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Financing growth
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Financing growth
Chapter Outline 13.1 Introduction 243 13.2 Cash flows for funding 244 13.3 Financing options 245 13.3.1 Bond finance 246 13.3.2 Government programs 247 13.3.2.1 European Union programs 247 13.3.2.2 United States government programs Feature 13.1 Airport valuation 254
251
13.4 Summary 256 References 257
13.1
Introduction
Any airport business model is rooted in traffic. Traffic volumes, however, are not fully under the airports’ control. They are subject to a number of external factors, such as regional location, political environment, and primarily economic situation. Airport economics are clearly dominated by the fact that airports are fixed cost, twosided businesses. Achieving economies of scale and phasing investment are essential to lower unit cost of these asset-intensive ventures. This is a challenging task given the investment cycle which is unavoidable to accommodate traffic growth and remain competitive—otherwise airlines may turn away and fly elsewhere. At some point of time, capacity expansions will become inescapable, which are lumpy. Since operating cash flow and depreciation usually are not sufficient to cover investment spending, capex will trigger additional funding requirements. External sources include investors (i.e., equity) and creditors (for example, bank loans); issuing bonds is another option. European airports can avail of a number of EU (European Union)-wide funding programs, while most US airports are eligible for government grants. Project and cost management as well as financial skills are required for a thorough phasing of major investment spending and an optimal use of debt facilities and equity supply. This chapter’s feature is on airport valuation, which will introduce different approaches to evaluate an airport. What they basically have in common is that value is driven by the business fundamentals.
Foundations of Airport Economics and Finance. DOI: https://doi.org/10.1016/B978-0-12-810528-3.00013-5 © 2019 Elsevier Inc. All rights reserved.
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13.2
Foundations of Airport Economics and Finance
Cash flows for funding
Throughout the book the impasse of attracting additional traffic in order to lower unit cost and accommodating it via innovative/disruptive measures and/or capex for new infrastructure has been deliberated on. The industry appears to be subject to a vicious circle (the investment life cycle), since not going forward means going backward. The resulting dilemma is that growth needs to be profitable in general and typically results in substantial funding requirements in particular. Therefore, the focus of this chapter is on long-term investment funding rather than day-to-day working capital management—although the latter is the most important internal source for financing the business. Other sources of funding are summarized in Table 13.1. Table 13.1 Cash flow typology Type
Major components of inflow
Cash flow from operating activities
Incoming payments from: Sales of goods and services Rent Concessionaires Interest income Dividend income Proceeds from: Sales of fixed assets (land, buildings, equipment) Divestment of foreign participations (equity, securities)
Cash flow from investing activities
Outgoing payments to: Suppliers Other operating expenses Employees Creditors for interest charges Tax authorities Payments for: Purchase of fixed assets (runway, terminal building, parking garage) Investment in foreign participations (equity, securities) Outflows for: Cash transactions with shareholders (dividend payments) Repayment transactions with creditors (payback of loans, call of bonds)
G
G
G
G
G
G
G
G
G
G
G
G
G
Cash flow from financing activities
Major components of outflow
Inflows from: Cash transactions with shareholders (issuance of shares) Borrowing transactions with creditors (loan agreements, issuance of bonds)
G
G
G
G
G
Source: Compiled by author from various sources.
In capitalizing on the basic cash flow statement (cf. Fig. 3.6), Table 13.1 highlights the funding sources or cash flows available. The net cash flow from operations, resulting from generation of revenue after covering operating expenses, has been discussed extensively in previous chapters. One specific way of funding expansion projects from operating cash flow is known as “prefinancing” airport investments via increased airport charges. This option is often used for funding major projects such as runways and terminals. In this case, airport operators charge higher prices as soon as the construction work
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starts or even before. Since this is long before the in-service date, airline users are heavily opposing this approach (Forsyth, 2018; IATA, n.d.). Still, current examples of airports raising and/or implementing new charges for supporting airport expansion include: G
G
G
Singapore Changi (SIN), Hong Kong International (HKG) implemented airport construction fee in 2016 to contribute to the funding of a third runway, and Dubai International (DXB): additional passenger facility charge from 2016 to support financing its own as well as Al Maktoum’s (DWC) expansion (Chong, 2018).
Prefinancing of infrastructure investments by user charges is criticized by IATA, which is in favor of full funding by the airport and subsequent recovery over longterm operation (IATA, n.d.; Chong, 2018). The only remaining alternative in terms of a company internal source for investment funding is the positive cash flow from divestment of assets. This may result from, for example, sales of marketable securities, land, or buildings and/or an equity stake in an airport abroad. Practically, this is a viable option as long as these assets were held for sale anyway or are not considered essential for the company’s local (core) operation and generation of future revenue. Any other source of investment funding is external in nature. Cash flows from financing activities include, for example, shareholders equity, bank loans, bonds, and leasing. While the latter is not (yet) very prominent in the airport sector except for equipment, dedicated facilities from public investment institutions/banks are frequently used across Europe. A specific case is the quite common financing of US airports via government grants.
13.3
Financing options
As introduced in the context of the WACC discussion in Chapter 7, the two basic ways for a company to raise funds from the market is by issuing a debt instrument or equities, which differ on a number of aspects. Debt providers or creditors receive interest payments at regular intervals and a final principal payment upon maturity. Their claims must be honored in full before the claims of equity holders or investors can be paid. Instead, investors enjoy voting rights usually in proportion to their share of stock, for example, for electing the management board and ultimately control the company. Moreover, they receive cash dividends as declared at the annual general meeting and may benefit from an appreciation of the share price. In contrast to interest charges for debt instruments, these are not tax deductible to the firm (Mishkin and Eakins, 2015). Table 13.2 lists various instruments available in the debt and equity markets.
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Table 13.2 Financial markets and financing forms Debt market instruments
Equity market instruments
Bank loan Leases Commercial paper Supplier credit Corporate bonds Asset-backed securities Other securities Euromarket instruments
Ordinary shares/common stock Preference shares/preferred stock Warrants
Source: Adapted from Hillier, D., Grinblatt, M., Titman, S., 2012. Financial Markets and Corporate Strategy, second European ed. McGraw-Hill Education, Maidenhead.
Another particularity of equity finance by issuing new (common) shares is that the existing ones will be diluted. Since the enterprise value (EV) does not change, the value hence price per share will go down and voting rights will redistributed among all shareholders—including the new ones. Since this is to the detriment of the original investors, they usually have the right to buy new shares pro rata. Alternatively, capital can be borrowed from creditors. Existing shareholdings and voting rights remain intact; interest payments lower the basis for taxation and can be planned well ahead (usually) without fluctuations. Debt instruments used by airports are primarily loans and bonds. Both have similar features, that is, regular interest payment and a specific maturity date, but the key difference is the tradability of bonds.
13.3.1 Bond finance A bond is a debt instrument—a long-term note payable—that certifies a contract between the bond issuer and the bondholder as spelled out in the bond indenture. The issuer pledges to pay the loan principal (par value of the bond) to the bondholder on a fixed date (maturity date) as well as a periodic interest. Bonds are customarily issued for 10 30 years. The interest rate, or the price of the bond, depends primarily on the market rate and the company-specific risk as reflected by the investment grade assigned by a rating agency (Moody’s, 2017a,b). A bond, or rather the creditworthiness of the issuing company, is rated on a number of criteria. Their considerations are focusing on factors such as: G
G
G
G
G
market position/traffic volumes/carrier base, revenue diversification/aero- and nonaeronautical revenues, capital program, debt structure/leverage, and liquidity/cash/debt service reserves, etc. (Lehman, 2011; Heffintrayer, 2016).
While Table 13.3 lists the resulting investment grades applied by Moody’s, Standard & Poor’s, and Fitch, Table 13.4 assembles the recent ratings of an international selection of airports/operators.
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Table 13.3 Rating criteria and schemes Moody’s
Standard & Poor’s
Fitch
Profile
Investment grade: high creditworthiness Aaa Aa 1 3 A1 3 Baa 1 3
AAA AA 1 / 2 A1/2 BBB 1 / 2
AAA AA 1 / 2 A1/2 BBB 1 / 2
Gilt edge, prime, maximum safety Very high grade, high quality Upper medium grade Lower medium grade
Distinctly speculative: low creditworthiness Ba 1 3 B1 3
BB 1 / 2 B1/2
BB 1 / 2 B1/2
Low grade, speculative High speculative
Predominantly speculative: substantial risk or in default Caa Ca C
CCC CC C CI D
CCC CC C DDD-D
Substantial risk, in poor standing May be in default; extremely speculative Even more speculative than those above Income bonds; no interest being paid Default
Source: Adapted from Hillier, D., Grinblatt, M., Titman, S., 2012. Financial Markets and Corporate Strategy, second European ed. McGraw-Hill Education, Maidenhead; Prather, D., 2015. Airport Management. Aviation Supplies & Academics, Newcastle.
As evidenced by the numerous examples covered by Table 13.4 for a period of roughly 2 years only, bond financing has developed into a popular alternative to standard loan facilities on an international scale. In the United States, the bond market has traditionally been a critical funding source for airport capital projects. Bonds are flexible instruments for both the issuer and the bondholder, can provide large volumes, and the full amount goes directly to the issuing company’s cash box—and usually the interest rate is lower than for a typical bank loan.
13.3.2 Government programs Governments and public institutions frequently offer attractive financing options as a means of supporting economic development, including mobility and transportation. Typically, they come in the form of grants and loans, less frequently as guaranties.
13.3.2.1 European Union programs Financing programs of EU investment institutions and banks designed for i.a. financing airports are summarized by Table 13.5.
Table 13.4 Selected airport bond ratings Investment grade
Airport/Operator
Rating agency
Date
A3 A AAA A1 A1 Aa3
Moody’s Fitch S&P Moody’s Fitch Moody’s
April 2018 May 2017 September 2016 August 2016 August 2016 October 2016
BBB 1 Baa2 BBB AA 2 Aa3 AA 2 AA 2 Aa2 Baa1 Ba2 A 1 /A A1/A2 A 1 /A A1 Baa1 BBB 1 A1 BB 1
AENA AENA Airport Authority Hong Kong (AAHK) Alaska Int’l Airport System (AIAS) Alaska Int’l Airport System (AIAS) Atlanta, Charlotte, Los Angeles, Port Authority of New York, New Jersey Atlantia Atlantia/Atlantia EMTN program Atlantia: EMTN (euro medium-term note) program Aviation Enterprises Aviation Enterprises Aviation Enterprises Bangalore International Airport (BIAL) Boston Logan International Airport Brussels Airport Company (BAC) Delhi International Airport (DIAL) Denver International Airport (DEN) Denver International Airport (DEN) Denver International Airport (DEN) Flughafen Zurich AG (FZAG) Gatwick Funding Limited (GFL) Gatwick Funding Limited (GFL) Halifax Int’l Airport Authority (HIAA) Heathrow Finance plc (existing high yield notes)
S&P Moody’s S&P Fitch Moody’s S&P ICRA Moody’s Moody’s Moody’s Fitch Moody’s S&P S&P Moody’s S&P S&P Fitch
May 2018 May 2018 May 2018 July 2016 July 2016 July 2016 June 2017 October 2016 November 2016 September 2016 December 2017 December 2017 December 2017 April 2017 February 2018 March 2017 August 2017 June 2017
BB 1 A2
Heathrow Finance plc (existing high yield notes) Heathrow Funding Ltd (Class A notes)
Fitch S&P
October 2016 June 2017
Volume
EUR 10bn
INR 1,863.74 cr.
INR 30bn USD 84m Approx. USD 276m Approx. USD 276m Approx. USD 276m GBP 300m
(Continued)
Table 13.4 (Continued) Investment grade
Airport/Operator
Rating agency
Date
A2 A2 A2 BBB BBB BBB BBB Baa3 Baa1 BBB 1 A A3 A2 AA 1 A3 A2 A2 A2 A 1 /A 2 1 Baa2 AA BBB 1 /A 2 2
Heathrow Funding Ltd (Class A notes) Heathrow Funding Ltd (Class A notes) Heathrow Funding Ltd (Class A notes) Heathrow Funding Ltd (Class B notes) Heathrow Funding Ltd (Class B notes) Heathrow Funding Ltd (Class B notes) Heathrow Funding Ltd (Class B notes) LaGuardia, Terminal B Manchester Airport Group Funding plc (MAG) Manchester Airport Group Funding plc (MAG) Memphis-Shelby County Airport Auth. Memphis-Shelby County Airport Auth. Memphis-Shelby County Airport Auth. Narita International Airport (NAA) New Orleans Int’l Airport (MSY) New Orleans Int’l Airport (MSY) New Orleans Int’l Airport (MSY) Sacramento Int’l Airport (Bonds and senior lien debt) Schiphol Group Sydney Airport Finance Company Pty Ltd. (SAFL) Vancouver Airport Authority (YVR) Wellington Int’l Airport (WIAL)
Fitch S&P Fitch S&P Fitch S&P Fitch Moody’s Moody’s Fitch Fitch Moody’s S&P JCR Moody’s S&P Fitch Moody’s S&P Moody’s S&P S&P
June 2017 December 2016 October 2016 June 2017 June 2017 December 2016 October 2016 October 2016 February 2017 November 2016 September 2017 March 2017 March 2017 December 2017 February 2015 February 2015 February 2015 October 2017 August 2017 August 2017 January 2018 December 2015
a
GARB, general airport revenue bond; multiple ratings possible. Source: Compiled by author from various sources.
Volume
GBP 5.81bn USD 282m (GARBs)a
JPY 15bn Approx. USD 486m Approx. USD 486m Approx. USD 486m Lien debt USD 1,033m
Table 13.5 Dedicated EU programs Institution/Program
Characteristics
European Regional Development Fund (ERDF)— European Territorial Cooperation Goal (ETC)
G
Grants for projects aiming to enhance interregional cooperation in Europe
Examples G G G G G
Cohesion Fund
G
Grants contributing to projects in the field of environment and Trans-European Networts (TEN-T) in the area of transport infrastructure
G G G G
Connecting Europe Facility (CEF)—Transport
G
G
Horizon 2020 Article 187 JTI Single European Sky Air Traffic Management Research (SESAR)
G
Grants for projects of common interest within the framework of the Trans-European Networks policy in the sector of transport Project funding: between 20% and 50% of the total eligible costs Grants for development and research project on air traffic management in the Single European Sky for a safer air transport
G G G
G G G G
European Investment Fund (EIF) European Investment Bank (EIB)—project loans
G G
Guarantees for loans or bond issues Loans for investment projects contributing to EU policy objectives in all sectors of the economy
G G G G G G G
European Bank for Reconstruction and Development (EBRD)
G
European Fund for Strategic Investment (EFSI)—an initiative launched jointly by the EIB, EIF, and the EC
G
G
Loans Equity (converted loans)
G G G
G
Loans backed by a EUR 16bn (USD 18.6tn) guarantee from the EU budget Aims to revive investment in strategic EU projects to unlock investment of .EUR 315bn (USD 365tn) over 3 years
G G G G
Warsaw Chopin Airport Madeira Airport Santiago de Compostela Belfast Int’l Airport Belfast City Airport Riga Airport Athens, Corfu Airports Palma de Mallorca Airport Tenerife Airports Stuttgart Airport Budapest Airport Stockholm Skavsta Airport Birmingham Airport Liege Airport Heathrow Airport Zagreb Airport Milan Malpensa Airport Helsinki Airport Schiphol Airport ADP Orly Airport Frankfurt Airport Dubrovnik Airport Copenhagen Airport Pulkovo St. Petersburg Airports in Russia Budapest Airport Tallinn Airport Copenhagen Airport Greek Regional Airports Lithuanian Airports
Source: Compiled by author from Airports Council International (ACI) Europe, 2017. Guide to European Finance Instruments for Airports. ACI Europe, Brussels; Graham, A., Morrell, P., 2016. Airport Finance and Investment in the Global Economy. Routledge, Abingdon.
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The numerous examples given in the right-hand column indicate that European airports frequently avail of one of these dedicated programs for funding transport infrastructure. It is interesting to note, though, that the European Court of Auditors (ECA, 2014) concluded that EU-funded airport infrastructures frequently turned out to be of poor value for money.
13.3.2.2 United States government programs Before presenting the different programs, the focus needs to be widened due to some unique administrative and financial characteristics differentiating US airports from those elsewhere. These particularities result from specific renting/leasing practices and the available sources of finance. This has also been elaborated on in Section 9.6, where it was presented as the major reason for the relative absence of privatization in the United States (CRS, 2017; GAO, 2014, 2015). In the US, airports are mainly publicly owned on a local or state level and rely extensively on the municipal bond market for financing. The airport system differs greatly from other regions since the operation of facilities is mostly outsourced to private parties and not operated by the regional government. This privately managed operation results in strong cooperation between airport management and users. Even in pricing decisions, airlines influence the airport and several have in fact invested in their own terminal building (ACRP, 2007; Young and Wells, 2011; ACI North America, 2012; De Neufville and Odoni, 2013). One key factor is how the airport airline relationship is set up. Significant airlines sign lease and use agreements which include majority-in-interest (MII) clauses, allowing them to exert an influence or even control on financing and development decisions at the respective airport. Airlines in the EU do not have this farreaching type of influence over an airport, despite the EU Charges Directive which requires consultation. The signatory airlines in the United States—one or more collectively—share the financial risk with the airport. If an infrastructure debt arises and the airport cannot recover cost, the airline has the burden and pays the difference. For sharing those risks, signatory airlines may enjoy rebates on their charges under the residual charges system. Under this system, similar to the single till system in Europe and elsewhere, the contracted airline only pays the difference of the revenue target considering all nonaeronautical profits of the airport. Use agreements at residual cost airports are typically for the long term, as they were originally designed to provide security for issuing long-term airport revenue bonds. Airlines that are not in such a type of agreement with an airport, or where the airport operator assumes the major financial risk per se, are charged under the compensatory system which does not consider nonaeronautical revenue and typically leads to higher aeronautical charges to the airline (ACI North America, 2012; De Neufville and Odoni, 2013; Fu and Yang, 2017; Prather, 2015; Young and Wells, 2011). Airports in the United States rely on three main sources of funding: G
G
G
federal and state programs, bond issues, and private investment to supplement airport revenue.
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Alternative approaches like real-estate investment trusts (REITs) or straightforward privatization have been discussed but have not yet materialized. This is probably due to the negative implications of leaving the current system as discussed in Chapter 9, Ownership structure (ACRP, 2007; Hampton, 2009; Messer, 2011). Still, this may possibly change in the medium term, as the Trump administration appears to be warming up to private-sector airport investment, given the huge capital needs of nearly USD 100bn up to 2021 only. After unveiling the “Rebuilding Infrastructure in America” proposal, complementary funding mechanisms need to be identified next. A suggestion already included in the legislative outline is a significant liberalization of the Airport Privatization Pilot Program. Removing the current restrictions would effectively make it available to any and all airports. To facilitate financing, change-of-use provisions regarding tax-exempt bonds could allow the leasing consortium to take over existing ones, instead of replacing these by taxable bonds (ACI North America, 2017, 2018; CRS, 2017; Poole, 2018; Vogel, B. et al., 2017). Notwithstanding, the federal government provides grant-in-aid programs which do not need to be paid back since the postwar period to date. Table 13.6 gives an overview of US grant programs for airport funding. Table 13.6 US federal grant programs Program Airport Improvement Program (AIP)
Characteristics G
G
G
G
G
G
Passenger facility charges (PFCs)
G
G
G
G
Originally based on Airport and Airway Improvement Act of 1982 In general, AIP provides grants to public agencies for the planning and development of public-use airports Four particular purposes: planning, development, capacity enhancement, noise compatibility programs Funding from Trust Fund, relying on user fees and taxes on those benefiting from services made possible by AIP Funds may only be used for specific types of projects directly contributing to the capital improvement of airport facilities Eligibility: airport must be part of the National Plan of Integrated Airport Systems (NPIAS) Originally based on Aviation Safety and Capacity Expansion Act of 1990 In general, the PFC Program allows the collection of PFC fees up to USD 4.50 for every enplaned passenger at commercial airports controlled by public agencies PFCs are capped at USD 4.50 per flight segment with a maximum of two PFCs charged on a one-way trip or four PFCs on a round trip, for a maximum of USD 18 total Airports use these fees to fund FAA-approved projects that enhance safety, security, or capacity; reduce noise; or increase air carrier competition (Continued)
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Table 13.6 (Continued) Program Facilities and equipment program (F&E) Federal letters of intent (LOI)
Characteristics G
G
The F&E program provides funding for airports for installation of navigational aids/control towers FAA states its intent to appropriate future funds to an approved project in an LOI to support financing
Source: Young, S., Wells, A., 2011. Airport Planning & Management, sixth ed. McGraw-Hill, New York; Adapted from GAO, 2015. Airport Finance Information on Funding Sources and Planned Capital Development. United States Government Accountability Office, Washington, DC. Report GAO-15-306; Federal Aviation Authority (FAA), 2018a. Airport Improvement Program (AIP). ,https://www.faa.gov/airports/aip/. (accessed 28.07.18.); Federal Aviation Authority (FAA), 2018b. Passenger Facility Charge (PFC) program. ,https://www.faa.gov/airports/ pfc/. (accessed 28.07.18.).
The AIP and PFC programs are the primary ways of federal funding. Fig. 13.1 illustrates the allocation of the total amount of 3.2bn of AIP funding across airports in 2015. One of the resulting complaints from the disproportion between the share of enplanements and the share of grants is that a future prosecution of the current system continues to fail in addressing the problem of large hub airports (International Airport Review, 2018).
Figure 13.1 Airport Improvement Program funding of US airports in 2015. Note: 2015 AIP total 5 USD 3.2bn. Source: Adapted from Federal Aviation Authority (FAA), 2016. Airport Improvement Program (AIP) grant histories. ,https://www.faa.gov/airports/planning_capacity/passenger_ allcargo_stats/passenger/. (accessed 12.10.16.).
In July 2018 the US Department of Transportation (DOT) announced that the FAA will award USD 770.8m in airport infrastructure grants, as part of the total USD 3.18bn in AIP funding. It comprises 569 grants to 522 airports that will fund 949 infrastructure projects including runways, aprons, terminals, etc. The purpose is to support upgrading and modernizing airports in order to enhance safety, improve the travel experience, and also to strengthen local economies (FAA, 2018c).
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In addition to federal funding, grant programs for capital improvements were also offered by many US states. These are sourced from transportation user fees, fuel taxes, and the general tax base. State and local funding may be availed of by airports not eligible under AIP/PFC or in addition to federal grants (Young and Wells, 2011; Prather, 2015). Any party concerned with the financing of an airport company has a vested interest in approximating the value of the airport in question. Both potential providers of debt and equity have to look beyond financial statements when assessing credit facilities or going through an investment appraisal. This is because book values as per balance sheet do not adequately reflect the market value of the assets/operations (cf. Chapter 3, Measuring the financial position). Feature 13.1 is giving an overview of most frequently used approaches in the case of airports. Feature 13.1 Airport valuation The valuation of an airport involves more than the EV/EBITDA transaction multiples introduced in Chapter 9, Ownership structure, and the selection of stock market ratios presented in Chapter 12, Managing the financial performance. Still, some of these metrics are being used in Fig. 13.2, which is positioning selected airports in relation to their P/E ratios and EV/EBITDA multiples. The size of the bubbles represents the respective ROE, ranging from 2.1% for Malaysia Airports to 21.2% for AENA. The illustration is again based on the data used in Table 12.20 on stock market ratios (originally provided by Credit Suisse, 2017). P/E Malaysia Airports
60
Sydney Airport
50 Shenzhen Flughafen Airport Zürich AG
40 30
Beijing Capital Int’I
20 10
Airports of Thailand Grupo Aerop. Grupo Aerop. Del Sureste Del Pacifico
ADP Shanghal Fraport
Guangzhou Baiyum Int’I
Grupo Centre Norte
Int’I
AENA
Flughafen Wien
0 5
7
9
11
13
15
17
19
21
EV/EBITDA 23
Figure 13.2 Valuation matrix of publicly quoted companies/airport operators in 2015. Note: Bubble size 5 ROE. Source: Author based on Credit Suisse data.
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It is interesting to note that as a general rule and abstracting from outlying Malaysia Airports, a trend can reasonably well be fitted to airport operators. This suggests a valid correlation between the two ratios defining the matrix. On the other hand, no direct relation is visible with regard to the respective bubble size, indicating the current ROE. As with any other business entity, an airport is valued on the basis of its current and expected revenues, earnings, and cash flow. Traditional valuation measures such as price/earnings and EV/EBITDA ratios are performance indicators for the very near future. The earnings and EV multiples are calculated on the basis of historical data and projected for the next 1 3 years. It goes without saying that historical share performance can only give limited guidance and that expected future earnings are key to the valuation and share price performance of any business. It is basically the investors’ perception of likes and dislikes that are anticipated by the stock market and determine the respective share price (SBC, 1996; UBS, 1996). In addition to the overall investment climate, investors’ likes include everything bearing the potential for sustained growth in volume and earnings—and vice versa. The main drivers of valuation are summarized in Fig. 13.3, in combination with a selection of prominent tools.
Figure 13.3 Drivers and types of airport valuation. Source: Author.
It comes not at a surprise that the examples of investors’ likes and dislikes appear to be duplicates of the rating agencies’ grading criteria enumerated in Section 13.3.1. (Continued)
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Feature 13.1
(cont’d)
Three alternative valuation tools to the multiples/ratios discussed above and also applied to Fig. 13.2 are: G
G
G
The discounted cash flow approach (DCF, discounting future cash flows/dividends to net present value, NPV, at the cost of capital capturing differences in cash generation), the sum of the parts valuation or break-up analysis (SOTP, providing a range of values by aggregating the standalone value of individual business units/divisions, for example, using mini DCFs), and the regulatory asset base approach (RAB, the key concept of which is financial capital maintenance, FCM; RAB B net book value) (HSBC, 2014; Oxera, 2014, 2015; Credit Suisse, 2017).
Despite somewhat reduced importance for the RAB approach, it are effectively the fundamentals of the business in terms of investors’ likes and dislikes that are driving the value and the price investors are willing to pay. For an alternative valuation approach strictly based on the main drivers of financial performance as per the airport value tree see also Vogel and Graham (2010).
13.4
Summary
Capacity expansions become inevitable for a decent-sized commercial airport at some point, since not going forward means going backward. Such projects generally come in large chunks to accommodate traffic projected for some years to come. This is why operating cash flow and depreciation are typically not sufficient to cover associated capital expenditure. This will result in—sometimes considerable— needs for funding, to be covered by cash flow from financing activities. External sources include equity providers and various creditors. Issuing bonds is another option. While bond financing is well established amongst US airports, it is not yet that widespread but significantly growing across Europe. Project finance has not been discussed here, since it was already covered in the context of BOT projects in Section 9.3 on approaches to airport privatization. Financing US airports is generally different from financing European airports. This is resulting from the long-standing system of federal (and state) grants. European airports can avail of a number of EU-wide funding programs, but in contrast to the US system, there is usually a repayment requirement. This chapter’s feature focused on airport valuation. It introduced different approaches to evaluate an airport. One essentially shared characteristic among these tools is the fact that value is driven by the fundamentals of the business—investors’ likes and dislikes. Amongst these are the carrier base, the regulatory framework, and the position in the investment cycle etc.—very similar to the considerations of rating agencies in bond rating.
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References Airport Cooperative Research Program (ACRP), 2007. Innovative Finance and Alternative Sources of Revenue for Airports. Transportation Research Board (TRB), Washington, DC, ACRP Synthesis 1. Airports Council International (ACI) Europe, 2017. Guide to European Finance Instruments for Airports. ACI Europe, Brussels. Airports Council International (ACI) North America, 2012. Municipal bond market—a critical funding source for airport capital projects. ,http://www.aci-na.org/sites/default/files/ municipal_bond_market_fact_sheet.pdf. (accessed 01.03.16.). Airports Council International (ACI) North America, 2017. Airport Infrastructure Needs 2017 2021. ACI North America, Washington, DC. Airports Council International (ACI) North America, 2018. America’s Airports—Five Airport Infrastructure Principles. ACI North America, Washington, DC. Chong, A., 2018. Picking up the bill. Flight Airline Bus. 34 (4), 34 35. Credit Suisse (Ed.), 2017. European Airports. Credit Suisse Securities (Europe) Ltd.: Equity Research/Airport Services, London. CRS, 2017. Airport Privatization: Issues and Options for Congress. Congressional Research Service, Washington, DC, CRS Report R43545. De Neufville, R., Odoni, A., 2013. Airport Systems—Planning, Design and Management, second ed. McGraw-Hill Education, New York. European Court of Auditors (ECA), 2014. EU-Funded Airport Infrastructures: Poor Value for Money. European Court of Auditors, Luxembourg. Federal Aviation Authority (FAA), 2016. Airport Improvement Program (AIP) grant histories. ,https://www.faa.gov/airports/planning_capacity/passenger_allcargo_stats/ passenger/. (accessed 12.10.16.). Federal Aviation Authority (FAA), 2018a. Airport Improvement Program (AIP). ,https:// www.faa.gov/airports/aip/. (accessed 28.07.18.). Federal Aviation Authority (FAA), 2018b. Passenger Facility Charge (PFC) program. ,https://www.faa.gov/airports/pfc/. (accessed 28.07.18.). Federal Aviation Authority (FAA), 2018c. Press release—U.S. Department of Transportation announces $770.8 million in infrastructure grants to airports in 50 states and 5 U.S. territories. ,https://www.faa.gov/news/press_releases/news_story.cfm?newsId 5 22955.. (accessed 28.07.18.). Forsyth, P., 2018. Pre-financing airport investments, efficiency and distribution: do airlines really lose? J. Air Transp. Manage. 67, 259 267. Fu, X., Yang, H., 2017. Airport airline arrangements: An interpretive review of industry practices and recent studies. In: Bitzan, J., Peoples, J. (Eds.), The Economics of Airport Operations. Emerald Publishing, Bingley, 97 122. GAO, 2014. Airport Privatization—Limited Interest Despite FAA’s Pilot Program. United States Government Accountability Office, Washington, DC, Report GAO-15-42. GAO, 2015. Airport Finance—Information on Funding Sources and Planned Capital Development. United States Government Accountability Office, Washington, DC, Report GAO-15-306. Graham, A., Morrell, P., 2016. Airport Finance and Investment in the Global Economy. Routledge, Abingdon. Hampton, L., 2009. An introduction to financing airport infrastructure in the USA and elsewhere. J. Airport Manage. 3 (4), 320 327.
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Heffintrayer, E., 2016. Airport bonds: rating considerations. Paper Presented at the AAAE/ LeighFisher Passenger Facilities Charges & Rates and Charges Workshop. November, Moody’s Investor Service, Phoenix, AZ. Hillier, D., Grinblatt, M., Titman, S., 2012. Financial Markets and Corporate Strategy, second European ed. McGraw-Hill Education, Maidenhead. HSBC (Ed.), 2014. European Airports. HSBC Global Research, London. International Air Transport Association (IATA), n.d. Pre-funding. Position Paper. , https:// www.iata.org/policy/Documents/pre-funding.pdf . (accessed 17.01.18.). International Airport Review, 2018. U.S. bill fails to address problem of funding for large hub airports. ,https://www.internationalairportreview.com/news/68846/faa-bill. (accessed 03.05.18.). Lehman, S., 2011. Airport statistics that make or break a rating. Paper Presented at the ACI Statistics and Forecasting Workshop. March, Fitch Ratings, London. Messer, R., 2011. New financing opportunities for airports: exploring the possibility of a specialty REIT. J. Airport Manage. 5 (2), 320 327. Mishkin, F., Eakins, S., 2015. Financial Markets and Institutions, eighth ed. Pearson, Boston, MA. Moody’s, 2017a. Rating Methodology: Privately Managed Airports and Related Issuers. Moody’s Investor Service, London/New York. Moody’s, 2017b. Rating Methodology: Publicly Managed Airports and Related Issuers. Moody’s Investor Service, London/New York. Oxera, 2014. The Regulatory Asset Base and Regulatory Commitment. Agenda February. Oxera Consulting LLP, Oxford. Oxera, 2015. Aiming High in Setting the WACC: Framework or Guesswork? Agenda February. Oxera Consulting LLP, Oxford. Poole, R., 2018. Annual Privatization Report 2018—Air Transportation. Reason Foundation, Los Angeles, CA. Prather, D., 2015. Airport Management. Aviation Supplies & Academics, Newcastle. SBC Warburg (Ed.), 1996. European Airports’96. Swiss Bank Corporation, London. UBS (Ed.), 1996. European Airports. UBS Global Research, London/Zurich. Vogel, B., Ing, D., Lopez, R., 2017. To PPP or APPP: that is the question. Jane’s Airport Rev. 29 (8), 8 10. Vogel, H.-A., Graham, A., 2010. A driver-based approach to airport valuation. J. Air Transp. Stud. 1 (1), 20 47. Young, S., Wells, A., 2011. Airport Planning & Management, sixth ed. McGraw-Hill, New York.
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Chapter Outline 13.1 Introduction 243 13.2 Cash flows for funding 244 13.3 Financing options 245 13.3.1 Bond finance 246 13.3.2 Government programs 247 13.3.2.1 European Union programs 247 13.3.2.2 United States government programs Feature 13.1 Airport valuation 254
251
13.4 Summary 256 References 257
13.1
Introduction
Any airport business model is rooted in traffic. Traffic volumes, however, are not fully under the airports’ control. They are subject to a number of external factors, such as regional location, political environment, and primarily economic situation. Airport economics are clearly dominated by the fact that airports are fixed cost, twosided businesses. Achieving economies of scale and phasing investment are essential to lower unit cost of these asset-intensive ventures. This is a challenging task given the investment cycle which is unavoidable to accommodate traffic growth and remain competitive—otherwise airlines may turn away and fly elsewhere. At some point of time, capacity expansions will become inescapable, which are lumpy. Since operating cash flow and depreciation usually are not sufficient to cover investment spending, capex will trigger additional funding requirements. External sources include investors (i.e., equity) and creditors (for example, bank loans); issuing bonds is another option. European airports can avail of a number of EU (European Union)-wide funding programs, while most US airports are eligible for government grants. Project and cost management as well as financial skills are required for a thorough phasing of major investment spending and an optimal use of debt facilities and equity supply. This chapter’s feature is on airport valuation, which will introduce different approaches to evaluate an airport. What they basically have in common is that value is driven by the business fundamentals.
Foundations of Airport Economics and Finance. DOI: https://doi.org/10.1016/B978-0-12-810528-3.00013-5 © 2019 Elsevier Inc. All rights reserved.
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Foundations of Airport Economics and Finance
Cash flows for funding
Throughout the book the impasse of attracting additional traffic in order to lower unit cost and accommodating it via innovative/disruptive measures and/or capex for new infrastructure has been deliberated on. The industry appears to be subject to a vicious circle (the investment life cycle), since not going forward means going backward. The resulting dilemma is that growth needs to be profitable in general and typically results in substantial funding requirements in particular. Therefore, the focus of this chapter is on long-term investment funding rather than day-to-day working capital management—although the latter is the most important internal source for financing the business. Other sources of funding are summarized in Table 13.1. Table 13.1 Cash flow typology Type
Major components of inflow
Cash flow from operating activities
Incoming payments from: Sales of goods and services Rent Concessionaires Interest income Dividend income Proceeds from: Sales of fixed assets (land, buildings, equipment) Divestment of foreign participations (equity, securities)
Cash flow from investing activities
Outgoing payments to: Suppliers Other operating expenses Employees Creditors for interest charges Tax authorities Payments for: Purchase of fixed assets (runway, terminal building, parking garage) Investment in foreign participations (equity, securities) Outflows for: Cash transactions with shareholders (dividend payments) Repayment transactions with creditors (payback of loans, call of bonds)
G
G
G
G
G
G
G
G
G
G
G
G
G
Cash flow from financing activities
Major components of outflow
Inflows from: Cash transactions with shareholders (issuance of shares) Borrowing transactions with creditors (loan agreements, issuance of bonds)
G
G
G
G
G
Source: Compiled by author from various sources.
In capitalizing on the basic cash flow statement (cf. Fig. 3.6), Table 13.1 highlights the funding sources or cash flows available. The net cash flow from operations, resulting from generation of revenue after covering operating expenses, has been discussed extensively in previous chapters. One specific way of funding expansion projects from operating cash flow is known as “prefinancing” airport investments via increased airport charges. This option is often used for funding major projects such as runways and terminals. In this case, airport operators charge higher prices as soon as the construction work
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starts or even before. Since this is long before the in-service date, airline users are heavily opposing this approach (Forsyth, 2018; IATA, n.d.). Still, current examples of airports raising and/or implementing new charges for supporting airport expansion include: G
G
G
Singapore Changi (SIN), Hong Kong International (HKG) implemented airport construction fee in 2016 to contribute to the funding of a third runway, and Dubai International (DXB): additional passenger facility charge from 2016 to support financing its own as well as Al Maktoum’s (DWC) expansion (Chong, 2018).
Prefinancing of infrastructure investments by user charges is criticized by IATA, which is in favor of full funding by the airport and subsequent recovery over longterm operation (IATA, n.d.; Chong, 2018). The only remaining alternative in terms of a company internal source for investment funding is the positive cash flow from divestment of assets. This may result from, for example, sales of marketable securities, land, or buildings and/or an equity stake in an airport abroad. Practically, this is a viable option as long as these assets were held for sale anyway or are not considered essential for the company’s local (core) operation and generation of future revenue. Any other source of investment funding is external in nature. Cash flows from financing activities include, for example, shareholders equity, bank loans, bonds, and leasing. While the latter is not (yet) very prominent in the airport sector except for equipment, dedicated facilities from public investment institutions/banks are frequently used across Europe. A specific case is the quite common financing of US airports via government grants.
13.3
Financing options
As introduced in the context of the WACC discussion in Chapter 7, the two basic ways for a company to raise funds from the market is by issuing a debt instrument or equities, which differ on a number of aspects. Debt providers or creditors receive interest payments at regular intervals and a final principal payment upon maturity. Their claims must be honored in full before the claims of equity holders or investors can be paid. Instead, investors enjoy voting rights usually in proportion to their share of stock, for example, for electing the management board and ultimately control the company. Moreover, they receive cash dividends as declared at the annual general meeting and may benefit from an appreciation of the share price. In contrast to interest charges for debt instruments, these are not tax deductible to the firm (Mishkin and Eakins, 2015). Table 13.2 lists various instruments available in the debt and equity markets.
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Table 13.2 Financial markets and financing forms Debt market instruments
Equity market instruments
Bank loan Leases Commercial paper Supplier credit Corporate bonds Asset-backed securities Other securities Euromarket instruments
Ordinary shares/common stock Preference shares/preferred stock Warrants
Source: Adapted from Hillier, D., Grinblatt, M., Titman, S., 2012. Financial Markets and Corporate Strategy, second European ed. McGraw-Hill Education, Maidenhead.
Another particularity of equity finance by issuing new (common) shares is that the existing ones will be diluted. Since the enterprise value (EV) does not change, the value hence price per share will go down and voting rights will redistributed among all shareholders—including the new ones. Since this is to the detriment of the original investors, they usually have the right to buy new shares pro rata. Alternatively, capital can be borrowed from creditors. Existing shareholdings and voting rights remain intact; interest payments lower the basis for taxation and can be planned well ahead (usually) without fluctuations. Debt instruments used by airports are primarily loans and bonds. Both have similar features, that is, regular interest payment and a specific maturity date, but the key difference is the tradability of bonds.
13.3.1 Bond finance A bond is a debt instrument—a long-term note payable—that certifies a contract between the bond issuer and the bondholder as spelled out in the bond indenture. The issuer pledges to pay the loan principal (par value of the bond) to the bondholder on a fixed date (maturity date) as well as a periodic interest. Bonds are customarily issued for 10 30 years. The interest rate, or the price of the bond, depends primarily on the market rate and the company-specific risk as reflected by the investment grade assigned by a rating agency (Moody’s, 2017a,b). A bond, or rather the creditworthiness of the issuing company, is rated on a number of criteria. Their considerations are focusing on factors such as: G
G
G
G
G
market position/traffic volumes/carrier base, revenue diversification/aero- and nonaeronautical revenues, capital program, debt structure/leverage, and liquidity/cash/debt service reserves, etc. (Lehman, 2011; Heffintrayer, 2016).
While Table 13.3 lists the resulting investment grades applied by Moody’s, Standard & Poor’s, and Fitch, Table 13.4 assembles the recent ratings of an international selection of airports/operators.
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Table 13.3 Rating criteria and schemes Moody’s
Standard & Poor’s
Fitch
Profile
Investment grade: high creditworthiness Aaa Aa 1 3 A1 3 Baa 1 3
AAA AA 1 / 2 A1/2 BBB 1 / 2
AAA AA 1 / 2 A1/2 BBB 1 / 2
Gilt edge, prime, maximum safety Very high grade, high quality Upper medium grade Lower medium grade
Distinctly speculative: low creditworthiness Ba 1 3 B1 3
BB 1 / 2 B1/2
BB 1 / 2 B1/2
Low grade, speculative High speculative
Predominantly speculative: substantial risk or in default Caa Ca C
CCC CC C CI D
CCC CC C DDD-D
Substantial risk, in poor standing May be in default; extremely speculative Even more speculative than those above Income bonds; no interest being paid Default
Source: Adapted from Hillier, D., Grinblatt, M., Titman, S., 2012. Financial Markets and Corporate Strategy, second European ed. McGraw-Hill Education, Maidenhead; Prather, D., 2015. Airport Management. Aviation Supplies & Academics, Newcastle.
As evidenced by the numerous examples covered by Table 13.4 for a period of roughly 2 years only, bond financing has developed into a popular alternative to standard loan facilities on an international scale. In the United States, the bond market has traditionally been a critical funding source for airport capital projects. Bonds are flexible instruments for both the issuer and the bondholder, can provide large volumes, and the full amount goes directly to the issuing company’s cash box—and usually the interest rate is lower than for a typical bank loan.
13.3.2 Government programs Governments and public institutions frequently offer attractive financing options as a means of supporting economic development, including mobility and transportation. Typically, they come in the form of grants and loans, less frequently as guaranties.
13.3.2.1 European Union programs Financing programs of EU investment institutions and banks designed for i.a. financing airports are summarized by Table 13.5.
Table 13.4 Selected airport bond ratings Investment grade
Airport/Operator
Rating agency
Date
A3 A AAA A1 A1 Aa3
Moody’s Fitch S&P Moody’s Fitch Moody’s
April 2018 May 2017 September 2016 August 2016 August 2016 October 2016
BBB 1 Baa2 BBB AA 2 Aa3 AA 2 AA 2 Aa2 Baa1 Ba2 A 1 /A A1/A2 A 1 /A A1 Baa1 BBB 1 A1 BB 1
AENA AENA Airport Authority Hong Kong (AAHK) Alaska Int’l Airport System (AIAS) Alaska Int’l Airport System (AIAS) Atlanta, Charlotte, Los Angeles, Port Authority of New York, New Jersey Atlantia Atlantia/Atlantia EMTN program Atlantia: EMTN (euro medium-term note) program Aviation Enterprises Aviation Enterprises Aviation Enterprises Bangalore International Airport (BIAL) Boston Logan International Airport Brussels Airport Company (BAC) Delhi International Airport (DIAL) Denver International Airport (DEN) Denver International Airport (DEN) Denver International Airport (DEN) Flughafen Zurich AG (FZAG) Gatwick Funding Limited (GFL) Gatwick Funding Limited (GFL) Halifax Int’l Airport Authority (HIAA) Heathrow Finance plc (existing high yield notes)
S&P Moody’s S&P Fitch Moody’s S&P ICRA Moody’s Moody’s Moody’s Fitch Moody’s S&P S&P Moody’s S&P S&P Fitch
May 2018 May 2018 May 2018 July 2016 July 2016 July 2016 June 2017 October 2016 November 2016 September 2016 December 2017 December 2017 December 2017 April 2017 February 2018 March 2017 August 2017 June 2017
BB 1 A2
Heathrow Finance plc (existing high yield notes) Heathrow Funding Ltd (Class A notes)
Fitch S&P
October 2016 June 2017
Volume
EUR 10bn
INR 1,863.74 cr.
INR 30bn USD 84m Approx. USD 276m Approx. USD 276m Approx. USD 276m GBP 300m
(Continued)
Table 13.4 (Continued) Investment grade
Airport/Operator
Rating agency
Date
A2 A2 A2 BBB BBB BBB BBB Baa3 Baa1 BBB 1 A A3 A2 AA 1 A3 A2 A2 A2 A 1 /A 2 1 Baa2 AA BBB 1 /A 2 2
Heathrow Funding Ltd (Class A notes) Heathrow Funding Ltd (Class A notes) Heathrow Funding Ltd (Class A notes) Heathrow Funding Ltd (Class B notes) Heathrow Funding Ltd (Class B notes) Heathrow Funding Ltd (Class B notes) Heathrow Funding Ltd (Class B notes) LaGuardia, Terminal B Manchester Airport Group Funding plc (MAG) Manchester Airport Group Funding plc (MAG) Memphis-Shelby County Airport Auth. Memphis-Shelby County Airport Auth. Memphis-Shelby County Airport Auth. Narita International Airport (NAA) New Orleans Int’l Airport (MSY) New Orleans Int’l Airport (MSY) New Orleans Int’l Airport (MSY) Sacramento Int’l Airport (Bonds and senior lien debt) Schiphol Group Sydney Airport Finance Company Pty Ltd. (SAFL) Vancouver Airport Authority (YVR) Wellington Int’l Airport (WIAL)
Fitch S&P Fitch S&P Fitch S&P Fitch Moody’s Moody’s Fitch Fitch Moody’s S&P JCR Moody’s S&P Fitch Moody’s S&P Moody’s S&P S&P
June 2017 December 2016 October 2016 June 2017 June 2017 December 2016 October 2016 October 2016 February 2017 November 2016 September 2017 March 2017 March 2017 December 2017 February 2015 February 2015 February 2015 October 2017 August 2017 August 2017 January 2018 December 2015
a
GARB, general airport revenue bond; multiple ratings possible. Source: Compiled by author from various sources.
Volume
GBP 5.81bn USD 282m (GARBs)a
JPY 15bn Approx. USD 486m Approx. USD 486m Approx. USD 486m Lien debt USD 1,033m
Table 13.5 Dedicated EU programs Institution/Program
Characteristics
European Regional Development Fund (ERDF)— European Territorial Cooperation Goal (ETC)
G
Grants for projects aiming to enhance interregional cooperation in Europe
Examples G G G G G
Cohesion Fund
G
Grants contributing to projects in the field of environment and Trans-European Networts (TEN-T) in the area of transport infrastructure
G G G G
Connecting Europe Facility (CEF)—Transport
G
G
Horizon 2020 Article 187 JTI Single European Sky Air Traffic Management Research (SESAR)
G
Grants for projects of common interest within the framework of the Trans-European Networks policy in the sector of transport Project funding: between 20% and 50% of the total eligible costs Grants for development and research project on air traffic management in the Single European Sky for a safer air transport
G G G
G G G G
European Investment Fund (EIF) European Investment Bank (EIB)—project loans
G G
Guarantees for loans or bond issues Loans for investment projects contributing to EU policy objectives in all sectors of the economy
G G G G G G G
European Bank for Reconstruction and Development (EBRD)
G
European Fund for Strategic Investment (EFSI)—an initiative launched jointly by the EIB, EIF, and the EC
G
G
Loans Equity (converted loans)
G G G
G
Loans backed by a EUR 16bn (USD 18.6tn) guarantee from the EU budget Aims to revive investment in strategic EU projects to unlock investment of .EUR 315bn (USD 365tn) over 3 years
G G G G
Warsaw Chopin Airport Madeira Airport Santiago de Compostela Belfast Int’l Airport Belfast City Airport Riga Airport Athens, Corfu Airports Palma de Mallorca Airport Tenerife Airports Stuttgart Airport Budapest Airport Stockholm Skavsta Airport Birmingham Airport Liege Airport Heathrow Airport Zagreb Airport Milan Malpensa Airport Helsinki Airport Schiphol Airport ADP Orly Airport Frankfurt Airport Dubrovnik Airport Copenhagen Airport Pulkovo St. Petersburg Airports in Russia Budapest Airport Tallinn Airport Copenhagen Airport Greek Regional Airports Lithuanian Airports
Source: Compiled by author from Airports Council International (ACI) Europe, 2017. Guide to European Finance Instruments for Airports. ACI Europe, Brussels; Graham, A., Morrell, P., 2016. Airport Finance and Investment in the Global Economy. Routledge, Abingdon.
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The numerous examples given in the right-hand column indicate that European airports frequently avail of one of these dedicated programs for funding transport infrastructure. It is interesting to note, though, that the European Court of Auditors (ECA, 2014) concluded that EU-funded airport infrastructures frequently turned out to be of poor value for money.
13.3.2.2 United States government programs Before presenting the different programs, the focus needs to be widened due to some unique administrative and financial characteristics differentiating US airports from those elsewhere. These particularities result from specific renting/leasing practices and the available sources of finance. This has also been elaborated on in Section 9.6, where it was presented as the major reason for the relative absence of privatization in the United States (CRS, 2017; GAO, 2014, 2015). In the US, airports are mainly publicly owned on a local or state level and rely extensively on the municipal bond market for financing. The airport system differs greatly from other regions since the operation of facilities is mostly outsourced to private parties and not operated by the regional government. This privately managed operation results in strong cooperation between airport management and users. Even in pricing decisions, airlines influence the airport and several have in fact invested in their own terminal building (ACRP, 2007; Young and Wells, 2011; ACI North America, 2012; De Neufville and Odoni, 2013). One key factor is how the airport airline relationship is set up. Significant airlines sign lease and use agreements which include majority-in-interest (MII) clauses, allowing them to exert an influence or even control on financing and development decisions at the respective airport. Airlines in the EU do not have this farreaching type of influence over an airport, despite the EU Charges Directive which requires consultation. The signatory airlines in the United States—one or more collectively—share the financial risk with the airport. If an infrastructure debt arises and the airport cannot recover cost, the airline has the burden and pays the difference. For sharing those risks, signatory airlines may enjoy rebates on their charges under the residual charges system. Under this system, similar to the single till system in Europe and elsewhere, the contracted airline only pays the difference of the revenue target considering all nonaeronautical profits of the airport. Use agreements at residual cost airports are typically for the long term, as they were originally designed to provide security for issuing long-term airport revenue bonds. Airlines that are not in such a type of agreement with an airport, or where the airport operator assumes the major financial risk per se, are charged under the compensatory system which does not consider nonaeronautical revenue and typically leads to higher aeronautical charges to the airline (ACI North America, 2012; De Neufville and Odoni, 2013; Fu and Yang, 2017; Prather, 2015; Young and Wells, 2011). Airports in the United States rely on three main sources of funding: G
G
G
federal and state programs, bond issues, and private investment to supplement airport revenue.
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Alternative approaches like real-estate investment trusts (REITs) or straightforward privatization have been discussed but have not yet materialized. This is probably due to the negative implications of leaving the current system as discussed in Chapter 9, Ownership structure (ACRP, 2007; Hampton, 2009; Messer, 2011). Still, this may possibly change in the medium term, as the Trump administration appears to be warming up to private-sector airport investment, given the huge capital needs of nearly USD 100bn up to 2021 only. After unveiling the “Rebuilding Infrastructure in America” proposal, complementary funding mechanisms need to be identified next. A suggestion already included in the legislative outline is a significant liberalization of the Airport Privatization Pilot Program. Removing the current restrictions would effectively make it available to any and all airports. To facilitate financing, change-of-use provisions regarding tax-exempt bonds could allow the leasing consortium to take over existing ones, instead of replacing these by taxable bonds (ACI North America, 2017, 2018; CRS, 2017; Poole, 2018; Vogel, B. et al., 2017). Notwithstanding, the federal government provides grant-in-aid programs which do not need to be paid back since the postwar period to date. Table 13.6 gives an overview of US grant programs for airport funding. Table 13.6 US federal grant programs Program Airport Improvement Program (AIP)
Characteristics G
G
G
G
G
G
Passenger facility charges (PFCs)
G
G
G
G
Originally based on Airport and Airway Improvement Act of 1982 In general, AIP provides grants to public agencies for the planning and development of public-use airports Four particular purposes: planning, development, capacity enhancement, noise compatibility programs Funding from Trust Fund, relying on user fees and taxes on those benefiting from services made possible by AIP Funds may only be used for specific types of projects directly contributing to the capital improvement of airport facilities Eligibility: airport must be part of the National Plan of Integrated Airport Systems (NPIAS) Originally based on Aviation Safety and Capacity Expansion Act of 1990 In general, the PFC Program allows the collection of PFC fees up to USD 4.50 for every enplaned passenger at commercial airports controlled by public agencies PFCs are capped at USD 4.50 per flight segment with a maximum of two PFCs charged on a one-way trip or four PFCs on a round trip, for a maximum of USD 18 total Airports use these fees to fund FAA-approved projects that enhance safety, security, or capacity; reduce noise; or increase air carrier competition (Continued)
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Table 13.6 (Continued) Program Facilities and equipment program (F&E) Federal letters of intent (LOI)
Characteristics G
G
The F&E program provides funding for airports for installation of navigational aids/control towers FAA states its intent to appropriate future funds to an approved project in an LOI to support financing
Source: Young, S., Wells, A., 2011. Airport Planning & Management, sixth ed. McGraw-Hill, New York; Adapted from GAO, 2015. Airport Finance Information on Funding Sources and Planned Capital Development. United States Government Accountability Office, Washington, DC. Report GAO-15-306; Federal Aviation Authority (FAA), 2018a. Airport Improvement Program (AIP). ,https://www.faa.gov/airports/aip/. (accessed 28.07.18.); Federal Aviation Authority (FAA), 2018b. Passenger Facility Charge (PFC) program. ,https://www.faa.gov/airports/ pfc/. (accessed 28.07.18.).
The AIP and PFC programs are the primary ways of federal funding. Fig. 13.1 illustrates the allocation of the total amount of 3.2bn of AIP funding across airports in 2015. One of the resulting complaints from the disproportion between the share of enplanements and the share of grants is that a future prosecution of the current system continues to fail in addressing the problem of large hub airports (International Airport Review, 2018).
Figure 13.1 Airport Improvement Program funding of US airports in 2015. Note: 2015 AIP total 5 USD 3.2bn. Source: Adapted from Federal Aviation Authority (FAA), 2016. Airport Improvement Program (AIP) grant histories. ,https://www.faa.gov/airports/planning_capacity/passenger_ allcargo_stats/passenger/. (accessed 12.10.16.).
In July 2018 the US Department of Transportation (DOT) announced that the FAA will award USD 770.8m in airport infrastructure grants, as part of the total USD 3.18bn in AIP funding. It comprises 569 grants to 522 airports that will fund 949 infrastructure projects including runways, aprons, terminals, etc. The purpose is to support upgrading and modernizing airports in order to enhance safety, improve the travel experience, and also to strengthen local economies (FAA, 2018c).
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In addition to federal funding, grant programs for capital improvements were also offered by many US states. These are sourced from transportation user fees, fuel taxes, and the general tax base. State and local funding may be availed of by airports not eligible under AIP/PFC or in addition to federal grants (Young and Wells, 2011; Prather, 2015). Any party concerned with the financing of an airport company has a vested interest in approximating the value of the airport in question. Both potential providers of debt and equity have to look beyond financial statements when assessing credit facilities or going through an investment appraisal. This is because book values as per balance sheet do not adequately reflect the market value of the assets/operations (cf. Chapter 3, Measuring the financial position). Feature 13.1 is giving an overview of most frequently used approaches in the case of airports. Feature 13.1 Airport valuation The valuation of an airport involves more than the EV/EBITDA transaction multiples introduced in Chapter 9, Ownership structure, and the selection of stock market ratios presented in Chapter 12, Managing the financial performance. Still, some of these metrics are being used in Fig. 13.2, which is positioning selected airports in relation to their P/E ratios and EV/EBITDA multiples. The size of the bubbles represents the respective ROE, ranging from 2.1% for Malaysia Airports to 21.2% for AENA. The illustration is again based on the data used in Table 12.20 on stock market ratios (originally provided by Credit Suisse, 2017). P/E Malaysia Airports
60
Sydney Airport
50 Shenzhen Flughafen Airport Zürich AG
40 30
Beijing Capital Int’I
20 10
Airports of Thailand Grupo Aerop. Grupo Aerop. Del Sureste Del Pacifico
ADP Shanghal Fraport
Guangzhou Baiyum Int’I
Grupo Centre Norte
Int’I
AENA
Flughafen Wien
0 5
7
9
11
13
15
17
19
21
EV/EBITDA 23
Figure 13.2 Valuation matrix of publicly quoted companies/airport operators in 2015. Note: Bubble size 5 ROE. Source: Author based on Credit Suisse data.
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It is interesting to note that as a general rule and abstracting from outlying Malaysia Airports, a trend can reasonably well be fitted to airport operators. This suggests a valid correlation between the two ratios defining the matrix. On the other hand, no direct relation is visible with regard to the respective bubble size, indicating the current ROE. As with any other business entity, an airport is valued on the basis of its current and expected revenues, earnings, and cash flow. Traditional valuation measures such as price/earnings and EV/EBITDA ratios are performance indicators for the very near future. The earnings and EV multiples are calculated on the basis of historical data and projected for the next 1 3 years. It goes without saying that historical share performance can only give limited guidance and that expected future earnings are key to the valuation and share price performance of any business. It is basically the investors’ perception of likes and dislikes that are anticipated by the stock market and determine the respective share price (SBC, 1996; UBS, 1996). In addition to the overall investment climate, investors’ likes include everything bearing the potential for sustained growth in volume and earnings—and vice versa. The main drivers of valuation are summarized in Fig. 13.3, in combination with a selection of prominent tools.
Figure 13.3 Drivers and types of airport valuation. Source: Author.
It comes not at a surprise that the examples of investors’ likes and dislikes appear to be duplicates of the rating agencies’ grading criteria enumerated in Section 13.3.1. (Continued)
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Foundations of Airport Economics and Finance
Feature 13.1
(cont’d)
Three alternative valuation tools to the multiples/ratios discussed above and also applied to Fig. 13.2 are: G
G
G
The discounted cash flow approach (DCF, discounting future cash flows/dividends to net present value, NPV, at the cost of capital capturing differences in cash generation), the sum of the parts valuation or break-up analysis (SOTP, providing a range of values by aggregating the standalone value of individual business units/divisions, for example, using mini DCFs), and the regulatory asset base approach (RAB, the key concept of which is financial capital maintenance, FCM; RAB B net book value) (HSBC, 2014; Oxera, 2014, 2015; Credit Suisse, 2017).
Despite somewhat reduced importance for the RAB approach, it are effectively the fundamentals of the business in terms of investors’ likes and dislikes that are driving the value and the price investors are willing to pay. For an alternative valuation approach strictly based on the main drivers of financial performance as per the airport value tree see also Vogel and Graham (2010).
13.4
Summary
Capacity expansions become inevitable for a decent-sized commercial airport at some point, since not going forward means going backward. Such projects generally come in large chunks to accommodate traffic projected for some years to come. This is why operating cash flow and depreciation are typically not sufficient to cover associated capital expenditure. This will result in—sometimes considerable— needs for funding, to be covered by cash flow from financing activities. External sources include equity providers and various creditors. Issuing bonds is another option. While bond financing is well established amongst US airports, it is not yet that widespread but significantly growing across Europe. Project finance has not been discussed here, since it was already covered in the context of BOT projects in Section 9.3 on approaches to airport privatization. Financing US airports is generally different from financing European airports. This is resulting from the long-standing system of federal (and state) grants. European airports can avail of a number of EU-wide funding programs, but in contrast to the US system, there is usually a repayment requirement. This chapter’s feature focused on airport valuation. It introduced different approaches to evaluate an airport. One essentially shared characteristic among these tools is the fact that value is driven by the fundamentals of the business—investors’ likes and dislikes. Amongst these are the carrier base, the regulatory framework, and the position in the investment cycle etc.—very similar to the considerations of rating agencies in bond rating.
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