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Measuring the financial position
Measuring the financial position
3
Chapter Outline 3.1 Introduction 35 3.2 Recording business activities 3.2.1 3.2.2 3.2.3 3.2.4
36
The profit and loss account 36 The balance sheet 42 The statement of cash flows 44 The statement of changes in owners’ equity 45
3.3 Financial relationships exposed
45
Feature 3.1 International reporting standards 46
3.4 Summary 47 References 48
3.1
Introduction
In order to manage the finances of an airport company it is essential to measure its financial position accurately. There is no business activity that does not impact on either cost and/or revenue. All these transactions will be recorded in the “books” of a company, which is mandatory by law. The information contained will be used for various internal and external purposes. Among others, these include the assessment and controlling of business activities and the provision of company information to shareholders, creditors, and tax authorities. This chapter discusses the concept and use of financial statements (F/S) of airport operators. Individual similarities and differences will be pointed out and illustrated by real-world examples taken from the three sample airports: Copenhagen, Incheon, and Memphis. The F/S basically “translate” operating processes into commercial (accounting) language in terms of numbers. The full set comprises the profit and loss (P&L) account, the balance sheet (B/S), the statement of cash flows, and the statement of changes in equity. Abstracting from exceptional cases, for example, alignment with the parent company after a transfer of ownership, the reporting period is for 12 months. The fiscal year, however, is not necessarily identical to the calendar year. This is usually the case across mainland Europe, while in the Anglo-American and Asian parts of the world accounting periods frequently run from April 1 to March 31 or July 1 to June 30 and in rare cases from October 1 to September 30. Feature 3.1 will go into more details of reporting standards.
Foundations of Airport Economics and Finance. DOI: https://doi.org/10.1016/B978-0-12-810528-3.00003-2 © 2019 Elsevier Inc. All rights reserved.
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3.2
Foundations of Airport Economics and Finance
Recording business activities
3.2.1 The profit and loss account The P&L account is also referred to as the income statement (I/S) or earnings statement, or the company’s statement of operations. The latter because any company activity has revenue and/or cost implications, which are summarized systematically. This statement indicates how the revenue (money received for the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into the net income (the result after all revenues and expenses have been deducted, also known as the “bottom line”). It displays the revenues recognized for a specific period and the expenses charged against these revenues, including writeoffs (for example, depreciation and amortization of assets), interest charges due to creditors, and taxes (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). The purpose of the I/S is to show whether the company made a profit or lost money during the period being reported, typically the financial year (FY). This contrasts with the B/S, which represents a single moment in time. Fig. 3.1 illustrates the basic P&L structure and exemplifies the major types of revenue airports usually collect from their customers. A multistep I/S may report a number of subtotals to highlight important relationships between revenues and expenses. These include at least operating and net profit. Profit and loss + Revenue – Expenditure
• Nonaeronautical revenue • Aeronautical revenue • Airline-related charges • Passenger-related charges
= Operating profit (EBIT) – Interest – Taxes = Net profit/loss (EAT)
• Ground handling revenue • Other revenue
• Retail concessions • Property income/rent • Car parking • Food and beverages • Rental car concessions • Advertising
• Nonoperating income
Figure 3.1 P&L structure and revenue breakdown. Note: EBIT, Earnings before interest and taxes, which may differ from operating profit in the presence of nonoperating revenue; EAT, earnings after taxes. Source: Author.
The scope of services delivered by airports may vary based on the respective business model and general approach. European airports, for example, often deliver handling services (either by an own division or subsidiary), while in the AngloAmerican world the “landlord model” is more popular, which tends to outsource as many secondary (service) activities as possible—except for the vital functions. In the generally labor-intensive service industries, this is consequently mirrored on the cost side, usually involving significantly lower staff levels. (A more detailed discussion of this phenomenon is provided in Feature 4.1 on sector employment.) Table 3.1 summarizes the main revenue items in percentage of operating revenue for a sample of Copenhagen Airports Group (CPH) and Memphis-Shelby County Airport
Measuring the financial position
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Authority (MEM). Together with Incheon International Airport Corporation (ICN). These airport operators will be repeatedly used for illustration throughout the book. Table 3.1 Major revenue items for selected airports in FY 2015 Operating revenue
CPH (%)
MEM (%)
Operating revenue
Traffic Takeoff charges Passenger charges Security charges ETD charges Handling Aircraft parking, CUTE, etc. Concession revenue Rent Sales of services, etc.
58 11 27 13 ,1 5 2 28 4 10
25 22 3 40 27 13 35 10 16 9
Passenger airlines Terminal rentals Passenger landing fees and other Cargo airlines Cargo landing fees Ground rents and other rents Nonairline rentals Concession terminal and rental car Public and employee parking Other rentals
CUTE, Common use terminal equipment; ETD, explosives trace detection. Note: Subtotals in bold; thereof catagories in italics Source: Compiled by author from Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen; Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN.
Not all annual reports and accounts clearly specify the individual revenue (and cost) elements as, for example, provided by Copenhagen, since they deliver their set of FSs in different formats as Memphis does. Incheon International Airport Corporation (2016), for example, does not disclose any details to the public domain (cf. Chapter 12, Managing the financial performance). The two main types of revenue are aeronautical and nonaeronautical revenue. To illustrate revenue generated on the airside in more detail, Table 3.2 tabulates the essentials of Copenhagen’s airport charges. Table 3.2 CPH table of airport charges for the period April 1, 2015 to March 31, 2019 Charges type
Unit
DKK
USDa
Departing passenger Transfer/transit passengerb Adjustment .2.57 m annuallyb Departing passenger GO facility Departing passenger ETD surcharge/departing passenger Transfer passenger Express surcharge
99.66 60.17 0.50 5.55
16.46 9.94 0.08 0.09
75.95
12.55
45.59 4.30
7.53 0.71
30.45 45.63
5.03 7.54
Passenger-related charges Passenger charge
Security charge
(Continued)
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Foundations of Airport Economics and Finance
Table 3.2 (Continued) Charges type
Unit
DKK
USDa
Handling charge CUTE charge
Departing passenger Departing passenger
14.33 1.95
2.37 0.32
Passenger flights: per 1,000 kg Minimum scheduled passenger flights Cargo flights: per 1,000 kg to max. 200 t Minimum all other flights (cargo, charter) Per kg NOx Per 1,000 kg and hour (,3 h and 22:00 6:00 free) Minimum per hour Per 1,000 kg and 24 h
46.55
7.69
849.78
140.38
64.75
10.70
1,726.41
285.20
16.72 7.18
2.76 1.19
78.14 14.26
12.91 2.36
Minimum per 24 h
56.85
9.39
Aircraft-related charges Takeoff charge
Emission charge Parking charge inside critical security-restricted area Parking charge outside security-restricted areas
ETD, Explosive trace detectors; GO facility 5 low-cost pier. a Converted at 0,1652. b Prices subject to annual indexation (CPI) at April 1, 2018. Source: Adapted from Copenhagen Airports, 2017. Charges regulations applying to Copenhagen airport. ,https:// www.cph.dk/globalassets/6.-cph-business/5.-aviation/charges-and-slot/charges-regulations-cph-uk-1.-april-2017.pdf. (accessed 16.02.18.).
CPH’s accompanying scheme of route-incentive discounts (mainly for new air services) will be discussed in Feature 10.1, after a general introduction to the specifics of airport pricing and the impact of economic regulation in Chapter 10, Regulatory regime. On the landside, airports are frequently subcontracting the provision of commercial facilities to third parties or concessionaires. The latter usually pay a minimum annual guarantee of gross sales (MAG) or a percentage of gross sales (concession fee), whichever is higher, for the privilege of running a business on the airport’s premises. Frequently, this is in combination with a rental agreement for floor space and utilities used (Pitters and Buckner, 2018). Over time, different approaches to concession management and a variety of associated contract types in use at US airports have evolved as summarized in Table 3.3. In deciding on the most suitable model, parameters such as concession space, passenger volumes/characteristics, inhouse expertise and projected sales/revenue need to be addressed. Out of practical considerations, more than just one contracting approach may be pursued (ACI North America, 2016; Seaman, 2011).
Table 3.3 Concession contracting approaches Contract type
Major characteristics
Direct leasing (standard B)
The airport has a direct contract/ agreement with all concessionaire operators.
Advantage for the airport operator G
G
G
Prime operators/ B concessionaire (multiple primes)
Packages of locations are leased to one or two (more) operators. Each has more than three locations within the airport. Packages are for concession categories, e.g., food and beverage retail.
G
G
Highest level of control Ability to directly ensure that its priorities are carried out Ability to invest capital
Use of prime concessionaire’s know-how Leaves space for local concessionaires which contract directly with the airport
Disadvantages for the airport operator G
G
G
High staff costs to manage each location with specific contracts Significantly demanding on airport staff and other resources Competition among concessionaires
Competition
Capital investment
Administrative costs
Financial return
G
High
G
High
G
High
G
High
G
Medium
G
High
G
Low
G
Medium
(Continued)
Table 3.3 (Continued) Contract type
Major characteristics
Developer/ manager (thirdparty B)
All terminal locations are leased to a specialist thirdparty commercial developer, which invests in the program and directly contracts with concessionaires. The airport contracts with only one concessionaire for all food service and/or retail concessions. The concessionaire designs the program and contracts with other concessionaires (w/o own invest/ operation).
Master concessionaire (Leasing manager)
Advantage for the airport operator G
G
Usually contracts are for 15 years or more Attractive when limited capital financing is available
Disadvantages for the airport operator G
G
G
G
G
G
Less control of the program Use of concessionaire’s know-how Requires less airport resources Concessionaire might implement private sector efficiencies
G
G
Reduced control over concession program and concessionaires Limited number of developers/ managers available Risk of giving to much control over valuable resource At smaller airports financing and managing of major infrastructure projects might be difficult
Competition
Capital investment
Administrative costs
Financial return
G
High
G
High
G
Medium
G
Medium
G
High
G
n/a
G
Medium
G
Medium
Source: Compiled by author from Airports Council International (ACI) North America, 2016. Airport Concessions Report of ACI-NA Multi-Committee Task Force. ACI North America, Washington, DC; Airport Cooperative Research Program (ACRP) (Ed.), 2011. Resource Manual for Airport In-Terminal Concessions. Transportation Research Board (TRB), Washington, DC, ACRP Report 54; Seaman, B., 2011. The airport concession industry: Important issues and trends. Andrew Young School of Policy Studies Research Paper Series, Working Paper, 11-31. Georgia State University, Atlanta.
Measuring the financial position
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The different models of concession contracts have individual pros and cons, reflecting the approach of the operator toward handling this very important sector of the commercial side of the business. In particular regarding duty-free activities, many airports have extensive and long-standing relationships with specialized international chains, for example, the “Dufry Group.” The latter has meanwhile developed into a leading role for travel retail on a global scale, after integrating former competitors “Nuance” and “World Duty Free” (Airport Cooperative Research Program, ACRP, 2011; Butterworth-Hayes, 2017; Rozario, 2018). After exploring the revenue side, Fig. 3.2 gives a breakdown of the major cost categories or operating expenditure. In this context, the depreciation and amortization of (tangible and intangible) assets is of specific interest. First, according to standard profitability analysis, it is part of the operating expenses which management is accountable for on an operating level—in contrast to interest charges and taxes. Second, due to its significant volume, since airports are capital-intensive in nature and heavily invested in fixed assets (as highlighted next). Third, the concept of depreciation is reflecting the value of the respective assets, which is consumed in the process of generating revenues during the period in question (according to wear and tear). This lowers their book values in the B/S but does not constitute an outflow of cash from the company.
Profit and loss + Revenue – Expenditure = Operating profit (EBIT) – Interest – Taxes = Net profit/loss (EAT)
• Personnel • Contracted services • Materials/equipment/services • Communications/energy/waste • Insurance/claims/settlement • Maintenance • Lease/rent/concessions • General and administration
• Depreciation and amortization (‘DA’)
• Other expenditure
Figure 3.2 Breakdown of operating expenditure. Source: Author.
Hence depreciation and amortization (‘DA’)—being noncash expenses—can be added to operating profit (earnings before interest and taxes, EBIT) as an approximation of operating cash flow termed EBITDA or earnings before interest, taxes, depreciation and amortization. Table 3.4 exemplifies the main cost items as percentage of an airport’s operating expenditure for the same sample used in Table 3.1.
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Foundations of Airport Economics and Finance
Table 3.4 Major cost items for selected airports in FY 2015 Operating expenses
CPH (%)
MEM (%)
Operating expenses
External costs Operation and maintenance Energy Administration Other Staff costs
24 16 2 5 1 49
8 11 4 15 7 2
Amortization and depreciation
27
53
Airfield Terminal building Ground transportation General administration Police Field shop, other (non)aviation areas Depreciation
Note: Subtotals in bold; thereof catagories in italics; ICN does not disclose details. Source: Compiled by author from Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen; Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN.
Similar to the observations regarding the revenue side, the reports and accounts published by Memphis airport do not reveal a breakdown of cost which could be readily compared to Copenhagen, due to the different approach of compiling their F/S. Incheon, again, does not disclose any details to the public domain. Section 12.2 will go into further details and implications of that.
3.2.2 The balance sheet The B/S or statement of financial position is a summary of the financial balances of a company at a single point in time. Assets, liabilities, and owners’ equity are listed as of a specific date, such as the end of its FY, giving a “snapshot of a company’s financial condition.” The difference between the assets and the liabilities (or debt provided by creditors) is the equity or the net assets or the net worth or capital of the company, provided by the investors or owners. According to the concept of the B/S reflected by the accounting equation, net worth must equal total assets minus total liabilities. Assets (bearing the potential to generate future revenues) equal debt plus equity, showing how assets were financed: either by borrowing money (liability) or by using the investors’ money (owners’ equity) (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). Fig. 3.3 illustrates the general structure of a B/S and gives details of assets reflecting what the company owns, which can be categorized into current and fixed in order of decreasing liquidity. The latter include long-term (.1 year) tangibles, such as runway and terminal facilities, and intangibles; current include such assets which (are or) can easily be converted into cash.
Measuring the financial position
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Balance sheet
• Current assets • Cash • Accounts receivable • Inventory
• Fixed assets • Plant • Property • Equipment
Current assets 15%
Liabilities 60%
Fixed assets 85%
Owners’ equity 40%
Figure 3.3 Asset structure. Note: Values conceptually. Source: Author.
By nature, airport assets are driven by investment in noncurrent fixed assets. On average, the share of long-term fixed assets typically accounts for approximately 85% of total assets. Table 3.5 lists major long-term assets and specifies their useful lifetime of Copenhagen and Memphis airports. Significant variations regarding runways and buildings need to be pointed out, which will have a considerable impact on associated depreciation. The useful lifetime of assets needs to be approved by tax authorities, since higher depreciation will grow operating expenditure, thus lower the basis for taxation. Table 3.5 Major long-term assets and useful lifetimes for selected airports in FY 2015 Assets
Runways, taxiways, aprons, and airfield lighting Buildings Facilities constructed for tenants Roads, bridges, and fences Equipment and utility systems Land improvements (sewers etc.) Surface of new runways, roads, etc. Technical installation on runways Technical installations (lights etc.) Technical installations in buildings IT equipment Energy plant Vehicles etc. Furniture and fittings Security and technical equipment Other equipment
Useful lifetime CPH (years)
MEM (years)
80 100 40 100 n/a n/a n/a 40 10 15 20 25 3 5 15 4 15 10 10 5
15 30 10 40 18 20 3 40
Note: ICN does not disclose details. Source: Reproduced from Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen; Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN.
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Foundations of Airport Economics and Finance
The substantial volume of depreciation of capital-intensive airports as well as its very nature of being a noncash expenditure will be elaborated on in depth in Chapter 11, Specifics of airport economics. Fig. 3.4 explains some commonly used alternatives of short-term (,1 year) and long-term debt financing (in order of maturity). Numerous types of creditors are available, which usually are the main source of investment funding. (Further aspects of airport financing will be covered by Chapter 13, Financing growth.)
Balance sheet Current assets 15%
Liabilities 60%
Fixed assets 85%
Owners’ equity 40%
• Current liabilities • Accounts payable • Income taxes payable
• Long-term liabilities • Bank loans • Bonds
Figure 3.4 Debt structure. Note: Values conceptually. Source: Author.
Fig. 3.5 details another external source of (investment) funding—also providing cash flow from financing activities—is money provided by investors/owners. Both equity and debt reflect what the company owes. Balance sheet Current assets 15%
Liabilities 60%
• Owners’ equity
Fixed assets 85%
Owners’ equity 40%
• Retained earnings
(Shareholders’ funds) • Common stock • Paid-in capital
Figure 3.5 Structure of owners’ equity. Note: Values conceptually. Source: Author.
Earnings which are not paid out in terms of cash dividends but retained in the company will grow shareholders’ equity (cf. Figs. 3.7 and 3.8).
3.2.3 The statement of cash flows The statement of cash flows shows the company’s sources and uses of cash for a specific reporting period, incidentally mentioned in the discussion of the liabilities’ side of the B/S above (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). Fig. 3.6 shows the principle structure of this F/S.
Measuring the financial position
45
Effects of selling/buying of: • Fixed assets/debt • Equity securities
+ Cash flow from operating activities +/–Cash flow from investing activities +/–Cash flow from financing activities
Effects of: • Cash transactions with shareholders • Borrowing/repayment transactions with creditors
= Net increase/decrease over the period + Ending balance previous period
= Cash balance
Cash flow effects that determine net income: • Inflows: sales of goods and services , interest/dividend income • Outflows: payments to suppliers, employees, creditors, tax authorities
Figure 3.6 Statement of cash flows. Source: Author.
All cash flows resulting from operating, investing, and financing activities result in the net increase or decrease of cash during the period. Adding this to the ending balance of the previous period yields the cash balance. As introduced in course of the discussion of the B/S, internal sources include cash flows from operations and from divestment of assets. Usually, however, the cash flow from investing activities is negative, for example, for expansion programs and needs to be compensated for by cash flow from financing activities. This refers to capital from external sources, including all sorts of creditors and investors providing debt and equity, respectively (cf. Chapter 13: Financing growth).
3.2.4 The statement of changes in owners’ equity The statement of changes in equity shows the consequence of a profit or loss as well as injections or withdrawals of capital on the company’s equity base (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). Fig. 3.7 shows the general structure. Paid-in capital for common/preferred shares and premium beyond par value Share of profit not paid out to shareholders
Opening balance + + +
Share capital/premium Revaluation/translation reserves Retained earnings (net income - cash dividends)
= Ending balance
Supplementary capital; financial gain (deficit) associated with revaluation of (foreign) assets (held in foreign currency) to ‘fair value’, not reflecting ordinary business results
Figure 3.7 Statement of changes in owners’ equity. Source: Author.
The ending balance of the period will then be carried forward as the beginning balance of the subsequent period and so on.
3.3
Financial relationships exposed
Fig. 3.8 illustrates how the four basic statements essentially tie together. Profit is accounted for in the I/S can either be distributed to shareholders in terms of cash
46
Foundations of Airport Economics and Finance
dividends or retained and grow owners’ equity in the B/S. A mixture of both is probably the most realistic scenario. If the firm suffers a loss instead of making a profit, equity will shrink. According to the accounting equation (assets 5 liabilities 1 equity), assets may grow, for example, and/or loans may be repaid—or vice versa in the loss case. The company’s cash balance, made up for by cash flows generated from operations, investing as well as financing activities, will be recorded as a current asset—alongside any related liabilities incurred and/or shares issued.
Profit and loss
Balance sheet
Cash flow statement
+ Revenue – Expenditure = Operating profit (EBIT) – Interest – Taxes = Net profit/loss (EAT) Cash dividends
Current assets 15%
Liabilities 60%
Fixed assets 85%
Owners’ equity 40%
Retained earnings
Statement of changes in OE
Figure 3.8 Financial relationships exposed. Note: OE, Owners equity. Source: Author.
Based on the data provided by financial accounting, various ratios can be established for analyzing and comparing the financial performance of a firm. This is to be found in Part III of the book on “Managing the financial performance.” Feature 3.1 International reporting standards There is no airport-specific type of accounting, but accounting systems should allow for proper cost allocation regarding aeronautical and non-aeronautical activities and accounting practices must be adapted to local needs and regulations. This means, the prevailing accounting and reporting system in terms of national regulations and generally accepted accounting principles (GAAPs) applies to airports in the same way as it applies to any other business (ACI, 2016). Comparing alternative investment possibilities in international companies, including airports, by their F/S has been facilitated very much by the internationalization and harmonization of accounting rules. This trend had gathered momentum by the globalization of business and integration of financial markets. The move toward a harmonized international system continuously replacing a variety of local GAAPs has been driven by the International Accounting Standards Board (IASB). This independent UK-based body is
Measuring the financial position
47
dedicated to establishing a single set of high class, global accounting rules. The purpose of these International Accounting Standards or International Financial Reporting Standards (IFRSs—term used since 2003) is to provide transparent and comparable information in F/S. Major concerns dealt with include what information should be disclosed and the way this information should be presented, as well as how assets should be valued and profits be measured (Harrison et al., 2013; IFRS Foundation, 2017). Nowadays, more than 130 countries either require or permit the application of IFRSs, and still others are interested in or already in the process of adopting or converging with it. Hence, IFRS have become the de facto global standard for financial reporting, providing a fair representation of a company’s financial position, financial performance, and cash flows (IFRS Foundation, 2017). One practical implication for users of F/S of airports is, for example, that extremely differing useful lifetimes for the depreciation of major assets such as runways and terminal buildings will be avoided. Given the fact that airports are very capital-intensive, these differences (cf. Table 3.5) may materially affect accounting for profit and the basis for taxation. Moreover, a number of problems with regard to the comparability of data still remain. Reporting periods usually span the calendar year in mainland Europe, while elsewhere the FY frequently runs from April 1 to March 31, or July 1 to June 30. This requires at least a proper allocation of operational/traffic data to FYs. More difficult comparability issues may occur with the interpretation of financial ratios and other indicators based on financial data, even under the same GAAPs. These may result from different employment structures and/or variations of the scope of services provided. For example, laborintensive ground handling may have an impact on performance as may have different tax regimes. Additional problems of performance measurement and interpretation will be discussed in Section 12.3.2 on benchmarking.
3.4
Summary
Accounting data is essential for measuring and eventually managing the financial performance of an airport. Each business transaction is recorded in the company’s “books,” which form the basis for producing the set of F/S: the P&L account, the B/S, the statement of cash flows, and the statement of changes in owners’ equity. While the P&L accounts for profit by summarizing all airport activities in terms of revenue from air-and landside operations and cost incurred for the full reporting period, the B/S provides a snapshot of its assets and how these are financed by debt and equity at a specific point in time. B/S totals of airports are large and substantially dominated by fixed assets, such as runway and terminals. The statement of cash flows shows the company’s sources and uses of cash for a specific reporting period. The statement of changes in equity reflects retained earnings or a loss and capital injections or withdrawals during the FY.
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Foundations of Airport Economics and Finance
Despite significant progress in harmonizing accounting rules and financial reporting on a global scale, full comparability has not yet been achieved.
References Airport Cooperative Research Program (ACRP) (Ed.), 2011. Resource Manual for Airport InTerminal Concessions. Transportation Research Board (TRB), Washington, DC, ACRP Report 54. Airports Council International (ACI), 2016. Policies and Recommended Practices Handbook, eighth ed. ACI World, Montreal. Airports Council International (ACI) North America, 2016. Airport Concessions—Report of ACI-NA Multi-Committee Task Force. ACI North America, Washington, DC. Atrill, P., McLaney, E., 2011. Financial Accounting for Decision Makers, sixth ed. FT Prentice Hall/Pearson, Harlow. Butterworth-Hayes, P., 2017. Operators explore smarter retail methods. Jane’s Airport Rev. 29 (1), 12 13. Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen. Copenhagen Airports, 2017. Charges regulations applying to Copenhagen airport. ,https:// www.cph.dk/globalassets/6.-cph-business/5.-aviation/charges-and-slot/charges-regulationscph-uk-1.-april-2017.pdf. (accessed 16.02.18.). Harrison, W., Horngren, C., Thomas, W., Suwardy, T., 2013. Financial Accounting— International Financial Reporting Standards, ninth ed. Pearson Education Ltd. (Global Edition), Harlow. Horngren, C., Harrison, W., Oliver, S., 2012. Accounting, ninth ed. Pearson Education Limited (Global Edition), Harlow. Incheon International Airport Corporation, 2016. Annual Report 2016. Incheon International Airport Corporation, Incheon. International Financial Reporting Standards (IFRS) Foundation, 2017. Annual Report 2016. IFRS Foundation, London. Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN. Pitters, F., Buckner, K., 2018. Communicating airport concession operating costs. J. Airport Manage. 12 (2), 132 143. Rozario, K., 2018. Retail models income support. Passenger Terminal World 24, January 2018, 38 42. Seaman, B., 2011. The airport concession industry: Important issues and trends. Andrew Young School of Policy Studies Research Paper Series, Working Paper, 11-31. Georgia State University, Atlanta. Van Horne, J., Wachowicz, J., 2009. Fundamentals of financial management, 13th ed. FT Prentice Hall/Pearson, Harlow.
3
Chapter Outline 3.1 Introduction 35 3.2 Recording business activities 3.2.1 3.2.2 3.2.3 3.2.4
36
The profit and loss account 36 The balance sheet 42 The statement of cash flows 44 The statement of changes in owners’ equity 45
3.3 Financial relationships exposed
45
Feature 3.1 International reporting standards 46
3.4 Summary 47 References 48
3.1
Introduction
In order to manage the finances of an airport company it is essential to measure its financial position accurately. There is no business activity that does not impact on either cost and/or revenue. All these transactions will be recorded in the “books” of a company, which is mandatory by law. The information contained will be used for various internal and external purposes. Among others, these include the assessment and controlling of business activities and the provision of company information to shareholders, creditors, and tax authorities. This chapter discusses the concept and use of financial statements (F/S) of airport operators. Individual similarities and differences will be pointed out and illustrated by real-world examples taken from the three sample airports: Copenhagen, Incheon, and Memphis. The F/S basically “translate” operating processes into commercial (accounting) language in terms of numbers. The full set comprises the profit and loss (P&L) account, the balance sheet (B/S), the statement of cash flows, and the statement of changes in equity. Abstracting from exceptional cases, for example, alignment with the parent company after a transfer of ownership, the reporting period is for 12 months. The fiscal year, however, is not necessarily identical to the calendar year. This is usually the case across mainland Europe, while in the Anglo-American and Asian parts of the world accounting periods frequently run from April 1 to March 31 or July 1 to June 30 and in rare cases from October 1 to September 30. Feature 3.1 will go into more details of reporting standards.
Foundations of Airport Economics and Finance. DOI: https://doi.org/10.1016/B978-0-12-810528-3.00003-2 © 2019 Elsevier Inc. All rights reserved.
36
3.2
Foundations of Airport Economics and Finance
Recording business activities
3.2.1 The profit and loss account The P&L account is also referred to as the income statement (I/S) or earnings statement, or the company’s statement of operations. The latter because any company activity has revenue and/or cost implications, which are summarized systematically. This statement indicates how the revenue (money received for the sale of products and services before expenses are taken out, also known as the “top line”) is transformed into the net income (the result after all revenues and expenses have been deducted, also known as the “bottom line”). It displays the revenues recognized for a specific period and the expenses charged against these revenues, including writeoffs (for example, depreciation and amortization of assets), interest charges due to creditors, and taxes (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). The purpose of the I/S is to show whether the company made a profit or lost money during the period being reported, typically the financial year (FY). This contrasts with the B/S, which represents a single moment in time. Fig. 3.1 illustrates the basic P&L structure and exemplifies the major types of revenue airports usually collect from their customers. A multistep I/S may report a number of subtotals to highlight important relationships between revenues and expenses. These include at least operating and net profit. Profit and loss + Revenue – Expenditure
• Nonaeronautical revenue • Aeronautical revenue • Airline-related charges • Passenger-related charges
= Operating profit (EBIT) – Interest – Taxes = Net profit/loss (EAT)
• Ground handling revenue • Other revenue
• Retail concessions • Property income/rent • Car parking • Food and beverages • Rental car concessions • Advertising
• Nonoperating income
Figure 3.1 P&L structure and revenue breakdown. Note: EBIT, Earnings before interest and taxes, which may differ from operating profit in the presence of nonoperating revenue; EAT, earnings after taxes. Source: Author.
The scope of services delivered by airports may vary based on the respective business model and general approach. European airports, for example, often deliver handling services (either by an own division or subsidiary), while in the AngloAmerican world the “landlord model” is more popular, which tends to outsource as many secondary (service) activities as possible—except for the vital functions. In the generally labor-intensive service industries, this is consequently mirrored on the cost side, usually involving significantly lower staff levels. (A more detailed discussion of this phenomenon is provided in Feature 4.1 on sector employment.) Table 3.1 summarizes the main revenue items in percentage of operating revenue for a sample of Copenhagen Airports Group (CPH) and Memphis-Shelby County Airport
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37
Authority (MEM). Together with Incheon International Airport Corporation (ICN). These airport operators will be repeatedly used for illustration throughout the book. Table 3.1 Major revenue items for selected airports in FY 2015 Operating revenue
CPH (%)
MEM (%)
Operating revenue
Traffic Takeoff charges Passenger charges Security charges ETD charges Handling Aircraft parking, CUTE, etc. Concession revenue Rent Sales of services, etc.
58 11 27 13 ,1 5 2 28 4 10
25 22 3 40 27 13 35 10 16 9
Passenger airlines Terminal rentals Passenger landing fees and other Cargo airlines Cargo landing fees Ground rents and other rents Nonairline rentals Concession terminal and rental car Public and employee parking Other rentals
CUTE, Common use terminal equipment; ETD, explosives trace detection. Note: Subtotals in bold; thereof catagories in italics Source: Compiled by author from Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen; Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN.
Not all annual reports and accounts clearly specify the individual revenue (and cost) elements as, for example, provided by Copenhagen, since they deliver their set of FSs in different formats as Memphis does. Incheon International Airport Corporation (2016), for example, does not disclose any details to the public domain (cf. Chapter 12, Managing the financial performance). The two main types of revenue are aeronautical and nonaeronautical revenue. To illustrate revenue generated on the airside in more detail, Table 3.2 tabulates the essentials of Copenhagen’s airport charges. Table 3.2 CPH table of airport charges for the period April 1, 2015 to March 31, 2019 Charges type
Unit
DKK
USDa
Departing passenger Transfer/transit passengerb Adjustment .2.57 m annuallyb Departing passenger GO facility Departing passenger ETD surcharge/departing passenger Transfer passenger Express surcharge
99.66 60.17 0.50 5.55
16.46 9.94 0.08 0.09
75.95
12.55
45.59 4.30
7.53 0.71
30.45 45.63
5.03 7.54
Passenger-related charges Passenger charge
Security charge
(Continued)
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Foundations of Airport Economics and Finance
Table 3.2 (Continued) Charges type
Unit
DKK
USDa
Handling charge CUTE charge
Departing passenger Departing passenger
14.33 1.95
2.37 0.32
Passenger flights: per 1,000 kg Minimum scheduled passenger flights Cargo flights: per 1,000 kg to max. 200 t Minimum all other flights (cargo, charter) Per kg NOx Per 1,000 kg and hour (,3 h and 22:00 6:00 free) Minimum per hour Per 1,000 kg and 24 h
46.55
7.69
849.78
140.38
64.75
10.70
1,726.41
285.20
16.72 7.18
2.76 1.19
78.14 14.26
12.91 2.36
Minimum per 24 h
56.85
9.39
Aircraft-related charges Takeoff charge
Emission charge Parking charge inside critical security-restricted area Parking charge outside security-restricted areas
ETD, Explosive trace detectors; GO facility 5 low-cost pier. a Converted at 0,1652. b Prices subject to annual indexation (CPI) at April 1, 2018. Source: Adapted from Copenhagen Airports, 2017. Charges regulations applying to Copenhagen airport. ,https:// www.cph.dk/globalassets/6.-cph-business/5.-aviation/charges-and-slot/charges-regulations-cph-uk-1.-april-2017.pdf. (accessed 16.02.18.).
CPH’s accompanying scheme of route-incentive discounts (mainly for new air services) will be discussed in Feature 10.1, after a general introduction to the specifics of airport pricing and the impact of economic regulation in Chapter 10, Regulatory regime. On the landside, airports are frequently subcontracting the provision of commercial facilities to third parties or concessionaires. The latter usually pay a minimum annual guarantee of gross sales (MAG) or a percentage of gross sales (concession fee), whichever is higher, for the privilege of running a business on the airport’s premises. Frequently, this is in combination with a rental agreement for floor space and utilities used (Pitters and Buckner, 2018). Over time, different approaches to concession management and a variety of associated contract types in use at US airports have evolved as summarized in Table 3.3. In deciding on the most suitable model, parameters such as concession space, passenger volumes/characteristics, inhouse expertise and projected sales/revenue need to be addressed. Out of practical considerations, more than just one contracting approach may be pursued (ACI North America, 2016; Seaman, 2011).
Table 3.3 Concession contracting approaches Contract type
Major characteristics
Direct leasing (standard B)
The airport has a direct contract/ agreement with all concessionaire operators.
Advantage for the airport operator G
G
G
Prime operators/ B concessionaire (multiple primes)
Packages of locations are leased to one or two (more) operators. Each has more than three locations within the airport. Packages are for concession categories, e.g., food and beverage retail.
G
G
Highest level of control Ability to directly ensure that its priorities are carried out Ability to invest capital
Use of prime concessionaire’s know-how Leaves space for local concessionaires which contract directly with the airport
Disadvantages for the airport operator G
G
G
High staff costs to manage each location with specific contracts Significantly demanding on airport staff and other resources Competition among concessionaires
Competition
Capital investment
Administrative costs
Financial return
G
High
G
High
G
High
G
High
G
Medium
G
High
G
Low
G
Medium
(Continued)
Table 3.3 (Continued) Contract type
Major characteristics
Developer/ manager (thirdparty B)
All terminal locations are leased to a specialist thirdparty commercial developer, which invests in the program and directly contracts with concessionaires. The airport contracts with only one concessionaire for all food service and/or retail concessions. The concessionaire designs the program and contracts with other concessionaires (w/o own invest/ operation).
Master concessionaire (Leasing manager)
Advantage for the airport operator G
G
Usually contracts are for 15 years or more Attractive when limited capital financing is available
Disadvantages for the airport operator G
G
G
G
G
G
Less control of the program Use of concessionaire’s know-how Requires less airport resources Concessionaire might implement private sector efficiencies
G
G
Reduced control over concession program and concessionaires Limited number of developers/ managers available Risk of giving to much control over valuable resource At smaller airports financing and managing of major infrastructure projects might be difficult
Competition
Capital investment
Administrative costs
Financial return
G
High
G
High
G
Medium
G
Medium
G
High
G
n/a
G
Medium
G
Medium
Source: Compiled by author from Airports Council International (ACI) North America, 2016. Airport Concessions Report of ACI-NA Multi-Committee Task Force. ACI North America, Washington, DC; Airport Cooperative Research Program (ACRP) (Ed.), 2011. Resource Manual for Airport In-Terminal Concessions. Transportation Research Board (TRB), Washington, DC, ACRP Report 54; Seaman, B., 2011. The airport concession industry: Important issues and trends. Andrew Young School of Policy Studies Research Paper Series, Working Paper, 11-31. Georgia State University, Atlanta.
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The different models of concession contracts have individual pros and cons, reflecting the approach of the operator toward handling this very important sector of the commercial side of the business. In particular regarding duty-free activities, many airports have extensive and long-standing relationships with specialized international chains, for example, the “Dufry Group.” The latter has meanwhile developed into a leading role for travel retail on a global scale, after integrating former competitors “Nuance” and “World Duty Free” (Airport Cooperative Research Program, ACRP, 2011; Butterworth-Hayes, 2017; Rozario, 2018). After exploring the revenue side, Fig. 3.2 gives a breakdown of the major cost categories or operating expenditure. In this context, the depreciation and amortization of (tangible and intangible) assets is of specific interest. First, according to standard profitability analysis, it is part of the operating expenses which management is accountable for on an operating level—in contrast to interest charges and taxes. Second, due to its significant volume, since airports are capital-intensive in nature and heavily invested in fixed assets (as highlighted next). Third, the concept of depreciation is reflecting the value of the respective assets, which is consumed in the process of generating revenues during the period in question (according to wear and tear). This lowers their book values in the B/S but does not constitute an outflow of cash from the company.
Profit and loss + Revenue – Expenditure = Operating profit (EBIT) – Interest – Taxes = Net profit/loss (EAT)
• Personnel • Contracted services • Materials/equipment/services • Communications/energy/waste • Insurance/claims/settlement • Maintenance • Lease/rent/concessions • General and administration
• Depreciation and amortization (‘DA’)
• Other expenditure
Figure 3.2 Breakdown of operating expenditure. Source: Author.
Hence depreciation and amortization (‘DA’)—being noncash expenses—can be added to operating profit (earnings before interest and taxes, EBIT) as an approximation of operating cash flow termed EBITDA or earnings before interest, taxes, depreciation and amortization. Table 3.4 exemplifies the main cost items as percentage of an airport’s operating expenditure for the same sample used in Table 3.1.
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Foundations of Airport Economics and Finance
Table 3.4 Major cost items for selected airports in FY 2015 Operating expenses
CPH (%)
MEM (%)
Operating expenses
External costs Operation and maintenance Energy Administration Other Staff costs
24 16 2 5 1 49
8 11 4 15 7 2
Amortization and depreciation
27
53
Airfield Terminal building Ground transportation General administration Police Field shop, other (non)aviation areas Depreciation
Note: Subtotals in bold; thereof catagories in italics; ICN does not disclose details. Source: Compiled by author from Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen; Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN.
Similar to the observations regarding the revenue side, the reports and accounts published by Memphis airport do not reveal a breakdown of cost which could be readily compared to Copenhagen, due to the different approach of compiling their F/S. Incheon, again, does not disclose any details to the public domain. Section 12.2 will go into further details and implications of that.
3.2.2 The balance sheet The B/S or statement of financial position is a summary of the financial balances of a company at a single point in time. Assets, liabilities, and owners’ equity are listed as of a specific date, such as the end of its FY, giving a “snapshot of a company’s financial condition.” The difference between the assets and the liabilities (or debt provided by creditors) is the equity or the net assets or the net worth or capital of the company, provided by the investors or owners. According to the concept of the B/S reflected by the accounting equation, net worth must equal total assets minus total liabilities. Assets (bearing the potential to generate future revenues) equal debt plus equity, showing how assets were financed: either by borrowing money (liability) or by using the investors’ money (owners’ equity) (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). Fig. 3.3 illustrates the general structure of a B/S and gives details of assets reflecting what the company owns, which can be categorized into current and fixed in order of decreasing liquidity. The latter include long-term (.1 year) tangibles, such as runway and terminal facilities, and intangibles; current include such assets which (are or) can easily be converted into cash.
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43
Balance sheet
• Current assets • Cash • Accounts receivable • Inventory
• Fixed assets • Plant • Property • Equipment
Current assets 15%
Liabilities 60%
Fixed assets 85%
Owners’ equity 40%
Figure 3.3 Asset structure. Note: Values conceptually. Source: Author.
By nature, airport assets are driven by investment in noncurrent fixed assets. On average, the share of long-term fixed assets typically accounts for approximately 85% of total assets. Table 3.5 lists major long-term assets and specifies their useful lifetime of Copenhagen and Memphis airports. Significant variations regarding runways and buildings need to be pointed out, which will have a considerable impact on associated depreciation. The useful lifetime of assets needs to be approved by tax authorities, since higher depreciation will grow operating expenditure, thus lower the basis for taxation. Table 3.5 Major long-term assets and useful lifetimes for selected airports in FY 2015 Assets
Runways, taxiways, aprons, and airfield lighting Buildings Facilities constructed for tenants Roads, bridges, and fences Equipment and utility systems Land improvements (sewers etc.) Surface of new runways, roads, etc. Technical installation on runways Technical installations (lights etc.) Technical installations in buildings IT equipment Energy plant Vehicles etc. Furniture and fittings Security and technical equipment Other equipment
Useful lifetime CPH (years)
MEM (years)
80 100 40 100 n/a n/a n/a 40 10 15 20 25 3 5 15 4 15 10 10 5
15 30 10 40 18 20 3 40
Note: ICN does not disclose details. Source: Reproduced from Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen; Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN.
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Foundations of Airport Economics and Finance
The substantial volume of depreciation of capital-intensive airports as well as its very nature of being a noncash expenditure will be elaborated on in depth in Chapter 11, Specifics of airport economics. Fig. 3.4 explains some commonly used alternatives of short-term (,1 year) and long-term debt financing (in order of maturity). Numerous types of creditors are available, which usually are the main source of investment funding. (Further aspects of airport financing will be covered by Chapter 13, Financing growth.)
Balance sheet Current assets 15%
Liabilities 60%
Fixed assets 85%
Owners’ equity 40%
• Current liabilities • Accounts payable • Income taxes payable
• Long-term liabilities • Bank loans • Bonds
Figure 3.4 Debt structure. Note: Values conceptually. Source: Author.
Fig. 3.5 details another external source of (investment) funding—also providing cash flow from financing activities—is money provided by investors/owners. Both equity and debt reflect what the company owes. Balance sheet Current assets 15%
Liabilities 60%
• Owners’ equity
Fixed assets 85%
Owners’ equity 40%
• Retained earnings
(Shareholders’ funds) • Common stock • Paid-in capital
Figure 3.5 Structure of owners’ equity. Note: Values conceptually. Source: Author.
Earnings which are not paid out in terms of cash dividends but retained in the company will grow shareholders’ equity (cf. Figs. 3.7 and 3.8).
3.2.3 The statement of cash flows The statement of cash flows shows the company’s sources and uses of cash for a specific reporting period, incidentally mentioned in the discussion of the liabilities’ side of the B/S above (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). Fig. 3.6 shows the principle structure of this F/S.
Measuring the financial position
45
Effects of selling/buying of: • Fixed assets/debt • Equity securities
+ Cash flow from operating activities +/–Cash flow from investing activities +/–Cash flow from financing activities
Effects of: • Cash transactions with shareholders • Borrowing/repayment transactions with creditors
= Net increase/decrease over the period + Ending balance previous period
= Cash balance
Cash flow effects that determine net income: • Inflows: sales of goods and services , interest/dividend income • Outflows: payments to suppliers, employees, creditors, tax authorities
Figure 3.6 Statement of cash flows. Source: Author.
All cash flows resulting from operating, investing, and financing activities result in the net increase or decrease of cash during the period. Adding this to the ending balance of the previous period yields the cash balance. As introduced in course of the discussion of the B/S, internal sources include cash flows from operations and from divestment of assets. Usually, however, the cash flow from investing activities is negative, for example, for expansion programs and needs to be compensated for by cash flow from financing activities. This refers to capital from external sources, including all sorts of creditors and investors providing debt and equity, respectively (cf. Chapter 13: Financing growth).
3.2.4 The statement of changes in owners’ equity The statement of changes in equity shows the consequence of a profit or loss as well as injections or withdrawals of capital on the company’s equity base (Atrill and McLaney, 2011; Harrison et al., 2013; Horngren et al., 2012; Van Horne and Wachowicz, 2009). Fig. 3.7 shows the general structure. Paid-in capital for common/preferred shares and premium beyond par value Share of profit not paid out to shareholders
Opening balance + + +
Share capital/premium Revaluation/translation reserves Retained earnings (net income - cash dividends)
= Ending balance
Supplementary capital; financial gain (deficit) associated with revaluation of (foreign) assets (held in foreign currency) to ‘fair value’, not reflecting ordinary business results
Figure 3.7 Statement of changes in owners’ equity. Source: Author.
The ending balance of the period will then be carried forward as the beginning balance of the subsequent period and so on.
3.3
Financial relationships exposed
Fig. 3.8 illustrates how the four basic statements essentially tie together. Profit is accounted for in the I/S can either be distributed to shareholders in terms of cash
46
Foundations of Airport Economics and Finance
dividends or retained and grow owners’ equity in the B/S. A mixture of both is probably the most realistic scenario. If the firm suffers a loss instead of making a profit, equity will shrink. According to the accounting equation (assets 5 liabilities 1 equity), assets may grow, for example, and/or loans may be repaid—or vice versa in the loss case. The company’s cash balance, made up for by cash flows generated from operations, investing as well as financing activities, will be recorded as a current asset—alongside any related liabilities incurred and/or shares issued.
Profit and loss
Balance sheet
Cash flow statement
+ Revenue – Expenditure = Operating profit (EBIT) – Interest – Taxes = Net profit/loss (EAT) Cash dividends
Current assets 15%
Liabilities 60%
Fixed assets 85%
Owners’ equity 40%
Retained earnings
Statement of changes in OE
Figure 3.8 Financial relationships exposed. Note: OE, Owners equity. Source: Author.
Based on the data provided by financial accounting, various ratios can be established for analyzing and comparing the financial performance of a firm. This is to be found in Part III of the book on “Managing the financial performance.” Feature 3.1 International reporting standards There is no airport-specific type of accounting, but accounting systems should allow for proper cost allocation regarding aeronautical and non-aeronautical activities and accounting practices must be adapted to local needs and regulations. This means, the prevailing accounting and reporting system in terms of national regulations and generally accepted accounting principles (GAAPs) applies to airports in the same way as it applies to any other business (ACI, 2016). Comparing alternative investment possibilities in international companies, including airports, by their F/S has been facilitated very much by the internationalization and harmonization of accounting rules. This trend had gathered momentum by the globalization of business and integration of financial markets. The move toward a harmonized international system continuously replacing a variety of local GAAPs has been driven by the International Accounting Standards Board (IASB). This independent UK-based body is
Measuring the financial position
47
dedicated to establishing a single set of high class, global accounting rules. The purpose of these International Accounting Standards or International Financial Reporting Standards (IFRSs—term used since 2003) is to provide transparent and comparable information in F/S. Major concerns dealt with include what information should be disclosed and the way this information should be presented, as well as how assets should be valued and profits be measured (Harrison et al., 2013; IFRS Foundation, 2017). Nowadays, more than 130 countries either require or permit the application of IFRSs, and still others are interested in or already in the process of adopting or converging with it. Hence, IFRS have become the de facto global standard for financial reporting, providing a fair representation of a company’s financial position, financial performance, and cash flows (IFRS Foundation, 2017). One practical implication for users of F/S of airports is, for example, that extremely differing useful lifetimes for the depreciation of major assets such as runways and terminal buildings will be avoided. Given the fact that airports are very capital-intensive, these differences (cf. Table 3.5) may materially affect accounting for profit and the basis for taxation. Moreover, a number of problems with regard to the comparability of data still remain. Reporting periods usually span the calendar year in mainland Europe, while elsewhere the FY frequently runs from April 1 to March 31, or July 1 to June 30. This requires at least a proper allocation of operational/traffic data to FYs. More difficult comparability issues may occur with the interpretation of financial ratios and other indicators based on financial data, even under the same GAAPs. These may result from different employment structures and/or variations of the scope of services provided. For example, laborintensive ground handling may have an impact on performance as may have different tax regimes. Additional problems of performance measurement and interpretation will be discussed in Section 12.3.2 on benchmarking.
3.4
Summary
Accounting data is essential for measuring and eventually managing the financial performance of an airport. Each business transaction is recorded in the company’s “books,” which form the basis for producing the set of F/S: the P&L account, the B/S, the statement of cash flows, and the statement of changes in owners’ equity. While the P&L accounts for profit by summarizing all airport activities in terms of revenue from air-and landside operations and cost incurred for the full reporting period, the B/S provides a snapshot of its assets and how these are financed by debt and equity at a specific point in time. B/S totals of airports are large and substantially dominated by fixed assets, such as runway and terminals. The statement of cash flows shows the company’s sources and uses of cash for a specific reporting period. The statement of changes in equity reflects retained earnings or a loss and capital injections or withdrawals during the FY.
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Foundations of Airport Economics and Finance
Despite significant progress in harmonizing accounting rules and financial reporting on a global scale, full comparability has not yet been achieved.
References Airport Cooperative Research Program (ACRP) (Ed.), 2011. Resource Manual for Airport InTerminal Concessions. Transportation Research Board (TRB), Washington, DC, ACRP Report 54. Airports Council International (ACI), 2016. Policies and Recommended Practices Handbook, eighth ed. ACI World, Montreal. Airports Council International (ACI) North America, 2016. Airport Concessions—Report of ACI-NA Multi-Committee Task Force. ACI North America, Washington, DC. Atrill, P., McLaney, E., 2011. Financial Accounting for Decision Makers, sixth ed. FT Prentice Hall/Pearson, Harlow. Butterworth-Hayes, P., 2017. Operators explore smarter retail methods. Jane’s Airport Rev. 29 (1), 12 13. Copenhagen Airports, 2016. Group Annual Report 2015. Copenhagen Airports, Copenhagen. Copenhagen Airports, 2017. Charges regulations applying to Copenhagen airport. ,https:// www.cph.dk/globalassets/6.-cph-business/5.-aviation/charges-and-slot/charges-regulationscph-uk-1.-april-2017.pdf. (accessed 16.02.18.). Harrison, W., Horngren, C., Thomas, W., Suwardy, T., 2013. Financial Accounting— International Financial Reporting Standards, ninth ed. Pearson Education Ltd. (Global Edition), Harlow. Horngren, C., Harrison, W., Oliver, S., 2012. Accounting, ninth ed. Pearson Education Limited (Global Edition), Harlow. Incheon International Airport Corporation, 2016. Annual Report 2016. Incheon International Airport Corporation, Incheon. International Financial Reporting Standards (IFRS) Foundation, 2017. Annual Report 2016. IFRS Foundation, London. Memphis-Shelby County Airport Authority, 2016. Comprehensive Annual Financial Report June 30, 2016. Memphis-Shelby County Airport Authority, Memphis, TN. Pitters, F., Buckner, K., 2018. Communicating airport concession operating costs. J. Airport Manage. 12 (2), 132 143. Rozario, K., 2018. Retail models income support. Passenger Terminal World 24, January 2018, 38 42. Seaman, B., 2011. The airport concession industry: Important issues and trends. Andrew Young School of Policy Studies Research Paper Series, Working Paper, 11-31. Georgia State University, Atlanta. Van Horne, J., Wachowicz, J., 2009. Fundamentals of financial management, 13th ed. FT Prentice Hall/Pearson, Harlow.