Fitch Affirms Chicago O'Hare Airport, IL Revs 'A-'; Outlook Revised to Stable; Affirms PFCs at 'A'

NEW YORK--()--Fitch Ratings has affirmed the 'A-' rating for the city of Chicago (the city) O'Hare International Airport's (O'Hare, or the airport) $6.56 billion senior lien general airport revenue bonds (GARB). In addition, Fitch affirms the 'A' rating for the approximately $664 million passenger facility charge (PFC) revenue bonds. The Rating Outlook for the general airport senior lien bonds has been revised to Stable from Negative. The Rating Outlook for the PFC bonds remains Stable.

RATING RATIONALE: The Outlook revision to Stable reflects steadying airport traffic trends and greater certainty of American Airlines' operational support at O'Hare following the carrier's emergence from bankruptcy and subsequent merger with US Airways. Also factored into the rating is the favorable progress towards the airport's capital program with overall costs continuing to remain in line with earlier forecasts.

O'Hare's key credit and financial metrics, including leverage and coverage, are weaker than the indicative range for a large-hub 'A' category airport. However, Fitch considers the overall strength of the franchise which includes a strong local market, the strategic location of Chicago as a hub, and the demonstrated importance of the airport to both United and American Airlines, to somewhat mitigate these current concerns. The PFC bonds are rated at the 'A' level to reflect its high coverage ratios and lower leverage as compared to the general airport bonds.

KEY RATING DRIVERS

Revenue Risk - Volume: Stronger

SIZABLE TRAFFIC BASE SUBJECT TO CONCENTRATION AND CONNECTING EXPOSURES: O'Hare is the primary airport within the Chicago metropolitan area and is well positioned to serve as a major domestic connecting hub and international gateway. The airport relies heavily on its two dominant carriers, United Airlines and American Airlines, with an over 75% combined market share. Connecting traffic captures approximately half of the total 33.3 million enplanements. Traffic performance has been flat for several consecutive years with modest capacity reductions occurring at both United Airlines and American Airlines. Over the long term, Fitch expects the airport to demonstrate resilient traffic performance despite cycles in the economy and aviation sector.

Revenue Risk Price - Stronger

STRONG RATE SETTING MECHANISMS: The existing residual agreement runs through 2018 and provides for timely recovery of airport costs including funding requirements for reserve maintenance. Airline costs per enplanement (CPE) are currently moderate for a large-hub airport at $14.15 but are expected to rise above $20 over the next five years and potentially peak at over $25 later on as airport capital spending is captured in the airline rate base. Fitch believes the airport has successfully demonstrated its ability to pass costs under this airline rate setting framework which is expected to remain in place beyond the current term of the agreement.

Infrastructure Development/Renewal - Midrange

LARGE SCALE CAPITAL PROGRAM: Much of the airport improvements are focused on airfield improvements to enhance capacity for hubbing operations. To-date, the airport has been successful on project delivery while maintaining costs within its $3.3 billion budget for first phase of the airfield modernization program. Up to an additional $3.3 billion is currently considered for the completion phases of the capital plan with existing spending progressing within budget.

Debt Structure - Stronger

CONSOLIDATED CAPITAL STRUCTURE: Much of O'Hare's airport revenue and passenger facility charge debt is issued in fixed rate mode with conservative debt amortization.

STABLE FINANCIAL METRICS BUT VERY HIGH LEVERAGE: Debt service coverage and liquidity metrics have historically been sound. Taking into account rollover fund balance transfers, debt service coverage was 1.15x in fiscal 2013. Liquidity from unrestricted reserves is adequate based on 299 days cash on hand. High leverage remains a concern with a 15.7 times net debt to cashflow available for debt service. This leverage will take a number of years to evolve closer to the 10x range.

PFC COVERAGE PROVIDES CUSHION. A sizable air traffic market supports a large annual pledged PFC revenue level of nearly $131 million. The stand-alone PFC lien has moderate leverage of under 5.0x and PFC debt service coverage is stable at 1.85x in fiscal 2013. Fitch's base case projections indicate coverage levels to remain close to 2x placing a small level of risk to the connecting traffic segment of enplanements. The PFC rate is fixed at $4.50 per eligible enplaned passenger and no adjustments are assumed in the Fitch projections.

RATING SENSITIVITIES

Negative: Further countercyclical traffics or a changing profile to the traffic base, influenced by hubbing operations from ORD's leading carriers could impact credit quality.

Negative: A higher reliance on debt to fund identified capital programs resulting in sustained high leverage would likely impact the airport's ratings.

Negative: Significantly higher costs borne by carriers above the current projection line of around $20 - $22 per enplanement over the next five years could affect the cost competitiveness of the airport and have a negative impact on the airport credit.

Positive: A material downward change to the overall airport leverage, and sustained on a long term basis could enhance the financial flexibility of the airport and have a positive impact to the airport's credit.

Peer Group: Among its peers in the 'A' rating category for a large hub, international gateway airports Dallas-Ft Worth and Miami International Airport, Chicago O'Hare has a very high leverage and airline cost pressure driven by the capital programs.

CREDIT UPDATE

The underlying strength of the airport comes from the passenger base that ranks among the nation's largest for both origination and destination (O&D) traffic as well as international services. Approximately 50 carriers operate out of O'Hare to approximately 150 domestic and over 50 international non-stop destinations. In 2013, the airport handled over 33.3 million enplaned passengers with about half being connecting traffic. Still, Fitch notes that the economic downturn affected overall traffic activity, with enplaned passengers dropping more than 12% below 2007 levels. Both O&D and connecting traffic were affected due to lower overall traffic demand and carrier rationalization of capacity and service levels.

Operating data in recent months indicates healthy improvement in traffic volumes, with traffic up 4.1% over the first six months of 2014. This activity follows several years of largely weaker performance trends of flat growth since 2010. Both United [Issuer Default Rating (IDR) 'B' with a Positive Outlook by Fitch] and American (IDR 'B+' with a Stable Outlook) contribute the largest shares of O'Hare's enplanements with approximately 46.9% and 33.7%, respectively.

American emerged from bankruptcy in late 2013 and successfully completed its merger with US Airways. Both the American bankruptcy and merger developments have not led to any material operational changes. American has also indicated that O'Hare would remain an important role in both its hubbing network and international gateway roles. The stability of American is important as the carrier, together with United, will be influential to O'Hare's future capital investment and leveraging commitments.

O'Hare is close to completion of the first phase of the $3.3 billion OMP that includes new runways and runway extensions. Costs related to the completion phases of the OMP, which will cover the additional airfield projects, are also anticipated to be close to $3.3 billion. Together, the airfield projects position the airport better for capacity to manage operational growth. The phase 2A component, smaller at $1.03 billion, has already been approved by signatory carriers and all of its funding sources have been secured. Approximately $435 million has been spent to-date and the next runway project associated with this phase is expected to be completed by the end of 2015.

A future phase 2B component is much larger in scale at over $2 billion, and additional airline approvals would be needed to move forward. Fitch will consider the financial plans to support the entire capital program, including the timing and degree of future leverage on either the GARB or PFC credit. The airport's overall debt levels are already significant on a combined basis at slightly over $7 billion. Fitch estimates that net debt to CFADS is currently 15.7x for the GARBs but could fall to the 10x - 11x range over the next five years.

The overall airline cost and financial profile is reflective of both the residual operating agreement and growing fixed costs associated with debt issuances that supported past capital programs. Historically, O'Hare's financial operations have produced stable debt service coverage, at or exceeding 1.1x, and the estimated CPE was $14.15 in 2013. Going forward, coverage levels on overall airport debt are expected to remain largely at the minimum required 1.10x level specified under bond documents, but will require substantial increases in airline fees to cover higher debt costs. The latest sponsor traffic and financial forecasts assume both the full leveraging under the 2A and 2B capital programs and a positive direction in traffic performance that averages about 1.5%% annual growth through 2022, indicate that CPE levels will peak at about $25 after 2020. Fitch views the traffic growth assumptions to be somewhat optimistic given the recent performance in traffic, even in the context of post-recession recovery, and the risk of market share loss to the faster growing City-owned Midway airport. Underperformance in traffic would likely translate in even higher airline charges that may risk its ability to attract more services.

The PFC credit has historically maintained healthy coverage cushions. In 2013, debt service coverage derived from $131 million in pledged PFC revenues was 1.85x. Coverage of future maximum annual debt service is projected to remain over 1.90x based on current traffic levels. Fitch's rating on the PFC debt considers the risks inherent in the narrow nature of the revenue stream rendering the projected coverage ratios susceptible to losses in the connecting portion of the airport's traffic as well as only modest potential borrowings to support the capital program.

SECURITY

The airport general revenue bonds are secured by a first lien on airport net revenues. The PFC bonds are secured by a first lien on the PFC receipts.

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. 12, 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=855414

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Contacts

Fitch Ratings
Primary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com