Item 9a Supp
ITEM NO. 9a Supp DATE OF MEETING August 18, 2009 Aviation Division 2010-14 Business Plan Overview August 18, 2009 Outline Airline Industry Outlook for Sea-Tac Strategic Goals Challenges Strategies 2 Airline Industry Strength of economy is major driver of travel demand Amid worst recession in generations Airlines: Lower demand, particularly for "front of airplane" Revenue dropping faster than passenger levels Higher, volatile fuel costs Strategy: new fees and additional round of capacity cuts are latest additions to longstanding cost cutting Staggering losses since 2001 leaves little capability to absorb additional losses 3 Airline Industry Outlook As economy begins to recover, demand for travel will likely lag Have new video conferencing and webinar tools significantly altered demand for business travel? Experts say domestic industry still has too much capacity Recent airline announcements indicate capacity cuts are coming Will cuts be enough to improve profitability? If not: merger, bankruptcy, liquidation? How will needed capacity cuts affect Seattle market? Competition-induced capacity bubble on west coast? 4 Outlook for Sea-Tac Diverse mix of carriers Strong origin and destination base Reasonably balanced economic base in Puget Sound Largest carrier (Alaska) has strong cash position Conclusion: SEA traffic holding up better than most airports Do not expect "V" shaped rebound 5 Enplaned Passenger Forecast (Preliminary) 16,500 Year Assumption 2009 -7.0% 16,000 2010 0.0% 15,500 2011 1.0% 2012 2.5% 15,000 2013 2.7% 14,500 2014 2.7% 14,000 2007 2008 2009 2010 2011 2012 2013 2014 Not typical recovery; no sharp rebound Travel demand may pick up in late 2010 as economy improves, but capacity cuts and/or increased fares may dampen demand Growth rate in out years reflects FAA long-term forecast (2.7%) Continuing to review and refine forecast 6 Strategic Goals Given crisis facing airline industry, Sea-Tac has two overriding goals: 1. Manage airline costs Cost per Enplanement 2. Increase non-aeronautical Net Operating Income Debt service coverage Cash fund capital improvements 7 CPE History Cost Per Enplaned Passenger - CPE Growth in CPE $14.00 due to capital $12.00 $10.00 spending $8.00 CPE flat for three $6.00 years (2006-8) $4.00 2009 budget cuts $2.00 $0.00 mitigated increase 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 due to falling 13.00 enplanements 12.57 12.50 12.08 12.09 11.90 Challenge for 2010 12.00 11.50 is that most 2009 11.00 budget cuts were 10.50 not sustainable 10.00 2009 Bud 2009 Bud & 2009 Rev Bud & 2009 Fcst Rev Enpl Rev Enpl 8 Challenges Managing O&M Costs 2009 Budget $ (000's) AV % % Cost drivers include: Payroll 84,777 64% Square footage of terminal Outside Services 23,737 18% Acres of airfield pavement Utilities 13,571 10% Lineal feet of baggage system Other 10,580 8% Total Aviation 132,665 100% 70% Number of elevators and Corp/Police/CDD 56,856 30% escalators Total 189,521 100% Few costs directly tied to enplanements Payroll costs are major Need budget capacity for new component initiatives: Corporate costs also large, as AV receives ~ 70% of Corp Costs Part 150 study Implications: Maintenance for elevators & escalators Reducing costs requires reducing FTEs Wetlands adaptive Corporate decisions have management significant impact on airport 9 Challenges CIP and Debt Service Capital Spending $ millions Spent $3.5 billion since $450 $400 1999 $350 $300 While capital spending $250 $200 is falling, existing debt $150 service will rise through $100 $50 2013 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Use of PFCs to offset Existing Debt Service revenue bond debt 180,000 service is key to 160,000 140,000 managing CPE 120,000 100,000 Necessary new debt- 80,000 funded spending in 60,000 40,000 2010 and beyond will 20,000 add to cost structure 0 2007 2008 2009 2010 2011 2012 2013 2014 Gross Debt Service Net of PFC Offset 10 Challenges Capital Spending Needs Maintaining operational integrity of facility and equipment requires ongoing reinvestment Airline industry consolidation/cost saving strategies are driving facility changes & costs: Delta and NW on South Satellite Alaska move to North Satellite United and Continental? Capital costs drive increases in CPE challenge is to strike the right balance 11 Challenges Non-Aeronautical Non-Airline Revenues Per Enplanement Compared to recent years, 10.00 revenues per enplanement are 9.44 9.50 9.36 down slightly 9.18 9.19 9.16 9.00 Actual dollar decline compared 8.50 to 2008 is significant 8.00 Fewer passengers, spending fewer dollars 7.50 Parking: revenues down 17% 7.00 while passengers down 5% 6.50 Concessions: drop in sales per 6.00 enplanement 2005 2006 2007 2008 2009 Fcst Depressed market for property $ in Millions development -1.5% vs. 160 2008 Airline relocations have -7.6% vs. 150 -9.0% vs. 2008 depressed business for 2008 140 concessionaires on Concourses 130 A and D 120 110 Difficult time to invest in new 100 facilities/concepts 2008 2009 Budget Feb Fcst July Fcst 12 Strategies 1. Manage/reduce operating costs 2. Restore/develop/defend non-airline revenues 3. Prudent capital investments focusing on: Renewing existing assets Customer needs Common-use systems -- implemented opportunistically 13 Manage/Reduce Operating Costs Reducing O&M contributes to both strategic goals: Reduced airline costs, CPE Improves non-aeronautical NOI For 2010 budget, Aviation initiated business unit reviews and zero-based budget process to achieve 5% reduction target, Port implemented voluntary separation program (VSP) Identify non-critical functions Sustainable for current traffic levels Future: maintain focus on managing costs Benchmark key functions Process improvements, "Lean" efforts Explore airline consortium initiatives 14 O&M Reductions for 2010 How we "hit" target: Payroll: No furlough; normal salary & wage increases, flat benefits cost Eliminate 73.5 positions half empty; half filled Scaled back on level of customer service Eliminate renewable energy purchase Assume $1.5 million savings from VSP FTE summary Positions to be cut: 73.5 (8.8%) Eliminated positions occupied: 37.5 Open positions (to be filled): 12.0 Voluntarily separating: 7.0 15 Restore/Develop Non-airline Revenues Public parking: Explore new products and innovative services to win back customers Increase advertising through value-added promotion programs Develop advertising on Port's Wi-Fi home page and web site Concessions: Expand array of products and services Property development: Continue pre-development activities with City of SeaTac, Burien, and Des Moines for under-utilized property 16 Prudent Capital Investments Focus investments on maintaining and renewing existing assets. Many projects competing for approval: Key Aeronautical assets such as: Runway 16C Airfield pavement Baggage systems North Satellite: mechanical, seismic Key Non-aeronautical assets: Garage, revenue control system Freight elevators, grease ducts Selective new investments to: Accommodate customer needs: Delta club Enhance productivity of facility to achieve cost savings for airlines and/or airport Electrify ground service equipment Prepare facilities to maximize capacity and flexibility of existing footprint with common-use equipment CUSE expansion 17 Summary Actual Fcst Preliminary Forecast 2008 2009 2010 2011 2012 NOI ($ millions) 163.1 163.0 164.1 176.5 190.5 D/S Coverage 1.42 1.43 1.36 1.31 1.27 CPE (2009 Cap Bud) 11.89 12.09 12.78 13.86 14.29 NOI stable in near-term, growing in future 2010 operating budget will reflect need to reduce operating costs to achieve aeronautical and non-aeronautical goals Maintain strong debt service coverage Reduce aeronautical operating costs to mitigate rise in CPE due to increasing debt service 2010-2014 capital budget will reflect need to renew existing assets Timing and priority balanced against need to moderate growth of CPE 18
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