Aena S.M.E., S.A. (OTCPK:ANNSF) Q1 2021 Earnings Conference Call April 29, 2021 7:00 AM ET
Emilio Rotondo - Finance Director
Jose Leo - CFO
Conference Call Participants
Nicolò Pessina - Mediobanca
Siobhan Lynch - Deutsche Bank
Cristian Nedelcu - UBS
Elodie Rall - JPMorgan
Luis Prieto - Kepler
Arthur Truslove - Crédit Suisse
Marcin Wojtal - Bank of America
Dario Maglione - Exane BNP Paribas
José Arroyas - Santander
Nicolò Pessina - Mediobanca
Thank you. Good morning to everyone to the first quarter '21 results presentation. Today, we will be presenters, Jose Leo, CFO of Aena; and myself. I will just leave the floor to Jose now. Thank you.
Thank you, Emilio. Good afternoon, everyone, and thank you for joining us for this results presentation. Let's move on to the slide. Let's start by looking at the key highlights. Clearly, the first Q of 2021 is showing a continuation of the trend seen over the last part of 2020, entirely driven by the COVID-19 impact on traffic. So we see the traffic, the number of passengers going down at consolidated level by 76.4%. With a different combination of performances in the Spanish network and at the Luton Airport, the decline is very, very substantial, 80% and 89%, respectively, whilst in the Brazilian airports, the performance has been, by far, much better, mainly driven by the domestic traffic in that country. But all-in-all, pretty dull picture of the traffic as we haven't seen any substantial or any meaningful recovery from the COVID-19 consequences.
In terms of revenues, the reduction in revenues quarter-on-quarter is only shy of 55%. And clearly, this is a much better performance than the one that you would expect by looking at the passenger traffic numbers, and this is driven by the different accounting applying to idle revenues and non-idle or commercial revenues. For sure, we will discuss that in detail over the rest of the presentation and the Q&A. But let me tell you that whilst the aeronautical or Aena revenues are moving in line with traffic, commercial revenues are not. The reason for that is that there are revenues accounted for on the basis of the minimum guaranteed rents as it happened in 2020. We will elaborate further on that. The traffic is at the heart of the EBITDA performance. We are showing negative EBITDA this quarter of EUR121.5 million at consolidated levels. Clearly, the first quarter of the year is a quarter where usually, even in normal circumstances, the traffic levels are, on average, less than the traffic levels for the rest of the year, and this is always impacting the relative performance of quarter one, even in the normal year.
And this is clearly something that, in this particular year, is not the denominating force. The denominating force is the traffic performance driven by COVID but also, Q1 is subdued usually because we have to account on day one, on the 1st of January every year for the entire impact of the local taxes, particularly the business rates, so to speak, the EV as with this -- that is the name of this particular tax in Spain. And this is EUR151 million impact day one. Excluding that, clearly, we would enter into a positive EBITDA territory. But that doesn't mean that the performance is any good, clearly. That translates into a net loss for the quarter of EUR241 million, once again, affected or impacted by the local taxes accounting net of taxes -- of the corporation tax in this particular case, but still is clearly a negative picture. Let me tell you that, given the circumstances and given the impact of the revenue accounting -- commercial revenue accounting treatment, one very good proxy of what's going on in the business is the operating cash flow. And the operating cash flow is negative this quarter by EUR107 million, which means that we are still burning cash pre-CapEx, driven by the extremely low levels of traffic. Overall, for the whole year, we remain confident that, even taking into account all the existing perspectives on traffic evolution over the rest of the year, we expect our operating cash flow to be more or less neutral or breakeven over the year. That means that the cash that we will be burning will be entirely associated to the investment to the CapEx program.
On Page 5, we are disclosing more details on exactly what I have been discussing before, so I'm not going to go through the whole set of information, but I will focus on a couple of points. First of all, in terms of commercial and real estate revenue, as you can see, there is a typo here in the English version because clearly it's not increasing, but decreasing. Still in application of the IFRS 16 leases, as we did last year, we are accounting this, in this particular quarter, for EUR120 million, close to EUR120 million of minimum annual guaranteed rents as we have the full right to receive this revenue. That doesn't mean that there are no issues around it. We highlight on the next page that there are a number of tenants that have rejected the bid. So we will come back to that in a minute. On top of this, we are assessing any potential credit risks associated to these revenues. And frankly, in application of IFRS 9, the strict application of that and going through the proper analysis, we have come to the conclusion that we needed to provide for a relatively small amount of cash or amount of costs to take care of any potential credit risks. So from that angle, there are no losses or significant losses to be accounted for as part of these discussions on the minimum guarantee rents.
Moving on to Slide 6. Clearly, the key point here is the status of the negotiation of the commercial contracts. We put forward the offer that you all know very well. Part of the tenants, part of our commercial partners accepted the offer. In terms of numbers, the majority of them accepted the offer, but clearly, that only represents 14% of the MAGs or the revenues affected. So the largest players rejected the offer. Most of them decided to go legal. They apply the file for injunction requests, injunction decision orders before the Spanish courts. And the result of that is that a good number of cases, the judges decided to suspend or to temporarily suspend the execution of the guarantees associated to these contracts. So it's fair to say that we are on hold in terms of executing our guarantees on most of these situations.
But I want to highlight the fact that the judges, at this stage, are not getting into, let's say, the relevant case, which is, for me, how good or bad -- whether or not they offer made by Aena is good enough, they are not judging the merits of the offer we put on the table. The decisions are only about whether or not to grants the injunctions that the tenants are requesting. I'm sure we will come back to that later on. And with regard to the DORA, there is no new information. The DORA II proposal is being assessed by the different bodies involved in the process. And we expect the -- a decision to be made over the coming months. But frankly, we have no visibility as to when this will be made public. I think that this is all I wanted to comment on. And I suggest to skip, unless you have any particular interest on that, the Slides number 8 and number 9.
And I will pass you over to Emilio that will be taking you through the commercial business elements of this presentation, if that's okay. Thank you.
Thank you, Jose. So now we move into Slide number 10, okay, in which we are highlighting the key aspects for the analysis of the evolution of the commercial revenues this quarter. So first of all, as you know, Aena applies IFRS 16 leases and recognizes all the income associated with the minimum annual guarantees, which, during the first quarter, amounted EUR119.7 million as there still exists the contractor rights to receive these revenues. These MAGs have been recorded based on the amounts reflected in the contracts for each year in 2021, EUR704 million, distributed monthly based on passenger traffic, on the traffic curve of the year. Nevertheless, for those contracts in which the extension renewal amended, agreements have been signed, the criterion adopted for the record in the mark and any adjustments thereto resulting from the reduction agreements shall be linear throughout the life of the contract, and also within each year, for equal amounts in each month from the signing date of these agreements. So when these extensions of these renewals are signed, from that date, okay, the minimum annual guarantee is going to be linear during the remaining life of the contract, even during each one of the years.
In terms of the first contract that has incurred in this situation is the Duty Free activity contract due to the signing of the extension that entered into force in October 2020, so 6 months ago. And the impact of our applying in this linear criterion is that in the first quarter of 2021, EUR54.4 million in minimum annual guarantees have been recorded, which would not have been recorded following the previous distribution criteria. Additionally, in the first quarter of 2020, Aena did not record any MAGs from March 15 to March 31st, in amount of EUR26 million. As you remember, well, last year at the beginning of the pandemic, the accounted agreement was being analyzed. So this application of the IFRS 16 of applying 100% of the minimum guarantees was not yet applied on that quarter, was applied in June. So in June, this impact would be diminished.
Finally, in the future and in application of this IFRS 16, there might be adjustments resulting from potential commercial agreements or the application of court decisions, which would entail the minimum annual guarantees and any adjustments being recorded using the straight-line method throughout the life of the contract. So with this, what we want to highlight is that in the case of any contract that we signed the renewal, we sign any amendment in the future, we will also have the accounting impact of this linearity of the rents, the remaining part of the contract, and also the negative impact of the discounts being applied also throughout the life of the contract.
If we move into Page 11, and just to highlight how these changes that I have just mentioned have impacted the revenues, you see the first line of Duty Free shops that the growth is now 82% versus Q1 '20. That's because of the impact of this linearity of Duty Free contract, okay? Then we have the food and beverage, specialty shops and advertising that have been impacted also by the traffic curve within 2021. Car parks, minus 75%, because the contract now is a minimum annual guarantee per passenger -- sorry, car rental, it's minus 66%, and we have the minimum annual guarantee car parks. And finally, car parks, minus 75%, that reflect the traffic evolution as it's a business that is managed by Aena. This was mainly the main ideas we wanted to explain and to show in our presentation.
So now we move into the Q&A session. Thank you.
[Operator Instructions] And your first question comes from the line of Nicolò Pessina calling from Mediobanca.
The first one is on the quarterly results. I noticed an increase of the OpEx compared to the previous quarters. So I wonder, if it's something related to the planned reopening and recovery of traffic, or there is any other element that we should consider? And maybe if you can give us an idea of what you expect in terms of future evolution of the OpEx in the next quarter? And then I would have a couple of questions on the DORA II proposal you committed last month. The first one, if you can give us an idea of the [indiscernible] compensation for 2020 and '21, you intend to request? And if eventually, the calculation of the surplus or deficit that Aena generates the [indiscernible] every year could be a good proxy of such compensation? And secondly, I'd like to understand if the recovery of the central costs in '22, '23, will be included in the cap of the tariff for the following year, or it should be excluded? Of course, if it's included, it would have the tariffs to remain at a higher level for the rest of the DORA II periods.
Well, first of all, I didn't quite understand your second question. We can come back to that in a minute. Let me answer the other two, if that's okay. With regard to the Opex, I wanted to signal or to highlight that if you look at the OpEx in quarter one 2021, is not very different from the OpEx in quarter four 2020. So of course, to come to that conclusion, you have to take out of the quarter one 2021 costs the local taxes impact, which is, as I said before, EUR151 million. So that means that when you exclude that, the run rate, so to speak, of operating costs in quarter four 2020 and quarter one 2021 are pretty similar because both of them are levels of costs commensurate with really, really poor months or quarters in terms of traffic. Of course, they are not at the level of the quarter 2 2020 because at that time, we made a huge effort to, frankly, push very hard on each and every single service contract we have in the business.
And this is not attainable long-term with the intensity that we applied at that time. And our intention is to run the business at this sort of run rate until we see. Some traffic recovery. We are -- so to speak, focusing on this every month and looking ahead for every month and seeing whether or not we should relax some of the chokes that we put on the operating costs. So we need to see. If we see a signal of traffic recovery, of course, we will see the operating costs growing. And as I said a number of times, unfortunately, operating costs are never responding to the traffic in the same proportion. But otherwise, we will try and keep the costs under control at the current level. This is the intention. With regard to the COVID-related costs, they are all excluded of the cap. So the legislation that approve the mechanism to recover these costs for Aena explicitly indicated that they were excluded from the cap. And as I said before, I'm afraid I didn't understand your second question.
Well, very simply, can you give us an idea of the colic compensation you because the regulator?
The Article 27, well, no. The only thing I can tell you is we applied for that. We are not putting forward any particular figure. We are more keen on opening the door for the regulator to run the analysis to hopefully come to the conclusion that we should be compensated and to discuss the mechanism to effectively putting in place that compensation. The only other thing I can tell you, I'm sure you know is that we have offer to get that compensation any time after DORA II. So we are not particularly concerned about spreading that over a long period of time.
Our next question comes from the line of Siobhan Lynch from Deutsche Bank.
Three from me, if possible. The first, just to follow-on from the question on the OpEx being flat versus Q4. Q2 traffic this year, looks like it could still be down kind of minus 75%, minus 80% levels versus 2019. So is it plausible that you could keep OpEx flat again quarter-on-quarter? And then my second question is on the MAGs. So we know that the kind of core proceedings for the multiple approaches are happening at the moment. Are all the doors closed to discussion now, i.e., is it up to the court, or are you still trying to negotiate with the retailers? And on that, given that maybe we could see some delay in the traffic rebounds, and maybe we don't see traffic start to come back till Q3. Does this change your thoughts on ending the discounts in September? And then, my final question was just on short-haul flights. So we saw the French government progress the attempts last week to kind of ban flights under 2.5 hours that can be taken by train domestically. Do you think this is something that of increasing risk for Aena, particularly given that domestic Spain is your largest passenger market, or is it not very practical to implement in Spain?
Well, starting with the OpEx. You mentioned minus 65% -- well, comparing the potential traffic for 2021 with the 2019 levels. I believe this is still in the realms of the feasibility. So it's still feasible. It could happen. But clearly, it would be more and more challenging as we move forward if the recovery is delayed, and we don't see that recovery in the early months of the summer, but rather on the second half of the summer. But let's assume for a while that we get to that minus 65% traffic. That will mean that the coming months, probably starting in June, will be showing a certain degree of recovery. So we will see traffic growing over the rest of the summer, and hopefully, the autumn time. In that case, clearly, our operating costs will go up necessarily. And we wouldn't be able, if you like, to keep them at the current level. If this traffic recovery is not let's say, crystallizing of course, our intention will be to keep the costs under control at this level for as long as we don't see the traffic recovering. So hopefully, this is answering your question. Otherwise, please let me know.
With regard to the MAGs discussions, honestly speaking, at this stage, there are no negotiations ongoing. We put on the table, as I said a number of times, a proposal which is balanced and generals. On average, we would be reducing the MAGs by 60% on average over the 1.5 year period of time considered in the proposal. So there are no discussions. We are expecting them to hopefully come to the conclusion that it's better for them to accept the offer. If they don't, well, time will tell. We believe that it's extremely unlikely that judges come force a business to give up 100% or 80% of the revenues when contractually, we have a right to claim the payment of those revenues, and we are offering a reduction of 60% of them. So time will tell. In the meantime, we are not counting on that cash, and we are running the business and our financing arrangements with no -- let's say, not taking into account that these monies will be available over the coming months. When you make these kind of decisions, it's always tough. You have to consider the tradeoffs. But, on balance, believe me, we believe this is the right decision, the right position to be taken in the interest of our shareholders.
With regard to the -- sorry, let me see. If there is a delay in the traffic recovery, well, for the time being, we are abiding by the reference of the Royal Decree published by the Spanish government at the end of December. That Royal Decree, let's say, set the framework in terms of the conditions and the timing for this kind of rent reductions, we are abiding by that. We believe it's a good reference. Should the COVID-19 crisis go beyond the summer and the Spanish government consider alternatives, and they may potentially consider to extend this kind of arrangements, of course, we could take a look at that again. But in the meantime, we will try to keep an eye on this Royal decree and abide by it. With regard to the short-term flight prohibition in France, first of all, I think this is going to be the trend. Nobody in this business should be ignorant of the fact that this is a trend, a trend that will be developing in different countries at different times. But clearly, the end game is going to be that. I believe that, still, the business, the airport industry will be able to deal with that and over time to make up for that and still being a very vibrant business.
In the case of Spain, my view is that it will take a little bit longer for obvious reasons. I think for the Spanish government, the importance of the -- some connections and the importance of the tourism industry is different. But still, I believe this is the trend. Having said that, I have been checking some numbers for France, and I think it's the same for Spain. And I don't think the impact is going to be so big. Because one thing is, to be a domestic flight, the different thing is to be able to replace that domestic flight with a train trip of less than 2.5 hours. This is not a walk in the park. There are very few destinations, both in France, in my view and in Spain, that will meet that condition. But frankly, I think, over time, this will be impacting the business and the business should be replacing that using the slots for something different, long-haul or short-hall to European. And indeed, to take advantage of these rail connections as an additional way of bringing people to the long-haul flights, approaching or closing in catchment areas that were not available before.
Our next question comes from the line of Cristian Nedelcu calling from UBS.
Three if I may. The first one, looking at spend per passenger in Spain over the next few years, how do you see that versus pre-COVID levels? Is it higher, lower? Any tailwinds or headwinds to mention there? Secondly, coming back on the prior question on the MAGs cap. If I understood well, you don't expect the -- or the regulation says the COVID cost recovery cannot impact the MAGs caps. But do you believe there's any other lever that you could use to offset the K factor dilution in '22 and '23? So anything else that you could compensate that in the MAGs cap framework? And the third one, if I may, coming back to the timeline of the negotiations on the minimum annual guarantees and the court proceedings there, could you give us a bit of a spear, how -- which are the next milestones? I mean, how should we think about this? Is it going to take a few more quarters until the situation may be solved or any moving parts that we could consider there?
In terms of spend per passenger, clearly, for as long the COVID-19 impact is in play, the spend per passenger will tend to go up. And frankly, this is the kind of thing we are considering in our DORA II submission, without getting into the detail, but is -- it will be impossible to deliver the level of service, the quality standards and these kind of things that are required by the regulation with a reduced number of passengers. So what we are doing is clearly capturing all that in the DORA II. But what you know about our DORA II proposal is the kind of path to recover that we are expecting. So the passenger numbers that you can see there are our best this time of something that is balanced and adequate for the kind of discussion that the DORA II represents. In terms of the cap, the MAGs cap, I'm not sure. I remember -- you said that whether or not there is -- can you say again, Chris?
Yes, I think we have the K factor dilution in there in '22 and '23. And I think there's also a cap that a MAG cannot be higher than the prior year MAG. I was just wondering if you hope to convince the regulator to offset that K dilution with any other factor, such that you can actually increase the MAG throughout '23, '24, '25?
Well, the only possibility, and this is theoretical possibility, that, of course, we will discuss with the regulator, is the fact that as we have a cap, clearly, that cap is preventing us from recovering everything we are factoring over the 5 years in the equation, because remember that in 2026, we are proposing an increase in tariffs. This is because, somehow, there is a sort of a spillover from the previous years where we cannot exceed the cap. So one interesting solution would be -- but this is just theoretical, would be to take advantage of this headroom in '22, for instance, to fill it with part of the spillover. Hopefully, you understand the rational, but. In terms of the timing of the negotiation to be more precise, the timing of the court cases and next steps. I think the judges will be dealing with these requests or this injunction applications. That will take some time.
Frankly, I don't know how long, but probably weeks or months. And then the second stage will be the discussion on the merits of the proposal. So it will be a completely different stage. This is all predicated of the fact that some judges may believe that Aena shouldn't take any step that they may consider to be irreversible. But the merits of the proposal will be judged later on. And probably, that will take us into, I don't know, 2022, I don't know for how long, but certainly into 2022. So we may need to wait, I don't know, one year or one and half years. But my belief is that, as the traffic recovers, the tenants will be in a different mood to discuss these kind of things. And of course, we will be always open to restart the discussions.
Our next question comes from the line of Elodie Rall from JPMorgan.
Just coming back on the process of DORA II, could you remind us of the major milestone that we are going to see basically, when is the CNMC is going to come back and the DGAC, what's the phasing of that? And have you had any indication already on how everybody has received your proposal, and what they've said? So that's my first question. Second question is on M&A. We understood from the media that you were interested in purchasing maybe more Brazilian assets. So can you give us a little bit of insight on that? And last question is on bookings. I'm not sure if that question was asked about is if it was. But you already have some indication for the summer already with bookings?
Regarding your first question on DORA II milestones, well, firstly, and we believe before summer, we are going to have the CNMC proposal. That if we see back to what happened in DORA I, the report will come with a comparison with our proposal, okay? Although, in this case, our proposal is already public. Then before the 30th of September, we will have the final outcome from the regulator, from the DGAC, and that will come in place at the 1st of January of 2022, and the tariffs as in past years on March 2022. Regarding your second question on M&A in Brazil, you are correct. We we present an offer for the South airports in Brazil in the last round of -- that was launched by the Brazilian government. We didn't win, okay? There was another offer well above our first proposal. And regarding the strategy, as you can imagine, since we are operating the northeastern airports there in Brazil, brazil has come to be a strategic country for Aena. Also, in terms of the international expansion is one of our strategic plan pillars.
So we have a team that is always analyzing opportunities. That does not mean that we are going to offer to all of them. And of course, that does not mean that we are going to win them. But that was the case in Brazil. As I've mentioned, Brazil is strategic for us. And thus, it makes sense to analyze, in fact, the different projects that we're launching that will be launched by the government. We decided to offer for one of them -- to bid for one of them, although it has happened many times, we didn't want. Finally, on terms of the bookings for the summer. That's correct. Most of the airlines just launched the bookings with a very high percentage versus '19 figures, between 90%, 95%. Well, undoubted this is positive, and, I think, that show the positive view coming from the airlines. Although, on our situation is, let's say, we have to wait and see what happens in the next weeks in terms of lifting the restrictions and how the traffic evolves. Because, as you know, the airlines can take out those bookings with just 3 weeks in advance. So for us, that -- let's say that data does not give us a clear view of what is going to happen on the summer.
But just to you said 90% to 95% of 2019 level you've seen in terms of bookings for the summer? Is that what you said?
In summer airlines, that was the case, yes.
Your next question comes from the line of Luis Prieto calling from Kepler.
Apologies if these questions have already been asked, had a technical issue on my side on my end. The number one question would be, after the cash burn in Q1, what sort of operating cash flow would be reasonable to expect for the full year? And the second question is, I understand that in the AGM, it was mentioned that one of the objectives of the new strategic plan that the company is working on at the moment is the revision of the company's commercial business model. Given the current MAG dispute, is there a scenario in which the company moves away from the MAG model? And if so, what models could be contemplated in this revision?
Well, in response to your first question, as I said before, the objective for the year would be to keep the operating cash flow at breakeven points, so basically neutral. Assuming that the traffic decline for the whole year is something around the minus 65% on 2019, which is where we seem to be heading for, we don't know yet, but I think more and more, even if you look at what the ACI published last week, this seems to be the trend. So on that basis, our focus is on getting neutral impact from the operating side of the business on cash. So that will mean that we will be burning cash on the CapEx product and nothing else. With regard to your second question, frankly, it's too early. We are just starting to to work on our new strategic plans. This is something for -- our objective is to carry on working and to get something out probably before the end of the year unless the COVID-19 crisis like lingers for too long. But otherwise, this is the plan. And indeed, we will be looking at everything, turning every stone, looking at alternatives, but it's too early to say. It would be pure speculation.
And from what you're saying, do you feel there's a need to revise the model or do you prefer to leave it unchanged?
No. Let me tell you something. Before the COVID-19 crisis, we all said, I mean, everybody, every player in this industry said, things are changing. And although the business model is still robust and very, very good, over the coming years, everybody knows there will be a transformation in terms of the way people approach shopping at the airports and the airport experience overall. And we have that discussion a number of times. Probably part of that is driven by the digital war and the ability to get access to things any time, any place. And I suppose, everybody else in the airport industry was thinking of it. The COVID-19 has accelerated that, in my view, I mean, in everybody's view, and you need to think about it. But that doesn't mean that we are, let's say, dropping the current model or thinking the current model is not going to be effective for good while, still, but you need to think long term if you don't want to be in travel.
Your next question comes from the line of Andrew Lobbenberg calling from HSBC.
Thanks for the efforts to be as transparent as possible on the MAG, it's so confusion. I'll try and stay away from it. Can you just confirm are you in the clear on all the covenant situation, I think there were some sustaining, some solution. Can I ask, on the DORA II, are you absolutely confident that the whole thing goes to schedule? I know I asked this at the full year. And I think the President did read the possibility of an extension to the current door at this time and a short delay as a possibility.
And as we look at the -- in the U.K., the regulation of Heathrow, they're examining new concepts for regulation and different changes to share and traffic risk between the airports and the airlines. Are you guys open to any change, or no, you just want to push through with the standard DORA structure? And then just quickly, what do you think is going to happen with the slot regulations for the winter season?
Andrew, I didn't get your last question. Slot regulation, you meant?
Yes. Is that going to come back to normal?
Well, I recognize the minimum guarantee accounting is confusing. And bear with me, Andrew, we are trying to do as much as we can to be transparent and clear. And I'm pointing you out to the cash evolution to make clear to you that this is probably today a much better proxy of the -- in terms of the covenants, just as a reminder, we -- for Aena, we obtain waivers on the financial covenants that are in place, in some cases, until June '22, in some other cases, until December '22. So we are fine there, although, honestly speaking, if you know the issues with these covenants are always driven by the EBITDAs. So the EBITDAs are fully dependent on traffic. If traffic recovers later or recovers less intensively than we expect and we wish, we may need to extend that request for the waiver. But once again, I feel extremely confident about that. So I'm not particularly concerned about it.
With regard to Luton, we are now discussing with the lenders the extension of the waivers because the waivers are spiking there, and we are planning to extend them to the -- hopefully, for the rest of the year. And we are very confident as well. It's a matter of time. So this is the situation today. But these days, it's unavoidable that you need to go through these kind of discussions because as I said before, even if your debt levels are not high or indeed are not higher than before, the EBITDAs are clearly falling down the cliff. In terms of DORA II timing, I think, I am -- my view now more than ever is that this DORA is going to go ahead. I might be wrong, but we believe this is the most likely scenario. So some point in time this year, and hopefully delivering on time, the regulator will make public its position. So I'm confident that the DORA will go ahead. That means that it's too late for us to discuss any other aspects of the regulation.
As you mentioned, the Heathrow case is, well, clearly going to be revisited. But these discussions have been in place there for a long while. This is something you cannot bring up overnight. And the current regulation in Spain is very young. I think probably the best thing to do is to carry on with it and to focus on removing caps and things like that, which is the next stage for DORA III, where the caps will disappear. And to be more focused on this, getting rid of some of audits rather than trying to revamp the whole thing. This is a view. With regard to the slots, frankly, I don't know. But I would expect the European Union to be flexible if this is the last time. What I mean by that is, if there is some recovery over the summer, I personally believe that it wouldn't be bad to be flexible just for a number of months because, around the corner, let's say, next year, they can get back to normal, to the standard. But honestly, Andrew, I have no idea. I don't know. Because you know there are different airlines with different interests and different views.
So can I just hop back on the covenants quickly? Because I mean, you have been really transparent and honest. But the thing we should look at is operating cash flow rather than EBITDA. Why wouldn't banks want to do the same thing for your covenants? And that would look quite different than worse, no?
Well, I mean, the banks, they have to look to what their lawyers agreed some years ago, and they have no alternative, frankly. But I don't think there is any problem with this. I mean, what I see is that, particularly for Aena, the group of banks involved in the covenant discussions are very, well, positive. They are extremely helpful. They know what Aena is. They know what the circumstances are. So I'm not particularly concerned about that. But clearly, the banks, when they have to check the ratios, they have to abide by the contract. They cannot get back to their committees and say, let me amend the contract today. So thank you.
Your next question comes from the line of Arthur Truslove calling from Crédit Suisse.
First question for me was just around what sort of rules that are like -- rules you think are likely to apply for people traveling to Spain this summer. Are you expecting some sort of vaccine [Indiscernible] scheme? If you are, have you got any idea as to what the requirements of that might ultimately be? Second question just sort of going back into the reopening of the 2017 to '21 DORAs reflect the loss results from COVID. In your view, obviously, very early stages, but how would that sort of compensation most likely work? Would it likely be to higher tariffs at some stage, perhaps, in DORA III, or is there some other way that is that it might happen? I guess, the third question for me, where would your balance sheet needs to be in terms of net debt to EBITDA or indeed some other measures that you might -- in order for you to think about starting paying dividends again?
Well, with regard to your first question, I will share with you what I know today, that, first of all, the Spanish government approach is to be as helpful as possible and to be as, let's say, proactive as possible in developing any sort of European-wide solution. And indeed, part of that is the passport of the certificate, the digital green certificate. And I know the Spanish Health Department is working on that. They are working on the app, they are working on the digital development and everything, and they are coordinating with other European countries. But ultimately, for that to be effective, for Spain to be able to implement it effectively and in a way that really benefits the country, it is important to make sure that the rest of the European countries, or the main countries that our markets, are doing the same. And this is what is creating some difficulty in terms of assessing when that will be available.
For instance, let's think in terms of the UK, let's assume that the UK agrees to that earlier rather than later, that will make a huge difference to us, or Germany, indeed. So these kind of things. So I think, my expectation is that some point in time over the summer, that will be effective, and that will be extremely helpful. But I wish that would happen early in the summer, June. And frankly, today, I wouldn't be very confident on that because different countries are following different rules. Then there are other decisions that may help, even if there is no digital green Passport in place yet. For instance, decisions made by the UK. When the UK lift the restrictions on the 17th of May, our understanding is that they will be implementing a sort of traffic light code. Depending on where Spain sits in that traffic light code that will be more or less helpful. But potentially, if there are some regions that are meant to be green, that will be extremely helpful as well.
So there are a number of initiatives that, I think, some of them will come to fruition over the summer, but I would like to see them working early in the summer rather than later in the summer. And I cannot tell you whether that will happen or not, honestly speaking. Then with regard to the way we expect this gap, the deficit incurred to be recovered is exactly right what you said would be through slight increases in charges beyond 2026. We are not concerned, as I said before, about how long that will take because, well, as long as there is cost of capital consideration taking into account, it wouldn't be any problem for us to wait a number of DORAs to get compensated. And then in terms of the net to EBITDA, frankly, this is something I said a number of times in the past, pre-COVID. We don't have any target net debt-to-EBITDA ratio.
We are happy to -- well, maybe I misunderstood your question probably. I'm thinking now. Dividends are driven by profits rather than by the net debt to EBITDA. So this is the policy in place. Of course, this policy should be revisited in the coming year. But I see no reason to change that. So the payout will be dependent on -- there will be a payout, and that will -- that payout will apply to the profit, and that's the policy. So no reason to -- unless, obviously, things are extremely, extremely wrong and the business is in financial travel, which is not the case, frankly, I'm very, very confident that Aena is strong and will remain strong through the crisis in terms of the financial standing. Otherwise, it's just profits.
Just pushing back on that profit point. Clearly, you're recognizing revenue from the minimum annual guarantees at the moment. Would that likely be excluded from any profit calculations that you might perform in terms of thinking about dividends?
No, I can tell you, profit is going to be accounting -- IFRS based profit, and that is only one. I have to say the profit that we always used for as reference is the Aena S.M.E., so the parent company. But still, the accounting profits are just one. And they are IFRS-based, and they will apply.
Your next question comes from the line of Marcin Wojtal calling from Bank of America.
So I will just ask a question on a different topic. In March, you announced you are going to make EUR550 million investment in your climate action plan over the next 10 years. So can you give some examples of what these investments will cover? And is any of that in the regulated segment? And if any of that included in your DORA submission? And maybe a second question, if I may. In your DORA submission, you are including your walk at 7.68%, I believe. So can you explain why you are asking for an increase in the walk despite lower interest rates? Is it the higher risk profile of the assets or higher asset EBITDA or higher equity risk involved due to COVID?
Marcin, this is Emilio. Regarding the climate action plan, you are completely right. We have announced around EUR550 million to be invested between this year and 2030. So it's a slightly longer period than the pure DORA II, but a part of it would be included in DORA II being the most relevant project default photovoltaic plants that are going to be built in different airports in our network. Being, I think the investment of this photovoltaic plants, EUR350 million. But since early, I don't have now on top of my head the amount that is going to be a regulated investment. We can -- Jose, you know it.
Yes. Well, I think that roughly 60% -- more than 60% of that will be regulated, and the rest will be irregulated. And everything that is going to be invested over the coming 5 years is indeed in the DORA II submission.
Yes. Other investments will also be driven in, also to make more efficient the electricity consumption in different terminals using LEDs. Also in terms of the air conditioning of terminals also using clean energy and also the use of electric cars within our airports by us and also by the handling operators. So all-in-all, in order to reduce the climate impact of our network, but also trying to influence also the airline industry in terms of trying to use, in the future, hydrogen or other kind of sustainable fuels on this industry. Nevertheless, also remind you that, on our Annual General Meeting that was held 2 days ago, the climate action plan was approved, and you have a copy of this action plan on our website that you can download and read it in detail. Thank you.
I will answer your question on the WACC. First of all, we should beat WACC proposal that it is what we believe is our cost of capital, regardless whether this is higher, lower or equivalent to the previous one. It's true that the rates went down, but it's true as well that following the CNMC methodology that they have already applied to a number of other industries in Spain, we took the view that the current risk-free rates in Spain are somehow affected by the quantitative policies -- sorry, right to incorporate an element of correction or adjustment. That was already taken into account, as I said before, by the CNMC in a number of other regulatory instances. And in our case, we added that to the risk free rate to the Spanish bond yield to come to the risk-free rate. And with regard to the cost of equity, no doubt at all that the EBITDA went up. Statistically, this is absolutely clear, crystal clear. If you take into account the weight of the cost of equity in our WACC calculation is disproportionately, or disproportionately is not the right word, is higher than the relative weight of debt, all that together led us to cost of capital that is higher than the one we have today. We are happy to share with you if you need the details, frankly, no issues at all. But those are the two key headlines, if you like.
Your next question comes from the line of Dario Maglione calling from Exane BNP Paribas.
Three questions for me. On traffic for July and August, what's your assumption in terms of best case and worst case? Second question again on traffic. If we look at the US, the leisure traffic is really picking up quite quickly. When do you think leisure traffic in Spain will recover to 2019 level? And why not as soon as next year? And final question on the regulation, DORA II. And so, Aena put forward the proposed MAG for the DORA II. How do you expect the image to be in 2022 and 2023 taking account all the adjustments [Indiscernible] COVID and so on?
Well, regarding the traffic, July and August, since it's very difficult to give you any any forecast. Sincerely, I think that the -- talking in line to what Jose has mentioned a few minutes ago. First of all, we have to see how the different restrictions from the different countries are being lifted. One of them being the UK and whether or not initially Spain or certain regions of Spain are included in the -- well, the different traffic lights. So that would also be very important to what is going to be the traffic recovery. Nevertheless, we also have the domestic part that, as long as the State of Alarm ends by the 9th of May, the restrictions to travel within the different regions would be lifted. So this kind of traffic will not have any limit, hopefully, in the next month. So we might see a certain recovery coming from the domestic traffic, hopefully, similar to what we saw in July last year once the -- also the [Indiscernible] period and the restrictions were lifted here in Spain. In the case of the -- well, the example you have made of the US and leisure pick up. Well, undoubtedly, Aena network is going to benefit from our high percentage of leisure traffic in comparison with other airports. And that's also the reason why I was pointing now this UK, German and domestic leisure traffic.
Nevertheless, also, I think it's too soon to know whether this leisure traffic is going to be recovered back to 2019 figures next year, or is it going to take a longer term. As you can imagine, the current situation also in terms of vaccination programs, I think is going pretty well. And I think the prospects are -- well, tend to be optimistic. But sincerely, we prefer to wait and see before trying to stick to a certain year or for those that recovery. Your final question was regarding just the MAG and MAG of 2022, 2023. As we have mentioned earlier in this call, the MAG of years '22 and '23 is going to be affected by the K factor concentration coming from year '20 and '21. This negative impact is partly going to be offset by the COVID expenses and also the security expenses that we have also included in our proposal of regulation. And we have, let's say, another card that could be raised and has to be analyzed by the regulator, as Jose has mentioned also earlier, on this deficit created by the tariff cap during DORA II and that's it. Sincerely, we have the final regulation in September to see how this could be offset and how the regulation -- let's say, the regulator regulates on this front.
Your next question comes from the line of José Arroyas calling from Santander.
My questions have been answered.
Your next question comes from the line of Nicolò Pessina calling from Mediobanca.
Just a few quick follow-ups. The first one is with traffic in 2021, we feel very well below the 2019 level. Would you expect a high level of concentration as you were last year with a negative K factor in 2023? Probably yes, hearing the answer you just gave a minute ago, but I just wanted to have a confirmation of this. Second, with negative inflation in 2020 in Spain, should we expect a negative peak factor in 2022? And finally, we talked about Brazil before. The State of São Paulo recently launched an action for '22 very small regional airports. I'm wondering if you are looking at this option as an opportunity to grow in the country.
Regarding your first question, well, I think you have also answered yourself. Yes, we believe certain kind of -- or a certain amount of concentration is going to be generated in 2021. Nevertheless, we have to see how the traffic evolves. This first quarter, it has been a concentration. But as I mentioned, we still have to see what happens in third and fourth quarter in order to have a clear view of what is going to be amount that could be affecting on 2023 tariffs. Regarding your question on Brazil, I don't know if I got it correctly. You were mentioning 22 airports tender?
No, the key factor in 2022 should be negative, even negative inflation in 2022?
Well, Nicolò, with regard to the inflation in Spain and the index, as you know, they follow separate ways. So it's difficult to assess the key factor just by looking at the headline CPI, I would say, impossible because I wouldn't be able to tell you, so, frankly. And the final one, which round, in particular, you were thinking of in terms of the Brazilian?
Well, the state of São Paulo recently launched an option for 22 regional airports within the state.
We are looking at every opportunity there, but this is probably a longer shot. This is not for this year, as you said. I'm not aware of anything in mediate in Brazil, to be honest, for 2021, I'm not aware of anything. Maybe I'm missing something, but, no, I don't think so.
There are no further questions on the phone lines, so if you'd like to continue?
Okay. Then thank you very much to all of you for joining us on this quarterly presentation. As in other occasions, well, we'll be here on the first half results presentation next month of July. Thank you very much. Take care. Bye-bye.