MMM Group Limited Lethbridge Airport Financial Assessment and Governance Study Update 2016 February 2017 | 1216101-000 EXECUTIVE SUMMARY At the request of Lethbridge County and the City of Lethbridge, MMM Group Limited (a WSP Company) completed a 5-year update to the 2011 Financial Assessment and Governance Strategy for Lethbridge Airport (the ‘2011 Study’). The update reflects current market conditions and is intended to assist with future airport governance-related strategic decisions and to aid the Airport Committee in gaining a better understanding of current and future airport activity. The update incorporates changes in economic conditions and air transport industry trends since 2011, including the entry of WestJet’s Encore 78-Seat Q400 into Canada’s regional air service market. The approach followed in updating the 2011 Study is presented below. MMM was tasked with updating current market conditions, economics and air transport industry trends through the following tasks: ► Baseline airport conditions were revisited through Stakeholder consultation interviews and web- based surveys. ► An environmental context review was completed to update the economic outlook of the country and took into consideration current government policy initiatives, funding sources, and trends in the air transport industry as they relate to Lethbridge. ► A new baseline activity forecast was prepared following a review and update of previous assumptions. Forecasts of General Aviation activity were updated to reflect current conditions and anticipated growth. ► A technical due diligence of airfield infrastructure and operations was completed including a review of infrastructure assets and any specific constraints to airport development. Requirements for facility improvements to support current and future operations was projected. ► A review of capital projects completed since 2011 was compiled and used to update the 2011 Capital Plan. ► A baseline airport assessment was performed to determine how Lethbridge Airport compares against similar regional airports. ► The commercial due diligence was updated to reflect the most current operating revenues and expenditures. The long-term financial sustainability of the Airport was assessed under the growth scenarios. ► Viable airport governance approaches were reviewed and confirmed and a recommendation of the most appropriate model was provided. The requirements and strategic options for growing demand at the Airport were also identified. Lethbridge Airport | Financial Assessment and Governance Strategy Update MMM Group Limited | February 2017 | 1216101 Community engagement was undertaken with a different approach from the 2011 Study. Airport stakeholders identified by the County, City, and project team were interviewed to discuss their general opinions of the Airport as they related to the development of the Airport, passenger air service, and airport governance. Additionally, at the request of the County and City, two web-based surveys were developed to gain the input from a larger sample size. The first survey targeted the general public, while the second targeted the Lethbridge business community. These surveys are presented in Appendix A. Both surveys received a high response rate: the public survey had 1460 responses and the business survey 327 responses. The Environmental Context Review considered economic outlook and the aviation industry in context to Lethbridge Airport. The current weakness in the petroleum sector is the result of worldwide problems in the supply and demand for petroleum. Alberta’s reliance on synthetic crudes makes it particularly vulnerable to any weakness in the price of oil. The low price elasticity of demand has created strong price volatility. The aviation sector has suffered from the weak Alberta economy. However, Air Canada, WestJet, and other airlines have continued to improve their offerings at Calgary. The new Calgary service offerings provide better connections for the Lethbridge flights and could stimulate boardings at the Lethbridge Airport. Future flights by WestJet’s Encore regional service are an obvious goal for Lethbridge. Transport Canada Air Policy Directorate has recently focussed on Canada’s new international air policy with a primary objective to provide a framework that encourages competition and the development of new and expanded international air services. This area of focus does not pertain to Lethbridge Airport or other regional airports. Based on review of available Transport Canada documentation and publications, there appear to be few upcoming changes to airport policy. Specific to Lethbridge Airport, changes in airport policy should not have a significant impact on airport management or governance within the next 2 to 3 years. Long term traffic forecasts for Lethbridge Airport through to 2040 were prepared and considered: ► Scheduled passenger enplanements and deplanements; ► Itinerant general aviation landings and takeoffs; and ► Local general aviation landings and takeoffs. The forecasts were generally less optimistic than those prepared in 2011. The 2011 forecasts assumed that the 2007-2010 decline in passenger traffic was the result of the worldwide financial crisis and that once the crisis was resolved, traffic would rebound. However, Lethbridge’s traffic showed no such resilience. Passenger counts for 2015 were less than those of 2007-2009. The low oil prices and the weak provincial economy of 2015-2016 were not expected. The baseline forecasts therefore call for no changes in 2016 activity levels. However, several factors could stimulate traffic growth at Lethbridge Airport. Lethbridge Airport | Financial Assessment and Governance Strategy Update MMM Group Limited | February 2017 | 1216101 Current volumes, in conjunction with the future environment generated five forecasting scenarios: 1. Continuation of Air Canada and Air Integra services with no capacity changes. 2. Air Canada upgrades Lethbridge-Calgary service with two daily flights operated by 50-seat aircraft. 3. WestJet Encore inaugurates twice daily Calgary-Lethbridge services. 4. A Low Cost Carrier inaugurates 3/week flights to Lethbridge. 5. Charter airline offers winter-only flights to Mexico or the U.S. Sunbelt. A high-level review of airport facilities was undertaken to update the conditions, deficiencies, and future requirements of critical infrastructure. The process included the visual inspection of above ground facilities and equipment and consultations with airport staff. This review informed the Airport Capital Plan, specifically the base infrastructure needs. The capital needs summary identified total capital expenditures required over a 20-year planning period for the status quo as well as the four augmented growth scenarios. These costs ranged from $27.3M to $32.4M. Four airports were selected for comparison with Lethbridge Airport based on a number of criteria, including but not limited to: community population, passenger traffic, governance model, airport facilities, and financial performance (where available). The airports selected were: Nanaimo Airport, Kamloops Airport, Fredericton International Airport, and London International Airport. In general, the comparable airports have improved their financial performance since 2011, thanks in part to successful campaigns to secure new or improved air services. Three new lessons learned from the airports comparison include: 1. Attracting new passenger services will require long-term investment; 2. Lethbridge Airport’s competitive position could be improved by investing in ATB expansion and upgrades; and 3. Airports have significant economic value beyond facilitating passenger services. The financial performance of Lethbridge Airport in recent years was compared to the analysis completed in the 2011 Study. Since 2010, Airport revenue increased from $1.65M to $1.9M in 2015, an increase of 15%. During the same period, total expenditures increased from $2.37M to $2.4M, an increase of only 1.26%. Historically, the Airport has had significantly greater expenditures than revenues. In 2015, if indirect expenses are removed, the airport had an operating surplus of approximately $340,000. A variety of governance models have been utilized by airports across Canada. Some are more relevant to larger airports and some to smaller airports. The range includes extremes such as closing the Airport, up to airport authorities that require a large amount of commercial passenger traffic to be effective. The 2011 Study recommended the creation of an Airport Commission to provide a more focused vision for the future development of the Airport. While there have been many changes in Alberta and the aviation industry since the completion of the previous study, an Airport Commission remains the most appropriate governance model for Lethbridge Airport. There are a number of options that the County and City should consider to aid in increasing the utilization of Lethbridge Airport including: developing public education initiatives, direct marketing, preparing market demand studies, and completing an Airport Master Plan. Lethbridge Airport | Financial Assessment and Governance Strategy Update MMM Group Limited | February 2017 | 1216101 Recommendations Lethbridge County, the City of Lethbridge, and Lethbridge Airport should take the following recommendations into consideration: ► Negotiate a new airport ownership structure between Lethbridge County and the City of Lethbridge. ► Implement an Airport Commission governance model. ► Prepare an Airport