Current risk situation

The current risk situation of Flughafen Zürich AG is characterised primarily by the following risks:

1. Legal uncertainties

Various domestic or foreign restrictions might prevent Flughafen Zürich AG from fully utilising its infrastructure or cause it to incur additional capital expenditure and costs or generate less revenue. These restrictions include the following:

1.1 ORDINANCE ON AIRPORT CHARGES

Owing to the welcome growth in passenger numbers and the resulting increase in aviation revenues in recent years as well as declining interest rates, a reduction in airport charges is to be expected for the next charging period. On 12 November 2018, FOCA presented its draft proposals for the revision of the Ordinance on Airport Charges that was announced in June 2018. These proposals include a significant increase in transfer payments from the non-regulated airside segment and from road vehicle parking. If the ordinance is changed by the Federal Council as proposed by FOCA, this would have an additional negative impact on the airport charges collected by Flughafen Zürich AG.

1.2 REGULATION GOVERNING THE USE OF SOUTH GERMAN AIRSPACE

The use of south German airspace is presently regulated by an implementing regulation (DVO) issued unilaterally by Germany. On 4 September 2012, the then Swiss Federal Councillor Doris Leuthard and the then German Transport Minister Peter Ramsauer signed the new aviation treaty. The treaty must be ratified by both countries. The two chambers of Switzerland’s Parliament have already approved the treaty, but in Germany ratification was halted, and no date has yet been set for ratification there. Germany could also unilaterally change the implementing regulation (DVO), which could lead to additional capacity restrictions for Zurich Airport.

1.3 INVESTMENTS TO REDUCE OPERATIONAL COMPLEXITY

The runway and taxiway layout, the departure and approach routes and a number of operational regulations at Zurich Airport have developed historically and are the product of many political compromises. The operational complexity of the overall system is therefore considerable. After an incident involving two departing aircraft at the runway intersection, in 2012 Flughafen Zürich AG, Skyguide, Swiss and the Swiss Air Force prepared a comprehensive risk report with the assistance of the Federal Office of Civil Aviation (FOCA) and the Department of the Environment, Transport, Energy and Communications (DETEC). It proposed a number of measures aimed at improving safety. Some of these measures have since been implemented or are in the process of being implemented, while others are pending approval by the Federal government. Without implementing these additional measures to improve safety, there is a risk of further capacity restrictions which would consequently have a negative impact on business development.

1.4 noise exposure

In 2015, the Federal Office of Civil Aviation FOCA specified the noise levels permitted for Zurich Airport. Under the Federal Noise Abatement Ordinance, Flughafen Zürich AG is obliged to report annually on aircraft noise emissions. Reasons must be given for any noise exposure above the permitted level and measures for avoiding such infringements in future must be stated. If it is anticipated that noise emissions will greatly exceed the permitted levels in the long term, the relevant departments of the Federal Administration will take the necessary measures. The permitted noise exposure levels are greatly exceeded after 11 p.m. in particular. Flughafen Zürich AG has identified measures to improve the situation for night-time delays and is seeking approval for changes to the permitted noise levels (amendment of the 2014 operating regulations). The SAIP adopted by the Federal Council on 23 August 2017 also extends the night-time noise curve. Nevertheless, on 14 May 2018, in connection with its partial approval of changes to the 2014 operating regulations, FOCA instructed Flughafen Zürich AG to investigate the feasibility of bringing forward the last slots in the evening. The company is required to produce a report within a year setting out the operational feasibility, economic viability and the impact on noise exposure this would have. With its decision of 23 July 2018 on noise exposure reporting for 2016, FOCA limited the declared capacity of Zurich Airport for aircraft landing after 9 p.m. and taking off after 10.20 p.m. which will apply to the allocation of airport slots from the summer 2019 timetable onwards. This decision was challenged and is due to be heard by the Swiss Federal Administrative Court. At the same time, Flughafen Zürich AG was instructed to submit the necessary documentation to FOCA by the end of August 2018 to enable it to commence the process for setting the permitted levels of noise exposure during the night. The company submitted the requisite documents, which FOCA then published for public consultation. Various objections were received. The proceedings are still ongoing at FOCA. If no new night-time noise exposure limits are specified, in all probability it will become necessary to limit flight operations at night because they exceed the permitted levels of noise exposure.

1.5 Zurich Aircraft Noise Index (ZFI)

In 2007, the Zurich Cantonal Parliament’s counterproposal to a cantonal referendum was accepted. The counterproposal comprises the following two elements:

In recent years, the guideline figure of 47,000 persons was exceeded every year. This is largely due to the strong population growth in the region around the airport compared with the year 2000. It is conceivable that the Canton of Zurich, through its representatives on the Board of Directors or through the Swiss Federal government, could demand the implementation of measures that might have a negative impact on the airport’s development.

1.6 Discontinuation of Bilateral Agreements with the EU

The popular initiative aimed at capping immigration which was handed in at the end of August 2018 is shedding uncertainty on the continued existence of the Agreement on the Free Movement of Persons, and consequently all bilateral agreements with the EU. In a worst-case scenario, terminating the agreements could result in Switzerland being excluded from the Schengen system. This would result in extraordinary write-offs and additional costs for the company to make the necessary changes to its affected infrastructures. If visa procedures were to become more complex, a drop in demand at Zurich Airport would also have to be expected.

2. Decline in demand

Experience over the past few years has shown that the air transport sector is a growing but also volatile industry that is affected by external events such as economic crises, acts of terrorism or epidemics. Such events could temporarily cause a drop in demand at Zurich Airport. In addition, other external factors such as the political and macro-economic environment could have a negative impact on demand in both the aviation and non-aviation segments at Zurich Airport.

3. Increasing safety and security requirements

Additional safety and security regulations may result in rising costs and reduced revenue or changes in capacity. While some of these higher costs could at least subsequently be offset or refinanced through higher charges, the possibility of other elements having a negative impact on earnings cannot be ruled out.

4. Interruptions to business due to operational events or natural hazards

Given the complex and tightly interconnected nature of airport operations, they could be severely disrupted by operational events such as accidents or the failure of critical systems. Depending on the scale of the disruption, operations would have to be curtailed or even halted in order to maintain the safety of passengers and airport employees. The extensive airport infrastructure is especially exposed to natural hazards, in particular earthquakes and flooding following heavy precipitation. To minimise the risk, infrastructure and operations are designed to be robust and, where possible, cost-efficient property and business interruption insurance is taken out to cover it.

5. Hub carrier

Like any other hub airport, Flughafen Zürich AG depends to a considerable extent on the operational and financial performance of its hub carrier Swiss (and the latter’s parent, Lufthansa). The airline Swiss is Flughafen Zürich AG’s main customer. During the year under review, Swiss accounted for around 53% of the passenger volume (2017: 52%). The airline plays a major role within the Lufthansa Group as far as profits are concerned, so the risk of the hub carrier failing for economic reasons can be considered minor at present. Capacity reductions can never be ruled out, however.

6. Noise-related costs

Under Article 36a of the Civil Aviation Act and the Federal Expropriation Act in connection with Articles 679 and 684 of the Swiss Civil Code, Flughafen Zürich AG must bear the cost of formal expropriations and costs relating to sound insulation and resident protection measures as stated in Article 20 f. of the Environmental Protection Act and its corresponding ordinances. According to current legal practice, one of the several preconditions for any noise-related claim is that noise emissions must have exceeded the emission limits for commercial airports in effect since 1 June 2001. Both the operating licence and aviation and environmental laws form the basis for refinancing the costs related to such claims through air traffic charges (noise-related landing charges or special surcharges on passenger ticket fees). In the interests of transparency, costs and income relating to aircraft noise are additionally presented in a separate statement for the Airport of Zurich Noise Fund.

6.1 Reporting of noise-related costs in the financial statements

6.1.1 Formal expropriations

The rulings by the Swiss Federal Supreme Court in the first half of 2008 on fundamental issues related to formal expropriations enabled Flughafen Zürich AG to reliably estimate the total cost of compensation for formal expropriations for the first time, in spite of the remaining uncertainties regarding the accuracy of this estimate. With further rulings on 8 June 2010 and 9 December 2011, the Swiss Federal Supreme Court definitively set the cut-off date for the foreseeability of an eastern approach as 1 January 1961 and ruled definitively on the method used to calculate a decline in the market value of investment property. In the first half of 2016, the Swiss Federal Supreme Court handed down two rulings in test cases regarding claims for compensation relating to the eastern and southern approach routes. Based on these Swiss Federal Supreme Court rulings and other fundamental issues that have since been decided in a court of final instance, the company undertook a reappraisal of costs for formal expropriations, which in each case led to an adjustment to both the provision for formal expropriations and the intangible asset from the right of formal expropriation.

In the first half of 2018, the Swiss Federal Supreme Court handed down two rulings in test cases regarding cooperative ownership. These court rulings enabled Flughafen Zürich AG to undertake a reappraisal of the outstanding cost of compensation for formal expropriations. Based on the recalculation, the total cost expected in relation to formal expropriations decreased from CHF 385.0 million to CHF 350.0 million. This enabled the provision for formal expropriations as at 30 June 2018 to be reduced by CHF 34.5 million (nominal amount CHF 35.0 million, see note 19, Provision for formal expropriations plus sound insulation and resident protection). At the same time, the intangible asset from the right of formal expropriation was reduced by the same amount (see note 11, Intangible assets).

As at the reporting date, the estimated costs for formal expropriations amounted to CHF 350.0 million (31 December 2017: CHF 385.0 million), of which CHF 72.1 million had already been paid out at that date. The outstanding costs of CHF 277.9 million (nominal amount) are stated at their present value of CHF 275.2 million in the consolidated financial statements for the period ended 31 December 2018.

6.1.2 Sound insulation and resident protection measures

With respect to sound insulation and resident protection measures, FOCA required Flughafen Zürich AG, in connection with its 2014 operating regulations application, to submit an extended sound insulation programme by the end of June 2015. Based on the permitted noise exposure levels specified by FOCA, and taking into account the still pending changes to its 2014 operating regulations, the company duly submitted its 2015 sound insulation programme by this deadline. At its meeting on 22 June 2015, the Board of Directors approved a further CHF 100.0 million of measures in this context in addition to the CHF 240.0 million previously estimated for sound insulation and resident protection.

Flughafen Zürich AG is required to implement sound insulation measures in the area where it claims exemptions from noise limits (emission limit). In this context, the Federal Office of Civil Aviation (FOCA) has initiated a night-time noise abatement procedure. The area with exemptions under the Sectoral Aviation Infrastructure Plan adopted by the Federal Council on 23 August 2017 is to be extended. A provision for further costs of CHF 60.0 million, with a present value of CHF 57.6 million, was recognised in this context as at 30 June 2018 in addition to the cost of CHF 340.0 million previously estimated for sound insulation and resident protection (see note 5, Other income and expenses, and note 19, Provision for formal expropriations plus sound insulation and resident protection).

As at the reporting date, the estimated costs for sound insulation and resident protection measures amounted to CHF 400.0 million (31 December 2017: CHF 340.0 million), of which CHF 249.1 million had already been paid out at that date. The outstanding costs of CHF 150.9 million (nominal amount) are stated at their present value of CHF 148.2 million in the consolidated financial statements for the period ended 31 December 2018.

6.2 Risks for Flughafen Zürich AG based on noise-related issues

The reporting of noise-related costs in the financial statements is a complex matter. In particular the issue of formal expropriations involves significant assumptions and estimates concerning the capitalisation of such costs and the obligation to recognise appropriate provisions. This complexity is attributable to a large variety of relevant legal bases, unclear or pending legal practice and political debate.

Flughafen Zürich AG has received a total of around 20,000 noise-related claims for compensation, of which around 6,700 were still pending at the end of 2018. Almost 1,000 of these cases are currently being examined by the Swiss Federal Assessments Commission.

Depending on future and final-instance legal judgements, including with respect to the southern approaches, noise-related liabilities 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.

Aircraft noise costs are refinanced through charges. The most important charge from a refinancing standpoint up until 1 February 2014 was the separate CHF 5.00 passenger noise charge. Owing to a directive on airport charges issued by FOCA on 14 November 2013, this passenger-related noise supplement was no longer collected as of 1 February 2014 as it can be assumed that the funds of the Airport of Zurich Noise Fund are sufficient to finance the costs currently estimated. Should actual future noise-related costs significantly exceed the estimate, this supplement would have to be levied again over the medium term in order to cover the costs. Aircraft noise charges are still levied.

The consolidated financial statements (under IFRS) and individual financial statements (under CO) could be negatively impacted depending on the amount of effective costs and possible future changes in accounting standards.

6.3 Treatment of noise-related matters in the consolidated financial statements according to the International Financial Reporting Standards (IFRS)

The noise charges imposed on the basis of the “cost-by-causes principle” as well as the costs for sound insulation and resident protection measures and operating costs relating to aircraft noise are recognised in the income statement.

6.3.1 Formal expropriations

With the award of the operating licence, Flughafen Zürich AG was also granted a right of formal expropriation in respect of property owners exposed to aircraft noise. This right of formal expropriation was granted on condition that the airport operator bears the costs associated with compensation payments and is recognised as an intangible asset at the date when a current obligation arises on the basis of a definitive ruling or when the probable total costs can be estimated on the basis of court rulings in the final instance and therefore a reliable cost estimate as defined in IAS 38.21 becomes possible. The timing of recognition may differ depending on the airport region. At the same time as an intangible asset is recognised at the present value of the expected future payments, an equal amount is recognised as a provision. Any future adjustments to the probable total cost already recognised as assets and liabilities will be reflected on both sides of the balance sheet. The intangible asset is amortised using the straight-line method over the remaining duration of the operating licence (i.e. until May 2051).

To summarise, the significant effects on the consolidated financial statements are as follows:

6.3.2 Sound insulation and resident protection measures

The costs for sound insulation and resident protection measures that Flughafen Zürich AG has formally agreed to pay are recognised as a provision as soon as they can be reliably estimated.

6.4 Treatment of noise-related matters in the financial statements under the Swiss Code of Obligations (CO)

Costs for formal expropriations also qualify as an intangible asset in the financial statements under the Swiss Code of Obligations. They are not capitalised until the date on which the counterparty has acquired an enforceable claim. Amortisation of capitalised costs for formal expropriations is based at a minimum on the consolidated financial statements. Adequate provisions are recognised for liabilities arising from sound insulation and resident protection measures. Any balance of revenue after deduction of noise-related costs (compensation for formal expropriations, sound insulation and resident protection measures, operating costs, financing costs and amortisation) is transferred to the provision for aircraft noise.