2021 Financial Review

Overall performance

The Authority recorded a loss of $5.4 million before depreciation for the year ended December 31, 2021, and compares to a loss of $19.5 million for the year ended December 31, 2020. The Authority recorded depreciation of $31.3 million in 2021 compared to $31.7 million in 2020, 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 $36.7 million in 2021 compared to a net loss of $51.2 million in 2020.

The Authority’s net operating results for the three years ended December 31, 2021 are summarized as follows:

The COVID-19 pandemic continued to weigh heavily on the Ottawa International Airport (Airport) and the Canadian and global travel industry throughout 2021. The emergence of vaccines in the early part of the year together with favourable seasonal trends, led to improvements in caseload levels and the release of some public health restrictions in the middle part of the year. The positive trajectory was then impacted negatively by a significant variant of concern and which led to further public health and government travel restrictions late in the fiscal year and which suppressed travel demand through the holiday season and into the early stages of 2022. Consequently, air carriers responded by cancelling and consolidating routes and delaying their efforts to increase capacity to match emerging demand. In 2021, passenger levels were 14,1% lower than 2020 and 77,1% lower than 2019.

There are ranges of opinions as to the pace of the air travel recovery and, 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 continues to have a significant negative impact on the Authority’s business and results of operations, including aeronautical and commercial revenues and Airport Improvement Fees. The pandemic may also impact the cost of capital in the future, which may arise from disrupted credit markets and negative credit rating actions.

At the onset of the COVID 19 pandemic in 2020, the Authority quickly implemented significant reductions to operating and capital expenditures, including staff reductions. As flight schedules slowly get back to pre-pandemic levels, the Authority is also reinstating terminal services and adjusting staffing levels responsibly, as required.

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 Government of Canada (GOC) support programs that will help reduce costs, preserve liquidity and engage stakeholders:

1. Canada Emergency Wage Subsidy (CEWS): In 2020, the GOC announced the CEWS program, which provided a wage subsidy to eligible employers for the period from March 15, 2020 to October 2021. For 2021, the Authority qualified with the program’s requirements and resulted in benefits of $5.0 million (2020 – $6.6 million).
2. Ground rent waiver: In 2020, the GOC announced that, for the period from March 1, 2020, to December 31, 2020, and for the entire 2021 calendar year, it would waive the Authority’s lease requirements for the payment of ground rent to help with the COVID-19 pandemic. For 2021, the Authority saved $3.3 million (2020 – $2.2 million) in ground rent that would have been otherwise payable pursuant to its GOC ground lease requirements.
3. Airport Relief Fund (ARF) Program: In 2021, the GOC announced a support program to provide financial relief to certain airports to help maintain operations. The Authority received $5.7 million as part of the program’s prescribed funding formula based on airport size.
4. Airport Critical Infrastructure Program (ACIP): In 2021, the GOC announced a support program to assist financially Canada’s larger airports with investments in critical infrastructure related to safety, security or connectivity. In 2021, the Authority qualified for $9.0 million in ACIP funding to support capital spending on two major construction projects. During 2021, $2.6 million of this subsidy was applied as a reduction to capitalized construction costs included in property, plant and equipment. The balance of the approved ACIP funding will be applied to project-specific construction costs incurred during 2022 and 2023.

Domestic passenger volumes were 10.8% higher on a year-over-year basis. The positive trends in COVID-19 pandemic caseloads in the early part of 2021 led to the relaxing of public health and travel restrictions across provincial and federal jurisdictions. This resulted in increased domestic flight activity and passenger volumes on a year-over-year basis. The emergence of a significant variant of concern late in 2021 impacted the holiday travel season negatively, and the Authority continues to monitor the recovery trajectory in 2022.

Transborder and international passengers decreased 93.1% and 90.7%, respectively, on a year-over-year basis. Ongoing restrictions on direct flights from the Airport to and from US and international destinations have eliminated all travel activity from these sectors from March 2020 to September 2021. Direct flights from the Airport to and from US and international destinations resumed with a small increase in flight activity to US and sun destinations in the latter half of Q4 2021.

By sector, a quarterly view of 2021 passenger volumes compared to comparable quarters in 2020 is 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 2021, the number of landed seats decreased by 9.7% from the comparable period in 2020. The lower rate of decrease in seat volumes than experienced in passenger volumes (9.7% vs 14.1%) in 2021 is attributable partly to lower load factors experienced during this pandemic period with air carriers maintaining higher capacity into the Airport as they anticipate and adjust to demand for air travel.

Domestic landed seats increased by 9.4%, while transborder and international landed seats decreased by 90.6% and 83.4%, respectively, on a year-over-year basis. Variances in the sectors mirror the variances experienced in passenger volumes, as explained above.

Revenues

In 2021, total revenues increased $8.1 million to $56.6 million from $48.6 million in 2020.

Airport Improvement Fees (AIF) $19.3 million in 2021 increased $4.7 million compared to 2020. The increase is attributable to the AIF rates moving from $28 to $35 per enplaned passenger effective June 1, 2021, and offset by the unfavourable impact of the 14.1% decrease in passenger volume on a year-over-year basis. Passengers connecting through Ottawa are exempt from the AIF. Under an agreement with the air carriers, AIF is collected by the air carriers in the price of a ticket and are remitted to the Authority on an estimated basis, net of air carrier administration fees of 7%, 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 $13.0 million, including terminal and landing fees, loading bridge charges and security fees charged to air carriers, are 10.9% lower than 2020. The year-over-year decrease of 9.7% in landed seats in 2021 was partially offset by the favourable impact of the 3.0% increase in aeronautical fee rates effective February 1, 2021.

Revenues of $5.9 million from concessions decreased by 13.3% in 2021 as compared to the same period in 2020. The increase is attributable to higher demand for ground transportation and car rentals despite the lower passenger volumes combined with market driven price increases in car rental rates.

Parking revenues of $2.7 million are $1.8 million lower than 2020 and represent a decrease of 39.9%. A promotional offer for free daily parking from September to December 2021 accounted for $0.4 million of the decrease. The remainder of the decrease was attributable to the impact of the year-over-year decline of 14.1% in passenger volumes together with a notable shift of users from parking to ground transportation services.

Other revenues increased by $6.0 million from 2020. This is due primarily to receiving $5.7 million in GOC pandemic support through the ARF program in 2021.

Expenses

Total expenses before depreciation decreased by 8.9% to $62.0 million from $68.1 million in 2020.

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 increased by $1.3 million in 2021 compared to 2020. This increase is related to the interest on the $100 million Series F Revenue Bonds issued on May 5, 2021, at 2.698% and due on May 5, 2031.

On March 31, 2020, the GOC announced its decision to waive ground rent obligations 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 throughout the 2020 fiscal year.

Furthermore, the GOC announced on November 30, 2020, in response to the prolonged decline in air traffic and in recognition of the significant financial impact on airport authorities, that the ground rent waiver for the Airport was extended for the entire 2021 calendar year. This represents a benefit of $3.3 million in waived ground rent that would have otherwise been payable in 2021 based on the application of prescribed rates throughout the 2021 fiscal year.

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:

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

The cost of materials, supplies and services decreased $2.5 million as compared to 2020. Costs associated with the 2021 winter season decreased $0.8 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 chemicals, materials and repairs. Contract and professional fees decreased by $0.9 million as all non-essential spending was suspended. A further reduction of $0.8 million in expenses related to lower utility, repair, terminal building operations and service providers corresponded with the significant reduction in passenger volumes.

The cost of salaries and benefits decreased by $0.4 million in 2021 compared to 2020. Favourable savings arising from the staff reduction in 2020, slower hiring for vacant roles, lower overtime and lower pension and other benefit costs was offset by the unfavourable impact of lower contributions from the CEWS support program as compared to 2020 (2021 – $4.8 million vs. 2020 – $6.2 million).

Payments in lieu of municipal taxes (PILT) have decreased by 73.3% and reflects the impact of the provincial legislation, which prescribes the calculation of this payment. Under this legislation, PILT 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 $1.5 million paid for 2021 reflects this prescribed calculation.

Depreciation of $31.3 million in 2021 is similar to the $31.7 million recorded in 2020. The decrease over 2020 is due principally to a lower level of disposals in 2021 and related residual depreciation as compared to 2020.

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 has reduced planned capital expenditures with a focus on a small number of high-priority critical infrastructure programs. During 2021, the Authority invested $12.4 million in its capital expenditure program with $8.7 million on the LRT Airport station, $0.9 million on Apron and taxiway refurbishment, $0.8 million on a new parking revenue control system and $2.0 million on Terminal enhancements and major fleet additions. After reflecting the impact of $2.6 million in federal support related to the ACIP program, the Authority invested a net amount of $9.8 million in its capital program.

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 increased by $37.1 million during 2021 to $47.7 million as of December 31, 2021.

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.

On May 5, 2021, the Authority completed the issuance of the Series F $100.0 million Revenue Bonds at 2.698% due on May 5, 2031. Part of the net proceeds from this offering were used for the repayment of $35.0 million in bank indebtedness and $1.4 million was allocated to satisfy the Debt Service Reserve Fund requirement for the Series F Revenue Bonds.

At December 31, 2021, the balance of cash and qualified investments held in the Debt Service Reserve Fund for the Series B Amortizing Revenue Bonds and the Series F Revenue Bonds was $8.3 million.

Furthermore, in order to satisfy the Debt Service Reserve Fund requirement for the Series E Amortizing Revenue Bonds, $9.5 million of the Authority’s Credit Facility has been designated to an irrevocable standby letter of credit in favour of the Trustee.

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, 2021, $11.0 million of the Authority’s Credit Facilities had been allocated exclusively to the Operating and Maintenance Reserve Fund.

For the year ended December 31, 2020, due to the impact of the COVID-19 pandemic on the Authority’s 2020 financial results, the Authority was not compliant with the debt service coverage ratio. However, the Authority remained in compliance with the gross debt service coverage ratio.

On April 23, 2021, the Authority received the support of bondholders to waive temporarily, for the fiscal years ended December 31, 2021 and 2022, the requirement to comply with the rate covenants [debt service coverage ratio and gross debt service coverage ratio], the additional indebtedness covenant and the requirement to comply with the rate covenant for the sale of assets. Accordingly, the Authority is compliant with all provisions of its debt facilities, including the Master Trust Indenture provisions related to reserve funds, the flow of funds and the rate covenant requirements, as consented by the bondholders for the period ended December 31, 2021.

In 2021, Moody’s reaffirmed the Authority’s credit rating of Aa3 in respect of the Authority’s Bonds under the Master Trust Indenture. In January 2021, S&P Global issued event-based ratings action on the Authority and several other large airport authorities in Canada. The result of this 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. Both Moody’s and S&P Global updated its outlook for the Authority from “stable” to “negative” given the uncertainty of the rate and pace of the recovery of passenger volumes. This is not expected to cause any material impact to the Authority.

Balance sheet and other highlights

Accounts receivables increased $4.1 million to $9.4 million at December 31, 2021, and was consistent with the higher air carrier traffic and passenger volumes and their related receivables in 2021.

Risks and uncertainties

COVID-19 Pandemic

Given the evolving situation with the COVID-19 pandemic and the uncertain impact on the economy, 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 reviews frequently 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. A number of factors, including a 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 (97.8% – 2021; 96.9% – 2020) 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.