As a quasi-public entity jointly owned by two cities, the Dallas/Fort Worth International Airport may not appear to be the most fertile ground for finance transformation to take root in. However, DFW has been blessed with a multitude of revenue streams, including a natural gas contract that recently paid a $186 million bonus. This month's interview with DFW executive vice president and CFO Chris Poinsatte reveals the role that finance can play in unlocking new revenue streams.
Steve Player: What's the real role of finance here in terms of supporting airport operations?
Chris Poinsatte: First, you have to start with the big picture and understand the nature of the airport. We're owned by the cities, so we're technically a government organization. DFW is a residual airport, which means that revenues must equal expenses at the end of the year as defined in our Airline Use Agreement that was signed back in 1974. The DFW Use Agreement and bond documents define our current business model.
As I said, it's residual in nature, which means that we charge rates to the airlines (primarily for landing fees and terminal rentals) to equal the cost that it takes to operate the airport. If at the end of the year we've collected too much in fees from the airlines, we write them a check back; if it costs us more, they write us a check back.
The profit from certain lines of business, such as concessions and parking, is credited back to the terminals and landing fees. If you take the whole operating environment at the airport, it basically is a zero-sum gain at the end of every year.
SP: Even though you're owned by the cities, you operate on essentially a break-even concept. The airlines pay for the usage, and anything that you make helps to offset that payment. At the end of the day, your goal is to break even and provide a public utility in terms of an airport.
Poinsatte: Yes. In that business model, from a finance standpoint we try to do our budgeting at the beginning of the year so that we establish rates, fees, and charges that are reasonably close to what we're really going to do. We don't want to use the airlines' money all year; we'd rather have that cash flow match more closely to what it's actually costing us to run the airport.
SP: So you don't want to overcollect, but at the same time you don't want to undercollect and have a big surprise.
Poinsatte: That's exactly right. We are constantly monitoring what we're collecting and what it's costing us to run it. And at least for the past several years we have been making midyear adjustments in some cases to give the airlines back money through landing fee reductions and things like that. We call it a settlement at the end of the year, so the settlement is a smaller number.
SP: And that was the original contract -- how long is that in place for?
Poinsatte: It expires in 2009.
SP: What changes do you anticipate?
Poinsatte: Well, a couple of things. The airport industry is changing, and what we're seeing happen is that airports are taking more and more responsibility for the facilities and the management and the maintenance of those facilities. Airlines are stepping back into their core business, which is flying airplanes and maintaining airplanes.
And what we're also seeing happen is a move from a pure residual airport to an airport that has elements of a for-profit business -- it's called a compensatory airport in industry lingo. What we've been focusing on over the past several years is really identifying the profitability of our different lines of business and trying to really understand from both a capital and an operating standpoint what we've invested in those businesses and how much money we can make on those lines of business.
We're focused very much on diversification of revenue here. You have what the airlines pay, and then you have what the passengers pay for concessions, parking, and rental cars, and things like that, which is definitely tied to the airline business. We're actually looking to diversify our revenue streams through growing commercial development. We have 18,000 acres here, and about 6,000 more acres could be developed on the airport. We're looking at diversification of that revenue stream.
Also, we just signed a natural gas contract with Chesapeake Energy. They paid us a $186 million bonus, and we'll be earning 25 percent royalties on gross revenues in the future. This will provide us a great opportunity to diversify revenues even further.
SP: From a mission point of view, as a financial professional, how do you help management to sort out the different strategic options that they have out there? What role do you try to play?
Poinsatte: Well, I think that strategically, even though our business model is changing and even though the environment is changing, our core mission has remained the same. And this is to develop and grow our core business, which is the airline business and the number of passengers. The number of destinations we serve nonstop is probably one of our most important key performance indicators.
We want to focus on international growth -- this is the next great frontier for us. Because we have service to 135 U.S. destinations right now, we're not going to grow in that market. We want to grow in China, Asia, South America, Mexico, and more in Europe, too. Even though all of the other things have changed, this is still really what we're all about and will be the economic engine for the DFW region.
SP: The cities own what is almost an inland port, if you will. What is your long-term objective for the region?
Poinsatte: There are many factors that cause an airline to choose to come here, but location and market size are two of the biggest pieces of the equation. Another factor is the competition -- American represents 85 percent of our passengers and 75 percent of our landed weights. Airlines also look at the airport cost and the airport's gate and airfield capacity. We're very focused on growing our cargo segment. We were voted the best cargo airport in the world last year.
Getting back to your question of what the CFO's role is here, we're trying to drive a new strategic plan, a new vision for the airport. Our new vision is "Connecting the World," and we want to do that by focusing on four key drivers, which are customer satisfaction, employee engagement, operational excellence, and cost competitiveness. Right now we are going through an exercise with the departments to identify the initiatives from each department that support those four key drivers of our business. We know that if we do all of those things well, ultimately more airlines will choose to come to the airport.
What we'll be very focused on during the next 12 months is really developing the metric and measurement systems around those drivers for each of the departments to make sure that everybody understands how they interconnect, and everybody has responsibility for each of those drivers.
SP: And, Chris, what process are you using to help flush out those overall linkages of strategy to tactics and action plans to measures?
Poinsatte: I guess you'd call it kind of a modified balanced scorecard. It still has the elements from the balanced scorecard. In addition to departmental controllers who are assigned to each major department to provide ongoing financial support, we have formed a Business Analysis Section, which has five individuals. And we're developing Six Sigma black belts and green belts in that group whose job it is to really help the departments figure out what those strategies are, and what the key measurements are that they need to have. That group also then focuses on process improvement objectives.
SP: Okay, so within the finance organization, it's a support team for the rest of the business …
Poinsatte: Right. And then we do use consultants periodically to come in and facilitate that. We don't like to turn over our processes fully to outside folks. We like to develop them because we're going to need them forever.
SP: I know that in the past you have looked at some aspects of activity-based costing, and you've looking at some beyond budgeting techniques. Where are you in terms of the evolution of those support tools?
Poinsatte: Well, I've always been a huge supporter of beyond budgeting techniques. The challenge that we had here at the airport when I came four years ago was that everything revolved around the annual budget, and it was a fixed amount. The fear was that if you went over your budget, you would be fired. Consequently, what that led to was that everybody was padding every line item with contingency. And it was very challenging to get people to understand that we don't want to collect $40 million more than we need on a $400 million budget -- we want that to be more in the 2 to 3 percent range if we're going to give a settlement back to the airlines.
Our budget process was very antiquated, so we started implementing a continuous forecasting methodology here. On a one to ten scale, I'd say that we're probably at about a six right now. Being a government organization, we'll always have to have a budget. I would love to do away with the budget and just do continuous forecasting in its purest sense, but we will always have a budget and we will always have a settlement with the airlines. There will always be a focus at the end of the year on how we did.
But, having said that, we're using a Longview Solutions software system, which sits on top of our Oracle platform. We have been using that software for about two and a half years, and it has allowed us to consolidate our entire budget process down from nine months to two and a half months. Real staff work on it is a month and a half, and there's a month of approval processes, through the board and city councils.
We update that officially twice a year, with what we call an Outlook. But our departmental controllers are constantly updating what's going on in their departments through the system. If a contract changes and it's a three-year contract, they go ahead and forecast that out for three years in the system. When it comes time to do the budget, it's really just a matter of sitting down and making sure that the VPs have thought through any new initiatives.
There was a belief here at the airport that funding was constraining our ability to do things. We have changed that belief because we have flexibility in our process now such that if you come up with a good idea three weeks after the budget's approved, we're going to look at it. If it advances the strategic objectives, we're going to find the money and we're going to do it. This type of an approach is very different. It's been a culture shift for people to get used to it. As I said before, we are developing a new strategic plan. We are also developing a new reporting and monitoring methodology that will probably happen two or three times a year. Just as in the budget process, we want flexibility here.
SP: With your recent announcement concerning Chesapeake signing on to acquire the rights to develop the natural gas on the property, you find yourself in a situation where an unexpected windfall is coming in. How do you address that to make sure that the windfall gets applied appropriately?
Poinsatte: First of all, I learned a lesson when I was with the Associates Corporation 25 years ago, where we were more profitable for about 15 straight years in a row. You would think that management would ease up a bit, but every year management came in and got tougher on all their business decisions. This is exactly what I've tried to get my folks in finance and the rest of the executives to say: We're actually going to get tougher now that we've got money. And all the decisions are going to be evaluated twice as much as they were before, just to set the tone that just because we have this money doesn't mean that we're wealthy.
SP: It's been a four-year journey to this point. How have you kept everybody focused and kept them moving into that customer service role of finance actually supporting the business?
Poinsatte: Well, we do surveys to make sure that we know what our internal customers are saying. And I require our assistant vice presidents to go out and talk to every other vice president every year to informally communicate about how they're doing. And then I keep the pressure on. We do an annual getaway with the finance management team where we plan out what we're going to do. We follow up on it two or three times a year to make sure that we're on course.
We measure in finance daily, so that's how we keep on top of it. We do employee engagement surveys, too, to find out what our employees think, and I take those very seriously. It is in the performance plan for all of my managers to improve their employee engagement and customer satisfaction.