NEWCASTLE Airport has investigated ways to access a multimillion-dollar bailout of ratepayer funds from its owners Port Stephens and Newcastle councils as it struggles under a mountain of debt.
An ongoing Newcastle Herald investigation can reveal the airport, jointly owned by the councils, is teetering and in desperate need of a funding injection.
A series of internal reports reveal staff have repeatedly warned that the organisation is in financial trouble, has no clear plan to fund major projects and is fast running out of money - upgrading its financial management risk rating since February to "extreme".
One document outlines a board direction from last week to develop a plan to cut jobs, another describes an expectation the airport's credit rating will be slashed to a sub-investment grade, or junk status, due to its mountain of debt.
The main problem stems from the organisation's loss-making, property-development arm, Greater Newcastle Aerotropolis (GNAPL), which only survives due to cash injections from the airport's general operations (NAPL).
According to a financial deep-dive report from April, GNAPL is simply not viable, or "bankable", as a standalone company yet.
"GNAPL is loss making and is dependent upon NAPL to provide funding to continue as a going concern and maintain its solvency," it reads.
But falling passenger numbers following the collapse of Bonza and diverting millions in unbudgeted cash reserves to prop up GNAPL's property developments has sparked insolvency concerns.
Insiders say there are fears the airport is being "bled dry" and needs an urgent bailout.
The airport's outgoing CEO Peter Cock, however, issued a statement this week denying there were any problems.
"I would like to address and dispel recent media reports from the Newcastle Herald suggesting that Newcastle Airport is facing financial difficulties...," he said.
"We stringently report on potential risks, but our financial status remains robust, with a healthy working capital."
On Friday, Newcastle Airport board chair Jude Munro doubled down on denials she made earlier in the week and again took aim at the Herald's reporting.
"I am disappointed to learn that our commitment to good governance and ongoing risk management analysis has been misrepresented, leading to sensationalised and inaccurate reports about our financial status," she said.
"Our board of directors, known for their experience and expertise, passed a resolution and directed the airport leadership team for prudent management to maintain cash reserves of $15m. This decision aligns with our best practice standards as a skills-based and risk-averse board."
Ms Munro, Dr Cock and the airport were asked to detail the misrepresentation in the Herald's reporting, but declined.
A spokeswoman described the airport's financial position as "robust", pointing to a 15 per cent increase in revenue last financial year, passenger numbers returning to pre-COVID levels and forecast future growth from international travel.
"Our business performance aligns with our budget, and the outlook is strong," she said. "Investments have significantly increased our business value, and we focus on prudent cost management."
The Herald understands the airport made a loss of about $1 million last financial year.
The airport and Ms Munro declined to answers questions about the possibility of the airport seeking a bailout from Newcastle and Port Stephens councils, or if jobs would be cut.
The spokeswoman said the airport would not comment on commercial or internal matters.
She said regular reporting ensured "transparency" between management, the board and the councils and the airport was "confident" in its financial stability.
The airport's internal financial reporting and risk profiling paint a bleaker picture.
The financial management deep-dive review conducted in April details the possibility of seeking a bailout from Newcastle and Port Stephens councils, but warns any lifeline would require approval from Local Government Minister Ron Hoenig.
The report further warns that "willingness of councils to provide funding is also uncertain".
"The capacity of the shareholder councils to support the group is unclear," it reads.
"For example, the forecast debt levels of the group are likely to represent a disproportionate share of both shareholder council's gross debt levels ... Shareholder councils have not provided management with a clear mandate to engage the Office of Local Government to seek ministerial approval for a shareholder funding facility."
'We cannot ignore such serious concerns'
The Herald reported on Tuesday, as confirmed by Ms Munro, that the GNAPL board passed a solvency resolution at its meeting last week. It was the second in five months.
At the same time as the board passed the vote to confirm the company was solvent, it quietly issued airport management with a directive to accelerate documentation to allow council cash injections and slash costs, including job cuts.
"Review and reduce capital expenditure, including pausing board-approved projects...," the directive reads.
"Develop a plan to reduce labour costs including enacting a freeze on hiring and staff rationalisation plan ... Accelerate documentation of the working capital facility with CBA [Commonwealth Bank] to enable shareholder funding."
Newcastle lord mayor Ross Kerridge said any bailout from the council would result in increased rates or funding cuts to other community projects.
"I'm not making any judgment about these claims - they need proper investigation," Cr Kerridge said.
"However, we cannot ignore such serious concerns about one of our region's most crucial assets."
In February, the airport increased its financial management risk rating to "extreme", which sits well above the board's desired risk appetite of "medium".
The "extreme" risk rating was based on the airport's inadequate financial buffer and high debt levels.
"The main source of funding for capital projects is debt funding," the report reads.
"Equity funding is required for sustainable growth, but legal restrictions impact NAPL to receiving shareholder [council] contributions. Cash flows from operations is limited, and under pressure as interest costs increase in line with debt funding."
Internal reports identify the threat of cash reserves falling below $15 million, the minimum required under the airport's own internal policy to ensure ongoing payments are met.
Growing unease about cash flow saw the board direct management last week to "review" the working capital limit and investigate ways to allow a temporary reduction below the $15 million floor.
Newcastle and Port Stephens councils nominate two paid directors each to the Newcastle Airport Pty Ltd (NAPL) and the Greater Newcastle Aerotropolis (GNAPL) boards.
They are Newcastle's CEO Jeremy Bath and councillor Nuatali Nelmes and Port Stephens general manager Tim Crosdale. Port Stephens mayor Leah Anderson has just replaced the former mayor Ryan Palmer.
The airport's other directors are chair Jude Munro AO, deputy chair Samantha Martin-Williams, Morgan Parker, Neil Hart, Lee de Winton, and Katie Cooper, who recently replaced Mark Young.
The Herald reported last month that fees for work as directors on the two paid airport boards have risen by 60 per cent in the past five years to nearly $80,000 each per year.
In addition to the sums paid, the remuneration arrangement has come under scrutiny due to the fact that it is the directors who approve the board fees.
'Money has to come from somewhere'
A staff member said the airport's "aggressive pursuit" of property development was "repeatedly punching holes in its cash reserves".
The airport's "strategic vision" is to transition from a "small domestic airport with immaterial debt levels" to an international airport with "a substantial property business".
Its planned $110 million international terminal expansion, which will more than double the size of the airport, has blown out to $157 million. This includes an additional $9 million in the forecast final cost since the board-approved budget in June.
Add to that unbudgeted plannings costs of $1.7 million this financial year for the Kongsberg missile factory and Lockheed Martin Air 6500 project.
Plus, a further $5.9 million spent on subdivision costs, not yet eligible for bank funding, for the defence and aerospace subdivision precinct, Astra Aerolab.
The unexpected development costs are placing an unsustainable burden on the airport's viability.
An insider told the Herald the unfunded Kongsberg and Lockheed Martin projects were "a hell of a lot" to take on as the airport grappled with the ballooning cost of its terminal upgrade.
Despite the Federal Government hype about its $850 million partnership with Kongsberg and $500 million contract with Lockheed Martin, both projects require the airport to fund and manage the builds in return for long-term leases of the factories.
"The projects are debt-funded and at this stage we don't have money for them," the insider said. "Regardless of how well the business cases stack up, we've got to fund the projects and the money has to come from somewhere."
Another said revenue had remained relatively flat since 2019 and the airport was building a $157 million terminal and debt-funding a major property development, which meant its financial position could only deteriorate.
They said it raised questions about why the airport would take on more risk with the Kongsberg deal, when it was already drowning in debt.
"You have to ask yourself what is going on?" they said. "It is very curious."
In a May annual risk review, staff warned the airport was struggling to complete planned capital works, as undelivered projects rolled from one year to the next.
"This backlog, combined with adverse variances in the terminal and airfield projects, is placing considerable pressure on the FY25 budget and NAPL's overall financial position," the report reads.
It goes on to outline mounting financial stresses and warns the airport must "closely manage the funding over-commitment risk".
"Recent advancements in property projects have resulted in funding demands within the business surpassing the available sources of capital," it says.
"Further, softening in passenger forecasts combined with increasing costs has reduced forecast operating cash flows, limiting the ability to fund capital projects in the near term without raising further debt above the currently approved CBA facility."
But the GNAPL board splashed more cash last week, rubber stamping the controversial Kongsberg factory at the same time as approving an additional $500,000 for the project's planning.
Final approval for the project is needed from the Airport Partnership Board, described by insiders as the "ultimate decision-making authority within the airport's complicated structure", which is controlled by the two councils.
$130m loan denied
In April, the airport was denied an additional $130 million loan request, which would have seen its debt to the Commonwealth Bank increase to $412 million.
The terms of its agreement with the Commonwealth Bank restrict it from seeking funding from Australia's other big banks.
It is further hamstrung by its lease agreement with the Department of Defence that limits the airport to only receiving private funding form Australia's five major banks.
"Whilst any increase in facility limit requires CBA credit approval, the feedback from CBA was clear," the report reads.
"Further debt funding is not available should the terminal FFC [forecast final cost] exceed the March 2024 FFC estimate of $145 million. In that scenario CBA expects shareholders to contribute to any further cost overruns."
The revised cost of the terminal is estimated to be $157 million, meaning the airport must fund any shortfall.
"There is inherent complexity in simultaneously running the core business, delivering a 100 per cent debt-funded ACE Terminal Expansion Project, and cash funding significant property endeavours until bank conditions precedent are met and property loans are approved," the report reads.
Adding to the woes, the airport predicts its credit rating will be slashed to B next financial year due to its heavy debt burden, meaning the company is considered "highly speculative".
'B' ratings indicate a material default risk is present, but a limited margin of safety remains.
"By contrast, our Australian and New Zealand Airport peers operate with investment grade credit profiles (BBB or above)," the report reads.
"The difference in credit profile between NAPL and our peers places us at a significant disadvantage in terms of access to funding (tenor and cost), diversity of funding sources (bond and bank) and cost of capital when compared to our rated airport peers.
"This also has significant implications for the timing and predictability of distributions for shareholder councils."
Do you know more? Donna.page@newcastleherald.com.au
