NEWCASTLE Airport is facing a financial crisis due to cost blowouts on its terminal expansion, falling passenger numbers and unbudgeted expenditure for the Kongsberg missile factory and Lockheed Martin Air 6500 project.
The airport, which is owned by Newcastle and Port Stephens councils, has not paid a dividend in four years.
Documents seen by the Newcastle Herald reveal the operation is fast running out of money as costs balloon and funding options are exhausted.
A solvency resolution passed last week at the airport's Greater Newcastle Aerotropolis (GNAPL) board meeting and other documents reveal the airport's precarious financial position.
"In preparing the FY 2024/25 budget, it was identified that there is a capital scarcity in the business due to increasing costs of capital projects coinciding with declining passenger forecasts on the withdrawal of Bonza and reforecast of existing routes," one document reads.
Newcastle Airport board chair Jude Munro said on Tuesday that, during times of "extraordinary company growth", it was standard business practice to prioritise company expenditure.
"Our board of directors and airport leadership team are aligned and have been working closely together with full financial transparency," she said.
According to the documents, the critical shortage in cash reserves has resulted in increased solvency monitoring and cost-cutting measures introduced at the airport since at least June.
But it hasn't been enough to correct the problem. Instead, unbudgeted expenditure continues to pose an insolvency risk.
The 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 Newcastle Airport board-approved budget in June.
Add to that unbudgeted plannings costs for the Kongsberg and Lockheed Martin factories of $1.7 million, and $5.9 million spent on subdivision costs, not yet eligible for bank funding, for the defence and aerospace subdivision precinct, Astra Aerolab.
Ballooning project costs are not the airport's only problem.
A $170 million loan is expected to reach its limit this financial year, about 18 months earlier than planned. This is despite the syndicated facility being topped up by $10 million, following Commonwealth Bank approval to transfer funds from another airport loan.
The terminal expansion is being part-funded by a $55 million grant from the federal government. The Herald has previously reported that the rest of the money will come from a debt funding arrangement between the airport's owners, Newcastle and Port Stephens councils, and the Commonwealth Bank.
In response, Newcastle Airport CEO Peter Cock said the organisation adheres to "best practice guidelines" and provides monthly financial reports to the board.
"We stringently report on potential risks, but our financial status remains robust, with a healthy working capital...," he said. "Cost and supply chain challenges have been felt globally and are not unique to Newcastle Airport."
'Ultimate decision-making authority'
Newcastle Airport has become an increasingly uncomfortable topic for City of Newcastle.
Earlier this month, Newcastle councillors requested more information about the goings-on at the airport, particularly around Astra Aerolab and the federal government's recently-announced missile factory to be built in partnership with Kongsberg.
Greens Cr Charlotte McCabe, who has been vocal about her views on earning revenue from weapons manufacturers at Williamtown, asked the first meeting of the new council to hold off on deciding who will sit on Newcastle Airport boards until after a councillor briefing about the airport's operations.
That briefing and a tour of the airport took place on Thursday, but it's understood the councillors were not told of the considerable financial challenges.
A day later, Kongsberg's controversial missile factory project was rubber stamped by the GNAPL board, made up of the general managers and mayors of the two councils, Ms Munro and five independent directors.
Final approval 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.
The mayor and general manager/chief executives of each council make up the airport partnership board. The board reports to the full elected councils, which ultimately signs-off on the budgets, large contracts and loans.
The four members of the board are unpaid for this role, but the arrangement has been considered by some to be problematic as mayors and general managers, with limited experience in running airports or land developments, report to themselves.
Newly-elected Newcastle lord mayor Ross Kerridge has been advised he has a conflict of interest which prevents him from being a board member.
Cr Kerridge said of Tuesday that the reports of financial issues were of "great concern" and he would be "taking steps to gather more information".
A report will go before tonight's council meeting recommending former lord mayor Nuatali Nelmes and CEO Jeremy Bath retain their positions on the airport boards on an "interim" basis.
Newcastle and Port Stephens councils nominate two paid directors each to the Newcastle Airport Pty Ltd (NAPL) and the Greater Newcastle Aerotropolis (GNAPL) boards.
Cr Nelmes used her casting vote as lord mayor to appoint herself to the boards in 2019 for a fee of $50,000. Mr Bath was already on the boards at that time.
The Herald reported earlier this month that Cr Nelmes and Mr Bath's fees for work as directors on the 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.
City of Newcastle justified its decision to not report the fees because they are paid by the airport, not the council. This is despite the fact the council is a joint owner of the airport alongside Port Stephens Council.
Overruns and unbudgeted requirements
The solvency resolution passed at last week's airport board meeting outlines the risk of cash reserves falling below $15 million, the minimum required under the airport's own internal policy to ensure ongoing payments are met.
It's understood the board previously passed a solvency resolution just five months ago at the end of May.
"The analysis ... demonstrates that there is insufficient funding headroom for further unbudgeted funding approvals during FY2024/25 without specifically identifying a source of funding or cost savings, and that if funding is not identified or achieved there is reasonable probability that the cash reserves of the business will fall below the $15 million working capital policy limit," last week's solvency resolution reads.
It states that "management's view is that liquidity risk remains manageable", but warns the business must closely monitor "maintaining $15 million in available cash balance at all times".
It isn't only expenditure to date that management has warned about. Rather, it is what lies ahead in the current year when, during peak construction periods, monthly outgoings are forecast to exceed $20 million.
"As the terminal reaches completion ... the timing of cash receipts is of critical importance to maintain the required level of cash within the business to remain liquid," the resolution reads.
"Timing of construction progress has historically varied to forecasts and management are monitoring the timing of cash availability and payment obligations."
Containing 'cash expenditure'
Despite the cash reserve issues, the Herald can reveal there was a request for a further $500,000 for the planning stages of the not-yet-approved Kongsberg missile factory project made at this month's GNAPL board meeting.
"The analysis ... considers the current and forecast available sources of funding, and current commitments of the business to complete initiated capital projects, including board approved unbudgeted funds since the FY2024/25 budget was approved in June 2024," the resolution reads.
"The analysis does not include any forthcoming unbudgeted capital expenditure requests that may be required to progress property projects through the negotiation stage to the commencement of bank funding, such as the $0.5 million KDAu [Kongsberg] funding request for approval at the October GNAPL meeting."
Documents seen by the Herald, outline the need for increased solvency monitoring and provide a first quarter "reforecast" for this financial year.
One outlines a series of measures in June's "board-approved budget" designed to "contain forecast cash expenditure".
These include deferral and deletion of "non-critical capital projects", "staged delivery" of the apron project and transferring $10 million from one loan to top up another.
But escalating costs continue to put significant pressure on the airport's budget.
"Since preparing the budget, capital expenditure cost overruns and multiple unbudgeted capex requirements have arisen," a document reads.
This includes $1.7 million in unbudgeted property initiation costs for the Lockheed Martin and Kongsberg projects.
"The protracted negotiation and planning of Lockheed Martin and Kongsberg Defence Australia projects has required GNAPL board approval for $1.2 million in unbudgeted, non-recoverable, capital expenditure approvals in FY2024/25, plus a further $0.5 million requested for approval at the October 2024 meeting," the solvency resolution reads.
"If the projects are successful in reaching bank funded construction phase, there is a mechanism by which legal and management costs incurred to date could be retrospectively funded by a bank loan approval, however, this is subject to negotiation and approval with CBA, and is currently unapproved by CBA. There is a risk that not all funds expended are recovered under bank funding, once a loan is approved."
It's understood unbudgeted cash requests have been funded by airport surplus cash flow or the Commonwealth Bank loan, which is about to be maxed out.
The airport's fortunes took a serious nosedive when Jetstar closed its maintenance hanger in 2020.
But the airport's management hopes the terminal building will help attract international carriers, especially after RAAF/federal government-funded runway upgrades designed to accommodate larger, long-haul aircraft.
In an unrelated development, Newcastle Airport CEO Peter Cock announced on Monday he was stepping down from the role after almost 10 years, and planning a move back to Western Australia.
Do you know more? Donna.page@newcastleherald.com.au
- Editor's Note: This story was amended on October 29, 2024 to remove the statement that Jeremy Bath was appointed to the airport boards in 2018 as a result of changes to the airport's governance structure. Mr Bath said he was appointed to the boards in 2018 during a council meeting earlier this month. He was actually appointed in 2017. Mr Bath was not the first council general manager to sit on the airport boards, but the governance structure of the boards was changed in 2018.
