Fitch Affirms Capital Region Airport Commission (VA) Airport Revs at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A-' rating on approximately $102.6 million outstanding airport revenue bonds issued by the Capital Region Airport Commission (VA) on behalf of the Richmond International Airport (RIC).

The Rating Outlook is Stable.

Rating Rationale

The rating reflects RIC's small, predominantly origination/destination (O&D) market within a capital city. The enplanement base, which has shown some recent stability relative to peers, is still susceptible to persistent volatility while operations are heavily supported by non-aviation revenues. The airport's moderate debt level and liquidity position, however, provide the ability to sustain some weakness in operational performance. Additionally, the airport's low cost per enplanement (CPE) and hybrid airline use and lease agreement (AUL) are strengths within the rating category.

Key Rating Drivers

Essential Service Area with Small Enplanement Base: RIC serves a relatively small, but primarily O&D, traffic base of 1.6 million enplanements. Enplanements have historically been stable but recently experienced some erosion beginning in fiscal year (FY) 2009. Richmond, Virginia (rated 'AA+' with a Stable Outlook by Fitch) has a strong underlying economic base supported by governmental and educational sectors. The airport's traffic is favorably balanced with business passengers as well as a diverse carrier mix. Two airports in the Washington D.C. region are within 90 miles of RIC but competition is limited. Revenue Risk-Volume: Midrange

Airline Agreement Provides Stability: RIC operates with a competitive and generally stable cost structure under its current hybrid rate-setting airline use and lease agreement. Non-airline revenues account for approximately 66% of pledged revenues allowing CPE to remain in the mid-$5 range. While Fitch believes a diverse revenue stream contributes to low airline costs, a reliance on non-airline revenues could expose the airport to enplanement volatility or economic cyclicality risk. Revenue Risk-Price: Midrange

Manageable Capital Plan: The capital improvement plan is robust at $163 million through 2019; however, management does not expect to issue additional parity debt in the near term. The terminal was expanded in 2007 and major landside projects have been completed. Remaining airside projects will be predominantly grant-funded. Infrastructure Development and Renewal: Stronger

Conservative Debt Structure: The airport's debt is entirely fixed rate with a flat-to-declining amortization profile. Bond reserves are cash funded. Debt Structure: Stronger

Stable Financial Metrics: Debt service coverage moderately improved from a historic low of 1.58 times (x) in FY2010 to 1.70x in FY2013. Leverage is manageable at 4.87x net debt to FY2013 cash flow available for debt service while the airport's 260 days cash on hand provides additional financial cushion.

RATING SENSITIVITIES:

--Additional leverage that measurably increases debt metrics above current levels or dilutes coverage below 1.5x range;

--Declines in the enplanement base that materially affect debt service coverage levels;

--Ability to control costs, maintain revenues or retain balance sheet liquidity in order to preserve historical levels of financial flexibility.

SECURITY:

The bonds are secured by the net revenues of RIC's operations and certain funds under the bond resolution.

CREDIT UPDATE:

Primarily a business and seasonal airport, enplanements declined 0.9% in FY2013 to 1.6 million. However, fiscal year-to-date traffic levels increased 1.9% through April 2014. In Fitch's opinion, this positive trend should continue through fiscal year-end (June 30) as peak levels have historically occurred during the summer. Generally, traffic has been stable, benefiting from a 98% O&D traffic base.

The airport's one-year AUL provides a rate setting approach that is compensatory for the terminal cost center and residual on the airfield. While the airport has not yet entered negotiations for a new agreement, it does not see any material changes as the commission looks to extend its contractual relationship with the airlines. Under the current agreement, management has maintained a stable and competitive cost structure by proactively managing operating expenses and diversifying its revenue stream. As a result, CPE has averaged $5.73 over the last five fiscal years.

Various destination changes occurred in the past year with flights to Cleveland being cut while additional service to Boston-Logan and New York's LaGuardia added. Additionally, existing service to LaGuardia and Atlanta was up-gauged to meet demand and the airport has further witnessed growing demand for its daily nonstop to Orlando. This summer (May to mid-August), the airport is trial-testing seasonal service to Cancun, Mexico and Freeport, Bahamas.

Total operating revenues increased 0.7% to $39.3 million in FY2013. The airport's operating margin remains stable, dropping only slightly to 48% this past fiscal year. While management has done a prudent job cutting operating expenses to match lower traffic volume, expenses increased 4.5% in FY2013. Additionally, the airport is exposed to discretionary spending risk with parking and concession revenues contributing 45% and 20%, respectively, of pledged operating revenues.

Management does not expect to issue additional parity debt in the near term as the capital improvement plan will be funded from a combination of state and federal grants, passenger and customer facility charges and local funds. Additionally, the airport recently finished an apron expansion on Concourse B which will allow the addition of new gates.

Additional information is available on www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832044

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Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart
Associate Director
+1-312-368-3214
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Daniel Adelman
Analyst
+1-312-368-2080
or
Tertiary Analyst
Emma Chapman
Associate Director
+1-312-368-2063
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart
Associate Director
+1-312-368-3214
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Daniel Adelman
Analyst
+1-312-368-2080
or
Tertiary Analyst
Emma Chapman
Associate Director
+1-312-368-2063
or
Committee Chairperson
Chad Lewis
Senior Director
+1-212-908-0886
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com