New airport funding revenue set to take off…

There are a lot of issues facing infrastructure funding at a national level. The simple truth is there’s less money in the government pot. As a result, it’s time for economic infrastructure projects to start thinking outside the box about how they’re going to get funding.

Economic infrastructure has a distinguishing characteristic – there is a third party revenue stream generated by people that want to use that piece of infrastructure.

If you want to use a road, or use an airport, then there’s a way in which airport charges are included into the overall financial structure.

Pre-GFC environment, people were ready and willing to take the risk on the third party revenue streams. But as times get tougher, it’s becoming harder to justify taking the risk on the revenue stream.

To get a bit of insight on exactly how we can start to green-light regional airport development projects, I caught up with Martin Locke, Partner at PwC.

Martin and I took a look at the different models government can use to facilitate new investment in infrastructure that is expressly going to have an impact on productivity, and have an impact on growing the economy, generating revenue streams over time:

  1. Government can still decide to build and finance a new piece of infrastructure in its entirety. As revenue streams begin to firm up, government can then choose to sell off that piece of infrastructure. That’s been done in the context of some of the road transactions recently in Queensland. That model is what can be referred to as ‘build now, future sell’ and could apply in relation a completely new piece of infrastructure, or a piece of infrastructure that is an expansion of an existing arrangement.
  2. Another model is to leverage existing assets. This is when the government identifies a particular brownfield asset that’s already generating a revenue stream, and looks at how to expand it. Stakeholders may be asked to step up and take a risk on a revenue stream before it’s been firmed up. Repayment is sometimes provided out of the existing asset, rather than the expansion.  There’s an example of this currently being developed in the roads area with the extension of the F3 to connect up with the M2 motorway. That’s been done as an extension of the original concession – it’s called Missing Link. In return for taking on the risk of constructing and generating this new revenue stream, shareholders ask for compensation in the form of extending the lease term on the existing concession.
  3. Revenue securitisation is another option. When social infrastructure is financed from substantial government investment, it’s because the private sector won’t take the revenue risk. For economic infrastructure projects, the government’s approach is to pay the private financier an availability payment once the infrastructure has been built, generating a return on the initial private capital. Separately, government will also look to generate a charge and revenue stream from that piece of infrastructure. That type of transaction is what’s currently being contemplated for th East West Link project in Victoria. It’s also an example of what was in relation to the subsequent leasing of the Sydney desalination plant.
  4. Contingent support: The fourth area is for government to provide some form of contingent support for a project.  For example, private financier funding might build an expansion, and the government agrees to provide funding support for that expansion. When the private sector financiers step up with their money, they’re told what the projected revenue stream is going to be, as it’s still a projection, and government provides a return guarantee (normally set at a lower level). There’s a cap and collar type arrangement that is adjusted depending on how much is earned. Once the level of the cap is reached, any excess revenue is paid back to government.
  5.  Finally, government can provide subordinated debt. The private sector will provide funding, but will only agree to fund around 50 per cent of the capital costs of the expansion. This will be because they can only see sufficient revenue to amortise 50 per cent of the capital. Government can then offer the remaining balance, in the form of a subordinated loan. Their subordinated loan is only serviced after the prior ranking loan for the banks has actually been repaid. It provides a mechanism where government is providing funding, designed to earn a return and ultimately be repaid.

The above models certainly offer some innovative funding methods, but without a solid business case to begin with, hopes of funding will be slim. Martin shared his key advice for building a successful business case:

Provide clear support for the future ability to generate third party revenue.  If you’re coming up with financial projections around how you’re going to repay your capital, and how are you going to come up with different forms of revenue stream, do your due diligence around that revenue stream to provide strong evidence.

People make a mistake of confusing economic analysis with financial analysis. People will be trying to justify a project by claiming it’s got a really good economic cost benefit ratio. A lot of indirect economic externalities might help generate a really decent economic cost benefit ratio, but unless they are related to financial benefits, the project will not be financially viable.

The government has become increasingly credit constrained. There’s very little money to deploy. They would far sooner see projects being privately funded rather than publicly funded. Ask yourself: How do I make sure that I’ve actually got a business case and a financial structure that is consistent with private funding being made available?

Hear more from Martin during Regional Airport Development 2014 where he’ll facilitate the workshop ‘Exploring Alternative Funding Models for Infrastructure and Commercial Developments’.

 This workshop will assist you with understanding the alternative infrastructure funding models; and aims to guide you through the processes and criteria for securing such funds. Now is the time to comprehensively explore your funding options to ensure you can turn your master plan into master actions.

The airport v airline debate: why it needs to end

To put it simply, airlines and airports share a common goal; operating as many flights as possible to increase revenue.

However, achieving common ground and good communication has continued to be a challenge since the enforcement of airline deregulation.

To get some insight into exactly where the disparities lie and start to look at how they can be fixed, I spoke to Kevin Gill, Chief Operating Officer at Townsville Airport. He’s in a unique position of having experience from both sides of the coin; he worked as General Manager for privately owned ‘Macair’ for 8 years before joining Queensland Airports Limited (QAL) in 2008.

Where do the potential opportunities lie for airlines and airports to be maximising their revenue streams – have you any examples of this?

The traditional airport has been a landlord. The more contemporary airport immerses itself in understanding the airlines that would fit their destination, because ultimately an airport is a conduit to the destination. If we look at the Gold Coast Airport for example, you’ll tend to focus on typically low cost carriers, which are the correct fit to deliver tourism.

If you’re an airport like Townsville, it’s broader based with strong business content. The first step is to understand the correct airlines that would suit operating to your airport. Be proactive, and look at the emerging trends in your destination that could drive new destination ideas that may be of interest to your targeted airlines.

We have an example of that here; QAL’s research department identified a direct Darwin to Townsville service as an opportunity, because to get to Darwin, often meant a journey through Cairns or Brisbane. It became apparent that there are synergies with Darwin that were growing, between the two cities, those synergies were generally the mining industry and its on-going growth.  Both destinations have strong Defence connections, and there’s also Darwin’s increasing relevance as a gateway into Asia, and Townsville’s lack of connections into Asia.

As a result, the airport started to pitch a direct service to the airlines. AirNorth recognised the opportunity existed and commenced the route which has been very successful and is growing rapidly.

It was a new thinking of airports saying – “we’re not a landlord – we know our destinations, we know the opportunities, and we know our target market, let’s see where we can take this one”.

How does Townsville Airport ensure good operating costs for airline rates – where’s the focus?

Airport charges increased markedly at the start of the century, but if you look at the contemporary airport now, airlines get a lot more than a runway.

Looking beyond that initial price spike, investment in Australian airports has been very strong since they were Federal government owned.  If you look at airport charges as a percentage of airfares, they are still modest.

Airports now work hand in hand with airline partners to ensure that the Airport experience is seamless.  This maximises operational efficiencies and thus an Airline’s OTP.

Can you talk us through some of the common causes for disparate objectives between an airport and airline?

I’ve spent most of my career in airlines, so have seen both sides of the story.

Larger Airports have enjoyed strong financial performance in Australia but people often don’t understand the high levels of capital that are required to maintain and develop these assets. The airline industry has a history of uniformly not making much money.

Airports take a long term view with infrastructure development with planning horizons often beyond 10 years.  For example an airport may wish to increase the footprint of their terminal to meet long term projections and invest accordingly and pass on an increase charge to the airline.

On the other hand, the airline will not reap the benefits of the expanded footprint immediately and accordingly could be reluctant to agree to the increase charges in the short term.

That often causes a disparity in terms of short term versus long term thinking.

Different airlines also have different needs as dictated by their customer base.  FIFO operators only require a minimal facility whereas Virgin for example may require lounge and meeting facilities.

Certain airlines potentially may consider that they end up benefitting more from new infrastructure than other airlines.

What’s the key to successful communication and collaboration? 

The first thing that goes through my mind is empathy.  Until you’ve worked at an airline –  you don’t get to understand the pressures that airlines are under.

A jet airplane costs up to $8,000 an hour to operate, so if you’re an airline operator and the airport encourages you to start a new route, the costs rack up really quickly.

When an airport comes to an airline and advises them of a major redevelopment there is often a cost increase that is added to the list of increasing costs that an airline faces. Ultimately, the passenger ends up paying for it. Therefore it is imperative to ensure that the airlines feel that they are getting are getting value for money.

Airlines are trying to reduce costs and create a margin. This is typically 5% of turnover.  Airports are thinking about the longer term to ensure the correct infrastructure is provided to meet long term demand growth. If the parties can understand each others perspective then they are much more likely to collaborate effectively and reach mutually acceptable outcomes.

There’s no doubt that airlines and airports have to be partners.  We are increasingly immersed together. An airport is reliant on airlines adding capacity to grow their business and enable them to reinvest. There are other ways that airports can assist airlines. QAL for example, provides ground handling support services and also aircraft maintenance services to airlines.  It’s about having a deeper relationship beyond being a landlord.

What do you envisage the airport of the future to look like – what will be the differentiation between those that succeed in becoming cash flow positive and those that don’t?

If the destination is strong, then the airport should prosper, the airport needs to be proactive, and support destination growth.

Work with what you’ve got.  If you know what your destination key trigger points are, then again, be proactive.  Look at new route opportunities and drive the agenda with airlines with constructive ideas. Know you’re the industry you’re operating in.  You’re in aviation; you can’t be a passive landlord.

Airports that are smart really look at all of those negative touch points in facilitation, and try to overcome them, whether it be front of house road transport congestion, or runway congestion.  Technology enabling smart solutions is also going to be very important.

 Join Kevin at Regional Airport Development 2014 where he will be delivering the presentation ‘Attracting Airlines and Strengthening Relationships’.

 Find out more by visiting www.regionalairports.com.au

Regional Airports: The time for change has come…

It’s been nearly 20 years since the federal government distributed airports to local councils and local bodies to own and operate. In that time, the demand on regional airports has radically changed.

Just earlier this month Bundaberg Council released figures for 2013 showing a 17.4% increase in passenger numbers compared to 2012. The airport provides a gateway for tourism as well as providing hundreds of jobs and commercial opportunities for local residents.

So what’s the problem? Well, airports are ageing and starting to decay in some areas. If they are going to match demand for both services and tourism, some serious transformation is needed to turn airports into cash flow positive enterprises.

Airports are currently feeling the pressure from demands, operations, new regulations, safety, security and even changing aircraft types.

This has left many operators in search for knowledge, looking to uncover the real challenges facing the future operation of airports. It’s time start planning for the long term.

To gain some insight, I recently caught up with Bill Burke, CEO of Mildura Airports and  frequent sounding board for CEOs needing advice; he expressed the urgency for long term transformation planning:

Plan for the long term

“People often see airports as long-term assets that need little or no maintenance. All of a sudden, the day arrives when runways start to deteriorate and assets that had been considered indestructible suddenly start to fall apart. It then takes a lot of capital to fix them.

“It’s difficult to give specific time scales on when improvements are needed within the airport lifecycle. Just consider that every asset has a design life and once that benchmark is passed, the chances are some capital is going to be required for the repairs.”

Bill emphasised how it’s not just the runway that needs to be considered, terminals also decay and technology provides both new opportunities and new challenges:

“It’s about really understanding the needs of your airport as a whole and considering the wider vision beyond individual repairs and developments. Here at Mildura, we’ve recently completed the development of a new terminal building. When we presented it to the community, we received criticism over the size and direction the airport was taking. When we communicated the long term vision for the airport, exploring the logic of the layout, potential for expansion and how it fits the circulation of expected people, we managed to win the community round.”

“The terminal will allow the airport to operate for the next ten years, without any problems. Looking beyond that, I also built expansion opportunities into the plan, allowing the airport to evolve into the next phase. It will build on the facility that’s already here and be fairly simple and cost effective. The terminal will be able to double in size to accommodate growth.”

Be prepared to look for capital:

“Even with your long term plans in place, airports require large levels of capital to be sourced to adequately develop into an ‘airport of the future’. We can’t hide from that. I’m in the position currently where I need $20 million for a runway upgrade, without that capital the runway won’t be able to operate and provide the same level of service as it has before.”

Bill warns that too many people are just riding out the lifecycle and could land themselves in hot water:

“Too many airports – and I’ve seen too much of it in my career – have done little in the way of planning, they’ve never really looked far enough forward to think of where they might be right outside the square.”

Strive to achieve your potential

It’s not just asset management that will take regional airports to the next level, more has to be done to maximise existing revenue streams that could help secure larger capital and keep the day to day operations cash flow positive:

“Too few airports look at their operation in the bigger picture and put down a footprint and work to a blueprint that is expandable and can be developed in almost any direction to satisfy almost any requirement.”

“Regional airports need to look at everything they can. For some airports, there is opportunity for utilisation of the land resources – for industrial, commercial, maybe even sometimes retail activities”

“They need to also look at other commercial activities in terms of the facilities they have; in some cases they could lend themselves to aviation infrastructure uses.”

“You’ve got to identify what potential there is and what the market might be. There’s no point making a lot of noise and knocking on a lot of doors if you can’t deliver a product. I think every year an airport just has to evaluate its own potential.”

“Look at location and what’s happening in the wider community, try and work out where the airport fits in and where there’s potential to tap resources, do something bigger and better.”

“Airports that thrive in the future will be willing to embrace change, think long term and embrace knowledge.”

Bill will be joined by some of Australia’s leading airports during the 2014 Regional Airport Development Conference. The agenda has been designed to assist you on your journey of building and commercialising the airport of the future.