NEW YORK--()--Fitch Ratings affirms the 'BBB-' underlying rating on Susquehanna Area Regional Airport Authority's (SARAA; the airport or authority) approximately $149 million senior lien airport revenue bonds and 'BB+' on $24 million subordinate lien airport revenue bonds. The authority's senior and subordinate lien bonds are secured by a pledge of airport system net revenues and an irrevocable commitment of passenger facility charge (PFC) receipts. The Rating Outlook is Stable.
RATING RATIONALE:
--The authority's historically narrow coverage levels on its combined senior and subordinate debt obligations combined with an ongoing weak fund balances.
--Elevated leverage levels that constrains the airport's financial profile in future years. The debt burden is significant at approximately $273 million debt per enplanement when compared to the level of airport operations resulting in airline charges at close to $15 per enplanement.
--Limited size of the local air trade service area which is also subject to ongoing competition risk from larger regional airports. The traffic base is supported primarily by origin & destination demand anchored by state government and area corporations and universities but the overall passenger traffic level is small at approximately 650,000 enplanements. Carrier concentration is modest but any service reductions may influence traffic activity.
--Demonstrated ability by airport management in times of service fluctuations to raise airline rates and charges to meet bondholder covenants.
--Minimal future capital needs, with no additional debt plan.
KEY RATING DRIVERS:
--Management actions to maintain adequate cash flow to cover total airport obligations including rate adjustments to carriers and cost-containment strategies;
--Adverse developments with regard to air service or traffic. The AirTran service could be at risk given the recent acquisition by Southwest which currently serves at larger airports in the region.
--Actions to rebuild the airport's unrestricted liquidity and managing its debt service reserve accounts given the presence of credit lines which will expire in 2014. Fitch believes the liquidity risk exposure is potentially greater for the subordinate bonds given the lower coverage levels for such bonds.
SECURITY:
The senior lien bonds, which are secured by a pledge of airport system net revenues and an irrevocable commitment of PFC receipts. The subordinate lien bonds are secured by a subordinate pledge of airport system net revenues and receipts under a Federal Aviation Administration Airport Improvement Program (AIP) Letter of Intent (LOI) grant, all of which monies have been received.
CREDIT SUMMARY:
Historical financial challenges confronting the authority is a result of an aggressive capital spending for terminal infrastructure in the prior decade coupled with general underperformance of passenger volumes when compared to projections. The airport's dual lien structure allows for debt service coverage to remain solid at the senior lien level but otherwise weak on total debt. Coverage in fiscal 2010 with the benefit of a coverage account for calculation purposes was relatively stable from the previous year at 2.44 times (x) and 1.35x on senior lien and subordinate bonds, respectively. Without the coverage account, coverage levels on total debt was 1.21x. Fitch notes that with some traffic and revenue improvement in fiscal 2010, coverage has improved from 2008 and 2009 performance. Both coverage levels exceeded the required rate covenants of 1.25x for the senior bonds and 1.10x for all debt. For fiscal 2011, the authority expects senior lien debt service coverage to decline slightly to 2.23x, even with taking into account the use of PFCs as debt service offsets and considering the coverage account. Debt service coverage on total debt is expected to be 1.24x, in-line with historical coverage levels. The slight dip in coverage captures the authority's intention to increase staffing and forecast for slightly lower enplanement growth.
Traffic trends at the airport have been relatively stable during the recent recession with minimal air service and enplanement declines, despite the authority's very high cost per enplanement (CPE) levels at almost $15 per enplaned passenger. During 2010, travel demand improved with the growth in both load factors and seat capacity over the previous year. Fitch notes that in 2010 the airport turned in a seven year high traffic record of 671,000 enplanements. For fiscal 2011, the authority forecasts enplanements to decrease by approximately 3%, reflecting the ongoing uncertainty with rising oil prices and the possible adverse impacts on seat capacity. Additionally, Fitch views the airport to be highly sensitive to changes in service, particularly from AirTran given the pending integration with Southwest and the carrier's longstanding presence at Baltimore Washington International and Philadelphia International Aiport airports. The entrance of AirTran into the marketplace in late 2008, thus the airport's high cost structure and small enplanement base may leave the airport more vulnerable to retrenchment should AirTran and Southwest choose to consolidate operations in the general region.
Operating revenues increased by 6% from 2009, underpinned by a 7.3% increase in enplanements in 2010 from 2009. Almost all business activities posted improvements; parking revenues increased a notable 21%, cargo landed weight increased by 20%, and landing fees grew by 19%. Additionally, in 2010, the authority raised vehicle parking charges in parking garages and long-term surface lots to $20 per day and $8.50 per day, respectively. Parking rates were also raised in 2009 to $18 in the garage spaces per day and $7 in the long-term surface lot per day. The authority delivered two years of operating and expense controls. In 2010, operations and maintenance (O&M) decreased marginally by 1.6%, driven by mid-year layoffs implemented in 2009 and the lack of any large renewal and maintenance efforts during calendar year. In 2009, O&M declined by 3.0%, which was accomplished through layoffs and cutting back employee benefits.
Airline cost levels are comparatively high for a small-size airport and will likely remain elevated given the authority's debt profile remains at maximum annual debt service (MADS) through 2033. In 2010, the authority's CPE of $13.34 was only slightly lower than $14.65 CPE generated in 2009. For 2011, the authority expects this figure to remain largely unchanged, reflecting the authority's demonstrated ability to control its variable O&M costs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010;
--'Airports Rating Criteria' dated 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
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