Flughafen Zürich AG

Great. Ladies and gentlemen, welcome to the presentation of our company's full year result 2018 at Zürich Airport.

I also welcome the attendants who are now connected via phone, and would like to remind these attendants that analyst presentation is available on our webpage, zurich-airport.com. My name is Stephan Widrig, I'm the CEO of the company.

And I will host this presentation together with Lukas Brosi, our company's CFO. I will start with the business update and give you some insights on strategic topics and an update on the regulation, before our CFO will provide you with detailed information on our financial performance, followed by a brief outlook.

At the end, we will have enough time to answer your questions. I'd start with some of our highlights in the last year.

As the demand for international mobility continues to grow, 2018 saw a further year of rising passenger volumes. For the first time, the number of passengers had passed the 30 million mark.

Equally notable is the further increase in the number of peak days on which over 100,000 passengers were handled per day. During the year under review, Zürich Airport recorded 63 of these peak days versus 22 in the previous year.

And in July there was an all-time record of nearly 115,000 travelers on a single day. 2018 saw the addition of more new airlines and destinations at Zürich Airport and the expansion of the long-haul sector was especially welcomed.

New long-haul destinations included Buenos Aires, Colombo as well as Ho Chi Minh City and Hainan Airlines is now flying to Shenzhen in China, while Sichuan Airlines have introduced a service to Chengdu via Prague. We are constantly expanding our nonregulated business as well.

Our commercial centers, both landside and airside, are performing very well. Despite generally lackluster performance of the Swiss retail market as a whole, we can constantly increase commercial returns in absolute terms, especially on airside.

With regard to THE CIRCLE, both the construction and marketing are on track. And THE CIRCLE becomes a visible reality and is set to strengthen our airport as a leading center in the greater Zürich area.

Internationally, the implementation in Florianopolis goes smooth, and the new terminal will be fully operational in the second half of this year. And finally, Standard & Poor's raised our credit rating to AA-.

Thereafter, independent Swiss agency, fedafin confirmed the rating at the same solid level. On the next slide, you will find a brief overview of the group key figures.

In 2018, total passenger numbers grew by 5.8% to 31.1 million passengers. Our revenue increased to CHF 1.15 billion, a plus of 11.2%, while both segments, aviation and non-aviation, were on a positive trend.

As already communicated with the half year result our 2018 numbers were affected by a one-off effect of CHF 57.6 million for additional noise management and resident protection provisions being charged to the P&L. Compared with the same period last year, in addition to the increased provision for sound insulation measures in the first half of 2018, the previous year result was affected by the receipt of CHF 4.8 billion in connection with liquidation of the former Swissair, plus the one-off gain of CHF 36.3 million on the disposal of the remaining 5% interest in Bangalore International Airport.

When adjusted for these one-off effects, profit increased by CHF 33 million to CHF 284 million, which depicts a plus of 13.3% compared to 2017. Let us now have a closer look at the aviation business.

The increase in passenger volume divides into a 5.6% growth in the local passenger segment, while transfer passengers were up by 6.4%. The proportion of transfer passengers slightly increased from 28.3% to 28.4% over the prior year period.

The share of our home carrier SWISS remained stable at 52.9% compared to 52.3% in the previous year, followed by Edelweiss Air and easyJet. While SWISS grew mainly through bigger aircraft and a higher seat load factor, Edelweiss added intercontinental routes and easyJet contributed to a healthy competition on European routes.

The number of flight movements climbed by 3% to more than 278,000 takeoffs and landings. Last but not least, compared with the prior year period, the volume of freight handled at Zürich Airport increased by 0.6%.

I will now move to the non-aviation business and share some insights on the commercial business followed by an update on our strategic projects. First, I would like to share a detailed overview on the commercial performance for 2018.

Total sales for retail outlets due to free shops and restaurants at Zürich Airport amounted to around CHF 594 million, an increase of 3%. Thanks to continually rising passenger numbers, growth in airside turnover was positive, in particular the watches and jewelry segment posted strong growth as did restaurants.

Despite the difficult retail climate in Switzerland, landside revenues are stable. The new air restaurants that opened at the beginning of 2018 is proving highly popular among passengers, employees and visitors, which is also reflected in a healthy turnover.

For this year, a couple of changes to food segment concepts are in the pipeline and new luxury boutiques will augment [ DSI ] offering. The average concession rate, reflecting the revenues for our company based on the sales in the shops and the restaurants, saw a significant rise of 1 percentage points to 21.8%, boosted, in particular, by the new duty-free contract which kicked in at the beginning of 2018.

Due to renewals of other smaller contracts, we expect our average concession rate to increase further in the coming years, however, to a smaller degree. Let me continue with an update on the revision of the ordinance on airport charges.

The strong growth of passengers and strict cost control over the past years have brought us in a situation where we exceeded the allowed return on the regulated asset base. This, coupled with lower interest rates, makes it evident that a tariff decrease for the next regulatory period must be expected.

The Federal Office of Civil Aviation, FOCA, announced in June 2018 that the ordinance on airport charges might be selectively revised and that the regulator is assessing an adoption of today's transfer payments. Please let me remind you here that currently 30% of the economic value added of car parking and airside commercial activities has to be effectively transferred to the regulated segment to determine the airport charges.

Hence, the transfer payment forms a subsidy from the non-aviation to the aviation business. In November '18, FOCA then presented concrete proposals.

To our surprise, FOCA proposed that 50% of the economic value added from the commercial activities on the airside, along with a maximum of 75% of the parking segment, would be skimmed off for cross-subsidization. Further, our request for an adaption in the calculation formula for the allowed return has not been addressed.

If FOCA's proposal is to be implemented, aviation revenues at Zürich Airport will fall by around 25% in the forthcoming regulatory period. The new charges would take effect at the end of 2020 at the earliest.

After FOCA's ordinance draft was published, we had the chance to make our comments during the stakeholder involvement process that was concluded in December 2018. We are now awaiting the final decision on the ordinance this summer taken by the Swiss Federal Council, and we will keep on fighting that the proposal of FOCA will not get supported on government level in the meantime.

Furthermore, we have already reviewed our aviation CapEx plan, and we are preparing for the upcoming negotiation phase with the airlines and representatives. Let's switch back to more pleasant topics.

When THE CIRCLE opens in 2020, Zürich Airport is undoubtedly set to become a leading urban and business center in the greater Zürich area as well. Construction is proceeding on schedule.

3 of the 6 buildings have already reached their final height, and in some cases, entire facades are in place. The development becomes fully visible now and looks impressive.

The adjacent park is being upgraded, adding to the quality of the place. Various new tenants, such as Raiffeisen and Microsoft Switzerland, were acquired in 2018.

The latter is planning to move its head office to THE CIRCLE and also entered in a strategic partnership with us for the digitalization of THE CIRCLE. Contracts have also been signed with further tenants in the healthcare sector and well-known restaurateurs.

Additionally, we are in advanced negotiations with other potential tenants and intend to announce new contract conclusions within the next weeks. From a cost point of view, our budget of total CHF 1.2 billion remains unchanged.

International activities are progressing as well. We are currently active at 6 airport in 4 countries in Latin America.

We took over the operation of the airport in Florianopolis in January 2018 and construction work on the new terminal commenced already in April. It is scheduled for completion in the second half of 2019, compliant with the concession agreement, ahead of schedule and in line with the CapEx plan.

Besides Latin America, the development of our international business is focused on projects in Asia. To develop the market in Asia, we set up a regional office in Kuala Lumpur, which will be able to coordinate expansion and explore market opportunities on ground.

Early this year, we submitted bids for project in India. However, our offers ranked second behind the very aggressive local bidder and ahead of group of various competitors.

Additional opportunities in the pipeline will be in Brazil where the auction of the fourth privatization round will be held within the next days. With this, I'm handing over to Lukas.

Thank you, Stephan. Good afternoon, ladies and gentlemen.

Welcome also from my side. I will now give you an overview of the financial performance of the company.

In 2018, we have had a very successful financial year, mainly attributable to the higher-than-expected traffic here in Zürich and the strong non-aviation business. Before looking into the detailed numbers, I would like to point out difference between the bars on the slides.

The light blue bars are our reported numbers in accordance with our annual report. The dark blue bars represents the results adjusted for one-off effects.

As Stephan already mentioned earlier, we have had some -- we have had a one-off effect of CHF 57.6 million for increased sound insulation provisions in the first half year of 2018. And in 2017, we were positively affected by the Swissair liquidation dividend as well as our Bangalore divestment.

For the full financial year, Flughafen Zürich AG's revenue grew by CHF 160 million to CHF 1,153,000,000. Of the total revenue, approximately 57% was attributable to aviation and 43% to non-aviation business.

After deducting operating expenses, the adjusted EBITDA came to CHF 629 million, with the healthy margin of 54.5%. Our reported consolidated profit for the financial year amounts to CHF 238 million, whereas the adjusted profit stood at CHF 284 million.

In 2018, passenger-related charges increased in line with passenger growth by 5.7% to CHF 443 million. Other flight operating charges grew by 4.5% to CHF 138 million.

This happened mainly on the back of the Swiss fleet replacement program, which led to higher revenues from landing charges. The positive trend in aviation fees and other aviation revenue, which increased by 3.8% to CHF 76 million, was attributable to volume effects.

In sum, aviation revenue rose by 5.2% to CHF 657 million. On the non-aviation side, overall, revenue increased by CHF 83 million to CHF 496 million, which results in a plus of 20.2%.

Total commercial and parking revenues saw a year-on-year increase of CHF 40 million to CHF 248 million, which is equal to a rise of 6%. The increase of CHF 1.6 million in earnings from facility management was mainly driven by higher revenue from rental agreement, which is also reflected in a lower vacancy rate during the 2018 financial year.

Mainly higher earnings from VIP services contributed to a year-on-year increase of CHF 2 million in revenue from services to CHF 44 million. Finally, as a result of taking over the operation of Florianópolis airport in Southern Brazil and the associated expansion of infrastructure there, revenue from international airport business was lifted to CHF 83 million in the year under review.

This includes CHF 41 million for construction project under concession agreements. Let me remind you of the so-called concession accounting rules.

According to the International Reporting Standards, CapEx in our international concession has to be reflected in the P&L as revenue and operating costs at the same time. In total, this has a neutral impact on EBITDA.

In 2018, Flughafen Zurich AG once more proved to be disciplined on operating costs. Personnel expenses for the reporting year rose by CHF 10 million to CHF 211 million.

As well as higher headcount and the general pay rise, this is due to consolidating the personnel costs of international holdings, in particular, Florianópolis. By contrast, expenses for police and security increased only slightly by CHF 1.6 million to CHF 121.2 million, here in Zürich, security costs even saw a small decline.

Owing mainly to the expansion of the sound insulation program, operating expenses went up by 28% to CHF 582 million. After adjusting for one-off effects, expenses rose by 14.4%, primarily as a result of establishing operations in Florianópolis.

Operating expenses in Zürich went up by 2.2%, an increase significantly lower than the growth in passenger numbers. Please let me now outline some key figures.

Net financial debt, excluding the Airport of Zurich Noise Fund stands at CHF 580 million, leaving the net debt-to-EBITDA ratio unchanged at 0.9x. The return on invested capital is at 9%, up by 0.7 percentage points compared to the prior year period.

Although the operating cash flow was slightly higher than in the previous year, the free cash flow declined by CHF 100 million because of higher CapEx. To end the financial part of the presentation, let me now give you some additional information on CapEx.

In the period under review, Flughafen Zürich AG invested CHF 290 million in ongoing projects. This included, in particular, our share of the investment in THE CIRCLE of CHF 95 million, representing more than 1/3 of our total investments.

The project to expand and upgrade the baggage handling system at Zurich Airport was officially launched in March 2018. The total investment costs will amount to approximately CHF 407 million, with an expected completion date in 2025.

Thanks to a new 200-meter long access taxiway, aircraft will be able to line up for departure more flexibly, which in turn will improve punctuality. Two additional high-speed taxiways are being built for the east-west runway on the western side of Zürich Airport.

They allow planes to exit the landing runway more quickly, so it can be released to the next aircraft faster. The first high-speed taxiway went into operation in December 2018 and the second one is scheduled for completion in June 2019.

10 new open aircraft stands on the southern side of the airport were opened in October 2018. They provide additional space for medium-haul aircraft and are helping to meet the rising demand for stands for inter-European flights.

With this, let's move on to the outlook. Before presenting the guidance for 2019, I would like to share some of our summer timetable changes.

Capacity will be added from different carriers and we deem it to be a positive sign that the capacity growth is well diversified. I would just like to highlight some of the main changes.

SWISS will now fly 4 times per week to Danzig and Edelweiss offers its services now twice to Tirana as well as Kalamata in Greece. Let me finish with the guidance for 2019.

For a better understanding, we show the 2018 reference numbers on the left-hand side. Flughafen Zürich AG expects passenger growth around 3%, driven by some new routes and additional capacity.

We have had a pretty solid start into the new year 2019. However, we estimate the growth to slow down throughout the year, especially due to limited capacity for further growth during the volume-intense summer months.

Aviation revenues will be driven by the volume growth. Please be aware that the numbers of flight movements usually does not rise as fast as passenger numbers and the passenger mix may change too.

Therefore, the increase in aviation revenues is typically slightly lower than the increase in passenger figures. Non-aviation revenues will benefit mainly from commercial contract renewals and our international activities.

International business will be the main driver for OpEx as well. Additionally, costs in Zürich are expected to be slightly higher too.

Given the number of complex projects that need to be planned and executed in the upcoming year, the headcount will slightly increase. Please note that non-aviation revenues as well as OpEx, will be impacted by the already mentioned concession accounting.

However, this impact is EBITDA neutral. Factoring out one-off effects, EBITDA is expected to be slightly higher, whereas net profit is expected to be up by approximately 5%.

Lastly, the company has earmarked around CHF 350 million to CHF 400 million for investments in 2019. In addition to various work to maintain the value of the airport infrastructure, the biggest investment volume of around CHF 140 million is for THE CIRCLE.

With this, we would like to conclude the presentation. And I hand back to Stephan.

So we now open the Q&A part of this presentation. We've the questions of the attendants here in the meeting room after that participants on the phone will have the opportunity to bring up their questions.

May I ask you to take the microphone, introduce yourself with your name and your company, before asking your questions. We start with Mr.

Furger from Vontobel.

Pascal Furger from Vontobel and 3 questions if I may. So first one, maybe just a general one.

So with regards to airport charges, to you, Mr. Widrig, how much of your time is currently absorbed?

Maybe also, how much time do you expect is currently absorbed by the chairman with regards to this topic? And what do you expect for 2019?

Well, it is obviously an issue with high priority, and we spend all the time that is needed to safeguard our interest and that includes the Chairman.

Okay. Then maybe moving on to more financial questions.

So here, OpEx in Zürich were only up 2.2%. At the beginning of last year, you mentioned some additional costs with regards to the next CapEx cycle.

So this was obviously not visible in the numbers, so operating leverage is still strong. Have you just pushed out these additional costs or it just didn't materialize as you initially expected?

Now when we have a close look at the operating expenses, then, obviously, personnel expenses and the security costs are the 2 largest cost item. On the personnel expenses which were increasing in Zürich as well, we have benefited from an effect in relation to our pension plan where we paid a recovery fee until the last -- the middle of last year, so there was a base effect, which is also true for -- partly for security costs as the accountable police staff is within the same pension plan.

So there was a lower cost attributable to this effect. And we also saw efficiency gains on the security costs, mainly in the centralized security building, which led to almost a surprise in decrease of security costs beside the strong passenger volume we had to handle in Zürich.

And those are the main 2 cost items.

So will you continue to see this operating leverage in the next 2 years?

Well, as it was like a base effect, particularly in the personnel expenses and in the security costs because of the depletion of this contribution to the pension plan, this had a base effect. We estimate the number of staff, as we have mentioned in the guidance, to increase in connection or in looking forward into the year various projects we have to handle here in Zürich, but the operating leverage, in the general answer is still intact.

And then maybe last question on THE CIRCLE. So here, can you confirm that the pre-lettings currently at around 60%.

That's what you mentioned in a newspaper interview. And then maybe just in [indiscernible] listed real estate companies are mentioning increasing demand over the past 4 to 5 months, but mostly [ CBT ] Zürich to requests also, can you confirm this?

Also in -- with regards that the project will be now completed like in one year, has demand from tenants increased over the past few months?

Yes, I would confirm. I also would say that it becomes fully visible now that Zürich is a location in its own right and not to be comparable with the overall market in the north of Zürich because we are with THE CIRCLE, of course, creating a new urban center that is more than just an office building and that has all the synergies at this location.

So for us still as always has been it's not just a target to fill the house, but to fill the house with the right level of rents. And now you can -- you see the facade, you can look in the development and it's obvious for any tenant that it has a very -- a much bigger fascination than a pure office building.

And this, of course, helps a lot also in attracting the right key tenants that are also willing to pay a fair price for this location.

Johannes Braun, MainFirst. Couple ones on regulation and CapEx.

Firstly, there's a statement in your annual report regarding regulation which I do not fully get. It says basically that you would resist any proposed flashing of earnings, which reads to me a bit like you would propose -- you would resist any fee cut which I don't think is the message here, so can you please clarify that one?

Then on CapEx, just -- I think the CapEx guidance for 2019 is some CHF 50-ish million higher than what the market expected. Can you give us some reason for that?

Maybe it's just phasing. But then also, can you share some, let's say, guidance what the CapEx can be for the years beyond 2020 when the fees are cut, especially if you're not successful in your lobbying effort to get a more favorable outcome of the regulatory proposal?

And then, lastly, on the free cash flow on 2018, last year free cash flow was CHF 100 million lower, as you said, but CapEx was actually only CHF 50 million higher, while operating cash flow was, I think, slightly higher. So I do not get the math behind that.

Okay. Let me start with the regulation and the CapEx, and obviously, also on the cash flows that is all questions to me.

I think in terms of tariffs, we had a very strong passenger growth over the last years, stronger than we have expected and together with the lower interest rate, I think a tariff decrease was expected by the market. And I think that's -- that part of a potential tariff decrease that we are not rejecting.

Beside this, with the draft of the FOCA, there are basically 2 items where we are opposing, which is a further skim off of not -- nonregulated revenues. And you also request for an adoption in the way of how our allowed returns are calculated.

So if I understood your question -- if I understand your question correct, is if -- are we opposing it completely for a tariff decrease? And the answer is no, especially not on that part.

That belongs to the higher than allowed return we're currently in and the part of lower interest rates, lower cost of capital, to an extent that what we see as a sustainable capital return going forward as well. Your second question on CapEx, we -- I think was a year ago, we guided for roughly CHF 300 million to CHF 350 million of CapEx for the next 2 to 3 years.

And in 2019, in particular, we will have like the completion of THE CIRCLE, which is a phasing issue, and due to the CapEx of THE CIRCLE, which are like end loaded over the construction period. So basically, one can confirm the guidance we gave so far last year.

And you also expect that, overall, CapEx for the period after 2021 will be lower than the numbers we estimate for 2019. But 2019, to answer your question properly is basically phasing of THE CIRCLE.

And the last question, on the free cash flow, my feeling is that the difference is coming also from the investments into the international activities. I have to double check, but I will come back to you in the conference with an answer on that.

Good for you? Next one.

Then we change to the questions from the phone. First question, please?

First question from the phone, please?

Three from my side, if possible. The first one, on CapEx.

In your cash flow statement, you have around CHF 380 million of cash outflows with different CapEx streams. Could you guide -- you do guide for the CapEx for Zürich.

But could you guide also for these other CapEx streams for 2019 and 2020? What cash outflow should we expect in total with that?

Secondly, on airline capacity data, easyJet is seeing declines in capacity in Zürich airports, in Q2 and Q3, around 15% to 20% year-on-year. My question is if you have any insight into the reasons behind that.

And secondly, in your negotiations with the airlines that will start next summer around the tariffs, could you remind us what are your arguments, the arguments on your side for higher tariffs? And the last short one if possible, please.

Some recent press articles are claiming that you are no longer bidding for Sofia. Could you confirm it if that is accurate?

And on any further upside, any further details there on the timeline for Brazil. I think the auction is on Friday.

Are you bidding for all the clusters of airports or just for some of them?

Okay. I'll start with the international ones.

I hope I noted all of your questions, Cristian, but otherwise, please repeat it. First, Sofia, yes, we are not participating anymore in the bid process because of a decision we have taken.

In our view, it's like an imbalance of chances and risks under the concession where we have decided to withdraw from that process. In Brazil, obviously, as Latin America in general, but Brazil in particular is one of our focused markets.

We are closely following the developments of the next round of privatizations. You will understand that for tactical reasons so close before the auction, we are not commenting on our strategy in terms of whether we are bidding on if yes for how many of these 3 clusters.

And easyJet, yes, we are aware that they are reducing capacity. That's not the full visibility on which routes, but I personally believe that this is coming from a currently overcapacity after the bankruptcy of airberlin in the European network.

But yes, we are aware, and we are putting in no more like insights on -- to comment on what particular route this will be. Could you remind us of your questions regarding the tariffs?

Yes. My question is if you could please tell us in terms of the arguments which you believe are on your side in the negotiations with the airlines for the new tariffs.

What supports your view for higher tariffs in the airport?

There are these 2 aspects. Lukas was explaining one on the adjustment and the other one on the interest earned on the WACC calculation.

In terms of the adjustment, we have noted in all neighboring countries of Switzerland and especially also on all Lufthansa hubs, there is no adjustment at all. And so already, the current 30% adjustment is on the higher end in relation to our neighboring countries and competing hubs.

In addition, our rate here in Zürich are in European average. And at the same time, we have, on the cost side, the highest cost within Europe, so we are also at the end having a competitive pricing that we can offer for a high-quality airport with a very low minimum connecting time.

On the WACC calculation, the argumentation, it's a little bit more difficult because, of course, on the one hand, the government doesn't want to set the precedent compared to other infrastructure industries, but there is, for example, the power industry where it was also obvious that if no countermeasures are taken to the negative interest rates in Switzerland on such calculations, it will at the end lead to a reduction in the investment capacity for such infrastructures. And the other question is how much we set the new precedent?

And on the WACC calculation, we also have to accept that this calculation has not been changed by the FOCA, but this is a consequence of the negative interest rate. So I think on the adjustment, yes, my argumentation is quite clear on the WACC calculation.

It's a little bit trickier.

Let me answer the question on CapEx. We are not guiding, in particular, in -- on the base of the cash flow statement, but one can say that the CHF 350 million to CHF 400 million CapEx is purely for Zürich, and as we are guiding a mid to double-digit million amount for concession accounting, which is basically the investment in the international activities, so it would be a fair assumption to assume same amount than we had in 2018.

And also, answering the question of Johannes Braun, the difference comes from the CapEx in Zürich was CHF 50 million higher than the year before. The cash flow -- investing cash flow was CHF 100 million higher, and the difference comes from the international growth.

This is very helpful. Just -- could I just add one small comment on -- question on the CapEx of international.

This mid double digit, should we assume that this will recur over the next 3, 4 years? Or is it mainly caused by that Florianópolis investment that you're making?

And we'd only see it in '19, and after that, it should decrease materially?

Yes, that's a fair assumption. The terminal in Florianópolis, where these investments are mainly coming from, will be completed in the third quarter 2019.

My first one is on the potential tariff cuts that you are facing for the next regulatory period. Assuming they do come down by your guidance, are you already discussing with potential new entrants that could be interested in opening new routes if the tariffs come down by that amount?

My second question is regarding THE CIRCLE. The occupancy rate hasn't really increased.

So could you please let us know what you expect in terms wrap up for the next 12 months? And do you still expect to get close to, I guess, 100% by the time you open it or not?

And did you rent out some space yourself? And then thirdly, on the airside center passenger and what do you need to have maybe more momentum in that number and freight to turn more positive and -- or less volatile throughout the monthly detail you published?

Let me start with your question, which I understand as, is a 25% lower aeronautical tariff an incentive for new carriers to come to Zürich. If we want to find a positive element in this tariff discussion this might be yes.

Obviously, I think the aviation market is a very long-term business, and our target there is to maybe increase the portfolio by 1 to 2 additional new routes, long-haul routes in a way of balancing the growth of Edelweiss and SWISS together with the third-party carriers, which was true for the last year with the 2 new Chinese carriers. Honestly, I don't expect that a lower tariffs will increase in the attractiveness of carriers to fly to Zürich as there has to be a market in for new destination, which is something that we are monitoring very carefully, but will not have like a boosting effect in the year 2020 that we see plenty of new carriers from a competitive point of view by 25% over tariffs.

And the spend per PAX, yes, on airside, is decreasing. I think that mainly comes from, let's say, the population of our passengers, so the passenger mix.

You have to be aware, compared to, let's say, an emerging market where you have more and more people traveling, that we have basically in the local market the same population that is simply traveling more, and that has an impact on their spending behavior, especially on airside commercial activities. As long as we have this relatively high-growth numbers, to us, it's quite challenging to increase the spend per passenger on airside.

I think transfer is an important segment there where we do see disproportionately higher growth as well and also the new duty-free concepts on airside, which we also have to focusing more a little bit on the transfer segment might help to turn the momentum that we currently experience on the commercial business, especially on airside. And maybe the last question, and Stephan, please add your comments, is on the pre-letting of THE CIRCLE.

Yes, we are currently about 60% or -- we have never expected to open 100% pre-letting THE CIRCLE. We have always assumed a certain ramp-up here which is something that we consider as with the number and the size of THE CIRCLE is fair to assume, I think rather than the absolute percentage number of pre-letting at the opening, the focus of the next 12 months has to be especially that whatever is visible from a ground level from the passenger flows is fully open and fully operating.

And honestly, we don't see a pressure to fill in offices on the sixth and seventh floor by the opening, but it needs more time to negotiate and having maybe a positive momentum as well with the opening of THE CIRCLE for the marketing there. So the target is not 100%.

We have always assumed, both in our business plan and ramp-up phase, and we will steadily increase that until the grand opening next summer.

Well, I am thankful the CFO doesn't set the target to me, but -- and of course, for the rent ability, it's much more important to sign at the right prices. But nevertheless, I'm fully confident even without targets set by the CFO, that around 75% to 80% will be full.

And then the question is a little bit, at which prices can we sign other contracts and what is the right timing. And there, we trying to find the sweet spot between the vacancy rate and pricing for the space.

And if I may, just a quick follow-up on the airside retail. What are your expectations for the concession rate, please?

Because my understanding was that new contract would have been favorably impacting 2018 but 2019 a little bit as well, but given we saw the 100 basis point improvement, is there anything left from that to come?

Well, of course, we cannot have the same impact that the new duty free contract has because it's much minor space and volumes, but we are still confident that these contract renewals on the retail unit -- airside retail have a little bit room for -- to improve the concession rate.

First, some follow-up question on THE CIRCLE. My understanding, you said there has been some design changes.

So could you please give us an overview based on current plan? What share of the building is dedicated to office space?

What share of your office space has been rented so far by Flughafen Zürich? And what share of the office space has been rented by third parties?

And what share of the nonoffice space has been rented so far? And if the renting level of THE CIRCLE was to remain at current level, would you expect a positive contribution on group net income from THE CIRCLE during the first year of operation?

And second, on the dividend, do you have some more details on your medium-term dividend policy after the funds out of which you are doing the special dividends will be…

I maybe can start with the confirmation that no design changes have been made to THE CIRCLE except the ones that we announced one year ago, that we have changed a little bit the level of investments of our side to the interior fittings in order to react to shorter term orientation of the market, but even as we covered this also on the rent side. And I also can add that the overall office space within THE CIRCLE is around 70,000 square meters and Zürich Airport has roughly 10,000 square meters out of these 70,000 square meters.

Dividend, I hand over to Lukas.

Yes. Maybe to add.

I think I understood your question also in terms of the timing, and this is unchanged. We are still on track for a [ contractural ] completion at the end of this year and the opening has been expected and will be done in summer 2020.

And in terms of dividend policy, no changes so far to the policy. I think this communicated dividend policy, which includes the intention to pay also special dividend out of the capital contribution reserves, will allow us for -- besides the proposed dividend, for an additional dividend for the year -- financial year 2019, which is something that based on the annual result, we will decide next year.

But then that capital contribution reserve is depleted. And the decision on the adoption of dividend policy will be made once we have more clarity about the upcoming charges period.

In general, I think the Board of Directors intends to pursue an attractive dividend policy even after the capital contribution reserves will be depleted. Let me also remind you that our profits, which has been the relevant base of our ordinary dividend so far will be lower because of the tariff decrease and also more volatile in the future because mainly of the increasing importance of the international business.

And one way we -- one way could be that in order to, let's say, avoid volatility on the dividend, that the decoupling of the dividend from the profit maybe something that can be a next model for the dividend policy. So let's say, in other words, that assuming a positive course of business, the objective could also be to have a small constant ordinary increase in the dividend rather than linking the dividend to a defined percentage number.

So far, no changes to the dividend policy, but I just want to give you a little bit more insight of how we are currently thinking.

Coming back to one of the question, please. If the renting level of THE CIRCLE was to remain at current level, would you expect a positive contribution on group net income during the first year of operation?

Yes.

I have a couple of questions, please. The first one, I was wondering if you could talk a bit about the peak capacity constraint question.

And first part being, how the summer schedule growth looks based upon what you understand and maybe the opportunity going forward to try to manage schedule, et cetera, capacity to try to improve availability and slots. And then the second question is, kind of, aligned to that point, when you take account of what sort of cost and CapEx flexibility you have to manage even an outcome in terms of FOCA in line with your request and of not the original one, but just in line with your request, what opportunities you have on cost and CapEx taking account of your comments on capacity.

Okay. I take this question.

I mean on the capacity constraints, there is the European dimension and there is a Zürich Airport dimension. On the European dimension, I think this summer again will cause problems.

We have seen last year that Zürich Airport in terms of delays was better off than most of the other Lufthansa hubs. So within the European situation, we are doing fairly good.

The specific Zürich Airport dimension is that we have certain weather conditions, especially when we have wind from the east and where we have currently procedures that -- with which we have to reduce the capacity. And here, we are working politically.

We got the politicalizations that we can change these concepts, but we now have to go through all the legal proceedings till last court. But we are confident that we will achieve this, but it will take time obviously because you always have people who go all the way they can go on a court level.

At the same time, we also have got the political support for other minor adjustment to better separate landings and starts in the evening. So our long-term strategy is from 66 movements today seem stable at certain weather conditions to reach 70 movements per hour at all weather conditions in the next 10 years.

And with the 70 movements per hour and our wave system, we are confident that we can reach approximately 50 million passengers, and we expect this capacity to be there somewhere between 30 million and 40 million. And then somewhere in 40 million, we will reach our saturation level in terms of passenger capacity.

Now coming to your question, with the CapEx flexibility, also in relation to the tariff issue, we -- of course, in such a constraint system as we have here, we can do an enormous investment on certain infrastructures on ground to reach maybe 1 or 2 movements more per hour like a rapid exit or avoidance of runway crossing. And of course, if at the end, we have a tariff regulation that makes it for us viable to invest in the infrastructure even when you get only 1 or 2 movements per hour more, than we will do it, but with low back, of course, we will do less of such investments that give only a very small addition -- of additional capacity on movement, for example, or that have a high cost without any positive impact on the non-aviation segment.

So there are -- it's more -- it's probably more on a high number of small issues that we will feel the impact than on a large renewal as for example now with the baggage sorting facility because if you want to grow this airport to 50 million, of course, we have to ensure that baggage works also for this size, and we have to make sure that our key processes for passengers are adequate for this size and there we will not change, of course, the investment program, but we will change it on issues that either have a bad relation between additional capacity and investment or that at the end are profitable for the overall system, but not specifically for Zürich Airport.

Okay. And could you also comment on cost flexibility, please, under the scenario that you're requesting from FOCA, what cost flexibility you have to manage that?

Well, CapEx is basically the only leverage we have to mitigate an unfavorable outcome of the regulation because regulation basically is a cost-plus model, so if you are lowering your costs, this will even lead to a higher decrease of tariffs, so that's why the focus from a financial point of view is on CapEx. And there, as Stephan has correctly mentioned, there are 3 areas which are the investments in peak capacity, which has only a limited benefit to the airport.

Lifecycle investment as the second pillar where -- can be postponed, that's mainly then a question of the quality, which, in my view, is not only -- is not in the interest of the airlines and the regulator as well. And the third element of CapEx is also, in particular, on car parking, as there we are facing an imbalance of risks and chances when we have and when 75% of the economic value is skimmed off our cross subsidy.

But in the cost-plus model, you have limited room to maneuver for cost measures.

I got 2 questions. Just firstly, on FOCA's decision let's say if they were to stick with what their current proposals are, which you obviously disagree with.

Is there any appeal process, whether it is the current government or at the EU level that you can go through? And then secondly, following on from that, just on the duration of the regulatory review, obviously, currently, we have a 4-year cycle.

If you do end up with a very tough regulatory review outcome, what flexibility do you have on that 4-year regulatory duration thing?

Yes. To the first question, first, I think it's important to understand that the current proposal is from FOCA and the final decision will be made by the Swiss Council, the overall government, so it's a different body and that's the positive thing, the negative thing is there will be no appeal possible against then the decision of the overall Swiss government, so we better make sure the right regulation comes out.

On the duration at the end, the length of the period is not affected. This is 4 years foreseen.

It's not mandatory that it has to be 4 years. It could be also done differently.

It will form part of our analysis with which proposal we want to go in the next period, but from a, call it, stomach perception, it's in the interest of the capital markets to have clarity on the tariffs, so we think it's not so bad to have a 4-year period also there.

I was just wondering a bit more on the commercial activities and then especially if we look at the landside, development has been relatively weak in terms of turnover. Are there any particularities we should be aware of?

Is there something particular going on? Or is it just a general economic flow?

And are you engaging in any activity to reverse that pressure you see there? Then second, could you provide us with an update on the Brands & Dialogue module of THE CIRCLE?

Because I remember that you reserved roughly 20,000, 25,000 square meters of space for that, if I'm not mistaken. And I was wondering whether we could see some progress there as well.

Yes. Your question on landside commercial development which was negative in particular in February this year.

I strongly recommend not to try to build a trend from individual month that can always be like shifting in weekends, in bank holidays, construction work that affect a single month. In general, one can say that landside commercial business is progressing compared to the year, tough retail environment in Switzerland is developing quite well.

I think we are here at the point where we might see stable turnovers going forward, but still, the possibility to increase our revenues of the turnover base trends, that's what Stephan has mentioned in his presentation. I think that is true also for 2019 where in the normal portfolio management of contracts, some contracts have to be renewed.

And also, keep in mind and I think that something that might be a little bit underestimated is that next year about 6,000 more employees will be at the airport when we open THE CIRCLE and this has also a positive impact and a good impact on the momentum of the landside commercial business.

And at the end, I mean we have to accept that retail is in a transformation from a shift to online, and we try to address this transformation proactively, because we are convinced that you will still have the need to show product especially higher categories basically and you will do this at less locations in a more premium environment and that's very much the focus also of Brands & Dialogue within THE CIRCLE which will form 1 unit to the commercial area on the landside of the airport which will also have synergies and mutual contributions, of course, and in Brands & Dialogue we also create rooms for new categories like car or technology, which in a classic shopping center configuration would not have spaced. Overall space in Brands & Dialogue is about 20,000 square meters also about 60% rented out from a pure revenue perspective.

We have rented a key brand units on -- in the center of the area where you, of course, have the higher revenues. So in terms of revenues, it's even a higher push -- portion that has been rented out, and so even on the Brands & Dialogue, when we have our discussions with the retailers who are all in big transformation, I think we very much address the transformation challenges with the configuration we have set in THE CIRCLE.

But of course, they have pressure. They have to reduce shops, they have cost pressures, so we try to convince the right terms from them to reduce shops, but increase one at the airport.

I'm sorry, I'm just going to come back to a previous question and that's certainly me being stupid, but I want to understand how you can work with -- in the context of negotiations with FOCA or indeed moving on to the government, how you can use cutting CapEx successfully as leverage? Because when the government's looking at your role as a concession holder, they want you to provide aviation infrastructure for the company -- for the country and therefore surely they want for goodwill to have more CapEx rather than less in terms of developing infrastructure.

And then in the earlier answer you spoke about how you'd be looking to reduce some investment because of low WACC because that means there's less return. And yet when you spoke about the controversial aspect of the FOCA proposal, it's all about the change in dual to single till and it's not actually about WACC because you're accepting that interest rates are lower so I don't see how it can be an effective negotiating tool, sorry, it's me being thick, I'm sure.

Well, it's probably not the right forum to outline negotiation strategies here, but what is very obvious is that by setting the regulation you also define how much CapEx you'll trigger at the end of the day, so the government has to have the interest to have an attractive regulation if it wants to trigger investments in its infrastructure, especially in a situation like in Zürich where you have not the concession but ownership of land and infrastructure with the airport owner. Lukas you want to add?

No, I think we are not disclosing our tactics there in detail. And maybe your second question was in terms of the lower interest rate which are lower, and this is something that we are agreed to.

But as we see from other regulators and other industries such as utilities that are at least regulators that taken the negative interest environment to think about more creative models to calculate the allowed returns than the ones which have been valid for the last 50 years. I think -- I personally simply think that this is something that the regulator has to be -- has to address which is something that we are missing, but we see also other regulators following this discussion, I think that's also good argument towards our regulator.

Okay for you, Andrew?

Well, yes, and I mean it's complicated and confusing situation, isn't it? We'll see what comes.

Thank you. We try to clarify it by the mid of the year.

I have one final question which is related to [indiscernible] location policy, if you plan any update for the market, especially once the final outcome on the regulatory review would be known, and if you have already some initial thoughts that you can share with us.

The very general answer first is that I mean we are now in between this release draft stakeholder involvement that has been completed last year and the decision we are going to expect in summer. So I think a lot of thoughts have been made but are finally depending on the final outcome of the tariff negotiation.

And if it's an unfavorable outcome, this will raise the question of capital allocation definitely, but I think it's too early to go through scenarios until we know what the final outcome is. But behind the scenes, we obviously work on those...

So do we have more questions within the room? Then we close the session.

Thank you all for your interest in our company, for your long-term loyalty to our company. And we close the session here and at least to people in the room.

You will have sandwiches in the back. Thank you.

Closed.