Flughafen Zürich AG (FHZN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the investor conference call. I am Alessandro, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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. Please go ahead, sir.

Ladies and gentlemen, for today, we had initially planned to hold an Investor Day, allowing our shareholders, analysts and banking partners to get the first look and feel of THE CIRCLE just ahead of the public opening. Unfortunately, the current situation does not allow us to welcome you all here in Zurich. And instead, we decided to provide you with a business update and further color on the impact as well as the effects of COVID-19. My name is Stephan Widrig. I'm the CEO of Zurich Airport, and I will host this call together with Lukas Brosi, our company's CFO. We will go over some topics of interest before opening the Q&A session. Let me start with a traffic update. For the last 2 months, international travel has come to a standstill in April and May. Zurich Airport maintained only minimum operations for certain destinations and airfreight. As of now, we can see that the slow recovery has started. In June, our home carrier SWISS serves again 41 destinations in Europe and 8 long-haul destinations. For the time being, the lifting of global travel restrictions is difficult to predict. Among Switzerland, Germany, France, and Austria, borders will be fully open again starting mid-June. Our current assessment is that within the Schengen Area, freedom of travel will be restored in early July, saving some of the summer holiday travel. Travel from outside the Schengen Area might open earliest in the course of July. We, therefore, assume point-to-point connections within Europe to be the first to recover, followed by long-haul destinations with strong demand from the local market. For connecting traffic, however, it will take more time to set the complex networks up again. Operationally, the airport is ready for the ramp-up. We are closely working together with our partners. Our focus here is on increased hygiene measures, optimal use of the infrastructure and where physical distancing is not possible, masks are highly recommended. Which traffic figures do we expect? While we do not provide a traffic forecast for 2020, we estimate in our base case planning to reach precrisis traffic levels in 2023. Traffic in 2021 is expected to be approximately 20% below precrisis level. Switzerland's government has decided to support the national aviation industry with guarantees of around CHF 2 billion. While we will not ask for state support ourselves, we support the package since it will provide the liquidity needed to weather the crisis for some of our key partners. Additionally, it reduces our counterparty risks and helps that SWISS and Edelweiss, our 2 most important airlines in Zurich, can resume traffic faster. The Swiss Federal Council tied one important condition to the state aid to Swiss International Air Lines. Lufthansa Group, the owner of SWISS, needs to make sure that the recovery at Zurich Airport will be at least proportional to the growth rates at the German hubs, Frankfurt and Munich. I change to the tariffs. Three months ago, we started negotiations for airport charges with the airlines for the upcoming regulatory period. Several important parameters such as expected traffic volumes, CapEx plans and the WACC calculation have changed. Due to the massive decline in volumes and the anticipated time needed to recover, a tariff cut as expected before the crisis does not seem to be appropriate anymore. We hope to find a favorable outcome of the negotiations with the airline within the coming weeks. Otherwise, we will prepare a proposal for future tariffs to our regulator, the Federal Office of Civil Aviation. Besides these current tariff negotiations, we are still waiting for the court decision regarding the regulator's announcement to cut the flight operation charges by 15% already this year, and hence, ahead of the end of the current regulatory period. The purpose of this tariff cut was to avoid an assumed return above the cost of capital according to the ordinance on airport charges. Given the prevailing circumstances, a tariff decrease has become obsolete, hence, a positive outcome on this court decision is very likely. I will now move on to our commercial business. Most shops and restaurants were shut down by the federal government mid-March. Some services picked up again at the end of April. And since mid-May, all shops and restaurants are allowed to be open again. As a result, in the publicly accessible landside commercial center, most units are operational again. The situation is slowly getting back to normal. Frequencies and turnover will recover with a certain delay since commuters are still lacking due to the home office rules still in place and the reduced workforce at the airport. For the commercial platform on airside, which is for passengers only, the situation will take longer to recover. As long as passenger volumes do not reach an adequate level, most commercial partners will refrain from opening again. We estimate to see a slow recovery on airside in the coming weeks with all shops open once around 30% of precrisis traffic is back and reduced opening hours until about 50% of previous volumes are reached. Commercial revenue will be impacted heavily by the current crisis. Instead of the usual revenue share payment, most trends will be based on the agreed minimum annual guarantees. The latter will not be charged during the lockdown period during which the government did not allow the shops and restaurants to be open, which was for roughly 2 months. For airside shops and restaurants, a partnership-based approach for the time with low passenger volumes has to be found case by case, where we aim for entrepreneurial solutions with mutual benefits for the partners and ourselves. Otherwise, the minimum annual guarantees will be charged fully for the rest of the year. Despite COVID-19, our large construction project, THE CIRCLE, is making solid progress, and there will be only a short delay in completion, mostly because of disruptions in the supply chain. Several tenants have already taken over their areas and the official opening of the public areas is now planned for November '20. The preletting rate of THE CIRCLE stands above 75%, and we are confident to reach 80% at the opening. We haven't had any cancellations or bigger adjustments to our contracts so far. And we feel very comfortable with the existing solid set of tenants. Real estate revenues in general proved to be the most resilient item in our P&L. The recently acquired real estate portfolio from Priora Suisse is performing according to our expectations, and we estimate additional revenues of roughly CHF 20 million per year. Our international ventures, though, are heavily impacted by COVID-19 as well. In our Latin American concessions, cost-saving measurements have been taken, and CapEx has either been reduced or postponed where possible. Furthermore, the Brazilian government proactively decided to postpone concession payments, and the state-owned infrastructure bank, BNDES, allows to delay interest payments and amortizations of loans, all helpful to preserve liquidity. We are also extremely happy that we were able to secure the long-term financing of the 2 new concessions in Vitória and Macaé just a couple of weeks ago. Despite the extraordinary situation, the new financing was granted at favorable conditions and without corporate guarantee for the first time for a Brazilian airport. Due to the travel ban to India, the concession agreement for Delhi Noida airport has not been signed yet and future milestones will be postponed accordingly. We are still convinced of the long-term growth opportunities of the aviation market in India in general, and this specific asset in the national capital area, in particular. The current delay helps to shift the major CapEx and also the start of the concession period, which is in our interest due to the current situation. The concession will run for 40 years. And with a growing and highly mobile Indian population, we strongly believe in the future market potential. To recap, for India, we have the obligation to build a new airport with an initial capacity of 12 million passengers per year. We currently estimate the total CapEx for this airport is around CHF 650 million and additional CapEx for further phases are purely traffic-driven and only required if traffic numbers exceed the designed capacity. This new asset in India is expected to contribute a low double-digit Swiss franc million to EBITDA already in the first year of operations. High EBITDA margins are projected, especially in the first 6 years of operations since the concession fee per passenger only kicks in 6 years after inauguration. Overall, we expect a low double-digit IRR in Swiss franc real terms. Geographically, we continue to focus on Brazil and India, where it's now mainly about implementing the existing projects. With this, I'm handing over to Lukas to share some details on financials and CapEx.

Thank you, Stephan. Welcome, ladies and gentlemen, also from my side. I will start with an overview of the financial situation. Obviously, the focus over the last weeks was on the liquidity situation of the company. During a month like April, with virtually no traffic and commercial centers in lockdown, the operating cash flow in Zurich, hence, before CapEx and financing costs, amounted to roughly minus CHF 15 million. Luckily, we renewed our credit lines at the beginning of the year at very favorable conditions, and we accessed the capital market for a Swiss-franc-denominated bond in February already. In March, immediately after COVID-19 started to spread out in Europe, Flughafen Zürich AG decided to fully draw down the credit facility as an immediate measure. On top of that, costs and investment savings in the amount of approximately CHF 150 million for 2020 have been immediately initiated in Zurich. Furthermore, in the sense of responsible corporate governance, the Board proposes to the upcoming Annual General Meeting not to pay a dividend for the financial year 2019. At last but not least, the company tapped the capital market again in April and raised another bond in the amount of CHF 300 million. All in all, the current cash position exceeds CHF 800 million as of today, and the next large cash outlay will be the repayment of a bond of CHF 300 million at the beginning of July. To summarize, liquidity of the company is secured. Let me share some details on OpEx and CapEx developments. Our business model is based on a substantial block of fixed cost independent of traffic volumes. This results in a high operating leverage, which is beneficial in times of traffic growth, but backfires in dire straits. Still, we managed to bring the costs down immediately by 10% to 15%, which represents the short-term flexible costs in our business model. On the one hand, we've applied for short-time work for the whole company as per the very first possible day in March. For those of you who are not familiar with this concept, if a company applies for short-time work, employees are still hired by the company, yet parts of the salaries are paid by the unemployment insurance. On the other hand, the temporary closure of part of our infrastructure enabled us to save utility costs and all general and administrative budgets have been cut as well. We are convinced that part of the taken cost savings this year will be sustainable until passenger volumes have recovered. Besides the savings in operating costs, the most effective way to preserve cash is reducing investments. We have carefully reviewed our CapEx portfolio and did our utmost possible to delay or postpone only those investments which will not cause additional costs at the time they will be resumed or no penalties would occur. We initially guided for CapEx in the area of CHF 350 million in 2020 in Zurich. Now we expect this figure to drop well below CHF 300 million this year. We are prepared for -- to further reduce our investments. However, such a next step could cause substantial higher costs in the future, and we, therefore, would only implement these additional savings if ultimately needed. In the medium to long term, we are still convinced of an increasing demand for air travel, on which we base the planning of the infrastructure at the airport. The list of core projects to make the airport ready to handle up to 50 million passengers in the future, those remain broadly unchanged, but the timing will change. Increasing the capacity at Zurich Airport step by step will still be needed, but especially capacity-driven CapEx will come at a later stage than previously planned. We are currently reviewing our CapEx road map to assess postponements and potential design adjustments over the coming years. In sum, the midterm CapEx figure for Zurich will most likely tend to be below the initial guided CHF 300 million per annum. Let me continue with some thoughts on capital allocation and the debt situation of the company. The current crisis clearly shows that the conservative balance sheet is essential to get through difficult times without the need to ask for state aid and without losing sight of long-term perspectives. For the last couple of years, Flughafen Zürich AG has maintained an attractive dividend policy, and we are still committed to do so in the future. For the next years, we stick to the current dividend policy, which means an ordinary dividend of approximately 40% of profit shall be paid out going forward. The distribution of additional dividends from capital contribution reserves will eventually still be possible in the coming years. Please be aware, as the corporate tax law in Switzerland slightly changed this year, that future dividends from capital contribution reserve cannot exceed the amount of the ordinary dividend. As always, decisions regarding dividends are subject to Board and AGM approvals. A new dividend policy, which we have initially planned to release in the course of 2020, will be postponed. Once back on track and with more visibility on the long-term financial impact of COVID-19 and the tariff situation, in particular, we will reassess the situation. The net debt position of the company will likely peak over the coming 2 to 3 years under the current assumption. As a result of tight cost control and CapEx control going forward, net debt-to-EBITDA should again normalize below 3x thereafter, including all the before-mentioned projects in Zurich and abroad and accounting for an adequate shareholder remuneration. Thanks to the rock-solid balance sheet, access to the capital markets will be guaranteed at all times. We usually conclude our calls by giving guidance for the current financial year. Today, there are still too many moving pieces, which prevent us from making an accurate guidance, although we can see light at the end of the tunnel. We will hopefully be in a position to provide a guidance for the financial year 2020 when publishing the half year results on August 21. With this, I'm handing back to Stephan.

Thank you, Lukas. We now open the Q&A part of this presentation. [Operator Instructions]

[Operator Instructions] The first question comes from Cristian Nedelcu from UBS.

Three, if I may. Firstly, in terms of the OpEx per month. So could you -- you made some references in your presentation, but could you please tell us what is the cash OpEx per month in April, May? And equally so, as you advance into 2021, you mentioned your base case scenario is for traffic 20% below '19 levels. How should we think in big terms at that cash OpEx per month? Secondly, looking at the dividend. I believe there was -- or there is a motion in Switzerland under discussion that potentially may mean dividends cannot be paid in 2021 for companies that use short-term working. Could you give us an update there? Was there any decision taken? Does that represent an issue for you potentially paying a dividend in -- for 2021? And lastly, if I may, looking at the retail spend per passenger, I guess on the one hand, we have negative mix from slower recovery in intercontinental. We have social distancing that might change a bit the behavior, the spending behavior, in the airports. So could you tell us a bit 2 things? Firstly, how you see the evolution of retail spend per pax going forwards in 2021. And secondly, is there any initiative that you're pursuing together with duty-free operators in order to stimulate spending? Either it is omnichannel approaches, apps or anything that would make -- would help retail spend per passenger?

Cristian, thank you for your questions. Let me start with answering your questions regarding the situation of a dividend and once short-time working applies. The parliament has voted against this restriction on dividends for company on short-time work. So this will not affect our dividend policy going forward. In terms of OpEx, you asked for particular numbers for the lockdown periods. In general, as we are not guiding for the financial impacts in 2020, in general, we are not giving more color on individual monthly numbers, but one can say in terms of the cost savings that despite the fixed cost base we have, we managed to achieve savings of about 20 to -- 10% to 15%, and this was taken immediately, meaning starting in beginning of March. In absolute terms, the saving amounts to around CHF 50 million for the full year in Zurich. And once again, and I think that's also important, looking into the next year, I'm convinced that operating expenses remain below precrisis level during the ramp-up phase, and we use the crisis also to become more efficient. And your last question was on the spend per pax. I think there, special focus, as we have explained, is on airside where we really faced a challenging situation of basically the shops have to be opened. We have like a basic offering starting mid-June once we expect volumes to increase. This basic offering includes duty-free and most takeaway catering. This is guaranteed from ourself, and then the most shops on airside and restaurant will be open from the beginning of July. Obviously, I think the commercial partners and ourselves were mostly focused on -- go through the crisis before. Now we can discuss with our partners concrete steps also to, let's say, stimulate the spendings. But first, we have to go, let's say, through the minimal operation phase. And once we see that volumes are coming back, this is obviously something that we need to discuss with our partners.

Maybe to add 2 things to Lukas. You asked also for the cash burn in April, May for the company. This was around [ CHF 15 million ]. And with regard to the spend per pax, maybe a little bit further ahead 2021, with the 20% less traffic, as indicated. And since the minimum annual guarantee is, in general, about 80%, we are pretty confident that next year, definitely, the MAG will give a guarantee that the retail revenues will not go below even if consumer mood will not be that well.

The next question comes from Patrick Creuset from Goldman Sachs.

Thank you for the comprehensive update. I've just got 2 further questions, please. The first one is when you say the tariff cut is not appropriate anymore, is this just your position at this stage? Or do you now think this is basically the consensus across the key stakeholders on the tariff reset? And do you expect to be able to maintain pre-COVID tariffs essentially for full regulatory period of 4 years or just a 1-year reset? Second question is on the greenfield you won in India last year, which obviously was calculated on pre-COVID traffic assumptions, and you've just laid out how you think traffic will be substantially lower than previously assumed, you've canceled the dividend this year. Can you perhaps take us through your reasoning on going ahead with this investment? Will you perhaps attempt to renegotiate the concession terms to something that's more favorable in the lower-traffic environment? And will you retain the option to back out of the agreement as you've delayed the investment?

Thank you, Patrick. First, on the tariff situation. We are convinced that the tariff cuts, being in the massive crisis for all the industry partners, we are convinced that the tariff cut in the magnitude that we have expected before is not appropriate anymore. And I think there, clearly, our advantage is that we have a concrete framework how tariffs are calculated, and that's what we have based on our confidence on. We are now in the negotiation phase. We still hope and -- that we come with result out of this negotiation phase. If not, we are handing the proposal to the regulator in the sense that we have discussed earlier. In terms of the greenfield project in Noida, I think the concession contract has not yet been signed, but however, we stick to the project. And I think we -- or despite the current crisis from a financial point of view, the construction of this airport in Noida can be financed without exceeding our financial thresholds, first of all. And further, we are convinced that the current crisis should not be leading for a long-term strategic investment. The airport in Noida will be the second capital airport in India, and we have no doubt that the Indian aviation market will meet the growth expectation over the long concession period of 40 years. To your question regarding the traffic assumptions, one has also to think about that, first of all, the airport has to be constructed over the next 4 years. And I personally believe that traffic in markets such as India and Brazil, where you have normally a significant higher share of domestic traffic will recover faster than we -- what we expect to see in Europe. And last but not least, also, the concession is well balanced. In our view, the concession structure with the fixed charge per passenger is a good mechanism to share the traffic risk, especially with the state. And furthermore, also depending on traffic, future CapEx depends purely on the traffic volume. So that's like also a risk-sharing or a hedge in terms of traffic volumes over the concession period.

The next question comes from Ruxandra Haradau-Doser from Kepler Cheuvreux.

A follow-up question on the cost side. You mentioned that airlines are slowly starting to increase capacities as of June. How much capacity increase of airlines is required for you to start to increase the cost base from current level? Second, how do you expect transfer traffic to recover over the next 1, 2 years? And what transfer traffic trends do you expect long-term at Zurich Airport? And third, what is the share of business traffic at Zurich Airport?

Thank you, Ruxandra. The last question first. Business traffic amounts to roughly 40% at the airport. Where we split between leisure travel being 60% and all others being roughly 40%, but this share also includes different traffic. I would say the pure real business traffic amounts to roughly 30%. And in terms of the cost side, again, we are not giving here particular guidance. We stick to what we said on the cost side before. And in terms of transfer share, I think it's clear that -- or maybe the question, what we assume in terms of business travel or leisure travel, to give you a little bit more light on this, I think, for 2020, we expect a gradual recovery. Obviously, with this, the short-haul traffic will recover faster than long haul. And there, it's quite hard to predict what's really the transfer in terms of the networking of Lufthansa Group will really recover. I think we will see a situation where the full network of the hub as we are operating here in Zurich compared to Frankfurt and Munich will take time to fully recover. That's what we assume in our base CapEx. Coming back to the previous level takes us about 3 years. And I think transfer -- or let's say, the other way around, the first route that we see to recover are mainly the routes where we have a strong demand out of the local market here in Switzerland. So I think also, if you look at the announcement of SWISS, what they take up first in terms of long-haul routes, that's basically where you have like a natural demand in the local market. So transfer will take time.

The next question comes from Andrew Lobbenberg from HSBC.

Can I ask about the minimum guarantees? I think in your presentation, you spoke about trying to find entrepreneurial solutions. Otherwise, the existing MAGs will apply. I mean obviously, you're going to be negotiating. But can you offer some sort of a color or understanding as to the sort of things you're trying to negotiate? What are the parameters? The second one would come back to the makeup of traffic following on from Ruxandra. Do you expect the market share as we go through the recovery period, will the market share of SWISS and Edelweiss increase? Or do you expect other airlines to grow quicker? And then the final one is going to come back to the tariffs. I appreciate that you guys are in a very different place to other airports around the world and in Europe, in that you are facing a very substantial tariff cut, and you're arguing that's not appropriate. But if we look at it in terms of other airports and where they were, the other airports, we look at their ROCE-against-WACC calculation and say that justifies the tariff increase, and that will be impractical. So what gives you the confidence that you think you can defend the ROCE-against-WACC calculation to give you a better outcome than you are going to have when the airline sector, your customers, are in dire straits and having to take large amounts of money from the government? I just think that the ROCE-against-WACC whole structure, whole concept is going to be under great pressure, and airlines are going to be very, very resistant to airports getting a better tariff outcome than they were before COVID.

Thank you, Andrew, for your questions. I'll start with your question about what we understand regarding an entrepreneurial solution with the commercial partners. I think as stated, our commercial partners on the airside are particularly heavily affected because of -- there is the obligation to operate, but little or very little frequencies. And solutions are needed here in which the guarantees for the time until the passenger volumes have recovered somewhat have to be reduced. In return, however, we also expect contract improvements for the periods after the crisis, for example, the point is that we are not providing a general MAG wave, as you might see on other airports, but we are looking for individual solution case by case. And with this approach, we want to find the best solution for our partners and for us. And here again, as we are affected by the crisis likewise to our partners, at the end, it has to be a give and take, not a unilaterally concession by us, and that's what we understand from an entrepreneurial solution. We do not solve a problem by shifting the problem from one party to another. And that's the same answer I will give on your third question regarding the tariff decrease. First of all, there is a framework, there is a new framework in place, and that's what we rely our tariff calculations on. Obviously, airlines globally ask for lower tariff. But nevertheless, again, here, it doesn't solve the problem of the industry to shift the liquidity or revenue problem from one party to another. And here also, I also hope that from a political point of view, maybe that it has to be seen that a sustainable framework of tariff and not intervening by the first year of an overreturning or in the first year of an underreturning by the regulator is crucial for the airports in a long-term perspective. And it helps us at the end of the day also to go through the crisis without any state aid. And this is now nothing that really is written in the framework of the ordinance, but overall, is something that the regulator also has to take into consideration by setting the tariff. And the question, remind me -- now what's about market share of SWISS and Edelweiss, that's a little bit pure guessing in short term. In the long term, I assume that the market shares of these airlines will be more or less equal to precrisis level.

To add to -- small issue to what Lukas said on the minimum annual guarantee, one has to differentiate between landside where we can take a tougher stance and airside, during the lockdown and until we have approximately 30% of the traffic, we also have to give some maneuvering space for the partners for the rest of the year or for the traffic above 30%. In general, the minimum annual guarantee is due. And if a partner is restricted and wants a release there, he has to offer us something where we see also an advantage for us that weighs up this compromise. And in terms of the tariff, definitely, it's easier to keep the existing tariff and not reduce it. That's our case. While other airports that want to increase tariff in the current environment, this is much more difficult. But if we have not asked for any state aid and we're a very stable rock in this crisis for also the Swiss government as an aviation partner -- key airlines have asked for and that will receive state aid -- I think politically, we will get strong support that we don't have to reduce the tariff in this situation. So the biggest advantage is that, in our case, we speak about not reducing and not about increasing.

The next question comes from Johannes Braun from MainFirst Bank.

Two questions for me. First one, again, on the fees. Actually, I had exactly the same question. It was -- that was asked before. But just to be sure, you are now guiding for essentially flat fees for next year. That's your guidance or your expectation from your point of view as of now?

We are not guiding for flat fees. What we said clearly was that we -- like the tariff cut that we have expected is out of scope, not anymore applicable. We could still adjust certain fees, but the outcome, which will be much more favorable than what we have expected before. If you want to take it the other way around, it might be a positive impact of the current crisis.

Okay. And then just secondly, again, contrasting your statements a bit with what Lufthansa Group said recently, you said you expect 2021 traffic levels to be roughly 20% below 2019 levels. The Lufthansa Group apparently guides for capacities to be rather still 40% below 2019 levels with the fleet being 300 planes smaller. And on top of that, you might have lower load factors. So do you expect SWISS to outperform strongly within the Lufthansa Group? Or how can we reconcile your statements with what Lufthansa said?

Well, we are maybe a little bit more positive on the impact on SWISS compared to the whole Lufthansa Group. You don't have to underestimate that SWISS so far is not affected by fleet reduction. Significantly, Swiss has one of the newest fleet on the short term and on long term. And SWISS, in the Lufthansa portfolio, is still, one could say, the most attractive airline economic-wise. So we assume that there will be a large portion of lower capacity affecting the Lufthansa hubs than SWISS.

Your next question comes from Max Shramchenko from Antipodes Partners.

I'm new to the company. So I just have 2 questions. So one of them on your nonregulated business. So I see that the airport is -- in 2019, you showed about CHF 340 million of revenue from nonaero side. Can you help me understand how much of that is related to what you call landside versus the airside, which my understanding is the difference is that the airside is only accessible by the passengers? That's the first question. And the second question is can you help me understand the case for a European airport investing overseas in emerging markets. And what sort of returns do you generally expect and have achieved in the past on such investments? And do you take currency risk when you make those investments?

I'll start with the second question regarding the strategy of the international business. The strategy, I would say, is unchanged over the last year. And we don't have like a strategy to become the global #1, 2, 3 airport operator, but we are like adding the international airport to become, let's say, the third segment in a not-regulated business. And I think as -- we don't have a capacity constraint in Zurich right now, in particular, but also not in the next year. Nevertheless, in the long-term perspective, the question is where is the growth of our company coming from in 10 years from now. And I think there, we are now in a position to really look a little bit beyond the board as to what we could do best and this is operating airports and make them commercially attractive. And that's what our intention of the international business in a nutshell is. We have historically focused on emerging markets, mainly because that there is -- there, we see the yields that we expect from this business. From a portfolio point of view, we expect a 10% yield over the time of the concession, and the 10% reflects like the equity IRR from a Swiss franc investor in real term. And your question regarding the FX exposure to those investments, we -- first of all, we try to finance as much as possible locally to get to a neutral -- to a natural hedge in the balance sheet. And obviously, at the beginning, by the preparing of a bit of new airport, we assume a certain foreign exchange development over time. And once we get concrete cash flows out of these airports, they will -- that they will be hedged to the origin currency, being Swiss franc. And in terms of the question you had to the commercial revenues, not sure if I really understood that correctly. But to give you a split that the commercial revenues in our P&L, that's not what is spent in the shop, but our share from the turnover base trend. It's roughly CHF 150 million of retail tax and duty-free food and beverage, whereas on the turnover base, about 45% is generated on landside. If you have follow-ups to go more into details, then we can already answer you with the Investor Relations.

Sorry, sorry. I just wanted to clarify. So that's the shopping side, but what about the other side, which is rentals and facility management? How much of that is exposed to air versus landside?

We take your question. We need a couple of minutes to answer it. And if we don't -- if we are not able to answer it on the call, we will give you a follow-up afterwards.

[Operator Instructions] The next question comes from Marcin Wojtal from Bank of America.

So some follow-ups on the regulation, please. First, is there any scenario that your regulatory period is actually extended by, let's say, 1 year to perhaps give all sites more visibility on traffic and to perhaps postpone any decisions to 2022? Then again, on regulation, you're arguing that there should not be a tariff cut. But is it just a function of lower traffic? Or would you also argue that the allowed return should be a bit higher right now, since this crisis demonstrates that there is more risk in the airport business, so that should perhaps push the WACC a bit higher? And my last question is on your -- it's on the commercial side, you previously, I believe, you outlined plans to expand the landside commercial spaces by 2025, an investment of, I believe, around CHF 300 million. How are these investment plans impacted by COVID? Do you think that will -- this project will still go ahead? Or that will be perhaps slower than previously anticipated?

Thank you for your question. Your first question was is it an option to extend just the regulatory -- the now-running period for an additional year, for example. This could be an option. We obviously aim for a longer period, but we -- from today's perspective, this is an option that we could not completely rule out, which might be also something that we -- that could play a role once it comes to a second wave of infections or whatever. But yes, this is an option, but the strategy is rather to go for a longer period. In terms of the tariff cut, your question was is this mainly a function of lower tariff. Mainly, yes. There are other important drivers, such as CapEx and WACC and -- which have to be considered, especially some parameters to calculate the WACC have changed over the last weeks, especially, but also over a period since 2018. And some of these parameters will have a positive effect, others, a negative one. Overall, we expect that the results, particularly on the WACC, tend to be -- to come to a slightly higher WACC that we have compared to what we have initially assumed to reflect the higher risk. And your third question was regarding the adoption of the landside commercial space. Please, first, let me remind you that the -- this project is not only about adopting the commercial space on landside. It's also about the passenger flow. It's about the logistics of the airport, and the third element is also like increasing adopting the layout of the landside commercial business. This is one of the project which is currently under review. We still stick to the project, especially because it's not only purely, let's say, retail-driven. It also plays an important role in terms of the development of the airport, but one can assume that this project is also a 1 to 2 year later than initially planned.

The next question comes from Nicolas Mora from Morgan Stanley.

Just a couple of questions. And to start with regulation, and just to clarify, do you -- are you running for a full year regulatory period or single-year renewal? I know the question has been done, but you've been very good at avoiding answering it. Just to get a bit of clarity on that side. Second point, again, on regulation. I mean a fair amount of the -- your view of tariff moderation also lies on CapEx. Have you said -- and you highlighted you expected next year's CapEx and medium-term CapEx to be below the guided CHF 300 million at Zurich, even you said materially below CHF 300 million. I mean what's the wiggle room there? Considering that if you undershoot materially, the case for flat tariffs becomes weaker. So there is a bit of give and take as well there. I'm just trying to understand a little bit how much you expect to cut and how much that could feed into actually lower tariffs medium term. And then just a clarification on your real estate contribution. Are these revenues expected to go down at all in 2020? Are you suffering at all from a knock-on effect or lower tariff? Or basically, these revenues are providing you a very strong bedrock of stability? And last one on international expansion. You've talked about simply delayed CapEx, not just in Noida, but also in Brazil. Could you give us a little bit more color how much you think you can save there? And the very last on costs, this is not for this year, but more for 2021, 2022. Again, you highlighted you wanted to -- you thought you could keep some flexibility in cost cuts. But how much of the 10%, 15% cuts you've had today you think you can carry into next year and the year after in order to soften a still suboptimal traffic trend?

Thank you, Nicolas. Honestly was not by purpose that I avoided the question regarding the time line of the new regulatory period, but fair enough to ask again. I think the target is as long as possible with -- and there is not like a given 4-year defined period. The period can be shorter ones either on an agreement or by a proposal by ourselves. But again, the 4 year seems to be a fair assumption, but we have also a little bit carefully assess the impact of the ramp-up phase, et cetera. But here, the summary is as long as possible. In terms of the CapEx, you're absolutely right that this important driver is rather, let's say, against a flat tariffs when we lowered the CapEx. But this CapEx number is something that is, first of all, where we really lowered the CapEx driven by the lower volumes. And this has to be balanced out. I think there, the impact of lower tariff -- of lower volume, sorry, of lower volumes is a stronger driver than the impact that we see on lower CapEx. All in all, also given a slightly adopted WACC, we are confident that we end up on the tariffs in a sense on what we have discussed before. Your question regarding real estate, real estate is not really impacted by the current crisis. Also again, let me remind you that we even have higher revenues this year because of the portfolio that we have taken over last year and because of additional or first revenues from THE CIRCLE. So this is not linked to volumes. In terms of the Brazilian CapEx, very general, the CapEx for this year on our international activities was planned to be just like a minor issue compared to the CapEx number in Zurich. And also, in terms of the CapEx in Brazil, there is an obligation for about [ $80 million ] for adoptions on the layout in the airport in Macaé. We do have to construct this over the next 4 years. So this also provides us a certain flexibility, which we use by postponing this CapEx to an extent -- to a maximum extent. And your last question, unfortunately, for the time being, no further guidance on the operating cost development for next year.

[Operator Instructions] The next question is a follow-up from Mr. Cristian Nedelcu from UBS.

Just 2 short follow-ups, if I may. First of all, and please correct me if I'm wrong, but I think the ordinance mentioned that when traffic falls by more than 10% versus expectation, there is some sort of room there for you to claw back or to claw back some of the lost return there. So is that correct? And secondly, is this something that you are discussing with the regulator, with the airlines today? And secondly, just to be clear, in terms of offering incentives for different segments of traffic, either this intercontinental or others, are you currently evaluating the possibility to try to incentivize some segments of traffic going forward via temporary discounts or temporary incentives?

Both question can be answered with no. We are not providing voluntary incentives to airlines. And second or your first question, there is no specific clawback mechanism in the ordinance that would allow us to recover for the -- on the earnings we see this year. Here again, I think one has to find -- we want also to avoid, let's say, volatility also like tariff increases out of discussion for the time being. What we want to see is like a balanced solution over a long period. The target is that we are coming out with a much valuable -- or we end up with a much favorable outcome. But there is no specific rule in the current framework.

The next question comes from Stephanie D'Ath from RBC.

The first one is what makes you [indiscernible] levels in 2023. And secondly, you mentioned that allowed return or regulated WACC could be slightly higher than what you anticipated. I believe that the 4% to 4.5% range has been shared. Could we expect something on the higher end of this range or maybe even above that range? And then my third and last question is are you still considering working with a partner in India for the construction of the Delhi airport and, in particular, maybe a local partner that would be able to help you navigate through the local politics, et cetera?

Well, Stephanie will understand that I could not give you like a concrete percentage number of our WACC assumptions for the next regulatory period, so mainly for tactical reason. But again, here, it's -- we believe that, given changing input parameters, that the WACC will be higher than initially assumed and -- but no concrete number on this. We are currently not actively looking for a partner in India, as I personally believe that open the airport to a partner at a later stage will be much more value-creating once the asset is derisk or, even at a later stage, is operational than at the beginning of the concession. And on your first question, we had some, let's say, technical issue to really understand you, but I understood that your question was what makes us confident to be on precrisis level before 2023. I think here, it's, again, a summary of what we have discussed in terms of the situation of SWISS in the Lufthansa portfolio. And last but not least, in the long-term, we don't believe that the current situation is really a fundamental game changer. I think there is like also segments of travelers that come back and people who want to see the world. And 2 to 3 or 3 years of recovery from today's perspective, in the base case scenario, if things get not worse, seems to me like an appropriate assumption.

It's in that context also interesting to look on the recovery in China, where, for example, in Shenzhen, traffic is 80% back on precrisis level for domestic; in Shanghai, about 65% now, only 5, 6 months after the peak of the crisis. So the domestic travel recovery is quite well in China. And that is a similar development, I would expect, in Brazil and in India, where the traffic is mainly driven on domestic. And in order to ramp up the international operation, that will take a little bit longer. That's also why the forecast and outlooks of the network carriers, in general, are more pessimistic than of the low-cost part of the airline. So -- but still looking at the figures in China, which are real figures, which is always 2, 3 months ahead of Europe, makes us also confident that the recovery, especially within Schengen, will start this year and will -- we should also not be too pessimistic in the middle of the crisis in terms of traffic outlook since our world is just globally connected. I hear that no more questions are around. And since we have this a little bit positive note to the end, that gives me a good reason to conclude. Thereby, thank you a lot for your interest. Always here for your questions with our Investor Relations, and hereby, I conclude this telephone conference. Thank you.

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