Item 9b Supp
ITEM NO. 9b-Supp DATE OF MEETING August 11, 2009 Port of Seattle 2010 Budget Planning August 11, 2009 Overview Aviation Budget Preview Seaport Budget Preview Real Estate Budget Preview 2010 Budget Assumptions 2010 Budget Calendar 2 Airline Industry Domestic airline industry lost $9.5 billion in 2008 Oil price rise followed by financial collapse and deep economic recession Since 2001, industry has lost $37 billion, and was only profitable in 2006 and 2007 Airlines responded by reducing capacity by 12% in past two years, and cutting costs Weak economy has depressed travel demand in 2009 Top ten US airlines have lost nearly $2.5 billion in first half of 2009 In spite of new fees, revenues dropped 26% for June compared to June 2008 Fewer first class and business class tickets sold 3 Airline Industry Recent airline decisions/announcements: Delta: will reduce international capacity by 15% Reduced combined workforce by 10% Continental: will cut 1,700 more jobs (already cut 1,200) Southwest: Will cut capacity 5-6% in 2009 compared to 2008 1,400 Southwest employees (4%) took voluntary separation buyout United: will reduce international flights by 7% American: will reduce system wide capacity by 7.5% Outlook for remainder of 2009: Continued weak demand, low yields Relatively high and volatile oil prices Industry profits unlikely; liquidity concerns could lead to bankruptcy and/or liquidation Additional capacity cuts possible in fall/winter 4 Sea-Tac Outlook 2009 Enplanement growth has remained strong: 2009 budget -3.0% Feb. 2009 revision -7.0% YTD June -5.1% Projection for 2009: -5.0% 7.0% Economy may be bottoming out, but demand for travel will likely lag the recovery Financial challenges will persist for airline industry Unclear how needed capacity reductions will affect Seattle market Alaska's scheduled seats for Q4 2009 at Sea-Tac are down 5.3% vs. 2008 Still a competition-induced capacity bubble on west coast? Currently assuming no passenger growth for 2010. 5 Aviation 2010 Budget Preview Key Revenue Assumptions Airline revenues Rates set to recover costs, so capital and operating budget decisions will affect revenues Passenger volume and landed weight is down, putting pressure on rates Non-airline revenues: Parking, rental car and concessions revenues affected by reduced enplanement levels and economy Parking has declined faster than enplanements Concessions sales per enplanement has dropped Rental car transaction percentage has dropped Commercial properties, utilities more stable 6 Aviation 2010 Budget Preview Expense Trends and Risks Achieving 5% expense reduction target is challenging Much of expense savings plan implemented in 2009 not sustainable Zero-based budget process designed to identify sustainable cuts Over 60% of budget composed of payroll-related costs Achieving budget target will require reduction in staff Rising maintenance costs for old elevators and escalators More snow? 7 Seaport 2010 Budget Preview Operating Revenue (excluding grants and reimbursements) is projected to be approximately flat compared to 2009 Budget Primary components of revenue: In place leases Volume: Cruise, Grain, Crane Rent Grants/Reimbursements 8 Seaport 2010 Budget Preview Key Revenue Assumptions TEU volume 8% decrease from 2009 budget Eagle Rate increase in July Container Terminal Customer Support Plan T25/30 lease full year of lease payments in 2010 Cruise forecast 6% increase in passengers Grain volume Properties in transition 9 Seaport 2010 Budget Preview Expenses 10% below 2009 Budget (excluding Grant Expenses) Expense Trends and Risks Asset Condition Assessments Repair Costs Environmental Reserves Stormwater Implementation of NW Clean Air Strategy Maintenance Dredging Fender Piling Expense Projects 10 ` Real Estate 2010 Budget Preview Operating Revenues expected to be flat or up slightly relative to 2009 Budget Third party revenue may increase due to addition of Maritime Event Center venue Harbor Services revenue may be up slightly if rate changes warranted Potential higher vacancies in commercial properties and recreational marinas Eastside Rail Corridor 11 Real Estate 2010 Budget Preview Expense Trends and Risks Deferred maintenance projects Tenant improvements (expenses related to lease renewals) Eastside Rail Corridor unknowns Audit implications unknown 12 Net Operating Income Comparison Operating Revenues, Operating Expenses and NOI 600 500 400 In Millions of Dollars Revenues 300 Expenses NOI Before Depr. 200 100 0 2004 2005 2006 2007 2008 2009 Est. 13 Payroll Assumptions (2010 Projected Salary and Benefits Rate) Average pay for performance of 3.75% (and funding for the increases is 2.8%) Salary ranges increase of 1.5% Reduction in benefit costs: average benefit rate projected at 38.7% (vs. 39.4% in 2009) Better forecast by the end of August 14 Other Budgeting Issues Revenue assumptions yet to be finalized Focus on sustainable O&M cost reductions (using Modified Zero Based Budgeting) Voluntary Separation Program (VSP) FTE reductions Recognize majority of severance costs in 2009 15 2010 Budget Calendar August Commission workshops on division business plans and strategies Budget Guidelines released on 8/12 Budget system available by 8/17 Finalize all the ZBB decisions by the end of Aug. 16 2010 Budget Calendar - Cont. September Preparation of preliminary operating and capital budgets Internal budget reviews by depts and divisions Executive preliminary budget reviews Commission tax levy workshop(s) October Commission budget workshops Operating and capital budgets Draft Plan of Finance & Tax Levy 17 2010 Budget Calendar - Cont. November Preliminary budget document released First and second reading of budget resolution December Statutory budget filed 18 Port of Seattle 2010 Budget Planning August 11, 2009
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