24 Further details

24.1 Information concerning the performance of a risk assessment

Flughafen Zürich AG has set itself the strategic goal of maintaining a comprehensive risk management system and is committed to carrying out uniform and systematic risk management.

Risk management ensures that risks are handled systematically with due consideration. As well as making all the risks associated with business activities transparent and enabling risk situations to be monitored, it supports a process of continual improvement.

The risk management system is the management and operating tool for managing corporate risk. It comprises the following components:

The risk management organisation forms the backbone of this system and includes the following units and functions:

Board of Directors, Management Board and Chief Risk Officer

The Board of Directors and Management Board have overall responsibility under Swiss company law for ensuring the groupʼs existence and profitability. The Board of Directors is responsible for overall oversight of risk management. The Chief Financial Officer also acts as the Management Boardʼs Chief Risk Officer.

Risk Management & Insurance department

The central Risk Management & Insurance department is run by the Risk Manager, who reports to the Chief Risk Officer. This department supports the line units in all matters relating to risk management and is responsible for risk reporting as well as the operation and continued development of the risk management system.

Line units (divisions and departments)

As part of their role, the line units bear responsibility for risks in their respective division or department and manage them in accordance with the risk management system (risk owner concept).

Specialised units

In consultation with the Risk Management & Insurance department, the specialised units perform specific risk-related cross-divisional functions within the group (liquidity management, occupational safety and health, information security, fire prevention, contingency planning, etc.).

In reporting on risks, Flughafen Zürich AG describes in detail the most important business risks identified and assesses them for their probability of occurrence as well as for their potential operational and economic impact. Responsibilities and a plan of action with specific target dates are also defined and outline how the respective risk can be reduced. The risk management organisation monitors the implementation of the plan on an ongoing basis.

a) Financial risk management

Due to the nature of its activities, Flughafen Zürich AG is exposed to various financial risks, including:

The following sections provide an overview of the extent of the various financial risks and the objectives, principles and processes relating to the assessment, monitoring and hedging of risks, as well as of the capital management of the group. Further information may also be found in the corresponding notes.

i) Credit risk

Credit risk refers to the risk that Flughafen Zürich AG could incur losses if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Cash and cash equivalents, accruals, trade receivables and other financial assets are exposed to credit risk.

Flughafen Zürich AG invests its cash and cash equivalents and fixed-term deposits with major banks with a rating indicating their solvency. In addition, the company minimises other risks relating to cash and cash equivalents and fixed-term deposits in that it does not invest with a single bank, but with a variety of financial service providers.

As a rule, accruals as at the reporting date are invoiced within one month and subsequently monitored as part of trade receivables management.

With the exception of Swiss as the main client, credit risk is distributed over a broad clientele. Trade receivables include an amount of CHF 27.1 million due from SWISS (2016: 35.3 million) (see note 13, Trade receivables). In the period between the reporting date and the preparation of the 2017 annual report, Swiss paid the outstanding amount arising from flight operations charges as at 31 December 2017 in full.

The exposure to credit risk primarily depends on the individual characteristics of each client. Risk assessments include a creditworthiness check, taking account of the clientʼs financial circumstances, past experience and other factors. The maturity structure of trade receivables is normally examined on a weekly basis. Where necessary, terms of payment aimed at minimising risk (normally proforma invoicing) are applied, or security is requested (mainly in the form of bank guarantees).

The financial assets of the Airport of Zurich Noise Fund are invested by professional financial institutions, partly on the basis of a conservative, money market-oriented investment strategy (mainly in fixed-rate debt instruments) and partly in a mixed investment fund. Here, priority is given to preservation of value and flexibility with respect to early redemption of investments. The direct use of derivative financial instruments is not permitted. The investment horizon is based on the expected obligation to make payments from the Airport of Zurich Noise Fund and averages around four years. For bonds held directly, the minimum acceptable rating is BBB+ (Standard & Poorʼs) or Baa1 (Moodyʼs), or an equivalent rating from another recognised rating agency (see note 20, Airport of Zurich Noise Fund).

The maximum exposure to credit risk corresponds to the carrying amounts of the individual financial assets. No guarantees or similar commitments exist that could give rise to an increase in the credit exposure above the respective carrying amounts. The maximum exposure to credit risk as at the reporting date was as follows:

ii) Liquidity risk

Liquidity risk refers to the risk that Flughafen Zürich AG may not be able to meet its financial obligations on the due date.

Flughafen Zürich AG monitors liquidity risk via a prudent liquidity management process. Here it observes the principle that it must have sufficient flexibility and room for manoeuvre with respect to the availability of liquid funds at short notice. This means maintaining an adequate reserve of liquid funds, ensuring the availability of sufficient funds for financing purposes by securing adequate credit facilities, and being able to issue financial securities on the capital market. For this purpose, the company uses rolling liquidity planning that is based on expected cash flows and is periodically updated. Treasury is responsible for monitoring liquidity risk. As at the reporting date, Flughafen Zürich AG had the following unused credit facilities at its disposal:

The table below shows the contractual maturities of financial liabilities (including interest payments) held by Flughafen Zürich AG:

iii) Market risk

(foreign currency and interest rate risks) Market risk refers to the risk that changes in market prices such as exchange rates and interest rates could have an impact on the finance result or the value of the financial instruments.

The objective of market risk management is to monitor and control such risks in order to ensure that they do not exceed a specified limit.

iiia) Currency risk

Currency risks arise on transactions in currencies that differ from the functional currency of the entity concerned.

In business operations, most transactions are conducted in the foreign currency of the respective subsidiaries. As at the reporting date, there were foreign currency accounts and trade receivables in euros and US dollars.

The following table shows the currency risks:

An appreciation or depreciation of the Swiss franc by 10% against the currencies below as at 31 December 2017 would have increased or decreased profit or equity by the amounts in the table below. This analysis assumes that all other variables – in particular interest rates – remain unchanged. The analysis for the prior year was based on the same assumptions.

iiib) Interest rate risk

Interest rate risk can be divided into an interest-related cash flow risk, i.e. the risk that future interest payments could change due to fluctuations in the market interest rate, and an interest-related risk of a change in fair value, i.e. the risk that the fair value of a financial instrument could change due to fluctuations in the market interest rate.

Preference is normally given to external financing denominated in the functional currency, the Swiss franc, and subject to fixed interest rates. However, if external financing in foreign currencies is obtainable on more attractive terms, both the currency and the interest rate risk are hedged. In the case of such foreign currency transactions, the aim is to make fixed interest payments and repayments in the functional currency, the Swiss franc.

All non-current financing transactions have been concluded at a fixed interest rate. The interest rate risk on short-term variable advances is hedged on a case-by-case basis using interest rate swaps.

The financial assets of the Airport of Zurich Noise Fund are primarily invested in fixed-rate debt instruments and a mixed investment fund. The direct use of derivative financial instruments is not permitted here.

As at the reporting date, Flughafen Zürich AGʼs interest rate profile was as follows (interest-bearing financial instruments):

The table below shows the sensitivity analysis for variable and fixed-rate financial instruments with a deviation of 50 basis points:

B) Fair values

Due to their short-term nature, the carrying amounts of cash and cash equivalents, fixed-term deposits, trade receivables, other current receivables and current liabilities are a reasonable approximation of their fair values.

Financial assets in the Airport of Zurich Noise Fund: The fair value of the bonds corresponds to the market price of the securities at the reporting date (level 1). The fair value of the mixed investment fund is the unadjusted net asset value, as the units may be redeemed at that value as at the reporting date (level 2).

Financial liabilities: The fair value of the debentures corresponds to the market price (level 1).

Derivative financial instruments: The fair value of the cross currency swas is determined using a fair value model (level 2). The key inputs are foreign exchange rates and interest rates observable in the market. Unobservable inputs are not significant to the measurement.

c) Categories of financial instruments

The following table shows the carrying amounts of all financial instruments by category:

d) Fair value hierarchy of financial instruments

Financial instruments recognised or disclosed at fair value are categorised according to the following hierarchy, reflecting the significance of the inputs used to measure fair value:

Level 1 – Quoted market prices

The inputs used to measure the assets or liabilities are quoted, unadjusted market prices determined in active markets for identical assets or liabilities at the measurement date.

Level 2 – Measurement based on observable inputs

The assets or liabilities are measured on the basis of inputs (other than the quoted prices included within level 1) that are directly or indirectly observable for the asset or liability.

Level 3 – Measurement based on unobservable inputs

The inputs for these assets or liabilities are not observable.

e) Capital management

With respect to capital management, Flughafen Zürich AG pays particular attention to ensuring the continuation of the groupʼs activities, achieving an acceptable dividend for shareholders and optimising the balance sheet structure, particularly in periods of major investment activity, taking account of the cost of capital. In order to achieve these objectives, Flughafen Zürich AG can adjust the amount of the dividend payment or repay capital to shareholders.

Flughafen Zürich AG constantly monitors the following key financial data: equity ratio, debt ratio and interest coverage. Here it is especially important to ensure that the ratio of debt to equity is in line with the budgetable cash flows and investments, and tends towards the conservative side. In this way a high degree of entrepreneurial flexibility can be assured at all times, including when unforeseeable events occur.

The necessary quantity of treasury shares may be held for the purpose of employee and bonus programmes. It is not permitted to accumulate several yearsʼ worth of treasury shares for the purpose of bonus programmes, however. Neither is it permitted to hold treasury shares to use as payment for acquisitions (exchange of shares in the event of a takeover) or for the purpose of speculating on higher selling prices. Accumulated treasury shares may in no case exceed 10% of all shares issued.

24.2 Tenancy agreements

The tenancy agreements entered into by Flughafen Zürich AG in its capacity as landlord may be either fixed tenancy or turnover-based agreements:

a) Fixed tenancy agreements

Fixed tenancy agreements comprise in particular agreements for office, warehouse, archive and workshop premises. They are divided into limited-term and indefinite agreements, whereby the latter are usually subject to either six or twelve monthsʼ notice to be communicated in advance.

b) Turnover-based agreements

Sales-based tenancy agreements primarily relate to commercial premises. These agreements between the partners generally comprise guaranteed basic rents plus turnover-based portions with a fixed term of five years and no other options. Moreover, some agreements involving basic rents and turnover-based portions exist as a function of passenger trends or prior-year sales.

Commercial revenue (retail, tax & duty free plus food & beverage) and revenue from facility management (rental and leasing agreements) in the reporting period comprised conditional rental payments amounting to CHF 90.3 million (see also note 2, Revenue).

At the reporting date, minimum lease payments (fixed rents and guaranteed basic rents) under non-cancellable leases were as follows:

24.3 Capital commitments

As at the reporting date, capital commitments for various buildings and engineering structures amounted to around CHF 265 million in total. The most significant capital commitments involved the expansion and refurbishment of car parking facilities (CHF 52 million), refurbishment and expansion of the baggage sorting system (approx. CHF 23 million) and the creation of stands on the southern side of the airport (CHF 15 million). In addition, the companyʼs share of capital commitments for THE CIRCLE amount to approximately CHF 200 million.

24.4 Contingent liabilities

A number of legal proceedings and claims against Flughafen Zürich AG in the context of its normal business activities are still pending. The company does not expect the amounts required to settle these lawsuits and claims to have a significantly negative impact on the consolidated financial statements and cash flow of Flughafen Zürich AG.

Depending on future and final-instance legal judgements, especially with respect to the southern approaches, in particular the new noise-related liabilities, but also the old ones, may in future be subject to substantial adjustments, which would also require adjustments to the noise-related costs recognised as assets and liabilities in the balance sheet. At the present time, it is not possible to reliably estimate the total costs to capitalise as an intangible asset from the right of formal expropriation, the resulting amortisation or the corresponding provision.

As part of its involvement in the expansion and operation of Confins International Airport in Belo Horizonte, Flughafen Zürich AG provides a guarantee as credit protection for local debt financing, which is made available by the Brazilian development bank Banco Nacional de Desenvolvimento Econômico e Social (BNDES). As at the reporting date, the amount of this guarantee is CHF 15.9 million (31 December 2016: CHF 14.9 million). In the context of the local debt financing, the company has also entered into a counterbond for CCR S.A. of Brazil in the amount of CHF 14.9 million (2016: CHF 0.0 million). Moreover, the company has entered into a counterbond for a performance bond which the operator, Concessionária do Aeroporto Internacional de Confins S.A., had to submit to Brazilʼs National Civil Aviation Authority (ANAC). As at the reporting date, the amount arising from the counterbond was CHF 12.0 million (2016: CHF 22.0 million).

In connection with the concession for the airport in Florianópolis, the operator, Concessionária do Aeroporto Internacional de Florianópolis S.A., has entered into a performance bond for Brazilʼs National Civil Aviation Authority (ANAC). As at the reporting date, the amount arising from the counterbond was BRL 113.5 million (2016: BRL 0.0 million), or CHF 33.5 million (2016: CHF 0.0 million).

As part of the concession arrangements for the airports in Antofagasta and Iquique, the operators have entered into counterbonds for performance bonds issued to the Chilean Ministry of Public Works (Ministerio de Obras Públicas). As at the reporting date, the total amount arising from these counterbonds was CHF 6.9 million.

Flughafen Zürich AG is jointly and severally liable to third parties for the liabilities of the co-ownership structure THE CIRCLE and the ordinary partnership THE CIRCLE.

24.5 Related parties

Related parties are:

a) Transactions with related parties

In the reporting period, the Canton of Zurich police force was paid CHF 98.4 million (2016: CHF 97.2 million) by Flughafen Zürich AG in accordance with the applicable service level agreement. In this context, accrued expenses amounting to CHF 6.3 million at the reporting date (2016: CHF 8.0 million) were included in “Other current liabilities, accruals and deferrals”.

In financial year 2017, consulting revenue from operations and management agreements amounted to CHF 3.3 million (2016: 2.2 million) for the airport in Belo Horizonte and to CHF 3.3 million (2016: CHF 0 million) for the Chilean airports.

In the reporting period, Flughafen Zürich AG paid employer contributions amounting to CHF18.1 million (2016: CHF 17.4 million) to the BVK Employee Pension Fund of the Canton of Zurich for employee benefits (see note 22, Employee Benefits). As at the reporting date, CHF 2.4 million of this (2016: CHF 2.3 million) was still included in “Other current liabilities, accruals and deferrals” (see note 23).

b) Shares held by related parties

As at the reporting date, members of the Board of Directors and related parties held the following number of shares:

As at the reporting date, members of the Management Board and related parties held the following number of shares:

Neither members of the Board of Directors nor the Management Board held options on the companyʼs shares at the reporting date.

c) Remuneration for key management personnel

Remuneration for the members of the Board of Directors and Management Board comprises the following:

24.6 Composition of the group

As at the reporting date, the group comprised the following companies:

In addition, the following associates are included by applying the equity method:

24.7 Notes on the licence to operate Zurich Airport

The Swiss Federal Department of the Environment, Transport, Energy and Communications (DETEC) awarded Flughafen Zürich AG the licence to operate Zurich Airport for 50 years from 1 June 2001 to 31 May 2051.

The licence encompasses the operation of an airport in accordance with the provisions of the ICAO (International Civil Aviation Organisation) governing domestic, international and intercontinental civil aviation services. Flughafen Zürich AG is authorised and obliged to operate Zurich Airport for the entire period cited in the operating licence, and to provide the necessary infrastructure for this purpose. To accomplish this, it is entitled to collect charges from all users of the airport. Furthermore, Flughafen Zürich AG is authorised to assign specific rights and obligations arising from the operating licence to third parties. Insofar as they concern activities relating to airport operations such as aircraft handling, passenger handling, baggage sorting and handling, mail and freight handling, these rights and obligations shall be subject to the provisions of public law. Flughafen Zürich AG regulates rights and obligations it has assigned to third parties in the form of binding entitlements (concessions).

The concessionaire is obliged to grant access to the airport to all aircraft that are licensed to provide domestic and international flights. The volume of flight traffic and handling of licensed aircraft are governed by the regulations laid down in the Sectoral Aviation Infrastructure Plan (SAIP) and the provisions of the operating regulations. The concessionaire is obligated to implement all measures relating to regulations governing the use of German airspace for landings at, and take-offs from, Zurich Airport without delay, and to submit the necessary applications for approval by the authorities in good time. The concessionaire is empowered and obliged to enforce sound insulation measures and to implement them where they are not contested. The provision whereby the concessionaire shall meet all obligations to which it is bound through clauses of the civil aviation treaty between Germany and Switzerland without entitlement to compensation was declared null and void in response to an objection lodged by Flughafen Zürich AG.

As part of the bilateral agreements that came into effect on 1 June 2002, the EU ground handling directive (Council Directive 96/67/EC of 15 October 1996 on access to the groundhandling market at Community airports) also became applicable to Switzerland. The principles governing the granting of rights to carry out ground handling activities are defined in the operating regulations for Flughafen Zürich AG dated 30 June 2011. Accordingly, at the end of an initial seven-year period, licences for ground handling operations in areas in which the number of admissible service providers may be limited were re-awarded on the basis of tender procedures on 1 December 2011 for the period to the end of November 2018.

24.8 Service concessions for the operation of foreign airports

As at the reporting date, Flughafen Zürich AG was responsible, via its subsidiaries, for the operation and expansion of three foreign airports:

Brazil

On 16 March 2017, in a public tender conducted by the Brazilian government as part of an airport privatisation programme, Flughafen Zürich AG was awarded the concession for the operation and expansion of Hercílio Luz International Airport (IATA: FLN) in Florianópolis in the south of Brazil. The airport has a catchment area of 1.1 million people and is located in Santa Catarina, a popular holiday destination for both local and international travellers. In 2017, traffic volumes reached 3.8 million passengers. A concession fee of BRL 241.5 million (CHF 71.2 million) is due as consideration for the right to operate the airport. A portion of the concession fee (BRL 83.3 million; adjusted for inflation: BRL 83.7 million – approximately CHF 24.7 million) was paid on the day that the concession arrangement was signed. Further minimum concession payments totalling BRL 158.2 million (adjusted for inflation; approximately CHF 46.7 million as at 31 December 2017) are payable over the term of the concession. The concession runs for 30 years. Following the signing of the concession arrangement on 28 July 2017 and with all suspensive conditions having been met, the wholly-owned subsidiary Concessionária do Aeroporto Internacional de Florianópolis S.A., as sole holder of the concession, took over flight operations from the state-owned operator Infraero on 3 January 2018. Flughafen Zürich AG is currently expecting investments in airport infrastructure of approximately BRL 550 million (CHF 162 million) during the first four years.

Chile

Since January 2013, Sociedad Concesionaria Aeropuerto de Iquique S.A., a wholly-owned subsidiary of A-port Chile S.A., has held the concession for the operation and upgrade of Diego Aracena International Airport (IATA: IQQ) in Iquique in the north of Chile. The airport is located 41 kilometres south west of the city of Iquique in the Tarapacá region. With 1.3 million passengers a year, it is the countryʼs fifth-largest airport. Since April 2017, Flughafen Zürich AG has held a 100% interest in A-port Chile S.A. The concession arrangement in Iquique provides for a term of four years, which in December 2016 was extended by a further 15 months until March 2018. In May 2017, A-port Chile S.A. tendered successfully for the concession for the airport in Iquique. The new concession, which will commence in April 2018, has a variable term that is dependent upon traffic volumes and ranges from an anticipated 18 years up to a specified maximum of 25 years. As part of the concession arrangement, the company has undertaken to invest in measures to upgrade and extend the airport infrastructure, in particular to extend the existing terminal. Flughafen Zürich AG is currently expecting investments in airport infrastructure of approximately USD 63 million (CHF 62 million) during the first four years.

Since 2011, Sociedad Concesionaria Aeropuerto de Antofagasta S.A., a wholly-owned subsidiary of A-port Chile S.A., has held the concession for the upgrade and operation of Andrés Sabella International Airport (IATA: ANF) in Antofagasta in the north of Chile. The airport is located approximately 25 kilometres north of the city of Antofagasta. The concession has a term that is dependent upon traffic volumes and ends 36 months after the date on which 75% of the maximum aeronautical revenues are generated, but at the latest after 15 years. It is currently expected to end in 2025. No notable infrastructure investments are anticipated in the period through to the end of the concession.

24.9 Events after the reporting date

The Board of Directors authorised the 2017 consolidated financial statements for issue on 26 February 2018. These also have to be approved by the General Meeting of Shareholders.

No events occurred between 31 December 2017 and the date on which these consolidated financial statements were authorised for issue by the Board of Directors which would require an adjustment to the carrying amounts of the groupʼs assets and liabilities or which would have to be disclosed here.