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  1. Risk Factors in Airport Financingin Challenging TimesorIf You Build It and They Don’t Come,Who Will Pay? 30th Annual FAA Aviation Forecast Conference District of Columbia Presented by: Karen M. George John F. Brown Company

  2. The Industry in this Time of Change • For airlines, the world has changed. There is a new reality. Airlines that fail to squarely and honestly face and adapt to their new operating environment will fail – and the same might be said for airports. • Legacy airlines have no choice but to cut costs that will not add value that customers are willing to pay for. • LCC’s have always been reluctant to assume any such costs. • Message to airports is clear: plan, design, construct and operate facilities to insure that airlines and other customers receive value commensurate with costs.

  3. The Industry (cont.) • In this new operating environment, high costs and excess capacity have the potential to overstress the long-term financial integrity of an airport. • High airport costs reduce the margin for error in investment and operating decisions. • Errors in estimates of airline demand, airline facility requirements, cost, funding, and other decision factors can compound to create substantial financial challenges for an airport.

  4. The Industry (cont.) • Excess capacity exposes current users to higher unit costs, which suggests that, in some cases, being behind the demand curve may be the better course under present circumstances, notwithstanding the risk of congestion and possible delay. • In residual agreement airports, non-airline revenues, if less than their potential, also exposes airlines to higher unit costs than necessary. • Overall, there is reason to be especially cautious in airport spending decisions. Insuring that airside and terminal capacity is appropriately sized to airline demand, and reviewing the cost-value of spending decisions will help an airport insure its long-term financial integrity.

  5. Critical Tools for Successful Airport Financial Planning • Knowledge, Knowledge, Knowledge • Airline Industry • Strengths and Opportunities • Vulnerabilities and Threats • Airport Passenger Market • Strengths and Opportunities • Vulnerabilities and Threats • Risk Tolerance /Risk Allocation • Minor Downturns • Catastrophic Downturns

  6. Finance Plan: Airport Goals Financial goals: • Comply with bond covenants • Meet debt affordability and other financial targets • Maintain financial flexibility Operational goals: • Provide modern, efficient, safe, secure facilities • Accommodate changing needs of airlines (RJs, affiliations) • Manage capacity to: • Insure competitive access for all airlines • Avoid premature investment in expansion • Mitigate bankruptcy risk

  7. Potential Market Risks • Weak local (O&D) traffic trends • High levels of connecting traffic • Secondary hub status in a connecting hub network • Market concentration in 1 or 2 airlines • Weak financial condition of hub or dominant airline • Exceptional volatility in passenger trends • Competition from alternative airports • Competition from ground modes • Exceptionally high or low fares and yields • Weak catchment area economics • Strong imbalance in visitor-resident mix

  8. Potential Financial Risks • High cost • High debt • Leveraged capital structure • Excess capacity • Obsolete design • Weak price-value • High levels of airline rates and charges • Inability or unwillingness to pay • Weak cash flow, inadequate liquidity • Thin debt service coverage margins • Little or no headroom in non-airline rates • Significant future borrowing requirements

  9. Risk tolerance line (varies by organization) Business Model:Risk Exposure and Tolerance Example of a Risk Profile (Probability Impact) Matrix

  10. Karen M. George John F. Brown Company (612) 385-4642 kgeorge@johnfbrown.com

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