Financial Review 2015
This Financial Review reports on the results and financial position of the Ottawa International Airport Authority (the Authority) for its year ended December 31, 2015. This review should be read in conjunction with the audited financial statements and related notes of the Authority. This review contains forward-looking statements, including statements regarding the business and anticipated financial performance of the Authority. These statements are subject to a number of risks and uncertainties that will cause actual results to differ from those contemplated in the forward-looking statements.
Earnings before depreciation for the year ended December 31, 2015 were $27.8 million compared to $29.2 million for the year ended December 31, 2014. Incremental interest expense associated to the new $300 million Amortizing Revenue Bonds issue which bears interest at a rate of 3.933% completed on June 9, 2015 (“Series E”) was the most significant factor impacting earnings before depreciation for the year.
The Authority recorded depreciation of $25.9 million in 2015 compared to $22.5 million in 2014, reflecting depreciation of the terminal building and related facilities over their estimated economic lives. After subtracting depreciation, the Authority generated net earnings of $1.9 million in 2015 compared to $6.7 million in 2014.
The Authority’s net operating results for the three years ended December 31, 2015 are summarized as follows:
Results of Operations
During 2015, the Ottawa Airport saw positive passenger volumes with increases of 0.9% over 2014 and 1.7% over 2013. While the Canadian economy experienced declines in growth in the first half of 2015, the second half growth was more encouraging in each of the last two quarters. Nonetheless, growth was lower than expected in the fourth quarter with lower energy prices, declines in the Canadian dollar compounded by mixed economic and market trends in global markets to start the new fiscal year. The Authority is closely monitoring passenger traffic patterns in all sectors including monitoring the impact of the new federal government budget and spending initiatives coupled with other fiscal and monetary measures to improve economic conditions that should drive incremental passenger growth in 2016 and beyond.
The following table summarizes passenger volumes for the last three fiscal years:
Passenger volumes between Ottawa and domestic locations experienced year over year growth of 0.3% starting in the first quarter of 2015 with continued momentum with growth in the range of 2.0% in each of the remaining three quarters of 2015. While overall domestic growth was 1.6% year over year, domestic carriers saw mixed results. Air Canada produced 5.3% year over year growth with higher passenger volume connecting to the U.S. through its Toronto, and to a lesser degree, its Montreal hubs resulting in a lower number of Air Canada-operated flights to the U.S. from Ottawa Airport. Westjet was flat with 2014 and was negatively impacted by lower flow traffic between Alberta and the Atlantic Provinces. Porter experienced a decline of 3.8% on a year over year basis due to Billy Bishop Airport operating at full capacity and, therefore, new Porter routes came at the expense of airports like Ottawa who have the highest frequency levels.
Transborder volumes were 0.7% lower than in 2014. U.S. passenger traffic has been impacted by the consolidation of American air carriers evidenced by the reduction of multiple departures in favour of higher loads to the same destination. Additionally, the cancellation of the redundant Charlotte, North Carolina flight after the American Airlines and US Airways merger impacted U.S. passenger volumes as well.
International volumes decreased by 2.0% in 2015. The winter cancellation of the Ottawa-Frankfurt route by Air Canada was partially offset by increased charter activity to non-U.S. sunshine destinations. While further volume improvements were noted in the second and third quarters of 2015, the trend of winter charter season starting later than in previous years negatively impacted volumes in the fourth quarter.
By sector, a quarterly view of 2015 passenger volumes compared to comparable quarters in 2014 is as follows:
By quarter, total passenger volumes were as follows:
The size of an aircraft (based on maximum takeoff weight) and the number of “landed” seats on an aircraft (regardless of whether those seats are occupied by passengers) are the most significant factors in the determination of aeronautical fees charged to airlines. In 2015, the number of landed seats decreased by 0.5% from 2014 with 0.3% year over year growth in domestic seats offset by decreases of 4.6% and 0.9% in transborder and international sectors, respectively. Contributing factors include higher rates of cancellations in the first quarter of 2015 of inbound flights from other North American airports due to the worse than normal winter weather conditions and a later start of the winter charter season in late 2015. Furthermore, volumes were impacted by the global airline trend of operating fewer flights with higher load factors (seat occupancy) demonstrated by the rationalization of multiple departures to the same destination and the impact of the consolidation of U.S.-based air carriers evidenced by the cancellation of the Charlotte, North Carolina flight due to the American Airlines and US Airways merger. In addition, domestic seat growth was constrained by smaller aircraft with higher loads used to service existing routes.
Total revenues increased by 5.3% to $118.2 million in 2015 compared to $112.3 million in 2014.
Revenues by Category
Airport improvement fees (AIF) at $45.4 million in 2015 increased by 4.1% from $43.6 million in 2014. The increase of $1.8 million is attributable to the residual year over year impact of the increase in the rate from $20 to $23 per enplaned passenger effective March 1, 2014, combined with the incremental fees related to the 0.9% increase in passenger volume in 2015. Passengers connecting through Ottawa are exempt from the airport improvement fee charged by the Authority. An average of approximately 93.0% of departing passengers originated their flight in Ottawa in 2015 as compared to 92.0% in 2014. Under an agreement with the airlines, AIF is collected by the airlines in the price of a ticket and are paid to airport authorities on an estimated basis, net of airline collection fees of 6.0%, on the first of the month following the month of enplanement. Final settlement based on actual passenger volumes occurs at the end of the month following the month of enplanement.
At $37.7 million in 2015, total aeronautical revenues, which include terminal fees, loading bridge charges and landing fees charged to air carriers, were 2.5% higher than revenues of $36.7 million in 2014. The impact of the 3.0% increase in landing fee and general terminal fee rates effective February 1, 2015 was offset by the 0.5% decrease in seat volumes in the year, and by minor changes in the domestic versus international and transborder mix of flights serving Ottawa. Terminal fee rates for transborder and international flights are higher than rates for domestic flights. With airline seat volume growth trending lower than inflationary growth and with increases in downloaded and regulatory expenses that are beyond the Authority’s ability to control growing at a rate that is significantly beyond inflation, the Authority has increased its aeronautical fee rates by 4.0% effective February 1, 2016. Despite these increases, the Authority’s average aeronautical fee rates remain among the lowest in Canada.
Concession revenues of $10.9 million increased 9.4% as compared to 2014. The $0.9 million increase was attributable to favourable adjustments to minimum annual guarantees provided under concession agreements, space optimization activities with new passenger terminal tenants, the renegotiation of the taxi brokerage services contract and the impact of increased passenger volumes on all concession areas.
Car parking revenues increased to $13.7 million from $13.4 million in 2014, an increase of $0.3 million or 2.2%. The year over year increase is commensurate with the change in the rate structure for parking that was effective on March 1, 2014, the change in mix of passengers and the availability of parking options. The change in the rate structure focused on optimizing pricing models and revenues based on passengers’ profiles and their specific needs. Domestic passengers tend to park for shorter periods of time for business purpose day-trips and leisure, transborder and international passengers park at the airport for longer periods of time.
Land and space rentals revenues of $6.2 million increased 7.2% as compared to 2014. Increases are attributable to favourable lease renewal activities with existing tenants, inflationary adjustments embedded within land leases and exclusive use space rental rates and the impact of a favourable retroactive adjustment on the signing of a lease renewal.
Other income of $4.2 million increased by $1.6 million and is attributable to the gain on the bond forward transaction related to the Series E offering. Prior to the closing of the Series E financing, a bond forward transaction was entered into to protect from volatility in interest rates and it resulted in a $1.6 million gain being recorded. It has been fully recognized and the Authority has elected not to apply hedge accounting.
Expenses before depreciation increased $7.3 million to $90.4 million in 2015 from $83.1 million in 2014. Depreciation increased to $25.9 million in 2015 from $22.5 million in 2014. Depreciation reflects depreciation on continuing investment in property, plant and equipment during 2015. Total depreciation increased as additional capital investment projects including the baggage handling system, boarding bridge replacement and the de-icing pad refurbishment were completed and put into use in the Ottawa Airport’s operations during 2015 and accordingly, the related depreciation was included in the 2015 results.
Expenses by Category
Interest expense reflected in the statement of operations results from borrowing to invest in the Authority’s capital programs. Interest expense has increased $4.4 million and is attributable to the net interest expense on the Series E Bonds issued on June 9, 2015. Interest expense incurred on the Series E Bonds is offset by the interest income earned on the $200.0 million that has been set aside in the segregated fund maintained by the Trustee and that will be used to retire the Authority’s Series D Bonds maturing in May 2017.
Ground rent payable to the Government of Canada increased by 5.0% to $8.7 million in 2015 due to higher revenues in 2015. The Authority operates the airport under the terms of a ground lease with the Government of Canada that sets out the formula for calculating annual ground rent. The amount reflected as ground rent expense is estimated based on that formula. The formula calculates rent as a royalty based on a percentage of gross annual revenues on a progressive scale. Ground rent is calculated as a percentage of gross annual revenues as defined in the lease, with no rent payable on the Authority’s first $5.0 million in annual revenue and an increasing rent percentage payable as revenue increases, on a cumulative basis. Rent is levied at a maximum 12.0% rate on annual revenues in excess of $250.0 million as follows:
Based on the Authority’s projections, estimated ground rent payments under the ground lease for the next five years are as follows:
The cost of materials, supplies and services increased $1.9 million from $29.2 million in 2014 to $31.1 million in 2015. The 6.4% increase over 2014 is primarily due to volume and contracted rate increases for terminal services, including building repairs, maintenance contract costs, utilities and other outsourced and professional services. In particular, incremental operating costs related to the new baggage handling system exceeded $1.0 million and included professional services for monitoring, system support and maintenance. Also, the first and fourth quarters of 2015 experienced a mixture of weather conditions that required a higher usage of airfield winter maintenance chemicals and materials than in 2014. Furthermore, continued increases in hydro rates as compared to 2014 unfavorably impacted expenses on a year over year basis.
The cost of salaries and benefits increased 2.9% from $20.9 million in 2014 to $21.5 million in 2015. Increases resulted from contracted rate increases and the year over year impact of the mid-2014 increase in headcount in the Airport Operations Coordination Centre as the Authority replaced outsourced services with employees on a more cost effective basis.
Payments in lieu of municipal taxes have increased by 0.8% and reflect the impact of the provincial legislation which dictates the calculation of this payment. Under this legislation, payments in lieu of municipal taxes are based on a fixed legislated rate for the Authority, multiplied by the previous year’s passenger numbers, but to a maximum increase of 5.0% over the previous year’s amount. The $5.0 million paid for 2015 reflects this prescribed calculation. The number of passengers travelling through the Ottawa airport in 2015 increased from 2014 by 0.9%. Payments in lieu of taxes will increase in 2016 by 0.9% from the 2015 amount based on this legislation reflecting the increase in passenger volumes that occurred in 2015.
Summary of Quaterly Results
The Authority’s quarterly results are influenced by passenger activity, aircraft movements, maintenance project decisions, and other factors such as weather conditions and economic conditions and do not necessarily fluctuate consistently over time based on the season. Due to these external factors, the historic results on a quarterly basis cannot be relied upon as a predictor of future trends.
Selected unaudited quarterly financial information for the eight most recently completed quarters is set out below:
In accordance with the Authority’s mandate, all earnings are retained and reinvested in airport operations and development, including investment in property, plant, and equipment to meet ongoing operating requirements.
During 2015, the Authority made gross cash payments of $37.5 million related to its capital expenditure programs, and recorded $6.4 million as receivable (of which $4.6 million was received) from the Canadian Air Transportation Security Authority (CATSA) for CATSA’s share in the cost of the airport’s new baggage handling system. Before subtracting this amount from CATSA, the Authority spent over $12.0 million in 2015 on a project to renovate and expand the airport’s baggage handling system to comply with new regulations for baggage screening. The Authority commenced this project in 2012 and while many elements have been completed through 2015, completion is expected in the first half of 2016. The total cost of this project and associated work, net of costs to be covered by CATSA, is expected to be approximately $37.0 million. In addition, in 2015, the Authority replaced four boarding bridges at a cost of $6.0 million, $3.6 million for apron and taxiway work within the de-icing portion of the airfield and $1.7 million for the redesign of the oversized baggage system within the transborder area.
In addition to ground rent payments noted above, the Authority has operating commitments in the ordinary course of business requiring payments which diminish as contracts expire as follows:
Liquidity and Capital Resources
As a non-share capital corporation, the Authority funds its operating requirements, including debt service, through Operating revenues and AIF revenues. The Authority manages its operations to ensure that AIF revenues are not used to fund regular operational expenses or operational capital. AIF revenues are used to fund debt service costs and other expenses related to the Authority’s major infrastructure construction programs including airport expansion projects. The Authority finances major infrastructure expenditures by borrowing in the capital markets and by using bank credit.
The Authority maintains access to an aggregate of $140.0 million ($132.0 million prior to May 2015) in committed Credit Facilities with two Canadian banks. In May 2015, some of the Credit Facilities were renegotiated in advance of the Series E Bond financing. Facilities were increased to better reflect current financial requirements of the Authority. The 364-day facilities that expired on October 17, 2015 have been extended for another 364-day term expiring on October 14, 2016. The following table summarizes the amounts available under each of these Credit Facilities, along with their related expiry dates and intended purposes:
The Authority’s cash and cash equivalents increased by $91.4 million during 2015. On June 9, 2015, the Authority completed the $300.0 million Series E Bonds issue which bears interest at a rate of 3.933%. The net proceeds from this offering were used to pre-fund the repayment of the Series D Bonds by depositing $200.0 million into a segregated fund held by the Trustee, to refinance existing bank indebtedness incurred by the Authority and to use for future general corporate and capital expenditures. Prior to the closing of the offering, a bond forward transaction was entered into to protect from volatility in interest rates and it resulted in a $1.6 million gain being recorded. The Authority has elected not to apply hedge accounting with respect to this forward transaction, therefore the related gain has been recognized in the statement of operations and comprehensive income for the year.
In 2002, the Authority established a Capital Markets Platform under a Master Trust Indenture (MTI) setting out the terms of all debt, including bank facilities and revenue bonds. Under the MTI, the Authority is required to maintain with the Trustee a Debt Service Reserve Fund equal to six months’ debt service in the form of cash, qualified investments or letter of credit. At December 31, 2015, the balance of cash and qualified investments held in the Debt Service Reserve Fund was $11.2 million. Furthermore, in order to satisfy the Debt Service Reserve Fund requirement for the Series E Bonds, $5.9 million of the Authority’s Credit Facility has been designated to an irrevocable standby letter of credit in favor of the Trustee.
The MTI also requires that the Authority maintain an Operating and Maintenance Reserve Fund in an amount equal to 25% of defined operating and maintenance expenses for the previous year. This fund may be maintained in the form of cash and investments held by the Authority or the undrawn availability of a committed credit facility. As at December 31, 2015, $13.2 million of the Authority’s credit facilities had been allocated exclusively to the Operating and Maintenance Reserve Fund.
At December 31, 2015, the Authority was in full compliance with the provisions of its debt facilities, including the MTI’s provisions related to reserve funds, the flow of funds and the rate covenant.
During 2015, Standard & Poors and Moody’s reaffirmed the Authority’s credit ratings with stable outlooks in respect of the Authority’s revenue bonds under the MTI at A+ and Aa3, respectively.
Other Balance Sheet Highlights
The Authority’s accounts receivable increased by $0.7 million during the year as the result of a $1.8 million increase in amounts receivable from CATSA related to the baggage handling system and offset by reductions in AIF and HST receivable amounts. The AIF amount was lower than expected due to a payment by one major carrier in late December 2015.
The post-employment benefit liability decreased by $4.0 million in the year and reflects a reduction of $1.1 million in the amount payable related to the defined pension plan and $2.9 million related to the post-employment benefits plan. The movement in the defined pension plan is related to the pension plan’s transition on an accounting basis as at December 31, 2015 from a deficit position to a surplus position. The plan’s transition to a surplus position was mainly the result of employer contributions and actuarial gains on Plan assets. In particular, the Authority contributed $2.3 million in special solvency payments during the year and as required by pension legislation. Pursuant to the application of international accounting standards related to limiting the defined benefit asset, the balance sheet surplus position of $0.1 million was limited to the present value of the Authority’s future economic benefit. The resulting adjustment of $2.1 million to adjust to the surplus position was recognized in other comprehensive income.
The change in the post-employment benefits plan is mainly related to actuarial gains and losses arising from changes in economic and demographic assumptions and plan experience. These actuarial gains and losses have been recognized in other comprehensive income.
Risks and Uncertainties
Levels of Aviation Activity
The Authority will continue to face certain risks beyond its control which may or may not have a significant impact on its financial condition. Airport revenue is largely a function of passenger volumes. Passenger volumes are driven by air travel demand. The events of the past several years have emphasized the volatile nature of air travel demand and the impact of external factors such as economic conditions, health epidemics, geopolitical unrest (September 11, 2001), government regulation, the price of airfares, additional taxes on airline tickets and the financial uncertainty of the airline industry.
The financial uncertainty of the airline industry, although currently relatively stable in Canada, remains an ongoing risk to the Authority. This is mitigated by the fact that approximately 93.0% (92.0% in 2014) of the passenger activity at the airport originates or terminates at the Ottawa Airport, as opposed to connecting through Ottawa. Connecting passenger volumes are more vulnerable to fluctuation due to routing and scheduling changes by airlines. In addition, a greater percentage of the traffic through the airport is business travelers, whose travel decisions are less discretionary than those of leisure travellers.
Aviation Liability Insurance
The availability of adequate insurance coverage is subject to the conditions of the overall insurance market and the Authority’s claims and performance record. The Authority participates with an insurance buying group that also includes airport authorities from Vancouver, Edmonton, Calgary, Winnipeg, Montreal, and Halifax. This group has been successful in placing all of its insurance needs. In previous years, there have been significant changes in the insurance markets for aviation, largely driven by the events of September 11, 2001. These events limited certain insurance products and resulted in higher pricing. The Government of Canada has extended an indemnification for third-party aviation war risk liability for all essential aviation service operators in Canada. The Government of Canada has indemnified the Authority for losses in excess of US $50,0 million, the limit of insurance coverage which is currently available to airport operators on the market. The Government of Canada originally provided this indemnification in response to a decision by international insurers to withdraw third-party aviation war risk liability coverage that was available before September 11, 2001. The Government of Canada has indicated that it will cease providing excess indemnity coverage by June 30, 2016 and the Authority is actively engaged with members of the insurance buying group and the insurance market in ensuring ongoing cost-effective coverage beyond June 30, 2016.