current portion of long-term debt
Tenants security deposits
Long -term debt
Equity in capital assets
Total liabilities & equity
4,952
1,783
318
3,987
15,204
26,244
2,569
1,260
294
2,750
7,280
14,153
1,949
3,422
1,260
289
3,926
2,927
13,773
Capital Structure
Short-term debt
Long-term debt
Equity
Total
0.0%
27.5%
72.5%
100.0%
0.0%
35.5%
64.5%
100.0%
19.4%
51.5%
29.1%
100.0%
$3.59
$2.58
$4.68
Debt per passenger
* For 11 months ended Dec. 31, 1997. Authority assumed responsibility for management,
operation and development of airport on February 1, 1997.
Passenger Statistics
Total enplaned passengers (000s)
1,606
1,555
1,523
Travel Mix
Domestic
Transborder
International
76%
20%
5%
78%
18%
4%
80%
16%
4%
Connecting/Non-Connecting Mix
O&D passengers
Connecting passengers
90%
10%
98%
2%
n/a
n/a
n/a
n/a
A ir cargo (metric tonnes)
Growth
Domestic
Transborder
International
Total passengers
A ir Cargo
0.5%
11.6%
18.0%
3.2%
(0.9%)
12.2%
22.4%
2.1%
n/a
9.5%
(5.2%)
4.3%
6.6%
n/a
n/a
n/a
P e r e n p l a n e d p a s s e n g e r ($)
Landing fees
Terminal charges
Concessions
Car parking
Real estate (rentals)
Other revenue
A irport improvement fee (net)
Total revenue
4.93
6.81
3.44
3.29
2.01
1.09
2.40
23.97
5.06
6.90
3.20
3.33
2.03
1.06
21.57
4.31
4.48
2.47
3.08
1.82
1.43
17.59
Operating and maintenance
Payments in lieu of taxes
Ground lease paid to Federal Government
Interest and other
Depreciation & amortization
Total Expenses
10.93
2.62
3.70
0.14
1.63
19.03
11.24
2.56
3.41
0.11
1.45
18.77
9.36
2.57
2.61
0.22
0.91
15.67
4.93
5.08
2.53
8.64
2.80
2.91
2.80
6.21
1.92
2.14
1.92
4.53
Recurring surplus
- excluding interest
- excluding AIF
- excluding ground lease
Benchmark Report
Winnipeg Airports Authority Inc.
Current Report:
RATING
No rating assigned. Reference report only.
January 18, 2001
Geneviève Lavallée, CFA / Eric Beauchemin
(416) 593-5577 x277/x252
e-mail: [email protected]
OVERVIEW
The Winnipeg Airports Authority Inc. (“WAA”) is an
independent, not-for-profit, federally incorporated Canadian
airport authority. The WAA operates the Winnipeg
International Airport (“YWG”) under a 60-year ground
lease with the Government of Canada, with an option to
extend for an additional 20 years. The YWG serves the
Winnipeg area, and is currently Canada’s eighth busiest
airport, with volumes in excess of 1.5 million enplaned
passengers per year.
The YWG has experienced a significant increase in its
passenger traffic since 1993, although it did see a marked
reduction in 1998 and 1999 relative to 1997 due to the
departure of Greyhound Airlines in late 1997. Despite
Winnipeg’s strong economic performance, results so far this
year suggest passenger volumes are likely to be unchanged
in 2000 from 1999 due to the changes that have taken place
in the airline industry. The WAA’s financial results
continued to improve in 1999 largely due to the full-year
effect of the unrestricted Airport Improvement fee (AIF)
and the implementation of a $5 restricted AIF in October
1999 (collected as one $10 AIF). The WAA’s operating
results were also stronger in 1999, with cash flows from
operations (excludes the cash generated by the restricted
CONSIDERATIONS
Strengths:
• Flexibility to set revenue structure to offset costs
• Low municipal taxes and ground lease payments
• High origination and destination (O&D) passenger mix
• Favourable medium-term economic outlook
• Reserve fund established to finance future terminal renewal
• WAA enjoys a monopoly in its franchise area
FINANCIAL INFORMATION
AIF) up to $7.9 million from $4.9 million in 1998. The
WAA increased its debt marginally, however, as its cash
flows from operations were not sufficient to cover the
$9.1 million in capital expenditures, and the cash generated
from the restricted AIF can only be used to finance future
terminal renewal projects and not maintenance capital
expenditures. Going forward, the WAA plans to continue to
set aside the cash generated from the restricted AIF to
finance the future terminal renewal project expected begin
in 2003.
The WAA’s commitment to further diversify its revenue
base, its competitive airline fees and charges, the lack of
major capital expenditures during the next two to three
years, and the favourable economic outlook are positive for
the WAA’s financial outlook. However, the WAA faces
challenges, some of which could cause its financial position
to weaken. While the economic outlook for the Winnipeg
region is generally favourable, the region continues to have
weaker economic attributes, which limits growth in
passenger traffic. Like most airport authorities, the WAA
has substantial fixed operating costs, and it faces the risks
associated with the air travel industry and increased
exposure to a single major airline.
Challenges:
• Weaker economic attributes of region served
• Substantial fixed operating costs
• Low concession and parking revenue
• Inherent risk associated with travel industry
• Increased exposure to a single major airline
Interest coverage*
Free cash flow after capex ($ 000s)
Cash flow from operations + restricted AIF/enplaned pass. ($)
Debt per enplaned passenger ($)
Total revenue per enplaned passenger ($)
Total expenses per enplaned passenger ($)
Passenger volume growth
Air cargo volume (metric tonnes)
Year ended December 31
1999
1998
1997
32.6
29.9
110.8
840
(1,541)
(1,921)
6.23
3.38
3.04
4.69
4.26
3.23
21.51
17.88
14.24
16.27
15.21
11.71
1.5%
(7.9%)
10.6%
108,000
105,000
103,000
*Operating surplus+restricted AIF/interest costs.
THE COMPANY The WAA was established in 1992 and is an independent, not-for-profit, federally incorporated Canadian airport
authority. The WAA operates the YWG under a 60-year ground lease (signed on December 31, 1996) with the Government of
Canada, with an option to extend for an additional 20 years. A 15-member Board of Directors, composed of community
representatives nominated by the federal provincial and local governments, business and professional groups and the Board itself,
governs the WAA. The YWG serves the Winnipeg area, and is currently Canada’s eighth busiest airport, with volumes in excess
of 1.5 million enplaned passengers per year.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, but we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
Winnipeg Airports Authority Inc. - Page 2
CONSIDERATIONS
Strengths: (1) The WAA has the legislated ability to set
rates and charges it requires from users of the YWG’s
facilities to operate a commercially viable operation. The
WAA can adjust landing fees and terminal fees charged to
airlines with 60 days notice. Furthermore, the WAA levies
an Airport Improvement Fee (AIF). The AIF is an
important source of funding. In 1999, it accounted for 21%
of the WAA's total revenue and is projected to be higher in
2000 as the AIF was increased to $10/enplaned passenger
(from $5) in October 1999.
(2) The relatively low property taxes levied on the WAA
($1.57 per enplaned passenger) and low ground lease
payments ($1.32 per enplaned passenger) contribute to the
WAA’s low operating cost structure, thus permitting the
WAA to maintain lower airline rates and charges.
(3) The WAA's O&D passenger traffic comprises 79% of
the total traffic volume, which provides a more stable
activity base than airports dependent on connecting traffic.
As a result, the WAA is less exposed to the financial
failures, restructuring or new alliances of airlines than
airports that rely heavily on connecting traffic. If one
airline reduces service, another one will increase service to
the originating or ultimate destination of the passenger.
Such outcomes have already been seen as evidenced by the
limited effect on YWG of the Air Canada/Canadian Airlines
merger.
(4) The medium-term outlook for the Winnipeg economy is
favourable, with economic growth of 2.5% expected over
the next five years based on the Conference Board of
Canada’s outlook. The diversified economic base of the
Winnipeg region, combined with the continued favourable
outlook for the North American economy, underlie the
outlook. A diversified economic base provides more
economic stability, which is positive for passenger traffic
volumes at the YWG.
(5) In October 1999, the WAA increased its AIF by $5 to
$10 per enplaned passenger to help finance the future
terminal renewal project. The $5 increase is being allocated
entirely to a special reserve fund, where the proceeds are
being invested to fund the terminal renewal project expected
to begin in 2003. This reserve fund provides the WAA with
additional financial flexibility in the short-term, and will
reduce its financing requirements in the medium-term when
it embarks on its major capital project. DBRS expects that
the WAA’s reserve fund will have grown to about
$26 million by the end of 2003.
(6) The YWG is the only major airport between Toronto
and Calgary, with most cities in between too far to reach by
car. As a result, the YWG serves a population of over
2 million, significantly greater than the population of the
CAPITAL EXPENDITURES
The WAA is currently preparing Airport Development
Studies to provide a framework for the future development
of the airport. The document, Airport Development Studies,
Phase II, provides the key findings necessary to develop
three important documents, which will provide the blueprint
for the airport and the capital expenditures necessary in
order to meet the projected capacity requirements to the
Winnipeg Census Metropolitan Area (CMA). It also serves
as a hub for flights to northern Manitoba, Nunavut and
northern Ontario. Given the distance between Winnipeg
and all other major cities, the YWG is unlikely to attract
major competition from any other airports or other types of
passenger travel.
Challenges: (1) The region served by the YWG exhibits
weaker economic attributes compared to the other regions
served by the major Canadian airport authorities. The
Winnipeg region has experienced little population growth
since 1994, and the residents of the region typically have
lower-than-average income levels, which limits the growth
in demand for leisure travel.
(2) A substantial portion of the WAA’s expenses is fixed in
nature. Therefore, cash flows from operations are highly
sensitive to changes in passenger and air traffic volumes.
(3) The WAA is well behind the large airports in concession
and parking revenue largely due to its small size and
location. It is expected that these sources of revenue, as
well as other sources of commercial revenue, will increase
in importance over the medium- and long-term given the
objectives laid out in the Long Term Strategic Plan 19992015 and the construction of a new parkade in 2004. The
WAA is committed to further diversifying its revenue base,
which will help it reduce its reliance on any one client or
any one source of revenue.
(4) The volatile nature of the air travel industry can
significantly affect traffic volumes and may cause the rates
and charges for a particular year to be set too low. Airline
travel is sensitive to: (a) economic conditions for business
and tourism; (b) energy price increases which can
substantially impact air fares; and (c) event risks such as
labour strikes, terrorism or war. Furthermore, the departure
and entrance of new airlines, primarily low-cost air carriers,
can also affect traffic volumes and create uncertainties for
smaller airports, such as YWG, when setting their fees.
(5) Canadian airport authorities’ exposure to a single major
carrier has increased as a result of the acquisition of
Canadian Airlines by Air Canada. They are now more
exposed to the impact of adverse events such as labour
strikes by Air Canada employees, and to reduced service as
a result of changes in the airline’s strategy. However, the
risk associated with a high exposure to a single airline is
reduced for airports that are more dependent on O&D
passenger traffic, like the Calgary International Airport
(YYC). If an airline fails or reduces service, another one
will likely increase service to the originating or ultimate
destination of the passenger.
year 2020. These three documents include: (1) Airport
Development Plan; (2) Air Terminal Renewal Strategy; and
(3) Business Park Development Strategy. The Business
Park Development Strategy has been completed, and
provides the WAA with a clear direction regarding land
development opportunities and priorities. The Airport
Development Plan, which will include the Air Terminal
Winnipeg Airports Authority Inc. - Page 3
Renewal Strategy, is scheduled to be completed by
December 31, 2000.
The key findings of the Airport Development Studies, Phase
II, are as follows:
• The existing taxiway system and aprons areas need to
be improved and expanded.
• Current runways are sufficient to meet projected
capacity. However, land should be reserved for a
future runway.
• The existing terminal building cannot support
additional demand, and extensive renovation and
expansion is uneconomical and would not be
functionally adequate. The design of the existing
terminal building reflects the regulated airline
environment in the early 1980s when YWG
accommodated only three major airlines using bridgeboarded jets.
• A new, two-level, passenger terminal building is
required to efficiently meet the existing and future
demand.
• Enhanced and expanded parking services are required.
LOCAL ECONOMY
YWG directly serves the Winnipeg Census Metropolitan
Area (CMA), which is the eighth largest metropolitan area
in Canada with a population of just under 678,000 and
including the capital city of the Province of Manitoba.
However, given that the YWG is the only major airport
between Toronto and Calgary and that most cities in
between are too far to reach by car, the airport serves a
broader population area of over two million.
The Winnipeg CMA comprises 60% of the Manitoba's
population, and excluding agriculture and mining, accounts
for close to 80% of the province's total economic activity.
The region’s economic base has experienced significant
diversification over the last ten years, including substantial
gains in the export and service sectors, and the food
processing industry. The technology industry has also
increased in importance, particularly the aerospace and
telecommunication sectors.
Winnipeg’s economic performance has been favourable
since 1996, following almost a decade of weak economic
growth. Winnipeg’s labour market continued to improve in
1999, albeit modestly, with employment increasing 0.6%.
However, the unemployment rate edged higher to 5.8%
(annual average) as the increase in the labour force more
than offset the job gains. Winnipeg has begun to experience
tight labour markets, with employers having difficulties
finding sufficient skilled workers.
Economic Statistics (Winnipeg CMA)
Population (000s)
Population growth
Employment (000s)
Employment growth
Unemployment rate
The current capital program consists primarily of
expenditures required to restore and replace existing
facilities. Expansion-related projects will depend on the
blueprint laid out in the Airport Development Plan and the
Air Terminal Renewal Strategy. Capital spending for 2000
is currently estimated at $4.3 million, while spending in
2001 is projected to rise to $14 million. The increase in
2001 is related to the reconstruction of runway 13/31. It is
expected that any significant expansion-related projects (i.e.
construction of a new terminal building) will begin only in
2003.
The WAA’s ongoing capital program is currently being
limited to its operating cash flows (which excludes the
portion of the AIF allocated to a special reserve fund for the
purpose of funding the future terminal renewal project) in
order to avoid issuing long-term debt and to maximize its
financial flexibility.
It is expected that long-term debt issuance will be required
in the medium-term when the WAA embarks on its terminal
renewal program.
The economic outlook for Winnipeg remains favourable,
with private sector forecasters expecting sustained,
moderate economic growth of about 2.5% per year over the
next five years as a result of the diversified economic base
and the continued favourable economic outlook for Canada
and U.S. In addition, the City of Winnipeg has introduced a
number of measures to enhance Winnipeg’s economic
growth. These include: 1) endorsing the creation of
CentreVenture Development Corporation, a new entity set
up to provide leadership in creating and sustaining business
opportunities and economic development in the downtown
core; 2) streamlining processes that support economic
growth such as obtaining building permits on-line,
automated building inspections; and 3) attracting strategic
events to Winnipeg such as the 1999 Pan Am games, the
National Figure Skating championships, and a stop on the
PGA Seniors’ Tour.
Despite Winnipeg’s favourable economic performance in
recent years, its population base has exhibited no increase
since 1994. Furthermore, the average income levels in
Winnipeg rank behind almost all other major metropolitan
areas in Canada. While the economic outlook for Winnipeg
remains positive, these weaker economic attributes are
likely to continue to have a dampening effect on the growth
of passenger travel in the medium term.
Year ended December 31
1999
1998
678
(0.1%)
346
0.6%
5.8%
678
0.1%
344
3.2%
5.6%
1997
1996
1995
1994
1993
678
(0.2%)
333
0.7%
7.3%
679
(0.2%)
330
(1.0%)
8.1%
680
0.4%
334
4.3%
7.7%
678
0.3%
320
(0.2%)
10.3%
676
0.4%
321
0.6%
11.0%
Winnipeg Airports Authority Inc. - Page 4
PASSENGER STATISTICS
Total Enplaned Passengers
(millions)
Vancouver
1999
7.9
1998
7.8
1997
7.4
1996
7.0
1995
6.0
1994
5.4
Toronto
13.9
13.4
13.0
12.1
11.2
10.5
Montreal
4.8
4.6
4.5
4.5
4.3
4.1
Edmonton*
1.8
1.9
1.8
1.6
1.3
1.2
Calgary
3.9
3.8
3.7
3.5
2.8
2.5
Ottawa
1.6
1.6
1.5
1.4
1.3
1.3
Winnipeg
1.5
1.5
1.6
1.4
1.1
1.1
3.7%
3.1%
7.4%
5.8%
5.4%
.03%
1.7%
3.0%
(3.0%)
3.7%
10.5%
8.0%
1.6%
3.2%
7.6%
9.6%
3.2%
2.1%
6.6%
5.0%
0.9%
(7.3%)
10.6%
6.4%
*For Edmonton marketplace.
Growth
1999
1998
1997
Avg. 1994-1999
1.9%
4.7%
5.6%
7.9%
The YWG has higher passenger volumes relative to its
population base when compared to other cities of similar
size such as Edmonton and Ottawa. This is largely due to
the airport’s location as the only major airport between
Toronto and Calgary, which sharply increases the
population served to beyond the population of the Winnipeg
CMA. Furthermore, YWG acts as a hub for flights to
Travel Mix
1999
Domestic
International
Transborder
Total *
Vancouver
53%
21%
26%
100%
northern Manitoba, Nunavut and northern Ontario. The
YWG saw strong growth in passenger volumes over the
1994-1997 period, but growth has slowed noticeably since
that time largely due to changes in the airline industry
(e.g., the exit of Greyhound Airlines in 1997) and the
resulting changes in the number of flights offered.
Toronto
45%
23%
33%
100%
Montreal
44%
30%
26%
100%
Edmonton
86%
2%
12%
100%
Calgary
72%
9%
19%
100%
Ottawa
76%
5%
20%
100%
Winnipeg
85%
2%
13%
100%
70%
30%
88%
12%
89%
11%
77%
23%
90%
10%
79%
21%
* Totals may not add to 100 due to rounding.
O&D
Connecting
72%
28%
The statis tics show that the YWG is largely a domestic
airport, with the new Air Canada being the dominant air
carrier. However, YWG has experienced a marked increase
in its international travel in recent years as charter airlines
have begun to add more international flights to satisfy the
demand for leisure travel. The YWG has a higher share of
connecting traffic compared to other airports of similar size
like Ottawa and Edmonton as it serves as a hub for certain
northern and central Canada destinations.
In recent years, the growth pattern of domestic travel has
been highly correlated with the services offered by new lowcost airlines. Much of the decline in domestic travel in 1998
and 1999 was due to the exit of Greyhound Airlines.
However, the losses appear to have been reversed since the
introduction of new services by WestJet. In addition,
CanJet recently added new service from Winnipeg to
eastern Canada, which should provide an additional boost to
domestic travel.
REVENUE ANALYSIS
Since assuming responsibility for the management and
operations of the YWG on January 1, 1997, the WAA’s
revenues have grown rapidly, with virtually all of the
growth coming from non-airline revenue sources. More
specifically, parking, rental and AIF revenue have
accounted for most of the revenue growth since 1997. In
July 1998, the WAA introduced an AIF of $5 per enplaned
passenger. The AIF was increased to $10 per enplaned
passenger in October 1999, with half ($5/enplaned
passenger) of the AIF collected being allocated to a special
reserve fund for the purpose of funding the future terminal
renewal project. The other half of the AIF is used to fund
ongoing capital requirements. The introduction of the AIF
played a large role in the double-digit total revenue growth
in 1998 and 1999. The WAA has a diversified revenue
base, including investment returns from WASCO, a wholly
owned subsidiary (for profit) established in 1997. While
WAA has a diversified revenue base and seeks to further
diversify its revenue sources through a variety of initiatives,
its concession and parking revenue remains weaker relative
to other major Canadian airports.
In 1999, the WAA maintained competitive landing fees and
terminal charges (on a per enplaned basis) relative to the
other major Canadian airport authorities. It obtained 36%
Winnipeg Airports Authority Inc. - Page 5
of its total revenue from airlines, which is down
significantly from 1997 when its dependence on airline
revenue was at 50%. The dependence on airline revenue is
expected to continue to decline in 2000, as total revenue
will include the full-year impact of the $10 AIF and as the
WAA further diversifies its revenue base.
The WAA’s total revenue is projected to be up around 17%
in 2000 due to the full-year impact of the increase in the
Revenue per Enplaned Passenger
1999
($)
Vancouver
Landing fees
4.44
Terminal charges
4.60
Concessions
7.74
Parking
2.51
Rentals, fees, other
3.39
AIF (net)
7.03
Total
29.70
% of revenue from airlines
% Toronto % Montreal
15 11.49 38 4.94 (2)
15
7.16
24 5.68 (2)
26
3.67
12 13.60 (3)
8
5.50
18
n/a
11
2.19
7
3.38
24
0
0
6.59
100 30.02 100 34.19
30
62
AIF. However, the results are likely to be even better than
the projected 17% growth as the WAA increased its landing
fees in 2000 in anticipation of reduced traffic due to the Air
Canada/Canadian Airlines merger and to recover the costs
of the reconstruction of runway 13/31 in 2001, but the
traffic volumes to date are significantly better than
expected.
% Edmonton % Calgary % Ottawa % Winnipeg %
14 4.12 (1) 17
4.48
18
4.93
21
4.81
22
17 4.12 (1) 17
3.45
14
6.81
28
2.97
14
40
3.05
13
3.36
14
3.44
14
2.69
13
3.74
15
2.26
9
3.29
14
1.94
9
10
2.30
9
3.36
14
3.10
13
4.58
21
19
7.05
29
7.70
31
2.40
10
4.52
21
100 24.39 100 24.61 100 23.97 100 21.51 100
32
34
32
49
36
(1) Estimated on the basis of a 50/50 weighting between landing fees and general terminal fees.
(2) Weighting between landing fees and terminal charges based on the weighting from Aeroports de Montreal's 2000 budget.
(3) Includes revenues from parking and de-icing operations.
OPERATING EXPENSE ANALYSIS
Since 1997, all of the WAA’s operating expenses have
increased significantly except for property taxes, which
have declined 21%.
The WAA’s operating and
maintenance expenses have increased substantially since
1997, with a 7.9% increase recorded in 1999. While wages
and salaries were unchanged in 1999 following a sharp
increase in 1998, goods and services expenses increased
significantly above the rate of inflation and the growth in
aircraft movements in both years. The ground lease rent has
also risen sharply, although it remains significantly lower on
a per enplaned passenger basis relative to most of the other
major Canadian airports.
The WAA’s interest costs remained low in 1999, as only a
marginal amount of debt had to be incurred to cover capital
expenditures. While there was more than sufficient cash
Expenses per enplaned passenger
1999
($)
Vancouver
Operating and maintenance
8.30
Utilities, insurance & taxes
1.73
Ground lease paid
7.63
Total operating expenses
17.66
Interest expense (incl. capitalized)
2.68
Depreciation and amortization
3.12
Total expenses
23.46
generated in 1999 to cover the WAA’s capital expenditures,
a portion of the AIF revenue is allocated to a special reserve
fund to finance the future terminal renewal project and,
therefore, is not available to fund ongoing capital
requirements.
Relative to other airports of similar size (Edmonton,
Calgary and Ottawa), YWG has significantly lower ground
lease payments per enplaned passenger. Its property taxes
are much more competitive than in Ottawa, but they are
above those in Alberta. In terms of operating and
maintenance expenses, they are slightly above those in
Edmonton and Ottawa, who have similar levels of passenger
traffic. Compared to the other major Canadian airport
authorities, YWG currently has one of the lowest cost
structures per enplaned passenger.
% Toronto % Montreal % Edmonton % Calgary % Ottawa % Winnipeg %
47
10.62
50
17.53 76
11.91
91
7.48
56 10.93 63
12.19
81
10
1.98
9
3.64
16
1.40
11
0.85
6
2.62
15
1.57
10
43
8.48
40
1.92
8
(0.21)
-2
5.09
38
3.70
21
1.32
9
100 21.08 100 23.09 100 13.10 100 13.42 100 17.25 100 15.08 100
4.43
2.40
1.10
1.08
0.14
0.20
1.70
7.30
3.65
2.44
1.63
0.99
27.21
32.79
17.85
16.94
19.02
16.27
Winnipeg Airports Authority Inc. - Page 6
MEDIUM-TERM OUTLOOK
Over the next five years, DBRS expects that the WAA’s
financial position will remain relatively stable due to the
following: (1) the major capital projects (terminal renewal
project) are not expected to begin before 2003; (2) a reserve
fund has been established to finance the future terminal
renewal project, which will reduce the amount of debt
required; and (3) assumptions included in the revenue and
expenditure forecasts are very conservative and do not
incorporate any impacts of the WAA’s initiatives to expand
its revenue base. The projected stable financial position is
in sharp contrast to that of all other major Canadian airport
authorities that are currently embarking (or have embarked)
on their airport expansion programs.
DBRS expects commercial revenue to grow at 3.5% per
year (based on 2% inflation and 1.5% real passenger
growth) and that the WAA will maintain the growth rate of
its operating and maintenance expenses at 3.0%. Ground
lease payments are expected to increase only marginally and
property taxes are projected to remain stable (as forecast by
WAA). Assuming that the WAA increases its landing fees
and terminal charges only by the rate of inflation such that
the rate of growth of these revenues approximates 3.5%
(assuming volume increases of 1.5%), DBRS expects that
the WAA’s operating surplus (excludes the AIF revenues
dedicated to funding future terminal renewal, interest costs
and depreciation expense) will remain in the $6 million to
$8 million range in the medium-term and, therefore, be
sufficient to cover projected interest costs and maintenance
capital expenditures of $5 million per year. The WAA’s
debt burden is projected to increase modestly over the next
four years, and then increase sharply in 2005 due to the
projected sharp increase in capital expenditures in 2004 and
2005. However, this assumes that the reserve fund is not
used. It is expected that the WAA will begin using its
reserve fund before 2005 to fund the renewal project.
Outlook (DBRS estimates and WAA forecasts for certain items):
($ 000s)
2000P
2001P
Capital expenditures
4,300
14,100
Debt
3,197
10,894
Debt per enplaned passenger ($)
2.15
7.23
Operating expenses/enplaned passenger ($)
Operating revenue/enplaned passenger ($)
Interest costs/enlaned passenger ($)
Restricted AIF/enplaned passenger ($)
16.46
21.01
0.21
3.84
16.78
21.36
0.33
3.88
2002P
14,318
19,001
12.42
2003P
15,544
28,576
18.40
2004P
43,340
67,242
42.67
2005P
43,789
108,692
67.95
16.97
21.71
0.68
4.07
17.16
22.08
1.07
4.26
17.35
22.45
2.13
4.47
17.51
22.83
3.85
4.67
Winnipeg Airports Authority Inc. - Page 7
Winnipeg Airports Authority Inc.
Statement of Earnings ($ 000s)
Revenue
Landing fees
Terminal charges
Concessions
Car parking
Real estate (rentals)
Other revenue
Passenger security fees
Airport improvement fee (unrestricted)
Total operating revenue
Year ended December 31
1999
1998
1997
7,035
4,339
3,935
2,840
3,443
880
2,382
5,359
30,213
6,992
4,000
3,835
2,544
3,181
864
2,161
2,196
25,773
6,986
4,305
3,880
2,316
3,041
550
1,197
22,275
15,453
2,297
1,933
2,382
22,065
8,148
1,257
288
1,445
7,672
7,672
14,427
2,771
1,370
2,161
20,729
5,045
169
1,031
3,845
3,845
12,409
2,903
970
1,197
17,479
4,796
43
802
3,951
3,951
73.0%
25.4%
21.0%
6.4%
80.4%
14.9%
8.5%
5.3%
78.5%
17.7%
0.0%
4.4%
Interest Costs ($ 000s)
Interest capitalized
Total interest incurred
288
169
Interest coverage*
Interest coverage** (including restricted AIF)
28.3
32.6
29.9
29.9
110.8
110.8
Expenses
Operating and maintenance
Property taxes
Ground lease paid to federal government
Passenger security fees
Total operating expenses
Operating surplus
Airport improvement fee (restricted)
Interest charges
Depreciation
Recurring surplus
Unusual items
Surplus
Total operating expenses/total operating revenue
Recurring surplus/total operating revenue
Airport improvement fee (total)/total revenue
Ground lease/total operating revenue
43
* Operating surplus/interest costs. **Operating surplus+restrcited AIF/interest costs.
Annual Growth
Total operating revenue
Airline revenue
Non-airline revenue
Airport improvement fee (total)
Total operating expenses
Operating and maintenance expenses
Ground lease paid to federal government
17.2%
3.5%
6.5%
201.3%
6.4%
7.1%
41.1%
15.7%
(2.6%)
6.5%
n.a.
18.6%
16.3%
41.2%
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Cash Flow ($ 000s)
Operating surplus
Interest costs
Cash flow from operations
Cash from (used in) change in working capital
Operating cash after working capital
Net capital expenditure
Restricted AIF
Free cash flow
8,148
(288)
7,860
816
8,676
(9,093)
1,257
840
5,045
(169)
4,876
(1,332)
3,544
(5,085)
(1,541)
4,796
(43)
4,753
559
5,312
(7,233)
(1,921)
Cash flow from operations + restricted AIF/enplaned pass. ($)
Cash flow from operations growth
6.23
61.2%
3.38
2.6%
3.04
n.a.
Winnipeg Airports Authority Inc. - Page 8
Winnipeg Airports Authority Inc.
Balance Sheet ($ 000s)
Assets
Cash & restricted cash
Accounts receivable
Prepaid expenses & inventory
Restricted investments
Capital assets
Organization costs
Other assets
Total assets
Year ended December 31
1999
1998
1997
146
2,645
422
1,257
19,094
2,057
266
25,887
101
3,437
406
11,096
2,351
18
17,409
431
1,778
376
6,726
2,645
11,956
Liabilities & Equity
Bank indebtedness
Accounts payable & accrued liabilities
Deferred revenue
Current portion of long-term debt
Tenants security deposits
Long-term employee benefits
Long-term debt
Equity in capital assets
Total liabilities & equity
2,144
2,974
315
1,221
56
209
3,500
15,468
25,887
1,652
2,771
478
1,370
73
149
3,120
7,796
17,409
2,506
386
1,368
57
3,688
3,951
11,956
Capital Structure
Short-term debt
Long-term debt
Equity
Total
9.6%
21.1%
69.3%
100.0%
11.9%
32.2%
55.9%
100.0%
0.0%
56.1%
43.9%
100.0%
$4.69
$4.26
$3.23
Debt per passenger
Passenger Statistics
Total enplaned passengers (000s)
1,463
1,441
1,565
Travel Mix
Domestic
Transborder
International
85%
13%
2%
86%
12%
2%
87%
12%
1%
Connecting/Non Connecting Mix
O&D passengers
Connecting passengers
79%
21%
78%
22%
73%
27%
108,000
105,000
103,000
A ir cargo (metric tonnes)
Growth
Domestic
Transborder
International
Total passengers
A ir Cargo
0.3%
8.0%
13.2%
1.5%
(9.2% )
(2.3% )
30.2%
(7.9% )
12.9%
(3.3%)
0.4%
10.6%
2.9%
1.9%
2.0%
P e r e n p l a n e d p a s s e n g e r ($)
Landing fees
Terminal charges
Concessions
Car parking
Real estate (rentals)
Other revenue
Airport improvement fee (total)
Total revenue
4.81
2.97
2.69
1.94
2.35
2.23
4.52
21.51
4.85
2.77
2.66
1.76
2.21
2.10
1.52
17.88
4.46
2.75
2.48
1.48
1.94
1.12
14.24
Operating and maintenance
Payments in lieu of taxes
Ground lease paid to Federal Government
Other
Interest
Depreciation & amortization
Total expenses
10.56
1.57
1.32
1.63
0.20
0.99
16.27
10.01
1.92
0.95
1.50
0.12
0.72
15.21
7.93
1.86
0.62
0.76
0.03
0.51
11.71
5.24
5.44
0.72
6.57
2.67
2.78
1.14
3.62
2.53
2.55
2.53
3.14
Recurring surplus
- excluding interest
- excluding AIF (total)
- excluding ground lease
Benchmark Report
BAA plc
Current Report:
RATING
No rating assigned. Reference report only.
January 18, 2001
Eric Beauchemin / Geneviève Lavallée, CFA
(416) 593-5577 x252/x277
e-mail: [email protected]
COMMENTARY
BAA plc (the “Company”) is the world’s biggest airport
operator. Based in the U.K., it owns and operates seven
airports in the country – Heathrow, Gatwick, Stansted,
Glasgow, Edinburgh, Aberdeen and Southampton – and
manages all or part of nine others abroad (U.S. (5),
Australia (2), Italy and Mauritius). During fiscal year 2000,
BAA’s U.K. airports served more than 117 million
passengers, including 62.3 million at Heathrow. The
Company is also involved in the development and
management of airport-related properties through BAA
Lynton, and in direct retailing through World Duty Free, a
subsidiary that owns and operates duty free shops in U.K.
and U.S. airports and along the U.S. borders.
Because it owns three of the four largest airports in the
U.K., BAA is able to manage its facilities as an integrated
system, resulting in enhanced synergies and a more
coordinated development plan. This also places the
Company in a dominant position in the U.K. airport
industry, with approximately 70% of passenger traffic and
75% of air cargo recorded in the country. BAA enjoys
strong revenue and operating cash flow, supported by a
relatively diversified revenue base that is composed
essentially of airport charges, concession rents as well as
retail sale and property management revenues. The rapid
expansion of direct retailing, which grew from 0% to 32.7%
CONSIDERATIONS
Strengths:
• Market dominance in the U.K.
• Diversified revenue base
• Conservative debt level
• Strong operating results and cash flow generation capacity
of total revenue in the last three years, has accelerated
revenue diversification and helped reduce the group’s
dependence on airline fees. BAA benefits from a solid
balance sheet, with significant liquid assets and a stable,
conservative level of indebtedness, which compares
favourably with large Canadian and international airports.
Nevertheless, BAA faces challenges that may weaken its
credit profile in the future. During the next decade, the
Company intends to accelerate the pace of its already
aggressive capital investment program, with a total of
£7.2 billion in planned infrastructure improvements. This
will put pressure on the group’s indebtedness, as cash flows
generated internally are unlikely to fully cover those
expenditures. BAA’s performance remains strongly linked
to that of the airline industry, which is fairly volatile and
sensitive to factors such as business cycles and fuel prices.
In addition, the prospects of its direct retail activities have
deteriorated. The abolition of duty free shopping within the
EU on July 1, 1999, has reduced the profitability of the
business while the slow recovery in the Trans-Pacific
market has forced BAA to close its inflight business. Given
that airline fee increases at BAA’s three largest airports are
subject to a price cap set by the Civil Aviation Authority
(“CAA”), the Company’s ability to deal with unexpected
adverse events through fee adjustments remains limited.
Challenges:
• Heavy capital investment program
• U.K. airport charges subject to approval of authorities
• Reduced prospects for the direct retailing business
• Volatile nature of airline industry
FINANCIAL INFORMATION
rolling 12 months
Cash flow from operations (£ millions)
Free cash flow (£ millions)
Total debt (£ millions)
Debt to total capital (excl. revaluation reserve)
Gross interest coverage
Current ratio
Return on equity (excl. revaluation reserve)
Enplaned Passenger -- U.K. airports (millions)
Sept 30, 2000
626
(30)
2,037
39.7%
6.1x
0.8
12.4%
69.5*
Year ended March 31
2000
615
61
1,996
39.5%
4.8x
0.9
11.4%
117.8
1999
578
(14)
2,066
41.6%
4.7x
0.7
13.4%
112.5
1998
411
(236)
1,920
42.4%
4.6x
0.5
14.7%
104.5
1997
406
(162)
1,458
37.3%
5.2x
0.9
n/a
n/a
* Six months to September 30, 2000.
THE COMPANY BAA is the world’s largest airport operator. Based in the U.K., the Company owns and operates seven airports
in the U.K. (Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton) and manages all or part of nine
airports abroad (Pittsburgh, Indianapolis, Harrisburg, Newark and Boston in the U.S., Melbourne and Launceston in Australia,
Naples in Italy, and Mauritius). During fiscal year 2000, more than 200 million passengers visited these airports. The Company is
also active in direct retailing and property management through two wholly owned subsidiaries, World Duty Free and BAA
Lynton.
Structured Finance
DOMINION BOND RATING SERVICE LIMITED
Information comes from sources believed to be reliable, b ut we cannot guarantee that it, or opinions in this Report, are complete or accurate. This Report is not to be construed as an offering of any
securities, and it may not be reproduced without our consent.
BAA plc - Page 2
CONSIDERATIONS
Strengths:
(1) During fiscal year 2000, 117.8 million
passengers visited the Company’s seven U.K. airports,
which was 4.7% more than the previous year and 66% more
than a decade ago. This represents about 70% of all the
U.K. passenger traffic. In addition, the three airports
handled nearly 75% of the country’s air cargo volume,
which puts BAA in a position of quasi-monopoly in the
U.K. airport market. This allows the entity to manage its
facilities as an integrated system, resulting in enhanced
synergies and a more coordinated development plan.
(2) BAA operates in 5 different countries and benefits from
a highly geographically diversified client base (airlines and
passengers). In addition to airport charges, the Company
derives important revenues from a wide range of activities
such as retail space management, development of office and
hotel facilities, provision of rail transit service (Heathrow
Express) and direct retail activities through their chain of
duty free shops. Such a diversification results in greater
revenue stability, reducing the group’s exposure to a
particular regional economy, airline or line of business.
(3) The Company has a solid balance sheet, with a strong
liquidity position, a stable, conservative level of debt and a
well-balanced term structure (73% of debt maturing in more
than 5 years). At September 30, 2000, debt accounted for
40% of total capital (excluding revaluation reserve), while
liquid assets were sufficient to cover 17.8% of total debt.
(4) Over the past few years, the Company has consistently
recorded strong operating results and good cash flow
generation, exhibiting good capacity to grow revenues and
to control operating as well as financing costs. Since 1997,
operating revenue and EBITDA increased by 59% and 35%
respectively. Results have remained strong despite
difficulties experienced in retail activities. BAA’s solid
operating performance is reflected in the stable, but strong
EBITDA margin and cash flow return on equity.
Challenges: (1) Over the next 10 years, the Company
intends to inject £6.1 billion in new infrastructure and
£1.1 billion in maintenance capital expenditures, for an
average annual capital spending of £720 million. BAA’s
aggressive plan may lead to higher indebtedness and a
COMPANY PROFILE
BAA is a publicly owned company that trades on the
London Stock Exchange and in the U.S. over-the-counter
market. Formerly a government business enterprise, the
Company was privatized in 1987. With approximately 70%
of passenger traffic and 75% of air cargo recorded in the
U.K., BAA benefits today from a quasi-monopoly in the
quickly expanding U.K. airport market.
The Company derives revenues from three broad business
segments: aeronautical activities, retail operations and
property and operational facility management.
Aeronautical activities (29% of revenue): Aeronautical
operations generate revenues from various fees charged to
airlines using BAA’s airports. Those fees include passenger
departing charges, runway movement charges, aircraft
parking charges, and other charges for handling passengers
and baggage. Unlike in Canada, airport fees at Heathrow,
deterioration in BAA’s financial flexibility, as operating
cash flows are unlikely to fully offset the flow of
investments.
(2) As opposed to Canadian airports, Heathrow, Gatwick
and Stansted airports are limited in their ability to set
landing, terminal and passenger departure charges. Fare
increases are subject to a price cap formula determined by
the CAA, the agency responsible for safety, regulation and
consumer protection in the U.K. aviation industry. The
formula usually limits fare increases to the inflation rate
minus a set percentage (RPI – X%). Although the regulator
usually takes extraordinary adverse cost events
(i.e., abolition of intra-EU duty-free) into account when
setting the permitted annual fare increases, the limited
flexibility to adjust user fees reduces the ability of U.K.
airports to deal with adverse revenue or expense changes.
(3) Retail activities represent an important source of
revenues for BAA. During FY2000, £1.1 billion of the
company’s total revenues (50%) originated from those
activities, £690 million of which were from World Duty
Free. Retail revenues allow airport authorities to maintain
low airline charges by having a larger part of their operating
costs born directly by the passengers. However, the
prospects of the Company’s direct retailing business have
been permanently reduced with the abolition, in July 1999,
of intra-EU duty free shopping and the closing of BAA’s
inflight business due to the slow recovery of Asian
economies and the sluggish Trans-Pacific travel market.
Although sales have almost completely recovered, margins
are lower and volumes remain highly dependent on the
willingness of suppliers and retailers to share with BAA the
costs of the tax and duty.
(4) The risks inherent to the airline industry can
significantly affect traffic volumes and cause airport charges
for a particular year to be set too low. In addition, air travel
is particularly sensitive to economic conditions and fuel
prices. As a result, events such as airline failures, route reorganizations, a slowdown in one of the world’s major
economies or persisting high energy prices may negatively
impact airport traffic and revenues.
Gatwick and Stansted are subject to a price formula that
limits annual fee increases. The formula, referred to as
“RPI-X%”, is set by the CAA every five years and usually
caps rate hikes to inflation less a fixed percentage, which is
based on factors such as retail performance, productivity
and customer service. The formulas are currently set at RPI3% for Heathrow and Gatwick and RPI+1% for Stansted,
and apply until March 31, 2003.
Despite the limitation in fee increases, revenues from airport
charges have grown at a healthy pace since 1997, fueled by
steady passenger growth in the U.K. and permitted fee
adjustments. Proceeds are expected to maintain their
upward trend in line with passenger traffic, which is
predicted to double in the U.K. over the next 20 years.
However, their relative importance is likely to continue to
decline as a result of the Company’s sustained efforts to
BAA plc - Page 3
expand alternative sources of revenue (particularly retail
revenue).
Retail operations (50% of revenue): The Company has two
types of retail activities, airport retail management and
direct retailing. Retail management involves developing,
letting and managing all commercial activities targeted at
passengers and visitors at all of BAA’s airports. These
activities generate revenue essentially through concession
rentals (e.g., restaurants, bookstores, bureau de change) and
car parking operations. BAA is also involved in direct
retailing through World Duty Free, which owns and
operates duty free shops in U.K. and U.S. airports and along
the U.S. borders. Since the creation of the European
division (World Duty Free Europe) and the acquisition of
the American division (World Duty Free Americas –
formerly Duty Free International) in 1997, direct retailing
has grown from 0% to 32.7% of BAA’s total revenue.
Retail operations are an important source of revenue
(£1,061 million in 2000) and present long-term growth
opportunities, particularly through expansion of retail
spaces and new retail management contracts, such as the
one with the Boston Logan International Airport signed in
July 2000 and commencing in 2002. However, the abolition
of intra-EU duty free shopping on July 1, 1999, has
adversely affected the viability of direct retailing. BAA has
been able to bring sales back to their original el vel by
assuming the cost of the tax and duty with its suppliers and
retailers, but margins remain lower. The Company’s recent
decision to exit the inflight duty free business as a result of
the slower than anticipated recovery of the Asian economies
also impacted on the business prospects.
Property and operational facility management (15% of
revenue): Properties and airport facilities are held partly by
the airports and partly by BAA Lynton, a real estate
EARNINGS
Operating revenue and EBITDA have experienced steady
increases since 1997, driven by the rapid expansion of the
direct retail activities, the introduction of new operational
facilities at U.K. airports, and strong traffic growth at BAA
airports, which averaged 6.6% per annum during the last
three years. During FY2000, EBITDA and revenue totaled
£779 million and £2,121 respectively, compared to
£759 million and £1,959 for 1999. Strong abilities to grow
revenues and to control operating costs also allowed the
Company to consistently record growing cash flows and
maintain relatively high profitability over the past few
years, as evidenced by the relatively high ROE (12.4%) and
cash flow return on average equity (20.8%). Interest costs
continued to increase in 2000, however, as a result of the
completion of a number of major projects and the reduction
in interest capitalization.
Although hurt by the abolition of intra-EU duty free
shopping in July 1999, the slow recovery of the TransPacific market and the strength of the U.S. dollar, direct
retailing remains a key source of revenue for BAA and
continues to have potential. To compensate partially for the
loss of sale revenue, the CAA has authorized BAA to
increase its airport charges at its U.K. airports by a greater
subsidiary. The airports own and manage properties that are
an integral part of them, such as airline lounges, check-in
desks, baggage systems, fuel facilities, and aircraft hangars,
for which they obtain rental income, while BAA Lynton
develops and manages office, warehouse and hotel
properties at and around BAA’s airports. At the end of
FY2000, BAA’s portfolio of investment properties included
close to 30 million square feet of non-retail, airport-related
property and was valued at £2,361 million.
The importance of BAA Lynton as a revenue generator has
been decreasing. During FY2000, the subsidiary completed
the disposal of non-airport-related properties, following the
decision of its parent to focus on core airport business. It
also recently sold all its cargo related properties and a 90%
interest in its eight airport hotels, in accordance with the
group’s strategy of securing a stream of developments
profits without committing significant long-term resources.
As a result, future growth in this business segment is more
likely to be provided by airport operational facilities, as
BAA continues to invest heavily in airport expansion and
new equipment.
Other activities: The Company owns and operates the
Heathrow Express, a train service that runs between the
airport and central London (Paddington station) in
15 minutes. Although service was severely disrupted by the
train crash at Ladbroke Grove in October 1999, the
Heathrow Express experienced strong passenger growth and
cash flow generation in its first full year of operation. The
Company’s objective is to serve 50% of all passengers
reaching the airport by public transport. It had close to a
third of the market at the end of September 2000. BAA also
has a 50% interest in BAA McArthurGlen, Europe’s largest
developer, owner and operator of designer outlets which
currently has eleven centres open.
percentage than would otherwise be permitted. The
Heathrow Express also posted a good performance. For its
first full year of operation, the service earned an operating
profit of £4.1 million on revenue of £52 million.
Outlook: BAA benefits from a strong and growing
customer base on which it can expand its portfolio of
activities. As a result, revenue and EBITDA are likely to
maintain their upward trend, at least in the medium term.
Strong growth anticipated in passenger traffic over the next
decade (at least 5% per annum), combined with the
introduction of new operational facilities and the expansion
of airside retail space at BAA’s airports should pave the
way for a healthy performance in the future. Revenue
growth is also likely to come from increased traffic at the
Heathrow Express, which is by far the fastest link between
Heathrow and central London, and from new retail
management contracts, as more and more countries are
looking at private management for their airports. BAA is
currently in sole negotiations with the City of New York for
the management and operation of the John F Kennedy and
La Guardia Airports.
BAA plc - Page 4
FINANCIAL PROFILE
The Company has a strong balance sheet, with a relatively
low debt level and high liquid assets. Despite high cash
requirements over the past three years, mostly attributable to
substantial capital expenditures and the acquisition of World
Duty Free Americas, the group has managed to control the
relative importance of its indebtedness with the help of
strong cash flow from operations and strategic asset
disposals. As at September 30, 2000, BAA’s debt to capital
ratio stood at 30.8%, little changed since 1997. Even with
the revaluation reserve excluded from equity, the ratio is
still a low 39.7%, which compares favourably with those of
Canada’s largest airports. (BAA provides for depreciation
of operating assets only. Investment properties are revalued
annually, with adjustments transferred to an equity account.)
The superior financial flexibility is reflected in the
Company’s very high EBITDA to interest ratio of 7 and
solid liquidity position (£369 million in liquid assets). In
addition, the term structure of the debt is well diversified,
with 10% of its debt maturing during FY2001. Secured debt
is virtually non-existent, while the level of fixed rate debt
stands at 78%, limiting the exposure to changes in interest
rates.
are forecast to total £500 million this year. Major ongoing
projects include airside redevelopment at Heathrow
Terminal 3
(£80 million), the construction of two
international departure lounges at Gatwick (£55 million),
and the development of a terminal at Edinburgh Airport
(£54 million). Over the next ten years, an additional
£6.1 billion will be invested in new infrastructure and
£1.1 billion in the maintenance of existing installations,
with the lion’s share of the injections going to the U.K.
airports. The key project will be the construction of
Terminal 5 at Heathrow airport, which, if approved by the
Secretary of State, would allow the airport to increase its
capacity by 20 million passengers by 2007. Although
BAA can count on solid increases in its airport and retail
revenue in the future, operating cash flows are not likely to
be sufficient to fully cover capital investments of
£720 million per year for the next decade.
In addition, BAA announced on June 5, 2000, that it would
buy back up to £400 million of its shares. By the end of
September 2000, the Company had already bought back
25 million shares, at a cost of £129 million. Because BAA
intends to finance the initiative with funds generated
internally, mostly through previous asset disposals, and
because of the relatively small size of the buy-back, the
program should have no material impact on leverage ratios.
However, it will reduce the Company’s liquidity position by
bringing financial assets to a very low level.
Outlook: BAA’s balance sheet will likely weaken in the
future as a result of the Company’s aggressive investment
plan and the ongoing share buy-back program. Capital
investments amounted to £435 million during FY2000 and
BAA plc
B a l a n c e S h e e t (£ millions)
Assets
Cash & cash equivalents
Amounts receivable
Inventory
Total current assets
Long-term investments
Operating fixed assets (1)
Investment properties (1)
Goodwill
Total Assets
Liabilities & Equity
Short-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other long-term creditors
Provisions for liabilities and charges
Equity minority interests
Shareholders' equity (2)
Total Liabilities & Equity
6 months ended
Sept 30, 2000
369
245
104
718
37
3,974
2,417
179
7,325
216
644
860
1,821
40
27
11
4,566
7,325
for year ended March 31
2000
480
196
126
802
50
3,881
2,361
175
7,269
1999
222
209
123
554
61
3,659
2,400
337
7,011
1998
89
247
101
437
108
3,395
2,149
343
6,432
1997
306
222
5
533
67
2,871
2,025
0
5,496
209
666
875
1,787
42
38
10
4,517
7,269
155
635
790
1,911
70
0
6
4,234
7,011
227
710
937
1,693
62
1
0
3,739
6,432
57
534
591
1,401
38
5
0
3,461
5,496
(1) Operating fixed assets and investment properties at end of Sept. 2000 estimated based on breakdown in 1999/00 annual report.
(2) Includes revaluation reserve (£1,466 million in 2000, £1,336 million in 1999, £1,129 in 1998 and £1,009 in 1997).
Capital Structure
Short-term debt (inc. bank loans)
Long-term debt
Equity (exc. reveluation reserve)
Total
4.2%
35.4%
60.3%
100.0%
4.1%
35.4%
60.5%
100.0%
3.1%
38.5%
58.4%
100.0%
5.0%
37.4%
57.6%
100.0%
1.5%
35.8%
62.7%
100.0%
BAA plc - Page 5
BAA plc
rolling 12 months
S t a t e m e n t o f E a r n i n g s (£ millions)
Operating revenue
Operating expenses
EBITDA
Depreciation & amortization
Operating income
Interest charges
Interest revenue
Pre-tax income
Taxes
Income after taxes
Share of operating profit (loss) in joint ventures
Extra items & gain (loss) on disc. operations
Minority interests
Net income
For year ended March 31
Sept 30, 2000
2,185
(1,373)
812
(219)
593
(114)
17
496
(122)
374
14
24
(3)
409
2000
2,121
(1,342)
779
(209)
570
(135)
25
460
(122)
338
34
(110)
(3)
259
1999
1,959
(1,200)
759
(183)
576
(116)
24
484
(115)
369
23
9
(3)
398
1998
1,679
(1,024)
655
(134)
521
(73)
24
472
(101)
371
0
(94)
0
277
1997
1,373
(772)
601
(110)
491
(65)
18
444
(111)
333
0
(37)
0
296
409
219
9
(14)
3
626
(498)
(169)
(41)
11
(30)
259
209
156
(34)
25
615
(435)
(150)
30
31
61
398
183
0
(23)
20
578
(482)
(125)
(29)
15
(14)
277
134
0
0
0
411
(566)
(109)
(264)
28
(236)
296
110
0
0
0
406
(445)
(108)
(147)
(15)
(162)
C a s h F l o w (£ millions)
Net income
Depreciation & amortization
Impairment & write-off
Share of (profit) or loss in joint ventures
Dividends from joint ventures
Cash flow from operations
Capital expenditures (excl. capitalized interest)
Dividends paid
Cash flow before working capital
Change in non-cash working capital
Free cash flow
Financial Ratios
Current ratio
Cash flow from operations/Current liabilities
Debt to total capital
Debt to total capital (exc. revaluation reserve)
L-t debt/L-t debt+shareholder's equity
Cash flow from operations/Total debt
Cash flow from operations/Current liabilities
Cash flow from operations/Capital expenditures
Gross interest coverage (EBITDA)*
Net interest coverage (EBITDA)*
EBITDA margin
Return on average equity
Return on average equity (excl. rev. reserve)
Cash flow return on average equity
Cash flow return on average equity (excl. rev. reserve)
rolling 12 months
as at March 31
30 Sept 2000
0.8
0.7
30.8%
39.7%
28.5%
30.7%
72.8%
125.7%
2000
0.9
0.7
30.6%
39.5%
28.3%
30.8%
70.3%
141.4%
1999
0.7
0.7
32.8%
41.6%
31.1%
28.0%
73.2%
119.9%
1998
0.5
0.4
33.9%
42.4%
31.2%
21.4%
43.9%
72.6%
1997
0.9
0.7
29.6%
37.3%
28.8%
27.8%
68.7%
91.2%
6.1x
7.0x
37.2%
8.5%
12.4%
14.2%
20.8%
4.8x
5.7x
36.7%
7.7%
11.4%
14.1%
20.7%
4.7x
5.6x
38.7%
9.3%
13.4%
14.5%
21.0%
4.6x
5.6x
39.0%
10.3%
14.7%
11.4%
16.2%
5.2x
6.1x
43.8%
10.0%
n/a
n/a
n/a
* Includes capitalised interest
P a s s e n g e r S t a t i s t i c s (millions)
U.K. (1)
International (2)
Total
- annual growth
2000
117.8
96.7
214.5
5.1%
1999
112.5
91.6
204.1
8.0%
1998
104.5
84.5
189.0
6.8%
1997
98.0
78.9
176.9
4.5%
1996
93.6
75.7
169.3
6.5%
1995
87.7
71.2
158.9
-
(1) Includes Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton.
(2) Includes Pittsburgh, Indianapolis, Harrisburgh and Newark in the U.S., Melbourne and Launceston in Australia, Naples in Italy and Mauritius.