Measuring airport financial performance

The global airport industry is subject to economic landscapes which vary from one region or jurisdiction to another. Consequently, measurement of airport financial performance and the subsequent interpretation of economic indicators must consider institutional objectives in both local and national contexts. Some airports are geared toward maximizing returns for investors or shareholders, like any other business, whereas others are mandated purely to recover the costs they incur in providing airport services and infrastructure. For instance, many airports in the US are owned by local governments and are financed by municipal bonds. The objective of airports and local governments in these contexts is primarily to generate local economic benefits, as opposed to generating financial returns on investments.

Benchmarking financial performance is also a complex task for the airport industry because of the diversity of capital structures that airports employ. In turn, this affects their bottom lines. Since various forms of equity and debt financing are used by aviation stakeholders and airport operators, an airport’s ownership model has a direct impact on its capital structure and influences the composition of its invested capital. For example, government-owned airports use different methods to raise capital than do airports that are publicly listed and traded on stock exchanges. In other cases, public-private partnerships (PPPs) are formed to facilitate financing by private stakeholders of specific facets of an airport’s business. Government-owned airports, which constitute the majority of airports worldwide, are financed by the public purse, government debt, fees levied on users of infrastructure and commercial activities, or a combination thereof.

Any discussion of airport revenue and profitability would be incomplete without considering the role played by economic regulation. An airport’s capacity to generate revenue is a function of throughput and its market characteristics, but this capacity also varies depending on the jurisdiction in which an airport operates. Not only do airport managers face multifaceted challenges in the areas of safety, security and the environment, but often they must also comply with economic regulations which govern the pricing of airport services. These among a few examples one should consider with caution when interpreting various profitability indicators and benchmarks.

Profitability measures

Profitability measures sometimes vary both in terms of how they are calculated and how they are interpreted. Accounting standards and methodologies aimed at calculating profitability indicators vary not only among jurisdictions but also across companies and industries. Care should always be taken in explaining the nuances of different profitability indicators. Various measures can be used to examine airport profitability. The earnings before interest, taxes, depreciation and amortization (EBITDA) margin is a measure of a company’s operating performance before factoring in cost allocations for fixed assets, payments to creditors and the tax environment in which it operates. Alternatively, purely from an accounting perspective, net profit is defined as the difference between total revenues (aeronautical, non-aeronautical and non-operating revenues) and total costs, which include total operating expenses, capital costs and taxes. An airport’s net profit margin is an important indicator of how efficiently the airport is managed after taking into consideration all expenses, capital costs and taxes. Because this ratio is the result of an airport’s operations for any given period, it effectively summarizes in a single measure management’s ability to run the business. A higher margin or revenue in excess of costs indicates higher profitability and is more desirable from an investment standpoint. However, because the airport business is capital-intensive, net profit margins are only partial indicators in that they do not consider some aspects 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 the full story of financial performance and economic efficiency. Only when it is compared to the weighted average cost of capital (WACC) does ROIC offer meaningful results. While the calculation of the WACC is of critical importance for many stakeholders including investors and regulators, it essentially serves as a measure of the opportunity cost of an alternative investment with a similar risk profile. Thus, WACC can be viewed as the expected return from an airport investment, from the perspectives of both equity holders and debt holders. 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. In contrast, ROIC that falls short of WACC indicates net economic losses. Previous studies 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 in some cases may be suffering real economic losses compared to WACC. It is important to note that WACC varies according to jurisdiction, financing structure, market conditions, traffic risk and political risk depending on where airport operators and investors place their capital investments.