CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on approximately $1.526 billion in outstanding airport system revenue bonds issued on behalf of Florida's Fort Lauderdale-Hollywood International Airport (FLL or the airport). The Rating Outlook is Stable.
The rating reflects a large and growing airport serving a predominantly leisure-based market in south Florida that faces moderate competition from airports in nearby Miami and Palm Beach. The airport's cost structure and liquidity compares favorably to its 'A'-rated peers while leverage is relatively high. The airport is currently undergoing a large capital program that, until its successful completion, constrains the rating due to uncertainty related to future debt load.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Growing Traffic Base, Carrier Diversification: FLL is the leading domestic O&D airport for south Florida with nearly 12 million enplanements. Carrier service exposure is exceptionally well-diversified across many low-cost carriers. Some vulnerability to traffic volatility is evident given the leisure-oriented market FLL serves; however, passenger trends are largely positive. Competition exists from both Miami and Palm Beach airports.
Revenue Risk - Price: Stronger
Sound Rate-Setting Structure: The airport currently utilizes a residual use agreement that runs through fiscal year (FY) 2016. Current airline costs are very low at $4.13 per enplanement, and Fitch believes that the airport has sufficient economic flexibility to pursue its capital plan, even in a strained economic environment. However, Fitch views its flexibility to pass costs to carriers beyond current expectations as potentially more limited due to competition and low-cost carrier presence.
Infrastructure Development and Renewal: Midrange
Significant Capital Spending Underway: The extension of the airport's second runway as well as terminal expansion and redevelopment will come at a cost of $2.3 billion. Much of these costs will be funded through additional borrowing. While passenger facility charges (PFCs), grants and additional commercial revenues are expected to fund much of these added debt-related costs, traffic underperformance could translate to higher than planned airline charges.
Debt Structure: Stronger
Debt Structure is Conservative: The airport's debt is fixed rate with a flat-to-declining amortization profile, secured by a first lien on general airport revenue.
Adequate Metrics: Because of the residual agreement, the airport maintains narrow debt service coverage levels based on current operating revenue. Historical liquidity levels have been adequate while airport leverage is expected to rise in conjunction with the capital program.
Peers: Among its 'A'-rated, south Florida peers, such as Miami, Palm Beach and Lee County, the airport exhibits favorable cost per enplanement (CPE) levels and average liquidity. Traffic levels are stronger than all but Miami while debt service coverage and leverage are on the weaker end compared to peers.
RATING SENSITIVITIES
Negative:
-- Leverage: Significant additional borrowing beyond the airport's current plan;
--Traffic Base: Material declines in enplanement levels, due to competition or service changes, that pressure non-airline revenue generation and CPE levels;
-- Financial Performance: Material declines in liquidity or debt service coverage levels that adversely affect the airport's financial or operating profile.
Positive:
--Successful completion of the airport's current capital program, coupled with commensurate enplanement growth and revenue generation, which leads to below-forecast CPE levels and improved debt service coverage may lead to a higher rating.
CREDIT UPDATE
Enplanements and carrier service at the airport have shown solid performance in the last five years through estimated 2014, growing at an annually compounded rate of 3.3%. Total enplanements in FY2013 increased 0.4% and are currently on track to increase nearly 2% in FY2014, based on 11 months of data. The airport has continued to expand its international service presence in the last five years, most notably in the last 12 months, with a nearly 25% increase in international traffic. JetBlue Airways Corp. (JetBlue; rated 'B' with Stable Outlook by Fitch) has introduced eight new routes - six Caribbean and two South American, during the past year, in addition to their four new domestic routes to Jacksonville, Las Vegas, Pittsburgh and Worcester. New airline entrants, representing nine new routes, include: Copa Airlines; Norwegian Air Shuttle; TAME and Volaris. Additional discussions are underway with several foreign carriers to introduce new international service while current domestic carriers have added approximately 12 new routes. Low-cost carriers account for 61% of total enplanements.
The airport's revenue generation capabilities remain strong and diverse in Fitch's opinion. Operating revenue was $185.5 million in FY2013, a modest increase of 1.7% over the prior year, while FY2014 operating revenue is expected to grow nearly 6% based on healthy non-airline revenue and an anticipated increase in airline revenue. FY2014 operating margin is expected to improve to nearly 35%, from 32% in FY2013. Non-airline revenue, which represents approximately 74% of total operating revenue, increased 2.1% in FY2013. The main categories of non-airline revenue - rental car, parking and concessions, have been steadily increasing over the last couple of years, despite no significant increase in passenger activity. This increase in non-airline revenue has allowed the airport to maintain reasonable terminal rents and landing fees, resulting in its relatively low CPE. The airport is actively addressing its weakness in parking revenue, experienced in FY2008-09 as the result of significant rate increases and considerable competition from several off-airport parking operators that provide free shuttles, and is undertaking a key parking initiative to address customer concerns.
Management has emphasized cost containment practices in the last few years in order to maintain low operating expense, even during periods of high enplanement growth. In FY2013, salaries, wages and benefits increased 5.4% after several years of salary freezes and furloughs. Additionally, there was an increase in the number of full-time positions to meet service-level demands and the management of capital projects. Contractual services increased 10.7% as a result of a new ground transportation management contract and parking management fees, introduced to improve the operations and customer service levels for ground transportation services at the airport. In Fitch's view, management is cognizant of efficient cost containment, allowing expenses to grow only as necessary to maintain customer service levels. FY2014 operating expense is forecast to remain relatively flat, growing approximately 1%.
In order to accommodate current and future anticipated growth, FLL's approximately $2.3 billion 10-year capital improvement plan (CIP) includes extending the South Runway (recently completed on time and under budget), re-building Terminal Four's concourse including four additional gates, the construction of a new Concourse A in Terminal One, and the renovation of all four terminals. The South Runway extension should increase the capacity for airfield operations by 44%, by permitting simultaneous dual operations of air carrier aircraft of all sizes, while the terminal renovations will increase customer service levels and concession revenue generation. Although a large part of the CIP is funded through federal and state grants and PFCs, approximately $1.7 billion of funding will be provided through new bond issues from FY2012 through FY2017. Approximately 44% of this additional debt will be paid by grants and PFCs, with the remainder paid from airport revenues, through airline rates and charges. The additional debt paid from the airport revenues will increase the overall CPE, although planned improvements in non-airline revenues should mitigate this impact. In Fitch's opinion, this expansion and improvement program is consistent with other large airports within the portfolio.
In Fitch's base case, which incorporates moderate enplanement growth, cost escalation and additional debt issuance, debt service coverage, per the bond resolution, hovers just below 1.5x while net deb-to-adjusted cash flow available for debt service (CFADS) peaks just over 12x. In Fitch's rating case, which models for near-term enplanement stress and further cost escalation, debt service coverage is in the 1.3x range while leverage hits 14x. In both cases CPE levels grow to the high-$8 to mid-$9 range within five years. These financial metrics are in line with previous analysis.
SECURITY
The bonds are payable from the net revenue of the airport's operations. PFCs are not pledged by the bond resolution as a source of security of or payment for the bonds, but have been irrevocably committed as available revenue to the payment of debt service on various issues.
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=893094
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