REED

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Presentation
Financing Major Airport Expansions in the U.S.
San Diego, CAMarch 30, 2006
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Airports are real businesses

• All major U.S. airports are self-sustainingnot
  subsidized by taxpayers and/or government
• Economic impacts of individual airport to the
  local community (e.g. jobs, revenues) are
  typically measured in the billions of dollars
• Airports look to maximize revenue and yield much
  like airlines
• Airports do compete for passengers and air
  service against other airports
• Airport initiatives similar to those of
  commercial enterprises
• Focus on customer service and enhance the travel
  experience
• Provide a safe and secure environment
• Maintain cost competitiveness
• Increase service offering (e.g.,
  frequency/destination breadth of air service, new
  retail outlets, etc.)

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Several key frameworks govern an airports
financial structure
Financial Structure Framework
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AIRPORT FINANCIAL STRUCTURE
FEDERAL LAW/GOVERNANCE
USE LEASE AGREEMENT

• Revenue diversion prohibition
• Rate-making guidance and restrictions
• Funding grants
• Passenger Facility Charges

• Foundation of airport financial structure
• Rate-making methodology for airline tenants
• Term of agreement

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BOND INDENTURE/ ORDINANCE

• Allows airport to access capital markets (i.e.,
  bond issues)
• Provides security basis for bondholders
• Sets debt coverage requirements and flow of funds

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Federal governance regulations and standards
provide the first key framework to an airports
financial structure

• All commercial service airports in the U.S. are
  governed by federal laws and standards on a
  variety of financial issues
• Revenue diversion Revenues generated by a
  federally obligated airport must be expended for
  the capital or operating costs of the airport
• Rate-making Fees charged to air carriers for
  usage of airport facilities must be "fair and
  reasonable"
• Among other items, Federal law allows airports to
  charge Passenger Facility Charges (PFCs) which
  are airport revenues to be used to fund airport
  capital projects
• Certain assurances to comply with applicable
  federal law and other standards must be provided
  to receive federal funding and grant
  participation
• Federal government provides certain user-based
  funding grants (Airport Improvement ProgramAIP)
  to airports in the U.S.
• Entitlement Funds
• Discretionary Grants
• Letter-of-Intent (LOI) Funds

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The second key framework to an airports
financial structure, bond indentures, allows the
airport operator to access capital markets

• Airports are capital intensive operations with a
  large portion of projects being funded by the
  issuance of debt obligations
• Most airports in the U.S. are self sustaining and
  as such are operated on the revenues created
  within their respective airport system
• An airports bond indenture provides the
  security basis for the bondholder (or investor
  in the airports outstanding bonds)
• A flow of funds for the use of airport revenues
  is defined in the bond indenture which outlines
  the priority of revenue use for certain
  obligations
• As an extra means of security to the bondholder,
  airport bond indentures typically include debt
  service coverage requirements and debt service
  reserve funds

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Third, Use Lease Agreements provide the
foundation for airport finances

• Term of agreement
• Rate-making methodology (i.e., how airline
  tenants are charged for using facilities)
• Leased premises (Exclusive, Preferential,
  Common-Use)
• Majority-in-Interest provisions
• Provides air carriers certain voting rights on
  implementation of capital projects
• Voting right typically based on activity market
  share
• Budget process and time frame outlined
• Use Lease Agreements reflect each individual
  airports unique operating profileone size does
  not fit all

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The airports rate charges methodology is a
fundamental provision of the use lease
agreement

• Two basic charging methodologies (or some
  combination of both)

Residual
Revenues
Signatory Airline Fees Concessions/Parking N
on-Signatory Airline Fees

Expenses
- Operations and Maintenance

Additional Fee To Net Zero
Refund To Net Zero
Transfer Items
- Debt Services PFC/Credits/LOI - Fund Deposits
Negative Sum (Deficit)
Positive Sum (Surplus)
Increase Signatory Landing Fee
Refund to Signatory Airlines
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and is the foundation of the airports finances

• Two basic charging methodologies (or some
  combination of both)

Compensatory
Revenues
Signatory Airline Fees Concessions/Parking N
on-Signatory Airline Fees

Expenses
- Operations and Maintenance

Transfer Items
- Debt Services PFC/Credits/LOI - Fund Deposits
Positive or Negative Sum
The Airport does not have the ability to increase
rates in case of a deficit. However, the Airport
keeps any excess (i.e. not refunded to airline)
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The funding needs of the airport are typically
developed and provided for in a Capital
Improvement Program (CIP)

• The CIP represents the strategy and operational
  implementation for airport development
• A CIP can involve a series of projects or one
  large project (e.g. a new airport)
• Completion of the CIP requires the development of
  a Plan of Finance
• Sources of funds
• Uses of funds (CIP projects and costs of the
  financing)
• Timing/scheduling considerations (i.e.,
  construction draws)
• Implementation initiatives include those
  activities related to design/construction,
  financing structure, program management, etc.

Capital Improvement Program
Plan of Finance
Implementation
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The Plan of Finance taps into a wide range of
funding sources

• General Airport Revenue Bonds (GARBs)
• Airport revenues (e.g., airline rates charges,
  parking revenues, concession revenues, etc) are
  pledged for repayment of bond debt service
• Passenger Facility Charges and federal AIP grants
  also used to pay debt service and/or reimburse
  project costs
• General Obligation Bonds (GOs)
• Special Facility Revenue Bonds
• Passenger Facility Charges (PFCs)
• Federal Airport Improvement Program (AIP)
• Customer Facility Charges (i.e., rental car
  facilities)
• Airport Discretionary Funds
• State and Local Grants

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Passenger Facility Charges (PFCs) are a major
funding source for airport capital improvements
and are only collected from eligible enplanements
Eligible
Noneligible
Determine Eligibility

• Airline crew
• Non-revenue Frequent Flier tickets
• Enplanements in excess of 2 airports for any one
  trip (no more than two PFCs per one-way trip and
  two in each direction of a round trip)
• Flights defined as Essential Air Service
• Certain flights in Hawaii and Alaska on planes
  with a capacity of less than 60 passengers

• All revenue enplaned passengers

Airline Collects Fee From Passenger

• PFC charges are built into the ticket price
• Each airport may charge/collect up to 4.50

Airline Retains 0.11 Administrative Fee

• PFC Regulations allow airlines to retain .11 of
  each PFC collected to cover collection and
  accounting costs
• Airlines may also retain interest earnings on
  PFCs while in their possession

Airline Remits PFC to Airport

• Airlines are required to remit PFC revenues on a
  monthly basis
• Airlines hold PFC revenues in trust with no
  property interest

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PFC funds may be used in one of two ways, on a
Pay-as-You-Go (PAYG) cash basis or on a leveraged
basis

• All projects must be eligible in accordance with
  PFC regulations to use PFC revenues

Pay As You Go PFC
Leveraged PFC

• PFC project costs are paid on a cash basis
• PAYG is the most efficient way to pay for some
  projects
• PFCs are used to pay direct project costs
  without finance charges
• Project scope and timing limited by PFC income
  flow and market factors

• PFC revenues are used to service debt related to
  eligible projects
• Pledges future PFC revenue to pay for large-scale
  and longer-term projects
• Enables the construction of larger projects for
  which current funds are not available
• Allows the Airport to spread costs out over time
• Increases overall cost of project due to interest
  charges

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AIP is the primary mechanism for direct federal
funding of airport capital projects
AIP Federal Funds
Funding Category

• Apportionments
• Small Airport Fund
• Discretionary Fund
• Set-Asides

Airport Improvement Program(In Millions)
Fiscal Years
Source FAA Office of Airport Planning and
Programming
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Key stakeholders in airport development and
expansion

• Local communities/region
• Traveling public
• State and federal government
• Investors
• Concessionaires
• Other airport tenants

And, of course, the Airlines
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Role of airlines

• Cost control and/or cost reduction is key
  consideration in todays aviation environment
• Airlines also focus on operational flexibility
  and operational costs inherent in new airport
  design
• Competitive access, while not the role of the
  airlines, is part of the overall plan for any new
  airport facilities
• Airline approval rights on airport capital
  projects (or lack thereof) are typically spelled
  out in the Use Lease Agreement

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Case examples of airport development
Denver International Airport
Austin-Bergstrom International Airport
Detroit Metropolitan International Airport
New Airport
New Airport
New Terminal Complex/Runway
Development
New Site
Air Force Base Conversion
Greenfield SiteExisting Airport
Location
5 Runways, 3 Concourses94 Gates, 3 Module
Terminal,Automated Baggage System
1 Runway, 600,000 sq. ft.Terminal Building, 25
Gates, 2,500 Space Parking Garage
1 Runway, 2 Concourses97 Gates, Terminal
Building,11,000 Space Garage
Key Project Elements
Opened Feb 1995
Opened May 1999
Opened Feb 2002
Opening
581 Million
4.3 Billion
1.2 Billion
Airport Cost
38 Million
Other Cost1
0.6 Billion
200 Million
Total Cost
4.9 Billion
781 Million
1.2 Billion
1 Includes related costs borne by third parties
(e.g., FAA, special airline facilities, etc).
Estimate.
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with varying impacts to airline rates charges
Airline Cost Per Enplaned Passenger (Pre- and
Post-Development)
ILLUSTRATIVE
Airline Cost Per EnplanedPassenger
Airport
Source Respective airports
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Cost competitiveness of airport facilities a key
consideration when developing/implementing the
CIPs Plan of Finance
Airline Cost per Enplaned PassengerConnecting
Hub Airports (2005)
More Expensive
Airline Cost per Enplaned Passenger
Less Expensive
Airport
Note For certain other airports, airline paid-in
costs are not in the airports published cost
(e.g., special facilities bonds, certain terminal
maintenance contracts, etc.) Source Respective
Airport Official Statements SAN-San Diego County
Regional Airport Authority
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Airline cost per enplaned passenger for select
origination and destination (OD) airports
Airline Cost per Enplaned PassengerSelect OD
Airports (2005)
Airline Cost per Enplaned Passenger
Airport
Note For certain other airports, airline paid-in
costs are not in the airports published cost
(e.g., special facilities bonds, certain terminal
maintenance contracts, etc.) (1) Projected cost
per enplaned passenger for 2005 Source
Respective airports
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Conclusion

• Key Developing and implementing an efficient
  Plan of Finance
• while maintaining cost competitiveness of new
  airport facilities.