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HomeMy WebLinkAbout028865 RES - 11/16/2010RESOLUTION NO. A RESOLUTION OF THE CITY OF CORPUS CHRISTI, TEXAS ACCEPTING THE REPORT OF TRILLION AVIATION CONCERNING THE OPERATION OF THE CITY'S AIRPORT; AUTHORIZING THE .. CITY SECRETARY TO ACCEPT AND FILE SUCH REPORT; AUTHORIZING MATTERS INCIDENT AND RELATED THERETO; AND PROVIDING AN EFFECTIVE DATE WHEREAS, the City Council (the Governing Body) of the City of Corpus Christi, Texas (the City) has previously issued the "City of Corpus Christi, Texas General Airport Revenue Bonds, Series 2000A (Exempt Facility Bonds)" (the Series A Obligations) and the "City of Corpus Christi, Texas General Airport System Revenue Bonds, Series 2000B" (the Series B Obligations and, together with the Series A Obligations, the Obligations); and WHEREAS, the City's ordinance establishing the program pursuant to which each series of Obligations was authorized, adopted by the Issuer's City Council on August 22, 2000 (the Master Ordinance), requires the Issuer to at all times fix, charge, impose and collect rentals, rates, fees and other charges for the use of the City's Airport (the Airport) in such amounts to satisfy revenue to expense coverage ratios specified in the Master Ordinance; and WHEREAS, the Master Ordinance continues by stating that if these coverage ratios in any fiscal year of the City fall below the specified levels, the City shall, within a specified time (with which the City has heretofore complied) request that an airport consultant rnalce its recommendations, if any, as to a revision of the City's Airport rental's, rates, fees and other charges, operating expenses, or the method of operation of the Airport in order to satisfy as quickly as practicable the aforementioned coverage covenants; and WHEREAS, the recommendations of the airport consultant are to be filed with the City Secretary; and WHEREAS, on August 27, 2010, Trillion Aviation, consultants to the City's Airport (the Airport Consultants), delivered to the City its report concerning the Airport's operation (attached hereto as Appendix 1, the Report), which Report was commissioned and delivered in accordance with, and as required by the provisions of, the Master Ordinance; and WHEREAS, after review of the Report, City staff has recommended its acceptance by the Governing Body, the filing of the same with the City Secretary, and, to the extent practicable, the implementation of the recommendations therein within a reasonable timeframe, all as specified in the Master Ordinance; now, therefore, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF CORPUS CHRISTI, TEXAS THAT: SECTION 1: The Governing Body hereby accepts the Report, directs the City Secretary to accept and file the same in the official records of the City, and, to the extent permitted by applicable law and subject to compliance with all other legal prerequisites (including, but not limited to, further approval by this Governing Body prior to the execution of any contracts obligating the City to 90235640.1 02$865 INDEXED undertake any action or accept any financial or other liability), City staff is hereby directed to commence implementation of the recommendations made within the Report within a reasonable timeframe. SECTION 2: City staff is hereby authorized to take all action necessary or incidental to the implementation of this Resolution, as well as the filing of all notices (including material event notices) as required or that are desirable with respect to the same. Any action heretofore taken on behalf of the City in furtherance or in relation to the subject of this Resolution are hereby ratified and approved as the act and deed of the Governing body. SECTION 3: The recitals contained in the preamble hereof are hereby found to be true, and such recitals are hereby made a part of this Resolution for all purposes and are adopted as a part of the judgment and findings of the Governing Body. SECTION 4: All ordinances and resolutions, or parts thereof, which are in conflict or inconsistent with any provision of this Resolution are hereby repealed to the extent of such conflict, and the provisions of this Resolution shall be and remain controlling as to the matters resolved herein. SECTION 5: This Resolution shall be construed and enforced in accordance with the laws of the State of Texas and the United States of America. SECTION 6: If any provision of this Resolution or the application thereof to any person or circumstance shall be held to be invalid, the remainder of this Resolution and the application of such provision to other persons and circumstances shall nevertheless be valid, and the Governing Body hereby declares that this Resolution would have been enacted without such invalid provision. SECTION 7: It is officially found, determined, and declared that the meeting at which this Resolution is adopted was open to the public and public notice of the time, place, and subject matter of the public business to be considered at such meeting, including this Resolution, was given, all as required by Chapter 551, as amended, Texas Government Code. SECTION 8: This Resolution shall be in force and effect from and after its final passage, and it is so resolved. [The remainder of this page intentionally left blank.] -2- 90235640.1 PASSED, ADOPTED AND APPROVED on this the 16th day of November, 2010. ATTEST: ,City Secrretary t r (CITY SEAL eP APPROVED THIS 16th DAY OF NOVEMBER, 2010: CITY OF CORPUS CHRISTI, TEXAS Mayor 90235640.1 -3- THE STATE OF TEXAS )( COUNTY OF NUECES )( 1, the undersigned, City Secretary of the City of Corpus Christi, Texas, do hereby certify that the above and foregoing is a true, full and correct copy of a Resolution passed by the City Council of the City of Corpus Christi, Texas (and of the minutes pertaining thereto) on the 16th day of November, 2010, relating to establishing the City's acceptance of the report of Trillion Aviation concerning the operation of the City's airport, which Resolution is duly of record in the minutes of said City Council, and said meeting was open to the public, and public notice of the time, place and purpose of said meeting was given, all as required by Texas Government Code, Chapter 55L EXECUTED UNDER MY HAND AND SEAL of said City, this the 16th day of November, 2010. -4- 90235640.1 Corpus Christi, Texas l(P+Li of )Vo1� �oPa' ,2010 The above resolution was passed by the following vote: Joe Adame Chris N. Adler Larry Elizondo, Sr. Kevin Kieschnick Priscilla Leal John E. Marez Nelda Martinez Mark Scott A bs(44,4 /4i AditA Ai, 028865 90235640 .1 APPENDIX I The Report Appendix 1-1 trillion AVIATION Bond Covenant Compliance Report To: Fred Segundo, Director of Aviation Enrique Castillo, Assistant Director of Aviation From: John DeCoster and Dan Benzon, Trillion Aviation Date: August 27, 2010 Re: Bond Covenant Compliance Report Background The following report represents an analysis of the current and projected financial condition of the Corpus Christi International Airport (CRP). The analysis was commissioned as a result of insufficient airport fund net revenues to cover the one hundred twenty five percent (125%) debt service coverage requirement for the outstanding general airport revenue bonds as is required under the terms of the bond ordinance covenants. There are two series of bonds that are impacted by the coverage requirement. This analysis will primarily focus on the revenue and expense elements of the airport operation to review the trends that have formed over the past few years and to develop an action plan for stabilizing the financial performance of CRP to help ensure its future financial self sufficiency. This report assesses each major category of airport revenues and expenses and recommends opportunities to improve financial performance through increasing revenues and decreasing expenses to provide sufficient available cash to an amount reasonably in excess of the minimum 125% coverage requirement. This report further recommends that certain management reporting tools are implemented in order to provide real time management to assess financial performance. Since many of the contractual arrangements in CRP are existing agreements and have business terms that span over a number of years, the ability to impact the revenue stream in any single year is limited, except in a few unique situations. The following are the significant contracts that impact the revenue stream: 1. Airline Use and Lease Agreement- Executed in 2009 for a 5 -year term expiring in July 2014. Rents are pre-set at fixed rates with a slight increase each year. Landing fees are based on a full cost recovery methodology for the costs associated with the airfield. Any increased non -airline revenue or reduced expenses will result in a direct benefit to the overall financial performance of the airport based on the rate making methodologies in place. 2. Atlantic Aviation, Fixed Base Operator (FBO) - Atlantic is one of two FBO's on the Airport and its current lease extension expires October 2010. Negotiations ceased due to the unwillingness of Atlantic to accept the new business terms that increase revenue and management control associated with the FBO and the airport is in the process of implementing a new business model to significantly increase the potential return to the airport. Triav, LLC • 4301 W. William Cannon Dr. • Suite B-150, #293 • Austin, Texas 78749 • www.trillionay.com • 763 234-1725 3. Signature Flight Support (FBO) - Signature is the other FBO at the Airport and its lease does not expire until October 2012. Signature's current business terms are substantially the same as Atlantic's and it is anticipated that similar business terms to what has been introduced for the expiring Atlantic lease will be implemented when the current Signature agreement expires. 4. Public Parking- The airport -controlled public parking lot is currently operated with city employees with all revenues being collected by the airport. Management is currently reviewing third party contracting staffing alternatives that would provide more flexibility and increase the margin on the operation. A decision and implementation is expected in the second half of calendar year 2010. 5. Food and Beverage Concession- The current contract does not expire until 2015. The primary location is in the non -secure portion of the terminal and alternatives are being reviewed to increase sales resulting in increased commissions to the Airport. Revenues have been decreasing and alternatives to reverse that trend have been developed and will be implemented in calendar year 2010. 6. Rental Cars- The current rental car agreement expires in 2014 and provides for a Minimum Annual Guarantee (MAC) or a concession fee based on sales, whichever is greater. Most of the car rental concessionaires are paying their concession fee based on the MAG as passenger activity has declined with the recent economic downturn. The Airport has also implemented a Customer Facility Charge (CFC) to fund the proposed improvements in the Car Rental Quick Turn Around (QTA) facility that is currently in design. It will be important to monitor and modify the CFC upon adoption of the comprehensive project design and budget in order to have sufficient revenues to fully support the construction, maintenance, and repair/replacement fund for the facility. All recommendations in this report are made without a specific dollar or percentage target in mind; rather the goal of this exercise is to identify the broadest array of opportunities to increase revenue with measured risk and to reduce expenses without lowering service standards to achieve the airport's goals and objectives. By balancing these components, the result should significantly reduce the risk on the operating budget and provide increased financial stability for airport senior management to have available funds for discretionary spending and additional non -airline revenue generating development. Short and long term financial self sufficiency of the airport is imperative. One significant way to achieve that independence is to diversify the non -airline revenue sources with a goal to have airline rates and charges account for no more than twenty five percent (25%) of the airport's overall revenue stream. Reducing reliance on the airline revenue is beneficial in that additional discretionary non -airline revenue allows the airport to: 1) reduce the financial strain from any one segment of the business; 2) keep the airline rates and charges low, thus increasing the attractiveness of the airport to maintaining and attracting commercial and general aviation service; and 3) insulate the financial stability of the Airport from reductions in scheduled service so as not to pose as much of a short term financial threat as it relates to passenger activity based revenues (i.e., parking, car rentals, food and beverage concessions, FBO's). 2 Outlined below are the agreed to tasks associated with this Bond Covenant Compliance Report. Task 1- Review and assess airport revenues and expenses includable in the rate covenant calculation for FY2009 (and FY2007 and FY2008) For FY2009, a summary of the YTD "variances" in revenues and expenses of actual to budget includes: August -27,329 272,779 September October 42,013 -17,710 -44,100 -77,269 November 32 63,578 December 17,916 95,229 January -17,419 -12,098 February March -24,397 127,841 13,231 49,343 April May 63,954 7,283 -45,054 115,285 The variance report for FY2009 indicates that revenues for the year tracked slightly lower than budgeted and the expenses tracked ahead of budget. The net year to date difference between revenues and expenses is approximately $600,000 favorable. However, since the budget is estimated as a straight line over 12 months, additional in depth analysis needs to be performed for the last 2 months of the fiscal year to ensure there are not unidentified extraordinary expenses pending. While this appears to be an overall positive result, there are timing deficiencies in the reporting and tracking system that need to be addressed in order to provide more "real time" responsiveness to budget performance due to the potential wide swings on a monthly basis actual to a straight line budget. It is recommended that revenues and expenses are analyzed on a month to month basis over the past three year period to determine monthly spending and revenue patterns and correlate that to a corresponding activity level. The FY2011 budget needs to be re -stated and projected on a monthly basis so that the monthly variance reports are managed against meaningful data. The monthly variance reports should also incorporate an "action" section so when the variance is more than 10% or a minimum of $1,000, whichever is greater, there is a detailed explanation regarding the variance. For expenses exceeding the monthly budget, a corrective action statement for implementation by the respective department manager needs to be identified and implemented immediately. With the current straight line allocation of expenses over the twelve months, there is no ability for management to determine if there is a budget problem or a cyclical issue until later into the budget year when there is less time to implement corrective actions. A similar process needs to be incorporated for revenues where revenues are falling short of budgeted levels. In addition to making the managing and reporting on the budget throughout the year a requirement, it is recommended that financial performance should be considered a significant criterion in the annual performance review for department heads. If allowable 3 under city policy, it might be worthwhile to consider an employee incentive program for ideas that are presented by employees that can have an impact on financial performance. Attached, as Exhibit A, is a comparison of the expenditures and revenues for FY2007, FY2008, and FY2009. Expenditures have a certain degree of variability based on activity. Knowing that variability should allow management the ability to adjust services during down times, to save money or to cross utilize resources, little things like changing the frequency of rest room janitorial services because of airline schedule changes can have a savings impact without compromising customer service. identifying and implementing activity based service modifications should be a task immediately assigned to all department heads for development and available for implementation. This Exhibit A also benchmarks the passenger related revenues against the actual activity for each year in order to determine a benchmark revenue unit per passenger. This is an important management tool in that a significant portion of the gross revenues will be passenger activity driven (e.g., concession, parking, PFC's, etc), thus forecasting based upon activity projections instead of historical information should give more accurate guidance in the development of the gross revenue budgets. In addition, this will allow management to follow trends and to determine the impact of relevant variables (e.g., changes in pricing, utilization trends, etc.) and the impact they have on airport revenue. Once again, this also serves as a signal to address negative trends and determine corrective action. On the operating expense side, benchmarking will give management a valuable tool to constantly monitor the expenses versus the passenger activity. One of the most difficult challenges is managing expenses and implementing corrective actions on expenses as it gets further into the fiscal year. Usually the amount that needs to be reduced to bring expenses in line with reduced demand, when the information is not constantly monitored and accurate, is draconian and will have significant impacts on the level of customer service. The challenge is to have in place a tool to keep delayed responses from getting out of control. Benchmarking expenses against historical spending patterns on a monthly basis is an effective tool to accomplish that objective. CRP is staffed higher than many airports its size and thus CRP provides more of the support services directly with airport staff rather than relying on contracted services or the governing body (i.e., the city). While there are certainly services provided by the city for which the city needs reimbursement as part of the city governance structure that are not otherwise performed directly by airport staff, the charge backs have grown recently in addition to the airport directly performing some of the same services. An in depth internal analysis needs to be conducted in order to determine the cost/benefit of the charge back levels. Where there is duplication of services between the airport and the city, a determination needs to be made on the most effective means of providing the service to the airport. Once established, either the airport staffing or city support needs to be adjusted accordingly and the commensurate financial adjustments made. A goal of this analysis is to identify targets for increasing revenue and reducing expenses to maximize net revenues for debt service coverage purposes. A key element included in the task is the identification of management processes that will enhance the ability to effectively track and report the revenues and expenses. In looking at the 4 historical trends and reviewing the multi-year benchmarking of key revenue and expense line items, the following recommendations are being made with regard to reporting, expenses, and revenues: 1. Implement the specific airport and city budget adjustments identified in this report. In addition to the budget targets, develop a benchmark goal for each revenue and expense line item by month based upon historical patterns as identified in Exhibit A against projected activity and have department heads monitor, report, and adjust the operation to meet the financial budget objective and the benchmarking metric. 2. For non -airline revenue streams, have department heads develop a revenue generation plan and projection to generate the maximum revenue possible on an annual basis based on projected activity. 3. Incorporate financial management as a significant criterion in the annual performance evaluation process for department managers. 4. Perform an audit/reconciliation of city services that are charged back to the airport and assess the level of chargeback and/or direct employee staffing. Make a recommendation to adjust or eliminate identified duplications. Task 2- Determine additional considerations of revenue and expense components for calculation Airport economics have grown beyond the philosophy of revenues representing merely terminal rents, landing fees, parking, car rentals, and fuel/land rent from FBO's as the predominant income streams. Airports have become economic engines for their communities and have to be managed as a business enterprise. Financially self sufficient airports have turned the overall airport complex and experience into a regional revenue generating asset. Maximizing the value of the full asset base of the airport includes developing available land; increasing general aviation activity; providing customer amenities that support the airport tenants and visitors; and promoting development of non -aviation activities on the airport. This approach includes airports taking additional risk by broadening their income streams so that all users of the airport complex participate in a "pay for what you use" approach toward the investment that the airport maintains. Outlined below are recommended innovative approaches for increasing non -airline income opportunities for the Airport: 1. Increase revenues from the FBO operations. Typically FBO's are multi-million dollar businesses that return about $100,000 or less annually to an airport. Land rent and fuel flowage fees for fuel sold are the primary sources of those revenues. In the past, commercial airlines purchased fuel from the FBO which made the fuel concession fee a steady revenue stream due to the volume of fuel purchased by the airlines. Since oil skyrocketed a few years ago, airlines have fundamentally changed their approach to providing fuel in spoke cities, and now they purchase the fuel under their volume purchase agreements and supply it to the FBO for storage. Rather than "selling" fuel now, the FBO's are merely storing and dispensing the fuel for an "in to plane" fee. Since the labor, storage, and trucking are the only components and they are not considered eligible for a concession fee to the airport in the current FBO contract, the commercial service fuel sales revenue to the airport has effectively been 5 eliminated. An initiative is underway to change that aspect of the business with a new FBO economic model, management structure, and resulting business terms which will be implemented by January 2011. This model separates the traditional long term FBO leases associated with facility development from the operational performance of an FBO under a short term arrangement so that the airport can adjust the business model as the industry changes and maximize the revenue to the airport from the FBO. 2. Taxis, courtesy shuttles, and limousines utilize the roadway infrastructure of the airport and are supported by airport police. The fees charged to those users need to be commensurate with the investment the airport has made in constructing, maintaining, managing, and refurbishing those assets. in many airports, a permit or activity based fee structure is calculated and imposed to recover their pro-rata portion of those costs. 3. Increase the current long term covered parking area by converting the short term lot to covered parking and establish the parking fees to recognize the added value of the covered parking. Ultimately, all of the parking spaces adjacent to the terminal will be covered commanding a higher rate and improving customer service with the only lower cost parking being the furthest from the terminal, thus incentivizing customers to utilize the higher revenue parking spaces. Also, a review of the hourly parking rates needs to be performed with consideration of front end loading parking fees to increase the revenue from the shorter term parking while not pricing the long term parking non-competitively. Although there will be a capital investment required, this will allow the airport to take a significantly underutilized asset and convert it to premium parking. In addition, it is recommended that the airport develop a premium "preferred customer parking program" that would sell corporate passes for the right to use the close in covered stalls for unlimited parking on a monthly basis. With CRP served primarily as a business travel market, there should potentially be a broad base of potential clients that this program can be offered to which would result in improved customer service perceptions and increased revenue. 4. Develop available airport land. Although most of the land would be used for functions that would not drive revenue other than land rent, aggregating a critical mass on the airport property will give the city the ability to develop hotel and food venues on site which would generate percentage rent in addition to the land rent. Since the airport is not close to quality hotels and/or eating establishments, this becomes an option to make the airport more customer friendly for tenants as well as generate significant revenue from the easily accessible highway. This process has already commenced with the negotiation of a land lease for FedEx Ground that is currently under way. The airport is in the process of creating lease templates that would be readily available to submit to potential developers and accelerate the responsiveness that is essential to compete in the development market. . 5. Develop a convenience store/gas station/food court venue on the airport adjacent to the highway. With the airport exposure from the highway; the convenient on and off ramp; the employee and visitor traffic associated with the airport; and the car rental returns, there should be enough critical mass to develop a "C-store" immediately. This would not require any investment from the airport. The process would include issuance of an RFQ to the industry and have a third party developer take the risk on the development. Land rent and 6 percentage rent on sales would constitute the revenue to the airport. This will be implemented in the second half of calendar year 2010. 6. Continue discussions with DEA for the development of a facility on airport property. A site has been identified and a land lease is being prepared. 7. Pursue a sublease of the vacated DHL facility. DHL ceased operations in the United States and vacated all the existing facilities. To stabilize the revenue and utilization on the facility, a sublease opportunity is under pursuit. 8. Expand/convert the food and beverage concessions on the secure side of the terminal. Since the introduction of limited access to the concourse after 9111, passengers spend most of their airport dwell time on the secure side. Currently, the food and beverage options on the concourse are insufficient and an increased revenue opportunity is currently missed. The main food and beverage concession was developed pre -security prior to 9/11 and is not utilized heavily. In fact, according to the benchmarking analysis in Exhibit A, the net revenue per passenger has dropped the last three years indicating the need to make changes. By relocating some glass partitions, the orientation of the food and beverage facility can be changed to the secure concourse, which is more accessible to the waiting passengers, thus increasing the opportunity to improve sales. It has been shown that passengers, who are the primary spenders in airport food and beverage concessions, do not return back through the checkpoint to utilize concessions once they are through security so there are sales opportunities that are not currently realized because of passenger traffic patterns. Sales at other similarly size airports have shown significant increases when the main concession is within the secure concourse. This will occur in calendar year 2010. 9. Expand the advertising program at the airport to include advertising in the holdrooms as well as placement of billboards on the highway frontage road as well as along Interstate 37 to/from San Antonio. 10. Review the opportunity to add airport -financed T -hangars for general aviation rentals. Under this program the airport would receive all rental income rather than a third party. This is currently being explored. Outlined below are expense recommendations to reduce expenses: 1. Review and implement staffing adjustment plan recommendations. 2. Task department heads with developing dual budgets for FY11, one that is flat and one that defines a 5% reduction in operating expenses to represent a potential projected reduction in passenger activity (excluding staffing related costs). 3. Refinance existing debt based upon call dates. There is a significant amount of debt that has an increasing interest rate of over five percent that is subject to upcoming refinancing in February and August 2011 (at 101% redemption) and February 2012 and thereafter (at 100% redemption). Since interest rates are currently at historically low levels, it is recommended that the city consider refinancing the debt as each call date is realized. It is recommended that staff develop a matrix identifying debt refinancing opportunities and costs and develop a comprehensive financing plan to restructure the debt according to assumptions on rate savings. Implement when savings are projected. 4. Adjust city administrative inter -governmental charges for areas where the services are more efficiently performed or are currently performed by airport services or staff. 7 Task 3- Clarify and categorize rate covenant formula computations Pursuant to the master ordinance under which the general airport revenue bonds were issued, the city covenanted that it would establish and at all times fix, change, impose and collect rentals, rates, fees and other charges for the use of the airport, such that in each fiscal year the net revenues will be at least sufficient to equal the greater of a) all amounts required to be deposited to the credit of the debt service, debt service reserve, operating reserve and subordinated debt funds, or b) an amount not less that 1.25 times the annual debt service requirements for the bonds for such fiscal year. This rate covenant has met and exceeded the second prong of the test above in each fiscal year since issuance of the bonds (in 2000) except fiscal year 2009. In fiscal year 2009, the rate covenant test resulted in a ratio of 1.09 times annual debt service requirements for the bonds, which was the greater of the two standards. In computing the rate covenant test, the operating expenses are subtracted from gross revenues (operating revenues and non-operating revenues). The resulting net revenues are available for debt service and measured against current debt service and average annual debt service to determine if the coverage ratio of 125% of annual debt service requirements is met. See Exhibit B. In fiscal year 2009, operating revenues decreased substantially (approximately 13%) due to reduced passenger activity and decreased non -airline revenues at CRP. This trend was mirrored at airports throughout the country due to the economic recession and the airline industry cutback in capacity. Even though CRP passenger traffic was down less than many of its peer airports, each airport saw a disproportional decrease in customer spending (e.g., concessions, parking, etc.) that exceeded the decrease in enplanement activity. Thus, operating revenues were negatively impacted by both reduced passenger traffic, and for those passengers still traveling, their spending at the airport was significantly reduced. At CRP, greater than 30% of the operating revenues come directly from airline rates and charges with the remainder generated as non -airline revenues. Importantly, due to the current airline lease agreement, the landing fees paid by the airlines is a cost recovery formula and the terminal rentals paid by the airlines are fixed; therefore, the airline terminal rental payments applied to operating revenue do not fluctuate with service, but the increase or decrease in activity does impact the non -airline revenues generated by the passenger traffic. As economic recovery grows, both passenger traffic and customer spending should increase. In addition to the traditional marketing and air service development activities, the airport senior management is enhancing its operating revenue opportunities through new and modified non -airline revenue generating contracts that seek to increase earnings beyond the traditional airline passenger traffic modes (i.e., concessions, parking, etc) as discussed in the section above. Contrary to rate covenant projections in the 2000 bonds' official statement, beginning in fiscal year 2002, operating expenses have substantially surpassed estimates that they would not exceed $5MM annually through fiscal year 2006, thus accounting for all of the unanticipated operating and maintenance costs associated with the new terminal. The 8 operating expenses have averaged $6.74MM over the past seven fiscal years. A significant portion of the manageable operating expenses appear in personnel (i.e., wages, benefits, training, etc.) and intergovernmental charges to the city for services. The current airport senior management has begun reducing these costs (estimated $6.6MM) in fiscal year 2010 and it is anticipated that the operating expenses should and will be further reduced in fiscal year 2011. Non-operating revenue consists principally of airline collected passenger facility charges (currently assessed at the maximum level of $4.50 per enplanement) and investment income, which is determined by the city. While the amount of passenger facility charges received is directly attributable to commercial airline passenger activity, all investment income is based on decisions made outside the airport staff scope. It is essential that such funds are not co -mingled with other city funds, that the qualified investments are conservative and reasonable and that the actual revenue earned is directly credited to the appropriate cost center at the airport. In short, the airline requirement in operating revenue is fixed, while the traditional non - airline revenues and passenger facility charges will vary with commercial airline enplanement activity and the economy. Increasing operating revenues through a broadened non -airline revenue base and decreasing operating expenses through effective cost management practices would preserve an acceptable rate covenant ratio greater than 125% of debt service requirements. In fiscal year 2010, airport senior management appears to be on course for net revenue amounts that exceed the rate covenant requirements. See Exhibit B. Planning for fiscal year 2011, airport senior management is addressing non -airline revenue generation and further operating expense reductions that should provide a foundation to avoid future rate covenant ratio issues and to seek a coverage ratio nearing 150% as airline activity rebounds to pre -economic recession activity levels. Task 4- Analyze and recommend opportunities for revenue enhancement, expense reductions, budget benchmarking, and rate covenant controls and corrective actions for airport go -forward planning. When airports are part of a city or county government structure, there is typically less flexibility to reduce positions or outsource city jobs because of union contracts or city policies. Major targets for outsourcing are usually parking management, engineering services, janitorial, and maintenance services. Because these tasks usually represent a disproportionate number of employees, if they are employees rather than contract services, then that factor has a significant impact on the number of employees reported at any airport. For U.S. airports the size of Corpus Christi, the range of direct employees typically ranges from 20 to 100 depending on the level of outsourcing. CRP is definitely at the high end of that range, which drives a higher fixed cost structure and a higher benefit cost structure since benefit packages for governmental agencies typically exceed those for contract services. As additional facilities are developed or taken under direct management by the airport, it is recommended that the services provided by the current employee base and/or contractors should be broadened to absorb service for the ancillary facilities with little/no additional staff resulting in the overhead being spread throughout a broader base. An example is having airport staff/contractors maintain the QTA with no additional staff and 9 transfer that commensurate overhead to that cost center paid for with CFC's and reduce the expense from the direct terminal cost center. One of he most difficult issues to deal with during economic stress is that of employees and the difficult task of adjusting staffing levels to meet the new normal. A number of specific opportunities are recommended for implementation with regard to staffing and outsourcing. Senior airport staff and its consultants have discussed a proposed plan for reducing direct employee staff or transferring staff costs to projects to best utilize resources. By transferring project related services directly to the projects rather than maintain those resources in the operating budget, the airport will be in a position to either support the cost of those specialized services with projects and fund them through the projects and/or eliminate them when there are no longer projects to support. Task 5- Preliminary findings and recommendations The need to improve the quality of the management reporting process is a key component to ensuring that management has good and timely information to respond and make informed decisions. There is plenty of information available currently, but it is voluminous and disjointed. Much of the reporting has evolved through the years through a number of airport administrations. A new approach needs to be taken with the tracking and reporting streamlined and consolidated so that management can track the interrelatedness of activity with results. Merely looking at historical patterns will not allow management the ability to react to changes in a real time mode. Due to deteriorating economic conditions impacting air travel and certain passenger based customer spending, CRP has experienced a decrease in airport passenger traffic, which is not expected to change significantly in the short term with the reduced airline capacity industry wide. The commensurate reductions have resulted in decreased gross operating revenues including a reduction in traditional non -airline revenues such as concessions and parking as well as decreased passenger facility charges. All are essential components in determining the rate covenant ratio. In 2009, Airport senior staff negotiated and executed a five-year use and lease agreement with all three commercial carriers, namely American, Continental and Southwest, that establishes fixed airline terminal rates and charges over the time period and commits the airlines to the square footage identified in their respective leases through the full lease term. Regardless of changes in service levels, the airlines are required to pay rental charges and fees equivalent to the budgeted pre -determined airport requirement. Airport senior staff has initiated a number of non -airline revenue producing projects to increase the non-traditional non -airline revenues at CRP. A signed letter of intent has recently been received from FedEx Ground to develop a distribution facility on the airport. In addition, discussions are actively occurring with the Coast Guard and others for additional development on airport property. Airport staff will also be soliciting interest in the development of landside property for a convenience store offering automobile gas and nationally recognized fast food vendors to support the tenants and car rental operations on the airport. Additional specific recommendations for increasing revenue are included above. 10 Regarding operating expenses, there are two main drivers of cost that airport senior management should continue to address. First, with the decrease in gross operating revenues due to the economic recession, airport staffing levels should be commensurately adjusted to better reflect the size of operation or outsourcing alternatives researched and implemented where the cost/benefit is supported. Second, with the reduction in operating expenses at the airport, there should be similar reductions in inter -governmental charges as there are both redundancies and lower utilization levels than are currently reflected in the required budget and in accordance with the analysis recommended in this report. With significant right sizing in personnel expenses, aggressively pursuing outsourcing alternatives, and adjustments in inter- governmental charges, the airport senior staff can adjust its costs to be in line with similar sized competitive airports and better support the activity level for CRP. Another key component of the overall expense structure that affects both the expense and bond coverage requirement is the overall airport debt. The city and airport management should complete the analysis recommended in this report and develop a strategy to reduce overall debt; thus, lowering the annual debt service obligations. The unencumbered cash can then be used to invest in infrastructure requirements such as the covered parking infrastructure, T -hangars, revenue producing billboards, and additional general aviation facilities. While the airport has minimal control over some aspects of the rate covenant ratio components, in the areas where senior management can impact the rate, it has initiated corrective actions and will continue to pursue all feasible alternatives. In 2011 and beyond, through incorporation of these adjustments impacting net revenues available for debt service, the rate covenant ratio should not decrease below 125% of debt service requirements and the airport senior staff should set a new goal of meeting a level approaching 150% on a going forward basis. 11 CO T.. CD O N 47 CD O 07 O N M COh Tr CO 47 CO O c7 C7 v CO c7 h m N CO Nr- N M O a0 C4 v07 M r O) N 10 CO h M h p (0 4) CO CO O O CO h V d) M M CO d7 O O N O N N O CO O r N O O t4 r 4) V N r CO CO O O N p CO 10 CO CD O) CD C r N r7 0 0 0 0 N O O O O r M r O O O h C N r O r r 47 r 10 O 6 0 e5 0 M 0r of r W Enplanements 69 64 64 64 64 69. 64 69 69 69 69 69 64 64 64 64 64 69 49 69 69 69 64 69 64 64 64 64 64 64 64 64 64 64 h h h h h h h 1- h h h h h h h h 1. h r-1` h h h h h h h h C7) O CD 07 O) CD 0) CD O) 0) CA CO CD CD 0) CD CI) CD 0) Q) O O O) O) 01 01 CD O N N N CV N N 04 N N 04 N N CV N N N N N N G N N N N N N N N N 0000000000000000000 ci MM ME o o cies" cep 0 mO 0 o M0 vv rh et vvvvvvvv v v vvvv v dv ..ch et eh a vvvv 10 m EL W h 0-0-0-0- 0) 0)0) 0) 6) N N N N N M 050)0707 CC 0 0 0 0 v v v v v et O d' CO O) 4) 00 CO r r 47 4) 07 W N O O 01 h Cl v O 07 OD O CO CO v LO CO C0 C) 07 Ns O O 0 'Cr h O 00 tl' N O 4) 0 4 07 1n CO h V h co m co n h N CD O C7) CO 47 N O CO O 00 r O) CO N CD CO O 4 N 00 07 co O 01 v Cl h N O co 1� O V O 4) 0 r o co. rOY47hi�h4)• d--r47cOMt0W47h CV- C?Orn47CDODIDN h..— CDo 0 P. in 470)Mr00707retr CO-U)00)CO hCDU7007CV U7 CD CD dt .4r UU) r400) O CO r N r r v CD N r 07 0 0 rt N 47 eh 0 C7 V' V� M N N N v v CD N r r r 40 N r r r co r 63 69 69 .64 64 64 64 44 69 0. 64 64 64 ED. 64 E4 69 64 64 64 CO. 64 64 64 Cis cis 64 69 64 69 69.49 49 69 O CO CO 0 N C0 N 4) M h v CA 4) u)400 10 O t0 CD CO ,1- C.O h N 4) [- r t7) N O W h inV' O M C'7 N O r O C) OD OD r17 Cr) O C D V N 10 47 CO V st CDVS 0. 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O a ca a O 1- I- F- F rY F- F 6- 4, a p 0 Cr 0 0 0 O O 0 O O O O 0 0 ED 0 0 0 N M V N Or .cr CD CO 11) CA O N (4 h 4) O O O O OM CO CO CO CO V' U744) 47 47 CO 0 0 0 0 G C O O o 0 O o 0 0 0 0 0 1')40''))CN7MMCO MCOCO0)iNNCV 00440c1')cN')CCOECV NOONOCN7 0 40 0 0 0 M ''S' 0 0 OC) CO N C O 0 0 01 0 0 0 0 0 nLOrn474)4)10tO CO 40 M CO CO CO CO CO CD h LO C) 0 CO CO 0 0 0 4D CD 0 60359 60365 Rate Covenant Test Fiscal Year Ending July 31, 2010 \ 2 N CO q 2 CO CO T- w 0 w CO OD 4 & 0 K - k CO k k c e _ CJ n T T k CO CO CO CO CO /\ ¥ m o & 4 ( N 7 0 \ CO CO c e , c.1 n - _ kT k\ \ k k c CS) � 7 w e - _ r 0 0 CI CI 0 0 0 0 0 k\ k\ o C CO k CO CO CO ¥ m .- c..i _ m = k \ \ & 0) as as 41) Cll o o Combined Net Operating income Combined non -Operating Revenue Net Revenue Available for Debt Service Current Debt Service Current Debt Service coverage Rate Covenant Test: *Oper Rev, Oper Exp and Non-Oper Rev updates; June rough projections (not official) m : k k /ems\ \ k 0) _0 R 7 \ k/mak k k O 2 / _ c ' e = 2 70k\ . 2I 2f cs 7 q % 17 222E 0 _ a ®®k7 u\ a\E\ 1a5 000m 7_ N 0 \ / trillion AVIATION Bond Covenant Compliance Report — Executive Summary August 27, 2010 Background The bond covenant compliance report represents an analysis of the current and projected financial condition of the Corpus Christi International Airport (CRP). The analysis was commissioned as a result of insufficient airport fund net revenues in fiscal year 2009 to cover the one hundred twenty five percent (125%) debt service coverage requirement for the outstanding general airport revenue bonds as is required under the terms of the bond ordinance covenants. There are two series of bonds that are subjected to the coverage requirement. This analysis will primarily focus on the revenue and expense elements of the airport operation to review the trends that have formed over the past few years and to develop an action plan for stabilizing the financial performance of CRP to help ensure its future financial self sufficiency. Objective This report assesses each major category of airport revenues and expenses, and recommends opportunities to improve financial performance through increasing revenues and decreasing expenses to provide sufficient available cash to an amount reasonably in excess of the minimum 125% coverage requirement. In addition, this report recommends certain management reporting tools for implementation to provide real time ability to assess financial performance. Since many of the contractual arrangements in CRP are existing agreements and have business terms that span over a number of years, the ability to impact the revenue stream in any single year are limited, except in a few unique situations. Reporting A variance report for fiscal year 2010 indicates that revenues for the year tracked slightly lower than originally budgeted and the expenses tracked over budget. The net year to date difference between revenues and expenses appears to be approximately $600,000 (favorable). However, since the budget is estimated as a straight line over twelve (12) months, additional in depth analysis needs to be performed for the last two (2) months of the fiscal year to ensure there are not unidentified, extraordinary expenses pending. While this appears to be an overall positive result, there are deficiencies in the reporting and tracking system that need to be addressed in order to provide more "real time" responsiveness to budget performance due to the potential wide swings on a monthly basis. It is recommended that revenues and expenses are analyzed on a month-to- month basis over the past three-year period to determine monthly spending and revenue patterns, and then to correlate that to a corresponding activity level. The fiscal year 2011 budget needs to be restated and projected on a monthly basis so that the monthly variance reports are managed against meaningful data. The monthly variance reports should also incorporate an "action" section so when any variance is more than 10% or a minimum of $1,000, whichever is greater, there is a detailed explanation regarding the variance. For expenses exceeding the budget, a Triav, LLC • 4301 W. William Cannon Dr. • Suite B-150, #293 • Austin, Texas 78749 • www.trillionay.com • 763 234-1725 "corrective action statement" for implementation by the respective department manager needs to be identified and implemented immediately. Staffing and Allocations CRP is staffed higher than many airports its size, and therefore, CRP provides more of the support services directly with airport staff rather than relying on its governing body (i.e., the city). While there are certain services for which the city needs reimbursement as part of the city governance structure that are not otherwise performed directly by airport staff, the charge backs have grown recently in addition to the airport directly performing the same service. An in-depth internal analysis needs to be conducted in order to determine the appropriateness of the charge back levels. Where there is duplication of services between the airport and the city, a determination needs to be made on the most effective means of providing the service to the airport, Once established, either the airport staffing or city support needs to be adjusted accordingly and the commensurate financial adjustments made. Recommendations In looking at the historical trends and reviewing the multi-year benchmarking of key revenue and expense line items, the following recommendations are made with regard to reporting, expenses, and revenues: o Implement the specific airport and city budget adjustments identified in this report. In addition to the budget targets, develop a benchmark goal for each revenue and expense line item by month based upon historical patterns. o For non -airline revenue streams, have department heads develop a revenue generation plan and projection to generate the maximum revenue possible on an annual basis. o Incorporate financial management as a significant criterion in the annual performance evaluation process for department managers. o Perform an audit/reconciliation of city services that are charged back to the airport and assess the level of chargeback and/or direct employee staffing. Make a recommendation for a reduction to eliminate identified duplications and to adjust inter -governmental allocations to the airport. Outlined below are recommended innovative approaches for increasing non -airline income opportunities for the Airport: o Increase revenues from the FBO operations. o Taxis, courtesy shuttles, and limousines utilize the roadway infrastructure of the airport and are supported by airport police. The fees charged to those users need to be commensurate with the investment the airport has made in constructing, maintaining, managing, and refurbishing those assets. In many airports, a permit or activity -based fee structure is calculated and imposed to recover their pro -rata portion of those costs. a Increase the current long-term covered parking area by converting the short-term lot to covered parking and establish the parking fees to recognize the added value of the covered parking. o Develop available airport land and sublease vacated facilities. o Develop a convenience store/gas station/food court venue on the airport adjacent to the highway. 2 o Expand/convert the food and beverage concessions on the secure side of the terminal. Outlined below are cost recommendations to reduce expenses: o Review and implement staffing adjustment recommendations. o Task department heads with developing dual budgets for fiscal year 2011, one that is flat and one that defines a 5% reduction in operating expenses to represent a potential projected reduction in passenger activity (excluding staffing - related costs). o Refinance existing debt based upon call dates. o Reduce or eliminate the city administrative inter -governmental charges for areas where the services are more efficiently performed or are currently performed by airport services or staff. Conclusion While the airport has minimal control over some aspects of the rate covenant ratio components, in the areas where senior management can impact the rate, it has initiated corrective actions and will continue to pursue all feasible alternatives. In fiscal year 2011 and beyond, through incorporation of these adjustments impacting net revenues available for debt service, the rate covenant ratio should not decrease below 125% of debt service requirements and should allow airport senior staff to set a new goal of meeting a level approaching 150% on a going forward basis. 3