2019 Financial Review

This Financial Review reports on the results and financial position of the Ottawa Macdonald-Cartier International Airport Authority (“Authority”) for its year ended December 31, 2019. 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 (prior to the COVID-19 pandemic). 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.

Overall performance

Earnings before depreciation for the year ended December 31, 2019 were $36.2 million compared to $38.3 million for the year ended December 31, 2018. The Authority recorded depreciation of $31.1 million in 2019 compared to $31.3 million in 2018, reflecting depreciation of the terminal building, airfield facilities and other assets over their estimated economic lives. After subtracting depreciation, the Authority generated net earnings of $5.1 million in 2019 compared to net earnings of $7.0 million in 2018.

The Authority’s net operating results for the three years ended December 31, 2019 are summarized as follows:

(IN MILLIONS OF CANADIAN DOLLARS) 2019
$
2018
$
2017
$
Revenues 138.1 138.1 132.6
Expenses 101.9 99.8 99.8
Earnings before depreciation 36.2 38.3 32.8
Depreciation 31.1 31.3 29.0
Net earnings 5.1 7.0 3.8
Total assets 510.7 500.4 495.0
Gross – long-term debt 418.7 423.3 427.5

Results of Operations

Operating activities

During 2019, the Ottawa Macdonald-Cartier International Airport (the “Airport”) saw similar passenger volumes as in 2018 and an increase of 5.5% over 2017.

The following table summarizes passenger volumes for the last three fiscal years:

% change – 2019 versus
2019 2018 2017 2018 2017
Domestic 3,993,553 4,002,209 3,813,672 (0.2) 4.7
Transborder 686,297 720,770 647,574 (4.8) 6.0
International 426,637 387,822 378,431 10.0 12.7
Total 5,106,487 5,110,801 4,839,677 (0.1) 5.5

Domestic passenger volumes were 0.2% lower on a year over year basis. The first quarter of 2019 was unfavourably impacted by significant snow events and complex weather conditions throughout the network that resulted in a doubling of the number of cancelled flights as compared to 2018 and was a contributing factor to the lower than expected flows. Volumes in the remaining quarters were slightly above and below the prior year with decreases in flows to Toronto and Edmonton and offset by increases to Montreal and Charlottetown.

Transborder volumes decreased by 4.8% as compared to 2018. The temporary suspension of the United flights to Chicago and American’s reduced frequencies to Philadelphia were significant factors in the lower than expected volumes. These reductions were offset partially by United increasing capacity to Washington Dulles and Delta to New York – LaGuardia.

International traffic increased 10.0% from the comparable period in 2018. Air Canada, Sunwing and Air Transat experienced strong flows to its Caribbean and Mexican destinations as compared to the prior year.

By sector, a quarterly view of 2019 passenger volumes compared to comparable quarters in 2018 is as follows:

Domestic Transborder International
Q1 Lower by 0.3% Higher by 0.7% Higher by 14.2%
Q2 Higher by 2.6% Higher by 5.5% Higher by 13.5%
Q3 Lower by 1.7% Lower by 12.1% Higher by 2.0%
Q4 Lower by 1.4% Lower by 13.9% Higher by 5.9%
Total Lower by 0.2% Lower by 4.8% Higher by 10.0%

By quarter, total passenger volumes were as follows:

2019 2018 % change
Q1 1,271,207 1,248,517 1.8
Q2 1,296,994 1,252,447 3.6
Q3 1,317,719 1,355,155 (2.8)
Q4 1,220,567 1,254,682 (2.7)
Total 5,106,487 5,110,801 (0.1)

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 drivers of aeronautical revenue. In 2019, the number of landed seats decreased by 2.0% as compared to 2018. Domestic landed seats decreased 1.9%, transborder decreased by 8.2% on a year over year basis while international increased by 8.3%. Variances by sector mirror largely the variances experienced in passenger volumes as explained above.

Revenues

Total revenues for 2019 remained in line with 2018 at $138.1 million.

2019 2018 Change
Revenues by category
(IN THOUSANDS OF CANADIAN DOLLARS)
$ $ $ %
Airport improvement fees 53,988 54,215 (227) (0.4)
Terminal fees 28,003 28,511 (508) (1.8)
Landing fees 13,351 13,472 (121) (0.9)
Concessions 15,586 15,291 295 1.9
Car parking 15,980 16,082 (102) (0.6)
Land and space rentals 6,616  6,623 (7) (0.1)
Other revenue 4,538 3,866 672 17.4
138,062 138,060 2 0.0

Airport improvement fees (“AIF”) of $54.0 million in 2019 was $0.2 million lower than 2018. The decrease is attributable to the 0.1% decrease in passenger volumes on a year over year basis combined with a small decrease in AIF eligible originating passengers. Under an agreement with the air carriers, AIF is collected by the air carriers in the price of a ticket for passengers originating their flight in Ottawa. Passengers connecting through Ottawa do not pay AIF. In 2019, the number of departing passengers originating their flight in Ottawa increased slightly to 93.6% from 93.4% in 2018. These funds are remitted to the Authority on an estimated basis, net of an air carrier service fee of 6.0%, on the first of the month following the month of enplanement of passengers. Final settlement based on actual passenger volumes occurs at the end of the month following the month of enplanement.

Aeronautical revenues of $41.4 million in 2019, including terminal and landing fees, loading bridge charges and security fees charged to air carriers, were 1.5% lower than the comparable period in 2018 at $42.0 million. The Authority maintained 2019 aeronautical charges at 2018 levels and the 2.0% decline in landed seats unfavourably impacted revenues. The unfavourable impact from the decline in seats was offset slightly by increased flight activity to international destinations in 2019 and which attract higher fees from the air carriers. For 2020, the Authority is raising its aeronautical rates and charges by 3.0% effective February 1, 2020. This rate increase is required to offset the impact of the general slowdown in growth of air carrier seat volumes that have not kept pace with inflation, together with increases in operating expenses resulting from the evolving economic and regulatory environment directly impacting the cost of providing services to air carriers and its passengers. Despite these increases, the Authority’s average aeronautical fee rates remain among the lowest in Canada.

Concession revenues of $15.6 million increased 1.9% as compared to 2018. Favourable volumes in private transportation company services, car rentals and hotel revenues were strong contributors. These favourable volumes were offset by expected declines in the food and retail segment due to the start of the concession refresh program in the second half of 2019 affecting food and retail concessions throughout the main passenger terminal building. Significant renovation and construction works are planned throughout 2020 with new retail and food offerings coming online in the second half of 2020.

Car parking revenues decreased slightly to $16.0 million from $16.1 million in 2018, a decrease of $0.1 million or 0.6%. While passenger growth was flat with 2018 levels, a small decline in overall transaction volumes in 2019 was offset by parking rate price increases on January 1, 2019. The Authority is monitoring the impact of the various competing options available to passengers. The availability of taxi brokerage, private transportation company services, cell phone parking and other public transit options may be impacting transaction volumes. There is an ongoing effort to adjust the rate structure based on optimizing pricing models and revenues based on passengers’ profiles, stay durations and their specific needs as domestic passengers tend to park for shorter periods for business purpose day trips while leisure, transborder and international passengers tend to park at the Airport for longer periods.

Other revenues increased by $0.7 million over 2018. Higher utility recoveries from tenants, higher yields on cash balances and the impact of new accounting standards on lease accounting (IFRS16) effective in 2019 were the prime factors for the increase.

Expenses

Total expenses before depreciation increased by 2.1% to $101.8 million from of $99.8 million in 2018.

2019 2018 Change
Expenses by category
(IN THOUSANDS OF CANADIAN DOLLARS)
$ $ $ %
Interest 20,531 20,818 (287) (1.4)
Ground rent 10,530 10,553 (23) (0.2)
Materials, supplies and services 40,429 38,741 1,688 4.4
Salaries and benefits 24,873 24,425 448 1.8
Payments in lieu of municipal taxes 5,475 5,214 261 5.0
101,838 99,751 2,123 2.1

Interest expense reflected in the statement of operations results from borrowing to invest in the Authority’s capital programs. Interest expense has decreased $0.3 million in 2019. The lower cost of debt service is a direct benefit of the year over year decline in long term debt achieved through the scheduled semi-annual principal instalments on the Series B Revenue Bonds.

Rent payable to the Government of Canada decreased by 0.2% to $10.5 million in 2019 due to lower eligible revenues in 2019 compared to 2018. The Authority operates the Airport under the terms of a ground lease (as amended, the “Lease”) with the Government of Canada that sets out the formula for calculating annual rent. The amount reflected as 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. 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 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 million as follows:

Gross revenues Rent payable
%
Cumulative maximum rent
$
On the first $5 million of revenues 0.0 0
On the next $5 million 1.0 50,000
On the next $15 million 5.0 800,000
On the next $75 million 8.0 6,800,000
On the next $150 million 10.0 21,800,000
On revenues over $250 million 12.0

Based on the Authority’s projections, estimated rent payments under the Lease for the next five years are as follows:

2020 $11.0 million
2021 $11.5 million
2022 $12.0 million
2023 $12.6 million
2024 $13.1 million

The cost of materials, supplies and services increased $1.7 million to $40.4 million in 2019. Contracted and professional services increased $1.3 million year over year with increases in policing and security, baggage handling services, maintenance and cleaning contracts and other operational services. Repairs and related materials increased $0.4 million over the prior year due to costs incurred for maintaining escalators, elevators, conveyors and heating/air conditioning equipment.

The cost of salaries and benefits increased $0.4 million to $24.9 million in 2019, an increase of 1.8%. Annual contracted increases for salaries and benefit programs were offset by slower hiring for vacant roles and lower pension and other benefit costs in 2019.

Payments in lieu of municipal taxes have increased by 5.0% 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 per passenger 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 $5.5 million paid for 2019 reflects this prescribed calculation. Payments in lieu of taxes will increase in 2020 by 0.5% from the 2019 amount based on this prescribed calculation.

Depreciation reflects the allocation of cost over the useful life of the assets and investments in property, plant and equipment. In 2019, depreciation of $31.2 million was $0.1 million lower than 2018. Incremental depreciation related to capital projects completed in 2018 and 2019 including departure check-in upgrade, apron and taxiway reconstruction and expansion, major fleet vehicles, runway approach lighting and information technology initiatives were offset by lower levels of accelerated depreciation related to asset disposals in 2019 as compared to 2018.

Summary of quarterly 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:

Quarter ended
(IN MILLIONS OF CANADIAN DOLLARS)
2018
$
2019
$
March June Sept. Dec. March June Sept. Dec.
Revenues 34.5 33.7 35.3 34.6 35.4 34.3 34.5 33.9
Expenses 25.2 24.1 23.1 27.4 26.8 24.8 23.1 27.2
Earnings before depreciation 9.3 9.6 12.2 7.2 8.6 9.5 11.4 6.7
Depreciation 7.5 7.4 8.2 8.2 7.5 7.6 7.7 8.3
Net earnings (loss) 1.8 2.2 4.0 (1.0) 1.1 1.9 3.7 (1.6)

Capital expenditures

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 2019, the Authority invested $36.3 million in its capital expenditure programs. Significant spending on capital projects include CATSA pre-board screening relocation at $8.6 million, apron and taxiway restoration at $6.8 million, main terminal building enhancements and upgrades at $4.9 million, Combined Services Building upgrades at $3.1 million and LRT Phase 2 – station infrastructure at $2.6 million.

Contractual obligations

In addition to rent payments noted above, the Authority has operating commitments in the ordinary course of business requiring payments, which diminish as contracts expire, as follows:

Payments for years ending December 31
(IN THOUSANDS OF CANADIAN DOLLARS)
Total 2020 2021 2022 2023 2024 Thereafter
Long-term debt (Note 1) 418,667 8,753 13,116 14,023 14,988 16,014 351,773
Operating commitments 25,235 13,518 6,240 3,964 1,508 5
Capital commitments 25,608 25,608
Total contractual obligations 469,510 47,879 19,356 17,987 16,496 16,019 351,773

Note 1 – Further information on interest rates and maturity dates on long-term debt are provided in Note 7 to the Authority’s audited financial statements.

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 investment 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 million in committed credit facilities (“Credit Facilities”) with two Canadian banks. The 364-day Credit Facilities that expired on October 13, 2019 have been extended for another 364-day term expiring on October 13, 2020. The following table summarizes the amounts available under each of these Credit Facilities, along with their related expiry dates and intended purposes:

Type of Facility Dec 31, 2019
(IN MILLIONS OF CANADIAN DOLLARS)
Dec 31, 2018
(IN MILLIONS OF CANADIAN DOLLARS)
Maturity Purpose
Revolver – 364-Day 40.0 40.0 October 13, 2020 General corporate and capital expenditures
USD Contingency ($10 million USD) 14.0 14.0 October 13, 2020 Interest rate hedging
Letter of Credit 6.0 6.0 October 13, 2020 Letter of credit and guarantee
Revolver – 5-Year 80.0 80.0 May 15, 2020 General corporate and capital expenditures
Total 140.0 140.0

The Authority’s cash and cash equivalents decreased by $8.8 million during 2019 to $21.7 million as at December 31, 2019.

The Authority issues revenue bonds (collectively, “Bonds”) under a trust indenture dated May 24, 2002 (as amended or supplemented, the “Master Trust Indenture”) setting out the terms of all debt, including bank facilities and revenue bonds. Under the Master Trust Indenture, the Authority is required to maintain with the trustee under the Master Trust Indenture (“Trustee”), a debt service fund (“Debt Service Reserve Fund”) equal to six months’ debt service in the form of cash, qualified investments or letter of credit. At December 31, 2019, the balance of cash and qualified investments held in the Debt Service Reserve Fund for the Series B Amortizing Revenue Bonds was $6.7 million. Furthermore, in order to satisfy the Debt Service Reserve Fund requirement for the Series E Amortizing Revenue Bonds, an irrevocable standby letter of credit in favour of the Trustee in the amount of $5.9 million has been drawn from the Authority’s Credit Facility.

The Master Trust Indenture also requires that the Authority maintain an operating fund (“Operating and Maintenance Reserve Fund”) in an amount equal to 25.0% 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, 2019, $16.3 million of the Authority’s Credit Facilities had been designated to the Operating and Maintenance Reserve Fund.

At December 31, 2019, the Authority was in full compliance with the provisions of its debt facilities, including the Master Trust Indenture provisions related to reserve funds, the flow of funds and the rate covenant.

During 2019, S&P Global and Moody’s reaffirmed the Authority’s credit ratings with stable outlooks in respect of the Authority’s Bonds under the Master Trust Indenture at A+ and Aa3, respectively.

Balance sheet and other highlights

The Authority’s accounts receivables increased $1.5 million at December 31, 2019 and is a return to expected levels as the balance at December 31, 2018 was lower than usual due to an early receipt of $2.3 million from one major carrier in late December 2018.

Accounts payable and accrued liabilities decreased by $2.5 million to $16.2 million at December 31, 2019 and was due to a large payment run late in December 2019 with a resulting lower level of trade payable balances as compared to December 2018.

Risks and uncertainties

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 trends, government regulation, price of airfares, additional taxes on airline tickets, leakage of passengers to nearby airports, alternative modes of travel 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 93.6% (93.4% in 2018) of the passenger activity originates or terminates at the Airport, as opposed to connecting through the Airport. 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 and government travellers, 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.