Ladies and gentlemen, good morning or good afternoon. Welcome to the Flughafen Zürich AG half year results 2018 conference call. I'm Sherry, the conference call operator. I would like to remind you that all participants will be listening on remote and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to join operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Stephan Widrig, CEO. You will now be joined into the conference room. Thank you. Ladies and gentlemen, please hold the line. The conference will begin shortly. Thank you.
Ladies and gentlemen, welcome to the presentation of our company's half year results, 2018 at Zurich Airport. I also welcome the attendants who are connected via phone and would like to remind these that the analyst presentation is available on our webpage, zurich-airport.com. My name is Stephan Widrig. I'm the CEO of this company, and I will host the presentation along with Lukas Brosi, the company's CFO. I will start with a business update and give you some insight on strategic topics 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. Between January and June 2018, 14.6 million passengers used Zurich Airport as their departure, transfer, or destination airport, representing an increase of 6.4% compared with the prior year period.
Total revenue increased by 10.5% to CHF 540 million, with both aviation and non-aviation on a positive trend. The half year results in 2017 as well as in 2018 have been impacted by one-off effects, whereas the divestment of the remaining shareholding in Bangalore boosted the profit in the last year. A provision for additional costs for sound insulation measures reduced EBITDA and profit in the first half year 2018. I will explain the nature of this one-off effect in more detail in a second. Excluding one-off effects, EBITDA rose by 9.4% to CHF 297 million, and profit was up by 16.6%, CHF 230 million. CapEx amounted to CHF 109 million in the first half of 2018. Let's have first a closer look at the aviation business. The increase in passenger volumes divides into a 6.8% growth in the local passenger segment, while transfer passengers were up by 5.4%.
The proportion of transfer passengers declined from 28.7% to 28.4% over the prior year period. The number of flight movements climbed by 2.4%, 234,000 takeoffs and landings. Compared with the prior year period, the volume of freight handled at Zurich Airport increased by 5.4%. In June, the Federal Office of Civil Aviation, our regulator, announced a selective revision of the ordinance on airport charges. FOCA is planning to make some minor amendments and adjustments to the structure and the procedure for setting the charges, which we all welcome. However, they are also considering to increase the transfer payments to cross-subsidize the cost of the aviation segment. This mechanism is part of the adjusted dual-tier structure of the regulatory framework in Switzerland. Public hearings on this matter will start at the end of this year, with a final decision of the government expected in the first half of 2019.
We will argue for leaving the adjustment at the current level. Should the regulatory framework be adjusted in an unfavorable way for us, countermeasures, as for example, a review of the CapEx plan have to be considered. As per the current timeline of the FOCA, the revised ordinance is expected to come into force in summer 2019, just ahead of the renegotiation phase for the next regulatory period. The latter will start in 2020. Due to the increased traffic volumes on the one hand and the impact of constantly falling interest rates over the past years on the other hand, the tariff reduction had to be expected in all scenarios for the next regulatory period. We expect charges to be unchanged until an agreement for the next regulatory period is found. As mentioned at the beginning, the enhancement of the sound insulation program negatively impacts our 2018 figures.
Flughafen Zürich AG is required to implement sound insulation measures in the area where it claims exemptions from noise emission limits. In the context of the updated Sectoral Aviation Infrastructure Plan, the SAIP, which allows us to increase capacity, the area with exemptions is also to be extended. The provision for further costs of CHF 60 million with a present value of CHF 57.6 million was recognized in this context as at the end of June 2018. It's important to highlight that this one-off effect is valuation neutral, as all noise related costs are refinanced by dedicated noise charges and fully covered by the Airport of Zurich Noise Fund. The total estimated cost for sound insulation and resident protection now amounts to CHF 400 million. Furthermore, two rulings by the Swiss Federal Supreme Court enabled us to undertake a reappraisal of the outstanding cost of compensation for formal expropriations.
This type of compensation payment reflects the minor value to property owner because of aircraft noise. Based on the recalculation in the first half year 2018, the total cost expected in relation to formal expropriations decreased by CHF 34.5 million to CHF 350 million. This change has no impact on the income statement, as the intangible asset from the right of formal expropriation was reduced by the same amount at the same time. Formal expropriations are also financed by the noise fund. The earmarked noise fund is well-equipped and future financing secured. Shareholders are not affected by payments or returns of the noise fund. I will now move on to the non-aviation business and share some insights on the commercial business, followed by an update on strategic projects. To start with, I would like to highlight certain characteristics of our two centers here at the Airport of Zurich.
The first one is the airside center. It's approximately 14,000 sq m of floor space, mainly for tax and duty-free operations, travel retail brands, and food and beverage. The airside center is only accessible to passengers, hence there is a high correlation between passenger numbers and commercial turnover. The second one is the landside center with some 19,000 sq m of floor space, mainly for grocery stores, retail shops, and restaurants. The landside center is publicly accessible, open on Sundays, and mainly frequented by visitors, commuters, employees, and meeters and greeters. Public holidays, for example, Easter as well as Whitsun or Sundays in general, generate high sales. Therefore, changes in the timing of public holidays or weekends may distort the monthly performance of a single month.
As a result of the different dynamics and characteristics of the two centers, we intend to focus in our reporting on the spend per departing passengers on the airside center going forward, which will make our performance better comparable to other airports and previous periods. I will now share a detailed overview on the commercial performance for the first half 2018. Total sales for retail outlets and restaurant operators at Zürich Airport amounted to around CHF 285 million, an increase of 4.5%. Thanks to rising passenger numbers, airside turnover was up by 7.9% during the first half of the year. All the restaurant units, and especially the watches and jewelry segment, recorded above average growth. Following the remodeling, the duty-free stores in the central departure and arrival area have had a good start with the new shop concept. With a negative 0.2%, landside turnover was roughly at previous years' levels.
Owing to the expansion of the baggage sorting system, one large landside restaurant closed its doors at the end of last year. This closure was not immediately offset by new offerings. Whereas the food retail segment saw a reasonable growth in the other units, other shops, in particular fashion, continued to suffer from the increasing competition of online shopping. The average concession rates are on increase of 0.8 percentage points to 21.5%, boosted in particular by the new duty-free contract. Our large mixed-use real estate project, The Circle, is progressing well. The shape of the buildings gets more and more visible.
It is widely seen as a pioneer project in how to create a vibrant real estate platform at airports for an increasing demand of users from hotels and offices to health or new retail formats. It exploits the location potential of airports due to its perfect connection to all means of transport. While no new major rental contracts have been announced since spring, negotiations are progressing well with a constantly increasing number of interested parties. We perceive the market reception as very positive and also the envisaged pricing as adequate and accepted by the interested tenants. Construction cost forecasts have also been stable and unchanged since our last public update was announced. Same holds true for the timeline, where everything progresses according to the plan, with the public opening planned for 2020. Long story short, The Circle is on track and all stable.
In 2017, Flughafen Zürich AG was awarded the concession to expand and operate the airport in the southern Brazilian city of Florianópolis. We took over the operation of this airport in January this year. 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. Floripa Airport also benefited from the favorable market conditions and secured a 300 million Brazilian reais financing. The debt financing was secured earlier than initially anticipated, leading to slightly higher financing costs of approximately CHF 2 million in 2018, which we now have included in the profit forecast. Besides Latin America, the development of our international business is focused on projects in Europe and 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 when they arise. With this, I'm handing over to Lukas.
Thank you, Stephan. Good morning, ladies and gentlemen. Welcome also from my side. I will now give you an overview of the financial performance of the company. As mentioned before, the total revenue increased by 10.5% to CHF 540 million. I will give you some more color on the subsegments on the next slides. As indicated at the beginning of the presentation, the half year results in 2017 as well as in 2018 have been impacted by one-off effects. Whereas the divestment of the remaining shareholding in Bengaluru Airport increased the figures below EBIT by more than CHF 30 million last year, the provisions for additional costs for sound insulation measures had a pre-tax impact of nearly CHF 60 million on EBITDA level in 2018. The detailed figures are shown on the slide. At CHF 239.6 million, EBITDA is below the prior year figure.
Adjusted for the provision for sound insulation measures, EBITDA improved by 9.4% to CHF 297.1 million, representing an adjusted EBITDA margin of 55%. After deducting amortization and depreciation, EBIT was at CHF 115.8 million. Adjusted for the one-off effect, EBIT improved by 14.6%. Profit in the first half of 2018 amounted to CHF 84.5 million, down CHF 58.7 million from the prior year period. When adjusted for one-off effects, profit increased by 16.6% or CHF 18.5 million. In the first half of 2018, passenger-related charges increased in line with passenger growth by 6.5% to CHF 206.1 million. Flight operation charges grew by 4.1% to CHF 66.1 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, which increased by CHF 0.7 million to CHF 34.6 million, is attributable to volume effects.
In sum, aviation revenue rose by 5.7% to CHF 309 million. Overall, non-aviation revenue increased by 17.7% to CHF 231.2 million. Commercial and parking revenue grew to CHF 117.5 million, an increase of 5.6%. In particular, this was due to the higher revenue achieved from retail, tax and duty-free, plus food and beverage of CHF 4.8 million. International revenue saw the biggest increase, mainly due to the full consolidation of Florianópolis Airport. Revenues increased by CHF 27 million to CHF 31.9 million. This includes CHF 8.8 million for construction projects under concession arrangements. Let me remind you of the so-called concession accounting rules. According to the international reporting standards, CapEx in our 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. Let's switch from revenues to the development of our cost base.
Personnel expenses rose by 5.5% to CHF 103 million. Besides a small increase in Zurich, this is mainly due to consolidating the personal costs of the international holdings. Despite much higher passenger volumes, the cost for police and security rose by only 0.5%. The total operating expenses rose by 38.4% to CHF 300.6 million in the first half of 2018, in particular because of the expansion of the sound insulation program. After adjusting for this one-off effect, expenses rose by 11.9%, primarily due to setting up operations in Florianópolis. This increase includes the already before-mentioned CHF 8.8 million for construction projects under concession arrangements. Operating expenses in Zurich increased by 1.9%, considerably lower than the growth in traffic. Please let me now outline some key figures. Net financial debt, excluding the Airport Zurich Noise Fund, stands at CHF 670 million, leaving the net debt to EBITDA ratio unchanged at 1.1 times.
The return on investor capital on a 12-month rolling period is at 8.5%, up by 0.1 percentage point compared to the prior year period. Although the operating cash flow was more or less on par with the previous year, the free cash flow declined by CHF 31 million because of higher CapEx. Let me give you some additional information on CapEx. In the period under review, we invested CHF 109 million in ongoing projects. This includes, in particular, the investment in The Circle of CHF 36.4 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 cost will amount approximately CHF 470 million, with an expected completion of the project in 2025. An additional 200-meter long multiple entry access taxiway is being built for runway 16 at Zurich Airport.
Aircraft will then be able to line up more efficiently when taking off from this runway, which in turn will improve punctuality. Two high-speed taxiways are also being built for runway 28 on the western side of Zurich Airport. The first high-speed taxiway is expected to be completed by November 2018 and the second one by June 2019. High-speed taxiways allow aircraft to exit the landing runway more rapidly and so release it to the next aircraft more quickly. Let's move on to the outlook. The growth in traffic volume is based on a healthy mix between home carrier and foreign network carriers. Five new long-haul destinations departing from Zurich have been added to the summer flight timetable. Chengdu and Shenzhen in China, Denver and Philadelphia in the U.S., plus the Seychelles. In addition, the number of flights to San Francisco and Vancouver are stepped up during the main season.
Edelweiss announced an expansion of its fleet by three new Airbus A320s, bringing its fleet to 15 airplanes at the end of 2018. The carrier will expand its long-haul network with flights to Colombo, Ho Chi Minh City, Varadero, and Buenos Aires as per the upcoming winter timetable. These developments enhance Zurich's attractiveness as a place to live and work, boost tourism, and provide businesses with faster and better access to new as well as existing markets. Let me finish with an update on the guidance for this year. For a better understanding, we show the 2017 reference numbers on the left-hand side. Flughafen Zürich AG expects passenger growth of around 6%, with local passenger growth outperforming the increase in transfer volumes. Aviation revenues will be increasing on the back of passenger growth, and non-aviation revenues will benefit from new commercial concepts and our international activities.
International business will be the main driver for OpEx as well. 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 years, the headcount will slightly increase. Please note that non-aviation revenues as well as OpEx will be impacted by the already mentioned concession accounting. This impact is EBITDA neutral. Factoring out one-off effects in the financial year 2017 and any one-off effects during the current year, EBITDA is expected to be 6%-8% higher, whereas net profit is expected to be up between 10% and 12%. Because of the before-mentioned higher financing costs in Brazil, we expect this profit growth is disproportionately lower. Lastly, the company has earmarked around CHF 300 million for investments.
In addition to various work to maintain the value of the airport's infrastructure, the biggest investment volume of around CHF 120 million is for The Circle.
With this, we would like to conclude the presentation. We now open the Q&A part of this presentation with questions of the attendants 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 introduce yourself with your name and your company before asking your questions. Participants in the room, please use the hand microphone.
For questions, turn one.
Good morning. This is Wolfgang Burger from Bank Vontobel. I have three questions from my side. The first one is on the whole regulated business. Here the FOCA is in progress and is currently doing the revision of the framework. Here, you mentioned if the process would turn out more negative, as you initially expected, you would also adjust your CapEx. Here, which CapEx could you cut in case the exchange, the increase, basically, in this transfer payment to the regulated asset from the non-regulated asset would exceed your initial expectations? Is there a risk that basically other charges would be adjusted as well? The second question is with regards to your OpEx. Here, if I exclude the impact from the noise from IQ rising underlying growth in OpEx of 1.9%. Here, particularly personal expenses increased 5.5%.
Would the headcount increase relate to the next CapEx cycle? You mentioned this. Has this now been completed, or do we see a sequential increase again? My question is basically, will we see the operating leverage, where we have very strong track record again next year? Maybe the last question just on your international business. Here you mentioned your office in Asia, versus full year results. You mentioned you already have a pipeline there. Has this pipeline been increased? Are there more basically projects in the pipeline, or can we expect closing there anytime soon? Thank you.
With regard to your first question of the link of the tariff regulation and CapEx, there I think the main focus would be to review again CapEx investments, especially on stands and taxiways, partially runways, that have a large civil works proportion and that we do for very few movements per hour in the peak. I think there, depending on the regulation, we could react on the CapEx front with sizable investments on the civil works side to compensate the effects. I think with the terminal buildings as such, where we plan from currently CHF 30 million over the next 15 years to reach somewhere 50 million passengers, this should not be impacted because there it's mainly generated also by the commercial businesses in terms of revenues. The main focus would be on the, I would say, on the investments outside on civil works.
Your question regarding OpEx or in particular the personal expenses. I think, first of all, one has to distinguish between the impact of the international business and the cost development in Zurich in general. Cost development in Zurich was 1.9% total OpEx in first half year. In particular, the operating costs in relation to future larger projects are impacted because we are in a very early stage of those projects. We are in a study phase where costs cannot be capitalized under the accounting rules. I would say that whatever belongs to the CapEx program going forward in terms of operating costs can be capitalized once we are closer to the realization of those projects. I expect a slight increase in personal expenses this year in Zurich, but definitely disproportionately lower than the volume increase, obviously.
On the international business, we have opened the Asian office, it is correct. We are following different projects also, I would say, in an early stage. In concrete, the one project that is, I would say, the closest to realization is on the Philippines. We are following a project near to Manila, which is Clark Airport. Other opportunities, which are not disclosed in detail, but are also in, let's say, the earlier stage than the one mentioned.
Maybe one additional side note on the OpEx in Zurich. I just want to mention that the Zurich OpEx grew by 1.1%, with the growth in passengers. I think we did to the plan of keeping a very cost control. That of course applies also for the future. If you look at the performance of the first half-year, I think this is also quite a good achievement with these passenger volumes.
Hi, good morning. It is Ashika from Barclays. Two questions as well, if I may. The first one on growth. I think the slot restriction is coming towards an end now. So I just wanted to ask about your medium-term growth outlook. Is that restricted to the number of movements in the airport, or is there still a load factor opportunity? Do you know, for example, what the average load factor at the airport is currently, and if there's room for upside there? My second question is also around the regulatory change. Do you have a sense from the regulator what that 30% could go to? Is there a range yet that they've guided towards in terms of where that cost subsidy might move? My final question is on Brazil. I think in previous presentations you said that you expect Brazil to be a positive contributor to profit this year.
You mentioned the higher financing charges. Clearly, there might be a currency impact from the real. Is that still the case that you expect Brazil to be positive from a profit point of view this year? Thank you.
With regard to your first question on the growth. In Zurich Airport, we would currently have about 66 movements per hour that we can do in a peak hour. With all the political decisions that have been made, we are confident to be able to increase this to 70 movements per hour, both in the daily concepts when we have landings from the north, as well in the evening concepts when we have landings from the east. It will still take a few years till all the legal measures have come to a conclusion.
You have some people who take it to the Supreme Court, but I think the decisions that have been made by the right political bodies are in a way that we think it's robust enough that we will achieve these 70 movements per hour in full concept at all weather conditions over the next 5 to 10 years at Zurich Airport. If we transform then the 70 movements an hour with a mix of wide bodies, narrow bodies in a similar way as we have it now with a home carrier, but at the same time also with a competitive set-up from low-cost airlines. We believe that we can manage approximately 50 million passengers, and we will achieve this somewhere in the next 20 years.
Difficult to predict, of course, depending on macroeconomic levels, that's then where with the current political decisions, we would have a saturation reached at these 70 movements per hour and 50 million passengers.
Okay, regarding your second and third question. The regulator, the FOCA announced that it's currently assessing whether the transfer payment has to be adopted or not, has not in concrete mentioned a percentage number. Obviously, the correction will go upwards, therefore we are simply not able to give you a more precise guidance on that. For Brazil, we are not disclosing the financial numbers on individual assets, but overall, we expect a positive contribution on EBITDA level of about CHF 50 million that year from international business, which obviously the majority comes from Florianópolis. The financing cost is announced about CHF 2 million, as we heard during the presentation. Carving out the volatility on the reais, I would say Florianópolis is able to provide a positive contribution, which is impressive in the first year of the concession.
Obviously, we have a lot of uncertainty regarding the developments, looking at the upcoming votes in Brazil, et cetera, in terms of the currency. Whatever belongs to the cross-currency risk from consolidating the asset, this goes in equity and not directly into P&L.
Next question in the room. No more questions in the room, we move on the questions on the conf call.
The first question from the phone is from Vittorio Corelli, Santander. Please go ahead.
Yeah, good morning. Thank you for receiving my question. First is related to the operating cash flows, which looks to be flat despite the EBITDA improvement on a like-for-like basis. I notice higher cash taxes and a visible impact from liability. Just more color on this trend. Duty free. I noticed that the underlying spend per pax should be almost flat despite the refurbishment of the area in the Zurich terminal. Can you explain what is happening there? Why is not, in this case, working the new layout? Just a confirmation on the dividends, the net profit outlook 2018, like for like should be up a double-digit. Should I wait for a dividend growth of a similar amount?
Thank you. The CFO takes the big folder. I start with the question on duty free. On duty free, you have to see that the, again, very comfortable growth we had this year, of course, was mainly triggered by Swiss leisure traffic or general leisure and tourist traffic more than business traffic. It's known that leisure traffic makes less spend per pax here in Zurich. The growth of course has not been exactly along the passenger growth because the mix has shifted a little bit more towards the leisure traffic and this has then also, if you just look at spend per pax, has an impact. If you look at the absolute figures, of course, the growth has been also quite well.
Buon giorno, Vittorio. Dividends obviously will be decided next year in the shareholder meeting, but from today's point of view, I can confirm that there will not be adjustment so far to the dividend policy and also the one-off effect of the increased sound insulation liabilities does not affect the underlying profit number for dividends. Your questions regarding operating cash flow. Well, this is mainly attributable to the shifts we had in relation to also the increased liability for sound insulation. I recommend you to stick to the annual or to the half year results on page 21. It has to be completed that this is also impacted by the one-off effect in the two periods we are comparing. The underlying EBITDA growth leads obviously also to a higher operating cash flow than factoring out all these effects.
Yes, just to follow up on the cash flows. I mean, this one-off is not cash, so you have a lower net income, and then you have the equal adjustment a few lines below. This should not be included in the cash flow calculation. Is that correct?
Let me check, and I answer to your questions later on in the call.
Okay. Grazie. Thank you.
Next question on the conf call.
Next question is on Johannes Braun, MainFirst. Please go ahead.
Yeah, hello. Thanks for taking my questions. I have three questions. On the potential change of the transfer payment potentially forced upon you by the FOCA. Appreciate we do not yet know how much the transfer payment will change, but can you give us a sensitivity what a 10 percentage point change of the transfer payment means in terms of aviation fees? How much will aviation fees change for every 10% increase in that transfer payment? Secondly, any news on Laudamotion? Are they planning to grow in Zurich anytime soon, or do they still lack aircraft? Thirdly, in the past you always mentioned easyJet as one of the major driver for capacity growth at the airport that was missing this time. I was just wondering if there are any change in plans by easyJet for Zurich.
I start with the second question. On Laudamotion or Ryanair, if you want. I don't think this will have a major presence in Zürich for various reasons. I nevertheless believe that Zürich is a very attractive market for the established low-cost airlines here such as easyJet, Vueling and Germania. The problem with the low cost here, of course, is with the slot constraint and with the night curfew, it's difficult to place additional aircraft here. We of course try still to have a few more slots for aircraft based in Switzerland with a full rotation. Mainly I think the growth of these airlines will be triggered by fleets they have based somewhere else and then they fly in Zürich and fly out again. This growth of easyJet last year has been quite sizable and has this year been held stable in their volumes.
We see also a continued interest of these, I would say, low cost airlines that fit to the Swiss and Zürich market as the ones mentioned before. Overall, of course our strategy is to keep a strong, healthy hub carrier here with Swiss and to grow their network as a medium-sized hub, as an intercontinental carrier with focusing also on a certain premium market. At the same time keep the competitive set on the European routes, and there also have this easyJet, Eurowings, Germania, and the like growing in a similar way as Swiss grows. If you look at the figures in first half-year of this year, this was very much done in this way, and we expect this to continue in the same way.
This is also our strategy, having a strong home carrier for intercontinental and having a good competitive set on European routes. Also quite special was additional long-distance routes, Lukas was mentioning. For example, San Francisco, we had previously only Swiss. Now we have with United the second carrier on the route that increased to the competitivity. Also Vancouver with Air Canada, for example, China with two Chinese carriers now flying to Zürich, with Edelweiss still increasing its network intercontinentally with Denver and Seychelles in the first half-year, and now in the second half-year with Buenos Aires and Vietnam. Very good developments, I think, on the network front in our perception and very stable on the current mix we have, and that works for Zürich.
Let me answer your questions regarding the sensitivities of the transfer payment. Well, obviously, we are not providing here detailed sensitivities, what I can give you as an idea or an indication is that at the end of 2017, this transfer payment amounted to 13 million, and by the half-year 2018, the number was even slightly lower. The transfer payment amounted to roughly CHF 12 million. I think you can do your calculations on that.
Okay. I'll try and see on Thursday.
Yeah. Next question on the conf call.
Next question is from Andrew Lobbenberg, HSBC. Please go ahead.
Oh, hi there. Can I come back on the airport charges? I think you indicated in your prepared remarks that under all circumstances, regardless of the outcome of the transfer payment debate, we should be working or assuming a reduction in fees. Are you able to offer any indication of the quantum of that just in terms of a range? Obviously, you can't be too precise, I appreciate that. On retail, you said that going forward, you would be focusing, I think your discussions on the performance of airside retail, so I think better comparability with other airports. What are we meant to think about what that means for the business of the landside? When it opens, how will you be presenting the performance of The Circle? Because that is effectively landside trading as well.
A third question on the airside retail, I think in response to a previous question, you were looking to defend the performance of the duty-free in particular being about flat. Compared to other airports who've reported recently, you're doing brilliantly. I was rather curious, rather than explaining away the weakening mix, I was just curious to understand why you guys doing so well compared to your peers around Europe.
That's good for a change to have such a comment in an investor conference. Thank you. Let's leave the CFO first answer on the airport charges question.
Well, for the time being, I think it's taken the major drivers for calculating the tariffs, which is basically the cost of capital, the estimated volume growth, but also the CapEx to be spent during a regulated period. I think one can confirm that obviously the cost of capital and the strong passenger growth leads to a decrease of the tariffs, which is basically what we expect for the next tariff period. For the time being, we are not providing more details on that as I think also the regulatory framework is under review. It makes it also hard for us to predict this impact in a percentage number for the next tariff period. For The Circle in terms of how we measure the performance, I think we currently setting up the reporting accordingly.
I think first step, as Stephan has explained, is to make also more visibility on the different dynamics on landside and airside, and The Circle obviously is closer to the dynamics on landside, which we then will adopt once it comes closer to the opening of The Circle.
We will still report the landside turnovers on a monthly level, but not show the turnover per departing passengers. With the mix of landside and airside, we will report the fixed revenues, rental revenues on The Circle. You have also a lot of fixed rental returns, as you do now at Zurich Airport. With regard to your comment on the performance in general, I would say this is mainly due to very strong macroeconomic conditions and purchase power in Switzerland. That probably merits more of this than our performance, but on the latter at least, what we have is now two commercial platforms that really work. Also on the landside retail, we can clearly beat the overall retail trend in Zurich because we have this commuter flow constantly increasing at Zurich Airport.
We are very comparable to a railway commercial platform for the domestic market. That's the only retail that really grows in Switzerland. With The Circle, I'm also very sure that we can, on the one hand, reach new segments such as cars or with the Iori brand house, it's more going from sales towards brand presence. Also with this watch house. At the same time become probably the number one commercial machine of Switzerland and Zurich, combining the landside retail and The Circle. This makes us also as a kind of flagship destination for brands to showcase their heritage. But this is more, I would say, a 5, 10-year development.
This is not really the opening of The Circle, if you just look at the platforms, how they are positioned, and how they are envisaged, and now it's visible, everyone would agree that we have a good foundation to also be successful in a new retail reality with online sales quite transforming the industry and making us changing from pure sales business, from pure turnover figures towards brand showcases and marketing revenues at the end. On that transformation, we are well ahead with our platforms towards the overall industry. At least that is a kind of merit. Otherwise, mainly the figures, of course, are triggered by Swiss purchase power and Switzerland doing very well macroeconomically.
Okay. Thank you.
Next question is a follow-up from Vittorio Corelli. Please go ahead.
Hi, good morning. Apologies for that. It's a follow-up on the regulation, right? Assuming that the scenario on the next regulatory period has changed in the possible contribution from the non-aviation business to the aviation business, assuming that all the rest of the elements are equal WACC, equal OP expectation and traffic growth, a higher contribution from non-aviation business should imply a higher drop in the aviation tariff. Is that correct?
If I understood your question correctly, your question is if the transfer payment is increasing to a maximum assumed that this lead to a higher drop in tariff.
Ceteris paribus. All the rest equal, obviously.
Yeah.
Yes. This assume a higher drop in aviation tariff.
Basically, the transfer payment, let's say if the regulator assumes as for 5.8% allowed return, this includes also the transfer payment, and the higher the transfer payment is, the lower is the, let's say, allowed organic return on the regulated business. Your assumption is correct.
Okay. Thank you.
Next question on the call?
There are no more questions at this time.
Please answer also the open questions from Vittorio in terms of the cash flow statement I dived into. Starting with an EBITDA excluding all the one-off effects we had in the previous year and in the current year, the delta is about CHF 25 million. The difference why we end up with the cash flow being net is mainly attributable to an increase in taxes and an increase of the net current assets. I think your question was also if the provision is non-cash, which is true. If this answer your question, then fine. Otherwise, please reach out to us after the call for going into more details.
Okay. Thank you.
We change to a final round of question in the room here, and we start with Mr. Rechberger. Mic, microphone.
Thank you. Landside, rather weak first half of year. What's your expectation there on retail? I mean, duty free and not duty free, on retail and restaurants and so on. The Philippines, you mentioned the Clark Airport near to Manila.
Do you expect a rather bigger investment or is it more management contract or what are your plans there? Car parking, an increase of only 2% versus first half of 2017. Why is that? I mean, you had local passengers grow stronger than 2%. I would like to have some more regarding The Circle office space development. How is the situation there? It seems to be rather tough now, the market in Zurich. It seems you see quite some interest in your spaces now.
Regarding retail on landside, I wouldn't agree to say it's a bad performance. Retail on landside was also impacted in the first half of 2018 by the mentioned closing of one of the larger restaurants, which has an impact on the numbers. Even considering this, compared with peers, we think that the performance is quite okay, and I think the right way of looking into the performance of both centers is whether we are able to increase also the concession rate, which was true, and in detail, also the revenues out of the sales on landside have been increased, which I think is the right way of measuring the performance from our point of view as the landlord of those centers.
On Clark, we are targeting a minority investment together with a financial partner and not give you an idea on the equity as this is something for tactical reasons we don't want to be too disclosed.
Car park revenues under the average growth, I think is also a clear indication that the growth is mainly triggered by leisure traffic, Leisure people don't really take the car to the airport the same way how business passengers would do. I think it's an indication. Overall, the profitability of the car parks is very good and strongly performing. We couldn't grow at these figures. We grow passenger-wise also with the car park for a long time. We still have the potential there to grow also on the pricing and on the product differentiation with flexible pricing also. We are quite happy. Of course, we can't grow in the same way as the passengers do because leisure traffic doesn't pay CHF 200 for a week of holidays for their car at Zurich Airport.
With regard to The Circle and your question on the office market, I think now with the project becoming visible, people really understand that that's not just an office building, but they rent office space in a vibrant platform with restaurants, with the hotels, convention, retail formats. We can more or less put on the market a product that is probably equally visible on the Zurich market as the Prime Tower would be. You have a flagship building, but with a much more diverse interior. This is I think an attractive proposition that we can differentiate from a pure office building somewhere in Zurich North. That's what we feel also on the reception in the discussions we have. The visibility of the building with construction progress really helps here also.
Of course, one problem also was in the initial marketing of the project that we, of course, looked for an anchor tenant taking a very large space, With the office market turning and with banks rather reducing, this was difficult to get this anchor tenant three, four years before the project. Now with one and a half years to go till the opening, of course, all the people that look for smaller space, 1,000 sq m, 2,000 sq m, for them now the window opens to look at new office, Especially for them, it seems to be a very good proposition.
It's probably looking ahead, rather not the discussion of having I mean, we have all the key anchor tenants in all the buildings, It's probably not so much the question of getting one big anchor tenant for one building, but it's more the question of getting 10 or 20 tenants having a few thousand sq m. Of course, they have a smaller timeframe. Now with the visibility and with the time for the opening, also these discussions can open, There we see a very good reception on the market. More questions in the room? Good. We are quite good in time, one hour. Haven't achieved this so far, but I think.
We take it as a positive.
Take it, yeah, as a solid, strong business performance in the first half year. Thank you all for attending on the call. Thank you all for coming. At least for the people in the room, we can offer some sandwiches in the back. I close the session here, and thank you for coming.
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