Fitch Affirms Palm Beach County, FL Dept of Airport's $98MM System Revs at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Palm Beach County, Florida, Department of Airport's approximately $98.4 million of outstanding airport system revenue bonds at 'A'. The Rating Outlook is Stable.

AFFIRMATION RATIONALE

The airport's rating affirmation reflects a stable to improving traffic profile that serves an affluent area of south Florida that benefits from above average wealth levels and an appropriate mix of year-around business and leisure travel. The airport is serviced by a broad mix of major carriers with cost per enplanement (CPE) levels appropriate for its rating category. Beginning in fiscal year (FY) 2015, debt service will substantially drop leading to strong financial metrics, liquidity and flexibility for the rating level. However, the airport is limited to this category due to its size, relative market competition and susceptibility to moderate economic cyclicality.

KEY RATING DRIVERS

Medium Hub with Diversified Carrier Base: Palm Beach International Airport (PBIA) served 2.8 million enplanements in FY2013 (ending Sept. 30). This represents a slight increase of 0.5% year-over-year compared to FY2012. PBIA features a well-diversified carrier mix with no single airline exceeding 26% of enplanements and further benefits from a top 30 destination pair with its service to New York City. Revenue Risk - Volume: Midrange

Low Historical Cost Profile: The airport utilizes a hybrid use and lease agreement (AUL) that provides adequate cost recovery terms as well as moderate airline charges. The current agreement expires Sept. 30, 2014 but a new agreement is nearing approval and is expected to be extended for a five year term. The airport's CPE remained moderate relative to peers at $7.40 for FY2013, less than the $7.76 CPE in FY2012. The airport forecasts its CPE level to be reduced another $0.20 in FY2014 followed by a further reduction to the $4 - 5 range beginning in FY2015 when annual debt service requirements drop substantially. Revenue Risk - Price: Midrange

Moderate Infrastructure Plan: The five-year capital improvement plan is modest at $90 million and will be largely funded through airport improvement program grants and passenger facility charge (PFC) revenues, with no additional borrowing planned. Infrastructure Development and Renewal: Stronger

Conservative Debt Structure: All of PBIA's debt is fixed rate with annual debt service in the mid-$6 million range from FY2015 to FY2036. Debt Structure: Stronger

Low Leverage and Strong Liquidity: PBIA's net debt to cash flow available for debt service (CFADS) of 1.44x is low relative to peers. In FY2013, the airport's debt service coverage ratio (DSCR) decreased to 1.65x from 1.70x; however, the airport maintained a healthy level of $61.8 million in unrestricted cash, equivalent to 567 days cash on hand, and coverage is expected to substantially increase as debt service decreases next fiscal year.

RATING SENSITIVITIES

--Strained Traffic Performance: Material shifts in the airport's traffic profile, to levels closer to 2 million enplanements, due to either an elevated dependence on leisure-oriented traffic or the extremely competitive environment within the south Florida region may weaken credit quality;

--Weakened Financial Flexibility: Material changes in the financial profile that negatively affect leverage, coverage or liquidity would likely add downward pressure on the current rating;

--Positive Outlook: The airport's size, coupled with inherent vulnerabilities to competition from larger airports in the region, restricts the likelihood of a higher rating.

SECURITY

As special obligations of the county, the county irrevocably pledges all net revenues of the airport system and all funds established by the Bond Resolution.

CREDIT UPDATE

Enplanements increased 0.5% in FY2013 and, through seven months of FY2014, have increased an additional 3.3%. From FY2007, after reaching an enplanement base of 3.5 million, PBIA experienced a substantial erosion of its traffic base by nearly 20% through FY2012. This downturn was caused by airline consolidation, and their effects on seat capacity and service cuts, the weak economy and competition from other south Florida airports. However, enplanements are stabilizing, and possibly beginning to rebound, as the economy recovers and service carriers look to backfill their competitors' old routes as well as increase their own service offerings.

Over the last year, the airport experienced 18% and 13% passenger reductions within Southwest Airlines/AirTran's (Southwest, rated 'BBB' with a Stable Outlook by Fitch) and United Airlines/Continental Airlines' (United, rated 'B' with a Positive Outlook) service related to residual effects of their mergers, respectively, as they trimmed duplicate routes. However, the airport experienced aggregate passenger growth of 7.5% within service provided by their remaining, more predominant, carriers as they added service at PBIA.

In November 2013, American Airlines, Inc. (American, rated 'B+' with a Stable Outlook) added additional daily service to LAX and LGA. Other carriers have followed suit as they added new service to Newport News (6x per week), Nassau and Montreal (both 3x per week), and Asheville (2x per week). The airport is hopeful that two other carriers announce additional routes in the near term as well as the possible addition of a new carrier later this year. Noteworthy, PBIA serves a top 30 destination pair with its service to New York City (ranked #26 city pair by passengers as of Sept. 30, 2013).

Non-aviation revenue increased 2.9% in FY2013, following a FY2012 increase of 0.6%, and represents 48% of total operating revenues of the airport. The two largest drivers of non-aviation revenue at the airport are parking (23% of total operating revenue, $14.7 million) and car rental concessions (16% of total operating revenue, $10.3 million). Parking realized a 2% increase from FY2012 while car rental concessions realized a 4% increase. No parking fare increases were recently implemented nor are future increases planned according to the airport. Other concessions and operating revenue represent 14% of total operating revenue and realized an increase of 3.6% from FY2012.

Operating costs decreased 2% in FY2013 due to cost-cutting measures related to Fire Rescue services (11% decrease) and General/Administrative contractual service savings (9% decrease). Salaries and benefits make up the largest component of operating costs (27%) and realized a 3% increase year-over-year. In FY2016, the inline baggage handling system will come online, adding an incremental cost of approximately $1.5 million per year. The airport and the carriers anticipate this increase and have taken it in to consideration during recent AUL negotiations.

Fitch developed base and rating case scenarios on the premise that traffic levels may experience different levels of stresses over the next several years. In both cases, the FY2014 DSCR is expected to maintain its current level before improving to well above 2x over the subsequent four years. Similar to the airport's forecasts, the base case projects moderate enplanement growth of approximately 1%. Under such scenario, the CPE declines to just under the $6 level in FY2015 while the DSCR eclipses 3x. Fitch's rating case stresses traffic to the 2.6 million enplanement range in FY2016, concurrent with other expected operating cost increases, resulting in CPE falling to only the high $6 range and DSCRs in the mid-2x range. The airport also maintains the ability to apply PFCs, PFC interest income and environmental operating fees collected annually toward DSCR calculations, which would result in appreciably higher levels of coverage compared to the indenture reported calculation.

Additional information is available at '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=835696

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart, +1 312-368-3214
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman, +1 212-908-0755
Senior Director
or
Tertiary Analyst
Markian Dziuk, +1 312-368-3187
Analyst
or
Committee Chairperson
Chad Lewis, +1 212-908-0886
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Casey Cathcart, +1 312-368-3214
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Seth Lehman, +1 212-908-0755
Senior Director
or
Tertiary Analyst
Markian Dziuk, +1 312-368-3187
Analyst
or
Committee Chairperson
Chad Lewis, +1 212-908-0886
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com