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HomeMy WebLinkAbout07 - Section 6 - Primary Management OptionsSECTION 6 6 Primary Management Options 6.1 GTU Potential Management Options For the purposes of this study, it was requested that CH2MHILL consider alternative options for managing the airport, along with the current City managed option. The three options considered cover the full potential range of possible options available to the City of Georgetown. The three options analyzed are: 1. Current city managed airport; 2. Airport managed through a contract management arrangement; 3. Full airport privatization. All three options have relatively small potential derivative options, but these are the three primary options which provide the City with the full range of scenarios for consideration. For the purpose of analyzing each of the three concepts from an equal starting point, all three concepts assume an improved revenue production being achieved in the existing City managed option. Therefore, for this analysis, the current city managed operation with revenue improvement in fueling and leasing revenue will be the baseline concept that will be compared to the two private operation options. Finally, none of the reviewed options considers the City taking exclusive fueling rights at GTU, which is a separate option being analyzed in this business plan, and further discussion in Section 5. The following is a description of each of the three operating concepts:12 1. City managed airport: The City managed airport is essentially the same operation as that which currently exists, with only minor modifications. The baseline profit and loss assumptions in this concept consider an improved revenue generation capability at GTU as a result of some of the following business plan recommendations: • A commercially well conceived fuel pricing best practice that will render GTU a return on investment of between 10 and 12% versus the current 8 %. • A commercially well conceived standard lease for hangars and t- hangars that render GTU a return on each lease that will include; market based rates, a return for routine maintenance required, and annual Consumer Price Index (CPI) increases based on a well defined local index. • An airport with a solid brand and marketing plan, with airport service offerings consistent with the airport brand. In this case, an executive or business airport brand. • An improved business development scheme that will render additional opportunities for ground leases associated with new hangars, t- hangars, and potentially for non - aviation ground leases. In following the list of recommendations in this business plan, the current City managed function can improve its financial performance, and solidify its bottom line over the longer term. Under a City managed scenario the airport conceptually attains operational break even, while struggling to meet its local share of capital improvements requirement. A baseline Pro Forma Profit and Loss (P &L) statement for a city managed option is provided under Appendix D, Table D -1, City Managed Option. 2. Airport managed through a private contract management arrangement: in its simplest form, contract airport management would take over the staffing and commercial management function of GTU. There are numerous examples of private contract management of public airport facilities in the United States, and most of these arrangements can be successful as public - private partnerships, as long as both parties 12 Involves legal issues. GEORGETOWN MUNICIPAL AIRPORT BUSINESS CASE ANALYSIS 75 COPYRIGHT 2013 BY CH2M HILL, INC. PRIMARY MANAGEMENT OPTIONS understand the business parameters that each party would need to achieve success. Some of the basic parameters of a contract airport management function are as follows:13 • The contract operator will supply the staffing function at a cost similar to that of the public sector, with a 10 -12% mark up on staffing costs as a required profit margin. • The City would remain the responsible party for all other costs at the airport outside of the contract for staffing. • The private operator would collect all revenues at the airport, and remit them to the City, less their monthly management fee. • The private operator would most likely be retained to function as airport business developer. For this function, the private operator would have a pre- arranged incentive program in their contract that would allow both the City and private operator to share in the pre- agreed revenue improvements on a somewhat equal but varying basis. • Incentive clauses may include any of the following: increases in fuel sales; increases in aviation ground leases; increases in non - aviation ground leases; scoring at a defined level on customer service surveys; increases in aviation operations activity. • The private operator would be responsible for all branding and marketing requirements. • The private operator would be contracted to the City under very well defined level of service requirements for a full range of airport related customer service performance indicators. • The private operator would be responsible for airfield safety and security. • Some example airports with contract operators include the following: San Marcos Municipal Airport (TX), Addison Airport (TX), and Teeterboro Airport (NJ). A conceptual pro -forma P &L has been prepared for the private contract airport operator scenario at GTU. Based on our analysis and understanding of these private airport operating scenarios, this concept would be a feasible option for the City of Georgetown to consider. Under the contract management scenario, the airport conceptually attains operational break even each year, and in the final 3 years begins to perform well enough financially to handle local share of capital improvement requirements. P &L information for a contract management option is provided under Appendix D, Table D -2, Contract Management Option. 3. Full airport privatization: Full airport privatization refers to a complete lease- concession of all airport activity, over a specific length of time, usually a 25 -50 year term. In this management scenario, all commercial rights at the airport would be owned by the private operator. For these commercial rights, the city would delegate all of their O &M and capital development responsibilities to the private operator. In this way, the private developer would have full and comprehensive responsibility for all activities at the airport over the lease- concession term. The program that governs full airport privatizations is administered by the FAA, and will usually require at least 2 years in order to move through the FAA approval process. Some of the basic parameters of a full airport privatization are as follows: • The private operator gains essentially full ownership of all operations, maintenance, and commercial activity at the airport for a specific amount of time. • The private operator will usually seek property development rights for non - aviation property as a means of potentially boosting their return on investment for the project. • The private operator would be responsible for all branding and marketing requirements. 13 involves legal issues. 76 GEORGETOWN MUNICIPAL AIRPORT BUSINESS CASE ANALYSIS COPYRIGHT 2013 BY CH2M HILL, INC. PRIMARY MANAGEMENT OPTIONS • The private operator would be responsible to the City to meet well defined level of service and safety /security requirements. • Failure to meet the pre - established KPIs would put the private operator into a default situation. • The private operator would be responsible for delivering all planned capital improvement projects. Capital improvement projects would be planned by the City prior to the privatization, for the term of the privatization, and these would be the responsibility of the operator to deliver, using the traditional airport grant programs. • The full privatization would effectively take the airport off of the City's books from an operational standpoint over the term of the lease- concession. • For an economically viable full airport privatization, the owning public entity could expect a onetime concession fee, and /or an annual concession fee paid for the commercial rights granted. A conceptual pro -forma P &L has been prepared for the full privatization scenario at GTU. Based on our analysis, there is not currently sufficient commercial activity and revenue generation upside to support the full privatization scenario. P &L information for a full airport privatization option is provided under Appendix D, Table D -3, Full Airport Privatization Option. 6.2 Potential Management Options - Pros and Cons Each of the three potential operating scenarios offers distinct pros and cons to the City of Georgetown, should they be chosen. The following Pros and Cons are general in nature, and apply to GTU and most all airports that may be considering a range of possible management options at a broad level. The following is a listing of primary Pros and Cons associated with each airport operating scenario: 1. City managed airport: PROS: • Current operation is customer focused, and is supported by the stakeholders • Current operation is capable of increased revenue production above that of existing • Stakeholders have a comfort level with the current management set up • The City does very well in maintaining the required airport safety functions • The City has taken a proactive role in ensuring the long term viability of GTU CONS: • The Current operation even with an improvement to revenue generation will have difficulty supporting the local share of major capital expenditures in certain years • Current commercial, branding and marketing inefficiencies may be difficult to overcome as a City department • City staff have a difficult time in picking up and implementing a developer or business development role • Necessary staffing needs are sometimes difficult to obtain approval for and implement within the City system 2. Private contract management: PROS: • Private operator is able to make staffing changes and move more quickly within the confines of their contract GEORGETOWN MUNICIPAL AIRPORT BUSINESS CASE ANALYSIS 77 COPYRIGHT 2013 BY CH2M HILL, INC. PRIMARY MANAGEMENT OPTIONS • Private operator would be much more likely to bring a strong land developer, marketing and business development acumen to the GTU market • Private operator would relieve the City of responsibility for day to day operations at GTU • Private operator would probably offer the City a higher return on investment over time, particularly if they are operating under a well conceived incentive laden contract • Private operator would bring a stronger business and commercial management system and operation to the airport CONS: • The city would need to have strong oversight of the incentive basis and the service level performance indicators carried in the private operator contract • The City may lose touch with the stakeholders, without a solid feedback process • The City would still be responsible for funding all operations and capital programs • After paying out private operator profit margin and incentives, the City will continue to be responsible for all expenses and major capital local share requirements • Private operator may continue to be hampered by City property development constraints and time to approve new development 3. Full airport privatization: PROS: • The airport operating requirements effectively come off the City books as a responsibility • The private owner will have significant incentive to brand, market, and upgrade service levels at the airport since they will own all bottom line aspects of the facility • The private owner will have a significant incentive to bring in their property development capabilities with regard to aviation, aviation support and non - aviation land development • This method of airport management could include a onetime, and/ or annual concession fee for the City • This method of airport management would most likely result in market growth and an improved level of service to stakeholders • The City retains full asset ownership of the facility CONS: • The City would lose direct contact with users and stakeholders • The City would lose direct control of level of service at the airport • The private owner, rather than the City would be responsible for all safety /security aspects at the airport • The lease concession term would most likely be in excess of 25 years, in order for it to meet financial feasibility for the private owner. This would be a very long term commitment for the City to consider • The City would need to secure exclusive fueling rights for the private owner, in order for the concept to be feasible • The City would still need to provide direct and continual oversight for the concept in order to make sure that the private owner is complying with all pre- agreed service standards 78 GEORGETOWN MUNICIPAL AIRPORT BUSINESS CASE ANALYSIS COPYRIGHT 2013 BY CH2M HILL, INC. PRIMARY MANAGEMENT OPTIONS 6.3 Conclusion All of the management concepts considered offer the City distinct pros and cons. The current City managed structure could be successful in the future with certain modifications and recommendations being proposed in this business plan. Both current City management and a private contract management arrangement are feasible under the current fueling structure. The full airport privatization concept is only feasible if it included exclusive fueling rights. It should be noted that in our analysis which is backed up by the conceptual profit and loss statements, the only operating option that will cover ongoing operational requirements, and also cover all local match capital costs in the long term, is an operating option that includes improved fueling revenues from either exclusive fueling rights, or an option that includes additional retail fueling margin for GTU. GEORGETOWN MUNICIPAL AIRPORT BUSINESS CASE ANALYSIS 79 COPYRIGHT 2013 BY CH2M HILL, INC. Disclaimers The purpose of this business case assessment, as summarized in this document, is to assess background data, assemble best practices from other similar airport operations, and provide suggestions on management models based on benchmarking of other facilities, and assumptions about current operations. The information collected, evaluated, and presented to the Client is intended to provide a summary of best practices. Several factors, many of which are beyond CH2M HILL'S control, affect the Client's operations and financial performance. Decisions on and implementation of the recommendations suitable to the airport are the responsibility of the airport /Client, and the contents of this report are provided to facilitate decision - making, and do not provide any guarantees of end - results. The Executive Summary Report is intended for the Client's sole and exclusive use and is not for the benefit of any third party and may not be distributed to, disclosed in any form to, used by, or relied upon by, any third party without prior written consent of CH2M HILL, which consent may be withheld in its sole discretion. CH2M HILL accepts no responsibility or liability for the consequence of this document/ report being used for a purpose other than the purposes for which it was developed. Any person using or relying on this document for such other purpose agrees, and will by such use or reliance be taken to confirm this agreement to indemnify CH2M HILL for all loss or damage resulting there from. CH2M HILL accepts no responsibility or liability for this document /report to any party. To the extent that this document /report is based on information supplied by other parties, CH2M HILL accepts no liability for any loss or damage suffered by the client, arising from any conclusions based on data supplied by parties other than CH2M HILL and used by CH2M HILL in preparing this document /report. GEORGETOWN MUNICIPAL AIRPORT BUSINESS CASE ANALYSIS COPYRIGHT 2013 BY CH2M HILL, INC.