Fitch Affirms Orange County, CA John Wayne Airport's $197MM Revs at 'AA-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'AA-' rating on approximately $197 million in outstanding Orange County, CA airport revenue bonds issued on behalf of John Wayne Airport (JWA). The Rating Outlook is Stable.

The 'AA-' rating for the mid-sized JWA is supported by a strong origination/destination (O&D) base serving the wealthy population of Orange County, CA with strong coverage, robust liquidity, and continued enplanement growth. The airport's strong balance sheet and declining debt service mitigate the rise in expenses due to the recent completion of expansionary capital projects. Coverage markers remain strong in the rating case with average coverage of 5.65x or 2.71x, respectively depending upon whether passenger facility charges (PFCs) are used as debt service offset or as revenues. JWA's cost per enplanement (CPE) is somewhat higher than similarly rated peers, but is supported by strong financial metrics.

KEY RATING DRIVERS

Diversified O&D Airport [Revenue Risk - Volume: Midrange]: JWA is the only commercial airport in Orange County and the second largest commercial airport within the Greater Los Angeles Area resulting in a passenger mix which is 92.6% O&D. The carrier with the largest market share is Southwest at 43% which is significant and a factor in the midrange assessment.

Hybrid Use and Lease Agreement in Place Through 2015 [Revenue Risk - Price: Stronger]: JWA operates a hybrid airline use and lease agreement (AUL) which is commercial compensatory in the terminal and residual on the airfield. A five-year extension of the agreement is currently underway, with no material alteration of terms. The combination of airline revenues derived from the agreement and performance of non-airline revenues collectively generates significant sources of operating revenues to meet costs with a high degree of cushion. Moreover, with CPE below $10, JWA is competitive with other airports in the southern California region and is not under pressure to rise substantially if traffic stabilizes.

Limited Future Capital Needs [Infrastructure and Renewal Risk: Stronger]: JWA has scheduled approximately $25 million in projects for 2016, with a total current capital improvement program (CIP) of $169 million. This includes $118 million for the new Terminal Improvement Project, an upgrade to existing terminals A and B, which began in January 2016 and is slated for 2019 completion. No new borrowing is anticipated in conjunction with the program as funding is anticipated from a combination of grants, and funds on hand. Once the program is complete JWA will have minimal capital needs for the foreseeable future, which will be funded on a pay-go basis.

Conservative Debt Structure [Debt Structure: Stronger]: JWA's fixed-rate debt remains relatively flat at approximately $18 million through 2030 then declines to approximately $6.5 million. JWA currently has no new money borrowing plans.

Strong Balance Sheet: JWA maintains a strong balance sheet with 812 days cash on hand (DCOH) as of fiscal year (FY) 2015 (ended June 30). Management's policy is to maintain a minimum of 500 DCOH. The strong balance sheet provides JWA with a negative net debt to CFADS ratio. Coverage grew stronger in FY 2015 at 6.41x debt service coverage ratio (DSCR) using passenger facility charges (PFCs) as an offset and 2.99x with PFCs treated as revenue.

Peers: JWA's financial profile is consistent with other 'AA-' credits. JWA's CPE is on the higher end versus other 'AA-' credits (Raleigh Durham and Minneapolis both in mid-$6 range). DCOH is on the lower end of 'AA-' credits but higher end of 'A+' credits. JWA's rating is further supported by low net debt/CFADS (leverage) of -0.02x and strong debt service coverage of 2.99x compared to Raleigh Durham's leverage at 6.50x and coverage at 1.42x.

RATING SENSITIVITIES

Negative: Future changes to the maximum annual passenger limit that could modify airport traffic potential.

Negative: Additional leverage that results in a significant increase to JWA's net debt to CFADS ratio.

Negative: Management's inability to control costs or a prolonged decline in enplanements given a rising CPE and limited revenue growth.

Positive: No upward rating movement seen at this time.

CREDIT UPDATE

Total annual passengers grew 3.3% in FY 2015 to 9.6 million, following 2% growth in FY 2014. Through the first nine months of FY 2016, total passenger growth has accelerated 11.4% over the same period last year, due to multiple carriers adding service to new destinations, additional frequencies to existing markets, and the entrance of two new low-cost carriers. Due to maximum annual enplanement (MAP) restrictions, the airport is projecting regulated flat growth in FY 2017, following high year-to-date volume. Enplanements are limited by legal restrictions with 10.8 million MAP through 2020, increasing to 11.8 million in 2021 and up to 12.5 MAP effective 2026 through 2030.

The airport maintains a diversified carrier mix with no single airline accounting for more than 50% of market share. Southwest has maintained its position as the largest carrier by market share at JWA, currently representing about 43% of the market, and continues to show its commitment with their enplanements increasing 7.4% in FY 2015, up from 6% in FY 2014. Southwest is followed by United (14%), American Airlines (14%), Alaska Airlines (9%), Delta (8%), and several other carriers below 5% of the market. In FY 2016, there were also two new low-cost carrier entrants, Compass Airlines and Horizon Air.

Approximately 40% of JWA's revenues are from airlines, while 60% are from non-airline revenues that include parking, rental cars, concessions and others. Operating revenue increased 3.8%, to $122 million, in FY 2015, compared to $118 million in FY 2014. Airline and concession revenues increased 2.5% and 5.0%, respectively, in FY 2015, driven by enplanement growth. Concession revenue is buttressed by inflation-adjusted minimum annual guarantees. Total revenues are forecasted to increase by 6.6% in FY 2016 due to strong year-to-date performance. Overall, solid revenue growth combined with 2.5% decrease in expenses yielded an 18% increase to CFADS in FY 2015.

JWA's strong balance sheet is a credit strength as its unrestricted cash and investments and special investments with the treasurer were $183 million in FY 2015, an increase from $159 million in FY 2014, representing approximately 812 DCOH in FY 2015. The strong balance sheet provides a negative net debt-to-CFADS ratio. The sizable cash balances provide JWA with a considerable amount of financial flexibility. Airport management has historically demonstrated its willingness to use surplus revenues to pay down debt balances as it did to defeased the 2003 series bonds in full on July 1, 2013. Long-term debt per enplanement was $40.7 in FY 2015, which is commensurate with the rating.

In March 2016, the Federal Aviation Authority approved an airport-requested amendment to its PFC application. It allows the airport to reallocate excess amounts from PFC bond financing and interest to PFC pay-as-you-go on approved PFC projects to reimburse the airport for actual eligible costs expended on these projects, thereby allowing the airport to move up to $70 million in restricted funds to unrestricted funds for current and future capital projects. This includes the $118 million Terminal Improvement Project, which involves seismic retrofitting and an effort to bring terminals A & B up to the standards of the newer terminal C. The project, which began in January 2016 and is expected to be completed by 2019, comprises the majority of the airport's $148 million fully pay-go and grant funded CIP.

Indenture DSCR, which offsets debt service with PFCs, has been in excess of 2.00x since 2004. Using this calculation, DSCR was 6.41x in FY 2015, up from 5.44x in FY 2014. Fitch calculated coverage, which treats PFC revenue as part of CFADS, was 2.99x in FY 2015, up from 2.63x in FY 2014. CPE remained mostly flat at $9.91.

Base case scenario forecasts 9.7% enplanement growth in FY 2016, in-line with nine month year-to-date performance, and just 1% growth in FY 2017 and FY 2018, followed by flat growth through FY 2021, due to MAP restrictions. Revenues fluctuate with enplanements, and expenses are stressed 4%, in alignment with historical five-year CAGR of 4%. Minimum DSCR with PFCs as debt service offset is 5.44x and 2.63x with PFCs as revenue. Leverage remains in negative territory and CPE averages $9.01, congruent with management policy to maintain CPE below $10.00.

Rating case scenario assumes 7.1% FYE 2016 enplanement growth, followed by a stress of 7.5% in FY 2017, with a 2% recovery through FY 2021. Revenues track enplanement volume and expenses are stressed 4.5% in FY 2018-FY 2021. DSCRs never fall below 4.85x using PFCs as offset and 2.40x using PFCs as revenue. Net debt/CFADS remains negative due to JWA's strong cash position and CPE averages $9.40. Overall, the airport continues to maintain a strong balance sheet and financial metrics consistent with the rating.

JWA is owned and operated by Orange County, CA under the direct control of the county board of supervisors. JWA operates under a settlement agreement between various groups within the county and the city of Newport Beach, CA. The settlement agreement limits the average daily departures and million annual passengers, which include both enplaned and deplaned passengers. An amended agreement was approved in October 2014 extending the expiration to Dec. 31, 2030. Current total passenger limits of 10.8 million annually will remain in effect through 2020, then increase to 11.8 million in 2021 and either 12.2 MAP or 12.5 MAP in 2026 depending upon performance.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

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Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California St., 4th Fl.
San Francisco, CA 94108
or
Secondary Analyst
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Scott Monroe
Director
+1-415-732-5618
Fitch Ratings, Inc.
650 California St., 4th Fl.
San Francisco, CA 94108
or
Secondary Analyst
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com