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Airport Authority Hong Kong: Financial challenges at the turn of the decade

On 21 October 2020, Cathay Pacific announced Hong Kong’s biggest mass lay-offs in three decades , cutting 5300 jobs in the city and closing its regional airline , Cathay Dragon, in a desperate restructuring attempt to survive the coronavirus pandemic.Cathay Pacific also said that it would expect to run at 10% of its pre-pandemic passenger capacity for the rest of 2020.

Cathay Pacific's current troubles would have been unforeseen about one and a half years ago before social unrest in Hong Kong as well as the global COVID-19 pandemic forced a drastic decline in daily passengers by 99% compared to the previous year.

It would not just be Cathay Pacific that was having problems - other international airlines operating at Hong Kong International Airport were not spared from the crisis too and had to reduce or even terminate their operations. This meant that Hong Kong International Airport, run by Airport Authority Hong Kong, could not escape whatever difficulties had befallen their airline customers.

Not surprisingly, over the first nine months of the year, HKIA handled 8.6 million passengers and 124,555 flight movements, reporting 84.5% and 60.9% declines, respectively. Cargo throughput saw an 8.4% drop to 3.2 million tonnes.

With Airport Authority Hong Kong unable to generate sufficient revenues from airline operators, tenants as well as passengers, it has to face one of the most financially-challenging periods in its history.

In this article, we review the Airport Authority Hong Kong's operational and financial performance over the past ten years to understand the extent of challenges that it faces to maintain its financial well-being.

Traffic Statistics

Over the past ten years, passenger traffic at Hong Kong International Airport grew at an average annual growth rate of 1.9%, reaching 60.9 million passengers in the year ending in March 2020 from 51.5 million passengers in the year ending in March 2011. Passenger traffic handled in the year ending in March 2020 declined by 18.9% compared to that in the previous year.

Annual passenger traffic growth had been positive over the past 10 years until the year ending in March 2019, following which the social unrest caused by large-scale protests that broke out in Hong Kong led to a decline in passenger traffic to and from the city.

The city's situation was exacerbated by the impact of the global COVID-19 pandemic in February and March of 2020, which further lowered the demand for air travel.

As a result, over the first quarter of 2020, HKIA handled 8.2 million passengers and 63,345 flight movements, representing year-on-year decreases of 56.5% and 40.1%, respectively. Cargo throughput fell 10.9% to 988,000 tonnes compared to the same period last year.

Aircraft movements at Hong Kong International Airport followed a similar trend with an average annual growth rate of 2.0% over the past ten years to reach 377,000 movements in the year ending in March 2020 from 316,000 movements in the year ending in March 2011.Aircraft movements for the year ending in March 2020 declined by 12.1% compared to that in the previous year.

In comparison to the growth in passenger and aircraft traffic, growth in cargo traffic at Hong Kong International Airport over the past ten years has been more challenging, with the average annual growth rate being 1.3% and cargo traffic facing year-on-year declines in the years ending in March 2012 , March 2016 ,March 2019 and March 2020. These declines could be attributed to challenges in the global trading environment.

In particular,due to the disruption of the global supply chains caused by the COVID-19 pandemic as well as the fallout from trade disputes in the region such as the US-China trade war, cargo traffic in the year ending in March 2020 fell by 7.1% to 4.7 mil tons compared to that in 2019.

Financial Performance

Airport Authority Hong Kong's turnover grew at an annual average rate of 5.5% over the past ten years to reach HKD 17.1 bil in the year ending in March 2020. This was largely in line with the trend of increasing passenger traffic until the year ending in March 2019.

While turnover for the year ending in March 2020 had declined by 12.1% compared to the previous year due to the fall in passenger traffic by 18.9%, turnover for the year ending in March 2019 had declined by 11.5% compared to the previous year. This was attributed to a one-off gain from the sublease of land at HKIA for SKYCITY's hotel development in 2017/2018 and lower revenue from retail licences and airside support services franchises in 2018/2019.

Airport Authority Hong Kong's operating expenses (opex) grew at a annual average rate of 7.2% over the past ten years to HKD 10.8 bil. Operating expenses for the year ending in March 2020 continued to see a year-on-year increase despite the fall in passenger traffic.

The biggest increase in annual operating expenses was seen in the year ending March 2016 by 15.9% compared to the previous year. This was due to a mainly due to inflationary pressures, strong traffic growth and expenditures required to comply with the Environmental Permit for the three-runway system (3RS) during the fiscal year.

Airport Authority Hong Kong's earnings before interest, taxes, depreciation, and amortization (EBITDA) grew at an average annual growth rate of 3.1% over the past ten years, which was lower than the average annual growth rate for passenger traffic at 3.9%.

Challenges were faced maintaining a year-on-year increase in EBITDA over the past two fiscal years with turnover decreasing but operating expenses still increasing.

It generated HKD 9.2 of EBITDA per passenger in the year ending March 2020 from HKD 7.0 per passenger generated in the year ending in March 2011.

The pressures from the external environment facing Airport Authority of Hong Kong have affected its profits - a closer look at its cash position and balance statements also provide a greater understanding about the other challenges Airport Authority Hong Kong faces.

At the end of March 2020, Airport Authority Hong Kong reported that it held HKD 12.9 bil in cash and cash equivalents, a 39.0% decrease from that held at the end of March 2019.

The steep decline in cash and cash equivalents were partially due to the lower profits generated by Airport Authority Hong Kong, which translated into lower net cash generated from operations.

In the year ending March 2020, net cash generated from operations at Hong Kong International Airport was HKD 10.0 bil, 17.6% lower than that generated in the previous year.

While Airport Authority Hong Kong's poorer cash position as of March 2020 was caused by lower profits which translated into lower net cash generated from operations, the cash outlay for capital development projects should also not be overlooked as a factor for the poorer cash position.

The protests in Hong Kong as well as the COVID-19 pandemic could not have come at a worse time just as Hong Kong Airport Authority had intensified its investment in capital development projects in order to improve the capacity and enhance the performance of Hong Kong International Airport.

While annual capital expenditure over the past 10 years had been kept below HKD 5.5 bil until the year ending in March 2017, annual capital expenditure gradually increased from HKD 16.3 bil in the year ending in March 2018 to HKD 21.3 bil in the year ending in March 2020, just when the COVID-19 pandemic had started to add on to problems already caused by the protests.

This congruence of factors therefore put pressure on Hong Kong Airport Authority's ability to maintain a healthier cash position.

The decline in cash and cash equivalents held as current assets by Airport Authority Hong Kong contributed to a HKD 8.6 bil decline in current assets to HKD 16.3 bil at the end of March 2020 .

While current assets failed to grow in the year ending in March 2020, current liabilities held by Airport Authority Hong Kong fell by HKD 0.6 bil to reach HKD 15.0 bil at the end of March 2020.

Current liabilities had increased significantly from HKD 8.7 bil as of the end of March 2018 to HKD 15.6 bil as of the end of March 2019 mainly due to an increase in trade and other payables.

The decrease in current assets and increase in current liabilities held by Airport Authority Hong Kong over the past 2 years have forced down Airport Authority Hong Kong's current ratio from 2.6 as of the end of March 2018 to 1.1 as of the end of March 2020.

While a ratio of 1.1 indicates that Airport Authority Hong Kong is just able to cover its short-term obligations, the current climate in which the airport operates - revenue generation has become a bigger challenge than ever - necessitates that it has to maintain a higher current ratio in order to improve its liquidity position.

Fortunately, in June 2020, Airport Authority Hong Kong received a lifeline with a signing of five-year HKD 35 bil loan facilities with 21 local and international banks. The facilities comprise a term loan tranche of HKD 17.5 bil and a revolving credit facility tranche of the same amount. They will be used for funding Airport Authority Hong Kong's capital expenditure, including that of the Three-runway System (3RS) project and for general corporate purposes.

In any case, the loan facilities are expected to improve Airport Authority Hong Kong's liquidity position.

Conclusion

As of October 2020, there are no signs of an end to the global COVID-19 pandemic and the International Airport Transport Association (IATA) only predicts a recovery to pre-COVID-19 levels in 2024 at the very earliest.

This means that an airport like Hong Kong International Airport which depends fully depends on international traffic will need to bite the bullet, tighten its budget and cut operating costs to their essentials. At the same time, Airport Authority Hong Kong would have to be innovate and think out of the box by looking at alternative sources to generate revenues.

In the meantime, it is clear that Airport Authority Hong Kong sees the current state of affairs as temporary as it has not given up on its expansion plans. The optimism about Hong Kong International Airport's long-term prospects is shared by Hong Kong's financial industry at least with the signing of the long-term loan facilities.

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