The LFV Group. Swedish Airports and Air Navigation Services

Transcription

1 The LFV Group Swedish Airports and Air Navigation Services Annual Report 2006

2 The year in brief Highlights Operating revenue, 2006, SEK M Civil aviation revenue 3,877 (3,712) Commercial revenue 1,981 (1,822) Other operating revenue 122 (149) Expenses and profit, 2006, SEK M Profit after financial items 447 (238) Depreciation/ amortisation 1,187 (1,188) Net financial items etc. 293 (313) Staff expenses Various extemal expenses SEK M 2,500 2,138 (2,079) 1,915 (1,866) Capital spending, Air traffic (000) Number of landings Number of passengers 29,601 28,837 Cargo and mail forwarded (tonnes) Financial data (SEK M) Income statement Operating revenue 5,980 5,683 Operating expenses -5,240 5,132 Profit on holdings in associated companies -9 7 Operating profit Financial income Financial expenses Profit after financial items Income tax and tax equivalent Minority share -6-5 Profit for the year Balance sheet Fixed assets 13,491 13,865 Current assets 1,149 1,099 Equity 3,437 3,130 Deferred tax, provisions and long-term liabilities etc. 9,724 9,833 Current liabilities 1,478 2,001 Total assets 14,640 14,964 Miscellaneous Capital spending ,000 1,500 1, Financial ratios, % Liquidity ratio Equity/assets ratio Return on equity (after income tax and tax equivalent) 9 5 Return on capital employed 6 4 Return on total assets 5 4 Staff Number of full-time equivalent employees 3,418 3,489 Antal Number passagerare of passengers och luftrumsrörelser and airspace movements, Millions of passengers Thousands of movements International passengers Domestic passengers Other airspace movements Overflights of Swedish airspace The year in brief > LFV 2006 <

3 This is LFV The LFV Group consists of the State enterprise (Luftfartsverket) and its subsidiaries and associated companies. During 2006 as a whole, LFV operated 17 airports and was responsible for air navigation services in Sweden. LFV reported sales of SEK 6.0 billion during Its profit after financial items was SEK 447 M. At year-end, the number of employees was 4,054. Our mission is to generate added value for our customers and promote air travel by operating cost-effective, safe and well managed airports and air navigation services. Our vision is that our customers shall single out LFV s airports and air navigation services as a good example when it comes to cost-effectiveness, safety and functionality. During 2006, a total of 29,600,782 passengers travelled through our airports, where 278,453 landings took place. Our revenue comes predominantly (65 per cent) from charges attributable to air traffic at our airports and from traffic that passes through Sweden s airspace. Our other revenue (35 per cent) comes from airport shops, parking spaces, conference facilities, restaurants and so on. Shops, restaurants and so on are run by tenants and business partners, while parking spaces are mainly run under our own auspices. LFV Group Internal Auditing Stockholm Group Division Airports Division Air Navigation Services Division Scheduled European air services A number of low fare airlines opened new destinations: - FlyMe opened 12 new destinations from Göteborg-Landvetter Airport during the first half of Ryanair expanded services from Malmö Airport by adding three new routes to Barcelona, Marseille and Madrid. Heavy air cargo servic Stockholm-Arlanda Airport gained three new destinations: - Hong Kong, - Seoul and - Taipei. Jönköping Airport gained its first air cargo routes. Intercontinental passenger routes Stockholm-Arlanda Airport gained two new American non-stop destinations: - Philadelphia and - Boston. Air charter For the first time, Norrland (northern Sweden) gained intercontinental air charter service in the form of departures to Thailand from - Luleå Airport and - Umeå Airport. Flight connections with Iraq were resumed in the form of charter traffic to Erbil. Climate neutrality LFV has halved carbon dioxide emissions from its own operations. Its target for the period is to reduce emissions by a further 4 per cent annually on average. LFV offsets its own remaining carbon dioxide emissions by supporting projects that reduce or offset carbon dioxide emissions through: - planting of trees in Costa Rica - bioenergy production in South Africa - wind power stations in China. During 2006, Swedavia AB* carried out projects in the following countries and regions, among others: - Kosovo: Upgrading the airport in Pristina to international standards. - Iraq: Training staff before a new airport went into service in Erbil. - Bhutan and Ghana: Improving the civil aviation sectors in these countries. - India: Planning the development of 6 regional airports. - Indonesia: Helping decentralise the country s civil aviation sector. - Mongolia: Improving the country s civil aviation sector. - United Arab Emirates: Training of air traffic controllers. *Swedavia markets and sells LFV s know-how abroad. > LFV 2006 < This is LFV

4 BOARD OF DIRECTORS Director General DG s Office Group staff units LFV Internal A-Banan Holding AB service units Projekt AB AIRPORTS (17) Stockholm Division Stockholm-Arlanda Stockholm-Bromma Group Airports Division Göteborg-Landvetter Jönköping Kalmar 3 Karlstad Kiruna Luleå 4 Malmö Ronneby 4 Skellefteå Sundsvall-Härnösand Umeå Visby Ängelholm-Helsingborg Önsköldsvik Åre Östersund AIR NAVIGATION SERVICES Air Navigation Services (ANS) Division ATS units 1 (35) Stockholm-Arlanda Arvidsjaur Borlänge Stockholm-Bromma Halmstad Jönköping Kalmar Karlstad Kiruna Kristianstad Göteborg-Landvetter Ljungbyhed Luleå 4 Malmen/Linköping Malmö Norrköping Ronneby 4 Saab/Linköping Skavsta/Nyköping Skellefteå Sundsvall-Härnösand Såtenäs Säve/Göteborg Söderhamn Trollhättan Umeå Uppsala Vidsel Visby Västerås Växjö Ängelholm-Helsingborg Örebro Örnsköldsvik Åre Östersund AIR TRAFFIC CONTROL CENTRES 2 (2) Malmö Stockholm-Arlanda LFV airports 1 LFV provides local air traffic control services at 35 airports. ATS units 2 Air traffic control centres are responsible for air traffic management in airspace outside airport areas. Control centres 3 The airport was transferred to a new owner on January 1, Head office, Norrköping 4 LFV is responsible for civil aviation at the airport through an agreement with the Swedish Armed Forces. This is LFV > LFV 2006 <

5 Contents The year in brief This is LFV Contents Front flap Front flap Accounting principles Comments of the Director General 2-3 Important events in LFV Group objectives and strategies 5-7 Director General Airports 8-15 Air Navigation Services The environment Human resources and leadership Accounts 26 Income statements Balance sheets Funds statements Notes Group objectives and strategies Performance report according to the annual appropriations directive for LFV Multi-year overview Proposed dividend Definitions Auditors Report 53 8 Board of Directors and Auditors Group Management 56 Addresses Cover Airports 44 Charts, tables Number of passengers, European routes 8 Passenger growth, largest national airports Traffic charges Airport revenue Airport statistics, Punctuality, domestic and international traffic 46 Emissions per passenger, LFV operations Ten-year summary Performance report according to annual appropriations directive for LFV Contents > LFV 2006 < 1

6 Comments of the Director General Doubled earnings for LFV in 2006 LFV reported good earnings in We lived up to our target of return on equity above 8 per cent. Profit was SEK 447 M, compared to SEK 238 M in Revenue rose by 5 per cent to SEK 5,980 M, not least because our efforts to boost commercial revenue have borne fruit. Expenses increased by 2 per cent to SEK 5,240 M and the number of passengers by 3 per cent to more than 29 million. To LFV, it is important to keep down prices paid by the airlines, so we carried out a price reduction on January 1, Among the purposes of this reduction, totalling nearly SEK 100 M, is to support continued growth in the number of nonstop routes at our international airports. We are spending SEK 15 M on projects to stimulate greater inbound tourism. The money will be used for joint business projects with tourism organisations, regional agencies and other partners to market Sweden, there by generating better business potential for airports. In 2006, LFV received the Eagle Award as the world s best provider of air navigation services. The reasons were that we managed to keep our costs down, streamline operations and at the same time maintain first-rate service. Air traffic trends International travel at LFV airports continued its robust growth. During 2006, it rose by 7 per cent to more than 16 million passengers, which is the highest figure ever. LFV believes there will be continued strong demand for international travel. The number of domestic passengers declined during the year by 2 per cent. Total passenger numbers are still below the peak figures from The domestic market is showing signs of saturation. For short distances, other modes of transport have improved their competitiveness. This is why LFV withdrew from three airports Halmstad, Norrköping and Kalmar during the year. LFV believes that a few additional airports should preferably be operated by municipal and regional bodies and looks forward to a clarification of the Swedish State s responsibility for the structure of airports by the Governmentappointed inquiry on airports. In 2006, the number of landings decreased by 3 per cent to just below 220,000. However, the number of airspace movements rose by 4 per cent to more than 680,000, which is almost at the level of the peak year The number of overflights rose by 12 per cent during 2006, accounting for the large increase. There is growing demand for air cargo. Several new cargo routes were added at our airports in Stockholm, Gothenburg and Malmö. A new postal terminal was inaugurated at Stockholm- Arlanda Airport during the year. At Malmö Airport, ground was broken in January 2007 for a cargo terminal. The airport attracted several new routes and has become an exciting challenger for both air cargo and low fare air travel in the Öresund region of southern Sweden and eastern Denmark. Environmental impact of aviation During autumn 2006, there was lively debate on climate change and the greenhouse effect. The role of civil aviation was singled out. It may be worth pointing out that civil aviation accounts for 2-3 per cent of global carbon dioxide emissions. LFV welcomes the EU s proposal that civil aviation should be part of its emission trading scheme (ETS). For an international industry like civil aviation, it is important that taxes and charges are not introduced in isolation by one country. LFV has cut emissions from its own operations by more than half in the space of a few years. We are continuing the task of reducing our emissions but have also decided to offset the remaining emissions by supporting projects in other countries in accordance with the flexible mechanisms offered in the Kyoto Protocol. Since 2006, LFV has been Sweden s first carbon neutral company. 2 > LFV 2006 < Comments of the Director General

7 The Air Navigation Service works continuously to make flights paths as straight as possible. This saves fuel and is thus both environmentally and financially beneficial. Another step to make flying more environmentally sound is green flights. During 2006 there were about 800 such flights to Stockholm- Arlanda Airport. The concept is presented in greater detail on page 18. Emission ceiling should be re-assessed In compliance with environmental legislation, Sweden s airports undergo a permitting process. There are normally conditions regarding the number of airspace movements allowed. At Stockholm-Arlanda Airport, there is also an emission ceiling, which includes passengers trips to and from the airport. Since it was created, the railway to Stockholm- Arlanda Airport has accounted for a large proportion of trips to the airport, but many people still choose to drive their car. The dilemma of the emission ceiling is that LFV cannot control all emissions covered by the ceiling.the ceiling is also questionable from an environmental standpoint. Shifting travel to other airports will hardly improve the environment. Studies that have been conducted instead point towards higher atmospheric emissions and discharges into the soil. LFV has thus requested a re-assessment of these conditions. Public transport plays a key role at Stockholm-Arlanda Airport. LFV is also pushing for good public transport to other airports. Malmö Airport has proposed a bus solution using an existing railway station, while awaiting a fixed rail connection. Göteborg-Landvetter Airport is planning a rail connection tying together the airport with Borås and Gothenburg. Looking at Sweden as a whole, buses are the dominant mode of public transport. They work well, but their operations can be improved, preferably in collaboration with county transport companies, which should play a more active role in supplying public transport to airports. Capital spending During the past three years, our capital spending has been SEK annually. This is substantially lower than in previous periods. The planning framework for the next several years is about SEK 1 billion annually. This includes safety-related investments, traffc investments such as expansion of Pier F at Stockholm-Arlanda Airport and commercial investments such as a new parking structure at Göteborg-Landvetter. Stockholm-Bromma Airport boosted its passenger numbers by 22 per cent to more than 1.6 million in LFV has been tasked with pursuing discussions with the City of Stockholm about the future of civil aviation at Stockholm-Bromma after A decision is important for long-term planning of airport capacity in the Stockholm region. LFV since January 1, 2007 After sixty years as Luftfartsverket, we are changing our name to LFV. This is a natural change after narrowing our task and will avoid confusion with Luftfartsstyrelsen (the Swedish Civil Aviation Authority), which was spun off from us in Our new trademark contains a crown and wings in order to maintain continuity with our past. Over the years, we have worked successfully to satisfy the demands of the aviation industry and of passengers for safe, cost-effective and smoothly functioning airports and air navigation services. We will continue to do this. To me, it is satisfying to be able to declare that civil aviation plays an important role for both the business community and private individuals. It is encouraging that the airlines and LFV, after a few diffcult years, are again operating mainly in the black. I would like to conclude by thanking all our employees for a job well done during Lars Rekke, Director General Comments of the Director General > LFV 2006 < 3

8 Important events in 2006 Sharply improved profit: SEK 447 M in 2006 compared to SEK 238 M in The increasing number of passengers, greater cost effciency but also improved earnings from LFV s commercial ventures led to sharply improved profit. LFV also surpassed its targeted return on equity after tax equivalent, 8 per cent. The return in 2006 was 9 per cent. LFV cutting prices by SEK 100 M. At the beginning of 2007, LFV is carrying out its largest price cut ever, covering international traffic from Stockholm-Arlanda Airport and Göteborg-Landvetter Airport. It is also investing about SEK 15 M to promote inbound tourism, in order to strengthen business at a number of airports. Capital spending was SEK 812 M, somewhat higher than in Capital spending was SEK 812 M during 2006, compared to SEK 785 M in The renovation of Terminal 5 at Stockholm-Arlanda Airport was completed, improving service by expanding the choice of shops and restaurants. Together with Denmark s Naviair, Ireland s IAA and supplier Thales, LFV initiated a joint project to improve and upgrade the air traffc management system. LFV changes trademark. Luftfartsverket changed its name to LFV at the beginning of The reasons are the narrowing of LFV s role, increased internationalisation and a desire to avoid confusion with Luftfartsstyrelsen (the Swedish Civil Aviation Authority). The new trademark will serve as a guarantee and seal of quality for LFV s operations and for the portfolio of trademarks developed for its airports and air navigation services. LFV a climate neutral company. LFV has halved its carbon dioxide emissions and is continuing efforts to reduce them further. Remaining emissions are being offset by contributions for tree planting in Costa Rica, wind power in China and biofuel-based heat production in South Africa. LFV is working actively to reduce the environmental impact of its operations and supports proposals that civil aviation should be included in international emission trading. Fewer LFV airports during Operations at Halmstad Airport were taken over by the Municipality of Halmstad on January 1, Norrköping Airport was transferred to the Municipality of Norrköping on July 1, 2006 and Kalmar Airport to the Municipality of Kalmar on January 1, This left LFV with a portfolio of 16 airports. Stockholm-Bromma Airport celebrating its 70th birthday. Seventy-year-old Stockholm-Bromma Airport is Sweden s fourth largest airport, with 1,634,310 passengers during 2006, an increase of no less than 22 per cent. LFV s agreement with the City of Stockholm for the airport expires in Given today s short agreement period and uncertainty about the future, it is diffcult to project the benefits of important investments. LFV has been assigned, via its 2007 annual appropriations directive, to initiate discussions with the City of Stockholm on future operations at Stockholm-Bromma. Government considers making LFV a limited liability company In her current inquiry into the Swedish State s responsibility for the country s airports, investigator Christina Rogestam has been asked to present proposals for a new financing model for the entire civil aviation sector and analyse travel by air, rail and bus. The government s supplementary instructions for the inquiry also request that she present supporting documentation for a possible decision to turn LFV into a limited liability company. 4 > LFV 2006 < Important events in 2006

9 LFV Group objectives and strategies LFV s strategic change process Finances > > > Does not achieve owner s financial Achieves owner s profitability target. Financial stability and capacity to cope targets. Positive cash flow and reduced need with major changes in the business Lack of profitability and negative for borrowing. environment. cash flow. Sustainable development > > > Environment regarded as an expense item. Increased environmental awareness Working towards sustainable Weak public image. and focus on environmental issues. development for LFV airports Improved communications with and the Air Navigation Service. neighbours and general public. Acceptance of operations among neighbours and general public. Airports > > > Rising expenses and prices Greater productivity and lower prices. The highest customer added value In a Nordic perspective, in the Nordic countries. expenses and prices still high. Competitive prices and high product quality. Commercial products > > > In international terms, Positive development for commercial Profit from commercial products is at weak commercial operations. products, among other things through the level of equivalent operations Underutilised commercial potential. partnerships. abroad. Air Navigation Service > > > Increasing expenses and higher prices. Higher productivity and lower prices. Through international collaboration, Old air traffic management system New, modern air traffic management mainly with Nordic air traffic manageclose to its capacity ceiling. system with high capacity and ment organisations, LFV increases the efficiency-raising potential. long-term cost-effectiveness and capacity of air navigation services. LFV Group objectives and strategies > LFV 2006 < 5

10 LFV s mission LFV s vision LFV Group objectives We shall generate added value for our customers and promote air travel by operating cost-effective, safe and well managed airports and air navigation services. Our customers shall single out LFV s airports and air navigation services as a good example when it comes to cost-effectiveness, safety and functionality. The LFV Group has formulated six objectives for the coming planning period, to be achieved by These objectives focus on cost-effectiveness, financial stability, taking advantage of commercial potential and sustainable development. The Government s targets for LFV According to its appropriations directive, LFV shall contribute to the fulfilment of Sweden s transport policy objectives for air travel by assuming responsibility for operating and improving cost-effective, safe and well functioning airports and air navigation services. Target for return on equity The long-term target for return on equity is that profit after tax equivalent shall amount to 8 per cent of equity. In 2006, return on equity amounted to 9 per cent. Target for equity/assets ratio The 2006 target for equity/assets ratio was 25 per cent. At the end of 2006, the equity/assets ratio was 23 per cent. According to LFV s business plan, the target for the equity/assets ratio will be achieved during Restrictions on price increases As a restriction on price increases, traffc charge excluding air navigation charges en route, aviation security charges and noise-related charges may increase by no more than the Net Price Index, measured starting in For several years, LFV has lowered the prices for its infrastructure services. On January 1, 2007 it lowered these prices by about SEK 100 M more. These prices are consequently well below the price ceiling. A performance report, as provided by the appropriations directive, on how the LFV Group s operations have contributed to achieving Sweden s transport policy objectives can be found on pages LFV Group objectives and strategies The Board of Directors of the LFV Group has adopted the Group objectives and strategies below for operating and improving LFV s airports and air navigation services in keeping with its task. Group objective: Financial strength LFV shall fulfil the financial targets established by its owner and at the same time have a financial stability that enables us to cope with recurring changes in traffc volume and traffc structure. Strategies LFV shall maintain strict cost controls and increase its productivity. Benchmarking shall ensure that the financial standards required of LFV s operations are competitive. Utilisation of existing facilities shall be made more effcient, while maintaining safety and security standards, in order to avoid costly new capital spending and ensure long-term profitability. Commercial investments with good profitability will enjoy priority. By fulfilling the return requirements of its owner and being restrictive with capital spending, LFV will lower its debt/ equity ratio in order to create financial sustainability. Target fulfilment: Financial strength The action programme that began in 2001 and was completed in 2006 has provided lasting improvements in earnings totalling SEK 1 billion on an annual basis. Together with lower capital spending and the recovery of the civil aviation market, this improved LFV s financial position. In 2006, LFV fulfilled its owner s target for return on equity for the first time since Low capital spending and improved utilisation of available capacity contributed to positive cash flow and a reduced debt burden. Starting in 2007, LFV also expects to meet its owner s target for the equity/ assets ratio. Group objective: Sustainable development LFV supports sustainable development, where the social and economic effects of its airports and air navigation services are weighed together with environmental aspects. Strategies By sustainable development, we mean that LFV runs credible operations with a long-term approach to environmental impact, economic development and acceptance by employees and neighbours. LFV shall communicate the positive and negative impact of its operations on the economy, the community and the environment in a transparent, clear way. LFV shall work in a systematic, measurable way with steps to improve the environment in order to generate credibility and acceptance of its operations in its surroundings. It shall welcome opinions about its operations in a professional way and in open, on-going dialogue. LFV works continuously to reduce emissions of greenhouse gases and to reduce noise as well as soil and waterway discharges. Target fulfilment: Sustainable development During 2006, LFV began to build a biofuel-fired heat generating plant at Malmö Airport. This measure will help reduce the environmental impact of the airport by eliminating fossil carbon dioxide emissions, compared to current technology. The investment is estimated at SEK 22 M. The plant will be completed during the first half of In 2006, LFV became the first large company in Sweden to become climate neutral. To offset the emissions that still occur, LFV buys emission reduction certificates, that is, participations in projects that lead to equivalent reductions in the carbon dioxide content of the atmosphere. LFV is consequently climate neutral. To achieve long-term reduction in the number of people exposed to noise, LFV is reviewing how noise exposure around its airports may look in the future. This description will be used in long-term local development planning. LFV also carries out noise-insulating measures in residential buildings that today are exposed to noise levels that exceed the limits set by Parliament. During 2006, LFV improved its work with chemicals and established an information system common to all units. Work is now under way to inventory LFV s use of chemicals and phase out the most environmentally disruptive, which may also have a positive effect on runoff water recipients, that is, lakes and streams.. Group objective: Attractive employer LFV shall be an attractive employer with a positive image. Strategies LFV shall strengthen operational efforts at skills recruitment and increase its internal mobility. LFV shall strengthen and develop businesslike management. LFV shall develop an image as an 6 > LFV 2006 < LFV Group objectives and strategies

11 employer that reflects its values, as well as management by objectives and diversity. It must develop its employer role in such a way that its operations and employees are capable of meeting market demands and acting quickly in response to changes. Management by objective shall be strengthened and lead to improved performance. Target fulfilment: Attractive employer LFV continued its introduction of a skills recruitment process. Strategic competencies, gap analysis and an action plan for how LFV should cover future competency needs are being produced. LFV s management development programme, which started during 2006, is helping develop leadership and the employer role. LFV s new human resource policy, based on its mission and values, is being introduced and will contribute to the development of a positive employer image. A new salary policy and a model for objective-related contracts are available to all managers. LFV is consulting with employees on its diversity plan. These objectives shall lead to greater awareness of the need to take full advantage of the experiences and competencies of employees. Group objective: Airports LFV shall offer its customers airports with the best customer value in the Nordic countries in every category. Strategies LFV is working to change the current emission ceiling at Stockholm-Arlanda Airport to allow full utilisation of the airport s capacity. This is especially important, since total emissions by both ground and air traffc risks increasing due to the emission ceiling. By providing competitive infrastructure products that offer good value for money and by pursuing active marketing, LFV shall stimulate the development of the air travel market and increase passenger value. When finances permit, LFV s focus is on cutting infrastructure prices charged to airlines, primarily for aircraft with good environmental qualities. It is especially important for airport charges at Stockholm-Arlanda Airport and Malmö Airport to be competitive, primarily in a Nordic perspective. In the domestic market, LFV shall contribute to good accessibility, among other things by means of continued low infrastructure prices. LFV is improving air cargo operations at its airports to ensure that the volume of cargo that flies non-stop from Sweden will increase. Target fulfilment: Airports LFV works actively to attract new traffc. During 2006 it introduced a number of incentive programmes aimed at stimulating new passenger and cargo routes. Starting on January 1, 2007, it is implementing a price cut for airport infrastructure totalling about SEK 100 M, focusing on international traffc at Stockholm-Arlanda Airport and Göteborg-Landvetter Airport. During 2006, many new international routes began service, especially from Sweden s two main international airports: Stockholm-Arlanda and Göteborg-Landvetter. In air cargo, too, a number of significant new routes opened. During 2006, domestic traffc growth was weak as a result of a saturated market. During the autumn, international charter traffc also showed a downward trend, especially in Stockholm, Gothenburg and Malmö. However, the objective is that by 2010, LFV s airports shall have the best customer value in the Nordic countries. Group objective: Commercial products LFV s net profit from commercial products shall increase from SEK 693 M in 2006 to at least SEK 940 M by Strategies LFV shall increase its earnings from commercial products per unit of area and passenger. It shall develop new products and, where appropriate, seek partners that can provide expertise and risk capital to increase profitability. The commercial potential of land, especially at major airports, shall be developed. LFV shall develop new advertising products. Target fulfilment: Commercial products Profit on commercial operations is following the existing plan and totalled SEK 693 M in The major economic potential is found at LFV s larger airports. Through collaboration between LFV and Schiphol Airport in the Netherlands within the framework of Arlanda Schiphol Development Company AB (ASDC), LFV has access to internationally acknowledged expertise in shop and restaurant operations at airports. A number of new commercial units went into service during the year, especially at Arlanda. At Malmö Airport, the passenger terminal was renovated to create a common departure hall for domestic and international passengers, stimulating shop and restaurant sales. The potential for development of commercial products at LFV s smaller airports is limited. LFV is also working actively here with commercial development, but with greater emphasis on car parking and advertising products. Group objective: Air navigation services LFV s air navigation services shall be competitive and we shall successfully participate in the development of cross-border air navigation services in Europe. Strategies LFV shall be one of Europe s five most cost-effective producers of air navigation services. During the period, LFV s portion of Sweden s en-route charges shall not exceed SEK 400 per service unit, on the condition that the number of service units shows at least 3 per cent volume growth. In the long term, LFV shall endeavour to increase the cost-effectiveness of its air navigation services through collaboration, mainly with Nordic air traffic management organisations. Through high effciency and low costs, LFV shall successfully be able to sell its air navigation services to airports in an open market with financial value added. During the three-year planning period, capacity at Stockholm-Arlanda Airport shall increase from 80 aircraft movements to 90 per hour. Target fulfilment: Air navigation services In recent years, LFV has increased its productivity and has thus been able to lower en route charges. This has been possible through a combination of cost restraint and a continued increase in the number of overflights. The EU ordinances on a Single European Sky have gone into effect. This has resulted in talks between market players on the establishment of several alliances among air navigation services in Europe to seek collaboration and more effcient use of common airspace. LFV is continuing to pursue intensive efforts to develop Nordic collaboration, mainly through the Nordic Upper Airspace Concept (NUAC) project, whose goal is to join with Denmark s Naviair to deliver safe air navigation services that are more cost-effective and flexible. LFV Group objectives and strategies > LFV 2006 < 7

12 LFV s airports Generally speaking, 2006 was another year of traffic growth. International traffic rose sharply, while domestic traffic declined somewhat. LFV s air cargo investments paid off at several airports. Higher revenue from both airport operations and commercial operations, combined with streamlining of costs, enabled LFV to implement the largest price cut in its history. The purpose is to improve prerequisites for an expanded range of aviation services so that the business community and individuals can enjoy even more efficient transport. The adjustment of LFV s airport portfolio to changed market conditions continued. During the year, Norrköping and Kalmar Airports were transferred to municipal owners. Air travel in Sweden and the world According to the International Air Transport Association (IATA), global passenger traffc continued to grow during 2006 (+5.9 per cent), but at a somewhat slower pace than in 2005 (+7.6 per cent). Air cargo traffc also increased (+4.6 per cent), but here the rate of growth was somewhat higher than in 2005 (+3.2 per cent). In Europe, the restructuring of the civil aviation industry is continuing. The two largest low fare market players, Ryanair and easyjet, have an increasingly strong grip on the market (see the chart below). Even today, the smaller of these two companies, easyjet, has a larger European volume than Air France, KLM and British have. These market players are not yet in the same league in terms of size as the merged groups Air France-KLM and Lufthansa, but if the trend continues, Ryanair, easyjet and one or more other low fare carriers will dominate the European market within a year or so. Airport structure LFV s airports provide good coverage of Sweden from Malmö Airport in the south to Kiruna Airport north of the Arctic Circle. Together they form a coherent system that gives passengers access to important business and leisure destinations. Stockholm-Arlanda Airport, serving as a hub that offers more Millions of passengers Number of passengers in European traffic, 2006 than 170 non-stop destinations and frequent departures on many routes, ties together the traffc flows in the system. This increases accessibility both for the businesses and inhabitants in the Lake Mälaren Valley region around Stockholm and for transfer passengers from other parts of Sweden. In recent years, travel has changed in a way that that has meant a concentration of growth at major airports and significant traffc declines at a number of smaller airports. For this reason, LFV has studied the structure of the airport system and proposed changes in the Swedish State s responsibility for airports. On January 1, 2006, LFV withdrew from its involvement in Halmstad Airport. After reaching agreements with the respective municipalities and receiving approval from the Swedish Government, LFV withdrew from Norrköping Airport on June 30, 2006 and Kalmar Airport on January 1, In June 2006, the Government decided to carry out a review of the overall Swedish airport system. The directives for the inquiry include examining the role of LFV as a State infrastructure manager for airports. A supplementary directive asked the investigator, in connection with her analysis of LFV s role as a State infrastructure manager, to report on the financial and transport policy conditions and consequences of alternative operational mechanisms for LFV. The inquiry is scheduled for completion in the autumn of Traffic developments Traffc continued to grow during 2006 but at a slower pace than during 2004 and The total increase in passengers was 2.7 per cent. The number of passengers in international traffc rose by 6.8 per cent, while domestic traffc decreased by 2.0 per cent. The very strong Swedish economy and a recovery in the euro area are the most important reasons behind the continued increase in international traffc. Domestic traffic decreased despite good Swedish economic conditions, largely because airlines made capacity adjustments where capacity was previously too large to give the airlines the potential to make a profit. A strong year for air cargo LFV s efforts to attract air cargo business paid off during 2006, with new heavy air cargo operations being established. Göteborg-Landvetter Airport has a well-established position as a heavy cargo airport. Stockholm-Arlanda Airport previously had a substantially weaker position, but during 2006 Arlanda went from virtually no heavy air cargo aircraft to six departures per week in cargo-version jumbo jets. During the year, Göteborg-Landvetter Airport added two new heavy air cargo departures a week. It also added two new jumbo jet departures in January Since November 2006, Jönköping Airport has also had two air cargo aircraft departures a week. 0 Air France - KLM Lufthansa Ryanair easyjet British Airways 8 > LFV 2006 < Airports

13 Lower prices thanks to commercial successes and greater cost efficiency A strong improvement in earnings from airport operations during 2006 enabled LFV to carry out its largest price cut ever at the beginning of A combination of greater cost efficiency, increased traffic volume and commercial successes contributed to LFV s strong earnings. The price cut is targeted to those market segments where LFV sees the largest potential for future growth and where international competition is toughest. Xxxxxxxxxxxxxxxxxxxxxxxxxxxxx Airports > LFV 2006 < 9

14 LFV s efforts to attract more air cargo business paid off during A number of new departures were added at LFV s airports. To stimulate even more air cargo, special price discounts for air cargo above 200 tonnes were introduced. The good conditions for air cargo expansion in Sweden are largely due to the potential for using the Swedish market to reduce problems with imbalances in global cargo flows. Today the demand for air cargo from Asia to Europe is much larger than in the other direction. This means that air cargo companies generally have problems with low load factors and low prices on their flights back to Asia. By making a stopover in Sweden and picking up Swedish export merchandise bound for Asia, the load factor can be boosted, improving the financial return for these operations. With more non-stop flights, the Swedish business sector enjoys more effcient transport services. In many cases, higher load factors and non-stop flights also mean improved environmental effciency. To stimulate air cargo operators to continue investing in operations at LFV airports, a special discount ladder for pure air cargo flights with payloads above 200 tonnes has been introduced. Marketing of LFV s airports The effects of the liberalisation of the European civil aviation market in the early 1990s have materialised gradually. The rapid expansion of low fare air travel is perhaps the most obvious change, but in the wake of deregulation the competitive conditions affecting airports have also clearly changed. Having generally been comparatively protected in their geographic catchment areas, airports have become increasingly exposed to competition. % 12 Passenger growth, 2006 compared to Oslo-Gardermoen Helsinki-Vantaa Paris-Roissy Copenhagen-Kastrup Amsterdam Stockholm-Arlanda Frankfurt London-Heathrow Source: ACI Compared to the airports in other Nordic capitals and the largest airports elsewhere in Europe, Stockholm-Arlanda Airport showed good growth during In 2006, however, Arlanda reported low passenger growth compared to these airports (see chart above). There are two main reasons for this: 1. Due among other things to the fast, efficient service offered by Stockholm-Bromma Airport, a sizeable proportion of domestic traffic from Arlanda has moved to Bromma. 2. The rapid expansion of low fare service has decelerated, which can be explained at least partly by the previous Swedish Government s proposal to introduce an aviation tax. 10 > LFV 2006 < Airports

15 Malmö Airport is an excellent example of changed market conditions. The airport previously had a more or less given market base consisting of domestic traffic to Stockholm and international charter traffc to supply the need for holiday travel by inhabitants of southern Sweden. Today Malmö Airport is competing with airports in places like Bologna, Oslo or Bratislava to attract new scheduled air routes from countries like Germany, when airlines with pan-european brands are searching for new expansion opportunities. The destination is rarely an airport. Instead it is a region or country. Airlines naturally demand that airports be effcient and passenger-friendly, but in many cases this is regarded as an almost self-evident requirement. The decisions of airlines to establish new non-stop routes are thus determined primarily by such factors as tourist destinations, the strength and structure of the business community and the population size and prosperity of the catchment area. To take better advantage of existing market opportunities and meet tougher competition, LFV has strengthened its marketing efforts in order to create additional non-stop routes that provide more effcient transport service and greater accessibility. To market Swedish destinations to airlines, LFV works in close co-operation with numerous public and private regional organisations that work with tourism and business development. One concrete example of the efforts being made is that, aside from its price cuts at the beginning of 2007, LFV has allocated SEK 15 M for inbound tourism projects aimed at creating new flows of tourists and other passengers. All projects will be carried out together with other parties such as tourist promotion organisations and tour operators. Especially in European traffc, marketing work has been made easier by the new Government s decision late in 2006 not to introduce any aviation tax. The first to announce new routes after this decision was Malmö Airport, where the number of international scheduled routes has increased from four to seven due to new routes to Barcelona, Madrid and Marseille. Lower prices for airlines Aviation charges (also called traffc or infrastructure charges) are the airports largest source of revenue, accounting for about 58 per cent of their total operating revenue. Passenger charges are payable per departing passenger, while the take-off charge is based on aircraft weight and exhaust emissions. Exhaust and noise charges encourage the airlines to employ aircraft with less environmental impact. Aside from the published charges, there are introductory rebates for new traffc. The changed market structure described above naturally requires LFV to adapt its products and prices to the changed needs of its customers. Traffic trend at LFV s airports, 2006 Passengers Number Change from 2005 Landings Number Change from 2005 International 16,269,361 7% International 100,930 0% of which of which European traffic 14,519,569 8% European traffic 95,418 0% Rest of world 1,749,792-1% Rest of world 5,512 1% Domestic 13,331,421-2% Domestic 118,324 5% Total 29,600,782 3% Total scheduled and charter 219,254 3% Taxi flights and general aviation 59,199-19% Total 278,453 7% Airports > LFV 2006 < 11

16 LFV is working actively to increase its commercial earnings. For example, during 2006 Malmö Airport invested in a renovated terminal with completely new commercial potential as well as advertising space on the air traffic control tower. There is especially large growth potential for intercontinental airlines and European low fare airlines, while the competition is tough between different airport operators. These airline customers view Sweden as one possibility among many when they consider expanding. This is why it is important for LFV s products and prices to be competitive for these market segments. By means of traffc growth, stronger commercial operations and continued streamlining of costs, during 2006 LFV created room to carry out a unique price cut at the beginning of The value of the entire price cut package to customers, including investments in inbound tourism, is more than SEK 100 M. The largest single step was a cut in the passenger charge for international traffc at Stockholm-Arlanda Airport and Göteborg- Landvetter Airport. In addition, LFV lowered the take-off charge for passenger aircraft normally used in intercontinental traffc, in order to lower the airlines costs for such traffc to the same level as for European flights. Examples of charges LFV s total charges for a given flight are determined by a number of factors. The charge varies depending on the aircraft s exhaust and noise characteristics as well as its maximum take-off weight, which airport the flight is departing from and the number of passengers. The table below to the right (page 13) shows in a simplified way how the charge system works. The overall charges for a single journey on some of the highest-volume domestic routes totalled between SEK 115 and SEK 130 per passenger. Future changes in LFV s charges The goal of LFV is to be able to keep traffc charges unchanged or lower them. An unchanged level of charges is projected to require a certain traffc growth. If possible, taking into account the trend of LFV s earnings, LFV aims to lower the level of charges further in order to stimulate market growth. Airport operations products Earnings from airport operations products during 2006 totalled SEK -276 M (-421). This means that traffc charges are too low to cover the costs of the airports. The deficit is covered by commercial operations. Significant improvements in airport effciency have been implemented in recent years. The task of increasing costeffectiveness will continue, so that over time LFV can meet both the targets of its owner and the need of airlines for low charges. At all LFV airports, organisational structure and operations are being reviewed to improve effciency. The completion of Pier F at Stockholm-Arlanda Airport is under way. This investment marks the completion of the pier s interior while creating three new aircraft parking stands. The arrival hall for international passengers at Göteborg-Landvetter Airport has had insuffcient capacity and is now being renovated, including new baggage conveyors with substantially higher capacity. Considering the spare capacity generally available at LFV s airports, capital spending can and should be limited in order to keep costs down. In order to deal with the capacity issue in the Stockholm region, LFV needs a decision about the future of Stockholm-Bromma Airport. Commercial products During 2006, LFV s profit from commercial products was SEK 693 M, an increase of SEK 90 M compared to Commercial products generate 44 per cent of revenue at LFV airports. Looking ahead, LFV will work actively to increase commercial revenue through collaboration with external market players, development of new products, exploitation of more terminal area and land as well as generally attaching greater importance to commercial aspects when renovations, extensions and new construction are planned. LFV s target is for net profit from commercial products to increase from SEK 693 M in 2006 to SEK 940 M in There is a trend towards a lower proportion of travel to and from airports occurring by car, while volume and profit from total commercial operations need to increase. The number of cars parking at Stockholm-Arlanda Airport increased by only 40 per cent of passenger growth, which clearly shows that more passengers are travelling to and from the airport by other modes of transport besides their own car. Combined with efforts to increase earnings from other products, the outcome was that for the first time, property leasing provided the largest financial earnings, a first place that previously belonged to parking operations. Especially at Stockholm-Arlanda Airport and Malmö Airport, LFV also worked to improve airport accessibility via other modes of ground transport 12 > LFV 2006 < Airports

17 besides air passengers own cars. LFV works together with Göteborg & Co. and Stockholm Business Region to strengthen awareness of Scandinavia and Sweden as international meeting venues. This work strengthens both airport operations and hotel and conference operations. During 2006 hotel operations at Stockholm-Arlanda Airport increased sharply. Eventually new investments may be needed to expand hotel capacity. The new Rest and Fly concept has worked well, showing that it was possible to broaden the product range successfully to include low-price accommodations near terminals. At the start of 2006, conference operations at Stockholm-Arlanda Airport were transferred from the subsidiary LFV Airport Center AB (LAC) to the State enterprise, with continued good earnings. During the year, LFV requested changes in Sweden s alcohol beverage legislation in order to level the playing field with many other airports in the world, Europe and the Nordic countries. Norway allows incoming passengers to buy alcoholic beverages at airports. This diverges from the previous Nordic agreement on tax legislation concerning alcoholic beverage sales and means lower earnings for Swedish airports. To limit the competitive disadvantages to Swedish airport operations and introduce a system that is more effcient in various respects, LFV advocates allowing sales to arriving passengers. Reducing the quantity of alcoholic beverages transported in aircraft means less environmental impact and also improves service to passengers. For a number of years, LFV s advertising business has performed more weakly than expected. Competition with other media has been tough, but during 2006 signs of recovery for advertising products began to be evident. LFV expanded its sales organisations, which resulted in larger and longer contracts than previously. By improving effciency, property management costs were reduced. This had a positive impact on profit from all operations. Traffic charges per passenger and single journey, 2006 Air route Arlanda to Landvetter Bromma to Landvetter Arlanda to Luleå Aircraft type Boeing Avro RJ 100 Boeing Cabin factor 60% 60% 60% Charges in effect on December Aircraft-related charges 1 (SEK) Passenger charge (SEK) En route charge (SEK) Total Take-off, exhaust and noise charges plus Terminal Navigation Charge (TNC). TNC covers the cost of air navigation services at the airport and in its vicinity. Airports > LFV 2006 < 13

18 Restaurants and shops in terminals At Göteborg-Landvetter Airport, three new cafés opened in They employ modern, attractive café concepts that meet the need of travellers to have a choice between sitting down on the spot for a while or easily bringing food on board their flights. Malmö Airport has created a terminal concept unique in Sweden, with a common terminal for all domestic and international passengers. The renovated terminal uses entirely open spaces where all passengers are welcomed by new shop and restaurant concepts. The renovation includes the entire terminal and provides new potential for commercial operations. A new restaurant and a new café opened, while the duty- and tax-free shop expanded greatly. Aside from commercial advantages, the renovation signifies an increase in the passenger capacity of the terminal, enablin it to accommodate nearly four million passengers per year. To offer passengers better service and a larger product range as well as increased commercial revenue at Stockholm- Arlanda Airport, LFV is collaborating with Amsterdam Airport Schiphol in the Netherlands in order to benefit from the commercial expertise and experience found at Schiphol. This collaboration takes place through Arlanda Schiphol Development Company AB (ASDC), owned 60 per cent by LFV and 40 per cent by Amsterdam Airport Schiphol. The company is responsible for commercial development of shops, restaurants and commercial services (currency exchange offces, banks and so on). In 2006, six new shops in the fields of fashion, design and electronic were inaugurated, as well as five new businesses in the food and beverage field. In both Terminal 2 and Terminal 5, commercial areas were upgraded to create more attractive shopping experiences, contributing to a noticeable increase in sales. This work is now continuing gradually in other parts of the terminals. ASDC also received overall marketing responsibility during the year. Instead of having a number of players handling their marketing independently, resources are being centralised at ASDC, resulting in more numerous, vigorous and better co-ordinated sales campaigns. In 2006, total sales in ASDC s areas of responsibility rose 10 per cent, despite lower duty- and tax-free sales. In percentage terms, the increase in sales is thus substantially higher than passenger growth. These operations provided LFV with revenue of SEK 326 M in 2006, an increase of SEK 40 M on the preceding year. SEK per passenger Aviation revenue and commercial revenue at airports, Breakdown of Group commercial product revenue, Real estate products 39% (40%) Advertising 3% (3%) Ground handling 12% (13%) Miscellaneous 22% (20%) Car parking incl. bus fee 24% (24%) Aviation revenue per passenger Commercial revenue per passenger Commercial operations Commercial operations offer services to travellers and generate a surplus that makes it possible to maintain lower prices for airport operations products. Trends by product category Sales, SEK M Real estate LFV s commercial operations are dominated by real estate products, which have the highest sales and profit. In many cases, LFV applies sales-based rents, which means that LFV shares financial risk with tenants Car parking etc. Car parking is an important activity, enabling airports to serve as hubs in the transport system. Air traffic growth during 2006 led to a small increase in both sales and profit Advertising etc. Through business partners, LFV sells advertising space at its airports. In recent years, these operations have had diminishing profitability due to tough competition with other media, but during 2006 the trend reversed > LFV 2006 < Airports

19 Increased revenue from both airport operations and commercial operations during 2006 enabled LFV to carry out the largest price cut in its history at the beginning of Airport statistics, 2006 PASSENGERS LANDINGS STAFF FINANCIAL DATA Total of which Total Full-time Fixed Capital internat., equivalent assets 1 spending Sales Profit 2 number Change number Change number Change number SEK M SEK M SEK M SEK M Stockholm-Arlanda 17,539,390 3% 12,207,474 7% 113,565-3% 781 8, , Göteborg-Landvetter 4,281,043 5% 2,934,046 8% 33,197 0% Malmö 1,883,128 4% 701,098 1% 21,063 1% Stockholm-Bromma 1,634,310 22% 126,429-5% 28,305 7% Luleå 912,688 1% 52,337 16% 8,965-2% Umeå 801,307-1% 36,985 10% 10,712 2% Åre Östersund 396,189 2% 21,347 3% 3,958-9% Ängelholm-Helsingborg 362,165-3% % 6,005 3% Sundsvall-Härnösand 337,661-5% 12, % 6,638-10% Visby 289,985 5% 8,182-4% 11,732 5% Skellefteå 220,438-13% 9,004 47% 3,521-17% Ronneby 209,613 2% 35 98% 4,538 12% Kiruna 171,323 3% 1,029 4% 3,046-17% Kalmar 3 156,967-12% 23,122 1% 4,511-16% Örnsköldsvik 131,612-8% 3,714 1,747-14% Jönköping 126,296 7% 57,524 27% 7,283-18% Karlstad 112,392 22% 40,486-30% 5,202-31% Norrköping 4 34,275 54% 33,661 53% 4,465-47% Book value. 2 Operating profit. 3 The airport was transferred to a new owner on January 1, Results for 2006 included extra expenses caused by this transfer. 4 The airport was transferred to a new owner on July 1, Airports > LFV 2006 < 15

20 LFV s air navigation services Dynamic developments are continuing in air navigation services as a consequence of the EU initiative known as Single European Sky, and 2006 was another very eventful year. At year-end, the Air Navigation Services (ANS) Division of LFV was certified according to the standards that apply today to all suppliers of air navigation services in the EU. Another step in the Division s efforts to provide continuous improvement for customers was also implemented at the end of 2006 when ANS received ISO 9001:2000 quality management certification. A final certificate will be received at the end of the first quarter of LFV wins IATA s Eagle Award LFV/ANS received confirmation that customers appreciate its air navigation services when it won the 2006 Eagle Award from the International Air Transport Association (IATA). The Eagle Award is the world s most prestigious prize awarded to airports and suppliers of air navigation services. LFV/ANS ranks first in Europe in terms of cost-effectiveness and keeping down charges to airlines. Meanwhile it is endeavouring to improve operations and effciency through cross-border collaboration with its neighbours in the airspace field and through collaboration in technology and procurement. Aviation safety Aviation safety enjoys top priority in the work of the Division. Extensive resources and energy are devoted to maintaining a high level of aviation safety. No accidents have been caused by the operations of ANS. During 2006, however, an incident occurred in which the risk of a collision between two small aircraft was obvious, which meant that the aviation safety target was not met. Control centres are stable The new control centres in Stockholm and Malmö, which went into operation in 2005, have met expectations. The former control centre in Sundsvall is now fully integrated into the Stockholm centre. A major interruption occurred when the Stockholm centre s regular computer was down for about 3 hours. There was never any danger to aviation safety, since the centre s emergency system worked as intended, but some delays in air traffc occurred. The fault was identified and steps were taken to avoid a repetition. the supplier Thales, LFV has reached agreement as to how this will occur. The agreement means that costs of development work will be shared by several parties. This has generated great interest from other suppliers of air traffc management services, and additional air navigation service suppliers will probably join over time. Greater cost-effectiveness In 2005, effciency measures were implemented, among other things because of the new control centres that went into service. Experience from 2006 indicated that these measures were wellbalanced and it has been possible to continue operating with high quality and availability. However, during certain periods of the year especially during the summer there is an imbalance between staff supply and demand. This is true of both airports and control centres and is because during the summer holiday period, air traffc does not diminish in the same way as previously. It can thus not be ruled out that delays will increase during the summer months. In light of this, LFV has ordered increased training of air traffc controllers from the Scandinavian air traffc services academy, Entry Point North. Euro/SU The technical system will be devel- 0 oped in a number of steps during the next several years. Together with Denmark s Naviair, Ireland s IAA and En route charges, 2006 United Kingdom Belgium y German France Norway Development of air navigation services LFV acquiring data links In the air traffc management system of the future, data links are a vital element. They enable significant larger quantities of time-critical data to be exchanged than allowed by today s voice communications and radar-based systems Denmark Controlled airspace movements Number during 2006 Netherlands Sweden Finland Change from preceding year 681,533 4% Of which, number of overflights Change from preceding year 275,212 12% Ireland Average Source: EUROCONTROL 16 > LFV 2006 < Air Navigation Services