Ladies and gentlemen, welcome to the Flughafen Zürich AG full year results 2018 conference call. I am Alessandro, the conference call operator. I would like to remind you that all participants will be in listen-only mode. The conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Stefan Dietrick, CEO. He will now be joining to the conference room. As a reminder, if you wish to register for a question, please press star and one on your telephone.
Good. We can start. Ladies and gentlemen, welcome to the presentation of our company's full year results 2018 at Zurich Airport. I also welcome the attendants who are now connected via phone. Would like to remind these attendants that the analyst presentation is available on our webpage, zurich-airport.com. My name is Stefan Dietrick. I'm the CEO of the company. I will host this presentation together with Lukas Brosi, our company's CFO. I will start with a business update and give you some insights on strategic topics and an update on the regulation before our CFO will provide you with detailed information on our financial performance, followed by a brief outlook. At the end, we will have enough time to answer your questions. I start with some of our highlights in the last year.
As the demand for international mobility continues to grow, 2018 saw a further year of rising passenger volumes. For the first time, the number of passengers had passed the 30 million mark. Equally notable is the further increase in the number of peak days on which over 100,000 passengers were handled per day. During the year, under review, Zurich Airport recorded 63 of these peak days versus 22 in the previous year. In July, there was an all-time record of nearly 115,000 travelers on a single day. 2018 saw the addition of more new airlines and destinations at Zurich Airport. The expansion of the long-haul sector was especially welcome. New long-haul destinations included Buenos Aires, Colombo, as well as Ho Chi Minh City. Hainan Airlines is now flying to Shenzhen in China, while Sichuan Airlines has introduced a service to Chengdu via Prague.
We are constantly expanding our non-regulated business as well. Our commercial centers, both land side and air side, are performing very well. Despite the generally lackluster performance of the Swiss retail market as a whole, we can constantly increase commercial returns in absolute terms, especially on air side. With regard to The Circle, both the construction and marketing are on track. The Circle becomes a visible reality and is set to strengthen our airport as a leading center in the Greater Zurich area. Internationally, the implementation in Florianopolis goes smooth. The new terminal will be fully operational in the second half of this year. Finally, Standard & Poor's raised our credit rating to AA-, whereas the independent Swiss agency, Creditreform, confirmed the rating at the same solid level. On the next slide, you will find a brief overview of the group key figures.
In 2018, total passenger numbers grew by 5.8% to 31.1 million passengers. Our revenue increased to CHF 1.15 billion, a plus of 11.2%, while both segments, aviation and non-aviation, were on a positive trend. As already communicated with the half year result, our 2018 numbers were affected by a one-off effect of CHF 57.6 million for additional noise management and resident protection provisions being charged to the P&L.
Compared with the same period last year, in addition to the increased provision for sound insulation measures in the first half of 2018, the previous year result was affected by the receipt of CHF 4.8 million in connection with the liquidation of the former Swissair, plus the one-off gain of CHF 36.3 million on the disposal of the remaining 5% interest in Bangalore International Airport. Adjusted for each one of effects, profit increased by CHF 33 million to CHF 284 million, which depicts a plus of 13.3% compared to 2017. Let us now have a closer look at the aviation business. The increase in passenger volume divides into a 5.6% growth in the local passenger segment, while transfer passengers were up by 6.4%. The proportion of transfer passengers slightly increased from 28.3% to 28.4% over the prior year period.
The share of our home carrier, Swiss, remained stable at 52.9% compared to 52.3% in the previous year, followed by Edelweiss Air and easyJet. While Swiss grew mainly through bigger aircraft and a higher seat load factor, Edelweiss added intercontinental routes, and easyJet contributed to a healthy competition on European routes. The number of flight movements climbed by 3% to more than 278,000 takeoffs and landings. Last but not least, compared with the prior year period, the volume of freight handled at Zurich Airport increased by 0.6%. I will now move to the non-aviation business and share some insights on the commercial business, followed by an update on our strategic projects. First, I would like to share a detailed overview on the commercial performance for 2018. Total sales for retail outlets, duty-free shops, and restaurants at Zurich Airport amounted to around CHF 594 million, an increase of 3%.
Thanks to continually rising passenger numbers, growth in air side turnover was positive. In particular, the watches and jewelry segment posted strong growth, as did restaurants. Despite the difficult retail climate in Switzerland, landside revenues are stable. The new AIR Restaurant that opened at the beginning of 2018 is proving highly popular among passengers, employees, and visitors, which is also reflected in its healthy turnover. For this year, a couple of changes to food segment concepts are in the pipeline. A new luxury boutiques will augment the air side offering. The average concession rate reflecting the revenues for our company based on the sales in the shops and restaurants, saw a significant rise of one percentage point to 21.8%, boosted in particular by the new duty-free contract, which kicked in at the beginning of 2018.
Due to renewals of other smaller contracts, we expect our average concession rate to increase further in the coming years, however, to a smaller degree. Let me continue with an update on the revision of the ordinance on airport charges. The strong growth of passengers and strict cost control over the past years have brought us in a situation where we exceeded the allowed return on the regulated asset base. This, coupled with lower interest rates, makes it evident that a tariff decrease for the next regulatory period must be expected. The Federal Office of Civil Aviation, FOCA, announced in June 2018 that the ordinance on airport charges might be selectively revised, and that the regulator is assessing an adoption of today's transfer payments.
Please let me remind you here that currently 30% of the economic value added of car parking and air side commercial activities has to be effectively transferred to the regulated segment to determine the aero charges. Hence, the transfer payment forms a subsidy from the non-aviation to the aviation business. In November 2018, FOCA then presented concrete proposals. To our surprise, FOCA proposed that 50% of the economic value added from the commercial activities on the air side, along with a maximum of 75% of the parking segment, would be skinned off for cross-subsidization. Further, our request for an adaptation in the calculation formula for the allowed return has not been addressed. If FOCA's proposal is to be implemented, aviation revenues at Zurich Airport will fall by around 25% in the forthcoming regulatory period. The new charges would take effect at the end of 2020 at the earliest.
After FOCA's ordinance draft was published, we had the chance to make our comments during the stakeholder involvement process that was concluded in December 2018. We are now awaiting the final decision on the ordinance this summer, taken by the Swiss Federal Council, and we will keep on fighting that the proposal of FOCA will not get supported on government level in the meantime. Furthermore, we have already reviewed our aviation CapEx plan, and we are preparing for the upcoming negotiation phase with the airlines and representatives. Let's switch back to more pleasant topics. When The Circle opens in 2020, Zurich Airport is undoubtedly set to become a leading urban and business center in the greater Zurich area as well. Construction is proceeding on schedule. Three of the six buildings have already reached their final height, and in some cases, entire facades are in place.
The development becomes fully visible now and looks impressive. The adjacent park is being upgraded, adding to the quality of the place. Various new tenants, such as Raiffeisen and Microsoft Switzerland, were acquired in 2018. The latter is planning to move its head office to The Circle and also entered in a strategic partnership with us for the digitalization of The Circle. Contracts have also been signed with further tenants in the healthcare sector and well-known restaurateurs. Additionally, we are in advanced negotiations with other potential tenants and intend to announce new contract conclusions within the next weeks. From a cost point of view, our budget of total CHF 1.2 billion remains unchanged. International activities are progressing as well. We are currently active at six airports in four countries in Latin America.
We took over the operation of the airport in Florianópolis in January 2018, construction work on the new terminal commenced already in April. It is scheduled for completion in the second half of 2019, compliant with the concession agreement ahead of schedule and in line with the CapEx plan. Besides Latin America, the development of our international business is focused on projects in Asia. To develop the market in Asia, we set up a regional office in Kuala Lumpur, which will be able to coordinate expansion and explore market opportunities on ground. Early this year, we submitted bids for projects in India. However, our office ranked second behind a very aggressive local bidder and ahead of a group of various competitors. Additional opportunities in the pipeline will be in Brazil, where the auction of the fourth privatization round will be held within the next days.
With this, I'm handing over to Lukas.
Thank you, Stefan. Good afternoon, ladies and gentlemen. Welcome also from my side. I'll now give you an overview of the financial performance of the company. In 2018, we have had a very successful financial year, mainly attributable to the higher than expected traffic here in Zurich and a strong non-aviation business. Before looking into the detailed numbers, I would like to point out the difference between the bars on the slides. The light blue bars are our reported numbers in accordance with our annual report. The dark blue bars represent the results adjusted for one-off effects. As Stefan already mentioned earlier, we have had a one-off effect of CHF 57.6 million for increased sound insulation provisions in the first half year of 2018. In 2017, we were positively affected by the Swissair liquidation dividend as well as our Bangalore divestment.
For the full financial year, Flughafen Zürich AG's revenue grew by CHF 116 million to CHF 1 billion 153 million. Of the total revenue, approximately 57% was attributable to aviation and 43% to non-aviation business. After deducting operating expenses, the adjusted EBITDA came to CHF 629 million, with a healthy margin of 54.5%. Our reported consolidated profit for the financial year amounts to CHF 238 million, whereas the adjusted profits stood at CHF 284 million. In 2018, passenger-related charges increased in line with passenger growth by 5.7% to CHF 443 million. Other flight operating charges grew by 4.5% to CHF 138 million. This happened mainly on the back of the Swiss fleet replacement program, which led to higher revenues from landing charges. The positive trend in aviation fees and other aviation revenue, which increased by 3.8% to CHF 76 million, was attributable to volume effects.
In sum, aviation revenue rose by 5.2% to CHF 657 million. On the non-aviation side, overall revenue increased by CHF 83 million to CHF 496 million, which results in a plus of 20.2%. Total commercial and parking revenues saw a year-on-year increase of CHF 14 million to CHF 248 million, which is equal to a rise of 6%. The increase of CHF 1.6 million in earnings from facility management was mainly driven by higher revenue from rental agreement, which is also reflected in a lower vacancy rate during the 2018 financial year. Mainly higher earnings from VIP services contributed to a year-on-year increase of CHF 2 million in revenue from services to CHF 44 million. Finally, as a result of taking over the operation of Florianopolis Airport in southern Brazil and the associated expansion of infrastructure there, the revenue from international airport business was lifted to CHF 83 million in the year under review.
This includes CHF 41 million for construction projects under concession agreements. Let me remind you of the so-called concession accounting rules. According to the international reporting standards, CapEx in our international concession has to be reflected in the P&L as revenue and operating costs at the same time. In total, this has a neutral impact on EBITDA. In 2018, Flughafen Zürich gave once more proof to be disciplined on operating costs. Personnel expenses for the reporting year rose by CHF 10 million to CHF 211 million. As well as higher headcount and a general pay rise, this is due to consolidating the personal cost of international holdings, in particular Florianopolis. By contrast, expenses for police and security increased only slightly by CHF 1.6 million to CHF 121.2 million. Here in Zurich, security costs even saw a small decline.
Owing mainly to the expansion of the sound insulation program, operating expenses went up by 28% to CHF 582 million. After adjusting for one-off effects, expenses rose by 14.4%, primarily as a result of establishing operations in Florianopolis. Operating expenses in Zurich went up by 2.2%, an increase significantly lower than the growth in passenger numbers. Please let me now outline some key figures. Net financial debt, excluding the Airport Zurich Noise Fund, stands at CHF 580 million, leaving the net debt to EBITDA ratio unchanged at 0.9 times. The return on invested capital is at 9%, up by 0.7 percentage points compared to the prior year period. Although the operating cash flow was slightly higher than in the previous year, the free cash flow declined by CHF 100 million because of higher CapEx.
To end the financial part of the presentation, let me now give you some additional information on CapEx. In the period under review, Flughafen Zürich invested CHF 290 million in ongoing projects. This included, in particular, our share of the investment in The Circle of CHF 95 million, representing more than a third of our total investments. The project to expand and upgrade the baggage handling system at Zurich Airport was officially launched in March 2018. The total investment costs will amount to approximately CHF 407 million, with an expected completion date in 2025. Thanks to a new 200-meter-long access taxiway, aircraft will be able to line up for departure more flexibly, which in turn will improve punctuality. Two additional high-speed taxiways are being built for the east-west runway on the western side of Zurich Airport.
They allow planes to exit the landing runway more quickly so it can be released to the next aircraft faster. The first high-speed taxiway went into operation December 2018, and the second one is scheduled for completion in June 2019. 10 new open aircraft stands on the southern side of the airport were opened in October 2018. They provide additional space for medium-haul aircraft and are helping to meet the rising demand for stands for inter-European flights. With this, let's move on to the outlook. Before presenting the guidance for 2019, I would like to share some of our summer timetable changes. Capacity will be added from different carriers, and we deem it to be a positive sign that the capacity growth is well diversified. I would just like to highlight some of the main changes.
Swiss will now fly four times per week to Gdańsk, and Edelweiss offers its services now twice to Tirana as well as Kalamata in Greece. Let me finish with the guidance for 2019. For a better understanding, we show the 2018 reference numbers on the left-hand side. Flughafen Zürich expects passenger growth around 3%, driven by some new routes and additional capacity. We have had a pretty solid start into the new year, 2019. However, we estimate the growth to slow down throughout the year, especially due to limited capacity for further growth during the volume intense summer months. Aviation revenues will be driven by the volume growth. Please be aware that the numbers of flight movements usually does not rise as fast as passenger numbers and the passenger mix may change, too. Therefore, the increase in aviation revenues is typically slightly lower than the increase in passenger figures.
Non-aviation revenues will benefit mainly from commercial contract renewals and our international activities. International business will be the main driver for OpEx as well. Additionally, costs in Zurich are expected to be slightly higher, too. Given the number of complex projects that need to be planned and executed in the upcoming year, the headcount will slightly increase. Please note that non-aviation revenues as well as OpEx will be impacted by the already mentioned concession accounting. However, this impact is EBITDA neutral. Factoring out one of effects, EBITDA is expected to be slightly higher, whereas net profit is expected to be up by approximately 5%. Lastly, the company has earmarked around CHF 350 million-CHF 400 million for investment in 2019. In addition to various work to maintain the value of the airport's infrastructure, the biggest investment volume of around CHF 140 million is for The Circle.
With this, we would like to conclude the presentation, and I hand back to Stefan.
We now open the Q&A part of this presentation with questions of the attendees here in the meeting room. After that, participants on the phone will have the opportunity to bring up their questions. May I ask you to take the microphone, introduce yourself with your name and your company before asking your questions. We start with Mr. Furger from Vontobel.
Thank you. Bosso Furger from Vontobel. Three questions, if I may. First one, maybe just a general one. With regards to airport charges, to you, Mr. Dietrick, how much of your time is currently absorbed? Maybe also, how much time do you expect is currently absorbed by the chairman with regards to this topic, and what do you expect for 2019?
It is obviously an issue with high priority, and we spend all the time that is needed to safeguard our interest, and that includes the chairman.
Maybe moving on to more financial questions. Here, OpEx in Zurich were only up 2.2%. At the beginning of last year, you mentioned some additional costs with regards to the next CapEx cycle, so this was obviously not visible in the numbers, so operating leverage is still strong. Have you just pushed out these additional costs, or it just didn't materialize as you initially expected?
When we have a closer look at the operating expenses, obviously personal expenses and security costs are the two largest cost item. On the personal expenses, which were increasing in Zurich as well. We have benefited from an effect in relation to our pension plan, where we paid a recovery fee until the middle of last year. That was the base effect, which is also true partly for security costs as the cantonal police staff is within the same pension plan. There was a lower cost attributable to this effect. We also saw efficiency gains on the security costs, mainly in the centralized security building, which led to almost a surprising decrease of security costs beside the strong passenger volume we had to handle in Zurich. Those are the main two cost items.
Do you continue to see this operating leverage in the next year?
As it was like a base effect, particularly in the personal expenses and in the security costs because of the depletion of this contribution to the pension plan, this had a base effect. We estimate the number of staff, as we have mentioned in the guidance, to increase in connection or in looking forward into the various projects we had to handle here in Zurich. The operating leverage in the general answer is still intact.
Maybe last question on The Circle. Here, can you confirm that pre-letting is currently at around 60%? That is what you mentioned in a newspaper interview. Maybe just some research or listed real estate companies are mentioning increasing demand over the past four to five months, but mostly CBD Zurich request also. Can you confirm this? Also with regards that the project will be now completed in one year. Has demand from tenants increased over the past few months?
Yes, I would confirm. I also would say that it becomes fully visible now that Zurich is a location in its own right and not to be comparable with the overall market in the north of Zurich. We are, with The Circle, of course, creating a new urban center that is more than just an office building and that has all the synergies at this location. For us, still, as always has been, it is not just a target to fill the house, but to fill the house with the right level of rents. Now you see the façade, you can walk in the development, and it is obvious for any tenant that it has a very much bigger fascination than a pure office building.
This of course helps a lot also in attracting the right key tenants that are also willing to pay a fair price for this location.
Jan Storm MainFirst . Couple ones on regulation and CapEx. Firstly, there is a statement in your annual report regarding regulation, which I do not fully get. It says basically that you would resist any proposed slashing of earnings, which reads to me a bit like you would resist any fee cut, which I do not think is the message here. Can you please clarify that one? On CapEx, just I think the CapEx guidance for 2019 is some CHF 50 million-ish higher than what the market expected. Can you give us some reason for that? Maybe it is just phasing. Also can you share some, let us say, guidance what the CapEx can be for the years beyond 2020 when the fees are cut, especially if you are not successful in your lobbying effort to get a more favorable outcome of the regulatory proposal.
Lastly, on the free cash flow on 2018. Last year, free cash flow was CHF 100 million lower, as you said, but CapEx was actually only CHF 50 million higher, while operating cash flow was, I think, slightly higher. I do not get the math behind that.
Okay. Let me start with regulation and CapEx, obviously also on the cash flows. These are all questions to me. In terms of tariffs, we had a very strong passenger growth over the last years, stronger than we have expected. Together with lower interest rates, I think a tariff decrease was expected by the market. I think that part of a potential tariff decrease that we are not rejecting. Besides this, with the draft of the FOCA, there are basically two items where we are opposing, which is the further scheme of non-regulated revenues. We also request for an adoption in the way of how our allowed returns are calculated. If I understand your question correct, is if are we opposing completely for a tariff decrease?
The answer is no, especially not on that part that belongs to the higher than allowed return we're currently in, and the part of lower interest rates, lower cost of capital to an extent that what we see as a sustainable capital return going forward as well. Your second question on CapEx. I think it was a year ago, we guided for roughly CHF 300 million-CHF 350 million of CapEx for the next two to three years. In 2019, in particular, we will have the completion of The Circle, which is a phasing issue, due to the CapEx of The Circle, which are end loaded over the construction period. Basically one can confirm the guidance we gave so far, last year. We also expect that overall CapEx for the period after 2021 will be lower than the numbers we estimate for 2019.
2019, to answer your question properly, is basically phasing of The Circle. The last question on the free cash flow. My feeling is that the difference is coming also from the investments into the international activities. I have to double-check, but I will come back during the conference with an answer on that.
Good for you. Next one. We change to the questions on the phone. First question, please. First question from the phone, please.
The first question comes from Cristian Nedelcu with UBS. Please go ahead.
Hello. Thank you very much for taking my questions. Three from my side, if possible. The first one, on CapEx. In your cash flow statement, you have around CHF 380 million of cash outflows with different CapEx streams. You do guide for the CapEx for Zurich, but could you guide also for these other CapEx streams for 2019 and 2020? What cash outflow should we expect in total with that? Secondly, on airline capacity data, easyJet is seeing declines in capacity in Zurich airports, in Q2 and Q3, around 15%-20% year-over-year. My question is if you have any insight into the reasons behind that. Secondly, in your negotiations with the airlines that will start next summer around the tariffs? Could you remind us what are your arguments, the arguments on your side for higher tariffs? The last short one, if possible, please.
Some recent press articles are claiming that you are no longer bidding for Sofia. Could you confirm if that is accurate? On any further upside, any further details there on the timeline for Brazil? I think the auction is on Friday. Are you bidding for all the clusters of airports or just for some of them? Thank you.
Okay. I'll start with the international ones. I hope I noted all of your questions, Cristian, but otherwise, please repeat it. First, Sofia, yes, we are not participating anymore in the bid process because of a decision we have taken. In our view, it's like an imbalance of chances and risks on the concession, where we have decided to withdraw from that process. In Brazil, obviously as Latin America in general, but Brazil in particular is one of our focus markets. We are closely following the developments of the next round of privatizations. You will understand that for tactical reasons, so close before the auction, we are not commenting on our strategy in terms of whether we are bidding and if yes, for how many of these three clusters. easyJet, yes, we are aware that they are reducing capacity.
We have not the full visibility on which routes, I personally believe that this is coming from a currently overcapacity after the bankruptcy of Air Berlin in the European network. Yes, we are aware, but there are no more insights to comment on what particular route this will be. Could you remind us of your questions regarding the tariffs?
Yes. My question is, if you could please tell us in terms of the arguments which you believe are on your side in the negotiations with the airlines for the new tariffs, what supports your view for higher tariffs in the airport?
There are these two aspects Lukas was explaining, one on the adjustment and the other one on the interest on the WACC calculation. In terms of the adjustment, we have to note that in all neighboring countries of Switzerland, and especially also on all Lufthansa hubs, there is no adjustment at all. Already the current 30% adjustment is on the higher end in relation to our neighboring countries and competing hubs. In addition, our rates here in Zurich are in European average, and at the same time, we have on the cost side, the highest cost within Europe. We are also at the end having a competitive pricing that we can offer for a high-quality airport with a very low minimum connecting time.
On the WACC calculation, the argumentation is a little bit more difficult because of course, on the one hand, the government doesn't want to set the precedent compared to other infrastructure industries. There is, for example, the power industry, where it was also obvious that if no countermeasures are taken to the negative interest rates in Switzerland on such calculations, it will at the end lead to a reduction in the investment capacity for such infrastructures. There, the question is how much we set a new precedent. On the WACC calculation, we also have to accept that this calculation has not been changed by the FOCA, but this is a consequence of the negative interest rate. I think on the adjustment, the argumentation is quite clear. On the WACC calculation, it's a little bit trickier.
Let me answer the question on CapEx. We are not guiding in particular on the base of the cash flow statement, but one can say that the CHF 350 million-CHF 400 million CapEx is purely for Zurich. As we are guiding a CHF mid double-digit million amount for concession accounting, which is basically the investment in the international activity. It would be a fair assumption to assume same amount than we had in 2018. Also answering the question of Johannes Braun, the difference comes from the CapEx in Zurich was CHF 50 million higher than the year before. The investing cash flow was CHF 100 million higher, the difference comes from the international project.
And-
Okay. Go ahead, yeah.
Thank you very much. This is very helpful. Just could I just add one small comment on a question on the CapEx of international. This CHF mid double-digit, should we assume that this will recur over the next three, four years, or is it mainly caused by the Florianopolis investment that you are making, we would only see it in 2019, after that it should decrease materially?
Yes, that's a fair assumption. The terminal in Florianopolis, where these investments are mainly coming from, will be completed in the third quarter 2019.
Thank you very much.
Next one on the phone.
The next question comes from Stéphanie D'Ath from Royal Bank of Canada. Please go ahead.
Yes. Good. Thanks for answering my questions. My first one is on the potential tariff cuts that you are facing for the next regulatory period. Assuming they do come down by your guidance, are you already discussing with potential new entrants that could be interested in opening new routes if your tariffs come down by that amount? My second question is regarding The Circle. The occupancy rate hasn't really increased, could you please let us know what you expect in terms of ramp up for the next 12 months? Do you still expect to get close to, I guess, 100% by the time you open it or not? Did you rent out some space yourself?
Thirdly, on the air side and the passenger, what do you need to have maybe more momentum in that number and for it to turn more positive or less volatile throughout the monthly data you publish? Thank you.
Let me start with your question, which I understand as is a 25% lower aeronautical tariff an incentive for new carriers to come to Zurich. If we want to find a positive element in this tariff discussion, this might be, yes. Obviously, I think the aviation market is a very long-term business, and our target there is to maybe increase the portfolio by one to two additional new routes, long haul routes in a way of balancing the growth of Edelweiss and Swiss together with the third party carriers. Which was true for last year with the two new Chinese carriers.
Honestly, I don't expect that a lower tariffs will increase in the attractiveness of carriers to fly to Zurich as there has to be a market for new destination, which is something that we are monitoring very carefully, but will not have a boosting effect in the year 2020 that we see plenty of new carriers from a competitive point of view by 25% lower tariffs. The spend per pax. Yes, on air side is decreasing. I think that mainly comes from, let's say, the population of our passengers. So the passenger mix. We have to be aware compared to, let's say, an emerging market where you have more and more people traveling, that we have basically in the local market, the same population that is simply traveling more and that has an impact on their spending behavior, especially on air side commercial activities.
As long as we have these relatively high growth numbers to us, it's quite challenging to increase the spend per passenger on air side. I think transfer is an important segment there where we do see disproportionately higher growth as well. Also the new duty free concepts on the air side, which we also have to focusing more a little bit on the transfer segment might help to turn the momentum that we currently experience on the commercial business, especially on air side. Maybe the last question, and Stefan please add your comments is on the pre-letting of The Circle. Yes, we are currently about 60% or we never expected to open on 100% pre-letting The Circle. We have always assumed a certain ramp up period, which is something that we consider as with the number and the size of The Circle is fair to assume.
I think rather than the absolute percentage number of pre-letting at the opening, the focus of the next 12 months has to be especially that whatever is visible from a ground level from the passenger flows is fully open and fully operating. Honestly, we don't see a pressure to fill in offices on the sixth or seventh floor by the opening when it needs more time to negotiate and having maybe a positive momentum as well with the opening of The Circle for the marketing there. The target is not 100%. We have always assumed also in our business plan a ramp up phase, and we will steadily increase that until the grand opening next summer.
I'm thankful the CFO doesn't set the targets to me. Of course, for the rentability, it's much more important to sign at the right prices. Nevertheless, I'm fully confident, even without target set by the CFO, that around 75%-80% will be full. The question is a little bit at which prices can we sign other contracts and what is the right timing? There we try to find the sweet spot between a vacancy rate and pricing for the space.
Thank you. If I may, just a quick follow-up on the airside retail. What are your expectations for the concession rates, please? My understanding was that new contracts would have been favorably impacting 2018, but 2019 a little bit as well. Given this other 100 basis point improvement, is there anything left from that to come? Thank you.
Well, of course, it cannot have the same impact that the new duty-free contract has because it's much minor space and volumes. We are still confident that with contract renewals on the retail units airside, we still have a little bit of room to improve the concession rate.
Thank you.
Next question.
Next question comes from Ruxandra Haradau-Döser with Credit Suisse. Please go ahead.
Good afternoon. First, some follow-up questions on The Circle. My understanding is that there have been some design changes. Could you please give us an overview based on current plans, what share of the building is dedicated to office space? What share of the office space has been rented so far by Flughafen Zürich, and what share of the office space has been rented by third parties? What share of the non-office space has been rented so far? If the renting level of The Circle was to remain at current levels, would you expect a positive contribution on group net income from The Circle during the first years of operation? Second, on the dividends, do you have some more details on your medium-term dividend policy after the funds out of which you are paying the special dividend will be exhausted?
Maybe can start with the confirmation that no design changes have been made to The Circle except the ones that we announced one year ago, that we have changed a little bit the level of investments of our side to the interior fittings in order to react to shorter-term orientation of the market, but we will recover this also on the rent side. I also can add that the overall office space within The Circle is around 70,000 square meters, and Zurich Airport has roughly 10,000 square meters out of these 70,000 square meters. Dividend, I hand over to Luka.
Yeah. Maybe to add, I think I understood the question also in terms of the timing and this is unchanged. We're still on track for a construction completion at the end of this year, and the opening has been expected and will be then in summer 2020. In terms of dividend policy, no changes so far to the policy. I think this communicated dividend policy, which includes the intention to pay also special dividend out of the capital contribution reserves, will allow us for, besides the proposed dividend, for an additional dividend for the financial year 2019, which is something that based on the annual result, we will decide next year. That capital contribution reserve is depleted. The decision on the adoption of a dividend policy will be made once we have more clarity about the upcoming charges period.
In general, I think the board of directors intends to pursue an attractive dividend policy even after the capital contribution reserves will be depleted. Let me also remind you that our profit, which has been the relevant base of our ordinary dividend so far, will be lower because of the tariff decrease and also more volatile in the future, because mainly of the increasing importance of the international business. One way could be that in order to, let's say, avoid volatility on the dividend, that decoupling of the dividend from the profit may be something that can be a next model for the dividend policy. Let's say in other words, that assuming a positive course of business, the objective could also be to have a small constant ordinary increase in the dividend rather than linking the dividend to a defined percentage number.
So far, no changes to the dividend policy, I just want to give you a little bit more insight of how we are currently thinking.
Thank you very much. Coming back to one of the questions, please. If the renting level of The Circle was to remain at current levels, would you expect a positive contribution on group net income during the first years of operation?
Yes.
Okay, thanks.
Clear answer. Next question.
The next question comes from Peter Testa with One Investments. Please go ahead.
Hi. I have a couple of questions, please. The first one, I was wondering if you could talk a bit about the peak capacity constraint question. First part being how the summer schedule growth looks based upon what you understand, and maybe the opportunity going forward to try to manage schedule, et cetera, capacity to try to improve availability and slots. Then the second question is allied to that point. When you take account of what sort of cost and CapEx flexibility you have to manage even an outcome in terms of FOCA in line with your request, not the original one, but just in line with your request, what opportunities you have on cost and CapEx, taking account of your comments on capacity. Thank you.
Okay. I take this question. On the capacity constraints, there is a European dimension and there is a Zurich Airport dimension. On the European dimension, I think this summer again will cause problems. We have seen last year that Zurich Airport, in terms of delays, was better off than most of the other Lufthansa hubs. Within the European situation, we are doing fairly good. The specific Zurich Airport dimension is that we have certain weather conditions, especially when we have wind from the east, where we have currently procedures with which we have to reduce the capacity. Here we are working politically.
We got the political decisions that we can change these concepts. We now have to go through all the legal proceedings till the last court. We are confident that we will achieve this. It will take time, obviously, because you always have people who go all the way they can go on a court level. At the same time, we also have got political support for other minor adjustments to better separate landings and starts in the evening. Our long-term strategy is from 66 movements today, instable at certain weather conditions, to reach 70 movements per hour at all weather conditions in the next 10 years. With the 70 movements per hour and our wave system, we are confident that we can reach approximately 50 million passengers, and we expect this capacity to be there somewhere between 2030 and 2040.
Somewhere in 2040, we will reach our saturation level in terms of passenger capacity. Now, coming to your question with the CapEx flexibility, also in relation to the tariff issue. We, of course, in such a constrained system as we have here, we can do an enormous investment on certain infrastructures on ground to reach maybe one or two movements more per hour, like a rapid exit or avoidance of a runway crossing. Of course, if at the end we have a tariff regulation that makes it, for us, viable to invest in the infrastructure, even when we get only one or two movements per hour more, then we will do it.
With low WACC, of course, we will do less of such investments that give only a very small of additional capacity on movements, for example, or that have a high cost without any positive impact on the non-aviation segment. It's probably more on a high number of small issues that we will feel the impact than on a large renewal as, for example, now with the baggage sorting facility. If we want to grow this airport to 50 million, of course, we have to ensure that baggage works also for this size. We have to make sure that our key processes for the passengers are adequate for this size.
There we will not change, of course, the investment program, but we will change it on issues that either have a bad relation between additional capacity and investment or that at the end are profitable for the overall system, but not specifically for Zurich Airport.
Okay.
C ould you also comment on cost flexibility, please, under the scenario that you're requesting from FOCA? With cost flexibility, you have to manage that. CapEx is basically the only leverage we have to mitigate an unfavorable outcome of the regulation because the regulation basically is a cost-plus model. If you are lowering your costs, this will even lead to a higher decrease of tariff. That's why the focus from a financial point of view is on CapEx. There, as Stefan has correctly mentioned, there are three areas which are the investment in peak capacity, which has only a limited benefit to the airport. Life cycle investment is the second pillar where it can be postponed. That's mainly a question of the quality, which in my view is not in the interest of the airlines and the regulator as well.
The third element on CapEx is also in particular on car parking, as there we are facing an imbalance of risks and chances when 75% of the economic value is skimped off for cross-subsidy. In a cost-plus model, you have limited room to maneuver for cost measures.
Okay. Thank you very much for the answers.
Next question.
The next question comes from Jenny Ping with Citi. Please go ahead.
Hi. Thank you very much. I've got two questions. Just firstly, on FOCA's decision, let's say if they were to stick with what their current proposals are, which you obviously disagree with, is there any appeal process, whether it's with the current government or at the EU level that you can go through? Secondly, following on from that, just on the duration of the regulatory review. Obviously, currently we have a four-year cycle. If you do end up with a very tough regulatory review outcome, what flexibility do you have on that four-year regulatory duration, please? Thank you.
Yeah. To the first question, first, I think it's important to understand that the current proposal is from FOCA, and the final decision will be made by the Swiss Council, the overall Government. It's a different body. That's the positive thing. The negative thing is there will be no appeal possible against then the decision of the overall Swiss Government. We better make sure the right regulation comes out. On the duration, at the end, the length of the period is not affected. This is 4 years foreseen. It's not mandatory that it has to be 4 years. It could be also done differently. It will form part of our analysis with which proposal we want to go in the next period. From a, call it stomach perception, it's in the interest of the capital markets to have clarity on the tariffs.
We think it's not so bad to have a 4-year period also there.
Thanks.
Okay. Next question.
The next question comes from Albert Pranger with Kempen. Please go ahead.
Thank you, gentlemen. I was just wondering a bit more on the commercial activities. Especially if we look at the land side, development has been relatively weak in terms of turnover. Are there any particularities we should be aware of? Is there something particular going on, or is it just a general economic flow? Are you engaging in any activity to reverse that pressure you see there? Second, could you provide us with an update on the Brands & Dialogue module of The Circle? Because I remember that you reserved roughly 20,000, 25,000 sq m of space for that, if I am not mistaken. I was wondering whether we could see some progress there as well. Thank you.
Yes. Your question on land side commercial development, which was negative in particular in February this year. I strongly recommend not to try to build a trend from individual months that can always be like a shift in weekends, in bank holidays, construction work that affects a single month. In general, one can say that land side commercial business is progressing compared to the tough retail environment in Switzerland, is developing quite well. I think we are here at the point where we might see stable turnovers going forward, but still the possibility to increase our revenues of the turnover-based rents. That is what Stefan has mentioned in his presentation. I think that is true also for 2019, where in the normal portfolio management of contracts, some contracts have to be renewed.
Also keep in mind, I think that is something that might be a little bit underestimated, is that next year about 6,000 more employees will be at the airport when you open The Circle. This has also a positive impact and a good impact on the momentum of the land side commercial business.
At the end, we have to accept that retail is in a transformation from a shift to online. We try to address this transformation proactively because we are convinced that you will still have the need to show products, especially higher categories physically, and you will do this at less locations in a more premium environment. That is very much the focus also of Brands & Dialogue within The Circle, which will form one unit to the commercial area on the land side of the airport, which will also have synergies and mutual contributions, of course. In Brands & Dialogue, we also create rooms for new categories like car or technology, which in a classical shopping center configuration would not have space. Overall space in Brands & Dialogue is about 20,000 sq m, also about 60% rented out.
From a pure revenue perspective, we have rented the key brand units in the center of the area where you, of course, have the higher revenues. In terms of revenues, it's even a higher portion that has been rented out. Even on the Brands & Dialogue, when we have our discussions with the retailers who are all in big transformation, I think we very much address their transformation challenges with the configuration we have set in The Circle. Of course, they have pressure. They have to reduce shops. They have cost pressures. We try to convince the right ones from them to reduce shops, but increase one at the airport.
Great. Thank you.
Next one.
The next question comes from Andrew Lobbenberg with HSBC. Please go ahead.
Oh, hi there. I'm sorry, I know this is going to come back to a previous question, and it's certainly me being stupid, but I want to understand how you can work with, in the context of the negotiations with FOCA or indeed moving on to the government, how you can use cutting CapEx successfully as leverage. Because when the government's looking at your role as a concession holder, they want you to provide aviation infrastructure for the country, and therefore, surely they want, for goodwill, to have more CapEx rather than less in terms of developing infrastructure. In the earlier answer, you spoke about how you'd be looking to reduce some investment because of low WACC, because that means there's less return.
Yet, when you spoke about the controversial aspect of the FOCA proposal, it's all about the change in dual to single till, and it's not actually about WACC because you're accepting that interest rates are lower. I don't see how it can be an effective negotiating tool. Sorry, it's me being thick, I'm sure.
Well, it's probably not the right forum to outline negotiation strategies here, but what is very obvious is that by setting the regulation, you also define how much CapEx you trigger at the end of the day. The government has to have the interest to have an attractive regulation if it wants to trigger investments in its infrastructure, especially in a situation like in Zurich, where you have, not the concession, but ownership of land and infrastructure with the airport owner. Lukas, want to add?
No, I think we are not disclosing our tactics there in detail. Maybe your second question was in terms of the lower interest rates, which are lower, and this is something that we are agreed to. As we see from other regulators at other industries such as utilities, that at least there are regulators that taken the negative interest environment to think about more creative models to calculate the allowed returns than the ones which have been valid for the last 50 years. I personally simply think that this is something that the regulator has to address, which is something that we are missing, but we see also other regulators following this discussion. I think that's also a good argument towards our regulator.
Okay for you, Andrew?
Well, yeah, I mean, it's a complicated and confusing situation, isn't it? We'll see what comes. Thanks.
Thank you. We try to clarify it by the mid of the year.
Yeah.
Next question.
The next question comes from Oriana Bastianelli with Kairos. Please go ahead.
Hi, good afternoon to everybody. I have one final question, which is related to your capital allocation policy. If you plan any update for the market, especially once the final outcome on the regulatory review will be known, and if you have already some initial thoughts that you can share with us. Thank you very much.
A very general answer first is that, we are now in between this release draft stakeholder involvement that has been completed last year and the decision we are going to expect in summer. I think a lot of thoughts have been made, but are finally depending on the final outcome of the tariff negotiation. If it's an unfavorable outcome, this will raise the question of capital allocation, definitely. I think it's too early to go through scenarios until we know what the final outcome is. Behind the scenes, we obviously work on those thoughts.
Thank you.
Thank you, Oriana. Next one.
We have no more questions at this time.
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