Feasibility study

Even though a project may be conceptually correct, it is necessary to carry out a study in economic terms, money, in order to ensure its viability. Then, the feasibility study is the best tool to increase confidence in the success of the project. The aim of this feasibility study is to identify which will be the economic benefits for our stakeholders.

First of all, we have to define the main parameters that we are going to consider for our analysis in order to make it clear and easy to understand:

1. The initial investment is 110 M$ in order to buy the land, design and build the airport and start the operation in the first year. This value has been estimated through comparing similar airports from the same region.
2. Yucatán airport is designed to cover up to 7,1 million of passengers a year and 70.000 operations a year taking into account the forecast analysis done before the start of the project. The airport will need a new investment and, in consequence, the development of a new project, if the traffic grows more than that because it would means that the airport is saturated.
3. For the first year of airport operation, it has been considered to have the following traffic (table 1) with 70-30 (national - international) proportion and 50-50 (arrivals - departures):

4. Incomes definition:

• As it has been already exposed in the section related to the pricing, there will be an income of 34 $/passenger for international departing passenger and another one of 15 $/passenger for national departing passenger which have been calculated according to the prices of the region with the aim to foster the international flights.
• There will be an income for each landing based on its weight (normally MTOW) of 14,37 $/Tm for national flights and 31,19 $/Tm for international flights.
• There will be an income depending on the VIP zone clients. This price is 24,95 $/user/day and we consider an average of 470 users a day.
• There will be an income from the rental areas of the airport. This income is split into commercial rentals, offices rentals and check-in desks rentals. These prices are shown in table 2:

• There will be an income from the advertisement whose prices are in detail in table 3:

5. Finally, the costs based on similar airports have been considered as follows:

• The taxes in Mexico are around 8,25%. So we have obtained a cost of taxes as a 8,25% of the total incomes.
• The cost in the land-side of the airport (salaries, repair, maintenance, small investments…) is obtained by a ratio cost/passenger equal to 8,9 $/passenger.
• The cost in the airside of the airport (salaries, meteorological service, ATC service, maintenance, repair…) is obtained by a ratio cost/operation equal to 300$/operation.

Besides, we have considered an annual growth of the airport traffic of 7% and a discount rate of 6% based on the forecast analysis performed. Then, as we have calculated this annual growth of the airport traffic, our feasibility study is done for 12 years due to the 7% of annual growth obtained. In other words, in 12 years we will probably have to make a new investment to avoid the saturation of the airport and enlarge its installations. So, with all this information the traffic evolutions for the first and the last year is shown in table 4:

Hence, the feasibility study is (table 5):

As it can be seen, the cash flow will be 56,2 M$ in year 12. Besides, this positive cash flow is obtained since the first year (15,74 M$). The discount cash flow (M$) affects a lot the value of cash flow, although in year 12 it will be greater than in year 1 because the change of international behavior of the airport, which has been forecasted to achieve a 63% of the total number of passengers. The NPV, after 12 years, is 139,2 M€ and ROI is 1,3, what indicates the profitability of this project in this period of 12 years. The IRR (internal rate of return) has been calculated for 12 years that is the period until the next investment. The value of 8,81% is a good value, this value indicates us that this project will be profitable. And finally, the PBT is 6,22 years, it indicates that in 6,22 years the investment will be recovered.

All these indicators have good values which ensure us about the profitability of our business.

In the following link, you can find the whole analysis for the 12 years: feasibility study.

Although this analysis shows us that our business will be profitable, it just represents a base scenario. In order to increase the confidence in our project, it is mandatory to define two more scenarios: optimistic one and pessimistic one.

Optimistic Scenario

• Investment reduction of 10%
• Government grant of 3% of the initial investment (so, the initial investment is -13%)
• National taxes moved to 6,5% (-21%)
• Annual airport growth of 9% (+30%)
• Land-side costs optimized so they are 8 $/passenger
• Airside costs optimized so they are 250 $/operation

Pessimistic Scenario

• Initial investment growth +10%
• National taxes moved to 8,5% (+3%)
• Annual airport growth of 5,5%
• Land-side costs worsened so they are 9 $/passenger
• Airside costs worsened so they are 350 $/operation

With all of these changes in the considered factors, we obtain the following results that are shown in table 6:

As can be seen, in all scenarios our business is profitable although obviously not at the same level.

Sensitivity study

Once we have performed the feasibility study, now we need to identify which are those factors that can be more risky. In order to do so, we will carry out a study for each variation of external and internal factors based on how they affect parameters such as NPV, ROI, IRR and PBT. It should be noted that the criteria used to define the sensitivity that one factor has over the considered parameters is:

• Robust: factor variation > parameter variation (will be shown in green)
• Medium: factor variation ≈ parameter variation (will be shown in orange)
• Sensible: factor variation < parameter variation (will be shown in red)

In that manner, the following factors will be considered for this analysis (table 7):

These variations allows us to evaluate in which degree of sensitivity is each factor. To make easier the reading of this analysis, just the results of the first variation will be shown in table 8 and if you want to go further, you can enter here to access to all detailed analysis: sensitivity study. Remember the criteria shown above (red, orange, green).

After that, the control matrix can be fulfilled as follows in figure 1 so as to know which parameters need more control:

Finally, after performing all this analysis we obtain the following conclusions:

• Our business is quite robust against the external threats such the Mexican taxes and the airport growth which has been forecasted.
• Regarding to the internal factors, we can see all of them are placed in the close monitoring block. The reason why is that one of the main objectives of our value proposition is to be a low-cost airport and that leaves little margin in economic terms. However, it should be noted that this level of sensitivity is quite different amongst the different factors. In case of air-side cost and initial investment, they even could be considered as okay due they are in the lowest part of the close monitoring block. The remaining three factors are placed from higher to lower level of sensitivity: international growth rate (due to the change of operating of the airport), land-side cost (this price is quite optimized, there is no much margin) and international departure (similar to land-side cost).

We already know which are the most risky factors, so we must keep it controlled and monitored while performing a risk analysis so as to have a plan in case of crisis of any of these factors or even others.