CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Palm Beach County, Florida's $85.9 million of outstanding airport system revenue bonds at 'A'. The bonds were issued on behalf of the Palm Beach International Airport. The Rating Outlook is Stable.
The airport's rating reflects a moderately stable traffic base that serves an affluent area of South Florida with a balance of year-round business and leisure travel, but is still exposed to some economic cyclicality. The airport's carrier mix is diverse, the capital program is manageable with no borrowing plans, and forecast cost per enplanement (CPE) levels, in the $5 range, are very competitive for the region. In fiscal 2015, annual debt service requirements substantially decrease, which should lead to strong financial metrics, liquidity and flexibility in future years.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Medium Hub, Diversified Carrier Base: The airport served 2.9 million enplanements in fiscal 2014, representing an annual increase of 3%, but still below pre-recession peak levels. The airport benefits from a well-diversified carrier mix with no single airline exceeding 26% of enplanements, and its traffic base is further supported by a national, top destination pair with its service between New York City.
Revenue Risk - Price: Midrange
Low Historical Cost Profile: The airport utilizes a hybrid use and lease agreement (AUL) that provides adequate cost recovery terms as well as moderate airline charges. The current agreement began on Oct. 1, 2014 and will be employed through 2019. The airport's CPE remained moderate relative to peers at $7.06 for fiscal 2014, less than the $7.46 CPE in fiscal 2013 and, while the airport's CPE would drop with the decreased debt service obligation, the new inline baggage system cost will be fully passed through to the airlines. Nonetheless, CPE is expected to evolve down to the $5 level within two years under stable traffic levels.
Infrastructure Development and Renewal: Stronger
Moderate Infrastructure Plan: The five-year capital improvement plan is modest at $90 million and will be largely funded through airport improvement program grants and passenger facility charge (PFC) revenues, with no additional borrowing planned.
Debt Structure: Stronger
Conservative Debt Structure: All of the airport's debt is fixed rate with annual debt service in the mid-$6 million range beginning fiscal 2015 to final maturity in 2036.
Financial Metrics
Low Leverage, Strong Liquidity: The airport's net debt-to-cash flow available for debt service of 1.16x is low relative to peers. In fiscal 2014, the airport's debt service coverage increased to 1.66x from 1.49x, and the airport maintained a healthy $65.2 million in unrestricted cash, equivalent to 584 days cash on hand. Coverage is expected to substantially increase as debt service shifts down starting in the current fiscal year.
Peer Group: The airport's peers include Lee County, Florida (rated 'A'/Stable Outlook by Fitch), and Jacksonville (FL) Aviation Authority ('A'/Stable Outlook). Traffic levels are similar among the airports. With the reduction in debt service in fiscal 2015, CPE and coverage levels are expected to be substantially stronger in Palm Beach; however, Palm Beach does face competition from larger nearby airports.
RATING SENSITIVITIES
Positive - Performance: Sustained realization of stronger financial metrics in conjunction with continued enplanement growth may lead to an upgrade;
Negative - Performance: Material shifts in the airport's traffic base or financial profile due to economic conditions or additional leverage that affects coverage or liquidity may pressure the rating.
CREDIT UPDATE
The airport's enplanements continue to grow behind improving tourism levels and increased flight frequency by airlines. In fiscal 2014, traffic increased 3% to 2.9 million, and through seven months of fiscal 2015, has increased an additional 5%. Further supporting the traffic base, carriers such as JetBlue Airways Corp. ('B+'/Stable Outlook) and Spirit Airlines, Inc. expanded their own service offerings with recent increases in daily flight frequency. Other changes include inaugural service by Allegiant Airlines to Asheville, NC, and Frontier Airlines to three other locations.
An increase in non-aviation revenue and management's ability to contain expenses had positive effects on financial performance in fiscal 2014. While total aviation revenue (landing fees and terminal rentals) fell 1.3% to $20.8 million, non-aviation revenue grew 11%, driven by parking and other rentals, which increased 6% and 13%, respectively. Total revenue for the airport increased 7% in fiscal 2014, to $69.5 million. However, with a prominent dependence on non-aviation revenue (70% of total revenue in fiscal 2014), the airport is vulnerable to future volatility in traffic.
Expenses increased 2.5% in fiscal 2014, driven by growth in salaries/benefits and maintenance, up 2% and 11%, respectively. In fiscal 2016, the inline baggage handling system will come online, adding an incremental cost of approximately $2 million per year. However, Fitch views management's ability to contain costs as prudent, indicated by a five-year annual rate decline of 2%.
On Oct. 1, 2014, the new AUL agreement, signed by all signatory carriers, went into effect. Under the new hybrid agreement, airfield revenue is credited toward signatory carriers' revenue requirements by the airport, and expenditure requirements in the terminal are paid by the airlines. The airport reserves the right to adjust rates and charges throughout the year if a rate adjustment is needed in excess of 10%. Furthermore, as a result of the large decrease in debt service in fiscal 2015, the airport will no longer charge airlines apron rental and loading bridge fees. However, the new AUL calculation for terminal space does not include unusable space in the denominator, meaning the space being leased by the airlines has increased proportionally to the amount of available, usable space. While airline revenue will be impacted, Fitch does not view this as a concern as the airport maintains sufficient cash flow to service a much less significant debt obligation, and current CPE levels are more than reasonable.
Under Fitch's five-year base case forecast, which assumes flat annual enplanement growth and escalating costs of approximately 3% annually, coverage averages in the middle-to-high 2x range. Fitch expects CPE levels to decrease significantly in fiscal 2015, with slight growth thereafter to 4-5x. Fitch's rating case assumes a near-term enplanement stress of 10%, with only slight recovery thereafter, and an increase in costs of 3%-4% annually. Under this scenario, coverage levels remain in the 2x range, displaying the airport's ability to withstand near-term losses in its traffic base. CPE remains in the upper $5 range over the five-year period, which is an appropriate level for the rating category.
SECURITY
As special obligations of the county, the county irrevocably pledges all net revenues of the airport system and all funds established by the bond resolution.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Airports (pub. 13 Dec 2013)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987731
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