Fitch Rates Dallas-Fort Worth Airport Joint Revenue Refunding Bonds Ser 2014E 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to approximately $97.2 million joint revenue refunding bonds, series 2014E, issued by the cities of Dallas and Fort Worth, Texas for Dallas - Fort Worth International Airport (DFW). In addition, Fitch has affirmed approximately $6.3 billion in outstanding DFW bonds at 'A'. The Rating Outlook is Stable.

RATING RATIONALE

The rating reflects the strong demand for air travel in an expanding market, the strategic location of Dallas-Ft Worth to serve as a hub, stability from the recent American Airlines-US Airways merger, and coverage metrics that remain constant. The high degree of single-carrier exposure and the capital program which focuses on terminal redevelopment, leading to a sizable increase in airport borrowings in recent years, constrain the rating. Operating characteristics and leverage metrics are comparable to other large-hub 'A' category airports.

KEY RATING DRIVERS

SIZABLE TRAFFIC BASE SUBJECT TO CONCENTRATION AND CONNECTING EXPOSURES: DFW is located in a strong primary market area that generates strong demand for air service. DFW has a base of 30.1 million total enplanements, of which 12.8 million are categorized as origination/destination. Further, DFW's favorable central geographic location provides for a well-balanced traffic profile for both domestic and international passengers. The bankruptcy of DFW's leading carrier, American Airlines (85% of enplanements) and American's merger with US Airways have not impacted operations at DFW. Fitch will continue to monitor developments of the combined carrier at DFW. Revenue Risk - Volume: Midrange.

STRONG RATE-SETTING MECHANISM: The current airline use agreement (which runs through 2020) allows for timely recovery of costs within all airline cost centers. The agreement also provides for adequate cash flow generation to meet all funding requirements under the bond documents as well as funding for renewal and replacement. Airline costs are currently low for a large-hub airport at $7.20. However, rates will steadily increase over the next five years as capital spending is funded. Revenue Risk - Price: Stronger.

LARGE-SCALE CAPITAL PROGRAM WITH RELIANCE ON ADDITIONAL BORROWINGS: Much of the $2 billion terminal renewal and improvement program (TRIP) as well as another $2.2 billion of airport improvements will be funded by up to $2 billion of additional borrowings. While there have been some recent modest upward revisions to the TRIP budget, and potential for over $500 million of additional TRIP projects coupled with $300 million of additional projects under consideration, Fitch currently does not see these developments as a material credit concern., Prudent management of capital spending and borrowings, however, will be critical to credit maintenance. Infrastructure Development and Renewal: Midrange.

FIXED-RATE, LOW-COST CAPITAL STRUCTURE: All of DFW's debt is issued in fixed-rate mode with generally conservative debt amortization. Aggregate general airport debt is projected to peak at $7 billion in 2016 and approximately 30%-50% of future debt service is expected to be paid from passenger facility charges (PFC). Debt Structure: Stronger.

STABLE BUT MORE LEVERED FINANCIAL POSITION: Debt service coverage and liquidity metrics have been sound. In fiscal 2013 (ended Sept. 30), debt coverage was 1.50x combined (including the use of rollover coverage funds) with 710 days cash on hand. High leverage remains a concern as debt per enplanement was around $205 in fiscal 2013 and $488 per origination enplanements.

RATING SENSITIVITIES

Negative: Enplanement Declines: Losses in total enplanements that signify a change in American's total support at DFW (15%-25% reduction from current levels).

Negative: Lack of Adequate Revenue Growth: Flat or declining airline and non-airline revenue for multiple years.

Negative: Leverage: Borrowing Beyond the Current Plan: Significant additional borrowing beyond the airport's current plan.

Positive: Unlikely given the growing debt burden to support the capital program.

SECURITY

The bonds are secured by an irrevocable first lien on gross revenues generated by the operations of DFW, as well as PFC revenues to the extent they are specifically pledged to an individual series of bonds.

TRANSACTION SUMMARY

Net proceeds of the series 2014E bonds will be used to refund maturities of the series 2004B and 2007 bonds for debt service savings. Additionally, a portion of the proceeds of approximately $14.2 million will be used to provide for additional deposits into the debt service reserve fund in order to meet the post-issuance requirements. The 2014E bonds will be fixed-rate obligations with final maturity of Nov. 1, 2027.

Fitch views DFW as an airport with an important role in the national aviation system and a favorable geographic location to support its standing as a Midwestern transportation hub. Fiscal 2013 operating data indicated positive trends in enplanements (30.1 million), up 3.3 % over the prior year, with growth in both domestic and international passengers. Connecting passengers remain the dominant component of traffic, representing 58% of total passengers. For the first six months of fiscal 2014, the airport is realizing additional traffic growth of about 2.1%, primarily supported by domestic operations with American Airlines. Improvement in traffic is having a positive impact on year-to-date non-airline operating revenues, up 10.7% for the first six months of fiscal 2014.

American Airlines, including American Eagle and its recently merged US Airways, account for an 85% market share of traffic. Even through the recent bankruptcy period followed by the merger with US Airways, American has demonstrated a strong commitment to the Dallas-Ft Worth market and is expected to remain a vital hub for its global network. DFW is the largest hub operation in the combined American - US Airways network, with over 800 daily departures and is supported by a favorable, high average passenger yield. The current rating level assumes the combined carrier will maintain a comparable level of operation at DFW.

The elimination of flight restrictions at nearby city of Dallas' Love Field airport later in 2014 may create more competitive dynamics between the two regional airports, particularly for air services at major domestic markets. Fitch notes that Love Field has physical limitations for growth and would not be introducing international service.

Financial performance under the current airline agreement is healthy evidenced by stable debt service coverage levels and strong reserve balances. The ongoing capital programs, including the $2.2 billion TRIP, have resulted in a much higher leverage position in recent years. Still, the program is expected to enhance non-airline revenues while airline costs should be competitive with many of the hubs operated by other major network carriers.

The multi-year TRIP plan calls for an estimated $2.045 billion of expenditures at four existing terminals built in the 1970s. The TRIP budget has seen some increases over the past year and management is contemplating additional TRIP projects in the range of $650 million. Separately, potential scope additions of approximately $250 million are under consideration, including a new parking garage at Terminal C. The financial plan anticipates much of the funding will come from existing and future borrowings. Additional capital needs separate from TRIP are at a similar spending level although the funding will be more balanced with debt, grants and airport funds. The rising debt levels resulting from borrowings issued mainly in 2013 and 2014 will result in rising cost and leverage metrics. DFW's debt is expected to peak at $7 billion by 2016. The cost per enplanement (CPE) is likely to reach the $12-$14 range from the $7.20 level in fiscal 2013. Similarly, net debt to cashflow is now very high at 15x and will remain over 10x for the next several years under both the airport's financial plan and Fitch's base case forecast.

Debt service coverage levels are expected to remain stable near 1.5x (including the use of rollover coverage funds) over the five-year forecast period. In Fitch's view, the overall financial flexibility including the airline cost and debt service coverage stability will depend on both maintenance of current traffic performance as well as steady and timely growth in airline and non-airline revenues. In particular, revenue growth in terminal concessions and commercial development activities will be instrumental to preserving the airport's financial profile. Fitch recognizes that the TRIP enhancements have the potential to increase concession revenue from new and reconfigured concession spaces, increase parking revenue from expanded and improved parking garages, and reduce operating expense through energy and maintenance cost savings.

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 Airports

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

Rating Criteria for Infrastructure and Project Finance

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=846974

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Contacts

Fitch Ratings
Primary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10041
or
Secondary Analyst
Jeffrey Lack, +1-312-368-3171
Associate Director
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10041
or
Secondary Analyst
Jeffrey Lack, +1-312-368-3171
Associate Director
or
Committee Chairperson
Scott Zuchorski, +1-212-908-0659
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com