Fitch Affirms Philadelphia Int'l Airport Revs at 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Philadelphia, Pennsylvania's $1.315 billion in outstanding airport revenue bonds at 'A'. The Rating Outlook is Stable.

KEY RATING DRIVERS:

The 'A' rating reflects Philadelphia International Airport's (PHL, or the airport) role in providing air service to a stable and large service area that generates a solid base of origination & destination (O&D) traffic offset by a high degree of carrier concentration in American Airlines/US Airways (American, rated 'B+'; Stable Outlook by Fitch) and low debt service coverage from current cashflows that is under 1.0x. Fitch will monitor the effects of the renegotiated airline agreement in 2015, along with any airline capacity adjustments, and the expected $400 million in borrowing associated with the capacity enhancement program (CEP) on the airport's financial profile.

Revenue Risk - Volume: Midrange.

Single-Carrier Concentration with Connecting Traffic Exposure: As the nation's sixth largest regional market, with over six million people, Philadelphia supports a large enplanement base of over 15 million. Connecting enplanements (44%) remain vulnerable to the operations of PHL's primary carrier, American; the carrier accounts for 77% of total traffic.

Revenue Risk - Price: Midrange.

Adequate Cost-Recovery Framework: The residual use and lease agreement (AUL) has resulted in a somewhat competitive cost per enplaned passenger (CPE) level under $11 for the last seven years ($10.57 in fiscal 2013, ended June 30). The AUL was extended to June 2015 following its expiration in 2013 but negotiations for a new agreement or another extension are currently taking place. Should the airport take out its commercial paper program and issue some new money bonds to support the CEP, which could prove challenging for the airport, CPE would increase to over $15 by 2018 in Fitch's base case.

Infrastructure Development and Renewal: Midrange.

Large Capital Plan Partially Debt Funded: The eight-year CEP is large at $1.2 billion and it has received MII approval from the airlines under the AUL. Approximately half of the total plan is expected to be funded by debt and the airport's $350 million commercial paper program. The plan also provides for the construction of a new runway should future air traffic warrant it.

Debt Structure: Stronger.

Variable-Rate Debt and Swap Exposure: Approximately 11% of the current outstanding debt is variable rate that is supported by two direct-pay letters of credit (LOC) and is synthetically fixed through swaps. The airport has a $350 million commercial paper program to fund interim capital expenses associated with its CEP and a debt service reserve fund that are both supported by several LOCs.

Historically Stable Financial Position May Face Pressure: The airport's relatively high leverage of 13.0x measured by net debt-to-cash flow available for debt service (CFADS) and low liquidity of 165 days cash on hand limits PHL's ability to fund its capital plan without impacting the airline rate base. The airport's legal calculation for debt service coverage was sound at 2.56x; however, coverage from current cashflows dropped below 1.0x for the first time in recent history to 0.82x (in fiscal 2013).

Peer: Philadelphia's peers include Detroit (rated 'A-'; Stable Outlook) and Minneapolis-St. Paul (rated 'AA-'/ 'A'; Stable Outlook) given similar enplanement bases and trends as well as debt amounts. Each airport has carrier concentration greater than 70% but Philadelphia's cash on hand is lower and the airport has a higher CPE.

RATING SENSITIVITIES

Negative: Material reduction or elimination of American's hubbing activity.

Negative: Debt service coverage from current cashflows projected to remain under 1.0x for several years.

Positive: Given the single carrier concentration and planned additional borrowing for the large CEP, upward rating movement is unlikely at this time.

Credit Update

The airport's passenger base has been relatively flat since the boost provided by the entry of Southwest Airlines into the market in 2004. Southwest's service peaked in 2009 and has been declining, with a significant reduction in 2012 of 21 flights. The flight reductions have been partially mitigated by the entry of new carriers, including jetBlue, Spirit, Alaska, Qatar Airlines, and Frontier. In fiscal 2014 (ended June 30), enplanements at the airport rose just 0.7% to 15.32 million (given the severe winter) following a 0.8% decline in fiscal 2013. Given the amount of new service offerings since the American/US Airways merger closed, the airport expects enplanements to rise by 1.8% in fiscal 2015 to 15.59 million.

The airport is one of the primary hubs for American/US Airways, the dominant carrier at the airport. Including its regional/commuter jet subsidiaries, American accounts for 77% of enplanements followed by Southwest/AirTran at 7.3% in fiscal 2014. Despite the merger closing in December 2013 and the carrier's management publicly stating it intends to maintain all hubs, the potential for operational changes at all of the combined carrier's hubs, including PHL, remains. PHL has the advantage of lower costs and less congestion compared to New York City area airports and a robust domestic route network that supports the hubbing operation. Still, if the combined American/US Airways were to measurably restructure its route network and de-emphasize Philadelphia airport as a primary connecting hub, an immediate effect on the airport's operations would likely occur since the timing and possibility for backfill may be uncertain.

The airport's use and lease agreement is based on a residual methodology for setting fees and charges, which has resulted in adequate financial metrics. In 2013, PHL and the airlines extended the agreement to June 2015 and the airlines provided approval for additional capital expenditures; however, negotiations for a new agreement or another extension are currently taking place. The rate setting structure has allowed the airport to consistently generate debt service coverage levels above the two rate covenant coverage requirements. For fiscal 2013, debt service coverage was 2.56x compared to the covenant of 1.50x (excluding allocated expense from the City) and total debt service coverage was 1.64x relative to the covenant of 1.0x (including allocated expenses). Alternatively, excluding fund balances and revenue deferred from prior years, debt service coverage was a low 0.82x in fiscal 2013.

The airport's leverage level was high at approximately 13.0x net debt-to-CFADS in fiscal 2013. Taking into account debt service from the $400 million in planned bond issuances/CP take-out and growth trends in passengers, CPE is expected to increase from $10.57 in fiscal 2013 to over $15 in Fitch's base case. Any unanticipated or sustained declines in traffic would exacerbate the CPE increases and/or lead to tighter financial flexibility.

SECURITY

The bonds are secured by the net revenues generated through the operations of the airport. In addition, the airport may pledge certain passenger facility charge (PFC) revenues for eligible projects.

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=903674

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Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1 212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1 212-908-0755
or
Tertiary Analyst
Emari Wydick
Analytical Consultant
+1-312-606-2308
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tanya Langman
Director
+1 212-908-0716
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1 212-908-0755
or
Tertiary Analyst
Emari Wydick
Analytical Consultant
+1-312-606-2308
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com