Fitch Affirms $204.3MM Orange County, CA, John Wayne Airport Revs at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'AA-' rating on approximately $204.3 million in outstanding Orange County, CA airport revenue bonds issued on behalf of John Wayne Airport (JWA).

The Rating Outlook remains Stable.

Rationale:

The ratings reflect JWA's strength as an origination/destination (O&D) market serving the wealthy population of Orange County, CA, with strong coverage, robust liquidity, and recently rising enplanements. Traffic has partially recovered from the declines throughout the recession. The airport's strong balance sheet and declining debt service mitigate the rise in expenses due to the recent completion of expansionary capital projects.

KEY RATING DRIVERS:

Diversified O&D Airport: JWA is the only commercial airport in Orange County, CA, and the second-largest commercial airport within the greater Los Angeles area, which results in a passenger mix which is 94% O&D. It is served by a diverse group of carriers with no single carrier currently representing more than 40% of the market. Revenue Risk - Volume: Midrange

Hybrid Use and Lease Agreement Through 2015: JWA operates a hybrid use and lease agreement which is commercial compensatory in the terminal and residual on the airfield. The combination of airline revenues derived from the agreement and performance non-airline revenues collectively generates significant sources of operating revenues to meet costs with a high degree of cushion. Further, cost per enplanement (CPE) remains competitive with other airports in the southern California region and is not under pressure to rise substantially if traffic stabilizes. There are no changes expected to the business terms in the airline agreement, with negotiations beginning in March 2015. Revenue Risk - Price: Stronger

Limited Future Capital Needs: JWA is nearing the end of its $543 million airport improvement program with just $73 million of additional projects remaining. No new borrowing is anticipated in conjunction with the program as funding is anticipated from a combination of grants and funds on hand. Once the program is complete JWA will have minimal capital needs for the foreseeable future which will be funded on a pay-go basis. Infrastructure development/renewal: Stronger

Conservative Debt Structure: JWA's fixed-rate debt remains relatively flat at approximately $18 million through 2030 then declines to approximately $6.4 million. JWA defeased the 2003 series bonds in full on July 1, 2013 and currently has no new money borrowing plans. Debt Structure: Stronger

Strong Balance Sheet Provides Financial Flexibility: JWA maintains a strong balance sheet with 659 days cash on hand as of FY 2013. The strong balance sheet provides JWA with a low net debt-to-cash flow available for debt service (CFADS) ratio of 1.77x. The debt service coverage ratio (DSCR) remained strong in FY 2013 at 3.23x using PFCs as an offset and 2.11x with passenger facility charges (PFCs) treated as revenue.

RATING SENSITIVITIES

--Negative: Future changes to the maximum annual passenger limit that could modify airport traffic potential.

--Negative: Additional leverage that results in a significant increase to JWA's net debt-to-CFADS ratio.

--Negative: Management's inability to control costs or a prolonged decline in enplanements given a rising CPE and limited revenue growth.

--Positive: None anticipated at this time.

SECURITY

The bonds are secured by the net revenues of JWA.

CREDIT UPDATE

Enplanements were up 5.5% in 2013 to 4.5 million following an increase of 0.6% in 2012. Between FY 2008 and 2013 enplanements at JWA declined 0.99% on average annually. Specifically, enplanements were down 3.5% in FY 2008 and 10.7% in FY 2009 due primarily to high jet fuel prices, airline capacity reductions, the bankruptcy and liquidation of Aloha Airlines and the overall downturn in both the local and national economy. Year-to-date FY 2014 enplanements through May are up 2.2% driven by higher average commercial carrier load factors and domestic enplanements.

JWA's carrier mix remains diversified. Southwest has maintained its position as the largest carrier by market share at JWA, currently representing about 40% of the market, and is followed by United with 17%, American Airlines with 13%, Alaska Airlines (9%), Delta (8%), US Airways (5%), and several other carriers that held below 5% of the market.

JWA's strong balance sheet is a credit strength as its unrestricted cash and investments and special investments with the treasurer were $144 million in FY 2013, down from $153 million in 2012, representing approximately 659 days cash on hand in FY 2013. The strong balance sheet provides a relatively low net debt-to-CFADS ratio of 1.77x. The sizable cash balances provide JWA with a considerable amount of financial flexibility. Airport management has historically demonstrated its willingness to use surplus revenues to pay down debt balances as it did to defease the 2003 series bonds in full on July 1, 2013, which Fitch views favorably. Long-term debt per enplanement equaled $46 in FY 2013, which is acceptable at the current rating level.

JWA's use and lease agreement, which expires in 2015, employs a residual rate-setting methodology on the airfield and a compensatory methodology in its terminal. This business model has consistently produced solid net operating income results of $34.4 million in 2013, up from $33.7 million in 2012. Operating expenses outpaced revenue growth from 2008-2013 with average annual growth rates of 6% and 1%, respectively, as a result of several expansionary projects coming online. If operating expenses continue to outpace revenue growth, operating income and financial margins will narrow. Under the current agreement the CPE was $9.95 in FY 2013.

Approximately 40% of JWA's revenues is derived from the airlines, while 60% is derived from all non-airline revenues sources that include parking, rental cars, concessions and other. JWA's DSCR under the calculation set in the bond documents has been in excess of 2.00x since 2004, coming in at 6.36x and 3.62x in FY 2011 and FY 2012 respectively. Calculating FY 2011 and FY 2012 DSCR using PFC as a revenue instead of an offset results in coverage of 2.42x and 2.16x, respectively. The CPE decreased from $10.38 in FY 2012 to $9.95 in FY 2013.

JWA is owned and operated by Orange County, CA under the direct control of the county board of supervisors. JWA operates under a settlement agreement between various groups within the county and the city of Newport Beach CA. The settlement agreement limits the average daily departures (ADDs) and million annual passengers (MAPs), which include both enplaned and deplaned passengers. Since early 2012, the four signees have been discussing a second extension to the settlement agreement. The proposed agreement is expected to take effect in 2015 and run through 2030. Current total passenger limits of 10.8 million annually will remain in effect through 2020, then increase to 11.8 million in 2021 and either 12.2 MAP or 12.5 MAP in 2026 depending upon performance.

JWA submitted a request in November 2013 to the U.S. Customs and Border Protection for designation as a Port of Entry, which if successful may increase international service at the airport. Fitch will continue to monitor this and other traffic-sensitive developments at JWA.

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=842938

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Contacts

Fitch Ratings
Primary Analyst
Zane Latham
Associate Director
+1-415-732-5612
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Tertiary Analyst
Matthew Chou
Analyst
+1-415-732-7576
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Zane Latham
Associate Director
+1-415-732-5612
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Tertiary Analyst
Matthew Chou
Analyst
+1-415-732-7576
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com