Fitch Affirms Long Beach's (CA) Airport Rev Bonds at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings affirms the 'A-' rating on Long Beach, CA's outstanding $117.5 million airport revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating reflects a relatively small airport facility serving Long Beach and the surrounding area as well as a secondary airport for the greater Los Angeles air service area. LGB is acutely susceptible to JetBlue Airways Corp.'s (Fitch Rated 'B' with a Stable Outlook) service decisions as they compose of 80% of the market. Still, the past decade of passenger levels have been largely stable although recent activity has been weaker. City restrictions exist on the number of flights at the airport, and the limited air carrier slots continue to remain in high demand.

Small Hub with a Concentrated Traffic Base - Volume Risk: Weaker

The airport operated with 1.50 million enplanements in fiscal year (FY) 2013 (ending Sept. 30), of which 95% was origination & destination (O&D) traffic. This represents a 8.9% year-over-year decline compared to FY 2012. Through the first 10 months of FY 2014 enplanements have continued to decline by 4.9% and the airport expects traffic to reach a base of 1.4 million before stabilizing.

Moderate Historical Cost Profile - Price Risk: Midrange

The airport's cost per enplaned passenger (CPE) was low relative to peers at $7.50 for FY 2013. The airport forecasts 2014 CPE to be higher at $8.52. The airport utilizes an ordinance like approach for rate setting, which nets some non-airline revenues against annual debt service obligations. To the extent traffic levels were to face adverse developments, the economic capacity to raise airline rates could be limited.

Limited Near-Term Infrastructure Needs - Infrastructure Development & Renewal: Midrange

The current capital improvement plan (CIP) totals $141.8 million through FY 2018, consisting primarily of runway and taxiway rehabilitation. The airport has completed a number of major capital projects in recent years and there are currently no anticipated future borrowings expected.

Conservative Debt Structure - Debt Structure: Stronger

All existing long-term debt is fixed rate, flat debt service profile and benefits from a cash funded debt service reserve.

Stable Financial Profile

The airport maintains adequate financial flexibility, with 377 days cash on hand. The airport has an internal policy to maintain coverage at 1.5x and liquidity of 365 DCOH. Estimated FY 2014 coverage, without the benefit of transfers, is expected to be slightly over the 1.5x level. Debt per enplanement is at $83 and leverage is comparable to peers at 5.9x net debt-to-cash flow available for debt service (CFADS).

Peer Analysis

Similar airports with an 'A-' rating include Ontario, CA and Albany, NY. All three exhibit a weaker volume score but LGB is leveraged higher than the others with a comparable CPE to Albany and a higher debt service coverage ratio.

RATING SENSITIVITIES

Negative: A continued downward trend in airport traffic leading to lower than projected stabilization of traffic at 1.4 million may pressure financial metrics resulting in a weaker credit profile.

Negative: Increases in airline costs above current forecasts to maintain adequate coverage metrics would lead to negative rating action.

Negative: Should JetBlue exit or substantially retrench its presence at LGB, it is uncertain how the airport's enplanement base would recover, given that new and/or incumbent carriers could fill slots with smaller gauge aircraft.

Positive: Not likely at this time given the traffic limitations, current leverage, and the service exposure to JetBlue.

CREDIT UPDATE

Noise ordinances currently restrict activity at LGB to 41 commercial air carrier slots but competition for the slots remains high. When airlines relinquished slots in the past (Horizon in 2009, Frontier in April 2011, and Allegiant in September 2011), the airport received significantly more applications for slots than are available. Despite shifting of air carrier slots and slot restrictions, traffic levels have remained steady at or above 1.4 million enplanements.

As JetBlue continues to reposition capacity to its growing Caribbean/Latin American service, enplanements at LGB have continued to decline.

Despite heavy volatility in enplanements, cashflows have been relatively stable due to the airport prudently managing expense growth at a 1.5% compound annual growth rate (CAGR) since FY 2008. FY 2013 debt service coverage ratio (DSCR) with transfers declined to 1.90x from 2.40x in FY 2012 due to increasing debt service obligations. DSCR is expected to decline further to 1.81x in FY 2014 as debt service ramps up to maximum annual debt service (MADS). Without the use of rolling coverage, DSCR is projected to be approximately 1.56x in FY 2014, consistent with management's internal policy to maintain a 1.5x DSCR on a cash flow basis. CPE is expected to increase to the $8 range in FY 2014 and remain relatively flat if enplanement declines bottom out at the 1.4 million base as the airport has projected.

The airport is located between major business and tourist destinations between Los Angeles and Orange Counties, with convenient access to the major freeway links in Southern California. Long Beach Airport is owned by the City of Long Beach. The mayor and the city council of Long Beach serve as the board of directors and set policies for the airport. The airport director and airport staff oversee day-to-day operations.

SECURITY

The bonds are secured by the net revenues generated at the airport.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 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=898154

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Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Analyst
+1-212-368-2082
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Emma Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Daniel Adelman
Analyst
+1-212-368-2082
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Emma Griffith
Director
+1-212-908-9124
or
Committee Chairperson
Seth Lehman
Senior Director
+1-212-908-0755
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com