Transcription:
Mike Scarchilli (00:04):
Hi everyone and welcome to the Bond Buyer Podcast, your essential resource for insights into all things municipal finance. I'm Mike Scarchilli, editor-in-chief for the Bond Buyer. And today's episode features a timely and informative conversation recorded live earlier this month at the Bond Buyer's Southeast Public Finance Conference in Atlanta, where aviation finance leaders shared insights into the rapidly evolving airport sector. Moderated by Asha Mathew of Assured Guaranty, the panel features Kathleen Sharman, chief Financial Officer of the Greater Orlando Aviation Authority, Damian Brooke, Executive Vice President and Chief Financial Officer of Tampa International Airport, and Kevin McPeek, Managing Director at PFM Financial Advisors. Together they discuss shifting passenger demand, capital planning, alternative revenue strategies, and the role of federal grants in funding critical infrastructure projects. They also explore how Florida airports are adapting to economic pressures, policy changes, and funding constraints while positioning themselves for long-term growth. Let's get into it.
Asha Mathew (01:13):
Good morning everyone. We're so glad that you could join us. As you've heard, we have three esteemed panelists here who are experts in the airport sector. We've heard from two amazing panels on transportation, and so we're just focusing our efforts on the airports right now. We're going to just talk about the aviation industry and the constantly adopting shifts in passenger demand, technological advancements, economic pressures, global events. So stay tuned. We have a great discussion for you. We have two o and D airports here on this panel, and they're about less than two hours away from each other, so I'm sure there's going to be some overlap here. So we'll start with Kathleen on this question. Since Orlando has a larger international footprint, are you seeing increases or a softening in the domestic leisure market? And maybe you could provide some insight on the recent passenger volume and trends of the airport.
Kathleen Sharman (02:12):
Sure. Thank you very much and it's a pleasure to be here. Yeah, it's actually Doha and it was really cool. So yes, in terms of traffic, just to kind of pile on I guess to the last panel a little bit, the governor DeSantis did really do a good job keeping the state open during the COVID pandemic, and while we were very, very hard hit, when Disney World closes, you're in trouble, right? They don't close. So when that fateful day happened, we're like, oh my goodness. So we really took the big nose dive and probably bigger fell harder and faster than anybody, but certainly by 2022 we're fully recovered and saw a great increase. And I don't know, one of my favorite movies is the movie Space Balls. I don't know if you guys know that movie, right? But when Darth Helmut talks, he's going fast and he goes, ludicrous, speed
(03:15):
Well, we had ludicrous speed, like ludicrous growth in employments in 2023 and 2024. It was just crazy. And a lot of that fueled by the ULCC, the ultra low cost carrier, the frontiers and the spirits who increased seat capacity, and then with all the government assistance, people who never even flew before had the ability to travel. And they traveled to probably Damien's airport as well because Florida was open for business. And I think that there was a really good balance in keeping us safe, in keeping us open, which was terrific. So then fast forward to now, and while we have budgeted and we are seeing a little bit of a pullback in seats in the market, we budgeted a 4% decline actually for this fiscal year. I mean, we had over 58 million passengers last year and about 7.6 million of them were international passengers. We have seen a softening, in fact, year to date or fiscal year to date.
(04:20):
We're actually down a little bit more. We're down almost 6% right now. However, we are blessed in Orlando. While we were very diverse, we have known for our leisure and our theme parks, but we have a lot of other stuff going on. You can debate whether more people are moving or half back in it. But as far as I'm concerned, my commute has doubled since I live here. So I think people are actually moving here, and you can see it in our o and d in our point of sale, really, really increasing. So more people are living here, but the theme parks are constantly reinventing themselves. And in fact, next week Epic Universe is going to open a new theme park. So we're already seeing some of those seats come back. So we think we're going to kind of end up where we thought, and again, just under ludicrous, but still above. If you look at all the graphs that you see and all the pitch books and rating agency presentations and investor presentations, we're still well above the 22 mark. And so I think we're in good shape.
Asha Mathew (05:22):
Damien, do you want to just talk about Tampa and how Tampa is also fairing?
Damian Brooke (05:27):
Yeah, sure. We saw some of the same impacts that Kathleen saw. Obviously we're about 26 million passengers, a little less than half the size of Orlando, but we've seen a lot of the same shifts over the years coming out of COVID, we saw the same recovery. Our problem in Tampa right now is we can't build things fast enough. Like a lot of airports, when you had COVID airports pushed back their large capital projects, we pushed back a new terminal about four years, and the growth came back so fast from COVID that now we're behind the eight where we can't build things fast enough right now having to build remote stands to handle additional services instead of, because we're basically out of gates at this point. Looking at the nearer term first quarter of this year, we've had a hell of a year in Tampa, obviously with storms, I saw a quick recovery over about a three month period, but the first calendar quarter of this year, our traffic was down close to 5% year over year.
(06:21):
And as we look at the rest of this fiscal year, we're in October one fiscal year, we're projecting to miss budget by about four to 5% for the full year as well. We're also, we're working on our 26 budget right now, and we typically talk to the airlines when we're trying to project passenger traffic numbers. They typically give us different levels of projections that they've come up with, but all the airlines this year have pulled their guidance as everybody in this room knows. So we've actually changed how we're looking at projecting traffic numbers for Tampa for next year. There's a very close correlation between GDP and passenger traffic at airports. So we've actually gone to that methodology really focusing on GDP versus talking to the airlines themselves because I don't think they really have any more of an idea what next year's going to look like than we do. So based on the GDP analysis that we've been doing, we're basically projecting flat traffic next year at Tampa versus this year we'll see a bit of an increase, but that's pretty much just going to be all recovery, getting back the passengers that we lost during with the Milton, with Helene,
Asha Mathew (07:30):
I mean, given those trends, how have you seen the traffic patterns change, I guess over the last 10 years?
Damian Brooke (07:36):
I mean, 10 years ago, Tampa used to be a heavily tourism or leisure driven market. About 65% of the traffic at the airport about 10 years ago was people flying in from Cleveland, going to the beaches and then flying home. Over the last 10 years, we've seen so much growth in the local economy from a business perspective. We've had close to 30 different corporate relocations coming in over the last couple of years. So right now we're a 50, what we call a 50 50 market, 50% originating traffic, 50% destination traffic. If we're going into a recessionary period, we think that puts us in a much stronger position than a market which is more heavily dependent on leisure traffic. So from technology to cybersecurity, we're seeing all these different companies moving into Tampa right now, and that's creating a different issue for us, which is fixing the mass transit issue. We can keep investing in the airport, but does it make sense to keep doing that if you can't get people off the airport, it takes 10 hours to fly from Frankfurt to Tampa nonstop, but if it's going to take two hours to get them the last 10 miles, is it really worth investing billions of dollars into the airport? So we're starting to have those conversations and the community is very focused on the mass transit issue, but it is all impact our longer term plans for the airport.
Asha Mathew (08:59):
Kevin, did you want to add onto that? Or maybe we can discuss more scale?
Kevin McPeek (09:04):
Just to take a step back. And then we're fortunate at PFM to work in a lot of airports in this region, but also a lot of airports nationwide. And I think the question about softening demand, I think across the board in all the regions where we work, I think the answer is folks are starting to see that, but it's in the early stages and I don't think anybody quite knows the extent to which this is just a slight softening or something more. I know rating agencies are already weighing in on the matter and taking different views, but the one point I want to make again is there have been different levels of recovery post pandemic depending on region. It's varied by airport, whether you're a hub or a spoke. And even within airline systems for Delta, for example, their hubs have recovered at different paces.
(09:49):
So it's hard to know what the impact is going to be on an airport by airport basis, but I think the answer is yes, demand is softening. But the point I would want to make in particular to, although I think most of the rating analysts have left, but investors is when we've been talking with rating agencies recently and investors, we show recovery since the pandemic and across the board, traffic and employs are generally at a hundred to 105, 110% of those pre pandemic levels. But when you look at revenues, the security for the garb, the bonds being issued, that revenue performance has been even better. So even a stronger recovery, maybe 20, 30% over 2019 levels. So even if there is a softening of demand, even if that impacts some of those revenues that have grown, there's still strength and a buffer there from the overall credit quality. And I think that obviously traffic is going to move up and down and there's going to be trends here and there. But from a security standpoint, the airports have been very strategic in growing the revenues that they can control during this growth period. And so they're, I believe, much better suited, more strongly positioned than they have been historically, although they've always been well positioned. But again, the ability to grow those revenues in this five year period has been pretty impressive.
Damian Brooke (11:08):
Yeah, I'll jump in on that as well. At Tampa the long term, we do believe the growth is going to continue. We do think it's just hopefully just a one year, two year blip, but our capital program for the next six years is about three and a half billion dollars. It's 6 billion over the next 15 years, and it's all tied to growth. If you look at what the airlines are doing right now over the summer, the airlines, even though load factors are down year over year, about six points, they're filling about 6% less seats than they were about 12 months ago. If you look at the capacity projections going forward for Tampa for June, July, August, projecting their schedules right now show an increase of seats between six and 9% year over year. The airlines are still very, very bullish on Tampa. What we don't know is what percentage of that additional capacity are they going to be able to fill? But long term, we're still very bullet. You heard Mr. Watkins in the last session, he's obviously extremely bullish on the state of Florida. And we are as well. We expect that growth to continue in the longer term. And like I said, the biggest issue we've got is we can't build gates fast enough given the demand that we see for the future.
Asha Mathew (12:23):
So Kathleen, if you wanted to just jump
Kathleen Sharman (12:24):
In just Sure. Well, with this we're they have a saying in airports Council International, if you've seen one airport, you've seen one airport. So even though we're two hours away, we do have subtle differences. Our load factors are holding. Damien talked about the 50 50, we're probably like 30, 70, but we still, and thanks to some of the rating agencies who've kind of had, I'll say an epiphany or a, what do they call that? Evolving...
Kathleen Sharman (12:56):
On exposure to leisure. In fact, at this conference last year, I was on a panel with Joe Lopez. They've definitely seen it as more of a positive. So I'm not totally, I think both are good I guess. But I don't think exposure to leisure is all that bad. And I think in fact during the pandemic certainly it was almost the savior. People really don't want to give up their vacation. And I think as the generations evolve, people are looking more for experiences versus necessarily things. I think we're seeing that. I think, as I said earlier, airlines are putting, just like with Damien, more seats in our market, our load factors are holding. So I think it, it's going to be good in terms of his view on camp build fast enough. I have a different view, and we might get into it a little bit. I mean, we definitely are building also, but I think that part of the key to sustainable growth and managing your growth wisely is to use your assets in an efficient way. So we're also trying to use technology and just the different way that we price things in order to make very good efficient use of our assets so we don't have to necessarily build as fast. Ultimately we will build just like everybody will as we're growing. You see again, those lines going back from, gosh, 1970 and Orlando was like a K quo hut and it was like, no traffic, like 6 million, and now we're almost at 60 million. So obviously we're going to grow over time. So
Asha Mathew (14:35):
Just to shift it a little bit, I know that regionally and then Kevin mentioned that a lot of the airports are facing similar issues. We've all heard about what has, and we've discussed in prior panels about Newark and what we've seen in the airports there and with issues with air traffic control. So Damon, I know that Jacksonville, a TC center is controlling the majority of the Florida airspace. So do you feel any issues with congestion in Tampa,
Damian Brooke (15:06):
What you saw on Newark over the last, say, the last couple of weeks? We've kind of been seeing it down in Florida for a while. Obviously have some staffing issues. They're fully aware of the issues they've gotten. They're doing their best to remediate those. But whenever we have peak period traffic, bad weather, you get days and periods where everything just comes together into a bad day. And the Florida airports, we do see some significant delays mainly because of how that Jacksonville FA center is being able to operate at this point. But like I said with the FAS announcement a couple of days ago to throw billions into the overall A TC network fix Newark, they've also got to fix Jacksonville as well, but they're fully aware of it.
Kathleen Sharman (15:53):
Kathleen. Yeah, that's really the same exact things that we experience and is recent developments, I think is terrific that the administration is recognizing the need to continue the investment in that aging FA infrastructure. And so all those things are going to help.
Asha Mathew (16:15):
Kevin, can you also speak on just the changing regulatory requirements with respect to a IP grants and grant assurances?
Kevin McPeek (16:25):
Sure. And what I'm going to do here or try to do is to provide a little big picture context, and I think Damien and Kathleen are dealing right now daily with this matter, and then I'll let them maybe speak to the details. But what I want to share, and again, it's a lot of uncertainty here, so it's hard to really say what things might look like going forward. But what I wanted to talk about is for programs and projects that we do know about that are nearing the end of their sometimes almost decades long program, how important are those grants to the overall funding? And what I'm going to ultimately leave with is, or hopefully the point being is I think when we have this discussion, I think the calculus is different. Whether we're talking about a program, multi-phase program relative to an individual project that's going to be financed.
(17:16):
And looking back at some of the airports we've had in either in the market recently or over the last couple of years, I look at a place like Salt Lake City that's got a 5 billion plus program. But when it's all said and done, grant funding is going to be about 5% of those total costs. When I look at Columbus just starting out on a $2 billion program, just have their first issuance earlier this year, it's about that same ratio, about 5% as grant funded. And Pittsburgh, again, the end of their 2 billion program, it's coincidentally 5% as well. So when every time you meet with rating agencies and investors, now that's the question about grant funding. And so from a big picture standpoint, it's a small piece of the overall pie for a program. And so once we put that in perspective, then I think we're doing, hopefully we will be doing a better job going forward of talking more specifically about grants because they've been 5%.
(18:18):
We typically, maybe we get ultra detailed in how we disclose it, and we say not just grants, but federal grants, but I think there's so many different flavors of federal grants that we're going to do a better job. Issuers are need to do a better job breaking that down into which specific type of federal grant are we talking about? And then we can all try to understand what's the relative risk with that type of a grant relative to a different type of grant. And that's the information that I think we'll have to communicate with investors and rating agencies. Again, not only to provide the inventory of the various types of grants that are factored into that piece of the pot, but then we also need to talk about, when we're talking about showing a five year, 10 year CIP, those grants can add up. But if we're talking about, again, a multi-year period, sometimes those grants were received multiple years ago and have already been spent, collected and reimbursed.
(19:12):
So we really need to do a better job just getting down into those details. And again, from a program standpoint, it's one answer, but, and if we were having this panel yesterday, my answer might be different, but I had my first email last night at dinner from a client saying, we are pausing this project and pausing this financing because of the grant uncertainty. And in that case, it's more of an individual project that they're looking at and maybe it's a hundred to $200 million and the share that's funded with grants could be higher. For a hundred million project, you could be looking at 20 million of federal grants depending on the nature of the project. And in that case, it's a bigger piece of the pie. It's a bigger factor. So I think on a project by project basis, it's a different calculation. But when we talk about big airports or medium high pub airports doing big programs, again, it's an important consideration what we need to explain better, but it's not going to move the needle necessarily if certain grants go away and they need to incrementally increase the debt finance portion of the project. Again, it's an important consideration, but doesn't impact the desire or ability to do the program, to do it affordably
Damian Brooke (20:27):
On an ongoing basis. If you take out the one-off program, so the federal governments put out there like the infrastructure funding and so on, so forth, on an ongoing basis just looking at entitlements and discretionary funds, we get less than 10 million a year. So next year when I'm looking at a $700 million capital program, I've got to take to my board the federal grants too, to Kevin's point, are a pretty small portion of that. Are we going to change our policies and procedures to work around the federal? The changes in the administration, probably not given the fact that such a small piece of the overall pie state of Florida has been a great partner for the last two phases of our master plan. They provided us with over $250 million, which we've been spending down over the last five, six years. And that's going to be a bigger piece of the funding pie for a new airside D that we're currently building right now than anything that we're going to get from the federal government. So I mean, grants are great. We appreciate them no matter where they come from with funding sources starting to tighten up for the airport industry as a whole. And we'll talk about PFCs I think a little bit later, but any grants that we can get, we certainly all appreciate. But the federal piece is just a relatively small piece of the pie.
Kathleen Sharman (21:44):
I would sort of echo that. I'll just put it in a different context. I have a 5.4 billion capital program and about 400 and 450 million are state and federal grants or federal grants. Now, that's a lot of money, 400 million, but to Damien's point, it is just one tool in the toolbox. We've also been very fortunate and grateful to the state of Florida who's contributed significantly to some of our big all projects, especially our terminal, our new terminal sea. And we do try to leverage on our executive airport, for example, we try to leverage the FOC contributions matching the federal contributions. So it's still an important issue. I think being in Florida versus maybe some other states. We did amend our, slightly amend some of our policies to conform with some of the suggestions from the administration. It wasn't a big heavy lift because we already kind of were in a state that was kind of aligned with what those policies were. So we have a grant that's sitting right now on an A, mayor's waiting for city council approval. So we are going to accept the federal A TP, which is the competitive portion of the bipartisan infrastructure bill or the EA funds. So we've, Orlando has gotten about 120 million in hundred 25 million. Actually, this is the last 5 million in those funds. So if other airports don't want that money, we will happily take it here in Orlando and leverage it and spend it. So again, we've seeing one airport, seen in one airport.
Asha Mathew (23:32):
So just shifting our focus from more time on, we've discussed the economic risks a little bit of the industry, and then we have airports here. How do we see airports? What kind of protections do they have in place to protect them from the downside of the industry risk or just economic risks?
Kathleen Sharman (23:55):
I can start if you want in terms of, I think a big thing for Orlando, and probably for Tampa too, is our capital program is modular and demand driven. So it's very focused on unmuting the demand. As I mentioned a little bit earlier, we have ways to, Damien was talking about building hard stands right now to kind of bridge his gap to where he needs to be in terms of this full build out. But we can slow down or speed up depending on what the demand is. So we think that that's a big important hedge, if you will, on protecting us from the downside. In terms of the tariffs say the uncertainty of that, we're taking that risk. I mean, the cost is the cost. We are not going to a markup. We're going to pay what it costs. So we're baking that in. And if we need to speed up or slow down like we did during COVID, I mean that's what we need to do. But so I think that's modular and demand driven and throughput is the keys to that.
Damian Brooke (25:02):
I mean, what we've done is everything Kathleen said, a hundred percent spot on. What we've also done is we've really gone down the road of looking at alternative revenue sources. For the last 10 years, we've been building up reserves. We had about a hundred million in reserves about 10 years ago. We're little over half a billion in reserves right now. And that was done purposely to protect us from a recession or a downturn that we all knew was going to come at some point. The aviation industry is one of the most cyclical ones out there. If you want to make money in the stock market and you got a long window, just put money in airlines, you'll eventually make money. But we knew 10 years ago that what we're seeing now was going to come at some point. Those additional reserves helped us get through COVID.
25:46):
We didn't lay anybody off. We were able to support all of our team because of the reserves that we built up. But over the last 12, 18 months, even a little bit longer, we've started really digging into alternative revenue sources. We've gone really heavy into real estate at Tampa International over the last four or five years, opened up one office building. We're opening up another office building, the office building because of the growth of the business community in Tampa. Remember, we're talking about the 50 50 originating destination split. You can't find new office space in Tampa right now. So we're building office buildings on airport as quickly as we can. First one leased up a hundred percent a year earlier than what we projected. We're now building a second one. We've got a real estate plan for the airport, adding at least two, maybe three additional hotels. That's how we're really focusing on trying to protect ourselves going forward, not just having to rely on the traditional revenue sources for airports, concessions, parking. We're looking to broaden that net as much as we possibly
Kathleen Sharman (26:45):
Ditto, not as much as Damian, but absolutely focusing on those real estate deals is critical. And in Orlando, we have over 11,000 acres, so we have a lot of land to be able to do that.
Damian Brooke (27:00):
We're about 3,300 acres, so we don't have that level of flexibility unfortunately.
Asha Mathew (27:07):
Kevin, is there anything else you want to add on?
Kevin McPeek (27:09):
The one thing I would add and kind of getting into the airline agreement side or lack thereof with my panelists here, but ultimately given the race and charges structure at airports based off of cost recovery. So to some degree, there's always a backstop there should traffic come down, airlines are either on the hook for majority of costs or in a residual deal, all the costs. So there is that from a credit standpoint and an investor standpoint, understanding that nature, the nature of airline rates and charges, the nature of a particular business deal at an airport should provide comfort that notwithstanding their ability to manage through downturns, there is some commitment there from key tenants to continue to pay those bills.
Damian Brooke (27:53):
I think what's also happening across the airport industry is airports are taking a look at those agreements and kind of tightening them up a little bit. Orlando and Tampa, both are under rates by resolution and rates by ordinance. And that gives us a lot more control over the rates that the airlines have to pay to operate at our airports. Under our old agreements, the airlines were paying about 45 cents on the dollar in terms of total cost. Now that number under the new agreements up to about 75%, we've still got room where we could increase the cost to the airlines. Not something you necessarily want to do, but if we're talking about how do we protect ourselves as an entity against a downturn, you've got to look at all options in terms of driving up your revenues and lowering your expenses,
Asha Mathew (28:38):
Kevin, you and review a lot of the airports across the nation. So just in terms of CIP, there's a lot of airports ranging from sizes, but also at different stages of their CIP. So maybe you can talk about the different considerations and impacts of the airports at the different levels.
Kevin McPeek (28:59):
And what I'm going to try to hit on here too is as we think about helping our clients, our issuers go through the process, some of the stakeholders that they're talking to, whether it's the airlines, the rating agencies or investors, and kind of talk about what those perspectives are right now. But a lot of the airports where we work, obviously you've got your Orlandos and your Tampas, but where we're seeing medium hub and small hub airports, airports that haven't historically had major projects, the growth has been so strong, especially here regionally, airports like Charleston and Jacksonville, where Charleston completed a major terminal project in 2013 thinking it was going to give them 20, 30 years of use and it will, but they don't have enough room, so they need to keep building and Jacksonville's kind of in the same boat. So what's I guess different when you get to those airports, right, is these projects are expensive.
(29:50):
And so in the impact on metrics at these smaller 2 million, 3 million, 4 million in employment airports, it's hard to do a big project and not have a material impact to your metrics, your leverage, your CPE or airline cost per employment. So a lot of what the discussion is is on a case by case basis, making sure the stakeholders understand why the project is happening and what the impacts are. And I kind of working through my list, I would say I've been pleasantly surprised at a few ways, but with the airlines, I feel like there's a general understanding of the need to invest in airport facilities and particular terminal facilities. And so for a reasonable project with reasonable impacts, they seem to be willing to have those discussions. Now, I will say that I think the tone of those discussions now is probably different than it was two, three years ago where these airlines are having these discussions at a large number of airports and seeing the impacts of these costs hitting them system wide.
(30:51):
And I think with, again, the economic condition and airline trends, they're back to focusing on their costs. So maybe there might be a little bit more scrutiny on those projects. But in general, I would say at least my thought is that where there's a solid demand for a project, they're willing to consider investing and committing to fund the project that similarly with rating agencies, I think there's an acknowledgement on their part that some of the metrics that they've looked like or looked at in the past are changing the leverage metrics that maybe made sense 10, 20 years ago. They're going to be different now if you're, again, a 4 million in payment airport taking on a $2 billion program, you're going to see leverage ultimately in the three to 400 of debt per employment. And again, I've been pleasantly surprised that when we talk about what the agencies, they understand it, their factoring it into their metrics and kind of maybe not formally changing their scorecards yet, but acknowledging that they can get comfortable with a rating or a high rating where leverage now is a lot higher than it would've been in the past.
(32:04):
And then from an investor standpoint, and I know investors in the room, but I think it's an exciting process to be able to take these airports that don't have a lot or any outstanding debt to market. And I know from an investor side, sure, more work getting familiar with the credit, but we like to go and we think there's a benefit to being new to a portfolio, a different type of credit, maybe a different region than what these investors already hold. And so I think through this process, we've learned that there be some more questions and some more diligence that we need to work through to get both their agencies and the investors comfortable with the credit. But again, I think the opportunities that exist at some of these smaller airports to take on projects and be again, kind of new issuers is I think an interesting time in our market
Asha Mathew (32:59):
As these projects are in place for these airports. And we talk about bot financing, how do we feel about the tax or the discussions on tax exemption bonds going away, or how does that impact the specific airports or the industry as a whole?
Damian Brooke (33:16):
I mean, for us, some good news the other day, it looks like the exemption's not going anywhere, which is a good thing for us. It would've impacted us to the tune of about 940 million over the next 15 years given size of the debt issues that we're looking at. We're going to be funding about 85% of our capital program ourselves, either through reserves or new debt issues over that period. So keeping the tax exemption for us was critical.
Kathleen Sharman (33:44):
Yeah, agreed. That some good news recently. So that's great, at least for now. But we would've dealt with it because the facilities need to be built, the demand is there, and it's really all about that demand driven. This might be a good place to talk about the passenger facility charge as well, right? Because that was a big tool in the toolbox that for a lot of us, we've kind of used up, I got mine is leveraged out to 2052 or something like that. So while we were able to build that really nice new terminal, and basically 50% of that was financed with passenger facility charges that those are gone now. So it seems that this administration may be a little more evolving also to the consideration of maybe taking away the cap on that. So to the extent that goes away, that'll really help. I mean, just like 50 cents, think of all the things of all the millions of passengers that go through our terminals could really leverage up a lot of stuff and buy us a lot of things. So hopefully that's a tool that may come back. But in any case though, we would've, it just would've cost more. But because the demands there, and maybe we would've just, the timing might've been different, modular and demand driven and increasing our throughput, but we would've made it through.
Damian Brooke (35:16):
Yeah, I mean, CP has not changed in 24 years. The buying value of that $4 and 50 cents now is down in a low $2. So when you take into account inflation, if there was a, we ran the numbers in Tampa and just looking at our forward capital program, the debt issues that we're going to have to issue, if we were able to offset some of that debt by using increased PFCs, it would've a measurable difference. So if there was a $2 increase in the PFC, right now, take it from four 50 to six 50 over the next 14, 15 years, that would lower airline costs to Tampa International by about $240 million. That's just one airport. If you look at all the hundreds of airports around the country that utilize PFCs, the airlines actually have the ability to lower their costs significantly for the next 5, 10, 15 years if they choose to go down the road of supporting A PFC increase. Traditionally, they've not done that because I think they've viewed it as a way to, I don't want to say control, but manage capital development at the airports. But I think what's happened is after COVID costs have gone up so much that their cost per employment has gone up so much that they're now going to have to start looking for an alternative relief. I think the PFC is the most logical one for them, but we have to let them get there on their own.
Kevin McPeek (36:38):
Well, and I guess thinking ahead, right? There's a long way to go before we know what these new tax laws look like. But as a sector, again, thinking ahead, the question I have is what does a MT look like and why do airports or do airports? Will airports have to continue to issue a MT debt for important infrastructure projects like terminals and how many folks are ultimately going to be paying a MT and do the buyers of the bonds by any A MT? And so when we're talking with investors, we get comments like, well, one, we think your airport is underrated, so we like buying your bonds because we know we can get a higher yield. And then I think on the A MT side too, they can benefit from that additional what 30, 40, 50, 60 basis points of yield that they get from buying an A MT bond versus a non A MT. And ultimately those costs work their way through the airport to the airlines. And so again, is that a cost that the airline or airports continue to finance going forward? But I guess let's just keep the tax exemption for now and then think about what else we can maybe think about down the road
Asha Mathew (37:49):
Just to stay on the alternate sources of revenues, given that the PFCs have kind of hit its max, Kevin, do you see what airports might be doing in order to fund or find alternate sources of revenues, whether it's p threes or any other areas that you
Kevin McPeek (38:10):
Yeah, I think from an operating standpoint, people like Kathleen and Damien are very great at finding new sources of revenues to come in the door. But when it comes to sources of funding for projects or for programs, I think there continue to be opportunities that we as a sector are still trying to figure out how they fit. So p threes is an example where I'm surprised sometimes by the client, some of my clients that are approached by some of these P three developers and looking at opportunities to see how they could work at that airport, how that fits is we're still trying to figure that out and does it fit? What are the goals that would be accomplished by having that P three financing versus airport's ability to pretty efficiently access capital themselves? But that's an option that's out there. And again, I think that's kind of working its way down to maybe some of the smaller airports that haven't seen that in the past. And just one other thing before we've got clients, we've had a client complete a TIA financing at TIA for airports, and so that's another tool that's there. It's been hard to get one done. We've got others in the pipeline, and particularly when we've got airport clients that could qualify as a rural airport and can finance a share of their costs at a half the treasury rate, that can help complete some of these programs and help overall affordability.
Kathleen Sharman (39:42):
I can maybe give a couple examples and put that a little bit into context. When you hear P three and you even said as revenue, it's not right. They're not doing it for free. They're making money because I was just at a world conference, United States, interestingly enough for all the perception of being sort of the wild west and all that when it comes to transportation infrastructure, we're kind of socialistic, right? The government really does support it. Look at how they supported us through COVID, through a lot of these grants. Whether that'll continue or not, I don't know, but I think that because of that and because of the tax favorable infrastructure, our cost of money as infrastructure providers is so much less. So it doesn't really make sense to privatize a whole airport or something like that. But having said that, there is a place for limited P three like transactions maybe on an airport or another transportation facility.
(40:49):
I can give you an example of one that we did in Orlando, and we did, it wasn't a public private partnership, but it was a public partnership with the Orlando Utilities Commission. And basically what the deal was was the authority gate sold the right to operate and the obligation to maintain some of our complex infrastructure assets in the new terminal, the chiller plants and the emergency power distribution technical stuff. The utility was much better capable of managing that. They're the experts. And so we could use our time doing airport stuff, but it was essentially debt. It was a debt transactions. And what we did too was put it on a lien status that was well below all our senior priorities subordinate, and it was just the bottom of the, the bucket, but they were willing to do that. So it kind of made us a better credit.
(41:50):
And I got to say this, I can't not say it right, Orlando is, there's no other US airport that's more highly rated than Orlando. So I just have to take a bow for that. Appreciate, and again, I think it comes to trying to use all these different toolboxes, and it's the service area region. It's from the state, from the governor, keeping it open from the diversity of the companies that operate there and our theme bar park. So there's a lot of reasons for that, but it's also doing stuff like leveraging these other types of transactions. We're also looking at the office that administers tia also administers what they call R, which is a railroad TIA kind of like. And because one of our projects is located really close to the Bright Line Station, we're actually able to qualify for that. So we're kind of working through some of those issues in order to take advantage of that lower financing.
(42:50):
So I think that although doing a whole airport as a P three right now with our current tax structure doesn't necessarily make sense. And that's why you don't see it in the United States except for the Port Authority where they don't have the revenue use issue. By the way, another thing why investors should be happy like that, most airports are not allowed to take airport revenue and funnel it to a city or somewhere else. The airport revenue has to stay on the airport. So I think that using all those different, there is a place for it. It's just not necessarily a holistic place.
Damian Brooke (43:27):
Yeah, I mean, that's well said. I mean, financially it just doesn't make sense. But you've also got to look at the governance as well. More than 90% I think of the airports in this country are city or county owned. And if you're going to be using private money to build a terminal or to build a parking garage, that private party is going to want control over the rates. So you're going to have to get your city council, your board of directors to give up control of parking rates or concessions for a period of time until that private party gets their money out. And I've not seen any politicians that are really too willing to do that. So I think there's a couple of reasons why p threes just haven't taken off. Like you said, cost. But governance is also another reason.
Kathleen Sharman (44:03):
That's an excellent point. It just reminds me of not only have I worked in airports for, I learned that you can stay over 25 and that's good enough, but it's a lot over 25 years. But I also worked in the toll road space for same a long time and was actually here in Atlanta when they implemented the I 85 HOV to hot. That was one of the things I kind of was brought down to do. And it was very ironic. The governor, when we first opened that row, he forced the agency to lower the tolls to a penny a mile. Now I'm sure it's all congest. It's been around for a while, and I think it's not like that anymore. But yeah, that was when the I 75 Northwest Corridor was being looked at, and I was actually in the governor's office going to, and so a lot of the bankers don't really like me. I killed that P three twice in Georgia because, but it was legit. Georgia was a AAA state, AAA credit rating state, so they had a great access to cost of capital and the governor could not. I'm like, sir, you're not going to be able to just make that concession error, lower those tolls. And it was like, maybe not then. So that is an excellent point, Damien, what you made about that control.
Asha Mathew (45:25):
I think that's all the time we have for today. So can you just give us a round of applauses or for our panelists,
Mike Scarchilli (45:32):
We hope you enjoyed this episode of the Bond Buyer Podcast. A big thank you to our panelists, Kathleen Sharman, Damien Brooke, and Kevin McPeek for their perspectives, and to Asha Mathew for moderating such dynamic conversation. Here are three key takeaways from today's episode. One, airports across the US are experiencing a softening in passenger traffic following a post pandemic surge. But long-term growth projections remain strong and demand-driven. Modular capital programs are helping manage risk. Two, while federal grants play an important role, they generally make up a small portion of airport capital funding. Strategic partnerships with state governments and creative financing tools like real estate development and alternative revenue sources are helping bridge the gap. And three, the retention of the tax exemption for municipal bonds and the potential for future increases in passenger facility charges remains a crucial factor in keeping capital costs manageable and infrastructure investments on track. Thanks again for listening to the Bond Buyer podcast. This episode was produced by the Bond Buyer. If you liked what you heard, please subscribe on your favorite podcast platform. Leave us a review and check out our continuing coverage at www.bondbuyer.com. Until next time, I'm Mike Scarchilli, signing off.