2020 INTERIM REPORT
DEAR SIR OR MADAM
The first half of 2020 was largely dominated by the coronavirus crisis: compared with a profit of CHF 143.4 million in the first six months of 2019, the first half of 2020 will reflect a loss of CHF 27.5 million.
ASSESSMENT OF THE EXCEPTIONAL SITUATION
The coronavirus crisis has had a severe economic impact on the entire aviation industry and on Flughafen Zürich AG. At times, there was a near-total collapse in revenues, which is reflected in first-half business performance. In response, the airport operator very quickly introduced short-time working and took various measures to secure liquidity. There will be further substantial cuts in capital expenditure and costs over the coming months and years.
Despite air traffic coming to an almost complete standstill in the spring, Zurich Airport always remained open. Even in these challenging times, it was therefore able to fulfil its mandate to provide a basic service and maintain Switzerlandʼs aviation links to the world so that repatriation, air freight and ambulance flights could continue to operate along with a few passenger flights.
We have seen signs of a slow recovery since the gradual reopening of borders in June. The revival of the travel sector is expected to begin in Europe initially, but it is likely to be several years before the intercontinental market fully recovers. In the meantime, a “new normal” is becoming established at Zurich Airport as far as travel behaviour and passenger processes are concerned. One key element is Zurich Airportʼs protection concept, which is designed to ensure the safety of all passengers, visitors and airport staff.
Trend in traffic volume
Between January and June 2020, 5.3 million passengers used Zurich Airport as their departure, transfer or destination airport, a decrease of 64.3% compared with the prior-year period. The number of local passengers dropped by 64.0% and the number of transfer passengers by 65.3%.
The number of flight movements declined by 55.5% to 60,417 take-offs and landings in the first half of 2020. Flight movements declined at a slower pace than passenger numbers due in particular to a year-on-year increase in the number of freight flights. Despite this, the volume of freight handled at Zurich Airport decreased by 36.1% compared with the first half of 2019 to 144,526 tonnes.
Trend in revenue
Total revenue slumped by almost 50% compared with the first half of 2019 to CHF 310.4 million. Revenue from aviation operations was down by 58.6% to CHF 130.4 million. Aviation revenue declined at a slower pace than passenger numbers due to the fact that not all charges depend on passenger volumes. For example, the number of flight movements determines the landing charges. Non-aviation revenue was down by 34.0% in the same period to CHF 180.0 million. In the case of commercial revenue, Flughafen Zürich AG was unable to charge rent during the lockdown period of roughly two months ordered by the authorities. While parking revenue and revenue from international business also suffered as a result of the crisis, revenue from facility management was up by 10.4% to CHF 69.1 million. This rise is due mainly to the purchase of a total of 36 buildings and plots of land from Priora Suisse AG at the end of 2019, although the first rental income from the Circle also contributed to the positive trend. The crisis shows that the increasingly important real estate business has a stabilising effect on total revenue.
Operating expenses decreased by 27.7% year on year to CHF 205.5 million, although last yearʼs cost base was negatively impacted in particular by an amount of CHF 45.1 million for the development of the infrastructure in Florianópolis. After adjusting for expenses from construction projects, operating expenses were down by 15.5% or CHF 37.0 million. The savings are mainly attributable to lower personnel expenses as a result of short-time working, lower police and security expenses and other general cost reductions.
Operating and consolidated result
Earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 65.5% to CHF 104.9 million. The bottom-line result for the first half of 2020 was a loss of CHF 27.5 million. In the prior-year period, Flughafen Zürich AG was able to post a profit of CHF 143.4 million.
Measures taken to reduce costs offset some of the falls in revenue in the regulated segment amounting to CHF –183.0 million, with earnings before interest and tax (EBIT) in regulated business coming to CHF –74.9 million (prior-year period: CHF 74.6 million). The 10.8% rise in invested capital to CHF 2 billion is attributable to the new debentures placed in the first half of 2020 (or the corresponding cash).
The non-regulated segment achieved EBIT of CHF 56.7 million. Invested capital in the non-regulated segment increased by CHF 0.7 billion to CHF 2.3 billion (+45.8%) due to investments in the Circle and international projects in particular, the acquisition of Prioraʼs property portfolio and the high level of cash.
Non-current assets were up slightly on the 2019 year-end figure to CHF 4.3 billion as at 30 June 2020. Besides the Circle, the biggest ongoing projects at the Zurich site in the first half of 2020 were the upgrading and extension of the baggage system, the renovation of the maintenance workshop and the extension of landside passenger areas.
Adjusted for the noise component, invested capital was CHF 4.3 billion as at mid-2020 (prior-year period: CHF 3.4 billion). The increase is attributable to the factors outlined under “Segment reporting”.
At the end of February, before the outbreak of the pandemic in Europe, Flughafen Zürich AG was able to raise funds by placing a 15-year CHF 400 million debenture (coupon of 0.2%) on the Swiss capital market.
After the outbreak of the crisis, Flughafen Zürich AG took further extensive measures to secure liquidity: besides reducing costs and capital expenditure, it drew down its existing credit facilities in full (a portion has since been repaid). This was followed in May by a further placement, of a four-year CHF 300 million debenture (coupon of 0.7%).
Even after the repayment of a CHF 300 million debenture that fell due at the beginning of July, the companyʼs liquidity therefore remains on a solid footing.
At the end of March of this year, Standard & Poorʼs placed the AA- rating on CreditWatch. In mid-July, the rating was then downgraded to A+ with a negative outlook. At the same time, the independent Swiss rating agency fedafin AG continues to assign Flughafen Zürich AG an Aa- rating.
It is difficult to issue a reliable forecast for the current financial year, owing to considerable uncertainty over the further course of the coronavirus crisis. Provided that international passenger travel picks up in the fourth quarter, passenger volumes for the 2020 financial year are expected to be around 10 million. A lower transfer volume and a higher inner-European traffic volume than in the previous year are expected. Any developments in the other direction, such as renewed border closures, changed quarantine rules or sustained or additional travel restrictions would result in lower passenger volumes. On the non-aviation side, commercial revenue for 2020 is based mostly on the minimum annual rents agreed. With most commercial partners, solutions have been found whereby the minimum annual rents are essentially suspended for the period of the closures ordered by the authorities, but are otherwise payable. While real estate revenue is very stable in spite of the crisis, parking revenue and revenue from international business remain under pressure.
Flughafen Zürich AG introduced measures to reduce costs at an early stage. In the case of operating expenses, the cost base can be cut by 10–15% year on year due to short-time working and other savings (excluding expenses from construction projects). Because a large part of the costs of Flughafen Zurich AG is directly related to the infrastructure which was available also during the period of minimal operations, the expected drop in sales in the current year can only be offset by cost reductions up to a limited extent.
A loss is therefore anticipated for the current financial year.
Investments at the Zurich site will amount to around CHF 250–300 million with around CHF 20 million at the subsidiaries abroad in addition.
BRIDGING FINANCE FOR AVIATION INDUSTRY
The current crisis must not be allowed to result in long-term structural damage to our regional and national economies. Ensuring the survival of airlines and aviation-related businesses based in Switzerland is vital. We therefore welcome the bridging loans for Swiss aviation offered by the federal government. CHF 1.275 billion in the form of state-guaranteed loans has been made available to the Swiss and Edelweiss airlines plus a further CHF 600 million worth of credit to aviation-related businesses such as ground handling firms.
We are expecting the aid packages provided also to be used to pay for contractually obligated services to system partners such as airports. If the crisis proves to be prolonged, adequate compensation for maintaining key services, similar to that provided for public transport, will also be crucial. As things stand today, our company does not intend to apply for a bridging loan.
SUCCESSFUL CONCLUSION OF AIRPORT CHARGES NEGOTIATIONS
Immediately after negotiations on airport charges commenced in March 2020 as prescribed by the Swiss Ordinance on Airport Charges, the aviation industry worldwide was hit by the coronavirus pandemic. This introduced a high level of uncertainty as regards setting new flight operations charges. An extension of the current charging period was therefore agreed with the negotiating parties Swiss International Air Lines AG, easyJet Europe Airline GmbH and representatives of other commercial airlines, light aviation / sport flying, business aviation and freight companies. It was also agreed that the next round of negotiations on flight operations charges would commence by the beginning of 2025 at the latest. A temporary 10% cut in flight operations charges (excluding emission and noise charges) was also agreed for 2021 in order to help the airlines ramp up their operations again. The agreement has helped establish some planning certainty and stability for all concerned in the current climate. Provided no amendments are submitted, the agreed charges will apply from 1 January 2021.
We are aiming to cut the companyʼs CO2 emissions to net zero by 2050. The coronavirus pandemic has done nothing to alter this plan. To achieve this goal, among other things we plan to renovate buildings, install modern energy supply systems and pursue our commitment to virtually carbon-neutral alternative fuels.
Further steps and commitments in this regard were taken in the first half of this year: in May we entered into a partnership with high-tech company Synhelion SA, which is researching a process to mass-produce synthetic fuel from air and sunlight, making it carbon-neutral. We have undertaken to buy and use the fuel produced in the test facility once it becomes available. In addition, since January this year, the firm awarded our taxi concession to carry passengers has been operating a fleet of sustainable vehicles, including hydrogen-powered taxis.
The opening of the Circle also takes us a major step closer to our carbon-free future. The complex is LEED® PLATINUM-compliant and MINERGIE-certified, utilising efficient alternative energy sources, for example solar power or heat pumps with systematic heat recovery and underground thermal energy storage.
CANTONAL DEVELOPMENT PLAN
The 2017 development plan includes shifting the airport perimeter and the noise exposure boundary line in line with the Sectoral Aviation Infrastructure Plan (SAIP2). On 22 June, the Cantonal Parliament voted overwhelmingly in favour of the revision by 113 to 59. The spatial planning policies of the federal government and the canton have thus now been harmonised. We welcome the fact that the Cantonal Parliament has brought the Cantonal Development Plan into line with the SAIP and that both policies are once again coordinated with respect to the boundary line.
TAXIWAY ROUTING AROUND RUNWAY 28
On 19 May, the Federal Office of Civil Aviation (FOCA) opened the planning application for a taxiway routed around runway 28. The aim is to eliminate over 100,000 runway crossings (as per 2019) across runway 28 in order to significantly reduce the complexity of airport operations.
SECOND STAGE OF ZONE WEST DEVELOPMENT
The second phase of work in this zone, involving extending the existing apron by around ten hectares in the direction of the River Glatt, commenced in the spring. The preparatory building work has been carried out but the civil engineering works have been temporarily suspended due to the coronavirus pandemic. The first phase was already completed in October 2017 with the commissioning of two new stands for aircraft up to category E.
Zurich Airport received the Airport Service Quality (ASQ) Award in the category 25–40 million passengers in Europe. The ASQ Award is presented annually by Airports Council International (ACI) World, the international umbrella organisation for airport operators. The award recognises airports throughout the world that in the opinion of passengers offer the best customer experience. Following on from 2006, 2008 and 2018, this is the fourth time Zurich Airport has taken first place in an ASQ Award.
As a result of the lockdown and flight operations more or less coming to a standstill, virtually all shops and restaurants were closed for several weeks. Only minimal basic services were provided landside and airside. During the period of the closure ordered by the Federal Council, Flughafen Zürich AG was unable to charge rent for the sales areas affected by the lockdown. Most landside shops and restaurants have been operating again since 11 May but, although rising, footfall remained low until the end of June. Airside outlets have been gradually re-opening since mid June. The first half of the year saw new airside tenants Jelmoli, an Omega boutique and a Brezelkönig outlet open their doors.
CONSTRUCTION PROGRESS AND FURTHER TENANTS FOR THE CIRCLE
Despite the coronavirus pandemic, the focus was on progressing the construction and marketing of the complex. As the first tenant, we moved into our new head office in the Circle on 26 May. Our “home base” in the best location provides a hub that facilitates both personal interaction and concentrated working for our approximately 600 employees. Other firms are also relocating their Swiss headquarters to the Circle. As well as Microsoft and SAP, another globally active IT company – the SAP consultancy itelligence AG – and Unispace Global are moving into the Circle. As they are joining several other IT companies based there, the complex is rapidly emerging as a leading technology and innovation cluster in Switzerland.
Biopharma multinational MSD (Merck Sharp & Dohme AG) has increased the amount of floorspace it originally leased in the Circle from around 4,300 m2 to 6,100 m2. Other tenants, including Inventx and Raiffeisen, have also opted to extend the space they are renting in the Circle. Advance leasing commitments are currently running at over 80%. With these additionally recruited tenants and added areas, the office space in five of the six buildings is now leased, and only around 10,000 m2 of the total 70,000 m2 office space is still available.
Handovers are ongoing, and we are expecting only slight delays before this process is complete. It is anticipated that the park will be opened in the autumn. Opening of public-facing areas such as the congress centre, hotel, restaurants and shops is planned from November 2020. Inauguration celebrations will be held in spring 2021 once the project has been completed.
INFRASTRUCTURE AND PROJECTS
EXPANSION OF BAGGAGE SYSTEM AND LANDSIDE PASSENGER AREAS
The baggage system is currently being upgraded. Despite interruptions in some foreign supply chains during recent months, the overall timetable has not been affected. The first new part of the system – a new baggage transport line – commenced operation back in February. Work on the new building will be completed by the end of the year, followed by gradual installation of the new central area for the baggage sorting system, along with the renewal of other parts of the system at the airport. The project is expected to be completed by 2025.
The civil engineering works for extending the landside passenger areas are also on track. The passage to the Circle will be finished in time for entering service in the autumn. The above-ground work will commence slightly later than planned. The new landside passenger areas – including new retail outlets, underground logistics and a food hall above ground – are scheduled to come on stream in stages from the summer of 2025.
At the beginning of 2020 we took over operational management of two Brazilian airports Vitória and Macaé. All eight Latin American airports we are involved with likewise saw a massive drop in traffic as a result of the travel restrictions imposed during the coronavirus pandemic. Despite minimal operations, immediate measures taken helped to secure liquidity. Since the travel restrictions were imposed by official order, the airports are entitled to compensation from the respective authorities. These compensation packages are to be negotiated in detail in the coming months.
The development work for the new Noida International Airport near Delhi, for which we were awarded the operating licence at the end of 2019, is proceeding according to plan. The concession agreement is due to be signed in the second half of this year and construction work is scheduled to commence in the second quarter of 2021.
Following the awarding of the new airport operating licences in Brazil and India, the focus of our international business in the immediate future will be on consolidation in these two key markets.
Chairman of the Board of Directors
Chief Executive Officer