Airport Finance - The Money Folks Talk

MADISON, WI - The Airport Council International-North America (ACI-NA) Airport CFO Summit, held here in July, drew some 30 industry professionals. Airport Business caught up with a group of finance executives to discuss how the airport finance arena has changed over the years.

Included in the conversation were Deborah McElroy, executive VP, policy and external affairs, ACI-NA; Chris Poinsatte, executive VP and CFO, Dallas/Fort Worth International Airport; Cindy Nichol, finance director, San Francisco International Airport; Borgan Anderson, manager of aviation finance and budget, Port of Seattle (2011 Chair of the ACI-NA finance committee); and Kimberly Jones, finance and administration director, Dane County Regional Airport in Madison.

Comments Nichol, “It’s funny when you go back and look at articles of even 40 years ago, much less 25 … I think the fundamental pressures have remained the same.

“The airlines are trying to operate on a margin in a deregulated market, and that’s tough. What it does is put pressure on rates and charges for us.”

The Airport Improvement Program (AIP) came into being in 1982, and passenger facility charges (PFCs) and policies on rates and charges and airport revenue really spell out more clearly what the options and requirements are, she relates.

“I think we’ve done a lot in terms of really changing the face of non-airline revenues, especially with regard to the terminal; it’s now a marketplace,” adds Nichol. “There’s a huge diversity.”

Says Poinsatte, “If you go back to deregulation — what you’ve seen happen over the last 25 years is a shift in responsibilities; the airlines really managed everything at the airport. The airport is now more focused on the customer.

“Over the last 25 years we’ve seen a huge focus on that, and now we are shifting into what I would call the new business model that we’re all trying to figure out, which is to operate more like a business.”

It takes a balanced approach to focusing on the customer, the employee, and operational excellence, he adds.

On 9/11 and security, says Poinsatte, “Over time we have had to develop a very close relationship with the TSA and actually help them figure how to serve the customer better.

“Our security costs have probably doubled over the last ten years … I know our police and security force has. That has put a large burden on us, but we really try to work very hard on making the customer experience through security less inconvenient.”

Remarks McElroy, “The biggest change is the fact that airports are no longer just facilities. An airport is a hugely complex business.”

Operating like a business

“The importance of developing the non-airline side of the business is clear; airports are increasingly acting in a business-like way ... I would even use the term ‘entrepreneurial way’,” says Anderson.

“In Seattle, we went from a long-term residual agreement to more of a hybrid/compensatory, which made the airport completely responsible for the non-aeronautical side of the business — and gave us incentive to really improve that and make business decisions about the kind of concessions we have, and the business arrangement over those concessions.

“We also operate our own parking garage; we are constantly looking at different ways to price our products to both meet the needs of our customers and to improve the bottom line.”

Another factor that has always been there but is even more important now, says Anderson, is the recognition that a healthy airport is critical to communities and regions in terms of both domestic and global economic connectivity.

“In Seattle, we’ve seen quite a bit of growth in international direct flights in recent years; that’s very important to our entire region,” he explains.

“What we are faced with now is the need to make investments to accommodate future growth. That’s something the domestic carriers really aren’t all that excited about. It does create a situation where the airport is looking long-term at what benefits the region.

“If you went back 25 years ago, for the most part, the airlines had the stronger position and could say ‘no’ to a lot of things. Now the trend with a lot of lease agreements, or lack thereof, is to shift more control to airports.”

Adds Poinsatte, “The reason we exist is to grow the economy; I think our number now, and it’s been the same number since I’ve been at the airport … there is more than $16 billion in economic activity generated from DFW; this year alone we’ve added nine new international flights.”

Getting green

Driving some financial consideration more now than ever is sustainability and the shift of focus on the environmental aspect of operating an airport, says Jones. “It’s not always cheap, but there are a lot of communities that have initiatives to move forward with as many environmentally sustainable projects as possible.”

Poinsatte agrees that building and operating with a focus on environmental sustainability can come with a higher cost up front, but the long-term benefits are clear. “We put the triple-bottom-line [three pillars for measuring organizational success: economic, ecological, and social] in everything we do; we’ve cut our emissions by a considerable amount over the last 25 years.”

Benefits of variable-rate

With regard to financing and how airports issue debt, Nichol says things were once very plain vanilla — 30-year fixed rate debt that was either taxable or tax-exempt. “Now we have AMT (alternative minimum tax) in the mix which is not completely functional perhaps right now,” she remarks.

“Airports had the two-year AMT holiday, which helped a lot with airport financing,” adds Nichol. Airports also have a much more diversified portfolio of the kinds of debt they can issue.

“We now have GASB 53, which governs how we report our derivatives on our books,” she relates. “That affects our financial standing; it’s just a lot more to manage.

“At SFO after 9/11, being able to really harness variable-rate debt saved the airport a ton of money. It’s not like we went nuts on that … we won’t have more than 20 percent of our total portfolio in variable-rate, but it saved millions of dollars.”

Poinsatte agrees, commenting, “DFW has probably saved $70 or $80 million over the course of time by using variable-rate products.”

Carrier leases and facility utilization

On AIP funding, Poinsatte relates that there are a lot of airports that would be happy to get out of the program altogether for the trade-off of the ability to charge a PFC, while letting airports finance in the same way as the Canadian model — that is as opposed to relying on federal government grant assurances.

Says Nichol, “We came off a 30-year lease agreement in June, and are now in a ten-year agreement. Compared to DFW, we have no land, and that one thing makes a huge difference because we have to control our terminal facilities … we have to have a different philosophy.

“The one significant change — we are still a residual airport, but we’ve gone from having exclusive-use gates for the airlines in the domestic terminal to preferential and common-use. That enables us to get much better use of our facilities.

“We also have airfield capacity issues that we are going to start experiencing around 2030 ... so we really need to get the most out of our facilities.

“SFO has the philosophy of not turning over development outside of the terminal area to third-party developers; we need to control that.”

Remarks Poinsatte, “We use third-party developers all the time. We came off a 35-year residual lease to a hybrid where we control all of the non-airline revenue sources. We have a different situation since American is 85 percent of our passengers … we really do want an agreement with them.

“That said, we have much more of a sharing than we did before; airlines really controlled everything. American maintains two of the terminals in Dallas; we would like to take that because we think we are more focused on ensuring that the facilities are maintained well and that the customer experience is good.”

In Seattle, “In our evolution from a long-term residual agreement to where we are today … we’ve moved away from exclusive leases to preferential and common use,” says Anderson. “It allows us to utilize the terminal more efficiently; technology is also helping in that regard.”