2020 Financial Review

Overall performance

The Authority recorded a loss of $19.5 million before depreciation for the year ended December 31, 2020 and compares to earnings of $36.2 million for the year ended December 31, 2019. The Authority recorded depreciation of $31.7 million in 2020 compared to $31.1 million in 2019, reflecting depreciation of the terminal building, airfield facilities and other assets over their estimated economic lives. After subtracting depreciation, the Authority generated a net loss of $51.2 million in 2020 compared to net earnings of $5.1 million in 2019.

The Authority’s net operating results for the three years ended December 31, 2020 are summarized as follows:

The COVID-19 global pandemic and resulting economic contraction has had and is expected to continue to have, a negative impact on demand for air travel. The Ottawa International Airport (Airport) experienced an 87.5% decline in passenger volumes during the period from March 2020 to December 2020 as compared to the same periods in 2019. This is due to a combination of widespread public health concerns compounded by travel advisories and restrictions by governments as well as an emerging economic contraction. Consequently, air carriers responded by cancelling routes, laying off staff and grounding aircraft. There is a range of opinions as to the pace of the air travel recovery but, given the unprecedented nature of this event, there is significant uncertainty on the length and shape of the recovery. The Authority and numerous industry sources predict that passenger aviation may not return to pre-pandemic levels for at least three to five years. This reduced activity is having a significant negative impact on the Authority’s business and results of operations, including aeronautical, commercial revenues and airport improvement fees. The pandemic will also impact the cost of capital in the future, which may arise from disrupted credit markets and negative credit rating actions.

The Authority and the Canadian Airports Council are actively engaging with federal, provincial and municipal governments to discuss risks to the sector and related financial support. The Authority has participated in the following COVID-19 pandemic Federal Government support programs that will help reduce costs, preserve liquidity and engage stakeholders:

1. Canada Emergency Wage Subsidy (CEWS): On March 27, 2020, the Government of Canada (GOC) announced the CEWS program which provides a 75% wage subsidy (up to a maximum of $847 per week per employee) to eligible employers for the period from March 15, 2020 to December 19, 2020. The program has been extended to June 2021. For 2020, the Authority qualified with the program’s requirements and resulted in benefits of $6.6 million.
2. Ground rent waiver: On March 31, 2020, the GOC announced that, for the period from March 1, 2020 to December 31, 2020, it would waive lease requirements for the payment of ground rent to help the air transportation sector deal with the COVID-19 pandemic. On November 30, 2020, the GOC announced that the requirement for ground rent would also be waived for the Authority for the entire 2021 calendar year. For 2020, the Authority saved $2.2 million in-ground rent that would have been otherwise payable pursuant to its GOC ground lease requirements.
3. Canada Emergency Commercial Rent Assistance Program (CECRA): The CECRA program allows qualifying commercial tenants to benefit from this program and requires the Authority to forgive a proportion of rent receivable from those tenants. The Authority’s portion of rent forgiven to qualifying tenants was $0.1 million.

Results of Operations

Operating activities

During 2020, the Airport saw a 73.3% decline in passenger volumes compared to 2019 and 2018.

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

Domestic passenger volumes were 74.2% lower on a year over year basis. Despite seeing favourable growth in passenger volumes in January and February 2020, volumes decreased 86.6% year over year from mid-March to December 2020 due to the COVID-19 pandemic. Since mid-March, Canada’s airlines have significantly scaled back air service in response to reduced demand fueled by government travel restrictions, public health concerns and the resulting economic downturn.

Transborder volumes were 76.2% lower in 2020 compared to 2019. After experiencing some erosion in year over year passenger flows early in 2020, the pandemic and the resulting Canada – U.S. border limitations led to the inevitable suspension of all airport non-stop service to the U.S. Only Canada’s four largest airports (Toronto, Vancouver, Montreal and Calgary) maintained U.S. access.

International traffic decreased 60.5% from the comparable period in 2019. Despite a strong start in service to many Mexican and Caribbean sunshine destinations by Air Canada, Sunwing and Air Transat, these gains were quickly eroded by the disruption caused by the COVID-19 pandemic and the withdrawal of all international service starting in April 2020.

By sector, a quarterly view of 2020 passenger volumes compared to comparable quarters in 2019 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 drivers of aeronautical revenue. In 2020, the number of landed seats decreased by 67.5% from the comparable period in 2019.

Domestic, transborder and international landed seats decreased 67.5%, 72.9% and 58.7%, respectively, on a year over year basis. Variances in the sectors mirror the variances experienced in passenger volumes, as explained above.

Airport improvement fees (AIF) of $14.6 million in 2020 decreased by 72.9% from the comparable period in 2019. The decrease is attributable to the 73.3% year over year decrease in passenger volume due to the COVID-19 pandemic. This decrease is offset partially by revenue generated by an increase in AIF from $23 to $28 per enplaned passenger effective October 1, 2020. Passengers connecting through Ottawa are exempt from the AIF. Under an agreement with the air carriers, the AIF is included by the air carriers in the price of a ticket and paid to the Authority on an estimated basis, net of air carrier administration fees of 7% (6% in 2019), on the first of the month following the month of enplanement of passengers. Final settlement based on actual passenger enplanements occurs at the end of the month following the month of enplanement.

Aeronautical revenues of $14.7 million, including terminal and landing fees, loading bridge charges and security fees charged to air carriers are 64.6% lower than the comparable period in 2019. The year-over-year decrease of 67.5% in landed seats in 2020 is offset partially by the impact of the 3% increase in aeronautical fee rates effective February 1, 2020.

Revenues of $5.2 million from concessions decreased by 66.7% in 2020 as compared to the same period in 2019. The decrease was attributable to the impact of the COVID-19 pandemic and the lower passenger volumes as described above and the corresponding decreases in spending on food, retail and ground transportation services.

Parking revenues of $4.5 million are $11.5 million lower in 2020 compared to 2019 and the 72% decrease year over year is largely in line with the 73.3% decline in passenger volumes in 2020.

Other revenues decreased by $1.5 million from 2019. Lower utility recoveries from tenants, employee parking and lower interest on reduced cash balances were the main contributors to the year-over-year decrease.

Interest expense reflected in the statement of operations results from borrowing to invest in the Authority’s capital programs and includes interest incurred on bank indebtedness. Interest expense has decreased $0.3 million in 2020. 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 and E Amortizing Revenue Bonds.

The amount reflected as ground rent expense is estimated based on the prescribed rent formula as outlined below. On March 31, 2020, the GOC announced its decision to waive ground rent obligations for the period from March 1, 2020 to December 31, 2020. Accordingly, ground rent payable pursuant to the adjusted calculation for the months of January and February was recognized as the total ground rent for the year ended December 31, 2020. This represents a benefit of $2.2 million in waived ground rent that would have otherwise been payable in 2020 based on the application of prescribed rates on total 2020 revenues.

The Authority operates the Airport under the terms of a Ground Lease (as amended, the “Lease”) with the GOC 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% rate on annual revenues in excess of $250 million as follows:

The cost of materials, supplies and services decreased $15.8 million to $24.6 million in 2020. Costs associated with the 2020 winter season decreased $1.5 million over the prior year as there was a lower number of snow events and complex weather conditions that required less airfield maintenance expenses including fuel, winter maintenance runway and apron chemicals, materials and repairs. Contract and professional fees decreased by $7.0 million as all non-essential spending was suspended combined with major reductions in expenses related to terminal building operations and service providers to correspond with the significant reduction in passenger volumes. Reduced utility and repair expenses and AIF handling fees paid to air carriers as a result of a decrease in AIF revenues also contributed to lower expenses in 2020.

The cost of salaries and benefits decreased by $7.5 million in 2020 compared to the same period in 2019 including $6.2 million in benefits from the CEWS federal government pandemic support program. Furthermore, the Authority reduced the cost of salaries and benefits through a 15% cut in Authority positions as part of the effort to align staffing given the significant negative impact of the COVID-19 pandemic.

Payments in lieu of municipal taxes (PILT) have increased by 0.5% year over year and reflect the impact of the provincial legislation, which prescribes the calculation of this payment. Under this legislation, PILT is 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% over the previous year’s amount. The $5.5 million paid for 2020 reflects this prescribed calculation. PILT will decrease in 2021 by $3.9 million or 73.3% from the 2020 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 2020, depreciation of $31.7 million was $0.6 million higher than 2019. Incremental depreciation related to capital projects completed in 2019 and 2020 include departure check-in upgrade, Canadian Air Transport Security Authority (CATSA) security screening checkpoint relocation project, apron and taxiway reconstruction and refurbishment, major fleet vehicles, and information technology initiatives. Contributing to the increase in 2020 are amounts related to the disposal of certain infrastructure assets related to the CATSA relocation project that were written off prior to being fully depreciated.

Summary of quarterly results

The Authority’s quarterly results are influenced by passenger activity, aircraft movements, federal government travel restrictions and other factors such as weather 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:

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.

As a result of the unprecedented COVID-19 pandemic, the Authority took immediate steps at the outset of the pandemic to reduce planned capital expenditures by $31.4 million to focus on a limited number of essential projects. During the year, the Authority invested $16.8 million in core projects including the CATSA security screening checkpoint relocation at $7.2 million, concession base building centre court at $2.1 million, major fleet additions at $2.0 million, LRT Phase 2 – station infrastructure at $0.9 million and main terminal building enhancements and upgrades at $4.6 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:

The Authority’s cash and cash equivalents decreased by $11.0 million during 2020 to $10.7 million as at December 31, 2020.

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, 2020, the balance of cash and qualified investments held in the Debt Service Reserve Fund for the Series B Amortizing Revenue Bonds was $6.9 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 has been drawn from the available Credit Facilities. As of February 2, 2021, the value of the letter of credit has been increased from $5.9 million to $9.5 million in order to return to compliance on current and future debt service obligations.

The Master Trust Indenture also requires that the Authority maintain an operating fund (“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, 2020, $12.1 million of the Authority’s Credit Facilities had been allocated exclusively to the Operating and Maintenance Reserve Fund.

As at December 31, 2020, due to the impact of COVID-19 pandemic on the Authority’s 2020 financial results, the Authority was not compliant with the debt service coverage ratio, however, the Authority remains in compliance with the gross debt service coverage ratio. Pursuant to the Authority’s corporate documents, the Authority has the unfettered ability to raise its rates and charges as required to meet its obligations. Under the Master Trust Indenture, the Authority is required to take all lawful measures to revise its schedule of rates and charges necessary to achieve the ratios and has already taken action to increase rates in 2020 and 2021. Notwithstanding the temporary non-compliance with the debt service coverage ratio, the Authority continues to meet its debt service obligations. Except for the items discussed above, the Authority is compliant with all other provisions of its debt facilities, including the Master Trust Indenture provisions related to reserve funds, the flow of funds and rate covenant requirements.

During 2020, S&P Global and Moody’s reaffirmed the Authority’s credit ratings in respect of the Authority’s Bonds under the Master Trust Indenture at A+ and Aa3, respectively. On January 28, 2021, S&P Global issued event-based ratings action on the Authority and several other large airport authorities in Canada. The result of their latest review and expectations of the air travel industry and related financial analysis over the next twelve to twenty-four months caused S&P Global to downgrade the rating for the Authority from A+ to A. This is not expected to cause any material impact to the Authority.

Balance sheet and other highlights

Accounts receivables decreased $4.9 million to $5.2 million at December 31, 2020 as balances were impacted by lower revenues as a result of the pandemic. The Authority continues to monitor trade and other receivable balances during the COVID-19 pandemic and has made reasonable allowances for doubtful accounts and will adjust as conditions warrant. This decline was offset by $2.2 million in prepayments to the GOC made prior to the March 2020 announcement of the GOC COVID-19 ground rent relief measures. The Authority expects these amounts to be repaid in early 2021.

Accounts payable and accrued liabilities decreased $1.8 million to $14.3 million as at December 31, 2020. The decrease reflects reduced trade and capital program payables due to lower spending levels for both operating and capital expenditures in 2020.

Risks and uncertainties

COVID-19 Pandemic

Given the rapidly evolving situation with the COVID-19 pandemic and the emerging economic contraction, Management continues to analyze the extent of the financial impact, which is and continues to be material. While the full duration and scope of the pandemic is yet to be known, the Authority is focused on the long-term financial sustainability of the Airport. The Authority has implemented significant reductions in its operating expenditures, resource levels and capital investment programs. The Authority frequently reviews future operating, resource and capital requirements to align spending levels with emerging trends on the recovery of the air transportation sector to ensure long-term financial sustainability.

Aviation Activity

The Authority will continue to face certain risks beyond its control, which can have a significant impact on its financial condition. The Canadian airports model is based on the user community paying for all Authority activities with no government funding. Airports establish reasonable rates and charges to its user community and stakeholders that must ensure financial sustainability. Airport revenue is largely a function of passenger volumes. Air travel demand drives capacity and supply. The COVID-19 pandemic event together with global events of the past several years have all emphasized the volatile nature of aviation. A multitude of external factors impact the commercial aviation sector and include 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 financial uncertainty of the airline industry.

The financial health of commercial aviation is an ongoing risk to the Authority and the COVID-19 pandemic has put an even greater financial stress on the industry. As travel advisories and governmental restrictions are lifted over time, these actions, combined with increased consumer confidence, should result in increased flight frequencies and passenger volumes. The Authority cautions that the recovery will take years and that a number of factors including different pace of recovery for business and leisure travellers, traveller discretion on mode of travel and associated environmental impact and pace of economic recovery may present risks to the resumption of flights to their previous activity levels as well as to all previous destinations. The high level of origin and destination passengers activity (96.9% – 2020; 93.2% – 2019) continues to be a strong driver and predictor of the strength of the Ottawa market as flight activity resumes over the foreseeable future.

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.