The global airport industry issubject to economic landscapes which vary from one region or jurisdiction toanother. Consequently, measurement of airport financial performance and thesubsequent interpretation of economic indicators must consider institutionalobjectives in both local and national contexts. Some airports are geared towardmaximizing returns for investors or shareholders, like any other business, whereasothers are mandated purely to recover the costs they incur in providing airportservices and infrastructure. For instance, many airports in the US are owned bylocal governments and are financed by municipal bonds. The objective ofairports and local governments in these contexts is primarily to generate localeconomic benefits, as opposed to generating financial returns on investments.
Benchmarking financialperformance is also a complex task for the airport industry because of thediversity of capital structures that airports employ. In turn, this affectstheir bottom lines. Since various forms of equity and debt financing are usedby aviation stakeholders and airport operators, an airport’s ownership modelhas a direct impact on its capital structure and influences the composition ofits invested capital. For example, government-owned airports use differentmethods to raise capital than do airports that are publicly listed and tradedon stock exchanges. In other cases, public-private partnerships (PPPs) areformed to facilitate financing by private stakeholders of specific facets of anairport’s business. Government-owned airports, which constitute the majority ofairports worldwide, are financed by the public purse, government debt, feeslevied on users of infrastructure and commercial activities, or a combinationthereof.
Any discussion of airport revenueand profitability would be incomplete without considering the role played byeconomic regulation. An airport’s capacity to generate revenue is a function ofthroughput and its market characteristics, but this capacity also variesdepending on the jurisdiction in which an airport operates. Not only do airportmanagers face multifaceted challenges in the areas of safety, security and theenvironment, but often they must also comply with economic regulations whichgovern the pricing of airport services. These among a few examples one shouldconsider with caution when interpreting various profitability indicators andbenchmarks.
Profitability measures
Profitability measures sometimesvary both in terms of how they are calculated and how they are interpreted.Accounting standards and methodologies aimed at calculating profitabilityindicators vary not only among jurisdictions but also across companies andindustries. Care should always be taken in explaining the nuances of differentprofitability indicators. Various measures can be used to examine airportprofitability. The earnings before interest, taxes, depreciation andamortization (EBITDA) margin is a measure of a company’s operating performancebefore factoring in cost allocations for fixed assets, payments to creditorsand the tax environment in which it operates. Alternatively, purely from anaccounting perspective, net profit is defined as the difference between totalrevenues (aeronautical, non-aeronautical and non-operating revenues) and totalcosts, which include total operating expenses, capital costs and taxes. Anairport’s net profit margin is an important indicator of how efficiently theairport is managed after taking into consideration all expenses, capital costsand taxes. Because this ratio is the result of an airport’s operations for anygiven period, it effectively summarizes in a single measure management’sability to run the business. A higher margin or revenue in excess of costsindicates higher profitability and is more desirable from an investmentstandpoint. However, because the airport business is capital-intensive, netprofit margins are only partial indicators in that they do not consider someaspects of an airport’s balance sheet (i.e. invested capital).
Return on invested capital
Return on invested capital (ROIC) is a measure that combines almost every element of an airport’s income statement and balance sheet. It is a robust measure of profitability, because within a single measure not only does it consider the effective management of total revenues and total costs in a financial year, but it also takes invested capital into account. From an investor’s point of view, ROIC measures the payment that both debt and equity holders would receive by providing their capital. In the case of equity holders, ROIC is the return for bearing the equity risk. When examined through the lens of this measure, actual returns are considerably lower across the industry compared to net profit margins. A global ROIC of 7.4% was calculated for the industry in 2017. However, differences in ROIC exist between airports in advanced economies and airports located in emerging markets. The latter group has higher returns overall mainly due to the greater risk premia and higher borrowing costs in these markets.
The weighted average cost of capital
By itself, ROIC does not tell thefull story of financial performance and economic efficiency. Only when it iscompared to the weighted average cost of capital (WACC) does ROIC offermeaningful results. While the calculation of the WACC is of critical importancefor many stakeholders including investors and regulators, it essentially servesas a measure of the opportunity cost of an alternative investment with asimilar risk profile. Thus, WACC can be viewed as the expected return from anairport investment, from the perspectives of both equity holders and debtholders. ROIC, on the other hand, is the actual return. If ROIC exceeds WACC,an airport has created value in the form of real, positive economic profits. Incontrast, ROIC that falls short of WACC indicates net economic losses. Previousstudies have pointed to overall airport-industry WACC being in the realm of 6%to 8%. In essence, airports are just breaking even in generating returns and insome cases may be suffering real economic losses compared to WACC. It isimportant to note that WACC varies according to jurisdiction, financingstructure, market conditions, traffic risk and political risk depending onwhere airport operators and investors place their capital investments.
2019 Airport Key Performance Indicators
