Denver Airport: Operating Results and Financial Risks (Letter Report,
02/09/96, GAO/AIMD-96-27).
After reviewing available financial data and analyzing the risks
associated with the financial condition of the new Denver International
Airport, GAO has found no evidence that the airport will be unable to
meet its financial obligations, including payments to bondholders. This
report (1) analyzes the limited data available on actual results after
the airport opened for operations in February 1995 and (2) identifies
risks that could affect the airport's future financial condition. GAO
also reviews estimated cash flow and the airport's cash reserves.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-96-27
TITLE: Denver Airport: Operating Results and Financial Risks
DATE: 02/09/96
SUBJECT: Airports
Government facility construction
Investigations by federal agencies
Municipal bonds
Airline industry
Litigation
Financial management
Projections
Competition
Information disclosure
IDENTIFIER: Colorado Springs Airport (CO)
Denver International Airport (CO)
Stapleton International Airport (Denver, CO)
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Cover
================================================================ COVER
Report to the Honorable
Hank Brown, U.S. Senate
February 1996
DENVER AIRPORT - OPERATING RESULTS
AND FINANCIAL RISKS
GAO/AIMD-96-27
Denver International Airport
(913721)
Abbreviations
=============================================================== ABBREV
DIA - Denver International Airport
DOT - Department of Transportation
FAA - Federal Aviation Administration
PFC - passenger facility charges
SEC - Securities and Exchange Commission
SIA - Stapleton International Airport
TWA - Trans World Airlines
Letter
=============================================================== LETTER
B-261527
February 9, 1996
The Honorable Hank Brown
United States Senate
Dear Senator Brown:
You asked us to consult with you on the financial viability of the
Denver International Airport (DIA), which opened for operations on
February 28, 1995. Specifically, you asked that we (1) analyze the
limited data available on actual results after DIA opened for
operations and (2) identify the risks associated with assessing DIA's
financial condition. You also asked us to review estimated cash
flows and DIA's cash reserves. Finally, you asked us to comment on
DIA's ability to meet its financial obligations, including payments
to its bondholders.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
In any attempt to estimate future financial performance, differences
between expected and actual results of operations may arise because
events and circumstances frequently do not occur as expected, and
those differences may be material. Furthermore, current operating
results are not necessarily predictive of future results and can only
provide an indication of an entity's future performance. This is
especially true in the early stages of new commercial operations. At
the time of our review, DIA had only been operating for 6 months,
and, accordingly, the actual financial data available on operations
were of limited predictive value.
In addition to the inherent risks that are always present when making
financial projections, there are a number of risks that are specific
to DIA's operations. For example, DIA's future financial performance
could be threatened if (1) United Airlines, its major tenant, or the
airline industry in general underwent financial stress or upheaval,
(2) DIA experienced significant declines in passenger volumes, or (3)
unknown construction defects resulted in major unexpected costs.
Further, the City of Denver has acknowledged that the Securities and
Exchange Commission (SEC) is conducting a formal investigation
regarding the adequacy of the city's disclosure of information in
bond offering documents with respect to the automated baggage system
and related delays in opening the airport. Current estimates of
whether the city will be able to repay investors would not appear to
be within the scope of the SEC's investigation. Generally, when the
SEC finds a violation of federal securities law, it can pursue
various enforcement mechanisms, including a "cease-and-desist" order,
or it can ask a court to impose monetary penalties. In addition, DIA
bondholders have filed several class action lawsuits seeking damages
related to inadequate disclosures. Any SEC determination that
disclosures were not fair or complete could affect the results of
these lawsuits.
Based on our review of the data available as described in this
report, we found no issues that would lead us to believe that DIA
would be unable to meet its financial obligations, including payments
to bondholders under current financing arrangements. However, the
risk factors we identified could result in limiting DIA's future
ability to meet its obligations. We emphasize that these risk
factors should be carefully considered by users of our report.
BACKGROUND
------------------------------------------------------------ Letter :2
DIA was built to replace Stapleton International Airport (SIA), which
in 1994 was the eighth busiest airport in the world. A great deal of
controversy was generated by DIA's construction. Proponents pointed
to various inadequacies related to SIA's facilities, limits on
expansion, and noise pollution. Opponents raised objections related
to DIA's construction and operating costs, levels of future passenger
demand, and long-term financial viability. The airport, which opened
for business on February 28, 1995, experienced numerous construction
delays and cost overruns. Allegations of inadequate disclosures in
bond offerings to the public have resulted in an SEC investigation
and several lawsuits.
About 65 percent of DIA's revenues are collected from the airlines
for space rental and landing fees. The remaining 35 percent of
revenues come from concessions, passenger facility charges (PFCs),\1
interest income, and other sources.
To help ensure that revenues will cover costs, DIA has a rate
maintenance covenant with bondholders. This covenant requires DIA to
set annual rates and fees to result in an amount that, when combined
with funds held in reserve in the coverage account,\2 is equal to (1)
all costs of operating the airport plus (2) 125 percent of the debt
service requirements on senior bonds for that year. Senior bonds
comprise about $3.5 billion of DIA's total $3.8 billion bond debt.
DIA's revenue bonds were issued under the 1984 General Bond
Ordinance, which promises bondholders that the rate maintenance
covenant will be honored in setting billing rates for airlines.
Under the airlines' use and lease agreements, each airline is
required to pay rates and charges sufficient to meet the rate
maintenance covenant after taking into consideration all airport
revenues. Because there are no limits on costs built into the rate
maintenance cost recovery model, DIA has agreed to share 80 percent
of net receipts\3 with airlines for 5 years from February 28, 1995,
and lower percentages thereafter. After sharing net receipts with
the airlines, DIA estimates that it will retain an estimated $6.3
million to $7.6 million a year for fiscal years 1996 through 2000,
which will be transferred into the capital fund.
Many airports calculate the airlines' cost per enplaned passenger as
a benchmark. This cost is based on the airlines' share of airport
costs, divided by the actual number of enplaned passengers. DIA's
lease contract with United Airlines includes a provision for
nullifying the contract if the cost per enplaned passenger rises
beyond a predetermined level.
--------------------
\1 The Aviation Safety and Capacity Expansion Act of 1990 authorizes
a locally imposed PFC of up to $3 per enplaned passenger. In May
1992, the Federal Aviation Administration approved Denver's PFC
application, authorizing the city to collect up to $2.3 billion in
PFC revenues through the year 2025.
\2 The coverage account is a cash account required to be maintained
at a specific level by DIA's bond indentures. As of September 25,
1995, this account had $47 million. By December 31, 1996, it is
required to have $58.4 million.
\3 Net receipts represent total receipts less total disbursements
before allocations to airlines.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3
To identify risks that could affect DIA's financial performance, we
read and evaluated risk disclosures in DIA's Official Statements;
interviewed DIA, Colorado Springs Airport, and SEC officials;
obtained financial information on United Airlines; interviewed
airline industry experts, including airline executives, aviation
forecasters, and airline financial consultants; and obtained data
from American Express on ticket prices at DIA.
To review DIA's revenues, we (1) sampled DIA's daily revenue
transactions for March through May 1995 and examined supporting
documentation regarding collections of airline rents and landing
fees, (2) tested supporting documentation for revenues from
concessions such as parking, fees from rental car companies, food and
beverage concessions, and retailers, (3) extracted data from reports
on City of Denver investment income and journal vouchers on receipts
of passenger facility charges from airlines, (4) compared actual
revenues for March through May 1995 to the monthly estimates of cash
flows DIA prepared for 1995, (5) analyzed and studied for consistency
DIA's long-term estimates covering 1996 through 2000 for revenue and
other financial information, and (6) reviewed the terms of lease
agreements with airlines and cargo carriers, obtained and analyzed
passenger data from airline landing reports for March through August
1995, and became familiar with the rates and charges methodology DIA
used to set rental rates and landing fees for airlines.
To review DIA's debt service requirements, we examined DIA's plan of
finance, which summarized details on all outstanding revenue bonds at
DIA and contained detailed amortization schedules for paying off
revenue bonds. We compared selected payments on this schedule to
bond documents. We also inspected documentation for actual transfers
of operating funds to DIA's bond fund for March through May 1995.
To review DIA's operating costs, we obtained DIA's weekly cash flow
statements for March through May 1995 and operating expense data
files for that period and traced samples from those files to
supporting documentation. We also reviewed DIA's operations and
maintenance cost budgets by studying supporting documentation, such
as contracts and other DIA budgetary analysis, for all budgetary line
items exceeding $1 million. We compared DIA's budgets to those of
other operating airports. Finally, we interviewed DIA and City of
Denver officials to gain an understanding of the accounting system
for DIA expenses and to obtain further information about transactions
tested.
We used information from our tests of revenues, bond debt, and
expenses to prepare a statement of actual cash flows for March
through May 1995. We also analyzed the cash balances the City of
Denver maintained in DIA operating and cash reserve accounts.
To review DIA's actual cash reserves and cash flows, we obtained cash
reserve balances from City of Denver accounting records and reviewed
the audit work papers of DIA's auditors, identified restrictions on
the use of reserve funds, interviewed bond analysts, and performed
detailed analyses of DIA documentation supporting cash receipts and
disbursements.
We also interviewed DIA managers and airline officials and reviewed
testimony before a congressional subcommittee by proponents and
opponents of DIA.
We performed our work between March 1995 and November 1995 in
accordance with generally accepted government auditing standards for
performance audits. This report is not intended to be a financial
projection under the American Institute of Certified Public
Accountants' standards for such reporting.
RISKS THAT COULD AFFECT DIA'S
FUTURE FINANCIAL CONDITION
------------------------------------------------------------ Letter :4
There are certain risks inherent in any projection of financial data
to future periods. Specifically, differences between expected and
actual results of operations may arise because events and
circumstances frequently do not occur as expected, and those
differences may be material.
In addition, DIA's future financial performance could be threatened
by a number of factors specific to the airport's operations, most
notably the overall volatility of the airline industry in general and
any future deterioration in the financial health of its major tenant,
United Airlines. Also, because DIA's revenues are primarily driven
by passenger volume, increased ticket prices may be a concern if they
result in significant passenger declines. Other risks include the
possibility of (1) unknown construction defects resulting in major
unexpected costs or (2) adverse actions arising from a current
Securities and Exchange Commission investigation and/or lawsuits
filed by bondholders against DIA. The potential severity of the
effect on DIA's future financial condition varies with each of these
risk elements.
HEALTH OF THE AIRLINE
INDUSTRY AND UNITED AIRLINES
---------------------------------------------------------- Letter :4.1
Financial results of the airline industry, a key risk factor, have
been volatile since deregulation in 1978. Most airlines have
reported substantial net losses since 1990, with total losses of
about $13 billion from 1990 through 1994. For example, one of the
airlines that used DIA, MarkAir, filed for bankruptcy in April 1995
and went out of business in October 1995.
In addition to the condition of the airline industry in general, an
important factor affecting DIA's financial viability is the financial
health of its major tenant, United Airlines. United accounted for
over 70 percent of passenger enplanements during the first 4 months
of 1995, as discussed later. Also, DIA has projected that 43.1
percent of enplanements for 1995 will be passenger transfers as a
result of United's hubbing operation.
United Airlines reported annual losses in 1993, 1992, and 1991 of $50
million, $957 million, and $332 million, respectively. United
reported profits in 1994 for the first time since 1990, with net
earnings of $51 million shown on its audited financial statements for
the calendar year 1994. United Airlines is thinly capitalized, with
net equity of about $76 million and debt of about $12 billion,
reported as of March 31, 1995. In late October 1995, United
announced record profits of $243 million for the quarter ended
September 30, 1995.
In commenting on a draft of this report, DIA's Director of Aviation
acknowledged that there are risks inherent with any business venture
and related financial projections and that the volatility of the
airline industry could impact the financial performance of DIA. The
comments point out DIA's view that the risks associated with the
financial health of United Airlines are offset by several factors,
including DIA's strong market in both origination and destination
travel as well as regional connecting traffic.
RISKS TO PASSENGER VOLUME
---------------------------------------------------------- Letter :4.2
Risks to passenger volume is another key consideration in DIA's
future financial health. One factor influencing passenger volume, in
turn, is ticket prices. Ticket prices at DIA increased 20 percent to
38 percent compared to those charged a year earlier at SIA. American
Express recently reported that the average fare paid at DIA for March
1995 was 20 percent higher than fares at SIA in March 1994, with an
average fare of $290 at DIA compared to $241 at SIA.\4
American Express also reported that the average fare nationally,
based on 215 domestic city pairs, showed no change during that
period. In addition, the American Express review for the second
quarter of 1995 reported that the average fare paid at DIA in June
1995 was 38 percent higher than the average fare at SIA in June 1994,
while the average fare was up 7 percent nationally during that
period.
We also reviewed the Department of Transportation's (DOT) airfare
statistics, which are based on a broader 10 percent sample of all
domestic airline travel. DOT's data showed that the average fare for
Denver travel for the second quarter of 1995--DIA's first full
quarter of operation--was 9 percent higher than the SIA fare for the
same period in 1994. According to DOT's statistics, the average fare
nationwide for the second quarter of 1995 was 2.4 percent higher
compared to the average fare 1 year earlier.
According to airline industry representatives we interviewed, airport
charges to airlines for rental costs and landing fees represent a
small fraction of airlines' total costs, which also include, for
example, aircraft fuel and maintenance costs and personnel and
benefits expenses. Thus, the industry officials indicated that the
lack of a competitive market in the Denver area for United Airlines,
rather than DIA airline charges, is probably the most important
factor affecting the price of tickets. United Airlines dominates the
market at DIA, carrying about 70 percent of all passengers enplaned
in Denver during the first 4 months of 1995. Historically,
Continental Airlines was United's major competition in the Denver
market; however, as discussed later, Continental has eliminated its
hubbing operation from Denver.
Airlines that have a reputation for low fares, such as Southwest,
have stated in media reports that they have chosen not to use DIA
because its rates are too high. The airport at Colorado Springs,
which is located about 70 miles south of Denver, has attracted a low
fare airline, Western Pacific Airlines, that is offering competition
to DIA. Colorado Springs expects to enplane 1.4 million passengers
in 1995 compared to 791,000 in 1994, a 72-percent growth rate.
Colorado Springs Airport officials told us that some of the growth is
fueled by Denver passengers, although they have not performed any
studies to verify this. Future growth at Colorado Springs, however,
will be limited by its size; it is currently operating at full
capacity with only about 7 percent of DIA's passenger volume.
Our analysis of landing reports generated by the airlines for the
first 6 months of operations at DIA showed that DIA enplaned 100.3
percent of forecasted passengers for March, April, and May 1995.
However, volumes declined through the summer of 1995 as compared to
forecasts, with 94.5 percent in June, 90.6 percent in July, and 89.0
percent in August.\5 DIA officials stated that higher ticket prices
were the primary cause of the decline in passenger volume in the
summer of 1995, as well as the loss of Continental's hubbing
operation. Passenger volume has improved in recent months, with 90.3
percent of forecasted passengers enplaned in September, 94.8 percent
in October, and 99.1 percent in November.
--------------------
\4 The American Express Business Travel Review, 1st Quarter, 1995,
pp. 14-15. American Express's computation was based on a one-way
average price paid by all business travelers booked by American
Express Business Travel who traveled from DIA to 10 other cities.
The 10 cities were selected based on a large number of yearly
passengers or those that provide widespread geographic balance. The
ten cities paired with DIA were Atlanta, Chicago, Dallas, Newark,
Omaha, Salt Lake City, San Francisco, San Jose, Seattle, and
Washington, D.C.
\5 Our analysis included an adjustment for seasonality in passenger
demand by considering that historical data for March through August
for the years 1992 through 1994 at SIA show that 53.66 percent of
annual Denver passengers were enplaned in this 6-month period.
RISK OF CONSTRUCTION DEFECTS
---------------------------------------------------------- Letter :4.3
Another critical risk factor that we identified are the many
allegations that have been made about improper construction practices
at DIA, involving the main terminal, concourses, and runways.
Although investigations to date have not disclosed major deficiencies
that would result in significant repair costs, if undisclosed defects
are present that eventually cause expensive repairs, DIA's cost
structure could be materially affected. It should be noted, however,
that the City of Denver's contracts with its DIA building contractors
included a standard "Latent Defect Clause." This clause states that
any hidden defects that develop as a result of materials and
equipment incorporated into the project will be remedied by the
contractor at no extra cost to the city.
POTENTIAL ADVERSE ACTIONS
RESULTING FROM SEC
INVESTIGATION AND BONDHOLDER
LAWSUITS
---------------------------------------------------------- Letter :4.4
The City of Denver has advised us that the Securities and Exchange
Commission (SEC) is conducting a formal investigation regarding the
adequacy of the city's disclosure of information in bond offering
documents with respect to the automated baggage system and related
delays in opening the airport. Current estimates of whether the city
will be able to repay investors would not appear to be within the
scope of that investigation. Generally, when the SEC finds a
violation of federal security law, it has the discretion to pursue a
range of enforcement mechanisms and penalties. The SEC may, for
example, require correction of public filings, direct future
compliance, or, in some circumstances, ask a court to impose monetary
penalties.
The City of Denver provided us with a copy of a letter dated October
11, 1995, in which SEC regional staff advised the city that as a
result of its investigation, the staff planned to recommend that the
Commission institute an administrative action, the next step in the
SEC's enforcement process. The city was given an opportunity to
submit a written statement (known as a "Wells Submission") to the SEC
to counter the staff's recommendation. The city advised us that it
issued its Wells Submission on December 7, 1995, and denied violating
federal securities laws in connection with the financing of DIA.
Also, in February 1995 and March 1995, four class action lawsuits
were filed in United States District Court for the Colorado District
by DIA bondholders seeking damages from the City and County of
Denver. The four lawsuits allege that the city misrepresented the
design and construction status of the automated baggage system and
the opening date of DIA. In addition, two of the lawsuits make
allegations that the city and other defendants engaged in a
conspiracy to conceal adverse facts from the investing public in
order to artificially inflate the market price of the bonds. On May
1, 1995, a class action complaint was filed in Denver District Court
by the four plaintiffs in the federal court cases, making
substantially similar allegations. An SEC determination resulting
from its investigation that disclosures were not fair or complete
could aid litigants claiming losses from improper disclosures.
OTHER KEY RISKS
---------------------------------------------------------- Letter :4.5
In its Official Statement published in June 1995 to promote bond
sales, DIA noted several investment risk factors that could
potentially affect the security of DIA bonds, including the ongoing
SEC investigation and bondholder litigation discussed above. In
addition, we have summarized the following risk factors from that
statement as items that must be noted as part of any analysis of
DIA's long-term financial condition.
DIA estimates operating revenues of about $500 million per year for
the period 1995 to 2000, and anticipates receiving federal
grants in amounts adequate to retire $118 million in subordinate
bonds over the 5-year period. Grants require congressional
action that cannot be assured.
Many of the airlines operating at DIA, including United,
Continental, Delta, Northwest, TWA, and others, have sent
letters objecting to various aspects of the rates and charges
for the airport. DIA officials stated that only TWA has filed a
complaint with DOT, and DOT resolved TWA's complaint in favor of
the City of Denver.
Other factors that will affect aviation activity at DIA include (1)
the growth of the economy in the Denver metropolitan area, (2)
airline service and route networks, (3) national and
international economic and political conditions, (4) the price
of aviation fuel, (5) levels of airfares, and (6) the capacity
of the national air traffic control system.
DIA'S ABILITY TO MEET ITS
FINANCIAL OBLIGATIONS
------------------------------------------------------------ Letter :5
Based on our review of DIA's long-term budgets and the data available
on actual operations from its opening on February 28, 1995, through
August 31, 1995, we found no significant issues which would lead us
to believe that DIA will be unable to meet its financial obligations.
However, the risks we identified in the previous section must be
carefully considered by users of our report.
Passenger enplanements are a key measure primarily because United
Airlines, which accounts for over 70 percent of DIA passengers, has
an agreement with DIA that it will honor its lease as long as costs
per enplaned passenger do not exceed a specified level. DIA's leases
also include a rate maintenance agreement that allows it to charge
rates and fees sufficient to cover DIA's debt service and operating
costs. Thus, the effectiveness of this agreement in supporting DIA's
ability to meet its obligations is based upon maintaining the level
of enplanements and costs per enplaned passenger within limits
specified by the United lease agreement.
During its initial 6 months of operations, DIA's volume of enplaned
passengers averaged 95 percent of estimates. Both DIA and the
Federal Aviation Administration (FAA) expect enplanement levels to
increase over the next 5 years. Although leases were below
anticipated levels due to Continental Airlines' removal of its hub
from Denver and MarkAir's bankruptcy, DIA estimates that it will have
positive net revenues of $19.5 million for 1995. Debt service
requirements have been spread relatively evenly over the next 30
years. DIA's current budgeted operating costs were based on
contractual agreements and detailed budgets. DIA expects these
operating expenses to increase with the levels of inflation over the
next 30 years. DIA posted positive cash flows during the period
under review and has adequate cash reserves to draw on in case of
emergency in the immediate future.
PASSENGER VOLUME
---------------------------------------------------------- Letter :5.1
DIA's ability to generate sufficient revenues to cover its operating
costs and debt service requirements ultimately depends upon the
number of passengers that choose to use the airport. Passenger
volume dictates airline demand for space at DIA and is directly
linked to the financial success or failure of DIA concessions.
We analyzed airline landing reports for the first 6 months of
operations at DIA and found that its volume of enplaned passengers
was about 95 percent of its estimates. DIA and FAA both expect
enplanement levels to increase in future years. Provided DIA does
not suffer a significant decline in passenger levels, a risk we
previously discussed, and have unanticipated costs, it should be able
to keep its cost per enplaned passenger within the limits specified
by its lease agreement with United Airlines.
In October 1995, DIA estimated that passenger enplanements for 1995
would be 15.9 million,\6 while FAA estimated that they would be 15.1
million. Both estimated that enplanements would rise from 1995 to
2000, reaching 18.2 million in 2000. DIA estimated an annual growth
rate of about 2.6 percent in passenger volume from 1995 through 2000,
while FAA estimated an annual growth rate of about 4 percent from
1995 through 2010.
United Airlines has an agreement with DIA that it will honor its
30-year lease as long as costs per enplaned passenger do not exceed
$20, measured in 1990 dollars. In June 1995, DIA estimated that
United's cost per enplaned passenger in 1995 would be $16.31 in 1990
dollars and, if enplanement levels approximate estimates and
unanticipated costs are not incurred, would drop to $13.22 by the
year 2000. In our October 1994 report,\7 we estimated that, with all
other factors remaining constant, passenger traffic would have to
drop to between 12 million and 12.5 million enplaned passengers in
1995 to drive costs above $20 per enplaned passenger.
--------------------
\6 As of the February 28, 1995, opening date at DIA, 16,135,000
passengers were estimated for 1995.
\7 New Denver Airport: Impact of the Delayed Baggage System
(GAO/RCED-95-35BR, October 14, 1994).
NET REVENUES
---------------------------------------------------------- Letter :5.2
DIA has three concourses containing a total of 90 jet gates; however,
as of September 1, 1995, only 76 of the gates were being used by
airlines, with 69 of them covered by lease agreements. DIA is
operating substantially below capacity due to Continental Airlines'
decision to remove its hub from Denver and, to a lesser extent,
MarkAir's bankruptcy and failure.
Although this reduced the level of operations, DIA's reports show
that it has covered its costs and achieved positive cash flows for
its first 6 months. Following DIA's April 1995 agreement allowing
Continental to reduce its lease commitment from 20 gates to 10, DIA
raised its rental rates to airlines, effective May 1, 1995, by 6.8
percent. Other airlines, primarily United, have increased passenger
volume due to Continental's pullout. In addition, reported operating
costs have been below budget. All these factors have contributed to
DIA's positive financial results to date. Furthermore, because DIA
is operating below capacity, it is positioned to meet the expected
increase in passenger volumes in future years without constructing
new facilities.
DIA's 14 idle gates were all on concourse A, which was planned to
support Continental Airlines' hubbing operation. Continental entered
into an agreement with DIA in August 1992 to lease 20 of the 26 gates
on concourse A but had eliminated most of its Denver operations by
the time DIA opened in 1995. In April 1995, Continental's lease
commitment was reduced to 10 gates for 5 years. Further, Continental
was allowed to sublease up to 7 of these gates. As of September 1,
1995, Frontier was subleasing 4 gates and America West was subleasing
1 gate from Continental. Two other gates on concourse A were used by
Mexicana Airlines and Martinair Holland.
All 44 gates on concourse B were leased by United Airlines for 30
years. The 20 gates on concourse C were used by various airlines,
with 13 gates leased as of September 1, 1995, generally under 5-year
leases. The remaining seven gates were used by non-signatory
airlines. Airlines operating on a non-signatory basis pay 20 percent
higher rates for space rent and landing fees and do not share in the
year-end dividend based on 80 percent of DIA's net receipts. Five of
those unleased gates on concourse C were used by MarkAir, which filed
for bankruptcy in April 1995. In October 1995, MarkAir went out of
business, owing DIA about $2.9 million.
DIA also hosts a substantial air cargo operation. It has lease
agreements with several major cargo carriers, including Federal
Express, United Parcel Service, and Emery Worldwide. According to
DIA's estimate, which we reviewed and found reasonable, this
operation was to produce $3.3 million in space rent plus about $5
million in landing fees for fiscal year 1995.
DIA'S OPERATING COSTS
---------------------------------------------------------- Letter :5.3
Debt service requirements and operations and maintenance are DIA's
two major cost components. Debt service costs are expected to remain
relatively stable over the next 30 years. Operating costs are
expected to rise with inflation over that time frame.
DEBT SERVICE REQUIREMENTS
-------------------------------------------------------- Letter :5.3.1
Debt service payments constitute over 60 percent of DIA's estimated
annual costs. DIA's bonds are scheduled to be paid off in relatively
equal installments over the next 30 years. After a bond sale in June
1995, DIA had bonds payable of about $3.8 billion. DIA's June 22,
1995, estimates included two future bond sales to finance capital
improvements. The first of these sales, held on November 15, 1995,
after the end of our review, yielded $107,585,000 in bond principal.
The second sale was scheduled for January 1, 1997, for $40,835,000 in
bond principal.
Based on its current contractual agreements with bondholders and
estimated servicing requirements on the two additional bond sales,
DIA's cash requirements for servicing the debt on its bonds will be
spread relatively evenly over the next 30 years. Annual bond
payments will rise from about $288 million in fiscal year 1996 to
about $327 million in fiscal year 2005. From fiscal years 2006
through 2024, the payments are to range from $307 million to $329
million, with a final bond payment in fiscal year 2025 totaling $267
million.
OPERATIONS AND
MAINTENANCE COSTS
-------------------------------------------------------- Letter :5.3.2
In addition to debt service payments, operations and maintenance and
other expenses of the Denver Airport System (including upkeep of
Stapleton International Airport) comprise DIA's other major cost
element. DIA estimated that these costs would be about $159 million
in fiscal year 1996 and would increase by about 3 percent a year as a
result of inflation. Table 1 lists DIA's estimated operations and
maintenance costs for fiscal year 1996 by cost category.
Table 1
DIA's Estimated Operations and
Maintenance Costs for Fiscal Year 1996
by Cost Category
Cost category Estimated cost
-------------------------------------------------- ------------------
Personnel $44,125,000
Cleaning 20,648,000
Utilities 19,438,000
Supplies and materials 9,681,000
Repairs and maintenance 8,374,000
Professional services 8,099,000
Police 7,726,000
City interfund services 7,014,000
Stapleton International Airport 5,749,000
Underground train 5,662,000
Variable rate bond fees 5,142,000
Aircraft rescue and fire fighting 5,012,000
Management fees 4,001,000
Shuttle bus services 3,120,000
De-icing facility management fee 2,027,000
Other contractual services 1,431,000
Fuel line fill-up 985,000
Miscellaneous 455,000
======================================================================
Total $158,689,000
----------------------------------------------------------------------
Source: DIA data as of June 1, 1995. GAO examined all budget
estimates exceeding $1 million and concluded they were reasonable.
We reviewed DIA's budgets for operations and maintenance costs by
category and found the estimated amounts to be reasonable and
supported by adequate documentation. Many cost categories were
supported by contracts for services, including cleaning services,
parking system management, and operation and maintenance of the
underground train. Other categories were based on detailed,
documented budgets that were developed using data such as number of
employees, utility costs per square foot of building space, and other
standard estimating methods. Estimates beyond the current year are
based on 1996 estimates that were adjusted for a reasonable inflation
factor.
DIA CASH FLOWS
---------------------------------------------------------- Letter :5.4
Estimates and analyses of short- and long-term cash flows are
valuable financial management tools, especially when cash flows are
volatile or uncertain--for example, when an operation is just getting
underway or during periods when significant construction and capital
improvement programs are being carried out. Used in conjunction with
an entity's other important financial reports, cash flow estimates
and statements provide useful analytical information. For example,
comparing cash flows with accrual-based accounting information can
yield valuable management information.
In response to our request, DIA prepared estimates of cash flows for
fiscal years 1996 through 2000. In April 1995, DIA officials also
provided estimates of cash flows by month for 1995. We compiled
DIA's actual cash flows for March through May 1995 and found that DIA
produced a positive cash flow of $1.5 million in its first 3 months
of operations.\8
In September 1995, DIA's finance office provided us with cash flow
statements it prepared for March through August 1995. The statements
showed a positive cash flow of $1.8 million for March through May,
which approximates the results of our analysis, and $12.1 million for
June through August 1995. We confirmed that the statement's $49.9
million ending cash balance as of August 31, 1995, matched the
balance on DIA's general ledger.
At the time of our review, DIA officials said they were not required
to prepare long-term cash flow estimates or statements. DIA's
Finance Director told us that DIA did not use long-term cash flow
estimates and analysis to assist in managing DIA operations. She
stated that financial information available on the accrual basis of
accounting was not materially different from information available on
the cash basis and, in DIA's view, is sufficient for long-term
planning. Finally, she stated that DIA's rate maintenance covenant
ensures that DIA will generate adequate receipts to cover all
disbursements.
We surveyed seven airports about their use of cash flow estimates as
a management tool. Two of the seven stated that they use cash flow
estimates. For example, an Atlanta airport official stated that cash
flow estimates were particularly valuable in its new concourse
construction program. The five airports that did not use cash flow
analyses had stable operations that experienced minimal fluctuations
from year to year in receipts and disbursements.
In commenting on a draft of this report, DIA's Director of Aviation
reiterated DIA's position that cash flow estimates beyond the current
fiscal year are not useful for several reasons and that the airport's
5-year feasibility study is an adequate long-term planning tool. We
believe, however, that cash flow estimates would have been a valuable
management tool during the period of our review as DIA completed
construction. Also, in conjunction with DIA's other financial data,
such estimates could continue to provide useful analytical data as
the airport's operations stabilize during its initial years of
operations.
DIA's comments also stated that weekly cash flow estimates had been
prepared since January 1994 and that weekly estimates were rolled up
into monthly and quarterly reports. During the course of our work,
we made repeated requests for such estimates, including a writen
request on January 27, 1995. In a letter dated February 2, 1995,
DIA's Assistant Director of Aviation for Finance advised us that the
monthly cash flow estimates for 1995 had not been completed. As
stated earlier in this section, we did not receive DIA's estimates of
cash flows for fiscal year 1995 by month until April 1995.
--------------------
\8 Short-term fluctuations in cash receipts and expenditures can
affect the usefulness of a 3-month cash flow analysis. For example,
United Airlines paid $4.56 million on June 2, 1995, for landing fees
that were due on May 15. Had DIA received this payment prior to May
31, the cash flow analysis would have reported a positive cash flow
of about $6 million.
DIA CASH RESERVES
---------------------------------------------------------- Letter :5.5
As of September 25, 1995, the date of DIA's latest available reserve
fund statement, DIA had an operating cash balance of $57 million and
held $420 million in reserve funds. In the event of a temporary
financial crisis, about $260 million of these reserve funds could be
used, subject to certain restrictions. Table 2 presents DIA's
reported reserve fund balances as of September 25, 1995.
Table 2
DIA Reserve Funds as of September 25,
1995
Reserve fund Balance
-------------------------------------------------- ------------------
Bond $312,801,299
Capital 47,548,054
Coverage 47,000,000
Operations and maintenance 12,462,998
======================================================================
Total $419,812,351
----------------------------------------------------------------------
The following restrictions apply to the use of the reserve funds:
Bond Reserve Fund. Under terms of the bond ordinance, money can be
withdrawn from this fund only to meet debt service requirements.
Withdrawn funds must be paid back at the rate of 1/60th of the
amount owed each month. Our analysis showed that about $200
million could be withdrawn from this fund before the payback
requirements would exceed the remaining balance. However,
according to bond analysts to whom we spoke, drawing on this
fund could have a negative effect on DIA's bond ratings if DIA
seeks future bond financing. As previously discussed, only one
additional bond sale is currently being planned.
Capital Fund. This fund can be used without restriction to pay for
capital improvement costs, extraordinary costs, or debt service
requirements. DIA anticipates that in the ordinary course of
business, it will draw upon this fund for capital improvements.
Coverage Fund. DIA's rate maintenance covenant requires that net
revenues of the airport, combined with the coverage fund, equal
no less than 125 percent of the debt service requirement on
senior bonds for the upcoming year. The coverage fund amount is
calculated at the end of each year and must be fully funded at
that time. In June 1995, DIA reported that the December 31,
1996, coverage fund requirement will be $58.4 million. Any
amounts withdrawn from the coverage fund must be replenished by
December 31 of each year, which effectively limits the use of
this fund in a financial crisis.
Operations and Maintenance Reserve Fund. This fund must be fully
funded by January 1, 1997. Full funding requires that 2 months
of operations and maintenance expenses be on deposit in the
fund, a requirement of about $27 million. This fund can be used
to cover operations and maintenance expenses if net cash from
operations is inadequate.
---------------------------------------------------------- Letter :5.6
We requested written comments on a draft of this report from the
Secretary of Transportation and the Director of Aviation, DIA, of the
City of Denver. A representative of the Secretary advised us that
the Department of Transportation had no comments on the report.
DIA's Director of Aviation provided us with written comments, which
are incorporated in the report as appropriate and reprinted in
appendix I.
As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter. At that time, we will
send copies to the Secretary of Transportation; the Director, Office
of Management and Budget; officials of the City of Denver; and
interested congressional committees. We will also make copies
available to others upon request.
Please contact me at (202) 512-9542 if you or your staff have any
questions. Major contributors to this report are listed in appendix
II.
Sincerely yours,
Lisa G. Jacobson
Director
(See figure in printed edition.)Appendix I
COMMENTS FROM DENVER INTERNATIONAL
AIRPORT
============================================================== Letter
(See figure in printed edition.)
The following are GAO's comments on the letter from Denver
International Airport's Director of Aviation dated January 22, 1996.
GAO COMMENTS
1. See the "Health of the Airline Industry and United Airlines"
section of the report. Also, we did not reprint the referenced
article.
2. See the "DIA Cash Flows" section of the report.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
DENVER REGIONAL OFFICE
Lowell Hegg, Assistant Director
Patricia Cheeseboro, Senior Evaluator
John Furutani, Evaluator
Miguel Lujan, Evaluator
OFFICE OF THE GENERAL COUNSEL
Thomas H. Armstrong, Assistant General Counsel
*** End of document. ***