NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the Memphis-Shelby County Airport Authority, Tennessee's (the Authority) proposed $144 million series 2011A bonds and $44 million 2011B bonds (collectively referred to as the 2011 issuance). In addition, Fitch has affirmed its 'A+' rating on the Authority's approximately $479.2 million outstanding bonds secured by the net revenues generated by the operation of Memphis International Airport (the airport).
The Rating Outlook is Stable.
RATING RATIONALE:
The A+ rating reflects:
--The airport's position as the primary airport serving the City of Memphis TN and surrounding region.
--The airport's long-standing premier ranking as the world's busiest cargo airport by tonnage with the presence of Federal Express Corporation's (FedEx) Worldhub operations and major capital investment on airport property.
--Moderately scaled capital improvement program (CIP) with no anticipated future borrowing needs through 2015.
--The airport's residual methodology enables the airport to pass along all costs to the air carriers to the extent non-airline and cargo related revenues are insufficient.
--The airport's financial flexibility as one of very few U.S. airports that does not levy a passenger facility charge (PFC).
--High carrier concentration with Delta representing 87% of enplanements and high proportion of connecting traffic due to Delta's hubbing operations with O&D representing only 36.9% of all passenger traffic.
--Historical enplanement fluctuations.
--The short-term nature of the airport's current use and lease agreement which expires in mid-2011.
--The potential for modest origination and destination leakage to competing airports which have competitive airfares.
--Anticipated changes to the Additional Bonds Test which will make it easier for the airport to increase its leverage.
KEY RATING DRIVERS:
Future rating actions are likely to be influenced by the following:
--Major loss of Delta flights at the airport.
--Reduction in FedEx operations at the airport.
--Management's ability to control costs.
--Further volatility in enplanements.
SECURITY:
The Authority's bonds are secured by net revenues of the Authority.
CREDIT SUMMARY:
The proceeds of the 2011 issuance will be used to refund all or a portion of the Authority's 1999D, 2001A, and 2001B bonds for economic savings.
The airport is located approximately 13 miles from Memphis' central business district and serves the eight-county Memphis metropolitan statistical area. The airport served 4.97 million enplaned passengers in fiscal 2010 (fiscal year ended June 30), down 3.6% from fiscal 2009 (the airport had projected a 7% decline in 2010), levels last seen in fiscal 1999. The airport recently restated its enplanements for FY 2001-2009 to correct a reporting error that excluded certain Northwest Airlines enplaned passengers (international passengers) from the total enplaned passenger count. The restatements for these periods resulted in annual enplanements increases that ranged between 136,243 to 190,823 enplaned passengers. The enplanement declines at the airport began in calendar 2008; however, September and October 2010 were up 2.5% and 0.8%, respectively, over the same months in 2009.
With the merger of Delta/Northwest in late 2008, the airport effectively ranks as the fifth largest domestic hub in the combined network. Including its regional affiliates, the carrier is the airport's leader, representing 87% of total enplanements in fiscal 2010. US Airways Express is the next largest carrier at 3.7%, followed by American Airlines at 3.2%. Given this carrier composition, any major loss of connecting flights may result in a much lower traffic base with difficult recovery prospects and pressure the rating.
The presence of FedEx balances the operations of the airport and provides a cushion against any decline by Delta. FedEx recently signed a 30-year lease agreement at the airport with two 10-year options, and the carrier accounted for 99% of total cargo volume at the airport in fiscal 2010, and has represented at least 92% of such activity since fiscal 1992. Long-term stability will be heavily influenced by Delta and FedEx's commitment to the airport.
The airport's airline agreement employs a cost center residual rate-setting methodology which expired in June 2010 and has been extended to June 2011. The airport expects to enter into a new 10-year agreement beginning July 2011, which will employ the same methodology. The agreement allows all parking and concession revenues to be credited to the terminal cost center resulting in a competitive airline cost structure. In fiscal 2010, the Authority's operating revenues remained diversified. The airport's fiscal 2010 revenues of $104.5 million were derived from the following sources: 29.3% Passenger Airlines; 36.6% Cargo Airline; and 34.1% Non-Airline. While the airport's enplanements have declined 20% since 2001, expenses have continued to grow at a CAGR of 2.86% in the same period. The airport could have greater financial flexibility and cushion if it were to adjust expenses in line with enplanements.
The airport does not currently levy a PFC, implementation of a PFC could generate more than $20 million in annual receipts at the maximum $4.50 per passenger rate. While no near-term plans are in place to institute this commonly used charge, most of the collected funds would be available to defray debt-service costs on the airport's outstanding debt. Fitch views this revenue option as a potential source of financial flexibility.
The airport's net revenues, including the coverage carryforward account, have historically provided sufficient debt-service coverage ratios, ranging from 1.25x to 1.44x since fiscal 2001. Without including the coverage carryforward account ratios have been closer to 1.1x. The airport projects debt-service coverage to remain at or above the rate covenant of 1.25x for the foreseeable future. The residual nature of the current airline agreement enables the airport to continue to meet its coverage requirements.
In addition, the Authority pays the debt service on approximately $3.92 million in outstanding general obligation (GO) bonds issued by the city of Memphis (GO bonds rated 'A+' by Fitch) that financed earlier airport projects. The GO bonds mature in 2012. The bonds are payable from excess net revenues of the airport authority, after payment of general airport revenue bond debt service. Coverage of total obligations has ranged between 1.13x and 1.34x since fiscal 2001 and is projected to remain at or above 1.2x through fiscal 2015.
The airport's modest 2011-2015 CIP is almost fully funded, no future borrowing anticipated through CIP expiring in 2015. The program contains a total estimated cost of more than $265.6 million. Project costs are to be partially funded with federal and state grants (75%) and existing Capital Fund (25%).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Rating Criteria for Infrastructure and Project Finance Aug. 13, 2010;
-- Rating Criteria for Airports, Nov. 29, 2010.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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